-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EIyA0rIS7JWM4RoU0geCTruZxsQJZxnaBakuhDicyIDozp+ODe3XI6UH6GoKEqal R+2yRm3bJMgzWna+Q4T6BQ== 0000950137-06-002349.txt : 20060228 0000950137-06-002349.hdr.sgml : 20060228 20060228142122 ACCESSION NUMBER: 0000950137-06-002349 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060228 DATE AS OF CHANGE: 20060228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERTAINMENT PROPERTIES TRUST CENTRAL INDEX KEY: 0001045450 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 431790877 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13561 FILM NUMBER: 06650218 BUSINESS ADDRESS: STREET 1: 30 PERSHING RD STREET 2: STE 301 CITY: KANSAS CITY STATE: MO ZIP: 64108 BUSINESS PHONE: 8164721700 MAIL ADDRESS: STREET 1: ONE KANSAS CITY PLACE STREET 2: 1200 MAIN STREET SUITE 3250 CITY: KANSAS CITY STATE: MO ZIP: 64105 10-K 1 c02916e10vk.txt FORM 10-K 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, 2005 COMMISSION FILE NUMBER 1-13561 ENTERTAINMENT PROPERTIES TRUST (Exact name of registrant as specified in its charter) MARYLAND 43-1790877 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 30 W. PERSHING ROAD, SUITE 201 KANSAS CITY, MISSOURI 64108 (Address of principal executive office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Class Name of each exchange on which registered Common Shares of Beneficial Interest, New York Stock Exchange par value $.01 per share 9.50% Series A Cumulative Redeemable Preferred New York Stock Exchange Shares, par value $.01 per share 7.75% Series B Cumulative Redeemable Preferred New York Stock Exchange Shares, par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS DEFINED IN RULE 405 OF THE SECURITIES ACT. YES [X] NO [ ] INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE ACT. YES [ ] NO [X] 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 (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. LARGE ACCELERATED FILER [X] ACCELERATED FILER [ ] NON-ACCELERATED FILER [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X] THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST ("COMMON SHARES") OF THE REGISTRANT HELD BY NON-AFFILIATES, BASED ON THE CLOSING PRICE ON THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER, AS REPORTED ON THE NEW YORK STOCK EXCHANGE, WAS $1,212,828,686. AT FEBRUARY 24, 2006, THERE WERE 26,365,841 COMMON SHARES OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2006 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K. PART I ITEM 1. BUSINESS Investors should review the Risk Factors commencing on page 4 of this report for a discussion of risks that may impact our financial condition, business or share price. GENERAL Entertainment Properties Trust ("we," "us," "EPR" or the "Company") was formed on August 22, 1997 as a Maryland real estate investment trust ("REIT") to capitalize on the opportunities created by the development of destination entertainment and entertainment-related properties, including megaplex movie theatre complexes. We completed an initial public offering of our common shares of beneficial interest ("common shares") on November 18, 1997. We are a self-administered REIT. As of December 31, 2005, our real estate portfolio was comprised of over $1.4 billion in assets and consisted of 67 megaplex theatre properties (including three joint venture properties) located in 24 states and Ontario, Canada, six additional theatre properties under development, seven entertainment retail centers (including one joint venture property) located in Westminster, Colorado, New Rochelle, New York, Burbank, California and Ontario, Canada, other specialty properties, and land parcels leased to restaurant and retail operators adjacent to several of our theatre properties. Our theatre properties are leased to leading theatre operators, including American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc. ("AMCE"), Muvico Entertainment, LLC ("Muvico"), Regal Cinemas, Inc. ("Regal"), Consolidated Theatres ("Consolidated"), Loews Cineplex Entertainment ("Loews"), Rave Motion Pictures ("Rave"), AmStar Cinemas, LLC ("AmStar") , Wallace Theatres ("Wallace"), Crown Theatres ("Crown"), Southern Theatres ("Southern") and Kerasotes Theatres ("Kerasotes"). Approximately 54% of our megaplex theatre properties are leased to AMC. During the year ended December 31, 2005, approximately $31.8 million, or 19.3% of our total revenue was derived from our four entertainment retail centers in Ontario, Canada which we acquired on March 1, 2004, and our mortgage note receivable, funded on June 1, 2005, which is secured by property also in Ontario, Canada. The Canadian entertainment retail centers represent approximately $174.6 million, or 13.6% of our total rental properties at December 31, 2005, and combined with the carrying value of our mortgage note receivable, represent approximately $218.6 million or 15.5% of our total assets at December 31, 2005. (See "Risk Factors - There are risks in owning assets outside the U.S." and "Changes in foreign currency exchange rates may have an impact on the value of our shares.") For a discussion of material property acquisitions during the year ended December 31, 2005, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments." We aggregate the financial information of all our properties into one reportable segment because the properties all have similar economic characteristics and provide similar services to similar types and classes of customers. We believe entertainment is an important sector of the retail real estate industry and that, as a result of our focus on properties in this sector and the industry relationships of our management, we have a competitive advantage in providing capital to operators of these types of properties. Our principal business strategy is to be the nation's leading entertainment real estate company by continuing to acquire high-quality properties leased to entertainment and entertainment-related business operators, generally under long-term triple-net leases that require the tenant to pay substantially all expenses associated with the operation and maintenance of the property. 1 Megaplex theatres typically have at least 12 screens with stadium-style seating (seating with elevation between rows to provide unobstructed viewing) and are equipped with amenities that significantly enhance the audio and visual experience of the patron. We believe the development of megaplex theatres has accelerated the obsolescence of many of the previous generation of multiplex movie theatres by setting new standards for moviegoers, who, in our experience, have demonstrated their preference for the more attractive surroundings, wider variety of films and superior customer service typical of megaplex theatres (see "Risk Factors - Operating risks in the entertainment industry may affect the ability of our tenants to perform under their leases" and "Market prices for our shares may be affected by perceptions about the financial health or share value of our tenants or the performance of REIT stocks generally.") We expect the development of megaplex theatres to continue in the United States and abroad for the foreseeable future. With the development of the stadium style megaplex theatre as the preeminent format for cinema exhibition, the older generation of smaller flat-floor theatres has generally experienced a significant downturn in attendance and performance. As a result of the significant capital commitment involved in building megaplex theatres and the experience and industry relationships of our management, we believe we will continue to have opportunities to provide capital to businesses that seek to develop and operate these properties but would prefer to lease rather than own the properties. We believe our ability to finance these properties will enable us to continue to grow and diversify our asset base (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of capital requirements necessary for the Company's continued growth). BUSINESS OBJECTIVES AND STRATEGIES Our primary business objective is to continue to enhance shareholder value by achieving predictable and increasing Funds From Operations ("FFO") per Share (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Funds From Operations" for a discussion of FFO), through the acquisition of high-quality properties leased primarily to entertainment and entertainment-related business operators. We intend to achieve this objective by continuing to execute the Growth Strategies, Operating Strategies and Capitalization Strategies described below: GROWTH STRATEGIES FUTURE INVESTMENTS We intend to pursue acquisitions of high-quality properties from operators with a strong market presence. As a part of our growth strategy, we will consider developing additional megaplex theatre properties, and developing or acquiring single-tenant entertainment, entertainment-related or specialty properties. We will also consider developing or acquiring additional entertainment retail centers ("ERC's"), centers generally anchored by an entertainment component such as a megaplex theatre and containing other entertainment-related properties. In lieu of acquisition or development, we may also pursue opportunities to provide mortgage financing for these same property types. To accomplish our growth strategies, we will consider entering into additional joint ventures with other developers or investors (see "Capitalization Strategies - Joint Ventures"). OPERATING STRATEGIES LEASE RISK MINIMIZATION To avoid initial lease-up risks and produce a predictable income stream, we typically acquire single-tenant properties that are leased under long-term leases. We believe our willingness to make long-term investments in properties offers our tenants financial flexibility and allows tenants to allocate capital to their core businesses. Although we will continue to emphasize single-tenant properties, we have acquired and may continue to acquire multi-tenant properties we believe add value to our shareholders. 2 LEASE STRUCTURE We have structured our property acquisitions and leasing arrangements to achieve a positive spread between our cost of capital and the rentals paid by our tenants. We typically structure leases on a triple-net basis under which the tenants bear the principal portion of the financial and operational responsibility for the properties. During each lease term and any renewal periods, the leases typically provide for periodic increases in rent and/or percentage rent based upon a percentage of the tenant's gross sales over a pre-determined level. In our multi-tenant property leases and some of our theatre leases, we require the tenant to pay a common area maintenance (CAM) charge to defray its pro rata share of insurance, taxes and maintenance costs. TENANT RELATIONSHIPS We intend to continue developing and maintaining long-term working relationships with theatre, restaurant, retail, and other entertainment-related and specialty business operators and developers by providing capital for multiple properties on a national or regional basis, thereby enhancing efficiency and value to those operators and to the Company. PORTFOLIO DIVERSIFICATION We will endeavor to further diversify our asset base by property type, geographic location and tenant. In pursuing this diversification strategy, we 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. We may also consider the acquisition of other specialty properties if they add value to our shareholders. CAPITALIZATION STRATEGIES DEBT AND EQUITY FINANCING We finance the acquisition of properties with a combination of debt and preferred and common equity financing (See "Risk Factors - There is risk in using debt to fund property acquisitions" and "We must obtain new financing in order to grow"). We expect to maintain a debt to total capitalization ratio (i.e., total debt of the Company as a percentage of shareholders' equity plus total debt) of approximately 50% to 55%. On January 31, 2006, we amended and restated our secured revolving variable rate credit facility to increase the size of the facility to $200 million from $150 million, extend its term, improve the pricing and convert from a secured to an unsecured facility. The amended facility (referred to in this report as the "unsecured revolving variable rate credit facility") carries an interest rate ranging from LIBOR plus 130 to 175 basis points, compared to LIBOR plus 175 to 250 basis points previously paid. The unsecured revolving variable rate credit facility has a three year term expiring in 2009 with a one-year extension available at our option. JOINT VENTURES We will examine and may pursue potential additional joint venture opportunities with institutional investors or developers if they are considered to add value to our shareholders. We may employ higher leverage in joint ventures (See "Risk Factors - Joint ventures may limit flexibility with jointly owned investments"). PAYMENT OF REGULAR DISTRIBUTIONS We have paid and expect to continue paying quarterly dividend distributions to our common and preferred shareholders. Our Series A preferred shares have a dividend rate of 9.50% and our Series B preferred shares have a dividend rate of 7.75%. Among the factors the Board of Trustees considers in setting the 3 common share distribution rate are the applicable REIT tax rules and regulations that apply to distributions, the Company's results of operations, including FFO per share, and the Company's Cash Available for Distribution (defined as net cash flow available for distribution after payment of operating expenses, debt service, and other obligations). We expect to periodically increase distributions on our common shares as FFO and Cash Available for Distribution increase and as other considerations and factors warrant (See "Risk Factors - We cannot assure you we will continue paying dividends at historical rates"). COMPETITION We compete for real estate financing opportunities with other companies that invest in real estate, as well as traditional financial sources such as banks and insurance companies. While we were the first publicly traded REIT formed to specialize in entertainment-themed properties, other REITs have financed and may continue to seek to finance entertainment properties as new properties are developed or become available for acquisition. EMPLOYEES As of December 31, 2005, we had thirteen full time employees. WEBSITE ACCESS TO EXCHANGE ACT REPORTS AND OTHER DOCUMENTS Our internet website address is www.eprkc.com. We make available through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to the SEC. You may also view our Code of Business Conduct and Ethics, Company Governance Guidelines, Independence Standards for Trustees and the charters of our audit, nominating/company governance and compensation committees on our website. Copies of these documents are also available in print to any shareholder who requests them. ITEM 1A. RISK FACTORS There are many risks and uncertainties that can affect our future business, financial performance or share price. Some of these are beyond our control. Here is a brief description of some of the important factors which could cause our future business, operating results, financial condition or share price to be materially different than our expectations. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements on page 28 of this report. RISKS THAT MAY IMPACT OUR FINANCIAL CONDITION OR PERFORMANCE WE COULD BE ADVERSELY AFFECTED BY A TENANT'S BANKRUPTCY If a tenant becomes bankrupt or insolvent, that could diminish the income we expect from that tenant's leases. We may not be able to evict a tenant solely because of its bankruptcy. On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that might be substantially less than the remaining rent owed under the leases. In addition, any claim we have for unpaid past rent would likely not be paid in full and we would also have to take a charge against earnings for any accrued straight-line rent receivable related to the leases. Two of our tenants, Edwards Theatre Circuit, Inc. (now part of the Regal Entertainment Group), which operates two of our theatre properties, and Loews 4 Cineplex Entertainment (now merged with AMC), which operates two of our theatres, filed for, and emerged from, bankruptcy reorganization in 2002. We did not incur any significant expenses or loss of revenue as a result of those bankruptcy reorganizations. WE COULD BE ADVERSELY AFFECTED BY A MORTGAGOR'S BANKRUPTCY OR DEFAULT If a mortgagor becomes bankrupt or insolvent or defaults under its mortgage, that could force us to declare a default and foreclose on the underlying property. There is a risk that the fair value of the property will be less than the carrying value of the property's debt at the time of the foreclosure and we may have to take a charge against earnings. We may experience costs and delays in recovering a property in foreclosure or finding a substitute operator for the property. If the mortgage we hold is subordinated to senior financing secured by the property, our recovery would be limited to any amount remaining after satisfaction of all amounts due to the holder of the senior financing. We have agreed to subordinate our Canadian mortgage financing to any bank construction financing to be obtained by the borrower. OUR THEATRE TENANTS MAY BE ADVERSELY AFFECTED BY THE OBSOLESCENCE OF ANY OLDER MULTIPLEX THEATRES THEY OWN OR BY ANY OVERBUILDING OF MEGAPLEX THEATRES IN THEIR MARKETS. The development of megaplex movie theatres has rendered many older multiplex theatres obsolete. To the extent our tenants own a substantial number of multiplexes, they have been, or may in the future be, required to take significant charges against their earnings resulting from the impairment of these assets. Megaplex theatre operators have also been and could in the future be adversely affected by any overbuilding of megaplex theatres in their markets and the cost of financing, building and leasing megaplex theatres. OPERATING RISKS IN THE ENTERTAINMENT INDUSTRY MAY AFFECT THE ABILITY OF OUR TENANTS TO PERFORM UNDER THEIR LEASES The ability of our tenants to operate successfully in the entertainment industry and remain current on their lease obligations depends on a number of factors, including the availability and popularity of motion pictures, the performance of those pictures in tenants' markets, the allocation of popular pictures to tenants and the terms on which the pictures are licensed. Neither we nor our tenants control the operations of motion picture distributors. Megaplex theatres represent a greater capital investment, and generate higher rents, than the previous generation of multiplex theatres. For this reason, the ability of our tenants to operate profitably and perform under their leases could be dependent on their ability to generate higher revenues per screen than multiplex theatres typically produce. The success of "out-of-home" entertainment venues such as megaplex theatres and entertainment retail centers also depends on general economic conditions and the willingness of consumers to spend time and money on out-of-home entertainment. A SINGLE TENANT REPRESENTS A SUBSTANTIAL PORTION OF OUR LEASE REVENUES Approximately 54% of our megaplex theatre properties are leased to AMC, one of the nation's largest movie exhibition companies. AMCE has guaranteed AMC's performance under substantially all of their leases. We have diversified and expect to continue to diversify our real estate portfolio by entering into lease transactions with a number of other leading operators. Nevertheless, our revenues and our continuing ability to pay shareholder dividends are currently substantially dependent on AMC's performance under its leases and AMCE's performance under its guaranty. We believe AMC occupies a strong position in the industry and we intend to continue acquiring and leasing back AMC theatres. However, if for any reason AMC failed to perform under its lease obligations and AMCE did not perform under its guaranty, we could be required to reduce or suspend our shareholder dividends and may not have sufficient funds to support operations until substitute tenants are obtained. If that happened, we cannot predict when or whether we could obtain substitute quality tenants on acceptable terms. 5 THERE IS RISK IN USING DEBT TO FUND PROPERTY ACQUISITIONS We have used leverage to acquire properties and expect to continue to do so in the future. Although the use of leverage is common in the real estate industry, our use of debt to acquire properties does expose us to some risks. If a significant number of our tenants fail to make their lease payments and we don't have sufficient cash to pay principal and interest on the debt, we could default on our debt obligations. A substantial amount of our debt financing is secured by mortgages on our properties. If we fail to meet our mortgage payments, the lenders could declare a default and foreclose on those properties. Our unsecured revolving variable rate credit facility also exposes us to the risk of higher interest rates on amounts borrowed under that facility. If the tenants of properties in the borrowing base for our unsecured revolving variable rate credit facility default on their lease obligations or the properties otherwise fail to qualify for inclusion in the borrowing base, that could limit the amount we could borrow under the facility. A PORTION OF OUR SECURED DEBT HAS A "HYPER-AMORTIZATION" PROVISION WHICH MAY REQUIRE US TO REFINANCE THE DEBT OR SELL THE PROPERTIES SECURING THE DEBT PRIOR TO MATURITY As of December 31, 2005, we had approximately $94.9 million outstanding under a single secured mortgage loan agreement that contains a "hyper-amortization" feature, in which the principal payment schedule is rapidly accelerated, and our principal payments are substantially increased, if we fail to pay the balance on the anticipated prepayment date of July 11, 2008. We undertook this debt on the assumption that we will be able to refinance the debt prior to these hyper-amortization payments becoming due. If we cannot obtain acceptable refinancing at the appropriate time, the hyper-amortization payments will require substantially all of the revenues from those properties securing the debt to be applied to the debt repayment, which could substantially reduce our common share dividend rate and could adversely affect our financial condition and liquidity. WE MUST OBTAIN NEW FINANCING IN ORDER TO GROW As a REIT, we are required to distribute at least 90% of our taxable net income to shareholders in the form of dividends. This means we are limited in our ability to use internal capital to acquire properties and must continually raise new capital in order to continue to grow and diversify our real estate portfolio. Our ability to raise new capital depends in part on factors beyond our control, including conditions in equity and credit markets, conditions in the industries in which our tenants are engaged and the performance of real estate investment trusts generally. We continually consider and evaluate a variety of potential transactions to raise additional capital, but we cannot assure that attractive alternatives will always be available to us, nor that our share price will increase or remain at a level that will permit us to continue to raise equity capital publicly or privately. IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE TAXED AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR PAYMENT OF DIVIDENDS TO OUR SHAREHOLDERS If we fail to qualify as a REIT for federal income tax purposes, we will be taxed as a corporation. We are organized and believe we qualify as a REIT, and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code on which there are only limited judicial and administrative interpretations, and depends on facts and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws, the application of the tax laws to our qualification as a REIT or the federal income tax consequences of that qualification. 