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, 2001 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 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. THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST OF THE REGISTRANT HELD BY NON-AFFILIATES ON MARCH 6, 2002, WAS $366,832,731 (BASED ON THE CLOSING SALES PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE ON MARCH 6, 2002 OF $21.45). AT MARCH 6, 2002, THERE WERE 17,101,759 COMMON SHARES OF BENEFICIAL INTEREST OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2002 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 3 of this Report for a discussion of risks that may impact our financial condition, business or share price. GENERAL Entertainment Properties Trust (the "Company") was formed on August 22, 1997 as a Maryland real estate investment trust ("REIT") to capitalize on the opportunities created by the development of destination entertainment and entertainment-related properties, including megaplex movie theatre complexes. The Company completed an initial public offering ("IPO") of its common shares of beneficial interest ("Shares") on November 18, 1997. The Company is the first publicly-traded REIT formed exclusively to invest in entertainment-related properties. The Company is a self-administered REIT. As of December 31, 2001, the Company's real estate portfolio was comprised primarily of 26 megaplex theatre properties, including one joint venture property, located in eleven states, one entertainment-themed retail center ("ETRC") located in Westminster, Colorado, and land parcels leased to restaurant operators and related properties adjacent to several of its theatre properties. The Company's theatre properties are leased to leading theatre operators, including American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc. ("AMCE"), Muvico Entertainment LLC ("Muvico"), Edwards Theatre Circuits, Inc. ("Edwards"), Consolidated Theatres ("Consolidated") and Loews Cineplex Entertainment ("Loews"). The Company believes entertainment is an important sector of the retail real estate industry and that, as a result of the Company's focus on properties in this sector and the industry relationships of its management, it has a competitive advantage in providing capital to operators of these types of properties. The principal business strategy of the Company is to continue acquiring 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. The Company believes the development of megaplex theatres has accelerated the obsolescence of many existing movie theatres by setting new standards for moviegoers, who, in the Company's experience, have demonstrated their preference for the more attractive surroundings, wider variety of films and superior customer service typical of megaplex theatres (see "Operating risks in the entertainment industry may affect the ability of our tenants to perform under their leases" and "Market prices for our Shares may be affected by perceptions about the financial health or share value of our tenants or the performance of REIT stocks generally" under "Risk Factors"). The Company expects the development of megaplex theatres to continue in the United States and abroad for the foreseeable future. With the development of the stadium style megaplex theatre as the preeminent store format for cinema exhibition, the older generation of 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 the Company's management, the Company believes it will continue to have opportunities to provide capital to businesses that seek to develop and operate these properties but would prefer to lease rather than own the properties. The Company believes its ability to finance these properties will enable it to continue to grow and diversify 1
its 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 The Company's business objectives are 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. The Company intends to achieve these objectives by continuing to execute the Growth Strategies, Operating Strategies and Capitalization Strategies described below: GROWTH STRATEGIES FUTURE PROPERTIES The Company intends to pursue acquisitions of high-quality entertainment related properties from operators with a strong market presence. Pursuant to an agreement with AMCE the Company has the right to acquire and lease back to the operator a number of existing and future megaplex theatre properties. See "Tenants and Leases" and "Additional Property Acquisitions" in Item 2 -- "Properties" for a discussion of these agreements. As a part of the growth strategy, the Company will consider entering into joint ventures with other developers or investors in real estate, developing additional megaplex theatre properties and developing or acquiring entertainment-themed retail centers ("ETRCs") 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, the Company typically acquires single-tenant properties that are leased under long-term leases. The Company believes its willingness to make long-term investments in properties offers tenants financial flexibility and allows tenants to allocate capital to their core businesses. LEASE STRUCTURE The Company typically structures leases on a triple-net basis under which the tenants bear the principal portion of the financial and operational responsibility for the properties. During each lease term and any renewal periods, the leases typically provide for periodic increases in rent and/or percentage rent based upon a percentage of the tenant's gross sales over a pre-determined level. TENANT RELATIONSHIPS The Company intends to continue developing and maintaining long-term working relationships with theatre, restaurant and other entertainment-related business operators and developers by providing capital for multiple properties on a national or regional basis, thereby enhancing efficiency and value to those operators and to the Company. PORTFOLIO DIVERSIFICATION The Company will endeavor to further diversify its 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. 2
CAPITALIZATION STRATEGIES USE OF LEVERAGE; DEBT TO TOTAL CAPITALIZATION The Company seeks 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 item 1, and "Liquidity and Capital Resources" and "Capital Requirements for Additional Acquisitions and Future Growth" in Item 7 -- "Management's Discussion and Analysis"). In addition, the Company has issued and may in the future seek to issue additional equity as circumstances warrant and opportunities to do so become available. The Company expects to maintain a debt to total capitalization ratio (i.e., total debt of the Company as a percentage of shareholder equity plus total debt) of approximately 50% to 55%. JOINT VENTURES The Company will examine and pursue potential joint venture opportunities with institutional investors or developers if they are considered to add value to the shareholders. The Company may employ higher leverage in joint ventures (See "Risk Factors -- Joint Ventures may limit flexibility with jointly held investments"). PAYMENT OF REGULAR DISTRIBUTIONS The Company has paid and expects to continue paying quarterly dividend distributions to its shareholders. Among the factors the Board of Trustees considers in setting the distribution rate are the 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. The Company expects 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" in Item 1 of this Form 10-K. COMPETITION The Company competes 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 the Company was 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, ETRCs and related restaurant and retail properties are developed or become available for acquisition. EMPLOYEES As of December 31, 2001, the Company had six full time employees. 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 15 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 3
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 this obsolescence. 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. and Loews Cineplex Entertainment, have filed for bankruptcy reorganization, as have other theatre operators. 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-themed retail centers also depends on general economic conditions and the willingness of consumers to spend time and money on out-of-home entertainment. A SINGLE TENANT REPRESENTS A SUBSTANTIAL PORTION OF OUR LEASE REVENUES Approximately 69% of our megaplex theatre properties are leased to AMC, one of the nation's largest movie exhibition companies. Our property and lease concentration with AMC will increase as a result of several current and planned theatre acquisitions and leases to AMC. AMCE has guaranteed AMC's performance under the leases. We have diversified and expect to continue to diversify our real estate portfolio by entering into lease transactions with a number of other leading theatre operators. Nevertheless, our revenues and our continuing ability to pay shareholder dividends remain substantially dependent on AMC's performance under its leases and AMCE's performance under its guaranty. It is also possible, although not verifiable, that some theatre operators may be reluctant to lease from us because of our strong relationship with AMC. We believe AMC occupies a stronger position when compared with other theatre operators 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. Peter C. Brown, the Chairman of our Board of Trustees, is Chairman of AMCE. The Company believes the lease terms between the Company and AMC are comparable to those available from other tenants of comparable credit quality. Mr. Brown does not participate in discussions between the Company and AMC regarding acquisitions of AMC properties or lease terms concerning AMC properties. 4
