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EXHIBIT 13.1
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the five years
ended December 31, 1999 is derived from the Company's audited consolidated
financial statements. The unaudited selected consolidated pro forma income
statement data for the year ended December 31, 1997 is presented as if the
Distribution and the CBS Merger had occurred on January 1, 1997. The unaudited
selected consolidated pro forma information does not purport to represent what
the Company's results of operations would have been had such transactions, in
fact, occurred on such date or to project the Company's financial position or
results of operations for any future period. The information in the following
table should be read in conjunction with the Company's consolidated financial
statements and related notes included herein.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
UNAUDITED
ACTUAL PRO FORMA ACTUAL
-------------------------- --------- ------------------------------------------
1999 1998 1997(5) 1997(6)(7) 1996 1995
--------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues:
Hospitality and attractions $ 245,705 $ 246,354 $ 311,418 $ 311,418 $ 280,411 $ 244,279
Creative content 205,565 203,537 162,782 162,782 46,918 48,608
Interactive media 54,224 68,942 85,952 350,415 417,613 413,219
Corporate and other 5,294 5,642 1,380 1,380 2,216 1,354
--------- --------- --------- --------- --------- ---------
Total revenues 510,788 524,475 561,532 825,995 747,158 707,460
--------- --------- --------- --------- --------- ---------
Operating expenses:
Operating costs 324,560 315,077 363,369(8)(9) 511,162(8)(9) 443,236 442,208(8)
Selling, general and
administrative 138,318 123,681 132,511 161,280 125,459 115,361
Merger costs (1,741) -- 22,645(10) 22,645(10) -- --
Restructuring charges 3,102 -- 13,654(10) 13,654(10) -- --
Line of business closing
charges 12,201(1) -- 42,006(11) 42,006(11) -- --
Depreciation and amortization:
Hospitality and
attractions 25,515 23,835 28,544 28,544 25,570 18,570
Creative content 13,757 9,294 6,553 6,553 3,229 2,976
Interactive media 6,553 4,415 4,709 13,870 15,989 12,812
Corporate and other 6,749 5,240 4,430 4,430 4,068 3,728
--------- --------- --------- --------- --------- ---------
Total depreciation and
amortization 52,574 42,784 44,236 53,397 48,856 38,086
--------- --------- --------- --------- --------- ---------
Total operating expenses 529,014 481,542 618,421 804,144 617,551 595,655
--------- --------- --------- --------- --------- ---------
Operating income (loss):
Hospitality and attractions 38,270 44,051 50,846 50,846 42,634 36,843
Creative content (11,366) 11,339 11,689 11,689 7,010 9,235
Interactive media (5,596) 8,211 (14,810)(8)(9) 63,930(8)(9) 103,708 88,553(8)
Corporate and other (25,972) (20,668) (26,309) (26,309) (23,745) (22,826)
Merger costs 1,741 -- (22,645)(10) (22,645)(10) -- --
Restructuring charges (3,102) -- (13,654)(10) (13,654)(10) -- --
Line of business closing
charges (12,201)(1) -- (42,006)(11) (42,006)(11) -- --
--------- --------- --------- --------- --------- ---------
Total operating income
(loss) (18,226) 42,933 (56,889) 21,851 129,607 111,805
Interest expense (16,101) (30,031) (26,994) (27,177) (19,538) (4,200)
Interest income 6,275 25,606 23,726 24,022 22,904 7,011
Other gains and losses 589,574(2)(3) 11,359(3)(4) 146,193(12) 143,532(12) 71,741(15) (8,264)(16)
--------- --------- --------- --------- --------- ---------
Income from continuing
operations before
provision for income
taxes 561,522 49,867 86,036 162,228 204,714 106,352
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Provision for income taxes 211,730 18,673 (19,788)(13) 10,792(13) 73,549 40,945
--------- --------- --------- --------- --------- ---------
Income from continuing
operations 349,792 31,194 105,824 151,436 131,165 65,407
Discontinued operations, net of
taxes -- -- -- -- -- 42,998(3)
Cumulative effect of accounting
change, net of taxes -- -- (7,537)(14) (7,537)(14) -- --
--------- --------- --------- --------- --------- ---------
Net income $ 349,792 $ 31,194 $ 98,287 $ 143,899 $ 131,165 $ 108,405
========= ========= ========= ========= ========= =========
Income per share:
Income from continuing
operations $ 10.63 $ 0.95 $ 3.27 $ 4.68 $ 4.07 $ 2.04
========= ========= ========= ========= ========= =========
Net income $ 10.63 $ 0.95 $ 3.04 $ 4.45 $ 4.07 $ 3.38
========= ========= ========= ========= ========= =========
Income per share - assuming
dilution:
Income from continuing
operations $ 10.53 $ 0.94 $ 3.24 $ 4.64 $ 4.02 $ 2.01
========= ========= ========= ========= ========= =========
Net income $ 10.53 $ 0.94 $ 3.01 $ 4.41 $ 4.02 $ 3.33
========= ========= ========= ========= ========= =========
Dividends per share $ 0.80 $ 0.65 N/A $ 1.05 $ 1.08 $ 0.89
========= ========= ========= ========= ========= =========
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (AMOUNTS IN THOUSANDS)
Total assets $1,732,384(2) $1,011,992 $1,117,562 $1,182,248 $1,095,812
Total debt, including current portion 310,123 282,981(3) 388,397 363,409 340,044
Total stockholders' equity 961,159(2) 525,160 516,224 512,963 419,106
(1) Charge related to the closing of Word's Unison Records label.
(2) Includes a pretax gain of $459,307 on the divestiture of television
station KTVT in Dallas-Fort Worth in exchange for CBS Series B
preferred stock which is convertible into 10,141,691 shares of CBS
common stock, $4,210 of cash, and other consideration. The CBS Series B
preferred stock was included in total assets at its current value of
$648,434 at December 31, 1999.
(3) In 1993, the Company formalized plans to sell its cable television
systems segment (the "Systems") and began accounting for the Systems as
discontinued operations. The Systems were sold in September 1995, which
resulted in a gain of $42,998, net of income taxes of $30,824. Net
proceeds were $198,800 in cash and a note receivable with a face amount
of $165,688, which was recorded at $150,688, net of a $15,000 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 $15,000 related to the note receivable discount. During
1999, the Company received cash and recognized a pretax gain of
$129,875 representing the value of the Rights. The proceeds from the
note receivable prepayment and the Rights were used to reduce
outstanding bank indebtedness.
(4) Includes:
(a) a pretax gain of $16,072 on the sale of the Company's
investment in the Texas Rangers Baseball Club, Ltd.;
(b) a pretax gain totaling $8,538 primarily related to the
settlement of contingencies from the sales of television
stations KHTV in Houston and KSTW in Seattle;
(c) a pretax loss of $23,616 on the write-off of a note receivable
from Z Music; and
(d) a pretax loss of $9,200 related to the termination of an
operating lease for a satellite transponder for CMT
International.
(5) Reflects the unaudited pro forma results of operations as if the CBS
Merger had occurred on January 1, 1997.
(6) Includes the results of operations of the Cable Networks Business for
the first nine months of 1997. On October 1, 1997, the Cable Networks
Business was acquired by CBS in the CBS Merger.
(7) In January 1997, the Company purchased the net assets of Word for
approximately $120,000. The results of operations of Word have been
included from the date of acquisition.
(8) Includes pretax charges of $11,740 and $13,302 for 1997 and 1995,
respectively, for the write-down to net realizable value of certain
television program rights.
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(9) Includes a pretax charge of $5,000 related to plans to cease the
European operations of CMT International effective March 31, 1998.
(10) The merger costs and the 1997 restructuring charge are related to the
CBS Merger.
(11) Charge related to the closing of the Opryland theme park at the end of
the 1997 operating season.
(12) Includes a pretax gain of $144,259 on the sale of television station
KSTW in Seattle.
(13) Includes a deferred tax benefit of $55,000 related to the revaluation
of certain reserves as a result of the 1997 Restructuring and CBS
Merger.
(14) Reflects the cumulative effect of the change in accounting method for
deferred preopening costs to expense these costs as incurred, effective
January 1, 1997, of $12,335, net of a related tax benefit of $4,798.
(15) Includes a pretax gain of $73,850 on the sale of television station
KHTV in Houston.
(16) Includes a pretax loss of $5,529 to reflect the loss upon the disposal
of the Company's 14% limited partnership interest in the Fiesta Texas
theme park.
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GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During 1999, the Company restated its reportable segments for all
periods presented based upon an internal realignment of operational
responsibilities. The Company is managed using the following four business
segments: hospitality and attractions, creative content, interactive media, and
corporate and other. Certain events which occurred during each of 1999, 1998 and
1997 affect the comparability of the Company's results of operations among the
periods under review. The principal events are as follows:
DIVESTITURE OF KTVT
In October 1999, CBS Corporation acquired the Company's television
station KTVT in Dallas-Ft. Worth in exchange for $485 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 income.
UNISON RECORDS CLOSING
During 1999, the Company recorded a pretax loss of $12.2 million
related to the closing of Unison Records, a specialty record label of Word which
dealt primarily in value-priced acoustical and instrumental recordings. The
Unison closing charge is reflected as a line of business closing charge in the
consolidated statements of income. The Unison closing charge includes
write-downs of the carrying value of inventories, accounts receivable and other
assets of $4.3 million, $3.5 million and $3.9 million, respectively, and other
costs associated with the Unison closing of $0.5 million.
GAYLORD ENTERTAINMENT CENTER NAMING RIGHTS
During 1999, the Company entered into a naming rights agreement related
to the Nashville Arena with the Nashville Predators of the National Hockey
League. The Nashville Arena has been renamed the Gaylord Entertainment Center as
a result of the agreement. The contractual commitment requires the Company to
pay $2.1 million during the first year of the contract, with a 5% escalation
each year for the next 20 years. The Company is accounting for the naming rights
agreement expense on a straight-line basis over the 20 year contract period.
GAYLORD DIGITAL
During the third quarter of 1999, the Company announced the creation of
a new division formed to initiate a focused Internet strategy, and the
acquisition of a controlling equity interest in two online operations,
Musicforce.com and Lightsource.com. This division is currently known as Gaylord
Digital. At December 31, 1999, the Company had acquired 84% of Musicforce.com
and Lightsource.com for $23.4 million in cash. The parties entered into option
agreements regarding the additional equity interests in the online operations.
The acquisition was financed through borrowings under the Company's revolving
credit agreement and has been accounted for using the purchase method of
accounting. The Company expects that Gaylord Digital will have operating losses
of approximately $20 million (excluding goodwill amortization) during the
combined period of 1999 and 2000.
REORGANIZATION AND CBS MERGER
Prior to September 30, 1997, the Company was a wholly owned subsidiary
of a corporation which was then known as Gaylord Entertainment Company ("Old
Gaylord"). On October 1, 1997, Old Gaylord consummated a merger transaction with
CBS (the "CBS Merger"), pursuant to which Old Gaylord became a wholly owned
subsidiary of CBS. Prior to the CBS Merger, Old Gaylord completed the 1997
restructuring whereby certain assets and liabilities that were part of Old
Gaylord's hospitality, attractions, music, television and radio businesses,
including all of its long-term debt, as well as CMT International and the
management of and option to acquire 95% of Z Music, were transferred to or
retained by the Company. As a result of the 1997 restructuring and the CBS
Merger, substantially all of the assets of the Cable Networks Business and its
liabilities, to the extent that they arose out of or related to the Cable
Networks Business, were acquired by CBS. The operating results of the Cable
Networks Business are included in the consolidated statements of income through
September 30, 1997.
OPRYLAND THEME PARK CLOSING
The Company closed the Opryland theme park at the end of the 1997
operating season. During 1998, the Company created a partnership with The Mills
Corporation to develop Opry Mills, a $200 million entertainment / retail complex
located on land previously used for the Opryland theme park. The Company holds a
one-third interest in the partnership.
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ACQUISITION OF WORD ENTERTAINMENT
In January 1997, the net assets of Word were purchased by the Company
for approximately $120 million in cash. The purchase price included
approximately $40 million of working capital.
DIVESTITURE OF KSTW
In June 1997, the Company sold television station KSTW in Seattle for
$160 million in cash.
RESULTS OF OPERATIONS
The following table contains selected income statement data for each of
the three years ended December 31, 1999, 1998 and 1997 (in thousands). The
unaudited pro forma data for the year ended December 31, 1997 is presented as if
the CBS Merger had occurred on January 1, 1997. The table also shows the
percentage relationships to total revenues and, in the case of segment operating
income, its relationship to segment revenues.
