Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 APRIL 30, 2003
----- --------------------------------
Common Stock, $.01 par value 33,792,238 shares
GAYLORD ENTERTAINMENT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 2003 and 2002 3
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 36
Part II - Other Information
Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
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 MARCH 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002
--------- ---------
Revenues ................................................... $ 114,380 $ 99,657
Operating expenses:
Operating costs ........................................ 65,696 68,182
Selling, general and administrative .................... 27,573 26,487
Preopening costs ....................................... 1,580 5,429
Depreciation ........................................... 13,342 14,293
Amortization ........................................... 1,231 937
--------- ---------
Operating income (loss) .............................. 4,958 (15,671)
Interest expense, net of amounts capitalized ............... (9,372) (11,601)
Interest income ............................................ 519 527
Unrealized gain (loss) on Viacom stock ..................... (46,652) 46,433
Unrealized gain (loss) on derivatives ...................... 39,466 (29,697)
Other gains and losses ..................................... 222 (618)
--------- ---------
Loss before income taxes and discontinued operations.. (10,859) (10,627)
Benefit for income taxes ................................... (4,236) (4,094)
--------- ---------
Loss from continuing operations ..................... (6,623) (6,533)
Income from discontinued operations, net of taxes .......... 167 958
Cumulative effect of accounting change, net of taxes ....... -- (2,572)
--------- ---------
Net loss ............................................ $ (6,456) $ (8,147)
========= =========
Income (loss) per share:
Loss from continuing operations ..................... $ (0.20) $ (0.19)
Income from discontinued operations, net of taxes ... 0.01 0.03
Cumulative effect of accounting change,
net of taxes ...................................... -- (0.08)
--------- ---------
Net loss ............................................ $ (0.19) $ (0.24)
========= =========
Income (loss) per share - assuming dilution:
Loss from continuing operations .................... $ (0.20) $ (0.19)
Income from discontinued operations, net of taxes .. 0.01 0.03
Cumulative effect of accounting change,
net of taxes .................................... -- (0.08)
--------- ---------
Net loss ........................................... $ (0.19) $ (0.24)
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents - unrestricted .................................................. $ 30,196 $ 98,632
Cash and cash equivalents - restricted .................................................... 33,621 19,323
Trade receivables, less allowance of $522 and $467, respectively .......................... 33,503 22,374
Deferred financing costs .................................................................. 26,865 26,865
Deferred income taxes ..................................................................... 20,553 20,553
Other current assets ...................................................................... 26,916 25,889
Current assets of discontinued operations ................................................. 4,206 4,095
----------- -----------
Total current assets .................................................................. 175,860 217,731
----------- -----------
Property and equipment, net of accumulated depreciation ....................................... 1,147,899 1,110,163
Goodwill ...................................................................................... 6,915 6,915
Amortized intangible assets, net of accumulated amortization .................................. 1,987 1,996
Investments ................................................................................... 462,427 509,080
Estimated fair value of derivative assets ..................................................... 232,168 207,727
Long-term deferred financing costs ............................................................ 92,148 100,933
Other long-term assets ........................................................................ 25,410 24,323
Long-term assets of discontinued operations ................................................... 12,596 13,328
----------- -----------
Total assets .......................................................................... $ 2,157,410 $ 2,192,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ......................................................... $ 8,546 $ 8,526
Accounts payable and accrued liabilities .................................................. 72,585 80,685
Current liabilities of discontinued operations ............................................ 6,981 6,652
----------- -----------
Total current liabilities ............................................................. 88,112 95,863
----------- -----------
Secured forward exchange contract ............................................................. 613,054 613,054
Long-term debt, net of current portion ........................................................ 330,310 332,112
Deferred income taxes, net .................................................................... 239,902 244,372
Estimated fair value of derivative liabilities ................................................ 33,621 48,647
Other long-term liabilities ................................................................... 69,164 67,895
Long-term liabilities of discontinued operations .............................................. 83 789
Minority interest of discontinued operations .................................................. 1,730 1,885
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,
33,789 and 33,782 shares issued and outstanding, respectively ......................... 338 338
Additional paid-in capital ................................................................ 520,947 520,796
Retained earnings ......................................................................... 276,342 282,798
Other stockholders' equity ................................................................ (16,193) (16,353)
----------- -----------
Total stockholders' equity ............................................................ 781,434 787,579
----------- -----------
Total liabilities and stockholders' equity ............................................ $ 2,157,410 $ 2,192,196
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS)
2003 2002
--------- ---------
Cash Flows from Operating Activities:
Net loss .................................................................... $ (6,456) $ (8,147)
Amounts to reconcile net loss to net cash flows
used in operating activities:
Gain on discontinued operations, net of taxes ........................... (167) (958)
Cumulative effect of accounting change, net of taxes .................... -- 2,572
Unrealized gain (loss) on Viacom stock and related derivatives .......... 7,186 (16,736)
Depreciation and amortization ........................................... 14,573 15,230
Provision (benefit) for deferred income taxes ........................... (4,236) 324
Amortization of deferred financing costs ................................ 8,886 8,923
Changes in (net of acquisitions and divestitures):
Trade receivables ................................................... (11,129) (24,712)
Accounts payable and accrued liabilities ............................ (8,892) (9,107)
Other assets and liabilities ........................................ 361 3,829
--------- ---------
Net cash flows provided by (used in) operating activities - continuing
operations ...................................................... 126 (28,782)
Net cash flows provided by (used in) operating activities - discontinued
operations ...................................................... (578) 189
--------- ---------
Net cash flows used in operating activities ............................. (452) (28,593)
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment ......................................... (49,265) (28,966)
Other investing activities .................................................. (3,214) 1,471
--------- ---------
Net cash flows used in investing activities - continuing operations ..... (52,479) (27,495)
Net cash flows provided by investing activities - discontinued operations 696 80,734
--------- ---------
Net cash flows provided by (used in) investing activities ............... (51,783) 53,239
--------- ---------
Cash Flows from Financing Activities:
Repayment of long-term debt ................................................. (2,001) (100,398)
Proceeds from issuance of long-term debt .................................... -- 30,000
(Increase) decrease in restricted cash and cash equivalents ................. (14,298) 49,827
Proceeds from exercise of stock option and purchase plans ................... 52 555
Other financing activities, net ............................................. 140 1,120
--------- ---------
Net cash flows used in financing activities - continuing operations ..... (16,107) (18,896)
Net cash flows used in financing activities - discontinued operations ... (94) (437)
--------- ---------
Net cash flows used in financing activities ............................. (16,201) (19,333)
--------- ---------
Net change in cash and cash equivalents ......................................... (68,436) 5,313
Cash and cash equivalents - unrestricted, beginning of period ................... 98,632 9,194
--------- ---------
Cash and cash equivalents - unrestricted, end of period ......................... $ 30,196 $ 14,507
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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, 2002, 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. All adjustments are of a normal, recurring nature. The results of
operations for such interim period are not necessarily indicative of the results
for the full year.
2. CONSTRUCTION FUNDING REQUIREMENTS
Additional long-term financing is required to fund the Company's construction
commitments related to its hotel development projects and to fund its overall
anticipated operating losses in 2003. As of March 31, 2003, the Company had
$30.2 million in unrestricted cash in addition to the net cash flows from
certain operations to fund its cash requirements including the Company's 2003
construction commitments related to its hotel construction projects. These
resources are not adequate to fund all of the Company's 2003 construction
commitments. As a result of these required future financing requirements, the
Company is currently negotiating with its lenders and others regarding the
Company's future financing arrangements.
During the first quarter of 2003, the Company received a commitment for a $225
million credit facility arranged by Deutsche Bank Trust Company Americas, Bank
of America, N.A., and CIBC Inc. (collectively, the "Lenders"). However, the
commitment is subject to the completion of certain remaining due diligence by
the Lenders and the Lenders have the right to revise the credit facility
structure and/or decline to perform under the commitment if certain conditions
are not fulfilled or if certain changes occur within the financial markets. The
proceeds of this financing will be used to repay the Company's existing $60
million Term Loan and to complete the construction of the Texas hotel.
