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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13079
GAYLORD ENTERTAINMENT COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 73-0664379
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Gaylord Drive
Nashville, Tennessee 37214
(Address of principal executive offices)
(Zip Code)
(615) 316-6000
---------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 2002
----- -------------------------------
Common Stock, $.01 par value 33,769,824 shares
GAYLORD ENTERTAINMENT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
PAGE NO.
--------
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
For the Three Months Ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Operations -
For the Six Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 5
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Part II - Other Information
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
---------- ----------
Revenues $ 98,289 $ 70,105
Operating expenses:
Operating costs 61,957 47,205
Selling, general and administrative 25,786 18,509
Preopening costs 650 2,413
Gain on sale of assets (10,567) --
Impairment and other charges -- 11,388
Restructuring charges, net 70 (2,304)
Depreciation 11,996 8,757
Amortization 802 996
---------- ----------
Operating income (loss) 7,595 (16,859)
Interest expense, net of amounts capitalized (12,749) (12,121)
Interest income 550 2,177
Unrealized gain (loss) on Viacom stock, net (44,012) 85,603
Unrealized gain (loss) on derivatives, net 49,835 (66,020)
Other gains and losses 260 5,570
---------- ----------
Income (loss) before income taxes and discontinued operations 1,479 (1,650)
Benefit for income taxes (15,227) (195)
---------- ----------
Income (loss) from continuing operations 16,706 (1,455)
Income (loss) from discontinued operations, net of taxes 1,403 (2,103)
---------- ----------
Net income (loss) $ 18,109 $ (3,558)
========== ==========
Income (loss) per share:
Income (loss) from continuing operations $ 0.50 $ (0.05)
Income (loss) from discontinued operations, net of taxes 0.04 (0.06)
---------- ----------
Net income (loss) $ 0.54 $ (0.11)
========== ==========
Income (loss) per share - assuming dilution:
Income (loss) from continuing operations $ 0.50 $ (0.05)
Income (loss) from discontinued operations, net of taxes 0.04 (0.06)
---------- ----------
Net income (loss) $ 0.54 $ (0.11)
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
---------- ----------
Revenues $ 199,544 $ 150,338
Operating expenses:
Operating costs 131,079 100,789
Selling, general and administrative 53,689 35,865
Preopening costs 6,356 4,308
Gain on sale of assets (10,567) --
Impairment and other charges -- 11,388
Restructuring charges, net 70 (2,304)
Depreciation 26,322 17,445
Amortization 1,739 1,884
---------- ----------
Operating loss (9,144) (19,037)
Interest expense, net of amounts capitalized (24,350) (20,918)
Interest income 1,077 3,208
Unrealized gain on Viacom stock, net 2,421 84,405
Unrealized gain (loss) on derivatives, net 20,138 (27,081)
Other gains and losses 462 6,456
---------- ----------
Income (loss) before income taxes, discontinued operations and
cumulative effect of accounting change (9,396) 27,033
Provision (benefit) for income taxes (19,414) 9,049
---------- ----------
Income from continuing operations before discontinued operations and
cumulative effect of accounting change 10,018 17,984
Gain (loss) from discontinued operations, net of taxes 2,404 (9,327)
Cumulative effect of accounting change, net of taxes (2,595) 11,909
---------- ----------
Net income $ 9,827 $ 20,566
========== ==========
Income (loss) per share:
Income from continuing operations $ 0.30 $ 0.54
Income (loss) from discontinued operations, net of taxes 0.07 (0.29)
Cumulative effect of accounting change, net of taxes (0.08) 0.36
---------- ----------
Net income $ 0.29 $ 0.61
========== ==========
Income (loss) per share - assuming dilution:
Income from continuing operations $ 0.30 $ 0.54
Income (loss) from discontinued operations, net of taxes 0.07 (0.29)
Cumulative effect of accounting change, net of taxes (0.08) 0.36
---------- ----------
Net income $ 0.29 $ 0.61
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents - unrestricted $ 73,208 $ 9,194
Cash and cash equivalents - restricted 17,083 64,993
Trade receivables, less allowance of $3,225 and $3,185, respectively 36,899 15,079
Deferred financing costs 26,865 26,865
Other current assets 12,362 16,649
Current assets of discontinued operations 8,415 50,530
------------ ------------
Total current assets 174,832 183,310
------------ ------------
Property and equipment, net of accumulated depreciation 1,048,844 993,347
Goodwill, net of accumulated amortization 9,630 13,851
Amortized intangible assets, net of accumulated amortization 6,271 6,299
Investments 561,052 561,359
Estimated fair value of derivative assets 159,501 158,028
Long-term deferred financing costs 119,051 137,513
Other long-term assets 33,220 30,099
Long-term assets of discontinued operations 29,872 84,016
------------ ------------
Total assets $ 2,142,273 $ 2,167,822
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,004 $ 88,004
Accounts payable and accrued liabilities 84,178 91,221
Current liabilities of discontinued operations 12,657 30,833
------------ ------------
Total current liabilities 104,839 210,058
------------ ------------
Secured forward exchange contract 613,054 613,054
Long-term debt, net of current portion 395,219 380,993
Deferred income taxes, net 210,170 165,824
Estimated fair value of derivative liabilities 66,760 85,424
Other long-term liabilities and deferred gain 80,171 52,304
Long-term liabilities of discontinued operations -- 7
Minority interest of discontinued operations 1,737 1,679
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 150,000 shares authorized,
33,767 and 33,736 shares issued and outstanding, respectively 338 337
Additional paid-in capital 520,300 519,515
Retained earnings 159,642 149,815
Other stockholders' equity (9,957) (11,188)
------------ ------------
Total stockholders' equity 670,323 658,479
------------ ------------
Total liabilities and stockholders' equity $ 2,142,273 $ 2,167,822
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net income $ 9,827 $ 20,566
Amounts to reconcile net income to net cash flows
provided by operating activities:
(Gain) loss on discontinued operations, net of taxes (2,404) 9,327
Cumulative effect of accounting change, net of taxes 2,595 (11,909)
Unrealized gain on Viacom stock and related derivatives (22,559) (57,324)
Unamortized prior service costs related to benefit plans 3,751 --
Gain on sale of assets (10,567) --
Depreciation and amortization 28,061 19,329
Provision (benefit) for deferred income taxes (18,599) 5,572
Amortization of deferred financing costs 17,940 18,492
Changes in (net of acquisitions and divestitures):
Trade receivables (21,820) (3,100)
Accounts payable and accrued liabilities (7,217) (25,649)
Income tax refund received 64,598 23,868
Other assets and liabilities 10,747 7,511
---------- ----------
Net cash flows provided by operating activities - continuing operations 54,353 6,683
Net cash flows provided by operating activities - discontinued operations 301 4,812
---------- ----------
Net cash flows provided by operating activities 54,654 11,495
---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (84,941) (124,691)
Sale of assets 30,850 --
Other investing activities (367) (1,534)
---------- ----------
Net cash flows used in investing activities - continuing operations (54,458) (126,225)
Net cash flows provided by investing activities - discontinued operations 79,357 17,364
---------- ----------
Net cash flows provided by (used in) investing activities 24,899 (108,861)
---------- ----------
Cash Flows from Financing Activities:
Repayment of long-term debt (150,773) (237,501)
Proceeds from issuance of long-term debt 85,000 435,000
Deferred financing costs paid -- (19,600)
(Increase) decrease in restricted cash and cash equivalents 47,910 (18,598)
Proceeds from exercise of stock option and purchase plans 758 597
---------- ----------
Net cash flows provided by (used in) financing activities - continuing operations (17,105) 159,898
Net cash flows provided by (used in) financing activities - discontinued operations (637) 3,594
---------- ----------
Net cash flows provided by (used in) financing activities (17,742) 163,492
---------- ----------
Net change in cash and cash equivalents 61,811 66,126
Change in cash and cash equivalents, discontinued operations 2,203 5,044
Cash, beginning of period 9,194 26,757
---------- ----------
Cash, end of period $ 73,208 $ 97,927
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of Gaylord
Entertainment Company and subsidiaries (the "Company") and have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the financial information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments necessary for
a fair statement of the results of operations for the interim period have been
included. The results of operations for such interim period are not necessarily
indicative of the results for the full year.
During 2001, the Financial Accounting Standards Board ("FASB") issued Statements
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". The Company adopted the provisions of SFAS No. 142 during
the first quarter of 2002 as further described in Note 12. The Company adopted
the provisions of SFAS No. 144 during the third quarter of 2001 as further
described in Note 4.
2. INCOME PER SHARE:
The weighted average number of common shares outstanding is calculated as
follows:
(in thousands) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------- ------- ------- -------
Weighted average shares outstanding 33,767 33,517 33,754 33,472
Effect of dilutive stock options 77 -- 60 131
------- ------- ------- -------
Weighted average shares outstanding -
assuming dilution 33,844 33,517 33,814 33,603
======= ======= ======= =======
For the three months ended June 30, 2001, the Company's effect of dilutive stock
options was the equivalent of 179,000 shares of common stock outstanding. These
incremental shares were excluded from the computation of diluted earnings per
share as the effect of their inclusion would have been anti-dilutive.
7
3. COMPREHENSIVE INCOME:
Comprehensive income (loss) is as follows for the three months and six months of
the respective periods:
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) $ 18,109 $ (3,558) $ 9,827 $ 20,566
Unrealized loss on investments -- -- -- (17,957)
Unrealized loss on interest rate hedges (114) (106) (262) (106)
Foreign currency translation -- 134 792 487
-------- -------- -------- --------
Comprehensive income (loss) $ 17,995 $ (3,530) $ 10,357 $ 2,990
======== ======== ======== ========
4. DISCONTINUED OPERATIONS:
In August 2001, the FASB issued SFAS No. 144, which superceded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions for the disposal of
a segment of a business of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 retains the requirements of SFAS No. 121
for the recognition and measurement of an impairment loss and broadens the
presentation of discontinued operations to include a component of an entity
(rather than a segment of a business).
In accordance with the provisions of SFAS No. 144, the Company has presented the
operating results, financial position, cash flows and any gain or loss on
disposal of the following businesses as discontinued operations in its financial
statements as of June 30, 2002 and December 31, 2001 and for the three months
and six months ended June 30, 2002 and 2001: Acuff-Rose Music Publishing, Word
Entertainment ("Word"), the Company's international cable networks, the Oklahoma
Redhawks (the "Redhawks"), GET Management, Pandora Films, Gaylord Films, Gaylord
Sports Management, Gaylord Event Television, Gaylord Production Company, and the
Company's water taxis. During the second quarter of 2002, the Company committed
to a plan of disposal of its Acuff-Rose Music Publishing catalog entity.
Subsequent to June 30, 2002, the Company agreed to sell the Acuff-Rose Music
Publishing entity to Sony/ATV Music Publishing for approximately $157.0 million
in cash. The Company expects the sale to be completed during the third quarter
and expects to record a nonrecurring gain related to the sale of Acuff-Rose
Music Publishing. During the first quarter of 2002, the Company committed to a
plan of disposal of its ownership interests in the Redhawks, a minor league
baseball team based in Oklahoma City, Oklahoma. Also during the first quarter of
2002, the Company sold or otherwise ceased operations of Word and the
international cable networks. The other businesses listed above were sold during
2001.
