================================================================================UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549FORMForm 10-K
(MARK ONE) [X]FOR ANNUAL
REPORTAND TRANSITION REPORTSPURSUANT TOSECTIONSECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO.
(Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-13079
GAYLORD ENTERTAINMENT COMPANY (ExactGaylord Entertainment Company
(Exact name ofRegistrantregistrant as specified in its charter)DELAWARE 73-0664379 (State or other jurisdiction
73-0664379 (State or Other Jurisdiction of
Incorporation or Organization)(I.R.S. Employer
Identification No.)One Gaylord Drive, Nashville, Tennessee
(Address of Principal Executive Offices)37214
(Zip Code)Registrant’s Telephone Number, Including Area Code:
(615) 316-6000Securities registered pursuant to Section 12(b) of
(I.R.S. Employer incorporation or organization) Identification No.) ONE GAYLORD DRIVE, NASHVILLE, TENNESSEE 37214 (Addressthe Act:
(Title of Class)New York Stock Exchange
(Name of Exchange on Which Registered)Securities registered pursuant to Section 12(g) of
Principal Executive Offices) (Zip Code) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (615) 316-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK - $.01 PAR VALUE NEW YORK STOCK EXCHANGE (Titlethe Act:None(Title of Class)(Name of exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of Class)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.
[X]Yes[ ]þ NooIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ]þIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
[X]Yes[ ]þ NoAs of March 17, 2003, there were 33,789,575 shares of Common Stock outstanding.oThe aggregate market value of the shares of Common Stock held by non-affiliates of the registrant based on the closing price of the Common Stock on the New York Stock Exchange
onas of June 30,20022003 was approximately$503,662,550. For purposes$469,046,421.(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of
the foregoing calculation only,March 1, 2004, there were 39,467,814 shares of Common Stockheld by non-affiliates exclude only those shares beneficially owned by officers and directors.outstanding.DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
registrant'sregistrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held May8, 20037, 2004 are incorporated by reference into Part III of this Form 10-K.================================================================================GAYLORD ENTERTAINMENT COMPANY
20022003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
1
PART I
Throughout this report, we refer to Gaylord Entertainment Company, together with its subsidiaries, as
"we," "us," "Gaylord“we,” “us,” “Gaylord Entertainment," "Gaylord,"” “Gaylord,” or the"Company." ITEM“Company.”Item 1.
BUSINESSBusinessWe are
a diversifiedthe only hospitality companyoperating principallyfocused primarily on the large group meetings segment of the lodging market. Our hospitality business includes our Gaylord branded hotels consisting of the Gaylord Opryland Resort & Convention Center in Nashville, Tennessee, the Gaylord Palms Resort & Convention Center near Orlando, Florida and the Gaylord Texan Resort & Convention Center near Dallas, Texas (scheduled completion date: April 2004). We also own and operate the Radisson Hotel at Opryland in Nashville, Tennessee. Driven by our “All-in-One-Place” strategy, our award-winning Gaylord branded hotels incorporate not only high quality lodging, but also significant meeting, convention and exhibition space, superb food and beverage options and retail facilities within a single self-contained property. As a result, our properties provide a convenient and entertaining environment for our convention guests. In addition, our custom-tailored, all-inclusive solutions cater to the unique needs of meeting planners.In order to strengthen and diversify our hospitality business, on November 20, 2003, we acquired ResortQuest International, Inc. (“ResortQuest”) in a stock-for-stock transaction. ResortQuest is a leading provider of vacation condominium and home rental property management services in premier destination resort locations in the United States and Canada, with a branded network of vacation rental properties. ResortQuest currently provides management services to approximately 19,300 vacation rental properties, approximately 17,800 of which are under exclusive management contracts and approximately 1,500 of which are under non-exclusive management contracts.
We also own and operate several attractions in Nashville, including the Grand Ole Opry, a live country music variety show, which is the nation’s longest running radio show and an icon in country music. Our local Nashville attractions provide entertainment opportunities for Nashville-area residents and visitors, including our Nashville hotel and convention guests, while adding to our destination appeal.
We were originally incorporated in 1956 and were reorganized in connection with a 1997 corporate restructuring.
Our operations are organized into four
groups:principal business segments: (i) Hospitality, which includes our hotel operations; (ii) Opry and Attractions, which includes our Nashville attractions and assets related to the Grand Ole Opry; (iii)Media,ResortQuest; and (iv) Corporate and Other.The Hospitality segment comprises the operations of the Gaylord Hotel properties and the Radisson Hotel at Opryland. The Attractions segment represents all of the Nashville-area attractions, including the Grand Ole Opry, General Jackson Showboat, Ryman Auditorium, Springhouse Golf Club and the Wildhorse Saloon. It also includes the results of Corporate Magic, the Company's corporate event production business. The Media segment includes the Company's three radio stations. The Corporate and Other segment includes corporate expenses and results from investments in sports franchises and minority investments.These four business segments-— Hospitality, Opry and AttractionsMedia,Group, ResortQuest, and Corporate and Other-— represented81.9%approximately 82%,15.3%14%,2.7%,4% and0.1%0%, respectively, of total revenues in the calendar year ended December 31,2002.2003. Financial information by industry segment andgeographic areaour Gaylord hotel properties as of December 31, 2003 and for each of the three years in the period then ended,as of December 31, 2002,appears in Item 6, “Selected Financial Data,” and Item 7,"Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Results of Operations"” and in the Financial Reporting by Business Segments note (Note 20) to our Consolidated Financial Statements included in this annual report on Form 10-K.HOSPITALITY Gaylord Hotels - Strategic Plan. Gaylord Entertainment'sStrategy
Our goal is to become the
nation'snation’s premier hotel brand serving the meetings and conventions sector and to enhance our business by offering additional vacation and entertainment opportunities to our guests and target consumers. Our Gaylord branded hotels focus on the $86 billion large group meetings market. Our properties and service are designed to appeal to meeting planners who arrange these large group meetings. As a result of the ResortQuest acquisition, we operate a leading provider of vacation, condominium and home rental management services with approximately 19,300 vacation rental properties under management. The Grand Ole Opry is one of the brands best-known by the “country lifestyle” consumer, which we estimate to be approximately 70 million people in the United States.2
“All-in-One-Place” Product Offering.Through our “All-in-One-Place” strategy, our Gaylord branded hotels incorporate meeting and exhibition space, signature guest rooms, award-winning food and beverage offerings, fitness facilities and other attractions within a large hotel property so our attendees’ needs are met in one location. This strategy creates a better experience for both meeting planners and our guests, while at the same time allowing us to capture a greater share of their event spending. It is through this strategy of a self-contained destination dedicated primarily to the meetings industry that our Gaylord Opryland hotel in Nashville and our Gaylord Palms hotel in Florida claim a place among the leading convention hotels in the country.
Create Customer Rotation Between Our Hotels.In order to further capitalize on our success in Nashville, we opened our Gaylord Palms in January 2002, and are scheduled to open the new Gaylord Texan in April 2004. In 2001, we refocused the efforts of our sales force to capitalize on our expansion and the desires of some of our large group clients to meet in different parts of the country each year. In addition, we establish relationships with new customers as we increase our geographic reach. For example, upon opening the Gaylord Palms, we added new association clients such as the North American Veterinarian Association. There is a significant opportunity to establish strong relationships with new customers and rotate them to our other properties. For example, the National Collegiate Athletic Association (“NCAA”) has contracted for approximately 25,000 room nights among our Gaylord branded hotels over the next 5 years.
Leverage Brand Name Awareness.We believe that the Grand Ole Opry is one of the most recognized entertainment brands within the United States. We promote the Grand Ole Opry name through a number of media outlets including our WSM-AM radio station, the Internet, television and performances by the Grand Ole Opry’s members, many of whom are renowned country music artists. In addition to these long-standing promotion media, we believe that significant growth opportunities exist through leveraging and extending the Grand Ole Opry brand into other products and markets. As such, we have alliances in place with multiple distribution partners such as Great American Country (GAC) cable television channel, Westwood One Radio Network and Sirius Satellite Radio in an effort to foster brand extension. We are currently exploring additional products, such as television specials and retail products, through which we can capitalize on our brand affinity and awareness. We believe that licensing our brand for products may provide an opportunity to increase revenues and cash flow with relatively little capital investment.
Capitalize on the ResortQuest Acquisition.We believe the combination of Gaylord and ResortQuest has formed a stronger, more diversified hospitality company with the ability to offer a broader range of accommodations to existing and potential customers. We believe that there are significant opportunities to cross-sell hospitality products by offering ResortQuest’s vacation properties to our “country lifestyle” consumers and introducing our hotels and “country lifestyle” offerings to ResortQuest’s customers. Drawing upon the experience of our combined management teams, we believe that we can more fully develop the ResortQuest brand and take advantage of future growth opportunities through increased scale, improved operational efficiency and access to additional sources of capital. In addition, we have identified a number of cost saving opportunities and synergies, including eliminating redundant functions and optimizing the combined company’s infrastructure.
Industry Description
According toTradeshow Week, the large group meetings market generated approximately $86 billion of revenues for the companies that provide services to it. The convention hotel industry is estimated to have generated approximately $15 billion of these revenues. These revenues include event producer total gross sales (which include exhibitor and sponsor expenditures) and attendee “economic impact” (which includes spending on lodging, meals, entertainment and in-city transportation), not all of which we capture. The convention hotels that attract these group meetings typically have at least 25,000 square feet of exhibit space, often have more than 1,000 guest rooms and, on average, contain approximately 119,000 square feet of exhibit space, 94,000 square feet of meeting space and 40 meeting rooms.
3
The large group meetings market is comprised of approximately one million events annually, of which approximately 80% are corporate meetings and 18% are association meetings. The large majority of these events requires less than 250,000 square feet of exhibit or meeting space, with only 8% requiring over 500,000 square feet. Examples of industries participating in these meetings include health care, home furnishings, computers, sporting goods and recreation, education, building and construction, industrial, agriculture, food and beverage, boats and automotive. Association-sponsored events, which draw a large number of attendees requiring extensive meeting space and room availability, account for over half of total group spending and economic impact. Because associations and trade shows generally select their sites 2 to 5 years in advance, thereby increasing earnings visibility, the convention hotel segment of the lodging industry is more predictable and less susceptible to economic downturns than the general lodging industry.
A number of factors contribute to the success of a convention center hotel, including the following: the availability of sufficient meeting and exhibit space to satisfy large group users; the availability of rooms at competitive prices; access to quality entertainment and food & beverage venues; destination appeal; appropriate regional professional and consumer demographics; adequate loading docks, storage facilities and security; ease of site access via air and ground transportation; and the quality of service provided by hotel staff and event coordinators. The ability to offer as many of these elements within close proximity of each other is important in order to reduce the organizational and logistical planning efforts of the meeting planner. The meeting planner, who acts as an intermediary between the hotel event coordinator and the group scheduling the event, is typically a convention hotel’s direct customer. Effective interaction and coordination with meeting planners is key to booking events and generating repeat customers.
Largest Hotel Exhibit Hall Rankings 2003
Total Total Exhibit Space Number of Meeting Space Facility City (sq. ft.) Meeting Rooms (sq. ft.) Sands Expo Las Vegas, NV 1,125,600 146 231,477 Mandalay Bay Resort & Casino Las Vegas, NV 934,731 121 360,924 Walt Disney World Swan and Dolphin Lake Buena Vista, FL 329,000 84 248,655 Wyndham Anatole Hotel Dallas, TX 315,000 73 187,000 Gaylord Opryland Resort & Convention Center Nashville, TN 288,972 85 300,000 Hyatt Regency Chicago’s Riverside Center Chicago, IL 225,000 71 115,000 MGM Grand Hotel & Conference Center Las Vegas, NV 210,000 60 315,000 The Westin Diplomat Resort & Spa Hollywood, FL 209,000 39 60,000 Reno Hilton Reno, NV 190,000 40 110,000 Gaylord Texan Resort & Convention Center* Grapevine, TX 179,800 69 180,000 Gaylord Palms Resort & Convention Center Kissimmee, FL 178,500 61 200,000 Source: the Company;Tradeshow Week Major Exhibit Hall Directory 2003
* Scheduled to open in April 2004. Hospitality
Gaylord Hotels — Strategic Plan.Our goal is to become the nation’s premier brand in the meetings and convention sector. To accomplish this, our business strategy is to develop resorts and convention centers in desirable event destinations that are created based in large part on the needs of meeting planners and attendees. Using the slogan
"All in One Place," Gaylord Hotels“All-in-One-Place,” our hotels incorporate meeting, convention and exhibition space with a large hotel property so the attendees never have to leave the location during their meetings.4
This concept of a self-contained destination dedicated primarily to the meetings industry has madeourGaylord OprylandResort and Convention Center ("Gaylord Opryland")in Nashville one of the leading convention hotels in the country. In addition to operating Gaylord Opryland,in Nashville,we openedourthe Gaylord PalmsResort and Convention Center ("Gaylord Palms") in Kissimmee, Floridain January2002,2002. We are scheduled to open our new GaylordhotelTexan inGrapevine, Texas inAprilof2004, and have the option to purchase land for the development of a hotel in the Washington, D.C. area.The Company believesWe believe thatitsour new convention hotels will enablethe Companyus to capture additional convention business from groups that currently utilize Gaylord Opryland but must rotate their meetings to other locations due to theirattendees'attendees’ desires to visit different areas.The CompanyGaylord also anticipates thatitsour new hotels will capture new group business that currently does not come to the Nashville market and will seek to gain additional business at Gaylord Opryland in Nashville once these groups have experienced a Gaylord hotel in other markets.Plans for the properties to be developed include the following components, which the Company believes are the foundation of its success with Gaylord Opryland: (i) state-of-the-art meeting facilities, including a high ratio of square footage of meeting and exhibit space per guest room; (ii) expansive atriums themed to capture geographical and cultural aspects of the region in which the property is located; and (iii) entertainment components and innovative venues creating a superior guest experience not typically found in convention hotels. In October 2001, the Company announced a re-branding of the Opryland Hotels under the new brand of "Gaylord Hotels." Opryland Hotel Nashville was renamed Gaylord Opryland and the Opryland Hotel Florida was renamed the Gaylord Palms.Gaylord Opryland Resort and Convention Center
-— Nashville, Tennessee.Our flagship, Gaylord Opryland in Nashville, is one of the leading convention destinations in the United States. Designed with the lavish gardens and magnificent charm of a glorious Southern mansion, the resort is situated on approximately 172 acres in the Opryland1complex. Gaylord Opryland is one of the largest hotels in the United States in terms of number of guest rooms. Gaylord Opryland attracts convention business from trade associations and corporations, which accounted for approximately 80% of the hotel's revenues in each of 2002, 2001, and 2000.It also serves as a destination resort for vacationers due to its proximity to the Grand Ole Opry, the General Jacksonshowboat,Showboat, the Springhouse Golf Club(the Company's(Gaylord’s 18-hole championship golf course), and other attractions in the Nashville area.The Company believes that the ambiance created at Gaylord Opryland and the combination of the quality of its convention facilities and availability of live musical entertainment are factors that differentiate it from other convention hotels. In late 1999, the Company began a three-year, $54 million renovation and capital improvement program to refurbish the hotel, and as of December 31, 2002 this renovation program was substantially complete. The following table sets forth information concerning Gaylord Opryland in Nashville for each of the five years in the period ended December 31, 2002.Gaylord Opryland has 2,881 guest rooms, four ballrooms with approximately
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ----Average number of guest rooms............... 2,881 2,883 2,883 2,884 2,884 Occupancy rate.............................. 68.6% 70.3% 75.9% 78.0% 79.1% Average daily rate ("ADR").................. $ 142.58 $ 140.33 $ 140.03 $ 135.48 $ 137.02 Revenue per available room ("RevPAR")....... $ 97.80 $ 98.65 $ 106.22 $ 105.66 $ 108.33 Food and beverage revenues (in thousands)... $ 66,312 $ 72,800 $ 81,093 $ 85,686 $ 81,518 Total revenues (in thousands)............... $ 206,132 $ 221,953 $ 229,859 $ 234,435 $ 233,645124,000121,000 square feet, 85 banquet/meeting rooms, and total dedicated exhibition space of approximately 289,000 square feet. Total meeting, exhibit and pre-function space in the hotel is approximately 600,000 square feet.Gaylord Palms Resort and Convention Center
-— Kissimmee, Florida.We openedourGaylord PalmsResort and Convention Center in Kissimmee, Floridain January 2002. Gaylord Palms has 1,406 signature guest rooms and approximately400,000360,000 square feet of total meeting and exhibit space. The hotel is situated on a 65-acre site in Osceola County, Florida and is approximately 5 minutes from the main gate of the Walt DisneyWorld(R)World® Resort complex. Gaylord Palmsis designed similarly to Gaylord Opryland, with rooms overlooking large glass-covered atriums. The three atriums at Gaylord Palms are modeled after notable areas from the State of Florida: the Everglades, Key West and St. Augustine. Gaylord Palms alsohas a full-service spa,whichwith20,000-square20,000 square feet of dedicated space(over 25and 15 treatmentrooms) is one of the largest spas in Central Florida. The spa, known as the Canyon Ranch Spa Club, is managed by the Canyon Ranch Spa Company from Arizona, a leader in spa management.rooms. Hotel guests also have golf privileges at the world classFalcon'sFalcon’s Fire Golf Club, located a half-mile from the property.The following table sets forth information concerningGaylord
Palms in Kissimmee for the period subsequent to its January 2002 opening.
2002 ----Average number of guest rooms............... 1,406 Occupancy rate.............................. 64.9% Average daily rate ("ADR").................. $ 168.65 Revenue per available room ("RevPAR")....... $ 109.37 Food and beverage revenues (in thousands)... $ 54,411 Total revenues (in thousands)............... $ 126,473Gaylord OprylandTexan Resort and Convention Center — Grapevine, Texas.We began construction on our new GaylordhotelTexan inGrapevine, Texas inJuneof2000, and the hotel is scheduled to open in Aprilof2004. The1,5081,511 room hotel and convention center is located eight minutes from the Dallas/Fort Worth International Airport. Like its sister property in Kissimmee, Florida, our Texas hotel will feature a grand atrium enclosing several acres as well as over400,000360,000 square feet of pre-function, meeting and exhibition space all2under one roof. The property will also include a number of themed restaurants with an additional restaurant located on the point overlooking Lake Grapevine. Total net real estate, construction, and furnishings, fixtures and equipment and capitalized interest costs for the new Texas hotel are currently anticipated to be in the range of $515 million. As of December 31, 2002, the Company has incurred approximately $213 million of these costs.Gaylord Hotels Development Plan.In January 2000,
the Companywe announced plans to develop a Gaylord hotel on property to be acquiredfrom The Peterson Companieson the Potomac River in PrinceGeorge'sGeorge’s County, Maryland (in the Washington, D.C. market). We have entered into a purchase agreement with respect to the site of our proposed development. The purchase agreement is subject to designated closing conditions and provides for liquidated damages, currently in the amount of $1.0 million, in the event we elect not to purchase the property once the closing conditions have been satisfied. This project is subject to the availability of financing and resolution of certain zoning issues and final approval ofthe Company's BoardGaylord’s board ofDirectors. Management woulddirectors. Gaylord’s management is alsoconsiderconsidering other sitesin Phoenix, San Diego or Chicago as possible locations for ato locate future Gaylordhotel.Hotel properties.Radisson Hotel at Opryland.We also own and operate the Radisson Hotel at Opryland, a Radisson franchise hotel, which is located across the street from Gaylord Opryland. The hotel has 303 rooms and approximately 14,000 square feet of meeting space.
The Company purchased the hotel in April 1998 for approximately $16 million. A major renovation of the guest rooms and meeting space was completed in 1999 at a cost of approximately $7 million.In March 2000,the Companywe entered into a 20-year franchise agreement with Radisson in connection with the operation of this hotel.The franchise agreement contains customary termsOpry and
conditions. ATTRACTIONSAttractions GroupThe Grand Ole Opry.The Grand Ole Opry, which celebrated its 75th anniversary in 2000, is one of the most widely known platforms for country music in the world. The Opry features a live country music show with performances every Friday and Saturday night, as well as a Tuesday Night
Opry'sOpry on a seasonal basis.5
The Opry House, home of the Grand Ole Opry, is located in the Opryland complex. The Grand Ole Opry moved to the Opry House in 1974 from its most famous home in the Ryman Auditorium in downtown Nashville.TheEach week, the Grand Ole Opry is broadcast live to millions of country lifestyle consumers on terrestrial radio via Westwood One and WSM-AM, worldwide on the
Company's WSM-AMArmed Forces Radio Network, on satellite radiostation every Fridayvia Sirius Satellite Radio andSaturday night,on television via the Great American Country network andtheCMT-Canada. The broadcast of the Opry is also streamed on the Internet via www.opry.com and www.wsmonline.com. The show has been broadcast since 1925 on WSM-AM, making it the longest running live radio program in theworld. In 2001,United States. The television broadcast schedule on theCompany entered into an agreement (the "CMT Opry Live Agreement") with Viacom, Inc. pursuant to which Viacom agreed to move the exhibition of the Opry Live from its TNN channel to CMT. Under the CMT Opry Live Agreement, ViacomGreat American Country network willair the Opry Liveinclude 52 weekly telecasts airing onCMT each week through September 30, 2003Saturday nights at 8 p.m. EST andwill re-air the Opry Live showrepeating three times on weekends and twiceeach week for a total of three airings per week.on Tuesday evenings. The Grand Ole Oprycurrently has approximately 70 performing members who are stars or other notables inis also re-aired on 205 radio stations across the countrymusic field. There are no financial inducements attached to membership in thethrough syndication of “America’s Grand Ole Opryother than the prestige associated with membership.Weekend,” which is distributed by Westwood One. In addition to performances by members, the Grand Ole Opry presents performances by many other country music artists.Members include traditional favorites, such as Loretta Lynn and George Jones, as well as contemporary artists, like Alan Jackson, Vince Gill, and Martina McBride. The Opry House contains a 45,000 square foot auditorium with 4,424 seats, a television production center that includes a 300-seat studio and lighting, audio, and video control rooms, and set design and scenery shops. The Opry House is used by the Company for the production of television and other programming and by third parties such as national television networks and the Public Broadcasting System. The Opry House is also rented for concerts, theatrical productions, and special events and is used by Gaylord Opryland for convention entertainment and other events such as the Radio City Christmas Spectacular featuring the world famous Rockettes(TM).Ryman Auditorium.The Ryman Auditorium, which was built in 1892 and seats approximately 2,300, was recently designated as a National Historic Landmark. The former home of the Grand Ole Opry, the Ryman Auditorium was renovated and re-opened in 1994 for concerts and musical productions.
Recent concert performers have included Ricky Skaggs, Bruce Springsteen, Coldplay, The Pretenders, Dixie Chicks, Willie Nelson, Alison Krauss and Elvis 3Costello. The Ryman Auditorium consistently has received local awards as a venue for live music performances, and in January 2001, CitySearch editors listed the Ryman Auditorium among the top five concert venues in the United States for the second year in a row. Since its reopening, the Ryman Auditorium has featured musicals produced by the Company such as Always . . . Patsy Cline, Lost Highway - The Music & Legend of Hank Williams, Bye Bye Love - The Everly Brothers Musical, and Stand By Your Man: The Tammy Wynette Story.The Grand Ole Opry returns to the Ryman Auditorium periodically, most recently from November20022003 toFebruary 2003. TheJanuary 2004. In 2003, the Ryman Auditoriumis also host to a numberwas named “Theatre ofspecial events.the Year” by Pollstar Concert Industry Awards.The General Jackson Showboat.
The Company operatesWe operate the General Jackson Showboat, a 300-foot, four-deck paddle wheel showboat, on the Cumberland River, which flows past the Gaylord Oprylandcomplex.complex in Nashville. Its Victorian Theatre can seat 620 people for banquets and 1,000 people for theater-style presentations. The showboat stages Broadway-style shows and other theatrical productions. The General Jackson is one of many sources of entertainment thatthe CompanyGaylord makes available to conventions held at Gaylord Opryland.It contributes to the Company's revenues from convention participants as well as local business.During the day, it operates cruises, primarily serving tourists visiting the Opryland complex and the Nashville area.The Springhouse Golf Club.Home to a Senior PGA Tour event
sincefrom 1994 to 2003 and minutes from Gaylord Opryland, the Springhouse Golf Club was designed by former U.S. Open and PGA Champion Larry Nelson. The43,00040,000 square-foot antebellum-style clubhouse offers meeting space for up to 450 guests.The Wildhorse Saloon.Since 1994,
the Company haswe have owned and operated the Wildhorse Saloon, a country music performance venue on historic Second Avenue in downtown Nashville. Thethree story, 66,000 square-footthree-story facility includes a dance floor of approximately 2,500 square feet, as well as a restaurant and banquet facilitywhichthat can accommodate up to 2,000guests, and a 15' x 22' television screen which features country music videos and sporting events. The Wildhorse Saloon has featured performers such as Tim McGraw and the Dixie Chicks. The club has a broadcast-ready stage and facilities to house mobile production units from which broadcasts of live concerts may be distributed nationwide.guests.Corporate Magic.In March 2000,
the Companywe acquired Corporate Magic, Inc., a company specializing in the production of creative and entertainment events in support of the corporate and meetingmarketplace, for $9.0 million.marketplace. We believe the event and corporate entertainment planning function of Corporate Magic complements the meeting and convention aspects of our Gaylord Hotels business.MEDIAWSM-AM.WSM-AM
and WSM-FM. WSM-AM and WSM-FMcommenced broadcasting in1925 and 1967, respectively.1925. The involvement ofthe Company'sGaylord’s predecessors with country music dates back to the creation of the radio program that became The Grand Ole Opry, which has been broadcast live on WSM-AM since 1925. WSM-AMand WSM-FM are eachis broadcast from the Gaylord Opryland complex in Nashville andhavehas a country musicformats.format. WSM-AMwent on the air in 1925 andis one of thenation's 25 "clear channel"nation’s “clear channel” stations, meaning that no other station in a 750-mile radius uses the same frequency for nighttime broadcasts. As a result, thestation'sstation’s signal, transmitted by a 50,000 watt transmitter, can be heard at night in much of the United States and parts of Canada.The Company also has radio broadcast studios in Gaylord Opryland, the Wildhorse Saloon, the Ryman Auditorium, and the Opry Mills retail complex in Nashville. WWTN-FM. In 1995, the Company acquired the assets of radio station WWTN-FM, which operates out of Nashville, Tennessee. WWTN-FM has a news/talk/sports format and is the flagship station of the Nashville Predators, a National Hockey League club of which the Company owns a minority interest.On
March 25,July 21, 2003,the Company,we, throughitsour wholly-owned subsidiary Gaylord Investments, Inc.,entered into an agreement to sellsold the assets primarily used in the operations of WSM-FM and WWTN(FM) to Cumulus Broadcasting, Inc.("Cumulus"),for $62.5 million in cash, andthe CompanyGaylord entered into a joint sales agreement with Cumulus for WSM-AM4in 6
exchange for approximately$65$2.5 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 third quarter of 2003. In connection with this agreement, we also entered into a local marketing agreement with Cumulus pursuant to which, from the second business day after the expiration or termination of the waiting period under the Hart-Scott-Rodino Improvements Act of 1976 until the closing of the sale of the assets, we 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 underUnder 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.CORPORATE AND OTHERResortQuest
ResortQuest’s rental properties are generally second homes or investment properties owned by individuals who assign to ResortQuest the responsibility of managing, marketing and renting their properties. ResortQuest earns management fees as a percentage of the rental income from each property, but generally has no ownership interest in the properties. In addition to the vacation property management business, ResortQuest offers real estate brokerage services and other rental and property owner services. ResortQuest has also developed an industry leading proprietary vacation rental management software, First Resort Software, with over 900 licenses sold to vacation property management companies.
ResortQuest provides value-added services to both vacationers and property owners. For vacationers, ResortQuest offers the value, convenience and features of a condominium or home while providing many of the amenities and services of a hotel, such as centralized billing, check-in and housekeeping services. For property owners, ResortQuest offers a comprehensive package of marketing, management and rental services designed to enhance rental income and profitability while providing services to maintain the property. Property owners also benefit from ResortQuest’s QuestPerks program, which offers benefits such as discounts on lodging, air travel and car rentals. To manage guests’ expectations, ResortQuest has developed and implemented a five-tier rating system that segments its property portfolio into five categories: Quest Home, Platinum, Gold, Silver and Bronze.
Utilizing its marketing database, ResortQuest markets its properties through cable television ad campaigns and various other media channels. ResortQuest has significant distribution through ResortQuest.com, its proprietary website offering “real-time” reservations, and its inventory distribution partnerships that include Expedia, Travelocity, Condosaver, retail travel agents, travel wholesalers and others. ResortQuest is constantly enhancing its website to improve the booking experience for leisure travelers. In addition to detailed property descriptions, virtual tours, interior and exterior photos, floor plans and local information, vacationers can search for properties by date, activity, event or location; comparison shop among similar vacation rental units; check for special discounts and promotions; and obtain maps and driving directions.
Corporate and Other
Bass Pro Shops.
From 1993 to December 1999, the Company ownedWe own aminority19.1% interest in Bass Pro,L.P. As part of a reorganization of Bass Pro in December 1999, the Company contributed its limited partnership interest to a newly formed Delaware corporation, Bass Pro,Inc.for a 19% interest in the new entity.Bass Pro, Inc. owns and operates Bass Pro Shops, a retailer of premium outdoor sporting goods and fishing tackle. Bass Pro Shops serves its customers through an extensive mail order catalog operation, a retail center in Springfield, Missouri, and additional retail stores at Opry Mills in Nashville and in various other U.S. locations.Nashville Predators.
The Company ownsAs of December 31, 2003, we own a12.84%10.5% interest in the Nashville Hockey Club Limited Partnership, a limited partnership that owns the Nashville Predators, a National Hockey League franchisewhichthat began itsfifthsixth season in the fall of2002.2003. In July of 2002 and 2003 respectively, we exercised the first two of our three put options, each of which gives us the right to require that thePredatorslimited partnership repurchase one-third(1/3)ofourits interest in the partnership. To date, thePredators havelimited partnership has not completed this repurchase.We are engaged in continuing discussions with the Predators' partnership regarding our right to have our interest repurchased. In our accompanying financial statements, the value of our investment in the Predators' partnership has been reduced to zero.In August 1999,the Companywe entered into a Naming Rights Agreement with the limited partnership wherebythe Companywe purchased the right to name the Nashville Arena the"Gaylord“Gaylord EntertainmentCenter"Center” and to place certain advertising within the arena. Under the agreement, which has a 20-year term,the Company iswe are required to make annual payments, beginning at $2,050,000 in the first year and with a 5% escalation each year thereafter, and to purchase a minimum number of tickets to Predators games each year.RECENT DEVELOPMENTS AND STRATEGIC DIRECTIONWe contend that we made the payment due under the Naming Rights Agreement by way of set off against obligations owed pursuant to the put option. We currently are in litigation with the Nashville Hockey Club Limited Partnership to resolve the disputes regarding the team ownership and the naming rights for the Gaylord Entertainment Center. See “Legal Proceedings” below.7
Viacom.We hold an investment of approximately 11 million shares of Viacom Class B common stock (“Viacom 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. We 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 us against decreases in the fair market value of the Viacom stock, while providing for participation in increases in the fair market value. At December 31, 2003, the fair market value of our investment in the shares of Viacom stock was $480.4 million, or $43.66 per share. The secured forward exchange contract protects the Company against decreases in the fair market value of the Viacom stock by way of a put option at a strike price below $56.05 per share, while providing for participation in increases in the fair market value by way of a call option at a strike price of $75.30 per share, as of December 31, 2003. Future dividend distributions received from Viacom may result in an adjusted call strike price. For any appreciation above $75.30 per share, the Company will participate in the appreciation at a rate of 25.93%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Implementation of Strategic Direction
During the second quarter of 2001,
the Companywe hired a new Chairman of the Board and a new Chief Executive Officer. Once the new senior management team was in place, they devoted a significant portion of 2001 to reviewing the many different businesses they inherited when they joined the Company. After significant review, it was determined that, whilethe Companywe had four business segments for financial reporting purposes (Hospitality, Opry and Attractions Group, Media, consisting of our radio stations and other media assets, and Corporate andOther - all described above)Other), the future direction of the Company would be based on two core asset groups, which were aligned as follows: (i) Hospitality Core Asset Group: consisting of the Gaylord Hotelsthe Corporate Magic meeting and event planning businessand the various attractions that provide entertainment to guests of thehotels.hotels and (ii) Opry Core Asset Group: consisting of the Grand Ole Opry, WSM-AM radio, and the Ryman Auditorium.ItAs a result, it was
thusdetermined that Acuff-Rose Music Publishing, Word Entertainment, Music Country/CMT International, Oklahoma RedHawks, Opry Mills,andGET Management, WSM-FM and WWTN (FM) were not core assets of the Company, and as a result each has either been sold or otherwise disposed of by theCompany.Company as reflected in the following table:
Net Proceeds From Sale Business Sold Date (Cash and Other) (in millions) Interest in Oklahoma RedHawks November 17, 2003 $ 6.0 WSM-FM and WWTN(FM) July 21, 2003 62.5 Music Country/CMT International February 25, 2003 3.7 Acuff-Rose Music Publishing August 27, 2002 157.0 Opry Mills 33.3% Partnership Interest June 28, 2002 30.8 Word Entertainment January 4, 2002 84.0 Gaylord Production Company, Gaylord Films, Pandora Films, Gaylord Sports Management Group and Gaylord Event Television March 9, 2001 42.0 (1)
(1) Shortly after the closing, the Oklahoma Publishing Company, or OPUBCO, which purchased these assets, asserted that the Company breached certain representations and warranties in the purchase agreement. The Company entered into settlement negotiations pursuant to which the Company paid OPUBCO an aggregate of $825,000. Gaylord Digital, Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television, Gaylord Production Company, Z Music and the Opryland River Taxis, also not core assets of the Company, had previously been sold or otherwise disposed of by the Company. Remaining businesses to be sold include the
Company'sCompany’s interests in the Nashville Predators andthe Oklahoma Redhawks, andcertain5miscellaneous real estate 8
holdings. Management has yet to make a final decision as to whether to sell its minority interest in Bass Pro Shops, which it has determined to be a non-core asset. Following the decision to divest certain businesses, we restructured the corporate organization to streamline operations and remove duplicative costs. The Opryland Hospitality management group was combined with the Corporate management group and all Nashville management employees were consolidated into theCompany'sCompany’s Wendell Office Building.Highlights of some of the key developments resulting from this corporate redirection are set forth below. Sale of Acuff-Rose Music Publishing to Sony/ATV Music Publishing. On August 27, 2002, the Company completed the sale of its Acuff-Rose Music Publishing operations through the sale of substantially all of the assets (with certain exceptions) and the assumption of certain liabilities and obligations of Acuff-Rose Music Publishing, LLC, Acuff-Rose Music, LLC, Milene Music, LLC, Springhouse Music, LLC and Hickory Records, LLC (collectively, the "Sellers"), to Sony/ATV Music Publishing LLC. The Sellers engaged in the business of acquiring, publishing and exploiting musical compositions and producing, distributing and exploiting sound recordings. The proceeds from the sale totaled approximately $157 million in cash, before royalties payable to Sony for the period beginning July 1, 2002. The net proceeds were used to pay down amounts outstanding under the Company's credit facility with Deutsche Bank, Citibank and CIBC and to continue to build its core hospitality brand, Gaylord Hotels. Sale of Opry Mills Partnership Interest to The Mills Corporation. During 1998, the Company entered into a partnership with The Mills Corporation to develop the Opry Mills Shopping Center in Nashville, Tennessee. The Company held a one-third interest in the partnership as well as the title to the land on which the shopping center was constructed, which was being leased to the partnership. During the second quarter of 2002, the Company sold its partnership share to The Mills Corporation for approximately $30.8 million in cash. Sale of Word Entertainment to Warner Music Group. On January 4, 2002, the Company completed the sale of its Word Entertainment operations through the contribution of substantially all of the assets and liabilities of Gaylord Creative Group, Inc. ("GCG"), a wholly-owned subsidiary of the Company, to Idea Entertainment LLC ("Idea"), a wholly-owned subsidiary of GCG, and the sale of all of the outstanding membership interests of Idea to WMGA LLC, an affiliate of Warner Music Group Inc. GCG and its subsidiaries, operating under the trade name "Word Entertainment," engaged in the business of producing, distributing and marketing recorded music and related products, music publishing and creating audio-visual work. The proceeds to the Company from the sale totaled approximately $84 million in cash. Closing of International Cable Operations. On February 25, 2002, the Company closed its cable network operations in Brazil, Asia and Australia by selling its assets associated with MusicCountry Asia and MusicCountry Brazil to the Sound Track Channel ("STC"), a privately owned California limited liability company. In exchange for the assets, STC delivered to the Company promissory notes totaling approximately $3 million and a 5% equity interest in STC. In addition, as a part of the transaction with STC, STC assumed a portion of the Company's obligations under the Transponder Agreement with PanAmSat Corporation. The Company also closed its international cable operations in Argentina under an agreement with its joint venture partners pursuant to which the Company transferred its equity in Solo Tango, S.A. and Latin America MusicCountry, S.A. in exchange for cancellation of future obligations the Company had to its minority partners. In January of 2003, the Company completed its exit from the international cable business by selling its minority investment in Video Rola in Mexico for $650,000. Sale of Five Businesses to OPUBCO. On March 9, 2001, the Company sold its stock and equity interests in five of its businesses to The Oklahoma Publishing Company ("OPUBCO") for a purchase price of $22 million in cash and the assumption of approximately $20 million in debt. The businesses sold were Gaylord Production Company, Gaylord Films, Pandora Films, Gaylord Sports Management Group, and Gaylord Event Television. OPUBCO beneficially owns 6.2% of the Company's common stock. Three of the Company's directors, who are the beneficial owners of an additional 13.6% of the Company's common stock, are also directors of OPUBCO and voting trustees of a voting trust that controls OPUBCO. The transaction was reviewed and approved by a special committee of the independent directors of the Company. The Company received an appraisal from a firm that specializes in valuations related to films, entertainment and service businesses as well as a fairness opinion from an investment bank in connection with this transaction. 6Shortly after the closing, the Company received notification from OPUBCO asserting that the Company breached certain representations and warranties in the purchase agreement and OPUBCO demanded indemnification from the Company in the amount of $3.1 million. The Company's board of directors referred this matter to a special committee of independent directors for its consideration, and the special committee retained independent counsel to advise it on the merits of OPUBCO's indemnification request. After (i) reviewing the matters related to the indemnification request with counsel, (ii) considering the costs and uncertainties associated with litigation and (iii) considering the results of settlement negotiations with OPUBCO, the special committee authorized the Company to enter into a settlement pursuant to which the Company paid OPUBCO an aggregate of $825,000 and OPUBCO released the Company from any claims associated with the Company's indemnification obligations. Financing Activities. In February 2003, the Company received a commitment for a $225 million credit facility from Deutsche Bank, Bank of America and CIBC. The facility will consist of a $200 million term loan and a $25 million revolving credit facility. The Company expects definitive agreements with respect to this credit facility will be executed in the second quarter of 2003. Funding of the credit facility is subject to customary closing conditions and the lenders have the right to revise the credit facility structure and/or decline to perform under the commitment if the lenders determine that certain conditions exist within the Company's operations or if certain changes occur within the financial markets. Proceeds of the new credit facility will be used to pay off the Company's existing $60 million Term Loan, described below, and to complete the construction of Gaylord Opryland Texas. On October 9, 2001, the Company entered into a three-year $210 million delayed-draw senior term loan (the "Term Loan") with Deutsche Banc Alex. Brown Inc., Salomon Smith Barney, Inc. and CIBC World Markets Corp. Proceeds of the Term Loan were used to finance the completion of Gaylord Palms and for general operating needs of the Company. The Term Loan is primarily secured by the Company's ground lease interest in Gaylord Palms. The amounts outstanding under the term loan at March 21, 2003 were $60 million. On March 27, 2001, the Company entered into two new loan agreements, a $275 million senior loan (the "Senior Loan") and a $100 million mezzanine loan (the "Mezzanine Loan") (collectively, the "Nashville Hotel Loans"). The Senior Loan is secured by a first mortgage lien on the Gaylord Opryland hotel. The Mezzanine Loan is secured by the equity interest in the wholly-owned subsidiary that owns Gaylord Opryland. During May 2000, the Company entered into a seven-year secured forward exchange contract with an affiliate of Credit Suisse First Boston with respect to approximately 10.9 million shares of the Company's Viacom, Inc. Class B non-voting common stock ("Viacom Stock"). The contract has a notional amount of $613.1 million and required contract payments based upon a stated 5% rate. 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. By entering into the secured forward exchange contract, the Company realized cash proceeds of $506.3 million, net of discounted prepaid contract payments related to the first 3.25 years of the contract and transaction costs totaling $106.7 million. During October 2000, the Company prepaid the remaining contract payments related to the final 3.75 years of the contract for $83.2 million. As a result of the prepayment of the remaining contract payments, the Company was released from the covenants in the secured forward exchange contract which limited the Company's right to sales of assets, to incur additional indebtedness and to grant liens. The Company utilized $394.1 million of the net proceeds from the secured forward exchange contract to repay all outstanding indebtedness under its revolving credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a more complete description of the Company's financing activities. EMPLOYEESEmployees
As of December 31,
2002, the Company2003, we had approximately4,2157,200 full-time and5132,650 part-time and temporary employees. Of these, approximately3,5353,650 full-time and1761,020 part-time employees were employed in Hospitality; approximately360300 full-time and305560 part-time employees were employed inAttractions;Opry and Attractions Group; approximately833,000 full-time and231,000 part-time employees were employed inMedia;ResortQuest; and approximately237250 full-time and970 part-time employees were employed in Corporate and Other. After the opening of the Gaylord Texan in April of 2004, it is anticipated that an additional 1,450 employees will be employed in Hospitality. The Company believes its relations with its employees are good.7COMPETITION Hospitality.Competition
Hospitality The Gaylord Hotel properties compete with numerous other hotels throughout the United States and abroad, particularly the approximately 84 convention hotels located outside of Las Vegas, Nevada that have more than 800 rooms each
as well as the Las Vegas hotel/casinos.and a significant amount of meeting and exhibit space. Many of these hotels are operated by companies with greater financial, marketing, and human resources than the Company.The Company believesWe believe that competition among convention hotels is based on, among otherthings, factors which include:things: (i) thehotel'shotel’s reputation, (ii) the quality of thehotel'shotel’s facility, (iii) the quality and scope of ahotel'shotel’s meeting and convention facilities and services, (iv) the desirability of ahotel'shotel’s location, (v) travel distance to a hotel for meeting attendees, (vi) a hotelfacility'sfacility’s accessibility to a recognized airport, (vii) the amount of entertainment and recreational options available in and in the vicinity of the hotel, and (viii) price.The Company'sOur hotels also compete againstcivicmunicipal convention centers. These include the largest convention centers (e.g., Orlando, Chicago and Atlanta) as well as, for Gaylord Opryland, mid-size convention centers (between 100,000 and 500,000 square feet of meeting space located in second-tier cities).The hotel business is management and marketing intensive. The Gaylord Hotels compete with other hotels throughout the United States for high quality management and marketing personnel. There can be no assurance that the
Company'sCompany’s hotels will be able to attract and retain employees with the requisite managerial and marketing skills.Attractions.
Opry and Attractions The Grand Ole Opry and other attractions businesses
of the Companycompete with all other forms of entertainment and recreational activities. The success of the Opry and Attractions group is dependent upon certain factors beyondthe Company'sour control including economic conditions, the amount of available leisure time, transportation cost, public taste, and weather conditions.Media. The Company'sOur radiostations competestation competes with numerous other types of entertainment businesses, and success is often dependent on taste and fashion, which may fluctuate from time to time. WSM-AMWSM-FM, and WWTN-FM competecompetes for advertising revenues with other radio stations in the Nashville market on the basis of formats, ratings, market share, and the demographic makeup of theiraudiences.audience. Advertising rates ofthe radio stationsWSM-AM are based principally on the size, market share, and demographic profile oftheirits listening audiences.The Company's radio stationsWSM-AM primarilycompetecompetes for both audience share and advertisingrevenues. Theyrevenues and alsocompetecompetes with the Internet, newspapers, billboards, cable networks, local cable channels, and magazines for advertising revenues. Management competence and experience, station frequency signal coverage, network affiliation, effectiveness of programming format, sales effort, and level of customer service are all important factors in determining competitive position.REGULATION AND LEGISLATIONUnder a joint sales agreement with9
Cumulus, we continue to own and operate WSM-AM, and Cumulus sells all commercial advertising on WSM-AM and provides certain sales promotion and billing and collection services for a specified fee.
ResortQuest The vacation rental and property management industry is highly competitive and has low barriers to entry. The industry has two distinct customer groups: vacation property renters and vacation property owners. We believe that the principal competitive factors in attracting vacation property renters are:
• market share and visibility; • quality, cost and breadth of services and properties provided; and • long-term customer relationships. The principal competitive factors in attracting vacation property owners are the ability to generate higher rental income and the ability to provide comprehensive management services at competitive prices. ResortQuest competes for vacationers and property owners primarily with over 4,000 individual vacation rental and property management companies that typically operate in a limited geographic area. Some of our competitors are affiliated with the owners or operators of resorts in which such competitors provide their services. Certain of these smaller competitors may have lower overhead cost structures and may be able to provide their services at lower rates.
ResortQuest also competes for vacationers with large hotel and resort companies. Many of these competitors have greater financial resources than we have, enabling them to finance acquisition and development opportunities, to pay higher prices for the same opportunities or to develop and support their own operations. In addition, many of these companies can offer vacationers services not provided by vacation rental and property management companies, and they may have greater name recognition among vacationers. These companies might be willing to sacrifice profitability to capture a greater portion of the market for vacationers or pay higher prices than we would for the same acquisition opportunities. Consequently, we may encounter significant competition in our efforts to achieve our internal and acquisition growth objectives as well as our operating strategies focused on increasing the profitability of our existing and subsequent acquisitions.
Regulation and Legislation
Hospitality The Gaylord Hotels and the Radisson Hotel at Opryland are subject to certain federal, state, and local governmental regulations including, without limitation, health, safety, and environmental regulations applicable to hotel and restaurant operations.
The Company believesWe believe thatit iswe are in substantial compliance with such regulations. In addition, the sale of alcoholic beverages by a hotel requires a license and is subject to regulation by the applicable state and local authorities. The agencies involved have the power to limit, condition, suspend, or revoke any such license, and any disciplinary action or revocation could have an adverse effect upon the results of operations of theCompany'sCompany’s Hospitalityand Attractions segments. The Company's radio stations areGroup segment.
Opry and Attractions Group WSM-AM is subject to regulation under the Communications Act of 1934, as amended (the
"Communications Act"“Communications Act”). Under the Communications Act, the Federal Communications Commission, or FCC, among other things, assigns frequency bands for broadcasting; determines the frequencies, location, and signal strength of stations; issues, renews, revokes, and modifies station licenses; regulates equipment used by stations; and adopts and implements regulations and policies that directly or indirectly affect the ownership, operation, and other practices of broadcasting stations.Licenses issued for radio stations have terms of eight years. Radio broadcast licenses are renewable upon application to the FCC and in the past have been renewed except in rare cases. Competing applications will not be accepted at the time of license renewal, and will not be entertained at all unless the FCC first
10
concludes that renewal of the license would not serve the public interest. A station will be entitled to renewal in the absence of serious violations of8the Communications Act or the FCC regulations or other violations which constitute a pattern of abuse. The Company is not aware of any reason why its radio station licenseslicense should not be renewed.The foregoing is only a brief summary of certain provisions of the Communications Act and FCC regulations. The Communications Act and FCC regulations may be amended from time to time, and the Company cannot predict whether any such legislation will be enacted or whether new or amended FCC regulations will be adopted, or the effect on the Company of any such changes.
ADDITIONAL INFORMATION
ResortQuest The operations of ResortQuest are subject to various federal, state, local and foreign laws and regulations, including licensing requirements applicable to real estate operations and the sale of alcoholic beverages, laws and regulations relating to consumer protection and local ordinances. Many states have adopted specific laws and regulations which regulate our activities, such as:
• anti-fraud laws; • real estate and travel services provider license requirements; • environmental laws; • telemarketing and consumer privacy laws; and • the Fair Housing Act. The agencies involved in enforcing these laws and regulations have the power to limit, condition, suspend, or revoke any such license or activity by ResortQuest, and any disciplinary action or revocation affecting a significant portion of the operations of ResortQuest could have an adverse effect upon the results of operations of ResortQuest.
Additional Information
Our web site address is www.gaylordentertainment.com. Please note that our web site address is provided as an inactive textual reference only. We make available free of charge through our web site the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our web site is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
RISK FACTORSRisk Factors
You should carefully consider the following specific risk factors as well as the other information contained or incorporated by reference in this annual report on Form 10-K as these are important factors, among others, that could cause our actual results to differ from our expected or historical results. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Some statements in this
"Business"“Business” section and elsewhere in this annual report on Form 10-K are"forward-looking“forward-looking statements." WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY OUR BUSINESS STRATEGY.”
The successful implementation of our business strategy depends on the timely completion of our new Texas hotel, our ability to generate cash flows from our existing operations and other factors. We have refocused our business strategy on the development of additional resort and convention center hotels in selected locations in the United
States andStates; on our attractionsand mediaproperties, including the Grand Ole Opry, which areengagedfocused primarilyinon the country musicgenres.genre; and our recently acquired ResortQuest vacation rental and property management business. The success of our future operating results depends on11
our ability to implement our business strategy by successfully operating Gaylord Opryland and the Gaylord Palms and completing and successfully operating therecently-openedGaylordPalms, our new Gaylord hotel in Grapevine, Texas,Texan, which is under construction, and by further exploiting our attractions assets andmedia assets.our vacation rental business. Our ability to do this depends upon many factors, some of which are beyond our control. These include:- Our
• our ability to finance andcomplete the construction of the new Gaylord Texan on schedule and to achieve positive cash flow from operations within the anticipated ramp-up period;• our new Gaylord hotel in Grapevine, Texas on schedule and to achieve positive cash flow from operations within the anticipated ramp-up period. - Ourability to generate cash flows from existing operations;• our ability to hire and retain hotel management, catering and convention-related staff for our hotels and staff for our vacation rental offices; • our ability to capitalize on the strong brand recognition of certain of our Opry and Attractions assets; and • the continued popularity and demand for country music. If we are unable to successfully implement the business strategies described above, our cash flows
from existing operations. - Our ability to hireandretain hotel management, catering and convention-related staff for our hotels. - Our ability to capitalize on the strong brand recognition of certain of our media assets. OUR HOTEL AND CONVENTION BUSINESS IS SUBJECT TO SIGNIFICANT MARKET RISKS.net income may be reduced.
Our hotel and convention business and our vacation rental and property management business are subject to significant market risks. Our ability to continue to successfully
tooperate the Gaylord Opryland, the Gaylord Palms, andourthe new Gaylordhotel in Grapevine, TexasTexan upon its completion, and to operate our ResortQuest vacation rental business, is subject to factors beyond our control which couldadversely impactreduce the revenue and operating income of these properties. These factors include:-
• the desirability and perceived attractiveness of the Nashville, Tennessee area; the Orlando, Florida area; and the Dallas, Texas area as tourist and convention destinations; • adverse changes in the national economy and in the levels of tourism and convention business that would affect our hotels or vacation rental properties we manage; • the hotel and convention business is highly competitive, and Gaylord Palms is operating, and our new Gaylord Texan hotel will operate, in an extremely competitive market for convention and tourism business; • our group convention business is subject to reduced levels of demand during the year-end holiday periods, and we may not be able to attract sufficient general tourism guests to offset this seasonality; and • the vacation rental and property management business is highly competitive and has low barriers to entry, and we compete primarily with local vacation rental and property management companies located in its markets, some of whom are affiliated with the owners or operators of resorts where these competitors provide their services or which may have lower cost structures and may provide their services at lower rates.
Our recent acquisition of ResortQuest International, Inc., which we completed on November 20, 2003, involves substantial risks. The
desirabilityResortQuest acquisition involves the integration of two companies that previously have operated independently, which is a complex, costly andperceived attractivenesstime-consuming process. The process ofNashville, Tennessee, Kissimmee, Florida and Grapevine, Texas as tourist and convention destinations. 9- Adverse changesintegrating operations could cause an interruption of, or loss of momentum in, thenational economy and in the levels of tourism and convention business that would affect our hotels. - Increased competition for convention and tourism business in Nashville, Tennessee and Kissimmee, Florida. - Gaylord Palms is operating and our new Texas hotel will operate in highly competitive markets for convention and tourism business. - Our group convention business is subject to reduced levels of demand during the year-end holiday periods, and we may not be able to attract sufficient general tourism guests to offset this seasonality. WE REQUIRE ADDITIONAL FINANCING TO COMPLETE OUR NEW HOTEL PROJECTS. We require additional financing to complete the construction for our new Gaylord hotel in Grapevine, Texas. Our ability to obtain additional debt financing for this capital project has been limited by our existing level of indebtedness and limitations on our ability to grant liens on unencumbered assets. Although we have received a commitment for a new credit facility which we expect will be sufficient to fund completionactivities of theconstructioncombined company’s business and the loss ofGaylord Opryland Texas, the closingkey personnel. The diversion ofthe new credit facility is subject to the fulfillment of certain conditions, which we believe are customary; but there can be no assurance that the facility, which is expected to close in the second quarter of 2003, will ultimately closemanagement’s attention andbe funded. These financing efforts will be subject to market conditions prevailing from time to time as well as our financial condition and prospects. We may also need to divest certain non-core businesses in order to finance additional hotel development, and there can be no guarantee that such divestitures, if required, can be successfully completed. If we are unable to obtain additional financingany delays ordivest non-core assets on terms acceptable to us to complete the construction of our hotel projects as currently scheduled, our future prospects could be adversely affected in a material way. OUR MEDIA ASSETS DEPEND UPON POPULAR TASTES. The success of our operations in our media division depends to a large degree on popular tastes. There has been a reduction in the popularity and demand for country music over recent years. A continued decline in the popularity of this genre could adversely affect our revenues and operations. OUR BUSINESS PROSPECTS DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN SENIOR LEVEL EXECUTIVES. During 2001, the Company named a new chairman and a new chief executive officer and had numerous changes in senior management. Our future performance depends upon our ability to attract qualified senior executives and to retain their services. Our future financial results also will depend upon our ability to attract and retain highly skilled managerial and marketing personnel in our different areas of operation. Competition for qualified personnel is intense and is likely to increase in the future. We compete for qualified personnel against companies with significantly greater financial resources than ours. OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR LEVERAGE. As of February 28, 2003, the total amount of our long-term debt, including the current portion, was approximately $339.3 million. We intend to continue to make additional borrowings under our credit facilitiesdifficulties encountered in connection with thedevelopment of new hotel properties and for other general corporate purposes,ResortQuest acquisition and theaggregate amountintegration ofour indebtedness will likely increase, perhaps substantially. The amountthe two companies’ operations could harm the business, results ofour indebtedness could have important consequences to investors, includingoperations, financial condition or prospects of thefollowing: - Our ability to obtain additional financing in the futurecombined company. In addition, we may beimpaired; 10- Aunable to achieve the anticipated cost savings from the12
ResortQuest acquisition for many reasons. Gaylord and ResortQuest have incurred substantialportion of our cash flow from operations must be applied to pay principalexpenses, such as legal, accounting andinterest on our indebtedness, thus reducing funds available for other purposes; - Some of our borrowings, including borrowings under our credit facilities are and will continue to be at variable rates based upon prevailing interest rates, which will expose us tofinancial advisor fees, in connection with therisk of increased interest rates; - We may be further constrained by financial covenants and other restrictive provisions contained in credit agreements and other financing documents; - We may be substantially more leveraged than some of our competitors, which may place us at a competitive disadvantage; and - Our leverage may limit our flexibility to adjust to changing market conditions, reduce our ability to withstand competitive pressures and make us more vulnerable to a downturn in general economic conditions or our business. UNANTICIPATED EXPENSES COULD AFFECT THE RESULTS OF HOTELS WE OPEN IN NEW MARKETS.acquisition.
Unanticipated costs of hotels we open in new markets may reduce our operating income. As part of our growth plans, we may open or acquire new hotels in geographic areas in which we have little or no operating experience and in which potential customers may not be familiar with our business. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other areas. Even though we may incur substantial additional costs with these new hotel properties, they may attract fewer customers than our existing hotels. As a result, the results of operations at new hotel properties may be inferior to those of our existing hotels. The new hotels may even operate at a loss. Even if we are able to attract enough customers to our new hotel properties to operate them at a profit, it is possible that those customers could simply be moving future meetings or conventions from our existing hotel properties to our new hotel properties. Thus, the opening of a new hotel property could reduce the revenue of our existing hotel properties.
FLUCTUATIONS IN OUR OPERATING RESULTS AND OTHER FACTORS MAY RESULT IN DECREASES IN OUR STOCK PRICE.
Our hotel development is subject to timing, budgeting and other risks. We intend to develop additional hotel properties as suitable opportunities arise, taking into consideration the general economic climate. New project development has a number of risks, including risks associated with:
• construction delays or cost overruns that may increase project costs; • construction defects or noncompliance with construction specifications; • receipt of zoning, occupancy and other required governmental permits and authorizations; • development costs incurred for projects that are not pursued to completion; • so-called acts of God such as earthquakes, hurricanes, floods or fires that could delay the development of a project; • the availability and cost of capital; and • governmental restrictions on the nature or size of a project or timing of completion. In particular, the terms of our new revolving credit facility require us to achieve substantial completion and initial opening of the Gaylord Texan by June 30, 2004. Our development projects may not be completed on time or within budget.
Our real estate investments are subject to numerous risks. Because we own hotels and attractions properties, we are subject to the risks that generally relate to investments in real property. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, as well as the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate properties. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, governments can, under eminent domain laws, take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on our results of operations or financial condition. In addition, equity real estate investments, such as the investments we hold and any additional properties that we may
13
acquire, are relatively difficult to sell quickly. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our operating income will be reduced.
Our hotel and vacation rental properties are concentrated geographically and our revenues and operating income could be reduced by adverse conditions specific to our property locations. Our existing hotel properties are located predominately in the southeastern United States. As a result, our business and our financial operating results may be materially affected by adverse economic, weather or business conditions in the Southeast. In addition, our ResortQuest vacation rental business manages properties that are significantly concentrated in beach and island resorts located in Florida and Hawaii and mountain resorts located in Colorado. Adverse events or conditions which affect these areas in particular, such as economic recession, changes in regional travel patterns, extreme weather conditions or natural disasters, may have an adverse impact on our ResortQuest operations.
Hospitality companies have been the target of class actions and other lawsuits alleging violations of federal and state law. Our operating income may be reduced by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time, and we cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business.
Our properties are subject to environmental regulations that could impose significant financial liability on us. Environmental laws, ordinances and regulations of various federal, state, local and foreign governments regulate certain of our properties and could make us liable for the costs of removing or cleaning up hazardous or toxic substances on, under or in the properties we currently own or operate or those we previously owned or operated. Those laws could impose liability without regard to whether we knew of, or were responsible for, the presence of hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to properly clean up such substances when present, could jeopardize our ability to develop, use, sell or rent the real property or to borrow using the real property as collateral. If we arrange for the disposal or treatment of hazardous or toxic wastes, we could be liable for the costs of removing or cleaning up wastes at the disposal or treatment facility, even if we never owned or operated that facility. Other laws, ordinances and regulations could require us to manage, abate or remove lead- or asbestos-containing materials. Similarly, the operation and closure of storage tanks are often regulated by federal, state, local and foreign laws. Finally, certain laws, ordinances and regulations, particularly those governing the management or preservation of wetlands, coastal zones and threatened or endangered species, could limit our ability to develop, use, sell or rent our real property.
Any failure to attract, retain and integrate senior and managerial level executives could negatively impact our operations and development of our properties. During 2001, we appointed a new Chairman and a new Chief Executive Officer and had numerous changes in senior management. Our future performance depends upon our ability to attract qualified senior executives and to retain their services. Our future financial results also will depend upon our ability to attract and retain highly skilled managerial and marketing personnel in our different areas of operation. Competition for qualified personnel is intense and is likely to increase in the future. We compete for qualified personnel against companies with significantly greater financial resources than ours.
14
We have certain minority equity interests over which we have no significant control, to or for which we may owe significant obligations and for which there is no market, and these investments may not be profitable. We have certain minority investments which are not liquid and over which we have no rights, or ability, to exercise the direction or control of the respective enterprises. These include our equity interests in Viacom, Bass Pro and the Nashville Predators. When we make these investments, we sometimes extend guarantees related to such investments. For example, in connection with our investment in the Nashville Predators, we agreed to guarantee, severally and jointly with other investors, up to $15.0 million of specified obligations. The ultimate value of each of these investments will be dependent upon the efforts of others over an extended period of time. The nature of our interests and the absence of a market for those interests restricts our ability to dispose of them. Our lack of control over the management of these businesses and the lack of a market to sell our interest in these businesses may cause us to recognize a loss on our investment in these businesses. In addition, we may enter into joint venture arrangements. These arrangements are subject to uncertainties and risks, including those related to conflicting joint venture partner interests and to our joint venture partners failing to meet their financial or other obligations.
We are subject to risks relating to acts of God, terrorist activity and war. Our operating income may be reduced by acts of God, such as natural disasters or acts of terror, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. Some types of losses, such as from earthquake, hurricane, terrorism and environmental hazards, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife as well as geopolitical uncertainty have caused in the past, and may cause in the future, our results to differ materially from anticipated results.
We face risks related to an SEC investigation. In March 2003, we restated our historical financial statements for 2000, 2001 and the first nine months of 2002 to reflect certain non-cash changes, which resulted primarily from a change to our income tax accrual and a change in the manner in which we accounted for our investment in the Nashville Predators. We have been advised by the SEC staff that it is conducting a formal investigation into the financial results and transactions that were the subject of our restatement. The SEC staff is reviewing documents provided by us and our independent accountants and has taken or will take testimony from former and current employees of the Company. We have been cooperating with the SEC staff and intend to continue to do so. Nevertheless, if the SEC makes a determination adverse to us, we may face sanctions, including, but not limited to, monetary penalties and injunctive relief.
