1 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, 1998 COMMISSION FILE NUMBER 1-13561 ENTERTAINMENT PROPERTIES TRUST (Exact name of registrant as specified in its charter) MARYLAND 43-1790877 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) ONE KANSAS CITY PLACE 1200 MAIN STREET, SUITE 3250, KANSAS CITY, MISSOURI 64105 (Address of principal executive office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Class Name of each exchange on which registered -------------- ----------------------------------------- Common Shares of Beneficial Interest, New York Stock Exchange par value $.01 per share SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
2 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. [X] THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST OF THE REGISTRANT HELD BY NON-AFFILIATES ON MARCH 17, 1999, WAS $232,188,349 (BASED ON THE CLOSING SALES PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE ON MARCH 17, 1999). AT MARCH 17, 1999, THERE WERE 13,861,991 COMMON SHARES OF BENEFICIAL INTEREST OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 1999 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.
3 PART I ITEM 1. BUSINESS GENERAL Entertainment Properties Trust (the "Company") was formed on August 22, 1997 as a Maryland real estate investment trust ("REIT") to capitalize on the opportunities created by the development of destination entertainment and entertainment-related properties, including megaplex movie theatre complexes. The Company completed an initial public offering ("IPO") of its common shares of beneficial interest ("Shares") on November 18, 1997. The Company is the first publicly-traded REIT formed exclusively to invest in entertainment-related properties. The Company is a self-administered REIT specializing in the acquisition and ownership of entertainment-related properties. As of December 31, 1998, the Company's real estate portfolio was comprised of 21 megaplex theatre properties located in eleven states, and one entertainment-themed retail center ("ETRC") development property located in Westminster, Colorado. The Company also owns land parcels and related properties adjacent to several of its theatre properties. The Company's theatre properties are leased to leading theatre operators, including American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc. ("AMCE"), Consolidated Theatres ("Consolidated"), Muvico Entertainment LLC ("Muvico") and Edwards Theatre Circuits, Inc. ("Edwards"). The Company has also agreed to acquire theatre properties to be operated by Regal Cinemas and Loews Cineplex Entertainment. The Company believes entertainment is an important and discrete sector of the retail real estate industry and that, as a result of the Company's focus on properties in this sector and the industry relationships of its management, it has a competitive advantage in providing capital to operators of these types of properties. The principal business strategy of the Company is to continue acquiring a portfolio of high-quality properties leased to entertainment and entertainment-related business operators, generally under long-term triple-net leases that require the tenant to pay substantially all expenses associated with the operation and maintenance of the property. Megaplex theatres typically have at least 14 screens with predominantly stadium-style seating (seating with elevation between rows to provide unobstructed viewing) and are equipped with amenities that significantly enhance the audio and visual experience of the patron. The Company believes the development of megaplex theatres has accelerated the obsolescence of many existing movie theatres by setting new standards for moviegoers, who, in the Company's experience, have demonstrated their preference for the more attractive surroundings, wider variety of films, superior customer service and more comfortable seating typical of megaplex theatres. The Company expects the development of megaplex theatres to continue in the United States and abroad for the foreseeable future. As a result of the significant capital commitment involved in building these properties and the experience and industry relationships of the Company's management, the Company believes it will continue to have opportunities to provide capital to businesses that seek to develop and operate these properties but would prefer to lease rather than own the properties. The Company believes its ability to finance these properties will enable it to continue to grow and diversify its asset base. See Item 7 - "Management's Discussion and Analysis" for a discussion of capital requirements necessary for the Company's continued growth. 1
4 As a REIT, the Company primarily leases its properties to tenants on a triple-net basis and does not operate its properties. Instead, the tenants, and not the Company, assume the primary risks involved in the operation of the properties. The Company's existing theatre leases provide (and it is intended that future leases will provide) for constant rental payments with periodic escalators, together with an obligation to pay percentage rentals based on gross receipts as certain baseline revenues are achieved by the tenant. BUSINESS OBJECTIVES AND STRATEGIES The Company's business objectives are to continue to enhance shareholder value by achieving predictable and increasing Funds From Operations ("FFO") per Share (defined as net income plus depreciation divided by the number of Shares outstanding) and acquiring and developing a diversified portfolio of high-quality properties leased to entertainment and entertainment-related business operators, generally under long-term triple-net leases. The Company intends to achieve these objectives by continuing to execute the Growth Strategies, Operating Strategies and Capitalization Strategies described below: GROWTH STRATEGIES - - Purchase additional properties pursuant to existing agreements between the Company and leading theatre operators. - - Develop or acquire additional megaplex theatre properties and lease such properties to other qualified theatre exhibitors. - - Develop or acquire, and lease to qualified operators or master tenants, entertainment-themed retail centers ("ETRCs") and single-tenant, out-of-home, location-based entertainment and entertainment-related properties. FUTURE PROPERTIES. Pursuant to agreements with AMCE, Edwards, Muvico and Real Estate Innovations LLC, the Company has the right to acquire and lease back to the operator, a number of existing and future megaplex theatre properties. See "Tenants and Leases" and "Additional Property Acquisitions" in Item 2 - "Properties" for a discussion of the agreements. OTHER MEGAPLEX PROPERTIES. The Company intends to pursue acquisitions of high-quality properties from other operators with a strong market presence and believes it will continue to have opportunities to purchase megaplex theatres developed by these operators. See "Markets and Competition", this Item. ENTERTAINMENT-THEMED RETAIL CENTERS. The Company intends to pursue acquisitions of additional ETRCs, which are generally large multi-tenant retail developments that incorporate such elements as megaplex theatres, restaurants, book and/or music superstores, interactive entertainment venues and other specialty retail or leisure-time activities. The Company believes the most important component of an ETRC is a megaplex theatre because it attracts substantial customer traffic to the site. ETRC's typically provide a family entertainment experience by creating an atmosphere of fun and excitement. The Company believes that by broadening the traditional retail shopping concept, ETRC's attract a greater number of customers to spend more time and money at a single location. The Company also believes access to capital in this developing market is generally limited for all but the largest entertainment companies. As a result of the significant capital commitment involved in developing these projects and the experience and relationships of the Company's management, the Company believes it will have opportunities to provide capital to businesses that seek to develop and operate these properties but would prefer to lease rather than own the properties. The Company's 2
5 ability to finance the acquisition and development of these properties should enable it to grow and diversify its asset base. The Company believes it will have opportunities to provide capital to developers and operators of entertainment and entertainment-related properties due to its strong capital base of shareholders' equity, the funds available under its Bank Credit Facility and its potential access to capital markets. The Company also believes it should be in a position to acquire new properties for Shares or a combination of cash and Shares, creating the opportunity for transactions structured on a tax-deferred basis to the seller (through a subsidiary partnership or otherwise) and thereby potentially reducing the price that would be paid in all-cash transactions. The Company's ability to continue to grow and diversify its asset base as described above will depend on its ability to obtain additional capital for investment in properties. See Item 7 - "Management's Discussion and Analysis" for a discussion of these capital requirements and the Company's strategies for obtaining this capital. OPERATING STRATEGIES - - Purchase single-tenant properties supported by long-term leases or multi-tenant properties that are substantially leased to minimize the risks inherent in initial leasing. - - Structure leases, where possible, on a triple-net or similar basis under which the tenants bear substantially all operational expenses connected with the properties. - - Structure leases for contractual increases in rent and/or percentage rent based upon a percentage of a tenant's gross sales over a pre-determined level. - - Develop and maintain long-term working relationships with theatre, restaurant, retail and other entertainment-related business operators and developers. - - Diversify the Company's asset base by property type and tenant. LEASE RISK MINIMIZATION. To avoid initial lease-up risks and produce a predictable income stream, the Company intends to acquire single-tenant properties that are leased under long-term leases or multi-tenant properties that are substantially leased or leased to a master tenant. The Company believes its willingness to make long-term investments in properties offers tenants financial flexibility and allows tenants to allocate capital to their core businesses. LEASE STRUCTURE. The Company intends to structure leases, where possible, on a triple-net or similar 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 Company intends to provide for periodic increases in rent and/or percentage rent based upon a percentage of the tenant's gross sales over a pre-determined level. TENANT RELATIONSHIPS. The Company will seek to develop and maintain long-term working relationships with theatre, restaurant and other entertainment-related business operators and developers by providing capital for multiple properties on a national or regional basis, thereby enhancing efficiency and value to those operators and to the Company. In addition to existing tenants, the Company will target tenants whose competitive position and financial strength are deemed adequate to meet their obligations throughout the lease terms. 3