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 most of 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, 2001, we had approximately $100 million outstanding under secured mortgage arrangements which contain "hyper-amortization" features, in which the principal payment schedule is rapidly accelerated, and our principal payments are substantially increased, after a period of time but prior to the maturity date of the loan. We undertook this debt on the assumption that we can refinance the debt when these hyper-amortization payments become due. If we cannot obtain acceptable refinancing at the appropriate time, 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 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 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. 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 5
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. 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 o 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 o Changes in tax, zoning or other laws could make properties less attractive or less profitable If a tenant fails to perform on its lease covenants, that would not excuse us from meeting any debt obligation secured by the property 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. JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS We may acquire or develop properties in joint ventures with third parties when those transactions appear desirable. We would not own the entire interest in any property acquired by a joint venture. 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 off-balance sheet arrangements. 6
WE FACE ADDITIONAL RISKS IF WE DEVELOP PROPERTIES Our entertainment-themed retail center development in Westminster, Colorado and similar properties we may seek to develop in the future involve risks not typically encountered in the purchase and lease-back of megaplex theatres which are developed by the operator. The ownership or development of retail centers could expose us to the risk that a sufficient number of suitable tenants may not be found to enable the center to operate profitably and provide a return to us. Retail centers are also subject to fluctuations in occupancy rates, which could affect our operating results. FAILURE TO COMPLY WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER LAWS COULD RESULT IN SUBSTANTIAL COSTS Our theatres must comply with the Americans with Disabilities Act (ADA). The ADA requires that public accommodations reasonably accommodate individuals with disabilities and that new construction or alterations be made to commercial facilities to conform to accessibility guidelines. Failure to comply with the ADA can result in injunctions, fines, damage awards to private parties and additional capital expenditures to remedy noncompliance. Our leases require the tenants to comply with the ADA, and we believe our theatres provide disabled access in compliance with the ADA. Our properties are also subject to various other federal, state and local regulatory requirements. We believe our properties are in material compliance with all applicable regulatory requirements. However, we do not know whether existing requirements will change or whether compliance with future requirements will involve significant unanticipated expenditures. Although these expenditures would be the responsibility of our tenants, if tenants fail to perform these obligations, we may be required to do so. POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION COULD RESULT IN SUBSTANTIAL COSTS Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our 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. 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 7
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 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 attractive rates, and provisions in our loan covenants. If we do not maintain or increase our dividend rate, that could have an adverse effect on the market price of our shares. MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES One of the factors that investors may consider in deciding whether to buy or sell our shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend on our shares or seek securities paying higher dividends or interest. 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 share price during 2001 and 2000 and could have an adverse impact in the future if those trends persist in the cinema exhibition industry. LIMITS ON CHANGES IN CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS WHICH MAY BE BENEFICIAL TO OUR SHAREHOLDERS There are a number of provisions in our Declaration of Trust, Maryland law and agreements we have with others which could make it more difficult for a party to make a tender offer for our shares or complete a takeover of EPR which is not approved by our Board of Trustees. These include: - A staggered Board of Trustees 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 o 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 - AMCE's ability to terminate a Right to Purchase Agreement for additional megaplex theatre properties if there is a change in control of EPR 8
- Provisions of Maryland law limiting a court's ability to scrutinize the trustees' exercise of their business judgment in the event of a hostile takeover - Provisions in loan or joint venture agreements putting EPR in default upon a change in control - Provisions of employment agreements with our officers calling for share purchase loan forgiveness upon a hostile change in control Any or all of these provisions could delay or prevent a change in control of EPR, even if the change was in our shareholders' interest or offered a greater return to our shareholders. ITEM 2. PROPERTIES As of December 31, 2001, the Company's real estate portfolio consisted of 26 megaplex theatre properties (including one joint venture), one entertainment-themed retail center ("ETRC"), and eight restaurant and retail locations. 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. <TABLE> <CAPTION> Acquisition Building Property Location Date Screens Seats (gross sq. ft) Tenant - -------- -------- ---- ------- ----- -------------- ------ <S> <C> <C> <C> <C> <C> <C> MEGAPLEX THEATRE PROPERTIES Grand 24 (3) Dallas, TX 11/97 24 5,067 98,175 AMC Mission Valley 20 (1) (3) San Diego, CA 11/97 20 4,361 84,352 AMC Promenade 16 (3) Los Angeles, CA 11/97 16 2,860 129,822 AMC Ontario Mills 30 (3) Los Angeles, CA 11/97 30 5,469 131,534 AMC Lennox 24 (1) (3) Columbus, OH 11/97 24 4,412 98,261 AMC West Olive 16 (3) St. Louis, MO 11/97 16 2,817 60,418 AMC Studio 30 (3) Houston, TX 11/97 30 6,032 136,154 AMC Huebner Oaks 24 (3) San Antonio, TX 11/97 24 4,400 96,004 AMC First Colony 24 (1) (6) Houston, TX 11/97 24 5,098 107,690 AMC Oakview 24 (1) (6) Omaha, NE 11/97 24 5,098 107,402 AMC Leawood Town Center 20(6) Kansas City, MO 11/97 20 2,995 75,224 AMC Gulf Pointe 30 (2) (6) Houston, TX 2/98 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 3/98 30 6,210 130,757 AMC Mesquite 30 (2) (6) Dallas, TX 4/98 30 6,008 130,891 AMC Hampton Town Center 24(6) Norfolk, VA 6/98 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 8/98 18 3,424 73,637 Muvico Paradise 24 (6) Davie, FL 11/98 24 4,180 96,497 Muvico Boise Stadium (1) (4) Boise, ID 12/98 20 4,734 140,300 Edwards Aliso Viejo 20(6) Los Angeles, CA 12/98 20 4,352 98,557 Edwards Westminster 24 (7) Westminster, CO 6/99 24 4,812 107,000 AMC Woodridge 18 (2) (8) Woodridge, IL 6/99 18 4,343 80,600 Loews Tampa Palms 20 (8) Tampa, FL 6/99 20 4,200 83,000 Muvico Palm Promenade 24 (8) San Diego, CA 1/00 24 4,577 88,610 AMC Crossroads 20 (8) Raleigh, NC 1/00 20 3,936 77,475 Consolidated ---- -------- ---------- Subtotal Megaplex Theatres 600 119,297 2,652,988 </TABLE> 9