The hospitality industry and the vacation and property management industry are heavily regulated, including with respect to food and beverage sales, real estate brokerage licensing, employee relations and construction concerns, and compliance with these regulations could increase our costs and reduce our revenues and profits. Our hotel operations are subject to numerous laws, including those relating to the preparation and sale of food and beverages, liquor service and health and safety of premises. Our vacation rental operations are also subject to licensing requirements applicable to real estate operations, laws and regulations relating to consumer protection and local ordinances. We are also subject to laws regulating our relationship with our employees in areas such as hiring and firing, minimum wage and maximum working hours, overtime and working conditions. The success of expanding our hotel operations also depends upon our obtaining necessary building permits and zoning variances from local authorities. Compliance with these laws is time intensive and costly and may reduce our revenues and operating income.
15
If vacation rental property owners do not renew a significant number of property management contracts, revenues and operating income from our ResortQuest vacation rental business would be reduced. Through our ResortQuest vacation rental business, we provide rental and property management services to property owners pursuant to management contracts, which generally have one-year terms. The majority of such contracts contain automatic renewal provisions but also allow property owners to terminate the contract at any time. If property owners do not renew a significant number of management contracts or if we are unable to attract additional property owners, revenues and operating income for our ResortQuest business may be reduced. In addition, although most of its contracts are exclusive, industry standards in certain geographic markets dictate that rental services be provided on a non-exclusive basis.
Our substantial debt could reduce our cash flow and limit our future business activities. We currently have a significant amount of debt. As of December 31, 2003, we had $548.8 million of total debt, and stockholders’ equity of $904.5 million. Our substantial amount of debt could have important consequences to you. For example, it could:
• make it more difficult for us to satisfy our obligations under our existing indebtedness; • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments on our debt, thereby limiting the availability of our cash flow to fund future capital expenditures, working capital and other general corporate requirements; • limit our flexibility in planning for, or reacting to, changes in our business and the hospitality industry, which may place us at a competitive disadvantage compared with competitors that are less leveraged; and • limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity. In addition, the terms of our Nashville hotel loan, our new revolving credit facility and the indenture governing our 8% senior notes allow us to incur substantial amounts of additional debt subject to certain limitations. Any such additional debt could increase the risks associated with our substantial leverage. Our substantial leverage is evidenced by our earnings being insufficient to cover fixed charges by $71.8 million, $37.8 million and $167.3 million for the years ended December 31, 2003, 2001 and 2000.
To service our debt and pay other obligations, we will require a significant amount of cash, which may not be available to us. Our ability to make payments on, or repay or refinance, our debt, including any future debt we may incur, and to fund planned capital expenditures will depend largely upon our future operating performance and our ability to generate cash from operations. Our future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on the satisfaction of the covenants in our Nashville hotel loan and our new revolving credit facility and our other debt agreements, including the indenture governing our 8% senior notes due 2013 and other agreements we may enter into in the future. Specifically, we will need to maintain certain financial ratios and complete construction of the Gaylord Texan in Grapevine, Texas in 2004. Our business may not generate sufficient cash flow from operations or we may not have future borrowings available to us under our new revolving credit facility or from other sources in an amount sufficient to enable us to pay our debt, or to fund our other liquidity needs.
In addition, we will be required to refinance our Nashville hotel loan ($199.2 million outstanding as of December 31, 2003), which matures in 2004, subject to extension to 2006, and our new revolving credit facility which matures in 2006. At the expiration of the secured forward exchange contract relating to shares of Viacom stock we own, we will be required to incur additional debt or use any cash on hand to pay the estimated $156.0 million deferred tax payable at that time. We cannot assure you that we will be
16
able to refinance any of our debt, including our Nashville hotel loan and our new revolving credit facility or finance the deferred taxes on our Viacom stock on commercially reasonable terms or at all. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:
• sales of assets; • sales of equity; and/or • negotiations with our lenders to restructure the applicable debt. Our credit agreements, the indenture governing our 8% senior notes and the indenture governing any future debt securities we issue may restrict, or market or business conditions may limit, our ability to do some of these things.
The agreements governing our debt, including our 8% senior notes due 2013 and our senior secured loans, contain various covenants that limit our discretion in the operation of our business and could lead to acceleration of debt. Our existing agreements, including our new revolving credit facility, our Nashville hotel loan and our 8% senior notes, impose, and future financing agreements are likely to impose, operating and financial restrictions on our activities. These restrictions require us to comply with or maintain certain financial tests and ratios, including minimum consolidated net worth, minimum interest coverage ratio and maximum leverage ratios, and limit or prohibit our ability to, among other things:
• incur additional debt and issue preferred stock; • create liens; • redeem and/or prepay certain debt; • pay dividends on our stock to our stockholders or repurchase our stock; • make certain investments; • enter new lines of business; • engage in consolidations, mergers and acquisitions; • make certain capital expenditures; and • require our subsidiaries to pay dividends and make other distributions to us. These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities. In addition, our new revolving credit facility requires us to meet certain conditions relating to the Gaylord Texan in Grapevine, Texas by June 30, 2004. In particular, we are required to achieve substantial completion and initial opening of the Gaylord Texan by June 30, 2004. Failure to meet these conditions on schedule could result in a default and acceleration of any borrowings under our new revolving credit facility.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and maintain these financial tests and ratios. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.
17
Fluctuations in our operating results and other factors may result in decreases in our stock price. In recent periods, the market price for our common stock has fluctuated substantially. From time to time, there may be significant volatility in the market price of our common stock. We believe that the current market price of our common stock reflects expectations that we will be able to continue to operate our existing hotels profitably and to develop new hotel properties profitably. If we are unable to accomplish this, investors could sell shares of our common stock at or after the time that it becomes apparent that the expectations of the market may not be realized, resulting in a decrease in the market price of our common stock. In addition to our operating results, the operating results of other hospitality companies, changes in financial estimates or recommendations by analysts, adverse weather conditions, increased construction costs, changes in general conditions in the economy or the financial markets or other developments affecting us or our industry, such as the recent terrorist attacks, could cause the market price of our common stock to fluctuate substantially. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance.
OUR HOTEL PROPERTIES ARE CONCENTRATED GEOGRAPHICALLY. Our existing hotel properties are located predominately in the southeastern United States. As a result, our business and our financial operating results may be materially affected by adverse economic, weather or business conditions in the Southeast. 11HOSPITALITY COMPANIES HAVE BEEN THE TARGET OF CLASS ACTIONS AND OTHER LAWSUITS ALLEGING VIOLATIONS OF FEDERAL AND STATE LAW. We are subject to the risk that our results of operations may be adversely affected by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time, and we cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business. THE VALUE OF THE VIACOM STOCK WE OWN IS SUBJECT TO MARKET RISKS. The shares of Viacom Stock we own represent a significant assetExecutive Officers of the
Company. However, we have no right to vote on matters affecting Viacom or to otherwise participate in the direction of the affairs of that corporation. Our investment in Viacom is subject to the risks of declines in the market value of Viacom equity securities. While we have mitigated our exposure to declines in the stock market valuation below $56.04 per share by entering into the secured forward exchange contract described under the subheading "Financing Activities" under the heading "Corporate and Other" in this Item 1 and in "Management's Discussion and Analysis of Financial Condition and Results of Operations," the value of this asset ultimately is subject to the success of Viacom and its value in the securities markets. Further, accounting principles generally accepted in the United States applicable to the treatment of this contract will require us to record, and to reflect in our Company's financial statements, gains or losses based upon changes in the fair value of the derivatives associated with the secured forward exchange contract and the changes in the fair value of our Viacom Stock. The effect of this accounting treatment could be material to our results reflected in our consolidated financial statements for relevant periods. WE HAVE CERTAIN OTHER MINORITY EQUITY INTERESTS OVER WHICH WE HAVE NO SIGNIFICANT CONTROL. We have certain minority investments which are not liquid and over which we have no rights, or ability, to exercise the direction or control of the respective enterprises. These include our equity interests in Bass Pro and the Nashville Predators. The ultimate value of each of these investments will be dependent upon the efforts of others over an extended period of time. The nature of our interests and the absence of a market for those interests restricts our ability to dispose of them. RISKS RELATING TO ACTS OF GOD, TERRORIST ACTIVITY AND WAR. Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. Some types of losses, such as from earthquake, hurricane, terrorism and environmental hazards may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife as well as geopolitical uncertainty have caused in the past, and may cause in the future, our results to differ materially from anticipated results. 12EXECUTIVE OFFICERS OF THE REGISTRANTRegistrantThe following table sets forth certain information regarding the executive officers of the Company as of December 31,
2002.2003. All officers serve at the discretion of the Board of Directors.
NAME AGE POSITION ---- --- --------Name Age Position Michael D. Rose............. 61Rose62 Chairman of the Board of Directors Colin V. Reed............... 55Reed56 President and Chief Executive Officer David C. Kloeppel........... 33Kloeppel34 Executive Vice President and Chief Financial Officer Jay D. Sevigny.............. 43Sevigny44 Executive Vice President and Chief Operating Officer, Gaylord Opryland Resort and Convention Center Karen L. Spacek............. 43HotelsJohn P. Caparella 46 Senior Vice President CommunicationsandHuman Resources John P. Caparella........... 45 Senior Vice President;General Manager, Gaylord Palms Resort and Convention CenterJames S. Olin 44 Executive Vice President and Chief Executive Officer, ResortQuest Carter R. Todd.............. 45Todd46 Senior Vice President, Secretary and General Counsel Rod Connor 51 Senior Vice President and SecretaryChief Administrative Officer- -----------------The following is additional information with respect to the above-named executive officers.
Mr.Michael D. Rosehas served as Chairman of the Board of the Company since April 2001. Prior to that time, he was a private investor, and prior to December 1997, he was Chairman of the Board of Promus Hotel Corporation, Memphis, Tennessee, a franchiser and operator of hotel brands. Prior to January 1997, Mr. Rose was also Chairman of the Board of
Harrah'sHarrah’s Entertainment, Inc., an owner and manager of casinos in the United States. Mr. Rose is also a director offourfive other public companies, Darden Restaurants, Inc., an owner and operator of casual dining restaurants, FelCor Lodging Trust, Inc., a hotel real estate investment trust, First Tennessee National Corporation, a bank holding company, General Mills, Inc., a producer of packaged consumer foods, and Stein Mart, Inc.Mr.an owner and operator of retail apparel stores.Colin V. Reedwas elected President and Chief Executive Officer and a director of the Company in April 2001. Prior to that time, he was a member of the three-executive Office of the President of
Harrah'sHarrah’s EntertainmentInc., an owner and manager of casinos in the United States,since May 1999 and the Chief Financial Officer ofHarrah'sHarrah’s Entertainment since April 1997. Mr. Reed was a director ofHarrah'sHarrah’s Entertainment from 1998 to May 2001. He was Executive Vice President ofHarrah'sHarrah’s Entertainment from September 1995 to May 1999 and has served in several other management positions withHarrah'sHarrah’s Entertainment and its predecessor, Holiday Corp., since 1977. As part of his duties atHarrah's,Harrah’s Entertainment, Mr. Reed served as a director and Chairman of the Board of JCC Holding Company, an entity in whichHarrah'sHarrah’s Entertainment held a minority interest. On January 4,18
2001, JCC Holding Company filed a petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code. Mr. Reed is a director of Rite AidCorporation. Mr.Corporation, an owner and operator of retail drugstores.David C. Kloeppelis the
Company'sCompany’s Executive Vice President and Chief FinancialOfficer and Executive Vice President.Officer. Prior to joining the Company in September of 2001, Mr. Kloeppel worked in the Mergers and Acquisitions Department at Deutsche Bank in New York, where he was responsible for thatdepartment'sdepartment’s activities in the lodging, leisure and real estate sectors. Mr. Kloeppel earned an MBA from VanderbiltUniversity'sUniversity’s Owen Graduate School of Management, graduating with highest honors. He received his bachelor of science degree from Vanderbilt University, majoring in economics.Jay D. Sevignyis Executive Vice President of the Company and Chief Operating Officer, Gaylord Hotels, positions he has held since January 2004. From February 2002 until December 2003, Mr. Sevigny served as President of the Company’s Gaylord Opryland Resort and Convention Center in Nashville. Mr. Sevigny was hired in October 2001 as the Senior Vice President in charge of the
Company'sCompany’s Marketing and Attractions.In February of 2002, Mr. Sevigny was named President of the Company's Gaylord Opryland Resort 13and Convention Center in Nashville.Prior to joining the Company, Mr. Sevigny worked in different capacities forHarrah'sHarrah’s Entertainment, most recently as Division President Hotel/Casino in Las Vegas during 2000 and 2001, and as President and Chief Operating Officer ofHarrah'sHarrah’s New Orleans casino operations from 1998 to 2000. From 1997 to 1998, Mr. Sevigny was President of Midwest Operations for Station Casino in Kansas City, Missouri. Mr. Sevigny has a finance degree from the University ofNevada. Ms. SpacekNevada and is enrolled in theCompany's Senior Vice President for Communications and Human Resources. Prior to joining Gaylord in AugustExecutive MBA Program at Vanderbilt University’s Owen Graduate School of2001, Ms. Spacek worked for more than five years in different positions with Harrah's Entertainment, most recently as Vice President of Strategic Sourcing. Ms. Spacek earned both her MBA degree (with honors) and her undergraduate degree from the University of Texas. Mr.Management.John P. Caparellais a Senior Vice President of the Company and the General Manager of Gaylord
Palms. Prior toPalms Resort and Convention Center, positions he has held since joining the Company in November2000,2000. Prior to such time, Mr. Caparella served as Executive Vice President, Planning, Development and Administration and President of PlanetHollywood.com for Planet Hollywood International, Inc., a creator and developer of consumer brands relating to movies, sports and other entertainment-based themes, in Orlando, Florida since September 1997. Before joining Planet Hollywood, Mr. Caparella was with ITT Sheraton, an owner and operator of hotel brands, for 17 years in convention, resort, business and 4-star luxury properties, as well as ITTSheraton'sSheraton’s corporate headquarters. Mr. Caparella is a graduate of the State University of New York atDehli.Delhi.James S. Olinhas served as Executive Vice President of the Company and Chief Executive Officer of the Company’s ResortQuest subsidiary since the Company’s acquisition of ResortQuest International, Inc. in November 2003. Prior to such time, Mr. Olin was Chief Executive Officer and President of ResortQuest, positions he had held since October 2002 and April 2002, respectively. Mr. Olin held the position of Executive Vice President and Chief Operating Officer of ResortQuest from January 2000 until April 2002. Mr. Olin was formerly President of Abbott Resorts, Inc., one of the predecessor entities of ResortQuest, from 1992 to January 2000. Mr. Olin’s employment with the Company ended on March 10, 2004.
Carter R. Toddjoined Gaylord Entertainment Company in July 2001 as the
Company'sCompany’s Senior Vice President, General Counsel and Secretary. Prior to that time, he was a Corporate and Securities partner in the Nashville office of the regional law firm Baker, Donelson, Bearman & Caldwell. Mr. Todd has practiced law in Nashville since 1982 and is a graduate of Vanderbilt University School of Law and Davidson College.ITEM 2. PROPERTIES TheRod Connoris Senior Vice President and Chief Administrative Officer of the Company,
owns itsa position he has held since September 2003. From January 2002 to September 2003, he was Senior Vice President of Risk Management and Administration. From December 1997 to January 2002, Mr. Connor was Senior Vice President and Chief Administrative Officer. From February 1995 to December 1997, he was the Vice President and Corporate Controller of the Company. Mr. Connor has been an employee of the Company for over 30 years.19
Item 2. Properties We own our executive offices and headquarters located at One Gaylord Drive, Nashville, Tennessee, which consists of a four-story office building comprising approximately 80,000 square feet.
The Company ownsWe own the land and improvements that comprise the Opryland complex in Nashville, Tennessee, which are composed of thefollowingpropertiesand the properties listeddescribed below.The CompanyWe alsoownsown the former offices andthreetelevision studios of TNN and CMT, all of which are located within the Opryland complex and contain approximately87,00084,000 square feet of space. These facilities were previously leased to CBS through September 30, 2002.The CompanyGaylord believes that its present facilities for each of its business segments are generally well maintained.Hospitality.Hospitality
The Opryland complex includes the site of Gaylord Opryland (approximately 172 acres). In connection with
theour NashvilleHotel Loans,hotel loan, a first mortgage lien was granted on Gaylord Opryland, including the site on which it stands.The CompanyGaylord hasexecuted a 75-year lease with a 24-year renewal option onleased a 65-acre tract in Osceola County, Florida, on which Gaylord Palms islocated. The Companylocated pursuant to a 75 year ground lease with a 24 year renewal option. Gaylord has granted a leasehold mortgage to the lender under its revolving credit facility. Gaylord has acquired approximately 100 acres in Grapevine, Texas, through ownership (approximately 75 acres)orand ground lease (approximately 25 acres), on whichour newthe GaylordhotelTexan in Grapevine, Texas is being constructed.Attractions. The Company ownsOpry and Attractions
We own the General Jackson
showboat'sShowboat’s docking facility and the Opry House, both of which are located within the Opryland complex.The CompanyWe alsoownsown the Springhouse Golf Club, an 18-hole golf course situated onapproximately 240over 200 acres and the 6.7-acre site of the Radisson Hotel at Opryland, both of which are located near the Opryland complex. In downtown Nashville,the Company ownswe own the Ryman Auditorium and the Wildhorse Saloon dance hall and production facility.Media. The Company ownsWe own WSMRadio'sRadio’s offices and studios, which are also located within the Opryland complex.14ITEM 3. LEGAL PROCEEDINGSResortQuest
ResortQuest has approximately 200 properties in over 50 locations in 17 states in the U.S. and one province in Canada. These properties consist principally of offices and maintenance, laundry and storage facilities. We own approximately 40 of these facilities and lease approximately 160 properties. We consider all of these owned and leased properties to be suitable and adequate for the conduct of our business.
Item 3. Legal Proceedings We are a party to the lawsuit styledNashville Hockey Club Limited Partnership v. Gaylord Entertainment Company, Case No. 03-1474, now pending in the Chancery Court for Davidson County, Tennessee. In its complaint for breach of contract, Nashville Hockey Club Limited Partnership alleged that we failed to honor our payment obligation under a Naming Rights Agreement for the multi-purpose arena in Nashville known as the Gaylord Entertainment Center. Specifically, Plaintiff alleged that we failed to make a semi-annual payment to Plaintiff in the amount of $1,186,565.50 when due on January 1, 2003 and in the amount of $1,245,894 when due on July 1, 2003. We contended that we effectively fulfilled our obligations due under the Naming Rights Agreement by way of set off against obligations owed by Plaintiff to CCK Holdings, LLC (“CCK”) under a “put option” CCK exercised pursuant to the Partnership Agreement between CCK and Plaintiff. CCK has assigned the proceeds of its put option to us. We vigorously contested this case by filing an answer and counterclaim denying any liability to Plaintiff, specifically alleging that all payments due to Plaintiff under the Naming Rights Agreement had been paid in full and asserting a counterclaim for amounts owing on the put option under the Partnership Agreement. Plaintiff filed a motion for summary judgment which was argued on February 6, 2004, and on March 10, 2004 the Chancellor granted the Plaintiff’s motion, requiring us to make payments (including $4.1 million payable to date) under the Naming Rights Agreement in cash and finding that conditions to the satisfaction of our put option have not been met. Gaylord intends to appeal this decision and continue to vigorously assert its
20
rights in this litigation. Because we continued to recognize the expense under the Naming Rights Agreement, payment of the accrued amounts under the Naming Rights Agreement will not affect our results of operation.One of our ResortQuest subsidiaries is a party to the lawsuit styledAwbrey et al. v. Abbott Realty Services, Inc., Case No. 02-CA-1203, now pending in the Okaloosa County, Florida Circuit Court. The plaintiffs are owners of 16 condominium units at the Jade East condominium development in Destin, Florida, and they have filed suit alleging, among other things, nondisclosure and misrepresentation by our real estate sales agents in the sale of Plaintiffs’ units. Plaintiffs seek unspecified damages and a jury trial. We have filed pleadings denying the Plaintiffs’ allegations and asserting several affirmative defenses, among them that the claims of the Plaintiffs have been released in connection with the April 2001 settlement of a 1998 lawsuit filed by the Jade East condominium owners association against the original condominium’s developer. We have also filed a motion for summary judgment which has been set for hearing in May 2004. At this stage it is difficult to ascertain the likelihood of an unfavorable outcome. The damages sought by each Plaintiff are in excess of $200,000, making the total exposure to the sixteen unit owners in excess of $3.2 million. Those damages are disputed by the Company
maintainsas overstated and unproven, and we intend to vigorously defend this case.We maintain various insurance policies, including general liability and property damage insurance, as well as
product liability, workers'workers’ compensation, business interruption, and other policies, whichit believeswe believe provide adequate coverage for the risks associated withitsour range of operations. Varioussubsidiariesofthe Companyour subsidiaries are involved in lawsuits incidental to the ordinary course of their businesses, such as personal injury actions by guests and employees and complaints alleging employee discrimination.The Company believesWe believe thatit iswe are adequately insured against these claims byitsour existing insurance policies and that the outcome of any pending claims or proceedings will not have a material adverse effectupon itson our financial position or results of operations.The CompanyWe may have potential liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended
("CERCLA"(“CERCLA” or"Superfund"“Superfund”), for response costs at two Superfund sites. The liability relates to properties formerly owned byGaylord'sour predecessor. In 1991, OPUBCO assumed these liabilities and agreed to indemnifythe Companyus for any losses, damages, or other liabilities incurred by it in connection with these matters.The Company believesWe believe thatOPUBCO'sOPUBCO’s indemnification will fully coverthe Company'sour Superfund liabilities, if any, and that, based onthe Company'sour current estimates of these liabilities, OPUBCO has sufficient financial resources to fulfill its indemnification obligations.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted
Item 4. Submission of Matters to a Vote of Security Holders The Company held a Special Meeting of Stockholders on November 18, 2003 (the “Special Meeting”) to: (i) approve the issuance of shares of common stock under the Agreement and Plan of Merger dated as of August 4, 2003, by and among the Company, GET Merger Sub, Inc. and ResortQuest (“Proposal 1”), and (ii) adjourn the Special Meeting to a
votelater date, if necessary, to solicit additional proxies if there were not sufficient votes in favor of Proposal 1 (“Proposal 2”). The following table sets forth the number of votes cast for, against, and withheld/abstained with respect to each of theCompany's security holders duringproposals, both of which were approved at thefourth quarter of 2002. 15Special Meeting:
Number of votes cast for Proposal 1: 23,024,828 Number of votes cast against Proposal 1: 438,628 Number of abstentions: 4,913,371 Number of votes cast for Proposal 2: 19,498,922 Number of votes cast against Proposal 2: 3,878,810 Number of abstentions: 4,999,114 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The
Company'sCompany’s common stock is listed on the New York Stock Exchange under the symbolGET.“GET”. The following table sets forth, for the calendar quarters indicated, the high and low sales prices forthe Company'sour common stock as reported by the NYSE for the last two years:
HIGH LOW ---- ---2001 First Quarter.......................................................... $ 26.60 $ 20.00 Second Quarter......................................................... 29.15 24.95 Third Quarter.......................................................... 29.05 19.60 Fourth Quarter......................................................... 25.50 18.49
HIGH LOW ---- ---2002 First Quarter.......................................................... $ 26.98 $ 22.10 Second Quarter......................................................... 29.26 21.76 Third Quarter.......................................................... 23.05 17.90 Fourth Quarter......................................................... 21.35 16.16(b) HOLDERS The approximate number of
2003 2002 High Low High Low First Quarter $ 21.02 $ 16.55 $ 26.98 $ 22.10 Second Quarter 24.44 17.10 29.26 21.76 Third Quarter 26.24 17.70 23.05 17.90 Fourth Quarter 30.60 24.55 21.35 16.16 There were approximately 2,302 record holders of
the Company'sour common stock as of March 1, 2004.We have not paid dividends on
March 17,our common stock during the 2002 or 2003was 2,430. (c) CASH DIVIDENDS No cash dividends were paid during 2001 or 2002 and wefiscal years. We do not presently intend to declare any cash dividends. We intend to retain our earnings to fund the operation of our business, to service and repay our debt, and to make strategic investments as they arise. Moreover, the terms of our debt contain covenants that restrict our ability to pay dividends. Our Board of Directors may reevaluate this dividend policy in the future in light of our results of operations, financial condition, cash requirements, future prospects, loan agreements and other factors deemed relevant by our Board.Currently, we are prohibited from paying dividends by the termsThe following table includes information about our stock option plans as of
our Term Loan. 16ITEM 6. SELECTED FINANCIAL DATA.December 31, 2003:
Number of securities Number of securities to be issued upon Weighted average remaining available exercise of exercise price of for future issuance outstanding options, outstanding options, under equity warrants and rights warrants and rights compensation plans (in thousands, except per share data) Equity compensation plans approved by security holders 3,743,617 $ 24.88 2,113,252 Equity compensation plans not approved by security holders(1) — — —
(1) In connection with our acquisition of ResortQuest on November 20, 2003, we assumed the obligations of ResortQuest under its Amended and Restated 1998 Long-Term Incentive Plan. As of December 31, 2003, there were 416,292 shares of our common stock reserved for issuance upon the exercise of options previously granted under this stock option plan. No additional options to purchase our common stock will be issued under this plan. 22
Item 6. Selected Financial Data GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATAThe following selected historical financial
datainformation of Gaylord and its subsidiaries as of December 31, 2003, 2002 and 2001 and for each of the three years in the period ended December 31,2002 is2003 was derived fromthe Company'sour audited consolidated financial statements. The selected financialdatainformation as of December 31, 2000 and 1999 and for each of the two years in the period ended December 31,1999 is2000 was derived from previously issued audited consolidated financial statements adjusted for unaudited revisions for discontinuedoperations and restatements of income tax, partnership investments and other less significant items.operations. The information in the following table should be read in conjunction withthe Company's auditedour consolidated financial statements and related notes included herein.The Company has restated its results for the four year period from 1998-2001. This restatement resulted from items noted during a required re-audit based on applicable auditing standards which require a re-audit of prior year financial statements if a company's prior auditors have ceased operations and the historical financial statements include reclassifications to separately reflect the impact of discontinued operations. During 2002, the Company committed to plans of disposal for Acuff-Rose Music Publishing and the Oklahoma City Redhawks resulting in the reclassification of balances and operating results of those two businesses as discontinued operations in the Company's historical financial statements. Based on the requirements of applicable auditing standards, the Company engaged Ernst & Young LLP ("Ernst & Young"), the Company's current auditors, to perform the required re-audits of the Company's 2001 and 2000 consolidated financial statements since the Company's prior auditors, Arthur Andersen LLP, had ceased operations. The specific principles and accounts affected are discussed in more detail in Note 3 in the Company's consolidated financial statements. 17INCOME STATEMENT DATA:
Years Ended December 31, 2003 2002 2001 2000 1999 Revenues: Hospitality $ 369,263 $ 339,380 $ 228,712 $ 237,260 $ 239,248 Opry and Attractions 61,433 65,600 67,064 69,283 97,839 ResortQuest 17,920 — — — — Corporate and Other 184 272 290 64 5,318 Total revenues 448,800 405,252 296,066 306,607 342,405 Operating expenses: Operating costs 276,937 254,583 201,299 210,018 220,088 Selling, general and administrative 117,178 108,732 67,212 89,052 74,004 Preopening costs(1) 11,562 8,913 15,927 5,278 1,892 Gain on sale of assets(2) — (30,529 ) — — — Impairment and other charges 856 (6) — 14,262 (6) 75,660 (6) — Restructuring charges — (17 )(4) 2,182 (4) 12,952 (4) 2,786 (4) Merger costs — — — — (1,741 )(9) Depreciation and amortization: Hospitality 46,536 44,924 25,593 24,447 22,828 Opry and Attractions 5,129 5,778 6,270 13,955 11,159 ResortQuest 1,186 — — — — Corporate and Other 6,099 5,778 6,542 6,257 6,870 Total depreciation and amortization 58,950 56,480 38,405 44,659 40,857 Total operating expenses 465,483 398,162 339,287 437,619 337,886 Operating income (loss): Hospitality 42,347 25,972 34,270 45,478 43,859 Opry and Attractions (600 ) 1,596 (5,010 ) (44,413 )(8) (8,183 ) ResortQuest (2,616 ) — — — — Corporate and Other (43,396 ) (42,111 ) (40,110 ) (38,187 ) (28,220 ) Preopening costs(1) (11,562 ) (8,913 ) (15,927 ) (5,278 ) (1,892 ) Gain on sale of assets(2) — 30,529 — — — Impairment and other charges (856 )(6) — (14,262 )(6) (75,660 )(6) — Restructuring charges — 17 (4) (2,182 )(4) (12,952 )(4) (2,786 )(4) Merger costs — — — — 1,741 (9) Total operating income (loss) (16,683 ) 7,090 (43,221 ) (131,012 ) 4,519 23
Years Ended December 31, 2003 2002 2001 2000 1999 Interest expense, net of amounts capitalized (52,804 ) (46,960 ) (39,365 ) (30,307 ) (15,047 ) Interest income 2,461 2,808 5,554 4,046 5,922 Unrealized gain (loss) on Viacom stock 39,831 (37,300 ) 782 — — Unrealized (loss) gain on derivatives, net (33,228 ) 86,476 54,282 — — Other gains and losses 2,209 1,163 2,661 (3,514 ) 586,371 (10)(11) Income (loss) from continuing operations before income taxes (58,214 ) 13,277 (19,307 ) (160,787 ) 581,765 Provision (benefit) for income taxes (24,669 ) 1,318 (9,142 ) (52,331 ) 172,831 Income (loss) from continuing operations (33,545 ) 11,959 (10,165 ) (108,456 ) 408,934 Gain (loss) from discontinued operations, net of taxes(3) 34,371 85,757 (48,833 ) (47,600 ) (15,280 ) Cumulative effect of accounting change, net of taxes — (2,572 )(5) 11,202 (7) — — Net income (loss) $ 826 $ 95,144 $ (47,796 ) $ (156,056 ) $ 393,654 Income (loss) from continuing operations $ (0.97 ) $ 0.36 $ (0.30 ) $ (3.25 ) $ 12.42 Income (loss) from discontinued operations 0.99 2.54 (1.45 ) (1.42 ) (0.46 ) Cumulative effect of accounting change — (0.08 ) 0.33 — — Net income (loss) $ 0.02 $ 2.82 $ (1.42 ) $ (4.67 ) $ 11.96 Income (loss) from continuing operations $ (0.97 ) $ 0.36 $ (0.30 ) $ (3.25 ) $ 12.31 Income (loss) from discontinued operations 0.99 2.54 (1.45 ) (1.42 ) (0.46 ) Cumulative effect of accounting change — (0.08 ) 0.33 — — Net income (loss) $ 0.02 $ 2.82 $ (1.42 ) $ (4.67 ) $ 11.85 Dividends per share $ — $ — $ — $ — $ 0.80
As of December 31, 2003 2002 2001 2000 1999 Total assets $ 2,577,263 $ 2,178,691 (10) $ 2,177,644 (10 ) $ 1,930,805 (1 0 ) $1,741,215 Total debt 548,759 (12) 340,638 (12) 468,997 (12) 175,500 297,500 Secured forward exchange contract 613,054 (10) 613,054 (10) 613,054 (10) 613,054 (10) — Total stockholders’ equity 904,509 787,579 696,988 765,937 1,007,149
YEARS ENDED DECEMBER 31, ------------------------ (Restated) (Restated) (Restated) (Restated) (in thousands, except per share data) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ----Revenues: Hospitality............................... $ 339,380 $228,712 $ 237,260 $ 239,248 $ 237,076 Attractions............................... 63,512 65,878 63,235 57,760 56,602 Media..................................... 11,194 9,393 14,913 48,814 61,480 Corporate and other....................... 272 290 64 5,318 5,797 --------- -------- --------- --------- --------- Total revenues......................... 414,358 304,273 315,472 351,140 360,955 --------- -------- --------- --------- --------- Operating expenses: Operating costs........................... 260,357 205,421 213,725 223,627 219,547 Selling, general and administrative....... 110,619 68,913 90,806 76,977 69,560(1) Preopening costs (1)...................... 8,913 15,927 5,278 1,892 -- Gain on sale of assets (2)................ (30,529) -- -- -- -- Impairmentare related to the Gaylord Palms andother charges.............. -- 14,262(6) 75,712(6) -- -- Restructuring charges..................... 3(4) 2,182(4) 12,952(4) 2,786(4) -- Merger costs.............................. -- -- -- (1,741)(9) -- Depreciationthe new Gaylord Texan hotel under construction in Grapevine, Texas. Gaylord Palms opened in January 2002 andamortization: Hospitality............................ 44,924 25,593 24,447 22,828 21,390 Attractions............................ 5,295 5,810 6,443 6,396 5,525 Media.................................. 623 660 7,716 4,945 2,675 Corporate and other.................... 5,778 6,542 6,257 6,870 5,262 --------- -------- --------- --------- --------- Total depreciation and amortization.... 56,620 38,605 44,863 41,039 34,852 --------- -------- --------- --------- --------- Total operating expenses............... 405,983 345,310 443,336 344,580 323,959 --------- -------- --------- --------- --------- Operating income (loss): Hospitality............................... 25,972 34,270 45,478 43,859 47,031 Attractions............................... 3,094 (2,372) (8,025) (6,063) (3,059) Media..................................... (193) (454) (33,188)(8) (79) 16,480 Corporate and other....................... (42,111) (40,110) (38,187) (30,112) (23,456) Preopening costs (1)...................... (8,913) (15,927) (5,278) -- -- Gain on sale of assets (2)................ 30,529 -- -- -- -- Impairment and other charges.............. -- (14,262)(6) (75,712)(6) -- -- Restructuring charges..................... (3)(4) (2,182)(4) (12,952)(4) (2,786)(4) -- Merger costs.............................. -- -- -- 1,741(9) -- --------- -------- --------- --------- --------- Total operating income (loss)............. 8,375 (41,037) (127,864) 6,560 36,996 Interest expense, net of amounts capitalized. (46,960) (39,365) (30,319) (15,047) (28,742) Interest income.............................. 2,808 5,554 4,046 5,922 25,067 Unrealized gain (loss) on Viacom stock, net.. (37,300) 782 -- -- -- Unrealized gain on derivatives............... 86,476 54,282 -- -- -- Other gains and losses....................... 1,163 2,661 (3,514) 586,371(10)(11) 19,351(11)(12) --------- -------- --------- --------- --------- Income (loss) from continuing operations before income taxes....................... 14,562 (17,123) (157,651) 583,806 52,672 Provision (benefit) for income taxes......... 1,806 (8,313) (51,140) 173,437 20,580 --------- -------- --------- --------- --------- Income (loss) from continuing operations..... 12,756 (8,810) (106,511) 410,369 32,092 Gain (loss) from discontinued operations, net of taxes (3).............................. 84,960 (50,188) (49,545) (16,715) (2,471) Cumulative effect of accounting change, net of taxes.............................. (2,572)(5) 11,202(7) -- -- -- --------- -------- --------- --------- --------- Net income (loss)......................... $ 95,144 $(47,796) $(156,056) $ 393,654 $ 29,621 ========= ======== ========= ========= =========18
YEARS ENDED DECEMBER 31, ------------------------ (Restated) (Restated) (Restated) (Restated) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ----Income (loss) per share: Income (loss) from continuing operations.... $ 0.38 $ (0.26) $ (3.19) $ 12.47 $ 0.98 Income (loss) from discontinued operations............................... 2.52 (1.49) (1.48) (0.51) (0.08) Cumulative effect of accounting change...... (0.08) 0.33 -- -- -- ---------- --------- --------- ---------- ---------- Net income (loss)..................... $ 2.82 $ (1.42) $ (4.67) $ 11.96 $ 0.90 ========== ========= ========= ========== ========== Income (loss) per share - assuming dilution: Income (loss) from continuing operations.... $ 0.38 $ (0.26) $ (3.19) $ 12.35 $ 0.96 Income (loss) from discontinued operations.. 2.52 (1.49) (1.48) (0.50) (0.07) Cumulative effect of accounting change...... (0.08) 0.33 -- -- -- ----------- --------- --------- ---------- ---------- Net income (loss)..................... $ 2.82 $ (1.42) $ (4.67) $ 11.85 $ 0.89 ========== ========= ========= ========== ========== Dividends per share......................... $ -- $ -- $ -- $ 0.80 $ 0.65 ========== ========= ========= ========== ==========BALANCE SHEET DATA:
(IN THOUSANDS) AS OF DECEMBER 31, ------------------ (Restated) (Restated) (Restated) (Restated) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ----Total assets............................ $2,192,196(10) $2,177,644(10) $1,930,805(10) $1,741,215 $1,012,624 Total debt.............................. 340,638(13) 468,997(13) 175,500 297,500(8) 261,328 Secured forward exchange contract....... 613,034(10) 613,054(10) 613,054(10) -- -- Total stockholders' equity.............. 787,579 696,988 765,937(7) 1,007,149(7) 523,587- --------------- (1) Preopening costs are related to the Company's Gaylord Palms Resort and Convention Center hotel in Kissimmee, Florida and its new Gaylord hotel under construction in Grapevine, Texas. Gaylord Palms opened in January 2002 and the Texas hotel is anticipated to open in April 2004.the Gaylord Texan is anticipated to open in April 2004.(2) During 2002, the Company sold its one-third interest in the Opry Mills Shopping Center in Nashville, Tennessee and the related land lease interest between the Company and the Mills Corporation. (3) In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. In accordance with the provisions of SFAS No. 144, the Company has presented the operating results and financial position of the following businesses as discontinued operations: WSM-FM and WWTN(FM); Word Entertainment; Acuff-Rose Music Publishing; GET Management, the Company’s artist management business; Oklahoma RedHawks; the Company’s international cable networks; the businesses sold to affiliates of The Oklahoma Publishing Company 24
consisting of Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production Company; and the Company’s water taxis. (4) Related primarily to employee severance and contract termination costs. (5) Reflects the cumulative effect of the change in accounting method related to adopting the provisions of SFAS No. 142. The Company recorded an impairment loss related to impairment of the goodwill of the Radisson Hotel at Opryland. The impairment loss was $4.2 million, less taxes of $1.6 million. (6) Reflects the divestiture of certain businesses and reduction in the carrying values of certain assets. The components of the impairment and other charges related to continuing operations for the years ended December 31 are as follows:
2003 2001 2000 Programming, film and other content $ 856 $ 6,858 $ 7,410 Gaylord Digital and other technology investments — 4,576 48,127 Property and equipment — 2,828 3,397 Orlando-area Wildhorse Saloon — — 15,854 Other — — 872 Total impairment and other charges $ 856 $ 14,262 $ 75,660
(7) Reflects the cumulative effect of the change in accounting method related to recording the derivatives associated with the secured forward exchange contract at fair value as of January 1, 2001, of $18.3 million less a related deferred tax provision of $7.1 million. (8) Includes operating losses of $27.5 million related to Gaylord Digital, the Company’s Internet initiative, and operating losses of $6.1 million related to country record label development, both of which were closed during 2000. (9) The merger costs relate to the reversal of merger costs associated with the October 1, 1997 merger when TNN and CMT were acquired by CBS.
(10) 1999 results of operations include a pretax gain of $459.3 million on the divestiture of television station KTVT in Dallas-Ft. Worth in exchange for CBS Series B preferred stock (which was later converted into 11,003,000 shares of Viacom, Inc. Class B common stock), $4.2 million of cash, and other consideration. The CBS Series B preferred stock was included in total assets at its market value of $648.4 million at December 31, 1999. The Viacom, Inc. Class B common stock was included in total assets at its market values of $488.3 million, $448.5 million, $485.8 million and $514.4 million at December 31, 2003, 2002, 2001 and 2000, respectively. During 2000, the Company entered into a seven-year forward exchange contract for a notional amount of $613.1 million with respect to 10,937,900 shares of the Viacom, Inc. Class B common stock. Prepaid interest related to the secured forward exchange contract of $91.2 million, $118.1 million, $145.0 million and $171.9 million was included in total assets at December 31, 2003, 2002, 2001 and 2000 respectively. (11) In 1995, the Company sold its cable television systems. Net proceeds were $198.8 million in cash and a note receivable with a face amount of $165.7 million, which was recorded at $150.7 million, net of a $15.0 million discount. As part of the sale transaction, the Company also received contractual equity participation rights (the “Rights”) equal to 15% of the net distributable proceeds from future asset sales. During 1998, the Company collected the full amount of the note receivable and recorded a pretax gain of $15.0 million related to the note receivable discount. During 1999, the Company received cash and recognized a pretax gain of $129.9 million representing the value of the Rights. The proceeds from the note receivable prepayment and the Rights were used to reduce outstanding bank indebtedness. (12) Related primarily to the construction of the Gaylord Palms and the new Gaylord Texan. 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Three Years Ended December 31, 2003
Our Current Operations Our operations are organized into four principal businesses:
• Hospitality, consisting of our Gaylord Opryland Resort and Convention Center, our Gaylord Palms Resort and Convention Center, our Radisson Hotel at Opryland and, when opened, our new Gaylord Texan Resort and Convention Center on Lake Grapevine. • Opry and Attractions, consisting of our Grand Ole Opry assets and our Nashville attractions. • ResortQuest, consisting of our vacation rental property management business. • Corporate and Other, consisting of our ownership interests in certain entities including our corporate expenses. During 2003, 2002, and 2001, we disposed of certain businesses, which have been classified as discontinued operations and are described in more detail below.
During the third quarter of 2003, we completed a sale of the assets primarily used in the operation of WSM-FM and WWTN(FM) (collectively, the “Radio Operations”). The Radio Operations were previously included in a fourth business segment, media, along with WSM-AM. Due to the Radio Operations now being included in discontinued operations, WSM-AM is now grouped in the Opry and Attractions business segment for all periods presented.
The acquisition of ResortQuest was completed on November 20, 2003. The results of operations of ResortQuest for the period November 20, 2003 to December 31, 2003 are included in the results discussed below.
For the years ended December 31, our total revenues from continuing operations were divided among these businesses as follows:
Business 2003 2002 2001 Hospitality 82 % 84 % 77 % Opry and Attractions 14 % 16 % 23 % ResortQuest 4 % 0 % 0 % Corporate and Other 0 % 0 % 0 % We generate a significant portion of our revenues from our Hospitality business. We believe that we are the only hospitality company focused primarily on the large group meetings and conventions sector of the lodging market. Our strategy is to continue this focus by concentrating on our “All-in-One-Place” self-contained service offerings and by emphasizing customer rotation among our convention properties, while also offering additional vacation and entertainment opportunities to guests and target customers through the Opry and Attractions and ResortQuest businesses.
Our concentration in the hospitality industry, and in particular the large group meetings sector of the hospitality industry, exposes us to certain risks outside of our control. General economic conditions, particularly national and global economic conditions, can affect the number and size of meetings and conventions attending our hotels. Our business is also exposed to risks related to tourism, including terrorist attacks and other global events which affect levels of tourism in the United States and, in particular, the areas of the country in which our properties are located. Competition and the desirability of the locations in which our hotels and other vacation properties are located are also important risks to our business.
26
Key Performance Indicators; Hotel Industry Metrics As a hospitality-based company, our operating results are highly dependent on the volume of customers at our hotels and the quality of the customer mix at our hotels. These factors impact the price we can charge for our hotel rooms and other amenities such as food and beverages and meeting space at the resorts. Key performance indicators related to revenue are:
• hotel occupancy (volume indicator); • average daily rate (“ADR”) (price indicator); • Revenue per Available Room (“RevPAR”) (a summary measure of hotel results calculated by dividing room sales by room nights available to guests for the period); and • Total Revenue per Available Room (“Total RevPAR”) (a summary measure of hotel results calculated by dividing the sum of room sales, food and beverage sales and other ancillary services revenue (which equals hospitality segment revenues) by room nights available to guests for the period). We recognize revenue from rooms as earned on the close of business each day and from concessions and food and beverage sales at the time of sale. Almost all of our revenues are either cash-based or, for meeting and convention groups meeting our credit criteria, billed and collected on a short-term receivables basis. Our industry is capital intensive, and we rely on the ability of our resorts to generate operating cash flow to repay debt financing, fund maintenance capital expenditures and provide excess cash flow for future development.
Our results of operations are affected by the number and type of group meetings and conventions scheduled to attend our hotels in a given period. We attempt to offset any identified shortfalls in occupancy by creating special events at our hotels or offering incentives to groups in order to attract increased business during this period. A variety of factors can affect the results of any interim period, including the nature and quality of the group meetings and conventions attending our hotels during such period, which have often been contracted for several years in advance, and the level of transient business at our hotels during such period.
Overall Outlook We have invested heavily in our operations in 2003 and 2002, primarily in connection with the opening of the Gaylord Palms in 2002, the continued construction of the Gaylord Texan in 2003 and the ResortQuest acquisition, which was consummated in November 2003. Subsequent to the expected completion of the Gaylord Texan in April 2004, our investments in 2004 will consist primarily of ongoing capital improvements rather than construction commitments. We believe that the Gaylord Texan will have an impact on our operating results in 2004, given that it is currently expected to be in operation for over eight months of the fiscal year.
We also believe that a full year of operations of our ResortQuest subsidiary will impact our financial results. Only the results of operations of ResortQuest from the period November 20, 2003 to December 31, 2003 have been included in our historical financial results.
As previously announced, we have plans to develop a Gaylord hotel on property to be acquired on the Potomac River in Prince George’s County, Maryland (in the Washington, D.C. market), subject to the availability of financing, resolution of certain zoning issues and approval by our Board of Directors. We also are considering other potential sites. The timing and extent of any of these development projects is uncertain.
27
Selected Financial Information The following table contains our selected financial information for each of the three years ended December 31, 2003, 2002 and 2001. The table also shows the percentage relationships to total revenues and, in the case of segment operating income, its relationship to segment revenues.
INCOME STATEMENT DATA:
Years Ended December 31, 2003 % 2002 % 2001 % REVENUES: Hospitality $ 369,263 82.3 $ 339,380 83.7 $ 228,712 77.3 Opry and Attractions 61,433 13.7 65,600 16.2 67,064 22.6 ResortQuest 17,920 4.0 — — — — Corporate and Other 184 — 272 0.1 290 0.1 Total revenues 448,800 100.0 405,252 100.0 296,066 100.0 OPERATING EXPENSES: Operating costs 276,937 61.7 254,583 62.8 201,299 68.0 Selling, general and administrative 117,178 26.1 108,732 26.8 67,212 22.7 Preopening costs 11,562 2.6 8,913 2.2 15,927 5.4 Gain on sale of assets — — (30,529 ) (7.5 ) — — Impairment and other charges 856 0.2 — — 14,262 4.8 Restructuring charges — — (17 ) — 2,182 0.7 Depreciation and amortization: Hospitality 46,536 10.4 44,924 11.1 25,593 8.6 Opry and Attractions 5,129 1.1 5,778 1.4 6,270 2.1 ResortQuest 1,186 0.3 — — — — Corporate and Other 6,099 1.4 5,778 1.4 6,542 2.2 Total depreciation and amortization 58,950 13.1 56,480 13.9 38,405 13.0 Total operating expenses 465,483 103.7 398,162 98.3 339,287 114.6 OPERATING INCOME (LOSS): Hospitality 42,347 11.5 25,972 7.7 34,270 15.0 Opry and Attractions (600 ) (1.0 ) 1,596 2.4 (5,010 ) (7.5 ) ResortQuest (2,616 ) (14.6 ) — — — — Corporate and Other (43,396 ) (A ) (42,111 ) (A ) (40,110 ) (A ) Preopening costs (11,562 ) (B ) (8,913 ) (B ) (15,927 ) (B ) Gain on sale of assets — (B ) 30,529 (B ) — (B ) Impairment and other charges (856 ) (B ) — (B ) (14,262 ) (B ) Restructuring charges — (B ) 17 (B ) (2,182 ) (B ) Total operating income (loss) (16,683 ) (3.7 ) 7,090 1.7 (43,221 ) (14.6 ) Interest expense, net of amounts capitalized (52,804 ) (C ) (46,960 ) (C ) (39,365 ) (C ) Interest income 2,461 (C ) 2,808 (C ) 5,554 (C ) Unrealized gain on Viacom stock and derivatives, net 6,603 (C ) 49,176 (C ) 55,064 (C ) Other gains and (losses), net 2,209 (C ) 1,163 (C ) 2,661 (C ) (Provision) benefit for income taxes 24,669 (C ) (1,318 ) (C ) 9,142 (C ) Gain (loss) on discontinued operations, net 34,371 (C ) 85,757 (C ) (48,833 ) (C ) Cumulative effect of accounting change, net — (C ) (2,572 ) (C ) 11,202 (C ) Net income (loss) $ 826 (C ) $ 95,144 (C ) $ (47,796 ) (C ) 28
(A) These amounts have not been shown as a percentage of segment revenue because the Corporate and Other segment generates only minimal revenue.
(B) These amounts have not been shown as a percentage of segment revenue because the Company does not associate them with any individual segment in managing the Company. (C) These amounts have not been shown as a percentage of total revenue because they have no relationship to total revenue.
Summary Financial Results The following table summarizes our results of operations for the years ended 2003, 2002 and 2001:
Year Ended December 31, Percentage Percentage 2003 Change 2002 Change 2001 (In thousands, except percentages and per share data) Total revenues $ 448,800 10.7 % $ 405,252 36.9% $ 296,066 Total operating expenses 465,483 16.9 % 398,162 17.4% 339,287 Operating income (loss) (16,683 ) (335.3 %) 7,090 116.4% (43,221 ) Income (loss) from continuing operations (33,545 ) (380.5 %) 11,959 217.6% (10,165 ) Income (loss) from continuing operations per share — fully diluted (0.97 ) (369.4 %) 0.36 220.0% (0.30 )
2003 Results The Company’s total revenues in 2003 increased 10.7% from 2002 primarily due to an increase in Hospitality revenues. The Company’s income from continuing operations during the year ended 2003 decreased from the year ended 2002 primarily as a result of a decline in operating income caused by:
• A one-time gain of $30.5 million recognized in 2002 as a result of the sale of our Opry Mills investment, which increased our 2002 operating income by a corresponding amount. • An additional $2.65 million in preopening costs over 2002 primarily related to a $7.3 million increase in preopening costs at the Gaylord Texan and a $4.4 million decrease in preopening costs at the Gaylord Palms. • An additional $2.5 million in our depreciation and amortization expense in 2003 due to additional capital expenditures and the acquisition of ResortQuest. • A loss of $1.43 million from the operations of ResortQuest from the period from November 20, 2003 to December 31, 2002. Also contributing to our loss from continuing operations in 2003 were:
• The recognition of a net unrealized gain on our investment in Viacom stock and the related secured forward exchange contract of $6.6 million in 2003, as compared to a net unrealized gain of $49.2 million in 2002. • A $5.8 million increase in our interest expense in 2003 primarily due to the costs associated with refinancing our indebtedness and repaying the debt of ResortQuest, as well as additional amounts of debt outstanding. Serving to lessen the impact of the items described above was an 8.8% increase in Hospitality revenue in 2003, although such increase was partially offset by an 8.8% increase in our operating costs and a 7.8% increase in our selling general and administrative expenses.
29
2002 Results In 2002, income from continuing operations increased from 2001 primarily as a result of the one-time gain from the sale of our Opry Mills investment and a significant reduction in the amount of restructuring charges and impairment and other charges as compared to 2001. However, total revenues also increased 36.9% in 2002 as a result of an increase in Hospitality revenues caused by the opening of the Gaylord Palms. This increase in total revenues was offset partially by a 17.4% increase in operating expenses in 2002, consisting primarily of increases in operating costs, selling, general and administrative expenses, and depreciation and amortization expense related to the opening of the Gaylord Palms.
Per Share Results Results on a per share basis in 2003 were impacted by a higher weighted average number of shares outstanding, due to the issuance of 5,318,363 shares on November 20, 2003 in connection with the ResortQuest acquisition.
Operating Results The following table includes key information about our operating results:
Year Ended December 31, Percentage Percentage 2003 Change 2002 Change 2001 (In thousands, except percentages) Total revenues $ 448,800 10.7 % $ 405,252 36.9 % $ 296,066 Operating expenses: Operating costs 276,937 8.8 % 254,583 26.5 % 201,299 Selling, general and admin. 117,178 7.8 % 108,732 61.8 % 67,212 Preopening costs 11,562 29.7 % 8,913 (44.0 )% 15,927 Gain on sale of assets — — (30,529 ) — — Impairment and other charges 856 — — — 14,262 Restructuring charges — — (17 ) (100.8 )% 2,182 Depreciation and amortization 58,950 4.4 % 56,480 47.1 % 38,405 Operating income (loss) $ (16,683 ) (335.3 )% $ 7,090 116.4 % $ (43,221 ) The most important factors and trends contributing to our operating performance over the last three years have been:
• An improvement in the operating performance of our hotels as compared to previous periods. • Improved food and beverage, banquet and catering services at our hotels, which have increased our Total Revenue per Available Room at our hotels. • The impact of the opening of the Gaylord Palms in 2002 on our total revenues and the accompanying increase in our total operating expenses; • Our ongoing assessment of operations and the related incurrence of restructuring charges to streamline those operations; • Our re-evaluation of the carrying values of certain assets and the related incurrence of impairment charges related to these assets; • The ResortQuest acquisition, which was completed on November 20, 2003; and • Preopening costs associated with the Gaylord Palms and the Gaylord Texan. The factors described above, particularly the increase in Hospitality revenues associated with improved operations at the Gaylord Palms and Gaylord Opryland, and the inclusion of ResortQuest’s revenues for
30
the period from November 20, 2003 to December 31, 2003, led to the increase in our total revenue in 2003. The increase in total revenue in 2002 as compared to 2001 is primarily attributable to the opening of the Gaylord Palms in 2002.Excluding the one-time $30.5 million gain recognized on the sale of our interests in Opry Mills in 2002, operating loss improved 28.8% due to the increase in our total revenues and a reduction in the rate of growth of our operating costs.
Excluding the one-time $30.5 million gain recognized on the sale of our interests in Opry Mills in 2002 and our impairment and restructuring charges our operating loss improved 12.4% from 2001 to 2002 due primarily to the opening of the Gaylord Palms. In analyzing operating loss in 2001 compared to income from operations in 2002, we believe it is appropriate to eliminate the effect of the one-time gain on sale of the Opry Mills interest because it is non-recurring, because the gain or loss on sale of discontinued operations is not included in operating income (loss) and because considering operating loss after eliminating this item gives a more accurate comparison of the operating performance of our business for the periods.
Operating Results — Detailed Revenue Information The following presents detail of our net revenues:
Year Ended December 31, Percentage Percentage 2003 Change 2002 Change 2001 (In thousands, except percentages) Hospitality revenue $ 369,263 8.8 % $ 339,380 48.4 % $ 228,712 Opry and Attractions revenue 61,433 (6.4 )% 65,600 (2.2 )% 67,064 ResortQuest revenue 17,920 — — — — Corporate and other revenue 184 (32.4 )% 272 (6.2 )% 290 Total revenues $ 448,800 10.7 % $ 405,252 36.9 % $ 296,066 The growth in our total revenues in both 2003 and 2002 was driven primarily by a growth in Hospitality revenues during such periods. Total revenues also increased in 2003, as compared to 2002, as a result of the inclusion of the revenues of ResortQuest from the period November 20, 2003 to December 31, 2003. Detailed information with respect to the revenues of the Hospitality, the Opry and Attractions, ResortQuest and the Corporate and Other businesses are discussed in more detail below.
Hospitality Revenue
Hospitality revenue increased in 2003 as compared to 2002 due to the improved property-level performance at the Gaylord Palms and Gaylord Opryland as a result of an increase in food and beverage and other ancillary revenues, as well as a result of an increase in RevPAR due to increased occupancy levels. Hospitality revenue increased in 2002 as compared to 2001 primarily due to the opening of the
31
Gaylord Palms in January 2002. The following table presents details of the revenues, and the key revenue drivers, of our Hospitality business as a whole, Gaylord Opryland and Gaylord Palms:
Year Ended December 31, Percentage Percentage 2003 Change 2002 Change 2001 Total revenues (in thousands) $ 369,263 8.8 % $ 339,380 48.4 % $ 228,712 Occupancy 72.2 % 7.4 % 67.2 % (3.3 )% 69.5 % Average Daily Rate $ 142.57 (2.4 )% $ 146.07 8.1 % $ 135.15 RevPAR(2) $ 102.86 4.8 % $ 98.18 4.4 % $ 94.00 Total RevPAR (3) $ 220.44 8.3 % $ 203.60 3.5 % $ 196.62 Total revenues (in thousands) $ 215,265 4.4 % $ 206,132 (7.1 )% $ 221,932 Occupancy 72.4 % 5.6 % 68.6 % (2.4 )% 70.3 % Average Daily Rate $ 137.47 (3.6 )% $ 142.58 1.6 % $ 140.33 RevPAR(2) $ 99.59 1.8 % $ 97.80 (0.9 )% $ 98.65 Total RevPAR (3) $ 204.75 4.5 % $ 195.97 (7.1 )% $ 211.01 Total revenues (in thousands) $ 146,800 16.0 % $ 126,473 — $ — Occupancy 72.3 % 11.5 % 64.8 % — — Average Daily Rate $ 165.79 (1.7 )% $ 168.65 — $ — RevPAR(2) $ 119.87 9.6 % $ 109.37 — $ — Total RevPAR (3) $ 286.05 13.8 % $ 251.26 — $ —
(1) The results of our Hospitality business include the results of our Radisson Hotel at Opryland, located in Nashville, Tennessee. (2) 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. (3) The Company calculates Total Revenue per Available Room (“Total RevPAR”) by dividing the sum of room sales, food and beverage sales, and other ancillary services revenue (which equals hospitality segment revenues) by room nights available to guests for the period. Total Revenue per Available Room is not comparable to similarly titled measures such as revenues. Gaylord Opryland.The increase in Gaylord Opryland revenue in 2003 as compared to 2002 is due to improved occupancy at the hotel. Despite rate pressure caused by customer mix, the increase in hotel occupancy led to an increase in 2003 RevPAR. In addition, favorable food and beverage and other ancillary revenue contributed to the increase in Total Revenue per Available Room in 2003. The decline in revenue at the hotel in 2002 as compared to 2001 is due to the reduced occupancy levels at the hotel throughout 2002. Despite an improved average daily rate in 2002 due to more favorable group room pricing, the decline in occupancy led to a decline in 2002 RevPAR at the hotel. In addition, this lower occupancy contributed to a decline in food and beverage and other ancillary revenue at the hotel, resulting in the decline in Total Revenue per Available Room in 2002.
Gaylord Palms.The increase in Gaylord Palms revenue in 2003 as compared to 2002, its first year of operation, is primarily due to improved occupancy at the hotel during the first half of 2003 as well as improved rates at the hotel during the first quarter of 2003. Although average daily rate decreased in 2003 due to less favorable group room pricing throughout the second half of the year, this increase in occupancy (driven by improved group bookings and an increase in transient guests) led to an increase in 2003
32
RevPAR at the hotel. In addition, increased customer utilization of food and beverage and other ancillary services at the hotel contributed to the increase in Total Revenue per Available Room from 2002.
Opry and Attractions Revenue The decrease in Opry and Attractions revenues in 2003 and 2002, as compared to the previous year, was primarily a result of a decrease in the revenue of Corporate Magic, a company specializing in the production of creative events in the corporate entertainment marketplace, of $7.8 million in 2003 and $5.1 million in 2002. This reduction was caused by reduced spending by corporate customers as a result of the terrorist attacks of September 11, 2001 and the resulting downturn in the economy, which reduced demand for corporate events. The decrease in revenue of Corporate Magic was partially offset by an increase in revenues of the Grand Ole Opry of $2.3 million in 2003 (to $18.3 million) and $2.5 million (to $15.9 million) in 2002. The Grand Ole Opry revenue increase is due to an increase in popular performers appearing on the Grand Ole Opry and a resulting increase in attendance.
ResortQuest Revenue On November 20, 2003, we completed our acquisition of ResortQuest. Accordingly, our total revenues for the year ended December 31, 2003 include the revenues of ResortQuest from the period November 20, 2003 to December 31, 2003. Our ResortQuest group receives property management fees when the properties are rented, which are generally a percentage of the rental price of the vacation property. Management fees range from approximately 3% to over 40% of gross lodging revenues collected based upon the type of services provided by us to the property owner and the type of rental units managed. We also recognize other revenues primarily related to real estate broker commissions, food & beverage sales and software and maintenance sales.
Corporate and Other Revenue The decline in Corporate and Other revenue in 2003 and 2002, which consists of corporate sponsorships and rental income, is primarily due to reductions in sponsorship revenues from Opry Mills, which was divested in the second quarter of 2002.
Operating Results — Detailed Operating Expense Information The 16.9% increase in total operating expenses in 2003 can be attributed to an increase in our operating costs, driven primarily by increases in our preopening costs, depreciation and amortization expense and selling, general and administrative expenses. However, despite these increases:
• Operating costs, as a percentage of revenues, decreased to 61.7% during 2003 as compared to 62.8% during 2002. • Selling, general and administrative expenses, as a percentage of revenues, decreased to 26.1% during 2003 from 26.8% in 2002. These decreases are primarily the result of improved operational efficiency at our hotels. Excluding the gain on sale of assets, the impairment and other charges and restructuring charges from both periods, total operating expenses increased $35.9 million, or 8.4%, to $464.6 million in 2003 as compared to 2002.
Operating Costs Operating costs consist of direct costs associated with the daily operations of our core assets, primarily the room, food and beverage and convention costs in Hospitality. Operating costs also include the direct costs associated with the operations of our other business units. Operating costs increased in both 2003 and 2003 due to increases in Hospitality operating costs. Operating costs for each of our businesses are discussed below.
33
Hospitality Operating Costs.Hospitality operating costs were as follows:
Year Ended December 31, Percentage Percentage 2003 Change 2002 Change 2001 (In thousands, except percentages) Total Hospitality Operating Costs: $ 215,900 3.5 % $ 208,500 49.0 % $ 139,900 Gaylord Opryland Operating Costs: 131,000 1.0 % 129,700 (5.1 )% 136,600 Gaylord Palms Operating Costs: 81,700 8.6 % 75,200 — — Hospitality operating costs increased in 2003, as compared to 2002, primarily due to increased utilization of services at the Gaylord Opryland and the Gaylord Palms. The 2002 increase in Hospitality operating costs is primarily due to the opening of Gaylord Palms in January 2002, although such increase was partially offset by a decrease in operating costs at Gaylord Opryland due to the reduced levels of occupancy, and corresponding reductions in variable expenses, at the hotel during the year.
