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, 2002 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 of incorporation or organization) Identification No.) 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: <TABLE> <CAPTION> Title of Class Name of each exchange on which registered -------------- ----------------------------------------- <S> <C> Common Shares of Beneficial Interest, New York Stock Exchange par value $.01 per share 9.5% Series A Cumulative Preferred Shares, New York Stock Exchange par value $.01 per share </TABLE> SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12b-2). YES [X] NO [ ] THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST ("COMMON SHARES") OF THE REGISTRANT HELD BY NON-AFFILIATES ON FEBRUARY 21, 2003, WAS $422,713,092 (BASED ON THE CLOSING SALES PRICE PER COMMON SHARE ON THE NEW YORK STOCK EXCHANGE ON FEBRUARY 21, 2003 OF $24.59). AT FEBRUARY 21, 2003, THERE WERE 17,190,447 COMMON SHARES OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K.
PART I ITEM 1.BUSINESS Investors should review the Risk Factors commencing on page 4 of this Report for a discussion of risks that may impact our financial condition, business or share price. GENERAL Entertainment Properties Trust (the "Company") was formed on August 22, 1997 as a Maryland real estate investment trust ("REIT") to capitalize on the opportunities created by the development of destination entertainment and entertainment-related properties, including megaplex movie theatre complexes. We completed an initial public offering of our common shares of beneficial interest ("Common Shares") on November 18, 1997. We are the first publicly-traded REIT formed exclusively to invest in entertainment-related properties. We are a self-administered REIT. As of December 31, 2002, our real estate portfolio was comprised primarily of 37 megaplex theatre properties, including one joint venture property, located in seventeen states, one entertainment-themed retail center ("ETRC") located in Westminster, Colorado, and land parcels leased to restaurant and retail operators adjacent to several of our theatre properties. Our theatre properties are leased to leading theatre operators, including American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc. ("AMCE"), Muvico Entertainment LLC ("Muvico"), Edwards Theatre Circuits, Inc. ("Edwards"), Consolidated Theatres ("Consolidated"), Loews Cineplex Entertainment ("Loews"), and Rave Motion Pictures ("Rave"). Approximately 73% of the Company's megaplex theatre properties are leased to AMC. We aggregate the financial information of all our properties into one reportable segment because the properties all have similar economic characteristics and provide similar services to similar types and classes of customers. We believe entertainment is an important sector of the retail real estate industry and that, as a result of the our focus on properties in this sector and the industry relationships of our management, we have a competitive advantage in providing capital to operators of these types of properties. Our principal business strategy is to be the nation's leading entertainment real-estate company by continuing to acquire high-quality properties leased to entertainment and entertainment-related business operators, generally under long-term triple-net leases that require the tenant to pay substantially all expenses associated with the operation and maintenance of the property. Megaplex theatres typically have at least 14 screens with stadium-style seating (seating with elevation between rows to provide unobstructed viewing) and are equipped with amenities that significantly enhance the audio and visual experience of the patron. We believe the development of megaplex theatres has accelerated the obsolescence of many of the previous generation of existing multiplex movie theatres by setting new standards for moviegoers, who, in our experience, have demonstrated their preference for the more attractive surroundings, wider variety of films and superior customer service typical of megaplex theatres (see "Operating risks in the entertainment industry may affect the ability of our tenants to perform under their leases" and "Market prices for our Shares may be affected by perceptions about the financial health or share value of our tenants or the performance of REIT stocks generally" under "Risk Factors"). We expect the development of megaplex theatres to continue in the United States and abroad for the foreseeable future. With the development of the stadium style megaplex theatre as the preeminent store 1
format for cinema exhibition, the older generation of smaller flat-floor theatres has generally experienced a significant downturn in attendance and performance. As a result of the significant capital commitment involved in building these new properties and the experience and industry relationships of management, we believe we will continue to have opportunities to provide capital to businesses that seek to develop and operate these properties but would prefer to lease rather than own the properties. We believe our ability to finance these properties will enable us to continue to grow and diversify our asset base. See Item 7 - "Management's Discussion and Analysis" for a discussion of capital requirements necessary for the Company's continued growth. BUSINESS OBJECTIVES AND STRATEGIES Our primary business objective is to continue to enhance shareholder value by achieving predictable and increasing Funds From Operations ("FFO") per Share (See Item 7 - "Management's Discussion and Analysis - Funds From Operations" for a discussion of FFO), through the acquisition of high-quality properties leased to entertainment and entertainment-related business operators. We intend to achieve this objective by continuing to execute the Growth Strategies, Operating Strategies and Capitalization Strategies described below: GROWTH STRATEGIES FUTURE PROPERTIES We intend to pursue acquisitions of high-quality entertainment related properties from operators with a strong market presence. As a part of our growth strategy, we will consider entering into 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, we typically acquire single-tenant properties that are leased under long-term leases. We believe our willingness to make long-term investments in properties offers our tenants financial flexibility and allows tenants to allocate capital to their core businesses. Although we will continue to emphasize single-tenant properties, we will also evaluate multi-tenant properties we believe add value to our shareholders. LEASE STRUCTURE We typically structure leases on a triple-net basis under which the tenants bear the principal portion of the financial and operational responsibility for the properties. During each lease term and any renewal periods, the leases typically provide for periodic increases in rent and/or percentage rent based upon a percentage of the tenant's gross sales over a pre-determined level. TENANT RELATIONSHIPS We intend 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 2
We will endeavor to further diversify our asset base by property type, geographic location and tenant. In pursuing this diversification strategy, the Company will target theatre, restaurant, retail and other entertainment-related business operators which management views as leaders in their market segments and which have the financial strength to compete effectively and perform under their leases with the Company. CAPITALIZATION STRATEGIES USE OF LEVERAGE; DEBT TO TOTAL CAPITALIZATION We seek to enhance shareholder return through the use of leverage (see "Risk Factors - "There is risk in using debt to fund property acquisitions" and "We must obtain new financing in order to grow" in Item 1). In addition, we have issued and may in the future seek to issue additional equity as circumstances warrant and opportunities to do so become available. We expect to maintain a debt to total capitalization ratio (i.e., total debt of the Company as a percentage of shareholder equity plus total debt) of approximately 50% to 55%. JOINT VENTURES We will examine and pursue potential joint venture opportunities with institutional investors or developers if they are considered to add value to our shareholders. We may employ higher leverage in joint ventures (See "Risk Factors - - Joint Ventures may limit flexibility with jointly owned investments"). PAYMENT OF REGULAR DISTRIBUTIONS We have paid and expect to continue paying quarterly dividend distributions to our Common and Preferred shareholders. Our Preferred Shares have a dividend rate of 9.5%. Among the factors the Board of Trustees considers in setting the Common Share distribution rate are the applicable REIT rules and regulations that apply to distributions, the Company's results of operations, including FFO per Share, and the Company's Cash Available for Distribution (defined as net cash flow available for distribution after payment of operating expenses, debt service, and other obligations). We expect to periodically increase distributions as FFO and Cash Available for Distribution increase and as other considerations and factors warrant. See "Risk Factors - We cannot assure you we will continue paying dividends at historical rates" in Item 1 of this Form 10-K. COMPETITION We compete for real estate financing opportunities with other companies that invest in real estate, as well as traditional financial sources such as banks and insurance companies. While we were the first publicly traded REIT formed to specialize in entertainment-themed properties, other REITs have sought and may continue to seek to finance entertainment properties as new megaplex theatres, ETRCs and related restaurant and retail properties are developed or become available for acquisition. EMPLOYEES As of December 31, 2002, the Company had seven full time employees. WEBSITE ACCESS TO EXCHANGE ACT REPORTS Our internet website address is www.eprkc.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to the SEC. RISK FACTORS 3
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 20 of this report. RISKS THAT MAY IMPACT OUR FINANCIAL CONDITION OR PERFORMANCE WE COULD BE ADVERSELY AFFECTED BY A TENANT'S BANKRUPTCY If a tenant becomes bankrupt or insolvent, that could diminish the income we expect from that tenant's leases. We may not be able to evict a tenant solely because of its bankruptcy. On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that might be substantially less than the remaining rent owed under the leases. In addition, any claim we have for unpaid past rent would likely not be paid in full. The development of megaplex movie theatres has rendered many older multiplex theatres obsolete. To the extent our tenants own a substantial number of multiplexes, they have been, or may in the future be, required to take significant charges against earnings resulting from the impairment of these assets. Megaplex theatre operators have also been and could in the future be adversely affected by any overbuilding of megaplex theatres in their markets and the cost of financing, building and leasing megaplex theatres. Two of our tenants, Edwards Theatre Circuit, Inc., (now part of the Regal Entertainment Group), which operates two of our theatre properties, and Loews Cineplex Entertainment, which operates one of our theatres, have filed for, and emerged from, bankruptcy reorganization. The Company did not incur any significant expenses or loss of revenue as a result of those bankruptcy reorganizations. OPERATING RISKS IN THE ENTERTAINMENT INDUSTRY MAY AFFECT THE ABILITY OF OUR TENANTS TO PERFORM UNDER THEIR LEASES The ability of our tenants to operate successfully in the entertainment industry and remain current on their lease obligations depends on a number of factors, including the availability and popularity of motion pictures, the performance of those pictures in tenants' markets, the allocation of popular pictures to tenants and the terms on which the pictures are licensed. Neither we nor our tenants control the operations of motion picture distributors. Megaplex theatres represent a greater capital investment, and generate higher rents, than the previous generation of multiplex theatres. For this reason, the ability of our tenants to operate profitably and perform under their leases could be dependent on their ability to generate higher revenues per screen than multiplex theatres typically produce. The success of "out-of-home" entertainment venues such as megaplex theatres and entertainment-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 73% of our megaplex theatre properties are leased to AMC, one of the nation's largest movie exhibition companies. AMCE has guaranteed AMC's performance under the leases. We have diversified and expect to continue to diversify our real estate portfolio by entering into lease transactions with a number of other leading theatre operators. Nevertheless, our revenues and our continuing ability to pay shareholder dividends are currently substantially dependent on AMC's performance under its leases and AMCE's performance under its guaranty. 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. 4