6 PORTFOLIO DIVERSIFICATION. The Company will endeavor to further diversify its asset base by property type and tenant. In pursuing this diversification strategy, the Company will target theatre, restaurant, retail and other entertainment-related business operators which management views as leaders in their market segments and which have the financial strength to compete effectively and perform under their leases with the Company. If, as expected, ETRCs include an increasing number of diverse tenants, the Company expects to be able to serve the widening demands of this market and include additional complementary properties in its portfolio. Management is actively pursuing opportunities to finance the acquisition of additional properties through joint ventures, direct equity placements and other arrangements. See item 7-"Management's Discussion and Analysis". CAPITALIZATION STRATEGIES - - Employ moderate leverage, including the Bank Credit Facility, to fund additional acquisitions. - - Pursue joint venture opportunities and other arrangements to fund additional property acquisitions. - - Maintain a debt to total capitalization ratio consistent with prudent management and market expectations. - - Pay regular distributions and periodically increase distributions to Shareholders to the extent expected increases in FFO and Cash Available for Distribution (net earnings plus depreciation and amortization minus capital expenditures and principal payments on indebtedness) are realized. MODERATE USE OF LEVERAGE; DEBT TO TOTAL CAPITALIZATION. The Company will seek to enhance shareholder return through the moderate use of leverage. The Company currently has $52 million in availability under its Bank Credit Facility to fund the acquisition of additional properties consistent with the Company's investment policies and the terms of the credit agreement (see "Liquidity and Capital Resources" and "Capital Requirements for Additional Acquisitions and Future Growth" in Item 7 - "Management's Discussion and Analysis"). In addition, the Company may in the future obtain additional secured debt and/or refinance its existing unsecured debt with long-term debt or proceeds from the issuance of additional equity as circumstances warrant and opportunities to do so become available. The Company expects to maintain a debt to total capitalization ratio (i.e., total debt of the Company as a percentage of shareholder's equity plus total debt) of less than 50%. JOINT VENTURES. The Company will examine and pursue potential joint venture opportunities with institutional investors or developers if they are considered to add value to the shareholders. The Company may employ higher leverage in such joint ventures. PAYMENT OF REGULAR DISTRIBUTIONS. The Company has paid and expects to continue paying quarterly dividend distributions to its shareholders. Among the factors the Board of Trustees considers in setting the distribution rate are the Company's results of operations, including FFO per Share, and the Company's Cash Available for Distribution. The Company expects to periodically increase distributions as FFO and Cash Available for Distribution increase and as other considerations and factors warrant. See "Cautionary Statement Regarding Forward-Looking Information" in Item 7 of this Form 10-K. COMPETITION The Company competes for real estate financing opportunities with traditional financial sources such as banks, non-bank providers of leveraged lease and other structured finance facilities, equity markets and insurance companies, as well as other REITs. The popularity of REITs as real estate financing vehicles, and thus the 4
7 competition for high quality acquisition opportunities, has increased in recent years and may continue to do so in the foreseeable future. While the Company is the first publicly traded REIT formed to specialize in entertainment-themed properties, other entertainment-oriented REITs may enter the market in the future as new megaplex theatres and ETRCs are developed. The Company believes its capital base, access to existing and potential new financing and the industry relationships of its management will enable the Company to compete effectively for acquisition and financing opportunities. EMPLOYEES As of December 31, 1998, the Company had seven full time employees and one part-time employee. ITEM 2. PROPERTIES As of December 31, 1998, the Company's real estate portfolio consisted of 21 megaplex theatre properties that are geographically diversified throughout eleven states and one entertainment-themed retail center ("ETRC") development property located in Westminster, Colorado. The Company also owns land parcels and related properties adjacent to several of its theatre properties. 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> Building Acquisition (gross Property Location Date Screens Seats sq. ft) Tenant - -------- -------- ---- ------- ----- ------- ------ <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 First Colony 24 (1) Houston, TX 11/97 24 5,098 107,690 AMC Oakview 24 (1) Omaha, NE 11/97 24 5,098 107,402 AMC Leawood Town Center 20 Kansas City, MO 11/97 20 2,995 75,224 AMC Gulf Pointe 30 (2) Houston, TX 02/98 30 6,008 130,891 AMC South Barrington 30 Chicago, IL 03/98 30 6,210 130,891 AMC Cantera 30 (2) Chicago, IL 03/98 30 6,210 130,757 AMC Mesquite 30 (2) Dallas, TX 04/98 30 6,008 130,891 AMC Hampton Town Center 24 Norfolk, VA 06/98 24 5,098 107,396 AMC Raleigh Grand 16 Raleigh, NC 08/98 16 2,596 51,450 Consolidated Muvico Pompano 18 Pompano Beach, FL 08/98 18 3,424 73,637 Muvico Westminster Promenade Westminster, CO 10/98 -- -- -- Multi-Tenant Pompano Kmart Pompano Beach, FL 11/98 -- -- 80,540 Kmart Nickels Restaurant Pompano Beach, FL 11/98 -- -- 5,600 Nickels Muvico Paradise 24 Davie, FL 11/98 24 4,180 96,497 Muvico Boise Stadium (1) Boise, ID 12/98 20 4,734 140,300 Edwards Aliso Veijo 20 Los Angeles, CA 12/98 20 4,352 98,557 Edwards -- ----- ------ TOTAL 494 97,429 2,302,443 </TABLE> 5
8 (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 intends to ground lease or sell to restaurant or other entertainment themed operators. (3) Property is included as security for a $105 million mortgage facility. OFFICE LOCATIONS. The Company maintains two executive offices, one in Kansas City, Missouri and one in Los Angeles, California. Each office suite is leased from a third party landlord. The Kansas City office occupies a total of 1,534 square feet with annual rentals of $36,700. The Los Angeles office occupies a total of 1,494 square feet with annual rentals of $43,500 and an approximate 4.5% annual escalator. TENANTS AND LEASES The Company acquired an initial portfolio of sixteen megaplex theatre properties (the "AMC Properties") from subsidiaries of AMCE, including AMC, for an aggregate purchase price of approximately $362 million. Eleven of the AMC Properties were acquired in 1997 and five were acquired in 1998. Twelve of the AMC Properties were described in the Company's IPO Prospectus as the "Initial Properties" to be acquired by the Company, and four AMC Properties were among the "Option Properties" described in the Prospectus. The AMC Properties have an aggregate of 396 screens and 78,160 seats. Each AMC Property is located in a large metropolitan market and was constructed on or after May 1995. Each AMC Property was acquired by the Company at a price equal to AMCE's cost of development and construction. The Company's existing leases with AMC (the "AMC Leases") provide for aggregate annual rentals of approximately $38.3 million, or an average annual rental of approximately $2.4 million per Property. AMC's obligations under each Lease are guaranteed by AMCE. The Leases have initial terms ranging from 13 to 15 years (the "Fixed Term") and may be extended upon the same terms and conditions for four additional five-year terms (each, an "Extended Term") at the option of AMC. The Leases are triple-net leases that require AMC to pay substantially all expenses associated with the operation of the Properties, including taxes and other governmental charges, insurance, utilities, service, maintenance and any ground lease payments. Each Lease requires that, for a period of ten years, AMC must operate the Property only as a movie theatre and activities incidental thereto. The rental schedules under the AMC Leases provide a stable source of cash flow while allowing the Company to participate in future revenue growth experienced at those theatres. Rent for the first year of each Lease is set at a fixed amount and is subject to increase each year by the percentage increase in the Consumer Price Index ("CPI") for the previous year, not to exceed 2%. In addition, once AMC earns revenues in excess of a baseline amount it becomes obligated to pay annual percentage rent on the basis of such revenues. However, the Company does not expect to receive any annual percentage rent from AMC for at least five years after the commencement date of each Lease. During each Fixed Term, certain of AMC's obligations, including payment obligations, under each Lease are cross-defaulted to each of the other AMC Leases until AMCE's senior debt obligations or corporate credit are rated investment grade or AMC's rental payments to the Company represent less than 50% of the Company's rental income for any fiscal quarter. The Company has general recourse to AMC under the Leases and to AMCE under its guarantees of AMC's Lease obligations, but AMC's payment obligations under the Leases and AMCE's obligations under its guarantees are not secured by any assets of AMC or AMCE. 6