Opry and Attractions Operating Costs.Opry and Attractions operating costs decreased $0.2 million, or 0.5%, to $39.3 million in 2003. Although the operating costs of the Grand Ole Opry increased $2.9 million in 2003 in response to increased revenues, the operating costs of Corporate Magic decreased $5.6 million to $7.5 million in 2003, as compared to 2002. This decrease is due to Corporate Magic’s lower revenue and certain cost saving measures taken by the Company during 2003.
Operating costs in the Opry and Attractions group decreased $11.2 million, or 22.0%, to $39.5 million in 2002. The operating costs of Corporate Magic decreased $7.6 million, to $13.2 million in 2002, as compared to 2001 primarily due to the lower revenue and certain cost saving measures taken by the Company during 2002. The operating costs of the Grand Ole Opry and the General Jackson Showboat decreased $1.0 million in 2002 due to cost saving measures.
ResortQuest Operating Costs.Operating costs for ResortQuest during the period from November 20, 2003 to December 31, 2003 were $13.4 million.
Corporate and Other Operating Costs. Corporate and Other operating costs increased $1.7 million, or 25.4%, to $8.3 million in 2003 as compared to 2002 due primarily to changes in our long-term incentive plan compensation program and changes to the actuarial assumptions used in our pension plan. Corporate and Other operating costs decreased $4.1 million, or 38.4%, to $6.6 million in 2002 as compared to 2001 due to the elimination of unnecessary management levels and overhead at the hotels identified in our 2001 Strategic Assessment.
Selling, General and Administrative Expenses Selling, general and administrative expenses consist of administrative and overhead costs. Selling, general, and administrative expenses increased $8.4 million, or 7.8%, to $117.2 million in 2003, primarily due to increases in Hospitality selling, general and administrative expenses described below.
34
Hospitality Selling, General and Administrative Expenses.Hospitality selling, general and administrative expenses were as follows:
Year Ended December 31, Percentage Percentage 2003 Change 2002 Change 2001 (In thousands, except percentages) Total Hospitality SG&A Expenses: $ 64,500 7.5 % $ 60,000 107.6 % $ 28,900 Gaylord Opryland SG&A Expenses: 31,700 6.0 % 29,900 8.3 % 27,600 Gaylord Palms SG&A Expenses: 31,300 6.8 % 29,300 — — The increase in Gaylord Opryland’s selling, general and administrative expenses in 2003 and 2002 is due primarily to an increase in sales efforts at the hotel and advertising to promote the special events held at the hotel in these years. The increase in Gaylord Palms’ selling, general and administrative expenses in 2003 is due to an increase in sales efforts at the hotel and an increase in special events advertising, while the 2002 increase is primarily due to the opening of the Gaylord Palms in January 2002.
Opry and Attractions Selling, General and Administrative Expenses. Selling, general and administrative expenses in Opry and Attractions decreased $1.1 million, or 5.9%, to $17.6 million in 2003. This decrease is primarily due to a $0.9 million decrease at Corporate Magic due to decreased revenues in 2003.
Opry and Attractions selling, general and administrative expenses increased $3.6 million, or 23.7%, to $18.7 million in 2002. This increase was partially due to increases in selling, general and administrative expenses for the General Jackson Showboat (an increase of $1.4 million, to $1.9 million) due to increased labor costs associated with additional revenue and increased management support during 2002. Also, selling, general, and administrative expenses increased $1.3 million to $5.5 million at the Grand Ole Opry due to an increase in revenue.
ResortQuest Selling, General and Administrative Expenses.Selling, general and administrative expenses for ResortQuest during the period from November 20, 2003 to December 31, 2003 were $5.9 million.
Corporate and Other Selling, General and Administrative Expenses. Corporate and Other selling, general and administrative expenses, consist primarily of the Gaylord Entertainment Center naming rights agreement, senior management salaries and benefits, legal, human resources, accounting, pension and other administrative costs. During 2003, these expenses decreased $0.8 million, or 2.7%, to $29.2 million due to decreased corporate marketing expense.
During 2002, our Corporate and Other selling, general and administrative expenses increased $6.9 million, or 29.8%, to $30.0 million as a result of amendments to our retirement plans and our retirement savings plan. As a result of these amendments, and as more fully described in Note 17 to our consolidated financial statements:
• our retirement cash balance benefit was frozen and the policy related to future contributions to our retirement savings plan was changed; • as a result of these changes, we recorded a pretax charge of $5.7 million related to the write-off of unamortized prior service costs in selling, general, and administrative expenses; • we amended the eligibility requirements of our postretirement benefit plans effective December 31, 2001; and • in connection with the amendment and curtailment of the plans, we recorded a gain of $2.1 million which served to reduce our other selling, general and administrative expenses in 2002. 35
Other increases in Corporate and Other selling, general and administrative expenses in 2002 can be attributed to increased personnel costs related to new corporate departments that did not previously exist, new management personnel in other corporate departments, and increased corporate marketing expenses as compared to the same period in 2001.
Preopening Costs In accordance with AICPA SOP 98-5, “Reporting on the Costs of Start-Up Activities”, we expense the costs associated with start-up activities and organization costs as incurred. Preopening costs increased $2.6 million, or 29.7%, to $11.6 million in 2003. The increase in preopening costs in 2003, as compared to 2002, resulted from our hotel development activities. Preopening costs related to our Gaylord Texan hotel, scheduled to open in April 2004, totaled $11.3 million in 2003, as compared to $4.0 million in 2002. Preopening costs decreased in 2002 as compared to 2001 as a result of the opening of the Gaylord Palms in January of 2002. Gaylord Palms preopening costs decreased $7.7 million, to $4.5 million, in 2002 as compared to 2001. This decrease was partially offset by an increase in preopening costs related to the Gaylord Texan ($4.0 million in 2002, as compared to $3.1 million in 2001).
Gain on Sale of Assets During 2003, we did not recognize any material gains or losses on the sale of assets in operating income.
In 2002, we recognized a gain of approximately $30.5 million in connection with our ownership interest in Opry Mills. We entered into a partnership in 1998 with The Mills Corporation to develop the Opry Mills Shopping Center in Nashville,
Tennessee andTennessee. We held a one-third interest in therelatedpartnership as well as the title to the landlease interest betweenon which theCompany andshopping center was constructed, which was being leased to the partnership. During the second quarter of 2002, we sold our partnership share to certain affiliates of The MillsCorporation. (3) In August 2001, the FASB issued SFAS No. 144, "AccountingCorporation forthe Impairment or Disposal of Long-Lived Assets".approximately $30.8 million in cash proceeds. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate”, and other applicable pronouncements, we deferred approximately $20.0 million of the gain representing the estimated fair value of the continuing land lease interest between us and the Opry Mills partnership at June 30, 2002. We recognized the remainder of the proceeds, net of certain transaction costs, as a gain of approximately $10.6 million during the second quarter of 2002. During the third quarter of 2002, we sold our interest in the land lease to an affiliate of the Mills Corporation and recognized the remaining $20.0 million deferred gain, less certain transaction costs.
Impairment and Other Charges During 2001, we named a new Chairman and a new Chief Executive Officer, and had numerous changes in senior management. The new management team instituted a corporate reorganization and the reevaluation of our businesses and other investments (the “2001 Strategic Assessment”). As a result of the 2001 Strategic Assessment, we determined that the carrying value of certain long-lived assets were not fully recoverable and recorded pretax impairment and other charges from continuing operations during 2001 and 2003 in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The components of the impairment and other charges related to continuing operations for the years ended December 31 are as follows (amounts in thousands):
2003 2002 2001 Programming, film and other content $ 856 $ — $ 6,858 Gaylord Digital and other technology investments — — 4,576 Property and equipment — — 2,828 Total impairment and other charges $ 856 $ — $ 14,262 36
We began production of an IMAX movie during 2000 to portray the history of country music. As a result of the 2001 Strategic Assessment, the carrying value of the IMAX film asset was reevaluated on the basis of its estimated future cash flows, resulting in an impairment charge of $6.9 million in 2001.
At December 31, 2000, we held a minority investment in a technology start-up business. During 2001, the unfavorable environment for technology businesses created difficulty for this business to obtain adequate capital to execute its business plan and, subsequently, we were notified that this technology business had been unsuccessful in arranging financing, resulting in an impairment charge of $4.6 million. We also recorded an impairment charge related to idle real estate of $2.0 million during 2001 based upon an assessment of the value of the property. We sold this idle real estate during the second quarter of 2002. Proceeds from the sale approximated the carrying value of the property. In addition, we recorded an impairment charge for other idle property and equipment totaling $0.8 million during 2001 primarily due to the consolidation of offices resulting from personnel reductions.
In the third quarter of 2003, based on the revenues generated by the theatrical release of the IMAX movie, the asset was again reevaluated on the basis of estimated future cash flows. As a result, an additional impairment charge of $0.9 million was recorded in the third quarter of 2003. The carrying value of the asset was $1.2 million as of December 31, 2003.
Restructuring Charges As part of the 2001 Strategic Assessment, we recognized pretax restructuring charges from continuing operations of $5.8 million related to streamlining operations and reducing layers of management. We recognized additional pretax restructuring charges from discontinued operations of $3.0 million in 2001. These restructuring charges were recorded in accordance with EITF No. 94-3. The restructuring costs from continuing operations consisted of $4.7 million related to severance and other employee benefits and $1.1 million related to contract termination costs, offset by the reversal of restructuring charges recorded in 2000 of $3.7 million primarily related to negotiated reductions in certain contract termination costs. The restructuring costs from discontinued operations in 2001 consisted of $1.6 million related to severance and other employee benefits and $1.8 million related to contract termination costs offset by the reversal of restructuring charges recorded in 2000 of $0.4 million.
As part of our ongoing assessment of operations during 2002, we identified certain duplication of duties within divisions and realized the need to streamline those tasks and duties. Related to this assessment, during the second quarter of 2002, we adopted a plan of restructuring resulting in a pretax restructuring charge of $1.1 million related to employee severance costs and other employee benefits unrelated to discontinued operations. Also during 2002, we reversed approximately $1.1 million of the prior year’s restructuring charge. These restructuring charges were recorded in accordance with EITF No. 94-3. As of December 31, 2002, we recorded cash payments of $1.1 million against the 2002 restructuring accrual. During the fourth quarter of 2002, the outplacement agreements expired related to the 2002 restructuring charge. Therefore, we reversed the remaining $67,000 accrual. There was no remaining balance of the 2002 restructuring accrual at December 31, 2002.
Depreciation and Amortization Depreciation expense increased $1.2 million, or 2.4%, to $53.9 million in 2003. The increase in 2003 is due to additional capital expenditures and the acquisition of ResortQuest in 2003. Depreciation expense increased $18.0 million, or 51.7%, to $52.7 million in 2002. The increase during 2002 is primarily attributable to the opening of Gaylord Palms in January 2002. Depreciation expense of Gaylord Palms was $18.6 million subsequent to the January 2002 opening.
Amortization expense increased by $1.2 million, or 32.3%, to $5.0 million in 2003 and increased slightly, by $0.1 million, in 2002. Amortization of software increased $1.1 million during 2003 and $0.9 million during 2002, primarily at Gaylord Opryland, Gaylord Palms and the Corporate and Other group. The 2002 increase in amortization of software was partially offset by the adoption of SFAS No. 142 on January 1, 2002, under the provisions of which we no longer amortize goodwill.
37
Non-Operating Results
Interest Expense Interest expense increased $5.8 million, or 12.4%, to $52.8 million in 2003, net of capitalized interest of $14.8 million. The increase in interest expense is primarily due to the costs associated with refinancing our indebtedness and the repayment of the outstanding debt of ResortQuest, as well as additional amounts of debt outstanding during 2003. Interest expense related to the amortization of prepaid costs and interest of the secured forward exchange contract (all of which has been prepaid) was $26.9 million during 2003. Our weighted average interest rate on our borrowings, including the interest expense associated with the secured forward exchange contract and excluding the write-off of deferred financing costs during the period, was 5.3% in 2003 and 2002.
Interest expense increased $7.6 million, or 19.3%, to $47.0 million in 2002, net of capitalized interest of $6.8 million. The increase in interest expense is primarily due to the opening of the Gaylord Palms, after which interest related to the Gaylord Palms was no longer capitalized. Capitalized interest related to the Gaylord Palms hotel was $0.4 million during 2002 before its opening and was $16.4 million during 2001. The absence of capitalized interest related to Gaylord Palms was partially offset by an increase of $4.0 million of capitalized interest related to the Texas hotel. Interest expense related to the amortization of prepaid costs and interest of the secured forward exchange contract was $26.9 million during 2002 and 2001.
Excluding capitalized interest from each period, interest expense decreased $4.4 million in 2002 due to the lower average borrowing levels and lower weighted average interest rates during 2002. Our weighted average interest rate on our borrowings, including the interest expense associated with the secured forward exchange contract, was 5.3% in 2002 as compared to 6.3% in 2001.
Interest Income The decrease in interest income of $0.3 million (to $2.5 million) in 2003 and $2.7 million (to $2.8 million) in 2002 primarily relates to a decrease in interest income from invested cash balances.
Gain (Loss) on Viacom Stock and Derivatives During 2000, we entered into a seven-year secured forward exchange contract with respect to 10.9 million shares of our Viacom stock investment. Effective January 1, 2001, we adopted the provisions of SFAS No. 133, as amended. Components of the secured forward exchange contract are considered derivatives as defined by SFAS No. 133.
For the year ended December 31, 2003, we recorded net pretax losses of $33.2 million related to the decrease in fair value of the derivatives associated with the secured forward exchange contract. For the year ended December 31, 2003, we recorded net pretax gains of $39.8 million related to the increase in fair value of the Viacom stock. For the year ended December 31, 2002, we recorded net pretax gains of $86.5 million related to the increase in fair value of the derivatives associated with the secured forward exchange contract. For the year ended December 31, 2002, we recorded net pretax losses of $37.3 million related to the decrease in fair value of the Viacom stock. For the year ended December 31, 2001, we recorded net pretax gains of $54.3 million related to the increase in fair value of the derivatives associated with the secured forward exchange contract. Additionally, we recorded a nonrecurring pretax gain of $29.4 million on January 1, 2001, related to reclassifying our investment in Viacom stock from available-for-sale to trading as permitted by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. For the year ended December 31, 2001, we recorded net pretax losses of $28.6 million related to the decrease in fair value of the Viacom stock subsequent to January 1, 2001.
Other Gains and Losses Other gains and losses, which consisted of dividends received on the Viacom stock and gains and losses on disposals of fixed assets, increased $1.0 million, or 89.9%, to $2.2 million in 2003. Other gains and losses decreased $1.5 million, or 56.3%, to $1.2 million in 2002. The decrease in 2002 is primarily due to the fact
38
that during 2001, the indemnification period ended related to the sale of KTVT and we recognized a $4.6 million gain in 2001.
Income Taxes The effective income tax rate from continuing operations was 42%, 10%, and 47% in 2003, 2002, and 2001, respectively. The effective tax rate as applied to pretax income from continuing operations differed from the statutory federal rate due to the following:
2003 2002 2001 U.S. federal statutory rate 35 % 35 % 35 % State taxes (net of federal tax benefit and change in valuation allowance) 8 — 2 Effective tax law change — 7 — Previously accrued income taxes — (37 ) 16 Other (1 ) 5 (6 ) 42 % 10 % 47 % The effective income tax rate in 2003 (which was a benefit rate reflecting the 2003 loss) increased from 2002 primarily due to the impact in 2002 of previously recorded income taxes. The previously recorded income taxes relate to the favorable resolution of issues which were either settled with taxing authorities or had statutes of limitations expire. In addition, the rate increased due to the current year state tax benefit and the release of a portion of the state valuation allowance. The Company released valuation allowance of $2.4 million due to the utilization of state net operating loss carryforwards from the sale of Radio Operations. As a result, the Company increased the deferred tax asset by $2.4 million and increased the 2003 tax benefit by $2.4 million.
The effective income tax rate in 2002 decreased from 2001 primarily due to the impact in 2002 of previously recorded income taxes. In addition, the Tennessee legislature increased the corporate income tax rate from 6% to 6.5% during 2002. As a result, the Company increased the deferred tax liability by $1.3 million and increased 2002 tax expense by $1.3 million.
Gain (Loss) from Discontinued Operations The Company has
presented the operating results and financial position ofreflected the following businesses as discontinuedoperations:operations, consistent with the provisions of SFAS No. 144. The results of operations, net of taxes (prior to their disposal where applicable), and the estimated fair value of the assets and liabilities of these businesses have been reflected in the Company’s consolidated financial statements as discontinued operations in accordance with SFAS No. 144 for all periods presented.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). Subsequent to committing to a plan of disposal during the first quarter of 2003, 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”) in exchange for approximately $62.5 million in cash. 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, for a fee, made available to Cumulus substantially all of the broadcast time on WSM-FM and WWTN(FM). In turn, Cumulus provided programming to be broadcast during such broadcast time and collected revenues from the advertising that it sold for broadcast during this programming time. On July 22, 2003, the Company finalized the sale of WSM-FM and WWTN(FM) for approximately $62.5 million, at which time, net proceeds of approximately $50 million were placed in an escrow account for completion of the Texas hotel. Concurrently, the Company also entered into a joint sales agreement with Cumulus for WSM-AM in exchange for $2.5 million in cash. The Company will continue to own and operate WSM-AM, and under the terms of the joint sales agreement with Cumulus, Cumulus will be responsible for all sales of commercial advertising on WSM-AM and provide certain sales promotion, billing and collection services relating to WSM-AM, all for a specified commission. The joint sales agreement has a term of five years.
39
Acuff-Rose
Music;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. The Company recognized a pretax gain of $130.6 million during the third quarter of 2002 related to the sale in discontinued operations. The gain on the sale of Acuff-Rose Music Publishing is recorded in the income from discontinued operations in the consolidated statement of operations. Proceeds of $25.0 million were used to reduce the Company’s outstanding indebtedness.OKC
Redhawks;RedHawks.During 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. During the fourth quarter of 2003, the Company sold its interests in the RedHawks and received cash proceeds of approximately $6.0 million. The Company recognized a loss of $0.6 million, net of taxes, related to the sale in discontinued operations in the accompanying consolidated statement of operations.Word
Entertainment; GET Management,Entertainment.During 2001, theCompany's artist management business;Company committed to a plan to sell Word Entertainment. As a result of theCompany'sdecision to sell Word Entertainment, the Company reduced the carrying value of Word Entertainment to its estimated fair value by recognizing a pretax charge of $30.4 million in discontinued operations during 2001. The estimated fair value of Word Entertainment’s net assets was determined based upon ongoing negotiations with potential buyers. Related to the decision to sell Word Entertainment, a pretax restructuring charge of $1.5 million was recorded in discontinued operations in 2001. The restructuring charge consisted of $0.9 million related to lease termination costs and $0.6 million related to severance costs. In addition, the Company recorded a reversal of $0.1 million of restructuring charges originally recorded during 2000. During the first quarter of 2002, the Company sold Word Entertainment’s domestic operations to an affiliate of Warner Music Group for $84.1 million in cash, subject to future purchase price adjustments. The Company recognized a pretax gain of $0.5 million in discontinued operations during the first quarter of 2002 related to the sale of Word Entertainment. Proceeds from the sale of $80.0 million were used to reduce the Company’s outstanding indebtedness.International Cable Networks.During the second quarter of 2001, the Company adopted a formal plan to dispose of its international cable
networks;networks. As part of this plan, thebusinesses soldCompany hired investment bankers toaffiliatesfacilitate the disposition process, and formal communications with potentially interested parties began in July 2001. In an attempt to simplify the disposition process, in July 2001, the Company acquired an additional 25% ownership interest in its music networks in Argentina, increasing its ownership interest from 50% to 75%. In August 2001, the partnerships in Argentina finalized a pending transaction in which a third party acquired a 10% ownership interest in the companies in exchange for satellite, distribution and sales services, bringing the Company’s interest to 67.5%.In December 2001, the Company made the decision to cease funding of
The Oklahoma Publishingits cable networks in Asia and Brazil as well as its partnerships in Argentina if a sale had not been completed by February 28, 2002. At that time the Company("OPUBCO") in 2001recorded pretax restructuring charges of $1.9 million consisting ofPandora$1.0 million of severance and $0.9 million of contract termination costs related to the networks. Also during 2001, the Company negotiated reductions in the contract termination costs with several vendors that resulted in a reversal of $0.3 million of restructuring charges originally recorded during 2000. Based on the status of the Company’s efforts to sell its international cable networks at the end of 2001, the Company recorded pretax impairment and other charges of $23.3 million during 2001. Included in this charge are the impairment of an investment in the two Argentina-based music channels totaling $10.9 million, the impairment of fixed assets, including capital leases associated with certain transponders leased by the Company, of $6.9 million, the impairment of a receivable of $3.0 million from the Argentina-based channels, current assets of $1.5 million, and intangible assets of $1.0 million.During the first quarter of 2002, the Company finalized a transaction to sell certain assets of its Asia and Brazil networks, including the assignment of certain transponder leases. Also during the first quarter of 2002, the Company ceased operations based in Argentina. The transponder lease assignment required the Company to guarantee lease payments in 2002 from the acquirer of these networks. As such, the Company recorded a lease liability for the amount of the assignee’s portion of the transponder lease.
40
Businesses Sold to OPUBCO.During 2001, the Company sold five businesses (Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production
Company;Company) to affiliates of OPUBCO for $22.0 million in cash and theCompany's water taxis. (4) Related primarilyassumption of debt of $19.3 million. The Company recognized a pretax loss of $1.7 million related toemployee severance and contract termination costs. (5) Reflectsthecumulative effectsale in discontinued operations in the accompanying consolidated statement of operations. OPUBCO owns a minority interest in the Company. During 2002, three of thechangeCompany’s directors were also directors of OPUBCO and voting trustees of a voting trust that controls OPUBCO. Additionally, these three directors collectively owned a significant ownership interest inaccounting method related to adoptingthe Company.The following table reflects the results of operations of businesses accounted for as discontinued operations for the years ended December 31 (amounts in thousands):
2003 2002 2001 REVENUES: Radio Operations $ 3,703 $ 10,240 $ 8,207 Acuff-Rose Music Publishing — 7,654 14,764 RedHawks 5,034 6,289 6,122 Word Entertainment — 2,594 115,677 International cable networks — 744 5,025 Businesses sold to OPUBCO — — 2,195 Other — — 609 Total revenues $ 8,737 $ 27,521 $ 152,599 OPERATING INCOME (LOSS): Radio Operations $ 615 $ 1,305 $ 2,184 Acuff-Rose Music Publishing 16 933 2,119 RedHawks 436 841 363 Word Entertainment 22 (917 ) (5,710 ) International cable networks — (1,576 ) (6,375 ) Businesses sold to OPUBCO (620 ) — (1,816 ) Other — — (383 ) Impairment and other charges — — (53,716 ) Restructuring charges — (20 ) (2,959 ) Total operating income (loss) 469 566 (66,293 ) INTEREST EXPENSE (1 ) (81 ) (797 ) INTEREST INCOME 8 81 199 OTHER GAINS AND (LOSSES) Radio Operations 54,555 — — Acuff-Rose Music Publishing 450 130,465 (11 ) RedHawks (1,159 ) (193 ) (134 ) Word Entertainment 1,503 1,553 (1,059 ) International cable networks 497 3,617 (1,002 ) Businesses sold to OPUBCO — — (1,674 ) Other — — (251 ) Total other gains and (losses) 55,846 135,442 (4,131 ) Income (loss) before provision (benefit) for income taxes 56,322 136,008 (71,022 ) PROVISION (BENEFIT) FOR INCOME TAXES 21,951 50,251 (22,189 ) Net income (loss) from discontinued operations $ 34,371 $ 85,757 $ (48,833 ) 41
The assets and liabilities of the discontinued operations presented in the accompanying consolidated balance sheets are comprised of (amounts in thousands):
2003 2002 CURRENT ASSETS: Cash and cash equivalents $ 19 $ 1,812 Trade receivables, less allowance of $0 and $2,938, respectively — 1,954 Inventories — 163 Prepaid expenses — 97 Other current assets — 69 Total current assets 19 4,095 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION — 5,157 GOODWILL — 3,527 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION — 3,942 MUSIC AND FILM CATALOGS — — OTHER LONG-TERM ASSETS — 702 Total long-term assets — 13,328 Total assets $ 19 $ 17,423 CURRENT LIABILITIES: Current portion of long-term debt $ — $ 94 Accounts payable and accrued liabilities 2,930 6,558 Total current liabilities 2,930 6,652 LONG-TERM DEBT, NET OF CURRENT PORTION — — OTHER LONG-TERM LIABILITIES 825 789 Total long-term liabilities 825 789 Total liabilities 3,755 7,441 MINORITY INTEREST OF DISCONTINUED OPERATIONS — 1,885 TOTAL LIABILITIES AND MINORITY INTEREST OF DISCONTINUED OPERATIONS $ 3,755 $ 9,326
Cumulative Effect of Accounting Change During the second quarter of 2002, we completed our goodwill impairment test as required by SFAS No. 142. In accordance with the provisions of SFAS No.
142. The Company recorded an impairment loss related to impairment of142, we reflected thegoodwill of the Radisson Hotel at Opryland. The impairment loss waspretax $4.2 millionless taxes of $1.6 million. 19(6) Reflects the divestiture of certain businesses and reduction in the carrying values of certain assets. (7) Reflects theimpairment charge as a cumulative effect ofthea change in accountingmethod relatedprinciple 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.On January 1, 2001, we recorded a gain of $11.2 million, net of taxes of $7.1 million, as a cumulative effect of accounting change to
recordingrecord the derivatives associated with the secured forward exchange contract on our Viacom stock at fair value as of January 1, 2001, in accordance with the provisions of$18.3SFAS No. 133.42
Liquidity and Capital Resources
Cash Flows—Summary Our cash flows consisted of the following during the years ended December 31 (amounts in thousands):
2003 2002 2001 Net cash flows provided by operating activities — continuing operations $ 73,916 $ 83,829 $ 15,122 Net cash flows provided by operating activities — discontinued operations 2,890 3,451 368 Net cash flows provided by operating activities 76,806 87,280 15,490 Purchases of property and equipment (223,720 ) (175,404 ) (280,921 ) Other 2,075 29,920 3,033 Net cash flows (used in) investing activities — continuing operations (221,645 ) (145,484 ) (277,888 ) Net cash flows provided by investing activities — discontinued operations 65,354 232,570 17,794 Net cash flows provided by (used in) investing activities (156,291 ) 87,086 (260,094 ) Repayment of long-term debt (425,104 ) (214,846 ) (241,503 ) Proceeds from issuance of long-term debt 550,000 85,000 535,000 Other (22,984 ) 46,589 (69,360 ) Net cash flows provided by (used in) financing activities - continuing operations 101,912 (83,257 ) 224,137 Net cash flows provided by (used in) financing activities - discontinued operations (94 ) (1,671 ) 2,904 Net cash flows provided by (used in) financing activities 101,818 (84,928 ) 227,041 $ 22,333 $ 89,438 $ (17,563 )
Cash Flow From Operating Activities Cash flow from operating activities is the principal source of cash used to fund our operating expenses, interest payments on debt, and maintenance capital expenditures. During 2003, our net cash flows provided by operating activities — continuing operations were $73.9 million,
lessreflecting primarily our income from continuing operations before non-cash depreciation, amortization, income tax and interest expenses, as well as favorable changes in working capital. During 2002, our net cash flows provided by operating activities — continuing operations were $83.8 million, reflecting primarily our income from continuing operations before non-cash depreciation, amortization, income tax and interest expenses.
Cash Flow From Investing Activities During 2003, our primary uses of funds and investing activities were the purchases of property and equipment which totaled $223.7 million. These capital expenditures include continuing construction at the new Gaylord hotel in Grapevine, Texas of $193.3 million, approximately $1.3 million related to the possible development of a
related tax provision of $7.1 million. (8) Includes operating losses of $27.5new Gaylord hotel in Prince George’s County, Maryland and approximately $11.2 million related to GaylordDigital,Opryland. In addition, there were approximately $7.3 million of capital43
expenditures related to theCompany's internet initiative,Grand Ole Opry in 2003. We also received proceeds from the sale of assets and the sale of discontinued operations totaling approximately $64.7 million in 2003. During 2002, our primary uses of funds and investing activities were the purchases of property and equipment for the Gaylord Palms and Gaylord Texan which totaled $148.3 million. We received proceeds from the sale of assets and the sale of discontinued operations totaling approximately $263.4 million in 2002.
Cash Flow From Financing Activities The Company’s cash flows from financing activities reflect primarily the issuance of debt and the repayment of long-term debt. During 2003, the Company’s net cash flows provided by financing activities were approximately $101.9 million, reflecting the issuance of $550.0 million in debt, which consisted of the issuance of $350 million in Senior Notes and additional borrowings under our 2003 Florida/ Texas senior secured credit facility, and the repayment of $425.1 million in debt. During 2002, the Company’s net cash flows used in financing activities were approximately $83.3 million, reflecting the issuance of $85.0 million in debt and the repayment of $214.8 million in debt. The Company also experienced a decrease in restricted cash and cash equivalents of $45.7 million which was used to repay debt.
On January 9, 2004 we filed a Registration Statement on Form S-3 with the SEC pursuant to which we may sell from time to time, once the Registration Statement is declared effective by the SEC, up to $500 million of our debt or equity securities. Except as otherwise provided in the applicable prospectus supplement at the time of sale of the securities, we may use the net proceeds from the sale of the securities for general corporate purposes, which may include reducing our outstanding indebtedness, increasing our working capital, acquisitions and capital expenditures.
Principal Debt Agreements New Revolving Credit Facility.On November 20, 2003, we entered into a new $65.0 million revolving credit facility, which has been increased to $100.0 million. The new revolving credit facility, which replaces our old revolving credit portion of our 2003 Florida/ Texas senior secured credit facility discussed below, matures in May 2006. The new revolving credit facility has an interest rate, at our election, of either LIBOR plus 3.50% or the lending banks’ base rate plus 2.25%. Interest on our borrowings is payable quarterly, in arrears, for base rate loans and at the end of each interest rate period for LIBOR rate-based loans. Principal is payable in full at maturity. The new revolving credit facility is guaranteed on a senior unsecured basis by our subsidiaries that are guarantors of our new notes (consisting generally of our active domestic subsidiaries that are not parties to our Nashville hotel loan arrangements) and is secured by a leasehold mortgage on the Gaylord Palms Resort & Convention Center. We are required to pay a commitment fee equal to 0.5% per year of the average daily unused revolving portion of the new revolving credit facility.
The provisions of the new revolving credit facility contain a covenant requiring us to achieve substantial completion and initial opening of the Gaylord Texan by June 30, 2004. We currently expect the Gaylord Texan to open in April 2004. Failure to meet this condition on schedule could result in a default and acceleration of any borrowings under our new revolving credit facility.
In addition, the new revolving credit facility contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, capital expenditures, mergers and consolidations, liens and encumbrances and other matters customarily restricted in such agreements. The new revolving credit facility also requires us to meet certain financial tests, including, without limitation:
• a maximum total leverage ratio requiring that at the end of each fiscal quarter, our ratio of consolidated indebtedness minus unrestricted cash on hand to consolidated EBITDA for the most recent four fiscal quarters, subject to certain adjustments, not exceed a range of ratios (decreasing from 7.5 to 1.0 for 2003 to 5.0 to 1.0 for 2006) for the recent four fiscal quarters; 44
• a requirement that the adjusted net operating income for the Gaylord Palms Resort and Convention Center be at least $25,000,000 at the end of each fiscal quarter ending December 31, 2003, through December 31, 2004, and $28,000,000 at the end of each fiscal quarter thereafter, in each case based on the most recent four fiscal quarters; and • a minimum fixed charge coverage ratio requiring that, at the end of each fiscal quarter, our ratio of consolidated EBITDA for the most recent four fiscal quarters, subject to certain adjustments, to the sum of (i) consolidated interest expense and capitalized interest expense for the previous fiscal quarter, multiplied by four, and (ii) required amortization of indebtedness for the most recent four fiscal quarters, be not less than 1.5 to 1.0. As of December 31, 2003, we were in compliance with the foregoing covenants. As of December 31, 2003, no borrowings were outstanding under the new revolving credit facility, but the lending banks had issued $11.3 million of letters of credit under the credit facility for us. The revolving credit facility is cross-defaulted to our other indebtedness.
Nashville Hotel Loan.On March 27, 2001, we, through wholly owned subsidiaries, entered into a $275.0 million senior secured loan with Merrill Lynch Mortgage Lending, Inc. At the same time, we entered into a $100.0 million mezzanine loan which was repaid in November 2003 with the proceeds of the outstanding senior notes (as defined below). The senior and mezzanine loan borrower and its member were subsidiaries formed for the purposes of owning and operating
lossesthe Nashville hotel and entering into the loan transaction and are special-purpose entities whose activities are strictly limited. We fully consolidate these entities in our consolidated financial statements. The senior loan is secured by a first mortgage lien on the assets of$6.1Gaylord Opryland and is due in March 2004. At our option, the senior loan may be extended for two additional one-year terms to March 2006, subject to our Gaylord Opryland operations meeting certain financial ratios and other criteria. We have given notice to exercise our option to extend the loan until March 2005. Amounts outstanding under the senior loan bear interest at one-month LIBOR plus 1.02%. The senior loan requires monthly principal payments of $0.7 millionrelatedin addition tocountry record label development, bothmonthly interest payments. The terms ofwhich were closed during 2000. (9) The merger costs relatethe senior loan required us to purchase interest rate hedges in notional amounts equal to thereversaloutstanding balances ofmergerthe senior loan in order to protect against adverse changes in one-month LIBOR. Pursuant to the senior loan agreement, we had purchased instruments that cap our exposure to one-month LIBOR at 7.5%. We used $235.0 million of the proceeds from the senior loan and the mezzanine loan to refinance an existing interim loan incurred in 2000. The net proceeds from the senior loan and the mezzanine loan, after refinancing the existing interim loan and paying required escrows and fees, were approximately $97.6 million. The weighted average interest rates for the senior loan for the years ended December 31, 2003 and 2002, including amortization of deferred financing costs,associatedwere 4.2% and 4.5%, respectively.The terms of the senior loan impose and the old mezzanine loan imposed limits on transactions with affiliates and incurrence of indebtedness by the subsidiary borrower. Our senior loan also contains a cash management restriction that is triggered if a minimum debt service coverage ratio is not met. This provision has never been triggered. Upon a determination as of the end of any quarter that the debt service coverage ratio of the Nashville hotel (which is the ratio of net operating income from the Nashville hotel to principal and interest under the senior loan, all for the preceding 12-month period, subject to certain adjustments) is less than 1.25 to 1.0, excess cash flow from the Nashville hotel must thereafter be deposited in a reserve account with the
October 1, 1997 merger when TNNlender (subject to the borrower’s right to make a principal prepayment in amount necessary to cure). Depending upon the debt service coverage ratio level as of the beginning of each subsequent month, amounts in the reserve account are either released to the borrower or held by the lender as collateral and,CMTat the lender’s option, applied to the loan at the third payment date following deposit into the account.In addition, prior to its repayment in 2003, the old mezzanine loan contained financial covenants that were
acquired by CBS. (10) Includesstructured such that noncompliance at one level triggered certain cash management restrictions and noncompliance at apretax gainsecond level results in an event of$459.3 million ondefault. Based upon thedivestiture of television station KTVT in Dallas-Ft. Worth in exchange for CBS Series B preferred stock (which was later converted into 11,003,000 shares of Viacom, Inc. Class B common stock), $4.2 million of cash, and other consideration. The CBS Series B preferred stock was included in total assets at its market value of $648.4 million at December 31, 1999. The Viacom, Inc. Class B common stock was included in total assets at its market values of $448.5 million, $485.8 million and $514.4 millionfinancial covenant calculations at December 31, 2002, the mezzanine loan’s cash management restrictions were in effect45
which required that all excess cash flows, as defined, be escrowed and be used only to repay principal amounts owed on the senior loan. As of June 30, 2003, the noncompliance level which triggered cash management restrictions was cured and the cash management restrictions were lifted. During 2002, we negotiated certain revisions to the financial covenants under the mezzanine loan. After these revisions, we were in compliance with the covenants under the senior loan and the mezzanine loan for which the failure to comply would result in an event of default at December 31, 2002. We were also in compliance with all applicable covenants under the senior loan at December 31, 2003. An event of default under our other indebtedness does not cause an event of default under the Nashville hotel loan.Senior Notes.On November 12, 2003, we completed our offering of $350 million in aggregate principal amount of senior notes due 2013 (the “Senior Notes”) in an institutional private placement. The interest rate of the Senior Notes is 8%, although we have entered into interest rate swaps with respect to $125 million principal amount of the Senior Notes which results in an effective interest rate of LIBOR plus 2.95% with respect to that portion of the Senior Notes. The Senior Notes, which mature on November 15, 2013, bear interest semi-annually in cash in arrears on May 15 and November 15 of each year, starting on May 15, 2004. The Senior Notes are redeemable, in whole or in part, at any time on or after November 15, 2008 at a designated redemption amount, plus accrued and unpaid interest. In addition, we may redeem up to 35% of the Senior Notes before November 15, 2006 with the net cash proceeds from certain equity offerings. The Senior Notes rank equally in right of payment with our other unsecured unsubordinated debt, but are effectively subordinated to all of our secured debt to the extent of the assets securing such debt. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our subsidiaries that was a borrower or guarantor under the 2003 Florida/Texas loans discussed below, and as of November 2003, of the new revolving credit facility. In connection with the offering of the Senior Notes, we paid approximately $9.4 million in deferred financing costs. The net proceeds from the offering of the Senior Notes, together with $22.5 million of our cash on hand, were used as follows:
• $275.5 million was used to repay our $150 million senior term loan portion and the $50 million subordinated term loan portion of the 2003 loans discussed below, as well as the remaining $66 million of our $100 million mezzanine loan and to pay certain fees and expenses related to the ResortQuest acquisition; and • $79.2 million was placed in escrow pending consummation of the ResortQuest acquisition. As of November 20, 2003, the $79.2 million together with $8.2 million of the available cash, was used to repay ResortQuest’s senior notes and its credit facility, the principal amount of which aggregated $85.1 million at closing, and a related prepayment penalty. In addition, the Senior Notes indenture contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, capital expenditures, mergers and consolidations, liens and encumbrances and other matters customarily restricted in such agreements. The Senior Notes are cross-defaulted to our other indebtedness.
Prior Indebtedness.Prior to the closing of the notes offering and establishment of our new revolving credit facility, we had in place our 2003 Florida/ Texas senior secured credit facility, consisting of a $150 million term loan, a $50 million subordinated term loan and a $25 million revolving credit facility, outstanding amounts of which were repaid with proceeds of the Senior Notes offering. When the 2003 loans were first established, proceeds were used to repay 2001 term loans incurred in connection with the development of the Gaylord Palms.
Future Developments As previously announced, we have plans to develop a Gaylord hotel on property to be acquired on the Potomac River in Prince George’s County, Maryland (in the Washington, D.C. market), subject to the availability of financing, resolution of certain zoning issues and
2000, respectively.approval by our Board of Directors. We46
also are considering other potential sites. The timing and extent of any of these development projects is uncertain.
Commitments and Contractual Obligations The following table summarizes our significant contractual obligations as of December 31, 2003, including long-term debt and operating and capital lease commitments (amounts in thousands):
Total amounts Less than committed 1 year 1-3 years 3-5 years After 5 years Long-term debt $ 549,381 $ 8,104 $ 191,277 $ — $ 350,000 Capital leases 992 553 370 69 — Construction commitments 104,615 94,368 10,247 — — Arena naming rights 57,703 2,554 5,497 6,061 43,591 Operating leases 734,855 11,350 17,475 13,335 692,695 Other 4,828 322 644 644 3,218 Total contractual obligations $ 1,452,374 $ 117,251 $ 225,510 $ 20,109 $ 1,089,504 The total operating lease commitments of $734.9 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 where Gaylord Palms is located.
During
2000,2002 and 2001, the Company entered into certain agreements related to the construction of the new Gaylord hotel in Grapevine, Texas. At December 31, 2003, the Company had paid approximately $355.3 million related to these agreements, which is included as construction in progress in property and equipment in the consolidated balance sheets.During 1999, the Company entered into a
seven-year forward exchange20-year naming rights agreement related to the Nashville Arena with the Nashville Predators. The Nashville Arena has been renamed the Gaylord Entertainment Center as a result of the agreement. The contractual commitment required the Company to pay $2.1 million during the first year of the contract, with a 5% escalation each year for the remaining term of the agreement, and to purchase a minimum number of tickets to Predators games each year. See “Item 3. Legal Proceedings” for anotional amount of $613.1 million with respect to 10,937,900 sharesdiscussion of theViacom, Inc. Class B common stock. Prepaid interest related tocurrent status of our litigation regarding this agreement.At the expiration of the secured forward exchange contract
of $118.1 million, $145.0 million and $171.9 million was included in total assets at December 31, 2002, 2001 and 2000, respectively. (11) In 1995,relating to the Viacom stock owned by the Companysold its cable television systems. Net proceeds were $198.8 million in cash and a note receivable with a face amount of $165.7 million,whichwas recorded at $150.7 million, net of a $15.0 million discount. As part of the sale transaction, the Company also received contractual equity participation rights (the "Rights") equal to 15% of the net distributable proceeds from future asset sales. During 1998, the Company collected the full amount of the note receivable and recorded a pretax gain of $15.0 million related to the note receivable discount. During 1999, the Company received cash and recognized a pretax gain of $129.9 million representing the value of the Rights. The proceeds from the note receivable prepayment and the Rights were used to reduce outstanding bank indebtedness. (12) Includes a pretax gain of $16.1 million on the sale of the Company's investment in the Texas Rangers Baseball Club, Ltd. and a pretax gain totaling $8.5 million primarily related to the settlement of contingencies from the sales of television stations KHTV in Houston and KSTW in Seattle. (13) Related primarily to the construction of the Company's Gaylord Palms Resort and Convention Center hotel in Kissimmee, Florida and its new Gaylord hotel development in Grapevine, Texas. 20ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Gaylord Entertainment Company (the "Company")isa diversified hospitality and entertainment company operating, through its subsidiaries, principally in four business segments: hospitality; attractions; media; and corporate and other. During 2001, the Company restated its reportable segmentsscheduled forall periods presented based upon new management and an internal realignment of operational responsibilities. The Company is managed using the four business segments described above. Due to management's decision during 2002 to pursue plans to dispose of certain businesses, those businesses have been presented as discontinued operations as described in more detail below. 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 December 31, 2002, the Company had $98.6 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. In February 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, to complete the construction of the Texas hotel and fund any operating losses in 2003. Management currently anticipates securing the long-term financing under the existing commitment from the Lenders and expects to close the financing in the second quarter of 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,May 2007, the Company will be required tocurtail certain of its development expenditures on current and future construction projects to ensure adequate liquidity to fundpay theCompany's operations. RE-AUDIT AND RESTATEMENT OF FINANCIAL STATEMENTS During 2002, the Company committed to plans of disposal for Acuff-Rose Music Publishing and the Oklahoma City Redhawks resulting in the reclassification of balances and operating results of those two businesses as discontinued operations in the Company's historical financial statements. Based on the requirements of applicable auditing standards, the Company engaged Ernst & Young LLP ("Ernst & Young"), the Company's current auditors, to perform the required re-auditsdeferred taxes relating thereto. A complete description of theCompany's 2001secured forward exchange contract and2000 consolidated financial statements since the Company's prior auditors, Arthur Andersen LLP, had ceased operations. As a part of the re-audit process, Ernst & Young raised certain issues for the Company's consideration and after review of the relevant information, the Company determined that certain changes were necessary to the Company's historical consolidated financial statements. The revisions, which result primarily from a change to the Company's incomethis deferred taxaccrual and to accounting for its investment in the Nashville Predators limited partnership ("Predators"), as well as certain other less significant items, increased retained earnings at January 1, 2000 by approximately $40.5 million, increased net loss for the year ended December 31, 2000 by approximately $2.6 million, increased the net loss for the year ended December 31, 2001 by approximately $53,000, and decreased unaudited net income for the first six months of 2002 by approximately $13.0 million. Information related to the Company's unaudited quarterly financial information for the years 2002 and 2001liability is contained inNote 23 in the Company's consolidated financial 21statements. These restatements did not impact cash flows from operating, investing or financing activities. The first principal issue relates to income tax reserves maintained for certain tax related items as a result of a corporate reorganization in 1999. Upon further consideration of the factsNotes 10 andcircumstances existing at the time of the reorganization, the Company has determined that the income tax reserves should not have been maintained. As a result of these changes, retained earnings at January 1, 2000 has increased by approximately $47.0 million. In addition, because $14.0 million of the income tax reserve was reversed during 2002 due13 to theexpiration of the applicable statute of limitations, as a result of the restatement management was required to decrease previously reported unaudited net incomeCompany’s Consolidated Financial Statements for thefirst six months of 2002 by approximately $14.0 million to reflect the elimination of the income tax reserve. The second principal issue relates to the Company's accounting for its investment in the Predators. The Company purchased a limited partnership interest in the Predators during 1997. The Company's limited partnership interest includes an 8% preferred return and the right to put the investment back to the Predators over three annual installments beginning in 2002, but does not provide the Company with any right to receive any distributions in excess of its stated return and does not require the Company to fund any capital or operating shortfalls in the partnership. The Company had not previously recorded its pro-rata share of losses of the Predators in its historical statement of operations. However, after consultation with Ernst & Young concerning the accounting for the Company's investment in the Predators, the Company determined that it would be appropriate to recognize its pro-rata share of the Predators' operating results, which have been primarily losses. The revisions associated with the Company's investment in the Predators decreased retained earnings at January 1, 2000 by approximately $4.0 million, increased net loss by approximately $1.0 million and $2.0 million for the years endedyear-ended December 31,20002003 included herewith.Critical Accounting Policies and
2001, respectively, and decreased unaudited net income for the first six months of 2002 by approximately $1.0 million. During 2002, the investment in the Predators reached zero. The Company has not reduced the investment below zero as the Company is under no obligation to fund additional amounts to the Predators. The Company also revised its historical financial statements for other, less significant items by decreasing retained earnings by approximately $2.0 million at January 1, 2000, by increasing the net loss for the year ended December 31, 2000 by approximately $2.0 million, by reducing the net loss for the year ended December 31, 2001 by approximately $2.0 million, and by increasing unaudited net income for the first six months of 2002 as previously reported by approximately $3.0 million. The restated consolidated financial statements include both the impact of reclassifying discontinued operations as required by SFAS No. 144 (as discussed in Note 6 to the consolidated financial statements) and the restatement changes discussed above. Please refer to Note 3 to the consolidated financial statements for schedules reconciling the restatement related changes and the reclassification of discontinued operations with previously released financial data for 2001 and 2000. CRITICAL ACCOUNTING POLICIES Management'sEstimatesManagement’s Discussion and Analysis of Financial Condition and Results of Operations discusses the
Company'sCompany’s 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 theCompany'sCompany’s current judgments and estimates.47
This listing of critical accounting policies is not intended to be a comprehensive list of all of the
Company'sCompany’s accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by22generally accepted accounting principles, with no need for management'smanagement’s judgment regarding accounting policy. The Company believes that of its significant accounting policies, as discussed in Note 1 to the consolidated financial statements, the following may involve a higher degree of judgment and complexity.REVENUE RECOGNITIONRevenue 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
attractionsOpry andmediaAttractions segment when services are provided or goods are shipped, as applicable.The Company earns revenues from ResortQuest through property management fees, service fees, and other sources. The Company receives property management fees when the properties are rented, which are generally a percentage of the rental price of the vacation property. Management fees range from approximately 3% to over 40% of gross lodging revenues collected based upon the type of services provided to the property owner and the type of rental units managed. Revenues are recognized ratably over the rental period based on the Company’s proportionate share of the total rental price of the vacation condominium or home. The Company provides or arranges through third parties certain services for property owners or guests. Service fees include reservations, housekeeping, long-distance telephone, ski rentals, lift tickets, beach equipment and pool cleaning. Internally provided services are recognized as service fee revenue when the service is provided. Services provided by third parties are generally billed directly to property owners and are not included in the accompanying consolidated financial statements. The Company recognizes other revenues primarily related to real estate broker commissions and software and maintenance sales. The Company recognizes revenues on real estate sales when the transactions are complete, and such revenue is recorded net of the related agent commissions. The Company also sells a fully integrated software package, First Resort Software, specifically designed for the vacation property management business, along with ongoing service contracts. Software and maintenance revenues are recognized when the systems are installed and ratably over the service period, respectively, in accordance with SOP 97-2, “Software Revenue Recognition.” Provision for returns and other adjustments are provided for in the same period the
revenues arerevenue was recognized. The Company defers revenues related to deposits on advanceroombookings of rooms and vacation properties and advance ticket sales at theCompany'sCompany’s tourismproperties until such amounts are earned. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILLproperties.Impairment of Long-Lived Assets and Goodwill.In accounting for the
Company'sCompany’s long-lived assets other than goodwill, the Company applies the provisions ofStatement of Financial Accounting Standards ("SFAS")SFAS No. 144,"Accounting“Accounting for the Impairment or Disposal of Long-LivedAssets". The Company adopted the provisions ofAssets.” Under SFAS No. 144,during 2001 withthe Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Recoverability of long-lived assets that will continue to be used is measured by comparing the carrying amount of the asset or asset group to the related total future undiscounted net cash flows. If aneffective date ofasset or asset group’s carrying value is not recoverable through those cash flows, the asset group is considered to be impaired. The impairment is measured by the difference between the assets’ carrying amount and their fair value, based on the best information available, including market prices or discounted cash flow analysis.Effective January 1,
2001. The2002, the Companypreviously accounted for goodwill using SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". In June 2001,adopted SFAS No. 142,"Goodwill“Goodwill and Other IntangibleAssets" was issued. SFAS No. 142 is effective January 1, 2002.Assets.” Under SFAS No. 142, goodwill and other intangible assets with indefinite useful liveswillare notbeamortized butwill beare tested for impairment at least annually and whenever events or circumstances occur indicating that these intangibles may be impaired. ThedeterminationCompany performs its review of goodwill for impairment by comparing the carrying value of the applicable reporting unit to the fair value of the reporting unit. If the fair value is less than the carrying value then the Company measures potential impairment by allocating the fair value of the reporting unit to the tangible assets andmeasurementliabilities of the reporting unit in a manner similar to a business combination purchase price allocation. The remaining fair value of the reporting unit after assigning fair values to all of the reporting unit’s assets and liabilities represents the implied fair value48
of goodwill of the reporting unit. The impairment is measured by the difference between the carrying value of goodwill and the implied fair value of goodwill.The Company’s impairment review process relies on management’s judgment regarding the indicators of impairment, the estimates of fair values using market prices or discounted cash flows analyses, and the remaining lives of the assets used to generate their net cash flows. The assumptions and judgments used are subject to change, which could cause a different conclusion regarding impairment or a different calculation 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 CHARGESloss.Restructuring Charges.The Company has recognized restructuring charges in accordance with Emerging Issues Task Force
("EITF"(“EITF”) Issue No. 94-3,"Liability“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. 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 INSTRUMENTSDerivative 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“Accounting for Derivative Instruments and HedgingActivities"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 thederivative'sderivative’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.ASSESSMENT OF STRATEGIC ALTERNATIVESIncome Taxes.The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company must assess the likelihood that it will be able to recover its deferred tax assets. If recovery is not likely, the provision for taxes is increased by recording a reserve, in the form of a valuation allowance, against the estimated deferred tax assets that will not ultimately be recoverable.
The Company has federal and state net operating loss and tax credit carryforwards for which management believes it is more-likely-than-not that future taxable income will be sufficient to realize the recorded deferred tax assets. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, which involve estimates and uncertainties, in making this assessment. Projected future taxable income is based on management’s forecast of the operating results of the Company. Management periodically reviews such forecasts in comparison with actual results and expected trends. The Company has established valuation allowances for deferred tax assets primarily associated with certain subsidiaries with state operating loss carryforwards and tax credit carryforwards. In the event management determines that sufficient future taxable income, in light of tax planning strategies, may not be generated to fully recover net deferred tax assets, the Company will be required to adjust its deferred tax valuation allowance in the period in which the Company determines recovery is not probable.
In addition, the Company must deal with uncertainties in the application of complex tax regulations in the calculation of tax liabilities. The Company recognizes potential liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the
49
Company’s estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.Retirement and Postretirement Benefits Other than Pension Plans. The calculations of the costs and obligations of the Company’s retirement and postretirement benefits other than pension plans are dependent on significant assumptions, judgments, and estimates. These assumptions, judgments, and estimates, which are determined based on Company information and market indicators and are evaluated at each annual measurement date, include discount rates, health care cost trend rates, expected return on plan assets, mortality rates, and other factors. Actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expenses and recorded obligations in future periods. Thus, while management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension and postretirement benefit obligations and future expense.
Recently Issued Accounting Standards
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 replaces Emerging Issues Task Force (“EITF”) No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 required recognition of the liability at the commitment date to an exit plan. The Company adopted the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002 and the adoption did not have a material effect on the Company’s consolidated results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN No. 45, including, among others, residual value guarantees under capital lease arrangements and loan commitments. The disclosure requirements of FIN No. 45 were effective as of December 31, 2002. The recognition requirements of FIN No. 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on the Company’s consolidated results of operations, financial position, or liquidity.
In January 2003, the FASB issued FASB Interpretation 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN No. 46”). In December 2003, the FASB modified FIN No. 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN No. 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. FIN No. 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN No. 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest.
FIN No. 46 was effective immediately for VIEs created after January 31, 2003. The provisions of FIN No. 46, as revised, were adopted as of December 31, 2003 for the Company’s interests in VIEs that are special purposes entities (“SPEs”). The adoption of FIN No. 46 for interests in SPEs on December 31, 2003 did not have a material effect on the Company’s consolidated balance sheet. The Company expects
50
to adopt the provisions of FIN No. 46 for the Company’s variable interests in all VIEs as of March 31, 2004. The effect of adopting the provisions of FIN No. 46 for all the Company’s variable interests is not expected to have a material impact on the Company’s consolidated balance sheet at March 31, 2004.In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003. The Company did not enter into any financial instruments within the scope of SFAS No. 150 after May 31, 2003. Adoption of this statement did not have any effect on the Company’s consolidated financial statements.
In December 2003, the FASB issued a revision to SFAS 132, “Employer’s Disclosure about Pension and Other Postretirement Benefits.” This revised statement requires that companies provide more detailed disclosures about the plan assets, benefit obligations, cash flows, benefit costs, and investment policies of their pension and postretirement benefit plans. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The Company adopted the provisions of this statement on December 31, 2003.
Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is from changes in the value of our investment in Viacom stock and changes in interest rates.
Risk Related to a Change in Value of our Investment in Viacom Stock At December 31, 2003, we held an investment of 11.0 million shares of Viacom 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. We 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 December 31, 2003, the fair market value of our investment in the 11.0 million shares of Viacom stock was $488.3 million, or $44.38 per share. The secured forward exchange contract protects us against decreases in the fair market value of the Viacom stock by way of a put option at a strike price below $56.05 per share, while providing for participation in increases in the fair market value by way of a call option at a strike price of $75.30 per share, as of December 31, 2003. Future dividend distributions received from Viacom may result in an adjusted call strike price.
Risks Related to Changes in Interest Rates Interest Rate Risk Related to Our Indebtedness.We have exposure to interest rate changes primarily relating to outstanding indebtedness under the Senior Notes, our Nashville hotel loan and our new revolving credit facility.
In conjunction with our offering of the Senior Notes, we terminated our variable to fixed interest rate swaps with an original notional value of $200 million related to the senior term loan and the subordinated term loan portions of the 2003 Florida/ Texas senior secured credit facility which were repaid for a net benefit aggregating approximately $242,000.
We also entered into a new interest rate swap with respect to $125 million aggregate principal amount of our Senior Notes. This interest rate swap, which has a term of ten years, effectively adjusts the interest rate of that portion of the Senior Notes to LIBOR plus 2.95%. The interest rate swap and the Senior Notes are deemed effective and therefore the hedge has been treated as an effective fair value hedge under
51
SFAS No. 133. If LIBOR were to increase by 100 basis points, our annual interest cost would increase by approximately $1.3 million.The terms of the Nashville hotel loan required 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, we have purchased instruments that cap its exposure to one-month LIBOR at 7.50%. If LIBOR and Eurodollar rates were to increase by 100 basis points each, our annual interest cost under the Nashville hotel loan based on debt amounts outstanding at December 31, 2003 would increase by approximately $2.0 million.
Cash Balances.Certain of our outstanding cash balances are occasionally invested overnight with high credit quality financial institutions. We do not have significant exposure to changing interest rates on invested cash at December 31, 2003. As a result, the interest rate market risk implicit in these investments at December 31, 2003, if any, is low.
Risks Related to Foreign Currency Exchange Rates. Substantially all of our revenues are realized in U.S. dollars and are from customers in the United States. Although we own certain subsidiaries who conduct business in foreign markets and whose transactions are settled in foreign currencies, these operations are not material to our overall operations. Therefore, we do not believe we have any significant foreign currency exchange rate risk. We do not hedge against foreign currency exchange rate changes and do not speculate on the future direction of foreign currencies.
Summary Based upon our overall market risk exposures at December 31, 2003, we believe that the effects of changes in the stock price of our Viacom stock or interest rates could be material to our consolidated financial position, results of operations or cash flows. However, we believe that the effects of fluctuations in foreign currency exchange rates on our consolidated financial position, results of operations or cash flows would not be material.
Forward-Looking Statements
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 factors set forth under the caption “Risk Factors.” 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 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 7A. Quantitative and Qualitative Disclosures About Market Risk The information called for by this Item is provided under the caption “Market Risk” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
52
Item 8. Financial Statements and Supplementary Data Information with respect to this Item is contained in the Company’s consolidated financial statements included in the Index on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Effective June 14, 2002, the Company dismissed Arthur Andersen LLP (“Arthur Andersen”) as the Company’s independent public accountants. On that date, the Company appointed Ernst & Young LLP (“Ernst & Young”) as its independent auditors for the fiscal year ending December 31, 2002. These actions were recommended by the Company’s Audit Committee and approved by the Board of Directors of the Company.
Arthur Andersen’s reports on the Company’s consolidated financial statements for the Company’s fiscal years ended 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company’s two most recent fiscal years and any interim periods preceding the dismissal of Arthur Andersen, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Arthur Andersen, would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its report.
During the Company’s two most recent fiscal years and any interim periods preceding the dismissal of Arthur Andersen, there have been no reportable events of the type required to be disclosed by Item 304(a)(1)(v) of Regulation S-K.
The Company provided Arthur Andersen with a copy of the foregoing disclosure and Arthur Andersen stated its agreement with such statements. Arthur Andersen’s letter stating its agreement with such statements was filed as an exhibit to the current report on form 8-K, dated June 17, 2002.
During the fiscal years ended December 31, 2001 and 2000 and the subsequent interim period through June 14, 2002, the Company did not consult with Ernst & Young regarding any of the matters or events set fourth in Item 304(a)(2)(i) and (ii) of Regulation S-K. Notwithstanding the forgoing, during the fiscal year ended December 31, 2001 and during the first and second quarters of 2002, Ernst & Young and/or an affiliate thereof provided the Company with certain management and tax consulting services.
Item 9A. 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 (the “Exchange Act”) 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 as of December 31, 2003, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information about our Board of Directors is incorporated herein by reference to the discussion under the heading “Election of Directors” in our Proxy Statement for the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission.
53
Information required by Item 405 of Regulation S-K is incorporated herein by reference to the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission.
Certain other information concerning executive officers and certain other officers of the Company is included in Part I of this annual report on Form 10-K under the caption “Executive Officers of the Registrant.”
The Company has a separately designated audit committee of the board of directors established in accordance with the Exchange Act. Currently, Martin C. Dickinson, Laurence S. Geller, E. Gordon Gee, and Robert P. Bowen serve as members of the Audit Committee. Our Board of Directors has determined that Robert P. Bowen is an “audit committee financial expert” as defined by the SEC and is independent, as that term is defined in the Exchange Act.
Our Board of Directors has adopted a Code of Business Conduct and Ethics applicable to the members of our Board of Directors and our officers, including our Chief Executive Officer and Chief Financial Officer. In addition, the Board of Directors has adopted Corporate Governance Guidelines and restated charters for our Audit Committee, Human Resources Committee, and Nominating and Corporate Governance Committee. You can access our Code of Business Conduct and Ethics, Corporate Governance Guidelines and current committee charters on our website at www.gaylordentertainment.com or request a copy of any of the foregoing by writing to the following address: Gaylord Entertainment Company, Attention: Secretary, One Gaylord Drive, Nashville, Tennessee 37214. The Company will make any legally required disclosures regarding amendments to, or waivers of, provisions of the Code of Business Conduct and Ethics, Corporate Governance Guidelines or current committee charters on its website.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the discussion under the heading “Executive Compensation” in our Proxy Statement for the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the discussions under the headings “Beneficial Ownership” and “Equity Compensation Plan Information” in our Proxy Statement for the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated herein by reference to the discussion under the heading “Certain Relationships and Related Transactions” in our Proxy Statement for the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission.
Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated herein by reference to the discussion under the heading “Independent Auditor Fee Information” in our Proxy Statement for the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission.
54
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements
The accompanying index to financial statements on page F-1 of this annual report on Form 10-K is provided in response to this Item.
(a)(2) Financial Statement Schedules
The following financial statement schedules are filed as a part of this report, with reference to the
Company's ongoing assessmentapplicable pages of this annual report on Form 10-K:
Schedule II — Valuation and Qualifying Accounts for the Year Ended
December 31, 2003S-2 Schedule II — Valuation and Qualifying Accounts for the Year Ended
December 31, 2002S-3 Schedule II — Valuation and Qualifying Accounts for the Year Ended
December 31, 2001S-4 All other financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and
streamliningExchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.(a)(3) Exhibits
See Index to Exhibits, pages through .