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
Unaudited
Actual Actual Pro Forma Actual
1999 % 1998 % 1997 % 1997 %
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Hospitality and attractions $ 245,705 48.1% $ 246,354 47.0% $ 311,418 55.5% $ 311,418 37.7%
Creative content 205,565 40.3 203,537 38.8 162,782 29.0 162,782 19.7
Interactive media 54,224 10.6 68,942 13.1 85,952 15.3 350,415 42.4
Corporate and other 5,294 1.0 5,642 1.1 1,380 0.2 1,380 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 510,788 100.0 524,475 100.0 561,532 100.0 825,995 100.0
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operating costs 324,560 63.5 315,077 60.1 363,369 64.7 511,162 61.9
Selling, general and
administrative 138,318 27.1 123,681 23.6 132,511 23.6 161,280 19.5
Merger costs (1,741) (0.3) -- -- 22,645 4.0 22,645 2.7
Restructuring charges 3,102 0.6 -- -- 13,654 2.4 13,654 1.7
Line of business closing charges 12,201 2.4 -- -- 42,006 7.5 42,006 5.1
Depreciation and amortization:
Hospitality and attractions 25,515 23,835 28,544 28,544
Creative content 13,757 9,294 6,553 6,553
Interactive media 6,553 4,415 4,709 13,870
Corporate and other 6,749 5,240 4,430 4,430
- ------------------------------------------------------------------------------------------------------------------------------------
Total depreciation and
amortization 52,574 10.3 42,784 8.1 44,236 7.9 53,397 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 529,014 103.6 481,542 91.8 618,421 110.1 804,144 97.4
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Hospitality and attractions 38,270 15.6 44,051 17.9 50,846 16.3 50,846 16.3
Creative content (11,366) (5.5) 11,339 5.6 11,689 7.2 11,689 7.2
Interactive media (5,596) (10.3) 8,211 11.9 (14,810) (17.2) 63,930 18.2
Corporate and other (25,972) -- (20,668) -- (26,309) -- (26,309) --
Merger costs 1,741 -- -- -- (22,645) -- (22,645) --
Restructuring charges (3,102) -- -- -- (13,654) -- (13,654) --
Line of business closing charges (12,201) -- -- -- (42,006) -- (42,006) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating income (loss) $ (18,226) (3.6)% $ 42,933 8.2% $ (56,889) (10.1)% $ 21,851 2.6%
====================================================================================================================================
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YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
TOTAL REVENUES - Total revenues decreased $13.7 million, or 2.6%, to
$510.8 million in 1999 primarily due to the effect of the divestiture of KTVT.
Excluding the total revenues of KTVT from both periods, total revenues increased
$1.9 million, or 0.4%, in 1999.
HOSPITALITY AND ATTRACTIONS - Revenues in the hospitality and
attractions segment decreased $0.6 million, or 0.3%, to $245.7 million in 1999.
Revenues of the Opryland Hotel Nashville decreased $0.4 million to $223.4
million in 1999. The hotel's occupancy rate decreased to 78.0% in 1999 compared
to 79.1% in 1998. The hotel sold 789,600 rooms in 1999 compared to 801,900 rooms
sold in 1998, reflecting a 1.5% decrease from 1998. The hotel's average daily
rate decreased to $137.18 in 1999 from $138.51 in 1998. During 1999, the hotel
changed the calculation of its average daily rates in an attempt to report
amounts that are more consistent with industry standards and restated the
average daily rate calculations for all prior periods. This change is expected
to result in average daily rates that are approximately 2% lower than those
previously reported. Revenues associated with the Company's attractions
properties decreased $1.0 million in 1999 related to continued softness in
Nashville tourism. These decreases were partially offset by increased revenues
of $0.9 million in 1999 from the Inn at Opryland, which was purchased in April
1998.
CREATIVE CONTENT - Revenues in the creative content segment increased
$2.0 million, or 1.0%, to $205.6 million in 1999. The increase results primarily
from the revenues of Jack Nicklaus Productions, which was acquired in December
1999, of $7.1 million. Revenues from the Wildhorse Saloon in Orlando, Florida,
which opened in April 1998, increased $1.9 million in 1999. Pandora revenues
decreased $3.4 million, or 30.2%, to $7.9 million in 1999 due to fewer film
releases in 1999. Revenues of Word decreased $2.5 million, or 1.9%, to $129.6
million in 1999 related to declines at the now-closed Unison label and a decline
in sales of children's products.
INTERACTIVE MEDIA - Revenues in the interactive media segment decreased
$14.7 million, or 21.3%, to $54.2 million in 1999 due to the effect of the
divestiture of KTVT in October 1999. Excluding the revenues of KTVT from both
periods, revenues in the interactive media segment increased $0.8 million to
$18.2 million in 1999. The revenues of KTVT were $36.1 million and $51.6 million
in 1999 and 1998, respectively. Revenues of the Company's Internet division, now
known as Gaylord Digital, subsequent to its formation in 1999 were $1.6 million.
The Company's WWTN FM radio station produced increased revenues of $1.2 million
in 1999. The revenues of CMT International decreased $1.8 million in 1999
primarily related to CMT International ceasing its European operations effective
March 31, 1998.
CORPORATE AND OTHER - Revenues in the corporate and other segment
decreased $0.3 million to $5.3 million in 1999. Corporate and other segment
revenues consist primarily of consulting and other services revenues related to
the Opry Mills partnership in both 1999 and 1998, which will not be continuing
beyond 1999.
OPERATING EXPENSES
TOTAL OPERATING EXPENSES - Total operating expenses increased $47.5
million, or 9.9%, to $529.0 million in 1999. Operating costs, as a percentage of
revenues, increased to 63.5% during 1999 as compared to 60.1% during 1998.
Selling, general and administrative expenses, as a percentage of revenues,
increased to 27.1% during 1999 as compared to 23.6% in 1998.
OPERATING COSTS - Operating costs increased $9.5 million, or 3.0%, to
$324.6 million in 1999. Excluding the operating costs of KTVT from both periods,
operating costs increased $13.1 million, or 4.5%, to $306.1 million in 1999. The
increase is primarily the result of the December 1999 acquisition of Jack
Nicklaus Productions, which had operating costs in 1999 of $6.5 million and the
operating costs of the Company's Internet division, now known as Gaylord
Digital, of $2.7 million. Operating costs of the Wildhorse Saloon locations
increased $3.6 million in 1999 related to increased revenues and the opening of
the Orlando, Florida location in April 1998. The operating costs of Word
increased $2.8 million in 1999 related to increased revenues of lower-margin
distributed products and increased costs associated with the relocation of
Word's warehouse from Texas to Tennessee. Costs associated with the growth
strategy of Z Music increased operating costs by $2.0 million in 1999. These
increases were partially offset in 1999 by decreased operating costs at the
Opryland Hotel Nashville of $1.0 million.
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SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses increased $14.6 million, or 11.8%, to $138.3 million in
1999. Excluding the selling, general and administrative expenses of KTVT from
the results of both periods, selling, general and administrative expenses
increased $17.3 million, or 15.1%, in 1999. The 1999 increase is primarily
attributable to higher selling, general and administrative expenses of Word of
$8.3 million and Gaylord Digital of $4.4 million. Corporate selling, general and
administrative expenses, consisting primarily of senior management salaries and
benefits, legal, human resources, accounting, and other administrative costs,
increased $3.7 million in 1999, including $1.4 million of expense associated
with the naming rights for the Gaylord Entertainment Center subsequent to
entering into the naming rights agreement. The expense associated with the
naming rights agreement for the Gaylord Entertainment Center will be
approximately $3.4 million in 2000 based upon the straight-line accounting for
the naming rights expense. Hotel development efforts of the Opryland Hospitality
Group increased selling, general and administrative expenses $2.3 million in
1999. The selling, general and administrative costs of the Opryland Hotel
Nashville increased $2.2 million in 1999 primarily related to higher selling and
marketing costs. These increases were partially offset by the 1998 recognition
of a valuation reserve of $4.3 million on a long-term note receivable from Z
Music, Inc.
MERGER COSTS AND RESTRUCTURING CHARGES - During 1999, the Company
recognized a nonrecurring restructuring charge of $3.1 million related to
streamlining the Company's operations, primarily the Opryland Hotel Nashville.
The restructuring charge includes estimated costs for employee severance and
termination benefits of $2.4 million and other restructuring costs of $0.7
million. As of December 31, 1999, the Company has recorded cash charges of $2.6
million against the restructuring accrual. Additionally, the Company reversed
$1.7 million of the merger costs accrual originally recorded in 1997 related to
the CBS Merger based upon the settlement of the remaining contingencies
associated with the merger transaction.
LINE OF BUSINESS CLOSING CHARGES - During 1999, the Company recorded a
pretax loss of $12.2 million related to the closing of Unison Records, a
specialty record label of Word which dealt primarily in value-priced acoustical
and instrumental recordings. The Unison closing charge is reflected as a line of
business closing charge in the consolidated statements of income. The Unison
closing charge includes write-downs of the carrying value of inventories,
accounts receivable and other assets of $4.3 million, $3.5 million and $3.9
million, respectively, and other costs associated with the Unison closing of
$0.5 million.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
$9.8 million, or 22.9%, to $52.6 million in 1999. Excluding the depreciation and
amortization of KTVT from both periods, depreciation and amortization increased
$9.6 million, or 23.7%, in 1999. The increase is primarily attributable to the
depreciation expense of capital expenditures and the amortization expense of
intangible assets, primarily goodwill, associated with acquisitions.
OPERATING INCOME (LOSS)
Total operating income decreased $61.2 million to an operating loss of
$18.2 million during 1999. Excluding the operating results of KTVT, merger costs
reduction, the restructuring charge and the line of business closing charge from
both periods, total operating income decreased $38.1 million to an operating
loss of $13.0 million in 1999.
Hospitality and attractions segment operating income decreased $5.8
million to $38.3 million in 1999 primarily related to lower operating income
produced by the Opryland Hotel Nashville and expenses associated with the
Opryland Hospitality Group hotel developments. The operating income of the
creative content segment decreased $22.7 million to an operating loss of $11.4
million in 1999 primarily related to lower operating income generated by Word
and Pandora. Excluding the operating income of KTVT from both periods, the
operating loss of the interactive media segment increased $4.4 million to an
operating loss of $14.0 million in 1999 primarily as a result of the operating
losses of the Company's Internet division, now known as Gaylord Digital. The
operating income of KTVT was $8.4 million and $17.8 million in 1999 and 1998,
respectively.
Operating expenses associated with the Company's development plans
related to hotel expansion projects, Gaylord Digital, and record labels are
expected to significantly impact the Company's results of operations during
2000. Currently, the Company is expecting net losses for the year ended December
31, 2000, excluding any nonrecurring items, in the range of $48 million to $50
million, or $1.43 to $1.50 per diluted share.
INTEREST EXPENSE
Interest expense decreased $13.9 million to $16.1 million in 1999. The
decrease in 1999 is primarily attributable to lower average borrowing levels and
lower weighted average interest rates during 1999 than in 1998. During the
fourth quarter of 1998, the Company used proceeds of $238.4 million from a
long-term note receivable to reduce outstanding indebtedness. During the first
quarter of 1999, the Company used the proceeds from the equity participation
rights described below to further reduce outstanding indebtedness. The Company's
weighted average interest rate on its borrowings was 6.4% in 1999 compared to
6.6% in 1998.
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The Company is currently negotiating with its lenders and others
regarding the Company's future financing arrangements, which may include the
monetization of the CBS preferred stock acquired as part of the KTVT disposal as
well as other financing arrangements. The Company's effective interest rates on
its future financing structure are expected to be higher than the Company's
historical effective interest rates, with such increase potentially being
significantly higher than historical effective interest rates.
INTEREST INCOME
Interest income decreased $19.3 million to $6.3 million in 1999. The
decrease in 1999 primarily relates to the December 1998 collection of a
long-term note receivable. See "Liquidity and Capital Resources" This decrease
was partially offset in 1999 by nonrecurring interest income of $2.0 million
related to the settlement of contingencies between the Company and CBS as well
as interest income earned from Bass Pro, including a $1.8 million prepayment
penalty.
OTHER GAINS AND LOSSES
Other gains and losses during 1999 were comprised of the following
pretax amounts, in millions:
GAIN/
(LOSS)
------
Gain on divestiture of KTVT $459.3
Gain on equity participation rights 129.9
Other gains and losses, net 0.4
------
$589.6
======
During 1995, the Company sold its cable television systems (the
"Systems"). Net proceeds consisted of $198.8 million in cash and a 10-year note
receivable with a face amount of $165.7 million. The note receivable was
recorded net of a $15.0 million discount to reflect the note at fair value.
During 1998, the Company received $238.4 million representing prepayment of the
entire balance of the note receivable and related accrued interest. The Company
recorded a $15.0 million pretax gain during 1998 related to the note receivable
discount originally recorded as part of the Systems sale transaction. During
1999, the Company recognized a pretax gain of $129.9 million related to the
collection of $130 million in proceeds from the redemption of certain equity
participation rights in the Systems.