Management currently anticipates finalizing the long-term financing under the
existing commitment from the Lenders and expects to close the financing during
May 2003. If the Company is unable to secure a portion of the additional
financing it is seeking, or if the timing of such financing is significantly
delayed, the Company will be required to curtail certain of its development
expenditures on current and future construction projects to ensure adequate
liquidity to fund the Company's operations.
6
3. INCOME PER SHARE:
The weighted average number of common shares outstanding is calculated as
follows:
(in thousands) THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
-------- --------
Weighted average shares outstanding .................. 33,784 33,741
Effect of dilutive stock options ..................... -- --
-------- --------
Weighted average shares outstanding -
assuming dilution ............................... 33,784 33,741
======== ========
For the three months ended March 31, 2003 and 2002, the Company's effect of
dilutive stock options was the equivalent of 345 and 43,000 shares,
respectively, 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.
4. COMPREHENSIVE INCOME:
Comprehensive income (loss) is as follows for the three months of the respective
periods:
(in thousands) THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Net loss ................................................................. $(6,456) $(8,147)
Unrealized gain (loss) on interest rate hedges ........................... 75 (148)
Foreign currency translation ............................................. -- 792
-------- --------
Comprehensive loss ............................................... $(6,381) $(7,503)
======== ========
5. DISCONTINUED OPERATIONS:
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 March 31, 2003 and December 31, 2002 and for the three months
ended March 31, 2003 and 2002:
7
WSM-FM, WWTN(FM), Acuff-Rose Music Publishing, the Oklahoma Redhawks (the
"Redhawks"), Word Entertainment ("Word") and the Company's international cable
networks.
WSM-FM and WWTN(FM)
During the first quarter of 2003, the Company committed to a plan of disposal of
WSM-FM and WWTN(FM) (collectively, the "Radio operations"). Subsequent to
committing to a plan of disposal during the first quarter, the Company, through
a wholly-owned subsidiary, entered into an agreement to sell the assets
primarily used in the operations of WSM-FM and WWTN(FM) to Cumulus Broadcasting,
Inc. ("Cumulus"), and the Company entered into a joint sales agreement with
Cumulus for WSM-AM in exchange for approximately $65 million in cash.
Consummation of the sale of assets is subject to customary closing conditions,
including regulatory approvals, and is expected to take place in the second or
third quarter of 2003. In connection with this agreement, the Company also
entered into a local marketing agreement with Cumulus pursuant to which, from
April 21, 2003 until the closing of the sale of the assets, the Company will,
for a fee, make available to Cumulus substantially all of the broadcast time on
WSM-FM and WWTN(FM). In turn, Cumulus will provide programming to be broadcast
during such broadcast time and will collect revenues from the advertising that
it sells for broadcast during this programming time. The Company will continue
to own and operate WSM-AM, and under the terms of the joint sales agreement with
Cumulus, Cumulus will sell all of the commercial advertising on WSM-AM and
provide certain sales promotion and billing and collection services relating to
WSM-AM, all for a specified fee. The joint sales agreement has a term of five
years.
Acuff-Rose Music Publishing
During the second quarter of 2002, the Company committed to a plan of disposal
of its Acuff-Rose Music Publishing catalog entity. During the third quarter of
2002, the Company finalized the sale of the Acuff-Rose Music Publishing entity
to Sony/ATV Music Publishing for approximately $157.0 million in cash before
royalties payable to Sony for the period beginning July 1, 2002 until the sale
date. Proceeds of $25.0 million were used to reduce the Company's outstanding
indebtedness as further discussed in Note 6.
OKC Redhawks
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.
Word Entertainment
The Company committed to a plan to sell Word during the third quarter of 2001.
As a result of the decision to sell Word, the Company reduced the carrying value
of Word to its estimated fair value by recognizing a pretax charge of $29.0
million in discontinued operations during the third quarter of 2001. The
estimated fair value of Word's net assets was determined based upon ongoing
negotiations with potential buyers. 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 6.
International Cable Networks
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. 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 ceased its operations
based in Argentina during 2002.
8
The following table reflects the results of operations of businesses accounted
for as discontinued operations for the three months ended March 31:
(in thousands) THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- -------
REVENUES:
Radio operations ....................................................................... $ 2,731 $ 1,972
Acuff-Rose Music Publishing ............................................................ -- 3,250
Redhawks ............................................................................... 81 114
Word ................................................................................... -- 2,594
International cable networks ........................................................... -- 744
------- -------
Total revenues of discontinued operations ........................................... $ 2,812 $ 8,674
======= =======
OPERATING INCOME (LOSS):
Radio operations ....................................................................... $ 425 $ (136)
Acuff-Rose Music Publishing ............................................................ -- 337
Redhawks ............................................................................... (647) (814)
Word ................................................................................... -- (852)
International cable networks ........................................................... -- (1,576)
------- -------
Total operating loss of discontinued operations ..................................... (222) (3,041)
INTEREST EXPENSE .......................................................................... -- (80)
INTEREST INCOME ........................................................................... 2 23
OTHER GAINS AND LOSSES .................................................................... 155 4,969
------- -------
Income (loss) before provision (benefit) for income taxes ................................. (65) 1,871
PROVISION (BENEFIT) FOR INCOME TAXES ...................................................... (232) 913
------- -------
Income from discontinued operations ....................................................... $ 167 $ 958
======= =======
9
The assets and liabilities of the discontinued operations presented in the
accompanying condensed consolidated balance sheets are comprised of:
(in thousands) MARCH 31, DECEMBER 31,
2003 2002
------- ------------
Current assets:
Cash and cash equivalents ...................................... $ 1,647 $ 1,812
Trade receivables, less allowance of $202 and $490, respectively 1,930 1,600
Inventories .................................................... 265 163
Prepaid expenses ............................................... 328 127
Other current assets ........................................... 36 393
------- -------
Total current assets ........................................ 4,206 4,095
Property and equipment, net of accumulated depreciation ........... 5,064 5,157
Goodwill .......................................................... 3,527 3,527
Amortizable intangible assets, net of accumulated amortization .... 3,942 3,942
Other long-term assets ............................................ 63 702
------- -------
Total long-term assets ...................................... 12,596 13,328
------- -------
Total assets ........................................... $16,802 $17,423
======= =======
Current liabilities:
Current portion of long-term debt .............................. $ -- $ 94
Accounts payable and accrued expenses .......................... 6,981 6,558
------- -------
Total current liabilities ................................... 6,981 6,652
Other long-term liabilities ....................................... 83 789
------- -------
Total long-term liabilities .................................. 83 789
------- -------
Total liabilities ............................................ 7,064 7,441
------- -------
Minority interest of discontinued operations ................. 1,730 1,885
------- -------
Total liabilities and minority interest of discontinued
operations .......................................... $ 8,794 $ 9,326
======= =======
10
6. DEBT:
2003 Loan
The Company anticipates finalizing, in May 2003, a $225 million credit facility
("2003 Loan") with Deutsche Bank, Bank of America and CIBC. The 2003 Loan will
consist of a $25 million senior revolving facility, a $150 million senior term
loan and a $50 million subordinated term loan. The 2003 Loan will be due in
2006. The senior loan is expected to bear interest at LIBOR plus 3.5%. The
subordinated loan is expected to bear interest at LIBOR plus 8.0%. In addition,
the Company will be required to pay a commitment fee equal to 0.5% per year of
the average daily unused portion of the 2003 Loan. Proceeds of the 2003 Loan
will be used to pay off the Term Loan as discussed below and the remaining
proceeds will be deposited into an escrow account for the completion of the
construction of the Texas hotel. The provisions of the 2003 Loan contain
covenants and restrictions including compliance with certain financial
covenants, restrictions on additional indebtedness, escrowed cash balances, as
well as other customary restrictions. The terms of the 2003 Loan will require
the Company to purchase interest rate swaps. The purchase of the interest rate
swaps are expected to minimize the fluctuation in interest rate expense related
to the 2003 Loan. The interest rate swaps related to the 2003 Loan are discussed
in more detail in Note 8.