9 Rental amounts for the properties purchased from AMC were determined by the management of AMCE and the Company and were not negotiated on an arms-length basis. The rental payments are based on an initial capitalization rate of 10.5%, which the Company believes reflects the fair market value of the Properties to the Company based on rates for comparable triple-net lease transactions. The Company has the option to purchase one additional megaplex theatre property from AMCE, or its affiliates, located in Livonia, Michigan for a purchase price equal to AMCE's cost of developing and constructing the property. The Livonia theatre, when and if acquired by the Company, will be leased to AMC on a triple-net basis on terms similar to the Company's existing AMC Leases. Until November 2002, the Company has a right of first refusal and first offer to purchase and lease back to AMC any megaplex theatre and related entertainment property acquired or developed and owned (or ground leased) by AMCE or its subsidiaries, exercisable upon AMCE's intended disposition of the property. This right to purchase is intended to give the Company access to new projects developed by AMCE and its subsidiaries, thereby providing opportunities for future growth, although AMCE may lease entertainment and entertainment-related properties from owners other than the Company. AMCE is one of the leading theatrical exhibition companies in North America measured by revenues, and is an industry leader in the development of megaplex theatre complexes. In the fiscal year ended April 2, 1998, AMCE's consolidated revenues were $846.8 million. As of April 2, 1998, AMCE, through its subsidiaries, operated 229 theatres with an aggregate of 2,442 screens located in 23 states, the District of Columbia, Portugal and Japan. Approximately 61% of the screens operated by AMCE are located in Florida, California, Texas, Missouri and Michigan and approximately 70% of AMCE's domestic screens are located in areas among the 20 largest U.S. "Designated Market Areas" (television market areas as defined by Neilson Media Research). ADDITIONAL PROPERTY ACQUISITIONS The Company acquired the Raleigh Grand 16 megaplex theatre property in Raleigh, North Carolina from Real Estate Innovations LLC ("REI") in the third quarter of 1998. The Lease provides for a base term of 20 years with minimum annual rental payments and percentage rent payments. The theatre is operated by Consolidated Theaters. In addition, the Company has the option to acquire, for a pre-determined price, three additional megaplex movie theatre properties to be developed by REI and operated by Consolidated Theatres in the South and Mid-Atlantic regions. The Company acquired two megaplex theatre properties operated by Muvico Entertainment LLC ("Muvico") in 1998. Leases for the Muvico properties provide for a base term of 20 years with minimum annual rental payments and percentage rent payments. In addition, the Company has the option to acquire, for a pre-determined price, five additional megaplex movie theatre properties, predominately located in the State of Florida, to be operated by Muvico. The Company acquired two megaplex theatre properties from Edwards Theatres Circuits, Inc ("Edwards") in the fourth quarter of 1998. Leases for the Edwards properties provide for a base term of 20 years with minimum annual rental payments and percentage rent payments. In addition, the Company has a right of first refusal to acquire four additional megaplex movie theatre properties currently operated by Edwards in the State of California. The Company's rights under the agreement include the ability to match any purchase offer for the sites during the right of first refusal period. 7
10 The Company acquired the Westminster Promenade ETRC property in the fourth quarter of 1998. The property is in the development phase and, as currently planned, will include approximately 100,000 square feet of restaurant sites and light retail shops. The property is located adjacent to the AMC Westminster 24 theatre. The Company has entered into a letter of intent with Excel Legacy Corporation to form a 50/50 Joint Venture for the development of the Westminster Promenade ETRC. Excel Legacy is the owner of the Westminster AMC Theatre. The following table lists the properties acquired during 1998; <TABLE> <CAPTION> PROPERTY LOCATION OPERATOR SCREENS -------- -------- -------- ------- <S> <C> <C> <C> Gulf Pointe 30 Houston, TX AMC 30 South Barrington 30 Chicago, IL AMC 30 Cantera 30 Chicago, IL AMC 30 Mesquite 30 Dallas, TX AMC 30 Hampton Town Center 24 Norfolk, VA AMC 24 Muvico Pompano 18 Pompano Beach, FL Muvico 18 Muvico Paradise 24 Davie, FL Muvico 24 Raleigh 16 Raleigh, NC Consolidated 16 Aliso Viejo Stadium 20 Los Angeles, CA Edwards 20 Boise Stadium 21 Boise, ID Edwards 20 Westminster Promenade Westminster, CO Proposed Multi-tenant ETRC Pompano Kmart Pompano Beach, FL Kmart N/A Nickels Restaurant Pompano Beach, FL Nickels N/A </TABLE> PENDING ACQUISITIONS On July 22, 1998, the Company announced it had signed a definitive agreement with Sofran Powder Springs, Limited Partnership to acquire the Powder Springs 22-screen, 5,194-seat megaplex theatre in suburban Atlanta, Georgia. The Company intends to acquire the 22-screen theatre in the third quarter of 1999. The theatre will be operated by Regal Cinemas, based in Knoxville, Tennessee. According to publicly available information, Regal Cinemas is a national movie exhibitor that operates over 250 theatres in 28 states with more than 2,400 screens. On February 17, 1999, the Company announced the pending acquisition of the Loews Woodridge 18 theatre located in Woodridge, Illinois in suburban Chicago. The Company intends to acquire the 18 screen, 4,343 seat megaplex theatre during the second quarter of 1999. The theatre will be operated by Loews Cineplex Entertainment Corporation, the world's largest publicly traded theatre exhibition company measured by revenues. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8
11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Shares are traded on the New York Stock Exchange under the symbol EPR. The Company's Shares commenced trading on November 18, 1997. The following table sets forth for the periods shown the high and low sales prices of the Company's Shares on the New York Stock Exchange and distributions declared: <TABLE> <CAPTION> Share Price ----------- Declared High Low Distribution ---- --- ------------ <S> <C> <C> <C> 1998 Fourth Quarter $18.9375 $16.00 $0.40 Third Quarter $18.875 $14.00 0.40 Second Quarter $19.8125 $18.25 0.40 First Quarter $20.00 $19.1875 0.40 1997 Period from November 18 to December 31, 1997 $19.875 $18.875 $0.18 </TABLE> At March 17, 1999, there were approximately 7,700 holders of record of the Company's Shares. The Company declared quarterly distributions to shareholders aggregating $1.60 per Share in 1998. The Company has determined that 100% of the dividends paid on April 15, 1998, July 15, 1998, and October 15, 1998 represented ordinary dividend income to its shareholders. In addition, 83.02% or approximately $0.33 cents per Share of the fourth quarter dividend of $0.40 cents per Share declared on December 15, 1998 and paid on January 15, 1999 represented ordinary dividend income for the 1998 tax year. The remaining portion of the fourth quarter 1998 dividend payment (16.98%) represents ordinary dividend income to the shareholders in 1999. For the period November 18, 1997 to December 31, 1997, the Board of Trustees declared a distribution of $0.18 per Share which was paid on January 15, 1998. The Company determined that 100% of the 1997 dividend was ordinary dividend income to its shareholders for the 1997 tax year. The Board of Trustees and Company management expect to continue distributing a substantial portion of the Company's FFO as dividends on a quarterly basis (see "Liquidity and Capital Resources" in Item 7 - "Management's Discussion and Analysis"). SUBSEQUENT EVENTS On February 9, 1999, the Company instituted a dividend reinvestment and direct share purchase plan pursuant to which shareholders may elect to automatically reinvest their dividends by purchasing Shares issued directly by the Company and shareholders and others may purchase Shares for cash directly from the Company. On March 15, 1999, the Board of Trustees declared a quarterly dividend for the first quarter of 1999 of $0.42 per Share, which represented a five percent increase compared to the same period in 1998. This $0.42 per Share dividend, if annualized, would equal $1.68 per share, or an annual yield of approximately 10.0% based on the closing price of $16.75 of the Company's Shares on the NYSE on March 17, 1999. 9
12 ITEM 6. SELECTED FINANCIAL DATA The selected financial data included in this table is derived from the Company's consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included in this annual report on Form 10-K (in thousands except per Share data): <TABLE> <CAPTION> Year Ended Period ending December 31 December 31 1998 1997 ---- ---- <S> <C> <C> Rental revenue $35,031 $1,887 Depreciation and amortization 7,280 659 Income from operations 25,699 855 Interest expense (income) 6,461 (587) Net income 19,238 1,442 Net income per common Share: Basic $1.39 $0.10 Diluted 1.39 0.10 Weighted average number of common Shares outstanding Basic 13,802 13,800 Diluted 13,880 13,860 Funds from operations $26,213 $2,101 Cash dividends declared per common Share $1.60 $0.18 </TABLE> <TABLE> <CAPTION> December 31 December 31 1998 1997 --------------------- ----------------------- <S> <C> <C> Net real estate investments $455,997 $213,812 Total assets $464,371 $259,488 Dividends payable $5,545 $2,495 Long-term debt $206,037 $0 Total liabilities $215,809 $8,262 Shareholders' equity $248,562 $251,226 </TABLE> 10