(b) Reports on Form 8-K
The following Form 8-K reports were filed during the period October 1, 2003 through December 31, 2003:
(1) Filed October 20, 2003 (earliest event October 17, 2003) reporting, in Item 9, the Company’s intention to offer $225 million aggregate principal amount of senior notes and reporting, in Item 12, the Company’s expected financial results for the quarter ended September 30, 2003. (2) Filed October 29, 2003 (earliest event October 29, 2003) reporting, in Item 9, the pricing of the Company’s offering of $350 million aggregate principal amount of 8% senior notes due 2013. (3) Filed November 4, 2003 (earliest event November 4, 2003) reporting, in Item 9, the Company’s financial results for the quarter ended September 30, 2003. (4) Filed November 13, 2003 (earliest event November 12, 2003) reporting, in Item 5 and Item 9, the closing of the Company’s offering of $350 million aggregate principal amount of 8% senior notes due 2013 and an amendment to the Company’s 2003 Florida/ Texas senior secured credit facility to provide for the issuance of the notes. (5) Filed November 20, 2003 (earliest event November 20, 2003) reporting, in Item 5, the completion of the Company’s acquisition of ResortQuest International, Inc. The following Form 8-K reports were filed subsequent to December 31, 2003:
(1) Filed January 9, 2004 (earliest event January 9, 2004) reporting, in Item 5, the Company’s audited financial statements for the three years ended December 31, 2002, which reflect the addition of financial information concerning subsidiaries that are guarantors or non-guarantors of the Company’s outstanding senior notes. (2) Filed February 10, 2004 (earliest event February 10, 2004) reporting, in Item 9, the Company’s financial results for the quarter and year ended December 31, 2003. 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GAYLORD ENTERTAINMENT COMPANY
By: /s/ COLIN V. REED
Colin V. Reed President and Chief Executive Officer March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date /s/ MICHAEL D. ROSE
Michael D. RoseChairman of the Board March 10, 2004 /s/ MARTIN DICKINSON
Martin DickinsonDirector March 10, 2004 /s/ CHRISTINE GAYLORD EVEREST
Christine Gaylord EverestDirector March 10, 2004 /s/ E. K. GAYLORD II
E. K. Gaylord IIDirector March 10, 2004 /s/ ROBERT P. BOWEN
Robert P. BowenDirector March 10, 2004 /s/ LAURENCE S. GELLER
Laurence S. GellerDirector March 10, 2004 /s/ E. GORDON GEE
E. Gordon GeeDirector March 10, 2004 /s/ RALPH HORN
Ralph HornDirector March 10, 2004 /s/ COLIN V. REED
Colin V. ReedDirector, President and
Chief Executive Officer
(Principal Executive Officer)March 10, 2004 56
Signature Title Date /s/ DAVID C. KLOEPPEL
David C. KloeppelExecutive Vice President and
Chief Financial Officer
(Principal Financial Officer)March 10, 2004 /s/ ROD CONNOR
Rod ConnorSenior Vice President and
Chief Administrative Officer
(Principal Accounting Officer)March 10, 2004 57
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Auditors F-2 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 F-3 Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 F-5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001 F-6 Notes to Consolidated Financial Statements F-7 F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Gaylord Entertainment CompanyWe have audited the accompanying consolidated balance sheets of Gaylord Entertainment Company and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gaylord Entertainment Company and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 and elsewhere in the consolidated financial statements, the Company
identifiedchanged its method of accounting for goodwill and intangible assets in 2002 and derivative financial instruments and the disposition of long-lived assets in 2001.
/s/ ERNST & YOUNG LLP Nashville, Tennessee
February 9, 2004, except for theninth paragraph of Note 16,as to which the date is March 10, 2004F-2
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSFor the Years Ended December 31, 2003, 2002 and 2001
(Amounts in thousands, except per share data)
2003 2002 2001 $ 448,800 $ 405,252 $ 296,066 Operating costs 276,937 254,583 201,299 Selling, general and administrative 117,178 108,732 67,212 Preopening costs 11,562 8,913 15,927 Gain on sale of assets — (30,529 ) — Impairment and other charges 856 — 14,262 Restructuring charges — (17 ) 2,182 Depreciation 53,941 52,694 34,738 Amortization 5,009 3,786 3,667 Operating (loss) income (16,683 ) 7,090 (43,221 ) (52,804 ) (46,960 ) (39,365 ) 2,461 2,808 5,554 39,831 (37,300 ) 782 (33,228 ) 86,476 54,282 2,209 1,163 2,661 Income (loss) before provision (benefit) for income taxes, discontinued operations and cumulative effect of accounting change (58,214 ) 13,277 (19,307 ) (24,669 ) 1,318 (9,142 ) Income (loss) from continuing operations before discontinued operations and cumulative effect of accounting change (33,545 ) 11,959 (10,165 ) 34,371 85,757 (48,833 ) — (2,572 ) 11,202 Net income (loss) $ 826 $ 95,144 $ (47,796 ) Income (loss) from continuing operations $ (0.97 ) $ 0.36 $ (0.30 ) Gain (loss) from discontinued operations, net of taxes 0.99 2.54 (1.45 ) Cumulative effect of accounting change, net of taxes — (0.08 ) 0.33 Net income (loss) $ 0.02 $ 2.82 $ (1.42 ) Income (loss) from continuing operations $ (0.97 ) $ 0.36 $ (0.30 ) Gain (loss) from discontinued operations, net of taxes 0.99 2.54 (1.45 ) Cumulative effect of accounting change, net of taxes — (0.08 ) 0.33 Net income (loss) $ 0.02 $ 2.82 $ (1.42 ) The accompanying notes are an integral part of these consolidated financial statements.
F-3
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002(Amounts in thousands, except per share data)
2003 2002 ASSETS Cash and cash equivalents — unrestricted $ 120,965 $ 98,632 Cash and cash equivalents — restricted 37,723 19,323 Trade receivables, less allowance of $1,805 and $467, respectively 26,101 22,374 Deferred financing costs 26,865 26,865 Deferred income taxes 8,753 7,048 Other current assets 20,121 25,889 Current assets of discontinued operations 19 4,095 Total current assets 240,547 204,226 1,297,528 1,110,163 29,505 240 169,642 6,915 40,591 1,756 548,911 509,080 146,278 207,727 75,154 100,933 29,107 24,323 — 13,328 Total assets $ 2,577,263 $ 2,178,691 LIABILITIES AND STOCKHOLDERS’ EQUITY Current portion of long-term debt and capital lease obligations $ 8,584 $ 8,526 Accounts payable and accrued liabilities 154,952 80,685 Current liabilities of discontinued operations 2,930 6,652 Total current liabilities 166,466 95,863 613,054 613,054 540,175 332,112 251,039 230,867 21,969 48,647 79,226 67,895 825 789 — 1,885 Preferred stock, $.01 par value, 100,000 shares authorized, no shares issued or outstanding — — Common stock, $.01 par value, 150,000 shares authorized, 39,403 and 33,780 shares issued and outstanding, respectively 394 338 Additional paid-in capital 639,839 520,796 Retained earnings 283,624 282,798 Unearned compensation (2,704 ) (1,018 ) Accumulated other comprehensive loss (16,644 ) (15,335 ) Total stockholders’ equity 904,509 787,579 Total liabilities and stockholders’ equity $ 2,577,263 $ 2,178,691 The accompanying notes are an integral part of these consolidated financial statements.
F-4
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001(Amounts in thousands)
2003 2002 2001 Net income (loss) $ 826 $ 95,144 $ (47,796 ) Amounts to reconcile net income (loss) to net cash flows provided by operating activities: (Gain) loss from discontinued operations, net of taxes (34,371 ) (85,757 ) 48,833 Impairment and other charges 856 — 14,262 Cumulative effect of accounting change, net of taxes — 2,572 (11,202 ) Unrealized gain on Viacom stock and related derivatives (6,603 ) (49,176 ) (55,064 ) Depreciation and amortization 58,950 56,480 38,405 Gain on sale of assets — (30,529 ) — Provision (benefit) for deferred income taxes (24,871 ) 64,582 (11,428 ) Amortization of deferred financing costs 35,219 36,164 35,987 Changes in (net of acquisitions and divestitures): Trade receivables 3,242 (8,924 ) 5,273 Accounts payable and accrued liabilities 17,808 (336 ) (16,773 ) Other assets and liabilities 22,860 3,609 14,625 Net cash flows provided by operating activities — continuing operations 73,916 83,829 15,122 Net cash flows provided by operating activities — discontinued operations 2,890 3,451 368 Net cash flows provided by operating activities 76,806 87,280 15,490 Purchases of property and equipment (223,720 ) (175,404 ) (280,921 ) Cash of business acquired 4,228 — — Proceeds from sale of assets 175 30,875 — Other investing activities (2,328 ) (955 ) 3,033 Net cash flows used in investing activities — continuing operations (221,645 ) (145,484 ) (277,888 ) Net cash flows provided by investing activities — discontinued operations 65,354 232,570 17,794 Net cash flows provided by (used in) investing activities (156,291 ) 87,086 (260,094 ) Proceeds from issuance of debt 550,000 85,000 535,000 Repayment of long-term debt (425,104 ) (214,846 ) (241,503 ) Deferred financing costs paid (18,289 ) — (19,582 ) (Increase) decrease in cash and cash equivalents — restricted (8,560 ) 45,670 (52,326 ) Proceeds from exercise of stock options and stock purchase plans 4,459 919 2,548 Other financing activities (594 ) — — Net cash flows provided by (used in) financing activities — continuing operations 101,912 (83,257 ) 224,137 Net cash flows provided by (used in) financing activities — discontinued operations (94 ) (1,671 ) 2,904 Net cash flows provided by (used in) financing activities 101,818 (84,928 ) 227,041 22,333 89,438 (17,563 ) 98,632 9,194 26,757 $ 120,965 $ 98,632 $ 9,194 The accompanying notes are an integral part of these consolidated financial statements.
F-5
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2003, 2002 and 2001(Amounts in thousands)
Additional Other Total Common Paid-in Retained Unearned Comprehensive Stockholders’ Stock Capital Earnings Compensation Income (Loss) Equity BALANCE, December 31, 2000 $ 334 $ 513,779 $ 235,450 $ (80 ) $ 16,454 $ 765,937 COMPREHENSIVE LOSS: Net loss — — (47,796 ) — — (47,796 ) Reclassification of gain on marketable securities — — — — (17,957 ) (17,957 ) Unrealized loss on interest rate caps — — — — (213 ) (213 ) Minimum pension liability, net of deferred income taxes — — — — (7,672 ) (7,672 ) Foreign currency translation — — — — 711 711 Comprehensive loss (72,927 ) Exercise of stock options 2 2,327 — — — 2,329 Tax benefit on stock options — 720 — — — 720 Employee stock plan purchases — 219 — — — 219 Issuance of restricted stock 1 3,664 — (3,665 ) — — Cancellation of restricted stock — (928 ) — 928 — — Compensation expense — (86 ) — 796 — 710 BALANCE, December 31, 2001 337 519,695 187,654 (2,021 ) (8,677 ) 696,988 COMPREHENSIVE INCOME: Net income — — 95,144 — — 95,144 Unrealized loss on interest rate caps — — — — (161 ) (161 ) Minimum pension liability, net of deferred income taxes — — — — (7,252 ) (7,252 ) Foreign currency translation — — — — 755 755 Comprehensive income 88,486 Exercise of stock options 1 660 — — — 661 Tax benefit on stock options — 28 — — — 28 Employee stock plan purchases — 206 — — — 206 Modification of stock plan — 52 — — — 52 Issuance of restricted stock — 115 — (115 ) — — Issuance of stock warrants — 40 — — — 40 Cancellation of restricted stock — (32 ) — 32 — — Compensation expense — 32 — 1,086 — 1,118 338 520,796 282,798 (1,018 ) (15,335 ) 787,579 — — 826 — — 826 — — — — 498 498 — — — — (1,774 ) (1,774 ) — — — — (33 ) (33 ) (483 ) 53 105,276 — — — 105,329 — 5,596 — (1,387 ) — 4,209 2 4,187 — — — 4,189 — 881 — — — 881 — 270 — — — 270 — 24 — — — 24 1 1,237 — (1,238 ) — — — (43 ) — 43 — — — 1,615 — 896 — 2,511 $ 394 $ 639,839 $ 283,624 $ (2,704 ) $ (16,644 ) $ 904,509 The accompanying notes are an integral part of these consolidated financial statements.
F-6
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Summary of Significant Accounting Policies Gaylord Entertainment Company (the “Company”) is a diversified hospitality and entertainment company operating, through its subsidiaries, principally in four business segments: Hospitality; ResortQuest; Opry and Attractions; and Corporate and Other. During the third quarter of 2003, the Company completed a sale of the assets primarily used in the operation of WSM-FM and WWTN(FM) (collectively, the “Radio Operations”). The Radio Operations, along with other businesses with respect to which the Company pursued plans of disposal in 2002 and prior periods, have been presented as discontinued operations as described in more detail below and in Note 5. The Radio Operations were previously included in a separate business segment, Opry and Media, along with WSM-AM. Due to the Radio Operations being included in discontinued operations, WSM-AM is now grouped in the Opry and Attractions business segment for all periods presented.
Business Segments
Hospitality The Hospitality segment includes the operations of Gaylord Hotels(TM) branded hotels and the Radisson Hotel at Opryland. At December 31, 2003, the Company owns and operates the Gaylord Opryland Resort and Convention Center (“Gaylord Opryland” and formerly known as the “Opryland Hotel Nashville”), the Gaylord Palms Resort and Convention Center (“Gaylord Palms”) and the Radisson Hotel at Opryland. Gaylord Opryland and the Radisson Hotel at Opryland are both located in Nashville, Tennessee. Gaylord Opryland is owned and operated by Opryland Hotel Nashville, LLC, a consolidated wholly-owned subsidiary of the Company incorporated in Delaware. The Gaylord Palms in Kissimmee, Florida opened in January 2002. The Company is developing a Gaylord hotel in Grapevine, Texas, the Gaylord Texan Resort & Convention Center (“Gaylord Texan”), which is expected to open in April 2004. The Company has entered into a purchase agreement with respect to a tract of land for the development of a hotel in the Washington, D.C. area. The purchase agreement is subject to designated closing conditions and provides for liquidated damages, currently in the amount of $1.0 million, in the event the Company elects not to purchase the property once the closing conditions have been satisfied. This project is subject to the availability of financing, resolution of certain
duplicationzoning issues and approval ofdutiesthe Company’s Board of Directors.
ResortQuest The ResortQuest segment includes the operations of our vacation property management services subsidiaries. This branded network of vacation properties currently offers management services to approximately 19,300 properties in 50 premier beach, mountain, desert, and tropical resort locations. The acquisition of ResortQuest International, Inc. (“ResortQuest”) was completed on November 20, 2003 as further discussed in Note 6. The results of operations of ResortQuest for the period November 20, 2003 to December 31, 2003 are included in these consolidated financial statements.
Opry and Attractions The Opry and Attractions segment includes all of the Company’s Nashville-based tourist attractions. At December 31, 2003, these include the Grand Ole Opry, the General Jackson Showboat, the Wildhorse Saloon, the Ryman Auditorium and the Springhouse Golf Club, among others. The Opry and Attractions segment also includes Corporate Magic, which specializes in the production of creative events in the corporate entertainment marketplace, and WSM-AM.
TM A registered trademark of Gaylord Entertainment CompanyF-7
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Corporate and Other Corporate and Other includes salaries and benefits of the Company’s executive and administrative personnel and various other overhead costs. This segment also includes the expenses and activities associated with the Company’s ownership of various investments, including Bass Pro, Inc. (“Bass Pro”), the Nashville Predators, the naming rights agreement related to the Nashville Predators and Opry Mills. The Company owns minority interests in Bass Pro, a leading retailer of premium outdoor sporting goods and fishing products, and the Nashville Predators, a National Hockey League professional team. Until the second quarter of 2002, the Company owned a minority interest in a partnership with The Mills Corporation that developed Opry Mills, a Nashville entertainment and retail complex, which opened in May 2000. The Company sold its interest in Opry Mills during 2002 to certain affiliates of The Mills Corporation, as further discussed in Note 7. The Company also sold its majority interest in the Oklahoma RedHawks, a minor league baseball team, during the fourth quarter of 2003. During the first quarter of 2002, the Company disclosed that it intended to dispose of its investment in the Nashville Predators.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. The Company’s investments in non-controlled entities in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. The Company’s investments in other entities are accounted for using the cost method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents — Unrestricted
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Cash and Cash Equivalents — Restricted
Restricted cash and cash equivalents represent cash held in escrow for required capital expenditures, property taxes, insurance payments and other reserves required pursuant to the terms of the Company’s debt agreements, as further described in Note 12, as well as guest advance deposits held in escrow for lodging reservations and deposits held on real estate transactions.
Supplemental Cash Flow Information
Cash paid for interest for the years ended December 31 was comprised of (amounts in thousands):
2003 2002 2001 Debt interest paid $ 20,638 $ 17,749 $ 23,405 Deferred financing costs paid 18,289 — 19,582 Capitalized interest (14,810 ) (6,825 ) (18,781 ) Cash paid for interest, net of capitalized interest $ 24,117 $ 10,924 $ 24,206 Net cash refunds for income taxes were $1.0 million, $63.2 million and $21.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.
F-8
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s net cash flows provided by investing activities — discontinued operations in 2003, 2002, and 2001 primarily consist of cash proceeds received from the sale of discontinued operations.
On November 20, 2003, the Company acquired 100% of the outstanding common shares of ResortQuest in a tax-free stock for stock merger for a total purchase price of $114,698. The total purchase price of the ResortQuest acquisition was comprised of the following:
Fair value of common stock issued $ 105,329 Fair value of stock options issued 5,596 Direct merger costs 3,773 Total $ 114,698 The purchase price was allocated as follows:
Assets acquired, including cash acquired of $4,228 $ 283,019 Liabilities assumed (169,708 ) Deferred stock-based compensation 1,387 Net assets acquired $ 114,698 Accounts Receivable
The Company’s accounts receivable are primarily generated by meetings and convention attendees’ room nights, as well as vacation rental property management fees. Receivables arising from these sales are not collateralized. Credit risk associated with the accounts receivable is minimized due to the large and diverse nature of the customer base. No customers accounted for more than 10% of the Company’s trade receivables at December 31, 2003.
Allowance for Doubtful Accounts
The Company provides allowances for doubtful accounts based upon a percentage of revenue and periodic evaluations of the aging of accounts receivable.
Deferred Financing Costs
Deferred financing costs consist of prepaid interest, loan fees and other costs of financing that are amortized over the term of the related financing agreements, using the effective interest method. For the years ended December 31, 2003, 2002 and 2001, deferred financing costs of $35.2 million, $36.2 million and $36.0 million, respectively, were amortized and recorded as interest expense in the accompanying consolidated statements of operations. The current portion of deferred financing costs at December 31, 2003 represents the amount of prepaid contract payments related to the secured forward exchange contract discussed in Note 10 that will be amortized in the coming year.
Property and Equipment
Property and equipment are stated at cost. Improvements and significant renovations that extend the lives of existing assets are capitalized. Interest on funds borrowed to finance the construction of major capital additions is included in the cost of the applicable capital addition. Maintenance and repairs are charged to
F-9
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expense as incurred. Property and equipment are depreciated using the straight-line method over the following estimated useful lives:
Buildings 40 years Land improvements 20 years Attractions-related equipment 16 years Furniture, fixtures and equipment 3-8 years Leasehold improvements The shorter of the lease term or useful life Impairment of Long-Lived Assets
In accounting for the Company’s long-lived assets other than goodwill, the Company applies the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company adopted the provisions of SFAS No. 144 during 2001 with an effective date of January 1, 2001. Under SFAS No. 144, the Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Recoverability of long-lived assets that will continue to be used is measured by comparing the carrying amount of the asset or asset group to the related total future undiscounted net cash flows. If an asset or asset group’s carrying value is not recoverable through those cash flows, the asset group is considered to be impaired. The impairment is measured by the difference between the assets’ carrying amount and their fair value, based on the best information available, including market prices or discounted cash flow analyses.
Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 supersedes Accounting Principles Board (“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. The Company adopted the provisions of SFAS No. 141 in June of 2001.
SFAS No. 142 supercedes APB Opinion No. 17, “Intangible Assets”, and changes the accounting for goodwill and intangible assets. Effective January 1, 2002, the Company adopted SFAS No. 142. Under SFAS No. 142, goodwill and other intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually and whenever events or circumstances occur indicating that these intangibles may be impaired. The Company performs its review of goodwill for impairment by comparing the carrying value of the applicable reporting unit to the fair value of the reporting unit. If the fair value is less than the carrying value then the Company measures potential impairment by allocating the fair value of the reporting unit to the tangible assets and liabilities of the reporting unit in a manner similar to a business combination purchase price allocation. The remaining fair value of the reporting unit after assigning fair values to all of the reporting unit’s assets and liabilities represents the implied fair value of goodwill of the reporting unit. The impairment is measured by the difference between the carrying value of goodwill and the implied fair value of goodwill. The Company’s goodwill and intangibles are discussed further in Note 19.
Leases
The Company is leasing a 65.3 acre site in Osceola County, Florida on which the Gaylord Palms is located and a 23 acre site in Grapevine, Texas on which the Gaylord Texan will be located and has various other leasing arrangements, including leases for office space and office equipment. The Company
F-10
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accounts for lease obligations in accordance with SFAS No. 13, “Accounting for Leases”, and related interpretations. The Company’s leases are discussed further in Note 16.
Investments
The Company owns investments in marketable securities and has minority interest investments in certain businesses. Marketable securities are accounted for in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Generally, non-marketable investments (excluding limited partnerships) in which the Company owns less than 20 percent are accounted for using the cost method of accounting and investments in which the Company owns between 20 percent and 50 percent and limited partnerships are accounted for using the equity method of accounting.
Other Assets
Other current and long-term assets of continuing operations at December 31 consist of (amounts in thousands):
2003 2002 Other current assets: Other current receivables $ 6,716 $ 5,916 Note receivable — current portion — 10,000 Inventories 4,828 3,900 Prepaid expenses 7,596 3,850 Current income tax receivable — 1,478 Other current assets 981 745 Total other current assets $ 20,121 $ 25,889 Other long-term assets: Notes receivable $ 7,535 $ 7,500 Deferred software costs, net 15,904 11,101 Other long-term assets 5,668 5,722 Total other long-term assets $ 29,107 $ 24,323
Other current assets Other current receivables result primarily from non-operating income and are due within
divisionsone year. Inventories consist primarily of merchandise for resale andrealizedare carried at theneedlower of cost or market. Cost is computed on an average cost basis. Prepaid expenses consist of prepayments for insurance and contracts that will be expensed during the subsequent year.
Other long-term assets Long-term notes receivable primarily consists of an unsecured note receivable from Bass Pro. This long-term note receivable bears interest at a variable rate which is payable quarterly and matures in 2009.
During 1998, ResortQuest recorded a note receivable of $4.0 million as a result of cash advances made to
streamline those tasksa primary stockholder (“Debtor”) of the predecessor company who is no longer an affiliate of ResortQuest. The note is collateralized by a third mortgage on residential real estate owned by the Debtor. Due to the failure to make interest payments, the note receivable is now in default. The Company hasF-11
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accelerated the note and
duties. Relateddemanded payment in full, although the Company has agreed to forebear collection until July 2004. The Company also contracted an independent external third party to appraise the property by which the note is secured, confirm the outstanding senior claims on the property and assess the associated credit risk. Based on this assessment, the Companyadoptedrecognized aplanvaluation allowance ofrestructuring$4.0 million against the note receivable which was recorded as an adjustment of the purchase price allocation.The Company capitalizes the costs of computer software developed for internal use in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. Accordingly, the Company capitalized the external costs to acquire and develop computer software and certain internal payroll costs during 2002
as discussedand 2001. Deferred software costs are amortized on a straight-line basis over their estimated useful lives of 3 to 5 years.The Company accounts for the costs of computer software developed or obtained for internal use that is also sold or otherwise marketed in
Resultsaccordance with FASB Statement No. 86 “Accounting for the Costs ofOperations.Computer Software to be Sold, Leased, or Otherwise Marketed.”These costs are being amortized on a straight-line basis over the estimated useful lives of the related projects ranging from three to ten years. In
2001,accordance with Statement No. 86, the Companynamed a new chairman and a new chief executive officer, and had numerous changes in senior 23management, primarily becauseperiodically, or upon the occurrence of certain2000events,discussed below. Duringreviews these capitalized software cost balances for impairment.Preopening Costs
In accordance with AICPA SOP 98-5, “Reporting on the Costs of Start-Up Activities”, the Company expenses the costs associated with preopening expenses related to the construction of new hotels, start-up activities and organization costs as incurred.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities of continuing operations at December 31 consist of (amounts in thousands):
2003 2002 Trade accounts payable $ 9,737 $ 7,524 Accrued construction in progress 18,993 17,484 Property and other taxes payable 19,820 15,854 Deferred revenues 60,271 11,879 Accrued salaries and benefits 16,860 7,679 Restructuring accruals 289 701 Accrued self-insurance reserves 3,683 3,755 Accrued interest payable 3,232 554 Accrued advertising and promotion 7,422 4,206 Other accrued liabilities 14,645 11,049 Total accounts payable and accrued liabilities $ 154,952 $ 80,685 Deferred revenues consist primarily of deposits on advance bookings of rooms and vacation properties and advance ticket sales at the Company’s tourism properties. The increase in deferred revenues from 2002 is due to the acquisition of ResortQuest. The Company is self-insured up to a stop loss for certain losses relating to workers’ compensation claims, employee medical benefits and general liability claims. The
F-12
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company recognizes self-insured losses based upon estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry or the Company’s historical experience.
Income Taxes
In accordance with SFAS No. 109, “Accounting for Income Taxes”, the Company establishes deferred tax assets and liabilities based on the difference between the financial statement and income tax carrying amounts of assets and liabilities using existing tax laws and tax rates. See Note 13 for more detail on the Company’s income taxes.
Minority Interests of Discontinued Operations
Minority interests of discontinued operations relate to the interests in consolidated companies that the Company does not wholly own. The Company allocates income or loss to the minority interests based on the percentage ownership not owned by the Company as it may change throughout the year. As of December 31, 2003, the Company has no minority interests recorded on its consolidated balance sheet due to the sale of the Company’s interest in the Oklahoma RedHawks.
Revenue Recognition
Revenues from rooms are recognized 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 Opry and Attractions segment when services are provided or goods are shipped, as applicable.
The Company earns revenues from the ResortQuest segment through property management fees, service fees, and other sources. The Company receives property management fees when the properties are rented, which are generally a percentage of the rental price of the vacation property. Management fees range from approximately 3% to over 40% of gross lodging revenues collected based upon the type of services provided to the property owner and the type of rental units managed. Revenues are recognized ratably over the rental period based on the Company’s proportionate share of the total rental price of the vacation condominium or home. The Company provides or arranges through third parties certain services for property owners or guests. Service fees include reservations, housekeeping, long-distance telephone, ski rentals, lift tickets, beach equipment and pool cleaning. Internally provided services are recognized as service fee revenue when the service is provided. Services provided by third parties are generally billed directly to property owners and are not included in the accompanying consolidated financial statements. The Company recognizes other revenues primarily related to real estate broker commissions and software and maintenance sales. The Company recognizes revenues on real estate sales when the transactions are complete, and such revenue is recorded net of the related agent commissions. The Company also sells a fully integrated software package, First Resort Software, specifically designed for the vacation property management business, along with ongoing service contracts. Software and maintenance revenues are recognized when the systems are installed and ratably over the service period, respectively, in accordance with SOP 97-2, “Software Revenue Recognition.” Provision for returns and other adjustments are provided for in the same period the revenue was recognized.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs from continuing operations were $17.5 million, $22.8 million and $25.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.
F-13
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-Based Compensation
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
management team instituted a corporate reorganization, re-evaluatedpronouncement. The Company will continue to account for employee stock-based compensation in accordance with APB Opinion No. 25.If compensation cost for these plans had been determined consistent with SFAS No. 123, the
Company's businessesCompany’s net income (loss) (in thousands) andother investments and employed certain cost savings initiatives (the "2001 Strategic Assessment"). As a result ofincome (loss) per share (in dollars) for the2001 Strategic Assessment,years ended December 31 would have been reduced (increased) to theCompany recorded impairment and other charges and restructuring charges as discussedfollowing pro forma amounts:
2003 2002 2001 As reported $ 826 $ 95,144 $ (47,796 ) Stock-based employee compensation, net of tax effect 3,067 3,190 2,412 Pro forma $ (2,241 ) $ 91,954 $ (50,208 ) As reported $ 0.02 $ 2.82 $ (1.42 ) Pro forma $ (0.07 ) $ 2.72 $ (1.50 ) As reported $ 0.02 $ 2.82 $ (1.42 ) Pro forma $ (0.07 ) $ 2.72 $ (1.50 ) The Company’s stock-based compensation is further described in
Results of Operations. During 2000, the Company experienced a significant number of departures from its senior management, including the Company's president and chief executive officer. In addition, the Company continued to produce weaker than anticipated operating results during 2000 while attempting to fund its capital requirements related to its hotel construction project in Florida and hotel development activities in Texas. As a result of these factors, during 2000, the Company assessed its strategic alternatives related to its operations and capital requirements and developed a strategic plan designed to refocus the Company's operations, reduce its operating losses and reduce its negative cash flows (the "2000 Strategic Assessment"). As a result of the 2000 Strategic Assessment, the Company sold or ceased operations of several businesses and recorded impairment and other charges and restructuring charges as discussed in Results of Operations. TERRORIST ATTACKS As a result of the September 11, 2001 terrorist attacks and a slowdown in the U.S. economy, the hospitality industry has experienced occupancy rates that were significantly lower than those experienced in the first eight months of 2001 and during 2000 due to decreased tourism and travel activity. Although the Company experienced a slight increase of occupancy, average daily rate and revenue per available room in the fourth quarter of 2002 over fourth quarter of 2001, there is no guarantee that this increase will continue. The September 11 terrorist attacks were dramatic in scope and in their impact on the hospitality industry and it is currently not possible to accurately predict if and when travel patterns will be restored to pre-September 11 levels. DISCONTINUED OPERATIONSNote 15.Discontinued Operations
In August 2001, the FASB issued SFAS No. 144,
which“Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 superseded 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 APB Opinion No. 30,"Reporting“Reporting the Results of Operations-— Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions"Transactions”.SFAS No. 144
retainsretained the requirements of SFAS No. 121 for the recognition and measurement of an impairment loss andbroadensbroadened the presentation of discontinued operations to include a component of anF-14
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
entity (rather than a segment of a business). The Company adopted the provisions of SFAS No. 144 during 2001 with an effective date of January 1, 2001.
In accordance with the provisions of SFAS No. 144, the Company has presented the operating results, financial position and cash flows of the following businesses as discontinued operations in the accompanying consolidated financial statements as of December 31,
20022003 and20012002 and for each of the three years in the period ended December 31,2002:2003: WSM-FM and WWTN(FM); Word Entertainment("Word"(“Word”), theCompany'sCompany’s contemporary Christian music business; the Acuff-Rose Music Publishingcatalogentity; GET Management, theCompany'sCompany’s artist management business which was sold during 2001; theCompany'sCompany’s ownership interest in theRedhawks,Oklahoma RedHawks, a minor league baseball team based in Oklahoma City, Oklahoma; theCompany'sCompany’s international cable networks; the businesses sold to affiliates of The Oklahoma Publishing Company("OPUBCO"(“OPUBCO”) in 2001 consisting of Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production Company; and theCompany'sCompany’s water taxis that were sold in 2001.DERIVATIVESThe results of operations of these businesses, including impairment and other charges, restructuring charges and any gain or loss on disposal, have been reflected as discontinued operations, net of taxes, in the accompanying consolidated statements of operations and the assets and liabilities of these businesses are reflected as discontinued operations in the accompanying consolidated balance sheets, as further described in Note 5.Income (Loss) Per Share
SFAS No. 128, “Earnings Per Share”, established standards for computing and presenting earnings per share. Under the standards established by SFAS No. 128, earnings per share is measured at two levels: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding after considering the effect of conversion of dilutive instruments, calculated using the treasury stock method. Income per share amounts are calculated as follows for the years ended December 31 (income and share amounts in thousands):
2003 Income Shares Per Share Net income $ 826 34,460 $ 0.02 Effect of dilutive stock options — — — Net income — assuming dilution $ 826 34,460 $ 0.02
2002 Income Shares Per Share Net income $ 95,144 33,763 $ 2.82 Effect of dilutive stock options — 31 — Net income — assuming dilution $ 95,144 33,794 $ 2.82
2001 Loss Shares Per Share Net loss $ (47,796 ) 33,562 $ (1.42 ) Effect of dilutive stock options — — — Net loss — assuming dilution $ (47,796 ) 33,562 $ (1.42 ) F-15
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the years ended December 31, 2003 and 2001, the effect of dilutive stock options was the equivalent of approximately 74,000 and 99,000 shares of common stock outstanding, respectively. Because the Company had a loss from continuing operations in the years ended December 31, 2003 and 2001, these incremental shares were excluded from the computation of diluted earnings per share for those years as the effect of their inclusion would be anti-dilutive.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income”, requires that changes in the amounts of certain items, including gains and losses on certain securities, be shown in the financial statements as a component of comprehensive income. The Company’s comprehensive income (loss) is presented in the accompanying consolidated statements of stockholders’ equity.
Financial Instruments
The Company has issued $350.0 million in aggregate principal amount of Senior Notes due 2013, which are discussed further in Note 12. These Senior Notes accrue interest at a fixed rate of 8%. The Company has entered into fixed to variable interest rate swaps with respect to $125.0 million principal amount of the Senior Notes. The carrying value of $125.0 million of the Senior Notes covered by this interest rate swap approximates fair value based upon the variable nature of this financial instrument’s interest rate. However, the $225.0 million carrying value of the remaining Senior Notes does not approximate fair value. The fair value of this financial instrument, based upon quoted market prices, was $237.9 million as of December 31, 2003. The carrying value of the Senior Loan, which is also discussed in Note 12, approximates fair value based upon the variable nature of this financial instrument’s interest rate. The carrying value of the Company’s long-term notes receivable approximates fair value based upon the variable nature of these financial instruments’ interest rates. Certain of the Company’s investments are carried at fair value determined using quoted market prices as discussed further in Note 9. The carrying amount of short-term financial instruments (cash, trade receivables, accounts payable and accrued liabilities) approximates fair value due to the short maturity of those instruments. The concentration of credit risk on trade receivables is minimized by the large and diverse nature of the Company’s customer base.
Derivatives and Hedging Activities
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.securities as discussed in Note 11 and portions of its fixed rate debt as discussed in Note 12. Effective January 1, 2001, the Company records derivatives in accordance with the provisions of SFAS No. 133,as amended.“Accounting for Derivative Instruments and Hedging Activities”, which was subsequently amended by SFAS No. 138 and SFAS No. 149. 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 instrumentswill beare reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies fortreatmenthedge accounting.Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the 2003 financial statement presentation.
F-16
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Estimates
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. Actual results could differ from those estimates.
Newly Issued Accounting Standards
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 replaces Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 required recognition of the liability at the commitment date to an exit plan. The Company adopted the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002 and the adoption did not have a material effect on the Company’s consolidated results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN No. 45, including, among others, residual value guarantees under capital lease arrangements and loan commitments. The disclosure requirements of FIN No. 45 were effective as of December 31, 2002. The recognition requirements of FIN No. 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on the Company’s consolidated results of operations, financial position, or liquidity.
In January 2003, the FASB issued FASB Interpretation 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). In December 2003, the FASB modified FIN No. 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN No. 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. FIN No. 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN No. 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has significant variable interest.
FIN No. 46 was effective immediately for VIEs created after January 31, 2003. The provisions of FIN No. 46, as revised, were adopted as of December 31, 2003 for the Company’s interests in VIEs that are special purpose entities (“SPEs”). The adoption of FIN No. 46 for interests in SPEs on December 31, 2003 did not have a material effect on the Company’s consolidated balance sheet. The Company expects to adopt the provisions of FIN No. 46 for the Company’s variable interests in all VIEs as of March 31,
F-17
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004. The effect of adopting the provisions of FIN No. 46 for all the Company’s variable interests is not expected to have a material impact on the Company’s consolidated balance sheet at March 31, 2004.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003. The Company did not enter into any financial instruments within the scope of SFAS No. 150 after May 31, 2003. Adoption of this statement did not have any effect on the Company’s consolidated financial statements.
In December 2003, the FASB issued a revision to SFAS No. 132, “Employer’s Disclosure about Pension and Other Postretirement Benefits”. This revised statement requires that companies provide more detailed disclosures about the plan assets, benefit obligations, cash
flow hedgesflows, benefit costs, and investment policies of their pension and postretirement benefit plans. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The Company adopted the provisions of this statement on December 31, 2003 and the information contained in this report reflects the disclosures required under the revised standard.
2. Construction Funding Requirements As of December 31, 2003, the Company had $121.0 million in unrestricted cash, $88.7 million available under its revolving line of credit, and the net cash flows from certain operations to fund its cash requirements including the Company’s 2004 construction commitments related to its hotel construction projects. The Company believes that these resources are adequate to fund all of the Company’s 2004 construction commitments. The Company has entered into a purchase agreement with respect to a tract of land for the development of a hotel in the Washington, D.C. area. The purchase agreement is subject to designated closing conditions and provides for liquidated damages, currently in the amount of $1.0 million, in the event the Company elects not to purchase the property once the closing conditions have been satisfied. If the Company elects to purchase the property and develop the hotel, the Company would be required to obtain additional long term financing to fund the construction costs.
3. Impairment and Other Charges During 2001, the Company named a new chairman and a new chief executive officer, and had numerous changes in senior management. The new management team instituted a corporate reorganization and the reevaluation of the Company’s businesses and other investments (the “2001 Strategic Assessment”). As a result of the 2001 Strategic Assessment, the Company determined that the carrying value of certain long-lived assets were not fully recoverable and recorded pretax impairment and other charges from continuing operations during 2001 and 2003 in accordance with the provisions of SFAS No.
133. During 242000, the Company entered into a seven-year secured forward exchange contract with respect to 10,937,900 shares of its Viacom, Inc. ("Viacom") stock investment acquired, indirectly, as a result of the divestiture of television station KTVT in Dallas-Fort Worth as discussed below. Under SFAS No. 133,144.F-18
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of
the secured forward exchange contract are considered derivatives. The adoption of SFAS No. 133 has had a material impact on the Company's results of operations and financial position. 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 hedge accounting and changes in the values of these caps are recorded as other comprehensive income and losses in the consolidated statements of stockholders' equity. GAYLORD PALMS The Company's Gaylord Palms Resort and Convention Center ("Gaylord Palms") in Kissimmee, Florida commenced operations in January 2002. The Company recorded $4.5 million and $12.2 million of preopening expenses during 2002 and 2001, respectively. GAYLORD OPRYLAND TEXAS The Company's hotel in Texas, which is currently under construction and is expected to open in April of 2004, recorded $4.0 million and $3.1 million of preopening expenses during 2002 and 2001, respectively. The Company expects increases in preopening costs related to the Texas hotel until its completion. DIVESTITURE OF KTVT In October 1999, CBS Corporation ("CBS") acquired KTVT from the Company in exchange for $485.0 million of CBS Series B convertible preferred stock, $4.2 million of cash and other consideration. The Company recorded a pretax gain of $459.3 million, which is included in other gains and losses in the consolidated statements of operations, based upon the disposal of the net assets of KTVT of $29.9 million, including related selling costs. CBS merged with Viacom in May 2000, resulting in the conversion of CBS convertible preferred stock into Viacom stock. SUBSEQUENT EVENT On March 25, 2003, the Company, through its wholly-owned subsidiary Gaylord Investments, Inc., 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 third quarter of 2003. In connection with this agreement, the Company also entered into a local marketing agreement with Cumulus pursuant to which, from the second business day after the expiration or termination of the waiting period under the Hart-Scott-Rodino Improvements Act of 1976 until the closing of the sale of the stations, 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. 25RESULTS OF OPERATIONS The following table contains selected results of operations data for each of the three years ended December 31, 2002, 2001 and 2000. The table also shows the percentage relationships to total revenues and, in the case of segment operating income, its relationship to segment revenues.
(Restated) (Restated) (in thousands) 2002 % 2001 % 2000 % ---------- ----- ---------- ----- --------- -----REVENUES: Hospitality $ 339,380 81.9 $ 228,712 75.2 $ 237,260 75.2 Attractions 63,512 15.3 65,878 21.6 63,235 20.1 Media 11,194 2.7 9,393 3.1 14,913 4.7 Corporate and other 272 0.1 290 0.1 64 - ---------- ----- ---------- ----- --------- ----- Total revenues 414,358 100.0 304,273 100.0 315,472 100.0 ---------- ----- ---------- ----- --------- ----- OPERATING EXPENSES: Operating costs 260,357 62.8 205,421 67.5 213,725 67.7 Selling, general and administrative 110,619 26.7 68,913 22.7 90,806 28.8 Preopening costs 8,913 2.2 15,927 5.2 5,278 1.7 Gain on sale of assets (30,529) (7.4) - - - - Impairment and other charges - - 14,262 4.7 75,712 24.0 Restructuring charges 3 - 2,182 0.7 12,952 4.1 Depreciation and amortization: Hospitality 44,924 25,593 24,447 Attractions 5,295 5,810 6,443 Media 623 660 7,716 Corporate and other 5,778 6,542 6,257 ---------- ----- ---------- ----- --------- ----- Total depreciation and amortization 56,620 13.7 38,605 12.7 44,863 14.2 ---------- ----- ---------- ----- --------- ----- Total operating expenses 405,983 98.0 345,310 113.5 443,336 140.5 ---------- ----- ---------- ----- --------- ----- OPERATING INCOME (LOSS): Hospitality 25,972 7.7 34,270 15.0 45,478 19.2 Attractions 3,094 4.9 (2,372) (3.6) (8,025) (12.7) Media (193) (1.7) (454) (4.8) (33,188) - Corporate and other (42,111) - (40,110) - (38,187) - Preopening costs (8,913) - (15,927) - (5,278) - Gain on sale of assets 30,529 - - - - - Impairment and other charges - - (14,262) - (75,712) - Restructuring charges (3) - (2,182) - (12,952) - ---------- ----- ---------- ----- --------- ----- Total operating income (loss) 8,375 2.0 (41,037) (13.5) (127,864) (40.5) Interest expense, net of amounts capitalized (46,960) - (39,365) - (30,319) - Interest income 2,808 - 5,554 - 4,046 - Gain on Viacom stock and derivatives 49,176 - 55,064 - - - Other gains and losses 1,163 - 2,661 - (3,514) - (Provision) benefit for income taxes (1,806) - 8,313 - 51,140 - Gain (loss) on discontinued operations, net 84,960 - (50,188) - (49,545) - Cumulative effect of accounting change, net (2,572) - 11,202 - - - ---------- ----- ---------- ----- --------- ----- Net income (loss) $ 95,144 - $ (47,796) - $(156,056) - ========== ===== ========== ===== ========= =====26The 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 the Gaylord Opryland Resort and Convention Center ("Gaylord Opryland") and the Gaylord Palms Resort and Convention Center ("Gaylord Palms"), subsequent to its January 2002 opening, are shown in the following table.
2002 2001 2000 ----------- --------- ---------Gaylord Opryland Resort Occupancy 68.59% 70.30% 75.85% Average Daily Rate $ 142.58 $ 140.33 $ 140.03 RevPAR $ 97.80 $ 98.65 $ 106.22 Gaylord Palms Occupancy 64.85% - - Average Daily Rate $ 168.65 - - RevPAR $ 109.37 - -YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 REVENUES Total revenues increased $110.1 million, or 36.2%, to $414.4 million in 2002. As discussed below, the increase is primarily due to the opening of Gaylord Palms in January 2002. Revenues in the hospitality segment increased $110.7 million, or 48.4%, to $339.4 million in 2002. Revenues of the Gaylord Palms, subsequent to the January 2002 opening, were $126.5 million. The increase in revenues of the Gaylord Palms was partially offset by a decrease in revenues of Gaylord Opryland of $15.8 million, to $206.1 million, in 2002. This decrease was primarily attributable to the impact of a softer economy and decreased occupancy levels in the weeks following the September 11, 2001 terrorist attacks. The decrease in revenue of the Gaylord Opryland was also partially attributable to the annual rotation of convention business among different markets that is common in the meeting and convention industry. Revenues in the attractions segment decreased $2.4 million, or 3.6%, to $63.5 million in 2002. Revenues from Corporate Magic, a company specializing in the production of creative events in the corporate entertainment marketplace, decreased $5.1 million, to $18.7 million, primarily due to reduced spending by corporate customers as a result of the downturn in the economy. The decrease in revenue of Corporate Magic was partially offset by an increase in revenues of the Grand Ole Opry of $2.5 million, to $15.9 million in 2002. The Grand Ole Opry revenue increase is due to an increase in popular performers appearing on the Grand Ole Opry. Revenues in the media segment, which consists of the Company's three radio stations, increased $1.8 million, or 19.2%, to $11.2 million in 2002. Revenues of the Company's radio stations increased due to more effective selling of the Company's radio inventory. Revenues in the corporate and other segment remained constant at $0.3 million. 27OPERATING EXPENSES Total operating expenses increased $60.7 million, or 17.6%, to $406.0 million in 2002. Operating costs, as a percentage of revenues, decreased to 62.8% during 2002 as compared to 67.5% during 2001. Selling, general and administrative expenses, as a percentage of revenues, increased to 26.7% during 2002 as compared to 22.7% in 2001. Excluding the gain on sale of assets,the impairment and other chargesand restructuring charges from both periods, total operating expenses increased $107.6 million, or 32.7%, to $436.5 million in 2002. Total operating costs consist of direct costs associated with the daily operations of the Company's core assets, primarily the room, food and beverage and convention costs in the hospitality segment. Operating costs also include the direct costs associated with the operations of all of the Company's business units. Total operating costs increased $54.9 million, or 26.7%, to $260.4 million in 2002. Operating costs in the hospitality segment increased $68.6 million, or 49.0%, to $208.5 million in 2002 primarily as a result of the opening of the Gaylord Palms. Operating costs of the Gaylord Palms, subsequent to the January 2002 opening, was $79.0 million. The increase of operating costs generated by the opening of the Gaylord Palms was partially offset by a decrease in operating costs of the Gaylord Opryland of $7.3 million, to $135.7 million, in 2002. The decrease in operating costs at Gaylord Opryland is associated with lower revenues and reduced occupancy. Operating costs in the attractions segment decreased $10.1 million, or 20.3%, to $39.7 million in 2002. The operating costs of Corporate Magic decreased $7.6 million, to $13.2 million in 2002 as compared to 2001 primarily due to the lower revenue and certain cost saving measures taken by the Company during 2002. The operating costs of the Grand Ole Opry and the General Jackson, the Company's entertainment showboat, decreased $1.0 million in 2002 due to cost saving measures. Operating costs in the media segment increased slightly by $0.6 million, or 11.4%, to $5.6 million in 2002. The increase in operating costs is attributable to the increased revenue in the media segment for 2002 compared to 2001. The operating costs in the corporate and other segment decreased $4.1 million, or 38.4%, to $6.6 million in 2002 as compared to 2001 due to the elimination of unnecessary management levels and overhead at the hotels identified in the 2001 reorganization. Selling, general and administrative expenses consist of administrative and overhead costs. Selling, general and administrative expenses increased $41.7 million, or 60.5%, to $110.6 million in 2002. Selling, general and administrative expenses in the hospitality segment increased $31.1 million, or 107.2%, to $60.0 million in 2002. The increase is primarily attributable to the opening of Gaylord Palms in January 2002. Selling, general and administrative expenses for Gaylord Palms subsequent to its January 2002 opening was $29.3 million. Selling, general and administrative expenses at Gaylord Opryland increased $2.3 million, to $29.9 million in 2002 primarily due to an increase in advertising to promote the special events held at the resort. Selling, general and administrative expenses in the attractions segment increased $2.8 million, or 21.8%, to $15.4 million in 2002. Selling, general and administrative expenses increased $1.4 million, to $1.9 million, at the General Jackson due to increased labor costs associated with additional revenue and increased management support during 2002. Also, selling, general and administrative expenses increased $1.3 million, to $5.5 million, at the Grand Ole Opry associated with the increase in revenue. Selling, general and administrative expenses in the media segment increased $1.0 million, or 24.2%, to $5.2 million in 2002. Selling, general and administrative expenses in the media segment increased primarily due to increased costs associated with higher revenues. Corporate selling, general and administrative expenses, consisting primarily of the naming rights agreement, senior 28management salaries and benefits, legal, human resources, accounting, pension and other administrative costs increased $6.9 million, or 29.8%, to $30.0 million during 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 policyrelated tofuture Company contributions to the retirement savings plan was changed. The Company recorded a pretax charge of $5.7 million in 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 2002. These nonrecurring gains and losses were recorded in the corporate and other segment and were not allocated to the Company's other operating segments. Other increases in corporate, selling, general and administrative expenses can be attributed to increased personnel costs related to new corporate departments that did not exist last year, new management personnel in other corporate departments, and increased corporate marketing expenses as compared to the same period in 2001. Preopening costs decreased $7.0 million, or 44.0%, to $8.9 million in 2002 related to the Company's hotel development activities. The decrease in preopening costs is due to the opening of the Gaylord Palms in January of 2002. Gaylord Palms preopening costs decreased $8.4 million, to $4.5 million in 2002 as compared to 2001. This decrease was partially offset by an increase in preopening costs related to the hotel development in Texas. Preopening costs related to the Texas hotel was $4.0 million in 2002, as compared to $3.1 million in 2001. The Texas hotel is scheduled to open in April, 2004. In accordance with AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities", the Company expenses the costs associated with start-up activities and organization costs as incurred. GAIN ON SALE OF ASSETS During 1998, the Company entered into a partnership with The Mills Corporation to develop the Opry Mills Shopping Center in Nashville, Tennessee. The Company held a one-third interest in the partnership as well as the title to the land on which the shopping center was constructed, which was being leased to the partnership. During the second quarter of 2002, the Company sold its partnership share to certain affiliates of The Mills Corporation for approximately $30.8 million in cash proceeds. In accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real Estate", and other applicable pronouncements, the Company deferred approximately $20.0 million of the gain representing the estimated fair value of thecontinuingland lease interest between the Company and the Opry Mills partnership at June 30, 2002. The Company recognized the remainder of the proceeds, net of certain transaction costs, as a gain of approximately $10.6 million during the second quarter of 2002. During the third quarter of 2002, the Company sold its interest in the land lease to an affiliate of the Mills Corporation and recognized the remaining $20.0 million deferred gain, less certain transaction costs. IMPAIRMENT AND OTHER CHARGES The Company recognized pretax impairment and other charges as a result of the 2001 Strategic Assessment. The components of these chargesoperations for theyearyears ended December 31 are asfollows:follows (amounts in thousands):Additional impairment and other charges of $53.7 million during 2001 are included in discontinued operations.
2003 2002 2001 Programming, film and other content $ 856 — $ 6,858 Gaylord Digital and other technology investments — — 4,576 Property and equipment — — 2,828 Total impairment and other charges $ 856 — $ 14,262
(in thousands)2001 ----------Programming, filmImpairment andother content $ 6,858 Technology investments 4,576 Property and equipment 2,828 ---------- Total impairment and other charges $ 14,262 ==========Other Charges29The Company began production of an IMAX movie during 2000 to portray the history of country music. As a result of the 2001 Strategic Assessment, the carrying value of the IMAX film asset was reevaluated on the basis of its estimated future cash flows resulting in an impairment charge of $6.9 million.
At December 31, 2000, the Company held a minority investment in a technology start-up business. During 2001, the unfavorable environment for technology businesses created difficulty for this business to obtain adequate capital to execute its business plan and, subsequently, the Company was notified that this technology business had been unsuccessful in arranging financing, resulting in an impairment charge of $4.6 million. The Company also recorded an impairment charge related to idle real estate of $2.0 million during 2001 based upon an assessment of the value of the property. The Company sold this idle real estate during the second quarter of 2002. Proceeds from the sale approximated the carrying value of the property. In addition, the Company recorded an impairment charge for other idle property and equipment totaling $0.8 million during 2001 primarily due to the consolidation of offices resulting from personnel
reductions. RESTRUCTURING CHARGESreductions as discussed in Note 4.
2003 Impairment and Other Charges In the third quarter of 2003, based on the revenues generated by the theatrical release of the IMAX movie, the asset was again reevaluated on the basis of estimated future cash flows. As a result, an additional impairment charge of $0.9 million was recorded in the third quarter of 2003. The carrying value of the asset was $1.2 million as of December 31, 2003.
4. Restructuring Charges The following table summarizes the activities of the restructuring charges for continuing operations for the years ended December 31, 2003, 2002
Restructuring Chargeand 2001 (amounts in thousands):
Restructuring Balance at charges and Balance at December 31, 2002 adjustments Payments December 31, 2003 $ 431 $ — $ 337 $ 94 270 — 75 195 $ 701 $ — $ 412 $ 289 F-19
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restructuring Balance at charges and Balance at December 31, 2001 adjustments Payments December 31, 2002 2002 restructuring charge $ — $ 1,062 $ 1,062 $ — 2001 restructuring charges 4,168 (1,079 ) 2,658 431 2000 restructuring charge 1,569 — 1,299 270 $ 5,737 $ (17 ) $ 5,019 $ 701
Restructuring Balance at charges and Balance at December 31, 2000 adjustments Payments December 31, 2001 2001 restructuring charges $ — $ 5,848 $ 1,680 $ 4,168 2000 restructuring charge 10,825 (3,666 ) 5,590 1,569 $ 10,825 $ 2,182 $ 7,270 $ 5,737
2002 Restructuring Charge As part of the
Company'sCompany’s ongoing assessment of operations, the Company identified certain duplication of duties within divisions and realized the need to streamline those tasks and duties. Related to this assessment, during the second quarter of 2002 the Company adopted a plan of restructuring resulting in a pretax restructuring charge of $1.1 million related to employee severance costs and other employee benefits unrelated to the discontinued operations.Also during 2002, the Company reversed approximately $1.1 million of the 2001 restructuring charge. The 2002These restructuring charges were recorded in accordance with EITF Issue No. 94-3. As of December 31, 2002, the Companyhashad recorded cash payments of$1.08$1.1 million against the 2002 restructuring accrual. During the fourth quarter of 2002, the outplacement agreements expired related to the 2002 restructuring charge. Therefore, the Company reversed the remaining$67,000.$67,000 accrual. There was no remaining balance of the 2002 restructuring accrual at December 31, 2002.2001 Restructuring Charge
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.
The Company recognized additional pretax restructuring charges from discontinued operations of $3.0 million in 2001.These restructuring charges were recorded in accordance with EITF Issue No. 94-3.The restructuring costs from continuing operations consistDuring the second quarter of$4.7 million related2002, the Company entered into two subleases toseverance and other employee benefits and $1.1 million related to contract termination costs, offset bylease certain office space thereversal of restructuring chargesCompany previously had recorded in2000the 2001 restructuring charges. As a result, the Company reversed $0.9 million of$3.7 million primarily related to negotiated reductions in certain contract termination costs. The restructuring costs from discontinued operations consist of $1.6 million related to severance and other employee benefits and $1.8 million related to contract termination costs offset bythereversal of restructuring charges recorded in 2000 of $0.4 million. The2001 restructuring chargesprimarily resulted fromduring 2002 related to continuing operations based upon theCompany's strategic decisions to exitoccurrence of certainbusinesses and reduce corporate overhead and administrative costs. Thetriggering events. Also during the second quarter of 2002, the Company evaluated the 2001 restructuringplan resulted inaccrual and determined certain severance benefits and outplacement agreements had expired and adjusted thetermination or notification of pending termination of approximately 150 employees.previously recorded amounts by $0.2 million. As of December 31,2002,2003, the Company has recorded cash payments of$4.4$4.7 million against the 2001 restructuringaccrual, all of which related to continuing operations.accrual. The remaining balance of the 2001 restructuring accrualrelated to continuing operationsat December 31,20022003 of$0.4$0.1 million is included in accounts payable and accrued liabilities in the consolidated balance sheets. The Company expects the remaining balances of the 2001 restructuringaccruals for both continuing and discontinued operationsaccrual to be paid by the end of 2005.
2000 Restructuring Charge During 2000, the Company completed an assessment of its strategic alternatives related to its operations and capital requirements and developed a strategic plan designed to refocus the Company’s operations, reduce its operating losses, and reduce its negative cash flows (the “2000 Strategic Assessment”). As part of the Company’s 2000 Strategic Assessment, the Company recognized pretax restructuring charges of
F-20
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$13.1 million related to continuing operations during 2000, in
2003. DEPRECIATION EXPENSE Depreciation expense increased $18.0 million, or 51.5%, to $52.8 million in 2002. The increase during 2002 is primarily attributable to the openingaccordance with EITF Issue No. 94-3. Additional restructuring charges ofGaylord Palms in January 2002. Depreciation expense of Gaylord Palms was $18.6 million subsequent to the January 2002 opening. AMORTIZATION EXPENSE Amortization expense increased slightly, by $0.1 million in 2002. Amortization of software increased $0.9$3.2 million during2002 primarily at Gaylord Opryland, Gaylord Palms and the corporate and other segment. This increase was 30partially offset by the adoption of SFAS No. 142 on January 1, 2002, under the provisions of which2000 were included in discontinued operations. During 2001, the Companyno longer amortizes goodwill. Amortizationnegotiated reductions in certain contract termination costs, which allowed the reversal ofgoodwill for continuing operations for 2002 was $0.8 million. OPERATING INCOME (LOSS) Total operating loss decreased $49.4$3.7 millionto an operating income of $8.4 million during 2002. Hospitality segment operating income decreased $8.3 million to $26.0 million in 2002 primarily as a result of decreased operating income of Gaylord Opryland. The operating lossof theattractions segment decreased $5.5 million to an operating incomerestructuring charges originally recorded during 2000. During the second quarter of$3.1 million in2002,primarily as a result of increased operating income of Corporate Magic and the Grand Ole Opry. Media segment operating loss decreased $0.3 million to an operating loss of $0.2 million in 2002 as a result of increased operating income related to the radio stations. The operating loss of the corporate and other segment increased $2.0 million to an operating loss of $42.1 million in 2002 primarily because of the net change in the Company's pension plans. INTEREST EXPENSE Interest expense increased $7.6 million, or 19.3%, to $47.0 million in 2002, net of capitalized interest of $6.8 million. The increase in interest expense is primarily due to ceasing of interest capitalization in January 2002 because of the opening of the Gaylord Palms. Capitalized interest related to the Gaylord Palms hotel was $0.4 million during 2002 before its opening and was $16.4 million during 2001. The absence of capitalized interest related to Gaylord Palms was partially offset by an increase of $4.0 million of capitalized interest related to the Texas hotel. Interest expense related to the amortization of prepaid costs and interest of the secured forward exchange contract was $26.9 million during 2002 and 2001. Excluding capitalized interest from each period, interest expense decreased $4.4 million in 2002 due to the lower average borrowing levels and lower weighted average interest rates during 2002. The Company's weighted average interest rate on its borrowings, including the interest expense associated with the secured forward exchange contract, was 5.3% in 2002 as compared to 6.3% in 2001 as compared to 6.6% in 2000. As discussed previously, the Company is negotiating with potential additional financing sources regarding the Company's future financing arrangements. The Company's future borrowing levels are expected to be higher than the Company's historical borrowing levels which would increase the Company's interest expense. In addition, the interest rates on any additional borrowings may be higher than the current interest rates, which would also increase interest expense. INTEREST INCOME Interest income decreased $2.7 million, or 49.4%, to $2.8 million in 2002. The decrease in 2002 primarily relates to a decrease in average invested cash balances in 2002 as compared to 2001. GAIN (LOSS) ON VIACOM STOCK AND DERIVATIVES During 2000,the Company entered into aseven-year secured forward exchange contract with respect to 10.9 million shares of its Viacom stock investment. Effective January 1, 2001,sublease that reduced the liability the Companyadoptedwas originally required to pay, and theprovisions of SFAS No. 133, as amended. ComponentsCompany reversed $0.1 million of thesecured forward exchange contract are considered derivatives as defined by SFAS No. 133. In connection with the adoption of SFAS No. 133, the Company recorded a cumulative effect of an accounting change to record the derivatives associated with the secured forward exchange contract at fair value as of January 1, 2001, as discussed below. For the year ended December 31, 2002, the Company recorded net pretax gains of $86.5 million2000 restructuring charge related to theincreasereduction infair valuerequired payments. As of December 31, 2003, the Company has recorded cash payments of $9.3 million against the 2000 restructuring accrual related to continuing operations. The remaining balance of thederivatives associated with the secured forward exchange contract. For the 31year ended2000 restructuring accrual at December 31,2002,2003 of $0.2 million, from continuing operations, is included in accounts payable and accrued liabilities in the consolidated balance sheets, which the Companyrecorded net pretax lossesexpects to be paid by the end of$37.3 million related to2005.
5. Discontinued Operations As discussed in Note 1, the
decrease in fair value of the Viacom Stock. For the year ended December 31, 2001, the Company recorded net pretax gains of $54.3 million related to the increase in fair value of the derivatives associated with the secured forward exchange contract. Additionally, the Company recorded a nonrecurring pretax gain of $29.4 million on January 1, 2001, related to reclassifying its investment in Viacom stock from available-for-sale to trading as permitted by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". For the year ended December 31, 2001, the Company recorded net pretax losses of $28.6 million related to the decrease in fair value of the Viacom stock subsequent to January 1, 2001. OTHER GAINS AND LOSSES Other gains and losses decreased $1.5 million, or 56.3%, to $1.2 million in 2002. During 2001, the indemnification period ended related to the sale of KTVT and the Company recognized a $4.1 million gain. INCOME TAXES The Company's provision for income taxes was $1.8 million in 2002 compared to an income tax benefit of $8.3 million in 2001. DISCONTINUED OPERATIONS TheCompany has reflected the following businesses as discontinued operations, consistent with the provisions of SFAS No.144.144 and APB No. 30. The results of operations, net of taxes, (prior to their disposal, where applicable) and theestimated faircarrying value of the assets and liabilities of these businesses have been reflected in theCompany'saccompanying consolidated financial statements as discontinued operations in accordance with SFAS No. 144 for all periods presented.Acuff-Rose Music PublishingThese required revisions to the prior year financial statements did not impact cash flows from operating, investing or financing activities.