Term Loan
During 2001, the Company entered into a three-year delayed-draw senior term loan
(the "Term Loan") of up to $210.0 million with Deutsche Banc Alex. Brown Inc.,
Salomon Smith Barney, Inc. and CIBC World Markets Corp. (collectively the
"Banks"). Proceeds of the Term Loan were used to finance the construction of
Gaylord Palms and the initial construction phases of the Gaylord hotel in Texas
as well as for general operating purposes. The Term Loan is primarily secured by
the Company's ground lease interest in Gaylord Palms. At the Company's option,
amounts outstanding under the Term Loan bear interest at the prime interest rate
plus 2.125% or the one-month Eurodollar rate plus 3.375%. The terms of the Term
Loan required the purchase of interest rate hedges in notional amounts equal to
$100.0 million in order to protect against adverse changes in the one-month
Eurodollar rate. Pursuant to these agreements, the Company purchased instruments
that cap its exposure to the one-month Eurodollar rate at 6.625% as discussed
below and in Note 8. The Term Loan contains provisions that allow the Banks to
syndicate the Term Loan, which could result in a change to the terms and
structure of the Term Loan, including an increase in interest rates. In
addition, the Company is required to pay a commitment fee equal to 0.375% per
year of the average unused portion of the Term Loan.
During the first three months of 2002, the Company sold Word's domestic
operations as described in Note 5, 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 2002 sale of the Opry Mills investment to reduce
the outstanding balance of the Term Loan. In addition, the Company used $25.0
million of the net cash proceeds, as defined under the Term Loan agreement,
received from the 2002 sale of Acuff-Rose Music Publishing to reduce the
outstanding balance of the Term Loan. During 2003 and 2002, the Company made
principal payments of approximately $0 and $4.1 million, respectively, under the
Term Loan. Net borrowings under the Term Loan for 2003 and 2002 were $0 and
$85.0 million, respectively. As of March 31, 2003 and December 31, 2002, the
Company had outstanding borrowings of $60.0 million under the Term Loan and was
required to escrow certain amounts for Gaylord Palms. The Company's ability to
borrow additional funds under the Term Loan expired during 2002. However, the
lenders could reinstate the Company's ability to borrow additional funds at a
future date.
The terms of the Term Loan required the Company to purchase an interest rate
instrument which caps the interest rate paid by the Company. This instrument
expired in the fourth quarter of 2002. Due to the expiration of the interest
rate instrument, the Company was out of compliance with the terms of the Term
Loan. Subsequent to December 31, 2002, the Company obtained a waiver from the
lenders whereby this event of non-compliance was waived as of December 31, 2002
and also removed the requirement to maintain such instruments for the remaining
term of the Term Loan. The maximum amount available under the Term Loan is
reduced to $50.0 million in April 2004, with full repayment due in October 2004.
Debt repayments under the Term Loan reduce the borrowing capacity and are not
eligible to be re-borrowed. The Term Loan requires the Company to maintain
certain escrowed cash balances and 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
11
assets, as well as other customary covenants and restrictions. At March 31,
2003 and December 31, 2002, the unamortized balance of the deferred financing
costs related to the Term Loan was $1.8 million and $2.4 million, respectively.
The weighted average interest rates, including amortization of deferred
financing costs, under the Term Loan for the three months ended March 31, 2003
and 2002 were 9.6% and 13.0%, respectively. The weighted average interest rates
for the three months ended March 31, 2003 and 2002 includes 4.8% and 7.8%,
respectively, related to commitment fees and the amortization of deferred
financing costs.
Senior Loan and Mezzanine Loan
In 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") with affiliates of Merrill Lynch & Company acting as principal.
The Senior Loan is secured by a first mortgage lien on the assets of Gaylord
Opryland and is due in 2004. Amounts outstanding under the Senior Loan bear
interest at one-month LIBOR plus approximately 1.02%. 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%. At the
Company's option, the Nashville Hotel Loans may be extended for two additional
one-year terms beyond their scheduled maturities, subject to Gaylord Opryland
meeting certain financial ratios and other criteria. The Company currently
anticipates exercising the options to extend the Nashville Hotel Loans. The
Nashville Hotel Loans require monthly principal payments of $0.7 million during
their three-year terms in addition to monthly interest payments. The terms of
the Senior Loan and the Mezzanine Loan required the Company to purchase interest
rate hedges in notional amounts equal to the outstanding balances of the Senior
Loan and the Mezzanine Loan 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 7.5% as discussed in
Note 8. The Company used $235.0 million of the proceeds from the Nashville Hotel
Loans to refinance the Interim Loan discussed below. 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. The net
proceeds from the Nashville Hotel Loans after refinancing of the Interim Loan
and paying required escrows and fees were approximately $97.6 million. At March
31, 2003 and December 31, 2002 the unamortized balance of the deferred financing
costs related to the Nashville Hotel Loans was $5.8 million and $7.3 million,
respectively. The weighted average interest rates for the Senior Loan for the
three months ended March 31, 2003 and 2002, including amortization of deferred
financing costs, were 4.3% and 4.4%, respectively. The weighted average interest
rates for the Mezzanine Loan for the three months ended March 31, 2003 and 2002,
including amortization of deferred financing costs, were 10.8% and 10.2%,
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 December 31, 2002, the cash management restrictions were in
effect which requires that all excess cash flows, as defined, be escrowed and
may be used to repay principal amounts owed on the Senior Loan. As of March 31,
2003, the second level default was cured and the cash management restrictions
were lifted. During 2002, the Company negotiated certain revisions to the
financial covenants under the Nashville Hotel Loans and the Term Loan. 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 at March 31, 2003 and December 31,
2002. 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.
12
Interim Loan
During 2000, the Company entered into a six-month $200.0 million interim loan
agreement (the "Interim Loan") with Merrill Lynch Mortgage Capital, Inc. During
2000, the Company utilized $83.2 million of the proceeds from the Interim Loan
to prepay the remaining contract payments required by the SFEC discussed in Note
7. During 2001, the Company increased the borrowing capacity under the Interim
Loan to $250.0 million. The Company used $235.0 million of the proceeds from the
Nashville Hotel Loans discussed previously to refinance the Interim Loan during
March 2001.
Accrued interest payable at March 31, 2003 and December 31, 2002 was $0.5
million and $0.6 million, respectively, and is included in accounts payable and
accrued liabilities in the accompanying consolidated balance sheets.
7. 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 notional amount
of $613.1 million and required contract payments based upon a stated 5% rate.
The SFEC 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, as discussed below. The Company realized cash proceeds from the SFEC of
$506.5 million, net of discounted prepaid contract payments and prepaid interest
related to the first 3.25 years of the contract and transaction costs totaling
$106.6 million. In October 2000, the Company prepaid the remaining 3.75 years of
contract interest payments required by the SFEC of $83.2 million. As a result of
the prepayment, the Company will not be required to make any further contract
payments during the seven-year term of the SFEC. Additionally, as a result of
the prepayment, the Company was released from certain covenants of the SFEC,
which related to sales of assets, additional indebtedness and liens. The
unamortized balances of the prepaid contract interest are classified as current
assets of $26.9 million as of March 31, 2003 and December 31, 2002 and long-term
assets of $84.6 million and $91.2 million in the accompanying consolidated
balance sheets as of March 31, 2003 and December 31, 2002, respectively. The
Company is recognizing the prepaid contract payments and deferred financing
charges associated with the SFEC as interest expense over the seven-year
contract period using the effective interest method.
In accordance with the provisions of SFAS No. 133, as amended, certain
components of the secured forward exchange contract are considered derivatives,
as discussed in Note 8.
8. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company is expected to purchase interest rate swaps as required by the 2003
Loans as discussed in Note 6. The interest rate swap will hedge the variable
interest rate for a fixed interest rate and will minimize the fluctuation in
interest rate expense related to the 2003 Loan.
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.
For the three months ended March 31, 2003, the Company recorded net pretax gains
in the Company's consolidated statement of operations of $39.5 million related
to the increase in the fair value of the derivatives associated with the SFEC.
For the three months ended March 31, 2002, the Company recorded net pretax
losses in the Company's consolidated statement of operations of $29.7 million
related to the decrease in the 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. Two of the contracts cap the Company's
exposure to one-month LIBOR rates on up to $375.0 million of outstanding
indebtedness at 7.5%. Another interest rate cap, which caps the Company's
exposure on one-month Eurodollar rates on up to $100.0 million of outstanding
indebtedness at 6.625%, expired in October 2002. These interest rate caps
qualify for treatment as cash flow hedges in accordance with the provisions of
SFAS No. 133, as amended. As such, the effective portion of the gain or loss on
the derivative instrument is initially recorded in accumulated other
comprehensive income as a separate component of stockholder's equity and
subsequently reclassified into earnings in the period during which the hedged
13
transaction is recognized in earnings. The ineffective portion of the gain or
loss, if any, is reported in income (expense) immediately.