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, anticipated capital expenditures, shareholder returns and other matters, which reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results and other expectations expressed in the Company's forward-looking statements as a result of a number of factors including but not limited to those discussed in this Item. RESULTS OF OPERATIONS The Company began operations concurrent with its initial public offering on November 18, 1997. Consequently, there is insufficient historical information for 1997 with which to compare current results. The Company's revenues, which consist of property rentals, were $35.0 million for the year ended December 31, 1998. Rental revenue increased in 1998 consistent with the property acquisitions during the year. Revenues for the six week period ended December 31, 1997 were $1.9 million. General and administrative expense totaled $2.1 million for the year ended December 31, 1998 and $0.4 million for the period ended December 31, 1997. The increase in general and administrative expense for 1998 resulted from the impact of a full year of operations during 1998 compared to a six week period of operations in 1997. Net interest expense totaled $6.5 million for the year ended December 31, 1998. For the period ended December 31, 1997, the Company had net interest income of $0.6 million. Depreciation and amortization expense was $7.3 million for the year ended December 31, 1998, as a result of additional property acquisitions during the year. Depreciation and amortization was $0.7 million for the period ended December 31, 1997. Funds from operations for the year ended December 31, 1998 were $26.2 million or $1.89 per diluted Share. For the six week period ended December 31, 1997, FFO was $2.1 million or $0.15 per diluted Share. Net income for the year ended December 31, 1998 totaled $19.2 million or $1.39 per diluted Share. For the six week period ended December 31, 1997, net income was $1.4 million or $0.10 per diluted Share. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company had $2.3 million in cash and cash equivalents, secured mortgage indebtedness of approximately $108 million, and unsecured indebtedness of $98 million under the Bank Credit Facility. The $206 million aggregate principal amount of mortgage and unsecured indebtedness bears interest at a weighted average rate of 6.96%. As of December 31, 1998, the Company had drawn $98 million under the Bank Credit Facility. The remaining credit availability of $52 million will be utilized to acquire additional entertainment properties and to fund operations, if needed. The Bank Credit Facility contains a number of financial covenants and restrictions, including restrictions on the amount of secured indebtedness that can be obtained by the Company, and a restriction on dividends to 95% of FFO until March 2, 1999 and 90% of FFO thereafter (provided that the Company may at all times pay the dividends required to maintain its status as a REIT) and provisions governing the eligibility and value of properties for borrowing base calculations. 11
14 The Company anticipates that its cash from operations and credit available under the Bank Credit Facility will provide adequate liquidity to conduct its operations, fund administrative and operating costs, interest payments and additional planned property acquisitions, and allow distributions to the Company's shareholders and avoidance of corporate level federal income or excise tax in accordance with Internal Revenue Code requirements for qualification as a REIT. CAPITAL REQUIREMENTS FOR ADDITIONAL ACQUISITIONS AND FUTURE GROWTH The ability of the Company to continue to increase FFO and distributions to its shareholders will depend on the Company's ability to grow its portfolio by making additional property acquisitions, which in turn will depend on the Company's continued access to additional financing in the capital markets. The Company has $52 million of unused and available credit remaining under the Bank Credit Facility for making future acquisitions. As opportunities are presented for property acquisitions consistent with the Company's investment objectives that would cause the Company to exhaust its available credit under the Bank Credit Facility, the Company intends to consider: (i) entering into joint ventures with other investors to acquire or develop properties; (ii) issuing Company securities in exchange for properties; and/or (iii) conducting a public offering or direct placement of the Company's securities designed to raise capital for acquisitions and/or reduce borrowings under the Bank Credit Facility, thereby replenishing the available credit for future acquisitions. There can be no assurance these objectives can be achieved. The Company anticipates that additional capital will be obtained through the dividend reinvestment and direct share purchase plan, pursuant to which shareholders may elect to automatically reinvest their dividends to purchase Shares issued directly by the Company and shareholders and others may purchase Shares for cash directly from the Company. The Company plans to file a registration statement with the Securities and Exchange Commission to register Shares for issuance in exchange for the acquisition of additional properties as such opportunities may arise. FUNDS FROM OPERATIONS The Company believes that to facilitate a clear understanding of the historical consolidated operating results, FFO should be examined in conjunction with net income as presented in the Consolidated Financial Statements. FFO is considered by management as an appropriate measure of the performance of an equity REIT because it is predicated on cash flow analysis, which management believes is more reflective of the value of real estate companies, such as the Company, rather than a measure predicated on net income, which includes non-cash expenses, such as depreciation. FFO is generally defined as net income plus certain non-cash items, primarily depreciation of real estate properties. The following table summarizes the Company's FFO for the year ended December 31, 1998 and the period from August 29, 1997 (date of inception) to December 31, 1997 (in thousands except per Share data): <TABLE> <CAPTION> Year ended Period ended December 31, 1998 December 31, 1997 ----------------- ----------------- <S> <C> <C> Net Income $19,238 $ 1,442 Real estate depreciation 6,975 659 -------- --------- FFO $26,213 $ 2,101 ======= ======== Basic FFO per Share $ 1.90 $ 0.15 ======= ======== Diluted FFO per Share $ 1.89 $ 0.15 ======= ======== </TABLE> 12
15 FOURTH QUARTER RESULTS Rental revenues for the 1998 fourth quarter were $10.3 million. FFO was $7.1 million or $0.51 per Share and net income was $5.1 million or $0.37 per Share. The Company began operations concurrent with its initial public offering on November 18, 1997. Consequently, there is insufficient historical information for 1997 with which to compare current results. Quarterly Consolidated Statements of Income (Unaudited) (Dollars in thousands except per Share data) <TABLE> <CAPTION> Period from August 29 to 3/31/98 6/30/98 9/30/98 12/31/98 December 31, 1997 ------- ------- ------- -------- ----------------- <S> <C> <C> <C> <C> <C> Rental revenue $ 6,293 $ 8,616 $ 9,817 $ 10,305 $ 1,887 General and administrative expense 497 572 490 493 373 Depreciation and amortization 1,356 1,821 2,030 2,073 659 -------- -------- -------- -------- -------- Income from operations 4,440 6,223 7,297 7,739 855 Interest expense (income) (140) 1,547 2,381 2,673 (587) -------- -------- -------- -------- -------- Net income $ 4,580 $ 4,676 $ 4,916 $ 5,066 $ 1,442 ======== ======== ======== ======== ======== Basic and diluted income per common Share $ 0.33 $ 0.34 $ 0.35 $ 0.37 $ 0.10 ======== ======== ======== ======== ======== Shares used for computation Basic 13,800 13,800 13,800 13,802 13,800 Diluted 13,860 13,861 13,861 13,880 13,860 </TABLE> YEAR 2000 DISCLOSURE The Year 2000 issue concerns the inability of certain systems and devices to properly use or store dates beyond December 31, 1999, resulting in system failures or malfunctions that disrupt normal operations. This issue affects most companies to some degree. The Company believes its own internal operations, information systems and software applications are Year 2000 compliant. The Company's only computer software, other than standard office automation software, is its accounting software. The third party vendor of the Company's accounting software has certified that the system is Year 2000 compliant. The Company did not incur any additional expenditures for its accounting software relating to Year 2000 issues. The Company is in the process of assessing the extent to which it is vulnerable to any failure of its tenants or third-party service providers to remedy their own Year 2000 issues. The Company plans to process information from tenant surveys beginning in 1999 and complete its assessment by mid-1999. The Company's evaluation of these issues has been conducted by its own personnel or by inquiries of tenants and vendors in connection with their servicing operations. The Company's expenditures for assessing Year 2000 issues have not been material. In addition, the Company is not aware of any Year 2000 issues that will require material expenditures by the Company in the future. 13
16 The Company does not believe the risk posed by Year 2000 related problems at any of the Company's third-party service providers, such as its banks, payroll processor or telecommunications providers, would have a material effect on its operations. Nevertheless, Year 2000 related problems at such third-party service providers could delay the processing of financial transactions and the Company's payroll and could temporarily disrupt the Company's internal and external communications. However, the Company expects such disruptions, should they occur, to be temporary. The Company intends to complete outstanding assessments and continue to monitor Year 2000 issues, and develop contingency plans to the extent deemed necessary. However, based on current information, the Company does not anticipate developing any substantive contingency plans with respect to Year 2000 issues. In addition, the Company currently has no plans to use any independent verification or review of its assessments. While the Company believes it will be Year 2000 ready by December 31, 1999, there can be no assurance the Company will be successful in identifying and assessing all compliance issues. There can be no assurance that systems of other companies on which the Company relies will be Year 2000 compliant on a timely basis and thus no assurance that those companies' systems would not have a material adverse effect on the Company's business or results of operations. INFLATION Investments by the Company are financed with a combination of equity, mortgages and borrowings under the Bank Credit Facility. During inflationary periods, which are generally accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Assuming the current inflation rate remains moderate, the Company believes that equity and debt financing will continue to be available on acceptable terms. 