6 If we fail to qualify as a REIT we will face tax consequences that will substantially reduce the funds available for payment of dividends: - We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates - We could be subject to the federal alternative minimum tax and possibly increased state and local taxes - Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we were disqualified - We could be subject to tax penalties and interest In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of these factors, our failure to qualify as a REIT could adversely affect the market price for our shares. OUR DEVELOPMENT FINANCING ARRANGEMENTS EXPOSE US TO FUNDING AND PURCHASE RISKS Our ability to meet our construction financing obligations which we have undertaken or may enter into in the future depends on our ability to obtain equity or debt financing in the required amounts. There is no assurance we can obtain this financing at rates which will ensure a spread between our cost of capital and the rent payable to us under the leases to be entered into upon completion of construction. We will be obligated to purchase and lease-back the theatres that are subject to our development financing at predetermined rates (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Liquidity Requirements"). RISKS THAT APPLY TO OUR REAL ESTATE BUSINESS THERE ARE RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE Although our lease terms obligate the tenants to bear substantially all of the costs of operating the properties, investing in real estate involves a number of risks, including: - The risk that tenants will not perform under their leases, reducing our income from the leases or requiring us to assume the cost of performing obligations (such as taxes, insurance and maintenance) that are the tenant's responsibility under the lease - The risk that changes in economic conditions or real estate markets may adversely affect the value of our properties - The risk that local conditions could adversely affect the value of our properties - We may not always be able to lease properties at favorable rates - We may not always be able to sell a property when we desire to do so at a favorable price - Changes in tax, zoning or other laws could make properties less attractive or less profitable If a tenant fails to perform on its lease covenants, that would not excuse us from meeting any debt obligation secured by the property and could require us to fund reserves in favor of our lenders, thereby reducing funds available for payment of dividends. We cannot be assured that tenants will elect to renew their leases when the terms expire. If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no assurance we could obtain a substitute tenant on acceptable terms. If we cannot obtain another quality movie exhibitor to lease a megaplex theatre property, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in re-leasing the property. SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE Our leases require the tenants to carry comprehensive liability, casualty, workers' compensation, extended coverage and rental loss insurance on our properties. We believe the required coverage is of the type, and amount, customarily obtained by an owner of similar properties. We believe all of our properties are 7 adequately insured. However, there are some types of losses, such as catastrophic acts of nature, for which we or our tenants cannot obtain insurance at an acceptable cost. If there is an uninsured loss or a loss in excess of insurance limits, we could lose both the revenues generated by the affected property and the capital we have invested in the property. We would, however, remain obligated to repay any mortgage indebtedness or other obligations related to the property. Since September 11, 2001, the cost of insurance protection against terrorist acts has risen dramatically. There can be no assurance our tenants will be able to obtain terrorism insurance coverage, or that any coverage they do obtain will adequately protect our properties against loss from terrorist attack. JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS We may continue to acquire or develop properties in joint ventures with third parties when those transactions appear desirable. We would not own the entire interest in any property acquired by a joint venture. Major decisions regarding a joint venture property may require the consent of our partner. If we have a dispute with a joint venture partner, we may feel it necessary or become obligated to acquire the partner's interest in the venture. However, we cannot ensure that the price we would have to pay or the timing of the acquisition would be favorable to us. If we own less than a 50% interest in any joint venture, or if the venture is jointly controlled, the assets and financial results of the joint venture may not be reportable by us on a consolidated basis. To the extent we have commitments to, or on behalf of, or are dependent on, any such "off-balance sheet" arrangements, or if those arrangements or their properties or leases are subject to material contingencies, our liquidity, financial condition and operating results could be adversely affected by those commitments or off-balance sheet arrangements. OUR MULTI-TENANT PROPERTIES EXPOSE US TO ADDITIONAL RISKS Our entertainment retail centers in Westminster, Colorado, New Rochelle, New York, Burbank, California and Ontario, Canada, and similar properties we may seek to acquire or develop in the future, involve risks not typically encountered in the purchase and lease-back of megaplex theatres which are operated by a single tenant. The ownership or development of multi-tenant retail centers could expose us to the risk that a sufficient number of suitable tenants may not be found to enable the center to operate profitably and provide a return to us. Retail centers are also subject to tenant turnover and fluctuations in occupancy rates, which could affect our operating results. Multi-tenant retail centers also expose us to the risk of potential "CAM slippage," which may occur when CAM fees paid by tenants are exceeded by the actual cost of taxes, insurance and maintenance at the property. FAILURE TO COMPLY WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER LAWS COULD RESULT IN SUBSTANTIAL COSTS Our theatres must comply with the Americans with Disabilities Act (ADA). The ADA requires that public accommodations reasonably accommodate individuals with disabilities and that new construction or alterations be made to commercial facilities to conform to accessibility guidelines. Failure to comply with the ADA can result in injunctions, fines, damage awards to private parties and additional capital expenditures to remedy noncompliance. Our leases require the tenants to comply with the ADA. Recent rulings in lawsuits brought by the United States Department of Justice have found AMC, our most significant tenant, to be in violation of certain provisions of the ADA. AMC has advised us it estimates that it will cost approximately $63 million over the next five years to remedy these conditions. A portion of the rulings is being appealed by AMC. Regardless of the outcome of such appeal, the cost of remediation is the responsibility of AMC. Our properties are also subject to various other federal, state and local regulatory requirements. With the exception of the ADA issues discussed above, we believe our properties are in material compliance with all applicable regulatory requirements. However, we do not know whether existing requirements will change or whether compliance with future requirements will involve significant unanticipated expenditures. Although these expenditures would be the responsibility of our tenants, if tenants fail to perform these obligations, we may be required to do so. 8 POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION COULD RESULT IN SUBSTANTIAL COSTS Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or actual responsibility, simply because of our current or past ownership of the real estate. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our shareholders. This is so because: - As owner we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination - The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination - Even if more than one person is responsible for the contamination, each person who shares legal liability under environmental laws may be held responsible for all of the clean-up costs - Governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property. In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Most of our loan agreements require the Company or a subsidiary to indemnify the lender against environmental liabilities. Our leases require the tenants to operate the properties in compliance with environmental laws and to indemnify us against environmental liability arising from the operation of the properties. We believe all of our properties are in material compliance with environmental laws. However, we could be subject to strict liability under environmental laws because we own the properties. There is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases. Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our lenders, limit the amount we could borrow under our unsecured revolving variable rate credit facility, and reduce our ability to service our debt and pay dividends to shareholders. REAL ESTATE INVESTMENTS ARE RELATIVELY NON-LIQUID We may desire to sell a property in the future because of changes in market conditions, poor tenant performance or default of any mortgage we hold, or to avail ourselves of other opportunities. We may also be required to sell a property in the future to meet debt obligations or avoid a default. Specialty real estate projects such as megaplex theatres cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price. We may be required to invest in the restoration or modification of a property before we can sell it. THERE ARE RISKS IN OWNING ASSETS OUTSIDE THE UNITED STATES Our properties in Canada and the property securing our Canadian mortgage financing are subject to the risks normally associated with international operations. The rentals under our Canadian leases, the debt service on our Canadian mortgage financing and the payments to be received on our Canadian mortgage receivable are payable or collectible (as applicable) in Canadian dollars, which could expose us to losses resulting from fluctuations in exchange rates. Canadian real estate and tax laws are complex and subject to change, and we cannot assure you we will always be in compliance with those laws or that compliance will not expose us to additional expense. We may also be subject to fluctuations in Canadian real estate values or markets or the Canadian economy as a whole, which may adversely affect our Canadian investments. 9 RISKS THAT MAY AFFECT THE MARKET PRICE OF OUR SHARES WE CANNOT ASSURE YOU WE WILL CONTINUE PAYING DIVIDENDS AT HISTORICAL RATES Our ability to continue paying dividends on our common shares at historical rates, to pay dividends on our preferred shares at their stated rates or to increase our common share dividend rate will depend on a number of factors, including our financial condition and results of future operations, the performance of lease terms by tenants, our ability to acquire, finance and lease additional properties at attractive rates, and provisions in our loan covenants. If we do not maintain or increase our common share dividend rate, that could have an adverse effect on the market price of our common shares and possibly our preferred shares. MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES One of the factors that investors may consider in deciding whether to buy or sell our common shares or preferred shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend on our common shares or seek securities paying higher dividends or interest. MARKET PRICES FOR OUR SHARES MAY BE AFFECTED BY PERCEPTIONS ABOUT THE FINANCIAL HEALTH OR SHARE VALUE OF OUR TENANTS OR THE PERFORMANCE OF REIT STOCKS GENERALLY To the extent any of our tenants or other movie exhibitors report losses or slower earnings growth, take charges against earnings resulting from the obsolescence of multiplex theatres or enter bankruptcy proceedings, the market price for our shares could be adversely affected. The market price for our shares could also be affected by any weakness in movie exhibitor stocks generally. We believe these trends had an adverse impact on our common share price during 2001 and 2000. LIMITS ON CHANGES IN CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS WHICH MAY BE BENEFICIAL TO OUR SHAREHOLDERS There are a number of provisions in our Declaration of Trust, Maryland law and agreements we have with others which could make it more difficult for a party to make a tender offer for our shares or complete a takeover of the Company which is not approved by our Board of Trustees. These include: - A staggered Board of Trustees that can be increased in number without shareholder approval - A limit on beneficial ownership of our shares, which acts as a defense against a hostile takeover or acquisition of a significant or controlling interest, in addition to preserving our REIT status - The ability of the Board of Trustees to issue preferred or common shares, to reclassify preferred or common shares, and to increase the amount of our authorized preferred or common shares, without shareholder approval - Limits on the ability of shareholders to remove trustees without cause - Requirements for advance notice of shareholder proposals at annual shareholder meetings - Provisions of Maryland law restricting business combinations and control share acquisitions not approved by the Board of Trustees - Provisions of Maryland law protecting corporations (and by extension REITs) against unsolicited takeovers by limiting the duties of the trustees in unsolicited takeover situations - Provisions in Maryland law providing that the trustees are not subject to any higher duty or greater scrutiny than that applied to any other director under Maryland law in transactions relating to the acquisition or potential acquisition of control - Provisions of Maryland law creating a statutory presumption that an act of the trustees satisfies the applicable standards of conduct for trustees under Maryland law 10 - Provisions in loan or joint venture agreements putting the Company in default upon a change in control - Provisions of employment agreements with our officers calling for share purchase loan forgiveness, severance compensation and vesting of equity compensation upon a change in control Any or all of these provisions could delay or prevent a change in control of the Company, even if the change was in our shareholders' interest or offered a greater return to our shareholders. CHANGES IN FOREIGN CURRENCY EXCHANGE RATES MAY HAVE AN IMPACT ON THE VALUE OF OUR SHARES The functional currency for our Canadian operations and mortgage note receivable is the Canadian dollar. As a result, our future earnings could be affected by fluctuations in the exchange rate between U.S. and Canadian dollars, which in turn could affect our share price. We have attempted to mitigate our exposure to Canadian currency exchange risk by having both our Canadian lease rentals and the debt service on our Canadian mortgage financing payable in the same currency. We may also from time to time enter into foreign exchange contracts to hedge our transaction exposures. We had no outstanding foreign exchange contracts as of December 31, 2005 and 2004. If we enter into any such contracts in the future, we could be subject to the risk of loss on those contracts. We do not engage in purchasing forward exchange contracts for speculative purposes. TAX REFORM COULD ADVERSELY AFFECT THE VALUE OF OUR SHARES There have been a number of proposals in Congress for major revision of the federal income tax laws, including proposals to adopt a flat tax or replace the income tax system with a national sales tax or value-added tax. Any of these proposals, if enacted, could change the federal income tax laws applicable to REITS, subject us to federal tax or reduce or eliminate the current deduction for dividends paid to our shareholders, any of which could negatively affect the market for our shares. ITEM 1B. UNRESOLVED STAFF COMMENTS None 11 ITEM 2. PROPERTIES As of December 31, 2005, our real estate portfolio consisted of 67 megaplex theatre properties and various restaurant, retail and other properties located in 24 states and Ontario, Canada. Except as otherwise noted, all of the real estate investments listed below are owned or ground leased directly by us. The following table lists our properties, their locations, acquisition dates, number of theatre screens, number of seats, gross square footage, and the tenant.
ACQUISITION BUILDING PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT - ----------------------------------- -------------------- ----------- ------- --------- -------------- ------------- Megaplex Theatre Properties: Grand 24 (3) Dallas, TX 11/97 24 5,067 98,175 AMC Mission Valley 20 (1) (3) San Diego, CA 11/97 20 4,361 84,352 AMC Promenade 16 (3) Los Angeles, CA 11/97 16 2,860 129,822 AMC Ontario Mills 30 (3) Los Angeles, CA 11/97 30 5,469 131,534 AMC Lennox 24 (1) (3) Columbus, OH 11/97 24 4,412 98,261 AMC West Olive 16 (3) St. Louis, MO 11/97 16 2,817 60,418 AMC Studio 30 (3) Houston, TX 11/97 30 6,032 136,154 AMC Huebner Oaks 24 (3) San Antonio, TX 11/97 24 4,400 96,004 AMC First Colony 24 (1) (6) Houston, TX 11/97 24 5,098 107,690 AMC Oakview 24 (1) (6) (10) Omaha, NE 11/97 24 5,098 107,402 AMC Leawood Town Center 20 (6) Leawood, KS 2/98 20 2,995 75,224 AMC Gulf Pointe 30 (2) (6) Houston, TX 3/98 30 6,008 130,891 AMC South Barrington 30 (6) Chicago, IL 3/98 30 6,210 130,891 AMC Cantera 30 (2) (5) Chicago, IL 4/98 30 6,210 130,757 AMC Mesquite 30 (2) (6) Dallas, TX 6/98 30 6,008 130,891 AMC Hampton Town Center 24 (6) Norfolk, VA 8/98 24 5,098 107,396 AMC Raleigh Grand 16 (4) Raleigh, NC 8/98 16 2,596 51,450 Consolidated Pompano 18 (4) Pompano Beach, FL 11/98 18 3,424 73,637 Muvico Paradise 24 (6) Davie, FL 12/98 24 4,180 96,497 Muvico Boise Stadium (1) (4) Boise, ID 12/98 21 4,734 140,300 Regal Aliso Veijo Stadium 20 (6) Los Angeles, CA 12/98 20 4,352 98,557 Regal Westminster 24 (7) Westminster, CO 6/99 24 4,812 107,000 AMC Woodridge 18 (2) (10) Woodridge, IL 6/99 18 4,384 84,206 Loews Tampa Starlight 20 (10) Tampa, FL 1/00 20 3,928 84,000 Muvico Palm Promenade 24 (10) San Diego, CA 1/00 24 4,586 88,610 AMC Cary Crossroads 20 (10) Cary, NC 3/02 20 3,936 77,475 Consolidated Elmwood Palace 20 (10) New Orleans, LA 3/02 20 4,357 90,391 AMC Hammond Palace 10 (10) New Orleans, LA 3/02 10 1,531 39,850 AMC Houma Palace 10 (10) New Orleans, LA 3/02 10 1,871 44,450 AMC Westbank Palace 16 (10) New Orleans, LA 3/02 16 3,176 71,607 AMC Clearview Palace 12 (10) New Orleans, LA 3/02 12 2,495 70,000 AMC Olathe Studio 30 (10) Olathe, KS 6/02 30 5,731 113,108 AMC Forum 30 (10) Sterling Heights, MI 6/02 30 5,041 107,712 AMC Cherrydale 16 (10) Greenville, SC 6/02 16 2,744 51,450 Consolidated Livonia 20 (10) Detroit, MI 8/02 20 3,808 75,106 AMC Hoffman Town Centre 22 (10) Alexandria, VA 10/02 22 4,150 132,903 AMC Colonel Glenn 18 (4) Little Rock, AR 12/02 18 4,122 79,330 Rave AmStar Cinema 16 (9) Macon, GA 3/03 16 2,950 55,000 AmStar Star Southfield 20 (9) Southfield, MI 5/03 20 7,000 110,000 Loews Southwind 12 (9) Lawrence, KS 6/03 12 2,481 42,497 Wallace Veterans 24 (11) Tampa, FL 6/03 24 4,580 94,774 AMC New Roc City 18 and IMAX (12) New Rochelle, NY 10/03 18 3,400 103,000 Regal Harbour View Grande 16 (9) Suffolk, VA 11/03 16 3,036 61,500 Consolidated Columbiana Grande 14 (9) Columbia, SC 11/03 14 3,000 55,400 Consolidated The Grande 18 (9) Hialeah, FL 12/03 18 4,900 77,400 Crown === ======= ========= Subtotal Megpaplex Theatres, carried over to page 13 943 189,448 4,133,072 === ======= =========
12
ACQUISITION BUILDING PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT - ---------------------------------- -------------------- ----------- ------- --------- -------------- ------------ Megaplex Theatre Properties: Subtotal from page 12 n/a n/a 943 189,448 4,133,072 n/a Mississauga 16 (8) Toronto, ON 3/04 16 3,856 95,000 AMC Oakville 24 (8) Toronto, ON 3/04 24 4,772 89,290 AMC Whitby 24 (8) Toronto, ON 3/04 24 4,688 89,290 AMC Kanata 24 (8) Ottawa, ON 3/04 24 4,764 89,290 AMC Mesa Grand 24 (9) Phoenix, AZ 3/04 24 4,530 94,774 AMC Deer Valley 30 (4) Phoenix, AZ 3/04 30 5,877 113,768 AMC Hamilton 24 (4) Hamilton, NJ 3/04 24 4,268 95,466 AMC Grand Prairie 18 (9) Peoria, IL 7/04 18 4,063 82,330 Rave Lafayette Grand 16 (9) Lafayette, LA 7/04 16 2,744 61,579 Southern Northeast Mall 18 (9) Hurst, TX 11/04 18 3,886 98,250 Rave The Grand D'Iberville 14 (9) Biloxi, MS 12/04 14 2,400 48,000 Southern Avenue 16 (9) Melbourne, FL 12/04 16 3,600 75,850 Rave Mayfaire Cinema 16 (9) Wilmington, NC 2/05 16 3,050 57,338 Consolidated East Ridge 18 (9) Chattanooga, TN 3/05 18 4,133 82,330 Rave Burbank 16 (13) Burbank, CA 3/05 16 4,232 86,551 AMC ShowPlace 12 (9) Indianapolis, IN 6/05 12 2,200 45,700 Kerasotes The Grand Theatre 14 (9) Conroe, TX 6/05 14 2,400 45,000 Southern The Grand Theatre 14 (9) Hattiesburg, MS 9/05 14 2,200 46,000 Southern Auburn Stadium 10 Auburn, CA 12/05 10 1,573 32,185 Regal Arroyo Grande 10(2) Arroyo Grande, CA 12/05 10 1,714 34,500 Regal Modesto Stadium 10 Modesto, CA 12/05 10 1,885 38,873 Regal Manchester Stadium 16(1) Fresno, CA 12/05 16 3,860 80,600 Regal ===== ======= ========= Subtotal Megaplex Theatres 1,327 266,143 5,715,036 ===== ======= =========
ACQUISITION BUILDING PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT - ---------------------------------------- ----------------- ----------- ------- ------- -------------- --------------------------- Retail, Restaurant and Other Properties: Pompano Kmart Pompano Beach, FL 11/98 -- -- 80,540 Kmart Hooters Restaurant Pompano Beach, FL 11/98 -- -- 5,600 Hooters Restaurant Westminster Promenade(9) Westminster, CO 6/99 -- -- 140,000 Multi-Tenant On-The-Border Dallas, TX 1/99 -- -- 6,580 Brinkers Bennigan's Houston, TX 5/00 -- -- 6,575 S & A Bennigan's Dallas, TX 5/00 -- -- 6,575 S & A Texas Land & Cattle Houston, TX 5/00 -- -- 6,600 Tx.C.C., Inc. Texas Roadhouse Dallas, TX 1/99 -- -- 6,000 TX Roadhouse Roadhouse Grill Atlanta, GA 8/00 -- -- 6,850 Roadhouse Grill Cherrydale Shops Greenville, SC 6/02 -- -- 10,000 Multi-Tenant Johnny Carino's Dallas, TX 3/03 -- -- 6,200 Kona Rest. Group, Inc. Star Southfield, Center(9) Southfield, MI 5/03 -- -- 45,200 Multi-Tenant New Roc City(12) New Rochelle, NY 10/03 -- -- 344,000 Multi-Tenant Harbour View Station(9) Suffolk, SC 11/03 -- -- 21,855 Multi-Tenant Whitby Entertainment Centrum(8) Toronto, ON 3/04 -- -- 109,361 Multi-Tenant Oakville Entertainment Centrum(8) Toronto, ON 3/04 -- -- 127,071 Multi-Tenant Mississauga Entertainment Centrum(8) Toronto, ON 3/04 -- -- 92,657 Multi-Tenant Kanata Entertainment Centrum(8) Ottawa, ON 3/04 -- -- 258,772 Multi-Tenant Vland Chicago, IL 7/04 -- -- 7,500 Vland Warrenville Stir Crazy Chicago, IL 9/04 -- -- 6,500 Stir Crazy Cafe Burbank Village (13) Burbank, CA 3/05 -- -- 35,256 Multi-Tenant Asahi Sushi Bar Houston, TX 8/05 -- -- 9,000 EBI International, Inc. Sizzler Arroyo Grande,CA 12/05 -- -- 5,850 Arroyo Grande Sizzler, Inc. Mad River Mountain Bellefontaine, OH 11/05 -- -- 48,427 Mad River Mountain, Inc. ===== ======= ========= Subtotal Retail, Res taurant and Other Properties -- -- 1,392,969 ===== ======= ========= Total 1,327 266,143 7,108,005 ===== ======= =========
13 - ---------------- (1) Third party ground leased property. Although we are the tenant under the ground leases and have assumed responsibility for performing the obligations thereunder, pursuant to the leases, the theatre tenants are responsible for performing our obligations under the ground leases. (2) In addition to the theatre property itself, we have acquired land parcels adjacent to the theatre property, which we have or intend to ground lease or sell to restaurant or other entertainment themed operators. (3) Property is included as security for a $105 million mortgage note payable. (4) Property is included as security for $79 million in mortgage notes payable. (5) Property is included in the Atlantic-EPR I joint venture. (6) Property is included as security for $125 million in mortgage notes payable. (7) Property is included as security for a $17 million mortgage note payable. (8) Property is included as security for a $97 million mortgage note payable. (9) Property is included in the borrowing base for a $200 million unsecured revolving variable rate credit facility. (10) Property is included as security for $155.5 million in mortgage notes payable. (11) Property is included in the Atlantic-EPR II joint venture. (12) Property is included as security for a $66 million mortgage note payable and $4 million credit facility. (13) Property is included as security for a $36 million mortgage note payable. OFFICE LOCATION. Our executive office is located in Kansas City, Missouri and is leased from a third party landlord. The office occupies approximately 10,960 square feet with annual rentals of $203,000 and includes annual fixed rent escalations of $.50 per square foot. The lease expires in December, 2009. TENANTS AND LEASES Our existing leases on rental property (on a consolidated basis - excluding joint venture property) provide for aggregate annual rentals of approximately $158 million (not including periodic rent escalations or percentage rent). The megaplex theatre leases have an average remaining base term lease life of 13.6 years and may be extended for predetermined extension terms at the option of the tenant. The theatre leases are typically triple-net leases that require the tenant to pay substantially all expenses associated with the operation of the properties, including taxes, other governmental charges, insurance, utilities, service, maintenance and any ground lease payments. PROPERTY ACQUISITIONS IN 2005 The following table lists the significant rental properties we acquired or developed during 2005:
PROPERTY LOCATION TENANT - --------------------- ----------------- ----------- Mayfaire Cinema 16 Wilmington, NC Consolidated East Ridge 18 Chattanooga, TN Rave Burbank 16 Burbank, CA AMC ShowPlace 12 Indianapolis, IN Kerasotes The Grand Theatre 14 Conroe, TX Southern The Grand Theatre 14 Hattiesburg, MS Southern Auburn Stadium 10 Auburn, CA Regal Arroyo Grande 10 Arroyo Grande, CA Regal Modesto Stadium 10 Modesto, CA Regal Manchester Stadium 16 Manchester, CA Regal Mad River Mountain Bellefontaine, OH Mad River Mountain, Inc.
14 ITEM 3. LEGAL PROCEEDINGS Other than routine litigation and administrative proceedings arising in the ordinary course of business, we are not presently involved in any litigation nor, to our knowledge, is any litigation threatened against us or our properties, which is reasonably likely to have a material adverse effect on our liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table sets forth, for the quarterly periods indicated, the high and low sales prices per share for our common shares on the New York Stock Exchange ("NYSE") under the trading symbol "EPR" and the distributions declared.