9. RESTRUCTURING CHARGES:
The following table summarizes the activities of the restructuring charges for
the three months ended March 31, 2003:
(in thousands) BALANCE AT RESTRUCTURING CHARGES BALANCE AT
DECEMBER 31, 2002 AND ADJUSTMENTS PAYMENTS MARCH 31, 2003
----------------- --------------------- -------- ---------------
2001 restructuring charges $ 431 $ -- $ 104 $ 327
2000 restructuring charges 270 -- 21 249
----------------- --------------------- -------- --------------
$ 701 $ -- $ 125 $ 576
================= ===================== ======== ==============
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
entered into two subleases to lease certain office space the Company previously
had recorded in the 2001 restructuring charges. As a result, the Company
reversed $0.9 million of the 2001 restructuring charges during 2002 related to
continuing operations based upon the occurrence of certain triggering events.
Also during the second quarter of 2002, the Company evaluated the 2001
restructuring accrual and determined certain severance benefits and outplacement
agreements had expired and adjusted the previously recorded amounts by $0.2
million. As of March 31, 2003, the Company has recorded cash payments of $4.5
million against the 2001 restructuring accrual. The remaining balance of the
2001 restructuring accrual at March 31, 2003 of $0.3 million is included in
accounts payable and accrued liabilities in the consolidated balance sheets. The
Company expects the remaining balances of the 2001 restructuring accrual to be
paid during 2003.
2000 Restructuring Charges
As part of the Company's 2000 strategic assessment, 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 $3.2 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 and 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 $3.7 million of the
restructuring charges originally recorded during 2000. As of March 31, 2003, the
Company has recorded cash payments of $9.4 million against the 2000
restructuring accrual related to continuing operations. The remaining balance of
the 2000 restructuring accrual at March 31, 2003 of $0.2 million, from
continuing operations, is included in accounts payable and accrued liabilities
in the consolidated balance sheets, which the Company expects to be paid during
2003.
14
10. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest related to continuing operations for the three months
ended March 31, 2003 and 2002 was comprised of:
(in thousands) THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- -------
Debt interest paid $ 3,208 $ 4,526
Capitalized interest (2,718) (1,661)
------- -------
Cash interest paid, net of capitalized interest $ 490 $ 2,865
======= =======
Income tax refunds received were $1.5 million and $0 million for the three
months ended March 31, 2003 and 2002 respectively.
11. 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 required the Company to perform an
assessment of whether goodwill was impaired at the beginning of the fiscal year
in which the statement is adopted. Under the transitional provisions of SFAS No.
142, the first step was for the Company to evaluate whether the reporting unit's
carrying amount exceeded its fair value. If the reporting unit's carrying amount
exceeds it fair value, the second step of the impairment test would be
completed. During the second step, the Company compared 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 estimated 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 recorded
goodwill amount of $4.2 million associated with the Radisson Hotel at Opryland
in the hospitality segment. The circumstances leading to the goodwill impairment
assessment for 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 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.
15
The Company performed the annual impairment review on all goodwill at December
31, 2002 and determined that no further impairment, other than the goodwill
impairment of the Radisson Hotel at Opryland as discussed above, would be
required during 2002.
During the three months ended March 31, 2003, there were no changes to the
carrying amounts of goodwill. The carrying amounts of goodwill are included in
the Attractions and Opry Group at March 31, 2003 and December 31, 2002.
The Company also reassessed the useful lives and classification of identifiable
finite-lived intangible assets, at December 31, 2002, 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 $2.4 million at March 31, 2003 and December 31,
2002. The related accumulated amortization of intangible assets in continuing
operations was $454,000 and $445,000 at March 31, 2003 and December 31, 2002,
respectively. The amortization expense related to intangibles from continuing
operations during the three months ended March 31, 2003 and 2002 was $10,000 and
$14,000, respectively. The estimated amounts of amortization expense for the
next five years are equivalent to $58,000 per year.
12. STOCK PLANS:
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and related Interpretations, under which no compensation cost related to
employee stock options has been recognized. In December 2002, the FASB issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS No. 123". SFAS No. 148 amends SFAS No. 123 to
provide two additional methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. This
statement also amends the disclosure requirements of SFAS No. 123 to require
certain disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the amended disclosure
provisions of SFAS No. 148 on December 31, 2002 and the information contained in
this report reflects the disclosure requirements of the new pronouncement. The
Company will continue to account for employee stock-based compensation in
accordance with APB Opinion No. 25.
16
If compensation cost for these plans had been determined consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and income (loss)
per share for the three months ended March 31, 2003 and 2002 would have been
reduced (increased) to the following pro forma amounts:
(net loss in thousands)
(per share data in dollars)
2003 2002
------- ---------
Net loss:
As reported ........................................... $(6,456) $ (8,147)
Stock-based employee compensation, net of tax effect... 795 641
------- ---------
Pro forma ............................................. $(7,251) $ (8,788)
======= =========
Net loss per share:
As reported ........................................... $ (0.19) $ (0.24)
======= =========
Pro forma ............................................. $ (0.21) $ (0.26)
======= =========
Net loss per share assuming dilution:
As reported ........................................... $ (0.19) $ (0.24)
======= =========
Pro forma ............................................. $ (0.21) $ (0.26)
======= =========
At March 31, 2003 and December 31, 2002, 3,678,211 and 3,241,037 shares,
respectively, of the Company's common stock were reserved for future issuance
pursuant to the exercise of stock options under the stock option and incentive
plan. Under the terms of this plan, stock options are granted with an exercise
price equal to the fair market value at the date of grant and generally expire
ten years after the date of grant. Generally, stock options granted to
non-employee directors are exercisable immediately, while options granted to
employees are exercisable two to five years from the date of grant. The Company
accounts for this plan under APB Opinion No. 25 and related interpretations,
under which no compensation expense for employee and non-employee director stock
options has been recognized.
The plan also provides for the award of restricted stock. At March 31, 2003 and
December 31, 2002, awards of restricted stock of 93,275 and 86,025 shares,
respectively, of common stock were outstanding. The market value at the date of
grant of these restricted shares was recorded as unearned compensation as a
component of stockholders' equity. Unearned compensation is amortized and
expensed over the vesting period of the restricted stock.
17
The Company has an employee stock purchase plan whereby substantially all
employees are eligible to participate in the purchase of designated shares of
the Company's common stock at a price equal to the lower of 85% of the closing
price at the beginning or end of each quarterly stock purchase period. The
Company issued 3,413 and 2,031 shares of common stock at an average price of
$15.28 and $21.21 pursuant to this plan during the three months ended March 31,
2003 and 2002, respectively.
18
13. 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.
19
14. FINANCIAL REPORTING BY BUSINESS SEGMENTS:
The Company's continuing operations are organized and managed based upon its
products and services. The Company has restated its reportable segments during
the first quarter of 2003 primarily due to the Company's decision to dispose of
WSM-FM and WWTN(FM). Prior year information has been restated to conform to the
2003 presentation. 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
MARCH 31,
----------------------------
2003 2002
------------ -------------
Revenues:
Hospitality $ 99,515 $ 80,296
Attractions and Opry Group 14,817 19,305
Corporate and other 48 56
------------ -----------
Total $ 114,380 $ 99,657
============ ===========
Depreciation and amortization:
Hospitality $ 11,608 $ 12,329
Attractions and Opry Group 1,404 1,490
Corporate and other 1,561 1,411
------------ -----------
Total $ 14,573 $ 15,230
============ ===========
Operating income (loss):
Hospitality $ 18,626 $ 3,527
Attractions and Opry Group (1,597) (836)
Corporate and other (10,491) (12,933)
Preopening costs (1,580) (5,429)
------------ -----------
Total $ 4,958 $ (15,671)
============ ===========
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS SEGMENTS
The Company has restated its reportable segments during the first quarter of
2003 primarily due to the Company's decision to dispose of WSM-FM and WWTN(FM).