In October 1999, CBS acquired the Company's television station KTVT in
Dallas-Ft. Worth in exchange for $485 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 income.
The Company recorded a pretax loss of $23.6 million during 1998 related
to the write-off of a note receivable from Z Music when the Company foreclosed
on the note receivable and took a controlling interest in the assets of Z Music.
Also during 1998, the Company sold its investment in the Texas Rangers Baseball
Club, Ltd. for $16.1 million and recognized a gain of the same amount.
During 1998, the Company terminated an operating lease for a satellite
transponder related to the European operations of CMT International. The
termination of the satellite transponder lease resulted in a pretax charge of
$9.2 million during 1998. Additionally, the Company recorded a gain of $8.5
million during 1998 primarily related to the settlement of contingencies arising
from the sale of television stations KHTV in Houston and KSTW in Seattle.
INCOME TAXES
The Company's provision for income taxes was $211.7 million in 1999
compared to $18.7 million in 1998. The Company's effective tax rate on its
income before provision for income taxes was 37.7% for 1999 compared to 37.4%
for 1998.
8
9
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
TOTAL REVENUES - Total revenues decreased $301.5 million, or 36.5%,
to $524.5 million in 1998 primarily due to the effect of the CBS Merger. On a
pro forma basis, assuming the CBS Merger had occurred on January 1, 1997, total
revenues would have decreased $37.1 million, or 6.6%, in 1998. The decrease on a
pro forma basis is primarily attributable to the closing of the Opryland theme
park at the end of the 1997 operating season and the sale of television station
KSTW in June 1997. Excluding the total revenues of the Cable Networks Business,
the Opryland theme park and KSTW from the 1997 results, total revenues increased
$33.7 million, or 6.9%, in 1998. The increase was primarily attributable to
increased revenues in the creative content segment, principally from Word.
HOSPITALITY AND ATTRACTIONS - Revenues in the hospitality and
attractions segment decreased $65.1 million, or 20.9%, to $246.4 million in
1998, primarily due to the closing of the Opryland theme park at the end of the
1997 operating season. Excluding the revenues of the Opryland theme park from
1997, revenues in the hospitality and attractions segment decreased $6.6
million, or 2.6%, in 1998. The decrease relates primarily to decreased revenues
from the Opryland Hotel Nashville of $7.6 million, or 3.3%, to $223.8 million in
1998 principally because of fewer rooms sold to convention groups and a slowdown
in the Nashville tourism market. The hotel's occupancy rate decreased to 79.1%
in 1998 compared to 85.4% in 1997. The hotel sold 801,900 rooms in 1998 compared
to 862,300 rooms sold in 1997, reflecting a 7.0% decrease from 1997. The hotel's
average daily rate increased to $138.51 in 1998 from $131.82 in 1997. The
decrease in revenues from the Opryland Hotel Nashville is partially offset in
1998 by revenues from the Inn at Opryland, subsequent to its acquisition in
April 1998, of $4.1 million.
CREATIVE CONTENT - Revenues in the creative content segment
increased $40.8 million, or 25.0%, to $203.5 million in 1998. The increase
results primarily from increased revenues at Word of $19.9 million and
revenues from Pandora subsequent to the date of its acquisition of $11.3
million. Revenues increased from the Oklahoma Redhawks baseball team by
$5.9 million in 1998.
INTERACTIVE MEDIA - Revenues in the interactive media segment
decreased $281.5 million to $68.9 million in 1998 due to the effect of the CBS
Merger. On a pro forma basis, assuming the CBS Merger had occurred on January 1,
1997, revenues in the interactive media segment would have decreased $17.0
million in 1998, primarily as the result of the sale of KSTW in June 1997.
Excluding the revenues of the Cable Networks Business and KSTW from 1997,
revenues in the interactive media segment decreased $4.8 million, or 6.5%, in
1998. The decrease results primarily from CMT International ceasing its European
operations effective March 31, 1998.
CORPORATE AND OTHER - Revenues in the corporate and other segment
increased $4.3 million to $5.6 million in 1998 primarily related to consulting
and other services revenues related to the Opry Mills partnership of $5.0
million.
OPERATING EXPENSES
TOTAL OPERATING EXPENSES - Total operating expenses decreased $322.6
million, or 40.1%, to $481.5 million in 1998. On a pro forma basis, assuming the
CBS Merger had occurred on January 1, 1997, total operating expenses would have
decreased $136.9 million, or 22.1%, in 1998. The decrease is primarily
attributable to the closing of the Opryland theme park at the end of the 1997
operating season and the sale of television station KSTW in June 1997. Excluding
the total operating expenses of the Cable Networks Business, the Opryland theme
park, and KSTW from the 1997 results, total operating expenses decreased $67.1
million, or 12.2%, in 1998, which is primarily attributable to nonrecurring
charges in 1997, as discussed below. Operating costs, as a percentage of
revenues, decreased to 60.1% during 1998 as compared to 64.7% during 1997 on a
pro forma basis, assuming the CBS Merger had occurred on January 1, 1997.
Selling, general and administrative expenses, as a percentage of revenues,
remained unchanged at 23.6% during 1998 as compared to 1997 on a pro forma
basis, assuming the CBS Merger had occurred on January 1, 1997.
9
10
OPERATING COSTS - Operating costs decreased $196.1 million, or
38.4%, to $315.1 million in 1998. On a pro forma basis, assuming the CBS Merger
had occurred on January 1, 1997, operating costs would have decreased $48.3
million, or 13.3%, in 1998. The decrease on a pro forma basis is primarily the
result of the December 1997 closing of the Opryland theme park and the June 1997
sale of television station KSTW. In addition, during 1997 the Company recorded
nonrecurring charges to operations of $11.7 million for the write-down to net
realizable value of certain program rights at television station KTVT and $5.0
million related to plans to cease the European operations of CMT International.
Excluding the write-down of television program rights, the CMT International
European charge and the operating costs of the Cable Networks Business, the
Opryland theme park and KSTW from the 1997 results, operating costs increased
$13.8 million, or 4.6%, in 1998. The increase during 1998 is primarily
attributable to increased operating costs of Word of $11.3 million related to
increased sales and the operating costs of the Wildhorse Saloon in Orlando,
Florida, which opened in April 1998, of $3.5 million. The acquisition of Pandora
in July 1998 increased operating costs by $8.4 million during 1998.
Additionally, operating costs increased $3.2 million related to the Oklahoma
Redhawks baseball team and increased $2.7 million related to hotel development
costs of the Opryland Hospitality Group. These increases were partially offset
during 1998 by decreased operating expenses of $12.0 million related to the
European operations of CMT International, which ceased operations effective
March 31, 1998, as well as decreased operating costs at the Opryland Hotel
Nashville of $2.5 million.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased $37.6 million, or 23.3%, to $123.7 million in
1998. On a pro forma basis, assuming the CBS Merger had occurred on January 1,
1997, selling, general and administrative expenses would have decreased $8.8
million, or 6.7%, during 1998. The decrease is primarily the result of the
closing of the Opryland theme park at the end of the 1997 operating season and
the June 1997 sale of television station KSTW. Excluding the selling, general
and administrative expenses of the Cable Networks Business, the Opryland theme
park and KSTW from the 1997 results, selling, general and administrative
expenses increased $8.8 million, or 7.7%, in 1998. The increase is primarily
attributable to higher selling, general and administrative expenses of Word and
Blanton Harrell Entertainment, an artist management company, of $7.7 million and
increased valuation reserves of $2.9 million related to a long-term note
receivable from Z Music, as discussed below. Additionally, selling, general and
administrative expenses increased $2.3 million related to the Wildhorse Saloon
in Orlando, Florida, which opened in April 1998. Corporate general and
administrative expenses, consisting primarily of senior management salaries and
benefits, legal, human resources, accounting, and other administrative costs,
decreased $3.6 million in 1998.
MERGER COSTS AND RESTRUCTURING CHARGES - In connection with the CBS
Merger, the Company recognized nonrecurring merger costs and a restructuring
charge in 1997 of $22.6 million and $13.7 million, respectively. Merger costs
included professional and registration fees, debt refinancing costs, and
incentive compensation associated with the CBS Merger. The 1997 restructuring
charge included estimated costs for employee severance and termination benefits
of $6.5 million, asset write-downs of $3.7 million, and other costs associated
with the restructuring of $3.5 million.
LINE OF BUSINESS CLOSING CHARGES - During 1997, the Company recorded
a pretax charge of $42.0 million related to the closing of the Opryland theme
park at the end of the 1997 operating season. Included in this charge were asset
write-downs of $32.0 million related primarily to property, equipment and
inventory, estimated costs for employee severance and termination benefits of
$5.1 million, and other costs related to the closing of the park of $4.9
million.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization
decreased $10.6 million, or 19.9%, to $42.8 million in 1998. On a pro forma
basis, assuming the CBS Merger had occurred on January 1, 1997, depreciation and
amortization would have decreased $1.5 million, or 3.3%, during 1998. The
decrease is primarily related to the closing of the Opryland theme park at the
end of the 1997 operating season and the June 1997 sale of television station
KSTW. Excluding the depreciation and amortization of the Cable Networks
Business, the Opryland theme park and KSTW from the 1997 results, depreciation
and amortization increased $5.3 million, or 14.0%, in 1998. The increase is
primarily attributable to the depreciation expense of new acquisitions and
capital expenditures.
OPERATING INCOME
Total operating income increased $21.1 million to $42.9 million
during 1998. On a pro forma basis, assuming the CBS Merger had occurred on
January 1, 1997, total operating income would have increased $99.8 million in
1998. Excluding merger costs, the restructuring charge, the Opryland theme park
closing charge, the write-down of television program rights, the CMT
International European charge and the operating results of the Cable Networks
Business, the Opryland theme park and KSTW from the 1997 results, total
operating income increased $5.8 million, or 15.5%, in 1998.
10
11
Excluding the operating income of the Opryland theme park during 1997,
hospitality and attractions segment operating income decreased $6.2 million in
1998 primarily related to lower operating income produced by the Opryland Hotel
Nashville. Creative content segment operating income decreased $0.4 million in
1998 primarily related to the operating loss of the Wildhorse Saloon in
Orlando, Florida partially offset by greater operating income generated by
Word, the Oklahoma Redhawks baseball team and the acquisition of Pandora.
Excluding the 1997 operating income of the Cable Networks Business and KSTW, the
write-down of television program rights at KTVT during 1997 and the CMT
International charge related to ceasing European operations in 1997, the
operating income of the interactive media segment increased $6.7 million in 1998
primarily as a result of CMT International ceasing its European operations
effective March 31, 1998. The operating loss of the corporate and other segment
decreased $5.6 million primarily related to revenues from consulting and other
services provided to the Opry Mills partnership.
INTEREST EXPENSE
Interest expense increased $2.9 million to $30.0 million in 1998. The
increase in 1998 was primarily attributable to higher average debt levels as
compared to 1997. During the fourth quarter of 1998, the Company used proceeds
of $238.4 million from a long-term note receivable to reduce outstanding
indebtedness. The Company utilized the net proceeds from the sale of KSTW in
June 1997 to reduce outstanding indebtedness. The Company's weighted average
interest rate on its borrowings was 6.6% in 1998 and 1997.
INTEREST INCOME
Interest income increased $1.6 million to $25.6 million in 1998.
Interest income primarily resulted from interest income earned on a long-term
note receivable, which was paid in full during the fourth quarter of 1998. See
"Liquidity and Capital Resources"
OTHER GAINS AND LOSSES
Other gains and losses during 1998 were comprised of the following
pretax amounts, in millions:
GAIN/
(LOSS)
-----
Write-off of Z Music note receivable $(23.6)
Gain on sale of Texas Rangers investment 16.1
Gain on long-term note receivable discount 15.0
Loss on termination of transponder operating lease (9.2)
Settlement of contingencies from television station sales 8.5
Other gains and losses, net 4.6
-----
$ 11.4
=====
The Company recorded a pretax loss of $23.6 million during 1998 related
to the write-off of a note receivable from Z Music when the Company foreclosed
on the note receivable and took a controlling interest in the assets of Z Music.
Also during 1998, the Company sold its investment in the Texas Rangers Baseball
Club, Ltd. for $16.1 million and recognized a gain of the same amount.
During 1995, the Company sold its cable television systems (the
"Systems"). Net proceeds consisted of $198.8 million in cash and a 10-year note
receivable with a face amount of $165.7 million. The note receivable was
recorded net of a $15.0 million discount to reflect the note at fair value.
During 1998, the Company received $238.4 million representing prepayment of the
entire balance of the note receivable and related accrued interest. The Company
recorded a $15.0 million pretax gain during 1998 related to the note receivable
discount originally recorded as part of the Systems sale transaction.