SHARE PRICE DECLARED HIGH LOW DISTRIBUTION ----------- ------- ------------ 2005: Fourth quarter $ 44.31 $ 38.68 $ 0.6250 Third quarter 47.50 42.71 0.6250 Second quarter 46.82 41.15 0.6250 First quarter 44.80 40.44 0.6250 2004: Fourth quarter $ 45.00 $ 38.00 $ 0.5625 Third quarter 38.85 33.75 0.5625 Second quarter 41.55 31.57 0.5625 First quarter 40.91 33.71 0.5625
The closing price for our common shares on the NYSE on February 24, 2006 was $41.36 per share. We declared quarterly distributions to common shareholders aggregating $2.50 per common share in 2005 and $2.25 per common share in 2004. While we intend to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Trustees and will depend on our actual cash flow, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, debt covenants and other factors the Board of Trustees deems relevant. The actual cash flow available to pay dividends may be affected by a number of factors, including the revenues received from rental properties, our operating expenses, debt service on our borrowings, the ability of lessees to meet their obligations to us and any unanticipated capital expenditures (See "Risk Factors - We cannot assure you we will continue paying dividends at historical rates," in Item 1-"Business" and "Liquidity and Capital Resources" in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Our Series A preferred shares have a fixed dividend rate of 9.50% and our Series B preferred shares have a fixed dividend rate of 7.75%. On February 8, 2006, we closed on a public offering of 1,000,000 common shares at $41.25 per share. The underwriter of this offering subsequently exercised an option to purchase an additional 150,000 common shares at $41.25 per share which closed on February 15, 2006. Total net proceeds after expenses were approximately $46.2 million (described in Note 17 to the consolidated financial statements in this Form 10-K). On February 24, 2006, there were approximately 621 holders of record of our outstanding common shares. As a company with shares listed on the NYSE, we are required to comply with the corporate governance rules of the NYSE. Our CEO is required to certify to the NYSE that we are in compliance with the governance rules not later than 30 days after the date of each annual shareholder meeting. Our CEO complied with this requirement in 2005. We also filed with the SEC as exhibits to our annual report on Form 10-K for the year ended December 31, 2004 the certifications of our CEO and CFO required under Sections 302 and 906 of the Sarbanes-Oxley Act. 16 ITEM 6. SELECTED FINANCIAL DATA OPERATING STATEMENT DATA
YEAR ENDED DECEMBER 31, ----------- --------- ------- ------- ------ 2005 2004 2003 2002 2001 ----------- --------- ------- ------- ------ Rental revenue $ 145,227 124,423 89,965 71,610 54,667 Other income 3,517 557 1,195 -- -- Mortgage financing interest 3,560 -- -- -- -- Property operating expense, net of tenant reimbursements 3,680 2,322 698 201 -- Other operating expense 2,985 -- -- -- -- General and administrative expense 5,544 4,716 3,859 2,293 2,507 Costs associated with loan refinancing -- 1,134 -- -- -- Interest expense, net 42,427 38,054 30,570 24,475 20,334 Depreciation and amortization 27,597 23,365 16,359 12,862 10,209 Amortization of non-vested shares 1,705 1,377 926 1,048 240 ----------- ------- ------- ------- ------ Income before minority interests, income from joint ventures and gain on sale of real estate 68,366 54,012 38,748 30,731 21,377 Gain on sale of real estate -- -- -- 202 -- Minority interests (34) (953) (1,555) (1,195) -- Equity in income from joint ventures 728 654 401 1,421 2,203 Preferred dividend requirements (11,353) (5,463) (5,463) (3,225) -- ----------- ------- ------- ------- ------ Net income available to common shareholders $ 57,707 48,250 32,131 27,934 23,580 =========== ======= ======= ======= ====== Net income per common share: Basic $ 2.31 2.12 1.81 1.66 1.60 Diluted 2.26 2.07 1.77 1.64 1.60 Weighted average number of common shares outstanding: Basic 25,019 22,721 17,780 16,791 14,715 Diluted 25,504 23,664 19,051 17,762 14,783 Cash dividends declared per common share $ 2.50 2.25 2.00 1.90 1.80
BALANCE SHEET DATA
DECEMBER 31, ----------- --------- ------- ------- ------- 2005 2004 2003 2002 2001 ----------- --------- ------- ------- ------- Net real estate investments $ 1,303,758 1,144,553 900,096 692,922 530,280 Mortgage note and related accrued interest receivable 44,067 -- -- -- -- Total assets 1,414,165 1,213,448 965,918 730,387 583,351 Common dividends payable 15,770 14,097 9,829 8,162 6,659 Preferred dividends payable 2,916 1,366 1,366 1,366 -- Long-term debt 714,591 592,892 506,555 346,617 314,766 Total liabilities 742,509 620,059 521,509 361,834 325,223 Minority interests 5,235 6,049 21,630 15,375 -- Shareholders' equity 666,421 587,340 422,779 353,178 258,128
17 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 included in this Annual Report on Form 10-K. The forward-looking statements included in this discussion and elsewhere in this Form 10-K involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns, performance of leases by tenants 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 our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1 "Business - Risk Factors". OVERVIEW Our primary business strategy is to purchase real estate (land, buildings and other improvements) that we lease to operators of destination-based entertainment and entertainment-related properties. As of December 31, 2005, we had invested approximately $1.4 billion (before accumulated depreciation) in 67 megaplex theatre properties and various restaurant, retail and other properties located in 24 states and Ontario, Canada. As of December 31, 2005, we had invested approximately $19.8 million in development land and construction in progress for real-estate development. Also, as of December 31, 2005, we had invested approximately US $44.1 million (including accrued interest) in mortgage financing for the development of a new entertainment retail center located in downtown Toronto, Ontario, Canada. Substantially all of our single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other governmental charges, insurance, utilities, repairs and maintenance. A majority of our revenues are derived from rents received or accrued under long-term, triple-net leases. Tenants at our multi-tenant properties are required to pay common area maintenance charges to reimburse us for their pro rata portion of these costs. We incur general and administrative expenses including compensation expense for our executive officers and other employees, professional fees and various expenses incurred in the process of identifying, evaluating, acquiring and financing additional properties. We are self-administered and managed by our trustees, executive officers and other employees. Our primary non-cash expense is the depreciation of our properties. We depreciate buildings and improvements on our properties over a five-year to 40-year period for tax purposes and financial reporting purposes. Our property acquisitions and development financing commitments are financed by cash from operations, borrowings under our unsecured revolving variable rate credit facility, long-term mortgage debt and the sale of equity securities. It has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals paid by our tenants. We have primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties that have a high occupancy rate. We do not typically develop or acquire properties on a speculative basis or that are not significantly pre-leased. We have also entered into joint ventures formed to own and lease single properties, and have provided mortgage note financing for a new development in Canada as described above. We intend to continue entering into some or all of these types of arrangements in the foreseeable future. Our primary challenges have been locating suitable properties, negotiating favorable lease and financing terms, and managing our portfolio as we have continued to grow. Because of our emphasis on the entertainment sector of the real estate industry and the knowledge and industry relationships of our management, we have enjoyed favorable opportunities to acquire, finance and lease properties. We believe those opportunities will continue during 2006. 18 Our business is subject to a number of risks and uncertainties, including those described in "Risk Factors" in Item 1 of this report. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and assumptions that affect the reported assets and liabilities. The most significant assumptions and estimates relate to revenue recognition, depreciable lives of the real estate, the valuation of real estate, accounting for real estate acquisitions and estimating reserves for uncollectible receivables. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition Rents that are fixed and determinable are recognized on a straight-line basis over the minimum terms of the leases. Base rent escalation in most of our leases is dependent upon increases in the Consumer Price Index (CPI) and accordingly, management does not include any future base rent escalation amounts on these leases in current revenue. Most of our leases provide for percentage rents based upon the level of sales achieved by the tenant. These percentage rents are recognized once the required sales level is achieved. Real Estate Useful Lives We are required to make subjective assessments as to the useful lives of our properties for the purpose of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on our net income. Depreciation and amortization are provided on the straight-line method over the useful lives of the assets, as follows:
Buildings 40 years Tenant improvements Base term of lease or useful life, whichever is shorter Furniture, fixtures and equipment 3 to 7 years
Impairment of Real Estate Values We are required to make subjective assessments as to whether there are impairments in the value of our rental properties. These estimates of impairment may have a direct impact on our consolidated financial statements. We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors that may occur and indicate that impairments may exist include, but are not limited to: underperformance relative to projected future operating results, tenant difficulties and significant adverse industry or market economic trends. No such indicators existed during 2005. If an indicator of possible impairment exists, a property is evaluated for impairment by comparing the carrying amount of the property to the estimated undiscounted future cash flows expected to be generated by the property. If the carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis, an impairment charge is recognized in the amount by which the carrying amount of the property exceeds the fair value of the property. Management estimates fair value of our rental properties based on projected discounted cash flows using a discount rate determined by management to be commensurate with the risk inherent in the Company. Management did not record any impairment charges for 2005. 19 Real Estate Acquisitions Upon acquisitions of real estate properties, we make subjective estimates of the fair value of acquired tangible assets (consisting of land, building, tenant improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities (consisting of above and below market leases, in-place leases, tenant relationships and assumed financing that is determined to be above or below market terms) in accordance with Statement of Financial Accounting Standards (SFAS) No.141, Business Combinations. We utilize methods similar to those used by independent appraisers in making these estimates. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities. These estimates have a direct impact on our net income. Allowance for Doubtful Accounts Management makes quarterly estimates of the collectibility of its accounts receivable related to base rents, tenant escalations and reimbursements and other revenue or income. Management specifically analyzes tenant receivables, historical bad debts, customer credit worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of its allowance for doubtful accounts. In addition, when tenants are in bankruptcy, management makes estimates of the expected recovery of pre-petition administrative and damage claims. These estimates have a direct impact on our net income. RECENT DEVELOPMENTS Following are our significant developments during the year ended December 31, 2005: On March 11, 2005, we completed the acquisition of a megaplex theatre property in Chattanooga, Tennessee. The Chattanooga 18 is operated by Rave Motion Pictures and was acquired for a total cost (including land and building) of approximately $14.3 million. This theatre is leased under a long-term triple-net lease. On March 31, 2005, we completed the acquisition of an entertainment retail center anchored by an AMC megaplex theatre located in downtown Burbank, California for a total cost of approximately $51.9 million. The theatre is leased under a long-term lease and the retail shops have an average remaining lease life of approximately nine years. On May 19, 2005, a wholly-owned subsidiary of the Company obtained a $36.0 million non-recourse mortgage loan on this property. The mortgage note is a ten-year fixed rate loan that bears interest at 5.56% and is due and payable on June 6, 2015. As further described in Note 16 to the consolidated financial statements in this Form 10-K, on June 1, 2005 a wholly-owned subsidiary of the Company provided a secured mortgage construction loan of $47 million Canadian (US $ 37.5 million) to Metropolis Limited Partnership (the Partnership). The Partnership was formed for the purpose of developing a 13 level entertainment retail center in downtown Toronto, Ontario, Canada. It is anticipated that the development will be completed in 2008 at a total cost of approximately $272 million Canadian, including all capitalized costs, and will contain approximately 360,000 square feet of net rentable area (excluding signage). This mortgage note receivable bears interest at 15% and is senior to all other debt of and equity in the Partnership at December 31, 2005. The Partnership has an agreement with a bank to provide a first mortgage construction loan to the Partnership of $106 million. The bank construction financing will be senior to the Company's mortgage note. 20 On June 28, 2005, we completed the acquisition of a megaplex theatre property in Indianapolis, Indiana. The ShowPlace 12 is operated by Kerasotes Showplace Theatres and was acquired for a total cost (including land and building) of approximately $6.0 million. This theatre is leased under a long-term triple-net lease. On October 28, 2005, a wholly-owned subsidiary of the Company obtained six non-recourse mortgage loans aggregating $79.0 million in proceeds. Each of these loans is secured by an individual theatre property and require monthly principal and interest payments aggregating approximately $498 thousand. The mortgage notes are ten-year fixed rate loans that bear interest at 5.77% and are due and payable on November 6, 2015. On November 17, 2005, we completed the acquisition of the Mad River Ski Resort in Bellefontaine, Ohio. The property serves the Columbus and Dayton, Ohio markets and has over 40 acres of skiing terrain that is serviced by nine lifts. The acquisition price for the ski resort was $11.0 million and is leased to Peak Resorts under a long-term triple-net lease. On December 2, 2005, we completed the acquisition of four megaplex theatre properties leased to and operated by Regal Cinemas and located in California. The theatres are the Modesto Stadium 10 located in Modesto, California, the Auburn Stadium 10 located in Auburn, California, the Manchester Stadium 16 located in Fresno, California, and the Arroyo Grande Stadium 10 located in Arroyo Grande, California. A related land parcel leased to a restaurant operator was also purchased in Arroyo Grande. The properties were acquired for a total acquisition price of $33.4 million and are all leased under long-term triple-net leases. During the year ended December 31, 2005, we completed development of three megaplex theatre properties located in Wilmington, North Carolina, Conroe, Texas and Hattiesburg, Mississippi. The Mayfaire Cinema 16 in Wilmington is operated by Consolidated Theatres and was completed for a total development cost (including land and building) of approximately $8.7 million. The Grand Theatre 14 in Conroe is operated by Southern Theatres and was completed for a total development cost (including land and building) of approximately $10.1 million. The Hattiesburg Grand Theatre 14 in Hattiesburg is operated by Southern Theatres and was completed for a total development cost (including land and building) of approximately $9.7 million. These theatres are leased under long-term triple-net leases. As of December 31, 2005, we had six theatre development projects under construction for which we have agreed to either finance the development costs or purchase the theatre upon completion. The properties are being developed by the prospective tenants. These theatres are expected to have a total of 95 screens and their development costs (including land) are expected to be approximately $88.2 million. Through December 31, 2005, we have invested $26.9 million in these projects (including land), and have commitments to fund approximately $61.3 million of additional improvements. Development costs are advanced by us either in periodic draws or upon successful completion of construction. If we determine that construction is not being completed in accordance with the terms of the development agreement, we can discontinue funding construction draws or refuse to purchase the completed theatre. We have agreed to lease the theatres to the operators at pre-determined rates. The hurricane events of September 2005 in the Gulf States region of the United States impacted five of our theatres located in the New Orleans, Louisiana area, totaling 68 screens, and one of our theatres in Biloxi, Mississippi with 14 screens. The five New Orleans area theatres are all operated by AMC and the theatre in Biloxi is operated by Southern Theatres. All six of these theatres have reopened as of December 31, 2005. In addition, all six of these theatres are leased under long-term triple-net leases which require tenants to maintain a minimum of 18 months of business interruption insurance, and provide that repair of damage to the theatres is the responsibility of the tenants and/or the tenants' insurance providers. The tenants 21 remain responsible for paying base rent during any repair period. Percentage rent of $197,000 was received in 2005 related to one of these theatres. We expect no percentage rent will be received in 2006 related to any of these six theatres. One non triple-net retail property in Pompano Beach, Florida also had damage to the roof as a result of the hurricane events. The claim with the insurance company related to this damage is pending, but we expect to incur no loss as a result of this damage. As discussed above and in Note 17 to the consolidated financial statements in this Form 10-K, subsequent to December 31, 2005, we amended and restated our revolving credit facility, and also issued 1,150,000 common shares for proceeds, after expenses, of approximately $46.2 million. We also refinanced certain maturing mortgage notes payable. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 Rental revenue was $145.2 million for the year ended December 31, 2005, compared to $124.4 million for the year ended December 31, 2004. The $20.8 million increase resulted primarily from the property acquisitions and developments completed in 2005 and 2004 and base rent increases on existing properties. Percentage rents of $1.9 million and $2.2 million were recognized during 2005 and 2004, respectively. Straight-line rents of $2.2 million were recognized for both 2005 and 2004. As of December 31, 2005 and 2004, the receivable for straight-line rents was $4.7 million and $2.4 million, respectively. Tenant reimbursements totaled $12.5 million for the year ended December 31, 2005 compared to $8.3 million for the year ended December 31, 2004. These tenant reimbursements arise from the operations of our retail centers. The $4.2 million increase is due primarily to the acquisitions of the retail centers in Burbank, California on March 31, 2005 and Ontario, Canada on March 1, 2004. Other income was $3.5 million for the year ended December 31, 2005 compared to $557 thousand for the year ended December 31, 2004. The increase of $2.9 million relates to revenues from a family bowling center in Westminster, Colorado opened in November 2004 and a restaurant in Southfield, Michigan opened in September 2005. Both are operated through a wholly-owned taxable REIT subsidiary. Mortgage financing interest for the year ended December 31, 2005 was $3.6 million and related solely to interest income from the mortgage note financing we provided in Canada in June of 2005 (described in Note 16 to the consolidated financial statements in this Form 10-K). No such revenue was recognized during 2004. Our property operating expense totaled $16.2 million for the year ended December 31, 2005 compared to $10.7 million for the year ended December 31, 2004. These property operating expenses arise from the operations of our retail centers. The $5.5 million increase is due primarily to the acquisitions of the retail centers in Burbank, California on March 31, 2005 and Ontario, Canada on March 1, 2004, and increases in property taxes and maintenance at certain of these properties. Other operating expense totaled $3.0 million for the year ended December 31, 2005 and related solely to the operations of the family bowling center in Westminster, Colorado and a restaurant in Southfield, Michigan. Both are operated through a wholly-owned taxable REIT subsidiary. No such costs were incurred during 2004. 22 Our general and administrative expenses totaled $5.5 million for the year ended December 31, 2005 compared to $4.7 million for the year ended December 31, 2004. The $0.8 million increase is due primarily to the following: - An increase infranchise taxes due to an increase in the size of our real estate portfolio. - Payroll and related expenses attributable to increases in base compensation, bonus awards, and payroll taxes related to the vesting of stock grants and the exercise of stock options, and the addition of employees. Costs associated with loan refinancing for the year ended December 31, 2004 were $1.1 million. These costs related to the termination of our iStar Credit Facility and consisted of a prepayment penalty of $405 thousand and the write-off of $729 thousand of remaining unamortized financing fees. No such costs were incurred during the year ended December 31, 2005. Our net interest expense increased by $4.3 million to $42.4 million for the year ended December 31, 2005 from $38.1 million for the year ended December 31, 2004. The increase in net interest expense primarily resulted from increases in long-term debt used to finance real estate acquisitions and increases in the interest rate associated with our borrowings under the revolving variable rate credit facility that we amended and restated in 2006. Depreciation and amortization expense, including amortization of non-vested shares, totaled $29.3 million for the year ended December 31, 2005 compared to $24.7 million for the year ended December 31, 2004. The $4.6 million increase resulted primarily from the property acquisitions completed in 2005 and 2004 and grants of restricted shares to management. Income from joint ventures totaled $728 thousand for the year ended December 31, 2005 compared to $654 thousand for the same period in 2004. The increase is primarily due to the addition of the Atlantic-EPR II joint venture as of March 1, 2004. For the year ended December 31, 2005, minority interest in net income was $34 thousand compared to $953 thousand for the year ended December 31, 2004. The decrease is due primarily to the conversion of the preferred interest in EPT Gulf States, LLC as of September 20, 2004 to 857,145 common shares of the Company. Minority interest for the year ended December 31, 2005, relates solely to New Roc. Preferred dividend requirements for the year ended December 31, 2005 were $11.4 million compared to $5.5 million for the same period in 2004. The $5.9 million increase is due to the issuance of 3.2 million Series B preferred shares in January of 2005 (described in Note 14 to the consolidated financial statements in this Form 10-K). YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Rental revenue was $124.4 million for the year ended December 31, 2004, as compared to $90.0 million for the year ended December 31, 2003. The $34.4 million increase resulted primarily from property acquisitions completed in 2004 and 2003, base rent increases and percentage rents on existing properties. Percentage rents of $2.2 million and $1.9 million were recognized in 2004 and 2003, respectively. Straight-line rents of $2.2 million were recognized in 2004 compared to no straight-line rents recognized in 2003. As of December 31, 2004, the receivable for straight-line rents was $2.4 million. There was no receivable for straight-line rents at December 31, 2003. Tenant reimbursements totaled $8.3 million for the year ended December 31, 2004 compared to $2.3 million for the year ended December 31, 2003. These tenant reimbursements arise from the operations of 23 our retail centers. The $6.0 million increase is due primarily to the acquisitions of the retail centers in Southfield, Michigan on May 27, 2003, New Rochelle, New York on October 27, 2003, Suffolk, Virginia on November 12, 2003 and Ontario, Canada on March 1, 2004. Our property operating expense totaled $10.7 million for the year ended December 31, 2004 compared to $3.0 million for the year ended December 31, 2003. These property operating expenses arise from the operations of our retail centers. The $7.7 million increase is due primarily to the acquisitions of the retail centers in Southfield, Michigan on May 27, 2003, New Rochelle, New York on October 27, 2003, Suffolk, Virginia on November 12, 2003 and Ontario, Canada on March 1, 2004. Our general and administrative expenses totaled $4.7 million for the year ended December 31, 2004 compared to $3.9 million for the year ended December 31, 2003. The increase is primarily due to the following: - Increases in insurance expense, including premiums for both Director and Officer insurance and property and casualty insurance due to an overall increase in premiums in the insurance market and increases in the size of our real estate portfolio. - A $99 thousand expense incurred for professional fees on a project that was ultimately not executed. - An increase in payroll and related expenses attributable to increases in base compensation, bonus awards, and payroll taxes related to the vesting of stock grants and stock bonuses, and the addition of employees. - Increases in franchise and other miscellaneous taxes paid. Costs associated with loan refinancing in 2004 were $1.1 million. These costs related to the termination of our iStar credit facility and consisted of a prepayment penalty of $405 thousand and the write-off of $729 thousand of remaining unamortized financing fees. No such costs were incurred in 2003. Our net interest expense increased by $7.5 million to $38.1 million for the year ended December 31, 2004 from $30.6 million for the year ended December 31, 2003. The increase in net interest expense primarily resulted from increases in long-term debt used to finance real estate acquisitions. Depreciation and amortization expense, including amortization of non-vested shares, totaled $24.7 million for the year ended December 31, 2004 compared to $17.3 million for the year ended December 31, 2003. The $7.4 million increase resulted from the property acquisitions completed in 2003 and 2004 and grants of restricted shares to management. Amortization of non-vested shares was $1.4 million and $0.9 million in 2004 and 2003, respectively. Income from joint ventures totaled $654 thousand for the year ended December 31, 2004 compared to $401 thousand for the same period in 2003. The increase is due to the addition of the Atlantic-EPR II joint venture on March 1, 2004. For the year ended December 31, 2004, minority interest in net income was $953 thousand compared to $1.6 million in the prior year. The decrease is due primarily to the conversion of the preferred interest in our subsidiary, EPT Gulf States, LLC, as of September 20, 2004 to 857,145 common shares of the Company. 