Prior year information has been restated to conform to the 2003 presentation.
Gaylord Entertainment Company is a diversified hospitality and entertainment
company operating, through its subsidiaries, principally in three business
segments: hospitality; attractions and Opry group; and corporate and other. The
Company is managed using the three business segments described above.
CONSTRUCTION COMMITMENTS
Additional long-term financing is required to fund the Company's construction
commitments related to its hotel development projects and to fund its overall
anticipated operating losses in 2003. As of March 31, 2003, the Company had
$30.2 million in unrestricted cash in addition to the net cash flows from
certain operations to fund its cash requirements including the Company's 2003
construction commitments related to its hotel construction projects. These
resources are not adequate to fund all of the Company's 2003 construction
commitments. As a result of these required future financing requirements, the
Company is currently negotiating with its lenders and others regarding the
Company's future financing arrangements.
During the first quarter of 2003, the Company received a commitment for a $225
million credit facility arranged by Deutsche Bank Trust Company Americas, Bank
of America, N.A., and CIBC Inc. (collectively, the "Lenders"). However, the
commitment is subject to the completion of certain remaining due diligence by
the Lenders and the Lenders have the right to revise the credit facility
structure and/or decline to perform under the commitment if certain conditions
are not fulfilled or if certain changes occur within the financial markets. The
proceeds of this financing will be used to repay the Company's existing $60
million Term Loan and to complete the construction of the Texas hotel.
Management currently anticipates finalizing the long-term financing under the
existing commitment from the Lenders and expects to close the financing during
May 2003. If the Company is unable to secure a portion of the additional
financing it is seeking, or if the timing of such financing is significantly
delayed, the Company will be required to curtail certain of its development
expenditures on current and future construction projects to ensure adequate
liquidity to fund the Company's operations.
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
21
accounting principles, with no need for management's judgment regarding the
accounting policy. The Company believes that of its significant accounting
policies, the following may involve a higher degree of judgment and complexity.
Revenue Recognition
The Company recognizes revenue from its rooms as earned on the close of business
each day. Revenues from concessions and food and beverage sales are recognized
at the time of the sale. The Company recognizes revenues from the attractions
and Opry group segment 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 and advance ticket sales at the Company's
tourism properties 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". In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 was effective January 1, 2002. Under SFAS No. 142, goodwill
and other intangible assets with indefinite useful lives are no longer 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.
Restructuring Charges
Historically, 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 consolidated
financial statements. Effective January 1, 2003 all future restructuring charges
will be recorded in accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Restructuring charges are based
upon certain estimates of liabilities 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 and expiration of
outplacement agreements.
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.
22
RESULTS OF OPERATIONS
The following table contains unaudited selected summary financial data from
continuing operations for the three month periods ended March 31, 2003 and 2002.
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
MARCH 31,
--------------------------------------------------
2003 % 2002 %
---------------------- -------------------------
Revenues:
Hospitality $ 99,515 87.0 $ 80,296 80.6
Attractions and Opry group 14,817 13.0 19,305 19.4
Corporate and other 48 -- 56 --
---------- -------- --------- ---------
Total revenues 114,380 100.0 99,657 100.0
---------- -------- --------- ---------
Operating expenses:
Operating costs 65,696 57.4 68,182 68.4
Selling, general & administrative 27,573 24.1 26,487 26.6
Preopening costs 1,580 1.4 5,429 5.4
Depreciation and amortization:
Hospitality 11,608 12,329
Attractions and Opry group 1,404 1,490
Corporate and other 1,561 1,411
---------- -------- --------- ---------
Total depreciation and amortization 14,573 12.8 15,230 15.3
---------- -------- --------- ---------
Total operating expenses 109,422 95.7 115,328 115.7
---------- -------- --------- ---------
Operating income (loss):
Hospitality 18,626 18.7 3,527 4.4
Attractions and Opry group (1,597) (10.8) (836) (4.3)
Corporate and other (10,491) -- (12,933) --
Preopening costs (1,580) -- (5,429) --
---------- -------- --------- ---------
Total operating income (loss) 4,958 4.3 (15,671) (15.7)
Interest expense, net of amounts capitalized (9,372) -- (11,601) --
Interest income 519 -- 527 --
Gain (loss) on Viacom and derivatives, net (7,187) -- 16,736 --
Other gains and losses 223 -- (618) --
Benefit for income taxes 4,236 -- 4,094 --
Income from discontinued operations, net of taxes 167 -- 958 --
Cumulative effect of accounting change, net of taxes -- -- (2,572) --
---------- -------- --------- ---------
Net loss $ (6,456) -- $ (8,147) --
========== ======== ========= =========
23
PERIOD ENDED MARCH 31, 2003 COMPARED TO PERIOD ENDED MARCH 31, 2002
HOSPITALITY
The Hospitality segment comprises the operations of the Gaylord Hotel properties
and the Radisson Hotel at Opryland. The Gaylord Hotel properties consist of the
Gaylord Opryland Resort and Convention Center located in Nashville, Tennessee
("Gaylord Opryland") and the Gaylord Palms Resort and Convention Center located
in Kissimmee, Florida ("Gaylord Palms").
The Company considers Revenue per Available Room (RevPAR) to be a meaningful
indicator of our hospitality segment performance because it measures the period
over period change in room revenues. The Company calculates RevPAR by dividing
room sales for comparable properties by room nights available to guests for the
period. RevPAR is not comparable to similarly titled measures such as revenues.
Occupancy, average daily rate and RevPAR for Gaylord Opryland and Gaylord Palms,
subsequent to its January 2002 opening, are shown in the following table.
For the three months ended
March 31,
2003 2002
---------- ----------
Gaylord Opryland
Occupancy 77.91% 64.76%
Average Daily Rate $135.10 $139.75
RevPAR $105.26 $ 90.50
Gaylord Palms
Occupancy 76.38% 71.54%
Average Daily Rate $188.71 $180.40
RevPAR $144.14 $129.07
Total revenues in the hospitality segment increased $19.2 million, or 23.9%, to
$99.5 million in the first three months of 2003. The increase in revenues was
attributable to higher revenues at Gaylord Opryland and Gaylord Palms. Revenue
of Gaylord Palms increased $9.9 million, to $42.9 million, for the three months
ended March 31, 2003 as compared to the period ended March 31, 2002 subsequent
to its January 2002 opening. Revenue of Gaylord Opryland increased $9.2 million,
to $55.0 million, for the three months ended March 31, 2003 compared to the same
period of 2002. Revenues increased for Gaylord Opryland and Gaylord Palms due
the increase in occupancy and RevPAR as displayed in the table above. The
increase in occupancy is attributable to higher customer satisfaction, as well
as the lower than anticipated results in 2002 due to the effects of the
September 11, 2001 terrorist attacks.
Total operating expenses, which consists of direct operating costs and selling,
general and administrative expenses, in the hospitality segment increased $4.8
million, or 7.5%, to $69.3 million in the first three months of 2003 as compared
to the same period in 2002. Gaylord Palms operating expenses increased $3.6
million, to $29.3 million and Gaylord Opryland operating expenses increased $1.1
million, to $38.8 million.
Operating costs consists of direct costs associated with the daily operations of
the Company's assets. Operating costs in the hospitality segment increased $2.3
million, or 4.5%, to $53.8 million. Operating costs at Gaylord Opryland
increased
24
$2.0 million, to $31.9 million primarily due to higher costs associated with the
increased revenues. The increase of operating costs at Gaylord Opryland is also
due to increased utilities expense primarily the natural gas expense increase of
$0.6 million. Operating costs at Gaylord Palms increased $0.3 million, to $21.1
million primarily due to higher costs associated with the increased revenues.
Selling, general and administrative expenses consists of administrative and
overhead costs. Selling, general and administrative expenses in the hospitality
segment increased $2.5 million, or 19.4%, to $15.5 million, for the three months
ended March 31, 2003 compared to the same period ended 2002. Selling, general
and administrative expenses at Gaylord Palms increased $3.3 million, to $8.2
million, for the three months ended March 31, 2003 as compared to the period
ended March 31, 2002 subsequent to the January 2002 opening primarily due to
increased bonus accruals and additional positions filled since the January 2002
opening. Selling, general and administrative expenses at Gaylord Opryland
decreased $0.8 million, to $6.9 million primarily due to less advertising
expenses associated with local events that are not recurring in 2003.