During 1998, the Company terminated an operating lease for a satellite
transponder related to the European operations of CMT International. The
termination of the satellite transponder lease resulted in a pretax charge of
$9.2 million during 1998. Additionally, the Company recorded a gain of $8.5
million during 1998 primarily related to the settlement of contingencies arising
from the sale of television stations KHTV in Houston and KSTW in Seattle.
In June 1997, the Company sold television station KSTW in Seattle for
$160.0 million in cash. The sale resulted in a pretax gain of $144.3 million,
which is included in other gains and losses in 1997.
11
12
INCOME TAXES
The Company's provision for income taxes was $18.7 million in 1998
compared to $10.8 million in 1997. During 1997, the Company recorded a deferred
tax benefit of $55.0 million related to the revaluation of certain reserves as a
result of the 1997 restructuring and CBS Merger. The Company's effective tax
rate on its income before provision for income taxes was 37.4% for 1998 compared
to 6.7% for 1997.
ACCOUNTING CHANGE
Effective January 1, 1997, the Company changed its method of accounting
for deferred preopening costs to expense these costs as incurred. Prior to 1997,
preopening costs were deferred and amortized over five years on a straight-line
basis. The Company recorded a $7.5 million charge, net of taxes of $4.8 million,
to record the cumulative effect of this accounting change. This change did not
have a significant impact on results of operations before the cumulative effect
of this accounting change for 1997.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company entered into a revolving credit facility
(the "1997 Credit Facility") and utilized the proceeds to retire outstanding
indebtedness. The lenders under the 1997 Credit Facility are a syndicate of
banks with Bank of America, N.A. acting as agent (the "Agent"). The 1997 Credit
Facility was amended subsequent to December 31, 1999. As amended, the maximum
amount that can be borrowed under the 1997 Credit Facility is $525 million with
a final maturity of July 31, 2000. As amended, the 1997 Credit Facility is
secured by the CBS Series B preferred stock acquired in the KTVT disposal and is
guaranteed by certain of the Company's subsidiaries. At February 29, 2000, the
Company had approximately $190 million of available borrowing capacity under the
1997 Credit Facility.
Amounts outstanding under the 1997 Credit Facility, as amended
subsequent to December 31, 1999, bear interest at a rate, at the Company's
option, equal to either (i) the higher of the Agent's prime rate or the federal
funds rate plus 0.5%, or (ii) LIBOR plus 1%. At December 31, 1999, the Company's
borrowing rate under the 1997 Credit Facility was LIBOR plus 0.5%. In addition,
the Company is required to pay a commitment fee of 0.375% per year on the
average unused portion of the 1997 Credit Facility, as amended, as well as an
annual administrative fee.
The 1997 Credit Facility, as amended, subjects the Company to
limitations on, among other things, mergers and sales of assets, additional
indebtedness, capital expenditures, investments, acquisitions, liens, and
transactions with affiliates. At December 31, 1999, the Company was in
compliance with all financial covenants under the 1997 Credit Facility, as
amended subsequent to December 31, 1999.
During 1995, the Company sold the Systems to CCT Holdings Corp
("CCTH"). Net proceeds consisted of $198.8 million in cash and a 10-year note
receivable with a face amount of $165.7 million. As part of the sale
transaction, the Company also received contractual equity participation rights
(the "Rights") equal to 15% of the net distributable proceeds, as defined, from
certain future asset sales by the buyer of the Systems. During the fourth
quarter of 1998, the Company received $238.4 million representing prepayment of
the entire balance of the CCTH note receivable and related accrued interest.
During January 1999, the Company received cash and recognized a pretax gain of
approximately $130 million representing the value of the Rights upon the sale of
the Systems. The proceeds from the note receivable prepayment and the Rights
were used to reduce outstanding indebtedness under the 1997 Credit Facility.
During 1999, the Company advanced $28.1 million to Bass Pro, an entity
in which the Company owns a minority interest, under an unsecured note agreement
which bears interest at 8% annually and is due in 2003. During 1999, Bass Pro
prepaid $18.1 million of this note. 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.
During February 2000, the Company's Board of Directors voted to
discontinue the payment of dividends on its common stock. The Company paid
common stock dividends of $26.4 million in 1999. The Company currently projects
capital expenditures for 2000 of approximately $260 million, which includes
approximately $200 million related to the Company's hotel expansion projects in
Florida and Texas.
The Company is currently negotiating with its lenders and others
regarding the Company's future financing arrangements, which may include the
monetization of the CBS preferred stock acquired as part of the KTVT disposal.
At February 29, 2000, the CBS preferred stock had a fair value of approximately
$600 million, based upon the conversion ratio into CBS common stock. Management
expects that a new financing structure will be finalized prior to the expiration
of the 1997 Credit Facility at July 31, 2000. The Company's management believes
that the net cash flows from operations, together with the amount expected to be
available for borrowing under the 1997 Credit Facility and the Company's future
financing arrangements, will be sufficient to satisfy anticipated future cash
requirements, including its projected capital expenditures, of the Company on
both a short-term and long-term basis.
12
13
YEAR 2000
During 1996, the Company formed an internal task force responsible for
assessing, testing and correcting the Company's information technology and
systems risks associated with the year 2000. The task force completed its
assessment of the Company's systems, identified the Company's hardware, software
and equipment that would not operate properly in the year 2000, and took the
appropriate action to ensure compliance. In certain instances, hardware,
software and equipment that would not operate properly in the year 2000 was
replaced. The Company has not encountered any significant system problems
associated with the year 2000. The costs of the Company's year 2000 remediation
efforts were approximately $9 million. Included in the Company's costs were
hardware and software replacements of approximately $7 million, which were
capitalized. The Company is unaware of any remaining risks and uncertainties
associated with information technology operating properly in the year 2000 that
would result in a material adverse effect on the Company's business, financial
condition, results of operations or liquidity.
SEASONALITY
Certain of the Company's operations are subject to seasonal
fluctuation. Revenues in the music business are typically weakest in the first
calendar quarter following the Christmas buying season.
NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective, as amended, for fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes 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. The Company anticipates adopting the
provisions of SFAS No. 133 effective April 1, 2000 and is continuing to
determine the effects of SFAS No. 133 on the Company's financial statements.
FORWARD-LOOKING STATEMENTS / RISK FACTORS
This report contains certain forward-looking statements regarding,
among other things, the anticipated financial and operating results of the
Company. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions investors that
future financial and operating results may differ materially from those
projected in forward-looking statements made by, or on behalf of, the Company.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. The Company's future operating results depend on a number of factors
which were derived utilizing numerous assumptions and other important factors
that, if altered, could cause actual results to differ materially from those
projected in forward-looking statements. These factors, many of which are beyond
the Company's control, include the level of popularity of country music and
country lifestyles; the level of popularity of Christian music and family values
lifestyles; the ability to integrate acquired operations into the Company's
businesses; the ability of the Company to implement successfully its focused
Internet strategy; the ability of the Opryland Hospitality Group to successfully
develop hotel properties in other markets; the advertising market in the United
States in general and in the Company's Nashville radio markets in particular;
the perceived attractiveness of Nashville, Tennessee and the Company's
properties as convention and tourist destinations; consumer tastes and
preferences for the Company's programming and other entertainment offerings;
competition; market risk associated with the CBS stock owned by the Company; the
impact of weather on construction schedules; and consolidation in the
broadcasting and cable distribution industries.
In addition, investors are cautioned not to place undue reliance on
forward-looking statements contained in this report because they speak only as
of the date hereof. The Company undertakes no obligation to release publicly any
modifications or revisions to forward-looking statements contained in this
report to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
13
14
MARKET RISK
The following discusses the Company's exposure to market risk related
to changes in stock prices, interest rates and foreign currency exchange rates.
Investments - At December 31, 1999, the Company held an investment in
10,141.691 shares of CBS Corporation Series B convertible preferred stock (the
"CBS Stock"), which was acquired in 1999 as consideration in the disposal of
television station KTVT. Each share of the CBS Stock is convertible into 1,000
shares of CBS Corporation common stock and is held for other than trading
purposes. The Company has exposure for changes in the market price of the CBS
Corporation common stock. The Company has not undertaken any actions to manage
market price risk associated with the CBS Stock. At December 31, 1999, the fair
value of the Company's investment in the CBS Stock was $648.4 million. A 20%
increase in the stock price of CBS Corporation common stock would increase the
fair value of the investment in CBS Stock by $129.7 million on a pretax basis.
Conversely, a 20% decrease in the stock price of CBS Corporation common stock
would decrease the fair value of the investment in CBS Stock by $129.7 million
on a pretax basis.
Outstanding Debt - The Company has exposure to interest rate changes
primarily relating to outstanding indebtedness under the 1997 Credit Facility.
As of December 31, 1999, the Company had outstanding debt of $310.1 million,
$294.0 million of which was outstanding under the 1997 Credit Facility. The
majority of the Company's debt, including the 1997 Credit Facility, bears
interest at rates which vary with changes in the London Interbank Offered Rate
(LIBOR). The weighted average interest rate on the Company's borrowings in 1999
was 6.4%. The Company has not undertaken any actions to manage interest market
risk, and does not speculate on the future direction of interest rates. If LIBOR
rates were to increase by 100 basis points, the estimated impact on the
Company's consolidated financial statements would be to reduce net income by
approximately $1.8 million after taxes based on amounts outstanding at December
31, 1999. The Company is currently negotiating with its lenders and others
regarding the Company's future financing arrangements. Increases in interest
rates will increase the interest expense associated with future borrowings by
the Company.
Notes Receivable - The Company also has exposure to interest rate
changes relating to the fair market value of outstanding long-term notes
receivable with fixed interest rates. As of December 31, 1999, the Company had
outstanding long-term notes receivable of $19.7 million. The majority of the
Company's notes receivable bear interest at fixed rates, and therefore would
become less valuable if interest rates were to rise.
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, 1999. As a result, the interest rate market risk
implicit in these investments at December 31, 1999, 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, 1999, the Company believes that the effects of changes in the stock
price of CBS Corporation common stock or interest rates on the Company's
consolidated financial position, results of operations or cash flows could be
material. However, the Company believes that fluctuations in foreign currency
exchange rates on the Company's consolidated financial position, results of
operations or cash flows would not be material.
14
15
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
--------- --------- ---------
Revenues $ 510,788 $ 524,475 $ 825,995
Operating expenses:
Operating costs 324,560 315,077 511,162
Selling, general and administrative 138,318 123,681 161,280
Merger costs (1,741) -- 22,645
Restructuring charges 3,102 -- 13,654
Line of business closing charges 12,201 -- 42,006
Depreciation and amortization 52,574 42,784 53,397
--------- --------- ---------
Operating income (loss) (18,226) 42,933 21,851
Interest expense (16,101) (30,031) (27,177)
Interest income 6,275 25,606 24,022
Other gains and losses 589,574 11,359 143,532
--------- --------- ---------
Income before provision for income taxes 561,522 49,867 162,228
Provision for income taxes 211,730 18,673 10,792
--------- --------- ---------
Income before cumulative effect of accounting change 349,792 31,194 151,436
Cumulative effect of accounting change, net of taxes -- -- (7,537)
--------- --------- ---------
Net income $ 349,792 $ 31,194 $ 143,899
========= ========= =========
Income per share:
Income before cumulative effect of accounting change $ 10.63 $ 0.95 $ 4.68
Cumulative effect of accounting change, net of taxes -- -- (0.23)
--------- --------- ---------
Net income $ 10.63 $ 0.95 $ 4.45
========= ========= =========
Income per share - assuming dilution:
Income before cumulative effect of accounting change $ 10.53 $ 0.94 $ 4.64
Cumulative effect of accounting change, net of taxes -- -- (0.23)
--------- --------- ---------
Net income $ 10.53 $ 0.94 $ 4.41
========= ========= =========
The accompanying notes are an integral part of these statements.
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16
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 18,696 $ 18,746
Trade receivables, less allowance of $7,474 and $5,517, respectively 83,289 94,429
Inventories 28,527 27,018
Other assets 33,524 49,009
----------- -----------
Total current assets 164,036 189,202
----------- -----------
Property and equipment, net of accumulated depreciation 611,582 586,898
Intangible assets, net of accumulated amortization 141,874 117,529
Investments 742,155 78,140
Long-term notes receivable, net 19,715 9,015
Other assets 53,022 31,208
----------- -----------
Total assets $ 1,732,384 $ 1,011,992
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 299,788 $ 6,269
Accounts payable and accrued liabilities 128,123 115,837
----------- -----------
Total current liabilities 427,911 122,106
----------- -----------
Long-term debt, net of current portion 10,335 276,712
Deferred income taxes 292,966 52,747
Other liabilities 38,693 33,039
Minority interest 1,320 2,228
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, 33,282 and 32,808 shares
issued and outstanding, respectively 333 328
Additional paid-in capital 512,308 500,434
Retained earnings 351,028 26,699
Unrealized gain on investments 99,858 --
Other stockholders' equity (2,368) (2,301)
----------- -----------
Total stockholders' equity 961,159 525,160
----------- -----------
Total liabilities and stockholders' equity $ 1,732,384 $ 1,011,992
=========== ===========
The accompanying notes are an integral part of these statements.