<TABLE> <S> <C> <C> <C> <C> <C> <C> RETAIL AND RESTAURANT PROPERTIES Westminster Promenade Westminster, CO 10/98 - - 140,000 Multi-Tenant Pompano Kmart (8) Pompano Beach, FL 11/98 - - 80,540 Kmart Nickels Restaurant (8) Pompano Beach, FL 11/98 - - 5,600 Nickels 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 ---- ----- --------- Subtotal - - 265,320 Total 600 119,297 2,918,308 === ======= ========= </TABLE> (1) Third party ground leased property. Although the Company is the tenant under the ground leases and has assumed responsibility for performing the obligations thereunder, pursuant to the Leases, the theatre tenants are responsible for performing the Company's obligations under the ground leases. (2) In addition to the theatre property itself, the Company has acquired land parcels adjacent to the theatre property, which the Company has or intends to ground lease or sell to restaurant or other entertainment themed operators. (3) Property is included as security for a $105 million mortgage facility. (4) Property is included as security for a $20 million mortgage facility. (5) Property is included in the Atlantic-EPR joint venture. (6) Property is included as security for a $125 million mortgage facility. (7) Property is included as security for a $17 million mortgage. (8) Property is included as security for a $75 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 5,200 square feet with annual rentals of $115,000. 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 $60.1 million (not including rent escalations or percentage rent). The megaplex theatre Leases have an average remaining base term lease life of 13 years and may be extended for predetermined extension terms at the option of the tenant. The 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. ADDITIONAL PROPERTY ACQUISITIONS The following table lists the rental properties acquired during 2001: <TABLE> <CAPTION> PROPERTY LOCATION TENANT -------- -------- ------ <S> <C> <C> Palm Promenade Land parcel San Diego, CA AMC Woodridge Land Parcel Chicago, IL Loews Oakview Land Parcel Omaha, NE AMC </TABLE> 10
ITEM 3. LEGAL PROCEEDINGS None. 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 Shares on the New York Stock Exchange under the trading symbol "EPR" and the distributions declared. <TABLE> <CAPTION> Share Price ----------- Declared High Low Distribution ---- --- ------------ <S> <C> <C> <C> 2001 Fourth Quarter $19.68 $15.85 $0.45 Third Quarter $18.65 $15.60 0.45 Second Quarter $18.64 $13.85 0.45 First Quarter $15.00 $11.25 0.45 2000 Fourth Quarter $12.25 $10.5625 $0.44 Third Quarter $14.625 $10.4375 0.44 Second Quarter $15.00 $12.50 0.44 First Quarter $14.4375 $11.1275 0.44 </TABLE> At March 6, 2002, there were approximately 7,176 holders of record of the Company's Shares. The Company declared quarterly distributions to shareholders aggregating $1.80 per Share in 2001 and $1.76 per Share in 2000. While the Company intends to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Trustees and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, 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"). 11
ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> Year Ended Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Rental revenue $54,667 $53,287 $48,319 $35,031 $ 1,887 Depreciation and amortization 10,449 10,460 9,982 7,280 659 Income from operations 41,711 40,977 36,158 25,699 855 Interest expense (income) 20,334 18,909 13,278 6,461 (587) Equity in income from joint ventures 2,203 2,104 333 - - Net income 23,580 24,172 23,213 19,238 1,442 Net income per common Share: Basic $1.60 $1.63 $1.60 $1.39 $0.10 Diluted 1.60 1.63 1.60 1.39 0.10 Weighted average number of common Shares outstanding Basic 14,715 14,786 14,516 13,802 13,800 Diluted 14,783 14,810 14,552 13,880 13,860 Cash dividends declared per Share $1.80 $1.76 $1.68 $1.60 $0.18 </TABLE> <TABLE> <CAPTION> December 31, December 31, December 31, December 31, December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Net real estate investments $530,280 $472,795 $478,706 $455,997 $213,812 Total assets 583,351 513,534 516,291 464,371 259,488 Dividends payable 6,659 6,479 6,273 5,545 2,495 Long-term debt 314,766 244,547 238,737 206,037 0 Total liabilities 325,223 252,915 249,904 215,809 8,262 Shareholders' equity 258,128 260,619 266,387 248,562 251,226 </TABLE> 12
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". 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 earned. Base rent escalation in most of our leases is dependent upon increases in the Consumer Price Index (CPI) and accordingly, management does not include any future base rent escalation amounts in current revenue. Most of our leases provide for percentage rents based upon the level of sales achieved by the lessee. These percentage rents are recognized once the required sales level is achieved. REAL ESTATE USEFUL LIVES Land, buildings and leasehold improvements are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method over the useful lives of the assets, as follows: Buildings 40 years Leasehold improvements Terms of lease or useful lives, whichever is shorter The Company is required to make subjective assessments as to the useful lives of its properties for the purposes 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. IMPAIRMENT OF REAL ESTATE VALUES On a periodic basis, management assesses if the value of the real estate properties may be impaired. A property value is considered impaired only if management's estimate of current and projected operating cash flows (undiscounted and without interest charges) of the property over its remaining useful life is less than the net carrying value of the property. To the extent impairment has occurred, the carrying value of the property would be written down to an amount to reflect the fair value of the property. The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties and other investments. Management's estimates of impairment in the value of real estate have a direct impact on the Company's net income. RESULTS OF OPERATIONS This discussion of the results of operations compares the year ended December 31, 2001 with the year ended December 31, 2000 and the year ended December 31, 2000 with the year ended December 31, 1999. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Rental revenues increased $1.4 million, or 2.6%, to $54.7 million for the year ended December 31, 2001, as compared to $53.3 million for the year ended December 31, 2000. This increase resulted from the combined effect of (i) the acquisition of 3 properties in 2001 providing incremental revenues of $1.0 million, (ii) the full-year impact of 2 properties acquired in early 2000 providing incremental revenues of $0.2 million and (iii) base rent increases and percentage rent increases at 17 megaplex theatre properties of $0.2 million. General and administrative expense increased $0.7 million to $2.5 million for the year ended December 31, 2001 as compared to $1.9 million for the year ended December 31, 2000. The increase was due to (i) approximately $0.6 million in non-recurring costs incurred by the Company in a successful proxy contest during the first half of 2001 and (ii) cost increases over several categories of general corporate expenses ($0.1 million). Depreciation and amortization expense decreased $0.1 million to $10.4 million for the year ended December 31, 2001 as compared to $10.5 million for the year ended December 31, 2000. The decrease resulted from the full year impact of the contribution of the Cantera, IL, megaplex theatre property to the Atlantic joint venture in 2000, which is a non-consolidated joint venture. Net interest expense increased $1.4 million to $20.3 million for the year ended December 31, 2001, as compared to $18.9 million for the year ended December 31, 2000. The increase in interest expense during 2001 resulted from an increase in debt related to property acquisitions completed in 2001. Net income for the year ended December 31, 2001 declined by $0.6 million to $23.6 million or $1.60 per diluted Share. For the year ended December 31, 2000, net income was $24.2 million or $1.63 per diluted Share. The decrease in net income for 2001 was almost entirely due to the costs incurred in the successful proxy contest. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Total revenues increased $6.7 million, or 14%, to $55.4 million for the year ended December 31, 2000, as compared to $48.7 million for the year ended December 31, 1999. This increase resulted from the combined effect of (i) the acquisition of 2 properties in 2000 providing incremental revenues of $3.3 million, (ii) the full-year impact of 2 properties acquired in mid-1999 providing incremental revenues of $2.3 million, (iii) restaurant pad sites commencing operation in 2000 and rent adjustments as provided 13