During January 2002, the Company sold Word's domestic operations to an affiliate
of Warner Music Group for $84.1 million in cash (subject to certain future
purchase price adjustments). The Company recognized a pretax gain of $0.5
million during the three months ended March 31, 2002 related to the sale in
discontinued operations in the accompanying condensed consolidated statements of
operations. Proceeds from the sale of $80.0 million were used to reduce the
Company's outstanding indebtedness as further discussed in Note 5.
On June 1, 2001, the Company adopted a formal plan to dispose of its
international cable networks. During the first quarter of 2002, the Company
finalized a transaction to sell certain assets of its Asia and Brazil networks.
The terms of this transaction included the assignment of certain transponder
leases, which resulted in a reduction of the Company's transponder lease
liability and a related $3.8 million pretax gain which is reflected in
discontinued operations in the accompanying condensed consolidated statements of
operations.
8
The Company guaranteed $0.9 million in future lease payments by the assignee,
which is not included in the pretax gain above and continues to be reserved as a
lease liability. In addition, the Company has ceased its operations based in
Argentina.
The following table reflects the results of operations of businesses accounted
for as discontinued operations for the three months and six months ended June
30:
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- -------- -------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Word Entertainment $ -- $ 25,504 $ 2,594 $ 53,862
Acuff-Rose Music Publishing 4,404 4,515 7,654 7,639
International cable networks -- 1,243 744 2,551
Businesses sold to OPUBCO -- -- -- 2,195
Other 3,377 4,119 3,491 4,198
-------- -------- -------- --------
Total revenues of
discontinued operations $ 7,781 $ 35,381 $ 14,483 $ 70,445
======== ======== ======== ========
OPERATING INCOME (LOSS):
Word Entertainment $ (54) $ (3,081) $ (906) $ (6,630)
Acuff-Rose Music Publishing 1,056 1,024 1,393 1,528
International cable networks -- (2,004) (1,576) (4,183)
Businesses sold to OPUBCO -- -- -- (1,459)
Other 1,077 1,230 263 6
-------- -------- -------- --------
Total operating income (loss) of
discontinued operations 2,079 (2,831) (826) (10,738)
INTEREST EXPENSE -- (147) (80) (554)
INTEREST INCOME 27 90 50 156
OTHER GAINS AND LOSSES (346) (769) 4,623 (2,974)
-------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes 1,760 (3,657) 3,767 (14,110)
PROVISION (BENEFIT) FOR INCOME TAXES 357 (1,554) 1,363 (4,783)
-------- -------- -------- --------
Income (loss) from discontinued operations $ 1,403 $ (2,103) $ 2,404 $ (9,327)
======== ======== ======== ========
9
The assets and liabilities of the discontinued operations presented in the
accompanying condensed consolidated balance sheets are comprised of:
(in thousands) JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
Current assets:
Cash and cash equivalents $ 1,686 $ 3,889
Trade receivables, less allowance of $1,360 and $2,785, respectively 2,884 28,999
Inventories 228 6,486
Prepaid expenses 2,279 10,333
Other current assets 1,338 823
---------- ----------
Total current assets 8,415 50,530
Property and equipment, net of accumulated depreciation 6,897 17,342
Goodwill, net of accumulated amortization 1,162 28,688
Amortizable intangible assets, net of accumulated amortization 3,986 6,125
Music and film catalogs 15,209 26,274
Other long-term assets 2,618 5,587
---------- ----------
Total long-term assets 29,872 84,016
---------- ----------
Total assets $ 38,287 $ 134,546
========== ==========
Current liabilities:
Current portion of long-term debt $ 1,128 $ 5,515
Accounts payable and accrued expenses 11,529 25,318
---------- ----------
Total current liabilities 12,657 30,833
Other long-term liabilities -- 7
---------- ----------
Total long-term liabilities -- 7
---------- ----------
Total liabilities 12,657 30,840
---------- ----------
Minority interest of discontinued operations 1,737 1,679
---------- ----------
Total liabilities and minority interest of discontinued operations $ 14,394 $ 32,519
========== ==========
10
5. DEBT:
During 2001, the Company entered into a three-year delayed-draw senior term loan
("Term Loan") of up to $210.0 million with Deutsche Banc Alex. Brown Inc.,
Salomon Smith Barney, Inc. and CIBC World Markets Corp. The Term Loan is
primarily secured by the Company's ground lease interest in the Gaylord Palms
Resort and Convention Center hotel in Kissimmee, Florida ("Gaylord Palms").
During the first three months of 2002, the Company sold Word's domestic
operations, as described in Note 4, which required the prepayment of the Term
Loan in the amount of $80.0 million. As required by the Term Loan, the Company
used $15.9 million of the net cash proceeds, as defined under the Term Loan
agreement, received from the sale of the Opry Mills investment described in Note
11 to reduce the outstanding balance of the Term Loan. Under the Term Loan
during the first six months of 2002, the Company borrowed $85.0 million and made
total payments of $100.0 million. As of June 30, 2002 and December 31, 2001, the
Company had outstanding borrowings of $85.0 million and $100.0 million,
respectively under the Term Loan. The Company's ability to borrow additional
funds under the Term Loan expired on June 30, 2002. However, the lenders could
reinstate the Company's ability to borrow additional funds at a future date.
The Term Loan requires that the net proceeds from all asset sales by the Company
must be used to reduce outstanding borrowings until the borrowing capacity under
the Term Loan has been reduced to $60.0 million. Excess cash flows, as defined,
generated by Gaylord Palms must be used to reduce any amounts borrowed under the
Term Loan until its borrowing capacity is reduced to $85.0 million. Debt
repayments under the Term Loan reduce its borrowing capacity and are not
eligible to be re-borrowed. The Term Loan requires the Company to maintain
certain escrowed cash balances, comply with certain financial covenants, and
imposes limitations related to the payment of dividends, the incurrence of debt,
the guaranty of liens, and the sale of assets, as well as other customary
covenants and restrictions. At June 30, 2002 and December 31, 2001, the
unamortized balance of the deferred financing costs related to the Term Loan was
$3.9 million and $5.6 million, respectively. The weighted average interest rate,
including amortization of deferred financing costs, under the Term Loan for the
six months ended June 30, 2002 was 9.6%, including 4.5% related to commitment
fees and the amortization of deferred financing costs.
During the first quarter of 2001, the Company, through wholly-owned
subsidiaries, entered into two loan agreements, a $275.0 million senior loan
(the "Senior Loan") and a $100.0 million mezzanine loan (the "Mezzanine Loan")
(collectively, the "Nashville Hotel Loans"). The Senior Loan is secured by a
first mortgage lien on the assets of the Gaylord Opryland Resort and Convention
Center hotel in Nashville, Tennessee ("Gaylord Opryland") and is due in 2004.
Amounts outstanding under the Senior Loan bear interest at one-month LIBOR plus
approximately 0.9%. The Mezzanine Loan, secured by the equity interest in the
wholly-owned subsidiary that owns Gaylord Opryland, is due in 2004 and bears
interest at one-month LIBOR plus 6.0%. The Nashville Hotel Loans require monthly
principal payments of $0.7 million during their three-year terms in addition to
monthly interest payments. At closing, the Company was required to escrow
certain amounts, including $20.0 million related to future renovations and
related capital expenditures at Gaylord Opryland. During the second quarter
2002, the Company utilized $18.0 million of the proceeds received from the
federal income tax refund described in Note 13 to make a principal payment on
the Mezzanine Loan. At June 30, 2002 and December 31, 2001, the unamortized
balance of the deferred financing costs related to the Nashville Hotel Loans was
$10.4 million and $13.8 million, respectively. For the six month period ended
June 30, 2002, the weighted average interest rates for the Senior Loan and the
Mezzanine Loan, including amortization of deferred financing costs, were 4.5%
and 10.2%, respectively. At June 30, 2002, the Company had outstanding
borrowings of $236.2 million and $82.0 million under the Senior Loan and
Mezzanine Loan, respectively.
The terms of the Nashville Hotel Loans require that the Company maintain certain
escrowed cash balances and comply with certain financial covenants, and impose
limits on transactions with affiliates and indebtedness. The financial covenants
under the Nashville Hotel Loans are structured such that noncompliance at one
level triggers certain cash management restrictions and noncompliance at a
second level results in an event of default. Based upon the financial covenant
calculations at June 30, 2002 and December 31, 2001, the cash management
restrictions are in effect which require that all excess cash flows, as defined,
be escrowed and may
11
be used to repay principal amounts owed on the Senior Loan. During the first
six months of 2002, $28.8 million of restricted cash was utilized to repay
principal amounts outstanding under the Senior Loan.
The Company negotiated certain revisions to the financial covenants under the
Nashville Hotel Loans and the Term Loan during the first and second quarters of
2002. After these revisions, the Company was in compliance with the covenants
under the Nashville Hotel Loans and the covenants under the Term Loan in which
the failure to comply would result in an event of default. There can be no
assurance that the Company will remain in compliance with the covenants that
would result in an event of default under the Nashville Hotel Loans or the Term
Loan. The Company believes it has certain other possible alternatives to reduce
borrowings outstanding under the Nashville Hotel Loans which would allow the
Company to remedy any event of default. Any event of noncompliance that results
in an event of default under the Nashville Hotel Loans or the Term Loan would
enable the lenders to demand payment of all outstanding amounts, which would
have a material adverse effect on the Company's financial position, results of
operations and cash flows.
Like other companies in the hospitality industry, the Company was notified by
the insurers providing its property and casualty insurance that policies issued
upon renewal would no longer include coverage for terrorist acts. As a result,
the servicer for the Senior Loan notified the Company in May of 2002 that it
believed the lack of insurance covering terrorist acts and certain related
matters did constitute a default under that credit facility. Although coverage
for terrorist acts was never specifically required as part of the required
property and casualty coverage, the Company determined to resolve this issue by
obtaining coverage for terrorist acts. The Company has obtained coverage in an
amount equal to the outstanding balance of the Senior Loan. Subsequent to June
30, 2002, the Company received notice from the servicer that any previous
existing defaults are cured and coverage in an amount equal to the outstanding
balance of the loan will satisfy the requirements of the Senior Loan. The
servicer has reserved the right to impose additional insurance requirements if
there is a change in, among other things, the availability or cost of terrorism
insurance coverage, the risk of terrorist activity, or legislation affecting the
rights of lenders to require borrowers to maintain terrorism insurance. Based
upon the Company's curing any default which may have existed, this debt
continues to be classified as long-term in the accompanying condensed
consolidated balance sheets.
Accrued interest payable at June 30, 2002 and December 31, 2001 of $0.9 million
and $1.1 million, respectively, is included in accounts payable and accrued
liabilities in the accompanying condensed consolidated balance sheets.
While the Company has available the balance of the net proceeds from the Term
Loan, its unrestricted cash, the proceeds from the anticipated sale of
Acuff-Rose Music Publishing, and the net cash flows from operations to fund its
cash requirements, additional long-term financing is required to fund the
Company's construction commitments related to its hotel development projects and
to fund its anticipated operating losses. While there is no assurance that any
further financing will be secured, the Company believes it will secure
acceptable funding. However, if the Company is unable to obtain any part of the
additional financing it is seeking, or the timing of such financing is
significantly delayed, it would require the curtailment of development capital
expenditures to ensure adequate liquidity to fund the Company's operations.