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, the Company would participate in those revenue increases through its right to receive annual percentage rent. The Company's leases also provide for escalation in base rent in the event of increases in the Consumer Price Index, with a limit of 2% per annum, or fixed periodic increases. All of the Company's theatre leases are triple-net leases requiring the lessees to pay substantially all expenses associated with the operation of the properties, including maintenance and repairs, insurance, utilities and services, real estate taxes, and ground lease payments, thereby minimizing the Company's exposure to increases in costs and operating expenses resulting from inflation. FORWARD LOOKING INFORMATION CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND," "CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL," "FORECAST," OR OTHER COMPARABLE TERMS. THE COMPANY'S ACTUAL FINANCIAL CONDITION, RESULTS OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THE FOLLOWING: - - The Company's dependence on its largest tenant and lease guarantor for a substantial portion of its lease revenues and ability to make distributions to its shareholders - - The Company's continuing ability to diversify its portfolio - - Competition from other entities providing capital to the entertainment industry - - Dependence on key personnel - - Operating risks in the entertainment industry that may affect the operations of the Company's tenants - - Tax risks arising from the Company's continuing ability to qualify as a REIT - - Interest rates and availability of debt financing - - Availability of capital for future expansion - - General real estate investment risks - - Other risk and uncertainties INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS AND ARE ENCOURAGED TO REVIEW THE RISK FACTORS IDENTIFIED IN THE COMPANY'S PROSPECTUS CONTAINED IN ITS REGISTRATION STATEMENT ON FORM S-11 AND FORM S-3. 14
17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks, primarily relating to potential losses due to changes in interest rates. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings whenever possible. The Company is subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of the Company's borrowings are subject to mortgages or contractual agreements which limit the amount of indebtedness the Company may incur. Accordingly, if the Company is unable to raise additional equity or borrow money due to these limitations, the Company's ability to acquire additional properties may be limited. The following table presents the principal amounts, weighted average interest rates, and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes: <TABLE> <CAPTION> Expected Maturities Data (in millions) 1999 2000 2001 Thereafter ---- ---- ---- ---------- <S> <C> <C> <C> <C> Fixed rate debt $1.1 $1.2 $4.6 $101.0 Average interest rate 6.77% 6.77% 6.77% 6.77% Variable rate debt $ - $0.2 $98.0 $ - Average interest rate - 7.25% 7.15% - (as of December 31, 1998) </TABLE> As the table incorporates only those exposures that exist as of December 31, 1998, it does not consider exposures or positions that could arise after that date. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time and interest rates. 15
18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Entertainment Properties Trust CONTENTS Report of Independent Auditors................................................17 Audited Financial Statements Consolidated Balance Sheets ..................................................18 Consolidated Statements of Income ............................................19 Consolidated Statements of Changes in Shareholders' Equity ...................20 Consolidated Statements of Cash Flows ........................................21 Notes to Consolidated Financial Statements ...................................22 Other Financial Information Real Estate and Accumulated Depreciation .....................................30 16
19 Report of Independent Auditors The Board of Trustees Entertainment Properties Trust We have audited the accompanying consolidated balance sheets of Entertainment Properties Trust (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1998 and the period from August 29, 1997 (date of inception) to December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). 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 generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for the year ended December 31, 1998 and the period from August 29, 1997 (date of inception) to December 31, 1997, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule of real estate and accumulated depreciation is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. Ernst & Young LLP Kansas City, Missouri March 1, 1999 17
20 Entertainment Properties Trust Consolidated Balance Sheets (Dollars in thousands) <TABLE> <CAPTION> DECEMBER 31 1998 1997 ------------------------ ----------------------- <S> <C> <C> ASSETS Rental properties, net $438,348 $213,812 Land held for development 17,649 - Cash and cash equivalents 2,341 45,220 Other assets 6,033 456 ------------------------ ----------------------- Total assets $464,371 $259,488 ======================== ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 1,066 $ 2,524 Dividends payable 5,545 2,495 Unearned rents 3,161 1,875 Long-term debt 206,037 - Other liabilities - 1,368 ------------------------ ----------------------- Total liabilities 215,809 8,262 Commitments and contingencies - - Shareholders' equity Common Shares, $.01 par value; 50,000,000 shares authorized; 13,861,964 and 13,860,100 shares issued and outstanding in 1998 and 1997, respectively 139 139 Preferred Shares, $.01 par value; 5,000,000 shares Authorized; no shares issued or outstanding - - Additional paid-in-capital 255,756 255,720 Loans to officers (2,400) (2,400) Non-vested shares (940) (1,180) Distributions in excess of net income (3,993) (1,053) ------------------------ ----------------------- Shareholders' equity 248,562 251,226 ------------------------ ----------------------- Total liabilities and shareholders' equity $464,371 $259,488 ======================== ======================= </TABLE> See accompanying notes. 18
21 Entertainment Properties Trust Consolidated Statements of Income (Dollars in thousands except per share data) <TABLE> <CAPTION> PERIOD FROM YEAR ENDED AUGUST 29 TO DECEMBER 31, DECEMBER 31, 1998 1997 --------------------- ----------------------- <S> <C> <C> Rental revenue $35,031 $1,887 General and administrative expense 2,052 373 Depreciation and amortization 7,280 659 --------------------- ----------------------- Income from operations 25,699 855 Interest expense (income) 6,461 (587) --------------------- ----------------------- Net income $19,238 $1,442 ===================== ======================= Basic and diluted net income per common share $1.39 $0.10 ===================== ======================= Shares used for computation: Basic 13,802 13,800 Diluted 13,880 13,860 </TABLE> See accompanying notes. 19
22 Entertainment Properties Trust Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands) <TABLE> <CAPTION> ADDITIONAL NON-VESTED DISTRIBUTIONS COMMON PAID-IN LOANS TO SHARE IN EXCESS OF STOCK CAPITAL OFFICERS GRANTS NET INCOME TOTAL ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Issuance of common stock $139 $275,863 $ - $ - $ - $276,002 Costs of issuance of common stock - (20,143) - - - (20,143) Loans to officers - - (2,400) - - (2,400) Non-vested stock - - - (1,200) - (1,200) Amortization of stock grant - - - 20 - 20 Net income - - - - 1,442 1,442 Dividends to common shareholders ($.18 per share) - - - - (2,495) (2,495) ----------------------------------------------------------------------------------- Balance at December 31, 1997 139 255,720 (2,400) (1,180) (1,053) 251,226 Issuance of common stock - 36 - - - 36 Amortization of stock grant - - - 240 - 240 Net income - - - - 19,238 19,238 Dividends to common shareholders ($1.60 per share) - - - - (22,178) (22,178) =================================================================================== Balance at December 31, 1998 $139 $255,756 $(2,400) $ (940) $ (3,993) $248,562 =================================================================================== </TABLE> See accompanying notes. 20
23 Entertainment Properties Trust Consolidated Statements of Cash Flows (Dollars in thousands) <TABLE> <CAPTION> PERIOD FROM YEAR ENDED AUGUST 29 TO DECEMBER 31, DECEMBER 31, 1998 1997 ---------------------- --------------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 19,238 $ 1,442 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 7,280 659 Compensation pertaining to common Shares issued to trustees 36 - Increase in other assets (5,642) (456) (Decrease) increase in accounts payable and accrued liabilities (1,458) 2,524 Decrease (increase) in other liabilities (1,368) 1,368 Increase in unearned rent 1,286 1,875 ---------------------- --------------------- Net cash provided by operating activities 19,372 7,412 INVESTING ACTIVITIES Acquisition of rental properties (231,511) (214,471) Acquisition of development properties (17,649) - ---------------------- --------------------- Net cash used in investing activities (249,160) (214,471) FINANCING ACTIVITIES Issuance of common shares - 272,422 Costs associated with common share offering - (20,143) Proceeds from long-term debt 206,459 - Principal payments on long-term debt (422) - Distribution to shareholders (19,128) - ---------------------- --------------------- Net cash provided by financing activities 186,909 252,279 Net increase (decrease) in cash and cash equivalents (42,879) 45,220 Cash and cash equivalents at beginning of period 45,220 - ---------------------- --------------------- Cash and cash equivalents at end of period $ 2,341 $ 45,220 ====================== ===================== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY Declaration of dividend to common shareholders $ 5,545 $ 2,495 ====================== ===================== Cash paid for interest $ 5,738 $ - ====================== ===================== </TABLE> See accompanying notes. 21