16
17
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 349,792 $ 31,194 $ 143,899
Amounts to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 52,574 42,784 53,397
Provision (benefit) for deferred income taxes 176,644 20,168 (80,570)
Gain on equity participation rights (129,875) -- --
Gain on long-term note receivable -- (15,000) --
Gain on sale of investments -- (20,118) --
Write-off of Z Music note receivable -- 23,616 --
Cumulative effect of accounting change, net of taxes -- -- 7,537
Line of business closing charges 12,201 -- 42,006
Write-down of television program rights -- -- 11,740
Noncash interest income -- -- (22,936)
Gain on divestiture of television stations (459,307) -- (144,259)
Changes in (net of acquisitions and divestitures):
Trade receivables 11,519 (4,485) (6,744)
Interest receivable on long-term note -- 48,385 --
Accounts payable and accrued liabilities 2,121 (19,521) 24,506
Other assets and liabilities (9,512) (28,782) (2,195)
--------- --------- ---------
Net cash flows provided by operating activities 6,157 78,241 26,381
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (84,050) (51,193) (49,239)
Acquisition of businesses, net of cash acquired (26,421) (31,796) (120,191)
Proceeds from sale of property and equipment 263 6,336 4,228
Proceeds from sale of investments -- 20,130 --
Proceeds from equity participation rights 130,000 -- --
Principal proceeds from collection of long-term note receivable -- 165,688 --
Cash proceeds from divestiture of television stations, net of selling costs 951 -- 155,266
Cash received from (acquired by) CBS related to the Merger 13,155 -- (7,481)
Investments in, advances to and distributions from affiliates, net (27,394) (9,852) (10,880)
Other investing activities (23,703) (10,783) (11,351)
--------- --------- ---------
Net cash flows provided by (used in) investing activities (17,199) 88,530 (39,648)
--------- --------- ---------
Cash Flows from Financing Activities:
Net borrowings (payments) under revolving credit agreements 36,094 (134,690) 178,935
Proceeds from issuance of long-term debt 500 500 420
Repayment of long-term debt (9,452) (1,547) (149,762)
Dividends paid (26,355) (21,332) (33,929)
Proceeds from exercise of stock option and purchase plans 10,205 332 14,304
Purchase of treasury stock -- -- (1,709)
--------- --------- ---------
Net cash flows provided by (used in) financing activities 10,992 (156,737) 8,259
--------- --------- ---------
Net change in cash (50) 10,034 (5,008)
Cash, beginning of year 18,746 8,712 13,720
--------- --------- ---------
Cash, end of year $ 18,696 $ 18,746 $ 8,712
========= ========= =========
The accompanying notes are an integral part of these statements.
17
18
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Additional Other Total
Common Paid-in Retained Treasury Unearned Comprehensive Stockholders'
Stock Capital Earnings Stock Compensation Income Equity
------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 967 $ 483,287 $ 39,494 $(5,938) $(4,847) $ -- $ 512,963
Comprehensive income:
Net income -- -- 143,899 -- -- -- 143,899
Unrealized gain on investments -- -- -- -- -- 2,887 2,887
Foreign currency translation -- -- -- -- -- (116) (116)
---------
Comprehensive income 146,670
Cash dividends ($1.05 per share) -- -- (33,929) -- -- -- (33,929)
Exercise of stock options 14 14,290 -- -- -- -- 14,304
Tax benefit on stock options -- 6,598 -- -- -- -- 6,598
Issuance of restricted stock 1 1,321 -- -- (1,322) -- --
Compensation expense -- -- -- -- 3,954 -- 3,954
Old Gaylord stock retirement (975) -- -- -- -- -- (975)
New Gaylord stock distribution 324 651 -- -- -- -- 975
Cable Networks Business net assets -- -- (132,627) -- -- -- (132,627)
Purchase of treasury stock -- -- -- (1,709) -- -- (1,709)
Retirement of treasury stock (4) (7,643) -- 7,647 -- -- --
---------------------------------------------------------------------------------------
Balance, December 31, 1997 327 498,504 16,837 -- (2,215) 2,771 516,224
Comprehensive income:
Net income -- -- 31,194 -- -- -- 31,194
Realized gain on investments -- -- -- -- -- (2,887) (2,887)
Foreign currency translation -- -- -- -- -- (323) (323)
---------
Comprehensive income 27,984
Cash dividends ($0.65 per share) -- -- (21,332) -- -- -- (21,332)
Exercise of stock options -- 332 -- -- -- -- 332
Tax benefit on stock options -- 60 -- -- -- -- 60
Issuance of restricted stock 1 1,538 -- -- (1,539) -- --
Compensation expense -- -- -- -- 1,892 -- 1,892
---------------------------------------------------------------------------------------
Balance, December 31, 1998 328 500,434 26,699 -- (1,862) (439) 525,160
Comprehensive income:
Net income -- -- 349,792 -- -- -- 349,792
Unrealized gain on investments -- -- -- -- -- 99,858 99,858
Foreign currency translation -- -- -- -- -- (359) (359)
---------
Comprehensive income 449,291
Cash dividends ($0.80 per share) -- -- (26,355) -- -- -- (26,355)
CBS Merger arbitration settlement -- -- 892 -- -- -- 892
Exercise of stock options 5 10,125 -- -- -- -- 10,130
Tax benefit on stock options -- 1,443 -- -- -- -- 1,443
Employee stock plan purchases -- 75 -- -- -- -- 75
Issuance of restricted stock -- 231 -- -- (231) -- --
Compensation expense -- -- -- -- 523 -- 523
---------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 333 $ 512,308 $ 351,028 $ -- $(1,570) $ 99,060 $ 961,159
=======================================================================================
The accompanying notes are an integral part of these statements.
18
19
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Gaylord Entertainment Company (the "Company"), formerly New Gaylord
Entertainment Company, is a diversified entertainment company operating, through
its subsidiaries, principally in four business segments: hospitality and
attractions, creative content, interactive media, and corporate and other.
During 1997, the Company's former parent ("Old Gaylord") consummated a
transaction with CBS Corporation ("CBS") whereby certain assets and liabilities
of the Company were merged with CBS (the "Merger") as further described in Note
3.
BUSINESS SEGMENTS
HOSPITALITY AND ATTRACTIONS
At December 31, 1999, the Company owns and operates the Opryland Hotel
Nashville, the General Jackson showboat and various other tourist attractions
located in Nashville, Tennessee. During 1998, the Company formed the Opryland
Hospitality Group to expand the Opryland Hotel concept into other cities. During
1999, the Company began developing hotel projects near Orlando, Florida and
Dallas, Texas. The Florida and Texas hotel projects are scheduled to open in
2002 and 2003, respectively. The Company formerly owned and operated the
Opryland theme park which was closed at the end of the 1997 operating season.
CREATIVE CONTENT
At December 31, 1999, the Company owns and operates Word Entertainment
("Word"), a contemporary Christian music company, the Grand Ole Opry, the
Wildhorse Saloons and Acuff-Rose Music Publishing. The Company acquired the
assets of Word in January 1997 as further described in Note 4. During 1998, the
Company acquired Pandora Investments, S.A. ("Pandora"), a Luxembourg-based
company which acquires, distributes and produces theatrical feature film and
television programming primarily for markets outside of the United States, as
further described in Note 4. During 1998, the Company purchased the remaining
49% minority interest in a joint venture created to expand the Wildhorse Saloon
concept beyond Nashville to other cities.
INTERACTIVE MEDIA
At December 31, 1999, the Company owns and operates the CMT
International cable television networks operating in Asia and the Pacific Rim,
and Latin America. CMT International ceased its European operations as of March
31, 1998, as further described in Note 5. During 1999, the Company created a new
division formed to initiate a focused Internet strategy, which is now known as
Gaylord Digital, and acquired controlling equity interests in two online
operations, Musicforce.com and Lightsource.com as discussed in Note 4. The
Company divested its television stations, KTVT (Fort Worth-Dallas, Texas) in
October 1999 and KSTW (Tacoma-Seattle, Washington) in June 1997, as further
described in Note 5. During 1998, the Company acquired a controlling interest in
the assets of Z Music, Inc. ("Z Music"), a cable network featuring contemporary
Christian music videos, as further described in Note 2. Prior to October 1997,
the Company also owned The Nashville Network ("TNN"), a national basic cable
television network, and operated and owned 67% of the outstanding stock of
Country Music Television, Inc. ("CMT"), a country music video cable network
operated in the United States and Canada. During October 1997, TNN and CMT were
acquired by CBS in the Merger as further described in Note 3. In addition, the
Company owns and operates three radio stations in Nashville, Tennessee.
CORPORATE AND OTHER
During 1998, the Company created a partnership with The Mills
Corporation to develop Opry Mills, a $200,000 entertainment / retail complex.
The Company contributed land previously used for the Opryland theme park in
exchange for a one-third interest in the partnership, as further described in
Note 6. Opry Mills is anticipated to open in 2000. The Company also owns
minority interests in Bass Pro, Inc. ("Bass Pro"), which is a leading retailer
of premium outdoor sporting goods and fishing products, and the Nashville
Predators, a National Hockey League professional team.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. For accounting purposes, the
consolidated financial statements include Old Gaylord and its subsidiaries,
including the Company, prior to the merger with CBS. All significant
intercompany accounts and transactions have been eliminated in consolidation.
19
20
INVENTORIES
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including interest on funds
borrowed to finance the construction of major capital additions, and are
depreciated using straight-line and accelerated methods over the following
estimated useful lives:
Buildings 40 years
Land improvements 20 years
Attractions-related equipment 16 years
Furniture, equipment and vehicles 3-8 years
Leasehold improvements Life of lease
Depreciation expense includes amortization of capital leases which is
computed on a straight-line basis over the term of the lease. Maintenance and
repairs are charged to expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill which is amortized
using the straight-line method over its estimated useful life not exceeding 40
years. The Company continually evaluates whether later events and circumstances
have occurred that indicate the remaining balance of goodwill may not be
recoverable. In evaluating possible impairment, the Company uses the most
appropriate method of evaluation given the circumstances surrounding the
particular acquisition, which has generally been an estimate of the related
business unit's undiscounted operating income before interest and taxes over the
remaining life of the goodwill.
Amortization expense related to intangible assets for 1999, 1998 and
1997 was $7,839, $3,823 and $4,743, respectively. At December 31, 1999 and 1998,
accumulated amortization of intangible assets was $16,829 and $9,169,
respectively.
OTHER ASSETS
Other current and long-term assets consist of:
1999 1998
------- -------
Other current assets:
Other current receivables $14,440 $34,192
Prepaid expenses 18,042 12,695
Other current assets 1,042 2,122
------- -------
Total other current assets $33,524 $49,009
======= =======
Other long-term assets:
Music and film catalogs $30,344 $16,757
Deferred software costs, net 11,385 5,122
Prepaid pension cost 4,403 5,274
Other long-term assets 6,890 4,055
------- -------
Total other long-term assets $53,022 $31,208
======= =======
Other current receivables result primarily from non-operating income
and are due within one year. Music and film catalogs consist of the costs to
acquire music and film rights and are amortized over their estimated useful
lives.
The Company capitalizes the costs of computer software for internal use
in accordance with AICPA Statement of Position 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 1999. Deferred software costs are
amortized on a straight-line basis over its estimated useful life.
20
21
DEFERRED PREOPENING COSTS
Effective January 1, 1997, the Company changed its method of accounting
for deferred preopening costs to expense these costs as incurred in accordance
with AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". Prior to 1997, preopening costs were deferred and amortized over
five years on a straight-line basis. The Company recorded a $7,537 charge, net
of taxes of $4,798, to record the cumulative effect of this accounting change.
This change did not have a significant impact on results of operations before
the cumulative effect of this accounting change for 1997.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
1999 1998
-------- --------
Trade accounts payable $ 41,705 $ 31,198
Accrued royalties 10,161 14,709
Deferred revenues 16,992 11,076
Accrued salaries and benefits 5,306 8,202
Accrued interest payable 1,183 1,176
Property and other taxes payable 14,100 13,638
Other accrued liabilities 38,676 35,838
-------- --------
Total accounts payable and accrued liabilities $128,123 $115,837
======== ========
Accrued royalties consist primarily of music royalties and licensing
fees. Deferred revenues consist primarily of deposits on advance room bookings
at the Opryland Hotel, advance ticket sales at the Company's tourism properties
and music publishing advances.