24 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $6.5 million at December 31, 2005. In addition, we had restricted cash of $13.1 million at December 31, 2005 required in connection with debt service, payment of real estate taxes and capital improvements. Mortgage Debt and Credit Facilities As of December 31, 2005, we had total debt outstanding of $714.6 million. All of our debt at that time was mortgage debt secured by a substantial portion of our rental properties. As of December 31, 2005, $650.6 million of debt outstanding was fixed rate debt with a weighted average interest rate of approximately 6.3%. All of our debt is described in note 6 to the consolidated financial statements in this Form 10-K. At December 31, 2005, we had $64.0 million in debt outstanding under a secured revolving variable rate credit facility, with interest at a floating rate and secured by fourteen theatre properties, two theatre and retail mix properties and one retail mix property. As discussed above and in Note 17 to the consolidated financial statements in this Form 10-K, in January 2006, we amended our credit facility to increase its size to $200 million, extend its initial term to 2009, improve the pricing and convert from a secured to an unsecured facility. We also refinanced certain maturing mortgage notes payable. Our principal investing activity is the purchase and development of rental property, which has generally been financed with mortgage debt and the proceeds from equity offerings. Our unsecured revolving variable rate credit facility will also be used to finance the acquisition or development of properties. Continued growth of our rental property portfolio will depend in part on our continued ability to access funds through additional borrowings and equity security offerings. Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. We meet these requirements primarily through cash provided by operating activities. Cash provided by operating activities was $94.5 million for the year ended December 31, 2005, $80.7 million for the year ended December 31, 2004 and $54.7 million for the year ended December 31, 2003. We anticipate that our cash on hand, cash from operations, and funds available under our unsecured revolving variable rate credit facility will provide adequate liquidity to fund our operations, make interest and principal payments on our debt, and allow distributions to our shareholders and avoidance of corporate level federal income or excise tax in accordance with Internal Revenue Code requirements for qualification as a REIT. Long-term liquidity requirements at December 31, 2005 consisted primarily of maturities of long-term debt. Contractual obligations as of December 31, 2005 are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ CONTRACTUAL OBLIGATIONS 2006 2007 2008 2009 2010 THEREAFTER TOTAL ------------------------------------------------------------------ Long Term Debt Obligations $ 122,828 78,322 104,217 13,956 14,820 380,448 714,591 Operating Lease Obligations 203 209 214 220 - - 846 ------------------------------------------------------------------ Total $ 123,031 78,531 104,431 14,176 14,820 380,448 715,437 ==================================================================
25 As further described in Note 17 to the consolidated financial statements in this Form 10-K, subsequent to December 31, 2005, we amended and restated our revolving rate credit facility, completed a public offering of 1,150,000 shares at $41.25 per share, and refinanced certain maturing mortgage notes payable. We believe that we will be able to obtain financing in order to repay our debt obligations by refinancing the properties as the debt comes due. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us. Our primary use of cash after paying operating expenses, debt service and distributions to shareholders is in the acquisition of properties. We expect to finance these acquisitions with borrowings under our unsecured revolving variable rate credit facility, as well as long-term secured borrowings and equity financing alternatives. The availability and terms of any such financing will depend upon market and other conditions. If we borrow the maximum amount available under our unsecured revolving variable rate credit facility, there can be no assurance that we will be able to obtain additional acquisition financing, which would not affect our liquidity, but would affect our ability to grow (See "We must obtain new financing in order to grow" and "Risks that may affect the market price of our shares" under "Risk Factors"). In addition to the contractual obligations listed in the table above, we had six theatre projects under construction at December 31, 2005. The properties are being developed by and have been pre-leased to the prospective tenants under long-term triple-net leases. The cost of development is paid by us either in periodic draws or upon successful completion of construction. The related timing and amount of rental payments to be received by us from tenants under the leases correspond to the timing and amount of funding by us of the cost of development. These theatres will have a total of 95 screens and their total development costs (including land) will be approximately $88.2 million. Through December 31, 2005, we have invested $26.9 million in these projects (including land), and have commitments to fund an additional $61.3 million in improvements. We plan to fund development primarily with funds generated by debt financing and/or equity offerings. If we determine that construction is not being completed in accordance with the terms of the development agreement, we can discontinue funding construction draws or refuse to purchase the completed theatre. Off Balance Sheet Arrangements At December 31, 2005, we had a 20% investment interest in two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, which are accounted for under the equity method of accounting. We do not anticipate any material impact on our liquidity as a result of any commitments that may arise involving those joint ventures. We recognized income of $437, $410 and $401 (in thousands) from our investment in the Atlantic-EPR I joint venture during 2005, 2004 and 2003, respectively. We also recognized income of $291 and $244 (in thousands) from our investment in the Atlantic-EPR II joint venture during 2005 and 2004, respectively. Condensed financial information for Atlantic-EPR I and Atlantic-EPR II joint ventures is included in Note 4 to the consolidated financial statements included as part of this Form 10-K. The joint venture agreement for Atlantic-EPR I allows our partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per year in Atlantic-EPR I for our common shares or, at our discretion, the cash value of those shares as defined in the joint venture agreement. This same provision exists in the Atlantic-EPR II joint venture agreement, except that Atlantic's right to such exchange does not commence until 2007. 26 FUNDS FROM OPERATIONS (FFO) The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance and liquidity of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is a widely used measure of the operating performance of real estate companies and is provided here as a supplemental measure to Generally Accepted Accounting Principles (GAAP) net income available to common shareholders and earnings per share. FFO, as defined under the revised NAREIT definition and presented by us, is net income, computed in accordance with GAAP, excluding gains and losses from sales of depreciable operating properties, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships, joint ventures and other affiliates. Adjustments for unconsolidated partnerships, joint ventures and other affiliates are calculated to reflect FFO on the same basis. FFO is a non-GAAP financial measure. FFO does not represent cash flows from operations as defined by GAAP and is not indicative that cash flows are adequate to fund all cash needs and is not to be considered an alternative to net income or any other GAAP measure as a measurement of the results of our operations or our cash flows or liquidity as defined by GAAP. The following tables summarize the Company's FFO for the years ended December 31, 2005 and December 31, 2004 (in thousands):
YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 -------- ------- Net income available to common shareholders $57,707 48,250 Add: Real estate depreciation and amortization 27,043 22,379 Add: Allocated share of joint venture depreciation 242 223 ------- ------ Basic Funds From Operations 84,992 70,852 Add: minority interest in net income - 750 ------- ------ Diluted Funds From Operations $84,992 71,602 ======= ====== FFO per common share: Basic $ 3.40 3.12 Diluted 3.33 3.03 Shares used for computation (in thousands): Basic 25,019 22,721 Diluted 25,504 23,664 Other financial information: Straight-lined rental revenue $ 2,242 2,248
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS FASB Statement No. 123, Accounting for Stock-Based Compensation, was revised in December 2004 by FASB Statement No. 123R. FASB Statement No. 123R, Share Based Payment, also supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FASB Statement No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. For EPR, FASB Statement 27 No. 123R will be effective January 1, 2006. The adoption of FASB Statement No. 123R is not expected to have a material impact on our financial statements. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005 and clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. We adopted FIN 47 in 2005. The implementation of FIN 47 did not have any effect on our 2005 financial statements. EITF 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity when the Limited Partners Have Certain Rights," became effective in June 2005 for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, this guidance is effective no later than the beginning of the first reporting period in fiscal years beginning after December 31, 2005. We adopted EITF 04-5 in 2005. The implementation of EITF 04-5 did not have any effect on our 2005 financial statements. INFLATION Investments by EPR are financed with a combination of equity and debt. During inflationary periods, which are generally accompanied by rising interest rates, our ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. All of our megaplex theatre leases provide for base and participating rent features. To the extent inflation causes tenant revenues at our properties to increase over baseline amounts, we would participate in those revenue increases through our right to receive annual percentage rent. Our leases also generally provide for escalation in base rents in the event of increases in the Consumer Price Index, with a limit of 2% per annum, or fixed periodic increases. Our theatre leases are triple-net leases requiring the tenants to pay substantially all expenses associated with the operation of the properties, thereby minimizing our exposure to increases in costs and operating expenses resulting from inflation. A portion of our retail and restaurant leases are non-triple-net leases. These retail leases represent approximately 20% of our total real estate square footage. To the extent any of those leases contain fixed expense reimbursement provisions or limitations, we may be subject to increases in costs resulting from inflation that are not fully passed through to tenants. FORWARD LOOKING INFORMATION Cautionary statement regarding forward-looking information With the exception of historical information, this annual 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. Our actual financial condition, results of operations or business may vary materially from those contemplated by such forward-looking statements and involve various risks and uncertainties, including but not limited to those discussed under "Risk Factors" in this report. Investors are cautioned not to place undue reliance on any forward-looking statements. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks, primarily relating to potential losses due to changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings whenever possible. We also have a $200 million unsecured revolving line of credit that bears interest at a floating rate that we use to acquire properties and finance our development commitments. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings are subject to mortgages or contractual agreements which limit the amount of indebtedness we may incur. Accordingly, if we are unable to raise additional equity or borrow money due to these limitations, our ability to acquire additional properties may be limited. The following table presents the principal amounts, weighted average interest rates, and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31: Expected Maturities (in millions)
ESTIMATED 2006 2007 2008 2009 2010 THEREAFTER TOTAL FAIR VALUE ------- ---- ----- ---- ---- ---------- ----- ---------- December 31, 2005: Fixed rate debt $ 122.8 14.3 104.2 14.0 14.8 380.5 650.6 658.5 Average interest rate 7.2% 6.1% 6.7% 6.0% 6.0% 5.9% 6.3% - Variable rate debt $ - 64.0 - - - - 64.0 64.0 Average interest rate (as of - 6.6% - - - - 6.6% - December 31, 2005)
ESTIMATED 2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE ------- ----- ----- ----- ---- ---------- ----- ---------- December 31, 2004: Fixed rate debt $ 33.4 120.9 12.3 102.0 11.6 285.7 565.9 570.2 Average interest rate 8.3% 7.3% 6.2% 6.7% 6.1% 6.0% 6.5% - Variable rate debt $ - - 27.0 - - - 27.0 27.0 Average interest rate (as of - - 4.7% - - - 4.7% - December 31, 2004)
We have not engaged extensively in the use of derivatives to manage our interest rate and market risk due to our limited use of variable rate debt. For a discussion of derivative financial instruments and interest rate hedging activity, see note 10 to the consolidated financial statements. We financed the acquisition of our Canadian properties with non-recourse fixed rate mortgage loans from a Canadian lender in the original aggregate principal amount of approximately US $97 million. The loans were made and are payable by us in Canadian dollars, and the rents received from tenants of the properties are payable in Canadian dollars. We also provided a secured mortgage construction loan of U.S. $37.5 million. The loan is payable to us in Canadian dollars. Although we have attempted to mitigate the impact of foreign currency exchange risk on our Canadian properties by matching Canadian dollar debt financing with Canadian dollar rents, a significant change in the exchange rate between the Canadian and U.S. dollars could have a material impact on our earnings. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Entertainment Properties Trust CONTENTS Report of Independent Registered Public Accounting Firm...... 31 Audited Financial Statements Consolidated Balance Sheets ................................. 32 Consolidated Statements of Income ........................... 33 Consolidated Statements of Changes in Shareholders' Equity... 34 Consolidated Statements of Comprehensive Income ............. 35 Consolidated Statements of Cash Flows ....................... 36 Notes to Consolidated Financial Statements .................. 37 Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts ............. 58 Schedule III - Real Estate and Accumulated Depreciation ..... 59
30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005 and 2004, and the related consolidated statements of income, changes in shareholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedules listed in the Index at Item 15(2). These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Entertainment Properties Trust as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. KPMG LLP Kansas City, Missouri February 24, 2006 31 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2005 2004 ----------- ---------- ASSETS Rental properties, net of accumulated depreciation of $112.7 million and $87.1 million at December 31, 2005 and 2004, respectively $ 1,283,988 $ 1,120,792 Property under development 19,770 23,144 Mortgage note and related accrued interest receivable 44,067 - Investment in joint ventures 2,297 2,541 Cash and cash equivalents 6,546 11,255 Restricted cash 13,124 12,794 Intangible assets, net 10,461 10,900 Deferred financing costs, net 10,896 12,730 Other assets 23,016 19,292 ----------- ----------- Total assets $ 1,414,165 $ 1,213,448 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 7,928 $ 10,070 Common dividends payable 15,770 14,097 Preferred dividends payable 2,916 1,366 Unearned rents 1,304 1,634 Long-term debt 714,591 592,892 ----------- ----------- Total liabilities 742,509 620,059 Commitments and contingencies - - Minority interests 5,235 6,049 Shareholders' equity: Common Shares, $.01 par value; 50,000,000 shares authorized; and 25,881,647 and 25,578,472 shares issued at December 31, 2005 and 2004, respectively 259 256 Preferred Shares, $.01 par value; 10,000,000 shares authorized: 2,300,000 Series A shares issued at December 31, 2005 and 2004; liquidation preference of $57,500,000 23 23 3,200,000 Series B shares issued at December 31, 2005; liquidation preference of $80,000,000 32 - Additional paid-in-capital 703,963 618,715 Treasury shares at cost: 649,142 and 517,421 common shares at December 31, 2005 and 2004, respectively (14,350) (8,398) Loans to shareholders (3,525) (3,525) Non-vested shares (3,259) (2,338) Accumulated other comprehensive income 13,402 7,480 Distributions in excess of net income (30,124) (24,873) ----------- ----------- Shareholders' equity 666,421 587,340 ----------- ----------- Total liabilities and shareholders' equity $ 1,414,165 $ 1,213,448 =========== ===========
See accompanying notes to consolidated financial statements. 32 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------- 2005 2004 2003 ---------- --------- -------- Rental revenue $ 145,227 $ 124,423 $ 89,965 Tenant reimbursements 12,511 8,335 2,301 Other income 3,517 557 1,195 Mortgage financing interest 3,560 - - --------- --------- -------- Total revenue 164,815 133,315 93,461 Property operating expense 16,191 10,657 2,999 Other operating expense 2,985 - - General and administrative expense, excluding amortization of non-vested shares below 5,544 4,716 3,859 Costs associated with loan refinancing - 1,134 - Interest expense, net 42,427 38,054 30,570 Depreciation and amortization 27,597 23,365 16,359 Amortization of non-vested shares 1,705 1,377 926 --------- --------- -------- Income before income from joint ventures and minority interests 68,366 54,012 38,748 Equity in income from joint ventures 728 654 401 Minority interests (34) (953) (1,555) --------- --------- -------- Net income $ 69,060 $ 53,713 $37,594 Preferred dividend requirements (11,353) (5,463) (5,463) --------- --------- -------- Net income available to common shareholders $ 57,707 $ 48,250 $ 32,131 ========= ========= ======== Net income per common share: Basic $ 2.31 $ 2.12 $ 1.81 Diluted ========= ========= ======== $ 2.26 $ 2.07 $ 1.77 ========= ========= ======== Shares used for computation (in thousands): Basic 25,019 22,721 17,780 Diluted 25,504 23,664 19,051 Dividends per common share $ 2.50 $ 2.25 $ 2.00 ========= ========= ========
See accompanying notes to consolidated financial statements. 33 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PREFERRED ACCUMULATED COMMON STOCK STOCK ADDITIONAL OTHER ------------- ------------ PAID-IN TREASURY LOANS TO NON-VESTED COMPREHENSIVE SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS SHARES INCOME ------ ----- ------ ---- ---------- -------- ------------ ---------- ------------- Balance at December 31, 2002 17,656 177 2,300 23 379,447 (6,533) (3,525) (1,247) -- Shares issued to Trustees 2 -- -- -- 62 -- -- -- -- Issuance of restricted share grants 54 1 -- -- 1,303 -- -- (1,304) -- Amortization of restricted share grants -- -- -- -- -- -- -- 926 -- Stock option expense -- -- -- -- 25 -- -- -- -- Net income -- -- -- -- -- -- -- -- -- Issuances of common shares in Dividend Reinvestment Plan 21 -- -- -- 586 -- -- -- -- Issuance of common shares, net of costs of $1.4 million 2,397 23 -- -- 72,772 -- -- -- -- Dividends to common shareholders ($2.00 per share) -- -- -- -- -- -- -- -- -- Dividends to Series A preferred shareholders ($2.375 per share) -- -- -- -- -- -- -- -- -- ------ ----- ------ ---- ---------- -------- ------------ ---------- ------------- Balance at December 31, 2003 20,130 201 2,300 23 454,195 (6,533) (3,525) (1,625) -- Shares issued to Trustees 2 -- -- -- 66 -- -- -- -- Issuance of restricted share grants 56 1 -- -- 2,089 -- -- (2,090) -- Cancellation of common shares (1) -- -- -- (50) -- -- -- -- Amortization of restricted share grants -- -- -- -- -- -- -- 1,377 -- Stock option expense -- -- -- -- 116 -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- -- 7,480 Net income -- -- -- -- -- -- -- -- -- Issuances of common shares in Dividend Reinvestment Plan 23 -- -- -- 837 -- -- -- -- Issuances of common shares, net of costs of $3.5 million 5,190 52 -- -- 158,629 -- -- -- -- Stock option exercises, net 178 2 -- -- 2,833 (1,865) -- -- -- Dividends to common shareholders ($2.25 per share) -- -- -- -- -- -- -- -- -- Dividends to Series A preferred shareholders ($2.375 per share) -- -- -- -- -- -- -- -- -- ------ ----- ------ ---- ---------- -------- ------------ ---------- ------------- Balance at December 31, 2004 25,578 $ 256 2,300 $ 23 618,715 (8,398) (3,525) (2,338) 7,480 Shares issued to Trustees 4 -- -- -- 161 -- -- -- -- Issuance of restricted share grants 63 1 -- -- 2,625 -- -- (2,626) -- Amortization of restricted share grants -- -- -- -- -- -- -- 1,705 -- Stock option expense -- -- -- -- 145 -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- -- 5,922 Net income -- -- -- -- -- -- -- -- -- Purchase of 17,350 common shares for treasury -- -- -- -- -- (759) -- -- -- Issuances of common shares in Dividend Reinvestment Plan 22 -- -- -- 880 -- -- -- -- Issuance of preferred shares, net of costs of $2.7 million -- -- 3,200 32 77,229 -- -- -- -- Stock option exercises, net 215 2 -- -- 4,208 (5,193) -- -- -- Dividends to common shareholders ($2.50 per share) -- -- -- -- -- -- -- -- -- Dividends to Series A preferred shareholders ($2.375 per share) -- -- -- -- -- -- -- -- -- Dividends to Series B preferred shareholders ($1.841 per share) -- -- -- -- -- -- -- -- -- ------ ----- ------ ---- ---------- -------- ------------ ---------- ------------- Balance at December 31, 2005 25,882 $ 259 5,500 $ 55 $ 703,963 $(14,350) $ (3,525) $ (3,259) $ 13,402 ====== ===== ====== ==== ========== ======== ============ ========== ============= DISTRIBUTIONS IN EXCESS OF NET INCOME TOTAL ------------- --------- Balance at December 31, 2002 (15,164) 353,178 Shares issued to Trustees -- 62 Issuance of restricted share grants -- -- Amortization of restricted share grants -- 926 Stock option expense -- 25 Net income 37,594 37,594 Issuances of common shares in Dividend Reinvestment Plan -- 586 Issuance of common shares, net of costs of $1.4 million -- 72,795 Dividends to common shareholders ($2.00 per share) (36,924) (36,924) Dividends to Series A preferred shareholders ($2.375 per share) (5,463) (5,463) ------------- --------- Balance at December 31, 2003 (19,957) 422,779 Shares issued to Trustees -- 66 Issuance of restricted share grants -- -- Cancellation of common shares -- (50) Amortization of restricted share grants -- 1,377 Stock option expense -- 116 Foreign currency translation adjustment -- 7,480 Net income 53,713 53,713 Issuances of common shares in Dividend Reinvestment Plan -- 837 Issuances of common shares, net of costs of $3.5 million -- 158,681 Stock option exercises, net -- 970 Dividends to common shareholders ($2.25 per share) (53,166) (53,166) Dividends to Series A preferred shareholders ($2.375 per share) (5,463) (5,463) ------------- --------- Balance at December 31, 2004 (24,873) 587,340 Shares issued to Trustees -- 161 Issuance of restricted share grants -- -- Amortization of restricted share grants -- 1,705 Stock option expense -- 145 Foreign currency translation adjustment -- 5,922 Net income 69,060 69,060 Purchase of 17,350 common shares for treasury -- (759) Issuances of common shares in Dividend Reinvestment Plan -- 880 Issuance of preferred shares, net of costs of $2.7 million -- 77,261 Stock option exercises, net -- (983) Dividends to common shareholders ($2.50 per share) (62,958) (62,958) Dividends to Series A preferred shareholders ($2.375 per share) (5,463) (5,463) Dividends to Series B preferred shareholders ($1.841 per share) (5,890) (5,890) ------------- --------- Balance at December 31, 2005 $ (30,124) $ 666,421 ============= =========