We believe AMC occupies a strong position in the industry and we intend to continue acquiring and leasing back AMC theatres. However, if for any reason AMC failed to perform under its lease obligations and AMCE did not perform under its guaranty, we could be required to reduce or suspend our shareholder dividends and may not have sufficient funds to support operations until substitute tenants are obtained. If that happened, we cannot predict when or whether we could obtain substitute quality tenants on acceptable terms. Peter C. Brown, the Chairman of our Board of Trustees, is Chairman of AMCE. We believe 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 acquisition of AMC properties or lease terms concerning AMC properties. THERE IS RISK IN USING DEBT TO FUND PROPERTY ACQUISITIONS We have used leverage to acquire properties and expect to continue to do so in the future. Although the use of leverage is common in the real estate industry, our use of debt to acquire properties does expose us to some risks. If a significant number of our tenants fail to make their lease payments and we don't have sufficient cash to pay principal and interest on the debt, we could default on our debt obligations. Our debt financing is secured by mortgages on our properties. If we fail to meet our mortgage payments, the lenders could declare a default and foreclose on those properties. A PORTION OF OUR SECURED DEBT HAS "HYPER-AMORTIZATION" PROVISIONS WHICH MAY REQUIRE US TO REFINANCE THE DEBT OR SELL THE PROPERTIES SECURING THE DEBT PRIOR TO MATURITY As of December 31, 2002, we had approximately $99.6 million outstanding under a single secured mortgage loan agreement that contains a "hyper-amortization" feature, in which the principal payment schedule is rapidly accelerated, and our principal payments are substantially increased, if we fail to pay the balance on the anticipated prepayment date of July 11, 2008. We undertook this debt on the assumption that we can refinance the debt prior to these hyper-amortization payments becoming due. If we cannot obtain acceptable refinancing at the appropriate time, the hyper-amortization payments will require substantially all of the revenues from those properties securing the debt to be applied to the debt repayment, which would substantially reduce our Common Share dividend rate and could adversely affect our financial condition and liquidity. WE MUST OBTAIN NEW FINANCING IN ORDER TO GROW As a REIT, we are required to distribute at least 90% of our 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 5
tax laws, the application of the tax laws to our qualification as a REIT or the federal income tax consequences of that qualification. If we fail to qualify as a REIT we will face tax consequences that will substantially reduce the funds available for payment of dividends: - We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates - We could be subject to the federal alternative minimum tax and possibly increased state and local taxes - Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we were disqualified In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of these factors, our failure to qualify as a REIT could adversely affect the market price for our shares. RISKS THAT APPLY TO OUR REAL ESTATE BUSINESS THERE ARE RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE Although our lease terms obligate the tenants to bear substantially all of the costs of operating the properties, investing in real estate involves a number of risks, including: - The risk that tenants will not perform under their leases, reducing our income from the leases or requiring us to assume the cost of performing obligations (such as taxes, insurance and maintenance) that are the tenant's responsibility under the lease - The risk that changes in economic conditions or real estate markets may adversely affect the value of our properties - The risk that local conditions (such as oversupply of megaplex theatres or other entertainment-related properties) could adversely affect the value of our properties - We may not always be able to lease properties at favorable rates - We may not always be able to sell a property when we desire to do so at a favorable price - Changes in tax, zoning or other laws could make properties less attractive or less profitable If a tenant fails to perform on its lease covenants, that would not excuse us from meeting any debt obligation secured by the property and could require us to fund reserves in favor of our lenders, thereby reducing funds available for payment of dividends. We cannot be assured that tenants will elect to renew their leases when the terms expire. If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no assurance we could obtain a substitute tenant on acceptable terms. If we cannot obtain another quality movie exhibitor to lease a megaplex theatre property, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in re-leasing the property. SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE Our leases require the tenants to carry comprehensive liability, casualty, workers' compensation, extended coverage and rental loss insurance on our properties. We believe the required coverage is of the type, and amount, customarily obtained by an owner of similar properties. We believe all of our properties are adequately insured. However, there are some types of losses, such as catastrophic acts of nature, for which we or our tenants cannot obtain insurance at an acceptable cost. If there is an uninsured loss or a loss in excess of insurance limits, we could lose both the revenues generated by the affected property and the capital we have invested in the property. We would, however, remain obligated to repay any mortgage indebtedness or other obligations related to the property. Since September 11, 2001, the cost of insurance protection against terrorist acts has risen dramatically. There can be no assurance our tenants will be able to 6
obtain terrorism insurance coverage, or that any coverage they do obtain will adequately protect our properties against loss from terrorist attack. JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS We may acquire or develop properties in joint ventures with third parties when those transactions appear desirable. We would not own the entire interest in any property acquired by a joint venture. If we have a dispute with a joint venture partner, we may feel it necessary or become obligated to acquire the partner's interest in the venture. However, we cannot assure you that the price we would have to pay or the timing of the acquisition would be favorable to us. If we own less than a 50% interest in any joint venture, or if the venture is jointly controlled, the assets and financial results of the joint venture may not be reportable by us on a consolidated basis. To the extent we owe commitments to, or are dependant on, any such "off-balance sheet" arrangements, or if those arrangements or their properties or leases are subject to material contingencies, our liquidity, financial condition and operating results could be adversely affected by those commitments or off-balance sheet arrangements. 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 tenant turnover and 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 7
- Governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property. In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Most of our loan agreements require the Company or a subsidiary to indemnify the lender against environmental liabilities. Our leases require the tenants to operate the properties in compliance with environmental laws and to indemnify us against environmental liability arising from the operation of the properties. We believe all of our properties are in material compliance with environmental laws. However, we could be subject to strict liability under environmental laws because we own the properties. There is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases. Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our lenders and reduce our ability to service our debt and pay dividends to shareholders. REAL ESTATE INVESTMENTS ARE RELATIVELY NON-LIQUID We may desire to sell a property in the future because of changes in market conditions or poor tenant performance or to avail ourselves of other opportunities. We may also be required to sell a property in the future to meet debt obligations or avoid a default. Specialty real estate projects such as megaplex theatres cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price. We may be required to invest in the restoration or modification of a property before we can sell it. RISKS THAT MAY AFFECT THE MARKET PRICE OF OUR SHARES WE CANNOT ASSURE YOU WE WILL CONTINUE PAYING DIVIDENDS AT HISTORICAL RATES Our ability to continue paying dividends at historical rates or to increase our Common Share dividend rate will depend on a number of factors, including our financial condition and results of future operations, the performance of lease terms by tenants, our ability to acquire, finance and lease additional properties at attractive rates, and provisions in our loan covenants. If we do not maintain or increase our dividend rate, that could have an adverse effect on the market price of our Common Shares. MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES One of the factors that investors may consider in deciding whether to buy or sell our Common Shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend on our Common Shares or seek securities paying higher dividends or interest. MARKET PRICES FOR OUR SHARES MAY BE AFFECTED BY PERCEPTIONS ABOUT THE FINANCIAL HEALTH OR SHARE VALUE OF OUR TENANTS OR THE PERFORMANCE OF REIT STOCKS GENERALLY. To the extent any of our tenants or other movie exhibitors report losses or slower earnings growth, take charges against earnings resulting from the obsolescence of multiplex theatres or enter bankruptcy proceedings, the market price for our shares could be adversely affected. The market price for our shares could also be affected by any weakness in movie exhibitor stocks generally. We believe these trends had an adverse impact on our Common Share price during 2001 and 2000. CHANGES IN THE TAXATION OF CORPORATE DIVIDENDS MAY ADVERSELY AFFECT OUR SHARE PRICE. 8
The President has proposed that corporate dividends be excluded from income for federal income tax purposes. It is impossible to predict whether, or in what form, this proposal will be passed by Congress, or whether REIT shares would be entitled to any exclusion which does pass. If REIT shares are not entitled to the exclusion and the exclusion is passed by Congress, investors seeking dividend-paying investments may be more attracted to corporate shares, which may adversely affect the market for our shares. LIMITS ON CHANGES IN CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS WHICH MAY BE BENEFICIAL TO OUR SHAREHOLDERS There are a number of provisions in our Declaration of Trust, Maryland law and agreements we have with others which could make it more difficult for a party to make a tender offer for our shares or complete a takeover of the Company which is not approved by our Board of Trustees. These include: - A staggered Board of Trustees that can be increased in number without shareholder approval - A limit on beneficial ownership of our shares, which acts as a defense against a hostile takeover or acquisition of a significant or controlling interest, in addition to preserving our REIT status - The ability of the Board of Trustees to issue preferred shares or reclassify preferred or common shares without shareholder approval - Limits on the ability of shareholders to remove trustees without cause - Requirements for advance notice of shareholder proposals at annual shareholder meetings - Provisions of Maryland law restricting business combinations and control share acquisitions not approved by the Board of Trustees - Provisions of Maryland law 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 the Company in default upon a change in control - Provisions of employment agreements with our officers calling for share purchase loan forgiveness upon a hostile change in control Any or all of these provisions could delay or prevent a change in control of the Company, even if the change was in our shareholders' interest or offered a greater return to our shareholders. ITEM 2. PROPERTIES As of December 31, 2002, the Company's real estate portfolio consisted of 37 megaplex theatre properties (including one joint venture property), one entertainment-themed retail center ("ETRC"), and twelve 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 - -------- -------- ---- ------- ----- -------------- ------ MEGAPLEX THEATRE PROPERTIES <S> <C> <C> <C> <C> <C> <C> 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 </TABLE> 9
<TABLE> <S> <C> <C> <C> <C> <C> <C> First Colony 24 (1) (6) Houston, TX 11/97 24 5,098 107,690 AMC Oakview 24 (1) (6)(10) Omaha, NE 11/97 24 5,098 107,402 AMC Leawood Town Center 20(6) 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)(10) Woodridge, IL 6/99 18 4,405 80,600 Loews Tampa Starlight 20 (8)(10) Tampa, FL 6/99 20 3,928 83,000 Muvico Palm Promenade 24 (8)(10) San Diego, CA 1/00 24 4,577 88,610 AMC Crossroads 20 (8)(10) Raleigh, NC 1/00 20 3,936 77,475 Consolidated Elmwood Palace 20 (9)(10) New Orleans, LA 3/02 20 4,357 90,391 AMC Hammond Palace 10 (9)(10) New Orleans, LA 3/02 10 1,531 39,850 AMC Houma Palace 10 (9)(10) New Orleans, LA 3/02 10 1,871 44,450 AMC Westbank Palace 16 (9)(10) New Orleans, LA 3/02 16 3,176 71,607 AMC Clearview Palace 12 (9)(10) New Orleans, LA 3/02 12 2,479 70,000 AMC Olathe Station 30 (9)(10) Kansas City, MO 6/02 30 5,593 110,000 AMC Forum 30 (9)(10) Detroit, MI 6/02 30 5,041 107,712 AMC Cherrydale 16 (10) Greenville, SC 6/02 16 2,744 52,860 Consolidated Livonia 20 (10) Detroit, MI 8/02 20 3,808 75,106 AMC Hoffman Town Centre 22(10) Alexandria, VA 10/02 22 4,150 90,000 AMC Colonel Glenn 18 Little Rock, AR 12/02 18 3,984 79,330 Rave --- ------- --------- Subtotal Megaplex Theatres 804 157,821 3,484,294 </TABLE> <TABLE> <CAPTION> RETAIL AND RESTAURANT PROPERTIES <S> <C> <C> <C> <C> <C> <C> 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 On-The-Border (8) Dallas, TX 1/99 -- -- 6,580 Brinkers Bennigan's (8) Houston, TX 5/00 -- -- 6,575 S & A Bennigan's (8) Dallas, TX 5/00 -- -- 6,575 S & A Texas Land & Cattle (8) Houston, TX 5/00 -- -- 6,600 Tx.C.C., Inc. Texas Roadhouse (8) Dallas, TX 1/99 -- -- 6,000 TX Roadhouse Roadhouse Grill (8) Atlanta, GA 8/00 -- -- 6,850 Roadhouse Grill Cherrydale Shops Greenville, SC 6/02 -- -- 10,000 Multi-Tenant --- ------- --------- Subtotal -- -- 275,320 Total 804 157,821 3,759,614 === ======= ========= </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. 10