under some leases ($0.8 million), and (iv) the net impact of joint ventures (including the effect of non-consolidation) of $0.3 million. General and administrative expense decreased $0.3 million to $1.9 million for the year ended December 31, 2000 as compared to $2.2 million for the year ended December 31, 1999. The decrease during 2000 was due primarily to reduced acquisition activity in 2000 and reductions in costs related to the closing of the Company's California office. Depreciation and amortization expense increased $0.5 million to $10.5 million for the year ended December 31, 2000 as compared to $10.0 million for the year ended December 31, 1999. The increase was a result of additional property acquisitions during 2000 and 1999 as previously mentioned. Net interest expense increased $5.6 million to $18.9 million for the year ended December 31, 2000, as compared to $13.3 million for the year ended December 31, 1999. The increase in interest expense during 2000 was primarily attributable to overall increases in market interest rates and increases in the spread costs of outstanding advances under the Company's $127 million Bank Credit Facility. Net income for the year ended December 31, 2000 increased $1.0 million to $24.2 million or $1.63 per diluted Share. For the year ended December 31, 1999, net income was $23.2 million or $1.60 per diluted Share. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $24.6 million at December 31, 2001. In addition, the Company had restricted cash of $6.5 million available for debt service in connection with the $122.7 million mortgage debt due in February 2006. Mortgage Debt and Credit Facilities As of December 31, 2001, we had total debt outstanding of $314.8 million. All of our debt was mortgage debt secured by substantially all of our rental properties. Of this debt, $54.0 million was variable rate debt and $260.8 million was fixed rate debt. The $314.8 million aggregate principal amount of indebtedness had a weighted average interest rate of 7.4% as of December 31, 2001. All of our debt is described in footnote 6 in the "Notes to Consolidated Financial Statements" in this Form 10-K. At December 31, 2001 we had $54 million outstanding under our $75 million credit facility. The remaining $21 million available to borrow under that facility is subject to the Company providing specific properties, owned by the Company, as collateral security in exchange for borrowing the remaining $21 million. Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. On March 15, 2002, the Board of Trustees approved a 5.6% increase in its quarterly cash dividend to $0.475 per Share for the first quarter of 2002 payable on April 16, 2002 to shareholders of record as of March 28, 2002. At December 31, 2001, the Company had no unfunded acquisition or development commitments. We anticipate that our cash on hand and cash from operations will provide adequate liquidity to conduct operations, fund administrative and operating costs and interest and principal payments on its debt, and allow distributions to the Company's shareholders and avoidance of corporate level federal income or excise tax in accordance with Internal Revenue Code requirements for qualification as a REIT. Long-term liquidity requirements at December 31, 2001 consisted primarily of maturities of long-term debt. Aggregate annual principal maturities of mortgage debt as of December 31, 2001 are as follows (in thousands): <Table> <Caption> For the year ended December 31, <S> <C> 2002 $ 5,119 2003 5,492 2004 59,851 2005 24,849 2006 111,695 Thereafter 107,760 -------- Total $314,766 ======== </Table> 14
We anticipate that long-term liquidity requirements will also include amounts for acquisition of properties. 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. We have completed two financing events subsequent to December 31, 2001 that relate to our long-term liquidity as follows: On February 8, 2002, the Company completed the sale of 2.3 million common Shares for net proceeds of approximately $43 million. The proceeds from the offering are anticipated to be used to fund the Company's 2002 property acquisitions plan. On March 12, 2002, the Company received a commitment for a $50 million secured revolving credit facility. The Company will use the credit facility to fund property acquisitions expected to be completed during 2002. There can be no assurance that we will be able to obtain such financing in the future (See "We must obtain new financing in order to grow", and "Risks that may affect the market price of our Shares" under "Risk Factors"). At December 31, 2001, the Company has an investment interest in one non-consolidated real estate joint venture, The Atlantic-EPR partnership which is accounted for under the equity method of accounting. (see footnote #4 "Real Estate Joint Venture" in the Notes to Consolidated Financial Statements in this Form 10-K). We do not anticipate any material impact on our liquidity as a result of any commitments involving that joint venture. FUNDS FROM OPERATIONS The Company believes that to facilitate a clear understanding of the historical consolidated operating results, FFO should be examined in conjunction with net income as presented in the Consolidated Financial Statements. FFO is considered by management as an appropriate measure of the performance of an equity REIT because it is predicated on cash flow analysis, which management believes is more reflective of the value of real estate companies, such as the Company, rather than a measure predicated on net income, which includes non-cash expenses, such as depreciation. FFO is generally defined as net income plus certain non-cash items, primarily depreciation of real estate properties. FFO is not a concept under Generally Accepted Accounting Principles (GAAP) and is generally higher than GAAP net income because depreciation expense is not deducted when computing FFO. Comparison of our presentation of FFO, using the definition adopted by the National Association of Real Estate Investment Trusts (NAREIT), to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. The following table summarizes the Company's FFO for the years ended December 31, 2001 and December 31, 2000 (in thousands): <TABLE> <CAPTION> Year ended Year ended December 31, 2001 December 31, 2000 <S> <C> <C> Net Income $23,580 $24,172 Real estate depreciation 10,852 10,737 ------- ------ FFO $34,432 $34,909 ======= ======= </TABLE> 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 lessees to pay substantially all expenses associated with the operation of the properties, thereby minimizing the Company's exposure to increases in costs and operating expenses resulting from inflation. FORWARD LOOKING INFORMATION CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND," "CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL," "FORECAST," OR OTHER COMPARABLE TERMS. THE COMPANY'S ACTUAL FINANCIAL CONDITION, RESULTS OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING 15
STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED UNDER "BUSINESS - RISK FACTORS." INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks, primarily relating to potential losses due to changes in interest rates. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings whenever possible. The Company is subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of the Company's borrowings are subject to mortgages or contractual agreements which limit the amount of indebtedness the Company may incur. Accordingly, if the Company is unable to raise additional equity or borrow money due to these limitations, the Company's ability to acquire additional properties may be limited. The following table presents the principal amounts, weighted average interest rates, and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31: Expected Maturities (in millions) <TABLE> <CAPTION> DECEMBER 31, 2001 2002 2003 2004 2005 2006 Thereafter - ----------------- ---- ---- ---- ---- ---- ---------- <S> <C> <C> <C> <C> <C> <C> Fixed rate debt $5.1 $5.5 $5.9 $24.8 $111.7 $107.8 Average interest rate 7.6% 7.6% 7.6% 8.0% 7.9% 6.9% Variable rate debt $- $ - $54 $ - $ - $ - Average interest rate (as of December 31, 2001) - - 6.2% - - - </TABLE> <TABLE> <CAPTION> DECEMBER 31, 2000 2001 2002 2003 2004 2005 Thereafter - ----------------- ---- ---- ---- ---- ---- ---------- <S> <C> <C> <C> <C> <C> <C> Fixed rate debt $4.8 $1.6 $1.8 $1.9 $20.5 $94.9 Average interest rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Variable rate debt $119 $- $ - $ - $ - $ - Average interest rate (as of December 31, 2000) 9.5% - - - - - </TABLE> As the table incorporates only those exposures that existed as of December 31, 2001, it does not consider exposures or positions that have arisen or could arise after that date. For discussion of interest rate hedges we have acquired, see note 10 to the financial statements. 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Entertainment Properties Trust CONTENTS Report of Independent Auditors................................................20 Audited Financial Statements Consolidated Balance Sheets ..................................................21 Consolidated Statements of Income ............................................22 Consolidated Statements of Changes in Shareholders' Equity ...................23 Consolidated Statements of Cash Flows ........................................24 Notes to Consolidated Financial Statements ...................................25 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation ......................35 17
Report of Independent Auditors The Board of Trustees Entertainment Properties Trust We have audited the accompanying consolidated balance sheets of Entertainment Properties Trust (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(d). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Entertainment Properties Trust at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Ernst & Young LLP Kansas City, Missouri March 28, 2002 18