24 Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 1998 and 1997 1. ORGANIZATION Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT) organized on August 29, 1997. The Company was formed to acquire and develop entertainment properties including megaplex theatres and entertainment-themed retail centers. In November 1997, the Company completed an initial public offering of 13,860,000 common shares, the proceeds of which were used to acquire theatre properties in accordance with its business plan. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Entertainment Properties Trust and its wholly-owned subsidiaries, EPT DownReit, Inc. and EPT DownReit II, Inc. All significant intercompany transactions have been eliminated. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ significantly from such estimates and assumptions. RENTAL PROPERTIES Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition of the properties are capitalized. Accumulated depreciation is computed over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings and improvements. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over its estimated useful life. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company would record impairment losses on long-lived assets if events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets were less than the carrying amounts of those assets. 22
25 Entertainment Properties Trust Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION All leases contain provisions for periodic escalation in base rent (base rent escalation). In addition, tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Base rents are recognized on a straight-line basis over the term of the lease, and the base rent escalation and percentage rents are recognized when earned. INCOME TAXES The Company operates in a manner intended to enable it to qualify as a REIT under the Internal Revenue Code (the Code). A REIT which distributes at least 95% of its taxable income to its shareholders each year and which meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to continue to qualify as a REIT and to distribute substantially all of its taxable income to its shareholders. Accordingly, no provision has been made for income taxes. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from that reported for financial reporting purposes due primarily to differences in the basis of the assets and the estimated useful lives used to compute depreciation. SHARE BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee Share options rather than the alternative fair value accounting provided for under SFAS No. 123, "Accounting and Disclosure for Stock Based Compensation." Under APB 25, because the exercise price of the Company's employee Share options equals the market price of the underlying Shares at the date of grant, no compensation expense is recognized. CONCENTRATION OF RISK American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion of the rental properties held by the Company at December 31, 1998 as a result of a series of sale leaseback transactions pertaining to a number of AMC megaplex theatres. A substantial portion of the Company's revenues, and its ability to make distributions to its shareholders, will depend on rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations under the leases. RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in 2000. Management does not anticipate that the adoption of the new statement will have a significant effect on earnings or the financial position of the Company. 23
26 Entertainment Properties Trust Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DERIVATIVES The Company enters into interest rate cap agreements to mitigate changes in interest rates on variable rate borrowings. The notional amounts of such agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. None of these agreements are used for speculative or trading purposes. The costs of these agreements are included in other assets and are being amortized on a straight line basis over the life of the agreements. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instrument presented as of December 31, 1998 and 1997. Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value due to the short term maturities of these financial instruments. Long term debt: The fair value of long-term debt at December 31, 1998, which is estimated as the present value of future cash flows, discounted at market interest rates of debt instruments with similar terms and remaining maturities, approximates its carrying value. Derivatives: The estimated fair value of the interest rate cap agreement at December 31, 1998 approximates its carrying value. CASH EQUIVALENTS Cash equivalents include demand deposits and shares of a money market mutual fund for which cost approximates market value. 3. RENTAL PROPERTIES The following table summarizes the carrying amounts of rental properties as of December 31, 1998 and 1997 (in thousands); <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Buildings and improvements $ 368,429 $ 182,141 Land 77,553 32,330 --------- --------- 445,982 214,471 Accumulated depreciation (7,634) (659) --------- --------- Total $ 438,348 $ 213,812 ========= ========= </TABLE> Depreciation expense on rental properties was $7.0 million and $0.7 million for the year ended December 31, 1998 and the period ended December 31, 1997, respectively. 24
27 Entertainment Properties Trust Notes to Consolidated Financial Statements (continued) 4. OPERATING LEASES The Company's rental properties are leased under operating leases with expiration dates ranging from 13 to 20 years. Future minimum rentals on non-cancelable tenant leases at December 31, 1998 are as follows: <TABLE> <S> <C> 1999 $ 45,472 2000 45,472 2001 45,472 2002 45,211 2003 45,211 Thereafter 483,390 ------------ $710,228 ============ </TABLE> 5. LONG TERM DEBT Long term debt at December 31, 1998 consists of the following (in thousands): <TABLE> <S> <C> Mortgage note, payable 6.77%, due July 11, 2028 $104,578 Revolving line of credit, variable rates ranging from 7% to 7.44%, due March 2, 2001 98,000 Note payable, 7.25%, due December 1, 2000 155 Mortgage note payable, 7%, due December 28, 2001 3,304 -------- Total $206,037 ======== </TABLE> The Company's mortgage note payable due July 11, 2028 is collateralized by certain rental properties, which had a net book value of approximately $158.8 million at December 31, 1998. The Company's revolving line of credit is unsecured and provides for borrowing up to $150 million. Amounts available under this line of credit at December 31, 1998 totaled $52 million. The line of credit contains a number of financial covenants and restrictions, including restrictions on the amount of secured indebtedness that can be obtained by the Company, a restriction on dividends to 95% of funds from operations in the first year and 90% of funds from operations thereafter, and provisions governing the eligibility and value of properties for borrowing base calculations. 25
28 Entertainment Properties Trust Notes to Consolidated Financial Statements (continued) 5. LONG TERM DEBT (CONTINUED) Payments due on long term debt subsequent to December 31, 1998 are as follows (in thousands): <TABLE> <S> <C> 1999 $ 1,125 2000 1,339 2001 102,593 2002 1,380 2003 1,478 Thereafter 98,122 ------ Total $206,037 ======== </TABLE> 6. SHARE INCENTIVE PLAN The Company maintains a Share Incentive Plan (the Plan) under which options to purchase up to 1,500,000 of the Company's common Shares, subject to adjustment in the event of certain corporate events, may be granted. These options provide the right to purchase Shares at a price not less than the fair market value of the Shares at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the periods ended December 31, 1998 and 1997, respectively: risk-free interest rate of 4.7% and 5.8%, dividend yields of 8%, volatility factors of the expected market price of the Company's common Shares of 0.37 and 0.19 and an expected life of the options of seven years. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Company's pro forma information for each of the periods ended December 31, 1998 and 1997 is as follows (in thousands except for earnings per Share information): <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Net income: As reported $19,238 $1,442 Pro forma 19,231 1,442 Basic earnings per Share: As reported $1.39 $0.10 Pro forma $1.39 $0.10 </TABLE> 26
29 Entertainment Properties Trust Notes to Consolidated Financial Statements (continued) 6. SHARE INCENTIVE PLAN (CONTINUED) A summary of the Company's Share option activity and related information for the periods ended December 31 follows: <TABLE> <CAPTION> 1998 1997 -------------------------------------- ------------------------------------ Weighted Average Weighted Average Exercise Exercise Options Price Options Price -------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> Outstanding at the beginning of the period 60,000 $20.00 - $ - Granted 126,000 17.86 60,000 20.00 Exercised - - - - Forfeited (25,000) 19.50 - - ---------------- --------------- Outstanding at the end of the period 161,000 $18.41 60,000 $20.00 ================ =============== Exercisable at the end of period 12,000 $20.00 - - ================ =============== Weighted average fair value of options granted during the period $2.92 $1.43 ================ =============== </TABLE> Exercise prices for options outstanding at December 31, 1998 ranged from $14.81 to $19.50. The weighted average remaining contractual maturity of those options is 9.4 years. During 1997, the Company also granted 60,000 restricted Shares at the initial public offering price of $20 per Share to certain executives of the Company. The holders of these restricted Shares have voting rights and are eligible to receive dividends and distributions from the date of grant. These shares vest in equal increments over a period of five years from the date of grant. The Company records compensation expense pertaining to these restricted Shares ratably over the period of vesting. 7. RELATED PARTIES The Company loaned an aggregate of $2,400,000 to it's President, and it's Chief Operating Officer and Chief Financial Officer to purchase an aggregate of 120,000 Shares at the initial public offering price of $20 per Share. These notes bear interest at 6.1% and are due in approximately equal annual installments on November 30, 2000, 2001 and 2002. The Company has adopted a Loan Forgiveness Program, under which the Compensation Committee may forgive a portion of the above referenced indebtedness after application of proceeds from the sale of shares, following a change in control of the Company. The Compensation Committee may also forgive debt incurred by employees upon termination of employment by reason of death, disability, normal retirement or without cause. 27