(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 $54 million credit facility at December 31, 2002. Also see footnote 10. (9) Property is included as security for a $50 million revolving credit facility at December 31, 2002. Also see footnote 10. (10) Property is included as security for a $155.5 mortgage note as a result of our financing completed February 27, 2003 See note #16 to the accompanying consolidated financial statements regarding this subsequent event. 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 $116,000. The lease expires in March, 2009. TENANTS AND LEASES The Company's existing leases on rental property (on a consolidated basis - excluding joint venture property) provide for aggregate annual rentals of approximately $79.3 million (not including rent escalations or percentage rent). The megaplex theatre leases have an average remaining base term lease life of 14 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. PROPERTY ACQUISITIONS IN 2002 The following table lists the rental properties acquired during 2002: <TABLE> <CAPTION> PROPERTY LOCATION TENANT -------- -------- ------ <S> <C> <C> Elmwood Palace 20 New Orleans, LA AMC Hammond Palace 10 New Orleans, LA AMC Houma Palace 20 New Orleans, LA AMC Westbank Palace 16 New Orleans, LA AMC Clearview Palace 12 New Orleans, LA AMC Olathe Station 30 Kansas City, MO AMC Forum 30 Detroit, MI AMC Cherrydale 16 Greenville, SC Consolidated Cherrydale Shops Greenville, SC Multi -Tenant Livonia 20 Detroit, MI AMC Hoffman Town Centre 22 Alexandria, VA AMC Colonel Glenn 18 Little Rock, AR Rave Motion Pictures </TABLE> ITEM 3. LEGAL PROCEEDINGS Other than routine litigation and administrative proceedings arising in the ordinary course of business, the 11
Company is not presently involved in any litigation nor, to its knowledge, is any litigation threatened against the Company or its properties, which is reasonably likely to have a material adverse effect on the liquidity or results of operations of the Company. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the quarterly periods indicated, the high and low sales prices per Share for the Company's Common Shares on the New York Stock Exchange under the trading symbol "EPR" and the distributions declared. <TABLE> <CAPTION> Share Price ----------- Declared High Low Distribution ---- --- ------------ 2002 ---- <S> <C> <C> <C> Fourth Quarter $24.70 $19.85 $0.475 Third Quarter $24.76 $18.60 0.475 Second Quarter $24.70 $22.00 0.475 First Quarter $22.65 $18.90 0.475 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 </TABLE> At February 21, 2003, there were approximately 9,393 holders of record of the Company's Common Shares. The Company declared quarterly distributions to shareholders aggregating $1.90 per Common Share in 2002 and $1.80 per Common Share in 2001. While we intend to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Trustees and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, debt covenants and other factors the Board of Trustees deems relevant. The actual cash flow available to pay dividends may be affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, interest expense on Company borrowings, the ability of lessees to meet their obligations to the Company and any unanticipated capital expenditures (See "Risk Factors - We cannot assure you we will continue paying dividends at historical rates," in Item 1, and "Liquidity and Capital Resources" in Item 7 - "Management's Discussion and Analysis"). The Company's Preferred Shares have a fixed dividend rate of 9.5%. 12
ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Rental revenue $ 71,610 $ 54,667 $ 53,287 $ 48,319 $ 35,031 Property operating expense 201 -- -- -- -- General and administrative expense 2,293 2,507 1,850 2,179 2,052 Interest expense 24,475 20,334 18,909 13,278 6,461 Depreciation and amortization expense 12,862 10,209 10,184 9,609 7,040 Amortization of restricted share grants 1,048 240 276 373 240 -------- -------- -------- -------- -------- Income before minority interest, income from joint venture and gain on sale of real estate 30,731 21,377 22,068 22,880 19,238 -------- -------- -------- -------- -------- Gain on sale of real estate 202 -- -- -- -- Minority interest (1,195) -- -- -- -- Equity in income from joint ventures 1,421 2,203 2,104 333 -- Preferred dividend requirements (3,225) -- -- -- -- -------- -------- -------- -------- -------- Net income available to common shareholders 27,934 23,580 24,172 23,213 19,238 ======== ======== ======== ======== ======== Net income per common share: Basic $ 1.66 $ 1.60 $ 1.63 $ 1.60 $ 1.39 Diluted 1.64 1.60 1.63 1.60 1.39 Weighted average number of common shares outstanding Basic 16,791 14,715 14,786 14,516 13,802 Diluted 17,762 14,783 14,810 14,552 13,880 Cash dividends declared per common share $ 1.90 $ 1.80 $ 1.76 $ 1.68 $ 1.60 </TABLE> <TABLE> <CAPTION> December 31, December 31, December 31, December 31, December 31, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Net real estate investments $692,922 $530,280 $472,795 $478,706 $455,997 Total assets 730,387 583,351 513,534 516,291 464,371 Common dividends payable 8,162 6,659 6,479 6,273 5,545 Preferred dividends payable 1,366 -- -- -- -- Long-term debt 346,617 314,766 244,547 238,737 206,037 Total liabilities 361,834 325,223 252,915 249,904 215,809 Minority interest 15,375 -- -- -- -- Shareholders' equity 353,178 258,128 260,619 266,387 248,562 </TABLE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company included in this Annual Report on Form 10-K. The forward-looking statements included in this discussion and elsewhere in this Form 10-K involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns and other matters, which reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results and other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1 "Business - Risk Factors". OVERVIEW Our primary business strategy is to purchase real estate (land, buildings and other improvements) leased to operators of destination based entertainment and entertainment related properties under long-term, triple-net leases. As of December 31, 2002, we had invested approximately $726 million (before accumulated depreciation) in 37 megaplex theatre properties (including joint venture) and 12 restaurant and retail properties located in 17 states. We also own 7 development parcels of land located primarily adjacent to theatres that we own, for which we actively develop or pursue development projects that we feel would add value to the overall entertainment experience of theatre patrons. Substantially all of our properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other governmental charges, insurance, utilities, repairs and maintenance. Substantially all of our revenues are derived from rents received or accrued under long-term, triple-net leases and interest earned from the temporary investment of funds in short-term investments. We incur general and administrative expenses including compensation expense for our executive officers and other employees, professional fees and various expenses incurred in the process of identifying and acquiring additional properties. We are self-administered and managed by our trustees, executive officers and other employees. Our primary non-cash expense is the depreciation of our properties. We depreciate buildings and improvements on our properties over a seven-year to 40-year period for tax purposes and primarily a 40-year period for financial reporting purposes. We do not own or lease any significant personal property or equipment at any property we currently own. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related notes. In preparing these financial statements, management has made its best estimates and assumptions that affect the reported assets and liabilities. The most significant assumptions and estimates relate to revenue recognition, depreciable lives of the real estate and the valuation of real estate. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition Base rents are recognized on a straight-line basis over the term of the lease, and the base rent escalation is recognized when measurable. Base rent escalation in most of our leases is dependant upon increases in the Consumer Price Index (CPI) and accordingly, management does not include any future base rent escalation amounts in current revenue. Most of our leases provide for percentage rents based upon the level of sales achieved by the tenant. These percentage rents are recognized once the required sales level is achieved. 14
Real Estate Useful Lives We are required to make subjective assessments as to the useful lives of our properties for the purpose of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Depreciation and amortization are provided on the straight-line method over the useful lives of the assets, as follows: Buildings 40 years Tenant improvements Terms of lease or useful lives, whichever is shorter Impairment of Real Estate Values We are required to make subjective assessments as to whether there are impairments in the value of our rental properties. These estimates of impairment have a direct impact on the Company's consolidated financial statements. We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors that may occur and indicate that impairments may exist include, but are not limited to: underperformance relative to projected future operating results, tenant difficulties and significant adverse industry or market economic trends. No such indicators existed during 2002. If an indicator of possible impairment exists, a property is evaluated for impairment by a comparison of the carrying amount of the property to the estimated undiscounted future cash flows expected to be generated by the property. If the carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis, an impairment charge is recognized by the amount by which the carrying amount of the property exceeds the fair value of the property. Management estimates fair value of its rental properties based on projected discounted cash flows using a discount rate determined by management to be commensurate with the risk inherent in the Company. RECENT DEVELOPMENTS During the three months ended December 31, 2002, we completed approximately $30 million of acquisitions in two megaplex theatre properties described below. We funded these acquisitions with cash on hand and from borrowings drawn under our credit facilities. We purchased the AMC Hoffman Town Centre 22 screen theatre, located in Alexandria, Virginia in October, 2002 for approximately $22 million. The AMC Hoffman theatre, which opened in June 2001, is consistently ranked as the number one theatre in box office sales in the Washington, DC market. In December, 2002, we completed the purchase of the building and improvements of the Rave Motion Pictures Colonel Glenn 18 screen theatre located in Little Rock, Arkansas for approximately $8.2 million. The Company's overall investment in the Colonel Glen theatre totals approximately $12 million. Since the theatre's opening in December 2002, it consistently ranks as the number one theatre in box office sales in the Little Rock market. The following transactions occurred subsequent to December 31, 2002: In January, 2003, we completed the restaurant development of the final land parcel located adjacent to our Mesquite, Texas 30 screen megaplex theatre property. The casual dining restaurant is our fourth restaurant location adjacent to that theatre. The property lease includes a base term lease life of 15 years with three renewal options of 5 years each, exercisable at the option of the tenant. Our overall investment in that restaurant location is approximately $1.6 million. 15