Entertainment Properties Trust Consolidated Balance Sheets (In thousands except share and per share data) <TABLE> <CAPTION> DECEMBER 31 2001 2000 ------------------ ---------------- <S> <C> <C> ASSETS Rental properties, net $515,972 $460,537 Land held for development 14,308 12,258 Investment in joint ventures 12,479 27,391 Cash and cash equivalents 24,590 5,948 Restricted cash 6,495 - Notes receivable - 434 Other assets 9,507 6,966 ------------------ ---------------- Total assets $583,351 $513,534 ================== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 1,843 $ 1,499 Dividends payable 6,659 6,479 Unearned rents 1,955 390 Long-term debt 314,766 244,547 ------------------ ---------------- Total liabilities 325,223 252,915 Commitments and contingencies - - Shareholders' equity Common shares, $.01 par value; 50,000,000 shares authorized; 15,270,392 and 15,195,926 shares issued in 2001 and 2000, respectively 153 152 Preferred shares, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding - - Additional paid-in-capital 279,603 278,574 Treasury shares, at cost: 472,200 shares in 2001 and 2000 (6,533) (6,533) Loans to shareholders (3,525) (3,525) Non-vested shares (1,105) (575) Distributions in excess of net income (10,465) (7,474) ------------------ ---------------- Shareholders' equity 258,128 260,619 ------------------ ---------------- Total liabilities and shareholders' equity $583,351 $513,534 ================== ================ </TABLE> See accompanying notes. 19
Entertainment Properties Trust Consolidated Statements of Income (In thousands except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Rental revenue $ 54,667 $ 53,287 $ 48,319 General and administrative expense 2,507 1,850 2,179 Depreciation and amortization 10,449 10,460 9,982 -------- ------ -------- Income from operations 41,711 40,977 36,158 Interest expense 20,334 18,909 13,278 Income from joint venture 2,203 2,104 333 -------- -------- -------- Net income $ 23,580 $ 24,172 $ 23,213 ======== ======== ======== Basic and diluted net income per common share $1.60 $1.63 $1.60 ======= ======== ======== Shares used for computation: Basic 14,715 14,786 14,516 Diluted 14,783 14,810 14,552 </TABLE> See accompanying notes. 20
ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) <TABLE> <CAPTION> COMMON STOCK ADDITIONAL PAID-IN TREASURY SHARES PAR CAPITAL SHARES -------------------------------------------------- <S> <C> <C> <C> <C> Balance at December 31, 1998 13,862 $139 $255,756 $- Issuance of common stock 1,200 12 20,905 - Shares issued to Directors 3 - 54 - Issuance of stock grant 18 - 298 - Amortization of stock grant - - - - Net income - - - - Shares issued in Dividend Reinvestment Plan 8 - 113 - Purchase of treasury stock - - - (2,136) Dividends to common shareholders ($1.68 per share) - - - - -------------------------------------------------- Balance at December 31, 1999 15,091 151 277,126 (2,136) Loans to officers 80 1 1,124 - Shares issued to Directors 4 - 59 - Issuance of stock grant 21 - 265 - Amortization of stock grant - - - - Net income - - - - Purchase of treasury stock - - - (4,397) Dividends to common shareholders ($1.76 per share) - - - - -------------------------------------------------- Balance at December 31, 2000 15,196 152 278,574 (6,533) Shares issued to Directors 3 - 54 - Issuance of stock grant 64 1 857 - Amortization of stock grant - - - - Net income - - - - 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) ================================================== <CAPTION> LOANS TO NON-VESTED DISTRIBUTIONS IN EXCESS SHAREHOLDERS SHARES OF NET INCOME TOTAL ---------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance at December 31, 1998 $(2,400) $(940) $(3,993) $248,562 Issuance of common stock - - - 20,917 Shares issued to Directors - - - 54 Issuance of stock grant - (238) - 60 Amortization of stock grant - 373 - 373 Net income - - 23,213 23,213 Shares issued in Dividend Reinvestment Plan - - - 113 Purchase of treasury stock - - - (2,136) Dividends to common shareholders ($1.68 per share) - - (24,769) (24,769) ---------------------------------------------------------------------- Balance at December 31, 1999 (2,400) (805) (5,549) 266,387 Loans to officers (1,125) - - - Shares issued to Directors - - - 59 Issuance of stock grant - (220) - 45 Amortization of stock grant - 450 - 450 Net income - - 24,172 24,172 Purchase of treasury stock - - - (4,397) Dividends to common shareholders ($1.76 per share) - - (26,097) (26,097) ---------------------------------------------------------------------- Balance at December 31, 2000 (3,525) (575) (7,474) 260,619 Shares issued to Directors - - - 54 Issuance of stock grant - (860) - (2) Amortization of stock grant - 330 - 330 Net income - - 23,580 23,580 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) $(1,105) $ (10,465) $258,128 ====================================================================== </TABLE> See accompanying notes 21
Entertainment Properties Trust Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 23,580 $ 24,172 $ 23,213 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 10,449 10,460 9,982 Common shares issued to management and trustees 54 104 114 Increase in other assets (2,903) (1,253) (374) Increase in other accounts payable and accrued liabilities 84 165 318 Increase (decrease) in unearned rent 1,565 (2,966) 195 ---------- ----------- ---------- Net cash provided by operating activities 32,829 30,682 33,448 INVESTING ACTIVITIES Acquisition of rental properties (20,822) (37,027) (36,741) Net proceeds from contribution of rental property to joint venture - 13,867 - Proceeds from sale of equity interest in joint venture 1,445 1,428 - 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 (1,554) (789) (4,490) ---------- ----------- ---------- Net cash used in investing activities (34,267) (22,521) (41,231) FINANCING ACTIVITIES Proceeds from long-term debt facilities 179,000 20,175 34,000 Principal payments on long-term debt (126,150) (14,365) (1,145) Purchase of common shares - (4,397) (2,136) Proceeds from issuance of common shares 118 - 21,029 Funding of Megaplex 9 escrow (6,495) Distribution to shareholders (26,393) (25,891) (24,041) ---------- ----------- ---------- Net cash provided by (used in) financing activities 20,080 (24,478) 27,707 ---------- ----------- ---------- Net increase (decrease) in cash and cash equivalents 18,642 (16,317) 19,924 Cash and cash equivalents at beginning of year 5,948 22,265 2,341 ---------- ----------- ---------- Cash and cash equivalents at end of year $ 24,590 $ 5,948 $ 22,265 ========== =========== ========== SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY Declaration of dividend to common shareholders $ 6,659 $ 6,479 $ 6,273 ========== =========== ========== Transfer of land held for development to rental property $ 886 $ 831 $ 722 ========== =========== ========== Exchange of development property in connection with acquisition of rental property $ 1,818 $ - $ - ========== =========== ========== Contribution of rental properties to joint ventures $ - $ 33,568 $ 8,658 ========== =========== ========== Consolidation of assets and liabilities associated with purchase of remaining Westcol joint venture interest 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 $ 19,436 $ 18,048 $ 14,229 ========== =========== ========== </TABLE> See accompanying notes. 22
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 1. ORGANIZATION Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT) organized on August 29, 1997. The Company was formed to acquire and develop entertainment properties including megaplex theatres and entertainment-themed retail centers. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Entertainment Properties Trust and its wholly-owned subsidiaries, EPT DownReit, Inc., EPT DownReit II, Inc, Three Theatres, Inc., Megaplex Holdings, Inc. Megaplex 9, Inc., Cantera 30, Inc., Megaplex Four, Inc. and Westcol Holdings, LLC. All significant inter-company transactions have been eliminated. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ significantly from such estimates and assumptions. RENTAL PROPERTIES Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition of the properties are capitalized. Accumulated depreciation is computed over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings and improvements. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over its estimated useful life. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company records impairment losses on long-lived assets if events and circumstances indicate that the carrying value of an asset might not be fully recoverable. In such an event, the undiscounted cash flows estimated to be generated by those assets are compared to the carrying amounts of those assets and if less, the Company will recognize an impairment loss in the amount by which the carrying amount exceeds fair value. The Company believes that no impairment exists at December 31, 2001. 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. 23