During 1999, the Company recognized a nonrecurring restructuring charge
of $3,102 related to streamlining the Company's operations, primarily the
Opryland Hotel Nashville. The restructuring charge includes estimated costs for
employee severance and termination benefits of $2,372 and other restructuring
costs of $730. As of December 31, 1999, the Company has recorded cash charges of
$2,603 against the restructuring accrual. The remaining balance of the
restructuring accrual of $499 is included in accounts payable and accrued
liabilities in the consolidated balance sheet at December 31, 1999.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards ("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
rates.
REVENUE RECOGNITION
Revenue is 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.
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 stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations, under which no compensation
cost related to stock options has been recognized as further described in Note
11.
INCOME PER SHARE
SFAS No. 128, "Earnings Per Share", was issued and is effective for
fiscal periods ending after December 15, 1997. SFAS No. 128 establishes
standards for computing and presenting earnings per share. The Company adopted
the provisions of SFAS No. 128 in the fourth quarter of 1997. 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 additional dilution related to outstanding
stock options, calculated using the treasury stock method.
21
22
Income per share amounts are calculated as follows for the years ended
December 31:
1999 1998 1997
--------------------------- -------------------------- --------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
-------- ------ ------- -------- ------ ------ -------- ------ ------
Income before cumulative effect of
accounting change $349,792 32,908 $ 10.63 $ 31,194 32,805 $ 0.95 $151,436 32,341 $ 4.68
======== ======= ======== ====== ======== ======
Effect of dilutive stock options 305 353 308
------ ------ ------
Income before cumulative effect of
accounting change - assuming dilution $349,792 33,213 $ 10.53 $ 31,194 33,158 $ 0.94 $151,436 32,649 $ 4.64
======== ====== ======= ======== ====== ====== ======== ====== ======
The Company completed a common stock distribution in 1997 associated
with the Merger as further described in Note 3. All income per share and
dividend per share amounts in the accompanying consolidated financial statements
have been restated to reflect the retroactive application of the common stock
distribution.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires that changes in the amounts of
certain items, including gains and losses on certain securities, be shown in the
financial statements. The Company adopted the provisions of SFAS No. 130 on
January 1, 1998. The Company's comprehensive income is presented in the
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 6.
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.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", effective,
as amended, for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes 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. The
Company anticipates adopting the provisions of SFAS No. 133 effective April 1,
2000 and is continuing to determine the effects of SFAS No. 133 on the Company's
financial statements.
RECLASSIFICATIONS
Certain reclassifications of 1998 and 1997 amounts have been made to
conform with the 1999 presentation. The Company has restated its reportable
segments for all periods presented based upon internal realignment of
operational responsibilities in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
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23
2. LONG-TERM NOTES RECEIVABLE:
During 1995, the Company sold its cable television systems (the
"Systems") to CCT Holdings Corp. ("CCTH"). Net proceeds consisted of $198,800 in
cash and a 10-year note receivable with a face amount of $165,688. The note
receivable was recorded net of a $15,000 discount to reflect the note at fair
value based upon financial instruments of comparable credit risk and interest
rates. The Company recorded $24,376 and $22,936 of interest income related to
the note receivable during 1998 and 1997, respectively. As part of the sale
transaction, the Company also received contractual equity participation rights
equal to 15% of the net distributable proceeds, as defined, from certain future
asset sales by the buyer of the Systems. During 1998, the Company received
$238,449 representing prepayment of the entire balance of the CCTH note
receivable and related accrued interest. The Company recorded a $15,000 pretax
gain during 1998 related to the note receivable discount originally recorded as
part of the Systems sale transaction. The gain is included in other gains and
losses in the consolidated statements of income. During 1999, the Company
received cash and recognized a pretax gain of $129,875 representing the value of
the 15% contractual equity participation rights upon the sale of the Systems.
The proceeds from the note receivable prepayment and the equity participation
rights were used to reduce outstanding bank indebtedness.
During 1999, the Company advanced $28,080 to Bass Pro under an
unsecured note agreement which bears interest at 8% annually and is due in 2003.
Interest under the note agreement is payable annually. In the fourth quarter of
1999, Bass Pro prepaid $18,080 of this note. The Company recorded interest
income of $2,949, including a prepayment penalty of $1,800, from Bass Pro
related to this note agreement during 1999 in the consolidated statements of
income.
During 1998, the Company recognized a pretax loss of $23,616 related to
the write-off of a note receivable from Z Music. The Company foreclosed on the
note receivable and took a controlling interest in the assets of Z Music during
the fourth quarter of 1998. Prior to the foreclosure, the Company managed the
operations of Z Music, had an option to acquire 95% of the common stock of Z
Music, and funded Z Music's operations through advances under the note
receivable.
3. CBS MERGER:
On October 1, 1997, Old Gaylord consummated the Merger with CBS,
pursuant to which Old Gaylord became a wholly owned subsidiary of CBS. Prior to
the Merger, Old Gaylord was restructured (the "1997 Restructuring") whereby
certain assets and liabilities that were part of Old Gaylord's hospitality,
attractions, music, television and radio businesses, including all of its
long-term debt, as well as CMT International and the management of and option to
acquire 95% of Z Music, were transferred to or retained by the Company. As a
result of the 1997 Restructuring and the Merger, substantially all of the assets
of Old Gaylord's cable networks business, consisting primarily of TNN and CMT,
and certain other related businesses (collectively, the "Cable Networks
Business") and its liabilities, to the extent that they arose out of or related
to the Cable Networks Business, were acquired by CBS. In connection with the
Merger, the Company and CBS (or one or more of their respective subsidiaries)
entered into an agreement which provides, for a specified time period, that the
Company will not engage in certain specified activities which would constitute
competition with the Cable Networks Business and that CBS will not engage in
certain activities which would constitute competition with CMT International.
Following the 1997 Restructuring, on September 30, 1997, Old Gaylord
distributed (the "Distribution") pro rata to its stockholders all of the
outstanding capital stock of the Company. As a result of the Distribution, each
holder of record of the Class A Common Stock, $0.01 par value, and Class B
Common Stock, $0.01 par value (collectively, the "Old Gaylord Common Stock"), of
Old Gaylord on the record date for the Distribution received a number of shares
of Common Stock, $0.01 par value, of the Company ("Common Stock") equal to
one-third the number of shares of Old Gaylord Common Stock held by such holder.
Cash was distributed in lieu of any fractional shares of Common Stock.
23
24
At the time of the Merger, the book value of the net assets of the
Cable Networks Business was $132,627, which has been reflected in the
consolidated financial statements as a charge against retained earnings. The
following is a summary of the net assets acquired by CBS:
Cash $ 7,481
Accounts receivable, net 67,030
Other current assets 20,332
Property and equipment, net 53,386
Intangible assets, net 31,148
Other assets 10,532
Accounts payable and accrued expenses (35,855)
Long-term debt (4,605)
Minority interest (15,048)
Other liabilities (1,774)
--------
Cable Networks Business net assets $132,627
========
The operating results of the Cable Networks Business are included in
the consolidated statements of income through September 30, 1997 and are as
follows for the nine months ended September 30, 1997:
Revenues $264,463
========
Depreciation and amortization $ 9,161
========
Operating income, excluding allocated corporate expenses $ 78,740
========
Prior to the Merger, CBS was responsible for promoting and marketing
TNN, CMT and CMT International, selling advertising time on TNN and CMT,
marketing TNN and CMT to cable operators, and providing a satellite transponder
to deliver TNN programming to cable systems. In addition, CBS owned 33% of CMT
and CMT International prior to the Merger. CBS received a commission of 33% of
TNN's applicable gross receipts, net of agency commissions, and a commission of
10% of CMT's gross receipts, net of agency commissions, for its services prior
to the Merger. CBS commissions under these agreements were approximately $70,600
in 1997.
In connection with the Merger, 1997 Restructuring and Distribution, the
Company recognized nonrecurring merger costs and a restructuring charge in 1997
of $22,645 and $13,654, respectively. Merger costs included professional and
registration fees, debt refinancing costs, and incentive compensation associated
with the Merger. The Company recognized merger costs of $1,363 related to
restricted stock issued under stock option and incentive plans which vested at
the time of the Merger. The restructuring charge included estimated costs for
employee severance and termination benefits of $6,500, asset write-downs of
$3,653, and other costs associated with the restructuring of $3,501. At December
31, 1998, the Company had a remaining restructuring accrual of $2,294, which was
included in accounts payable and accrued liabilities in the consolidated balance
sheets.
During 1999, the Company settled the remaining contingencies associated
with the Merger and received a cash payment of $15,109 from CBS, including
nonrecurring interest income of $1,954. In addition, the Company recorded an
adjustment to the net assets of the Cable Networks Business of $892 related to
the settlement of Merger-related contingencies between the Company and CBS
during 1999. The Company reversed $1,741 of the merger costs accrual based upon
the settlement of the remaining contingencies associated with the Merger during
1999.
4. ACQUISITIONS:
During 1999, the Company acquired 84% of two online operations,
Musicforce.com and Lightsource.com, for approximately $23,400 in cash. The
parties entered into option agreements regarding the additional equity
interests in the online operations. The acquisition was financed through
borrowings under the Company's revolving credit agreement and has been accounted
for using the purchase method of accounting. The operating results of the online
operations have been included in the consolidated financial statements from the
date of acquisition of a controlling interest. The purchase price allocation has
been completed on a preliminary basis, subject to adjustment should additional
facts about the online operations become known. The excess of purchase price
over the fair values of the net assets acquired as of December 31, 1999 was
$20,368 and has been recorded as goodwill, which is being amortized on a
straight-line basis over seven years.
24
25
In July 1998, the Company purchased Pandora for approximately $17,000
in cash. The acquisition was financed through borrowings under a revolving
credit agreement and has been accounted for using the purchase method of
accounting. The operating results of Pandora have been included in the
consolidated financial statements from the date of acquisition.
In April 1998, the Company purchased the assets of a 307-room hotel
located adjacent to the Opryland Hotel for approximately $16,000 in cash. The
hotel was renamed the Inn at Opryland. The acquisition was financed through
borrowings under a revolving credit agreement and has been accounted for using
the purchase method of accounting. The operating results of the Inn at Opryland
have been included in the consolidated financial statements from the date of
acquisition.
In January 1997, the net assets of Word were purchased for
approximately $120,000 in cash. The purchase price included approximately
$40,000 of working capital. The acquisition was financed through borrowings
under a revolving credit agreement and has been accounted for using the purchase
method of accounting. The operating results of Word have been included in the
consolidated financial statements from the date of acquisition. The excess of
purchase price over the fair values of the net assets acquired was $64,143 and
has been recorded as goodwill, which is being amortized on a straight-line basis
over 40 years.
5. DIVESTITURES:
In October 1999, CBS acquired the Company's television station KTVT in
Dallas-Ft. Worth in exchange for $485,000 of CBS Series B convertible preferred
stock, $4,210 of cash and other consideration. The Company recorded a pretax
gain of $459,307, which is included in other gains and losses in the
consolidated statements of income, based upon the disposal of the net assets of
KTVT of $29,903, including related selling costs. During 1997, the Company
recorded a pretax charge of $11,740 to write-down certain program rights at KTVT
to net realizable value. This write-down related primarily to movie packages and
certain syndicated programming whose value was impaired by an operating decision
to purchase more first-run programming and is included in operating costs in the
consolidated statements of income. The operating results of KTVT included in the
consolidated statements of income through the disposal date are as follows:
Period Ended Year Ended Year Ended
October 12, December 31, December 31,
1999 1998 1997
------- ------- -------
Revenues $36,072 $51,636 $50,673
======= ======= =======
Depreciation and amortization $ 2,419 $ 2,232 $ 1,932
======= ======= =======
Operating income $ 8,372 $17,829 $ 5,176
======= ======= =======
Also during 1999, the Company recorded a pretax loss of $12,201 related
to the closing of Unison Records, a specialty record label of Word which dealt
primarily in value-priced acoustical and instrumental recordings. The Unison
closing charge is reflected as a line of business closing charge in the
consolidated statements of income. The Unison closing charge includes
write-downs of the carrying value of inventories, accounts receivable and other
assets of $4,270, $3,551 and $3,907, respectively, and other costs associated
with the Unison closing of $473.
During 1998, the Company sold its investment in the Texas Rangers
Baseball Club, Ltd. for $16,072 and recognized a pretax gain of the same amount.
Also during 1998, the Company recorded pretax gains totaling $8,538
primarily related to the settlement of contingencies arising from the sales of
television stations KHTV in Houston in 1996 and KSTW in Seattle in 1997.
During 1997, the Company recorded a pretax charge of $42,006 related to
the closing of the Opryland theme park at the end of the 1997 operating season.