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). Subsequent to committing to a plan of disposal during the first quarter of 2003, the Company, through a wholly-owned subsidiary, entered into an agreement to sell the assets primarily used in the operations of the Radio Operations to Cumulus Broadcasting, Inc. (“Cumulus”) in exchange for approximately $62.5 million in cash. 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, for a fee, made available to Cumulus substantially all of the broadcast time on WSM-FM and WWTN(FM). In turn, Cumulus provided programming to be broadcast during such broadcast time and collected revenues from the advertising that it sold for broadcast during this programming time. On July 22, 2003, the Company finalized the sale of the Radio Operations for approximately $62.5 million, at which time, net proceeds of approximately $50 million were placed in an escrow account for completion of the Gaylord Texan. Concurrently, the Company also entered into a joint sales agreement with Cumulus for WSM-AM in exchange for $2.5 million in cash. The Company will continue to own and operate WSM-AM, and under the terms of the joint sales agreement with Cumulus, Cumulus will be responsible for all sales of commercial advertising on WSM-AM and provide certain sales promotion, billing and collection services relating to WSM-AM, all for a specified commission. 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. The Company recognized a pretax gain of $130.6 million during the third quarter of 2002 related to the sale,
in discontinued operations. The gain on the sale of Acuff-Rose Music Publishingwhich is recorded in the income from discontinued operations in the consolidated statement of operations. Proceeds of$25.0F-21
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$25.0 million were used to reduce the
Company'sCompany’s outstandingindebtedness. OKC Redhawksindebtedness as further discussed in Note 12.
Oklahoma RedHawks During 2002, the Company committed to a plan of disposal of its approximately 78% ownership
interestsinterest in theRedhawks,Oklahoma RedHawks, a minor league baseball team based in Oklahoma City, Oklahoma.Word EntertainmentDuring the fourth quarter of 2003, the Company sold its interests in the RedHawks and received cash proceeds of approximately $6.0 million. The Company recognized a loss of $0.6 million, net of taxes, related to the sale in discontinued operations in the accompanying consolidated statement of operations.
Word Entertainment During 2001, the Company committed to a plan to sell Word Entertainment. As a result of the decision to sell Word Entertainment, the Company reduced the carrying value of Word Entertainment to its estimated fair value by recognizing a pretax charge of $30.4 million in discontinued operations during 2001. The estimated fair value of Word
Entertainment'sEntertainment’s net assets was determined based upon ongoing negotiations with potential buyers. Related to the decision to sell Word Entertainment, a pretax restructuring charge of $1.5 million was recorded in discontinued operations in 2001. The restructuring charge consisted of $0.9 million related to lease termination costs and $0.6 million related to severance costs. In addition, the Company recorded a reversal of $0.1 million of restructuring charges originally recorded during 2000. During the first quarter of 2002, the Company sold WordEntertainment'sEntertainment’s domestic operations to an affiliate of Warner Music Group for $84.1 million incash, subject to future purchase price adjustments.cash. The Company recognized a pretax gain of $0.5 million in discontinued operations during the first quarter of 2002 related to the sale of Word Entertainment. Proceeds from the sale of $80.0 million were used to reduce theCompany'sCompany’s outstandingindebtedness. International Cable Networks 32indebtedness as further discussed in Note 12. During the third quarter of 2003, due to the expiration of certain indemnification periods as specified in the sales contract, a previously established indemnification reserve of $1.5 million was reversed and is included in the consolidated statement of operations.
International Cable Networks During the second quarter of 2001, the Company adopted a formal plan to dispose of its international cable networks. As part of this plan, the Company hired investment bankers to facilitate the disposition process, and formal communications with potentially interested parties began in July 2001. In an attempt to simplify the disposition process, in July 2001, the Company acquired an additional 25% ownership interest in its music networks in Argentina, increasing its ownership interest from 50% to 75%. In August 2001, the partnerships in Argentina finalized a pending transaction in which a third party acquired a 10% ownership interest in the companies in exchange for satellite, distribution and sales services, bringing the
Company'sCompany’s interest to 67.5%.In December 2001, the Company made the decision to cease funding of its cable networks in Asia and Brazil as well as its partnerships in Argentina if a sale had not been completed by February 28, 2002. At that time the Company recorded pretax restructuring charges of $1.9 million consisting of $1.0 million of severance and $0.9 million of contract termination costs related to the networks. Also during 2001, the Company negotiated reductions in the contract termination costs with several vendors that resulted in a reversal of $0.3 million of restructuring charges originally recorded during 2000. Based on the status of the
Company'sCompany’s efforts to sell its international cable networks at the end of 2001, the Company recorded pretax impairment and other charges of $23.3 million during 2001. Included in this charge are the impairment of an investment in the two Argentina-based music channels totaling $10.9 million, the impairment of fixed assets, including capital leases associated with certain transponders leased by the Company, of $6.9 million,F-22
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the impairment of a receivable of $3.0 million from the Argentina-based channels, current assets of $1.5 million, and intangible assets of $1.0 million.
During the first quarter of 2002, the Company finalized a transaction to sell certain assets of its Asia and Brazil networks, including the assignment of certain transponder leases. Also during the first quarter of 2002, the Company ceased operations based in Argentina. The transponder lease assignment
requiresrequired the Company to guarantee lease payments in 2002 from the acquirer of these networks. As such, the Company recorded a lease liability for the amount of theassignee'sassignee’s portion of the transponder lease.Businesses Sold to OPUBCO
Businesses Sold to OPUBCO During 2001, the Company sold five businesses (Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production Company) to affiliates of OPUBCO for $22.0 million in cash and the assumption of debt of $19.3 million. The Company recognized a pretax loss of $1.7 million related to the sale in discontinued operations in the accompanying consolidated statement of operations. OPUBCO owns a minority interest in the Company.
Three of the Company's directors are also directors of OPUBCO and voting trustees of a voting trust that controls OPUBCO. Additionally, those three directors collectively own a significant ownership interest in the Company. 33The following table reflects the results of operations of businesses accounted for as discontinued operations for the years ended December 31:
(in thousands) 2002 2001 --------- ---------REVENUES: Acuff-Rose Music Publishing $ 7,654 $ 14,764 Redhawks 6,289 6,122 Word Entertainment 2,594 115,677 International cable networks 744 5,025 Businesses sold to OPUBCO - 2,195 Other - 609 --------- --------- Total revenues $ 17,281 $ 144,392 ========= ========= OPERATING INCOME (LOSS): Acuff-Rose Music Publishing $ 933 $ 2,119 Redhawks 841 363 Word Entertainment (917) (5,710) International cable networks (1,576) (6,375) Businesses sold to OPUBCO - (1,816) Other - (383) Impairment and other charges - (53,716) Restructuring charges - (2,959) --------- --------- Total operating loss (719) (68,477) INTEREST EXPENSE (81) (797) INTEREST INCOME 81 199 OTHER GAINS AND LOSSES 135,442 (4,131) --------- --------- Income (loss) before provision (benefit) for income taxes 134,723 (73,206) PROVISION (BENEFIT) FOR INCOME TAXES 49,763 (23,018) --------- --------- Net income (loss) from discontinued operations $ 84,960 $ (50,188) ========= =========34The assets and liabilities of the discontinued operations presented in the accompanying consolidated balance sheets are comprised of:
(in thousands) 2002 2001 -------- --------CURRENT ASSETS: Cash and cash equivalents $ 1,812 $ 3,889 Trade receivables, less allowance of $2,785 and $5,003, respectively 456 28,999 Inventories 163 6,486 Prepaid expenses 97 10,333 Other current assets - 823 -------- -------- Total current assets 2,528 50,530 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 3,242 17,342 GOODWILL 1,162 28,688 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION 3,942 6,125 MUSIC AND FILM CATALOGS - 26,274 OTHER LONG-TERM ASSETS 673 5,587 -------- -------- Total long-term assets 9,019 84,016 -------- -------- Total assets $ 11,547 $134,546 -------- -------- CURRENT LIABILITIES: Current portion of long-term debt $ 94 $ 5,515 Accounts payable and accrued liabilities 6,284 25,495 -------- -------- Total current liabilities 6,378 31,010 -------- -------- LONG-TERM DEBT, NET OF CURRENT PORTION - - OTHER LONG-TERM LIABILITIES 781 836 -------- -------- Total long-term liabilities 781 836 -------- -------- Total liabilities 7,159 31,846 MINORITY INTEREST OF DISCONTINUED OPERATIONS 1,885 1,679 -------- -------- TOTAL LIABILITIES AND MINORITY INTEREST OF DISCONTINUED OPERATIONS $ 9,044 $ 33,525 ======== ========CUMULATIVE EFFECT OF ACCOUNTING CHANGE During the second quarter of 2002, the Company completed its goodwill impairment test as required by SFAS No. 142. In accordance with the provisions of SFAS No. 142, the Company has reflected the pretax $4.2 million impairment charge as a cumulative effect of a change in accounting principle in the amount of $2.6 million, net of tax benefit of $1.6 million, as of January 1, 2002 in the consolidated statements of operations. On January 1, 2001, the Company recorded a gain of $11.9 million, net of taxes of $7.1 million, as a cumulative effect of an accounting change to record the derivatives associated with the secured forward exchange contract on its Viacom stock at fair value as of January 1, 2001, in accordance with the provisions of SFAS No. 133. 35YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUES Total revenues decreased $11.2 million, or 3.6%, to $304.3 million in 2001. Excluding the revenues of businesses divested in 2000, including the Orlando-area Wildhorse Saloon, KOA Campground, Gaylord Digital and country music record label development (collectively, the "2000 Divested Businesses") from 2000, total revenues decreased $1.9 million, or 0.6% in 2001. Revenues in the hospitality segment decreased $8.5 million, or 3.6%, to $228.7 million in 2001. Revenues of the Gaylord Opryland decreased $7.9 million to $222.0 million in 2001. Gaylord Opryland's occupancy rate decreased to 70.3% in 2001 compared to 75.9% in 2000. Revenue per available room (RevPAR) for the Gaylord Opryland decreased 7.1% to $98.65 for 2001 compared to $106.22 for 2000. This decrease was primarily attributable to the impact of a softer economy and decreased occupancy levels in the weeks following the September 11 terrorist attacks. The collection of a $2.2 million cancellation fee in 2000 also adversely affects comparisons with the prior year period. Gaylord Opryland's average daily rate increased to $140.33 in 2001 from $140.03 in 2000. Revenues in the attractions segment increased $2.6 million, or 4.2%, to $65.9 million in 2001. Excluding the revenues of the Orlando-area Wildhorse Saloon and the KOA Campground from 2000, revenues in the attractions segment increased $8.0 million, or 13.8% due to increased revenues of $10.1 million at Corporate Magic, a company specializing in the production of creative events in the corporate entertainment marketplace that was acquired in March 2000. Revenues of the Grand Ole Opry increased $1.4 million, to $13.4 million in 2001. These increases in revenues were partially offset by decreased revenues of the General Jackson, which decreased $1.5 million in 2001 as a result of an attendance decline of 16.3% partially offset by an increase in per capita spending of 16.3%. Revenues in the media segment decreased $5.5 million, or 37.0%, to $9.4 million in 2001. Excluding the revenues of Gaylord Digital from 2000, revenues in the media segment decreased $1.6 million, or 14.4%. Revenues of the Company's radio stations decreased $1.2 million during 2001 as a result of a weak advertising market and significant competition within the Nashville-area radio broadcasting market. Revenues in the corporate and other segment increased $0.2 million to $0.3 million in 2001. OPERATING EXPENSES Total operating expenses decreased $98.0 million, or 22.1%, to $345.3 million in 2001. Excluding impairment and other charges and restructuring charges, total operating expenses decreased $25.8 million, or 7.3%, to $328.9 million in 2001. Operating costs, as a percentage of revenues, decreased slightly to 67.5% during 2001 as compared to 67.7% during 2000. Selling, general and administrative expenses, as a percentage of revenues, decreased to 22.7% during 2001 as compared to 28.8% in 2000. Operating costs decreased $8.3 million, or 3.9%, to $205.4 million in 2001. Excluding the operating costs of the 2000 Divested Businesses from 2000, operating costs increased $9.3 million, or 4.7% in 2001. Operating costs in the hospitality segment increased $1.5 million, or 1.1%, to $139.9 million in 2001 primarily as a result of increased operating costs at Gaylord Opryland of $1.7 million. During 2000, the Company recorded certain unusual operating costs associated primarily with the settlement of tax and utility contingencies related to prior years totaling $5.0 million in the hospitality segment, $4.5 million of which was related to Gaylord Opryland. Excluding these nonrecurring costs, operating costs at Gaylord Opryland increased $6.7 million, or 5.2% due primarily to costs associated with various new shows and exhibits at the hotel in 2001. Operating costs in the attractions segment increased $1.0 million, or 2.1%, to $49.8 million in 2001. Excluding the operating costs of the Orlando-area Wildhorse Saloon and the KOA Campground from 2000, operating costs in the attractions segment increased $6.7 million, or 15.4%, in 2001. The operating costs of Corporate Magic increased 36$9.8 million in 2001 as compared to 2000 subsequent to its acquisition in March 2000 due to the fact that a large share of its annual business occurs in the first quarter of each year. This increase was partially offset by a decrease in operating costs of the Acuff Theater, a venue for concerts and theatrical performances, which had reduced operating costs in 2001 as compared to 2000 of $1.2 million due to decreased utilization of this venue. Operating costs in the media segment declined $11.8 million, or 70.0%, to $5.0 million in 2001. The decline in costs is almost entirely attributable to operating costs of Gaylord Digital and country music record label development costs in 2000. Excluding these costs, operating costs in the media segment increased slightly by $0.1 million, or 4.1% in 2001. The operating costs in the corporate and other segment increased $0.9 million in 2001 as compared to 2000 due to increased overhead and administrative costs related to the management of the Company's hotels. Selling, general and administrative expenses decreased $21.9 million, or 24.1%, to $68.9 million in 2001. Excluding the selling, general and administrative expenses of the 2000 Divested Businesses from 2000, selling, general and administrative expenses decreased $3.0 million, or 4.2%, in 2001. Selling, general and administrative expenses in the hospitality segment remained constant at $29.0 million for 2001 and 2000. Selling, general and administrative expenses at the Gaylord Opryland increased $0.1 million, to $27.6 million in 2001. Selling and promotion expense at the Gaylord Opryland increased $1.9 million due to increased advertising offset by lower general and administrative costs at the Gaylord Opryland of $1.8 million due to cost controls. Selling, general and administrative expenses in the attractions segment decreased $3.4 million, or 21.2%, to $12.7 million in 2001. Excluding the selling, general and administrative expenses of the Orlando-area Wildhorse Saloon and the KOA Campground from 2000, selling, general and administrative expenses in the attractions segment decreased $3.0 million, or 19.0%, in 2001. The decrease in 2001 is primarily attributable to nonrecurring bad debt expense recognized in 2000 of $2.4 million related to the Company's live entertainment business. In addition, the selling, general and administrative expenses of the Ryman Auditorium decreased $1.2 million in 2001 as compared to 2000 due to reductions in marketing expenses, fewer shows being produced in 2001 compared to 2000 and a shift to more co-produced shows in 2001 compared to 2000. Selling, general and administrative expenses in the media segment decreased $19.4 million, or 82.4%, to $4.2 million in 2001. The decline in costs is almost entirely attributable to operating costs of Gaylord Digital and country music record label development costs in 2000. Excluding these costs of Gaylord Digital and country music record label development costs, selling, general and administrative expenses in the media segment decreased by $1.0 million, or 19.6% in 2001. This decrease is attributable to cost saving measures instituted by the 2000 Strategic Assessment. Corporate selling, general and administrative expenses, consisting primarily of senior management salaries and benefits, legal, human resources, accounting, and other administrative costs increased $0.9 million, or 4.3%, to $23.1 million in 2002. The increase is primarily related to attracting new key management personnel needed as a result of the 2000 Strategic Assessment. Preopening costs increased $10.6 million to $15.9 million in 2001 related to the Company's hotel development activities in Florida and Texas. In accordance with AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities", the Company expenses the costs associated with start-up activities and organization costs as incurred. 37IMPAIRMENT AND OTHER CHARGES The Company recognized pretax impairment and other charges as a result of the 2001 and 2000 Strategic Assessments. The components of these charges for the years ended December 31 are as follows:
(in thousands) 2001 2000 ----------- -----------Programming, film and other content $ 6,858 $ 7,410 Gaylord Digital and other technology investments 4,576 48,127 Property and equipment 2,828 3,397 Orlando-area Wildhorse Saloon - 15,854 Other - 924 ----------- ----------- Total impairment and other charges $ 14,262 $ 75,712 =========== ===========Additional impairment and other charges of $28.9 million during 2000 are included in discontinued operations. 2001 Impairment and Other Charges The Company began production of an IMAX movie during 2000 to portray the history of country music. As a result of the 2001 Strategic Assessment, the carrying value of the IMAX film asset was reevaluated on the basis of its estimated future cash flows resulting in an impairment charge of $6.9 million. At December 31, 2000, the Company held a minority investment in a technology start-up business. During 2001, the unfavorable environment for technology businesses created difficulty for this business to obtain adequate capital to execute its business plan and, subsequently, the Company was notified that this technology business had been unsuccessful in arranging financing, resulting in an impairment charge of $4.6 million. The Company also recorded an impairment charge related to idle real estate of $2.0 million during 2001 based upon an assessment of the value of the property. The Company sold this idle real estate during the second quarter of 2002. Proceeds from the sale approximated the carrying value of the property. In addition, the Company recorded an impairment charge for other idle property and equipment totaling $0.8 million during 2001 primarily due to the consolidation of offices resulting from personnel reductions. 2000 Impairment and Other Charges The Company's 2000 Strategic Assessment of its programming, film and other content assets resulted in pretax impairment and other charges of $7.4 million based upon the projected cash flows for these assets. This charge included investments of $5.1 million, other receivables of $2.1 million and music and film catalogs of $0.2 million. The Company closed Gaylord Digital, its Internet-related business in 2000. During 1999 and 2000, Gaylord Digital was unable to produce the operating results initially anticipated and required an extensive amount of capital to fund its operating losses, investments and technology infrastructure. As a result of the closing, the Company recorded a pretax charge of $48.1 million in 2000 to reduce the carrying value of Gaylord Digital's assets to their fair value based upon estimated selling prices. The Gaylord Digital charge included the write-down of intangible assets of $25.8 million, property and equipment (including software) of $14.8 million, investments of $7.0 million and other assets of $0.6 million. The operating results of Gaylord Digital are included in continuing operations. Excluding the effect of the impairment and other charges, Gaylord Digital had revenues of $3.9 million and operating losses of $27.5 million for the year ended December 31, 2000. During the course of conducting the 2000 Strategic Assessment, other property and equipment of the Company were reviewed to determine whether the change in the Company's strategic direction resulted in additional impaired assets. This review indicated that certain property and equipment would not be recovered by projected cash flows. The Company recorded pretax impairment and other charges related to its property and equipment of $3.4 million. These charges included property and equipment write-downs in the hospitality segment of $1.4 million, in the attractions segment of $0.3 million, in the media segment of $0.2 million, and in the corporate and other segment of $1.5 million. During November 2000, the Company ceased the operations of the Orlando-area Wildhorse Saloon. Walt Disney World(R) Resort paid the Company approximately $1.8 million for the net assets of the Orlando-area Wildhorse Saloon and released the Company from its operating lease for the Wildhorse Saloon location. As a result of this divestiture, 38the Company recorded pretax charges of $15.9 million to reflect the impairment and other charges related to the divestiture. The Orlando-area Wildhorse Saloon charges included the write-off of equipment of $9.4 million, intangible assets of $8.1 million and other working capital items of $0.1 million offset by the $1.8 million of proceeds received from Disney. The operating results of the Orlando-area Wildhorse Saloon are included in continuing operations. Excluding the effect of the impairment and other charges, the Orlando-area Wildhorse Saloon had revenues of $4.4 million and operating losses of $1.6 million for the year ended December 31, 2000. RESTRUCTURING CHARGES During 2001, the Company recognized pretax restructuring charges from continuing operations of $5.8 million related to streamlining operations and reducing layers of management. The Company recognized additional pretax restructuring charges from discontinued operations of $3.0 million in 2001. These restructuring charges were recorded in accordance with EITF No. 94-3. The restructuring costs from continuing operations consisted of $4.7 million related to severance and other employee benefits and $1.1 million related to contract termination costs, offset by the reversal of restructuring charges recorded in 2000 of $3.7 million primarily related to negotiated reductions in certain contract termination costs. The restructuring costs from discontinued operations consist of $1.6 million related to severance and other employee benefits and $1.8 million related to contract termination costs offset by the reversal of restructuring charges recorded in 2000 of $0.4 million. The 2001 restructuring charges primarily resulted from the Company's strategic decisions to exit certain businesses and reduce corporate overhead and administrative costs. The 2001 restructuring plan resulted in the termination or notification of pending termination of approximately 150 employees. As of December 31, 2002, the Company has recorded cash payments of $4.4 million against the 2001 restructuring accrual, all of which relate to continuing operations. The remaining balance of the 2001 restructuring accrual related to continuing operations at December 31, 2002 of $0.5 million is included in accounts payable and accrued liabilities in the consolidated balance sheets. The Company expects the remaining balances of the restructuring accruals for both continuing and discontinued operations to be paid in 2003. 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 No. 94-3. Additional restructuring charges of $3.2 million during 2000 were included in discontinued operations. Restructuring charges related to continuing operations consist of contract termination costs of $8.0 million to exit specific activities and employee severance and related costs of $5.4 million offset by the reversal of the remaining restructuring accrual from the restructuring charges recorded in 1999 of $0.2 million. The 2000 restructuring charges relate to the Company's strategic decisions to exit certain lines of business, primarily businesses included in the Company's former music, media and entertainment segment, and to implement its 2000 strategic plan. As part of the Company's 2000 restructuring plan, approximately 375 employees were terminated or were informed of their pending termination. 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 December 31, 2002, the Company has recorded cash payments of $9.3 million against the 2000 restructuring accrual related to continuing operations. The remaining balance of the 2000 restructuring accrual at December 31, 2002 of $0.3 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. DEPRECIATION EXPENSE Depreciation expense decreased $0.6 million, or 1.8%, to $34.9 million in 2001. Excluding the depreciation of the 2000 Divested Businesses from 2000, depreciation expense increased $0.8 million, or 2.3%, in 2001. The increase is primarily attributable to increased depreciation expense at Gaylord Opryland of $0.9 million related to capital expenditures. AMORTIZATION EXPENSE 39Amortization expense decreased $5.6 million in 2001 primarily due to the divestiture of Gaylord Digital. Amortization expense of Gaylord Digital was zero and $6.1 million during 2001 and 2000, respectively. Amortization of software increased $0.6 million during 2001 primarily at Gaylord Opryland and the corporate and other segment. OPERATING INCOME (LOSS) Total operating loss decreased $86.8 million to an operating loss of $41.0 million during 2001. Excluding the operating losses of the 2000 Divested Businesses from 2000, as well as impairment and other charges and restructuring charges from both periods, total operating loss increased $20.6 million to an operating loss of $24.6 million in 2001. Hospitality segment operating income decreased $11.2 million to $34.3 million in 2001 as a result of decreased operating income of Gaylord Opryland. Excluding the operating losses of the Orlando-area Wildhorse Saloon and the KOA Campground from 2000, the operating loss of the attractions segment decreased $4.0 million to an operating loss of $2.4 million in 2001 primarily as a result of decreased operating losses of the Acuff Theater, Corporate Magic and the Ryman Auditorium. Media segment operating loss was $0.5 million in 2001 compared to an operating loss of $33.2 million in 2000. Excluding the operating losses of Gaylord Digital and country music record label development costs from 2000, the operating income of the media segment decreased $0.8 million in 2001 primarily as a result of increased operating losses at the Company's radio stations. The operating loss of the corporate and other segment increased $1.9 million to an operating loss of $40.1 million in 2001. INTEREST EXPENSE Interest expense increased $9.0 million to $39.4 million in 2001, net of capitalized interest of $18.8 million, including $16.4 million of capitalized interest related to Gaylord Palms. The Company no longer capitalized interest on Gaylord Palms subsequent to its opening date in January 2002. The increase in 2001 interest expense is primarily attributable to higher average borrowing levels including construction-related financing related to Gaylord Palms and the new Gaylord hotel in Grapevine, Texas, the secured forward exchange contract entered into in May 2000 and the amortization of deferred costs related to these financing activities. The Company's weighted average interest rate on its borrowings, including the interest expense associated with the secured forward exchange contract, was 6.3% in 2001 as compared to 6.6% in 2000. INTEREST INCOME Interest income increased $1.5 million to $5.6 million in 2001. The increase in 2001 primarily relates to an increase in interest income from invested cash balances. GAIN (LOSS) ON VIACOM STOCK AND DERIVATIVES The Company adopted the provisions of SFAS No. 133 on January 1, 2001. In connection with the adoption of SFAS No. 133, as amended, the Company recorded a gain of $11.9 million, net of taxes of $6.4 million, as a cumulative effect of an accounting change to record the derivatives associated with the secured forward exchange contract at fair value effective January 1, 2001. For the year ended December 31, 2001, the Company recorded net pretax gains of $54.3 million related to the increase in fair value of the derivatives associated with the secured forward exchange contract. Additionally, the Company recorded a nonrecurring pretax gain of $29.4 million on January 1, 2001, related to reclassifying its investment in Viacom stock from available-for-sale to trading as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". For the year ended December 31, 2001, the Company recorded net pretax losses of $28.6 million related to the decrease in fair value of the Viacom stock subsequent to January 1, 2001. OTHER GAINS AND LOSSES 40During 2001, the indemnification period related to the Company's 1999 disposition of television station KTVT in Dallas-Fort Worth ended, resulting in the recognition of a pretax gain of $4.6 million related to the reversal of previously recorded contingent liabilities. During 2001 and 2000, the Company recorded its share of equity losses of $3.9 million and $2.0 million, respectively, in the Nashville Predators. During 2000, the Company sold its KOA Campground located near Gaylord Opryland for $2.0 million in cash. The Company recognized a pretax loss on the sale of $3.2 million. INCOME TAXES The Company's benefit for income taxes was $8.3 million in 2001 compared to an income tax benefit of $51.1 million in 2000. DISCONTINUED OPERATIONS The Company has reflected the following businesses as discontinued operations, consistent with the provisions of SFAS No. 144. The results of operations, net of taxes, (prior to their disposal where applicable) and the estimated fair value of the assets and liabilities of these businesses have been reflected in the Company's consolidated financial statements as discontinued operations in accordance with SFAS No. 144 for all periods presented. Acuff-Rose Music Publishing During the second quarter of 2002, the Company committed to a plan of disposal of its Acuff-Rose Music Publishing entity. OKC Redhawks During 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 During 2001, the Company committed to a plan to sell Word Entertainment. As a result of the decision to sell Word Entertainment, the Company reduced the carrying value of Word Entertainment to its estimated fair value by recognizing a pretax charge of $30.4 million in discontinued operations during 2001. The estimated fair value of Word Entertainment's net assets was determined based upon ongoing negotiations with potential buyers. Related to the decision to sell Word Entertainment, a pretax restructuring charge of $1.5 million was recorded in discontinued operations in 2001. The restructuring charge consisted of $0.9 million related to lease termination costs and $0.6 million related to severance costs. In addition, the Company recorded a reversal of $0.1 million of restructuring charges originally recorded during 2000. During the first quarter of 2002, the Company sold Word Entertainment's domestic operations to an affiliate of Warner Music Group for $84.1 million in cash, subject to future purchase price adjustments. International Cable Networks During the second quarter of 2001, the Company adopted a formal plan to dispose of its international cable networks. As part of this plan, the Company hired investment bankers to facilitate the disposition process, and formal communications with potentially interested parties began in July 2001. In an attempt to simplify the disposition process, in July 2001, the Company acquired an additional 25% ownership interest in its music networks in Argentina, increasing its ownership interest from 50% to 75%. In August 2001, the partnerships in Argentina finalized a pending transaction in which a third party acquired a 10% ownership interest in the companies in exchange for satellite, distribution and sales services, bringing the Company's interest to 67.5%. In December 2001, the Company made the decision to cease funding of its cable networks in Asia and Brazil as well as its partnerships in Argentina if a sale had not been completed by February 28, 2002. At that time the Company recorded pretax restructuring charges of $1.9 million consisting of $1.0 million of severance and $0.9 million of contract termination costs related to the networks. Also during 2001, the Company negotiated reductions in the 41contract termination costs with several vendors that resulted in a reversal of $0.3 million of restructuring charges originally recorded during 2000. Based on the status of the Company's efforts to sell its international cable networks at the end of 2001, the Company recorded pretax impairment and other charges of $23.3 million during 2001. Included in this charge are the impairment of an investment in the two Argentina-based music channels totaling $10.9 million, the impairment of fixed assets, including capital leases associated with certain transponders leased by the Company, of $6.9 million, the impairment of a receivable of $3.0 million from the Argentina-based channels, current assets of $1.5 million, and intangible assets of $1.0 million. Businesses Sold to OPUBCO During 2001, the Company sold five businesses (Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production Company) to affiliates of OPUBCO for $22.0 million in cash and the assumption of debt of $19.3 million. The Company recognized a pretax loss of $1.7 million related to the sale in discontinued operations in the accompanying consolidated statement of operations. OPUBCO owns a minority interest in the Company. Three of the Company's directors are also directors of OPUBCO and voting trustees of a voting trust that controls OPUBCO. Additionally, those three directors collectively own a significant ownership interest in the Company. The following table reflects the results of operations of businesses accounted for as discontinued operations for the years ended December 31:
(in thousands) 2001 2000 --------- ---------REVENUES: Acuff-Rose Music Publishing $ 14,764 $ 14,100 Redhawks 6,122 5,890 Word Entertainment 115,677 130,706 International cable networks 5,025 6,606 Businesses sold to OPUBCO 2,195 39,706 Other 609 1,900 --------- --------- Total revenues $ 144,392 $ 198,908 ========= ========= OPERATING INCOME (LOSS): Acuff-Rose Music Publishing $ 2,119 $ 1,688 Redhawks 363 169 Word Entertainment (5,710) (15,241) International cable networks (6,375) (9,655) Businesses sold to OPUBCO (1,816) (8,240) Other (383) (144) Impairment and other charges (53,716) (29,826) Restructuring charges (2,959) (3,241) --------- --------- Total operating loss (68,477) (64,490) INTEREST EXPENSE (797) (1,310) INTEREST INCOME 199 683 OTHER GAINS AND LOSSES (4,131) (4,419) --------- --------- Income (loss) before benefit for income taxes (73,206) (69,536) PROVISION (BENEFIT) FOR INCOME TAXES (23,018) (19,991) --------- --------- Net income (loss) from discontinued operations $ (50,188) $ (49,545) ========= =========42On January 1, 2001, the Company recorded a gain of $11.9 million, net of taxes of $7.1 million, as a cumulative effect of an accounting change to record the derivatives associated with the secured forward exchange contract on its Viacom stock at fair value as of January 1, 2001, in accordance with the provisions of SFAS No. 133. 43LIQUIDITY AND CAPITAL RESOURCES The Company relies upon several different sources of capital to fund its operations and capital commitments, including the operating cash flow of its hospitality and attractions companies, its unrestricted cash balance of $98.6 million as of December 31, 2002 and the proceeds from the sale of non-core assets. FUTURE FINANCING 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 December 31, 2002, the Company had $98.6 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. In February 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, to complete the construction of the Texas hotel and fund any operating losses in 2003. Management currently anticipates securing the long-term financing under the existing commitment from the Lenders and expects to close the financing in the second quarter of 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. 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 corporate 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. 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 and, accordingly, this amount was classified as due within one year at December 31, 2001. As required by the Term Loan, the Company used $15.9 million of the net cash proceeds, as defined under the Term Loan agreement, received from the sale of the Opry Mills investment 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 sale of Acuff-Rose Music Publishing to reduce the outstanding balance of the Term Loan. Also during 2002, the Company made a principal payment of approximately $4.1 million under the Term Loan. Net borrowings under the Term Loan for 2002 and 2001 were $85.0 million and $100.0 million, respectively. As of December 31, 2002 and 2001, the Company had outstanding borrowings of $60.0 million and $100.0 million, respectively, under the Term Loan and was required to escrow certain amounts in a 44completion reserve account 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 they waived this event of non-compliance as of December 31, 2002 and also removed the requirement to maintain such instruments for the remainder of the term of the loan. The maximum amount available under the Term Loan reduces to $50.0 million in April 2004, with full repayment due in October 2004. Debt repayments under the Term Loan reduce its borrowing capacity and are not eligible to be re-borrowed. The Term Loan requires the Company to maintain certain escrowed cash balances, comply with certain financial covenants, and imposes limitations related to the payment of dividends, the incurrence of debt, the guaranty of liens, and the sale of assets, as well as other customary covenants and restrictions. At December 31, 2002 and 2001, the unamortized balance of the deferred financing costs related to the Term Loan was $2.4 million and $5.6 million, respectively. The weighted average interest rate, including amortization of deferred financing costs, under the Term Loan for 2002 and 2001 was 9.6% and 8.3%, respectively. The weighted average interest rate of 9.6% for 2002 includes 4.5% related to commitment fees and the amortization of deferred financing costs. SENIOR AND MEZZANINE LOANS 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 Nashville Hotel Loans require monthly principal payments of $667,000 during their three-year terms in addition to monthly interest payments. The terms of the Senior Loan and the Mezzanine Loan required the purchase of 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 7.50%. The Company used $235.0 million of the proceeds from the Nashville Hotel Loans to refinance a $250.0 million interim loan that was scheduled to mature in April 2001. 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 December 31, 2002 and 2001, the unamortized balance of the deferred financing costs related to the Nashville Hotel Loans was $7.3 million and $13.8 million, respectively. The weighted average interest rates for the Senior Loan for 2002 and 2001, including amortization of deferred financing costs, were 4.5% and 6.2%, respectively. The weighted average interest rates for the Mezzanine Loan for 2002 and 2001, including amortization of deferred financing costs, were 10.5% and 12.0%, 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 are in effect which require that all excess cash flows, as defined, be escrowed and may be used to repay principal amounts owed on the Senior Loan. During 2002, $47.8 million of restricted cash was utilized to repay principal amounts outstanding under the Senior Loan. 45The Company negotiated certain revisions to the financial covenants under the Nashville Hotel Loans and the Term Loan during the first and second quarters of 2002. After these revisions, the Company was in compliance with the covenants under the Nashville Hotel Loans and the covenants under the Term Loan with which the failure to comply would result in an event of default. There can be no assurance that the Company will remain in compliance with the covenants that would result in an event of default under the Nashville Hotel Loans or the Term Loan. The Company believes it has certain other possible alternatives to reduce borrowings outstanding under the Nashville Hotel Loans, including application of unrestricted cash on hand, 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. During the second quarter of 2002, like other companies in the hospitality industry, the Company was notified by the insurers providing its property and casualty insurance that policies issued upon renewal would no longer include coverage for terrorist acts. As a result, the servicer for the Senior Loan notified the Company in May of 2002 that it believed the lack of insurance covering terrorist acts and certain related matters did constitute a default under that credit facility. Although coverage for terrorist acts was never specifically required as part of the required property and casualty coverage, the Company determined to resolve this issue by obtaining coverage for terrorist acts. The Company has obtained coverage in an amount equal to the outstanding balance of the Senior Loan. During the third quarter of 2002, the Company received notice from the servicer that any previous existing defaults were cured and coverage in an amount equal to the outstanding balance of the loan satisfied the requirements of the Senior Loan. The servicer has reserved the right to impose additional insurance requirements if there is a change in, among other things, the availability or cost of terrorism insurance coverage, the risk of terrorist activity, or legislation affecting the rights of lenders to require borrowers to maintain terrorism insurance. CASH FLOW FROM OPERATING ACTIVITIES Cash flow from operating activities is the principal source of cash used to fund the Company's operating expenses, interest payments on debt, and maintenance capital expenditures. During 2002, the Company's net cash flows provided by operating activities were $88.9 million, reflecting primarily the Company's income from continuing operations; depreciation and amortization; and the provision for deferred income taxes. CASH FLOW FROM INVESTING ACTIVITIES During 2002, the Company's primary uses of funds and investing activities included the purchases of property and equipment for the Gaylord Palms and Gaylord Opryland Texas which totaled $175.6 million. The Company received proceeds from the sale of assets and the sale of discontinued operations totaling approximately $263.4 million. CASH FLOW FROM FINANCING ACTIVITIES The Company's cash flows from financing activities reflect primarily the issuance of debt and the repayment of long-term debt. During 2002, the Company's net cash flows used in financing activities were approximately $83.6 million, reflecting the issuance of $85.0 million in debt and the repayment of $214.8 million in debt. The Company also experienced a decrease in restricted cash and cash equivalents of $45.7 million which was used to repay debt. CAPITAL REQUIREMENTS The Company currently projects capital expenditures for 2003 of approximately $230.0 million, which includes continuing construction at the new Gaylord hotel in Grapevine, Texas of $204.0 million and approximately $12.0 million related to improvements to Gaylord Opryland. The Company has obtained a commitment for a new credit facility to fund these expenditures. If the Company does not obtain this financing, or a suitable alternative, capital expenditures will need to be reduced to continue to fund ongoing operations. COMMITMENTS Future minimum cash lease commitments under all noncancelable operating leases in effect for continuing operations 46at December 31, 2002 are as follows: 2003 - $6.2 million, 2004 - $5.7 million, 2005 - $4.7 million, 2006 - $3.4 million, 2007 - $3.5 million, and 2008 and thereafter - $683.2 million. The Company entered into a 75-year operating lease agreement during 1999 for 65.3 acres of land located in Osceola County, Florida for the development of Gaylord Palms. The lease required annual lease payments of approximately $0.9 million until the completion of construction in 2002, at which point the annual lease payments increased to approximately $3.2 million. The lease agreement provides for a 3% escalation of base rent each year beginning five years after the opening of Gaylord Palms. During 2001 and 2002, the Company entered into certain agreements related to the construction of the new Gaylord hotel in Grapevine, Texas. At December 31, 2002, the Company has paid approximately $201.1 million related to these agreements, which is included as construction in progress in property and equipment in the Company's consolidated balance sheets. During 1999, the Company entered into a 20-year naming rights agreement related to the Nashville Arena with the Nashville Predators. The Nashville Arena has been renamed the Gaylord Entertainment Center as a result of the agreement. The contractual commitment required the Company to pay $2.1 million during the first year of the contract, with a 5% escalation each year for the remaining term of the agreement, and to purchase a minimum number of tickets to Predators games each year. The following table summarizes our significant contractual obligations as of December 31, 2002, including long-term debt and operating and capital lease commitments:
(in thousands) Total amounts Less than 1-2 3-4 After 4 Contractual obligations committed 1 year years years years - ----------------------- --------- ------ ----- ----- -----Long-term debt $ 339,185 $ 8,004 $ 331,181 $ - $ - Capital leases 1,453 522 844 87 - Construction commitments 275,000 204,000 71,000 - - Arena naming rights 61,323 2,373 5,108 5,632 48,210 Operating leases 706,794 6,242 10,410 6,940 683,202 Other 5,525 325 650 650 3,900 ---------- ---------- ---------- ---------- ---------- Total contractual obligations $1,389,280 $ 221,466 $ 419,193 $ 13,309 $ 735,312 ========== ========== ========== ========== ==========The total operating lease amount of $706.8 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 where Gaylord Palms is located. NEWLY ISSUED ACCOUNTING STANDARDS In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 replaces EITF No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have any significant impact on previously reported costs. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123 to provide two 47additional 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 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. FORWARD-LOOKING STATEMENTS 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 factors set forth under the caption "Risk Factors." 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 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. 48MARKET 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 December 31, 2002, 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 December 31, 2002, the fair market value of the Company's investment in the 11.0 million shares of Viacom stock was $448.5 million, or $40.76 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 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 by approximately $2.4 million after taxes based on debt amounts outstanding at December 31, 2002. Cash Balances - Certain of the Company's outstanding cash balances are occasionally invested overnight with high credit quality financial institutions. The Company does not have significant exposure to changing interest rates on invested cash at December 31, 2002. As a result, the interest rate market risk implicit in these investments at December 31, 2002, if any, is low. Foreign Currency Exchange Rates - Substantially all of the Company's revenues are realized in U.S. dollars and are from customers in the United States. Although the Company owns certain subsidiaries who 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 December 31, 2002, the Company believes that the effects of changes in the stock price of its Viacom stock or interest rates could be material to the Company's 49consolidated 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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information called for by this Item is provided under the caption "Market Risk" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information with respect to this Item is contained in the Company's consolidated financial statements included in the Index on page F-1 of this annual report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Effective June 14, 2002, the Company dismissed Arthur Andersen LLP ("Arthur Andersen") as the Company's independent public accountants. On that date, the Company appointed Ernst & Young LLP ("Ernst & Young") as its independent auditors for the fiscal year ending December 31, 2002. These actions were recommended by the Company's Audit Committee and approved by the Board of Directors of the Company. Arthur Andersen's reports on the Company's consolidated financial statements for the Company's fiscal years ended 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and any interim periods preceding the dismissal of Arthur Andersen, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Arthur Andersen, would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its report. During the Company's two most recent fiscal years and any interim periods preceding the dismissal of Arthur Andersen, there have been no reportable events of the type required to be disclosed by Item 304(a)(1)(v) of Regulation S-K. The Company provided Arthur Andersen with a copy of the foregoing disclosure and Arthur Andersen stated its agreement with such statements. During the fiscal years ended December 31, 2001 and 2000 and the subsequent interim period through June 14, 2002, the Company did not consult with Ernst & Young regarding any of the matters or events set fourth in Item 304(a)(2)(i) and (ii) of Regulation S-K. Notwithstanding the forgoing, during the fiscal year ended December 31, 2001 and during the first and second quarters of 2002, Ernst & Young and/or an affiliate thereof provided the Company with certain management and tax consulting services. 50PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information about our Directors is incorporated herein by reference to the discussion under the heading "Item 1 - Election of Directors" in our Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission. Information required by Item 405 of Regulation S-K is incorporated herein by reference to the discussion under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission. Certain other information concerning executive officers and certain other officers of the Company is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant." Our Board of Directors has determined that Robert P. Bowen is an "audit committee financial expert" as defined by the SEC and is independent, as that term is defined by the listing requirements of the New York Stock Exchange. The Company has adopted a Code of Business Conduct and Ethics that applies to all of our directors and employees, including our President and Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, a copy of which has been posted on the Company's website at www.gaylordentertainment.com. The Company will make any legally required disclosures regarding amendments to, or waivers of, provisions of the Code of Business Conduct and Ethics on its website. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the discussion under the heading "Executive Compensation" in our Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this Item is incorporated herein by reference to the discussions under the headings "Beneficial Ownership" and "Equity Compensation Plan Information" in our Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to the discussion under the heading "Certain Relationships and Related Transactions" in our Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission. ITEM 14. 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. 51PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 15(A)(1) FINANCIAL STATEMENTS The accompanying index to financial statements on page F-1 of this annual report on Form 10-K is provided in response to this Item. 15(A)(2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedules are filed as a part of this report, with reference to the applicable pages of this annual report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts for the Year Ended December 31, 2002........................................................ S-2 Schedule II - Valuation and Qualifying Accounts for the Year Ended December 31, 2001........................................................ S-3 Schedule II - Valuation and Qualifying Accounts for the Year Ended December 31, 2000........................................................ S-4All other financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 15(A)(3) EXHIBITS See Index to Exhibits, pages 55 through 59. 15(B) REPORTS ON FORM 8-K No Current Reports on Form 8-K were filed with the Securities and Exchange Commission during the fourth quarter of 2002. 52SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GAYLORD ENTERTAINMENT COMPANY By: /s/ COLIN V. REED ----------------------------- Colin V. Reed March 28, 2003 President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE/s/ MICHAEL D. ROSE Chairman of the Board March 28, 2003 - ----------------------------- Michael D. Rose /s/ MARTIN C. DICKINSON Director March 28, 2003 - ----------------------------- Martin C. Dickinson /s/ CHRISTINE GAYLORD EVEREST Director March 28, 2003 - ------------------------------ Christine Gaylord Everest /s/ E. K. GAYLORD II Director March 28, 2003 - ------------------------------ E. K. Gaylord II /s/ ROBERT P. BOWEN Director March 28, 2003 - ------------------------------ Robert P. Bowen /s/ LAURENCE S. GELLER Director March 28, 2003 - ------------------------------ Laurence S. Geller /s/ E. GORDON GEE Director March 28, 2003 - ------------------------------ E. Gordon Gee /s/ RALPH HORN Director March 28, 2003 - ------------------------------ Ralph Horn /s/ COLIN V. REED Director, President and March 28 2003 - ------------------------------ Chief Executive Officer Colin V. Reed (Principal Executive Officer) /s/ DAVID C. KLOEPPEL Executive Vice President and March 28, 2003 - ------------------------------ Chief Financial Officer David C. Kloeppel (Principal Financial Officer) /s/ KENNETH A. CONWAY Vice President and March 28, 2003 - ------------------------------ Chief Accounting Officer Kenneth A. Conway (Principal Accounting Officer)53CERTIFICATION I, Colin V. Reed, certify that: 1. I have reviewed this annual report on Form 10-K of Gaylord Entertainment Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ COLIN V. REED ------------------------------------- Colin V. Reed President and Chief Executive Officer 54CERTIFICATION I, David C. Kloeppel, certify that: 1. I have reviewed this annual report of Form 10-K of Gaylord Entertainment Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ DAVID C. KLOEPPEL ----------------------------------- David C. Kloeppel Executive Vice President and Chief Financial Officer 55INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ -----------2.1+ Agreement and Plan of Merger dated February 9, 1997 by and among Westinghouse Electric Corporation ("Westinghouse"), G Acquisition Corp. and Old Gaylord (incorporated by reference to Exhibit 2.1 to Old Gaylord's Current Report on Form 8-K dated February 9, 1997 (File No. 1-10881)). 2.2+ Agreement and Plan of Merger, dated as of April 9, 1999, by and among the Registrant, Gaylord Television Company, Gaylord Communications, Inc., CBS Corporation, CBS Dallas Ventures, Inc. and CBS Dallas Media, Inc. (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K dated April 19, 1999 (File No. 1-13079)). 2.3+ First Amendment to the Agreement and Plan of Merger, dated as of October 8, 1999, by and among the Registrant, Gaylord Television Company, Gaylord Communications, Inc., CBS Corporation, CBS Dallas Ventures, Inc. and CBS Dallas Media, Inc. (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form S-3 of CBS Corporation, as filed with the Securities and Exchange Commission on October 12, 1999 (File No. 333-88775)). 2.4+ Securities Purchase Agreement, dated as of March 9, 2001, by and among the Registrant, Gaylord Creative Group, Inc., PaperBoy Productions, Inc., and Gaylord Sports, Inc. (incorporated by reference to Exhibit 2.8 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13079)). 2.5+ Purchase Agreement among WMGA, LLC and Registrant, and Registrant's subsidiary, Gaylord Creative Group, Inc. (incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K dated January 16, 2002). 2.6+ Asset Purchase Agreement, dated as of July 1, 2002, by and between Acuff-Rose Music Publishing, Inc., Acuff-Rose Music, Inc., Milene Music, Inc., Springhouse Music, Inc., and Hickory Records, Inc. and Sony/ATV Music Publishing LLC (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 2.7+ Purchase and Sale Agreement, dated as of June 28, 2002, by and between The Mills Limited Partnership (as Purchaser) and Opryland Attractions, Inc. (as Seller) (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3 to the Registrant's Current Report on Form 8-K dated October 7, 1997 (File No. 1-13079)). 3.2 Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). 3.3 Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form 10, as amended (File No. 1-13079)). 4.1 Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 10, as amended (File No. 1-13079)). 10.1 Tax Disaffiliation Agreement by and among Old Gaylord, the Registrant and Westinghouse, dated September 30, 1997 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, dated October 7, 1997 (File No. 1-13079)).56
EXHIBIT NUMBER DESCRIPTION - ------ -----------10.2 Agreement and Plan of Distribution, dated September 30, 1997, between Old Gaylord and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated October 7, 1997 (File No. 1-13079)). 10.3 Tax Matters Agreement, dated as of April 9, 1999, by and among the Registrant, Gaylord Television Company, Gaylord Communications, Inc. and CBS Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated April 19, 1999). 10.4 Amended and Restated Tax Matters Agreement, dated as of October 8, 1999, by and among the Registrant, Gaylord Television Company, Gaylord Communications, Inc. and CBS Corporation (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-3 of CBS Corporation, as filed with the Securities and Exchange Commission on October 12, 1999). 10.5 First Amendment to Post-Closing Covenants Agreement and Non-Competition Agreements, dated as of April 9, 1999, by and among the Registrant, CBS Corporation, Edward L. Gaylord and E. K. Gaylord, II (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated April 19, 1999). 10.6 Opryland Hotel - Florida Ground Lease, dated as of March 3, 1999, by and between Xentury City Development Company, L.C., and Opryland Hotel - Florida Limited Partnership (incorporated by reference to Exhibit 10.11 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 1999). 10.7 Guaranteed Maximum Price (GMP) Construction Agreement dated as of November 8, 1999, by and among Opryland Hotel - Florida, L.P. Opryland Hospitality Group, and Perini/Suitt (incorporated by reference to Exhibit 10.8 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000). 10.8 First Amendment to Guaranteed Maximum Price (GMP) Construction Agreement dated as of September 5, 2000 by and among Opryland Hotel - Florida, L.P., Opryland Hospitality Group d/b/a OLH, G.P., and Perini/Suitt (incorporated by reference to Exhibit 10.9 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000). 10.9 Naming Rights Agreement dated as of November 24, 1999, by and between Registrant and Nashville Hockey Club Limited Partnership (incorporated by reference to Exhibit 10.24 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 1999). 10.10 SAILS Mandatorily Exchangeable Securities Contract dated as of May 22, 2000, among the Registrant, OLH G.P., Credit Suisse First Boston International, and Credit Suisse First Boston Corporation, as agent (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated May 23, 2000). 10.11 SAILS Pledge Agreement dated as of May 22, 2000, among the Registrant, Credit Suisse First Boston International, and Credit Suisse First Boston Corporation, as agent (incorporated by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K dated May 23, 2000). 10.12 Amended and Restated Loan and Security Agreement dated as of March 27, 2001, by and between Opryland Hotel Nashville, LLC, and Merrill Lynch Mortgage Lending, Inc. (incorporated by reference to Exhibit 10.13 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000). 10.13 Mezzanine Loan Agreement dated as of March 27, 2001, by and between Merrill Lynch Mortgage Capital Inc. and OHN Holdings, LLC (incorporated by reference to Exhibit 10.14 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000).57
EXHIBIT NUMBER DESCRIPTION - ------ -----------10.14 First Amendment dated January 18, 2002 to Mezzanine Loan Agreement, dated as of March 27, 2001 by and between Opryland Mezzanine Trust 2001-1, a Delaware business trust, and OHN Holdings, LLC (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.15+ Credit Agreement, dated as of October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P., Banker's Trust Company, Deutsche Banc, Alex. Brown, Inc. and Salomon Smith Barney, Inc. (incorporated by reference to Exhibit 10.15 to Registrants's Annual Report on Form 10-K for the year ended December 31, 2001). 10.16 First Amendment dated November 30, 2001 to Credit Agreement, dated as of October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P., Bankers Trust Company, Citicorp Real Estate, Inc. and CIBC Inc. (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.17 Second Amendment dated December 31, 2001 to Credit Agreement, dated as of October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P., Bankers Trust Company, Citicorp Real Estate, Inc. and CIBC Inc. (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.18 Third Amendment dated February 28, 2002 to Credit Agreement, dated as of October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P., Bankers Trust Company, Citicorp Real Estate, Inc. and CIBC Inc. (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.19 Fourth Amendment dated May 1, 2002 to Credit Agreement, dated as of October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P., Bankers Trust Company, Citicorp Real Estate, Inc. and CIBC Inc. (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.20 Fifth Amendment dated June 28, 2002 to Credit Agreement, dated as of October 9, 2001 by and among Registrant, Opryland Hotel-Florida, L.P., Bankers Trust Company, Citicorp Real Estate, Inc. and CIBC Inc. (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.21* Hotel/Convention Center Sublease Agreement, dated as of May 16, 2000, by and between the City of Grapevine, Texas and Opryland Hotel - Texas Limited Partnership. 10.22* Sublease Addendum Number 1, dated July 28, 2000, by and between the City of Grapevine, Texas and Opryland Hotel - Texas Limited Partnership. 10.23*+ Guaranteed Maximum Price Construction Agreement, dated November 15, 2002, by and between Gaylord Entertainment Company and Centex Construction Company, Inc.EXECUTIVE COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.24 Gaylord Entertainment Company 1997 Omnibus Stock Option and Incentive Plan (as amended at May 2002 Stockholders Meeting) (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).58
10.25 The Opryland USA Inc. Supplemental Deferred Compensation Plan (incorporated by reference to Exhibit 10.11 to Old Gaylord's Registration Statement on Form S-1 (Registration No. 33-42329)). 10.26 Gaylord Entertainment Company Retirement Benefit Restoration Plan (incorporated by reference to Exhibit 10.19 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000). 10.27 Form of Severance Agreement between the Registrant and certain of its executive officers (incorporated by reference to Exhibit 10.23 to Old Gaylord's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-10881)). 10.28 Consulting Agreement, dated October 31, 2001, between the Registrant and Dave Jones (incorporated by reference to Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10.29 Letter Agreement dated February 14, 2001 between the Registrant and Carl W. Kornmeyer (incorporated by reference to Exhibit 10.26 to Gaylord's Annual Report on Form 10-K for the year ended December 31, 2000). 10.30 Executive Employment Agreement of David C. Kloeppel, dated September 4, 2001, with Registrant (incorporated by reference to Exhibit 10.1 to Gaylord's Quarterly Report on Form 10-Q for quarter ended September 30, 2001). 10.31 Executive Employment Agreement of Colin V. Reed, dated April 23, 2001, with Registrant (incorporated by reference to Exhibit 10.1 to Gaylord's Quarterly Report on Form 10-Q for quarter ended June 30, 2001). 10.32 Executive Employment Agreement of Michael D. Rose, dated April 23, 2001, with Registrant (incorporated by reference to Exhibit 10.2 to Gaylord's Quarterly Report on Form 10-Q for quarter ended June 30, 2001). 10.33* Letter Agreement, dated October 17, 2001, between the Registrant and Jay Sevigny. 10.34 Indemnification Agreement, dated as of April 23, 2001, by and between the Registrant and Colin V. Reed (incorporated by reference to Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10.35 Indemnification Agreement, dated as of April 23, 2001, by and between the Registrant and Michael D. Rose (incorporated by reference to Exhibit 10.31 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10.36* Form of Indemnification Agreement between the Registrant and each of its non-employee directors. 10.37* Gaylord Entertainment Company Director Compensation Policy. 14* Gaylord Entertainment Company Code of Business Conduct and Ethics. 16 Letter from Arthur Andersen LLP regarding change in independent auditor (incorporated by reference to Exhibit 16.1 to Registrant's Current Report on Form 8-K dated June 19, 2002). 21* Subsidiaries of Gaylord Entertainment Company. 23* Consent of Independent Public Accountants. 99.1* Gaylord Entertainment Company Audit Committee Charter.59
EXHIBIT NUMBER DESCRIPTION - ------ -----------99.2* Gaylord Entertainment Company Corporate Governance Guidelines. 99.3* Gaylord Entertainment Company Nominating Committee Charter. 99.4* Certification of Colin V. Reed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.5* Certification of David C. Kloeppel pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.- ------------------------- + As directed by Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to this exhibit are omitted from this filing. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Commission upon request. * Filed herewith. 60GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----Report of Independent Auditors........................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000..................................... F-3 Consolidated Balance Sheets as of December 31, 2002 and 2001............. F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000..................................... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000..................................... F-6 Notes to Consolidated Financial Statements............................... F-7F-1REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Gaylord Entertainment Company We have audited the accompanying consolidated balance sheets of Gaylord Entertainment Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gaylord Entertainment Company and subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 3 to the consolidated financial statements, the accompanying consolidated balance sheet as of December 31, 2001 and the related consolidated statements of operations, cash flows and stockholders' equity for the years ended December 31, 2001 and 2000 have been restated. As discussed in Note 1 and elsewhere in the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets in 2002, derivative financial instruments and the disposition of long-lived assets in 2001. Ernst & Young LLP Nashville, Tennessee February 5, 2003 (except for Notes 2 and 22, as to which the date is March 25, 2003) F-2GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (in thousands, except per share data)
(Restated) (Restated) 2002 2001 2000 --------- ---------- ----------REVENUES $ 414,358 $ 304,273 $ 315,472 OPERATING EXPENSES: Operating costs 260,357 205,421 213,725 Selling, general and administrative 110,619 68,913 90,806 Preopening costs 8,913 15,927 5,278 Gain on sale of assets (30,529) - - Impairment and other charges - 14,262 75,712 Restructuring charges 3 2,182 12,952 Depreciation 52,834 34,867 35,511 Amortization 3,786 3,738 9,352 --------- --------- --------- Operating income (loss) 8,375 (41,037) (127,864) INTEREST EXPENSE, NET OF AMOUNTS CAPITALIZED (46,960) (39,365) (30,319) INTEREST INCOME 2,808 5,554 4,046 UNREALIZED GAIN (LOSS) ON VIACOM STOCK (37,300) 782 - UNREALIZED GAIN ON DERIVATIVES 86,476 54,282 - OTHER GAINS AND LOSSES 1,163 2,661 (3,514) --------- --------- --------- Income (loss) before provision (benefit) for income taxes, discontinued operations and cumulative effect of accounting change 14,562 (17,123) (157,651) PROVISION (BENEFIT) FOR INCOME TAXES 1,806 (8,313) (51,140) --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting change 12,756 (8,810) (106,511) GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES 84,960 (50,188) (49,545) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES (2,572) 11,202 - --------- --------- --------- Net income (loss) $ 95,144 $ (47,796) $(156,056) ========= ========= ========= INCOME (LOSS) PER SHARE: Income (loss) from continuing operations $ 0.38 $ (0.26) $ (3.19) Gain (loss) from discontinued operations, net of taxes 2.52 (1.49) (1.48) Cumulative effect of accounting change, net of taxes (0.08) 0.33 - --------- --------- --------- Net income (loss) $ 2.82 $ (1.42) $ (4.67) ========= ========= ========= INCOME (LOSS) PER SHARE - ASSUMING DILUTION: Income (loss) from continuing operations $ 0.38 $ (0.26) $ (3.19) Gain (loss) from discontinued operations, net of taxes 2.52 (1.49) (1.48) Cumulative effect of accounting change, net of taxes (0.08) 0.33 - --------- --------- --------- Net income (loss) $ 2.82 $ (1.42) $ (4.67) ========= ========= =========The accompanying notes are an integral part of these consolidated financial statements. F-3GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (in thousands, except per share data)
(Restated) 2002 2001 ----------- -----------ASSETS CURRENT ASSETS: Cash and cash equivalents - unrestricted $ 98,632 $ 9,194 Cash and cash equivalents - restricted 19,323 64,993 Trade receivables, less allowance of $620 and $3,185, respectively 23,872 14,441 Deferred financing costs 26,865 26,865 Deferred income taxes 20,553 23,438 Other current assets 25,958 15,209 Current assets of discontinued operations 2,528 50,530 ----------- ----------- Total current assets 217,731 204,670 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 1,112,078 993,347 GOODWILL 9,280 13,501 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION 1,996 6,299 INVESTMENTS 509,080 550,172 ESTIMATED FAIR VALUE OF DERIVATIVE ASSETS 207,727 158,028 LONG-TERM DEFERRED FINANCING COSTS 100,933 137,513 OTHER ASSETS 24,352 30,098 LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 9,019 84,016 ----------- ----------- Total assets $ 2,192,196 $ 2,177,644 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 8,526 $ 88,004 Accounts payable and accrued liabilities 80,959 88,261 Current liabilities of discontinued operations 6,378 31,010 ----------- ----------- Total current liabilities 95,863 207,275 SECURED FORWARD EXCHANGE CONTRACT 613,054 613,054 NON-CURRENT LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 332,112 380,993 DEFERRED INCOME TAXES 244,372 138,599 ESTIMATED FAIR VALUE OF DERIVATIVE LIABILITIES 48,647 85,424 OTHER LIABILITIES 67,903 52,796 LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS 781 836 MINORITY INTEREST OF DISCONTINUED OPERATIONS 1,885 1,679 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 100,000 shares authorized, no shares issued or outstanding - - Common stock, $.01 par value, 150,000 shares authorized, 33,780 and 33,736 shares issued and outstanding, respectively 338 337 Additional paid-in capital 520,796 519,695 Retained earnings 282,798 187,654 Unearned compensation (1,018) (2,021) Accumulated other comprehensive loss (15,335) (8,677) ----------- ----------- Total stockholders' equity 787,579 696,988 ----------- ----------- Total liabilities and stockholders' equity $ 2,192,196 $ 2,177,644 =========== ===========The accompanying notes are an integral part of these consolidated financial statements. F-4GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (in thousands)