On February 27, 2003, the Company completed the issuance of $155.5 million in 10-year mortgage certificates secured by 15 of our megaplex properties. The certificates have a 20-year amortization, with the principal balance due at maturity in 2013. The certificates were issued with a weighted average interest rate of 5.65%. The proceeds from the debt were used to pay down approximately $92 million in existing indebtedness secured by the properties, with the remaining proceeds to be used to acquire additional properties and for other general corporate purposes. RESULTS OF OPERATIONS This discussion of the results of operations compares the year ended December 31, 2002 with the year ended December 31, 2001 and the year ended December 31, 2001 with the year ended December 31, 2000. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 RENTAL REVENUE - Total revenue was $71.6 million for the year ended December 31, 2002, as compared to $54.7 million for the year ended December 31, 2001. The $16.9 million increase resulted from property acquisitions completed in 2002 ($9.6 million), property acquisitions completed during 2001 ($1.9 million), the acquisition and consolidation in December 2001 of the remaining third party interest in the Westcol joint venture ($4.5 million), and from base rent increases and percentage rent payments on existing properties ($0.9 million). PROPERTY OPERATING EXPENSE - Our property operating expenses totaled $0.2 million for the year ended December 31, 2002. These expenses arise from the operations of Westcol Center, an entertainment and retail center in Westminster Colorado, in which the Company acquired sole ownership in December 2001 by buying the remaining interest in the Westcol joint venture. For the same period in 2001, we accounted for our partial interest in the Westcol joint venture under the equity method of accounting. Therefore, the Company did not recognize expenses related to the venture in 2001. GENERAL AND ADMINISTRATIVE EXPENSE - Our general and administrative expenses totaled $2.3 million for the year ended December 31, 2002 compared to $2.5 million for the same period in 2001. The decline was primarily due to expenses incurred in the prior year related to the Company's successful defense against a proxy contest. INTEREST EXPENSE - Our interest expense increased to $24.5 million for the year ended December 31, 2002 from $20.3 million for the year ended December 31, 2001. The $4.1 million increase in interest expense resulted from an increase in long-term debt related to financings of property acquisitions made during fiscal 2002 and 2001, and the recognition of interest expense from the Westcol theatre first mortgage loan, acquired with the acquisition/consolidation of the remaining third party interest in the Westcol joint venture in December 2001. DEPRECIATION AND AMORTIZATION EXPENSE - Our depreciation and amortization expenses, including amortization of share based compensation, totaled $13.9 million for the year ended December 31, 2002 compared to $10.4 million for the same period in 2001. The $3.5 million increase resulted from the property acquisitions completed in 2001 and 2002 and from increases in amortization of stock based compensation. EQUITY IN INCOME FROM JOINT VENTURE - Income from joint venture totaled $1.4 million for the year ended December 31, 2002 compared to $2.2 million for the same period in 2001. The decrease was primarily attributed to the acquisition of the remaining third party interest in the Westcol joint venture in December 2001 which was consolidated for the entire year in 2002. During 2001, through the date of acquisition we accounted for our interest in the Westcol joint venture using the equity method of accounting, which 16
represented $735,000 of the 2001 income from joint ventures. In December 2002, our partner in our remaining joint venture substantially increased its interest in that joint venture. MINORITY INTEREST - For year ended December 31, 2002 minority interest in net income was $1.2 million, arising from the issuance of $15 million of common and preferred interests by EPT Gulf States, LLC, our consolidated subsidiary, as a result of the Gulf States theatres acquisition completed on March 15, 2002. In 2001, the Company had no minority interest outstanding. NET INCOME AVAILABLE TO COMMON SHAREHOLDERS - Net income available to common shareholders for the year ended December 31, 2002 totaled $27.9 million as compared to $23.6 million for the year ended December 31, 2001. The $4.3 million increase in net income available to common shareholders resulted from the $16.9 million increase in total revenue offset by increases in our expenses and distributions to minority interests in EPT Gulf States and our preferred shareholders. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 RENTAL REVENUE - Total 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 payments at 17 megaplex theatre properties of $0.2 million. GENERAL AND ADMINISTRATIVE EXPENSE - Our 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). INTEREST EXPENSE - Our 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. DEPRECIATION AND AMORTIZATION EXPENSE - Our depreciation and amortization expense totaled $10.4 million for the year ended December 31, 2001 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 megaplex theatre property to the Atlantic joint venture in 2000, which is a non-consolidated joint venture. NET INCOME - 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. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $10.1 million at December 31, 2002. In addition, the Company had restricted cash of $6.5 million available for debt service in connection with the $119.7 million mortgage debt due in February 2006. Mortgage Debt and Credit Facilities 17
As of December 31, 2002, we had total debt outstanding of $346.6 million. All of our debt was mortgage debt secured by substantially all of our rental properties. Of this debt, $91.0 million was variable rate debt and $255.6 million was fixed rate debt. The $346.6 million aggregate principal amount of indebtedness had a weighted average interest rate of 7.0% as of December 31, 2002. All of our debt is described in footnote 5 in the "Notes to Consolidated Financial Statements" in this Form 10-K. At December 31, 2002, we had $37 million outstanding under our $50 million revolving credit facility. The remaining $13 million under that facility was fully available to borrow. On February 27, 2003, the Company completed the issuance of $155.5 million in 10-year mortgage certificates secured by 15 of our megaplex properties. The certificates have a 20-year amortization, with the principal balance due at maturity in 2013. The certificates were issued with a weighted average interest rate of 5.65%. The proceeds from the debt were used to pay down approximately $92 million in existing indebtedness secured by the properties, with the remaining proceeds to be used to acquire additional properties and for other general corporate purposes. Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. At December 31, 2002, we 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 our debt, and allow distributions to the Company's shareholders and avoidance of corporate level federal income or excise tax in accordance with Internal Revenue Code requirements for qualification as a REIT. Long-term liquidity requirements at December 31, 2002 consisted primarily of maturities of long-term debt. Aggregate annual principal maturities of our mortgage debt as of December 31, 2002 are as follows (in thousands): <TABLE> <CAPTION> For the year ended December 31, <S> <C> 2003 $ 5,543 2004 59,939 2005 61,924 2006 111,880 2007 2,710 Thereafter 104,621 ------- Total $ 346,617 ========= </TABLE> We believe that we will be able to obtain financing in order to repay our debt obligations by refinancing the properties as the debt comes due. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us. We anticipate that long-term liquidity requirements will also include amounts for acquisition of properties. We 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 completed two equity financings during the year ended December 31, 2002. On February 8, 2002, we completed the sale of 2.3 million Common Shares for net proceeds of approximately $43 million. The proceeds from the offering were used to complete property acquisitions. On May 28, 2002, we completed 18
the sale of 2.3 million Series A Preferred shares ("Preferred Shares") for net proceeds of approximately $55 million. The proceeds from the equity offerings were used to complete property acquisitions 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, 2002, the Company had an investment interest in one non-consolidated real estate joint venture, Atlantic-EPR I, which is accounted for under the equity method of accounting. (see footnote #3 "Real Estate Joint Ventures" 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 that may arise involving that joint venture. FUNDS FROM OPERATIONS We believe that to facilitate a clear understanding of the historical consolidated operating results, funds from operations (FFO) should be examined in conjunction with net income as presented in the Consolidated Financial Statements. FFO, a non-GAAP financial measure, is defined as net income (computed in accordance with GAAP), excluding gains and losses from sales of depreciable operating properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships, joint ventures and other affiliates. Adjustments for unconsolidated partnerships, joint ventures and other affiliates are calculated to reflect FFO on the same basis. FFO does not represent cash flows from operations as defined by GAAP and is not indicative that cash flows are adequate to fund all cash needs and is not to be considered an alternative to net income or any other GAAP measure as a measurement of the results of the Company's operations or the Company's cash flows or liquidity as defined by GAAP. The following tables summarize the Company's FFO for the years ended December 31, 2002 and 2001 (in thousands): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2002 2001 ---- ---- <S> <C> <C> Net income available to common shareholders $ 27,934 $ 23,580 Less: Gain on sale of real estate (202) -- Add: Real estate depreciation 12,700 10,061 Add: Allocated share of joint venture depreciation 497 791 -------- -------- Basic Funds From Operations 40,929 34,432 Add: minority interest in net income 1,195 -- -------- -------- Diluted Funds From Operations $ 42,124 $ 34,432 ======== ======== Weighted average common shares: Basic 16,791 14,715 Diluted 17,762 14,783 </TABLE> IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company would also record a corresponding asset that is depreciated over 19
the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of SFAS No. 4 are applied in fiscal years beginning after May 15, 2002. The provisions of the Statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material effect on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. Under SFAS No. 146, a commitment to an exit or disposal plan no longer will be a sufficient basis for recording a liability for those activities. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. INFLATION Investments by the Company are financed with a combination of equity and secured mortgage indebtedness. During inflationary periods, which are generally accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. All of the Company's megaplex theatre leases provide for base and participating rent features. To the extent inflation causes tenant revenues at the Company's properties to increase over baseline amounts, the Company would participate in those revenue increases through its right to receive annual percentage rent. The Company's leases also generally provide for escalation in base rents in the event of increases in the Consumer Price Index, with a limit of 2% per annum, or fixed periodic increases. All of the Company's theatre leases are triple-net leases requiring the tenants to pay substantially all expenses associated with the operation of the properties, thereby minimizing the Company's exposure to increases in costs and operating expenses resulting from inflation. 20
FORWARD LOOKING INFORMATION CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND," "CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL," "FORECAST," OR OTHER COMPARABLE TERMS. THE COMPANY'S ACTUAL FINANCIAL CONDITION, RESULTS OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED UNDER "BUSINESS - RISK FACTORS." INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks, primarily relating to potential losses due to changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings whenever possible. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. Our borrowings are subject to mortgages or contractual agreements which limit the amount of indebtedness we may incur. Accordingly, if we are unable to raise additional equity or borrow money due to these limitations, our ability to acquire additional properties may be limited. The following table presents the principal amounts, weighted average interest rates, and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31: Expected Maturities (in millions) <TABLE> <CAPTION> Estimated DECEMBER 31, 2002 2003 2004 2005 2006 2007 Thereafter Total Fair Value - ----------------- ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt $ 5.5 $ 5.9 $ 24.9 $111.9 $ 2.7 $104.7 $255.6 $270.0 Average interest rate 11.7% 11.7% 9.1% 7.4% 6.9% 6.9% 7.5% Variable rate debt $ -- $ 54.0 $ 37.0 $ -- $ -- $ -- $ 91.0 $ 91.0 Average interest rate (as of December 31, 2002) -- 6.2% 4.4% -- -- -- 5.5% </TABLE> <TABLE> <CAPTION> Estimated DECEMBER 31, 2001 2002 2003 2004 2005 2006 Thereafter Total Fair Value - ----------------- ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt $ 5.1 $ 5.5 $ 5.9 $ 24.8 $111.7 $107.8 $260.8 $260.8 Average interest rate 7.6% 7.6% 7.6% 8.0% 7.9% 6.9% 7.5% Variable rate debt $ -- $ -- $ 54.0 $ -- $ -- $ -- $ 54.0 $ 54.0 Average interest rate (as of December 31, 2001) -- -- 6.2% -- -- -- 6.2% -- </TABLE> As the table incorporates only those exposures that existed as of December 31, 2002, it does not consider exposures or positions that have arisen or could arise after that date. For discussion of interest rate hedging activity, see note 9 to the consolidated financial statements. 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Entertainment Properties Trust CONTENTS <TABLE> <S> <C> Reports of Independent Auditors..................................... 24 Audited Financial Statements Consolidated Balance Sheets ........................................ 26 Consolidated Statements of Income .................................. 27 Consolidated Statements of Changes in Shareholders' Equity ......... 28 Consolidated Statements of Cash Flows .............................. 29 Notes to Consolidated Financial Statements ......................... 30 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation ............ 44 </TABLE> 23