Entertainment Properties Trust Notes to Consolidated Financial Statements (continue) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION All leases contain provisions for periodic escalation in base rent (base rent escalation). In addition, tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Base rents are recognized on a straight-line basis over the term of the lease, and the base rent escalation is recognized when earned. Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreements. 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 will determine the taxability of distributions to shareholders, will differ from that reported for financial reporting purposes due primarily to differences in the basis of the assets and the estimated useful lives used to compute depreciation. SHARE BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee Share options rather than the alternative fair value accounting provided for under SFAS No. 123, "Accounting and Disclosure for Stock Based Compensation." Under APB 25, because the exercise price of the Company's employee share options equals the market price of the underlying shares at the date of grant, no compensation expense is recognized. CONCENTRATION OF RISK American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (65%) of the megaplex theatre rental properties held by the Company at December 31, 2001 as a result of a series of sale leaseback transactions pertaining to a number of AMC megaplex theatres. A substantial portion (approximately 71%) of the Company's revenues, and its ability to make distributions to its shareholders, will depend on rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations under the leases. AMC Entertainment, Inc. is a publicly held company (AMEX:AEN) and accordingly, their financial information is publicly available. RECENTLY ISSUED ACCOUNTING STANDARD During 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for years beginning after December 15, 2001. Management does not believe that the adoption of SFAS No. 144 will have a significant effect on earnings or the financial position of the Company. 24
Entertainment Properties Trust Notes to Consolidated Financial Statements (continue) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instrument presented as of December 31, 2001 and 2000. Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value due to the short term maturities of these financial instruments. Accounts payable and accrued liabilities: The carrying amount of accounts payable and accrued interest approximates fair value due to the short term maturities of these amounts. Long term debt: The fair value of long-term debt at December 31, 2001 and 2000, which is estimated as the present value of future cash flows, discounted at market interest rates of debt instruments with similar terms and remaining maturities, approximates its carrying value. CASH EQUIVALENTS Cash equivalents include demand deposits and shares of a money market mutual fund for which cost approximates market value. RESTRICTED CASH Restricted cash represents demand deposits required in connection with the $125 million secured non-recourse mortgage facility completed during 2001. These deposits are restricted for debt service under the terms of the facility. 3. RENTAL PROPERTIES The following table summarizes the carrying amounts of rental properties as of December 31, 2001, 2000 and 1999 (in thousands): <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Buildings and improvements $ 430,054 $ 400,183 $ 396,779 Land 119,456 83,874 84,432 --------- --------- --------- 549,510 484,057 481,211 Accumulated depreciation (33,538) (23,520) (14,805) --------- --------- --------- Total $ 515,972 $ 460,537 $ 466,406 ========= ========= ========= </TABLE> Depreciation expense on rental properties was $10.1 million, $10.2 million and $9.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. 25
Entertainment Properties Trust Notes to Consolidated Financial Statements (continue) 4. REAL ESTATE JOINT VENTURES WESTCOL JOINT VENTURE On June 30, 1999, the Company completed the formation of a joint venture structured as a limited liability corporation (LLC), Westcol, with Excel Legacy Corp. (Amex: XLG), whereby the Company contributed certain undeveloped land parcels with a carrying value of $8.7 million in exchange for a 50% interest in the real estate joint venture, comprised of the undeveloped land parcels and the Westminster AMC 24 screen theatre in Westminster, Colorado. 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 remaining interest, the Company has consolidated the assets and liabilities of the joint venture at the time of acquisition. 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), 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. During 2000 and 2001, the Company sold to Atlantic a total of a 16% interest in Atlantic-EPR in exchange for $2.8 million in cash. It is expected that Atlantic will acquire up to an additional 64% interest in Atlantic-EPR by selling securities to German investors, with the proceeds of those sales to be contributed to Atlantic-EPR and then paid to the Company to reduce its interest. Atlantic EPR is subject to joint control between the Company and Atlantic and accordingly, the Company does not consolidate the financial results of Atlantic EPR but rather accounts for its investment in the real estate joint venture under the equity method of accounting. Atlantic-EPR had net income of $1.7 million during the year ended December 31, 2001. As of December 31, 2001, Atlantic-EPR's balance sheet was comprised of the following (in thousands): <TABLE> <CAPTION> <S> <C> Real Estate (net of accumulated depreciation) $34,597 Other assets 235 Non-recourse debt 17,524 Other liabilities 120 Equity 17,188 </TABLE> 26
Entertainment Properties Trust Notes to Consolidated Financial Statements (continue) 5. OPERATING LEASES The Company's rental properties are leased under operating leases with expiration dates ranging from 12 to 20 years. Future minimum rentals on non-cancelable tenant leases at December 31, 2001 are as follows (in thousands): <TABLE> <S> <C> 2002 $ 60,119 2003 60,119 2004 60,119 2005 60,178 2006 60,178 Thereafter 463,369 -------- $764,082 ======== </TABLE> 6. LONG TERM DEBT Long term debt at December 31 consists of the following (in thousands): <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> (1)Secured credit facility, 5.63%-6.75%, due May 31, 2004 $ 54,000 $ -- $ -- (2)Mortgage note payable, 8.18%, due February 1, 2005 19,731 19,981 -- (3)Mortgage note payable, 6.50%-15.03%, due February 15, 2006 122,692 -- -- (4)Mortgage note payable, 6.77%, due July 11, 2008 100,973 102,262 103,433 (5)Mortgage note payable, 7.37%, due July 15, 2018 17,369 -- -- Mortgage note payable, 7.00%, due December 28, 2001 -- 3,304 3,304 Revolving line of credit due March 2, 2001 -- 119,000 132,000 Total $314,766 $244,547 $238,737 ======== ======== ======== </TABLE> (1)The Company's secured credit facility due May 31, 2004 is collateralized by four theatre properties and other land parcels, which had a net book value of approximately $85.5 million at December 31, 2001. (2)The Company's mortgage note payable due February 1, 2005 is collateralized by three theatre properties, which had a net book value of approximately $40.7 million at December 31, 2001. (3)The Company's mortgage note payable due February 15, 2006 is collateralized by nine theatre properties, which had a net book value of approximately $197.9 million at December 31, 2001. (4)The Company's mortgage note payable due July 11, 2008 is collateralized by eight theatre properties, which had a net book value of approximately $148.9 million at December 31, 2001. (5)The Company's mortgage note payable due June 15, 2018 is collateralized by one theatre property, which had a net book value of approximately $23.3 million at December 31, 2001. 27
Entertainment Properties Trust Notes to Consolidated Financial Statements (continue) 6. LONG TERM DEBT (CONTINUED) Payments due on long term debt subsequent to December 31, 2001 are as follows (in thousands): <TABLE> <S> <C> 2002 $ 5,119 2003 5,492 2004 59,851 2005 24,849 2006 111,695 Thereafter 107,760 -------- Total $314,766 ======== </TABLE> 7. SHARE INCENTIVE PLAN The Company maintains a Share Incentive Plan (the Plan) under which options to purchase up to 1,500,000 of the Company's common Shares, subject to adjustment in the event of certain corporate events, may be granted. These options provide the right to purchase Shares at a price not less than the fair market value of the Shares at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the periods ended December 31, 2001, 2000 and 1999, respectively: risk-free interest rate of 5.0%, dividend yield of 8%, volatility factors of the expected market price of the Company's common Shares of 0.223-0.251, 0.35 and 0.18 and an expected life of the options of eight years. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Company's pro forma information for each of the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands except for earnings per Share information): <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Net income: As reported $23,580 $24,172 $23,213 Pro forma 23,408 24,041 23,174 Basic earnings per Share: As reported $1.60 $1.63 $1.60 Pro forma 1.60 1.63 1.59 </TABLE> 28