ATTRACTIONS AND OPRY GROUP
The Attractions and Opry Group consists of the Grand Ole Opry, WSM-AM, the Ryman
Auditorium, the General Jackson showboat, the Springhouse Golf Course and
Corporate Magic, a company specializing in the production of creative and
entertainment events in support of the corporate and meeting marketplace.
Revenues in the Attractions and Opry Group segment decreased $4.5 million, or
23.2%, to $14.8 million for the three months ended March 31, 2003 as compared to
the three months ended March 31, 2002. The decrease in revenues in the
Attractions and Opry Group are primarily due to a $5.3 million decrease at
Corporate Magic due to decreased corporate spending during the first quarter of
2003, as compared to the same period of 2002.
Total operating expenses in the Attractions and Opry Group segment decreased
$3.6 million, or 19.5%, to $15.0 million for the three months ended March 31,
2003 as compared to the three months ended March 31, 2002. The decrease in total
operating expense is primarily due to the decrease in operating expenses of
Corporate Magic as discussed below.
Operating costs of the Attractions and Opry Group segment decreased $5.2
million, or 34.3%, to $9.9 million for the three months ended March 31, 2003 as
compared to the same period of 2002. The decrease in operating costs is
attributable to the decrease of operating costs of Corporate Magic. The
operating costs of Corporate Magic decreased $4.5 million, to $4.5 million for
the three months ended March 31, 2003 as compared to the three months ended
March 31, 2002. The decrease in Corporate Magic operating costs during 2003 is
attributable to the decrease in revenue.
Selling, general and administrative expenses of the Attractions and Opry Group
increased $1.6 million for the three months ended March 31, 2003 as compared to
the three months ended March 31, 2002. The increase in selling, general and
administrative expenses is primarily due to the increase in certain profit
sharing and bonus plan expenses.
CORPORATE AND OTHER
Corporate and Other consists of the naming rights agreement, salaries and
benefits, legal, human resources, accounting, pension and other administrative
costs. Total operating expenses in the Corporate and Other segment decreased
$2.6 million, or 22.5%, to $9.0 million during the three months ended March 31,
2003 as compared to the three months ended March 31, 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
25
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. The change in
operating costs associated with the change in pension plans was a net increase
of selling, general and administrative costs in 2002 of $3.3 million. These
nonrecurring gains and losses were recorded in the corporate and other segment
and were not allocated to the Company's other operating segments.
PREOPENING COSTS
Preopening costs are costs related to the Company's hotel development
activities. Preopening costs decreased $3.8 million, or 70.9%, to $1.6 million
for the three months ended March 31, 2003 as compared to the three months ended
March 31, 2002. The decrease in preopening costs is attributable to the opening
of Gaylord Palms in January 2002. Preopening costs for the periods ending March
31 are as follows:
(in thousands)
2003 2002
-------- ---------
Gaylord Palms .................. $ -- $ 4,805
Texas hotel .................... 1,542 624
Other preopening ............... 38 --
-------- ---------
Total preopening costs ......... $1,580 $ 5,429
======== =========
The Company expects preopening costs to increase during the remainder of 2003 as
a result of the Texas hotel which is scheduled to open in April 2004. The
Company anticipates preopening costs associated with the Texas hotel to total
$9.7 million for the twelve months ended December 31, 2003.
Consolidated Operating Income (Loss)
Total operating income increased $20.6 million from an operating loss to
operating income of $5.0 million in the three month period ended March 31, 2003
as compared to the three months ended March 31, 2002. Operating income in the
hospitality segment increased $15.1 million during the first three months of
2003 primarily as a result of Gaylord Palms and Gaylord Opryland increased
revenue. Operating income of the attractions and Opry group segment decreased
$0.8 million to an operating loss of $1.6 million for the first three months of
2003. The operating income of the attractions and Opry group segment decreased
as a result of decreased operating income of Corporate Magic of $0.5 million due
to decreased corporate spending and a reduction in corporate events for the
first three months of 2003 as compared to the first three months of 2002.
Operating loss of the corporate and other segment decreased $2.4 million during
the first three months of 2003 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.
Consolidated Interest Expense
Consolidated interest expense, including amortization of deferred financing
costs, decreased $2.2 million to $9.4 million for the first quarter of 2003. The
decrease in the first three months of 2003 was primarily caused by an increase
in capitalized interest of $1.1 million related to the increase in capitalized
interest of the Texas hotel during the first quarter of 2003. The decrease in
interest expense is also attributable to lower average borrowing levels and
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, was 5.1% in the first three months of 2003 as
compared to 5.3% in the first three months of 2002.
26
Consolidated Interest Income
Interest income remained constant at $0.5 million for the first three months of
2003 as compared to the first three months of 2002.
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.
For the three months ended March 31, 2003, the Company recorded net pretax
losses of $46.7 million related to the decrease in fair value of the Viacom
Stock. For the three months ended March 31, 2003, the Company recorded net
pretax gains of $39.5 million related to the increase in fair value of the
derivatives associated with the secured forward exchange contract. For the three
months ended March 31, 2002, the Company recorded net pretax gains of $46.4
million related to the increase in fair value of the Viacom Stock. For the three
months ended March 31, 2002, the Company recorded net pretax losses of $29.7
million related to the decrease in fair value of the derivatives associated with
the secured forward exchange contract.
Consolidated Other Gains and Losses
Other gains and losses increased $0.8 million during the three months ended
March 31, 2003 as compared to the same period in 2002.
Consolidated Income Taxes
The benefit for income taxes increased $0.1 million to a $4.2 million benefit in
the first quarter of 2003. The effective tax rate for income taxes was 39.0% for
the first three months of 2003 compared to 38.5% for the first three months of
2002.
Discontinued Operations
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 March 31, 2003 and December 31, 2002 and for the three months
ended March 31, 2003 and 2002: WSM-FM, WWTN(FM), Acuff-Rose Music Publishing,
the Oklahoma Redhawks (the "Redhawks"), Word Entertainment ("Word") and the
Company's international cable networks.
27
WSM-FM and WWTN(FM)
During the first quarter of 2003, the Company committed to a plan of disposal of
WSM-FM and WWTN(FM) (collectively, the "Radio operations"). Subsequent to
committing to a plan of disposal during the first quarter, the Company, through
a wholly-owned subsidiary, entered into an agreement to sell the assets
primarily used in the operations of WSM-FM and WWTN(FM) to Cumulus Broadcasting,
Inc. ("Cumulus"), and the Company entered into a joint sales agreement with
Cumulus for WSM-AM in exchange for approximately $65 million in cash.
Consummation of the sale of assets is subject to customary closing conditions,
including regulatory approvals, and is expected to take place in the second or
third quarter of 2003. In connection with this agreement, the Company also
entered into a local marketing agreement with Cumulus pursuant to which, from
April 21, 2003 until the closing of the sale of the assets, the Company will,
for a fee, make available to Cumulus substantially all of the broadcast time on
WSM-FM and WWTN(FM). In turn, Cumulus will provide programming to be broadcast
during such broadcast time and will collect revenues from the advertising that
it sells for broadcast during this programming time. The Company will continue
to own and operate WSM-AM, and under the terms of the joint sales agreement with
Cumulus, Cumulus will sell all of the commercial advertising on WSM-AM and
provide certain sales promotion and billing and collection services relating to
WSM-AM, all for a specified fee. The joint sales agreement has a term of five
years.
Acuff-Rose Music Publishing
During the second quarter of 2002, the Company committed to a plan of disposal
of its Acuff-Rose Music Publishing catalog entity. During the third quarter of
2002, the Company finalized the sale of the Acuff-Rose Music Publishing entity
to Sony/ATV Music Publishing for approximately $157.0 million in cash before
royalties payable to Sony for the period beginning July 1, 2002. Proceeds of
$25.0 million were used to reduce the Company's outstanding indebtedness.
OKC Redhawks
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.
Word Entertainment
The Company committed to a plan to sell Word during the third quarter of 2001.