Independent Auditors' Report The Board of Trustees Entertainment Properties Trust: We have audited the accompanying consolidated balance sheet of Entertainment Properties Trust (the Company) as of December 31, 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the accompanying 2002 financial statement schedule listed in the Index at Item 15(d). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these 2002 consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Entertainment Properties Trust as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related 2002 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. KPMG LLP Kansas City, Missouri February 7, 2003 24
Report of Independent Auditors The Board of Trustees Entertainment Properties Trust We have audited the accompanying consolidated balance sheet of Entertainment Properties Trust (the Company) as of December 31, 2001, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 2001 and 2000. Our audits also included the financial statement schedule for 2001 listed in the Index at Item 15(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 the consolidated results of its operations and its cash flows for the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion the related 2001 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 25
Entertainment Properties Trust Consolidated Balance Sheets (In thousands except share and per share data) <TABLE> <CAPTION> DECEMBER 31 2002 2001 --------- --------- <S> <C> <C> ASSETS Rental properties, net (notes 2 and 5) $ 679,937 $ 515,972 Land held for development 12,985 14,308 Investment in joint ventures (note 3) 1,109 12,479 Cash and cash equivalents 10,091 24,590 Restricted cash (note 5) 6,495 6,495 Receivable from joint venture (note 3) 8,438 -- Other assets 11,332 9,507 --------- --------- Total assets $ 730,387 $ 583,351 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 1,653 $ 1,843 Common dividends payable 8,162 6,659 Preferred dividends payable 1,366 -- Unearned rents 4,036 1,955 Long-term debt (note 5) 346,617 314,766 --------- --------- Total liabilities 361,834 325,223 Commitments and contingencies -- -- Minority interest (note 10) 15,375 -- Shareholders' equity: Common shares, $.01 par value; 50,000,000 shares authorized; 17,655,822 and 15,270,392 shares issued in 2002 and 2001, respectively 177 153 Preferred shares, $.01 par value; 5,000,000 shares authorized; 2,300,000 and no shares issued at December 31, 2002 and 2001, respectively 23 -- Additional paid-in-capital 379,447 279,603 Treasury shares, at cost: 472,200 common shares in 2002 and 2001 (6,533) (6,533) Loans to shareholders (note 7) (3,525) (3,525) Non-vested shares (note 6) (1,276) (1,105) Distributions in excess of net income (15,135) (10,465) --------- --------- Shareholders' equity 353,178 258,128 --------- --------- Total liabilities and shareholders' equity $ 730,387 $ 583,351 ========= ========= </TABLE> See accompanying notes to consolidated financial statements 26
Entertainment Properties Trust Consolidated Statements of Income (In thousands except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2002 2001 2000 -------- ------- ------- <S> <C> <C> <C> Rental revenue (note 4) $ 71,610 $54,667 $53,287 Property operating expense 201 -- -- General and administrative expense, excluding share based compensation below 2,293 2,507 1,850 Interest expense 24,475 20,334 18,909 Depreciation and amortization 12,862 10,209 10,184 Amortization of share based compensation 1,048 240 276 -------- ------- ------- Income before minority interest, income from joint venture and gain on sale of real estate 30,731 21,377 22,068 Gain on sale of real estate 202 -- -- Equity in income from joint ventures (note 3) 1,421 2,203 2,104 Minority interest (note 10) (1,195) -- -- -------- ------- ------- Net income $ 31,159 $23,580 $24,172 Preferred dividend requirements (note 11) (3,225) -- -- -------- ------- ------- Net income available to common shareholders $ 27,934 $23,580 $24,172 ======== ======= ======= Basic net income per common share $ 1.66 $ 1.60 $ 1.63 ======== ======= ======= Diluted net income per common share $ 1.64 $ 1.60 $ 1.63 ======== ======= ======= Shares used for computation: Basic 16,791 14,715 14,786 Diluted 17,762 14,783 14,810 </TABLE> See accompanying notes to consolidated financial statements. 27
ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) <TABLE> <CAPTION> COMMON STOCK PREFERRED STOCK ADDITIONAL SHARES PAR SHARES PAR PAID-IN CAPITAL ------ --- ------ --- --------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 1999 15,091 $ 151 -- $ -- $277,126 Loans to officers 80 1 -- -- 1,124 Shares issued to Directors 4 -- -- -- 59 Issuance of restricted share grant 21 -- -- -- 265 Amortization of restricted share grant -- -- -- -- -- Net income -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- Dividends to common shareholders ($1.76 per share) -- -- -- -- -- ------ ------- ----- ------- -------- Balance at December 31, 2000 15,196 $ 152 -- $ -- $278,574 Shares issued to Directors 3 -- -- -- 54 Issuance of restricted share grant 64 1 -- -- 857 Amortization of restricted share 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 Shares issued to Directors 2 -- -- -- 54 Issuance of restricted share grant 62 1 -- -- 1,218 Amortization of restricted share grant -- -- -- -- -- Net income -- -- -- -- -- Common Shares issued in Dividend Reinvestment Plan 22 -- -- -- 475 Common Shares issued in secondary offering 2,300 23 -- -- 42,685 Preferred shares issued -- -- 2,300 23 55,412 Dividends to common shareholders ($1.90 per share) -- -- -- -- -- Dividends to preferred shareholders ($1.40 per share) -- -- -- -- -- ------ ------- ----- ------- -------- Balance at December 31, 2002 17,656 $ 177 2,300 $ 23 $379,447 ====== ======= ===== ======= ======== </TABLE> <TABLE> <CAPTION> TREASURY LOANS TO NON-VESTED DISTRIBUTIONS IN SHARES SHAREHOLDERS SHARES EXCESS OF NET INCOME TOTAL ------ ------------ ------ -------------------- ----- <S> <C> <C> <C> <C> <C> Balance at December 31, 1999 $(2,136) $(2,400) $ (805) $ (5,549) $ 266,387 Loans to officers -- (1,125) -- -- -- Shares issued to Directors -- -- -- -- 59 Issuance of restricted share grant -- -- (220) -- 45 Amortization of restricted share grant -- -- 450 -- 450 Net income -- -- -- 24,172 24,172 Purchase of treasury stock (4,397) -- -- -- (4,397) Dividends to common shareholders ($1.76 per share) -- -- -- (26,097) (26,097) ------- ------- ------- -------- --------- Balance at December 31, 2000 $(6,533) $(3,525) $ (575) $ (7,474) $ 260,619 Shares issued to Directors -- -- -- -- 54 Issuance of restricted share grant -- -- (860) -- (2) Amortization of restricted share grant -- -- 330 -- 330 Net income -- -- -- 23,580 23,580 Shares issued in Dividend Reinvestment Plan -- -- -- -- 118 Dividends to common shareholders ($1.80 per share) -- -- -- (26,571) (26,571) ------- ------- ------- -------- --------- Balance at December 31, 2001 $(6,533) $(3,525) $(1,105) $(10,465) $ 258,128 Shares issued to Directors -- -- -- -- 54 Issuance of restricted share grant -- -- (1,219) -- (0) Amortization of restricted share grant -- -- 1,048 -- 1,048 Net income -- -- -- 31,159 31,159 Common Shares issued in Dividend Reinvestment Plan -- -- -- -- 475 Common Shares issued in secondary offering -- -- -- -- 42,708 Preferred shares issued -- -- -- 55,435 Dividends to common shareholders ($1.90 per share) -- -- -- (32,604) (32,604) Dividends to preferred shareholders ($1.40 per share) -- -- -- (3,225) (3,225) ------- ------- ------- -------- --------- Balance at December 31, 2002 $(6,533) $(3,525) $(1,276) $(15,135) $ 353,178 ======= ======= ======= ======== ========= </TABLE> See accompanying notes to consolidated financial statements. 28
Entertainment Properties Trust Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, OPERATING ACTIVITIES 2002 2001 2000 --------- --------- -------- <S> <C> <C> <C> Net income $ 31,159 $ 23,580 $ 24,172 Adjustments to reconcile net income to net cash provided by operating activities Minority interest in net income 1,195 -- -- Gain on sale of real estate (201) -- -- Equity in income from joint venture (1,421) -- -- Depreciation and amortization 13,910 10,449 10,460 Common shares issued to management and trustees 54 54 104 (Increase) decrease in other assets (732) (819) 114 Increase (decrease) in other accounts payable and accrued liabilities (190) 84 165 Increase (decrease) in unearned rent 2,081 1,565 (2,966) --------- --------- -------- Net cash provided by operating activities 45,855 34,913 32,049 INVESTING ACTIVITIES Acquisition of rental properties (161,514) (20,822) (37,027) Net proceeds from contribution of rental property to joint venture -- -- 13,867 Net proceeds from sale of real estate 3,533 -- -- Distributions from joint venture 1,735 -- -- Proceeds from sale of equity interest in joint venture 3,065 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 (2,160) (1,554) (789) --------- --------- -------- Net cash used in investing activities (155,341) (34,267) (22,521) FINANCING ACTIVITIES Proceeds from long-term debt facilities 37,000 179,000 20,175 Principal payments on long-term debt (5,149) (126,150) (14,365) Deferred financing fees paid (1,702) (2,084) (1,367) Purchase of common shares -- -- (4,397) Proceeds from issuance of common shares 43,183 118 -- Proceeds from issuance of preferred shares 55,435 -- -- Funding of restricted cash escrow deposits -- (6,495) -- Distribution to minority interest (820) -- -- Distribution to preferred shareholders (1,859) -- -- Distribution to common shareholders (31,101) (26,393) (25,891) --------- --------- -------- Net cash provided by (used in) financing activities 94,987 17,996 (25,845) --------- --------- -------- Net increase (decrease) in cash and cash equivalents (14,499) 18,642 (16,317) Cash and cash equivalents at beginning of year 24,590 5,948 22,265 --------- --------- -------- Cash and cash equivalents at end of year $ 10,091 $ 24,590 $ 5,948 ========= ========= ======== SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY Declaration of dividend to preferred shareholders $ 1,366 $ -- $ -- ========= ========= ======== Declaration of dividend to common shareholders $ 8,162 $ 6,659 $ 6,479 ========= ========= ======== Acquisition of rental properties in exchange for minority interest in subsidiary $ 15,000 $ -- $ -- ========= ========= ======== Sale of equity interest in joint venture to be received in 2003 $ 8,359 $ -- $ -- ========= ========= ======== Transfer of land held for development to rental property $ -- $ 886 $ 831 ========= ========= ======== Exchange of development property in connection with acquisition of rental property $ -- $ 1,818 $ -- ========= ========= ======== Contribution of rental properties to joint venture $ -- $ -- $ 33,568 ========= ========= ======== Consolidation of assets and liabilities associated with purchase of Westcol joint venture Fair value of assets $ -- $ 46,534 $ -- Fair value of liabilities, net of amounts due to the Company -- 17,767 -- Less: Company's interest ownership prior to acquisition -- 15,267 -- --------- --------- -------- Cash paid for remaining interest $ -- $ 13,500 $ -- ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 23,315 $ 19,436 $ 18,048 ========= ========= ======== </TABLE> See accompanying notes to consolidated financial statements 29
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT) organized on August 29, 1997. The Company was formed to acquire and develop entertainment properties including megaplex theatres and entertainment-themed retail centers. At December 31, 2002, the Company owned 37 megaplex theatre properties, including one joint venture property, located in seventeen states, one entertainment-themed retail center ("ETRC") located in Westminster, Colorado, and land parcels leased to restaurant and retail operators and related properties adjacent to several of its theatre properties. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Entertainment Properties Trust and its wholly-owned subsidiaries, EPT DownReit, Inc., EPT DownReit II, Inc, Three Theatres, Inc., Megaplex Holdings, Inc., Megaplex Nine, Inc., Cantera 30, Inc., Megaplex Four, Inc., Westcol Holdings, LLC., 30 W Pershing, LLC and EPT Gulf States, LLC (97% common interest owned). All significant inter-company transactions have been eliminated in consolidation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. RENTAL PROPERTIES Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition of the properties are capitalized. Accumulated depreciation is computed over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings and the term of the lease for tenant improvements. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. The Company applies Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", for the recognition and measurement of impairment of long-lived assets to be held and used. Management reviews a property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value. 30
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 DEFERRED FINANCING COSTS Included in other assets are deferred financing costs which are amortized over the terms of the related long-term debt obligations. CAPITALIZED DEVELOPMENT COSTS The Company capitalizes certain costs that relate to real estate under development including interest and development personnel costs. OPERATING SEGMENT The Company aggregates the financial information of all its properties into one reportable segment because the properties all have similar economic characteristics and provide similar services to similar types and classes of customers. REVENUE RECOGNITION All leases contain provisions for periodic escalation in base rent (base rent escalation), which are primarily based on an inflation index. Base rents are recognized on a straight-line basis over the term of the lease, and the base rent escalation is recognized when measurable. In addition, tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreements. 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. CONCENTRATION OF RISK American Multi-Cinema, Inc. (AMC) is the lessee of 73% and 69% of the megaplex theatre rental properties owned by the Company (including joint venture properties) at December 31, 2002 and 2001, respectively. A substantial portion of the Company's revenues (approximately $51.6 million or 72%, and $38.6 million or 71% for the years ended December 31 2002 and 2001, respectively, including joint ventures) result from the rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations under the leases. AMC Entertainment, Inc. is a publicly held company (AMEX:AEN) and accordingly, their financial information is publicly available. 31