30 Entertainment Properties Trust Notes to Consolidated Financial Statements (continued) 8. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per Share as of December 31, 1998 and 1997 (dollars in thousands except Share information): <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Numerator for basic and dilutive earnings per Share - net income available to common shareholders $ 19,238 $ 1,442 =========== =========== Denominator: Denominator for basic earnings per Share -- weighted-average Shares 13,802,467 13,800,100 Effect of dilutive securities: Employee Share options 30,000 -- Non-vested Share grants 48,000 60,000 ----------- ----------- Dilutive potential common Shares 78,000 60,000 Denominator for diluted earnings per Share - adjusted weighted-average Shares 13,880,467 13,860,100 =========== =========== Basic and diluted net income per Share $1.39 $0.10 ===== ===== </TABLE> Options to purchase 131,000 common Shares were outstanding during 1998 but were not included in the computation of diluted earnings per Share because the options' exercise price was greater than the average market price of the common Shares and, therefore, the effect would be antidilutive. 9. DERIVATIVES In connection with a long-term debt agreement due July 2028, the Company entered into a forward contract to essentially which fix the base rate of interest on a notional amount of $105,000,000. The forward contract settled on June 29, 1998, the closing date of the long-term debt issuance, and as a result of a decrease in market interest rates, the Company recorded a loss of $1,442,000. This loss is being amortized as an increase to interest expense over the term of the long-term debt and will result in an effective interest rate of 6.84%. As required by its Bank Credit Facility agreement, the Company is party to an interest rate cap agreement with a notional amount of $20,000,000 at an interest rate of 9.75% and maturity date of May 7, 2001. The fair value of the interest rate cap agreement is not material to the consolidated financial statements at December 31, 1998. 10. COMMITMENTS At December 31, 1998, the Company is obligated under a purchase agreement to acquire a theatre property, subject to completion of construction of the property. The Company expects to acquire the property during 1999. 28
31 Entertainment Properties Trust Real Estate and Accumulated Depreciation December 31, 1998 <TABLE> <CAPTION> Initial Cost to Company Costs Capitalization ------------------------- Buildings and Subsequent to Acquisition --------------------------------- Description Location Encumbrance Land Improvement Improvements Carrying Costs <S> <C> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $ 11,953 $ 3,060 $15,540 Mission Valley 20 San Diego, CA 10,446 16,300 Promenade 16 Los Angeles, CA 18,330 6,021 22,479 Ontario Mills 30 Los Angeles, CA 16,274 5,521 19,779 Lennox 24 Columbus, OH 8,267 12,900 West Olive 16 St. Louis, MO 11,461 4,985 12,815 Studio 30 Houston, TX 16,984 6,023 20,077 Huebner Oaks 24 San Antonio, TX 10,863 3,006 13,894 First Colony 24 Houston, TX 19,100 Oakview 24 Omaha, NE 16,700 Leawood 20 Kansas City, MO 3,714 12,086 Gulf Pointe 30 Houston, TX 4,304 21,496 South Barrington 30 Chicago, IL 6,577 27,723 Cantera 30 Chicago, IL 7,513 27,487 Mesquite 30 Dallas, TX 2,912 20,288 Hampton Town Center 24 Norfolk, VA 3,822 24,678 Pompano 18 Pompano Beach, FL 6,376 9,898 2,426 Raleigh Grand 16 Raleigh, NC 2,919 5,839 Paradise 24 Davie, FL 2,000 13,000 Pompano Kmart Pompano Beach, FL 600 2,423 Nickels Restaurant Pompano Beach, FL 200 800 Aliso Viejo 20 Los Angeles, CA 8,000 14,000 Bosie Stadium Boise, ID 16,000 Property under Various 3,304 17,254 395 Development Acquisition Costs - - 401 - - -------- ------- -------- ------ TOTAL $107,882 $94,807 $366,003 $2,426 $395 ======== ======= ======== ====== ==== <CAPTION> Gross Amount Carried at Which at Close of Period ------------------------------------------------ Buildings and Accumulated Description Location Land Improvements Total Depreciation - ----------- -------- ---- ------------ ----- ------------ <S> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $3,060 $15,540 $18,600 $451 Mission Valley 20 San Diego, CA 16,300 16,300 473 Promenade 16 Los Angeles, CA 6,021 22,479 28,500 654 Ontario Mills 30 Los Angeles, CA 5,521 19,779 25,300 574 Lennox 24 Columbus, OH 12,900 12,900 375 West Olive 16 St. Louis, MO 4,985 12,815 17,800 372 Studio 30 Houston, TX 6,023 20,377 26,400 592 Huebner Oaks 24 San Antonio, TX 3,006 13,894 16,900 403 First Colony 24 Houston, TX 19,100 19,100 517 Oakview 24 Omaha, NE 16,700 16,700 452 Leawood 20 Kansas City, MO 3,714 12,086 15,800 330 Gulf Pointe 30 Houston, TX 4,304 21,496 25,800 495 South Barrington 30 Chicago, IL 6,577 27,723 34,300 580 Cantera 30 Chicago, IL 7,513 27,487 35,000 517 Mesquite 30 Dallas, TX 2,912 20,288 23,200 339 Hampton Town Center 24 Norfolk, VA 3,822 24,678 28,500 311 Pompano 18 Pompano Beach, FL 6,376 12,324 18,700 116 Raleigh Grand 16 Raleigh, NC 2,919 5,839 8,758 63 Paradise 24 Davie, FL 2,000 13,000 15,000 Pompano Kmart Pompano Beach, FL 600 2,423 3,023 6 Nickels Restaurant Pompano Beach, FL 200 800 1,000 4 Aliso Viejo 20 Los Angeles, CA 8,000 14,000 22,000 Bosie Stadium Boise, ID 16,000 16,000 Property under Various 17,649 17,649 Development Acquisition Costs - 401 401 10 ------- -------- --------- ------ TOTAL $95,202 $368,429 $ 463,631 $7,634 ======= ======== ========= ====== <CAPTION> Life on Which Depreciation in Latest Date of Date Income Statement Description Location nstruction Acquired is Computed - ----------- -------- ---------- -------- ----------- <S> <C> <C> <C> <C> Grand 24 Dallas, TX 5/95 11/97(1) 40 years Mission Valley 20 San Diego, CA 12/95 11/97(1) 40 years Promenade 16 Los Angeles, CA 3/96 11/97(1) 40 years Ontario Mills 30 Los Angeles, CA 12/96 11/97(1) 40 years Lennox 24 Columbus, OH 12/96 11/97(1) 40 years West Olive 16 St. Louis, MO 4/97 11/97(1) 40 years Studio 30 Houston, TX 5/97 11/97(1) 40 years Huebner Oaks 24 San Antonio, TX 6/97 11/97(1) 40 years First Colony 24 Houston, TX 12/97 11/97 40 years Oakview 24 Omaha, NE 2/98 11/97 40 years Leawood 20 Kansas City, MO 12/97 11/97 40 years Gulf Pointe 30 Houston, TX 1/98 2/98 40 years South Barrington 30 Chicago, IL 3/98 3/98 40 years Cantera 30 Chicago, IL 3/98 3/98 40 years Mesquite 30 Dallas, TX 4/98 4/98 40 years Hampton Town Center 24 Norfolk, VA 6/98 6/98 40 years Pompano 18 Pompano Beach, FL 8/98 8/98 40 years Raleigh Grand 16 Raleigh, NC 5/98 8/98 40 years Paradise 24 Davie, FL 11/98 11/98 40 years Pompano Kmart Pompano Beach, FL 6/77 11/98 40 years Nickels Restaurant Pompano Beach, FL 9/98 11/98 40 years Aliso Viejo 20 Los Angeles, CA 4/98 12/98 40 years Bosie Stadium Boise, ID 12/97 12/98 40 years Property under Various Various Various 40 years Development Acquisition Costs TOTAL </TABLE> (1) Properties initially acquired in November 1997 were transferred to wholly owned subsidiary in June 1998 at net book value. RECONCILIATION: <TABLE> <CAPTION> Real Estate ----------- <S> <C> <C> Balance at beginning of the period $214,471 Additions during the period $246,339 Improvements 2,426 Other 395 249,160 -------- Deductions during period - Balance at Close of period $463,631 ======== </TABLE> 30
32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 12, 1999, which will be filed no later than April 13, 1999 (the "Proxy Statement"), contains under the captions "Election of Trustees", "Executive Compensation", and "Section 16(a) Beneficial Ownership Reporting Compliance" the information required by Item 10 of Form 10-K, which information is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION The definitive Proxy Statement contains under the captions "Election of Trustees - -- Compensation of Trustees" and "Executive Compensation" the information required by Item 11 of Form 10-K, which information is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The definitive Proxy Statement contains under the caption "Ownership of Company Shares" the information required by Item 12 of Form 10-K, which information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Peter C. Brown, Chairman of the Board of the Company, is Co-Chairman, President and Chief Financial Officer of AMCE and Executive Vice-President and Chief Financial Officer of AMC. Sixteen of the Company's existing properties were acquired from AMCE or its affiliates and have been leased back to AMC. Reference is made to Item 2 of this Form 10-K for information with respect to the purchase prices and lease terms in connection with such properties and the manner in which such prices and terms were arrived at. Mr. Brown had no direct financial interest in those transactions. 31
33 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits, Financial Statements and Financial Statement Schedules: Financial Statements: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the year ended December 31, 1998, and for the period from August 29, 1997 to December 31, 1997 Consolidated Statements of Changes in Shareholders' Equity for the year ended December 31, 1998, and for the period from August 29, 1997 to December 31, 1997 Consolidated Statements of Cash Flows for the year ended December 31, 1998, and for the period from August 29, 1997 to December 31, 1997 Notes to Financial Statements (b) Reports on Form 8-K: Reports on Form 8-K filed with the Securities and Exchange Commission on October 7, 1998 and December 24, 1998. (c) Exhibits Exhibit No. Description 3.1 Declaration of Trust of the Company (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on September 10, 1997 and incorporated herein by reference). 3.2 Amended and Restated Declaration of Trust of the Company (filed as Exhibit 4.2 to Amendment No. 1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on October 28, 1997 and incorporated herein by reference). 3.3 Bylaws of the Company (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on September 10, 1997 and incorporated herein by reference). 3.4 Amended Bylaws of the Company (filed as Exhibit 4.4 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). 3.5 Form of share certificate for common shares of beneficial interest of Company (filed as Exhibit 4.5 to Amendment No. 1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on October 28, 1997 and incorporated herein by reference).