As a result of the decision to sell Word, the Company reduced the carrying value
of Word to its estimated fair value by recognizing a pretax charge of $29.0
million in discontinued operations during the third quarter of 2001. The
estimated fair value of Word's net assets was determined based upon ongoing
negotiations with potential buyers. 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. Proceeds from the sale of
$80.0 million were used to reduce the Company's outstanding indebtedness.
International Cable Networks
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. 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 ceased its operations
based in Argentina during 2002.
28
The following table reflects the results of operations of businesses accounted
for as discontinued operations for the three months ended March 31:
(in thousands) THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- -------
REVENUES:
Radio operations ...................................................................... $ 2,731 $ 1,972
Acuff-Rose Music Publishing ........................................................... -- 3,250
Redhawks .............................................................................. 81 114
Word .................................................................................. -- 2,594
International cable networks .......................................................... -- 744
------- -------
Total revenues of discontinued operations .......................................... $ 2,812 $ 8,674
======= =======
OPERATING INCOME (LOSS):
Radio operations ...................................................................... $ 425 $ (136)
Acuff-Rose Music Publishing ........................................................... -- 337
Redhawks .............................................................................. (647) (814)
Word .................................................................................. -- (852)
International cable networks .......................................................... -- (1,576)
------- -------
Total operating loss of discontinued operations .................................... (222) (3,041)
INTEREST EXPENSE ......................................................................... -- (80)
INTEREST INCOME .......................................................................... 2 23
OTHER GAINS AND LOSSES ................................................................... 155 4,969
------- -------
Income (loss) before provision (benefit) for income taxes ................................ (65) 1,871
PROVISION (BENEFIT) FOR INCOME TAXES ..................................................... (232) 913
------- -------
Income from discontinued operations ...................................................... $ 167 $ 958
======= =======
29
The assets and liabilities of the discontinued operations presented in the
accompanying condensed consolidated balance sheets are comprised of:
(in thousands) MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
Current assets:
Cash and cash equivalents .......................................... $ 1,647 $ 1,812
Trade receivables, less allowance of $202 and $490, respectively ... 1,930 1,600
Inventories ........................................................ 265 163
Prepaid expenses ................................................... 328 127
Other current assets ............................................... 36 393
------- -------
Total current assets ............................................ 4,206 4,095
Property and equipment, net of accumulated depreciation ............... 5,064 5,157
Goodwill .............................................................. 3,527 3,527
Amortizable intangible assets, net of accumulated amortization ........ 3,942 3,942
Other long-term assets ................................................ 63 702
------- -------
Total long-term assets .......................................... 12,596 13,328
------- -------
Total assets ............................................... $16,802 $17,423
======= =======
Current liabilities:
Current portion of long-term debt .................................. $ -- $ 94
Accounts payable and accrued expenses .............................. 6,981 6,558
------- -------
Total current liabilities ....................................... 6,981 6,652
Other long-term liabilities ........................................... 83 789
------- -------
Total long-term liabilities ...................................... 83 789
------- -------
Total liabilities ................................................ 7,064 7,441
------- -------
Minority interest of discontinued operations ..................... 1,730 1,885
------- -------
Total liabilities and minority interest of discontinued
operations ............................................ $ 8,794 $ 9,326
======= =======
30
Cumulative Effect of Accounting Change
During the second quarter of 2002, the Company completed its transitional
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 consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Net cash flows used in operating activities totaled $0.5 million and $28.6
million for the three months ended March 31, 2003 and 2002, respectively. The
decrease in the total used in operating activities was primarily related to the
change in the Viacom stock and the related derivatives. Net cash flows from
investing activities was a net use of $51.8 million for the three months ended
March 31, 2003 and was a net source of $53.2 million for the three months ended
March 31, 2002. The decrease was primarily attributable to the sale of Word
during the first quarter of 2002 and increased levels of capital spending
related to Gaylord Opryland Texas. Net cash flows for financing activities for
the three months ended March 31, 2003 was a use of $16.2 million compared to a
use of $19.3 million for the three months ended March 31, 2002. The change in
financing activities was primarily due to a decrease in the repayment of
long-term debt.
Additional long-term financing is required to fund the Company's construction
commitments related to its hotel development projects and to fund its overall
anticipated operating losses in 2003. As of March 31, 2003, the Company had
$30.2 million in unrestricted cash in addition to the net cash flows from
certain operations to fund its cash requirements including the Company's 2003
construction commitments related to its hotel construction projects. These
resources are not adequate to fund all of the Company's 2003 construction
commitments. As a result of these required future financing requirements, the
Company is currently negotiating with its lenders and others regarding the
Company's future financing arrangements.
During the first quarter of 2003, the Company received a commitment for a $225
million credit facility arranged by Deutsche Bank Trust Company Americas, Bank
of America, N.A., and CIBC Inc. (collectively, the "Lenders"). However, the
commitment is subject to the completion of certain remaining due diligence by
the Lenders and the Lenders have the right to revise the credit facility
structure and/or decline to perform under the commitment if certain conditions
are not fulfilled or if certain changes occur within the financial markets. The
proceeds of this financing will be used to repay the Company's existing $60
million Term Loan and to complete the construction of the Texas hotel.
Management currently anticipates finalizing the long-term financing under the
existing commitment from the Lenders and expects to close the financing during
May 2003. If the Company is unable to secure a portion of the additional
financing it is seeking, or if the timing of such financing is significantly
delayed, the Company will be required to curtail certain of its development
expenditures on current and future construction projects to ensure adequate
liquidity to fund the Company's operations.
Financing
The Company anticipates finalizing, in May 2003, a $225 million credit facility
("2003 Loan") with Deutsche Bank, Bank of America and CIBC. The 2003 Loan will
consist of a $25 million senior revolving facility, a $150 million senior term
loan and a $50 million subordinated term loan. The 2003 Loan will be due in
2006. The senior loan is expected to bear interest at LIBOR plus 3.5%. The
subordinated loan is expected to bear interest at LIBOR plus 8.0%. In addition,
the Company will be required to pay a commitment fee equal to 0.5% per year of
the average daily unused portion of the 2003 Loan. Proceeds of the 2003 Loan
will be used to pay off the Term Loan as discussed below and the remaining
proceeds will be deposited into an escrow account for the completion of the
construction of the Texas hotel. The
31
provisions of the 2003 Loan contain covenants and restrictions including
compliance with certain financial covenants, restrictions on additional
indebtedness, escrowed cash balances, as well as other customary restrictions.
The terms of the 2003 Loan will require the Company to purchase interest rate
swaps. The purchase of the interest rate swaps are expected to minimize the
fluctuation in interest rate expense related to the 2003 Loan.
During 2001, the Company entered into a three-year delayed-draw senior term loan
(the "Term Loan") of up to $210.0 million with Deutsche Banc Alex. Brown Inc.,
Salomon Smith Barney, Inc. and CIBC World Markets Corp. (collectively the
"Banks"). Proceeds of the Term Loan were used to finance the construction of
Gaylord Palms and the initial construction phases of the Gaylord hotel in Texas
as well as for general operating purposes. The Term Loan is primarily secured by
the Company's ground lease interest in Gaylord Palms. At the Company's option,
amounts outstanding under the Term Loan bear interest at the prime interest rate
plus 2.125% or the one-month Eurodollar rate plus 3.375%. The terms of the Term
Loan required the purchase of interest rate hedges in notional amounts equal to
$100.0 million in order to protect against adverse changes in the one-month
Eurodollar rate. Pursuant to these agreements, the Company purchased instruments
that cap its exposure to the one-month Eurodollar rate at 6.625% as discussed
below. The Term Loan contains provisions that allow the Banks to syndicate the
Term Loan, which could result in a change to the terms and structure of the Term
Loan, including an increase in interest rates. In addition, the Company is
required to pay a commitment fee equal to 0.375% per year of the average unused
portion of the Term Loan.