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 CASH EQUIVALENTS Cash equivalents include bank demand deposits and shares of highly liquid institutional money market mutual funds for which cost approximates market value. RESTRICTED CASH Restricted cash represents demand deposits required in connection with the $125 million secured non-recourse mortgage loan due in 2006. These deposits are restricted for debt service under the terms of the loan. 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 for stock options. 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 years ended December 31, 2002, 2001 and 2000, respectively: risk-free interest rate of 4.0% in 2002 and 5.0% in 2001 and 2000, dividend yield of 8%, volatility factors of the expected market price of the Company's common Shares of 0.146, 0.223-0.251, 0.35 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 periods. Pro forma information for each of the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands except for earnings per share information): <TABLE> <CAPTION> 2002 2001 2000 ---------- ---------- ---------- <S> <C> <C> <C> Net income: As reported $ 27,934 $ 23,580 $ 24,172 Pro forma $ 27,883 23,408 24,041 Basic earnings per share: As reported $ 1.66 $ 1.60 $ 1.63 Pro forma $ 1.66 1.60 1.63 Diluted earnings per share: As reported $ 1.64 $ 1.60 $ 1.63 Pro forma $ 1.64 1.60 1.63 </TABLE> 32
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Restricted share awards, which vest over time, are recorded as unearned compensation when granted, and amortized to expense over the vesting period. RECLASSIFICATIONS Certain 2001 and 2000 amounts have been reclassified to conform to current year presentation. 2. RENTAL PROPERTIES The following table summarizes the carrying amounts of rental properties as of December 31, 2002 and 2001 (in thousands): <TABLE> <CAPTION> 2002 2001 --------- --------- <S> <C> <C> Buildings and improvements $ 572,276 $ 430,054 Land 153,899 119,456 --------- --------- 726,175 549,510 Accumulated depreciation (46,238) (33,538) --------- --------- Total $ 679,937 $ 515,972 ========= ========= </TABLE> Depreciation expense on rental properties was $12.7 million, $10.1 million and $10.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. 3. REAL ESTATE JOINT VENTURES ATLANTIC JOINT VENTURE On May 11, 2000, the Company completed the formation of a joint venture partnership, Atlantic-EPR I, a Delaware General Partnership (Atlantic-EPR), 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, 2001 and 2002, the Company sold to Atlantic a total of an 80% interest in Atlantic-EPR in exchange for $14.3 million in cash. The final contribution by Atlantic of $8.4 million was paid to Atlantic-EPR in December 2002 but was not paid to the Company until January 2003. Accordingly, such contribution is included as a receivable from joint venture in the consolidated balance sheet at December 31, 2002. The joint venture agreement allows Atlantic to exchange up to a maximum of 10% of its ownership interest in Atlantic-EPR per year, beginning in 2005, for common shares of the Company, or cash at the discretion of the Company. Atlantic-EPR is subject to joint control between the Company and Atlantic and accordingly, the Company has not consolidated the financial results of Atlantic-EPR but rather accounts for its investment in the real estate joint venture under the equity method of accounting. The Company recognized income of $1,421, $1,468 and $1,191 (in thousands) from its investment in this joint venture during 2002, 2001 and 2000, respectively. 33
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Condensed financial information for Atlantic-EPR is as follows as of and for the years ended December 31, 2002, 2001, and 2000 (in thousands): <TABLE> <CAPTION> 2002 2001 2000 ------- ------- ------- <S> <C> <C> <C> Rental properties, net $31,821 $32,465 $33,127 Cash 9,342 141 148 Long-term debt 17,291 17,524 17,738 Payable to Entertainment Properties 8,438 -- -- Partners' equity 14,563 14,973 15,421 Rental revenue 3,932 3,869 2,544 Net income 1,845 1,717 1,115 </TABLE> WESTCOL JOINT VENTURE On June 30, 1999, the Company completed the formation of a joint venture structured as a limited liability company (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. The Company recognized income of $735 and $913 (in thousands) from its investment in this joint venture during 2001 and 2000, respectively. 4. OPERATING LEASES The Company's rental properties are leased under operating leases with expiration dates ranging from 9 to 20 years. Future minimum rentals on non-cancelable tenant leases at December 31, 2002 are as follows (in thousands): <TABLE> <S> <C> 2003 $ 79,260 2004 79,260 2005 79,260 2006 79,260 2007 78,999 Thereafter 667,663 ----------- $ 1,063,702 =========== </TABLE> 34
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 5. LONG-TERM DEBT Long term debt at December 31, 2002 and 2001 consists of the following (in thousands): <TABLE> <CAPTION> 2002 2001 -------- -------- <S> <C> <C> (1)Secured credit facility, 5.63%-6.75%, due May 31, 2004 $ 54,000 $ 54,000 (2)Revolving credit facility, 4.44%, due May 1, 2005 37,000 -- (3)Mortgage notes payable, 8.18%, due February 1, 2005 19,460 19,731 (4)Mortgage notes payable, 6.50%-15.03%, due February 15, 2006 119,724 122,692 (5)Mortgage note payable, 6.77%, due July 11, 2008 99,593 100,973 (6)Mortgage note payable, 7.37%, due July 15, 2018 16,840 17,369 -------- -------- Total $346,617 $314,766 ======== ======== </TABLE> (1)The Company's secured variable rate credit facility due May 31, 2004 is secured by four theatre properties, several retail and restaurant properties and other land parcels, which had a net book value of approximately $90.9 million at December 31, 2002. The loan requires monthly payments of interest with the outstanding principal due at maturity. (2)The Company's secured revolving variable rate credit facility due May 1, 2005 is secured by seven theatre properties which had a net book value of approximately $109.3 million at December 31, 2002. $37 million was outstanding on the revolving credit facility at December 31, 2002. The loan requires monthly payments of interest with the outstanding principal due at maturity. (3)The Company's mortgage note payable due February 1, 2005 is secured by three theatre properties, which had a net book value of approximately $39.9 million at December 31, 2002. The loan requires monthly principal and interest payments of approximately $158 thousand with a final principal payment at maturity of approximately $18.7 million. (4)The Company's mortgage note payable due February 10, 2006 is secured by nine theatre properties, which had a net book value of approximately $188.7 million at December 31, 2002 and by $6.5 million in cash escrow deposits. The escrow deposits are recorded as restricted cash in the accompanying consolidated balance sheets at December 31, 2002 and 2001. The escrow deposits are required by the terms of the mortgage notes and are available to pay debt service on the mortgage notes if certain triggering events occur, or they may be applied to the principal amount at maturity. The loan requires monthly principal and interest payments of approximately $1.1 million with a final principal payment at maturity of approximately $109.0 million. (5)The Company's mortgage note payable due July 11, 2008 is secured by eight theatre properties, which had a net book value of approximately $145.6 million at December 31, 2002. The loan requires monthly principal and interest payments of approximately $689 thousand. The loan has an anticipated prepayment date principal balance of approximately $89.9 million in July 2008. (6)The Company's mortgage note payable due June 15, 2018 is secured by one theatre property, which had a net book value of approximately $22.7 million at December 31, 2002. The loan requires monthly 35
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 principal and interest payments of approximately $151 thousand with a final principal payment at maturity of approximately $0.8 million. Certain of the Company's long-term debt agreements contain customary restrictive covenants related to financial and operating performance. At December 31, 2002, the Company was in compliance with all restrictive covenants. Principal payments due on long term debt obligations subsequent to December 31, 2002 are as follows (in thousands): <TABLE> <CAPTION> YEAR AMOUNT ---- ------ <S> <C> <C> 2003 $ 5,543 2004 59,939 2005 61,924 2006 111,880 2007 2,710 Thereafter 104,621 -------- Total $346,617 ======== </TABLE> The Company capitalizes a portion of interest costs as a component of land held for development. The following is a summary of interest costs during 2002, 2001 and 2000: <TABLE> <CAPTION> 2002 2001 2000 ------- ------- ------- <S> <C> <C> <C> Interest cost charged to income $24,475 $20,334 $18,909 Interest cost capitalized 961 880 961 ------- ------- ------- Total interest costs incurred $25,436 $21,214 $19,870 ======= ======= ======= </TABLE> 6. SHARE INCENTIVE PLAN The Company maintains a Share Incentive Plan (the Plan) under which shares and options to purchase up to 1,500,000 of the Company's common shares, subject to adjustment in the event of certain corporate events, may be granted. At December 31, 2002, there were 580,592 shares available for grant under the Plan. SHARE OPTIONS Share options granted under the Plan have exercise prices equal to or greater than the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years and typically become exercisable at a rate of 20% per year over a five - year period. For Trustees, Share options become exercisable at a rate of one-third per year over a three-year period. 36
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 A summary of the Company's stock option activity and related information is as follows: <TABLE> <CAPTION> WEIGHTED AVERAGE NUMBER OF OPTION PRICE EXERCISE SHARES PER SHARE PRICE EXERCISABLE ------ --------- ----- ----------- <S> <C> <C> <C> <C> Outstanding at December 31, 1999 210,998 $14.81-$20.00 $18.71 84,199 Exercised -- Granted 253,332 $14.00-$14.13 $14.12 Canceled/Expired 59,666 $19.125-$20.00 $19.89 ------- Outstanding at December 31, 2000 404,664 $14.00-$20.00 $15.88 101,198 Exercised -- Granted 179,732 $16.05-$16.30 $16.07 Canceled/Expired -- $19.13-$20.00 $19.68 ------- Outstanding at December 31, 2001 584,396 $14.00-$20.00 $15.93 207,954 Exercised 6,400 $16.30-$19.50 $18.50 Granted 164,791 $19.30-$22.90 $22.64 Canceled/Expired 9,000 $16.30-$19.30 $18.10 ------- Outstanding at December 31, 2002 733,787 $14.00-$20.00 $17.25 272,543 ======= </TABLE> The following table summarizes outstanding and exercisable options at December 31, 2002: <TABLE> <CAPTION> EXERCISE PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------- ------------------- ------------------- <S> <C> <C> $14.00 13,332 8,888 $14.13 240,000 96,000 $14.81 30,000 24,000 $16.05 169,732 35,723 $16.30 4,000 1,000 $18.19 50,000 40,000 $19.12 6,666 6,666 $19.30 10,000 -- $19.31 6,666 6,666 $19.50 13,600 13,600 $20.00 40,000 40,000 $22.36 10,000 -- $22.89 13,332 -- $22.90 126,459 -- ------- ------- 733,787 272,543 ======= ======= </TABLE> 37
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The weighted average remaining contractual life of outstanding options was 7.6 years at December 31, 2002. RESTRICTED SHARES During 2002, 2001 and 2000, the Company issued 37,275, 37,336 and 20,694, respectively, restricted common shares for bonus compensation to executives and other employees of the Company. During 2002 and 2001, the Company issued 22,855 and 26,458, respectively, restricted common shares to executives under a long-term compensation plan. Based upon the market price of the Company's common shares on the grant dates, approximately $1.2 million, $860 thousand, and $220 thousand were recognized as non-vested shares issued in 2002, 2001 and 2000 respectively. 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. Total expenses related to the restricted shares recorded during 2002, 2001 and 2000 amounted to $1.05 million, $330 thousand and $450 thousand, respectively. 7. RELATED PARTY TRANSACTIONS In 2000, the Company loaned an aggregate of $3.5 million to Company executives. The loans were made in order for the executives to purchase common shares of the Company at the market value of the shares on the date of the loan, as well as to repay borrowings on certain amounts previously loaned. The loans are recourse to the executive's assets and bear interest at 6.24%, are due on January 1, 2011 and interest is payable at maturity. These loans were issued with terms that include a Loan Forgiveness Program, under which the Compensation Committee of the Board of Directors may forgive a portion of the above referenced indebtedness after application of proceeds from the sale of shares, following a change in control of the Company. The Compensation Committee may also forgive the debt incurred upon termination of employment by reason of death, disability, normal retirement or without cause. At December 31, 2002, accrued interest receivable on these loans totaled $1.1 million.