6. SECURED FORWARD EXCHANGE CONTRACT:
During May 2000, the Company entered into a seven-year secured forward exchange
contract ("SFEC") with an affiliate of Credit Suisse First Boston with respect
to 10,937,900 shares of Viacom Stock. The seven-year SFEC has a face amount of
$613.1 million and required contract payments based upon a stated 5% rate. The
Company has incurred deferred financing costs related to the SFEC including the
prepayment of the required contract payments and other transaction costs. The
unamortized balances of these deferred financing costs are classified as current
assets of $26.9 million as of June 30, 2002 and December 31, 2001 and long-term
assets of $104.8 million and $118.1 million in the accompanying condensed
consolidated balance sheets as of June
12
30, 2002 and December 31, 2001, respectively. The Company is recognizing the
contract payments associated with the SFEC as interest expense over the
seven-year contract period using the effective interest method.
Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, certain components of the secured forward exchange
contract are considered derivatives, as discussed in Note 7. Changes in the fair
market value of the derivatives are recorded as gains and losses in the
accompanying condensed consolidated statements of operations.
7. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company utilizes derivative financial instruments to reduce interest rate
risks and to manage risk exposure to changes in the value of its Viacom Stock.
The Company recorded a gain of $11.9 million, net of taxes of $6.4 million, as a
cumulative effect of an accounting change on January 1, 2001, the date of
initial adoption of SFAS No. 133, to record the derivatives associated with the
SFEC at fair value. For the three months ended June 30, 2002 and 2001, the
Company recorded a pretax gain (loss) in the accompanying condensed consolidated
statement of operations of $49.8 million and $(66.0 million), respectively,
related to the estimated change in fair value of the derivatives associated with
the SFEC. For the six months ended June 30, 2002 and 2001, the Company recorded
a pretax gain (loss) in the accompanying condensed consolidated statement of
operations of $20.1 million and $(27.1 million), respectively, related to the
estimated change in fair value of the derivatives associated with the SFEC.
During 2001, the Company entered into three contracts to cap its interest rate
risk exposure on its long-term debt. These interest rate caps qualify for hedge
accounting and changes in the values of these caps are recorded as other
comprehensive income and losses.
8. RESTRUCTURING CHARGES:
The following table summarizes the activities of the restructuring charges for
the three months and six months ended June 30, 2002:
(in thousands) BALANCE AT RESTRUCTURING BALANCE
DECEMBER CHARGES AND AT MARCH
31, 2001 ADJUSTMENTS PAYMENTS 31, 2002
---------- ------------- -------- ---------
2002 restructuring charge $ -- $ -- $ -- $ --
2001 restructuring charges 4,168 -- 1,684 2,484
2000 restructuring charge 1,569 -- 796 773
------- ------- ------- -------
$ 5,737 $ -- $ 2,480 $ 3,257
======= ======= ======= =======
(in thousands) BALANCE AT RESTRUCTURING BALANCE
MARCH CHARGES AND AT JUNE 30,
31, 2002 ADJUSTMENTS PAYMENTS 2002
---------- ------------- -------- ---------
2002 restructuring charge $ -- $ 1,149 $ 968 $ 181
2001 restructuring charges 2,484 (937) 800 747
2000 restructuring charge 773 (142) 166 465
------- ------- ------- -------
$ 3,257 $ 70 $ 1,934 $ 1,393
======= ======= ======= =======
13
2002 Restructuring Charge
As part of the Company's ongoing assessment of operations, the Company
identified certain duplication of duties within divisions and realized the need
to streamline those tasks and duties. Related to this assessment, during the
second quarter of 2002 the Company adopted a plan of restructuring to streamline
certain operations and duties. Accordingly, the Company recorded a pretax
restructuring charge of $1.1 million related to employee severance costs and
other employee benefits. The restructuring charges all relate to continuing
operations. These restructuring charges were recorded in accordance with
Emerging Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". As of June 30, 2002, the
Company has recorded cash charges of $1.0 million against the 2002 restructuring
accrual. The remaining balance of the 2002 restructuring accrual at June 30,
2002 of $0.2 million is included in accounts payable and accrued liabilities in
the accompanying condensed consolidated balance sheets. The Company expects the
remaining balances of the restructuring accruals to be paid during 2002.
2001 Restructuring Charges
During 2001, the Company recognized net pretax restructuring charges from
continuing operations of $5.8 million related to streamlining operations and
reducing layers of management. These restructuring charges were recorded in
accordance with EITF No. 94-3. During the second quarter of 2002, the Company
reversed $0.9 million of the 2001 restructuring charges related to continuing
operations based upon the occurrence of certain triggering events. During the
second quarter of 2002, the Company entered into two subleases to lease certain
office space the Company previously had recorded in the 2001 restructuring
charges. Also during the second quarter of 2002, the Company evaluated the 2001
restructuring accrual and determined certain severance benefits and outplacement
agreements had expired. As of June 30, 2002, the Company has recorded cash
charges of $4.2 million against the 2001 restructuring accrual. The remaining
balance of the 2001 restructuring accrual at June 30, 2002 of $0.7 million is
included in accounts payable and accrued liabilities in the accompanying
condensed consolidated balance sheets.
During the second quarter of 2002, the Company recognized additional pretax
restructuring charges from discontinued operations of $3.3 million in 2001. The
Company reversed $0.3 million of the 2001 restructuring charge related to
discontinued operations. The $0.3 million reversal relates to certain subleases
and reduction in contract termination fees negotiated by the Company. The
remaining balance of the 2001 restructuring accrual related to discontinued
operations at June 30, 2002 of $1.1 million is included in current liabilities
of discontinued operations in the accompanying consolidated balance sheets.
The Company expects the remaining balances of the restructuring accruals for
both continuing and discontinued operations to be paid during 2002.
2000 Restructuring Charge
The Company recognized pretax restructuring charges of $13.1 million related to
continuing operations during 2000, in accordance with EITF Issue No. 94-3.
Additional restructuring charges of $3.1 million during 2000 were included in
discontinued operations. During the second quarter of 2002, the Company entered
into a sublease that reduced the liability the Company was originally required
to pay. The Company reversed $0.1 million of the 2000 restructuring charge
related to the reduction in required payments. During 2001, the Company
negotiated reductions in certain contract termination costs, which allowed the
reversal of $4.0 million of the restructuring charges originally recorded during
2000. As of June 30, 2002, the Company has recorded cash charges of $11.8
million against the 2000 restructuring accrual. The remaining balance of the
2000 restructuring accrual at June 30, 2002 of $0.5 million, all of which
relates to continuing operations, is included in accounts payable and accrued
liabilities in the accompanying condensed consolidated balance sheets, which the
Company expects to be paid during 2002.
14
9. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest related to continuing operations for the three months and
six months ended June 30, 2002 and 2001 was comprised of:
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
Debt interest paid $ 4,911 $ 5,532 $ 9,436 $ 11,469
Deferred financing costs paid - 272 - 19,600
Capitalized interest (1,453) (4,228) (3,114) (8,307)
-------- --------- --------- ---------
$ 3,458 $ 1,576 $ 6,322 $ 22,762
======== ========= ========= =========
In addition, the Company paid debt interest of $0.1 million and $0.5 million
related to discontinued operations during the three months and six months ended
June 30, 2001, respectively.
10. IMPAIRMENT AND OTHER CHARGES:
During the second quarter of 2001, the Company recorded pretax impairment and
other charges of $11.4 million. These charges included an investment in an IMAX
movie of $5.7 million, a minority investment in a technology business of $4.6
million and an investment in idle real estate of $1.1 million. The Company began
production of an IMAX movie during 2000 that portrayed the history of country
music. After encountering a number of operational issues that created
significant cost overruns, the carrying value of the IMAX film asset was
reassessed during the second quarter of 2001 resulting in the $5.7 million
impairment charge. During 2000, the Company made a minority investment in a
technology start-up business. During 2001, the unfavorable environment for
technology businesses created difficulty for this business to obtain adequate
capital to execute its business plan. During the second quarter of 2001, the
Company was notified that this technology business had been unsuccessful in
arranging financing. As such, the Company reassessed the investment's
realizability and reflected an impairment charge of $4.6 million during the
second quarter of 2001. The impairment charge related to idle real estate of
$1.1 million recorded during the second quarter of 2001 is based upon certain
third-party offers received during the second quarter of 2001 for such property.
The Company sold this idle real estate during the three months ended June 30,
2002. Proceeds from the sale approximated the carrying value of the property.
11. GAIN ON SALE OF ASSETS:
During 1998, the Company entered into a partnership with The Mills Corporation
to develop the Opry Mills Shopping Center in Nashville, Tennessee. The Company
held a one-third interest in the partnership as well as the title to the land on
which the shopping center was constructed, which is being leased to the
partnership. During the second quarter of 2002, the Company sold its partnership
share to certain affiliates of The Mills Corporation for approximately $30.8
million in cash proceeds upon the disposition. In accordance with the provisions
of SFAS No. 66, "Accounting for Sales of Real Estate", and other applicable
pronouncements, the Company has deferred approximately $20.0 million of the gain
representing the estimated present value of the continuing land lease interest
between the Company and the Opry Mills partnership. The Company will recognize
the $20.0 million deferred gain ratably over the approximately 70-year remaining
term of the land lease. The deferred gain is recorded as other long-term
liabilities in the accompanying condensed consolidated balance sheets. The
Company recognized the remainder of the proceeds, net of certain transaction
costs, as a gain of approximately $10.6 million during the second quarter of
2002.
15
12. GOODWILL AND INTANGIBLES:
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 supersedes APB Opinion
No. 16, "Business Combinations" and requires the use of the purchase method of
accounting for all business combinations prospectively. SFAS No. 141 also
provides guidance on recognition of intangible assets apart from goodwill. SFAS
No. 142 supercedes APB Opinion No. 17, "Intangible Assets", and changes the
accounting for goodwill and intangible assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite useful lives will not be amortized but will be
tested for impairment at least annually and whenever events or circumstances
occur indicating that these intangible assets may be impaired. The Company
adopted the provisions of SFAS No. 141 in June of 2001. The Company adopted the
provisions of SFAS No. 142 effective January 1, 2002, and as a result, the
Company ceased the amortization of goodwill on that date.
The transitional provisions of SFAS No. 142 require the Company to perform an
assessment of whether goodwill is impaired as of the beginning of the fiscal
year in which the statement is adopted. Under the transitional provisions of
SFAS No. 142, the first step is for the Company to evaluate whether the
reporting unit's carrying amount exceeds its fair value. If the reporting unit's
carrying amount exceeds it fair value, the second step of the impairment test
must be completed. During the second step, the Company must compare the implied
fair value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of its assets and liabilities in a manner
similar to a purchase price allocation in accordance with SFAS No. 141, to its
carrying amount. The Company completed the transitional goodwill impairment
reviews required by SFAS No. 142 during the second quarter of 2002. In
performing the impairment reviews, the Company estimated the fair values of the
reporting units using a present value method that discounted future cash flows.
Such valuations are sensitive to assumptions associated with cash flow growth,
discount rates and capital rates. In performing the impairment reviews, the
Company determined one reporting unit's goodwill to be impaired. Based on the
estimated fair value of the reporting unit, the Company impaired the goodwill
amount of $4.2 million associated with the Radisson Hotel at Opryland in the
hospitality segment. The circumstances leading to the goodwill impairment
related to the Radisson Hotel at Opryland primarily relate to the effect of the
September 11, 2001 terrorist attacks on the hospitality and tourism industries.