Included in this charge were asset write-downs of $32,020 related primarily to
property, equipment and inventory, estimated costs for employee severance and
termination benefits of $5,100, and other costs related to closing of the park
of $4,886.
Also during 1997, the Company recorded a $5,000 pretax charge to
operations related to its plans to cease the European operations of CMT
International effective March 31, 1998. The Company fully utilized this accrual
during 1998.
25
26
In addition, the Company sold television station KSTW in Seattle in
1997 for $160,000 in cash. The sale resulted in a pretax gain of $144,259, which
is included in other gains and losses in the consolidated statements of income.
The Company utilized the net proceeds from the sale to reduce outstanding
indebtedness.
6. INVESTMENTS:
Investments at December 31 are summarized as follows:
1999 1998
-------- -------
CBS Series B convertible
preferred stock $648,434 $ --
Bass Pro 60,598 61,568
Other investments 33,123 16,572
-------- -------
Total investments $742,155 $78,140
======== =======
The 10,141.691 shares of CBS Series B convertible preferred stock (the
"CBS Stock") were acquired during 1999 as consideration in the disposal of
television station KTVT as discussed in Note 5. Each share of the CBS Stock is
convertible into 1,000 shares of CBS common stock. The original carrying value
of the CBS Stock was $485,000. The Company has classified the CBS Stock as
available-for-sale as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and accordingly is carrying the CBS
Stock at market value, based upon the quoted market price of CBS common stock,
with the difference between cost and market value recorded as a component of
stockholders' equity, net of deferred income taxes.
The Company holds a minority interest in Bass Pro, a supplier of
premium outdoor sporting goods and fishing tackle which distributes its products
through retail centers and an extensive mail order catalog operation. 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 owns 19% of Bass Pro and will account for the
investment using the cost method of accounting. The Company accounted for the
Bass Pro investment using the equity method of accounting through December 31,
1999. The Company's original investment exceeded its share of the underlying
equity in the net assets of Bass Pro by approximately $36,000, which was being
amortized on a straight-line basis over 40 years.
During 1999, the Company purchased minority equity investments of
$6,579 in technology-based businesses related to the Company's Internet
strategy. These investments are accounted for using the cost method of
accounting.
During 1998, the Company created a partnership with The Mills
Corporation to develop Opry Mills, a $200,000 entertainment / retail complex
located on land previously used for the Opryland theme park. The Company holds a
one-third interest in the partnership through a non-cash capital contribution of
$2,049 reflecting the book value of the land where Opry Mills will be located.
During 1999, the Company's investment in Opry Mills increased to $5,272 related
to certain costs incurred on behalf of the Opry Mills partnership. The Company
accounts for the Opry Mills partnership using the equity method of accounting.
The Company recognized consulting and other services revenues related to the
Opry Mills partnership in 1999 and 1998 of $5,000 in each year.
The Company holds a preferred minority interest investment in the
Nashville Predators, a National Hockey League professional team, of $12,000 and
$12,095 at December 31, 1999 and 1998, respectively. The Nashville Predators
investment provides an annual 8% cumulative preferred return. A director of the
Company owns a majority equity interest in the Nashville Predators.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", certain of the Company's investments were
considered available-for-sale investments at December 31, 1997 and were carried
at market value, with the difference between cost and market value recorded as a
component of stockholders' equity. These investments were sold during 1998, with
a pretax gain of $3,296 recognized in other gains and losses in the consolidated
statements of income.
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7. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 is recorded at cost and
summarized as follows:
1999 1998
--------- ---------
Land and land improvements $ 95,509 $ 95,300
Buildings 471,419 472,804
Furniture, fixtures and equipment 253,760 261,286
Construction in progress 60,211 15,101
--------- ---------
880,899 844,491
Accumulated depreciation (269,317) (257,593)
--------- ---------
Property and equipment, net $ 611,582 $ 586,898
========= =========
Depreciation expense for 1999, 1998 and 1997 was $39,844, $35,602 and
$44,839, respectively. Capitalized interest for 1999, 1998 and 1997 was $472, $0
and $186, respectively. The Company recorded capital leases during 1998 of
$9,743, which are included in furniture, fixtures and equipment.
8. INCOME TAXES:
The provision for income taxes for the years ended December 31 consists
of:
1999 1998 1997
--------- -------- --------
Current:
Federal $ 37,347 $ (2,810) $ 86,342
State (2,261) 1,315 5,020
--------- -------- --------
Total current provision (benefit) 35,086 (1,495) 91,362
--------- -------- --------
Deferred:
Federal 148,608 19,747 (79,496)
State 28,036 421 (1,074)
--------- -------- --------
Total deferred provision (benefit) 176,644 20,168 (80,570)
--------- -------- --------
Total provision for income taxes $ 211,730 $ 18,673 $ 10,792
========= ======== ========
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. The effective
tax rate as applied to income from continuing operations for the years ended
December 31 differed from the statutory federal rate due to the following:
1999 1998 1997
---- ---- ----
Statutory federal rate 35% 35% 35%
State taxes 3 1 2
Merger related revaluation of reserves -- -- (37)
Non-deductible losses -- 1 7
---- ---- ----
38% 37% 7%
==== ==== ====
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28
The components of the net deferred tax liability as of December 31 are:
1999 1998
-------- -------
Deferred tax assets:
Amortization $ 2,268 $ 6,546
Accounting reserves and accruals 18,258 23,495
Other, net 16,271 4,780
-------- -------
Total deferred tax assets 36,797 34,821
-------- -------
Deferred tax liabilities:
Depreciation 41,105 42,257
Accounting reserves and accruals 288,658 45,311
-------- -------
Total deferred tax liabilities 329,763 87,568
-------- -------
Net deferred tax liability $292,966 $52,747
======== =======
The tax benefits associated with the exercise of stock options reduced
income taxes payable by $1,443, $60 and $6,598 in 1999, 1998 and 1997,
respectively, and are reflected as an increase in additional paid-in capital.
The deferred income taxes resulting from the unrealized gain on the investment
in CBS stock are $63,576 at December 31, 1999 and have been reflected as a
reduction in stockholders' equity. During 1997, the Company recorded a deferred
tax benefit of $55,000 related to the revaluation of certain reserves as a
result of the 1997 Restructuring and Merger. In addition, the Company reached
settlements of routine Internal Revenue Service audits of the Company's
1994-1995 tax returns during 1999. These settlements had no material impact on
the Company's financial position or results of operations.
Cash payments for income taxes were approximately $30,400, $11,400 and
$81,700 in 1999, 1998 and 1997, respectively.
9. LONG-TERM DEBT:
Long-term debt at December 31 consists of:
1999 1998
--------- ---------
1997 Credit Facility $ 294,000 $ 252,828
Capital lease obligations 8,181 9,384
Other debt 7,942 20,769
--------- ---------
Total debt 310,123 282,981
Less amounts due within one year (299,788) (6,269)
--------- ---------
Total long-term debt $ 10,335 $ 276,712
========= =========
Annual maturities of long-term debt, including capital lease
obligations, are as follows:
2000 $299,788
2001 1,378
2002 4,807
2003 1,577
2004 1,603
Years thereafter 970
--------
Total $310,123
========
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29
In August 1997, the Company entered into a revolving credit facility
(the "1997 Credit Facility") and utilized the proceeds to retire outstanding
indebtedness. The lenders under the 1997 Credit Facility are a syndicate of
banks with Bank of America, N.A. acting as agent (the "Agent"). The 1997 Credit
Facility was amended subsequent to December 31, 1999. As amended, the maximum
amount that can be borrowed under the 1997 Credit Facility is $525,000 with a
final maturity of July 31, 2000. As amended, the 1997 Credit Facility is secured
by the CBS Stock and is guaranteed by certain of the Company's subsidiaries. The
Company is currently negotiating with its lenders and others regarding the
Company's future financing arrangements.
Amounts outstanding under the 1997 Credit Facility, as amended
subsequent to December 31, 1999, bear interest at a rate, at the Company's
option, equal to either (i) the higher of the Agent's prime rate or the federal
funds rate plus 0.5%, or (ii) LIBOR plus 1%. At December 31, 1999, the Company's
borrowing rate under the 1997 Credit Facility was LIBOR plus 0.5%. In addition,
the Company is required to pay a commitment fee of 0.375% per year on the
average unused portion of the 1997 Credit Facility, as amended, as well as an
annual administrative fee. The weighted average interest rates for borrowings
under revolving credit agreements for 1999, 1998 and 1997 were 6.2%, 6.6% and
6.4%, respectively.
The 1997 Credit Facility, as amended, subjects the Company to
limitations on, among other things, mergers and sales of assets, additional
indebtedness, capital expenditures, investments, acquisitions, liens, and
transactions with affiliates. At December 31, 1999, the Company was in
compliance with all financial covenants under the 1997 Credit Facility, as
amended subsequent to December 31, 1999.
Capital lease obligations provide for aggregate payments, including
interest, of approximately $1,900 each year. At December 31, 1999, future
minimum payments for capital leases were $10,153, including $1,972 representing
interest.
Other debt consists primarily of revolving lines of credit utilized by
Pandora in the production of films. At December 31, 1999, Pandora's revolving
lines of credit had $4,442 outstanding, provide for additional borrowings of
approximately $700, and bear interest at LIBOR plus a margin of 1.6%. The
weighted average interest rates related to Pandora's revolving lines of credit
for 1999 and 1998 subsequent to the acquisition of Pandora were 8.9% and 7.0%,
respectively. Pandora had outstanding letters of credit of $19,335 at December
31, 1999 to collateralize its obligations related to film production. The
letters of credit reflect fair value as a condition of their underlying purpose.
Accrued interest payable for 1999 and 1998 was $1,183 and $1,176,
respectively, and is included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheets. Cash paid for interest for 1999, 1998
and 1997, excluding amounts capitalized, was $15,920, $30,217 and $30,747,
respectively.
10. STOCKHOLDERS' EQUITY:
As a result of the Distribution during 1997, each holder of record of
Old Gaylord Common Stock on the record date for the Distribution received a
number of shares of Common Stock of the Company equal to one-third the number of
shares of Old Gaylord Common Stock held by such holder. Cash was distributed in
lieu of any fractional shares of the Common Stock. Holders of Common Stock are
entitled to one vote per share. Holders of Class A Common Stock and Class B
Common Stock of Old Gaylord were entitled to one vote per share and five votes
per share, respectively. All income per share and dividend per share amounts in
the consolidated financial statements have been restated to reflect the
retroactive application of the Distribution.
29
30
11. STOCK PLANS:
At December 31, 1999 and 1998, 2,604,213 and 2,491,081 shares,
respectively, of Common Stock were reserved for future issuance pursuant to the
exercise of stock options under stock option and incentive plans for directors
and key employees. As a result of the Distribution, the Company adopted a new
stock option plan whereby all options to acquire Old Gaylord Common Stock that
were held by persons who, following the Distribution, were employees, former
employees or directors of the Company were converted into fully vested and
exercisable options to acquire Common Stock. As a result of the conversion of
options to acquire Old Gaylord Common Stock into options to acquire Common
Stock, the number of options issued was adjusted with an offsetting adjustment
in option price to maintain the same intrinsic value and original term of the
option. Under the terms of these plans, 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 one year from the date of grant, while
options granted to employees are exercisable two to five years from the date of
grant. The Company accounts for these plans under APB Opinion No. 25 under which
no compensation expense for employee stock options has been recognized. If
compensation cost for these plans had been determined consistent with SFAS No.
123, the Company's net income and income per share for the years ended December
31 would have been reduced to the following pro forma amounts:
1999 1998 1997
----------- ----------- -----------
Net income:
As reported $ 349,792 $ 31,194 $ 143,899
=========== =========== ===========
Pro forma $ 347,756 $ 29,778 $ 142,146
=========== =========== ===========
Income per share:
As reported $ 10.63 $ 0.95 $ 4.45
=========== =========== ===========
Pro forma $ 10.57 $ 0.91 $ 4.40
=========== =========== ===========
Income per share - assuming
dilution:
As reported $ 10.53 $ 0.94 $ 4.41
=========== =========== ===========
Pro forma $ 10.47 $ 0.90 $ 4.35
=========== =========== ===========
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. 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 1999, 1998 and 1997, respectively: risk-free
interest rates of 6.5%, 5.5% and 6.0%; expected volatility of 31.0%, 26.6% and
32.0%; expected lives of 7.5, 7.1 and 6.9 years; expected dividend rates of
2.7%, 2.7% and 2.0%. The weighted average fair value of options granted was
$10.02, $9.52 and $8.77 in 1999, 1998 and 1997, respectively.
The plans also provide for the award of restricted stock. At December
31, 1999 and 1998, awards of restricted stock of 90,226 and 81,940 shares,
respectively, of Common Stock were outstanding. Restricted stock issued prior to
the Distribution and Merger vested under the change in control provisions under
the plans. The market value at the date of grant of these restricted shares was
recorded as unearned compensation as a component of stockholders' equity.