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 8. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per common share for the years ended December 31, 2002, 2001 and 2000 (amounts in thousands except per share information): <TABLE> <CAPTION> 2002 2001 2000 ----------- ----------- ----------- <S> <C> <C> <C> Numerator for basic earnings per share: Net income available to common shareholders $ 27,934 $ 23,580 $ 24,172 =========== =========== =========== Denominator for basic earning per share: Weighted-average shares outstanding 16,790,889 14,714,756 14,786,263 Basic net income per common share $ 1.66 $ 1.60 $ 1.63 =========== =========== =========== Numerator for diluted earnings per common share: Net income available to common shareholders $ 27,934 $ 23,580 $ 24,172 Minority interest 1,195 -- -- ----------- ----------- ----------- Numerator for diluted earning per common share $ 29,129 $ 23,580 $ 24,172 =========== =========== =========== Denominator for diluted earning per share: Weighted-average shares outstanding 16,790,889 14,714,756 14,786,263 Effect of dilutive securities: Employee options to acquire common shares 167,476 30,065 -- Minority interest conversion into common shares 685,243 -- -- Non-vested common share grants 118,190 38,458 24,000 ----------- ----------- ----------- Dilutive potential common shares 970,909 68,523 24,000 ----------- ----------- ----------- Denominator for diluted earnings per share 17,761,798 14,783,279 14,810,263 =========== =========== =========== Diluted net income per common share $ 1.64 $ 1.60 $ 1.63 =========== =========== =========== </TABLE> 9. DERIVATIVE FINANCIAL INSTRUMENTS The Company purchased two interest rate cap agreements to limit the Company's exposure to increased interest rates on its $54 million variable rate credit facility. A $39,000,000 (notional amount) interest rate cap with a strike rate of 6.0% on three-month LIBOR was purchased for $11,700 and expires on June 18, 2003. A $15,000,000 (notional amount) interest rate cap with a strike rate of 6.0% on three-month LIBOR was purchased for $10,000 and expires on December 20, 2003. The aggregate cost of $21,700 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, 2002. 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 39
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 contract settled on June 29, 1998, the closing date of the long-term debt issuance, and the Company incurred a loss of $1,442,000, which is being amortized as an increase to interest expense over the ten year term of the long-term debt and will result in an effective interest rate of 6.84%. 10. PROPERTY ACQUISITIONS During the year ended December 31, 2002, we completed approximately $176 million of acquisitions, which included 11 megaplex theatre properties as described below. We funded the acquisitions with net proceeds from the common share follow-on offering completed in February of 2002, the net proceeds of the preferred share offering and from borrowings from our credit facilities and cash on hand. These megaplex acquisition properties have initial lease terms generally ranging from 17 to 20 years and include renewal options exercisable at the option of the tenant. On March 15, 2002, the Company acquired 5 megaplex theatres owned and operated by Gulf States Theatres, located in New Orleans, Louisiana. The aggregate purchase price of $67.2 million was comprised of approximately $52 million in cash and $15 million in common and preferred operating units issued by EPT Gulf States, LLC, a subsidiary of the Company, to the seller of the property, reflected as minority interest in the accompanying consolidated balance sheet at December 31, 2002. The operating units bear a 10% dividend yield and are convertible into 857,142 common shares of the Company at the option of the holder. On June 28, 2002, the Company acquired 3 megaplex theatres and one retail property from a third party developer for an aggregate cash purchase price of $53 million. Proceeds from the Company's issuance of the preferred shares described in note 11 to the consolidated financial statements were used to complete the purchase. On July 22, 2002, the Company acquired the land in Little Rock, AR, underlying an 18-screen megaplex theatre being constructed by Rave Motion Pictures, for a cash purchase price of $3.8 million. On December 14, 2002, the company purchased the building and improvements upon completion of the theatre. The Company's overall investment in the theatre totals approximately $12 million. On August 11, 2002, the Company acquired the Livonia, Michigan megaplex theatre for a cash purchase price of $22 million. On October 6, 2002, the Company acquired the Hoffman megaplex theatre in Alexandria, Virginia for a cash purchase price of $22 million. 11. SHARE OFFERINGS On February 8, 2002, the Company issued 2.3 million common shares in a registered public offering for net proceeds of $43 million. The proceeds were used to fund the acquisition of 5 megaplex theatres, completed in March 2002. On May 29, 2002, the Company issued 2.3 million 9.5% Series A cumulative preferred shares, in a registered public offering, for net proceeds of $55.4 million. The offering includes 300,000 shares from the underwriters' over-allotment option, which was exercised in full. The preferred shares have a liquidation preference of $25 per share. The proceeds were used to fund the $53 million acquisition of 3 megaplex 40
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 theatres, purchased on June 28, 2002. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Management compares the carrying value and the estimated fair value of our financial instruments. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at December 31, 2002 and 2001: CASH AND CASH EQUIVALENTS: Due to the highly liquid nature of our short term investments, the carrying value of our cash approximates the fair market value of our cash equivalents. ACCOUNTS RECEIVABLE: The carrying value of our accounts receivable approximates the fair market value due to the short term maturities of these amounts. DEBT INSTRUMENTS: The fair value of the Company's debt as of December 31, 2002 and 2001 is estimated by discounting the future cash flows of each instrument using current market rates. At December 31, 2002, the Company had a carrying value of $91 million in variable rate debt outstanding, which management believes represents fair market value. At December 31, 2002 the Company had a carrying value of $255.6 million in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 7.5%. If the future cash flows for our fixed rate debt were discounted using a 6% rate, or a change of 1.5 percentage points, management estimates that the fixed rate debt would have a fair market value of approximately $270.0 million at December 31, 2002. At December 31, 2001, management believes the carrying value of the Company's debt instruments represents the fair market value as of that date. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: The carrying value of accounts payable and accrued liabilities approximates fair value due to the short term maturities of these amounts. 13. OPERATING LEASE The Company leases its executive office from a third party landlord through March, 2009. Rental expense for this lease totaled approximately $114 thousand, $111 thousand and $79 thousand in 2002, 2001 and 2000, respectively, and is included as a component of general and administrative expense in the accompanying consolidated statements of income. Future minimum lease payments under this lease at December 31, 2002 are (in thousands): <TABLE> <CAPTION> YEAR AMOUNT ---- ------ <S> <C> 2003 $ 116 2004 119 </TABLE> 41
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 <TABLE> <S> <C> 2005 122 2006 125 2007 128 Thereafter 265 ----- Total $ 875 ===== </TABLE> 14. QUARTERLY FINANCIAL INFORMATION (unaudited) Summarized quarterly financial data for the years ended December 31, 2002 and 2001 are as follows (in thousands, except per share data): <TABLE> <CAPTION> 2002: March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- <S> <C> <C> <C> <C> Rental revenue $15,796 $16,989 $18,797 $20,028 Net income $6,877 $7,226 $8,413 $8,643 Net income available to common shareholders $6,877 $6,732 $7,047 $7,278 Basic net income per common share $0.43 $0.39 $0.41 $0.42 ======= ======= ======= ======= Diluted net income per common share $0.42 $0.39 $0.41 $0.42 ======= ======= ======= ======= 2001: 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> 15. DIVIDENDS COMMON SHARES Our Board of Trustees declared cash dividends totaling $1.90 per common share for the year ended December 31, 2002, and $1.80 per common share for the year ended December 31, 2001. Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2002 and 2001 are as follows: Cash dividends paid per common share for the year ended December 31, 2002: <TABLE> <CAPTION> Cash Taxable Long-Term Cash Payment Distribution Ordinary Return of Capital Record Date Date per share Dividend Capital Gain ----------- ---- --------- -------- ------- ---- <S> <C> <C> <C> <C> <C> 12-28-01 01-15-02 $0.4500 $0.3822 $0.0651 $0.0027 03-28-02 04-16-02 $0.4750 $0.4034 $0.0688 $0.0028 06-28-02 07-16-02 $0.4750 $0.4034 $0.0688 $0.0028 09-30-02 10-15-02 $0.4750 $0.4034 $0.0688 $0.0028 ------- ------- ------- ------- </TABLE> 42
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 <TABLE> <S> <C> <C> <C> <C> <C> Total for 2002 $1.8750 $1.5924 $0.2715 $0.0111 ======= ======= ======= ======= 100.0% 84.9% 14.5% 0.6% </TABLE> Cash dividends paid per common share for the Year ended December 31, 2001: <TABLE> <CAPTION> Cash Taxable Long-Term Cash Payment Distribution Ordinary Return of Capital Record Date Date per share Dividend Capital Gain ----------- ---- --------- -------- ------- ---- <S> <C> <C> <C> <C> <C> 12-31-00 01-16-01 $0.4400 $0.3344 $0.1056 $0.0000 03-30-01 04-17-01 $0.4500 $0.3420 $0.1080 $0.0000 06-29-01 07-17-01 $0.4500 $0.3420 $0.1080 $0.0000 09-28-01 10-17-01 $0.4500 $0.3420 $0.1080 $0.0000 ------- ------- ------- ------- Total for 2001 $1.7900 $1.3604 $0.4296 $0.0000 ======= ======= ======= ======= 100.0% 76.0% 24.0% 0.0% </TABLE> PREFERRED SHARES On May 29, 2002, the Company issued 2.3 million 9.5% Series A cumulative preferred shares in a registered public offering. Our Board of Trustees declared cash dividends totaling $0.80855 per preferred share for the year ended December 31, 2002. There were no preferred shares outstanding for the year ended December 31, 2001. Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2002 are as follows: Cash dividends paid per preferred share for the Year ended December 31, 2002: <TABLE> <CAPTION> Cash Taxable Long-Term Cash Payment Distribution Ordinary Return of Capital Record Date Date per share Dividend Capital Gain ----------- ---- --------- -------- ------- ---- <S> <C> <C> <C> <C> <C> 06-28-02 07-16-02 $0.21480 $0.21240 $0.00000 $0.00240 09-30-02 10-15-02 $0.59375 $0.58710 $0.00000 $0.00665 -------- -------- -------- -------- Total for 2002 $0.80855 $0.79950 $0.00000 $0.00905 ======== ======== ======== ======== 100.0% 98.9% 0.0% 1.1% </TABLE> 16. SUBSEQUENT DEVELOPMENTS On March 13, 2003, our Board of Trustees declared a cash dividend of $0.50 per common share for the first quarter of 2003. This represents an annual dividend rate of $2.00 per common share, or an increase of 5.3% compared to the first quarter of 2002. Our Board of Trustees also declared a cash dividend of $0.59375 per series A preferred share for the first quarter of 2003. On February 27, 2003, the Company completed the issuance of $155.5 million in 10-year mortgage certificates secured by 15 of our megaplex properties. The certificates have a 20-year amortization, with 43
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 the principal balance due at maturity in 2013. The certificates were issued with a weighted average interest rate of 5.65%. The proceeds from the debt were used to pay down approximately $92 million in existing indebtedness secured by the properties, with the remaining proceeds to be used to acquire additional properties and for other general corporate purposes. 44