In accordance with the provisions of SFAS No. 142, the Company has reflected the
pretax $4.2 million impairment charge as a cumulative effect of a change in
accounting principle in the amount of $2.6 million, net of tax benefit of $1.6
million, as of January 1, 2002 in the accompanying condensed consolidated
statements of operations.
The changes in the carrying amounts of goodwill by business segment for the six
months ended June 30, 2002 are as follows:
(in thousands) TRANSITIONAL
BALANCE AS OF IMPAIRMENT BALANCE AS OF
DECEMBER 31, 2001 LOSSES JUNE 30, 2002
----------------- ------------ -------------
Hospitality $ 4,221 $ (4,221) $ -
Attractions 7,265 - 7,265
Media 2,365 - 2,365
Corporate and Other - - -
-------------- ---------- ------------
Total $ 13,851 $ (4,221) $ 9,630
============== ========== ============
The Company estimates that amortization expense for goodwill for continuing
operations would have been $0.1 million and $0.2 million, net of taxes of $0.1
million and $0.1 million, for the three months and six months ended June 30,
2002, respectively.
The Company also reassessed the useful lives and classification of identifiable
finite-lived intangible assets and determined the lives of these intangible
assets to be appropriate. The carrying amount of amortized intangible assets in
continuing operations, including the intangible assets related to benefit plans,
was $6.7 million and
16
the related accumulated amortization was $0.4 million at June 30, 2002. The
amortization expense related to intangibles from continuing operations during
the three months and six months ended June 30, 2002 was $11,000 and $26,000,
respectively, and is estimated to be $0.1 million for the twelve months ended
December 31, 2002. The estimated amounts of amortization expense for the next
five years are equivalent to $0.1 million per year.
The following table presents a reconciliation of net income and income per share
assuming the nonamortization provisions of SFAS No. 142 were applied during
2001:
(in thousands,
except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------ -----------------------------------
2002 2001 2002 2001
------------------ ------------------ -------------- ---------------
Reported net income (loss) $ 18,109 $ (3,558) $ 9,827 $ 20,566
Add back: Goodwill amortization - 686 - 1,311
------------------ ------------------ -------------- ---------------
Adjusted net income (loss) $ 18,109 $ (2,872) $ 9,827 $ 21,877
================== ================== ============== ===============
Basic earnings (loss) per share
Reported net income (loss) $ 0.54 $ (0.11) $ 0.29 $ 0.61
Add back: Goodwill amortization - 0.02 - 0.04
------------------ ------------------ -------------- ---------------
Adjusted net income (loss) $ 0.54 $ (0.09) $ 0.29 $ 0.65
================== ================== ============== ===============
Diluted earnings (loss) per share
Reported net income (loss) $ 0.54 $ (0.11) $ 0.29 $ 0.61
Add back: Goodwill amortization - 0.02 - 0.04
------------------ ------------------ -------------- ---------------
Adjusted net income (loss) $ 0.54 $ (0.09) $ 0.29 $ 0.65
================== ================== ============== ===============
13. INCOME TAXES:
During the second quarter of 2002, the Company recognized a $15.5 million
benefit as a reduction in income tax expense resulting from the settlement of
certain federal income tax issues with the Internal Revenue Service. The Company
will not receive any cash proceeds related to this benefit. Also during the
second quarter of 2002, the Company received an income tax refund of $64.6
million in cash from the U.S. Department of Treasury as a result of the net
operating losses carry-back provisions of the Job Creation and Worker Assistance
Act of 2002. The income tax refund of $64.6 million had no net impact on the
accompanying condensed consolidated statements of operations.
14. COMMITMENTS AND CONTINGENCIES:
The Company is a defendant in a class action lawsuit related to the manner in
which Gaylord Opryland distributes service and delivery charges to certain
employees. Tennessee has a "Tip" statute that requires a business to pay tips
shown on statements over to its employee or employees who have served the
customer. The Company believes that it has paid over to its employees amounts in
excess of what the statute requires, and the Company intends to file a motion
for summary judgment in this matter and to vigorously contest this matter. On
June 12, 2002, counsel for the Company and counsel for the plaintiff class
attended a mediation session and some progress was made toward resolving this
case. The Company believes that it has reserved an appropriate amount for this
particular claim.
17
15. RETIREMENT PLANS AND RETIREMENT SAVINGS PLAN:
Effective December 31, 2001, the Company amended its retirement plans and its
retirement savings plan. As a result of these amendments, the retirement cash
balance benefit was frozen and the policy related to future Company
contributions to the retirement savings plan was changed. The Company recorded a
pretax charge of $5.7 million in the first quarter of 2002 related to the
write-off of unamortized prior service cost in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and related interpretations, which
is included in selling, general and administrative expenses. In addition, the
Company amended the eligibility requirements of its postretirement benefit plans
effective December 31, 2001. In connection with the amendment and curtailment of
the plans and in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and related interpretations, the
Company recorded a gain of $2.1 million which is reflected as a reduction in
corporate and other selling, general and administrative expenses in the first
quarter of 2002.
16. NEWLY ISSUED ACCOUNTING STANDARDS:
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 amends accounting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires companies to record the fair value of the liability
for an asset retirement obligation in the period in which the liability is
incurred. The Company will adopt the provisions of SFAS No. 143 on January 1,
2003 and anticipates the effects of SFAS No. 143 will be immaterial to the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds both SFAS Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment to SFAS No. 4, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". SFAS No.
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect. However, an entity is not prohibited from
classifying such gains and losses as extraordinary items, so long as they meet
the criteria in paragraph 20 of APB Opinion No. 30. The Company will adopt the
provisions of SFAS No. 145 on January 1, 2003 and anticipates the effects of
SFAS No. 145 will be immaterial to the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 nullifies EITF Issue No. 94-3.
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No.
94-3 had recognized the liability at the commitment date to an exit plan. The
Company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of adoption of this statement.
18
17. FINANCIAL REPORTING BY BUSINESS SEGMENTS:
The Company's continuing operations are organized and managed based upon its
products and services. The following information from continuing operations is
derived directly from the segments' internal financial reports used for
corporate management purposes.
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------------
2002 2001 2002 2001
------------ -------------- -------------- --------------
Revenues:
Hospitality $ 80,472 $ 51,661 $ 160,768 $ 110,152
Attractions 14,948 15,980 33,762 35,417
Media 2,813 2,440 4,902 4,659
Corporate and other 56 24 112 110
------------ -------------- -------------- --------------
Total $ 98,289 $ 70,105 $ 199,544 $ 150,338
============ ============== ============== ==============
Depreciation and amortization:
Hospitality $ 9,999 $ 6,346 $ 22,328 $ 12,663
Attractions 1,221 1,508 2,595 2,942
Media 155 163 304 330
Corporate and other 1,423 1,736 2,834 3,394
------------ -------------- -------------- --------------
Total $ 12,798 $ 9,753 $ 28,061 $ 19,329
============ ============== ============== ==============
Operating income (loss):
Hospitality $ 5,583 $ 6,402 $ 8,449 $ 16,977
Attractions 2,057 (254) 1,528 (1,644)
Media (212) (206) (655) (382)
Corporate and other (9,680) (11,304) (22,607) (20,596)
Preopening costs (650) (2,413) (6,356) (4,308)
Gain on sale of assets 10,567 - 10,567 -
Impairment and other charges - (11,388) - (11,388)
Restructuring charges (70) 2,304 (70) 2,304
------------ -------------- -------------- --------------
Total $ 7,595 $ (16,859) $ (9,144) $ (19,037)
============ ============== ============== ==============
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS SEGMENTS
Gaylord Entertainment Company is a diversified hospitality and entertainment
company operating, through its subsidiaries, principally in four business
segments: hospitality; attractions; media; and corporate and other. The Company
is managed using the four business segments described above.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. Accounting estimates are an integral part of the
preparation of the consolidated financial statements and the financial reporting
process and are based upon current judgments. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reported period.
Certain accounting estimates are particularly sensitive because of their
complexity and the possibility that future events affecting them may differ
materially from the Company's current judgments and estimates.
This listing of critical accounting policies is not intended to be a
comprehensive list of all of the Company's accounting policies. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles, with no need for management's judgment
regarding accounting policy. The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
Revenue Recognition
Revenues are recognized when services are provided or goods are shipped, as
applicable. Provision for returns and other adjustments are provided for in the
same period the revenues are recognized. The Company defers revenues related to
deposits on advance room bookings, advance ticket sales at the Company's tourism
properties and music publishing advances until such amounts are earned.
Impairment of Long-Lived Assets and Goodwill
In accounting for the Company's long-lived assets other than goodwill, the
Company applies the provisions of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The Company adopted the provisions of SFAS No. 144 during 2001 with an
effective date of January 1, 2001. The Company previously accounted for goodwill
using SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". In June 2001, SFAS No. 142, "Goodwill and
Other Intangible Assets" was issued with an effective date of January 1, 2002.
Under SFAS No. 142, goodwill and other intangible assets with indefinite useful
lives will not be amortized but will be tested for impairment at least annually
and whenever events or circumstances occur indicating that these intangibles may
be impaired. The determination and measurement of an impairment loss under these
accounting standards require the significant use of judgment and estimates. The
determination of fair value of these assets and the timing of an impairment
charge are two critical components of recognizing an asset impairment charge
that are subject to the significant use of judgment and estimation. Future
events may indicate differences from these judgments and estimates.
20
Restructuring Charges
The Company has recognized restructuring charges in accordance with Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" in its condensed consolidated
financial statements. Restructuring charges are based upon certain estimates of
liability related to costs to exit an activity. Liability estimates may change
as a result of future events, including negotiation of reductions in contract
termination liabilities.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce interest rate
risks and to manage risk exposure to changes in the value of certain owned
marketable securities. The Company records derivatives in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
was subsequently amended by SFAS No. 138. SFAS No. 133, as amended, established
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires all derivatives to be recognized in the
statement of financial position and to be measured at fair value. Changes in the
fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The measurement of the derivative's fair value
requires the use of estimates and assumptions. Changes in these estimates or
assumptions could materially impact the determination of the fair value of the
derivatives.
SUBSEQUENT EVENT
Subsequent to June 30, 2002, the Company agreed to sell Acuff-Rose Music
Publishing to Sony/ATV for approximately $157 million. The Company anticipates
the sale will be completed during the third quarter of 2002 and intends to use a
portion of the proceeds to reduce outstanding indebtedness. The Company
anticipates recording a nonrecurring gain during the third quarter of 2002
related to the sale.
21
RESULTS OF OPERATIONS
The following table contains unaudited selected summary financial data from
continuing operations for the three month and six month periods ended June 30,
2002 and 2001. The table also shows the percentage relationships to total
revenues and, in the case of segment operating income (loss), its relationship
to segment revenues.