Entertainment Properties Trust Notes to Consolidated Financial Statements (continue) 7. SHARE INCENTIVE PLAN (CONTINUED) A summary of the Company's stock option activity and related information is as follows: <TABLE> <CAPTION> WEIGHTED AVERAGE NUMBER OF OPTIONS PRICE EXERCISE SHARES PER SHARE PRICE EXERCISABLE ------ --------- ----- ----------- <S> <C> <C> <C> <C> Outstanding at December 31, 1998 200,999 $14.81-$20.00 $18.69 42,000 Exercised -- $ -- $ -- Granted 9,999 $19.12 $19.12 Canceled/Expired -- $ -- $ -- --------- Outstanding at December 31, 1999 210,998 $14.81-$20.00 $18.71 84,199 Exercised -- $ -- $ -- Granted 240,000 $14.13 $14.13 Canceled/Expired 43,000 $19.50-$20.00 $19.97 --------- Outstanding at December 31, 2000 407,998 $14.13-$20.00 $15.88 101,198 Exercised -- $ -- $ -- Granted 169,722 $16.05-$16.30 $16.07 Canceled/Expired -- $ -- $ -- --------- Outstanding at December 31, 2001 577,720 $14.13-$20.00 $15.93 172,798 </TABLE> The following table summarizes outstanding and exercisable options at December 31, 2001: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ------------------------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING PRICE OUTSTANDING PRICE - ------------------------------------------------------------------ ------------------------------------------- <S> <C> <C> <C> <C> $14.13 240,000 $14.13 48,000 $14.13 $14.81 30,000 $14.81 18,000 $14.81 $16.05 159,722 $16.05 -- -- $16.30 10,000 $16.30 -- -- $18.19 50,000 $18.19 30,000 $18.19 $19.12 9,999 $19.12 9,999 $19.12 $19.31 9,999 $19.31 9,999 $19.31 $19.50 18,000 $19.50 10,800 $19.50 $20.00 50,000 $20.00 46,000 $20.00 </TABLE> 29
7. SHARE INCENTIVE PLAN (CONTINUED) During 2001 and 2000, the Company issued 37,336 and 20,694, respectively, restricted Shares for bonus compensation to executives and other employees of the Company. During 2001, the Company issued 26,458 shares to executives under a long-term compensation plan. The holders of these restricted Shares have voting rights and are eligible to receive dividends from the date of grant. These shares vest in various increments over a period of three years 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. Compensation expense related to the restricted shares recorded during 2001 and 2000 amounted to $164,296 and $179,750, respectively. 8. RELATED PARTIES In 2000, the Company loaned an aggregate of $3,525,000 to executives within the Company. The loans were made in order for the executives to purchase shares of the Company's stock 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 bear interest at 6.24% and are due on January 1, 2011. The Company has adopted a Loan Forgiveness Program, under which the Compensation Committee may forgive a portion of the above referenced indebtedness after application of proceeds from the sale of shares, following a change in control of the Company. The Compensation Committee may also forgive the debt incurred upon termination of employment by reason of death, disability, normal retirement or without cause. 9. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per Share for the years ended December 31, 2001, 2000 and 1999 (amounts in thousands except Share information): <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Numerator for basic and diluted earnings per Share net income available to common shareholders $ 23,580 $ 24,172 $ 23,213 =========== =========== =========== Denominator: Denominator for basic earnings per Share weighted-average Shares 14,714,756 14,786,263 14,515,619 Effect of dilutive securities: Employee Share options 30,065 - - Non-vested Share grants 38,458 24,000 36,000 ----------- ----------- ----------- Dilutive potential common Shares 68,523 24,000 36,000 ----------- ----------- ----------- Denominator for diluted earnings per Share adjusted weighted-average Shares 14,783,279 14,810,263 14,551,619 =========== =========== =========== Basic and diluted net income per Share $1.60 $1.63 $1.60 ===== ===== ===== </TABLE> 30
10. DERIVATIVES The Company entered into two interest rate cap agreements in accordance with the $75 million variable rate credit facility to effectively limit the Company's exposure on interest rates above a 6.0% three-month LIBOR rate. A $15,000,000 notional amount interest rate cap with a strike rate of 6.0% on three-month LIBOR was purchased for $5,500 and expires on June 17, 2002. A $15,000,000 notional amount interest rate cap with a strike rate of 6.0% on three-month LIBOR was purchased for $7,750 and expires on December 20, 2002. The aggregate cost of $13,325 is amortized monthly over the lives of the interest rate cap agreements. The fair value of the interest rate caps is immaterial to the Company's financial statements at December 31, 2001. The Company expects to purchase additional interest rate caps in the future to limit exposure to variable interest rates on approximately 50% of the variable rate debt outstanding. In 1998, the Company entered into a forward contract in connection with a long-term debt agreement due July 2008 to essentially fix the base rate of interest on a notional amount of $105,000,000. The forward contract settled on June 29, 1998, the closing date of the long-term debt issuance, and the Company recorded a loss of $1,442,000. This loss is being amortized as an increase to interest expense over the term of the long-term debt and will result in an effective interest rate of 6.84%. 11. QUARTERLY RESULTS (unaudited) 2001 Quarterly Consolidated Statements of Income (In thousands except per Share data) <TABLE> <CAPTION> 3/31/01 6/30/01 9/30/01 12/31/01 ------- ------- ------- -------- <S> <C> <C> <C> <C> Rental revenue $13,374 $13,436 $13,651 $14,206 Net income $ 5,808 $ 5,569 $ 6,054 $ 6,149 Basic net income per common Share $ 0.40 $ 0.38 $ 0.41 $ 0.41 ======= ======= ======= ======= Diluted net income per common Share $0.40 $0.38 $0.41 $0.41 ======= ======= ======= ======= </TABLE> 2000 Quarterly Consolidated Statements of Income (Dollars in thousands except per Share data) <TABLE> <CAPTION> 3/31/00 6/30/00 9/30/00 12/31/00 ------- ------- ------- -------- <S> <C> <C> <C> <C> Rental revenue $13,700 $13,429 $13,084 $13,074 Net income $ 6,248 $ 6,446 $ 5,856 $ 5,622 ======= ======= ======= ======= Basic net income per common Share $0.42 $0.43 $0.40 $0.38 ======= ======= ======= ======= Diluted net income per common Share $0.42 $0.43 $0.40 $0.38 ======= ======= ======= ======= </TABLE> 31
12. SUBSEQUENT DEVELOPMENTS On February 8, 2002, the Company completed the sale of 2.3 million common Shares for net proceeds of approximately $43 million. The proceeds from the offering are anticipated to be used to fund the Company's 2002 property acquisitions plan. On March 12, 2001, the Company received a commitment for a $50 million secured revolving credit facility. The Company will use the credit facility to fund property acquisitions expected to be completed during 2002. On March 15, 2002, the Company completed the acquisition of five megaplex theatre properties from Gulf States Theatres. The Company simultaneously entered into 20-year lease agreements with AMC for the five theatres. On March 15, 2002, the Board of Trustees approved a 5.6% increase in its quarterly cash dividend to $0.475 per Share for the first quarter of 2002 payable on April 16, 2002 to shareholders of record as of March 28, 2002. 32
Entertainment Properties Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 2001 <TABLE> <CAPTION> Initial Cost Gross Amount at December 31, 2001 --------------------- --------------------------------- Buildings & Subsequent to Buildings & Description Market Encumbrance Land Improvements Acquisition Land Improvements Total ----------- ------ ----------- ---- ------------ ----------- ---- ------------ ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $ 11,542 $ 3,060 $ 15,540 $ 3,060 $ 15,281 $ 18,341 Mission Valley 20 San Diego, CA 10,087 16,300 16,028 16,028 Promenade 16 Los Angeles, CA 17,699 6,021 22,479 6,021 22,104 28,125 Ontario Mills 30 Los Angeles, CA 15,714 5,521 19,779 5,521 19,450 24,971 Lennox 24 Columbus, OH 7,982 12,900 12,685 12,685 West Olive 16 St. Louis, MO 11,066 4,985 12,815 4,985 12,602 17,587 Studio 30 Houston, TX 16,399 6,023 20,377 6,023 20,037 26,060 Huebner Oaks 24 San Antonio, TX 10,488 3,006 13,894 3,006 13,662 16,668 First Colony 24 Houston, TX 10,983 19,100 19,100 19,100 Oakview 24 Omaha, NE 9,603 5,215 16,700 5,215 16,700 21,915 Leawood 20 Kansas City, MO 9,255 3,714 12,086 3,714 12,086 15,800 Gulf Pointe 30 Houston, TX 15,088 4,304 21,496 4,304 21,496 25,800 South Barrington 30 Chicago, IL 20,131 6,577 27,723 6,577 27,723 34,300 Mesquite 30 Dallas, TX 13,605 2,912 20,288 2,912 20,288 23,200 Hampton Town Center 24 Norfolk, VA 16,787 3,822 24,678 3,822 24,678 28,500 Pompano 18 Pompano Beach, FL 7,834 6,376 9,899 2,426 6,376 12,325 18,701 Raleigh Grand 16 Raleigh, NC 4,093 2,919 5,559 2,919 5,559 8,478 Paradise 24 Miami, FL 13,987 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 13,220 8,000 14,000 8,000 14,000 22,000 Boise Stadium 20 