Entertainment Properties Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 2002 <TABLE> <CAPTION> Initial Cost Additions Gross Amount at December 31, 2002 ----------------------------------------------------------------------------- Buildings & Subsequent to Buildings & Description Market Encumbrance Land Improvements Acquisition Land Improvements Total - ----------- ------ ----------- ---- ------------ ----------- ---- ------------ ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $ 11,383 $ 3,060 $ 15,540 $ 3,060 $ 15,281 $ 18,341 Mission Valley 20 San Diego, CA 9,948 16,300 16,028 16,028 Promenade 16 Los Angeles, CA 17,456 6,021 22,479 6,021 22,104 28,125 Ontario Mills 30 Los Angeles, CA 15,498 5,521 19,779 5,521 19,450 24,971 Lennox 24 Columbus, OH 7,873 12,900 12,685 12,685 West Olive 16 St. Louis, MO 10,915 4,985 12,815 4,985 12,602 17,587 Studio 30 Houston, TX 16,175 6,023 20,377 6,023 20,037 26,060 Huebner Oaks 24 San Antonio, TX 10,345 3,006 13,894 3,006 13,662 16,668 First Colony 24 Houston, TX 10,959 19,100 67 19,167 19,167 Oakview 24 Omaha, NE 9,582 5,215 16,700 59 5,215 16,759 21,974 Leawood 20 Kansas City, MO 9,057 3,714 12,086 43 3,714 12,129 15,843 Gulf Pointe 30 Houston, TX 14,793 4,304 21,496 76 4,304 21,572 25,876 South Barrington 30 Chicago, IL 19,665 6,577 27,723 98 6,577 27,821 34,398 Mesquite 30 Dallas, TX 13,305 2,912 20,288 72 2,912 20,360 23,272 Hampton Town Center 24 Norfolk, VA 16,344 3,822 24,678 88 3,822 24,766 28,588 Pompano 18 Pompano Beach, FL 7,716 6,376 9,899 2,426 6,376 12,325 18,701 Raleigh Grand 16 Raleigh, NC 4,028 2,919 5,559 2,919 5,559 8,478 Paradise 24 Miami, FL 13,442 2,000 13,000 8,519 2,000 21,519 23,519 Pompano Kmart Pompano Beach, FL 1,789 600 2,423 600 2,423 3,023 Nickels Restaurant Pompano Beach, FL 589 200 803 200 803 1,003 Aliso Viejo 20 Los Angeles, CA 12,577 8,000 14,000 8,000 14,000 22,000 Bosie Stadium 20 Boise, ID 7,716 16,003 16,003 16,003 Woodridge 18 Chicago, IL 11,451 9,926 8,968 9,926 8,968 18,894 Cary Crossroads 20 Cary, NC 9,058 3,352 11,653 155 3,352 11,808 15,160 Tampa Palms 20 Tampa, FL 11,387 6,000 12,809 6,000 12,809 18,809 Palms Promenade San Diego, CA 15,317 7,500 17,750 7,500 17,750 25,250 On The Border Dallas, TX 549 674 205 879 879 Bennigans Dallas, TX 958 565 1,000 565 1,000 1,565 Bennigans Houston, TX 856 511 891 652 750 1,402 Texas Land & Cattle Dallas, TX 949 511 1,008 1,519 1,519 Texas Roadhouse Grill Atlanta, GA 554 886 886 886 Roadhouse Grill Atlanta, GA 543 868 868 868 Westminster 24 Denver, CO 16,840 5,850 17,314 5,850 17,314 23,164 Westminster Center Denver, CO 6,204 12,600 733 6,204 13,333 19,537 Subway Denver, Co 27 27 27 Westbank Palace 10 Westbank, LA 5,471 4,378 12,330 4,378 12,330 16,708 Houma Palace 10 Houma, LA 3,028 2,404 6,780 2,404 6,780 9,184 Hammond Palace 10 Hammond, LA 3,028 2,404 6,780 2,404 6,780 9,184 Elmwood Palace 10 Elmwood, LA 6,890 5,264 14,820 5,264 14,820 20,084 Clearview Palace 12 Clearview, LA 3,919 11,740 11,740 11,740 Sterling Forum 30 Sterling Heights, MI 7,998 5,975 17,956 5,975 17,957 23,932 Olathe Studio 30 Olathe, KS 6,666 4,000 15,935 4,000 15,935 19,935 Cherrydale 16 Greenville, SC 1,660 7,570 1,660 7,570 9,230 Livonia Livonia, MI 4,500 17,525 4,500 17,525 22,025 Hoffman 22 Alexandria, VA 22,035 22,035 22,035 Little Rock Rave Little Rock, AR 3,858 7,990 3,858 7,990 11,848 Development Various - 12,218 367 400 12,985 - 12,985 -------- -------- -------- ------- -------- -------- ------- TOTAL $346,617 $164,763 $560,791 $15,840 $166,884 $572,276 $739,160 ======== ======== ======== ======= ======== ======== ======== </TABLE> <TABLE> <CAPTION> Accumulated Date Depreciation Description Market Depreciation Acquired Life - ----------- ------ ------------ -------- ---- <S> <C> <C> <C> <C> Grand 24 Dallas, TX $ 1,719 11/97 (1) 40 years Mission Valley 20 San Diego, CA 1,803 11/97 (1) 40 years Promenade 16 Los Angeles, CA 2,487 11/97 (1) 40 years Ontario Mills 30 Los Angeles, CA 2,188 11/97 (1) 40 years Lennox 24 Columbus, OH 1,427 11/97 (1) 40 years West Olive 16 St. Louis, MO 1,418 11/97 (1) 40 years Studio 30 Houston, TX 2,254 11/97 (1) 40 years Huebner Oaks 24 San Antonio, TX 1,537 11/97 (1) 40 years First Colony 24 Houston, TX 2,430 11/97 40 years Oakview 24 Omaha, NE 2,125 11/97 40 years Leawood 20 Kansas City, MO 1,538 11/97 40 years Gulf Pointe 30 Houston, TX 2,645 2/98 40 years South Barrington 30 Chicago, IL 3,354 3/98 40 years Mesquite 30 Dallas, TX 2,370 4/98 40 years Hampton Town Center 24 Norfolk, VA 2,777 6/98 40 years Pompano 18 Pompano Beach, FL 1,344 8/98 40 years Raleigh Grand 16 Raleigh, NC 645 8/98 40 years Paradise 24 Miami, FL 2,053 11/98 40 years Pompano Kmart Pompano Beach, FL 243 11/98 40 years Nickels Restaurant Pompano Beach, FL 80 11/98 40 years Aliso Viejo 20 Los Angeles, CA 1,400 12/98 40 years Bosie Stadium 20 Boise, ID 1,600 12/98 40 years Woodridge 18 Chicago, IL 780 6/99 40 years Cary Crossroads 20 Cary, NC 874 6/99 40 years Tampa Palms 20 Tampa, FL 987 6/99 40 years Palms Promenade San Diego, CA 1,294 6/99 40 years On The Border Dallas, TX 11/97 Bennigans Dallas, TX 71 11/97 20 years Bennigans Houston, TX 83 11/97 20 years Texas Land & Cattle Dallas, TX 11/97 Texas Roadhouse Grill Atlanta, GA 3/99 Roadhouse Grill Atlanta, GA 3/99 Westminster 24 Denver, CO 469 12/01 40 years Westminster Center Denver, CO 356 12/01 40 years Subway Denver, Co 4 4/02 5 years Westbank Palace 10 Westbank, LA 244 3/02 40 years Houma Palace 10 Houma, LA 134 3/02 40 years Hammond Palace 10 Hammond, LA 134 3/02 40 years Elmwood Palace 10 Elmwood, LA 293 3/02 40 years Clearview Palace 12 Clearview, LA 232 3/02 40 years Sterling Forum 30 Sterling Heights, MI 224 6/02 40 years Olathe Studio 30 Olathe, KS 199 6/02 40 years Cherrydale 16 Greenville, SC 95 6/02 40 years Livonia Livonia, MI 182 8/02 40 years Hoffman 22 Alexandria, VA 138 10/02 40 years Little Rock Rave Little Rock, AR 8 12/02 40 years Development Various - ------- TOTAL $46,238 ======= </TABLE> See accompanying independent auditor's report. (1) Properties initially acquired in November 1997 were transferred to wholly owned subsidiary in June 1998 at net book value. 45
Entertainment Properties Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 2002 <TABLE> <CAPTION> Initial Cost Additions 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 18,700 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 Bosie 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 958 565 1,000 565 1,000 1,565 Bennigans Houston, TX 856 511 891 652 750 1,402 Texas Land & Cattle Dallas, TX 949 511 1,008 1,519 1,519 Texas Roadhouse Grill Atlanta, GA 554 886 886 886 Roadhouse Grill Atlanta, GA 543 868 868 868 Westminster 24 Denver, CO 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 15,026 -------- -------- -------- ------- --------- -------- -------- TOTAL $314,766 $130,320 $419,303 $16,490 $133,764 $430,114 $563,878 ======== ======== ======== ======= ======== ======== ======== </TABLE> <TABLE> <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 Bosie 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 30 11/97 20 years Bennigans Houston, TX 30 11/97 20 years Texas Land & Cattle Dallas, TX 11/97 Texas Roadhouse Grill Atlanta, GA 3/99 Roadhouse Grill Atlanta, GA 3/99 Westminster 24 Denver, CO 36 12/01 40 years Westminster Center Denver, CO 26 12/01 40 years Development Various 55 ------- TOTAL $33,598 ======= </TABLE> (1) Properties initially acquired in November 1997 were transferred to wholly owned subsidiary in June 1998 at net book value. See accompanying independent auditor's report. 46
Entertainment Properties Trust Schedule III - Real Estate and Accumulated Depreciation (continued) Reconciliation December 31, 2002 and 2001 DECEMBER 31, 2002 <TABLE> <CAPTION> Reconciliation: Real Estate ----------- <S> <C> Balance at beginning of the year $ 563,878 Acquisition of rental properties during the year 161,514 Acquisition of rental properties in exchange for minority interest in subsidiary during the year 15,000 Acquisition of development properties, including related capitalized costs, during the year 2,160 Net proceeds from sale of real estate (3,533) Gain on sale of real estate 201 Correcting reclassification between cost and accumulated depreciation (60) ---------- Balance at close of year $ 739,160 ========== </TABLE> See accompanying independent auditor's report. DECEMBER 31, 2001 <TABLE> <CAPTION> Reconciliation: Real Estate ----------- <S> <C> Balance at beginning of the year $496,315 Acquisition of rental properties during the year 22,490 Consolidation of Westcol joint venture acquisition real estate 45,073 -------- Balance at close of year $563,878 ======== </TABLE> See accompanying independent auditor's report. 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company previously reported a change in certifying accountants for 2002 in Current Reports on form 8-K filed on April 12, 2002. 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 14, 2003 (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", and "Company Performance" the information required by Item 11 of this Form 10-K, which information is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The Proxy Statement contains under the captions "Share Ownership" and "Equity Compensation Plan Information" the information required by Item 12 of this Form 10-K, which information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Proxy Statement contains under the caption "Transactions Between the Company and Trustees, Officers or their Affiliates" the information required by Item 13 of this Form 10-K, which information is incorporated herein by this reference. PART IV ITEM 14. CONTROLS AND PROCEDURES A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report. Based on that review and evaluation, the CEO and CFO have concluded that the Company's current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Company's internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company. 48
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits, Financial Statements and Financial Statement Schedules: Financial Statements: Reports of Independent Auditors Consolidated Balance Sheets as of December 31, 2002 and 2001. Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. Notes to Consolidated Financial Statements (b) Reports on Form 8-K: none (c) Exhibits 21 Subsidiaries of the Company 23 Consents of Independent Auditors (d) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation No other schedules meet the requirement for disclosure. 49
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 25, 2003 By /s/ David M. Brain ---------------------------------------------- David M. Brain, President - Chief Executive Officer Dated: March 25, 2003 By /s/ Fred L. Kennon ---------------------------------------------- Fred L. Kennon, Vice President - Chief Financial Officer Treasurer and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: <TABLE> <CAPTION> SIGNATURE AND TITLE DATE ------------------- ---- <S> <C> /s/ Peter C. Brown March 25, 2003 - ---------------------------------------------------- Peter C. Brown, Chairman of the Board /s/ David M. Brain March 25, 2003 - ---------------------------------------------------- David M. Brain, Chief Executive Officer and Trustee /s/ Robert J. Druten March 25, 2003 - ---------------------------------------------------- Robert J. Druten, Trustee /s/ Scott H. Ward March 25, 2003 - ---------------------------------------------------- Scott H. Ward, Trustee /s/ Danley K. Sheldon March 25, 2003 - ---------------------------------------------------- Danley K. Sheldon, Trustee </TABLE> 50
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT AND SEC RULE 13A-14 I, David M. Brain, President and Chief Executive Officer of Entertainment Properties Trust, certify that: 1. I have reviewed this annual report on Form 10-K of Entertainment Properties Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/ David M. Brain ------------------------------------- David M. Brain President and Chief Executive Officer 51
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT AND SEC RULE 13A-14 I, Fred L. Kennon, Vice President and Chief Financial Officer of Entertainment Properties Trust, certify that: 1. I have reviewed this annual report on Form 10-K of Entertainment Properties Trust 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/ Fred L Kennon ------------------------------------------ Fred L. Kennon Vice President and Chief Financial Officer 52
EXHIBIT INDEX Exhibits 21 Subsidiaries of the Company 23 Consents of Independent Auditors 53
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT In connection with the accompanying annual report on Form 10-K of Entertainment Properties Trust (the "Issuer") for the year ended December 31, 2002, I, David M. Brain, President and Chief Executive Officer of the Issuer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such annual report on Form 10-K of the Issuer for the year ended December 31, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such annual report on Form 10-K of the Issuer for the year ended December 31, 2002, fairly presents, in all material respects, the financial condition and results of operations of the Issuer for and as of the end of such year. /s/ David M. Brain -------------------------------------- David M. Brain President and Chief Executive Officer Date: March 25, 2003 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT In connection with the accompanying annual report on Form 10-K of Entertainment Properties Trust (the "Issuer") for the year ended December 31, 2002, I, Fred L. Kennon, Vice President and Chief Financial Officer of the Issuer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such annual report on Form 10-K of the Issuer for the year ended December 31, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such annual report on Form 10-K of the Issuer for the year ended December 31, 2002, fairly presents, in all material respects, the financial condition and results of operations of the Issuer for and as of the end of such year. /s/ Fred L. Kennon ------------------------------------------- Fred L. Kennon Vice President and Chief Financial Officer, Date: March 25, 2003 54