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------- --------------------------------------------
2002 % 2001 % 2002 % 2001 %
--------- ------- ----------- ------- ---------- ------- ----------- -------
Revenues:
Hospitality $ 80,472 81.9 $ 51,661 73.7 $160,768 80.6 $ 110,152 73.3
Attractions 14,948 15.2 15,980 22.8 33,762 16.9 35,417 23.6
Media 2,813 2.9 2,440 3.5 4,902 2.5 4,659 3.1
Corporate and other 56 - 24 - 112 - 110 -
--------- ------- ----------- ------- ---------- ------- ----------- -------
Total revenues 98,289 100.0 70,105 100.0 199,544 100.0 150,338 100.0
--------- ------- ----------- ------- ---------- ------- ----------- -------
Operating expenses:
Operating costs 61,957 63.1 47,205 67.4 131,079 65.7 100,789 66.9
Selling, general & administrative 25,786 26.2 18,509 26.4 53,689 26.9 35,865 23.9
Preopening costs 650 0.7 2,413 3.4 6,356 3.2 4,308 2.9
Gain on sale of assets (10,567) (10.8) - - (10,567) (5.3) - -
Impairment and other charges - - 11,388 16.2 - - 11,388 7.6
Restructuring charges, net 70 0.1 (2,304) (3.3) 70 - (2,304) (1.5)
Depreciation and amortization:
Hospitality 9,999 6,346 22,328 12,663
Attractions 1,221 1,508 2,595 2,942
Media 155 163 304 330
Corporate and other 1,423 1,736 2,834 3,394
--------- ------- ----------- ------- ---------- ------- ----------- -------
Total depreciation and amortization 12,798 13.0 9,753 13.9 28,061 14.1 19,329 12.9
--------- ------- ----------- ------- ---------- ------- ----------- -------
Total operating expenses 90,694 92.3 86,964 124.0 208,688 104.6 169,375 112.7
--------- ------- ----------- ------- ---------- ------- ----------- -------
Operating income (loss):
Hospitality 5,583 6.9 6,402 12.4 8,449 5.3 16,977 15.4
Attractions 2,057 13.8 (254) (1.6) 1,528 4.5 (1,644) (4.6)
Media (212) (7.5) (206) (8.4) (655) (13.4) (382) (8.2)
Corporate and other (9,680) - (11,304) - (22,607) - (20,596) -
Preopening costs (650) - (2,413) - (6,356) - (4,308) -
Gain on sale of assets 10,567 - - - 10,567 - - -
Impairment and other charges - - (11,388) - - - (11,388) -
Restructuring charges, net (70) - 2,304 - (70) - 2,304 -
--------- ------- ----------- ------- ---------- ------- ----------- -------
Total operating income (loss) $ 7,595 7.7 $ (16,859) (24.0) $ (9,144) (4.6) $ (19,037) (12.7)
========= ======= =========== ======= ========== ======= =========== =======
22
PERIODS ENDED JUNE 30, 2002 COMPARED TO PERIODS ENDED JUNE 30, 2001
Revenues
Total revenues increased $28.2 million, or 40.2%, to $98.3 million in the second
quarter of 2002, and increased $49.2 million, or 32.7%, to $199.5 million in the
first six months of 2002. Revenues for both the three months and six months
ended June 30, 2002, increased primarily due to the opening of the Gaylord Palms
Resort and Convention Center hotel in Kissimmee, Florida ("Gaylord Palms") in
January 2002.
Revenues in the hospitality segment increased $28.8 million, or 55.8%, to $80.5
million in the second quarter of 2002, and increased $50.6 million, or 46.0%, to
$160.8 million in the first six months of 2002. Gaylord Palms recorded revenues
of $65.5 million for the period subsequent to its opening. This revenue was
partially offset by the decrease in the revenues of the Gaylord Opryland Resort
and Convention Center hotel in Nashville, Tennessee ("Gaylord Opryland") of
$15.0 million, or 14.0%, to $92.0 million in the first six months of 2002. The
Gaylord Opryland's occupancy rate decreased to 66.1% in the first six months of
2002 compared to 69.0% in the first six months of 2001. Gaylord Opryland's
average daily rate decreased to $139.72 in the first six months of 2002 from
$141.28 in the first six months of 2001. Revenue per available room (RevPAR) for
the Gaylord Opryland decreased 5.3% to $92.37 for the first six months of 2002
compared to $97.52 in the first six months of 2001. The decrease was primarily
attributable to the impact of a softer economy and decreased occupancy levels
following the September 11th terrorist attacks. The decrease was also partially
attributable to the annual rotation of convention business among different
markets that is common in the meeting and convention industry. Gaylord Palms
recorded an occupancy rate, average daily rate, and RevPAR of 68.0%, $178.71 and
$121.53, respectively, during the five month period subsequent to its opening.
Revenues in the attractions segment decreased $1.0 million, or 6.5%, to $14.9
million in the second quarter of 2002, and decreased $1.7 million, or 4.7%, to
$33.8 million in the first six months of 2002. The decrease was primarily
attributable to the decrease in revenues of Corporate Magic of $2.8 million for
the first six months of 2002 primarily due to the downturn in economy. The
decrease of Corporate Magic revenues was partially offset by increased revenues
in the Grand Ole Opry of $1.1 million for the first six months of 2002 due to an
increase in the popular performers appearing on the Grand Ole Opry.
Revenues in the media segment increased slightly during the three months and six
months ended June 30, 2002.
Total Operating Expenses
Total operating expenses increased $3.7 million, or 4.3%, to $90.7 million in
the second quarter of 2002, and increased $39.3 million, or 23.2%, to $208.7
million in the first six months of 2002. Operating costs, as a percentage of
revenues, decreased to 65.7% during the first six months of 2002 as compared to
66.9% during the first six months of 2001. Selling, general and administrative
expenses, as a percentage of revenues, increased to 26.9% during the first six
months of 2002 as compared to 23.9% during the first six months of 2001.
Operating Costs
Operating costs in the hospitality segment increased $18.8 million, or 59.7%, to
$50.2 million in the second quarter of 2002, and increased $36.6 million, or
56.3%, to $101.7 million for the first six months of 2002. The increase in
operating costs was attributable to the opening of Gaylord Palms in January
2002. The operating costs of Gaylord Palms equaled $41.0 million subsequent to
its opening, including $4.9 million of real estate lease expense related to the
75-year operating lease on the 65.3-acre site on which Gaylord Palms is located.
As required by SFAS No. 13 "Accounting for Leases", the terms of this lease
require that the Company recognize the lease expense on a straight-line basis,
which resulted in approximately $3.6 million of non-cash lease expense during
the first six months of 2002. The increase was partially offset by a decrease in
operating costs at Gaylord Opryland of $3.0 million associated with lower
revenues and reduced occupancy.
23
Operating costs in the attractions segment decreased $3.1 million, or 26.1%, to
$8.8 million in the second quarter of 2002, and decreased $4.4 million, or
15.8%, to $23.4 million in the first six months of 2002. The decrease is
attributable to decreased operating expenses at Corporate Magic of $4.3 million
related to lower revenues and cost saving measures implemented during the first
six months of 2002.
Operating costs in the media segment increased slightly, by $0.2 million, or
18.7%, in the second quarter of 2002, and increased slightly, by $0.3 million,
or 13.2%, in the six months of 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the hospitality segment
increased $12.8 million, or 83.0%, to $28.3 million for the six months ended
June 30, 2002, which is primarily attributed to Gaylord Palms recording $13.3
million of these costs subsequent to its January 2002 opening.
Selling, general and administrative expenses in the attractions segment
decreased slightly, by $0.1 million for the six months ended June 2002 as
compared to the same period in 2001. Selling, general and administrative
expenses in the media segment increased slightly by $0.2 million for the six
months ended June 30, 2002, as compared to the same period in 2001.
Selling, general and administrative expenses in the corporate and other segment,
consisting primarily of senior management salaries and benefits, legal, human
resources, accounting and other administrative costs, remained relatively
unchanged for the second quarter, and increased $4.9 million, or 40.9%, for the
six months ended June 30, 2002. Effective December 31, 2001, the Company amended
its retirement plans and its retirement savings plan. As a result of these
amendments, the retirement cash balance benefit was frozen and the policy
related to future Company contributions to the retirement savings plan was
changed. The Company recorded a pretax charge of $5.7 million in the first
quarter of 2002 related to the write-off of unamortized prior service cost in
accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and
related interpretations, which is included in selling, general and
administrative expenses. In addition, the Company amended the eligibility
requirements of its postretirement benefit plans effective December 31, 2001. In
connection with the amendment and curtailment of the plans and in accordance
with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" and related interpretations, the Company recorded a gain of $2.1
million which is reflected as a reduction in corporate and other selling,
general and administrative expenses in the first quarter of 2002. These
nonrecurring gains and losses were recorded in the corporate and other segment
and were not allocated to the Company's other operating segments. Other
increases in corporate, selling, general and administrative expenses can be
attributed to increased personnel costs related to new corporate departments
that did not exist last year, new management personnel in other corporate
departments, increased corporate marketing expenses and increased bonus accruals
as compared to the same period in 2001.
Preopening Costs
Preopening costs related to the Company's hotel development activities in
Florida and Texas decreased $1.8 million for the second quarter due to the
opening of the Gaylord Palms in January 2002. Preopening costs increased $2.0
million, or 47.5%, to $6.4 million, in the first six months of 2002.
Gain on Sale of Assets
During the second quarter of 2002, the Company sold its partnership share of the
Opry Mills Shopping Center to certain affiliates of The Mills Corporation for
approximately $30.8 million in cash proceeds. In accordance with the provisions
of SFAS No. 66, "Accounting for Sales of Real Estate", and other applicable
pronouncements, the Company has deferred approximately $20.0 million of the gain
representing the present value of the continuing land lease interest between the
Company and the Opry Mills partnership. The Company will recognize the $20.0
million deferred gain ratably over the approximately 70-year remaining term of
the land lease. The Company recorded the remainder of the proceeds, net of
certain transaction costs, as a gain of approximately $10.6 million during the
second quarter of 2002.
24
Impairment and Other Charges
During the second quarter of 2001, the Company recorded pretax impairment and
other charges of $11.4 million. These charges included an investment in an IMAX
movie of $5.7 million, a minority investment in a technology business of $4.6
million and an investment in idle real estate of $1.1 million. The Company began
production of an IMAX movie during 2000 that portrayed the history of country
music. After encountering a number of operational issues that created
significant cost overruns, the carrying value of the IMAX film asset was
reassessed during the second quarter of 2001 resulting in the $5.7 million
impairment charge. During 2000, the Company made a minority investment in a
technology start-up business. During 2001, the unfavorable environment for
technology businesses created difficulty for this business to obtain adequate
capital to execute its business plan. During the second quarter of 2001, the
Company was notified that this technology business had been unsuccessful in
arranging financing. As such, the Company reassessed the investment's
realizability and reflected an impairment charge of $4.6 million during the
second quarter of 2001. The impairment charge related to idle real estate of
$1.1 million recorded during the second quarter of 2001 is based upon certain
third-party offers received during the second quarter of 2001 for such property.
The Company sold this idle real estate during the three months ended June 30,
2002. Proceeds from the sale approximated the carrying value of the property.
Restructuring Charges
As part of the Company's ongoing assessment of operations, the Company
identified certain duplication of duties within divisions and realized the need
to streamline those tasks and duties. Related to this assessment, during the
second quarter of 2002 the Company adopted a plan of restructuring to streamline
certain operations and duties. Accordingly, the Company recorded a pretax
restructuring charge of $1.1 million related to employee severance costs and
other employee benefits. The restructuring charges all relate to continuing
operations. The 2002 restructuring charge was partially offset by reversal of
prior years' restructuring accrual of $1.1 million, as discussed below.