See accompanying notes to consolidated financial statements. 34 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------- 2005 2004 2003 ------- ------- ------- Net income $69,060 $53,713 $37,594 Other comprehensive income: Foreign currency translation adjustment 5,922 7,480 - ------- ------- ------- Comprehensive income $74,982 $61,193 $37,594 ======= ======= =======
See accompanying notes to consolidated financial statements. 35 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 2005 2004 2003 --------- --------- --------- Operating activities: Net income $ 69,060 $ 53,713 $ 37,594 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in net income 34 953 1,555 Equity in income from joint ventures (728) (654) (401) Depreciation and amortization 27,597 23,365 16,359 Amortization of deferred financing costs 3,345 3,299 2,771 Costs associated with loan refinancing (non-cash portion) - 729 - Non-cash compensation expense to management and trustees 2,011 1,590 1,013 Increase in mortgage note accrued interest receivable (3,508) - - Increase in other assets (3,253) (6,533) (1,744) Increase in accounts payable and accrued liabilities 310 3,509 836 Increase (decrease) in unearned rents (337) 739 (3,275) --------- --------- --------- Net cash provided by operating activities 94,531 80,710 54,708 --------- --------- --------- Investing activities: Acquisition of rental properties and other assets (157,694) (221,038) (129,381) Net proceeds from sale of real estate and other assets 514 5,100 - Additions to properties under development (26,064) (41,197) (21,987) Distributions from joint ventures 855 811 486 Proceeds from sale of equity interest in joint venture - 8,240 8,437 Proceeds from secured note receivable - 5,000 - Investment in secured notes receivable (37,525) (5,000) (5,000) --------- --------- --------- Net cash used in investing activities (219,914) (248,084) (147,445) --------- --------- --------- Financing activities: Proceeds from long-term debt facilities 315,000 181,450 190,200 Principal payments on long-term debt (196,709) (90,923) (100,263) Deferred financing fees paid (2,083) (5,133) (7,550) Net proceeds from issuance of common shares 880 117,533 73,381 Net proceeds from issuance of preferred shares 77,261 - - Impact of stock option exercises, net (983) 970 - Purchase of common shares for treasury (759) - - Distributions paid to minority interests (848) (1,534) (1,875) Dividends paid to shareholders (71,088) (54,363) (40,720) --------- --------- --------- Net cash provided by financing activities 120,671 148,000 113,173 Effect of exchange rate changes on cash 3 102 - --------- --------- --------- Net increase (decrease) in cash and cash equivalents (4,709) (19,272) 20,436 Cash and cash equivalents at beginning of year 11,255 30,527 10,091 --------- --------- --------- Cash and cash equivalents at end of year $ 6,546 $ 11,255 $ 30,527 ========= ========= ========= Supplemental schedule of non-cash activity: Contribution of rental property to joint venture $ - $ 24,186 $ - Conversion of minority interest for common shares $ - $ 15,000 $ - Debt assumed by joint venture $ - $ 14,583 $ - Transfer of property under development to rental property $ 29,752 $ 59,443 $ 5,509 Issuance of restricted share grants $ 2,626 $ 2,040 $ 1,304 Assumption of debt of New Roc $ - $ - $ 70,000 Issuance of shares in acquisition of rental properties $ - $ 27,087 $ - Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 40,414 $ 37,008 $ 29,010 Cash paid (received) during the year for income taxes $ (321) $ 765 $ -
See accompanying notes to consolidated financial statements. 36 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 1. ORGANIZATION DESCRIPTION OF BUSINESS Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT) organized on August 29, 1997. The Company was formed to acquire and develop megaplex theatres, entertainment retail centers (centers generally anchored by an entertainment component such as a megaplex theatre and containing other entertainment-related properties) and other specialty properties. The Company's properties are located in the United States and Canada. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Entertainment Properties Trust and its subsidiaries, all of which are wholly-owned except for New Roc Associates, LP (New Roc). New Roc was acquired in October 2003 and is 71.4% owned. Minority interest expense related to New Roc was $34 thousand, $203 thousand and $55 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. Total minority interest in New Roc was $5.2 million and $6.0 million at December 31, 2005 and 2004, respectively. All significant inter-company transactions have been eliminated in consolidation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. RENTAL PROPERTIES Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition of the properties are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings and 3 to 20 years for furniture, fixtures and equipment. Tenant improvements, including allowances, are depreciated over the shorter of the base term of the lease or the estimated useful life. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. The Company applies Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", for the recognition and measurement of impairment of long-lived assets to be held and used. Management reviews a property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value. 37 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 ACCOUNTING FOR ACQUISITIONS For rental property acquisitions completed after June 30, 2001 (the effective date of SFAS No. 141, "Business Combinations"), the Company considers the fair values of both tangible and intangible assets acquired or liabilities assumed when allocating the purchase price (plus any capitalized costs incurred during the acquisition). Tangible assets may include land, building, tenant improvements, furniture, fixtures and equipment. Intangible assets or liabilities may include values assigned to in-place leases (including the separate values that may be assigned to above-market and below-market in-place leases), the value of tenant relationships, and any assumed financing that is determined to be above or below market terms. Most of the Company's rental property acquisitions do not involve in-place leases. In such cases, the cost of the acquisition is allocated to the tangible assets based on recent independent appraisals and management judgment. Because the Company typically executes these leases simultaneously with the purchase of the real estate, no value is ascribed to in-place leases in these transactions. For rental property acquisitions involving in-place leases, the fair value of the tangible assets is determined by valuing the property as if it were vacant based on management's determination of the relative fair values of the assets. Management determines the "as if vacant" fair value of a property using recent independent appraisals or methods similar to those used by independent appraisers. The aggregate value of intangible assets or liabilities is measured based on the difference between the stated price plus capitalized costs and the property as if vacant. In determining the fair value of acquired in-place leases, the Company considers many factors. On a lease-by-lease basis, management considers the present value of the difference between the contractual amounts to be paid pursuant to the leases and management's estimate of fair market lease rates. For above market leases, management considers such differences over the remaining non-cancelable lease terms and for below market leases, management considers such differences over the remaining initial lease terms plus any fixed rate renewal periods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below market lease values are amortized to income over the remaining initial lease terms plus any fixed rate renewal periods. Management considers several factors in determining the discount rate used in the present value calculations, including the credit risks associated with the respective tenants. If debt is assumed in the acquisition, the determination of whether it is above or below market is based upon a comparison of similar financing terms for similar rental properties. The fair value of acquired in-place leases also includes management's estimate, on a lease-by-lease basis, of the present value of the following amounts: (i) the value associated with avoiding the cost of originating the acquired in-place leases (i.e. the market cost to execute the leases, including leasing commissions, legal and other related costs); (ii) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed re-leasing period, (i.e. real estate taxes, insurance and other operating expenses); (iii) the value associated with lost rental revenue from existing leases during the assumed re-leasing period; and (iv) the value associated with avoided tenant improvement costs or other inducements to secure a tenant lease. These values are amortized over the remaining initial lease term of the respective leases. 38 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 The Company also determines the value, if any, associated with customer relationships considering factors such as the nature and extent of the Company's existing business relationship with the tenants, growth prospects for developing new business with the tenants and expectation of lease renewals. The value of customer relationship intangibles is amortized over the remaining initial lease terms plus any renewal periods. Management of the Company reviews the carrying value of intangible assets for impairment on an annual basis. Intangible assets consist of the following at December 31 (in thousands):
2005 2004 ------- ------- In-place leases, net of accumulated amortization of $1.9 million and $778 thousand, respectively $ 9,768 $10,207 Goodwill 693 693 ------- ------- Total intangible assets, net $10,461 $10,900 ======= =======
In-place leases, net at December 31, 2005 of approximately $9.8 million, relate to four entertainment retail centers in Ontario, Canada that were purchased on March 1, 2004 and one entertainment retail center in Burbank, California that was purchased on March 31, 2005. Goodwill at December 31, 2005 and 2004 relates solely to the acquisition of New Roc that was acquired on October 27, 2003. Amortization expense related to in-place leases is computed using the straight-line method and was $1.0 million and $778 thousand for the year ended December 31, 2005 and 2004, respectively. The weighted average life for these in-place leases at December 31, 2005 is 9 years. There was no amortization expense related to in-place leases for the year ended December 31, 2003. Future amortization of in-place leases at December 31, 2005 is as follows (in thousands):
AMOUNT ------ Year: 2006 $1,078 2007 1,078 2008 1,078 2009 1,070 2010 1,070 Thereafter 4,394 ------ Total $9,768 ======
DEFERRED FINANCING COSTS Deferred financing costs are amortized over the terms of the related long-term debt obligations or mortgage rate receivable as applicable. 39 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 CAPITALIZED DEVELOPMENT COSTS The Company capitalizes certain costs that relate to property under development including interest and development personnel costs. OPERATING SEGMENT The Company aggregates the financial information of all its properties into one reportable segment because the properties all have similar economic characteristics and provide similar services to similar types and classes of customers. REVENUE RECOGNITION Rents that are fixed and determinable are recognized on a straight-line basis over the minimum terms of the leases. Base rent escalation in those of the Company's leases that are dependent upon increases in the Consumer Price Index (CPI) is recognized when known. Straight-line rent receivable is included in other assets and was $4.7 million and $2.4 million at December 31, 2005 and 2004, respectively. In addition, most of the Company's tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreements. Percentage rents of $1.9 million, $2.2 million and $1.9 million were recognized in 2005, 2004 and 2003, respectively. ALLOWANCE FOR DOUBTFUL ACCOUNTS Accounts receivable, included in other assets, is reduced by an allowance for amounts that may become uncollectible in the future. The Company's receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the existing leases. The Company regularly evaluates the adequacy of its allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of the Company's tenants, historical trends of the tenant and/or other debtor, current economic conditions and changes in customer payment terms. Additionally, with respect to tenants in bankruptcy, the Company estimates the expected recovery through bankruptcy claims and increases the allowance for amounts deemed uncollectible. If the Company's assumptions regarding the collectiblity of accounts receivable prove incorrect, the Company could experience write-offs of the accounts receivable or accrued straight-line rents receivable in excess of its allowance for doubtful accounts. The allowance for doubtful accounts was $244 thousand and $93 thousand at December 31, 2005 and 2004, respectively. INCOME TAXES The Company operates in a manner intended to enable it to qualify as a REIT under the Internal Revenue Code (the Code). A REIT which distributes at least 90% of its taxable income to its shareholders each year and which meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to continue to qualify as a REIT and distribute substantially all of its taxable income to its shareholders. In 2004, the Company acquired certain real estate operations that are subject to income tax in Canada. Also in 2004, the Company formed certain taxable REIT subsidiaries, as permitted under the Code, through which it conducts certain business activities. The taxable REIT subsidiaries are subject to federal and state income taxes on their net taxable income. Temporary differences between income for financial reporting purposes and taxable income for the Canadian operations and the taxable REIT subsidiaries 40 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 relate primarily to depreciation, amortization of deferred financing costs and straight line rents. As of December 31, 2005, the Canadian operations and the taxable REIT subsidiaries had deferred tax assets totaling approximately $3.0 million and deferred tax liabilities totaling approximately $1.6 million. As there is no assurance that the Canadian operations and the taxable REIT subsidiaries will generate taxable income in the future beyond the reversal of temporary taxable differences, the deferred tax asset has been offset by a valuation allowance such that there is no net deferred tax asset or liability at December 31, 2005 and 2004. Furthermore, the Company qualified as a REIT and distributed the necessary amount of taxable income. Accordingly, no provision for income taxes was recorded for the years ended December 31, 2005, 2004 or 2003. Earnings and profits, which determine the taxability of distributions to shareholders, may differ from that reported for income tax reporting purposes due primarily to differences in the basis of the assets and the estimated useful lives used to compute depreciation. CONCENTRATION OF RISK American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (54%) of the megaplex theatre rental properties held by the Company (including joint venture properties) at December 31, 2005 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 rental revenues (approximately $82.1 million or 57%, $74.8 million or 60%, and $66.1 million or 73% for the years ended December 31, 2005, 2004 and 2003, respectively) result from the rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations under the leases. AMCE has publicly held debt and accordingly, their financial information is publicly available. CASH EQUIVALENTS Cash equivalents include bank demand deposits and shares of highly liquid institutional money market mutual funds for which cost approximates market value. RESTRICTED CASH Restricted cash represents deposits required in connection with debt service, payment of real estate taxes and capital improvements. SHARE BASED COMPENSATION Share Options During 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure," which provided alternative methods of accounting for stock-based compensation and amends SFAS No. 123 "Accounting for Stock-Based Compensation." Prior to 2003, the Company accounted for stock options issued under its share incentive plan under the recognition and measurement provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 prospectively for all awards granted, modified, or settled after January 1, 2003. Awards under the Company's plan vest either immediately or up to a period of 5 years. Stock option expense for options issued after January 1, 2003 is recognized on a straight-line basis over the vesting period. 41 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 The expense related to stock options included in the determination of net income for 2005, 2004 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards for each year (in thousands):
2005 2004 2003 -------- -------- -------- Net income available to common shareholders, as reported $ 57,707 $ 48,250 $ 32,131 Add: Stock-based compensation expense included in reported net income 145 116 25 Deduct: Total stock-based compensation expense determined under fair value based method for all awards (221) (241) (153) -------- -------- -------- Pro forma net income $ 57,631 $ 48,125 $ 32,003 ======== ======== ======== Basic earnings per share: As reported $ 2.31 $ 2.12 $ 1.81 Pro forma 2.30 2.12 1.80 Diluted earnings per share: As reported $ 2.26 $ 2.07 $ 1.77 Pro forma 2.26 2.07 1.76
The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.0% in 2005, 2004 and 2003, dividend yield of 6.0% in 2005 and 2004 and 8.0% in 2003, volatility factors of the expected market price of the Company's common shares of 20.7% in 2005, 14.1% in 2004 and 14.6% in 2003; and an expected life of the options of eight years. SFAS No. 123 was revised in December 2004 by FASB. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R will be effective for the Company beginning January 1, 2006. The adoption of SFAS No. 123R is not expected to have a material impact on the Company's financial statements. Restricted Shares Restricted share awards, which vest over time, are recorded as unearned compensation when granted using the fair value of the stock at the grant date, and amortized on a straight-line basis to expense over the vesting period. 42 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 FOREIGN CURRENCY TRANSLATION The Company accounts for the operations of its Canadian properties in Canadian dollars. The assets and liabilities related to the Company's Canadian properties are translated into U.S. dollars at current exchange rates; revenues and expenses are translated at average exchange rates. Resulting translation adjustments are recorded as a separate component of comprehensive income. RECLASSIFICATIONS Certain reclassifications have been made to the prior period amounts to conform to the current period presentation. 3. RENTAL PROPERTIES The following table summarizes the carrying amounts of rental properties as of December 31, 2005 and 2004 (in thousands):
2005 2004 -------------- --------- Buildings and improvements $ 1,068,569 940,598 Furniture, fixtures & equipment 5,240 2,000 Land 322,865 265,276 -------------- --------- 1,396,674 1,207,874 Accumulated depreciation (112,686) (87,082) -------------- --------- Total $ 1,283,988 1,120,792 ============== =========
Depreciation expense on rental properties was $25.9 million, $22.3 million and $16.2 million for the years ended December 31, 2005, 2004 and 2003, respectively. 4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES At December 31, 2005, the Company had a 20% investment interest in each of two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II. The Company accounts for its investment in these joint ventures under the equity method of accounting. The Company recognized income of $437, $410 and $401 (in thousands) from its investment in the Atlantic-EPR I joint venture during 2005, 2004 and 2003, respectively. The Company also received distributions from Atlantic-EPR I of $511, $512 and $486 (in thousands) during 2005, 2004 and 2003, respectively. Condensed financial information for Atlantic-EPR I is as follows as of and for the years ended December 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003 ------------- -------- ------ Rental properties, net $ 29,889 30,533 31,177 Cash 141 141 141 Long-term debt 16,470 16,768 17,039 Partners' equity 13,452 13,790 14,173 Rental revenue 4,156 4,077 4,006 Net income 2,063 1,949 1,911
43 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 The Atlantic-EPR II joint venture was formed on March 1, 2004. The Company recognized income of $291 and $244 (in thousands) from its investment in this joint venture during 2005 and 2004, respectively. The Company also received distributions from Atlantic-EPR II of $344 and $299 (in thousands) during 2005 and 2004, respectively. Condensed financial information for Atlantic-EPR II is as follows as of and for the years ended December 31, 2005 and 2004 (in thousands):
2005 2004 ---------- ------- Rental properties, net $ 23,341 23,802 Cash 114 103 Long-term debt 14,149 14,405 Note payable to Entertainment Properties Trust 117 117 Partners' equity 8,984 9,192 Rental revenue 2,778 2,377 Net income 1,280 1,046
The joint venture agreement for Atlantic-EPR I allows for the Company's partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per year in Atlantic-EPR I for common shares of the Company or, at the discretion of the Company, the cash value of those shares as defined in the joint venture agreement. This same provision exists in the Atlantic-EPR II joint venture agreement, except that Atlantic's right to such exchange does not commence until 2007. 5. OPERATING LEASES The Company's rental properties are leased under operating leases with expiration dates ranging from 3 to 25 years. Future minimum rentals on non-cancelable tenant leases at December 31, 2005 are as follows (in thousands):
AMOUNT ------------- Year: 2006 $ 157,948 2007 157,461 2008 157,613 2009 158,030 2010 156,771 Thereafter 1,130,822 ------------- Total $ 1,918,645 =============
The Company leases its executive office from a third party landlord through December, 2009. Rental expense for this lease totaled approximately $200 thousand, $195 thousand and $137 thousand in 2005, 2004 and 2003, respectively, and is included as a component of general and administrative expense in the accompanying consolidated statements of income. Future minimum lease payments under this lease at December 31, 2005 are (in thousands): 44 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003
AMOUNT --------- Year: 2006 $ 203 2007 209 2008 214 2009 220 2010 -- --------- Total $ 846 =========
6. LONG-TERM DEBT Long term debt at December 31, 2005 and 2004 consists of the following (in thousands):
2005 2004 ----------- -------- (1)Secured revolving variable rate credit facility, 64,000 27,000 due March 29, 2007 (2)Mortgage note payable, 8.18%, repaid February 1, 2005 -- 18,850 (3)Mortgage notes payable, 6.50%-15.03%, due February 10, 2006 109,355 113,074 (4)Mortgage note payable, 6.77%, due July 11, 2028 94,859 96,550 (5)Mortgage note payable, 7.37%, due July 15, 2018 14,998 15,660 (6)Mortgage notes payable, 4.26%-9.012%, due February 10, 2013 142,399 147,257 (7) Mortgage note payable, 6.84%, due March 1, 2014 105,711 105,038 (8) Mortgage note payable, 5.58%, due April 1, 2014 64,608 65,463 (9) Mortgage note payable, 5.56%, due June 5, 2015 35,780 -- (10) Mortgage notes payable, 5.77%, due November 6, 2015 78,881 -- Other 4,000 4,000 ----------- -------- Total $ 714,591 592,892 =========== ========