34 10.1 Form of Agreement of Sale and Purchase between the Company and American Multi-Cinema, Inc. (filed as Exhibit 10.1 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.2 Form of Option Agreement between the Company and American Multi-Cinema, Inc. (filed as Exhibit 10.2 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.3 Form of Option Agreement between the Company and Clip Funding, Limited Partnership (filed as Exhibit 10.3 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.4 Form of AMCE Right to Purchase Agreement between the Company and AMC Entertainment Inc. (filed as Exhibit 10.4 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.5 Form of Lease entered into between the Company and American Multi-Cinema, Inc. (filed as Exhibit 10.5 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.6 Form of Guaranty of Lease entered into between the Company and AMC Entertainment, Inc. (filed as Exhibit 10.6 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.7 Credit Agreement, dated as of March 2, 1998, among Entertainment Properties Trust, as Borrower, EPT DownReit, Inc., as Subsidiary Guarantor, The Bank of New York, as a Lender, The Bank of Nova Scotia, New York Agency, as a Lender, Goldman Sachs Mortgage Company, as a Lender, Bank Leumi USA, as a Lender, The Bank of New York, as Administrative Agent, The Bank of Nova Scotia, New York Agency and Goldman Sachs Mortgage Company, as Co-Syndication Agents and The Bank of Nova Scotia, New York Agency, and Goldman Sachs Mortgage Company, as Co-Documentation Agents, together with the Form of Note (filed as Exhibit 10.7 to the Company's annual report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.8 First Amendment to Credit Agreement, dated as of March 18, 1998, among Entertainment Properties Trust, as Borrower, EPT DownReit, Inc., as Subsidiary Guarantor, The Bank of New York, as a Lender, The Bank of Nova Scotia, New York Agency, as a Lender, Goldman Sachs Mortgage Company, as a Lender, Bank Leumi USA, as a Lender, The Bank of New York, as Administrative Agent, The Bank of Nova Scotia, New York Agency and Goldman Sachs Mortgage Company, as Co-Syndication Agents and The Bank of Nova Scotia, New York Agency, and Goldman Sachs Mortgage Company, as Co-Documentation Agents (filed as Exhibit 10.8 to the Company's annual report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference).
35 10.9 Form of Indemnification Agreement entered into between the Company and each of its trustees and officers (filed as Exhibit 10.8 to Amendment No. 1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on October 28, 1997 and incorporated herein by reference). ** 10.10 1997 Share Incentive Plan (filed as Exhibit 10.9 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). ** 10.11 Deferred Compensation Plan for Non-Employee Trustees (filed as Exhibit 10.10 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). ** 10.12 Annual Incentive Program (filed as Exhibit 10.11 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). ** 10.13 Employment Agreement with Robert L. Harris (filed as Exhibit 10.12 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). ** 10.14 Employment Agreement with David M. Brain (filed as Exhibit 10.13 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference).** 10.15 Loan Agreement dated as of June 29, 1998, between EPT DownReit II, Inc. as Borrower and Archon Financial, L.P. as Lender for a secured loan in the original principal amount of $105 million (filed as Exhibit 10.15 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 21 Subsidiaries of the Company 23 Consent of Independent Auditors 27 Financial Data Schedule (d) Financial Statement Schedules Real Estate and Accumulated Depreciation ** Management contracts or compensatory plans or arrangements required to be identified by Item 13(a).
36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENTERTAINMENT PROPERTIES TRUST Dated: March 26, 1999 By /s/ David M. Brain ------------------------------------------- David M. Brain, Chief Operating Officer and Chief Financial Officer Dated: March 26, 1999 By /s/ Fred L. Kennon ------------------------------------------- Fred L. Kennon, Vice President - Treasurer and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: SIGNATURE AND TITLE DATE ------------------- ---- /s/ Peter C. Brown March 26, 1999 - ------------------------------------------------------ Peter C. Brown, Chairman of the Board /s/ Robert L. Harris March 26, 1999 - ------------------------------------------------------ Robert L. Harris, President and Trustee /s/ David M. Brain March 26, 1999 - ----------------------------------------------------- David M. Brain, Chief Operating Officer and Chief Financial Officer /s/ Robert J. Druten March 26, 1999 - ------------------------------------------------------ Robert J. Druten, Trustee /s/ Scott H. Ward March 26, 1999 - ------------------------------------------------------- Scott H. Ward, Trustee /s/ Charles S. Paul March 26, 1999 - ------------------------------------------------------- Charles S. Paul, Trustee
37 INDEX OF EXHIBITS Exhibit No. Description - ----------- ----------- 3.1 Declaration of Trust of the Company (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on September 10, 1997 and incorporated herein by reference). 3.2 Amended and Restated Declaration of Trust of the Company (filed as Exhibit 4.2 to Amendment No. 1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on October 28, 1997 and incorporated herein by reference). 3.3 Bylaws of the Company (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on September 10, 1997 and incorporated herein by reference). 3.4 Amended Bylaws of the Company (filed as Exhibit 4.4 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). 3.5 Form of share certificate for common shares of beneficial interest of Company (filed as Exhibit 4.5 to Amendment No. 1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on October 28, 1997 and incorporated herein by reference). 10.1 Form of Agreement of Sale and Purchase between the Company and American Multi-Cinema, Inc. (filed as Exhibit 10.1 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.2 Form of Option Agreement between the Company and American Multi-Cinema, Inc. (filed as Exhibit 10.2 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.3 Form of Option Agreement between the Company and Clip Funding, Limited Partnership (filed as Exhibit 10.3 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.4 Form of AMCE Right to Purchase Agreement between the Company and AMC Entertainment Inc. (filed as Exhibit 10.4 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.5 Form of Lease entered into between the Company and American Multi-Cinema, Inc. (filed as Exhibit 10.5 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). 10.6 Form of Guaranty of Lease entered into between the Company and AMC Entertainment, Inc. (filed as Exhibit 10.6 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference).
38 Exhibit No. Description - ----------- ----------- 10.7 Credit Agreement, dated as of March 2, 1998, among Entertainment Properties Trust, as Borrower, EPT DownReit, Inc., as Subsidiary Guarantor, The Bank of New York, as a Lender, The Bank of Nova Scotia, New York Agency, as a Lender, Goldman Sachs Mortgage Company, as a Lender, Bank Leumi USA, as a Lender, The Bank of New York, as Administrative Agent, The Bank of Nova Scotia, New York Agency and Goldman Sachs Mortgage Company, as Co-Syndication Agents and The Bank of Nova Scotia, New York Agency, and Goldman Sachs Mortgage Company, as Co-Documentation Agents, together with the Form of Note (filed as Exhibit 10.7 to the Company's annual report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.8 First Amendment to Credit Agreement, dated as of March 18, 1998 among Entertainment Properties Trust, as Borrower, EPT DownReit, Inc., as Subsidiary Guarantor, The Bank of New York, as a Lender, The Bank of Nova Scotia, New York Agency, as a Lender, Goldman Sachs Mortgage Company, as a Lender, Bank Leumi USA, as a Lender, The Bank of New York, as Administrative Agent, The Bank of Nova Scotia, New York Agency and Goldman Sachs Mortgage Company, as Co-Syndication Agents and The Bank of Nova Scotia, New York Agency, and Goldman Sachs Mortgage Company, as Co-Documentation Agents. Agents (filed as Exhibit 10.8 to the Company's annual report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.19 Form of Indemnification Agreement entered into between the Company and each of its trustees and officers (filed as Exhibit 10.8 to Amendment No. 1 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on October 28, 1997 and incorporated herein by reference). ** 10.10 1997 Share Incentive Plan (filed as Exhibit 10.9 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). ** 10.11 Deferred Compensation Plan for Non-Employee Trustees (filed as Exhibit 10.10 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). ** 10.12 Annual Incentive Program (filed as Exhibit 10.11 to Amendment No. 2 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 5, 1997 and incorporated herein by reference). ** 10.13 Employment Agreement with Robert L. Harris (filed as Exhibit 10.12 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). ** 10.14 Employment Agreement with David M. Brain (filed as Exhibit 10.13 to Amendment No. 3 to the Company's Registration Statement on Form S-11 and S-3 (Registration No. 333-35281) filed on November 13, 1997 and incorporated herein by reference). **
39 Exhibit No. Description - ----------- ----------- 10.15 Loan Agreement dated as of June 29, 1998, between EPT DownReit II, Inc. as Borrower and Archon Financial, L.P. as Lender for a secured loan in the original principal amount of $105 million (filed as Exhibit 10.15 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 21 Subsidiaries of the Company 23 Consent of Independent Auditors 27 Financial Data Schedule - --------------------------------------------- ** Management contracts or compensatory plans or arrangements required to be identified by Item 13(a).