During the second quarter of 2002, the Company reversed $0.9 million of the 2001
restructuring charges related to continuing operations. The reversal included
charges related to a lease commitment and certain placement costs related to the
2001 and 2000 restructuring. During the second quarter of 2002, the Company
entered into two subleases to lease certain office space the Company previously
had recorded in the 2001 and 2000 restructuring charges. The sublease agreements
resulted in a reversal of the 2001 and 2000 restructuring charges in the amount
of $0.7 million and $0.1 million, respectively. Also during the second quarter
of 2002, the Company evaluated the 2001 restructuring accrual and determined
certain severance benefits and outplacement services had expired.
During the fourth quarter of 2000, the Company recognized pretax restructuring
charges of $16.4 million related to exiting certain lines of business and
implementing a new strategic plan. The restructuring charges consisted of
contract termination costs of $10.0 million to exit specific activities and
employee severance and related costs of $6.4 million. During the second quarter
of 2001, the Company negotiated reductions in certain contract termination
costs, which allowed the reversal of $2.3 million of the restructuring charges
originally recorded during the fourth quarter of 2000.
Depreciation Expense
Depreciation expense increased $3.2 million, or 37.0%, to $12.0 million in the
second quarter of 2002 and increased $8.9 million, or 50.9%, to $26.3 million
for the first six months of 2002. The increase in the three months and six
months ended June 30, 2002 is primarily attributable to Gaylord Palms
depreciation expense of $3.6 million and $9.2 million, respectively.
25
Amortization Expense
Amortization expense decreased slightly, by $0.1 million for the six months
ended June 30, 2002. Amortization of software increased $0.4 million in the
first six months of 2002 primarily at Gaylord Opryland and Gaylord Palms. This
increase was partially offset by the adoption of SFAS No. 142, under the
provisions of which the Company no longer amortizes goodwill. Amortization of
goodwill for continuing operations for the six months ended June 30, 2001, was
$0.5 million.
Operating Income (Loss)
Total operating income increased $24.5 million from an operating loss to
operating income of $7.6 million in the second quarter of 2002. Total operating
loss decreased $9.9 million to an operating loss of $9.1 million in the first
six months of 2002. As discussed above, a $10.6 million gain was recorded in the
second quarter of 2002 related to the sale of the Company's partnership interest
in the Opry Mills partnership. Operating income in the hospitality segment
decreased $8.5 million during the first six months of 2002 primarily as a result
of decreased operating income of the Gaylord Opryland hotel, which was partially
offset by the operating income of Gaylord Palms of $1.7 million subsequent to
its January 2002 opening. Operating income of the attractions segment increased
$3.2 million to operating income of $1.5 million for the first six months of
2002. The operating income of the attractions segment increased as a result of
increased operating income of Corporate Magic of $1.8 million and increased
operating income of the Grand Ole Opry of $1.1 million. Media segment operating
loss increased $0.3 million during the first six months of 2002. Operating loss
of the corporate and other segment increased $2.0 million during the first six
months of 2002 primarily due to the net charges related to the Company's
amendment of its retirement plans, retirement savings plan and postretirement
benefits plans discussed above.
Interest Expense
Interest expense, including amortization of deferred financing costs, increased
$0.6 million to $12.7 million for the second quarter of 2002, and increased $3.4
million to $24.4 million in the first six months of 2002. The increase in the
first six months of 2002 was primarily caused by a decrease in capitalized
interest of $5.2 million related to Gaylord Palms' opening for business during
the first quarter of 2002 and the resulting decline in hotel construction. The
increase is partially offset by lower weighted average interest rates. The
Company's weighted average interest rate on its borrowings, including the
interest expense related to the secured forward exchange contract discussed
below, was 5.3% in the first six months of 2002 as compared to 7.1% in the first
six months of 2001.
Interest Income
Interest income decreased $1.6 million to $0.6 million for the second quarter of
2002, and decreased $2.1 million to $1.1 million in the first six months of
2002. The decrease in the first six months of 2002 primarily relates to a
decrease in invested cash balances in the first six months of 2002 as compared
to the same period in 2001.
Unrealized Gain (Loss) on Viacom Stock and Derivatives
During 2000, the Company entered into a seven-year secured forward exchange
contract with respect to 10.9 million shares of its Viacom stock investment.
Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended, and
reclassified its investment in Viacom stock from available-for-sale to trading.
Under SFAS No. 133, components of the secured forward exchange contract are
considered derivatives.
In connection with the adoption of SFAS No. 133, the Company recorded a
cumulative effect of an accounting change to record the derivatives associated
with the secured forward exchange contract at fair value as of
26
January 1, 2001, as discussed below. For the three months ended June 30, 2002,
the Company recorded a pretax loss of $44.0 million related to the decrease in
fair value of the Viacom stock and a pretax gain of $49.8 million reflecting the
change in the estimated value of the derivatives associated with the secured
forward exchange contract. For the six months ended June 30, 2002, the Company
recorded a pretax gain of $2.4 million related to the increase in fair value of
the Viacom stock and a pretax gain of $20.1 million reflecting the change in the
estimated value of the derivatives associated with the secured forward exchange
contract. For the three months ended June 30, 2001, the Company recorded a
pretax gain of $85.6 million related to the increase in fair value of the Viacom
stock and a pretax loss of $66.0 million reflecting the change in the estimated
value of the derivatives associated with the secured forward exchange contract.
For the six months ended June 30, 2001, the Company recorded a pretax gain of
$55.0 million related to the increase in fair value of the Viacom stock and a
pretax loss of $27.1 million reflecting the change in the estimated value of the
derivatives associated with the secured forward exchange contract. Additionally,
the Company recorded a nonrecurring pretax gain of $29.4 million on January 1,
2001, related to reclassifying its investment in Viacom stock from
available-for-sale to trading as defined by SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The nonrecurring pretax gain
of $29.4 million was recorded as unrealized gain on Viacom stock.
Other Gains and Losses
Other gains and losses decreased $6.0 million during the six months ended June
30, 2002 as compared to the same period in 2001. The indemnification period
related to the 1999 disposal of television station KTVT ended during the second
quarter of 2001, which allowed the Company to recognize a non-operating pretax
gain of $4.6 million related to the settlement of the remaining contingencies.
Also during 2001, the Company recorded a gain of $0.7 million related to the
settlement of remaining contingencies on the 1998 sale of the Company's interest
in the Texas Rangers Baseball Club, Ltd.
Income Taxes
The benefit for income taxes increased $15.0 million to $15.2 million for the
second quarter of 2002. The change during the second quarter of 2002 is
attributable to the Company recognizing a $15.5 million benefit as a reduction
in income tax expense resulting from the settlement of certain federal income
tax issues with the Internal Revenue Service. The Company will not receive any
cash proceeds related to this benefit. The benefit for income taxes increased
$28.5 million from a provision of $9.0 million to a benefit of $19.4 million in
the first six months of 2002. The effective tax rate on income (loss) before
provision (benefit) for income taxes was 38.5% for the first six months of 2002
compared to 33.0% for the first six months of 2001. The increase in the
effective tax rate is based upon several factors including the effect of the
derivatives associated with the secured forward exchange contract, an
anticipated reduction in losses from foreign operations due to the Company's
exit from the international cable networks business and anticipated state income
tax benefits from certain subsidiaries. In addition, the Company recorded a
deferred tax liability of $6.4 million in the first six months of 2001
associated with the cumulative effect of an accounting change.
Discontinued Operations
In August 2001, the FASB issued SFAS No. 144, which superceded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions for the disposal of
a segment of a business of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 retains the requirements of SFAS No. 121
for the recognition and measurement of an impairment loss and broadens the
presentation of discontinued operations to include a component of an entity
(rather than a segment of a business).
In accordance with the provisions of SFAS No. 144, the Company has presented the
operating results, financial position, cash flows and any gain or loss on
disposal of the following businesses as discontinued operations in
27
its financial statements as of June 30, 2002 and December 31, 2001 and for the
three months and six months ended June 30, 2002 and 2001: Acuff-Rose Music
Publishing, Word Entertainment ("Word"), the Company's international cable
networks, the Oklahoma Redhawks (the "Redhawks"), GET Management, Pandora Films,
Gaylord Films, Gaylord Sports Management, Gaylord Event Television, Gaylord
Production Company, and the Company's water taxis. During the second quarter of
2002, the Company committed to a plan of disposal of its Acuff-Rose Music
Publishing catalog entity. Subsequent to June 30, 2002, the Company agreed to
sell the Acuff-Rose Music Publishing entity to Sony/ATV Music Publishing for
approximately $157.0 million in cash. The Company expects the sale to be
completed during the third quarter and expects to record a pretax nonrecurring
gain, related to the sale of Acuff-Rose Music Publishing. During the first
quarter of 2002, the Company committed to a plan of disposal of its ownership
interests in the Redhawks, a minor league baseball team based in Oklahoma City,
Oklahoma. Also during the first quarter of 2002, the Company sold or otherwise
ceased operations of Word and the international cable networks. The other
businesses listed above were sold during 2001.
During January 2002, the Company sold Word's domestic operations to an affiliate
of Warner Music Group for $84.1 million in cash (subject to certain future
purchase price adjustments). The Company recognized a pretax gain of $0.5
million related to the sale in discontinued operations in its results of
operations for the first six months of 2002. Proceeds from the sale of $80.0
million were used to reduce the Company's outstanding indebtedness.
On June 1, 2001, the Company adopted a formal plan to dispose of its
international cable networks. During the first quarter of 2002, the Company
finalized a transaction to sell certain assets of its Asia and Brazil networks.
The terms of this transaction included the assignment of certain transponder
leases, which resulted in a reduction of the Company's transponder lease
liability and a related $3.8 million pretax gain which is reflected in
discontinued operations in the consolidated financial statements. The Company
guaranteed $0.9 million in future lease payments by the assignee, which is not
included in the pretax gain above and continues to be reserved as a lease
liability. In addition, the Company has ceased its operations based in
Argentina.