(Restated) (Restated) 2002 2001 2000 --------- ---------- ----------CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 95,144 $ (47,796) $(156,056) Amounts to reconcile net income (loss) to net cash flows provided by operating activities: (Gain) loss on discontinued operations, net of taxes (84,960) 50,188 49,545 Impairment and other charges - 14,262 75,712 Cumulative effect of accounting change, net of taxes 2,572 (11,202) - Unrealized gain on Viacom stock and related derivatives (49,176) (55,064) - Depreciation and amortization 56,620 38,605 44,863 Gain on sale of assets (30,529) - - Provision (benefit) for deferred income taxes 65,070 (10,599) (51,118) Amortization of deferred financing costs 36,164 35,987 20,780 Changes in (net of acquisitions and divestitures): Trade receivables (9,431) 5,893 7,987 Accounts payable and accrued liabilities (280) (16,650) 40,083 Other assets and liabilities 3,628 14,630 5,555 --------- --------- --------- Net cash flows provided operating activities - continuing operations 84,822 18,254 37,351 Net cash flows provided by (used in) operating activities - discontinued operations 2,458 (2,764) (26,117) --------- --------- --------- Net cash flows provided by operating activities 87,280 15,490 11,234 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (185,649) (281,080) (223,037) Proceeds from sale of assets 30,875 - - Other investing activities 9,406 3,033 (27,226) --------- --------- --------- Net cash flows used in investing activities - continuing operations (145,368) (278,047) (250,263) Net cash flows provided by (used in) investing activities - discontinued operations 232,454 17,953 (38,677) --------- --------- --------- Net cash flows provided by (used in) investing activities 87,086 (260,094) (288,940) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 85,000 535,000 175,500 Repayment of long-term debt (214,846) (241,503) (3,500) Cash proceeds from secured forward exchange contract - - 613,054 Deferred financing costs paid - (19,582) (195,452) Net payments under revolving credit agreements - - (294,000) Decrease (increase) in cash and cash equivalents - restricted 45,670 (52,326) (12,667) Proceeds from exercise of stock options and stock purchase plans 919 2,548 2,136 --------- --------- --------- Net cash flows provided by (used in) financing activities - continuing operations (83,257) 224,137 285,071 Net cash flows provided by (used in) financing activities - discontinued operations (1,671) 2,904 9,306 --------- --------- --------- Net cash flows provided by (used in) financing activities (84,928) 227,041 294,377 --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS - UNRESTRICTED 89,438 (17,563) 16,671 CASH AND CASH EQUIVALENTS - UNRESTRICTED, BEGINNING OF YEAR 9,194 26,757 10,086 --------- --------- --------- CASH AND CASH EQUIVALENTS - UNRESTRICTED, END OF YEAR $ 98,632 $ 9,194 $ 26,757 ========= ========= =========The accompanying notes are an integral part of these consolidated financial statements. F-5GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (in thousands)
ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED UNEARNED COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) EQUITY ----------- ----------- ----------- ------------ ------------- -------------BALANCE, DECEMBER 31, 1999 (AS PREVIOUSLY REPORTED) $ 333 $ 512,308 $ 351,028 $ (1,570) $ 99,060 $ 961,159 RESTATEMENT ADJUSTMENTS - 93 40,478 - - 40,571 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1999 (RESTATED) 333 512,401 391,506 (1,570) 99,060 1,001,730 COMPREHENSIVE LOSS: Net loss - - (156,056) - - (156,056) Unrealized loss on investments, net - - - - (81,901) (81,901) Foreign currency translation - - - - (705) (705) ----------- Comprehensive loss (238,662) Exercise of stock options 2 1,845 - - - 1,847 Tax benefit on stock options - 1,000 - - - 1,000 Employee stock plan purchases - 289 - - - 289 Issuance of restricted stock 1 2,776 - (2,777) - - Cancellation of restricted stock (2) (4,705) - 4,707 - - Compensation expense - 173 - (440) - (267) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2000 (Restated) 334 513,779 235,450 (80) 16,454 765,937 COMPREHENSIVE LOSS: Net loss - - (47,796) - - (47,796) Reclassification of gain on marketable securities - - - - (17,957) (17,957) Unrealized loss on interest rate caps - - - - (213) (213) Minimum pension liability, net of deferred income taxes - - - - (7,672) (7,672) Foreign currency translation - - - - 711 711 ----------- Comprehensive loss (72,927) Exercise of stock options 2 2,327 - - - 2,329 Tax benefit on stock options - 720 - - - 720 Employee stock plan purchases - 219 - - - 219 Issuance of restricted stock 1 3,664 - (3,665) - - Cancellation of restricted stock - (928) - 928 - - Compensation expense - (86) - 796 - 710 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2001 (RESTATED) 337 519,695 187,654 (2,021) (8,677) 696,988 COMPREHENSIVE INCOME: NET INCOME - - 95,144 - - 95,144 UNREALIZED LOSS ON INTEREST RATE CAPS - - - - (161) (161) MINIMUM PENSION LIABILITY, NET OF DEFERRED INCOME TAXES - - - - (7,252) (7,252) FOREIGN CURRENCY TRANSLATION - - - - 755 755 ----------- COMPREHENSIVE INCOME 88,486 EXERCISE OF STOCK OPTIONS 1 660 - - - 661 TAX BENEFIT ON STOCK OPTIONS - 28 - - - 28 EMPLOYEE STOCK PLAN PURCHASES - 206 - - - 206 MODIFICATION OF STOCK PLAN - 52 - - - 52 ISSUANCE OF RESTRICTED STOCK - 115 - (115) - - ISSUANCE OF STOCK WARRANTS - 40 - - - 40 CANCELLATION OF RESTRICTED STOCK - (32) - 32 - - COMPENSATION EXPENSE - 32 - 1,086 - 1,118 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2002 $ 338 $ 520,796 $ 282,798 $ (1,018) $ (15,335) $ 787,579 =========== =========== =========== =========== =========== ===========The accompanying notes are an integral part of these consolidated financial statements. F-6GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Gaylord Entertainment Company (the "Company") is a diversified hospitality and entertainment company operating, through its subsidiaries, principally in four business segments: hospitality; attractions; media and corporate and other. Due to management's decision during 2002 to pursue plans to dispose of certain businesses, those businesses have been presented as discontinued operations as described in more detail below and in Note 6. BUSINESS SEGMENTS HOSPITALITY The hospitality segment includes the operations of Gaylord Hotels(TM) branded hotels and the Radisson Hotel at Opryland. At December 31, 2002, the Company owns and operates the Gaylord Opryland Resort Hotel and Convention Center ("Gaylord Opryland") (formerly known as the Opryland Hotel Nashville), the Gaylord Palms Resort Hotel and Convention Center ("Gaylord Palms") (formerly known as the Opryland Hotel Florida) and the Radisson Hotel at Opryland. Gaylord Opryland and the Radisson Hotel at Opryland are both located in Nashville, Tennessee. Gaylord Opryland is owned and operated by Opryland Hotel Nashville, LLC, a consolidated wholly-owned separate legal entity incorporated in Delaware. The Gaylord Palms in Kissimmee, Florida opened in January 2002. The Company is developing a Gaylord hotel in Grapevine, Texas, which is expected to open in 2004. The Company has the option to purchase land for the development of a hotel in the Washington, D.C. area. This project is subject to the availability of financing and final approval of the Company's Board of Directors. ATTRACTIONS The attractions segment includes all of the Company's Nashville-based tourist attractions. At December 31, 2002, these include the Grand Ole Opry, the General Jackson Showboat, the Wildhorse Saloon, the Ryman Auditorium and the Springhouse Golf Club, among others. The attractions segment also includes Corporate Magic, which specializes in the production of creative events in the corporate entertainment marketplace. MEDIA At December 31, 2002, the Company's media segment includes the operations of three radio stations in Nashville, Tennessee. During 1999, the Company created a new division, Gaylord Digital, formed to initiate a focused Internet strategy as further discussed in Note 7. During 2000, the Company closed Gaylord Digital, as further discussed in Note 4. CORPORATE AND OTHER Corporate includes salaries and benefits of the Company's executive and administrative personnel and various other overhead costs. This segment also includes the expenses associated with the Company's ownership of various investments, including Bass Pro, the Nashville Predators, the naming rights agreement and Opry Mills. The Company owns minority interests in Bass Pro, Inc. ("Bass Pro"), a leading retailer of premium outdoor sporting goods and fishing products, and the Nashville Predators, a National Hockey League professional team. Until the second quarter of 2002, the Company owned a minority interest in a partnership with The Mills Corporation that developed Opry Mills, a Nashville F-7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS entertainment and retail complex, which opened in May 2000. The Company sold its interest in Opry Mills during 2002 to certain affiliates of The Mills Corporation as further discussed in Note 8. During the first quarter of 2002, the Company disclosed that it intended to dispose of its investment in the Nashville Predators. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Investments in less than 50% owned limited partnerships are accounted for utilizing the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS - UNRESTRICTED The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. CASH AND CASH EQUIVALENTS - RESTRICTED Restricted cash and cash equivalents represent cash held in escrow for required capital expenditures, property taxes, insurance payments and other reserves required pursuant to the terms of the Company's debt agreements, as further described in Note 13. The Company also has restricted cash balances of $0.6 million which collateralize certain outstanding letters of credit. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest for the years ended December 31 was comprised of:
(in thousands) 2002 2001 2000 --------- --------- ---------Debt interest paid $ 17,749 $ 23,405 $ 13,043 Deferred financing costs paid - 19,582 195,452 Capitalized interest (6,825) (18,781) (6,775) --------- --------- --------- Cash interest paid, net of capitalized interest $ 10,924 $ 24,206 $ 201,720 ========= ========= =========Income taxes refunds received were $64.6 million, $23.9 million and $18.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. ACCOUNTS RECEIVABLE The Company's accounts receivable are primarily generated by meetings and convention attendees room nights. Receivables arising from these sales are not collateralized. Credit risk associated with the accounts receivables is minimized due to the large and diverse nature of the customer base. No customer accounted for more than 10% of the Company's trade receivables at December 31, 2002. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company provides allowances for doubtful accounts based upon a percentage of revenue and periodic evaluations of the aging of accounts receivable. At December 31, 2001, the Company had fully reserved a $2.4 million trade receivable from a customer. During 2002, the F-8NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company learned the customer would not be able to pay the Company for the receivable and therefore, wrote the trade receivable off against the related reserve. DEFERRED FINANCING COSTS Deferred financing costs consist of prepaid interest, loan fees and other costs of financing that are amortized over the term of the related financing agreements, using the effective interest method. For the years ended December 31, 2002, 2001 and 2000, deferred financing costs of $36.2 million, $36.0 million and $20.8 million, respectively, were amortized and recorded as interest expense in the accompanying consolidated statements of operations. The current portion of deferred financing costs at December 31, 2002 represents the amount of prepaid contract payments related to the secured forward exchange contract discussed in Note 11 that will be amortized in the coming year. F-9NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Improvements and significant renovations that extend the lives of existing assets are capitalized. Interest on funds borrowed to finance the construction of major capital additions is included in the cost of the applicable capital addition. Maintenance and repairs are charged to expense as incurred. Property and equipment are depreciated using straight-line method over the following estimated useful lives:
Buildings 40 years Land improvements 20 years Attractions-related equipment 16 years Furniture, fixtures and equipment 3-8 years Leasehold improvements The shorter of the lease term or useful lifeIMPAIRMENT OF LONG-LIVED ASSETS In accounting for the Company's long-lived assets other than goodwill, the Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company adopted the provisions of SFAS No. 144 during 2001 with an effective date of January 1, 2001. GOODWILL AND INTANGIBLES In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 supersedes Accounting Principles Board ("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. The Company adopted the provisions of SFAS No. 141 in June of 2001. 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 are no longer amortized but are 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. 142 effective January 1, 2002, and as a result, the Company ceased the amortization of goodwill on that date. In accordance with the provisions of SFAS 142, the Company performs its annual review of impairment of goodwill by comparing the carrying value of the applicable reporting unit to the fair value of the reporting unit. If the fair value is less than the carrying value, then the Company measures potential impairment by assigning the assets and liabilities of the Company to the reporting unit in a manner similar to a purchase transaction, in accordance with the provisions of SFAS 141, and comparing the implied value of goodwill to its carrying value. The Company's goodwill and intangibles are discussed further in Note 20. LEASES The Company is leasing a 65.3 acre site in Osceola County, Florida on which the Gaylord Palms is located and has various other leasing arrangements, including leases for office space and office equipment. The Company accounts for lease obligations in accordance with SFAS No. 13, "Accounting for Leases", and related interpretations. The Company's leases are discussed further in Note 17. F-10NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVESTMENTS The Company owns investments in marketable securities and has minority interest investments in certain businesses. Marketable securities are accounted for in accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Generally, non-marketable investments in which the Company owns less than 20 percent are accounted for using the cost method of accounting and investments in which the Company owns between 20 percent and 50 percent are accounted for using the equity method of accounting. OTHER ASSETS Other current and long-term assets of continuing operations at December 31 consist of:
(in thousands) 2002 2001 ------- -------Other current assets: Other current receivables $ 5,916 $ 5,097 Note receivable - current portion 10,000 - Inventories 3,900 3,450 Prepaid expenses 3,880 5,971 Current income tax receivable 1,478 - Other current assets 784 691 ------- ------- Total other current assets $25,958 $15,209 ======= ======= Other long-term assets: Note receivable $ 7,500 $17,791 Deferred software costs, net 11,130 8,025 Other long-term assets 5,722 4,282 ------- ------- Total other long-term assets $24,352 $30,098 ======= =======Other current assets Other current receivables result primarily from non-operating income and are due within one year. The current note receivable at December 31, 2002, is an unsecured note receivable from Bass Pro, which bears interest at a fixed annual rate of 8% which is payable annually. This note matures in October 2003. Inventories consist primarily of merchandise for resale and are carried at the lower of cost or market. Cost is computed on an average cost basis. Prepaid expenses consist of prepaid insurance and contracts that will be expensed during the subsequent year. Other long-term assets Long-term note receivable relates to an separate unsecured note receivable from Bass Pro. This long-term note receivable bears interest at a variable rate which is payable quarterly and matures in 2009. The Company capitalizes the costs of computer software for internal use in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Accordingly, the Company capitalized the external costs to acquire and develop computer software and certain internal payroll costs during 2002 and 2001. Deferred software costs are amortized on a straight-line basis over their estimated useful lives of 3 to 5 years. F-11NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PREOPENING COSTS In accordance with AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities", the Company expenses the costs associated with preopening expenses related to the construction of new hotels, start-up activities and organization costs as incurred. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities of continuing operations at December 31 consist of:
(in thousands) 2002 2001 ------- -------Trade accounts payable $ 7,547 $ 6,797 Accrued construction in progress 17,484 27,011 Property and other taxes payable 15,884 15,352 Deferred revenues 11,910 7,357 Accrued salaries and benefits 7,787 7,049 Restructuring accruals 701 5,737 Accrued self-insurance reserves 3,755 4,848 Accrued interest payable 554 1,099 Accrued advertising and promotion 4,206 1,728 Other accrued liabilities 11,131 11,283 ------- ------- Total accounts payable and accrued liabilities $80,959 $88,261 ======= =======Deferred revenues consist primarily of deposits on advance room bookings and advance ticket sales at the Company's tourism properties. The Company is self-insured up to a stop loss for certain losses relating to workers' compensation claims, employee medical benefits and general liability claims. The Company recognizes self-insured losses based upon estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry or the Company's historical experience. INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company establishes deferred tax assets and liabilities based on the difference between the financial statement and income tax carrying amounts of assets and liabilities using existing tax laws and tax rates. See Note 14 for more detail on the Company's income taxes. MINORITY INTERESTS OF DISCONTINUED OPERATIONS Minority interests relate to the interests in consolidated companies that the Company does not wholly own. The Company allocates income to the minority interests based on the percentage ownership throughout the year. REVENUE RECOGNITION Revenues are recognized when services are provided or goods are shipped, as applicable. Provision for returns and other adjustments are provided for in the same period the revenues are recognized. F-12NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs were $23.9 million, $26.6 million and $41.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in advertising expense during 2002 and 2001 compared to 2000 was the closing of Gaylord Digital as discussed in Note 4. STOCK-BASED COMPENSATION 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 reflect 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. 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 years ended December 31 would have been reduced (increased) to the following pro forma amounts:
(net income (loss) in thousands) (per share data in dollars) 2002 2001 2000 --------- ---------- ----------NET INCOME (LOSS): As reported $ 95,144 $ (47,796) $ (156,056) Stock-based employee compensation, net of tax effect $ 3,190 $ 2,412 $ 1,233 --------- ---------- ---------- Pro forma $ 91,954 $ (50,208) $ (157,289) ========= ========== ========== INCOME (LOSS) PER SHARE: As reported $ 2.82 $ (1.42) $ (4.67) ========= ========== ========== Pro forma $ 2.72 $ (1.50) $ (4.71) ========= ========== ========== INCOME (LOSS) PER SHARE - ASSUMING DILUTION: As reported $ 2.82 $ (1.42) $ (4.67) ========= ========== ========== Pro forma $ 2.72 $ (1.50) $ (4.71) ========= ========== ==========The Company's stock-based compensation is further described in Note 16. F-13NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISCONTINUED OPERATIONS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 superseded 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 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 retained the requirements of SFAS No. 121 for the recognition and measurement of an impairment loss and broadened the presentation of discontinued operations to include a component of an entity (rather than a segment of a business). The Company adopted the provisions of SFAS No. 144 during 2001 with an effective date of January 1, 2001. All dispositions or commitments to dispose of assets or businesses occuring prior to January 1, 2001 have been accounted for and presented in accordance with the provisions of APB Opinion No. 30. In accordance with the provisions of SFAS No. 144 and APB Opinion No. 30, the Company has presented the operating results, financial position and cash flows of the following businesses as discontinued operations in the accompanying financial statements as of December 31, 2002 and 2001 and for each of the three years ended December 31, 2002: Word Entertainment ("Word"), the Company's contemporary Christian music business; the Acuff-Rose Music Publishing entity; GET Management, the Company's artist management business which was sold during 2001; the Company's ownership interest in the Redhawks, a minor league baseball team based in Oklahoma City, Oklahoma; the Company's international cable networks; the businesses sold to affiliates of The Oklahoma Publishing Company ("OPUBCO") in 2001 consisting of Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production Company; and the Company's water taxis that were sold in 2001. The results of operations of these businesses, including impairment and other charges, restructuring charges and any gain or loss on disposal, have been reflected as discontinued operations, net of taxes, in the accompanying consolidated statements of operations and the assets and liabilities of these businesses are reflected as discontinued operations in the accompanying consolidated balance sheets, as further described in Note 6. F-14NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME (LOSS) PER SHARE SFAS No. 128, "Earnings Per Share", established standards for computing and presenting earnings per share. Under the standards established by SFAS No. 128, earnings per share is measured at two levels: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding after considering the effect of conversion of dilutive instruments, calculated using the treasury stock method. Income per share amounts are calculated as follows for the years ended December 31:
2002 ----------------------------------------------- (income and share amounts in thousands) INCOME SHARES PER SHARE ------------- --------- -----------Net income $ 95,144 33,763 $ 2.82 Effect of dilutive stock options - 31 - ------------ -------- ---------- Net income - assuming dilution $ 95,144 33,794 $ 2.82 ============ ======== ==========
2001 ----------------------------------------------- Loss Shares Per Share ------------- --------- -----------Net loss $ (47,796) 33,562 $ (1.42) Effect of dilutive stock options - - - ------------ -------- ---------- Net loss - assuming dilution $ (47,796) 33,562 $ (1.42) ============ ======== ==========
2000 ----------------------------------------------- Loss Shares Per Share ------------- --------- -----------Net loss $ (156,056) 33,389 $ (4.67) Effect of dilutive stock options - - - ------------ -------- ---------- Net loss - assuming dilution $ (156,056) 33,389 $ (4.67) ============ ======== ==========For the years ended December 31, 2001 and 2000, the effect of dilutive stock options was the equivalent of 99,000 shares and 120,000 shares, respectively, of common stock outstanding. Because the Company had a net loss in each of the years ended December 31, 2001 and 2000, these incremental shares were excluded from the computation of diluted earnings per share for those years as the effect of their inclusion would be anti-dilutive. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" requires that changes in the amounts of certain items, including gains and losses on certain securities, be shown in the financial statements as a component of comprehensive income. The Company's comprehensive income (loss) is presented in the accompanying consolidated statements of stockholders' equity. FINANCIAL INSTRUMENTS The Company's carrying value of its debt and long-term notes receivable approximates fair value based upon the variable nature of these financial instruments' interest rates. Certain of the Company's investments are carried at fair value determined using quoted market prices as discussed further in Note 10. The carrying amount of short-term financial instruments (cash, trade receivables, accounts payable and accrued liabilities) approximates fair value due to the short F-15NOTES TO CONSOLIDATED FINANCIAL STATEMENTS maturity of those instruments. The concentration of credit risk on trade receivables is minimized by the large and diverse nature of the Company's customer base. DERIVATIVES AND HEDGING ACTIVITIES 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 as discussed in Note 12. Effective January 1, 2001, the Company records derivatives in accordance with the provisions of 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 are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. ACCOUNTING ESTIMATES 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. Actual results could differ from those estimates. NEWLY ISSUED ACCOUNTING STANDARDS In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Issues Task Force ("EITF") No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have any significant impact on previously reported costs. 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 reflect 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. F-16NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2002, the Company had $98.6 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. In February 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, to compete the construction of the Texas hotel and fund any operating losses of the Company in 2003. Management currently anticipates securing the long-term financing under the existing commitment from the Lenders and expects to close the financing in the second quarter of 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. F-17NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RE-AUDIT AND RESTATEMENT OF FINANCIAL STATEMENTS During 2002, the Company committed to plans of disposal for Acuff-Rose Music Publishing and the Oklahoma City Redhawks resulting in the reclassification of balances and operating results of those two businesses as discontinued operations in the Company's historical financial statements. Based on the requirements of applicable auditing standards, the Company engaged Ernst & Young LLP ("Ernst & Young"), the Company's current auditors, to perform the required re-audits of the Company's 2001 and 2000 consolidated financial statements since the Company's prior auditors, Arthur Andersen LLP, had ceased operations. As a part of the re-audit process, Ernst & Young raised certain issues for the Company's consideration and after review of the relevant information, the Company determined that certain revisions were necessary to the Company's historical consolidated financial statements. The revisions, which result primarily from a change to the Company's income tax accrual and to accounting for its investment in the Nashville Predators limited partnership ("Predators"), as well as certain other items, increased retained earnings at January 1, 2000 by approximately $40.5 million, increased net loss for the year ended December 31, 2000 by approximately $2.6 million, increased the net loss for the year ended December 31, 2001 by approximately $53,000, and decreased unaudited net income for the first six months of 2002 by approximately $13.0 million. Restated information related to the Company's unaudited quarterly financial information for the years 2002 and 2001 is contained in Note 23. These restatements did not impact cash flows from operating, investing or financing activities. The first principal issue identified relates to income tax reserves maintained for certain tax related items as a result of a corporate reorganization in 1999. Upon further consideration of the facts and circumstances existing at the time of the reorganization, the Company has determined that the income tax reserves should not have been established. As a result of these changes, retained earnings at January 1, 2000 has increased by approximately $47 million. In addition, because some other elements of the restated income tax reserve were reversed during 2002 due to the expiration of the applicable statute of limitations, previously reported unaudited net income for the first six months of 2002 decreased by approximately $14.0 million to reflect the elimination of the income tax reserve should not have been established in 1999. The second principal issue relates to the Company's accounting for its investment in the Predators. The Company purchased a limited partnership interest in the Predators during 1997. The Company's limited partnership interest includes an 8% preferred return and the right to put the investment back to the Predators over three annual installments beginning in 2002. Moreover, it does not provide the Company with any right to receive any distributions in excess of its stated return and does not require the Company to fund any capital or operating shortfalls in the partnership. The Company had not previously recorded its pro-rata share of losses of the Predators in its historical statements of operations. However, after consultation with Ernst & Young concerning the accounting for the Company's investment in the Predators, the Company determined that it would be appropriate to recognize its pro-rata share of the Predators' operating results, which have been primarily losses. The revisions associated with the Company's investment, net of taxes, in the Predators decreased retained earnings at January 1, 2000 by approximately $4.0 million, increased net loss by approximately $1.0 million and $2.0 million for the years ended December 31, 2001 and 2000, respectively, and decreased unaudited net income for the first six months of 2002 by approximately $1.0 million. During 2002, the investment in the Predators reached zero. The Company has not reduced the investment below zero as the Company is under no obligation to fund additional amounts to the Predators. The Company also revised its historical financial statements for other, less significant items by decreasing retained earnings by approximately $2.0 million at January 1, 2000, by increasing the net loss for the year ended December 31, 2000 by approximately $2.0 million, by reducing the net loss for the year ended December 31, 2001 by approximately $2.0 million, and by increasing F-18NOTES TO CONSOLIDATED FINANCIAL STATEMENTS unaudited net income for the first nine months of 2002 as previously reported by approximately $3.0 million. The restated consolidated financial statements include both the impact of reclassifying discontinued operations as required by SFAS No. 144 (as discussed in Note 6) and the restatement changes discussed above. F-19NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following consolidated statements of operations and balance sheets reconcile previously reported and restated financial information.
Year ended As reported Year ended December 31, with Restatement December 31, 2001 Discontinued discontinued related 2001 (in thousands) As reported operations operations adjustments Restated -------------- -------------- -------------- ------------- --------------REVENUES $ 325,159 $ (20,886) $ 304,273 $ - $ 304,273 OPERATING EXPENSES: Operating costs 218,357 (12,936) 205,421 - 205,421 Selling, general and administrative 71,718 (2,798) 68,920 (7) 68,913 Preopening costs 15,141 - 15,141 786 15,927 Impairment and other charges 14,262 - 14,262 - 14,262 Restructuring charges 2,182 - 2,182 - 2,182 Depreciation 35,579 (712) 34,867 - 34,867 Amortization 5,696 (1,958) 3,738 - 3,738 -------------- ------------- ------------- ------------ ------------- Operating income (loss) (37,776) (2,482) (40,258) 779 (41,037) INTEREST EXPENSE, NET OF AMOUNTS CAPITALIZED (39,365) - (39,365) - (39,365) INTEREST INCOME 5,625 (71) 5,554 - 5,554 UNREALIZED GAIN (LOSS) ON VIACOM STOCK 782 - 782 - 782 UNREALIZED GAIN ON DERIVATIVES 54,282 - 54,282 - 54,282 OTHER GAINS AND LOSSES 5,976 145 6,121 (3,460) 2,661 -------------- ------------- ------------- ------------ ------------- Income (loss) before cumulative effect of accounting change (10,476) (2,408) (12,884) (4,239) (17,123) PROVISION (BENEFIT) FOR INCOME TAXES (3,188) (324) (3,512) (4,801) (8,313) -------------- ------------- ------------- ------------ ------------- Income (loss) from continuing operations before cumulative effect of accounting change (7,288) (2,084) (9,372) 562 (8,810) GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES (52,364) 2,084 (50,280) 92 (50,188) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NETOF TAXES 11,909 - 11,909 (707) 11,202 -------------- ------------- ------------- ------------ ------------- Net income (loss) $ (47,743) $ - $ (47,743) $ (53) $ (47,796) ============== ============= ============= ============ =============F-20NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended As reported Year ended December 31, with Restatement December 31, 2001 Discontinued discontinued related 2001 (Per share data in dollars) As reported operations operations adjustments Restated -------------- -------------- -------------- ------------- --------------INCOME (LOSS) PER SHARE: Income (loss) from continuing operations $ (0.22) $ (0.05) $ (0.27) $ 0.01 $ (0.26) Gain (loss) from discontinued operations, net of taxes (1.55) 0.05 (1.50) 0.01 (1.49) Cumulative effect of accounting change, net of taxes 0.35 - 0.35 (0.02) 0.33 -------------- ------------- ------------- ------------ ------------- Net income (loss) $ (1.42) $ - $ (1.42) $ (0.00) $ (1.42) ============== ============= ============= ============ ============= INCOME (LOSS) PER SHARE - ASSUMING DILUTION: Income (loss) from continuing operations $ (0.22) $ (0.05) $ (0.27) $ 0.01 $ (0.26) Gain (loss) from discontinued operations, net of taxes (1.55) 0.05 (1.50) 0.01 (1.49) Cumulative effect of accounting change, net of taxes 0.35 - 0.35 (0.02) 0.33 -------------- ------------- ------------- ------------ ------------- Net income (loss) $ (1.42) $ - $ (1.42) $ (0.00) $ (1.42) ============== ============= ============= ============ =============F-21NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As reported December 31, with Restatement December 31, 2001 Discontinued discontinued related 2001 (in thousands) As reported operations operations adjustments Restated -------------- -------------- -------------- ------------- --------------ASSETS CURRENT ASSETS: Cash and cash equivalents $ 10,846 $ (1,652) $ 9,194 $ - $ 9,194 - unrestricted Cash and cash equivalents - restricted 64,993 - 64,993 - 64,993 Trade receivables, less 19,264 (4,185) 15,079 (638) 14,441 allowance Deferred financing costs 26,865 - 26,865 - 26,865 Deferred income taxes - - - 23,438 23,438 Other current assets 18,462 (1,813) 16,649 (1,440) 15,209 Current assets of discontinued operations 42,880 7,650 50,530 - 50,530 -------------- ------------- ------------- ------------ ------------- Total current assets 183,310 - 183,310 21,360 204,670 Property and equipment, net of accumulated depreciation 1,000,332 (6,985) 993,347 - 993,347 GOODWILL 15,013 (1,162) 13,851 (350) 13,501 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION 10,322 (4,023) 6,299 - 6,299 INVESTMENTS 561,409 (49) 561,360 (11,188) 550,172 ESTIMATED FAIR VALUE OF DERIVATIVE ASSETS 158,028 - 158,028 - 158,028 LONG-TERM DEFERRED FINANCING COSTS 137,513 - 137,513 - 137,513 OTHER ASSETS 47,702 (17,604) 30,098 - 30,098 LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 54,193 29,823 84,016 - 84,016 -------------- ------------- ------------- ------------ ------------- Total assets $ 2,167,822 $ - $ 2,167,822 $ 9,822 $ 2,177,644 ============== ============= ============= ============ =============F-22NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As reported December 31, with Restatement December 31, 2001 As Discontinued discontinued related 2001 (in thousands) reported operations operations adjustments Restated -------------- -------------- -------------- ------------- --------------LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 88,004 $ - $ 88,004 $ - $ 88,004 Accounts payable and accrued liabilities 98,419 (7,375) 91,044 (2,783) 88,261 Current liabilities of discontinued operations 23,635 7,375 31,010 - 31,010 -------------- ------------- ------------- ------------ ------------- Total current liabilities 210,058 - 210,058 (2,783) 207,275 Secured forward exchange contract 613,054 - 613,054 - 613,054 LONG-TERM DEBT, NET OF CURRENT PORTION 380,993 - 380,993 - 380,993 DEFERRED INCOME TAXES, NET 165,824 - 165,824 (27,225) 138,599 ESTIMATED FAIR VALUE OF DERIVATIVE LIABILITIES 85,424 - 85,424 - 85,424 OTHER LIABILITIES 52,304 - 52,304 492 52,796 LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS 7 - 7 829 836 MINORITY INTEREST 1,679 (1,679) - - - MINORITY INTEREST OF DISCONTINUED OPERATIONS - 1,679 1,679 - 1,679 Commitments and contingencies STOCKHOLDERS' EQUITY: Preferred stock - - - - - Common stock 337 - 337 - 337 Additional paid-in capital 519,515 - 519,515 180 519,695 Retained earnings 149,815 - 149,815 37,839 187,654 Unearned compensation (2,021) - (2,021) - (2,021) Other comprehensive loss (9,167) - (9,167) 490 (8,677) -------------- ------------- ------------- ------------ ------------- Total stockholders' - equity 658,479 658,479 38,509 696,988 Total liabilities and stockholders' equity $ 2,167,822 $ - $ 2,167,822 $ 9,822 $ 2,177,644 ============== ============= ============= ============ =============F-23NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended As reported Year ended December 31, with Restatement December 31, 2000 Discontinued discontinued related 2000 (in thousands) As reported operations operations adjustments Restated -------------- -------------- -------------- ------------- --------------REVENUES $ 335,462 $ (19,990) $ 315,472 $ - $ 315,472 OPERATING EXPENSES: Operating costs 226,126 (12,401) 213,725 - 213,725 Selling, general and administrative 93,958 (3,015) 90,943 (137) 90,806 Preopening costs 5,278 - 5,278 - 5,278 Impairment and other charges 76,597 (885) 75,712 - 75,712 Restructuring charges 13,098 (146) 12,952 - 12,952 Depreciation 36,030 (519) 35,511 - 35,511 Amortization 11,550 (2,198) 9,352 - 9,352 -------------- ------------- ------------- ------------ ------------- Operating income (loss) (127,175) (826) (128,001) (137) (127,864) INTEREST EXPENSE, NET OF AMOUNTS CAPITALIZED (30,319) - (30,319) - (30,319) INTEREST INCOME 4,173 (127) 4,046 - 4,046 UNREALIZED GAIN (LOSS) ON - VIACOM STOCK - - - - UNREALIZED GAIN ON DERIVATIVES - - - - - OTHER GAINS AND LOSSES (1,277) 174 (1,103) (2,411) (3,514) -------------- ------------- ------------- ------------ ------------- Income (loss) before cumulative effect of accounting change (154,598) (779) (155,377) (2,274) (157,651) PROVISION (BENEFIT) FOR INCOME TAXES (49,867) 151 (49,716) (1,424) (51,140) -------------- ------------- ------------- ------------ ------------- Income (loss) from continuing operations before cumulative effect of accounting change (104,731) (930) (105,661) (850) (106,511) GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES (48,739) 930 (47,809) (1,736) (49,545) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES - - - - - -------------- ------------- ------------- ------------ ------------- Net income (loss) $ (153,470) $ - $ (153,470) $ (2,586) $ (156,056) ============== ============= ============= ============ =============F-24NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended As reported Year ended December 31, with Restatement December 31, 2000 As Discontinued discontinued related 2000 (Per share data in dollars) reported operations operations adjustments Restated -------------- -------------- -------------- ------------- --------------INCOME (LOSS) PER SHARE: Income (loss) from continuing operations $ (3.14) $ (0.03) $ (3.17) $ (0.02) $ (3.19) Gain (loss) from discontinued operations, net of taxes (1.46) 0.03 (1.43) (0.05) (1.48) Cumulative effect of accounting change, net of taxes - - - - - -------------- ------------- ------------- ------------ ------------- Net income (loss) $ (4.60) $ - $ (4.60) $ (0.07) $ (4.67) ============== ============= ============= ============ ============= INCOME (LOSS) PER SHARE - ASSUMING DILUTION: Income (loss) from continuing operations $ (3.14) $ (0.03) $ (3.17) $ (0.02) $ (3.19) Gain (loss) from discontinued operations, net of taxes (1.46) 0.03 (1.43) (0.05) (1.48) Cumulative effect of accounting change, net of taxes - - - - - -------------- ------------- ------------- ------------ ------------- Net income (loss) $ (4.60) $ - $ (4.60) $ (0.07) $ (4.67) ============== ============= ============= ============ =============F-25NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. IMPAIRMENT AND OTHER CHARGES During 2000, the Company experienced a significant number of departures from its senior management, including the Company's president and chief executive officer. In addition, the Company continued to produce weaker than anticipated operating results during 2000 while attempting to fund its capital requirements related to its hotel construction project in Florida and hotel development activities in Texas. As a result of these factors, during 2000, the Company completed an assessment of its strategic alternatives related to its operations and capital requirements and developed a strategic plan designed to refocus the Company's operations, reduce its operating losses and reduce its negative cash flows (the "2000 Strategic Assessment"). As a result of the 2000 Strategic Assessment, the Company adopted a plan to divest a number of its under-performing businesses through sale or closure and to curtail certain projects and business lines that were no longer projected to produce a positive return. As a result of the completion of the 2000 Strategic Assessment, the Company recognized pretax impairment and other charges in accordance with the provisions of SFAS No. 121 and other relevant authoritative literature. During 2001, the Company named a new chairman and a new chief executive officer, and had numerous changes in senior management, primarily because of certain 2000 events discussed below. The new management team instituted a corporate reorganization and the reevaluation of the Company's businesses and other investments (the "2001 Strategic Assessment"). As a result of the 2001 Strategic Assessment, the Company determined that the carrying value of certain long-lived assets were not fully recoverable and recorded further pretax impairment and other charges to continuing operations in accordance with the provisions of SFAS No. 144. The components of the impairment and other charges related to continuing operations for the years ended December 31 are as follows:
(in thousands) 2001 2000 --------- ---------Programming, film and other content $ 6,858 $ 7,410 Gaylord Digital and other technology investments 4,576 48,127 Property and equipment 2,828 3,397 Orlando-area Wildhorse Saloon - 15,854 Other - 924 --------- --------- Total impairment and other charges $ 14,262 $ 75,712 ========= =========Additional impairment and other charges of $53.7 million and $29.8 million during 2001 and 2000, respectively, are included in discontinued operations. 2001 Impairment and Other Charges The Company began production of an IMAX movie during 2000 to portray the history of country music. As a result of the 2001 Strategic Assessment, the carrying value of the IMAX film asset was reevaluated on the basis of its estimated future cash flows resulting in an impairment charge of $6.9 million. At December 31, 2000, the Company held a minority investment in a technology start-up business. During 2001, the unfavorable environment for technology businesses created difficulty for this business to obtain adequate capital to execute its business plan and, subsequently, the Company was notified that this technology business had been unsuccessful in arranging financing, resulting in an impairment charge of $4.6 million. The Company also recorded an impairment charge related to idle real estate of $2.0 million during 2001 based upon an assessment of the value of the property. The Company sold this idle real estate during the second quarter of 2002. Proceeds from the sale approximated the carrying value of the property. In addition, the Company recorded an impairment charge for other idle property and equipment F-26NOTES TO CONSOLIDATED FINANCIAL STATEMENTS totaling $0.8 million during 2001 primarily due to the consolidation of offices resulting from personnel reductions as discussed in Note 4. 2000 Impairment and Other Charges The Company's 2000 Strategic Assessment of its programming, film and other content assets resulted in pretax impairment and other charges of $7.4 million based upon the projected cash flows for these assets. This charge included investments of $5.1 million, other receivables of $2.1 million and music and film catalogs of $0.2 million. The Company closed Gaylord Digital, its Internet-related business in 2000. During 1999 and 2000, Gaylord Digital was unable to produce the operating results initially anticipated and required an extensive amount of capital to fund its operating losses, investments and technology infrastructure. As a result of the closing, the Company recorded a pretax charge of $48.1 million in 2000 to reduce the carrying value of Gaylord Digital's assets to their fair value based upon estimated selling prices. The Gaylord Digital charge included the write-down of intangible assets of $25.8 million, property and equipment (including software) of $14.8 million, investments of $7.0 million and other assets of $0.6 million. The operating results of Gaylord Digital are included in continuing operations. Excluding the effect of the impairment and other charges, Gaylord Digital had revenues of $3.9 million and operating losses of $27.5 million for the year ended December 31, 2000. During the course of conducting the 2000 Strategic Assessment, other property and equipment of the Company were reviewed to determine whether the change in the Company's strategic direction resulted in additional impaired assets. This review indicated that certain property and equipment would not be recovered by projected cash flows. The Company recorded pretax impairment and other charges related to its property and equipment of $3.4 million. These charges included property and equipment write-downs in the hospitality segment of $1.4 million, in the attractions segment of $0.3 million, in the media segment of $0.2 million, and in the corporate and other segment of $1.5 million. During November 2000, the Company ceased the operations of the Orlando-area Wildhorse Saloon. Walt Disney World(R) Resort paid the Company approximately $1.8 million for the net assets of the Orlando-area Wildhorse Saloon and released the Company from its operating lease for the Wildhorse Saloon location. As a result of this divestiture, the Company recorded pretax charges of $15.9 million to reflect the impairment and other charges related to the divestiture. The Orlando-area Wildhorse Saloon charges included the write-off of equipment of $9.4 million, intangible assets of $8.1 million and other working capital items of $0.1 million offset by the $1.8 million of proceeds received from Disney. The operating results of the Orlando-area Wildhorse Saloon are included in continuing operations. Excluding the effect of the impairment and other charges, the Orlando-area Wildhorse Saloon had revenues of $4.4 million and operating losses of $1.6 million for the year ended December 31, 2000. F-27NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. RESTRUCTURING CHARGES The following table summarizes the activities of the restructuring charges included in continuing operations for the years ended December 31, 2002, 2001 and 2000:
BALANCE AT RESTRUCTURING CHARGES BALANCE AT (in thousands) DECEMBER 31, 2001 AND ADJUSTMENTS PAYMENTS DECEMBER 31, 2002 ------------------- --------------------- ------------ -------------------2002 restructuring charge $ - $ 1,082 $ 1,082 $ - 2001 restructuring charges 4,168 (1,079) 2,658 431 2000 restructuring charge 1,569 - 1,299 270 ------------------- --------------------- ------------ ------------------- $ 5,737 $ 3 $ 5,039 $ 701 =================== ===================== ============ ===================
BALANCE AT RESTRUCTURING CHARGES BALANCE AT DECEMBER 31, 2000 AND ADJUSTMENTS PAYMENTS DECEMBER 31, 2001 ------------------- --------------------- ------------ -------------------2001 restructuring charges $ - $ 5,848 $ 1,680 $ 4,168 2000 restructuring charge 10,825 (3,666) 5,590 1,569 ------------------- --------------------- ------------ ------------------- $ 10,825 $ 2,182 $ 7,270 $ 5,737 =================== ===================== ============ ===================
BALANCE AT RESTRUCTURING CHARGES BALANCE AT DECEMBER 31, 1999 AND ADJUSTMENTS PAYMENTS DECEMBER 31, 2000 ------------------- --------------------- ------------ -------------------2000 restructuring charge $ - $ 13,186 $ 2,361 $ 10,825 1999 restructuring charge 469 (234) 235 - ------------------- --------------------- ------------ ------------------- $ 469 $ 12,952 $ 2,596 $ 10,825 =================== ===================== ============ ===================2002 Restructuring Charge As part of the Company's ongoing assessment of operations, the Company identified certain duplication of duties within divisions and realized the need to streamline those tasks and duties. Related to this assessment, during the second quarter of 2002 the Company adopted a plan of restructuring resulting in a pretax restructuring charge of $1.1 million related to employee severance costs and other employee benefits unrelated to the discontinued operations. These restructuring charges were recorded in accordance with EITF No. 94-3. As of December 31, 2002, the Company has recorded cash payments of $1.08 million against the 2002 restructuring accrual. During the fourth quarter of 2002, the outplacement agreements expired related to the 2002 restructuring charge. Therefore, the Company reversed the remaining $67,000. There was no remaining balance of the 2002 restructuring accrual at December 31, 2002. 2001 Restructuring Charges During 2001, the Company recognized net pretax restructuring charges from continuing operations of $5.8 million related to streamlining operations and reducing layers of management. These restructuring charges were recorded in accordance with EITF No. 94-3. During the second quarter of 2002, the Company 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 F-28NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2002, the Company has recorded cash payments of $4.4 million against the 2001 restructuring accrual. The remaining balance of the 2001 restructuring accrual at December 31, 2002 of $0.4 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 Charge 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 December 31, 2002, the Company has recorded cash payments of $9.3 million against the 2000 restructuring accrual related to continuing operations. The remaining balance of the 2000 restructuring accrual at December 31, 2002 of $0.3 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. 6. DISCONTINUED OPERATIONS As discussed in Note 1, the Company has reflected the following businesses as discontinued operations, consistent with the provisions of SFAS No. 144 and APB No. 30. The results of operations, net of taxes, (prior to their disposal where applicable) and the carrying value of the assets and liabilities of these businesses have been reflected in the accompanying consolidated financial statements as discontinued operations in accordance with SFAS No. 144 for all periods presented. These restatements did not impact cash flows from operating, investing or financing activities. 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. The Company recognized a pretax gain of $130.6 million during the third quarter of 2002 related to the sale in discontinued operations. The gain on the sale of Acuff-Rose Music Publishing is recorded in income from discontinued operations in the consolidated statement of operations. Proceeds of $25.0 million were used to reduce the Company's outstanding indebtedness as further discussed in Note 13. F-29NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OKC Redhawks During 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 During 2001, the Company committed to a plan to sell Word Entertainment. As a result of the decision to sell Word Entertainment, the Company reduced the carrying value of Word Entertainment to its estimated fair value by recognizing a pretax charge of $30.4 million in discontinued operations during 2001. The estimated fair value of Word Entertainment's net assets was determined based upon ongoing negotiations with potential buyers. Related to the decision to sell Word Entertainment, a pretax restructuring charge of $1.5 million was recorded in discontinued operations in 2001. The restructuring charge consisted of $0.9 million related to lease termination costs and $0.6 million related to severance costs. In addition, the Company recorded a reversal of $0.1 million of restructuring charges originally recorded during 2000. During the first quarter of 2002, the Company sold Word Entertainment's domestic operations to an affiliate of Warner Music Group for $84.1 million in cash, subject to future purchase price adjustments. The Company recognized a pretax gain of $0.5 million in discontinued operations during the first quarter of 2002 related to the sale of Word Entertainment. Proceeds from the sale of $80.0 million were used to reduce the Company's outstanding indebtedness as further discussed in Note 13. International Cable Networks During the second quarter of 2001, the Company adopted a formal plan to dispose of its international cable networks. As part of this plan, the Company hired investment bankers to facilitate the disposition process, and formal communications with potentially interested parties began in July 2001. In an attempt to simplify the disposition process, in July 2001, the Company acquired an additional 25% ownership interest in its music networks in Argentina, increasing its ownership interest from 50% to 75%. In August 2001, the partnerships in Argentina finalized a pending transaction in which a third party acquired a 10% ownership interest in the companies in exchange for satellite, distribution and sales services, bringing the Company's interest to 67.5%. In December 2001, the Company made the decision to cease funding of its cable networks in Asia and Brazil as well as its partnerships in Argentina if a sale had not been completed by February 28, 2002. At that time the Company recorded pretax restructuring charges of $1.9 million consisting of $1.0 million of severance and $0.9 million of contract termination costs related to the networks. Also during 2001, the Company negotiated reductions in the contract termination costs with several vendors that resulted in a reversal of $0.3 million of restructuring charges originally recorded during 2000. Based on the status of the Company's efforts to sell its international cable networks at the end of 2001, the Company recorded pretax impairment and other charges of $23.3 million during 2001. Included in this charge are the impairment of an investment in the two Argentina-based music channels totaling $10.9 million, the impairment of fixed assets, including capital leases associated with certain transponders leased by the Company, of $6.9 million, the impairment of a receivable of $3.0 million from the Argentina-based channels, current assets of $1.5 million, and intangible assets of $1.0 million. During the first quarter of 2002, the Company finalized a transaction to sell certain assets of its Asia and Brazil networks, including the assignment of certain transponder leases. Also during the first quarter of 2002, the Company ceased operations based in Argentina. The transponder lease assignment requires the Company to guarantee lease payments in 2002 from the acquirer of these networks. As such, the Company recorded a lease liability for the amount of the assignee's portion of the transponder lease. F-30NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Businesses Sold to OPUBCO During 2001, the Company sold five businesses (Pandora Films, Gaylord Films, Gaylord Sports Management, Gaylord Event Television and Gaylord Production Company) to affiliates of OPUBCO for $22.0 million in cash and the assumption of debt of $19.3 million. The Company recognized a pretax loss of $1.7 million related to the sale in discontinued operations in the accompanying consolidated statements of operations. OPUBCO owns a minority interest in the Company.During 2002, three of theCompany'sCompany’s directorsarewere also directors of OPUBCO and voting trustees of a voting trust that controls OPUBCO. Additionally, these three directors collectivelyownowned a significant ownership interest in the Company.The following table reflects the results of operations of businesses accounted for as discontinued operations for the years ended December 31
(in(amounts in thousands):
2002 2001 2000 --------- --------- ----------REVENUES: Acuff-Rose Music Publishing $ 7,654 $ 14,764 $ 14,100 Redhawks 6,289 6,122 5,890 Word Entertainment 2,594 115,677 130,706 International cable networks 744 5,025 6,606 Businesses sold to OPUBCO - 2,195 39,706 Other - 609 1,900 --------- --------- ---------- Total revenues $ 17,281 $ 144,392 $ 198,908 ========= ========= ========== OPERATING INCOME (LOSS): Acuff-Rose Music Publishing $ 933 $ 2,119 $ 1,688 Redhawks 841 363 169 Word Entertainment (917) (5,710) (15,241) International cable networks (1,576) (6,375) (9,655) Businesses sold to OPUBCO - (1,816) (8,240) Other - (383) (144) Impairment and other charges - (53,716) (29,826) Restructuring charges - (2,959) (3,241) --------- --------- ---------- Total operating loss (719) (68,477) (64,490) INTEREST EXPENSE (81) (797) (1,310) INTEREST INCOME 81 199 683 OTHER GAINS AND LOSSES 135,442 (4,131) (4,419) --------- --------- ---------- Income (loss) before benefit for income taxes 134,723 (73,206) (69,536) PROVISION (BENEFIT) FOR INCOME TAXES 49,763 (23,018) (19,991) --------- --------- ---------- Net income (loss) from discontinued operations $ 84,960 $ (50,188) $ (49,545) ========= ========= ==========F-31
2003 2002 2001 REVENUES: Radio Operations $ 3,703 $ 10,240 $ 8,207 Acuff-Rose Music Publishing — 7,654 14,764 RedHawks 5,034 6,289 6,122 Word Entertainment — 2,594 115,677 International cable networks — 744 5,025 Businesses sold to OPUBCO — — 2,195 Other — — 609 Total revenues $ 8,737 $ 27,521 $ 152,599 OPERATING INCOME (LOSS): Radio Operations $ 615 $ 1,305 $ 2,184 Acuff-Rose Music Publishing 16 933 2,119 RedHawks 436 841 363 Word Entertainment 22 (917 ) (5,710 ) International cable networks — (1,576 ) (6,375 ) Businesses sold to OPUBCO (620 ) — (1,816 ) Other — — (383 ) Impairment and other charges — — (53,716 ) Restructuring charges — (20 ) (2,959 ) Total operating income (loss) 469 566 (66,293 ) INTEREST EXPENSE (1 ) (81 ) (797 ) INTEREST INCOME 8 81 199 F-23
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2003 2002 2001 OTHER GAINS AND (LOSSES) Radio Operations 54,555 — — Acuff-Rose Music Publishing 450 130,465 (11 ) RedHawks (1,159 ) (193 ) (134 ) Word Entertainment 1,503 1,553 (1,059 ) International cable networks 497 3,617 (1,002 ) Businesses sold to OPUBCO — — (1,674 ) Other — — (251 ) Total other gains and (losses) 55,846 135,442 (4,131 ) Income (loss) before provision (benefit) for income taxes 56,322 136,008 (71,022 ) PROVISION (BENEFIT) FOR INCOME TAXES 21,951 50,251 (22,189 ) Net income (loss) from discontinued operations $ 34,371 $ 85,757 $ (48,833 ) F-24
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assets and liabilities of the discontinued operations presented in the accompanying consolidated balance sheets at December 31 are comprised
of:
2002 2001 --------- ----------CURRENT ASSETS: Cash and cash equivalents $ 1,812 $ 3,889 Trade receivables, less allowance of $2,785 and $5,003, respectively 456 28,999 Inventories 163 6,486 Prepaid expenses 97 10,333 Other current assets - 823 --------- ---------- Total current assets 2,528 50,530 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 3,242 17,342 GOODWILL 1,162 28,688 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION 3,942 6,125 MUSIC AND FILM CATALOGS - 26,274 OTHER LONG-TERM ASSETS 673 5,587 --------- ---------- Total long-term assets 9,019 84,016 --------- ---------- Total assets $ 11,547 $ 134,546 ========= ========== CURRENT LIABILITIES: Current portion of long-term debt $ 94 $ 5,515 Accounts payable and accrued liabilities 6,284 25,495 --------- ---------- Total current liabilities 6,378 31,010 LONG-TERM DEBT, NET OF CURRENT PORTION - - OTHER LONG-TERM LIABILITIES 781 836 --------- ---------- Total long-term liabilities 781 836 --------- ---------- Total liabilities 7,159 31,846 MINORITY INTEREST OF DISCONTINUED OPERATIONS 1,885 1,679 --------- ---------- TOTAL LIABILITIES AND MINORITY INTEREST OF DISCONTINUED OPERATIONS $ 9,044 $ 33,525 ========= ==========7. ACQUISITIONS During 2000,of (amounts in thousands):
2003 2002 CURRENT ASSETS: Cash and cash equivalents $ 19 $ 1,812 Trade receivables, less allowance of $0 and $2,938, respectively — 1,954 Inventories — 163 Prepaid expenses — 97 Other current assets — 69 Total current assets 19 4,095 PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION — 5,157 GOODWILL — 3,527 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION — 3,942 MUSIC AND FILM CATALOGS — — OTHER LONG-TERM ASSETS — 702 Total long-term assets — 13,328 Total assets $ 19 $ 17,423 CURRENT LIABILITIES: Current portion of long-term debt $ — $ 94 Accounts payable and accrued liabilities 2,930 6,558 Total current liabilities 2,930 6,652 LONG-TERM DEBT, NET OF CURRENT PORTION — — OTHER LONG-TERM LIABILITIES 825 789 Total long-term liabilities 825 789 Total liabilities 3,755 7,441 MINORITY INTEREST OF DISCONTINUED OPERATIONS — 1,885 TOTAL LIABILITIES & MINORITY INTEREST OF DISCONTINUED OPERATIONS $ 3,755 $ 9,326 6. Acquisition
On November 20, 2003, pursuant to the
CompanyAgreement and Plan of Merger dated as of August 4, 2003, Gaylord acquiredCorporate Magic,100% of the outstanding common shares of ResortQuest in acompany specializingtax-free, stock-for-stock merger. ResortQuest is one of the nation’s largest vacation rental property management companies with approximately 19,300 units under management in 50 premier destination resorts located in theproductioncontinental United States and Canada. Under the terms ofcreative eventsthe agreement, ResortQuest stockholders received 0.275 shares of Gaylord common stock for each outstanding share of ResortQuest common stock, and the ResortQuest option holders received 0.275 options to purchase Gaylord common stock for each outstanding option to purchase one share of ResortQuest common stock. Based on the number of shares of ResortQuest common stock outstanding as of November 20, 2003 (19,339,502), the exchange ratio (0.275 Gaylord common share for each ResortQuest common share) and the average market price of Gaylord’s common stock ($19.81, which is based on an average of the closing prices for two days before, the day of,F-25
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and two days after the date of the definitive agreement, August 4, 2003), Gaylord issued 5,318,363 shares of Gaylord common stock. In addition, based on the total number of ResortQuest options outstanding at November 20, 2003, Gaylord exchanged ResortQuest options for options to purchase 573,863 shares of Gaylord common stock. Together with the direct merger costs, this resulted in an aggregate purchase price of $114.7 million plus the
corporate entertainment marketplace, for $7.5 millionassumption of ResortQuest’s outstanding indebtedness as of November 20, 2003, which totaled $85.1 million.The total purchase price of the ResortQuest acquisition is as follows (amounts in
cash and a $1.5 million note payable. The acquisition was financed through borrowings under the Company's revolving credit agreement and wasthousands):
Fair value of Gaylord common stock issued $ 105,329 Fair value of Gaylord stock options issued 5,596 Direct merger costs incurred by Gaylord 3,773 Total $ 114,698 Gaylord has accounted for
usingthe ResortQuest acquisition under the purchase method of accounting.The operating results of Corporate Magic have been included in the accompanying consolidated financial statements from the date of the acquisition. During 1999, the Company formed Gaylord Digital, its Internet initiative, and acquired 84% of two online operations, Musicforce.com and Lightsource.com, for approximately $23.4 million in cash. During 2000, the Company acquired the remaining 16% of Musicforce.com and Lightsource.com for approximately $6.5 million in cash. The acquisition was financed through borrowings under the Company's revolving credit agreement and has been accounted for usingUnder the purchase method ofaccounting. The operating resultsaccounting, the total purchase price was allocated to ResortQuest’s net tangible and identifiable intangible assets based upon their fair value as of theonline operations havedate of completion of the ResortQuest acquisition. The Company determined these fair values with the assistance of a third party valuation expert. Any excess of the purchase price over the fair value of the net tangible and identifiable intangibles was recorded as goodwill. Goodwill will not be amortized and will be tested for impairment on an annual basis and whenever events or circumstances occur indicating that the goodwill may be impaired. The final allocation of the purchase price is subject to adjustments for a period not to exceed one year from the consummation date, the allocation period, in accordance with SFAS No. 141 “Business Combinations” and EITF Issue 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination.” The allocation period is intended to differentiate between amounts that are determined as a result of the identification and valuation process required by SFAS No. 141 for all assets acquired and liabilities assumed and amounts that are determined because information that was not previously obtainable becomes obtainable.The purchase price allocation as of November 20, 2003, was as follows:
(in thousands) Cash acquired $ 4,228 Tangible assets acquired 47,511 Amortizable intangible assets 29,718 Trade names 38,835 Goodwill 162,727 Total assets acquired 283,019 Liabilities assumed (84,608 ) Debt assumed (85,100 ) Deferred stock-based compensation 1,387 Net assets acquired $ 114,698 Tangible assets acquired totaled $47.5 million which included $9.8 million of restricted cash, $26.1 million of property and equipment and $7.0 million of net trade receivables.
As of November 20, 2003 and December 31, 2003, goodwill totaled $162.7 million which is reported within the ResortQuest segment. Approximately $73.5 million of the goodwill is expected to be deductible for income tax purposes. Approximately $29.7 million has been
included in the F-32allocated to amortizable intangible assets F-26
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accompanying consolidated financial statements— (Continued)consisting primarily of existing property management contracts and ResortQuest’s customer database. Property management contracts represent existing contracts with property owners, homeowner associations and other direct ancillary service contracts. Property management contracts are amortized on a straight-line basis over the remaining useful life of the contracts. Contracts originating in Hawaii are estimated to have a remaining useful life of ten years from acquisition, while contracts in the
datecontinental United States and Canada have a remaining estimated useful life ofacquisitionseven years from acquisition. Gaylord is amortizing the customer database over a two-year period. Included in the tangible assets acquired is ResortQuest’s vacation rental management software, First Resort Software (“FRS”) which is being amortized over a remaining estimated useful life ofa controlling interest. During 2000,five years.Of the total purchase price, approximately $38.8 million has been allocated to trade names consisting primarily of the “ResortQuest” trade name which is deemed to have an indefinite remaining useful life and therefore will not be amortized.
The Company
announcedrecorded approximately $4.0 million of reserves and adjustments related to theclosing of Gaylord Digital,Company’s plans to consolidate certain support functions, to adjust for employee benefits, and to account for outstanding legal claims filed against ResortQuest asfurther discussed in Note 4. 8. DIVESTITURESan adjustment to the purchase price allocation.7. Divestitures
During 1998, the Company entered into a partnership with The Mills Corporation to develop the Opry Mills Shopping Center in Nashville, Tennessee. The Company held a one-third interest in the partnership as well as the title to the land on which the shopping center was constructed, which was being leased to the partnership. During the second quarter of 2002, the Company sold its partnership share to certain affiliates of The Mills Corporation for approximately $30.8 million in cash proceeds. In accordance with the provisions of SFAS No. 66,
"Accounting“Accounting for Sales of RealEstate"Estate”, and other applicable pronouncements, the Companyrecognized a gain of $10.6 million during the second quarter of 2002 anddeferred approximately $20.0 million of the gain representing the estimated fair value of the continuing land lease interest between the Company and the Opry Mills partnership at June 30, 2002. The Company recognized the remainder of the proceeds, net of certain transaction costs, as a gain of approximately $10.6 million during the second quarter of 2002. During the third quarter of 2002, the Company sold its interest in the land lease to an affiliate of the Mills Corporation and recognized the remaining $20.0 million deferred gain, less certain transaction costs.During 2001, the indemnification period related to the
Company'sCompany’s 1999 disposition of television station KTVT in Dallas-Fort Worth ended, resulting in the recognition of a pretax gain of $4.6 million related to the reversal of previously recordedindemnificationcontingent liabilities. The gain is included in other gains and losses in the accompanying consolidated statements of operations.During 2000, the Company sold its KOA Campground located near Gaylord Opryland for $2.0 million in cash. The Company recognized a pretax loss on the sale of $3.2 million, which is included in other gainsF-27
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Property and
losses in the accompanying consolidated statements of operations. Also during 2000, the Company divested its Orlando-area Wildhorse Saloon and Gaylord Digital, as further discussed in Note 4. 9. PROPERTY AND EQUIPMENTEquipmentProperty and equipment of continuing operations at December 31 is recorded at cost and summarized as
follows:
(in thousands) 2002 2001 ----------- ----------Land and land improvements $ 129,355 $ 95,496 Buildings 820,038 498,478 Furniture, fixtures and equipment 316,914 235,160 Construction in progress 207,223 474,697 ----------- ---------- 1,473,530 1,303,831 Accumulated depreciation (361,452) (310,484) ----------- ---------- Property and equipment, net $ 1,112,078 $ 993,347 =========== ==========F-33NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concurrent with the sale of the Opry Mills partnership, the Company purchased $5.0 million of land fromfollows (amounts in thousands):
2003 2002 Land and land improvements $ 133,449 $ 128,972 Buildings 838,276 819,610 Furniture, fixtures and equipment 336,735 312,690 Construction in progress 397,969 207,215 1,706,429 1,468,487 Accumulated depreciation (408,901 ) (358,324 ) Property and equipment, net $ 1,297,528 $ 1,110,163 The
Mills Corporation. The decreaseincrease in construction in progress during20022003 primarily relates to theopeningconstruction of the GaylordPalmsTexan, whichresultedis scheduled to open inthe transfer of assets previously recorded in construction in progress into the appropriate property and equipment categories as the assets were placed into service. The decrease in construction in progress was partially offset by an increase in the costs of the Texas hotel construction project. Buildings and furniture, fixtures and equipment also increased due to renovations at Gaylord Opryland.April, 2004. Depreciation expense of continuing operations for the years ended December 31, 2003, 2002 and 2001and 2000was$52.8$53.9 million,$34.9$52.7 million and$35.5$34.7 million, respectively. Capitalized interest for the years ended December 31, 2003, 2002 and 2001and 2000was $14.8 million, $6.8 million and $18.8 million,and $6.8 million,respectively.10. INVESTMENTS9. Investments
Investments related to continuing operations at December 31 are summarized as
follows:follows (amounts in thousands):
(in thousands) 2002 2001 -------- --------Viacom Class B non-voting common stock $448,482 $485,782 Bass Pro 60,598 60,598 Other investments - 3,792 -------- -------- Total investments $509,080 $550,172 ======== ========
2003 2002 Viacom Class B non-voting common stock $ 488,313 $ 448,482 Bass Pro 60,598 60,598 Total investments $ 548,911 $ 509,080 The Company acquired CBS Series B convertible preferred stock
("(“CBSStock"Stock”) during 1999 as consideration in the divestiture of television station KTVT. CBS merged with Viacom in May 2000. As a result of the merger of CBS and Viacom, the Company received 11,003,000 shares of Viacom Class B non-voting common stock("(“ViacomStock"Stock”). The original carrying value of the CBS Stock was $485.0 million.At December 31, 2000, the Viacom Stock was classified as available-for-sale as defined by SFAS No. 115, and accordingly, the Viacom Stock was recorded at market value, based upon the quoted market price, with the difference between cost and market value recorded as a component of other comprehensive income, net of deferred income taxes. In connection with the
Company'sCompany’s adoption of SFAS No. 133, effective January 1, 2001, the Company recorded a nonrecurring pretax gain of $29.4 million, related to reclassifying its investment in the Viacom Stock from available-for-sale to trading as defined by SFAS No. 115. This gain, net of taxes of $11.4 million, had been previously recorded as a component ofstockholders'stockholders’ equity. As trading securities, the Viacom Stock continues to be recorded at market value, but changes in market value are included as gains and losses in the consolidated statements of operations. For the year ended December 31, 2003, the Company recorded net pretax gains of $39.8 million related to the increase in fair value of the Viacom Stock. For the year ended December 31, 2002, the Company recorded net pretax losses of $37.3 million related to the decrease in fair value of the Viacom Stock. For the yearF-28
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ended December 31, 2001, the Company recorded net pretax losses of $28.6 million related to the decrease in fair value of the Viacom Stock subsequent to January 1, 2001.