Boise, ID 7,834 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 3,352 11,653 15,005 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 958 401 1,164 565 970 1,535 Bennigans Houston, TX 856 511 891 652 720 1,372 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 543 751 868 868 Westminster 24 Denver, CO 17,369 5,850 17,314 5,850 17,314 23,164 Westminster Center Denver, CO 6,204 12,600 6,204 12,600 18,804 Development Various - 12,218 367 2,441 14,308 719 15,027 -------- -------- -------- ------- -------- -------- --------- TOTAL $314,766 $130,039 $419,303 $16,771 $133,764 $430,054 $ 563,818 ======== ======== ======== ======= ======== ======== ========= <CAPTION> Accumulated Date Depreciation Description Market Depreciation Acquired Life ----------- ------ ------------ -------- ---- <S> <C> <C> <C> <C> Grand 24 Dallas, TX $ 1,337 11/97(1) 40 years Mission Valley 20 San Diego, CA 1,402 11/97(1) 40 years Promenade 16 Los Angeles, CA 1,934 11/97(1) 40 years Ontario Mills 30 Los Angeles, CA 1,702 11/97(1) 40 years Lennox 24 Columbus, OH 1,110 11/97(1) 40 years West Olive 16 St. Louis, MO 1,103 11/97(1) 40 years Studio 30 Houston, TX 1,753 11/97(1) 40 years Huebner Oaks 24 San Antonio, TX 1,196 11/97(1) 40 years First Colony 24 Houston, TX 1,952 11/97 40 years Oakview 24 Omaha, NE 1,707 11/97 40 years Leawood 20 Kansas City, MO 1,235 11/97 40 years Gulf Pointe 30 Houston, TX 2,107 2/98 40 years South Barrington 30 Chicago, IL 2,660 3/98 40 years Mesquite 30 Dallas, TX 1,862 4/98 40 years Hampton Town Center 24 Norfolk, VA 2,162 6/98 40 years Pompano 18 Pompano Beach, FL 1,036 8/98 40 years Raleigh Grand 16 Raleigh, NC 499 8/98 40 years Paradise 24 Miami, FL 1,516 11/98 40 years Pompano Kmart Pompano Beach, FL 182 11/98 40 years Nickels Restaurant Pompano Beach, FL 60 11/98 40 years Aliso Viejo 20 Los Angeles, CA 1,050 12/98 40 years Boise Stadium 20 Boise, ID 1,200 12/98 40 years Woodridge 18 Chicago, IL 556 6/99 40 years Cary Crossroads 20 Cary, NC 583 6/99 40 years Tampa Palms 20 Tampa, FL 667 6/99 40 years Palms Promenade San Diego, CA 850 6/99 40 years On The Border Dallas, TX 11/97 Bennigans Dallas, TX 11/97 10 years Bennigans Houston, TX 11/97 10 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 36 12/01 40 years Westminster Center Denver, CO 26 12/01 40 years Development Various 55 ------- $33,538 ======= </TABLE> (1) Properties initially acquired in November 1997 were transferred to wholly owned subsidiary in June 1998 at net book value. <TABLE> <CAPTION> Reconciliation: Real Estate --------------- ----------- <S> <C> Balance at beginning of the period $ 496,315 Additions during the period 22,376 Consolidation of Westcol joint venture acquisition real estate 45,073 Balance at Close of period $ 563,764 ========== </TABLE> 33
Entertainment Properties Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 2000 <TABLE> <CAPTION> Initial Cost ----------------------- Subsequent Buildings & to Description Market Encumbrance Land Improvements Acquisition ----------- ------ ----------- ---- ------------ ----------- <S> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $ 11,688 $ 3,060 $ 15,540 Mission Valley 20 San Diego, CA 10,215 16,300 Promenade 16 Los Angeles, CA 17,924 6,021 22,479 Ontario Mills 30 Los Angeles, CA 15,913 5,521 19,779 Lennox 24 Columbus, OH 8,084 12,900 West Olive 16 St. Louis, MO 11,207 4,985 12,815 Studio 30 Houston, TX 16,608 6,023 20,377 Huebner Oaks 24 San Antonio, TX 10,623 3,006 13,894 First Colony 24 Houston, TX 19,100 Oakview 24 Omaha, NE 16,700 Leawood 20 Kansas City, MO 3,714 12,086 Gulf Pointe 30 Houston, TX 4,304 21,496 South Barrington 30 Chicago, IL 6,577 27,723 Mesquite 30 Dallas, TX 2,912 20,288 Hampton Town Center 24 Norfolk, VA 3,822 24,678 Pompano 18 Pompano Beach, FL 7,923 6,376 9,899 2,426 Raleigh Grand 16 Raleigh, NC 4,135 2,919 5,559 Paradise 24 Miami, FL 2,000 13,000 8,519 Pompano Kmart Pompano Beach, FL 600 2,423 Nickels Restaurant Pompano Beach, FL 200 803 Aliso Viejo 20 Los Angeles, CA 8,000 14,000 Boise Stadium 20 Boise, ID 7,923 16,003 Woodridge 18 Chicago, IL 8,968 Cary Crossroads 20 Cary, NC 3,352 11,653 Tampa Palms 20 Tampa, FL 6,000 12,809 Palms Promenade San Diego, CA 17,750 On The Border Dallas, TX 674 205 Bennigans Dallas, TX 401 1,164 Bennigans Houston, TX 511 891 Texas Land & Cattle Dallas, TX 511 1,008 Roadhouse Grill Atlanta, GA 751 117 Development/other Various 3,304 10,467 312 1,790 -------- ------- -------- ------- TOTAL $125,547 $92,707 $389,334 $16,120 ======== ======= ======== ======= <CAPTION> Gross Amount at December 31, 2000 ----------------------------------- Buildings & Accumulated Date Depreciation Description Land Improvements Total Depreciation Acquired Life ----------- ---- ------------ ----- ------------ -------- ---- <S> <C> <C> <C> <C> <C> <C> Grand 24 $ 3,060 $ 15,281 $ 18,341 $ 957 11/97(1) 40 years Mission Valley 20 16,028 16,028 1,003 11/97(1) 40 years Promenade 16 6,021 22,104 28,125 1,383 11/97(1) 40 years Ontario Mills 30 5,521 19,449 24,970 1,217 11/97(1) 40 years Lennox 24 12,685 12,685 794 11/97(1) 40 years West Olive 16 4,985 12,602 17,587 792 11/97(1) 40 years Studio 30 6,023 20,037 26,060 1,253 11/97(1) 40 years Huebner Oaks 24 3,006 13,662 16,668 855 11/97(1) 40 years First Colony 24 19,100 19,100 1,476 11/97 40 years Oakview 24 16,700 16,700 1,287 11/97 40 years Leawood 20 3,714 12,086 15,800 932 11/97 40 years Gulf Pointe 30 4,304 21,496 25,800 1,568 2/98 40 years South Barrington 30 6,577 27,723 34,300 1,964 3/98 40 years Mesquite 30 2,912 20,288 23,200 1,353 4/98 40 years Hampton Town Center 24 3,822 24,678 28,500 1,543 6/98 40 years Pompano 18 6,376 12,325 18,701 729 8/98 40 years Raleigh Grand 16 2,919 5,559 8,478 353 8/98 40 years Paradise 24 2,000 21,519 23,519 978 11/98 40 years Pompano Kmart 600 2,423 3,023 122 11/98 40 years Nickels Restaurant 200 803 1,003 40 11/98 40 years Aliso Viejo 20 8,000 14,000 22,000 700 12/98 40 years Boise Stadium 20 16,003 16,003 800 12/98 40 years Woodridge 18 8,968 8,968 334 6/99 40 years Cary Crossroads 20 3,352 11,653 15,005 291 6/99 40 years Tampa Palms 20 6,000 12,809 18,809 346 6/99 40 years Palms Promenade 17,750 17,750 407 6/99 40 years On The Border 879 879 11/97 Bennigans 1,164 1,729 7 11/97 10 years Bennigans 652 750 1,402 14 11/97 10 years Texas Land & Cattle 1,518 1,518 11/97 Roadhouse Grill 868 868 3/99 Development/other 12,153 540 12,798 26 -------- -------- -------- -------- TOTAL $ 96,027 $400,183 $496,315 $ 23,520 ======== ======== ======== ======== </TABLE> (1) Properties initially acquired in November 1997 were transferred to wholly owned subsidiary in June 1998 at net book value. <TABLE> <CAPTION> Reconciliation: Real Estate ----------- <S> <C> Balance at beginning of the period $ 495,745 Additions during the period 32,650 Improvements 2,617 Other 303 Deductions during period -- transfer of property to joint venture 35,000 Balance at Close of period $ 496,315 ========== </TABLE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 15, 2002 (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. ITEM 11. EXECUTIVE COMPENSATION The Proxy Statement contains under the captions "Election of Trustees -- Compensation of Trustees", "Executive Compensation", "Compensation Committee", "Company Performance and Equity Compensation Plan Information" 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 The Proxy Statement contains under the caption "Share Ownership" 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. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits, Financial Statements and Financial Statement Schedules: Financial Statements: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Income for the three years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the three years ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements (b) Reports on Form 8-K: none 35
(c) Exhibits 10.21 Second Amended and Restated Credit Agreement dated as of October 31, 2001 between Entertainment Properties Trust and SFT II, Inc. 21 Subsidiaries of the Company 23 Consent of Independent Auditors (d) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation No other schedules meet the requirement for disclosure. 36
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 28, 2002 By /s/ Fred L. Kennon ----------------------------------------- Fred L. Kennon, Vice President -- Chief Financial Officer Treasurer and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: SIGNATURE AND TITLE DATE ------------------- ---- /s/ Peter C. Brown March 28, 2002 - ------------------------------------------------------- Peter C. Brown, Chairman of the Board /s/ David M. Brain March 28, 2002 - ------------------------------------------------------- David M. Brain, Chief Executive Officer and Trustee /s/ Robert J. Druten March 28, 2002 - ------------------------------------------------------- Robert J. Druten, Trustee /s/ Scott H. Ward March 28, 2002 - ------------------------------------------------------- Scott H. Ward, Trustee /s/ Danley K. Sheldon March 28, 2002 - ------------------------------------------------------- Danley K. Sheldon, Trustee 37