During the first three months of 2002, the Company sold Word's domestic
operations 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 2002
sale of the Opry Mills investment to reduce the outstanding balance of the Term
Loan. In addition, the Company used $25.0 million of the net cash proceeds, as
defined under the Term Loan agreement, received from the 2002 sale of Acuff-Rose
Music Publishing to reduce the outstanding balance of the Term Loan. During 2003
and 2002, the Company made principal payments of approximately $0 and $4.1
million, respectively, under the Term Loan. Net borrowings under the Term Loan
for 2003 and 2002 were $0 and $85.0 million, respectively. As of March 31, 2003
and December 31, 2002, the Company had outstanding borrowings of $60.0 million
under the Term Loan and was required to escrow certain amounts for Gaylord
Palms. The Company's ability to borrow additional funds under the Term Loan
expired during 2002. However, the lenders could reinstate the Company's ability
to borrow additional funds at a future date.
The terms of the Term Loan required the Company to purchase an interest rate
instrument which caps the interest rate paid by the Company. This instrument
expired in the fourth quarter of 2002. Due to the expiration of the interest
rate instrument, the Company was out of compliance with the terms of the Term
Loan. Subsequent to December 31, 2002, the Company obtained a waiver from the
lenders whereby this event of non-compliance was waived as of December 31, 2002
and also removed the requirement to maintain such instruments for the remaining
term of the Term Loan. The maximum amount available under the Term Loan is
reduced to $50.0 million in April 2004, with full repayment due in October 2004.
Debt repayments under the Term Loan reduce the borrowing capacity and are not
eligible to be re-borrowed. The Term Loan requires the Company to maintain
certain escrowed cash balances and 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 March 31, 2003 and December 31, 2002, the
unamortized balance of the deferred financing costs related to the Term Loan was
$1.8 million and $2.4 million, respectively. The weighted average interest
rates, including amortization of deferred financing costs, under the Term Loan
for the three months ended March 31, 2003 and 2002 were 9.6% and 13.0%,
respectively. The weighted average interest rates for the three months ended
March 31, 2003 and 2002 includes 4.8% and 7.8%, respectively, related to
commitment fees and the amortization of deferred financing costs.
In 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") with affiliates of Merrill Lynch & Company acting as principal.
The Senior Loan is secured by a first mortgage lien on the assets of Gaylord
Opryland and is due in 2004. Amounts outstanding under the Senior Loan bear
interest at one-month LIBOR plus approximately 1.02%. The Mezzanine Loan,
secured by the equity interest in the wholly-owned
32
subsidiary that owns Gaylord Opryland, is due in 2004 and bears interest at
one-month LIBOR plus 6.0%. At the Company's option, the Nashville Hotel Loans
may be extended for two additional one-year terms beyond their scheduled
maturities, subject to Gaylord Opryland meeting certain financial ratios and
other criteria. The Nashville Hotel Loans require monthly principal payments of
$0.7 million during their three-year terms in addition to monthly interest
payments. The terms of the Senior Loan and the Mezzanine Loan required the
Company to purchase interest rate hedges in notional amounts equal to the
outstanding balances of the Senior Loan and the Mezzanine Loan 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 7.5%. The Company used $235.0 million of the proceeds from
the Nashville Hotel Loans to refinance the Interim Loan. 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. The net
proceeds from the Nashville Hotel Loans after refinancing of the Interim Loan
and paying required escrows and fees were approximately $97.6 million. At March
31, 2003 and December 31, 2002, the unamortized balance of the deferred
financing costs related to the Nashville Hotel Loans was $5.8 million and $7.3
million, respectively. The weighted average interest rates for the Senior Loan
for the three months ended March 31, 2003 and 2002, including amortization of
deferred financing costs, were 4.3% and 4.4%, respectively. The weighted average
interest rates for the Mezzanine Loan for the three months ended March 31, 2003
and 2002, including amortization of deferred financing costs, were 10.8% and
10.2%, 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 December 31, 2002, the cash management restrictions were in
effect which requires that all excess cash flows, as defined, be escrowed and
may be used to repay principal amounts owed on the Senior Loan. As of March 31,
2003, the second level default was cured and the cash management restrictions
were lifted. During 2002, the Company negotiated certain revisions to the
financial covenants under the Nashville Hotel Loans and the Term Loan. 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 at March 31, 2003 and December 31,
2002. 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.
33
The following table summarizes our significant contractual obligations as of
March 31, 2003, including long-term debt and operating lease commitments:
(in thousands)
TOTAL AMOUNTS LESS THAN OVER
CONTRACTUAL OBLIGATIONS COMMITTED 1 YEAR 1-2 YEARS 3-4 YEARS 4 YEARS
- ------------------------------------------------ ------------- ---------- ---------- ---------- -----------
Long-term debt ................................. $ 337,184 $ 8,004 $ 329,180 $ -- $ --
Capital leases ................................. 1,672 542 934 176 20
Construction commitments ....................... 252,000 232,000 20,000 -- --
Arena naming rights ............................ 61,323 2,373 5,108 5,632 48,210
Operating leases ............................... 713,933 8,281 19,480 6,690 679,482
Other .......................................... 5,525 325 650 650 3,900
---------- ---------- ---------- ---------- ----------
Total contractual obligations .................. $1,371,637 $ 251,525 $ 375,352 $ 13,148 $ 731,612
========== ========== ========== ========== ==========
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
2003 to total approximately $228.7 million, which includes continuing
construction costs at the new Gaylord hotel in Grapevine, Texas of approximately
$202.0 million, approximately $0.6 million related to the possible development
of a new Gaylord hotel in Prince George's County, Maryland and approximately
$12.4 million related to Gaylord Opryland. In addition, the Company anticipates
approximately $5.6 million of capital expenditures related to the Grand Ole
Opry. The Company's capital expenditures for continuing operations for the three
months ended March 31, 2003 were $49.3 million.
During the third quarter of 2002, the Company announced that the Gaylord
Opryland Texas Resort and Convention Center, located near the Dallas/Fort Worth
airport, is projected to open in April 2004, two months earlier than previously
announced.
34
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, 2002.
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
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 March 31, 2003, the Company held an investment of 11.0 million
shares of Viacom Class B common stock, which was received as the result of the
sale of television station KTVT to 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 March 31, 2003, the fair market value of the
Company's investment in the 11.0 million shares of Viacom stock was $401.8
million, or $36.52 per share. The secured forward exchange contract protects the
Company from 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.
Interest Rate Swaps - The Company enters into interest rate swap agreements to
manage its exposure to interest rate changes. The swaps involve the exchange of
fixed and variable interest rate payments without changing the principal
payments. The fair market value of these interest rate swap agreements
represents the estimated receipts or payments that would be made to terminate
the agreements. The fair market value of the interest rate swap agreements is
determined by the lender. Changes in certain market conditions could materially
affect the Company's consolidated financial position.
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 required the purchase of
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 purchased instruments that cap its exposure to the
one-month Eurodollar rate at 6.625%. During the third quarter of 2002, the
35
instruments expired and the Company was not required to purchase any additional
coverage. The terms of the Nashville Hotel Loans require the purchase of
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 for the three months ended March 31,
2003 by approximately $0.5 million after taxes based on debt amounts outstanding
at March 31, 2003.
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 March 31, 2003. As a result, the interest rate market risk
implicit in these investments at March 31, 2003, 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 March 31,
2003, 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the Chief Executive Officer and Chief Financial Officer of the Company
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Inapplicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Inapplicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
ITEM 5. OTHER INFORMATION
Inapplicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits following the Signatures page.
(b) (i) A Current Report on Form 8-K, dated January 17, 2003,
announcing the Company intended to make certain changes to its
previously issued historical financial statements.
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: May 15, 2003 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
CERTIFICATIONS
I, Colin V. Reed, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gaylord
Entertainment Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Colin V. Reed
-----------------
Colin V. Reed
President and Chief Executive Officer
39
I, David C. Kloeppel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gaylord
Entertainment Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ David C. Kloeppel
---------------------
David C. Kloeppel
Executive Vice President and Chief Financial Officer
40
INDEX TO EXHIBITS
4.1 Stock Purchase Warrant, dated November 7, 2002, by the Company to
Gilmore Entertainment Group, LLC.
10.1 Second Amendment to Mezzanine Loan Agreement, dated April 30, 2003,
by and between Opryland Mezzanine Trust 2001-1 and OHN Holdings, LLC.
99.1 Certification of Colin V. Reed pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
99.2 Certification of David C. Kloeppel pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
41