28
The following table reflects the results of operations of businesses accounted
for as discontinued operations for the three months and six months ended June
30:
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2002 2001 2002 2001
-------- ---------- -------- ---------
Revenues:
Word Entertainment $ - $ 25,504 $ 2,594 $ 53,862
Acuff-Rose Music Publishing 4,404 4,515 7,654 7,639
International cable networks - 1,243 744 2,551
Businesses sold to OPUBCO - - - 2,195
Other 3,377 4,119 3,491 4,198
-------- ---------- -------- ---------
Total revenues of
discontinued operations $ 7,781 $ 35,381 $ 14,483 $ 70,445
======== ========== ======== =========
OPERATING INCOME (LOSS):
Word Entertainment $ (54) $ (3,081) $ (906) $ (6,630)
Acuff-Rose Music Publishing 1,056 1,024 1,393 1,528
International cable networks - (2,004) (1,576) (4,183)
Businesses sold to OPUBCO - - - (1,459)
Other 1,077 1,230 263 6
-------- ---------- -------- ---------
Total operating income (loss) of
discontinued operations 2,079 (2,831) (826) (10,738)
INTEREST EXPENSE - (147) (80) (554)
INTEREST INCOME 27 90 50 156
OTHER GAINS AND LOSSES (346) (769) 4,623 (2,974)
-------- ---------- -------- ---------
Income (loss) before provision (benefit) for income taxes 1,760 (3,657) 3,767 (14,110)
PROVISION (BENEFIT) FOR INCOME TAXES 357 (1,554) 1,363 (4,783)
-------- ---------- -------- ---------
Income (loss) from discontinued operations $ 1,403 $ (2,103) $ 2,404 $ (9,327)
======== ========== ======== =========
29
The assets and liabilities of the discontinued operations presented in the
accompanying condensed consolidated balance sheets are comprised of:
(in thousands) JUNE 30, DECEMBER 31,
2002 2001
--------- -----------
Current assets:
Cash and cash equivalents $ 1,686 $ 3,889
Trade receivables, less allowance of $1,360 and $2,785, respectively 2,884 28,999
Inventories 228 6,486
Prepaid expenses 2,279 10,333
Other current assets 1,338 823
--------- -----------
Total current assets 8,415 50,530
Property and equipment, net of accumulated depreciation 6,897 17,342
Goodwill, net of accumulated amortization 1,162 28,688
Amortizable intangible assets, net of accumulated amortization 3,986 6,125
Music and film catalogs 15,209 26,274
Other long-term assets 2,618 5,587
--------- -----------
Total long-term assets 29,872 84,016
--------- -----------
Total assets $ 38,287 $ 134,546
========= ===========
Current liabilities:
Current portion of long-term debt $ 1,128 $ 5,515
Accounts payable and accrued expenses 11,529 25,318
--------- -----------
Total current liabilities 12,657 30,833
Other long-term liabilities - 7
--------- -----------
Total long-term liabilities - 7
--------- -----------
Total liabilities 12,657 30,840
--------- -----------
Minority interest of discontinued operations 1,737 1,679
--------- -----------
Total liabilities and minority interest of discontinued operations $ 14,394 $ 32,519
========= ===========
30
Cumulative Effect of Accounting Change
During the second quarter of 2002, the Company completed its goodwill impairment
test as required by SFAS No. 142. In accordance with the provisions of SFAS No.
142, the Company has reflected the pretax $4.2 million impairment charge as a
cumulative effect of a change in accounting principle in the amount of $2.6
million, net of tax benefit of $1.6 million, as of January 1, 2002 in the
accompanying consolidated statements of operations.
On January 1, 2001, the Company recorded a gain of $11.9 million, net of
deferred taxes of $6.4 million, as a cumulative effect of an accounting change
to record the derivatives associated with the secured forward exchange contract
on its Viacom stock at fair value as of January 1, 2001, in accordance with the
provisions of SFAS No. 133.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Net cash flows provided by operating activities totaled $54.7 million and $11.5
million for the six months ended June 30, 2002 and 2001, respectively. The
increase was primarily related to the change in the income tax refund to $64.6
million for the six months ended June 30, 2002 as compared to $23.9 million for
the six months ended June 30, 2001. The remaining increase was attributable to
the increase in operating assets associated with operating activities. Net cash
flows from investing activities was $24.9 million for the six months ended June
30, 2002 and was a net use of $108.9 million for the six months ended June 30,
2001. The increase was primarily attributable to the sale of Word and the sale
of its partnership interest in the Opry Mills partnership. The increase was
also attributable to the decrease in purchases of property and equipment due to
the opening of the Gaylord Palms in January 2002. Net cash flows for financing
activities for the six months ended June 30, 2002 was a use of $17.7 million
compared to cash flows provided by financing activities of $163.5 million for
the six months ended June 30, 2001. The decrease is primarily related to a
decrease in debt borrowed during the six months of 2002, as compared to the
same period of 2001. This decrease was offset by a change in restricted cash
used to re-pay debt.
Financing
During 2001, the Company entered into a three-year delayed-draw senior term loan
("Term Loan") with Deutsche Banc Alex. Brown Inc., Salomon Smith Barney, Inc.
and CIBC World Markets Corp. The Term Loan is primarily secured by the Company's
ground lease interest in the Gaylord Palms. The Term Loan requires that the net
proceeds from all asset sales by the Company must be used to reduce outstanding
borrowings until the borrowing capacity under the Term Loan has been reduced to
$60 million. Excess cash flows, as defined, generated by Gaylord Palms must be
used to reduce any amounts borrowed under the Term Loan until its borrowing
capacity is reduced to $85 million. Debt repayments under the Term Loan reduce
its borrowing capacity and are not eligible to be re-borrowed. The Term Loan
requires the Company to maintain certain escrowed cash balances, comply with
certain financial covenants, and imposes limitations related to the payment of
dividends, the incurrence of debt, the guaranty of liens, and the sale of
assets, as well as other customary covenants and restrictions. The weighted
average interest rate, including amortization of deferred financing costs, under
the Term Loan for the six months ended June 30, 2002 was 9.6%, including 4.5%
related to commitment fees and the amortization of deferred financing costs.
During the first quarter of 2002, the Company sold Word's domestic operations,
which required the prepayment of the Term Loan in the amount of $80 million. As
required by the Term Loan, the Company utilized $15.9 million of the net cash
proceeds, as defined under the Term Loan agreement, received from the sale of
the Opry Mills investment to reduce the outstanding balance of the Term Loan.
Under the Term Loan during the first six months of 2002, the Company borrowed
$85 million and made total payments of $100 million. As of June 30, 2002, the
Company had outstanding borrowings of $85 million under the Term Loan.
31
The Company's ability to borrow additional funds under the Term Loan expired on
June 30, 2002. However, the lenders could reinstate the Company's ability to
borrow additional funds at a future date.
During the first quarter of 2001, the Company, through wholly-owned
subsidiaries, entered into two loan agreements, a $275 million senior loan (the
"Senior Loan") and a $100 million mezzanine loan (the "Mezzanine Loan")
(collectively, the "Nashville Hotel Loans"). The Senior Loan is secured by a
first mortgage lien on the assets of the Gaylord Opryland and is due in 2004.
Amounts outstanding under the Senior Loan bear interest at one-month LIBOR plus
approximately 0.9%. The Mezzanine Loan, secured by the equity interest in the
wholly-owned subsidiary that owns Gaylord Opryland, is due in 2004 and bears
interest at one-month LIBOR plus 6.0%. The Nashville Hotel Loans require monthly
principal payments of $0.7 million during their three-year terms in addition to
monthly interest payments. At closing, the Company was required to escrow
certain amounts, including $20 million related to future renovations and related
capital expenditures at Gaylord Opryland. During the second quarter 2002, the
Company utilized $18 million of the proceeds received from a federal income tax
refund to make a principal payment on the Mezzanine Loan. For the six month
period ended June 30, 2002, the weighted average interest rates for the Senior
Loan and the Mezzanine Loan, including amortization of deferred financing costs,
were 4.5% and 10.2%, respectively. At June 30, 2002, the Company had outstanding
borrowings of $236.2 million and $82.0 million under the Senior Loan and
Mezzanine Loan, respectively.
The terms of the Nashville Hotel Loans require that the Company maintain certain
escrowed cash balances and comply with certain financial covenants, and impose
limits on transactions with affiliates and indebtedness. The financial covenants
under the Nashville Hotel Loans are structured such that noncompliance at one
level triggers certain cash management restrictions and noncompliance at a
second level results in an event of default. Based upon the financial covenant
calculations at June 30, 2002 the cash management restrictions are in effect
which require that all excess cash flows, as defined, be escrowed and may be
used to repay principal amounts owed on the Senior Loan. During the first six
months of 2002, $28.8 million of restricted cash was utilized to repay principal
amounts outstanding under the Senior Loan.
The Company negotiated certain revisions to the financial covenants under the
Nashville Hotel Loans and the Term Loan during the first and second quarters of
2002. After these revisions, the Company was in compliance with the covenants
under the Nashville Hotel Loans and the covenants under the Term Loan in which
the failure to comply would result in an event of default. There can be no
assurance that the Company will remain in compliance with the covenants that
would result in an event of default under the Nashville Hotel Loans or the Term
Loan. The Company believes it has certain other possible alternatives to reduce
borrowings outstanding under the Nashville Hotel Loans, including the proceeds
from the sale of Acuff-Rose Music Publishing, which would allow the Company to
remedy any event of default. Any event of noncompliance that results in an event
of default under the Nashville Hotel Loans or the Term Loan would enable the
lenders to demand payment of all outstanding amounts, which would have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
Like other companies in the hospitality industry, the Company was notified by
the insurers providing its property and casualty insurance that policies issued
upon renewal would no longer include coverage for terrorist acts. As a result,
the servicer for the Senior Loan notified the Company in May of 2002 that it
believed the lack of insurance covering terrorist acts and certain related
matters did constitute a default under that credit facility. Although coverage
for terrorist acts was never specifically required as part of the required
property and casualty coverage, the Company determined to resolve this issue by
obtaining coverage for terrorist acts. The Company has obtained coverage in an
amount equal to the outstanding balance of the Senior Loan. Subsequent to June
30, 2002, the Company received notice from the servicer that any previous
existing defaults are cured and coverage in an amount equal to the outstanding
balance of the loan will satisfy the requirements of the Senior Loan. The
servicer has reserved the right to impose additional insurance requirements if
there is a change in, among other things, the availability or cost of terrorism
insurance coverage, the risk of terrorist activity, or legislation affecting the
rights of lenders to require borrowers to maintain terrorism insurance.
32
Based upon the Company's curing any default which may have existed, this debt
continues to be classified as long-term in the accompanying condensed
consolidated balance sheets.
While the Company has available the balance of the net proceeds from the Term
Loan, its unrestricted cash, the proceeds from the anticipated sale of
Acuff-Rose Music Publishing, and the net cash flows from operations to fund its
cash requirements, additional long-term financing is required to fund the
Company's construction commitments related to its hotel development projects and
to fund its anticipated operating losses. While there is no assurance that any
further financing will be secured, the Company believes it will secure
acceptable funding. However, if the Company is unable to obtain any part of the
additional financing it is seeking, or the timing of such financing is
significantly delayed, it would require the curtailment of development capital
expenditures to ensure adequate liquidity to fund the Company's operations.
The following table summarizes our significant contractual obligations as of
June 30, 2002, including long-term debt and operating lease commitments:
(in thousands)
TOTAL AMOUNTS LESS THAN OVER
CONTRACTUAL OBLIGATIONS COMMITTED 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- ----------------------- ------------- --------- ---------- -------- ----------
Long-term debt $ 403,223 $ 8,004 $ 395,219 $ - $ -
Capital leases 434 297 137 - -
Operating leases 713,933 8,281 19,480 6,690 679,482
------------- --------- ---------- -------- ----------
Total contractual obligations $ 1,117,590 $ 16,582 $ 414,836 $ 6,690 $ 679,482
============= ========= ========== ======== ==========
The total operating lease amount of $713.9 million above includes the 75-year
operating lease agreement the Company entered into during 1999 for 65.3 acres of
land located in Osceola County, Florida for the land where Gaylord Palms is
located.
Capital Expenditures
The Company currently projects capital expenditures for the twelve months of
2002 to total approximately $120.0 million, which includes continuing
construction costs at the new Gaylord hotel in Grapevine, Texas of approximately
$54.5 million, approximately $6.8 million related to the development and
construction at the Gaylord hotel in Potomac, near Washington D.C. and
approximately $12.9 million related to Gaylord Opryland. The Company's capital
expenditures from continuing operations for the six months ended June 30, 2002
were $84.9 million.