(1)The Company's secured revolving variable rate credit facility was due March 29, 2007 and was secured by fourteen theatre properties, two theatre and retail mix properties and one retail mix property, which had a net book value of approximately $208.8 million at December 31, 2005. There was $64.0 million and $27 million outstanding on the $150 million secured revolving variable rate credit facility at December 31, 2005 and 2004, respectively. The note required monthly payments of interest with the outstanding principal due at maturity. At December 31, 2005, the principal amounts were bearing interest at LIBOR plus 225 basis points (6.59% at December 31, 2005). As described in Note 17, the Company's credit facility was amended and restated subsequent to December 31, 2005. (2)The Company's mortgage note payable due February 1, 2005 was secured by three theatre properties, which had a net book value of approximately $37.9 million at December 31, 2004. The note required monthly principal and interest payments with the outstanding principal due at maturity. The note was paid in full at maturity on February 1, 2005 (see Note 14). 45 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 (3)The Company's mortgage notes payable were due February 10, 2006 and were secured by nine theatre properties, which had a net book value of approximately $175.4 million at December 31, 2005, and by $6.5 million in cash escrow deposits. The escrow deposits are recorded as restricted cash in the accompanying consolidated balance sheets at December 31, 2005 and 2004. The escrow deposits were required by the terms of the mortgage notes and were available to pay debt service on the mortgage notes if certain triggering events occurred, or they were to be applied to the principal amount at maturity. The notes required monthly principal and interest payments of approximately $1.0 million with a final principal payment at maturity of approximately $109.0 million. As described in Note 17, these notes were paid in full at maturity using the cash escrow deposits, borrowings under the Company's unsecured revolving variable rate credit facility and proceeds of approximately $44 million from refinancing two of the theatre properties originally included as security. (4)The Company's mortgage note payable due July 11, 2028 is secured by eight theatre properties, which had a net book value of approximately $135.7 million at December 31, 2005. The note requires monthly principal and interest payments of approximately $689 thousand. This mortgage agreement contains a "hyper-amortization" feature, in which the principal payment schedule is rapidly accelerated, and our principal payments are substantially increased, if we fail to pay the balance of approximately $89.9 million on the anticipated prepayment date of July 11, 2008. (5)The Company's mortgage note payable due June 15, 2018 is secured by one theatre property, which had a net book value of approximately $21.4 million at December 31, 2005. The notes require monthly principal and interest payments of approximately $151 thousand with a final principal payment at maturity of approximately $0.8 million. (6)The Company's mortgage notes payable due February 10, 2013 are secured by fourteen theatre properties, which had a net book value of approximately $229.4 million at December 31, 2005. The notes require monthly principal and interest payments of approximately $1.1 million with a final principal payment at maturity of approximately $99.2 million. (7)The Company's mortgage note payable due March 1, 2014 is secured by four theatre and retail mix properties in Ontario, Canada, which had a net book value of approximately $174.6 million at December 31, 2005. The note requires monthly principal and interest payments of approximately $840 thousand with a final principal payment at maturity of approximately $73.6 million. The mortgage note payable is denominated in Canadian dollars. At December 31, 2005 and 2004, the outstanding balance in Canadian dollars was $126.3 million and $122.9 million, respectively. (8)The Company's mortgage note payable due April 1, 2014 is secured by one theatre and retail mix property, which had a net book value of approximately $95.7 million at December 31, 2005. The note requires monthly principal and interest payments of approximately $378 thousand with a final principal payment at maturity of approximately $55.3 million. 46 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 (9)The Company's mortgage note payable due June 5, 2015 is secured by one theatre and retail mix property, which had a net book value of approximately $50.9 million at December 31, 2005. The note requires monthly principal and interest payments of approximately $206 thousand with a final principal payment at maturity of approximately $30.1 million. (10)The Company's mortgage notes payable due November 6, 2015 are secured by six theatre properties, which had a net book value of approximately $90.0 million at December 31, 2005. The notes require monthly principal and interest payments of approximately $498 thousand with a final principal payment at maturity of approximately $60.7 million. Certain of the Company's long-term debt agreements contain customary restrictive covenants related to financial and operating performance. At December 31, 2005, the Company was in compliance with all restrictive covenants. Principal payments due on long term debt obligations subsequent to December 31, 2005 are as follows (in thousands):
AMOUNT ------------ Year: 2006 $ 122,828 2007 78,322 2008 104,217 2009 13,956 2010 14,820 Thereafter 380,448 ------------ Total $ 714,591 ============
As indicated above and in Note 17, subsequent to December 31, 2005, the Company amended and restated its credit facility, and refinanced $109 million in mortgage notes payable that had matured. As a result, $14.0 million of principal payments are now due in 2006 compared to the $122.8 million shown above. The Company capitalizes a portion of interest costs as a component of property under development. The following is a summary of interest costs incurred during 2005, 2004 and 2003 (in thousands):
2005 2004 2003 --------- ------- ------ Interest cost charged to income $ 42,427 38,054 30,570 Interest cost capitalized 160 688 832 --------- ------- ------ Total interest costs incurred $ 42,587 38,742 31,402 ========= ======= ======
47 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 7. SHARE INCENTIVE PLAN The Company maintains a Share Incentive Plan (the Plan) under which common shares and options to purchase up to 3,000,000 of the Company's common shares, subject to adjustment in the event of certain capital events, may be granted. At December 31, 2005, there were 1,606,243 shares available for grant under the Plan. SHARE OPTIONS Share options granted under the Plan have exercise prices equal to the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years, and typically become exercisable at a rate of 20% per year over a five-year period. For trustees, share options become exercisable at a rate of one-third per year over a three-year period. A summary of the Company's share option activity and related information is as follows:
WEIGHTED AVERAGE NUMBER OF OPTION PRICE EXERCISE SHARES PER SHARE PRICE ----------- ---------------------- -------------- Outstanding at December 31, 2002 733,787 14.00 - 20.00 17.25 Exercised 66,863 14.00 - 22.89 18.50 Granted 341,019 23.26 - 27.43 24.98 ----------- Outstanding at December 31, 2003 1,007,943 14.00 - 27.43 19.67 Exercised 178,353 14.13 - 26.87 16.22 Granted 151,087 32.50 - 39.80 36.41 ----------- Outstanding at December 31, 2004 980,677 $ 14.00 - $ 39.80 $ 22.99 Exercised 215,137 14.13 - 34.26 19.57 Granted 124,636 41.65 - 43.75 42.27 ----------- Outstanding at December 31, 2005 890,176 $ 14.00 - $ 43.75 $ 26.52 ===========
The weighted average fair value of options granted was $3.47, $1.18 and $.41 during 2005, 2004 and 2003, respectively. The following table summarizes outstanding and exercisable options at December 31, 2005:
Exercise Options Options Weighted avg. price range outstanding exercisable life remaining - ------------------- ----------- ----------- --------------- $ 14.00 - 19.99 230,811 195,483 4.7 20.00 - 29.99 387,065 135,864 6.8 30.00 - 39.99 147,664 64,796 9.3 40.00 - 43.75 124,636 - 9.8 ------- ------- --- 890,176 396,143 6.9 ======= ======= ===
48 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 RESTRICTED SHARES During 2005, 2004 and 2003, the Company issued 63,048, 55,651 and 54,480, respectively, of restricted common shares as bonus and long-term incentive compensation to executives and other employees of the Company. During 2004, the Company also issued 717 restricted common shares as retainers to trustees of the Company. No restricted common shares were issued to trustees of the Company during 2005. Based upon the market price of the Company's common shares on the grant dates, approximately $2.6 million, $2.1 million and $1.3 million were recognized as non-vested shares issued in 2005, 2004 and 2003 respectively. The holders of these restricted shares have voting rights and receive dividends from the date of grant. These shares vest ratably over a period of one to five years. The Company records the awards as unearned compensation when granted using the fair value of the shares at the grant date and stock compensation expense pertaining to these restricted shares is amortized on a straight-line basis over the period of vesting. Total stock compensation expense related to the restricted shares recorded during 2005, 2004 and 2003 amounted to $1.71 million, $1.38 million and $926 thousand, respectively. At December 31, 2005, there were 140,133 non-vested restricted shares issued and outstanding. 8. RELATED PARTY TRANSACTIONS In 2000, the Company loaned an aggregate of $3.5 million to Company executives. The loans were made in order for the executives to purchase common shares of the Company at the market value of the shares on the date of the loan, as well as to repay borrowings on certain amounts previously loaned. The loans are recourse to the executives' assets and bear interest at 6.24%, are due on January 1, 2011 and interest is payable at maturity. Interest income from these loans totaled $327 thousand, $307 thousand and $289 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. These loans were issued with terms that include a Loan Forgiveness Program, under which the compensation committee of the Board of Trustees may forgive a portion of the above referenced indebtedness after application of proceeds from the sale of shares, following a change in control of the Company. The compensation committee may also forgive the debt incurred upon termination of employment by reason of death, disability, normal retirement or without cause. At December 31, 2005 and 2004, accrued interest receivable on these loans, included in other assets in the accompanying consolidated balance sheets, was $2.00 million and $1.67 million, respectively. The Company loaned $5 million to a minority joint venture partner in 2003 in connection with an acquisition. This note is included in other assets, bears interest at 10% per year, matures on March 9, 2009, and is secured by the minority partner's interest in the partnership. In February 2004, the Company loaned an additional $5 million to the same minority partner with interest also at 10% per year. This note was paid in full, including all accrued interest, on October 14, 2004. Interest income from these loans totaled $500 thousand, $954 thousand and $163 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. 49 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 9. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per common share for the years ended December 31, 2005, 2004 and 2003 (amounts in thousands except per share information):
2005 2004 2003 ----------- ------ ------ Net income available to common shareholders $ 57,707 48,250 32,131 Weighted-average shares outstanding 25,019 22,721 17,780 Basic net income per common share $ 2.31 2.12 1.81 Numerator for diluted earnings per common share: Net income available to common shareholders $ 57,707 48,250 32,131 Minority interests -- 750 1,500 ----------- ------ ------ Numerator for diluted earnings per common share $ 57,707 49,000 33,631 =========== ====== ====== Weighted-average shares outstanding 25,019 22,721 17,780 Effect of dilutive securities: Employee options to acquire common shares 345 383 322 Minority interest convertible into common shares -- 429 857 Non-vested common share grants 140 131 92 ----------- ------ ------ Dilutive potential common shares 485 943 1,271 ----------- ------ ------ Denominator for diluted earnings per share 25,504 23,664 19,051 =========== ====== ====== Diluted net income per common share $ 2.26 2.07 1.77
10. DERIVATIVE FINANCIAL INSTRUMENTS In 1998, the Company entered into a forward contract in connection with a mortgage note payable due July 2028 to essentially fix the base rate of interest on a notional amount of $105 million. Because of a hyper-amortization feature on this note, as further described in Note 6, it is anticipated that this note will be paid in full prior to maturity in July, 2008, the optional prepayment date. The forward contract settled on June 29, 1998, the closing date of the long-term debt issuance, and the Company incurred a loss of $1.4 million, which is being amortized as an increase to interest expense over the anticipated ten year term of the long-term debt resulting in an effective interest rate of 6.84%. The remaining unamortized amount of $434 thousand and $605 thousand is included in other assets in the accompanying 2005 and 2004 consolidated balance sheets, respectively. 50 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 11. COMPLETED PROPERTY ACQUISITIONS The Company acquired a 71.4% ownership interest in New Roc Associates, LP (New Roc) on October 27, 2003 in exchange for cash of $25 million. New Roc owns an entertainment retail center encompassing 446 thousand square feet located in New Rochelle, New York. The results of New Roc's operations have been included in the consolidated financial statements since the date of acquisition. At any time after March 8, 2007, the Company's partner in New Roc, LRC Industries L.T.D. (LRC), has the right to exchange its interest in New Roc for common shares of the Company or the cash value of those shares, at the Company's option, as long as the net operating income (NOI) of New Roc during the preceding 12 months exceeds $8.9 million, and certain other conditions are met. The number of common shares of the Company issuable to LRC would equal 75% of LRC's capital in New Roc (up to 100% if New Roc's NOI is between $8.9 million and $10.0 million), divided by the greater of the Company's book value per share or the average closing price of the Company's common shares. New Roc's NOI was approximately $8.9 million for the year ended December 31, 2005 and LRC's capital in New Roc was approximately $5.2 million. On March 1, 2004, the Company also acquired, through a wholly-owned subsidiary, four separate entertainment retail centers anchored by AMC megaplex theatres located in Ontario, Canada for total consideration of U.S. $152 million. Approximately U.S. $27 million of the purchase price consisted of 747,243 restricted common shares of the Company valued at U.S. $36.25 per share determined based on a the approximate average market price of the Company's common shares over the 2-day period before and after the terms of the acquisition were agreed upon. The cash portion of the purchase price was paid in Canadian dollars and financed in part through Canadian-dollar non-recourse fixed-rate mortgage loans of approximately U.S. $97 million. The properties are the Mississauga Entertainment Centrum located in suburban Toronto, the Oakville Entertainment Centrum located in suburban Toronto, the Whitby Entertainment Centrum located in suburban Toronto, and the Kanata Centrum Walk located in suburban Ottawa. In accordance with Statement of Financial Accounting Standard (SFAS) No. 141 (described in Note 2), the Company allocated approximately $10 million of the purchase price to in-place leases and is amortizing this value over the remaining non-cancelable lease terms ranging from 5 to 19 years. The remaining amount of the purchase price of approximately $142 million was allocated $37 million to land and $105 million to buildings. The following unaudited pro forma results of operations reflect the Company's acquisitions of the Canadian properties as if they had occurred as of the beginning of 2004:
PRO FORMA YEAR ENDED DECEMBER 31, 2004 ------------------ Total revenue $ 136,981 Net income available to common shareholders $ 48,826 Basic net income per common share $ 2.14 Diluted net income per common share $ 2.08
51 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 For the year ended December 31, 2005 and 2004, respectively, approximately $28.2 million, or 17.1%, and $19.3 million, or 14.5%, of total revenue was derived from the Company's four entertainment retail centers in Ontario, Canada. For the year ended December 31, 2005, approximately $31.8 million, or 19.3% of our total revenue was derived from the Company's four entertainment retail centers in Ontario, Canada combined with the mortgage financing interest related to the Company's mortgage note receivable held in Canada and funded on June 1, 2005 (see Note 16). During 2005 and 2004, the Company acquired various other rental and development properties. Those acquisitions were recorded at the Company's cost of acquisition. Rental properties acquired generally consisted of properties subject to triple-net leases. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Management compares the carrying value and the estimated fair value of our financial instruments. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at December 31, 2005 and 2004: MORTGAGE NOTE RECEIVABLE AND RELATED ACCRUED INTEREST RECEIVABLE: At December 31, 2005, the Company had a mortgage note receivable with a carrying value, including related accrued interest, of $44.1 million. The note bears interest at 15% and its carrying value approximates fair value. CASH AND CASH EQUIVALENTS, RESTRICTED CASH: Due to the highly liquid nature of our short term investments, the carrying values of our cash and cash equivalents and restricted cash approximate the fair market values. ACCOUNTS RECEIVABLE: The carrying value of our accounts receivable, included in other assets, approximates the fair market value due to the short term maturities of these amounts. DEBT INSTRUMENTS: The fair value of the Company's debt as of December 31, 2005 and 2004 is estimated by discounting the future cash flows of each instrument using current market rates. At December 31, 2005, the Company had a carrying value of $64.0 million in variable rate debt outstanding, which management believes represents fair value. At December 31, 2005, the Company had a carrying value of $650.6 million in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 6.3%. Discounting the future cash flows for fixed rate debt using an estimated market rate of 5.75%, management estimates the fixed rate debt's fair value to be approximately $658.5 million at December 31, 2005. At December 31, 2004, the Company had a carrying value of $565.9 million in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 6.5%. Discounting the future cash flows for fixed rate debt using an estimated market rate of 6%, management estimates the fixed rate debt's fair value to be approximately $570.2 million at December 31, 2004. 52 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: The carrying value of accounts payable and accrued liabilities approximates fair value due to the short term maturities of these amounts. COMMON AND PREFERRED DIVIDENDS PAYABLE: The carrying values of common and preferred dividends payable approximate fair value due to the short term maturities of these amounts. 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial data for the years ended December 31, 2005 and 2004 are as follows (in thousands, except per share data):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- -------- ------------ ----------- 2005: Total revenue $ 37,943 40,774 41,825 44,274 Net income 15,813 17,322 17,814 18,112 Net income available to common shareholders 13,207 14,406 14,898 15,196 Basic net income per common share 0.53 0.58 0.59 0.61 Diluted net income per common share 0.52 0.57 0.58 0.60
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- -------- ------------ ----------- 2004: Total revenue $ 29,614 34,032 35,154 34,514 Net income 11,330 11,716 15,354 15,314 Net income available to common shareholders 9,964 10,350 13,988 13,948 Basic net income per common share 0.50 0.47 0.58 0.56 Diluted net income per common share 0.49 0.46 0.57 0.55
53 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 14. DIVIDENDS COMMON SHARES The Board of Trustees declared cash dividends totaling $2.50 per common share for the year ended December 31, 2005 and $2.25 per common share for the year ended December 31, 2004. Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2005 and 2004 are as follows: Cash dividends paid per common share for the year ended December 31, 2005:
CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN - ----------------- ------------ ------------ -------- --------- ------------ 12-31-04 01-14-05 $ 0.56250 0.46355 0.09895 -- 03-31-05 04-15-05 0.62500 0.51505 0.10995 -- 06-30-05 07-15-05 0.62500 0.51505 0.10995 -- 09-30-05 10-14-05 0.62500 0.51505 0.10995 -- ----------- ------- ------- ------------ Total for 2005 $ 2.43750 2.00870 0.42880 -- =========== ======= ======= ============ $ 100.0% 82.4% 17.6% --
Cash dividends paid per common share for the year ended December 31, 2004:
CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN - ----------------- ------------ ------------ -------- --------- ------------ 12-31-03 01-15-04 $ 0.50000 0.38960 0.11040 -- 03-31-04 04-15-04 0.56250 0.43820 0.12430 -- 06-30-04 07-15-04 0.56250 0.43820 0.12430 -- 09-30-04 10-15-04 0.56250 0.43820 0.12430 -- ----------- ------- ------- ------------ Total for 2004 $ 2.18750 1.70420 0.48330 -- =========== ======= ======= ============ $ 100.0% 77.9% 22.1% --
SERIES A PREFERRED SHARES On May 29, 2002, the Company issued 2.3 million 9.50% Series A cumulative redeemable preferred shares ("Series A preferred shares") in a registered public offering. The Company may not redeem the Series A preferred shares, which have a $25 liquidation preference per share, before May 29, 2007, except in limited circumstances to preserve the Company's REIT status. On or after May 29, 2007, the Company may, at its option, redeem the Series A preferred shares in whole at any time or in part from time to time, by paying $25 per share, plus any accrued and unpaid dividends up to and including the date of redemption. The Series A preferred shares generally have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any of the Company's other securities. The Board of Trustees declared cash dividends totaling $2.375 per Series A preferred share for the years ended December 31, 2005 and December 31, 2004, respectively. 54 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2005 and 2004 are as follows: Cash dividends paid per Series A preferred share for the year ended December 31, 2005:
CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN - ----------------- ------------ ------------ -------- --------- ------------ 12-31-04 01-14-05 $ 0.59375 0.59375 -- -- 03-31-05 04-15-05 0.59375 0.59375 -- -- 06-30-05 07-15-05 0.59375 0.59375 -- -- 09-30-05 10-14-05 0.59375 0.59375 -- -- ----------- ------- -------- ------------ Total for 2005 $ 2.37500 2.37500 -- -- =========== ======= ======== ============ $ 100.0% 100.0% -- --
Cash dividends paid per Series A preferred share for the year ended December 31, 2004:
CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN - ----------------- ------------ ------------ -------- --------- ------------ 12-31-03 01-15-04 $ 0.59375 0.59375 -- -- 03-31-04 04-15-04 0.59375 0.59375 -- -- 06-30-04 07-15-04 0.59375 0.59375 -- -- 09-30-04 10-15-04 0.59375 0.59375 -- -- ----------- ------- -------- ------------ Total for 2004 $ 2.37500 2.37500 -- -- =========== ======= ======== ============ $ 100.0% 100.0% -- --
SERIES B PREFERRED SHARES On January 19, 2005, the Company issued 3.2 million 7.75% Series B cumulative redeemable preferred shares ("Series B preferred shares") in a registered public offering for net proceeds of $77.5 million, before expenses. The Company pays cumulative dividends on the Series B preferred shares from (and including) the date of original issuance in the amount of $1.9375 per share each year, which is equivalent to 7.75% of the $25 liquidation preference per share. Dividends on the Series B preferred shares are payable quarterly in arrears, and began on April 15, 2005. The Company may not redeem the Series B preferred shares before January 19, 2010, except in limited circumstances to preserve the Company's REIT status. On or after January 19, 2010, the Company may, at its option, redeem the Series B preferred shares in whole at any time or in part from time to time, by paying $25 per share, plus any accrued and unpaid dividends up to and including the date of redemption. The Series B preferred shares generally have no stated maturity, will not be subject to any sinking fund or mandatory redemption, and are not convertible into any of the Company's other securities. Owners of the Series B preferred shares generally have no voting rights, except under certain dividend defaults. A portion of the proceeds from this offering was used to repay $18.8 million in mortgage notes payable on their due date of February 1, 2005, described in Note 6. The Board of Trustees declared cash dividends totaling $1.35625 per Series B preferred share for the year ended December 31, 2005. 55 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2005 are as follows: Cash dividends paid per Series B preferred share for the year ended December 31, 2005:
CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN - ----------------- ------------ ------------ -------- --------- ------------ 03-31-05 04-15-05 0.387500 0.387500 -- -- 06-30-05 07-15-05 0.484375 0.484375 -- -- 09-30-05 10-14-05 0.484375 0.484375 -- -- ----------- -------- --------- ------------ Total for 2005 $ 1.356250 1.356250 -- -- =========== ======== ========= ============ $ 100.0% 100.0% -- --