Bass Pro completed a restructuring at the end of 1999 whereby certain assets, including a resort hotel in Southern Missouri and an interest in a manufacturer of fishing boats, are no longer owned by Bass Pro. Subsequent to the Bass Pro restructuring, the
Company'sCompany’s ownership interest in Bass Pro equaled19%19.1% and, accordingly, the Company accounts for the investment using the cost method of accounting.Prior to the restructuring, the Company accounted for the Bass Pro investment using the equity method of accounting through December 31, 1999. F-34NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDuring 1997, the Company purchased a 19.9% limited partnership interest in the Nashville Predators for $12.0 million. The Company accounts for its investment using the equity method as required by EITF Issue No. 02-14,
"Whether“Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through OtherMeans"Means”. The Company recordedits share oflosses of $1.4 million$3.9 millionand$2.0$3.9 million during 20022001and2000,2001, respectively, resulting from the NashvillePredators'Predators’ net losses. The carrying value of the investment in the Predators was zero at December 31, 2003 and 2002 and $1.4 million at December 31, 2001. The Company has not recognized its share of losses in 2003 or reduced its investment below zero as the Company is not obligated to make future contributions to the Predators. Through dilution, the Company holds a 10.5% ownership interest in the NashvillePredators. 11. SECURED FORWARD EXCHANGE CONTRACTPredators as of December 31, 2003.10. Secured Forward Exchange Contract
During May 2000, the Company entered into a seven-year secured forward exchange contract
("SFEC"(“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 December 31,20022003 and20012002 and long-term assets of$91.2$64.3 million and$118.1$91.2 million in the accompanying consolidated balance sheets as of December 31,20022003 and2001,2002, 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. The Company utilized $394.1 million of the net proceeds from the SFEC to repay all outstanding indebtedness under its 1997 revolving credit facility. As a result of the SFEC, the 1997 revolving credit facility was terminated.The
Company'sCompany’s obligation under the SFEC is collateralized by a security interest in theCompany'sCompany’s Viacom Stock. At the end of the seven-year contract term, the Company may, at its option, elect to pay in cash rather than by delivery of all or a portion of the Viacom Stock. The SFECeliminates the Company's exposure to any decline in Viacom's share price below $56.05. During the seven-year term of the SFEC, if the Viacom Stock appreciates by 35% or less,protects the Companywill retainagainst decreases in theincrease infair market value of the ViacomStock. Ifstock by way of a put option at a strike price below $56.05 per share, while providing for participation in increases in the fair market value by way of a call option at a strike price of $75.30 per share, as of December 31, 2003. Future dividend distributions received from ViacomStock appreciates by more than 35%,may result in an adjusted call strike price. For any appreciation above $75.30 per share, the Company willretainparticipate in thefirst 35% increase in valueappreciation at a rate ofthe Viacom Stock and approximately 25.9% of any appreciation in excess of 35%25.93%.F-29
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
12. 12. DERIVATIVE FINANCIAL INSTRUMENTS11.11. Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce certain of its interest rate risks and to manage risk exposure to changes in the value of its Viacom Stock.
In accordance withThe Company adopted the provisions of SFAS No. 133 on January 1, 2001. In connection with the adoption of SFAS No. 133, as amended, the Company recorded a gain of $11.2 million, net of taxes of $7.1 million, as a cumulative effect of an accounting change effective January 1, 2001 to record the derivatives
F-35NOTES TO CONSOLIDATED FINANCIAL STATEMENTSassociated with the SFEC at fair value. Upon adoption of SFAS No. 133, the Company valued the SFEC based on pricing provided by a financial institution and reviewed by the Company. The financial institution’s market prices are prepared for each quarter close period on a mid-market basis by reference to proprietary models and do not reflect any bid/offer spread. For theyearyears ended December 31, 2003, 2002 and 2001, the Company recorded net pretax gains (losses) in theCompany'sCompany’s consolidated statement of operations of ($33.2) million, $86.5 million and $54.3 million, respectively, related to the increase (decrease) in the fair value of the derivatives associated with the SFEC.For the year ended December 31, 2001, the Company recorded net pretax gains in the Company's consolidated statement of operations of $54.3 million related to the increase in fair value of the derivatives associated with the SFEC subsequent to January 1, 2001.During 2001, the Company entered into three contracts to cap its interest rate risk exposure on its long-term debt. Two of the contracts
capcapped theCompany'sCompany’s exposure to one-month LIBOR rates on up to $375.0 million of outstanding indebtedness at 7.5%. Another interest rate cap, whichcapscapped theCompany'sCompany’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 capsqualifyqualified 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 ofstockholder'sstockholders’ equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized in earnings. The ineffective portion of the gain or loss, if any, isreportedrecognized as income or expense immediately.The Company also purchased LIBOR rate swaps as required by the 2003 Loans as discussed in
income (expense) immediately. 13. DEBTNote 12. TheCompany'sCompany hedged a notional amount of $200.0 million, although the 2003 Loans only required that 50% of the outstanding amount be hedged. The LIBOR rate swap effectively locks the variable interest rate at a fixed interest rate at 1.48% in year one and 2.09% in year two. The LIBOR rate swaps qualify for treatment as cash flow hedges in accordance with the provisions of SFAS No. 133, as amended. Anticipating the issuance of the Senior Notes and the subsequent repayment of the 2003 Loans, the Company terminated $100.0 million of the LIBOR rate swaps effective October 31, 2003. Upon issuance of the Senior Notes and the repayment of the 2003 Loans, the Company terminated the remaining $100.0 million of the LIBOR rate swaps effective November 12, 2003. The Company received proceeds from the termination of these LIBOR rate swaps in the amount of $0.2 million.Upon issuance of the Senior Notes, the Company entered into two interest rate swap agreements with a notional amount of $125.0 million to convert the fixed rate on a certain portion of the Senior Notes to a variable rate in order to access the lower borrowing costs currently available on floating-rate debt. Under these swap agreements, which mature on November 15, 2013, the Company receives a fixed rate of 8% and pays a variable rate, in arrears, equal to six-month LIBOR plus 2.95%. The terms of the swap agreement mirror the terms of the Senior Notes, including semi-annual settlements on the 15th of May and November each year. Under the provisions of SFAS No. 133, as amended, changes in the fair value of this interest rate swap agreement must be offset against the corresponding change in fair value of the Senior Notes through earnings. The Company has determined that there will not be an ineffective portion of this hedge and therefore, no impact on earnings. As of December 31, 2003, the Company determined that, based upon dealer quotes, the fair value of these interest rate swap agreements was ($1.5) million.
F-30
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has recorded a derivative liability and an offsetting reduction in the balance of the Senior Notes accordingly.
12. Debt
The Company’s debt and capital lease obligations related to continuing operations at December 31
consists of:consist of (amounts in thousands):
(in thousands) 2002 2001 --------- ---------Senior Loan $ 213,185 $ 268,997 Mezzanine Loan 66,000 100,000 Term Loan 60,000 100,000 Capital lease obligations 1,453 - --------- --------- Total debt 340,638 468,997 Less amounts due within one year (8,526) (88,004) --------- --------- Total long-term debt $ 332,112 $ 380,993 ========= =========
2003 2002 Senior Loan $ 199,181 $ 213,185 Mezzanine Loan — 66,000 Term Loan — 60,000 Senior Notes 350,000 — Fair value derivatives effective for Senior Notes (1,544 ) — Notes payable 200 — Capital lease obligations 922 1,453 Total debt 548,759 340,638 Less amounts due within one year (8,584 ) (8,526 ) Total long-term debt $ 540,175 $ 332,112 Annual maturities of long-term debt, excluding capital lease obligations and derivatives, are as
follows.follows (amounts in thousands). Note1716 discusses the capital lease obligations in more detail, including annual maturities.
(in thousands) Debt --------2003 $ 8,004 2004 331,181 2005 - 2006 - 2007 - Years thereafter - -------- Total $339,185 ========F-36
2004 $ 8,104 2005 8,104 2006 183,173 2007 — 2008 — Years thereafter 350,000 Total $ 549,381 Accrued interest payable at December 31, 2003 and 2002 was $3.2 million and $0.6 million, respectively, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
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, which was repaid and terminated in November 2003 using proceeds of the Senior Notes discussed below, was secured by the equity interest in the wholly-owned subsidiary that owns Gaylord Opryland, was due in April 2004 and bore interest at one-month LIBOR plus 6.0%. At the Company’s option, the Senior Loan may be extended for two additional one-year terms beyond its scheduled maturity, subject to Gaylord Opryland meeting certain financial ratios and other
F-31
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
criteria. The Nashville Hotel Loans required monthly principal payments of approximately $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 purchased instruments that cap its exposure to one-month LIBOR at 7.5% as discussed in Note 11. The Company used $235.0 million of the proceeds from the Nashville Hotel Loans to refinance the remaining outstanding portion of $235.0 million of an interim loan obtained from Merrill Lynch Mortgage Capital, Inc. in 2000. 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 an interim loan and paying required escrows and fees were approximately $97.6 million. At December 31, 2003 and 2002, the unamortized balance of the deferred financing costs related to the Nashville Hotel Loans was $0.8 million and $7.3 million, respectively. The weighted average interest rates for the Senior Loan for 2003 and 2002, including amortization of deferred financing costs, were 4.2% and 4.5%, respectively. The weighted average interest rates for the Mezzanine Loan for 2003 and 2002, including amortization of deferred financing costs, were 10.7% and 10.5%, respectively.
The terms of the Nashville Hotel Loans required 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 Mezzanine Loan were structured such that failure to meet certain ratios at one level triggers certain cash management restrictions and failure to meet certain ratios at a second level results in an event of default under the Mezzanine Loan. Based upon the financial covenant calculations at December 31, 2002, the cash management restrictions were in effect which required that all excess cash flows, as defined, be escrowed and may be used to repay principal amounts owed on the Senior Loan. During 2002, the Company negotiated certain revisions to the financial covenants under the Mezzanine Loan. After these revisions, the Company was in compliance with the covenants under the Nashville Hotel Loans for which the failure to comply would result in an event of default at December 31, 2002. During the second quarter of 2003, the Company’s ratios had improved such that the cash management restrictions were lifted. As of December 31, 2003, the Mezzanine Loan was repaid and the Company was in compliance with all covenants and the cash management restrictions were not in effect. 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. 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 Senior 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.
During November, 2003, the Company used the proceeds of the Senior Notes, as discussed below, to repay $66.0 million outstanding under the Mezzanine Loan portion of the Nashville Hotel Loans. As a result of the prepayment of the Mezzanine Loan, the Company wrote off $0.7 million in deferred financing costs, which is recorded as interest expense in the consolidated statement of operations. The remaining terms of the Senior Loan are the same as discussed above.
Term Loan
During 2001, the Company entered into a three-year delayed-draw senior term loan (the
"Term Loan"“Term Loan”) of up to $210.0 million with Deutsche Banc Alex. Brown Inc., Salomon Smith Barney, Inc. and CIBC World Markets Corp. (collectively the"Banks"“Banks”). During May 2003, the Company used $60 million of the proceeds from the 2003 Loans, as discussed below, to pay off the Term Loan. Concurrent with the payoff the Term Loan, the Company wrote off the remaining, unamortized deferred financing costs ofF-32
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$1.5 million related to the Term Loan, which is recorded as interest expense in the consolidated statement of operations. Proceeds of the Term Loan were used to finance the construction of Gaylord Palms and the initial construction phases of the Gaylord
hotel in TexasTexan, as well as for general operating purposes. The Term Loaniswas primarily secured by theCompany'sCompany’s ground lease interest in Gaylord Palms.At the
Company'sCompany’s option, amounts outstanding under the Term Loanbearbore 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 in Note12. 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.11. In addition, the Companyiswas 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'sWord’s domestic operations as described in Note6,5, which required the prepayment of the Term Loan in the amount of $80.0million and, accordingly, this amount was classified as due within one year at December 31, 2001.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 described in Note87 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 sale of Acuff-Rose Music Publishing to reduce the outstanding balance of the Term Loan. Also during 2002, the Company made a principal payment of approximately $4.1 million under the Term Loan. Net borrowings under the Term Loan for 2002and 2001were $85.0million and $100.0 million, respectively.million. As of December 31, 2002,and 2001,the Company had outstanding borrowings of $60.0 millionand $100.0 million, respectively,under the TermLoan and was requiredLoan. Proceeds from the 2003 Loans, as discussed below, were used toescrow certain amounts in a completion reserve account for Gaylord Palms. The Company's ability to borrow additional funds underrepay the Term Loanexpired during 2002. However, the lenders could reinstate the Company's ability to borrow additional funds at a future date.in 2003.The terms of the Term Loan required the Company to purchase an interest rate instrument which
capscapped 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 wherebythey waivedthis 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.2003 Loans
During May of 2003, the Company finalized a $225 million credit facility (the “2003 Loans”) with Deutsche Bank Trust Company Americas, Bank of America, N.A., CIBC Inc. and a syndicate of other lenders. The 2003 Loans consisted of a $25 million senior revolving facility, a $150 million senior term loan and a $50 million subordinated term loan. The
maximum amount available under2003 Loans were due in 2006. The senior loan bore interest of LIBOR plus 3.5%. The subordinated loan bore interest of LIBOR plus 8.0%. The 2003 Loans were secured by the Gaylord Palms assets and the Gaylord Texan assets. At the time of closing the 2003 Loans, the Company engaged LIBOR interest rate swaps which fixed the LIBOR rates of the 2003 Loans at 1.48% in year one and 2.09% in year two. The interest rate swaps related to the 2003 Loans are discussed in more detail in Note 11. The Company was required to pay a commitment fee equal to 0.5% per year of the average daily unused portion of the 2003 Loans. Proceeds of the 2003 Loans were used to pay off the Term Loanis reduced to $50.0of $60 millionin April 2004, with full repayment due in October 2004. Debt repayments underas discussed above and theTerm Loan reduceremaining net proceeds of approximately $134 million were deposited into an escrow account for theborrowing capacitycompletion of the construction of the Gaylord Texan. The provisions of the 2003 Loans contain covenants andare not eligible to be re-borrowed. The Term Loan requires the Company to maintain certain escrowed cash balances, complyrestrictions including compliance 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,restrictions on additional indebtedness, escrowed cash balances, as well as other customarycovenants andrestrictions.At December 31, 2002 and 2001,In connection with the
unamortized balanceoffering of thedeferred financing costs relatedSenior Notes, on November 12, 2003 the Company amended the 2003 Loans to, among other things, permit theTerm Loan was $2.4 million and $5.6 million, respectively. The weighted average interest rate, including amortization of deferred financing costs, under the Term Loan for 2002 and 2001 was 9.6% and 8.3%, respectively. The weighted average interest rate of 9.6% for 2002 includes 4.5% related to commitment feesResortQuest acquisition and theamortizationissuance ofdeferred financing costs.the SeniorLoan 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 & F-37F-33
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Notes, maintain the $25.0 million revolving credit facility portion of the 2003 Loans, to repay and eliminate the $150 million senior term loan portion and the $50 million subordinated term loan portion of the 2003 Loans and make certain other amendments to the 2003 Loans. During November, 2003, as discussed below, the Company
acting as principal. Theused the proceeds of the SeniorLoan is secured by a first mortgage lien on the assets of Gaylord Opryland and is due in 2004. AmountsNotes to repay all amounts outstanding under theSenior Loan bear2003 Loans. As a result of the prepayment of the 2003 Loans, the Company wrote off $6.6 million in deferred financing costs, which is included in interestat one-month LIBOR plus approximately 1.02%. The Mezzanine Loan, secured by the equity interestexpense in thewholly-owned subsidiary that owns Gaylord Opryland, isconsolidated statement of operations.Senior Notes
On November 12, 2003, the Company completed its offering of $350 million in aggregate principal amount of senior notes due 2013 (the “Senior Notes”) in
2004 and bearsan institutional private placement. The interestat 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 termsrate of the SeniorLoan andNotes is 8%, although theMezzanine Loan required the purchase ofCompany has entered into fixed to variable interest ratehedges in notional amounts equalswaps with respect tothe outstanding balances$125 million principal amount of the SeniorLoanNotes which results in an effective interest rate of LIBOR plus 2.95% with respect to that portion of the Senior Notes. The Senior Notes, which mature on November 15, 2013, bear interest semi-annually in arrears on May 15 andthe Mezzanine LoanNovember 15 of each year, starting on May 15, 2004. The Senior Notes are redeemable, inorder to protect against adverse changeswhole or inone-month LIBOR. Pursuant to these agreements,part, at any time on or after November 15, 2008 at a designated redemption amount, plus accrued and unpaid interest. In addition, the Companyhas purchased instruments that cap its exposuremay redeem up toone-month LIBOR at 7.5% as discussed in Note 12. The Company used $235.0 million35% of the Senior Notes before November 15, 2006 with the net cash proceeds from certain equity offerings. The Senior Notes rank equally in right of payment with theNashville HotelCompany’s other unsecured unsubordinated debt, but are effectively subordinated to all the Company’s secured debt to the extent of the assets securing such debt. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that was a borrower or guarantor under the 2003 Loans, and as of November 2003, torefinancetheInterim Loan discussed below. At closing,new revolving credit facility. In connection with the offering of the Senior Notes, the Companywas required to escrow certain amounts, including $20.0paid approximately $9.4 millionrelated to future renovations and related capital expenditures at Gaylord Opryland.in deferred financing costs. The net proceeds from theNashville Hotel Loans after refinancingoffering of theInterim Loan and paying required escrows and fees were approximately $97.6 million. At December 31, 2002 and 2001, the unamortized balanceSenior Notes, together with $22.5 million of thedeferred financing costsCompany’s cash on hand, were used as follows:
• $275.5 million was used to repay the $150 million senior term loan portion and the $50 million subordinated term loan portion of the 2003 Loans, as discussed above, as well as the remaining $66 million of the Company’s $100 million Mezzanine Loan and to pay certain fees and expenses related to the ResortQuest acquisition; and • $79.2 million was placed in escrow pending consummation of the ResortQuest acquisition. As of November 20, 2003, the $79.2 million together with $8.2 million of the available cash, was used to repay ResortQuest’s senior notes and its credit facility, the principal amount of which aggregated $85.1 million at closing and a related prepayment penalty. The Company wrote off $0.4 million in deferred financing costs, which is recorded as interest expense in the consolidated statements of operations. New Revolving Credit Facility
On November 20, 2003, the Company entered into a new $65.0 million revolving credit facility, which subsequently was increased to $100.0 million. The new revolving credit facility, which replaced the
Nashville Hotel Loans was $7.3 millionrevolving credit portion under the 2003 Florida/ Texas senior secured credit facility, matures in May 2006 and$13.8 million, respectively. The weighted averageborrowings thereunder bear interestrates forat a rate of either LIBOR plus 3.50% or theSenior Loan for 2002 and 2001, including amortization of deferred financing costs, were 4.5% and 6.2%, respectively. The weighted averagelending banks’ base rate plus 2.25%. Borrowings may be made with interestrates forperiods ranging from one to three months, at theMezzanine Loan for 2002 and 2001, including amortization of deferred financing costs, were 10.5% and 12.0%, respectively. The termselection of theNashville Hotel Loans require that theCompanymaintain certain escrowed cash balancesandcomply 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 and 2001, the cash management restrictions were in effect which requires thatallexcess cash flows, as defined, be escrowed andprincipal amounts may beused to repay principal amounts owed on the Senior Loan. At December 31, 2002 and December 31, 2001, $0 and $13.9 million, respectively, related to the cash management restrictions is included in restricted cash in the accompanying consolidated balance sheets. 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 December 31, 2002 and 2001. 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.continued until maturity. The Companybelieves it has certain other possible alternativesmay elect to reduceborrowingsprincipal amounts outstanding under theNashville Hotel Loans which would allow the Companyrevolving credit facility from time toremedy any event of default. Any event of noncompliance that results in an event of default under the Nashville Hotel Loanstime without penalty orthe 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. During the second quarter of 2002, like other companies in the hospitality industry, the Company was notifiedpremium. The new revolving credit facility is guaranteed by theinsurers providing its property and casualty insuranceCompany’s subsidiaries thatpolicies issued upon renewal would no longer include coverage for terrorist acts. As a result, the servicer for the Senior Loan notified the Company in May of 2002 that it believed the lack of insurance covering terrorist acts and certain related matters did constitute an event of default under the terms of that credit facility. Although coverage for terrorist acts was never specifically required as part of the required property and casualty coverage, the Company determined to resolve this issue by obtaining coverage for terrorist acts. The Company has obtained coverage in an amount equal to the outstanding balance of the Senior Loan. During the third quarter of 2002, the Company received notice from the servicer that any previous existing defaults were cured and coverage in F-38F-34
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an amount equal— (Continued)were guarantors or borrowers under our 2003 Florida/ Texas senior secured credit facility and is secured by a leasehold mortgage on the Gaylord Palms. The new revolving credit facility requires the Company to
the outstanding balanceachieve substantial completion and initial opening of theloan satisfied the requirementsGaylord Texan by June 30, 2004. As ofthe Senior Loan. The servicer has reserved the right to impose additional insurance requirements if there is a change in, among other things, the availability or cost of terrorism insurance coverage, the risk of terrorist activity, or legislation affecting the rights of lenders to require borrowers to maintain terrorism insurance. Based upon the Company's curing any default which may have existed, this debt continues to be classified as long-term in the accompanying consolidated balance sheets. 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 10. During 2001, the Company increased the borrowing capacityDecember 31, 2003, no borrowings were outstanding under theInterim Loan to $250.0 million.new revolving credit facility, but the lending banks had issued a total of $11.3 million in letters of credit under the credit facility for the Company. The Companyused $235.0 million of the proceeds from the Nashville Hotel Loans discussed previouslyis required torefinance the Interim Loan during March 2001. The Interim Loan requiredpay a commitment feeof 0.375%equal to 0.5% per yearonof the average daily unused revolving portion of theInterim Loan and a contingent exit fee of up to $4.0 million, depending upon Merrill Lynch's involvement in the refinancing of the Interim Loan. The Company recognized a portion of the exit fee as interest expense in the accompanying 2000 consolidated statement of operations. Pursuant to the terms of the Nashville Hotel Loans discussed previously, the contingencies related to the exit fee were removed and no payment of these fees was required. 1997 Credit Facility In August 1997, the Company entered into anew revolving creditfacility (the "1997 Credit Facility") and utilized the proceeds to retire outstanding indebtedness. The Company utilized $394.1 million of the net proceeds from the SFEC in 2000 to repay all outstanding indebtedness under the 1997 Credit Facility as discussed in Note 10. As a result of the SFEC, the 1997 Credit Facility was terminated. Accrued interest payable at December 31, 2002 and 2001 was $0.6 million and $1.1 million, respectively, and is included in accounts payble and accrued liabilities in the accompanying consolidated balance sheets. F-39NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. INCOME TAXESfacility.13. Income Taxes
The provision (benefit) for income taxes from continuing operations consists of the
following:following (amounts in thousands):
(in thousands) 2002 2001 2000 -------- -------- --------CURRENT: Federal $ - $ - $ (326) State 1,336 (32) 304 -------- -------- -------- Total current provision (benefit) $ 1,336 $ (32) $ (22) -------- -------- -------- DEFERRED: Federal 461 (7,928) (50,748) State (1,334) (353) (370) -------- -------- -------- Total deferred provision (benefit) (873) (8,281) (51,118) -------- -------- -------- Effect of tax law change 1,343 - - -------- -------- -------- Total provision (benefit) for income taxes $ 1,806 $ (8,313) $(51,140) ======== ======== ========
2003 2002 2001 Federal $ (18,367 ) $ — $ — State (3,284 ) 1,336 (32 ) Total current provision (benefit) (21,651 ) 1,336 (32 ) Federal 901 32 (8,657 ) State (4,053 ) (1,393 ) (453 ) Foreign 134 — — Total deferred benefit (3,018 ) (1,361 ) (9,110 ) Effect of tax law change — 1,343 — Total provision (benefit) for income taxes $ (24,669 ) $ 1,318 $ (9,142 ) The tax benefits associated with the exercise of stock options during the years ended 2003, 2002, and 2001
and 2000were$27,000, $0.7$0.9 million, $0.03 million and$1.0$0.7 million, respectively, and are reflected as an increase in additional paid-in capital in the accompanying consolidated statements ofstockholders'stockholders’ equity.During 2002, the Tennessee legislature increased the corporate income tax rate from 6% to 6.5%. As a result, the Company increased the deferred tax liability by $1.3 million and increased 2002 tax expense by $1.3 million. Due to the utilization of state net operating loss carryforwards from the sale of the Radio Operations in 2003, as discussed in Note 5, the Company released a portion of the valuation allowance to increase the deferred tax asset by $2.4 million and to reduce the tax expense by $2.4 million.
The effective tax rate as applied to pretax income (loss) from continuing operations differed from the statutory federal rate due to the following:
2002 2001 2000 ---- ---- ----U.S. federal statutory rate 35% 35% 35% State taxes, (net of federal tax benefit and change in valuation allowance) - 1 - Effective tax law change 6 - - Previously accrued income taxes (34) 19 (1) Other 5 (6) (2) --- --- --- 12% 49% 32% === === ===F-40
2003 2002 2001 U.S. federal statutory rate 35 % 35 % 35 % State taxes (net of federal tax benefit and change in valuation allowance) 8 — 2 Effective tax law change — 7 — Previously accrued income taxes — (37 ) 16 Other (1 ) 5 (6 ) 42 % 10 % 47 % F-35
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Provision is made for deferred federal and state income taxes in recognition of certain temporary differences in reporting items of income and expense for financial statement purposes and income tax purposes. Significant components of the
Company'sCompany’s deferred tax assets and liabilities at December 31 are asfollows:follows (amounts in thousands):
(in thousands) 2002 2001 --------- ---------DEFERRED TAX ASSETS: Accounting reserves and accruals $ 20,553 $ 23,438 Defined benefit plan 8,360 2,704 Goodwill and other intangibles 5,149 4,082 Investments in stock & partnerships 4,681 11,944 Forward exchange contract 28,111 17,524 Net operating loss carryforwards 15,296 107,236 Tax credits & other carryforwards 7,085 6,417 Other assets 540 2,415 --------- --------- Total deferred tax assets 89,775 175,760 Valuation allowance (11,403) (10,703) --------- --------- Total deferred tax assets, net of allowance 78,372 165,057 --------- --------- DEFERRED TAX LIABILITIES: Property, plant, & equipment, net 72,085 65,425 Investments in stock & derivatives 227,379 207,156 Other liabilities 2,727 7,637 --------- --------- Total deferred tax liabilities 302,191 280,218 --------- --------- Net deferred tax liabilities $ 223,819 $ 115,161 ========= =========
2003 2002 Accounting reserves and accruals $ 20,895 $ 20,553 Defined benefit plan 8,944 8,360 Goodwill and other intangibles — 5,149 Investments in stock 3,458 4,681 Forward exchange contract 38,609 28,111 Rent escalation and naming rights 6,752 — Net operating loss carryforwards 24,998 15,296 Tax credits and other carryforwards 7,833 7,085 Other assets 2,832 540 Total deferred tax assets 114,321 89,775 Valuation allowance (9,918 ) (11,403 ) Total deferred tax assets, net of valuation allowance 104,403 78,372 Goodwill and other intangibles 24,376 — Property and equipment, net 87,705 72,085 Investments in stock & derivatives 229,942 227,379 Investments in partnerships 1,939 — Other liabilities 2,727 2,727 Total deferred tax liabilities 346,689 302,191 Net deferred tax liabilities $ 242,286 $ 223,819 At December 31,
2002,2003, the Company had federal net operating loss carryforwards of$4.8$28.3 million which will begin to expire in 2020. In addition, the Company had federal minimum tax credits of $5.4 million that will not expire and other federal tax credits of$0.3$0.8 million that will begin to expire in 2018. The Company acquired net operating losses of $20.1 million and federal minimum tax credits of $0.2 million as a result of the acquisition of ResortQuest as described in Note 6. The Company’s utilization of these tax attributes will be limited due to the ownership change that resulted from the acquisition. However, management currently believes that these carryforwards will be ultimately fully utilized. State net operating loss carryforwards at December 31,20022003 totaled$306.8$349.8 million and will expire between20032004 and2017.2018. Foreign net operating loss carryforwards at December 31,20022003 totaled$2.5$0.2 million and will expirebetween 2010 and 2012.in 2010. The use of certain state and foreign net operating losses and other state and foreign deferred tax assets are limited to the future taxable earnings of separate legal entities. As a result, a valuation allowance has been provided for certain state and foreign deferred tax assets, including loss carryforwards. The change inthevaluation allowance was$(0.7)$(1.5) million, $(0.7) million and$(5.7)$(0.7) million in 2003, 20022001and20002001, respectively. Based on the expectation of future taxable income, management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance.F-36
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes resulting from the unrealized gain on the investment in the Viacom Stock were $11.4 million at December 31, 2000 and were reflected as a reduction in
stockholders'stockholders’ equity. Effective January 1, 2001, the Company reclassified its investment in the Viacom Stock from available-for-sale to trading as defined by SFAS No. 115, which required the recognition of a deferred tax provision of $11.4 million for the year ended December 31, 2001. These amounts are reflected in the accompanying consolidated statement ofoperations for the year endedoperations. At December 31,2002.2003, the deferred tax liability relating to the Viacom Stock and the related SFEC (see Note 10) was $229.9 million, which amounts will be payable upon expiration of the SFEC which is scheduled for May 2007.During the years ended 2002
2001and20002001, the Company recognizedprovision (benefits)benefits of$(4.9) million, $(3.2)$4.9 million and$1.1$3.2 million, respectively, related to the settlement of certain federal income tax issues with the Internal Revenue Service (“IRS”) as well as the closing of open tax years for federal and state tax purposes. The Company reached a $2.0 million partial settlement of Internal RevenueF-41NOTES TO CONSOLIDATED FINANCIAL STATEMENTSService audits of theCompany'sCompany’s 1996-1997 tax returns during 2001. TheCompany reached a final settlementIRS has completed and closed its audits of the Company’s tax returns through 1998. The IRS has also completed its audits of the Company’s tax returns for the1996years 1999 through1998 years in 2002 with2001. The Company does not believe the resolution of those audits will have anet cash paymentmaterial effect on the Company’s consolidated results of$0.1 million.operations or financial position.During the second quarter of 2002, the Company received an income tax refund of $64.6 million in cash from the U.S. Department of Treasury as a result of the net operating
losses carry-backloss carry back provisions of the Job Creation and Worker Assistance Act of 2002. Net cash refunds for income taxes were approximately $1.0 million, $63.2 million and $21.7 million in 2003, 2002 and$18.5 million in 2002,2001,and 2000,respectively.15. STOCKHOLDERS' EQUITY14. Stockholders’ Equity
Holders of common stock are entitled to one vote per share. During 2000, the
Company'sCompany’s Board of Directors voted to discontinue the payment of dividends on its common stock.16. STOCK PLANS15. Stock Plans
At December 31, 2003 and 2002, 3,327,325 and
2001,3,241,037and 3,053,737shares, respectively, of theCompany'sCompany’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 exercisabletwoone tofivefour 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 fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2003, 2002
2001and2000,2001, respectively: risk-free interest rates of4.1%2.8%,4.7%4.1% and6.4%4.7%; expected volatility of33.1%35.5%,34.2%33.1% and30.2%34.2%; expected lives of 4.8, 4.35.4and7.35.4 years; expected dividend rates of 0% for all years. The weighted average fair value of options granted was $7.40, $8.16 and $10.10 in 2003, 2002 and$12.83 in2001, respectively.F-37
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock option awards available for future grant under the stock plan at December 31, 2003 and 2002
2001were 2,113,252 and2000,956,181 shares of common stock, respectively. Stock option transactions under the plan and options converted at the ResortQuest acquisition are summarized as follows:
2003 2002 2001 Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 3,241,037 $ 26.21 3,053,737 $ 26.60 2,352,712 $ 26.38 Granted 777,390 21.21 635,475 24.26 1,544,600 25.35 Converted at ResortQuest acquisition 573,863 21.18 — — — — Exercised (235,860 ) 17.75 (29,198 ) 22.63 (203,543 ) 11.44 Canceled (612,813 ) 26.52 (418,977 ) 26.33 (640,032 ) 27.59 Outstanding at end of year 3,743,617 24.88 3,241,037 26.21 3,053,737 26.60 Exercisable at end of year 1,840,310 27.02 1,569,697 27.27 1,235,324 27.39 A summary of stock options outstanding at December 31, 2003 is as follows:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Option Remaining Average Number of Average Exercise Price Number of Contractual Exercise Shares Exercise Range Shares Life Price Exerciseable Price $ 12.58-20.00 325,383 5.1 $ 15.42 111,905 $ 14.92 20.01-25.00 1,181,990 7.7 21.65 289,332 22.94 25.01-30.00 1,964,844 6.6 26.86 1,176,839 27.16 30.01-35.00 153,012 4.2 32.56 143,846 32.60 35.01-40.00 116,326 4.3 40.00 116,326 40.00 40.01-58.18 2,062 5.3 57.12 2,062 57.12 12.58-58.18 3,743,617 6.6 24.88 1,840,310 27.02 The plan also provides for the award of restricted stock. At December 31,
20022003 and2001,2002, awards of restricted stock of86,025111,350 and109,86786,025 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 ofstockholders'stockholders’ equity. Unearned compensation is amortized and expensed over the vesting period of the restricted stock.Stock option awards availableAt December 31, 2003, there was approximately $1.4 million in unearned deferred compensation related to restricted unit grants recorded as other stockholders’ equity in the accompanying consolidated balance sheet.Included in compensation expense for
future2003 is $1.6 million related to the grant of 620,500 units under thestock plan at December 31, 2002 and 2001 were 956,181 and 1,177,345 sharesCompany’s Performance Accelerated Restricted Stock Unit Program which was implemented in the second quarter ofcommon stock, respectively. Stock option transactions under the plans are summarized as follows:
2002 2001 2000 ------------------------ ----------------------- ----------------------- WEIGHTED Weighted Weighted AVERAGE Average Average NUMBER OF EXERCISE Number of Exercise Number of Exercise SHARES PRICE Shares Price Shares Price --------- -------- --------- -------- --------- --------Outstanding at beginning of year 3,053,737 26.60 2,352,712 $ 26.38 2,604,213 $ 25.74 Granted 635,475 24.26 1,544,600 25.35 749,700 26.65 Exercised (29,198) 22.63 (203,543) 11.44 (178,335) 10.36 Canceled (418,977) 26.33 (640,032) 27.59 (822,866) 28.10 --------- ----- --------- ------- --------- -------F-42NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding at end of year 3,241,037 $ 26.21 3,053,737 $ 26.60 2,352,712 $ 26.38 ========= ========== ========= ========== ========= ========== Exercisable at end of year 1,569,697 $ 27.27 1,235,324 $ 27.39 1,138,681 $ 24.18 ========= ========== ========= ========== ========= ==========A summary of stock options outstanding at December 31, 2002 is as follows:2003.
WEIGHTED WEIGHTED AVERAGE OPTION AVERAGE NUMBER OF REMAINING EXERCISE EXERCISE NUMBER OF SHARES CONTRACTUAL PRICE RANGE PRICE SHARES EXERCISABLE LIFE - -------------- -------- --------- ----------- -----------$18.55 - 22.00 $20.64 258,545 110,420 6.4 YEARS 22.01 - 26.00 24.39 1,271,230 392,330 7.6 YEARS 26.01 - 30.00 27.67 1,456,096 854,446 6.8 YEARS 30.01 - 34.00 32.51 255,166 212,501 5.4 YEARS - -------------- ------ --------- --------- --------- $18.55 - 34.00 $27.27 3,241,037 1,569,697 7.0 YEARS ============== ====== ========= ========= =========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'sCompany’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 12,888, 14,75311,965and13,66611,965 shares of common stock at an average price of $16.95, $17.47$18.27and$21.19$18.27 pursuant to this plan during 2003, 2002 and 2001,and 2000,respectively.17. COMMITMENTSF-38
GAYLORD ENTERTAINMENT COMPANY ANDCONTINGENCIES Capital leasesSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Commitments and Contingencies
Capital leases During 2003 and 2002, the Company entered into one and three capital
leases.leases, respectively. There were no capital leases in effect at December 31, 2001. In the accompanying consolidated balancesheet,sheets, the following amounts of assets under capitalized lease agreements are included in property and equipment and other long-term assets and the related obligations are included indebt:debt (amounts in thousands):
2003 2002 Property and equipment $ 1,563 $ 1,965 Other long-term assets 898 412 Accumulated depreciation (567 ) (144 ) Net assets under capital leases in property and equipment $ 1,894 $ 2,233 Current lease obligations $ 480 $ 522 Long-term lease obligations 442 931 Capital lease obligations $ 922 $ 1,453
(in thousands) 2002 -----------Property and equipment $ 1,965 Other long-term assets 412 Accumulated depreciation (144) ----------- Net assets under capitalOperating leases in property and equipment $ 2,233 =========== Current lease obligations $ 522 Long-term lease obligations 931 ----------- Capital lease obligations $ 1,453 ===========Operating leasesRental expense related to continuing operations for operating leases was
$13.2$13.6 million,$2.8$13.1 million and $2.7 million for 2003, 20022001and2000,2001, respectively. The increase in 2002 is related toF-43NOTES TO CONSOLIDATED FINANCIAL STATEMENTSthe operating land lease for Gaylord Palms as discussed below.Of the $13.2 million of rentalNon-cash lease expense for 2003 and 2002 was $6.5 million,relates to non-cash lease expenseas discussed below.Future minimum cash lease commitments under all
noncancelablenon-cancelable leases in effect for continuing operations at December 31,20022003 are asfollows:follows (amounts in thousands):
(in thousands) Capital Leases Operating Leases -------------- ----------------2003 $ 560 $ 6,242 2004 741 5,697 2005 178 4,713 2006 89 3,422 2007 - 3,518 Years thereafter - 683,202 ------ --------- Total minimum lease payments $1,568 $ 706,794 ====== ========= Less amount representing interest (115) Total present value of minimum payments 1,453 Less current portion of obligations 522 ------ Long-term obligations $ 931 ======
Capital Operating Leases Leases 2004 $ 553 $ 11,350 2005 237 9,777 2006 133 7,698 2007 59 7,197 2008 10 6,138 Years thereafter — 692,695 Total minimum lease payments 992 $ 734,855 Less amount representing interest (70 ) Total present value of minimum payments 922 Less current portion of obligations (480 ) Long-term obligations $ 442 The Company entered into a 75-year operating lease agreement during 1999 for 65.3 acres of land located in Osceola County, Florida for the development of Gaylord Palms. The lease requires annual lease payments of approximately
$0.9 million until the completion of construction in 2002, at which point the annual lease payments increased to approximately$3.2 million. The lease agreement provides foraan annual 3% escalation of base renteach yearbeginningfive years after the opening of Gaylord Palms.in 2007. As required by SFAS No. 13, and related interpretations, the terms of this lease require that the Company recognize lease expense on a straight-line basis, which resulted in an annualF-39
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
lease expense of approximately $9.8 million for
2002, including2003 and 2002. This rent included approximately $6.5 million of non-cash expenses during 2003 and 2002. The Company is currently attempting to renegotiate certain terms of the lease in an attempt to more closely align thecash requirements undereconomic cost of the lease with the impact on theCompany'sCompany’s results of operations. At the end of the 75-year lease term, the Company may extend the operating lease to January 31, 2101, at which point the buildings and fixtures will be transferred to the lessor. The Company also records contingent rentals based upon net revenues associated with the Gaylord Palms operations. The Company recorded $0.7 million and $0.6 million of contingent rentals related to the Gaylord Palmssubsequent to its Januaryin 2003 and 2002,opening. Other commitments The Company was notified during 1997 by Nashville governmental authorities of an increase in the appraised value and property tax rates related to Gaylord Opryland resulting in an increased tax assessment. The Company contested the increases and was awarded a partial reduction in the assessed values. During the year ended December 31, 2000, the Company recognized a pretax charge to operations of $1.1 million for the resolution of the property tax dispute.respectively.
Other commitments and contingencies During 1999, the Company entered into a 20-year naming rights agreement related to the Nashville Arena with the Nashville Predators. The Nashville Arena has been renamed the Gaylord Entertainment Center as a result of the agreement. The contractual commitment required the Company to pay $2.1 million during the first year of the contract, with a 5% escalation each year for the remaining term of the agreement. The Company is accounting for the naming rights agreement expense on a straight-line basis over the 20-year contract period. The Company recognized naming rights expense of $3.4 million for the years ended December 31, 2003, 2002
2001and2000,2001, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.F-44NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe Company has purchased stop-loss coverage in order to limit its exposure to any significant levels of claims relating to
workers'workers’ compensation, employee medical benefits and general liability for which it is self-insured.The Company has entered into employment agreements with certain officers, which provides for severance payments upon certain events, including a change of control.
In connection with the Company’s execution of the Agreement of Limited Partnership of the Nashville Hockey Club, L.P. on June 25, 1997, the Company, its subsidiary CCK, Inc., Craig Leipold, Helen Johnson-Leipold (Mr. Leipold’s wife) and Samuel C. Johnson (Mr. Leipold’s father-in-law) entered into a guaranty agreement executed in
control.favor of the National Hockey League (NHL). This agreement provides for a continuing guarantee of the following obligations for as long as any of these obligations remain outstanding: (i) all obligations under the expansion agreement between the Nashville Hockey Club, L.P. and the NHL; and (ii) all operating expenses of the Nashville Hockey Club, L.P. The maximum potential amount which the Company and CCK, collectively, could be liable under the guaranty agreement is $15.0 million, although the Company and CCK would have recourse against the other guarantors if required to make payments under the guarantee. As of December 31, 2003, the Company had not recorded any liability in the consolidated balance sheet associated with this guarantee.The Company is a party to the lawsuit styledNashville Hockey Club Limited Partnership v. Gaylord Entertainment Company, Case No. 03-1474, now pending in the Chancery Court for Davidson County, Tennessee. In its complaint for breach of contract, Nashville Hockey Club Limited Partnership alleged that the Company failed to honor its payment obligation under a Naming Rights Agreement for the multi-purpose arena in Nashville known as the Gaylord Entertainment Center. Specifically, Plaintiff alleged that the Company failed to make a semi-annual payment to Plaintiff in the amount of $1,186,566 when due on January 1, 2003 and in the amount of $1,245,894 when due on July 1, 2003. The Company contended that it effectively fulfilled its obligations due under the Naming Rights Agreement by way of set off against obligations owed by Plaintiff to CCK Holdings, LLC (“CCK”) under a “put option” CCK exercised pursuant to the Partnership Agreement between CCK and Plaintiff. CCK has assigned the proceeds of its put option to the Company. The Company vigorously contested this case by filing an answer and counterclaim denying any liability to Plaintiff, specifically alleging that all payments due to Plaintiff under the Naming Rights Agreement had been paid in full and asserting a counterclaim for amounts owing on
F-40
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the put option under the Partnership Agreement. Plaintiff filed a motion for summary judgment which was argued on February 6, 2004, and on March 10, 2004 the Chancellor granted the Plaintiff’s motion, requiring the Company to make payments (including $4.1 million payable to date) under the Naming Rights Agreement in cash and finding that conditions to the satisfaction of the Company’s put option have not been met. The Company intends to appeal this decision and continue to vigorously assert its rights in this litigation. Because the Company continued to recognize the expense under the Naming Rights Agreement, payment of the accrued amounts under the Naming Rights Agreement will not affect the Company’s results of operation.
As previously disclosed in January 2003, the Company restated its historical financial statements for 2000, 2001 and the first nine months of 2002 to reflect certain non-cash changes, which resulted primarily from a change to the Company’s income tax accrual and the manner in which the Company accounted for its investment in the Nashville Predators. The Company has been advised by the Securities and Exchange Commission (the “SEC”) Staff that it is conducting a formal investigation into the financial results and transactions that were the subject of the restatement by the Company. The SEC Staff is reviewing documents provided by the Company and its independent public accountants and has taken or will take testimony from former and current employees of the Company. The Company has been cooperating with the SEC staff and intends to continue to do so. Nevertheless, if the SEC makes a determination adverse to the Company, the Company may face sanctions, including, but not limited to, monetary penalties and injunctive relief.
One of the Company’s ResortQuest subsidiaries is a party to the lawsuit styledAwbrey et al. v. Abbott Realty Services, Inc., Case No. 02-CA-1203, now pending in the Okaloosa County, Florida Circuit Court. The plaintiffs are owners of 16 condominium units at the Jade East condominium development in Destin, Florida, and they have filed suit alleging, among other things, nondisclosure and misrepresentation by the Company’s real estate sales agents in the sale of Plaintiffs’ units. Plaintiffs seek unspecified damages and a jury trial. The Company has filed pleadings denying the plaintiffs’ allegations and asserting several affirmative defenses, among them that the claims of the plaintiffs have been released in connection with the April 2001 settlement of a 1998 lawsuit filed by the Jade East condominium owners association against the original condominium’s developer. The Company has also filed a motion for summary judgment which has been set for hearing in May 2004. At this stage it is difficult to ascertain the likelihood of an unfavorable outcome. The damages sought by each plaintiff will be in excess of $200,000, making the total exposure to the sixteen unit owners in excess of $3.2 million. Those damages are disputed by the Company as overstated and unproven, and the Company intends to vigorously defend this case.
The Company, in the ordinary course of business, is involved in certain legal actions and claims on a variety of other matters. It is the opinion of management that such legal actions will not have a material effect on the results of operations, financial condition or liquidity of the Company.
18. RETIREMENT PLANS
17. Retirement Plans Prior to January 1, 2001, the Company maintained a noncontributory defined benefit pension plan in which substantially all of its employees were eligible to participate upon meeting the pension
plan'splan’s participation requirements. The benefits were based on years of service and compensation levels. On January 1, 2001 the Company amended its defined benefit pension plan to determine future benefits using a cash balance formula. On December 31, 2000, benefits credited under theplan'splan’s previous formula were frozen. Under the cash formula, each participant had an account which was credited monthly with 3% of qualified earnings and the interest earned on their previous month-end cash balance. In addition, the Company included a"grandfather"“grandfather” clause which assures that the participant will receive the greater of the benefitF-41
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
calculated under the cash balance plan and the benefit that would have been payable if the defined benefit plan had remained in existence. The benefit payable to a vested participant upon retirement at age 65, or age 55 with 15 years of service, is equal to the
participant'sparticipant’s account balance, which increases based upon length of service and compensation levels. At retirement, the employee generally receives the balance in the account as a lump sum. The funding policy of the Company is to contribute annually an amount which equals or exceeds the minimum required by applicable law.The following table sets forth the funded status at December
31:
(in thousands) 2002 2001 -------- --------CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 58,712 $ 57,608 Service cost - 2,592 Interest cost 3,964 4,288 Amendments - 1,867 Actuarial loss (gain) 5,359 (2,763) Benefits paid (5,021) (4,880) Curtailment (3,800) - -------- -------- Benefit obligation at end of year 59,214 58,712 -------- -------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 44,202 52,538 Actual loss on plan assets (3,870) (6,030) Employer contributions 1,794 2,574 Benefits paid (5,021) (4,880) -------- -------- Fair value of plan assets at end of year 37,105 44,202 -------- -------- Funded status (22,109) (14,510) Unrecognized net actuarial loss 22,944 14,829 Unrecognized prior service cost - 3,750 Adjustment for minimum liability (22,944) (14,779) -------- -------- Accrued pension cost $(22,109) $(10,710) ======== ========F-45NOTES TO CONSOLIDATED FINANCIAL STATEMENTS31 (amounts in thousands):
2003 2002 Benefit obligation at beginning of year $ 59,214 $ 58,712 Service cost — — Interest cost 4,031 3,964 Actuarial loss 6,874 5,359 Benefits paid (3,490 ) (5,021 ) Curtailment — (3,800 ) Benefit obligation at end of year 66,629 59,214 Fair value of plan assets at beginning of year 37,105 44,202 Actual gain (loss) on plan assets 5,495 (3,870 ) Employer contributions 3,819 1,794 Benefits paid (3,490 ) (5,021 ) Fair value of plan assets at end of year 42,929 37,105 Funded status (23,700 ) (22,109 ) Unrecognized net actuarial loss 24,943 22,944 Adjustment for minimum liability (24,943 ) (22,944 ) Employer contribution after measurement date 821 — Accrued pension cost $ (22,879 ) $ (22,109 ) Net periodic pension expense reflected in the accompanying consolidated statements of operations included the following components for the years ended December
31:31 (amounts in thousands):
2003 2002 2001 Service cost $ — $ — $ 2,592 Interest cost 4,031 3,964 4,288 Expected return on plan assets (2,991 ) (3,395 ) (4,131 ) Recognized net actuarial loss 2,371 710 169 Amortization of prior service cost — — 402 Curtailment loss — 3,750 — Total net periodic pension expense $ 3,411 $ 5,029 $ 3,320 The accumulated benefit obligation for the defined benefit pension plan was $66.6 million and $59.2 million at December 31, 2003 and 2002.
F-42
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands) 2002 2001 2000 ------- ------- -------Service cost $ - $ 2,592 $ 2,564 Interest cost 3,964 4,288 3,911 Expected return on plan assets (3,395) (4,131) (3,963) Recognized net actuarial loss 710 169 107 Amortization of prior service cost - 402 211 Curtailment loss 3,750 - - ------- ------- ------- Total net periodic pension expense $ 5,029 $ 3,320 $ 2,830 ======= ======= =======Assumptions The weighted-average
discount rateassumptions usedin determiningto determine theactuarial present value of the projectedbenefit obligationwas 7.0% for 2002, and 7.5% for 2001.at December 31 are as follows:
2003 2002 Discount rate 6.25 % 7.00 % Rate of compensation increase N/A 4.00 % Measurement date 9/30/03 9/30/02 The rate of increase in future compensation levels was not applicable for 2003 due to the Company amending the plan to freeze the cash balance benefit as described below.
The weighted-average assumptions used
was 4% andto determine theassumednet periodic pension expense for years ended December 31 are as follows:
2003 2002 Discount rate 7.00 % 7.50 % Rate of compensation increase N/A 4.00 % Expected long term rate of return on plan assets 8.00 % 8.00 % Measurement date 9/30/03 9/30/02 The Company determines the overall expected
long-termlong term rate of return on plan assetswas 8%. Planbased on its estimate of the return that plan assets will provide over the period that benefits areinvestedexpected to be paid out. In preparing this estimate, the Company considers its targeted allocation of plan assets among securities with various risk and return profiles, as well as the actual returns provided by plan assets in prior periods.
Plan Assets and Contributions The allocation of the defined benefit pension plan’s assets as of September 30, by asset categories, are as follows:
Asset Category 2003 2002 Equity securities 61 % 49 % Fixed income securities 33 % 48 % Cash 6 % 3 % Total 100 % 100 % The defined benefit pension plan’s investment strategy is to invest plan assets in a diverse
portfolio that primarily consistsgroup of equity anddebt securities.fixed income securities with the objective of achieving returns that will provide the plan with sufficient assets to make benefit payments as they become due, while maintaining a risk profile that is commensurate with this objective. Consistent with that strategy, the plan has set the following target asset allocation percentages for each major category of plan assets:
Asset Category Target Allocation Equity securities 60 % Fixed income securities 35 % Cash 5 % Total 100 % The Company expects to contribute $3.0 million to its defined benefit pension plan in 2004.
F-43
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Information The Company also maintains non-qualified retirement plans (the
"Non-Qualified Plans"“Non-Qualified Plans”) to provide benefits to certain key employees. The Non-Qualified Plans are not funded and thebeneficiaries'beneficiaries’ rights to receive distributions under these plans constitute unsecured claims to be paid from theCompany'sCompany’s general assets. At December 31,2002,2003, the Non-QualifiedPlans'Plans’ projected benefit obligations and accumulated benefit obligations were$10.3$11.4 million.The
Company'sCompany’s accrued cost related to its qualified and non-qualified retirement plans of$32.4$34.5 million and$20.8$32.4 million at December 31,20022003 and2001,2002, respectively, is included in other long-term liabilities in the accompanying consolidated balance sheets. The 2003 increase in the minimum liability related to the Company’s retirement plans resulted in a charge to equity of $1.8 million, net of taxes of $1.1 million. The 2002 increase in the minimum liability related to theCompany'sCompany’s retirement plans resulted in a charge to equity of $7.2 million, net of taxes of $4.7 million. The2001 increase in the minimum liability related to the Company's retirement plans resulted in a charge to equity of $7.7 million, net of taxes of $4.9 million. The2003 and 2002and 2001charges to equity due to the increase in the minimum liabilityisare included in other comprehensive loss in the accompanying consolidatedstatementstatements ofstockholders'stockholders’ equity.The Company also has contributory retirement savings plans in which substantially all employees are eligible to participate. The Company contributes an amount equal to the lesser of one-half of the amount of the
employee'semployee’s contribution or 3% of theemployee'semployee’s salary. In addition, effective January 1, 2002, the Company contributes 2% to 4% of theemployee'semployee’s salary, based upon theCompany'sCompany’s financial performance. Company contributions under the retirement savings plans were $4.1 million, $3.8 million and $1.5 million for 2003, 2002 and$1.6 million for 2002,2001,and 2000,respectively.Effective December 31, 2001, the Company amended its retirement plans and its retirement savings plan whereby the retirement cash balance benefit was frozen and whereby future Company contributions to the retirement savings plan will include 2% to 4% of the
employee'semployee’s salary, based upon theCompany'sCompany’s financial performance, in addition to the one-half match of theemployee'semployee’s salary up to a maximum of 3% as described above. As a result of these changes to the retirement plans, the Company recorded a pretax charge to operations 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'“Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for TerminationBenefits"Benefits”, and related interpretations.19. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS F-46NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Postretirement Benefits Other Than Pensions The Company sponsors unfunded defined benefit postretirement health care and life insurance plans for certain employees. The Company contributes toward the cost of health insurance benefits and contributes the full cost of providing life insurance benefits. In order to be eligible for these postretirement benefits, an employee must retire after attainment of age 55 and completion of 15 years of service, or attainment of age 65 and completion of 10 years of service. The
Company'sCompany’s Benefits Trust Committee determines retiree premiums.F-44
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reconciles the change in benefit obligation of the postretirement plans to the accrued postretirement liability as reflected in other liabilities in the accompanying consolidated balance sheets at December
31:
(in thousands) 2002 2001 -------- --------CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 13,665 $ 12,918 Service cost 306 688 Interest cost 1,353 946 Actuarial loss 862 - Contributions by plan participants 142 101 Benefits paid (987) (988) Remeasurements 9,054 - Amendments (4,673) - -------- -------- Benefit obligation at end of year 19,722 13,665 Unrecognized net actuarial gain 4,406 13,038 -------- -------- Accrued postretirement liability $ 24,128 $ 26,703 ======== ========F-47NOTES TO CONSOLIDATED FINANCIAL STATEMENTS31 (amounts in thousands):
2003 2002 Benefit obligation at beginning of year $ 19,722 $ 13,665 Service cost 341 306 Interest cost 1,380 1,353 Actuarial (gain) loss (485 ) 862 Contributions by plan participants — 142 Benefits paid (755 ) (987 ) Remeasurements — 9,054 Amendments — (4,673 ) Benefit obligation at end of year 20,203 19,722 Unrecognized net actuarial loss (1,520 ) (2,015 ) Unrecognized prior service cost 3,074 4,073 Unrecognized curtailment gain 2,103 2,348 Accrued postretirement liability $ 23,860 $ 24,128 Net postretirement benefit expense reflected in the accompanying consolidated statements of operations included the following components for the years ended December
31:31 (amounts in thousands):
(in thousands) 2002 2001 2000 ------- ------- -------Service cost $ 306 $ 688 $ 736 Interest cost 1,353 946 923 Curtailment gain (2,105) - - ------- ------- ------- Recognized net actuarial gain (1,284) (826) (811) ------- ------- ------- Net postretirement benefit expense $(1,730) $ 808 $ 848 ======= ======= =======
2003 2002 2001 Service cost $ 341 $ 306 $ 688 Interest cost 1,380 1,353 946 Curtailment gain — (2,105 ) — Recognized net actuarial (gain) loss 10 (41 ) (424 ) Amortization of prior service cost (999 ) (999 ) (158 ) Amortization of curtailment gain (244 ) (244 ) (244 ) Net postretirement benefit expense $ 488 $ (1,730 ) $ 808 The weighted-average assumptions used to determine the benefit obligation at December 31 are as follows:
2003 2002 Discount rate 6.25 % 7.00 % Measurement date 9/30/03 9/30/02 The weighted-average assumptions used to determine the net postretirement benefit expense for years ended December 31 are as follows:
2003 2002 Discount rate 7.00 % 7.50 % Measurement date 9/30/03 9/30/02 The health care cost trend is projected to be
10.75%10.1% in2003,2004, declining each year thereafter to an ultimate level trend rate of5.5%5.0% per year for20092012 and beyond. The health care cost trend rates are not applicable to the life insurance benefit plan. The health care cost trend rate assumption has a significant effect on theF-45
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amounts reported. To illustrate, a 1% increase in the assumed health care cost trend rate each year would increase the accumulated postretirement benefit obligation as of December 31,
20022003 by approximately9%10% and the aggregate of the service and interest cost components of net postretirement benefit expense would increase approximately 10%. Conversely, a 1% decrease in the assumed health care cost trend rate each year would decrease the accumulated postretirement benefit obligation as of December 31,20022003 by approximately8%9% and the aggregate of the service and interest cost components of net postretirement benefit expense would decrease approximately10%9%.The
weighted-average discount rate usedCompany expects to contribute $0.9 million to the plan indetermining the accumulated postretirement benefit obligation was 7.0% for 2002 and 7.5% for 2001.2004.The Company amended the plans effective December 31, 2001 such that only active employees whose age plus years of service total at least 60 and who have at least 10 years of service as of December 31, 2001 remain eligible. The amendment and curtailment of the plans were recorded in accordance with SFAS No. 106,
"Employers'“Employers’ Accounting for Postretirement Benefits Other ThanPensions"Pensions”, and related interpretations.20. GOODWILL AND INTANGIBLES
19. Goodwill and Intangibles The transitional provisions of SFAS No. 142 require the Company to perform an assessment of whether goodwill is impaired as of the beginning of the fiscal year in which the statement is adopted. Under the transitional provisions of SFAS No. 142, the first step is for the Company to evaluate whether the reporting
unit'sunit’s carrying amount exceeds its fair value. If the reportingunit'sunit’s carrying amount exceeds it fair value, the second step of the impairment test must be completed. During the second step, the Company must compare the implied fair value of the reportingunit'sunit’s goodwill, determined by allocating the reportingunit'sunit’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'sunit’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 withF-48NOTES TO CONSOLIDATED FINANCIAL STATEMENTSthe 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 accompanyingcondensedconsolidated statements of operations.The Company performed the annual impairment review on all goodwill at December 31,
20022003 and determined that no further impairmentother than the goodwill impairment of the Radisson Hotel at Opryland as discussed above, would becharges were required during2002.2003.F-46
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amounts of goodwill by business segment for the twelve months ended December 31, 2003 and 2002 are as
follows:
Balance as of Transitional Balance as of December 31, Impairment December 31, (in thousands) 2001 Losses 2002 ------------- ------------ -------------Hospitality $ 4,221 $ (4,221) $ - Attractions 6,915 - 6,915 Media 2,365 - 2,365 Corporate - - - ------- -------- ------- Total $13,501 $ (4,221) $ 9,280 ======= ======== =======F-49NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfollows (amounts in thousands):
Balance as of Balance as of December 31, Impairment December 31, 2002 Losses Acquisitions 2003 Hospitality $ — $ — $ — $ — Opry and Attractions 6,915 — — 6,915 ResortQuest — — 162,727 162,727 Corporate and other — — — — Total $ 6,915 $ — $ 162,727 $ 169,642
Balance as of Transitional Balance as of December 31, Impairment December 31, 2001 Losses Acquisitions 2002 Hospitality $ 4,221 $ (4,221 ) $ — $ — Opry and Attractions 6,915 — — 6,915 Corporate and other — — — — Total $ 11,136 $ (4,221 ) $ — $ 6,915 The following table presents a reconciliation of net income and income per share assuming the
nonamortizationnon-amortization provisions of SFAS No. 142 were applied during2001:
(in thousands) 2002 2001 2000 ---------- ---------- -----------Reported net income (loss) $ 95,144 $ (47,796) $ (156,056) Add back: Goodwill amortization, net of tax - 1,360 4,556 ---------- ---------- ----------- Adjusted net income (loss) $ 95,144 $ (46,436) $ (151,500) ========== ========== =========== Basic earnings (loss) per share - ------------------------------- Reported net income (loss) $ 2.82 $ (1.42) $ (4.67) Add back: Goodwill amortization, net of tax - 0.04 0.14 ---------- ---------- ----------- Adjusted net income (loss) $ 2.82 $ (1.38) $ (4.53) ========== ========== =========== Diluted earnings (loss) per share - --------------------------------- Reported net income (loss) $ 2.82 $ (1.42) $ (4.67) Add back: Goodwill amortization, net of tax - 0.04 0.14 ---------- ---------- ----------- Adjusted net income (loss) $ 2.82 $ (1.38) $ (4.53) ========== ========== ===========The above goodwill amortization during 2000 includes $4.1 million of amortization related totheacquisitions for Gaylord Digital as discussedyears ended December 31 (amounts inNote 7.thousands, except per share data):
2003 2002 2001 Reported net income (loss) $ 826 $ 95,144 $ (47,796 ) Add back: Goodwill amortization, net of tax — — 1,360 Adjusted net income (loss) $ 826 $ 95,144 $ (46,436 ) Basic earnings (loss) per share Reported net income (loss) $ 0.02 $ 2.82 $ (1.42 ) Add back: Goodwill amortization, net of tax — — 0.04 Adjusted net income (loss) $ 0.02 $ 2.82 $ (1.38 ) Diluted earnings (loss) per share Reported net income (loss) $ 0.02 $ 2.82 $ (1.42 ) Add back: Goodwill amortization, net of tax — — 0.04 Adjusted net income (loss) $ 0.02 $ 2.82 $ (1.38 ) The Company also reassessed the useful lives and classification of identifiable finite-lived intangible assets and determined the lives of these intangible assets to be appropriate.