Subsequent to June 30, 2002, the Company announced that the Gaylord Opryland
Texas Resort and Convention Center, located near the Dallas/Fort Worth airport
will open by April 2004, two months earlier than previously announced.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 supersedes APB Opinion
No. 16, "Business Combinations" and requires the use of the purchase method of
accounting for all business combinations prospectively. SFAS No. 141 also
provides guidance on recognition of intangible assets apart from goodwill. SFAS
No. 142 supercedes APB Opinion No. 17, "Intangible Assets", and changes the
accounting for goodwill and intangible assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite useful lives will not be amortized but will be
tested for impairment at least annually and whenever events or circumstances
occur indicating that these
33
intangible assets may be impaired. The Company adopted the provisions of SFAS
No. 141 in June of 2001. The Company adopted the provisions of SFAS No. 142
effective January 1, 2002, and as a result, the Company ceased the amortization
of goodwill on that date. As required by the provisions of SFAS No. 142, the
Company completed the transitional goodwill impairment review during the second
quarter of 2002 and recorded a cumulative effect of accounting change,
retroactive to January 1, 2002, attributed to the goodwill impairment of the
Radisson Hotel at Opryland.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 amends accounting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires companies to record the fair value of the liability
for an asset retirement obligation in the period in which the liability is
incurred. The Company will adopt the provisions of SFAS No. 143 on January 1,
2003 and anticipates the effects of SFAS No. 143 will be immaterial to the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds both SFAS Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment to SFAS No 4, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". SFAS No.
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect. However, an entity is not prohibited from
classifying such gains and losses as extraordinary items, so long as they meet
the criteria in paragraph 20 of APB No. 30. The Company will adopt the
provisions of SFAS No. 145 on January 1, 2003 and anticipates the effects of
SFAS No. 145 will be immaterial to the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 nullifies EITF Issue No. 94-3.
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No.
94-3 had recognized the liability at the commitment date to an exit plan. The
Company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of adoption of this statement.
FORWARD-LOOKING STATEMENTS / RISK FACTORS
This report contains statements with respect to the Company's beliefs and
expectations of the outcomes of future events that are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties,
including, without limitation, the risks and uncertainties associated with
economic conditions affecting the hospitality business generally, the timing of
the opening of new hotel facilities, costs associated with developing new hotel
facilities, business levels at the Company's hotels, the ability to successfully
complete potential divestitures, the ability to consummate the financing for new
developments and the other factors set forth under the caption "Risk Factors" in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Forward-looking statements include discussions regarding the Company's operating
strategy, strategic plan, hotel development strategy, industry and economic
conditions, financial condition, liquidity and capital resources, and results of
operations. You can identify these statements by forward-looking words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
"projects," and similar expressions. Although we believe that the plans,
objectives, expectations and prospects reflected in or suggested by our
forward-looking statements are reasonable, those statements involve
uncertainties and risks, and we cannot assure you that our plans, objectives,
expectations and prospects will be achieved. Our actual results could differ
materially from the results anticipated by the forward-looking statements as a
result of many known and unknown factors, including, but not limited to, those
contained in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, and elsewhere in this report. All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements. The Company does not undertake any
obligation to update or to release publicly any revisions to forward-looking
34
statements contained in this report to reflect events or circumstances occurring
after the date of this report or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related to changes
in stock prices, interest rates and foreign currency exchange rates.
Investments - At June 30, 2002, the Company held an investment of 11 million
shares of Viacom Class B common stock, which was received as the result of the
acquisition of television station KTVT by CBS in 1999 and the subsequent
acquisition of CBS by Viacom in 2000. The Company entered into a secured forward
exchange contract related to 10.9 million shares of the Viacom stock in 2000.
The secured forward exchange contract protects the Company against decreases in
the fair market value of the Viacom stock, while providing for participation in
increases in the fair market value. At June 30, 2002, the fair market value of
the Company's investment in the 11 million shares of Viacom stock was $488.2
million, or $44.37 per share. The secured forward exchange contract protects the
Company against market decreases below $56.04 per share, thereby limiting the
Company's market risk exposure related to the Viacom stock. At per share prices
greater than $56.04, the Company retains 100% of the per-share appreciation to a
maximum per-share price of $75.66. For per-share appreciation above $75.66, the
Company participates in 25.9% of the appreciation.
Outstanding Debt - The Company has exposure to interest rate changes primarily
relating to outstanding indebtedness under the Term Loan, the Nashville Hotel
Loans and potentially, with future financing arrangements. The Term Loan bears
interest, at the Company's option, at the prime interest rate plus 2.125% or the
Eurodollar rate plus 3.375%. The terms of the Term Loan require the Company to
purchase interest rate hedges in notional amounts equal to $100 million in order
to protect against adverse changes in the one-month Eurodollar rate. Pursuant to
these agreements, the Company has purchased instruments that cap its exposure to
the one-month Eurodollar rate at 6.625%. The terms of the Nashville Hotel Loans
require the Company to purchase interest rate hedges in notional amounts equal
to the outstanding balances of the Nashville Hotel Loans in order to protect
against adverse changes in one-month LIBOR. Pursuant to these agreements, the
Company has purchased instruments that cap its exposure to one-month LIBOR at
7.50%. The Company is currently negotiating with its lenders and others
regarding the Company's future financing arrangements. If LIBOR and Eurodollar
rates were to increase by 100 basis points each, the estimated impact on the
Company's consolidated financial statements would be to reduce net income by
approximately $1.8 million after taxes based on debt amounts outstanding at June
30, 2002.
Cash Balances - Certain of the Company's outstanding cash balances are
occasionally invested overnight with high credit quality financial institutions.
The Company does not have significant exposure to changing interest rates on
invested cash at June 30, 2002. As a result, the interest rate market risk
implicit in these investments at June 30, 2002, if any, is low.
Foreign Currency Exchange Rates - Substantially all of the Company's revenues
are realized in U.S. dollars and are from customers in the United States.
Although the Company owns certain subsidiaries that conduct business in foreign
markets and whose transactions are settled in foreign currencies, these
operations are not material to the overall operations of the Company. Therefore,
the Company does not believe it has any significant foreign currency exchange
rate risk. The Company does not hedge against foreign currency exchange rate
changes and does not speculate on the future direction of foreign currencies.
Summary - Based upon the Company's overall market risk exposures at June 30,
2002, the Company believes that the effects of changes in the stock price of its
Viacom stock or interest rates could be material to the Company's consolidated
financial position, results of operations or cash flows. However, the Company
believes that the effects of fluctuations in foreign currency exchange rates on
the Company's consolidated financial position, results of operations or cash
flows would not be material.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ROOM SERVICE TIP ALLOCATION CLASS ACTION. The Company is a
defendant in a class action lawsuit filed on June 23, 1997 in
the Second Circuit Court of Davidson County, Tennessee related
to the manner in which Gaylord Opryland distributes service
and delivery charges to certain employees. Tennessee has a
"Tip" statute that requires a business to pay tips shown on
statements over to its employee or employees who have served
the customer. The Company believes that it has paid over to
its employees amounts in excess of what the statute requires,
and the Company intends to file a motion for summary judgment
in this matter and to vigorously contest this matter. On June
12, 2002, counsel for the Company and counsel for the
plaintiff class attended a mediation session and some progress
was made toward resolving this case. The Company believes that
it has reserved an appropriate amount for this particular
claim.
GAYLORD FILMS. On March 9, 2001, the Company sold its stock
and equity interests in five of its businesses to The Oklahoma
Publishing Company ("OPUBCO") for a purchase price of $22
million in cash and the assumption of approximately $20
million in debt. The businesses sold were Gaylord Production
Company, Gaylord Films, Pandora Films, Gaylord Sports
Management Group, and Gaylord Event Television. OPUBCO is the
beneficial owner of 6.2% of the Company's common stock. Four
of the Company's directors, who are the beneficial owners of
approximately an additional 27% of the Company's common stock,
are also directors of OPUBCO and voting trustees of a voting
trust that controls OPUBCO. The transaction was reviewed and
approved by a special committee of the independent directors
of the Company. The Company received an appraisal from a firm
that specializes in valuations related to films, entertainment
and service businesses as well as a fairness opinion from an
investment bank. On August 5, 2002, counsel for the special
committee of the independent directors of the Company received
a letter from counsel for Gaylord Films asserting that the
Company breached certain representations and warranties in the
purchase agreement and demanding indemnification from the
Company in the amount of $3.1 million. No litigation has yet
been instituted with respect to this matter, and the Company
is actively engaged in settlement negotiations with OPUBCO to
resolve this matter. The Company believes that it has adequate
reserves for this matter and does not believe that the outcome
of this dispute will have a material adverse effect upon its
business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Inapplicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable
36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 14,
2002 (the "Annual Meeting"). The stockholders of the Company
voted to elect the directors listed below and the terms of
office of E.K. Gaylord II and Mary Agnes Wilderotter continued
after the meeting. The following table sets forth the number
of votes cast for and withheld/abstained with respect to each
of the nominees:
Withheld/
Nominee For Abstained
------- ---------- ----------
Martin C. Dickinson 29,871,140 127,585
C. Gaylord Everest 29,816,823 181,902
Edward L. Gaylord 28,194,597 1,804,128
E. Gordon Gee 29,876,892 121,833
Laurence S. Geller 29,876,127 122,598
Ralph Horn 29,828,885 169,840
Colin V. Reed 29,823,495 175,230
Michael D. Rose 29,830,675 168,050
The stockholders also voted to amend the Gaylord Entertainment
Company 1997 Omnibus Stock Option and Incentive Plan. A total
of 29,461,434 votes were cast for such proposal, 478,403 votes
were cast against such proposal, and 58,886 votes abstained
with respect to such proposal. There were 2 broker non-votes
with respect to the proposal.
ITEM 5. OTHER INFORMATION
Inapplicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits following the Signatures page.
(b) A Current Report on Form 8-K, dated June 17, 2002,
reporting the change in the Registrant's Certifying
Accountant under Item 4 from Arthur Andersen to Ernst
& Young LLP.
37
SIGNATURES
Pursuant to the requirements 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.
GAYLORD ENTERTAINMENT COMPANY
Date: August 14, 2002 By: /s/ Colin V. Reed
--------------------------- ---------------------------------
Colin V. Reed
President and Chief Executive
Officer (Principal Executive
Officer)
By: /s/ David C. Kloeppel
---------------------------------
David C. Kloeppel
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Kenneth A. Conway
---------------------------------
Kenneth A. Conway
Vice President and Chief
Accounting Officer (Principal
Accounting Officer)
38
INDEX TO EXHIBITS
10.1 Fifth Amendment dated June 28, 2002 to Credit Agreement, dated as of
October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P.,
Bankers Trust Company, Citicorp Real Estate, Inc. and CIBC Inc.
10.2 Purchase and Sale Agreement dated as of June 28, 2002 by and between
The Mills Limited Partnership (as Purchaser) and Opryland Attractions,
Inc. (as Seller).
10.3 Asset Purchase Agreement dated as of July 1, 2002 by and between
Acuff-Rose Music Publishing, Inc., Acuff-Rose Music, Inc., Milene
Music, Inc., Springhouse Music, Inc., and Hickory Records, Inc. and
Sony/ATV Music Publishing LLC.
10.4 Gaylord Entertainment Company 1997 Omnibus Stock Option and Incentive
Plan (as amended at May 2002 Stockholders Meeting).
39