15. CONVERSION OF PREFERRED INTEREST IN EPT GULF STATES, LLC On September 20, 2004, 100% of the preferred interest in EPT Gulf States, LLC (Gulf States), a subsidiary formed in 2002 for the purpose of acquiring five theatre properties, was converted to 857,145 restricted common shares of the Company. As a result, $15 million of minority interest in Gulf States was converted to common shares and additional paid-in-capital. Minority interest expense related to the preferred interest in Gulf States was $.8 million and $1.5 million for the years ended December 31, 2004 and 2003, respectively. 16. INVESTMENT IN MORTGAGE NOTE On June 1, 2005, a wholly-owned subsidiary of the Company provided a secured mortgage construction loan of $47 million Canadian (US $ 37.5 million) to Metropolis Limited Partnership (the Partnership). The Partnership was formed for the purpose of developing a 13 level entertainment retail center in downtown Toronto, Ontario, Canada. The Partnership consists of the developer of the center as general partner and two limited partner pension funds. It is anticipated that the development will be completed in 2008 at a total cost of approximately $272 million Canadian, including all capitalized costs, and will contain approximately 360,000 square feet of net rentable area (excluding signage). This mortgage note receivable bears interest at 15% and is senior to all other Partnership debt at December 31, 2005. The Partnership has an agreement with a bank to provide a first mortgage construction loan to the Partnership of up to $106 million. The bank construction financing will be senior to the Company's mortgage note. The note has a stated maturity of June 2, 2010. No principal or interest payments are due prior to November 30, 2007 at which time a 25% principal payment is due along with all accrued interest to date (defined as the "Option Due Date Amount"). The Partnership also has an option on November 30, 2007 (the "Option Date") to either pay off the note in full including all accrued interest, without penalty, or to extend the Option Due Date Amount by an additional 12 months, in which case the Option Date would be November 30, 2008. The Partnership could also prepay the note (in full only, including all accrued interest) at any other time with prepayment penalties as defined in the agreement. On the maturity date or any other date that the Partnership elects to prepay the note in full to the Company, the Company has the option to purchase a 50% equity interest in the Partnership or alternative joint venture vehicle that is established. The purchase price stipulated in the option is based on estimated fair market value of the entertainment center at the time of exercise, defined as the then existing stabilized net 56 ENTERTAINMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005, 2004, AND 2003 operating income capitalized at a pre-determined rate. A subscription agreement governs the terms of the cash flow sharing with the other partners should the Company elect to become an owner. The carrying value of the Company's mortgage note receivable at December 31, 2005 was US $44.1 million, including related accrued interest receivable of US $3.7 million. Cost overruns of the project, if any, are the responsibility of the Partnership. The Company has no obligation to fund any additional amounts, and has no other guarantees of any kind related to the project. 17. SUBSEQUENT DEVELOPMENTS On January 31, 2006, the Company amended and restated its secured revolving variable rate credit facility to increase the size of the facility to $200 million from $150 million and reduce the interest rate charged on the facility from rates ranging from LIBOR plus 175 to 250 basis points to LIBOR plus 130 to 175 basis points. The facility was also converted from a secured to an unsecured facility. The unsecured revolving variable rate credit facility has a three year term expiring in 2009 with a one year extension available at the Company's option. As a result of this amendment and restatement, the Company will expense certain unamortized financing costs, totaling approximately $673 thousand, in the first quarter of 2006. On February 8, 2006, the Company closed on a public offering of 1,000,000 common shares at $41.25 per share. The underwriter of this offering subsequently exercised an option to purchase an additional 150,000 common shares at $41.25 per share which closed on February 15, 2006. Total net proceeds to the Company after expenses were approximately $46.2 million. On February 10, 2006, the Company paid off approximately $109 million in mortgage notes payable that had matured using funds from related debt service escrow deposits, borrowings under the Company's amended and restated unsecured revolving variable rate credit facility and approximately $44 million in proceeds from the refinancing of two of the theatres originally included as security for those mortgage notes payable. The new mortgage loans bear interest at 5.84%, mature on March 6, 2016 and require monthly principal and interest payments totaling $279 thousand with a final principal payment at maturity totaling $33.9 million. 18. COMMITMENTS AND CONTINGENCIES As of December 31, 2005, the Company had six theatre development projects under construction for which it has agreed to either finance the development costs or purchase the theatre upon completion. The properties are being developed by the prospective tenants. These theatres are expected to have a total of 95 screens and their development costs (including land) are expected to be approximately $88.2 million. Through December 31, 2005, the Company has invested $26.9 million in these projects (including land), and has commitments to fund approximately $61.3 million of additional improvements. Development costs are advanced by the Company either in periodic draws or upon successful completion of construction. If the Company determines that construction is not being completed in accordance with the terms of the development agreement, the Company can discontinue funding construction draws or refuse to purchase the completed theatre. The Company has agreed to lease the theatres to the operators at pre-determined rates. ENTERTAINMENT PROPERTIES TRUST Schedule II - Valuation and Qualifying Accounts December 31, 2005
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT DESCRIPTION DECEMBER 31, 2004 DURING 2005 DURING 2005 DECEMBER 31, 2005 - ----------------- ----------------- ----------- ----------- ------------------ Reserve for Doubtful Accounts 93,000 482,000 (331,000) 244,000
See accompanying report of independent registered public accounting firm. ENTERTAINMENT PROPERTIES TRUST Schedule II - Valuation and Qualifying Accounts December 31, 2004 BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT DESCRIPTION DECEMBER 31, 2003 DURING 2004 DURING 2004 DECEMBER 31, 2004 - ----------------- ----------------- ----------- ----------- ------------------ Reserve for Doubtful Accounts 60,000 33,000 -- 93,000
See accompanying report of independent registered public accounting firm 58 ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation December 31, 2005
INITIAL COST -------------------- BUILDINGS, ADDITIONS (SALES) EQUIPMENT & SUBSEQUENT TO DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION - ---------------------- --------------------- ---------------- ------ ------------ ----------------- Grand 24 Dallas, TX $ 10,842 3,060 15,281 -- Mission Valley 20 San Diego, CA 9,475 -- 16,028 -- Promenade 16 Los Angeles, CA 16,626 6,021 22,104 -- Ontario Mills 30 Los Angeles, CA 14,761 5,521 19,450 -- Lennox 24 Columbus, OH 7,499 -- 12,685 -- West Olive 16 St. Louis, MO 10,396 4,985 12,602 -- Studio 30 Houston, TX 15,406 6,023 20,037 -- Huebner Oaks 24 San Antonio, TX 9,854 3,006 13,662 -- First Colony 24 Houston, TX 10,009 -- 19,100 67 Oakview 24 Omaha, NE 12,305 5,215 16,700 59 Leawood 20 Kansas City, MO 8,272 3,714 12,086 43 Gulf Pointe 30 Houston, TX 13,512 4,304 21,496 76 South Barrington 30 Chicago, IL 17,962 6,577 27,723 98 Mesquite 30 Dallas, TX 12,153 2,912 20,288 72 Hampton Town Center 24 Norfolk, VA 14,929 3,822 24,678 88 Pompano 18 Pompano Beach, FL 10,984 6,376 9,899 2,425 Raleigh Grand 16 Raleigh, NC 7,089 2,919 5,559 -- Paradise 24 Miami, FL 12,278 2,000 13,000 8,512 Pompano Kmart Pompano Beach, FL -- 600 2,430 -- Pompano Restaurant Pompano Beach, FL -- 200 803 430 Aliso Viejo 20 Los Angeles, CA 11,488 8,000 14,000 -- Bosie Stadium 20 Boise, ID 15,876 -- 16,003 -- Woodridge 18 Chicago, IL 8,140 9,926 8,968 -- Cary Crossroads 20 Cary, NC 8,714 3,352 11,653 155 Tampa Palms 20 Tampa, FL 10,319 6,000 12,809 -- Palm Promenade San Diego, CA 13,701 7,500 17,750 -- On The Border Dallas, TX -- 879 -- -- Bennigans Dallas, TX -- 565 -- 1,000 Bennigans Houston, TX -- 652 -- 750 Texas Land & Cattle Dallas, TX -- 1,519 -- -- Texas Roadhouse Grill Atlanta, GA -- 886 -- -- Roadhouse Grill Atlanta, GA -- 868 -- -- Westminster 24 Denver, CO 14,998 5,850 17,314 -- Westminster Center Denver, CO 6,336 6,204 12,600 2,739 Westbank Palace 10 Westbank, LA 9,172 4,378 12,330 -- Houma Palace 10 Houma, LA 5,159 2,404 6,780 -- Hammond Palace 10 Hammond, LA 5,016 2,404 6,780 -- Elmwood Palace 10 Elmwood, LA 13,185 5,264 14,820 -- Clearview Palace 12 Clearview, LA 6,879 -- 11,740 -- Sterling Forum 30 Sterling Heights, MI 16,051 5,975 17,956 3,400 Olathe Studio 30 Olathe, KS 11,465 4,000 15,935 -- Cherrydale 16 Greenville, SC 4,730 1,660 7,570 -- Livonia Livonia, MI 13,127 4,500 17,525 -- Hoffman 22 Alexandria, VA 13,185 -- 22,035 -- Little Rock Rave Little Rock, AR 10,884 3,858 7,990 -- AmStar Cinema 16 Macon, GA 2,125 1,982 5,056 -- Star Southfield Center Southfield, MI 8,157 8,000 20,518 767 ---------------- ------- ----------- ------------- Subtotals carried over to page 60 $ 423,059 163,881 583,743 20,681 ================ ======= =========== ============= GROSS AMOUNT AT DECEMBER 31, 2005 --------------------------------- BUILDINGS, EQUIPMENT & ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE - ---------------------- ------------------ ------ ------------ ------ ------------ -------- ------------ Grand 24 Dallas, TX 3,060 15,281 18,341 2,865 11/97 40 years Mission Valley 20 San Diego, CA -- 16,028 16,028 3,005 11/97 40 years Promenade 16 Los Angeles, CA 6,021 22,104 28,125 4,145 11/97 40 years Ontario Mills 30 Los Angeles, CA 5,521 19,450 24,971 3,647 11/97 40 years Lennox 24 Columbus, OH -- 12,685 12,685 2,379 11/97 40 years West Olive 16 St. Louis, MO 4,985 12,602 17,587 2,363 11/97 40 years Studio 30 Houston, TX 6,023 20,037 26,060 3,757 11/97 40 years Huebner Oaks 24 San Antonio, TX 3,006 13,662 16,668 2,562 11/97 40 years First Colony 24 Houston, TX -- 19,167 19,167 3,867 11/97 40 years Oakview 24 Omaha, NE 5,215 16,759 21,974 3,382 11/97 40 years Leawood 20 Kansas City, MO 3,714 12,129 15,843 2,447 11/97 40 years Gulf Pointe 30 Houston, TX 4,304 21,572 25,876 4,263 2/98 40 years South Barrington 30 Chicago, IL 6,577 27,821 34,398 5,440 3/98 40 years Mesquite 30 Dallas, TX 2,912 20,360 23,272 3,897 4/98 40 years Hampton Town Center 24 Norfolk, VA 3,822 24,766 28,588 4,628 6/98 40 years Pompano 18 Pompano Beach, FL 6,376 12,324 18,700 2,268 8/98 40 years Raleigh Grand 16 Raleigh, NC 2,919 5,559 8,478 1,062 8/98 40 years Paradise 24 Miami, FL 2,000 21,512 23,512 3,667 11/98 40 years Pompano Kmart Pompano Beach, FL 600 2,430 3,030 425 11/98 40 years Pompano Restaurant Pompano Beach, FL 200 1,233 1,433 244 11/98 40 years Aliso Viejo 20 Los Angeles, CA 8,000 14,000 22,000 2,450 12/98 40 years Bosie Stadium 20 Boise, ID -- 16,003 16,003 2,800 12/98 40 years Woodridge 18 Chicago, IL 9,926 8,968 18,894 1,452 6/99 40 years Cary Crossroads 20 Cary, NC 3,352 11,808 15,160 1,748 6/99 40 years Tampa Palms 20 Tampa, FL 6,000 12,809 18,809 1,948 6/99 40 years Palm Promenade San Diego, CA 7,500 17,750 25,250 2,626 6/99 40 years On The Border Dallas, TX 879 -- 879 -- 11/97 n/a Bennigans Dallas, TX 565 1,000 1,565 281 11/97 20 years Bennigans Houston, TX 652 750 1,402 211 11/97 20 years Texas Land & Cattle Dallas, TX 1,519 -- 1,519 -- 11/97 n/a Texas Roadhouse Grill Atlanta, GA 886 -- 886 -- 3/99 n/a Roadhouse Grill Atlanta, GA 868 -- 868 -- 3/99 n/a Westminster 24 Denver, CO 5,850 17,314 23,164 1,768 12/01 40 years Westminster Center Denver, CO 6,204 15,339 21,543 1,491 12/01 40 years Westbank Palace 10 Westbank, LA 4,378 12,330 16,708 1,169 3/2 40 years Houma Palace 10 Houma, LA 2,404 6,780 9,184 642 3/2 40 years Hammond Palace 10 Hammond, LA 2,404 6,780 9,184 642 3/2 40 years Elmwood Palace 10 Elmwood, LA 5,264 14,820 20,084 1,405 3/2 40 years Clearview Palace 12 Clearview, LA -- 11,740 11,740 1,113 3/2 40 years Sterling Forum 30 Sterling Heights, MI 5,975 21,356 27,331 2,160 6/2 40 years Olathe Studio 30 Olathe, KS 4,000 15,935 19,935 1,394 6/2 40 years Cherrydale 16 Greenville, SC 1,660 7,570 9,230 560 6/2 40 years Livonia Livonia, MI 4,500 17,525 22,025 1,497 8/2 40 years Hoffman 22 Alexandria, VA -- 22,035 22,035 1,790 10/2 40 years Little Rock Rave Little Rock, AR 3,858 7,990 11,848 608 12/2 40 years AmStar Cinema 16 Macon, GA 1,982 5,056 7,038 343 3/3 40 years Star Southfield Center Southfield, MI 8,000 21,285 29,285 1,920 5/3 40 years ------- --------- ------ --------- Subtotals carried over to page 60 163,881 604,424 768,305 92,331 ======= ========= ======= =========
59 ENTERTAINMENT PROPERTIES TRUST Continued Schedule III - Real Estate and Accumulated Depreciation December 31, 2005
INITIAL COST ------------------------ BUILDINGS, ADDITIONS (SALES) EQUIPMENT & SUBSEQUENT TO DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION - ------------------------ ----------------- --------------- ------- ------------ ----------------- Subtotal from page 59 n/a $ 423,059 163,881 583,743 20,681 Southwind 12 Lawrence, KS 1,518 1,500 3,526 -- New Roc City New Rochelle, NY 68,608 6,100 97,601 90 Harbour View Station Suffolk, VA 3,253 3,256 9,205 -- Columbiana Grande 14 Columbiana, SC 2,727 1,000 10,534 (2,446) The Grande 18 Hialeah, FL 2,411 7,985 -- -- Johnny Carino's Mesquite, TX -- 789 990 -- Kanata Centrum Toronto, Ontario 36,549 10,834 39,513 12,127 Oakville Centrum Toronto, Ontario 21,526 10,834 25,530 368 Mississauga Centrum Toronto, Ontario 21,935 9,974 18,994 8,237 Whitby Centrum Toronto, Ontario 25,701 11,006 23,709 9,218 Deer Valley 30 Phoenix, AZ 16,075 4,276 15,934 -- Mesa Grand 24 Phoenix, AZ 6,101 4,446 16,565 -- Hamilton 24 Hamilton, NJ 17,973 4,869 18,142 -- Grand Prairie 18 Peoria, IL 4,264 2,948 11,177 -- Lafayette Grand 16 Lafayette, LA 3,115 1,935 8,383 -- Northeast Mall 18 Hurst, TX 5,357 5,000 11,729 1,015 The Grand D'Iberville 14 Biloxi, MS 3,032 2,001 8,043 -- Melbourne 16 Melbourne, FL 3,915 3,817 8,830 320 Stir Crazy Chicago, IL -- 1,983 900 -- Vland Multi-tenant Retail Chicago, IL -- 1,936 -- 114 RMP Chatanooga 18 Chatanooga, TN 4,307 2,798 11,466 -- Mayfaire Cinema 16 Plex Wilmington, NC 2,626 1,650 7,047 -- Conroe Grande Theatre Conroe, TX -- 1,841 8,230 -- Splitz Westminster, CO -- -- 2,213 270 Etouffee Southfield, MI -- -- 1,200 -- Garner Land Garner, NC -- 1,305 -- -- Winston-Salem Land Winston-Salem, NC -- 3,616 -- -- Huntsville Land Huntsville, AL -- 3,508 -- -- Manchester Stadium 16 Fresno, CA -- -- 11,613 -- Modesto Stadium 10 Modesto, CA -- 2,542 3,910 -- Sizzler Arroyo Grande, CA -- 444 534 -- Arroyo Grande Stadium 10 Arroyo Grande, CA -- 2,641 3,810 -- Auburn Stadium 10 Auburn, CA -- 2,179 6,185 -- Kalamazoo Land Kalamazoo, MI -- 5,125 -- -- Pensacola Land Pensacola, FL -- 5,316 -- -- Mad River Mountain Bellefontaine, OH -- 5,108 5,994 -- Washington Square Indianapolis, IN 1,826 1,481 4,565 -- Savannah Land Savannah, GA -- 2,783 -- -- Burbank Village Burbank, CA 35,780 16,584 35,016 -- Asahi Houston, TX -- 1,482 1,365 -- Hattiesburg Theatre Hattiesburg, MS 2,933 1,978 7,733 -- Property Under Development Various -- 19,770 -- -- --------------- ------- ------------ -------------- Total $ 714,591 342,521 1,023,929 49,994 =============== ======= ============ ============== GROSS AMOUNT AT DECEMBER 31, 2005 --------------------------------- BUILDINGS, EQUIPMENT & ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE - ---------------------- ----------------- -------- ------------ -------- ------------ -------- ------------- Subtotal from page 59 n/a 163,881 604,424 768,305 92,331 n/a n/a Southwind 12 Lawrence, KS 1,500 3,526 5,026 228 6/3 40 years New Roc City New Rochelle, NY 6,100 97,691 103,791 8,107 10/3 40 years Harbour View Station Suffolk, VA 3,256 9,205 12,461 489 11/3 40 years Columbiana Grande 14 Columbiana, SC 1,000 8,088 9,088 459 11/3 40 years The Grande 18 Hialeah, FL 7,985 -- 7,985 -- 12/3 40 years Johnny Carino's Mesquite, TX 789 990 1,779 70 3/3 40 years Kanata Centrum Toronto, Ontario 10,834 51,640 62,474 2,116 3/4 40 years Oakville Centrum Toronto, Ontario 10,834 25,898 36,732 1,182 3/4 40 years Mississauga Centrum Toronto, Ontario 9,974 27,231 37,205 980 3/4 40 years Whitby Centrum Toronto, Ontario 11,006 32,927 43,933 1,490 3/4 40 years Deer Valley 30 Phoenix, AZ 4,276 15,934 20,210 697 3/4 40 years Mesa Grand 24 Phoenix, AZ 4,446 16,565 21,011 725 3/4 40 years Hamilton 24 Hamilton, NJ 4,869 18,142 23,011 794 3/4 40 years Grand Prairie 18 Peoria, IL 2,948 11,177 14,125 396 7/4 40 years Lafayette Grand 16 Lafayette, LA 1,935 8,383 10,318 396 7/4 40 years Northeast Mall 18 Hurst, TX 5,000 12,744 17,744 339 11/4 40 years The Grand D'Iberville 14 Biloxi, MS 2,001 8,043 10,044 209 12/4 40 years Melbourne 16 Melbourne, FL 3,817 9,150 12,967 235 12/4 40 years Stir Crazy Chicago, IL 1,983 900 2,883 75 10/4 15 years Vland Multi-tenant Retail Chicago, IL 2,050 -- 2,050 -- 7/4 n/a RMP Chatanooga 18 Chatanooga, TN 2,798 11,466 14,264 239 12/3 n/a Mayfaire Cinema 16 Plex Wilmington, NC 1,650 7,047 8,697 147 6/4 n/a Conroe Grande Theatre Conroe, TX 1,841 8,230 10,071 102 7/4 n/a Splitz Westminster, CO -- 2,483 2,483 61 12/4 40 years Etouffee Southfield, MI -- 1,200 1,200 7 38,934 various Garner Land Garner, NC 1,305 -- 1,305 -- 38,781 n/a Winston-Salem Land Winston-Salem, NC 3,616 -- 3,616 -- 38,873 n/a Huntsville Land Huntsville, AL 3,508 -- 3,508 -- 38,873 n/a Manchester Stadium 16 Fresno, CA -- 11,613 11,613 -- 39,056 40 years Modesto Stadium 10 Modesto, CA 2,542 3,910 6,452 -- 39,056 40 years Sizzler Arroyo Grande, CA 444 534 978 -- 39,056 40 years Arroyo Grande Stadium 10 Arroyo Grande, CA 2,641 3,810 6,451 -- 39,056 40 years Auburn Stadium 10 Auburn, CA 2,179 6,185 8,364 -- 39,056 40 years Kalamazoo Land Kalamazoo, MI 5,125 -- 5,125 -- 39,026 n/a Pensacola Land Pensacola, FL 5,316 -- 5,316 -- 38,842 n/a Mad River Mountain Bellefontaine, OH 5,108 5,994 11,102 20 39,026 40 years Washington Square Indianapolis, IN 1,481 4,565 6,046 57 38,873 40 years Savannah Land Savannah, GA 2,783 -- 2,783 -- 38,842 n/a Burbank Village Burbank, CA 16,584 35,016 51,600 657 38,781 40 years Asahi Houston, TX 1,482 1,365 2,847 30 38,934 15 years Hattiesburg Theatre Hattiesburg, MS 1,978 7,733 9,711 48 38,995 40 years Property Under Development Various 19,770 -- 19,770 -- various n/a -------- ----------- -------- ----------- Total 342,635 1,073,809 1,416,444 112,686 ======== =========== ========= ===========
60 ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation December 31, 2004
INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2004 -------------------- --------------------------------- BUILDINGS, ADDITIONS (SALES) BUILDINGS, EQUIPMENT & SUBSEQUENT TO EQUIPMENT & DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL - ---------------------- -------------------- ----------- ------- ------------ ----------------- ------ ------------ --------- Grand 24 Dallas, TX $ 11,035 3,060 15,281 -- 3,060 15,281 18,341 Mission Valley 20 San Diego, CA 9,644 -- 16,028 -- -- 16,028 16,028 Promenade 16 Los Angeles, CA 16,923 6,021 22,104 -- 6,021 22,104 28,125 Ontario Mills 30 Los Angeles, CA 15,024 5,521 19,450 -- 5,521 19,450 24,971 Lennox 24 Columbus, OH 7,632 -- 12,685 -- -- 12,685 12,685 West Olive 16 St. Louis, MO 10,581 4,985 12,602 -- 4,985 12,602 17,587 Studio 30 Houston, TX 15,680 6,023 20,037 -- 6,023 20,037 26,060 Huebner Oaks 24 San Antonio, TX 10,029 3,006 13,662 -- 3,006 13,662 16,668 First Colony 24 Houston, TX 10,349 -- 19,100 67 -- 19,167 19,167 Oakview 24 Omaha, NE 12,725 5,215 16,700 59 5,215 16,759 21,974 Leawood 20 Kansas City, MO 8,554 3,714 12,086 43 3,714 12,129 15,843 Gulf Pointe 30 Houston, TX 13,972 4,304 21,496 76 4,304 21,572 25,876 South Barrington 30 Chicago, IL 18,573 6,577 27,723 98 6,577 27,821 34,398 Mesquite 30 Dallas, TX 12,566 2,912 20,288 72 2,912 20,360 23,272 Hampton Town Center 24 Norfolk, VA 15,437 3,822 24,678 88 3,822 24,766 28,588 Pompano 18 Pompano Beach, FL 7,475 6,376 9,899 2,426 6,376 12,325 18,701 Raleigh Grand 16 Raleigh, NC 3,901 2,919 5,559 -- 2,919 5,559 8,478 Paradise 24 Miami, FL 12,695 2,000 13,000 8,512 2,000 21,512 23,512 Pompano Kmart Pompano Beach, FL -- 600 2,430 -- 600 2,430 3,030 Pompano Restaurant Pompano Beach, FL -- 200 803 430 200 1,233 1,433 Aliso Viejo 20 Los Angeles, CA 11,879 8,000 14,000 -- 8,000 14,000 22,000 Bosie Stadium 20 Boise, ID 7,475 -- 16,003 -- -- 16,003 16,003 Woodridge 18 Chicago, IL 8,418 9,926 8,968 -- 9,926 8,968 18,894 Cary Crossroads 20 Cary, NC 9,011 3,352 11,653 155 3,352 11,808 15,160 Tampa Palms 20 Tampa, FL 10,671 6,000 12,809 -- 6,000 12,809 18,809 Palm Promenade San Diego, CA 14,168 7,500 17,750 -- 7,500 17,750 25,250 On The Border Dallas, TX -- 879 -- -- 879 -- 879 Bennigans Dallas, TX -- 565 -- 1,000 565 1,000 1,565 Bennigans Houston, TX -- 652 -- 750 652 750 1,402 Texas Land & Cattle Dallas, TX -- 1,519 -- -- 1,519 -- 1,519 Texas Roadhouse Grill Atlanta, GA -- 886 -- -- 886 -- 886 Roadhouse Grill Atlanta, GA -- 868 -- -- 868 -- 868 Westminster 24 Denver, CO 15,659 5,850 17,314 -- 5,850 17,314 23,164 Westminster Center Denver, CO 3,141 6,204 12,600 2,184 6,204 14,784 20,988 Subway Denver, CO -- -- 27 -- -- 27 27 Westbank Palace 10 Westbank, LA 9,485 4,378 12,330 -- 4,378 12,330 16,708 Houma Palace 10 Houma, LA 5,335 2,404 6,780 -- 2,404 6,780 9,184 Hammond Palace 10 Hammond, LA 5,187 2,404 6,780 -- 2,404 6,780 9,184 Elmwood Palace 10 Elmwood, LA 13,635 5,264 14,820 -- 5,264 14,820 20,084 Clearview Palace 12 Clearview, LA 7,115 -- 11,740 -- -- 11,740 11,740 Sterling Forum 30 Sterling Heights, MI 16,599 5,975 17,956 3,400 5,975 21,356 27,331 Olathe Studio 30 Olathe, KS 11,856 4,000 15,935 -- 4,000 15,935 19,935 Cherrydale 16 Greenville, SC 4,891 1,660 7,570 -- 1,660 7,570 9,230 Livonia Livonia, MI 13,576 4,500 17,525 -- 4,500 17,525 22,025 Hoffman 22 Alexandria, VA 13,635 -- 22,035 -- -- 22,035 22,035 Little Rock Rave Little Rock, AR 1,773 3,858 7,990 -- 3,858 7,990 11,848 ----------- ------- ------- ------ ------- ------- ------- Subtotals carried over to page 62 $ 396,304 153,899 558,196 19,360 153,899 577,556 731,455 =========== ======= ======= ====== ======= ======= ======= ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE - --------------------- -------------------- ------------ -------- ------------ Grand 24 Dallas, TX 2,483 11/97 40 years Mission Valley 20 San Diego, CA 2,605 11/97 40 years Promenade 16 Los Angeles, CA 3,592 11/97 40 years Ontario Mills 30 Los Angeles, CA 3,161 11/97 40 years Lennox 24 Columbus, OH 2,061 11/97 40 years West Olive 16 St. Louis, MO 2,048 11/97 40 years Studio 30 Houston, TX 3,256 11/97 40 years Huebner Oaks 24 San Antonio, TX 2,220 11/97 40 years First Colony 24 Houston, TX 3,388 11/97 40 years Oakview 24 Omaha, NE 2,963 11/97 40 years Leawood 20 Kansas City, MO 2,144 11/97 40 years Gulf Pointe 30 Houston, TX 3,724 2/98 40 years South Barrington 30 Chicago, IL 4,745 3/98 40 years Mesquite 30 Dallas, TX 3,388 4/98 40 years Hampton Town Center 24 Norfolk, VA 4,011 6/98 40 years Pompano 18 Pompano Beach, FL 1,960 8/98 40 years Raleigh Grand 16 Raleigh, NC 923 8/98 40 years Paradise 24 Miami, FL 3,129 11/98 40 years Pompano Kmart Pompano Beach, FL 364 11/98 40 years Pompano Restaurant Pompano Beach, FL 181 11/98 40 years Aliso Viejo 20 Los Angeles, CA 2,100 12/98 40 years Bosie Stadium 20 Boise, ID 2,400 12/98 40 years Woodridge 18 Chicago, IL 1,228 6/99 40 years Cary Crossroads 20 Cary, NC 1,457 6/99 40 years Tampa Palms 20 Tampa, FL 1,628 6/99 40 years Palm Promenade San Diego, CA 2,182 6/99 40 years On The Border Dallas, TX -- 11/97 n/a Bennigans Dallas, TX 230 11/97 20 years Bennigans Houston, TX 172 11/97 20 years Texas Land & Cattle Dallas, TX -- 11/97 n/a Texas Roadhouse Grill Atlanta, GA -- 3/99 n/a Roadhouse Grill Atlanta, GA -- 3/99 n/a Westminster 24 Denver, CO 1,335 12/01 40 years Westminster Center Denver, CO 1,033 12/01 40 years Subway Denver, CO 15 4/2 5 years Westbank Palace 10 Westbank, LA 860 3/2 40 years Houma Palace 10 Houma, LA 473 3/2 40 years Hammond Palace 10 Hammond, LA 473 3/2 40 years Elmwood Palace 10 Elmwood, LA 1,034 3/2 40 years Clearview Palace 12 Clearview, LA 819 3/2 40 years Sterling Forum 30 Sterling Heights, MI 1,510 6/2 40 years Olathe Studio 30 Olathe, KS 996 6/2 40 years Cherrydale 16 Greenville, SC 473 6/2 40 years Livonia Livonia, MI 1,059 8/2 40 years Hoffman 22 Alexandria, VA 1,239 10/2 40 years Little Rock Rave Little Rock, AR 408 12/2 40 years ------ Subtotals carried over to page 62 75,470 ======
61 ENTERTAINMENT PROPERTIES TRUST Continued Schedule III - Real Estate and Accumulated Depreciation December 31, 2004