The carrying amount of indefinite lived intangible assets not subject to amortization was $40.6 million and $1.8 million at December 31, 2003 and 2002. The increase in indefinite lived intangible assets during 2003 is due to trade names obtained in the acquisition of ResortQuest. The gross carrying amount of amortized intangible assets in continuing operations
including the intangible assets related to benefit plans,was$2.4$30.1 million and$6.7$0.4 million at December 31,20022003 and2001,2002, respectively. Thedecreaseincrease in amortized intangible assets during20022003 is primarily related to property management contracts with vacation rental property owners obtained in thereclassificationacquisition ofthe intangible asset related to the benefit plan as discussed in Note 17.ResortQuest. The related accumulated amortization of intangible assets in continuing operations was$445,000$588,000 and$387,000F-47
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$131,000 at December 31,
20022003 and2001,2002, respectively. The amortization expense related to intangibles from continuing operations during the twelve months ended December 31, 2003 and 2002 was $457,000 and2001 was$58,000,and $59,000,respectively. The estimated amounts of amortization expense for the next five years are equivalent to$58,000$3.8 million per year.F-50NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. FINANCIAL REPORTING BY BUSINESS SEGMENTS
20. Financial Reporting By Business Segments The following information (amounts in thousands) from continuing operations is derived directly from the
segments'segments’ internal financial reports used for corporate management purposes. The2001 and 2000 amounts representCompany revised its reportable segments during theCompany's reported amounts infirst quarter of 2003 due to theCompany's 2001 Form 10-K as filed with the Securities and Exchange Commission. The 2001 and 2000 amount also present a reconciliationCompany’s decision toadjust for Acuff-Rose and the OKC Redhawks reclassified from continuing operations to discontinued operations, the restatement amounts as a resultdivest of there-auditRadio Operations and due to therestated amounts. Acuff-Rose was previously recorded in the media segment and OKC Redhawks was recorded in the corporate and other segment.
(Restated) (Restated) YEAR ENDED Year ended Year ended DECEMBER 31, December 31, December 31, (in thousands) 2002 2001 2000 ------------ ------------ ------------REVENUES: Hospitality $ 339,380 $ 228,712 $ 237,260 Attractions 63,512 65,878 63,235 Media 11,194 9,393 14,913 Corporate and other 272 290 64 ------------ ------------ ------------ Total $ 414,358 $ 304,273 $ 315,472 ============ ============ ============ DEPRECIATION AND AMORTIZATION: Hospitality $ 44,924 $ 25,593 $ 24,447 Attractions 5,295 5,810 6,443 Media 623 660 7,716 Corporate and other 5,778 6,542 6,257 ------------ ------------ ------------ Total $ 56,620 $ 38,605 $ 44,863 ============ ============ ============ OPERATING INCOME (LOSS): Hospitality $ 25,972 $ 34,270 $ 45,478 Attractions 3,094 (2,372) (8,025) Media (193) (454) (33,188) Corporate and other (42,111) (40,110) (38,187) Preopening costs (8,913) (15,927) (5,278) Gain on sale of assets 30,529 - - Impairment and other charges - (14,262) (75,712) Restructuring charges (3) (2,182)) (12,952) ------------ ------------ ------------ Total $ 8,375 $ (41,037) $ (127,864) ============ ============ ============ IDENTIFIABLE ASSETS: Hospitality $ 1,056,434 $ 947,646 $ 660,289 Attractions 82,600 88,270 88,715 Media 8,806 8,266 18,669 Corporate and other 1,032,809 998,916 899,949 Discontinued operations 11,547 134,546 263,183 ------------ ------------ ------------ Total $ 2,192,196 $ 2,177,644 $ 1,930,805 ============ ============ ============F-51acquisition of ResortQuest.
2003 2002 2001 Hospitality $ 369,263 $ 339,380 $ 228,712 Opry and Attractions 61,433 65,600 67,064 ResortQuest 17,920 — — Corporate and Other 184 272 290 Total $ 448,800 $ 405,252 $ 296,066 Hospitality $ 46,536 $ 44,924 $ 25,593 Opry and Attractions 5,129 5,778 6,270 ResortQuest 1,186 — — Corporate and Other 6,099 5,778 6,542 Total $ 58,950 $ 56,480 $ 38,405 Hospitality $ 42,347 $ 25,972 $ 34,270 Opry and Attractions (600 ) 1,596 (5,010 ) ResortQuest (2,616 ) — — Corporate and Other (43,396 ) (42,111 ) (40,110 ) Preopening costs (11,562 ) (8,913 ) (15,927 ) Gain on sale of assets — 30,529 — Impairment and other charges (856 ) — (14,262 ) Restructuring charges — 17 (2,182 ) Interest expense, net of amounts capitalized (52,804 ) (46,960 ) (39,365 ) Interest income 2,461 2,808 5,554 Unrealized gain (loss) on Viacom stock 39,831 (37,300 ) 782 Unrealized gain (loss) on derivatives (33,228 ) 86,476 54,282 Other gains and losses 2,209 1,163 2,661 Total $ (58,214 ) $ 13,277 $ (19,307 ) F-48
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The restated 2001 and 2000 segment information presented below includes both the impact of reclassifying discontinued operations as required by SFAS No. 144 (as discussed in Note 6) and the restatement changes (as discussed in Note 3). The following segment information reconcile previously reported and restated financial information.
Fiscal year As reported Fiscal year ended Dec. 31, with Restatement ended Dec. 31, 2001 Discontinued discontinued related 2001 (in thousands) As reported operations operations adjustments Restated -------------- ------------ ------------ ----------- --------------REVENUES: Hospitality $ 228,712 $ - $ 228,712 $ - $ 228,712 Attractions 65,878 - 65,878 - 65,878 Media 24,157 14,764 9,393 - 9,393 Corporate and other 6,412 6,122 290 - 290 ----------- ----------- ----------- ----------- ----------- Total $ 325,159 $ 20,886 $ 304,273 $ - $ 304,273 =========== =========== =========== =========== =========== DEPRECIATION AND AMORTIZATION: Hospitality $ 25,593 $ - $ 25,593 $ - $ 25,593 Attractions 5,810 - 5,810 - 5,810 Media 2,578 1,918 660 - 660 Corporate and other 7,294 752 6,542 - 6,542 ----------- ----------- ----------- ----------- ----------- Total $ 41,275 $ 2,670 $ 38,605 $ - $ 38,605 =========== =========== =========== =========== =========== OPERATING INCOME (LOSS): Hospitality $ 33,915 $ - $ 33,915 $ 355 $ 34,270 Attractions (2,372) - (2,372) - (2,372) Media 1,665 2,119 (454) - (454) Corporate and other (39,399) 363 (39,762) (348) (40,110) Preopening costs (15,141) - (15,141) (786) (15,927) Impairment and other - - (14,262) charges (14,262) (14,262) Restructuring charges (2,182) - (2,182) - (2,182) ----------- ----------- ----------- ----------- ----------- Total $ (37,776) $ 2,482 $ (40,258) $ (779) $ (41,037) =========== =========== =========== =========== =========== IDENTIFIABLE ASSETS: Hospitality $ 948,284 $ - $ 948,284 $ (638) $ 947,646 Attractions 88,620 - 88,620 (350) 88,270 Media 35,342 27,076 8,266 - 8,266 Corporate and other 998,503 10,397 988,106 (12,628) 975,478 ----------- ----------- ----------- ----------- ----------- Total $ 2,070,749 $ 37,473 $ 2,033,276 $ (13,616) $ 2,019,660 =========== =========== =========== =========== ===========F-52NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal year As reported Fiscal year ended Dec. 31, with Restatement ended Dec. 31, 2000 Discontinued discontinued related 2000 (in thousands) As reported operations operations adjustments Restated -------------- ------------ ------------ ----------- --------------REVENUES: Hospitality $ 237,260 $ - $ 237,260 $ - $ 237,260 Attractions 63,235 - 63,235 - 63,235 Media 29,013 14,100 14,913 - 14,913 Corporate and other 5,954 5,890 64 - 64 ----------- ----------- ----------- ----------- ----------- Total $ 335,462 $ 19,990 $ 315,472 $ - $ 315,472 =========== =========== =========== =========== =========== DEPRECIATION AND AMORTIZATION: Hospitality $ 24,447 $ - $ 24,447 $ - $ 24,447 Attractions 6,443 - 6,443 - 6,443 Media 9,650 1,934 7,716 - 7,716 Corporate and other 7,040 783 6,257 - 6,257 ----------- ----------- ----------- ----------- ----------- Total $ 47,580 $ 2,717 $ 44,863 $ - $ 44,863 =========== =========== =========== =========== =========== OPERATING INCOME (LOSS): Hospitality $ 45,949 $ - $ 45,949 $ (471) $ 45,478 Attractions (8,025) - (8,025) - (8,025) Media (31,500) 1,688 (33,188) - (33,188) Corporate and other (38,626) 169 (38,795) 608 (38,187) Preopening costs (5,278) - (5,278) - (5,278) Impairment and other charges (76,597) (885) (75,712) - (75,712) Restructuring charges (13,098) (146) (12,952) - (12,952) ----------- ----------- ----------- ----------- ----------- Total $ (127,175) $ 826 $ (128,001) $ 137 $ (127,864) =========== =========== =========== =========== =========== IDENTIFIABLE ASSETS: Hospitality $ 660,604 $ - $ 660,604 $ (315) $ 660,289 Attractions 89,065 - 89,065 (350) 88,715 Media 46,805 28,136 18,669 - 18,669 Corporate and other 918,963 10,574 908,389 (8,440) 899,949 ----------- ----------- ----------- ----------- ----------- Total $ 1,715,437 $ 38,710 $ 1,676,727 $ (9,105) $ 1,667,622 =========== =========== =========== =========== ===========F-53NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)
2003 2002 2001 Hospitality $ 1,209,124 $ 1,056,434 $ 947,646 Opry and Attractions 91,837 85,530 90,912 ResortQuest 288,992 — — Corporate and Other 987,291 1,032,809 998,916 Discontinued operations 19 17,423 140,170 Total $ 2,577,263 $ 2,192,196 $ 2,177,644 The following table represents the capital expenditures for continuing operations by segment for the years ended December
31.
(in thousands) 2002 2001 2000 -------- -------- --------CAPITAL EXPENDITURES: Hospitality $170,522 $277,643 $201,720 Attractions 2,625 2,471 392 Media 660 159 8,065 Corporate and other 11,842 807 8,168 -------- -------- -------- Total $185,649 $281,080 $218,345 ======== ======== ========22. SUBSEQUENT EVENT On March 25, 2003, the Company, through its wholly-owned subsidiary Gaylord Investments, Inc., entered into an agreement to sell the assets primarily used31 (amounts inthe 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 third quarter of 2003. In connection with this agreement, the Company also entered into a local marketing agreement with Cumulus pursuant to which, from the second business day after the expiration or termination of the waiting period under the Hart-Scott-Rodino Improvements Act of 1976 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)thousands).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. 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2003 2002 2001 Hospitality $ 211,043 $ 163,926 $ 277,643 Opry and Attractions 9,133 2,673 2,471 ResortQuest 1,504 — — Corporate and other 2,040 8,805 807 Total $ 223,720 $ 175,404 $ 280,921
21. Quarterly Financial Information (Unaudited) The following is selected unaudited quarterly financial data
as previously reported and as restated,for the fiscal years ended December 31, 2003 and 2002and 2001. As discussed(amounts inNote 3, the Company restated historical consolidated financial statements as part of the re-audit. The "As previously reported" column represents the amounts the Company reported on the respective Form 10-Q as filed with the Securities and Exchange Commission during the year of 2002. During the first quarter of 2002, Acuff-Rose Music was not reported as a discontinued operation because management had not adopted a formal plan to dispose of Acuff-Rose. During the second quarter of 2002, the Company adopted a plan to dispose of Acuff-Rose and classified it as discontinued operations. F-54NOTES TO CONSOLIDATED FINANCIAL STATEMENTSthousands, except per share data).The sum of the quarterly per share amounts may not equal the annual totals due to rounding.
First quarter ended March 31, 2002
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 104,505 $ (3,250) $ 101,255 $ - $ 101,255 Depreciation and amortization 15,741 (478) 15,263 - 15,263 Operating income (loss) (16,402) (337) (16,739) 932 (15,807) Income (loss) of continuing operations before income taxes, discontinued operations and accounting change (10,530) (345) (10,875) 112 (10,763) Provision (benefit) for income taxes (4,054) (93) (4,147) 113 (4,034) Income (loss) of continuing operations before discontinued operations (6,476) (252) (6,728) (1) (6,729) Gain (loss) from discontinued operations, net of taxes 789 252 1,041 113 1,154 Cumulative effect of accounting change (2,595) - (2,595) 23 (2,572) Net income (loss) (8,282) - (8,282) 135 (8,147) Net income (loss) per share (0.25) (0.00) (0.25) 0.01 (0.24) Net income (loss) per share - assuming dilution (0.25) (0.00) (0.25) 0.01 (0.24)F-55
2003 First Second Third Fourth Quarter Quarter Quarter Quarter Revenues $ 114,380 $ 105,470 $ 98,101 $ 130,849 Depreciation and amortization 14,573 14,304 14,567 15,506 Operating income (loss) 4,958 (1,539 ) (8,753 ) (11,349 ) Income (loss) of continuing operations before income taxes and discontinued operations (10,859 ) 17,878 (43,479 ) (21,754 ) Provision (benefit) for income taxes (4,236 ) 7,334 (19,072 ) (8,695 ) Income (loss) of continuing operations before discontinued operations (6,623 ) 10,544 (24,407 ) (13,059 ) Income (loss) from discontinued operations, net of taxes 167 809 35,150 (1,755 ) Net income (loss) (6,456 ) 11,353 10,743 (14,814 ) Net income (loss) per share (0.19 ) 0.34 0.32 (0.41 ) Net income (loss) per share — assuming dilution (0.19 ) 0.33 0.32 (0.41 ) During May of 2003, the Company finalized the 2003 Loans, which consisted of a $25 million senior revolving facility, a $150 million senior term loan, and a $50 million subordinated term loan. Proceeds of the 2003 Loans were used to pay off the Term Loan of $60 million and the remaining net proceeds of approximately $134 million were deposited into an escrow account for the completion of the construction of the Gaylord Texan. During November 2003, the Company used the proceeds of the Senior Notes to
F-49
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Second— (Continued)repay all amounts outstanding under the 2003 Loans. As a result of the prepayment of the 2003 Loans, the Company wrote off $6.6 million in deferred financing costs, which is included in interest expense in the consolidated statement of operations.
During the third quarter
ended June 30, 2002of 2003, the Company sold WSM-FM and WWTN(FM) to Cumulus and recorded a net of tax gain of approximately $33.3 million. This gain is recorded in income from discontinued operations in the consolidated statement of operations.During the fourth quarter of 2003, the Company sold its interest in the Oklahoma RedHawks minor-league baseball team and received cash proceeds of approximately $6.0 million. The Company recognized a loss of $0.6 million, net of taxes, related to the sale in discontinued operations in the accompanying consolidated statement of operations.
On November 20, 2003, the Company acquired 100% of the outstanding common shares of ResortQuest in a tax-free, stock for stock merger. The results of operations of ResortQuest for the period November 20, 2003 to December 31, 2003 are included in the consolidated financial statements.
During November 2003, the Company completed its offering of the Senior Notes. In connection with the offering of the Senior Notes, the Company paid approximately $9.4 million in deferred financing costs. The net proceeds from the offering of the Senior Notes, together with $22.5 million of the Company’s cash on hand, were used as follows:
• $275.5 million was used to repay the $150 million senior term loan portion and the $50 million subordinated term loan portion of the 2003 Loans, as discussed above, as well as the remaining $66 million of the Company’s $100 million Mezzanine Loan and to pay certain fees and expenses related to the ResortQuest acquisition; and • $79.2 million was placed in escrow pending consummation of the ResortQuest acquisition. As As reportedof November 20, 2003, the $79.2 million together withRestatement (in thousands, except per previously Discontinued discontinued$8.2 million of the available cash, was used to repay ResortQuest’s senior notes and credit facility, the principal amount of which aggregated $85.1 million at closing, and a relatedshare data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 98,289 $ - $ 98,289 $ - $ 98,289 Depreciation and amortization 12,798 - 12,798 - 12,798 Operating income (loss) 7,595 - 7,595 1,190 8,785 Income (loss) of continuing operations before income taxes 1,479 - 1,479 1,426 2,905 Provision (benefit) for income taxes (15,227) - (15,227) 13,365 (1,862) Income (loss) of continuing operations before discontinued operations 16,706 - 16,706 (11,939) 4,767 Gain (loss) from discontinued operations, net of taxes 1,403 - 1,403 (292) 1,111 Cumulative effect of accounting change - - - - - Net income (loss) 18,109 - 18,109 (12,231) 5,878 Net income (loss) per share 0.54 0.00 0.54 (0.37) 0.17 Net income (loss) per share 0.54 0.00 0.54 (0.37) 0.17 - - assuming dilutionprepayment penalty.
2002 First Second Third Fourth Quarter Quarter Quarter Quarter Revenues $ 99,657 $ 95,937 $ 100,421 $ 109,237 Depreciation and amortization 15,230 12,762 13,933 14,555 Operating income (loss) (15,671 ) 8,749 18,294 (4,282 ) Income (loss) of continuing operations before income taxes, discontinued operations and accounting change (10,627 ) 2,869 26,617 (5,582 ) Provision (benefit) for income taxes (4,094 ) (1,584 ) 7,283 (287 ) Income (loss) of continuing operations before discontinued operations and accounting change (6,533 ) 4,453 19,334 (5,295 ) Income from discontinued operations, net of taxes 958 1,425 80,710 2,664 Cumulative effect of accounting change, net of taxes (2,572 ) — — — Net income (loss) (8,147 ) 5,878 100,044 (2,631 ) Net income (loss) per share (0.24 ) 0.17 2.96 (0.08 ) Net income (loss) per share — assuming dilution (0.24 ) 0.17 2.96 (0.08 ) During the second quarter of 2002, the Company sold its partnership share of the Opry Mills partnership to certain affiliates of The Mills Corporation for approximately $30.8 million in cash proceeds upon the
F-50
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
disposition. The Company deferred approximately $20.0 million of the gain representing the estimated present value of the continuing land lease interest between the Company and the Opry Mills partnership at June 30, 2002. The Company recognized the remainder of the proceeds, net of certain transaction costs, as a gain of approximately $10.6 million during the second quarter of 2002.
Also during the second quarter of 2002, the Company adopted a plan of restructuring to streamline certain operations and duties. Accordingly, the Company recorded a pretax restructuring charge of $1.1 million related to employee severance costs and other employee benefits. The second quarter 2002 restructuring charge was offset by a reversal of $1.1 million of the fourth quarter 2001 restructuring charge.
F-56NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Third quarter ended September 30, 2002
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 102,954 $ - $102,954 - $ 102,954 Depreciation and amortization 13,969 - 13,969 - 13,969 Operating income (loss) 19,045 - 19,045 (10) 19,035 Income (loss) of continuing operations before income taxes 27,367 - 27,367 (9) 27,358 Provision (benefit) for income taxes 11,682 - 11,682 (4,118) 7,564 Income (loss) of continuing operations before discontinued operations 15,685 - 15,685 4,109 19,794 Gain (loss) from discontinued operations, net of taxes 83,599 - 83,599 (3,349) 80,250 Cumulative effect of accounting change - - - - - Net income (loss) 99,284 - 99,284 760 100,044 Net income (loss) per share 2.94 0.00 2.94 0.02 2.96 Net income (loss) per share - assuming dilution 2.94 0.00 2.94 0.02 2.96During the third quarter of 2002, the Company sold its interest in the land lease discussed above in relation to the sale of the Opry Mills partnership and recognized the remaining $20.0 million deferred gain, less certain transaction costs.
During the third quarter of 2002, the Company finalized the sale of Acuff-Rose Music Publishing to Sony/ATV Music Publishing for approximately $157.0 million in cash. The Company recognized a pretax gain of $130.6 million during the third quarter of 2002 related to the sale in discontinued operations. The gain on the sale of Acuff-Rose Music Publishing is recorded in the income from discontinued operations in the consolidated statement of operations.
F-5722. Information Concerning Guarantor and Non-Guarantor Subsidiaries
Not all of the Company’s subsidiaries guarantee the $350 million Senior Notes. All of the Company’s subsidiaries that are borrowers or have guaranteed under the Company’s new revolving credit facility or previously, the Company’s 2003 Florida/Texas senior secured credit facility, are guarantors (the “Guarantors”) of the Senior Notes. Certain of the Company’s subsidiaries, including those that incurred the Company’s Nashville Hotel Loan or own or manage the Nashville loan borrower (the “Non-Guarantors”), do not guarantee the Senior Notes. The condensed consolidating financial information includes certain allocations of revenues and expenses based on management’s best estimates, which are not necessarily indicative of financial position, results of operations and cash flows that these entities would have achieved on a stand alone basis.
The following consolidating schedules condensed financial information of the Company, the guarantor subsidiaries and non-guarantor subsidiaries as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003.
F-51
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fourth quarter ended— (Continued)GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31,2002
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 111,860 $ - $ 111,860 $ - $ 111,860 Depreciation and amortization 14,590 - 14,590 - 14,590 Operating income (loss) (3,638) - (3,638) - (3,638) Income (loss) of continuing operations before income taxes (4,938) - (4,938) - (4,938) Provision (benefit) for income taxes (3,651) - (3,651) 3,789 138 Income (loss) of continuing operations before discontinued operations (1,287) - (1,287) (3,789) (5,076) Gain (loss) from discontinued operations, net of taxes (1,344) - (1,344) 3,789 2,445 Cumulative effect of accounting change - - - - - Net income (loss) (2,631) - (2,631) - (2,631) Net income (loss) per share (0.08) 0.00 (0.08) 0.00 (0.08) Net income (loss) per share - assuming dilution (0.08) 0.00 (0.08) 0.00 (0.08)F-582003
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) Revenues $ 67,311 $ 208,844 $ 215,265 $ (42,620 ) $ 448,800 Operating expenses: Operating costs 23,255 127,799 137,237 (11,354 ) 276,937 Selling, general and administrative 35,664 49,772 31,713 29 117,178 Management fees — 14,620 16,675 (31,295 ) — Preopening costs — 11,562 — — 11,562 Impairment and other charges 856 — — — 856 Restructuring charges, net — — — — — Depreciation 5,559 24,350 24,032 — 53,941 Amortization 3,085 681 1,243 — 5,009 Operating income (loss) (1,108 ) (19,940 ) 4,365 — (16,683 ) Interest expense, net (43,142 ) (34,048 ) (22,061 ) 46,447 (52,804 ) Interest income 38,679 1,323 8,906 (46,447 ) 2,461 Unrealized loss on Viacom stock 39,831 — — — 39,831 Unrealized gain on derivatives (33,228 ) — — — (33,228 ) Other gains and (losses) 2,238 (10 ) (19 ) — 2,209 Income (loss) before income taxes, discontinued operations, and cumulative effect of accounting change 3,270 (52,675 ) (8,809 ) — (58,214 ) Provision (benefit) for income taxes 1,416 (22,767 ) (3,318 ) — (24,669 ) Equity in subsidiaries’ (earnings) losses, net 1,028 — — (1,028 ) — Income (loss) from continuing operations 826 (29,908 ) (5,491 ) 1,028 (33,545 ) Gain (loss) from discontinued operations, net — 871 33,500 — 34,371 Cumulative effect of accounting change, net — — — — — Net income (loss) $ 826 $ (29,037 ) $ 28,009 $ 1,028 $ 826 F-52
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First quarter ended March— (Continued)GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31,2001
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 83,357 $(3,124) $ 80,233 $ - $ 80,233 Depreciation and amortization 10,057 (481) 9,576 - 9,576 Operating income (loss) (1,674) (504) (2,178) (580) (2,758) Income (loss) of continuing operations before income taxes 29,188 (505) 28,683 (1,190) 27,493 Provision (benefit) for income taxes 9,411 (113) 9,298 (560) 8,738 Income (loss) of continuing operations before discontinued operations 19,777 (392) 19,385 (630) 18,755 Gain (loss) from discontinued operations, net of taxes (7,562) 392 (7,170) (386) (7,556) Cumulative effect of accounting change 11,909 - 11,909 (707) 11,202 Net income (loss) 24,124 - 24,124 (1,723) 22,401 Net income (loss) per share 0.72 (0.00) 0.72 (0.05) 0.67 Net income (loss) per share assuming dilution 0.72 (0.00) 0.72 (0.05) 0.67F-592002
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) Revenues $ 63,549 $ 176,149 $ 206,132 $ (40,578 ) $ 405,252 Operating expenses: Operating costs 16,399 112,497 135,685 (9,998 ) 254,583 Selling, general and administrative 39,814 39,286 29,998 (366 ) 108,732 Management fees — 13,196 17,454 (30,650 ) — Preopening costs — 8,913 — — 8,913 Gain on sale of assets — (30,529 ) — — (30,529 ) Restructuring charges, net (1,086 ) 104 965 — (17 ) Depreciation 6,238 22,895 23,561 — 52,694 Amortization 2,343 595 848 — 3,786 Operating income (loss) (159 ) 9,192 (2,379 ) 436 7,090 Interest expense, net (36,598 ) (30,037 ) (27,095 ) 46,770 (46,960 ) Interest income 45,499 290 3,789 (46,770 ) 2,808 Unrealized loss on Viacom stock (37,300 ) — — — (37,300 ) Unrealized gain on derivatives 86,476 — — — 86,476 Other gains and (losses) 1,753 (643 ) 53 — 1,163 Income (loss) before income taxes, discontinued operations, and cumulative effect of accounting change 59,671 (21,198 ) (25,632 ) 436 13,277 Provision (benefit) for income taxes 20,157 (9,462 ) (9,813 ) 436 1,318 Equity in subsidiaries’ (earnings) losses, net (55,630 ) — — 55,630 — Income (loss) from continuing operations 95,144 (11,736 ) (15,819 ) (55,630 ) 11,959 Gain (loss) from discontinued operations, net — 9,803 75,954 — 85,757 Cumulative effect of accounting change, net — (2,572 ) — — (2,572 ) Net income (loss) $ 95,144 $ (4,505 ) $ 60,135 $ (55,630 ) $ 95,144 F-53
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Second quarter ended June 30,— (Continued)GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 2001
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 70,105 $ - $ 70,105 $ - $ 70,105 Depreciation and amortization 9,753 - 9,753 - 9,753 Operating income (loss) (16,859) - (16,859) 129 (16,730) Income (loss) of continuing operations before income taxes (1,650) - (1,650) (853) (2,503) Provision (benefit) for income taxes (195) - (195) (885) (1,080) Income (loss) of continuing operations before discontinued operations (1,455) - (1,455) 32 (1,423) Gain (loss) from discontinued operations, net of taxes (2,103) - (2,103) (402) (2,505) Cumulative effect of accounting change - - - - - Net income (loss) (3,558) - (3,558) (370) (3,928) Net income (loss) per share (0.11) 0.00 (0.11) (0.01) (0.12) Net income (loss) per share - assuming dilution (0.11) 0.00 (0.11) (0.01) (0.12)During the second quarter of 2001, the Company recognized pretax impairment and other charges of $11.4 million. Also during the second quarter of 2001, the Company recorded a reversal of $2.3 million of the restructuring charges originally recorded during the fourth quarter of 2000. F-60
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) Revenues $ 45,649 $ 60,909 $ 222,073 $ (32,565 ) $ 296,066 Operating expenses: Operating costs 19,498 46,402 143,027 (7,628 ) 201,299 Selling, general and administrative 27,851 9,810 29,551 — 67,212 Management fees — 9,004 16,227 (25,231 ) — Preopening costs — 15,927 — — 15,927 Impairment and other charges 6,858 845 6,559 — 14,262 Restructuring charges, net 2,182 — — — 2,182 Depreciation 6,900 4,339 23,499 — 34,738 Amortization 2,091 934 642 — 3,667 Operating income (loss) (19,731 ) (26,352 ) 2,568 294 (43,221 ) Interest expense, net (33,412 ) (9,994 ) (42,062 ) 46,103 (39,365 ) Interest income 47,388 2,194 2,075 (46,103 ) 5,554 Unrealized loss on Viacom stock 782 — — — 782 Unrealized gain on derivatives 54,282 — — — 54,282 Other gains and (losses) (10,565 ) 13,112 114 — 2,661 Income (loss) before income taxes, discontinued operations, and cumulative effect of accounting change 38,744 (21,040 ) (37,305 ) 294 (19,307 ) Provision (benefit) for income taxes 14,465 (8,193 ) (15,708 ) 294 (9,142 ) Equity in subsidiaries’ (earnings) losses, net 83,277 — — (83,277 ) — Income (loss) from continuing operations (58,998 ) (12,847 ) (21,597 ) 83,277 (10,165 ) Gain (loss) from discontinued operations, net — (26,136 ) (22,697 ) — (48,833 ) Cumulative effect of accounting change, net 11,202 — — — 11,202 Net income (loss) $ (47,796 ) $ (38,983 ) $ (44,294 ) $ 83,277 $ (47,796 ) F-54
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Third quarter ended September 30, 2001
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 69,164 $ - $ 69,164 $ - $ 69,164 Depreciation and amortization 9,644 - 9,644 - 9,644 Operating income (loss) (8,004) - (8,004) (74) (8,078) Income (loss) of continuing operations before income taxes (37,412) - (37,412) (1,056) (38,468) Provision (benefit) for income taxes (12,318) - (12,318) (2,486) (14,804) Income (loss) of continuing operations before discontinued operations (25,094) - (25,094) 1,430 (23,664) Gain (loss) from discontinued operations, net of taxes (20,067) - (20,067) 132 (19,935) Cumulative effect of accounting change - - - - - Net income (loss) (45,161) - (45,161) 1,562 (43,599) Net income (loss) per share (1.35) 0.00 (1.35) 0.05 (1.30) Net income (loss) per share - assuming dilution (1.35) 0.00 (1.35) 0.05 (1.30)F-61— (Continued) GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2003
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) ASSETS: Current assets: Cash and cash equivalents — unrestricted $ 116,413 $ 2,958 $ 1,594 $ — $ 120,965 Cash and cash equivalents — restricted 4,651 17,738 15,334 — 37,723 Trade receivables, net 464 21,753 21,122 (17,238 ) 26,101 Deferred financing costs 26,865 — — — 26,865 Deferred income taxes 4,903 2,333 1,517 — 8,753 Other current assets 6,271 10,656 3,323 (129 ) 20,121 Intercompany receivables, net 838,904 — 46,645 (885,549 ) — Current assets of discontinued operations — — 19 — 19 Total current assets 998,471 55,438 89,554 (902,916 ) 240,547 Property and equipment, net 87,157 860,144 350,227 — 1,297,528 Amortized intangible assets, net 160 29,341 4 — 29,505 Goodwill — 169,642 — — 169,642 Indefinite lived intangible assets 1,480 39,111 — — 40,591 Investments 835,134 16,747 60,598 (363,568 ) 548,911 Estimated fair value of derivative assets 146,278 — — — 146,278 Long-term deferred financing costs 73,569 810 775 — 75,154 Other long-term assets 7,830 10,990 10,287 — 29,107 Long-term assets of discontinued operations — — — — Total assets $ 2,150,079 $ 1,182,223 $ 511,445 $ (1,266,484 ) $ 2,577,263 LIABILITIES AND STOCKHOLDERS’ EQUITY: Current liabilities: Current portion of long-term debt $ 558 $ 22 $ 8,004 $ — $ 8,584 Accounts payable and accrued liabilities 35,080 138,032 (629 ) (17,531 ) 154,952 Intercompany payables, net — 971,587 (86,038 ) (885,549 ) — Current liabilities of discontinued operations — 23 2,907 — 2,930 Total current liabilities 35,638 1,109,664 (75,756 ) (903,080 ) 166,466 Secured forward exchange contract 613,054 — — — 613,054 Long-term debt 348,797 201 191,177 — 540,175 Deferred income taxes 165,247 38,140 47,652 — 251,039 Estimated fair value of derivative liabilities 21,969 — — — 21,969 Other long-term liabilities 60,724 18,337 1 164 79,226 Long-term liabilities of discontinued operations — 825 — — 825 Minority interest of discontinued operations — — — — — Stockholders’ equity: Preferred stock — — — — — Common stock 394 3,337 2 (3,339 ) 394 Additional paid-in capital 639,839 234,997 165,955 (400,952 ) 639,839 Retained earnings 283,624 (224,213 ) 183,490 40,723 283,624 Other stockholders’ equity (19,207 ) 935 (1,076 ) — (19,348 ) Total stockholders’ equity 904,650 15,056 348,371 (363,568 ) 904,509 Total liabilities and stockholders’ equity $ 2,150,079 $ 1,182,223 $ 511,445 $ (1,266,484 ) $ 2,577,263 F-55
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fourth quarter ended— (Continued)GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31,2001
As As reported with Restatement (in thousands, except per previously Discontinued discontinued related share data) reported operations operations adjustments As restated ---------- ------------ ---------------- ----------- -----------Revenues $ 84,771 $ - $ 84,771 $ - $ 84,771 Depreciation and amortization 9,632 - 9,632 - 9,632 Operating income (loss) (13,217) - (13,217) (254) (13,471) Income (loss) of continuing operations before income taxes (2,505) - (2,505) (1,140) (3,645) Provision (benefit) for income taxes (572) - (572) (596) (1,168) Income (loss) of continuing operations before discontinued operations (1,933) - (1,933) (544) (2,477) Gain (loss) from discontinued operations, net of taxes (21,215) - (21,215) 1,022 (20,193) Cumulative effect of accounting change - - - - - Net income (loss) (23,148) - (23,148) 478 (22,670) Net income (loss) per share (0.69) 0.00 (0.69) 0.02 (0.67) Net income (loss) per share - assuming dilution (0.69) 0.00 (0.69) 0.02 (0.67)During2002
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) ASSETS: Current assets: Cash and cash equivalents — unrestricted $ 92,896 $ 3,644 $ 2,092 $ — $ 98,632 Cash and cash equivalents — restricted 2,732 — 16,591 — 19,323 Trade receivables, net 1,237 10,768 22,610 (12,241 ) 22,374 Deferred financing costs 26,865 — — — 26,865 Deferred income taxes 4,310 1,481 1,257 — 7,048 Other current assets 5,330 6,295 14,264 — 25,889 Intercompany receivables, net 488,251 — — (488,251 ) — Current assets of discontinued operations — — 4,095 — 4,095 Total current assets 621,621 22,188 60,909 (500,492 ) 204,226 Property and equipment, net 85,132 661,151 363,880 — 1,110,163 Amortized intangible assets, net — 43 197 — 240 Goodwill — 6,915 — — 6,915 Indefinite lived intangible assets 1,480 276 — — 1,756 Investments 748,143 22,202 60,598 (321,863 ) 509,080 Estimated fair value of derivative assets 207,727 — — — 207,727 Long-term deferred financing costs 93,660 — 7,273 — 100,933 Other long-term assets 11,432 2,351 10,540 — 24,323 Long-term assets of discontinued operations — — 13,328 — 13,328 Total assets $ 1,769,195 $ 715,126 $ 516,725 $ (822,355 ) $ 2,178,691 LIABILITIES AND STOCKHOLDERS’ EQUITY: Current liabilities: Current portion of long-term debt $ 522 $ — $ 8,004 $ — $ 8,526 Accounts payable and accrued liabilities 16,008 44,114 33,098 (12,535 ) 80,685 Intercompany payables, net — 655,381 (167,130 ) (488,251 ) — Current liabilities of discontinued operations — 1,523 5,129 — 6,652 Total current liabilities 16,530 701,018 (120,899 ) (500,786 ) 95,863 Secured forward exchange contract 613,054 — — — 613,054 Long-term debt 60,931 — 271,181 — 332,112 Deferred income taxes 177,462 5,122 48,283 — 230,867 Estimated fair value of derivative liabilities 48,647 — — — 48,647 Other long-term liabilities 64,581 (11,450 ) 14,470 294 67,895 Long-term liabilities of discontinued operations — (22,691 ) 23,480 — 789 Minority interest of discontinued operations — — 1,885 — 1,885 Stockholders’ equity: Preferred stock — — — — — Common stock 338 3,337 2 (3,339 ) 338 Additional paid-in capital 520,796 235,126 123,093 (358,219 ) 520,796 Retained earnings 282,798 (195,176 ) 155,481 39,695 282,798 Other stockholders’ equity (15,942 ) (160 ) (251 ) — (16,353 ) Total stockholders’ equity 787,990 43,127 278,325 (321,863 ) 787,579 Total liabilities and stockholders’ equity $ 1,769,195 $ 715,126 $ 516,725 $ (822,355 ) $ 2,178,691 F-56
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For thefourth quarter ofYear Ended December 31, 2003
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) Net cash provided by continuing operating activities $ (249,422 ) $ 271,090 $ 52,248 $ — $ 73,916 Net cash provided by discontinued operating activities — 22,887 (19,997 ) — 2,890 Net cash provided by operating activities $ (249,422 ) $ 293,977 $ 32,251 $ — $ 76,806 Purchases of property and equipment (8,686 ) (203,947 ) (11,087 ) — (223,720 ) Cash of business acquired — 4,228 — — 4,228 Sale of assets — — 175 — 175 Other investing activities (1,017 ) (289 ) (1,022 ) — (2,328 ) Net cash used in investing activities — continuing operations (9,703 ) (200,008 ) (11,934 ) — (221,645 ) Net cash provided by investing activities — discontinued operations — 5,869 59,485 — 65,354 Net cash provided by investing activities (9,703 ) (194,139 ) 47,551 — (156,291 ) Proceeds from issuance of long-term debt 350,000 200,000 — — 550,000 Repayment of long-term debt (60,000 ) (285,100 ) (80,004 ) — (425,104 ) Deferred financing costs paid (9,344 ) (8,643 ) (302 ) — (18,289 ) (Increase) decrease in restricted cash and cash equivalents (1,919 ) (7,898 ) 1,257 — (8,560 ) Proceeds from exercise of stock option and purchase plans 4,459 — — — 4,459 Other financing activities, net (554 ) 1,117 (1,157 ) — (594 ) Net cash used in financing activities — continuing operations 282,642 (100,524 ) (80,206 ) — 101,912 Net cash used in financing activities — discontinued operations — — (94 ) — (94 ) Net cash used in financing activities 282,642 (100,524 ) (80,300 ) — 101,818 Net change in cash 23,517 (686 ) (498 ) — 22,333 Cash and cash equivalents at beginning of year 92,896 3,644 2,092 — 98,632 Cash and cash equivalents at end of year $ 116,413 $ 2,958 $ 1,594 $ — $ 120,965 F-57
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) Net cash provided by continuing operating activities $ 110,765 $ 40,248 $ (67,184 ) $ — $ 83,829 Net cash provided by discontinued operating activities — (517 ) 3,968 — 3,451 Net cash provided by operating activities 110,765 39,731 (63,216 ) — 87,280 Purchases of property and equipment (9,887 ) (153,396 ) (12,121 ) — (175,404 ) Sale of assets — 30,875 — — 30,875 Other investing activities (4,064 ) 4,777 (1,668 ) — (955 ) Net cash used in investing activities — continuing operations (13,951 ) (117,744 ) (13,789 ) — (145,484 ) Net cash provided by investing activities — discontinued operations — 81,350 151,220 — 232,570 Net cash provided by investing activities (13,951 ) (36,394 ) 137,431 — 87,086 Proceeds from issuance of long-term debt 85,000 — — — 85,000 Repayment of long-term debt (125,034 ) — (89,812 ) — (214,846 ) (Increase) decrease in restricted cash and cash equivalents 28,089 — 17,581 — 45,670 Proceeds from exercise of stock option and purchase plans 919 — — — 919 Net cash used in financing activities — continuing operations (11,026 ) — (72,231 ) — (83,257 ) Net cash used in financing activities — discontinued operations — — (1,671 ) — (1,671 ) Net cash used in financing activities (11,026 ) — (73,902 ) — (84,928 ) Net change in cash 85,788 3,337 313 — 89,438 Cash and cash equivalents at beginning of year 7,108 307 1,779 — 9,194 Cash and cash equivalents at end of year $ 92,896 $ 3,644 $ 2,092 $ — $ 98,632 F-58
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001the Company recognized a pretax loss of $2.9 million from continuing operations representing impairment and other charges and pretax restructuring charges from continuing operations of $5.8 million offset by a pretax reversal of restructuring charges of $1.4 million originally recorded during the fourth quarter of 2000. F-62
Non- Issuer Guarantors Guarantors Eliminations Consolidated (In thousands) Net cash provided by continuing operating activities $ (84,464 ) $ 251,963 $ (152,377 ) — $ 15,122 Net cash provided by discontinued operating activities — 4,848 (4,480 ) — 368 Net cash provided by operating activities (84,464 ) 256,811 (156,857 ) — 15,490 Purchases of property and equipment (5,184 ) (262,420 ) (13,317 ) — (280,921 ) Other investing activities 889 4,850 (2,706 ) — 3,033 Net cash used in investing activities — continuing operations (4,295 ) (257,570 ) (16,023 ) — (277,888 ) Net cash provided by investing activities — discontinued operations — 452 17,342 — 17,794 Net cash provided by investing activities (4,295 ) (257,118 ) 1,319 — (260,094 ) Proceeds from issuance of long-term debt 100,000 — 435,000 — 535,000 Repayment of long-term debt (500 ) — (241,003 ) — (241,503 ) Deferred financing costs paid (3,642 ) — (15,940 ) — (19,582 ) (Increase) decrease in restricted cash and cash equivalents (26,861 ) — (25,465 ) — (52,326 ) Proceeds from exercise of stock option and purchase plans 2,548 — — — 2,548 Net cash used in financing activities — continuing operations 71,545 — 152,592 — 224,137 Net cash used in financing activities — discontinued operations — — 2,904 — 2,904 Net cash used in financing activities 71,545 — 155,496 — 227,041 Net change in cash (17,214 ) (307 ) (42 ) — (17,563 ) Cash and cash equivalents at beginning of year 24,322 614 1,821 — 26,757 Cash and cash equivalents at end of year $ 7,108 $ 307 $ 1,779 $ — $ 9,194 F-59
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTSAUDITORSTo Gaylord Entertainment Company:
We have audited the consolidated financial statements of Gaylord Entertainment Company as of December 31,
20022003 and20012002 and for each of the three years in the period ended December 31,2002,2003, and have issued our report thereon dated February5, 20039, 2004 (except forNotes 2 and 22the ninth paragraph of Note 16, as to which the date is March25, 2003)10, 2004) (included elsewhere in this Annual Report on Form 10-K.) Our audits also included the financial statement schedules listed in Item 15(A)(2) of this Annual Report on Form 10-K. These schedules are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion based on our audits.In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP Nashville, Tennessee
February5, 20039, 2004S-1
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
SCHEDULE II
-— VALUATION AND QUALIFYING ACCOUNTSFOR THE YEAR ENDED DECEMBERFor the Year Ended December 31,2002 (IN THOUSANDS)2003
ADDITIONS CHARGED TO BALANCE AT ---------------------- BALANCE BEGINNING COSTS AND OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD --------- -------- -------- ---------- ---------2000 restructuring charges - continuing operations $ 1,569 $ - $ - $ 1,299 $ 270 2001 restructuring charges - continuing operations 4,168 (1,079) - 2,658 431 2002 restructuring charges - continuing operations - 1,082 - 1,082 - ------- ------- ---- ------- ------- Total continuing operations 5,737 3 - 5,039 701 ------- ------- ---- ------- ------- 2000 restructuring charges - discontinued operations - - - - - 2001 restructuring charges - discontinued operations 3,383 - - 3,005 378 2002 restructuring charges - discontinued operations - - - - - ------- ------- ---- ------- ------- Total discontinued operations 3,383 - - 3,005 378 ------- ------- ---- ------- ------- Total $ 9,120 $ 3 $ - $ 8,004 $ 1,079 ======= ======= ==== ======= =======(Amounts in thousands)
Additions Charged to Balance at Balance Beginning Costs and Other at End of Period Expenses Accounts Deductions of Period 2000 restructuring charges — continuing operations $ 270 $ — $ — $ 75 $ 195 2001 restructuring charges — continuing operations 431 — — 337 94 Total continuing operations 701 — — 412 289 2001 restructuring charges — discontinuing operations 378 — — 162 216 Total $ 1,079 $ — $ — $ 574 $ 505 S-2
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
SCHEDULE II
-— VALUATION AND QUALIFYING ACCOUNTSFOR THE YEAR ENDED DECEMBERFor the Year Ended December 31,2001 (IN THOUSANDS)2002
ADDITIONS CHARGED TO BALANCE AT ---------------------- BALANCE BEGINNING COSTS AND OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD --------- -------- -------- ---------- ---------2000 restructuring charges - continuing operations $10,825 $(3,666) $ - $ 5,590 $ 1,569 2001 restructuring charges - continuing operations - 5,848 - 1,680 4,168 ------- ------- ---- ------- ------- Total continuing operations 10,825 2,182 - 7,270 5,737 ------- ------- ---- ------- ------- 2000 restructuring charges - discontinued operations 2,285 (424) - 1,861 - 2001 restructuring charges - discontinued operations - 3,383 - - 3,383 ------- ------- ---- ------- ------- Total discontinued operations 2,285 2,959 - 1,861 3,383 ------- ------- ---- ------- ------- Total $13,110 $ 5,141 $ - $ 9,131 $ 9,120 ======= ======= ==== ======= =======(In thousands)
Additions Charged to Balance at Balance Beginning Costs and Other at End of Period Expenses Accounts Deductions of Period 2000 restructuring charges — continuing operations $ 1,569 $ — $ — $ 1,299 $ 270 2001 restructuring charges — continuing operations 4,168 (1,079 ) — 2,658 431 2002 restructuring charges — continuing operations — 1,062 — 1,062 — Total continuing operations 5,737 (17 ) — 5,019 701 2000 restructuring charges — discontinued operations — — — — — 2001 restructuring charges — discontinued operations 3,383 — — 3,005 378 2002 restructuring charges — discontinued operations — 20 — 20 — Total discontinued operations 3,383 20 — 3,025 378 Total $ 9,120 $ 3 $ — $ 8,044 $ 1,079 S-3
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
SCHEDULE II
-— VALUATION AND QUALIFYING ACCOUNTSFOR THE YEAR ENDED DECEMBERFor the Year Ended December 31,2000 (AMOUNTS IN THOUSANDS)2001(In thousands)
Additions Charged to Balance at Balance Beginning Costs and Other at End of Period Expenses Accounts Deductions of Period 2000 restructuring charges — continuing operations $ 10,825 $ (3,666 ) $ — $ 5,590 $ 1,569 2001 restructuring charges — continuing operations — 5,848 — 1,680 4,168 Total continuing operations 10,825 2,182 — 7,270 5,737 2000 restructuring charges — discontinued operations 2,285 (424 ) — 1,861 — 2001 restructuring charges — discontinued operations — 3,383 — — 3,383 Total discontinued operations 2,285 2,959 — 1,861 3,383 Total $ 13,110 $ 5,141 $ — $ 9,131 $ 9,120 S-4
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PLANS OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCESSION: 2 .1† Agreement and Plan of Merger, dated as of February 9, 1997, by and among Westinghouse Electric Corporation (“Westinghouse”), G Acquisition Corp. and the former Gaylord Entertainment Company (“Old Gaylord”) (incorporated by reference to Exhibit 2.1 to Old Gaylord’s Current Report on Form 8-K dated February 9, 1997 (File No. 1-10881)). 2 .2† Agreement and Plan of Merger, dated as of April 9, 1999, by and among Gaylord Entertainment Company (the “Company”), Gaylord Television Company, Gaylord Communications, Inc., CBS Corporation, CBS Dallas Ventures, Inc. and CBS Dallas Media, Inc. (incorporated by reference to Exhibit 2 to the Company’s Current Report on Form 8-K dated April 19, 1999 (File No. 1-13079)). 2 .3† First Amendment to the Agreement and Plan of Merger, dated as of October 8, 1999, by and among the Company, Gaylord Television Company, Gaylord Communications, Inc., CBS Corporation, CBS Dallas Ventures, Inc. and CBS Dallas Media, Inc. (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form S-3 of CBS Corporation, as filed with the Securities and Exchange Commission (the “SEC”) on October 12, 1999 (File No. 333-88775)). 2 .4† Securities Purchase Agreement, dated as of March 9, 2001, by and among the Company, Gaylord Creative Group, Inc., PaperBoy Productions, Inc., and Gaylord Sports, Inc. (incorporated by reference to Exhibit 2.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13079)). 2 .5† Purchase Agreement among WMGA, LLC and the Company, and the Company’s subsidiary, Gaylord Creative Group, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated January 16, 2002 (File No. 1-13079)). 2 .6† Asset Purchase Agreement, dated as of July 1, 2002, by and between Acuff-Rose Music Publishing, Inc., Acuff-Rose Music, Inc., Milene Music, Inc., Springhouse Music, Inc., and Hickory Records, Inc. and Sony/ ATV Music Publishing LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 1-13079)). 2 .7† Purchase and Sale Agreement, dated as of June 28, 2002, by and between The Mills Limited Partnership (as Purchaser) and Opryland Attractions, Inc. (as Seller) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 1-13079)). 2 .8† Asset Purchase Agreement among Gaylord Investments, Inc., Cumulus Broadcasting, Inc. and Cumulus Licensing Corp., dated as of March 24, 2003 (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-13079)). 2 .9† Agreement and Plan of Merger, dated as of August 4, 2003, among the Company, GET Merger Sub, Inc. and ResortQuest International, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 5, 2003 (File No. 1-13079)).
GOVERNING DOCUMENTS OF THE COMPANY3 .1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated October 7, 1997 (File No. 1-13079)). 3 .2 Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-13079)). 3 .3 Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10, as amended on June 30, 1997 (File No. 1-13079)).
EXHIBIT NUMBER DESCRIPTION
INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF THE COMPANY’S COMMON STOCK:4 .1 Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10, as amended on June 30, 1997 (File No. 1-13079)). 4 .2 Reference is made to Exhibits 3.1, 3.2 and 3.2 hereof for instruments defining the rights of common stockholders of the Company. 4 .3 Stock Purchase Warrant, dated November 7, 2002, issued by the Company to Gilmore Entertainment Group, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-13079)).
INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF THE COMPANY’S SENIOR NOTES DUE 2013:4 .4 Indenture, dated as of November 12, 2003, by and between the Company, certain of its subsidiaries and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 13, 2003 (File No. 1-13079)). 4 .5 First Supplemental Indenture, dated as of November 20, 2003, by and between the Company, certain of its subsidiaries and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4 dated January 9, 2004 (File No. 333-111812)). 4 .6 Registration Rights Agreement, dated as of November 12, 2003, between the registrants signatory thereto and the Initial Purchasers (as defined therein) with respect to the Company’s 8% Senior Notes Due 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 dated January 9, 2004 (File No. 333-111812)).
MATERIAL CONTRACTS REGARDING THE 1997 RESTRUCTURING:10 .1 Tax Disaffiliation Agreement by and among Old Gaylord, the Company and Westinghouse, dated September 30, 1997 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated October 7, 1997 (File No. 1-13079)). 10 .2 Agreement and Plan of Distribution, dated September 30, 1997, between Old Gaylord and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 7, 1997 (File No. 1-13079)). 10 .3 Tax Matters Agreement, dated as of April 9, 1999, by and among the Company, Gaylord Television Company, Gaylord Communications, Inc. and CBS Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 19, 1999 (File No. 1-13079)). 10 .4 Amended and Restated Tax Matters Agreement, dated as of October 8, 1999, by and among the Company, Gaylord Television Company, Gaylord Communications, Inc. and CBS Corporation (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-3 of CBS Corporation, as filed with the SEC on October 12, 1999 (File No. 333-88775). 10 .5 First Amendment to Post-Closing Covenants Agreement and Non-Competition Agreements, dated as of April 9, 1999, by and among the Company, CBS Corporation, Edward L. Gaylord and E. K. Gaylord, II (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 19, 1999 (File No. 1-13079)).
MATERIAL CONTRACTS REGARDING THE NASHVILLE HOTEL LOANS:10 .6 Amended and Restated Loan and Security Agreement dated as of March 27, 2001, by and between Opryland Hotel Nashville, LLC, and Merrill Lynch Mortgage Lending, Inc. (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 13079)). 10 .7 Mezzanine Loan Agreement dated as of March 27, 2001, by and between Merrill Lynch Mortgage Capital Inc. and OHN Holdings, LLC (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13079)).
EXHIBIT NUMBER DESCRIPTION 10 .8 First Amendment dated January 18, 2002 to Mezzanine Loan Agreement, dated as of March 27, 2001 by and between Opryland Mezzanine Trust 2001-1, a Delaware business trust, and OHN Holdings, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 1-13079)). 10 .9 Second Amendment to Mezzanine Loan Agreement, dated April 30, 2003, by and between Opryland Mezzanine Trust 2001-1 and OHN Holdings, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-13079)).
MATERIAL CONTRACTS REGARDING THE 2003 TEXAS/FLORIDA CREDIT
FACILITY:10 .10 Subordinated Credit Agreement among Gaylord Hotels, LLC, various lenders, the Company and Deutsche Bank Trust Company Americas, dated as of May 22, 2003 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-13079)). 10 .11 Senior Credit Agreement among Opryland Hotel-Florida Limited Partnership, Opryland Hotel-Texas Limited Partnership, the Company, various lenders and Deutsche Bank Trust Company Americas, dated as of May 22, 2003 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-13079)). 10 .12 First Amendment to Credit Agreement and Ratification of Guaranty dated as of November 10, 2003 among Opryland Hotel-Florida Limited Partnership and Opryland Hotel-Texas Limited Partnership as Co-Borrowers, the Company, certain lenders and Deutsche Bank Trust Company Americas, as Administrative Agent, and certain subsidiary Guarantors (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated November 12, 2003 (File No. 1-13079)). 10 .13 Second Amendment to Credit Agreement and Ratification of Guaranty dated as of November 10, 2003 among Opryland Hotel-Florida Limited Partnership and Opryland Hotel-Texas Limited Partnership as Co-Borrowers, the Company, certain lenders and Deutsche Bank Trust Company Americas, as Administrative Agent, and certain subsidiary Guarantors (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated November 12, 2003 (File No. 1-13079)).
MATERIAL CONTRACTS REGARDING THE $100.0 MILLION REVOLVING CREDIT FACILITY:10 .14*† Credit Agreement, dated as of November 20, 2003, among Opryland Hotel-Florida Limited Partnership, as borrower, the Company, as parent guarantor, certain lenders party thereto, and Deutsche Bank Trust Company Americas, as administrative agent, with Deutsche Bank Securities Inc. and Banc of America Securities LLC, as joint book running managers and co-lead arrangers, and Bank of America, N.A., as syndication agent. 10 .15* First Amendment to Credit Agreement and Ratification of Guaranty, dated as of December 17, 2003, among Opryland Hotel-Florida Limited Partnership, as borrower, the Company, as parent guarantor, certain lenders party thereto, Deutsche Bank Trust Company Americas, as administrative agent, and the certain subsidiary guarantors.
MATERIAL CONTRACTS REGARDING THE GAYLORD PALMS:10 .16 Guaranteed Maximum Price (GMP) Construction Agreement dated as of November 8, 1999, by and among Opryland Hotel - Florida, L.P., Opryland Hospitality Group, and Perini/ Suitt (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13079)). 10 .17 First Amendment to Guaranteed Maximum Price (GMP) Construction Agreement dated as of September 5, 2000 by and among Opryland Hotel - Florida, L.P., Opryland Hospitality Group d/b/a OLH, G.P., and Perini/ Suitt (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13079)).
EXHIBIT NUMBER DESCRIPTION 10 .18 Opryland Hotel-Florida Ground Lease, dated as of March 3, 1999, by and between Xentury City Development Company, L.L.C., and Opryland Hotel-Florida Limited Partnership (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 1-13079)).
MATERIAL CONTRACTS REGARDING THE GAYLORD TEXAN:10 .19 Hotel/ Convention Center Sublease Agreement, dated as of May 16, 2000, by and between the City of Grapevine, Texas and Opryland Hotel-Texas Limited Partnership (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-13079)). 10 .20 Sublease Addendum Number 1, dated July 28, 2000, by and between the City of Grapevine, Texas and Opryland Hotel-Texas Limited Partnership (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-13079)). 10 .21† Guaranteed Maximum Price Construction Agreement, dated November 15, 2002, by and between Gaylord Entertainment Company and Centex Construction Company, Inc. (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-13079)).
MATERIAL CONTRACTS REGARDING NASHVILLE PREDATORS INVESTMENT:10 .22 Naming Rights Agreement dated as of November 24, 1999, by and between the Company and Nashville Hockey Club Limited Partnership (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 1-13079)). 10 .23 Guaranty dated as of June 25, 1997, by Craig Leipold, the Company, CCK, Inc. and other guarantors in favor of the Nashville Hockey League (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 1-13079)).
MATERIAL CONTRACTS REGARDING VIACOM STOCK:10 .24 SAILS Mandatorily Exchangeable Securities Contract dated as of May 22, 2000, among the Company, OLH G.P., Credit Suisse First Boston International, and Credit Suisse First Boston Corporation, as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 23, 2000 (File No. 1-13079)). 10 .25 SAILS Pledge Agreement dated as of May 22, 2000, among the Company, Credit Suisse First Boston International, and Credit Suisse First Boston Corporation, as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated May 23, 2000 (File No. 1-13079)).
EXECUTIVE COMPENSATION PLANS AND MANAGEMENT CONTRACTS:10 .26 Gaylord Entertainment Company 1997 Omnibus Stock Option and Incentive Plan (as amended at May 2002 Stockholders Meeting) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 1-13079)). 10 .27 Amended and Restated Gaylord Entertainment Company 1997 Omnibus Stock Option and Incentive Plan (including amendments adopted at the May 2003 Stockholders Meeting) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-13079)). 10 .28 The Opryland USA Inc. Supplemental Deferred Compensation Plan (incorporated by reference to Exhibit 10.11 to Old Gaylord’s Registration Statement on Form S-1 (File No. 33-42329)). 10 .29 Gaylord Entertainment Company Retirement Benefit Restoration Plan (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000) (File No. 1-13079)). 10 .30 Form of Severance Agreement between the Company and certain of its executive officers (incorporated by reference to Exhibit 10.23 to Old Gaylord’s Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-10881)).
EXHIBIT NUMBER DESCRIPTION 10 .31 Consulting Agreement, dated October 31, 2001, between the Company and Dave Jones (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-13079)). 10 .32 Letter Agreement dated February 14, 2001 between the Company and Carl W. Kornmeyer (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13079)). 10 .33 Executive Employment Agreement of David C. Kloeppel, dated September 4, 2001, with the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for quarter ended September 30, 2001 (File No. 1-13079)). 10 .34 Executive Employment Agreement of Colin V. Reed, dated April 23, 2001, with the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2001 (File No. 1-13079)). 10 .35 Indemnification Agreement, dated as of April 23, 2001, by and between the Company and Colin V. Reed (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-13079)). 10 .36 Executive Employment Agreement of Michael D. Rose, dated April 23, 2001, with the Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2001 (File No. 1-13079)). 10 .37 Indemnification Agreement, dated as of April 23, 2001, by and between the Company and Michael D. Rose (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-13079)). 10 .38* Executive Employment Agreement of Jay D. Sevigny, dated July 15, 2003, with the Company. 10 .39* Executive Employment Agreement of Jim Olin, dated August 4, 2003, with the Company. 10 .40 Form of Indemnification Agreement between the Company and each of its non-employee directors (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-13079)). 10 .41 Gaylord Entertainment Company Director Compensation Policy (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-13079)).
MISCELLANEOUS:16 Letter from Arthur Andersen LLP regarding change in independent auditor (incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K dated June 19, 2002 (File No. 1-13079)). 21* Subsidiaries of Gaylord Entertainment Company. 23* Consent of Independent Auditors. 31 .1* Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a — 14(a) and Rule 15d — 14(a). 31 .2* Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a — 14(a) and Rule 15d — 14(a). 32 .1* Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32 .2* Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. * Filed herewith.
ADDITIONS CHARGED TO BALANCE AT ---------------------- BALANCE BEGINNING COSTS AND OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD --------- -------- -------- ---------- ---------1999 restructuring charges - continuing operations $ 469 $ (234) $ - $ 235 $ - 2000 restructuring charges - continuing operations - 13,186 - 2,361 10,825 -------- -------- ---- -------- -------- Total continuing operations 469 12,952 - 2,596 10,825 -------- -------- ---- -------- -------- 1999 restructuring charges - discontinuing operations 30 - - 30 - 2000 restructuring charges - discontinuing operations - 3,241 - 956 2,285 -------- -------- ---- -------- -------- Total discontinuing operations 30 3,241 - 986 2,285 -------- -------- ---- -------- -------- Total $ 499 $ 16,193 $ - $ 3,582 $ 13,110 ======== ======== ==== ======== ========† As directed by Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to this exhibit are omitted from this filing. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. S-4