INITIAL COST ------------------- BUILDINGS, ADDITIONS (SALES) EQUIPMENT & SUBSEQUENT TO DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION - -------------------------- ---------------- ----------- ------- ------------ ----------------- Subtotal from page 61 n/a $ 396,304 153,899 558,196 19,360 AmStar Cinema 16 Macon, GA 1,053 1,982 5,056 -- Star Southfield Center Southfield, MI 4,044 8,000 20,518 24 Southwind 12 Lawrence, KS 752 1,500 3,526 -- New Roc City New Rochelle, NY 69,463 6,100 97,601 90 Harbour View Station Suffolk, VA 1,613 3,256 9,206 -- Columbiana Grande 14 Columbiana, SC 1,352 1,000 10,534 (2,000) The Grande 18 Hialeah, FL -- 7,985 -- -- Johnny Carino's Mesquite, TX -- 789 990 -- Rocky Mountain Choc. Westminster, CO -- -- 16 -- Kanata Centrum Toronto, Ontario 37,450 10,483 38,233 7,175 Oakville Centrum Toronto, Ontario 23,981 10,483 24,701 356 Mississauga Centrum Toronto, Ontario 18,913 9,651 18,377 -- Whitby Centrum Toronto, Ontario 24,695 10,648 22,940 5,267 Deer Valley 30 Phoenix, AZ 3,145 4,276 15,934 -- Mesa Grand 24 Phoenix, AZ 3,025 4,446 16,565 -- Hamilton 24 Hamilton, NJ 3,444 4,869 18,142 -- Grand Prairie 18 Peoria, IL 2,114 2,948 11,177 -- Lafayette Grand 16 Lafayette, LA 1,544 1,935 8,383 -- Northeast Mall 18 Hurst, TX -- 5,000 11,729 -- The Grand D'Iberville 14 Biloxi, MS -- 2,001 8,043 -- Melbourne 16 Melbourne, FL -- 3,817 8,830 -- Putting Edge Westminster, CO -- -- 482 -- Stir Crazy Chicago, IL -- 1,983 900 -- Vland Multi-tenant Retail Chicago, IL -- 1,936 -- -- Maximum Gamers Westminster, CO -- -- 34 -- Chatanooga Land Chatanooga, TN -- 2,798 -- -- Wilmington Land Wilmington, NC -- 1,650 -- -- Conroe Land Conroe, TX -- 1,841 -- -- Splitz Westminster, CO -- -- 2,213 -- Property Under Development Various -- 23,144 -- -- ----------- ------- ------- ------ Total $ 592,892 288,420 912,326 30,272 =========== ======= ======= ====== GROSS AMOUNT AT DECEMBER 31, 2004 ---------------------------------- BUILDINGS, EQUIPMENT & ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE - -------------------------- ---------------- ------- ------------- ---------- ------------ -------- ------------- Subtotal from page 61 n/a 153,899 577,556 731,455 75,470 n/a n/a AmStar Cinema 16 Macon, GA 1,982 5,056 7,038 219 3/3 40 years Star Southfield Center Southfield, MI 8,000 20,542 28,542 1,092 5/3 40 years Southwind 12 Lawrence, KS 1,500 3,526 5,026 140 6/3 40 years New Roc City New Rochelle, NY 6,100 97,691 103,791 5,659 10/3 40 years Harbour View Station Suffolk, VA 3,256 9,206 12,462 259 11/3 40 years Columbiana Grande 14 Columbiana, SC 1,000 8,534 9,534 697 11/3 40 years The Grande 18 Hialeah, FL 7,985 -- 7,985 -- 12/3 40 years Johnny Carino's Mesquite, TX 789 990 1,779 45 3/3 40 years Rocky Mountain Choc. Westminster, CO -- 16 16 2 11/3 10 years Kanata Centrum Toronto, Ontario 10,483 45,408 55,891 829 3/4 40 years Oakville Centrum Toronto, Ontario 10,483 25,057 35,540 517 3/4 40 years Mississauga Centrum Toronto, Ontario 9,651 18,377 28,028 383 3/4 40 years Whitby Centrum Toronto, Ontario 10,648 28,207 38,855 540 3/4 40 years Deer Valley 30 Phoenix, AZ 4,276 15,934 20,210 295 3/4 40 years Mesa Grand 24 Phoenix, AZ 4,446 16,565 21,011 313 3/4 40 years Hamilton 24 Hamilton, NJ 4,869 18,142 23,011 342 3/4 40 years Grand Prairie 18 Peoria, IL 2,948 11,177 14,125 116 7/4 40 years Lafayette Grand 16 Lafayette, LA 1,935 8,383 10,318 87 7/4 40 years Northeast Mall 18 Hurst, TX 5,000 11,729 16,729 37 11/4 40 years The Grand D'Iberville 14 Biloxi, MS 2,001 8,043 10,044 8 12/4 40 years Melbourne 16 Melbourne, FL 3,817 8,830 12,647 9 12/4 40 years Putting Edge Westminster, CO -- 482 482 8 7/4 10 years Stir Crazy Chicago, IL 1,983 900 2,883 15 10/4 15 years Vland Multi-tenant Retail Chicago, IL 1,936 -- 1,936 -- 7/4 n/a Maximum Gamers Westminster, CO -- 34 34 -- 11/4 5 years Chatanooga Land Chatanooga, TN 2,798 -- 2,798 -- 12/3 n/a Wilmington Land Wilmington, NC 1,650 -- 1,650 -- 6/4 n/a Conroe Land Conroe, TX 1,841 -- 1,841 -- 7/4 n/a Splitz Westminster, CO -- 2,213 2,213 -- 12/4 40 years Property Under Development Various 23,144 -- 23,144 -- various n/a ------- ------- --------- ------ Total 288,420 942,598 1,231,018 87,082 ======= ======= ========= ======
62 ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation (continued) Reconciliation December 31, 2005 Real Estate: Reconciliation: Balance at beginning of the year $ 1,231,018 Acquisition and development of rental properties during the year 186,346 Disposition of rental properties during the year (920) ----------- Balance at close of year $ 1,416,444 ===========
See accompanying report of independent registered public accounting firm. ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation (continued) Reconciliation December 31, 2004 Real Estate: Reconciliation: Balance at beginning of the year $ 965,056 Acquisition and development of rental properties during the year 295,793 Disposition of rental properties during the year (29,831) ----------- Balance at close of year $ 1,231,018 ===========
See accompanying report of independent registered public accounting firm. 63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Trustees. A review and evaluation was performed by our management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, were effective. There were no significant deficiencies or material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by us. CHANGE IN INTERNAL CONTROL Effective January 1, 2005, we implemented a new automated lease administration system. As part of the implementation, we modified our internal control over financial reporting to align our internal controls with the new technology. This new technology improves the efficiency of our operations and further strengthens our internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees Entertainment Properties Trust: We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Entertainment Properties Trust (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. 64 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Entertainment Properties Trust maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Entertainment Properties Trust as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and the related financial statement schedules, and our report dated February 24, 2006 expressed an unqualified opinion on those consolidated financial statements and related financial statement schedules. KPMG LLP Kansas City, Missouri February 24, 2006 65 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 10, 2006 (the "Proxy Statement"), contains under the captions "Election of Trustees", "Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" the information required by Item 10 of this Form 10-K, which information is incorporated herein by this reference. We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial Officer, and all other officers, employees and trustees. The Code may be viewed on our website at www.eprkc.com and is available in print to any shareholder who requests it. ITEM 11. EXECUTIVE COMPENSATION The Proxy Statement contains under the captions "Election of Trustees -- Compensation of Trustees", "Executive Compensation", "Compensation Committee", and "Company Performance" the information required by Item 11 of this Form 10-K, which information is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The Proxy Statement contains under the captions "Share Ownership" and "Equity Compensation Plan Information" the information required by Item 12 of this Form 10-K, which information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Proxy Statement contains under the caption "Transactions Between the Company and Trustees, Officers or their Affiliates" the information required by Item 13 of this Form 10-K, which information is incorporated herein by this reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Proxy Statement contains under the caption "Ratification of Appointment of Independent Auditors" the information required by Item 14 of this Form 10-K, which information is incorporated herein by this reference. 66 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (1) Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003. Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts Schedule III - Real Estate and Accumulated Depreciation (3) Exhibits 21 Subsidiaries of the Company 23 Consent of KPMG LLP 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. 67 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: February 24, 2006 By /s/ David M. Brain -------------------------------------- David M. Brain, President - Chief Executive Officer Dated: February 24, 2006 By /s/ Fred L. Kennon -------------------------------------- Fred L. Kennon, Vice President - Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE AND TITLE DATE - --------------------------------------- ----------------- /s/ Robert J. Druten February 24, 2006 - ---------------------------------------------------- Robert J. Druten, Chairman of the Board /s/ David M. Brain February 24, 2006 - ---------------------------------------------------- David M. Brain, Chief Executive Officer and Trustee /s/ Morgan G. Earnest, II February 24, 2006 - ---------------------------------------------------- Morgan G. Earnest, II, Trustee /s/ James A. Olson February 24, 2006 - ---------------------------------------------------- James A. Olson, Trustee /s/ Barrett Brady February 24, 2006 - ---------------------------------------------------- Barrett Brady, Trustee
68 List of Exhibits The Company has incorporated by reference certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act. 3.1 Amended and Restated Declaration of Trust of the Company, which is attached as Exhibit 3.2 to the Company's Form 8-K (Commission File No. 1-13561) filed on June 7, 1999, is hereby incorporated by reference as Exhibit 3.1 3.2 Amendment to Declaration of Trust of the Company, which is attached as Exhibit 3.1 to the Company's Form 8-K (Commission File No. 1-13561) filed on January 11, 2005, is hereby incorporated by reference as Exhibit 3.2 3.3 Bylaws of the Company, which are attached as Exhibit 3.3 to the Company's Form 8-K (Commission File No. 1-13561) filed on June 7, 1999, are hereby incorporated by reference as Exhibit 3.3 4.1 See Exhibits 3.1 and 3.2 4.2 See Exhibit 3.3 4.3 Form of share certificate for common shares of beneficial interest of the Company, which is attached as Exhibit 4.5 to the Company's Registration Statement on Form S-11, as amended, (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 4.3 4.4 Form of Articles Supplementary for 9.50% Series A Cumulative Redeemable Preferred Shares, which is attached as Exhibit 4.4 to the Company's Form 8-A12B (Commission File No. 1-13561) filed on May 24, 2002, is hereby incorporated by reference as Exhibit 4.4 4.5 Form of 9.50% Series A Preferred Share Certificate, which is attached as Exhibit 4.5 to the Company's Form 8-A12B (Commission File No. 1-13561) filed on May 24, 2002, is hereby incorporated by reference as Exhibit 4.5 4.6 Form of Articles Supplementary for 7.75% Series B Cumulative Redeemable Preferred Shares, which is attached as Exhibit 4.6 to the Company's Form 8-A12BA (Commission File No. 1-13561) filed on January 14, 2005, and to the Company's Form 8-K filed on January 14, 2005, is hereby incorporated by reference as Exhibit 4.6 4.7 Form of 7.75% Series B Cumulative Redeemable Preferred Share Certificate, which is attached as Exhibit 4.7 to the Company's Form 8-A12B (Commission File No. 1-13561) filed on January 12, 2005, is hereby incorporated by reference as Exhibit 4.7
69 4.8 Form of Registration Rights Agreement among Entertainment Properties Trust, Whitby Centrum Limited Partnership, Oakville Centrum Limited Partnership, Kanata Centrum Limited Partnership, Courtney Square Limited Partnership and 2041197 Ontario Ltd., dated February 24, 2004, which is attached as Exhibit 10.10 to the Company's Form 8-K/A (Commission File No. 1-13561) filed on March 16, 2004, is hereby incorporated by reference as Exhibit 4.8 4.9 Form of Registration Rights Agreement dated March 15, 2002 between EPR and the selling shareholders named therein, which is attached as Exhibit 4.7 to the Company's registration statement on Form S-3 (Commission File No. 333-119160) filed on September 21, 2004, is hereby incorporated by reference as Exhibit 4.9 4.10 Form of Agreement Regarding Ownership Limit Waiver between the Company and Cohen & Steers Capital Management, Inc., which is attached as Exhibit 4.7 to the Company's Form 8-K (Commission File No. 1-13561) filed on January 19, 2005, is hereby incorporated by reference as Exhibit 4.10 10.1 Form of Mississauga Entertainment Centrum Agreement dated November 14, 2003 among Courtney Square Ltd., EPR North Trust and Entertainment Properties Trust, which is attached as Exhibit 10.1 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated by reference as Exhibit 10.1 10.2 Form of Oakville Entertainment Centrum Agreement dated November 14, 2003 among Penex Winston Ltd., EPR North Trust and Entertainment Properties Trust, which is attached as Exhibit 10.2 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated by reference as Exhibit 10.2 10.3 Form of Whitby Entertainment Centrum Agreement dated November 14, 2003 among Penex Whitby Ltd., EPR North Trust and Entertainment Properties Trust, which is attached as Exhibit 10.3 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated by reference as Exhibit 10.3 10.4 Form of Kanata Entertainment Centrum Agreement dated November 14, 2003 among Penex Kanata Ltd., Penex Main Ltd., EPR North Trust and Entertainment Properties Trust, which is attached as Exhibit 10.4 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated by reference as Exhibit 10.4 10.5 Form of Amending Agreements among Courtney Square Ltd., EPR North Trust and Entertainment Properties Trust, which are attached as Exhibit 10.5 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, are hereby incorporated by reference as Exhibit 10.5
70 10.6 Form of Amending Agreements among Penex Winston Ltd., EPR North Trust and Entertainment Properties Trust, which are attached as Exhibit 10.6 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, are hereby incorporated by reference as Exhibit 10.6 10.7 Form of Amending Agreements among Penex Whitby Ltd., EPR North Trust and Entertainment Properties Trust, which are attached as Exhibit 10.7 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, are hereby incorporated by reference as Exhibit 10.7 10.8 Form of Amending Agreements among Penex Kanata Ltd., Penex Main Ltd., EPR North Trust and Entertainment Properties Trust, which are attached as Exhibit 10.8 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, are hereby incorporated by reference as Exhibit 10.8 10.9 Form of Note Purchase Agreement dated February 24, 2004 among Entertainment Properties Trust and Courtney Square Limited Partnership, Whitby Centrum Limited Partnership, Oakville Centrum Limited Partnership and Kanata Centrum Limited Partnership, which is attached as Exhibit 10.9 to the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated by reference as Exhibit 10.9 10.10 Form of Registration Rights Agreement among Entertainment Properties Trust, Whitby Centrum Limited Partnership, Oakville Centrum Limited Partnership, Kanata Centrum Limited Partnership, Courtney Square Limited Partnership and 2041197 Ontario Ltd., dated February 24, 2004 (see Exhibit 4.8) 10.11 Form of Agreement of Sale and Purchase between the Company and American Multi-Cinema, Inc., which is attached as Exhibit 10.1 to Amendment No. 3, filed on November 13, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.11 10.12 Form of Option Agreement between the Company and American Multi-Cinema, Inc., which is attached as Exhibit 10.2 to Amendment No. 3, filed on November 13, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.12 10.13 Form of Option Agreement between the Company and Clip Funding, Limited Partnership, which is attached as Exhibit 10.3 to Amendment No. 3, filed on November 13, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.13
71 10.14 Form of AMCE Right to Purchase Agreement between the Company and AMC Entertainment Inc., which is attached as Exhibit 10.4 to Amendment No. 3, filed on November 13, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.14 10.15 Form of Lease entered into between the Company and American Multi-Cinema, Inc., which is attached as Exhibit 10.5 to Amendment No. 3, filed on November 13, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.15 10.16 Form of Guaranty of Lease entered into between the Company and AMC Entertainment, Inc. which is attached as Exhibit 10.6 to Amendment No. 3, filed on November 13, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.16 10.17 Amended and Restated Master Credit Agreement, dated March 29, 2004, among the Company, 30 West Pershing, LLC and Fleet National Bank, which is attached as Exhibit 10.1 to the Company's Form 8-K (Commission File No. 1-13561) filed on April 5, 2004, is hereby incorporated by reference as Exhibit 10.17 10.18 Form of Indemnification Agreement entered into between the Company and each of its trustees and officers, which is attached as Exhibit 10.8 to Amendment No. 1, filed October 28, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.18 10.19 1997 Share Incentive Plan, which is attached as Exhibit 10.9 to Amendment No. 2, filed November 5, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.19 10.20 Deferred Compensation Plan for Non-Employee Trustees, which is attached as Exhibit 10.10 to Amendment No. 2, filed November 5, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.20 10.21 Annual Incentive Program, which is attached as Exhibit 10.11 to Amendment No. 2, filed November 5, 1997, to the Company's Registration Statement on Form S-11 (Registration No. 333-35281), is hereby incorporated by reference as Exhibit 10.21 10.22 Employment Agreement with David M. Brain, which is attached as Exhibit 10.12 to Amendment No. 1, filed May 20, 2002, to the Company's Registration 10.12 to Amendment No. 1, filed May 20, 2002, to the Company's Registration Statement on Form S-3 (Registration No. 333-87242), is hereby incorporated by reference as Exhibit 10.22
72 10.23 Employment Agreement with Fred L. Kennon, which is attached as Exhibit 10.24 to the Company's Form 10-K/A for the year ended December 31, 2003 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.23 10.24 Employment Agreement with Gregory K. Silvers, which is attached as Exhibit 10.25 to the Company's Form 10-K/A for the year ended December 31, 2003 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.24 10.25 Form of Loan Agreement, dated as of June 29, 1998, between EPT DownREIT II, Inc., as Borrower, and Archon Financial, L.P., as Lender, which is attached as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.25 10.26 Form of Mortgage and Security Agreement, Deed of Trust and Security Agreement and Loan Agreement for secured loans aggregating $20.2 million to 3 Theatres, Inc., a wholly-owned subsidiary of EPT DownREIT, Inc., which is attached as Exhibit 10.16 to the Company's Form 10-Q for the quarter ended March 31, 2000 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.26 10.27 Form of Loan Agreement, dated February 14, 2001, between Megaplex Nine, Inc. and Bear Stearns Funding, Inc., which is attached as Exhibit 10.19 to the Company's Form 10-K for the year ended December 31, 2000 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.27 10.28 Form of Limited Partnership Interest Purchase Agreement, dated October 27, 2003, among EPT New Roc GP, Inc., EPT New Roc, LLC, LRC Industries, Inc., DKH - New Roc Associates, L.P., LC New Roc Inc. and New Roc Associates, L.P., which is attached as Exhibit 10.1 to the Company's Form 8-K dated October 27, 2003 and filed November 12, 2003 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.28 10.29 Form of Second Amended and Restated Agreement of Limited Partnership of New Roc Associates, L.P., which is attached as Exhibit 10.2 to the Company's Form 8-K filed November 12, 2003 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.29 10.30 Form of Loan Agreement, dated February 27, 2003, among Flik, Inc., as Borrower, EPT DownREIT, Inc., as Indemnitor, and Secore Financial Corporation, as Lender, which is attached as Exhibit 10.21 to the Company's Form 8-K filed March 4, 2003 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.30
73 10.31 First Amended and Restated 1997 Share Incentive Plan included as Appendix D to the Company's definitive proxy statement filed April 8, 2004 (Commission File No. 1-13561), is hereby incorporated by reference as Exhibit 10.31 21 The list of the Company's Subsidiaries is attached hereto as Exhibit 21 23 Consent of KPMG LLP is attached hereto as Exhibit 23 31.1 Certification of David M. Brain, Chief Executive Officer of the Company, is attached hereto as Exhibit 31.1 31.2 Certification of Fred L. Kennon, Chief Financial Officer of the Company, is attached hereto as Exhibit 31.2 32 Certifications furnished pursuant to 18 U.S.C. Section 1350 of David M. Brain, Chief Executive Officer of the Company, and Fred L. Kennon, Chief Financial Officer of the Company, are attached hereto as Exhibit 32 10.32 Employment Agreement with Mark A. Peterson, which is attached as Exhibit 10.32 to the Company's Form 8-K (Commission File No. 001-13561) filed September 22, 2005, is hereby incorporated by reference as Exhibit 10.32. 1.2 Underwriting Agreement with RBC Capital Markets Corporation dated February 3, 2006, which is attached as Exhibit 1.2 to the Company's Form 8-K (Commission File No. 001-13561) filed February 3, 2006, is hereby incorporated by reference as Exhibit 1.2. 5.1 Sonnenschein, Nath & Rosenthal Opinion regarding the legality of the public offering of 1,150,000 common shares dated February 3, 2006, which is attached as Exhibit 5.1 to the Company's Form 8-K (Commission File No. 001-13561) filed February 3, 2006 is hereby incorporated by reference as Exhibit 5.1. 8.1 Sonnenschein, Nath & Rosenthal Opinion regarding the tax matters associated with the public offering of 1,150,000 common shares dated February 3, 2006, which is attached as Exhibit 8.1 to the Company's Form 8-K (Commission File No. 001-13561) filed February 3, 2006 is hereby incorporated by reference as Exhibit 8.1.
74 EX-21 2 c02916exv21.txt LIST OF THE COMPANY'S SUBSIDIARIES . . . EXHIBIT 21 Subsidiaries of the Company
Subsidiary Jurisdiction of Incorporation - ---------- ----------------------------- EPT DownREIT, Inc. Missouri EPT DownREIT II, Inc. Missouri 3 Theatres, Inc. Missouri Megaplex Holdings, Inc. Missouri Megaplex Nine, Inc. Missouri Cantera 30, Inc. Delaware Cantera 30 Theatre, L.P. Delaware Megaplex Four, Inc. Missouri Westcol Holdings, LLC Delaware Westcol Theatre, LLC Delaware Westcol Center, LLC Delaware Westcol Corp Delaware Theatre Sub, Inc. Missouri 30 West Pershing, LLC Missouri EPR Hialeah, Inc. Missouri Flik, Inc. Delaware Flik Depositor, Inc. Delaware Tampa Veterans 24, Inc. Delaware Tampa Veterans 24, L.P. Delaware EPT New Roc GP, Inc. Delaware EPT New Roc, LLC Delaware New Roc Associates, L.P. New York EPR Canada, Inc. Missouri EPR North Trust Delaware Kanata Entertainment Holdings, Inc. New Brunswick Oakville Entertainment Holdings, Inc. New Brunswick Mississauga Entertainment Holdings, Inc. New Brunswick Whitby Entertainment Holdings, Inc. New Brunswick EPT Melbourne, Inc. Missouri EPR TRS Holdings, Inc. Missouri EPR TRS I, Inc. Missouri EPR TRS II, Inc. Missouri EPT Kalamazoo, Inc. Missouri EPR Metropolis Trust Delaware Metropolis Entertainment Holdings, Inc. Delaware EPT Crotched Mountain, Inc. Missouri EPT Mad River, Inc. Missouri EPT Boise, Inc. Delaware EPT Deer Valley, Inc. Delaware EPT Hamilton, Inc. Delaware EPT Little Rock, Inc. Delaware
75 EPT Pompano, Inc. Delaware EPT Raleigh Theatres, Inc. Delaware Burbank Village, Inc. Delaware Burbank Village, L.P. Delaware EPT Pensacola, Inc. Missouri Exit 108 Entertainment, LLC Alabama EPT Boynton Beach 16, Inc. Missouri EPT Sarasota 20, Inc. Missouri EPT Kendall Empire 20, Inc. Missouri EPT Waterparks, Inc. Missouri Westminster Promenade Owners Association Colorado EPT Davie, Inc. Delaware EPT Aliso Viejo, Inc. Delaware
76 EX-23 3 c02916exv23.txt CONSENT OF KPMG LLP EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees Entertainment Properties Trust: We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-72021 pertaining to the Dividend Reinvestment and Direct Shares Purchase Plan, Form S-8 No. 333-76625 pertaining to the 1997 Share Incentive Plan, Form S-4 No. 33-78803 pertaining to the shelf registration of 5,000,000 common shares and Form S-3 No. 333-113626 for $400,000,000 in securities) of Entertainment Properties Trust of our reports dated February 24, 2006, with respect to the consolidated balance sheets of the Company as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders' equity, comprehensive income, and cash flows, for each of the years in the three-year period ended December 31, 2005, and all related financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of Entertainment Properties Trust. KPMG LLP Kansas City, Missouri February 24, 2006 77 EX-31.1 4 c02916exv31w1.txt CERTIFICATION OF DAVID M. BRAIN, CEO EXHIBIT 31.1 CERTIFICATION I, David M. Brain, President and Chief Executive Officer of Entertainment Properties Trust, certify that: 1. I have reviewed this annual report on Form 10-K of Entertainment Properties Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of trustees: 78 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 24, 2006 /s/ David M. Brain -------------------------------------- David M. Brain President and Chief Executive Officer 79 EX-31.2 5 c02916exv31w2.txt CERTIFICATION OF FRED L. KENNON, CFO EXHIBIT 31.2 CERTIFICATION I, Fred L. Kennon, Vice President and Chief Financial Officer of Entertainment Properties Trust, certify that: 1. I have reviewed this annual report on Form 10-K of Entertainment Properties Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of trustees: 80 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 24, 2006 /s/ Fred L. Kennon ------------------------------------------- Fred L. Kennon Vice President and Chief Financial Officer 81 EX-32 6 c02916exv32.txt CERTIFICATIONS FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES- OXLEY ACT I, David M. Brain, President and Chief Executive Officer of Entertainment Properties Trust (the "registrant"), have executed this certification for furnishing to the Securities and Exchange Commission in connection with the filing with the Commission of the registrant's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report"). I hereby certify that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant for and as of the end of that year. /s/ David M. Brain --------------------------------------- David M. Brain President and Chief Executive Officer Date: February 24, 2006 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES- OXLEY ACT I, Fred L. Kennon, Vice President and Chief Financial Officer of Entertainment Properties Trust (the "registrant"), have executed this certification for furnishing to the Securities and Exchange Commission in connection with the filing with the Commission of the registrant's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report"). I hereby certify that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant for and as of the end of that year. /s/ Fred L. Kennon ------------------------------------------- Fred L. Kennon Vice President and Chief Financial Officer Date: February 24, 2006 82 -----END PRIVACY-ENHANCED MESSAGE-----