Unearned compensation is amortized over the vesting period of the restricted
stock.
30
31
Stock option awards available for future grant under the stock plans at
December 31, 1999 and 1998 were 852,460 and 185,873 shares of Common Stock,
respectively. Stock option transactions under the plans are summarized as
follows:
1999 1998 1997
------------------------ ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
------------------------ ------------------------- -------------------------
Outstanding at beginning of year 2,491,081 $24.42 2,111,445 $23.06 2,864,184 $14.03
Granted 730,847 28.76 400,500 31.90 998,924 28.24
Exercised (461,995) 21.92 (15,814) 20.96 (1,363,834) 10.49
Effect of option conversions -- -- -- -- (249,548) --
Canceled (155,720) 30.03 (5,050) 28.24 (138,281) 23.74
------------------------ ------------------------- -------------------------
Outstanding at end of year 2,604,213 $25.74 2,491,081 $24.42 2,111,445 $23.06
======================== ========================= =========================
Exercisable at end of year 1,123,698 $21.43 1,312,159 $19.99 1,112,973 $18.41
======================== ========================= =========================
A summary of stock options outstanding as of December 31, 1999 is as
follows:
WEIGHTED
OPTION WEIGHTED AVERAGE
EXERCISE AVERAGE REMAINING
PRICE EXERCISE NUMBER CONTRACTUAL
RANGE PRICE OF SHARES EXERCISABLE LIFE
--------------- -------------- -------------- ---------------- ------------------
$ 10.17 $ 10.17 357,189 357,189 1.8 years
19.91-25.05 22.82 302,070 276,702 5.1 years
26.94-34.00 29.06 1,944,954 489,807 8.3 years
--------------- -------------- -------------- ---------------- ------------------
$ 10.17-34.00 $ 25.74 2,604,213 1,123,698 7.0 years
=============== ============== ============== ================ ==================
During 1999, the Company established an employee stock purchase plan
whereby substantially all employees are eligible to participate in the purchase
of designated shares of the Company's common stock at a price equal to the lower
of 85% of the closing price at the beginning or end of each quarterly stock
purchase period. The Company issued 3,007 shares of common stock at an average
price of $25.08 pursuant to this plan during 1999.
12. COMMITMENTS AND CONTINGENCIES:
Rental expense related to operating leases was $5,460, $5,234 and
$14,552 for 1999, 1998 and 1997, respectively. Future minimum lease commitments
under all noncancelable operating leases in effect as of December 31, 1999 are
as follows:
2000 $ 6,072
2001 5,351
2002 5,552
2003 5,493
2004 5,172
Years thereafter 707,253
----------
Total $ 734,893
==========
31
32
The Company entered into a 75 year operating lease agreement during
1999 for 65.3 acres of land located near Orlando, Florida for the development of
a new hotel. The lease requires annual lease payments of approximately $873
until the completion of construction in 2002 at which point the annual lease
payments increase to approximately $3,200. The lease agreement provides for a 3%
escalation of base rent each year beginning five years after the opening of the
hotel.
During 1999, the Company entered into a construction contract for the
development of the hotel project near Orlando, Florida. The Company expects
payments of approximately $285,000 related to the construction contract during
the construction period.
During 1999, the Company entered into a 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. A
director of the Company owns a majority equity interest in the Nashville
Predators. The contractual commitment requires the Company to pay $2,050 during
the first year of the contract, with a 5% escalation each year for the next 20
years. 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 $1,412 during the period of 1999 subsequent to entering
into the agreement, which is included in selling, general and administrative
expenses in the consolidated statements of income.
During 1998, the Company terminated an operating lease for a satellite
transponder related to the European operations of CMT International. The
termination of the satellite transponder lease resulted in a pretax charge of
$9,200 during 1998, which is included in other gains and losses in the
consolidated statements of income.
The Company was notified during 1997 by Nashville governmental
authorities of an increase in appraised value and property tax rates related to
the Opryland Hotel Nashville resulting in an increased tax assessment. The
Company has contested the increases and has been awarded a partial reduction in
the assessed values. The Company is in the process of appealing the appraised
values. At December 31, 1999, the Company's cumulative disputed property taxes
are $4,200, which have not been reflected in the consolidated financial
statements. The Company believes it has adequately provided for its property
taxes and intends to vigorously contest the increased tax assessment.
The Company is involved in certain legal actions and claims on a
variety of 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.
The Company is self-insured for certain losses relating to workers'
compensation claims, employee medical benefits and general liability claims. The
Company has purchased stop-loss coverage in order to limit its exposure to any
significant levels of self-insured 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.
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33
13. RETIREMENT PLANS:
The Company has a noncontributory defined benefit pension plan in which
substantially all of its employees are eligible to participate upon meeting the
pension plan's participation requirements. The benefits are based on years of
service and compensation levels. The funding policy of the Company is to
contribute annually an amount which equals or exceeds the minimum required by
applicable law. During 1999, the Company amended the pension plan to revise the
benefit formula related to benefit payment assumptions.
The following table sets forth the funded status at December 31:
1999 1998
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 46,480 $ 41,167
Service cost 3,188 2,124
Interest cost 3,999 3,036
Amendments 3,111 --
Actuarial loss 2,552 4,578
Benefits paid (3,068) (4,425)
-------- --------
Benefit obligation at end of year 56,262 46,480
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 48,399 41,048
Actual return on plan assets 1,184 7,348
Employer contributions 3,375 4,428
Benefits paid (3,068) (4,425)
-------- --------
Fair value of plan assets at end of year 49,890 48,399
-------- --------
Funded status (6,372) 1,919
Unrecognized net actuarial loss 8,279 3,758
Unrecognized prior service cost 2,496 (403)
-------- --------
Prepaid pension cost $ 4,403 $ 5,274
======== ========
Net periodic pension expense reflected in the consolidated statements
of income included the following components for the years ended December 31:
1999 1998 1997
------- ------- -------
Service cost $ 3,188 $ 2,124 $ 2,058
Interest cost 3,999 3,036 2,697
Expected return on plan assets (3,862) (3,229) (2,837)
Recognized net actuarial loss 709 -- 824
Amortization of prior service cost 211 (74) 34
------- ------- -------
Total net periodic pension expense $ 4,245 $ 1,857 $ 2,776
======= ======= =======
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% and 7.0% in 1999 and
1998, respectively. The rate of increase in future compensation levels and the
expected long-term rate of return on plan assets were 4% and 8%, respectively,
in both 1999 and 1998.
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's
contribution or 3% of the employee's salary. Company contributions under the
retirement savings plans were $1,892, $1,860 and $2,142 for 1999, 1998 and 1997,
respectively.
33
34
14. 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.
Generally, for employees who retired prior to January 1, 1993 and who
met the other age and service requirements, the Company contributes 100% of the
employee and spouse's health care premium, and provides a life insurance benefit
of 100% of pay up to $50. For employees retiring on or after January 1, 1993 and
who meet the other age and service requirements, the Company contributes from
50% to 90% of the health care premium based on years of service, 50% of the
health care premium for the spouses of eligible retirees regardless of service,
and provides a life insurance benefit of $12.
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:
1999 1998
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 22,596 $ 18,044
Service cost 1,815 1,565
Interest cost 1,518 1,288
Actuarial (gain) loss (9,872) 2,245
Contributions by plan participants 81 77
Benefits paid (706) (623)
-------- --------
Benefit obligation at end of year 15,432 22,596
Unrecognized net actuarial gain 11,234 1,569
-------- --------
Accrued postretirement liability $ 26,666 $ 24,165
======== ========
Net postretirement benefit expense reflected in the consolidated
statements of income included the following components for the years ended
December 31:
1999 1998 1997
------- ------- ------
Service cost $ 1,815 $ 1,565 $1,488
Interest cost 1,518 1,288 1,270
Recognized net actuarial gain (207) (194) --
------- ------- ------
Net postretirement benefit expense $ 3,126 $ 2,659 $2,758
======= ======= ======
For measurement purposes, an 8% annual rate of increase in the per
capita cost of covered health care claims was assumed for 1999. The health care
cost trend is projected to be 10% in 2000, decline by 1% for each of the next
two years and then decline 0.5% each year thereafter to an ultimate level trend
rate of 5.5% per year in 2007. 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 the 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, 1999 by
approximately 14% and the aggregate of the service and interest cost components
of net postretirement benefit expense would increase approximately 23%.
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, 1999 by approximately 13% and the aggregate of the service and interest cost
components of net postretirement benefit expense would decrease approximately
20%. The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 7.0% in 1999 and 1998,
respectively.
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35
15. FINANCIAL REPORTING BY BUSINESS SEGMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which the Company adopted on January 1, 1998. The Company is organized and
managed based upon its products and services. The following information is
derived directly from the segments' internal financial reports used for
corporate management purposes.
1999 1998 1997
----------- ----------- -----------
Revenues:
Hospitality and attractions $ 245,705 $ 246,354 $ 311,418
Creative content 205,565 203,537 162,782
Interactive media 54,224 68,942 350,415
Corporate and other 5,294 5,642 1,380
----------- ----------- -----------
Total $ 510,788 $ 524,475 $ 825,995
=========== =========== ===========
Operating income (loss):
Hospitality and attractions $ 38,270 $ 44,051 $ 50,846
Creative content (11,366) 11,339 11,689
Interactive media (5,596) 8,211 63,930
Corporate and other (25,972) (20,668) (26,309)
Merger costs and restructuring charges (1,361) -- (36,299)
Line of business closing charges (12,201) -- (42,006)
----------- ----------- -----------
Total $ (18,226) $ 42,933 $ 21,851
=========== =========== ===========
Depreciation and amortization:
Hospitality and attractions $ 25,515 $ 23,835 $ 28,544
Creative content 13,757 9,294 6,553
Interactive media 6,553 4,415 13,870
Corporate and other 6,749 5,240 4,430
----------- ----------- -----------
Total $ 52,574 $ 42,784 $ 53,397
=========== =========== ===========
Capital expenditures:
Hospitality and attractions $ 61,362 $ 13,924 $ 24,737
Creative content 6,587 27,143 8,123
Interactive media 10,617 4,914 13,497
Corporate and other 5,484 5,212 2,882
----------- ----------- -----------
Total $ 84,050 $ 51,193 $ 49,239
=========== =========== ===========
Identifiable assets:
Hospitality and attractions $ 493,613 $ 452,511 $ 461,715
Creative content 344,317 327,369 231,454
Interactive media 58,861 51,472 46,631
Corporate and other 835,593 180,640 377,762
----------- ----------- -----------
Total $ 1,732,384 $ 1,011,992 $ 1,117,562
=========== =========== ===========
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16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- ---------
1999
- ----
Revenues $ 113,139 $128,362 $135,711 $ 133,576
========= ======== ======== =========
Depreciation and amortization $ 12,024 $ 12,374 $ 13,408 $ 14,768
========= ======== ======== =========
Operating income (loss) $ (4,648) $ 3,425 $ 2,169 $ (19,172)
========= ======== ======== =========
Net income $ 79,792 $ 658 $ 726 $ 268,616
========= ======== ======== =========
Net income per share $ 2.43 $ 0.02 $ 0.02 $ 8.12
========= ======== ======== =========
Net income per share -
assuming dilution $ 2.41 $ 0.02 $ 0.02 $ 8.05
========= ======== ======== =========
1998
- ----
Revenues $ 108,021 $126,963 $134,904 $ 154,587
========= ======== ======== =========
Depreciation and amortization $ 9,830 $ 10,600 $ 11,171 $ 11,183
========= ======== ======== =========
Operating income $ 462 $ 13,010 $ 11,402 $ 18,059
========= ======== ======== =========
Net income $ 2,039 $ 7,322 $ 7,143 $ 14,690
========= ======== ======== =========
Net income per share $ 0.06 $ 0.22 $ 0.22 $ 0.45
========= ======== ======== =========
Net income per share - assuming
dilution $ 0.06 $ 0.22 $ 0.22 $ 0.44
========= ======== ======== =========
Certain of the Company's operations are subject to seasonal
fluctuation. Revenues in the music business are typically weakest in the first
calendar quarter following the Christmas buying season.
During the first quarter of 1999, the Company recognized a pretax gain
of $129,875 representing the value of the 15% contractual equity participation
rights upon the sale of the Systems. During the third quarter of 1999, the
Company recognized a nonrecurring restructuring charge of $3,102 related to
streamlining the Company's operations, primarily the Opryland Hotel Nashville,
and the reversal of accrued merger costs of $1,741 based upon the settlement of
the remaining contingencies associated with the Merger. During the fourth
quarter of 1999, the Company recorded a pretax gain of $459,307 related to the
divestiture of television station KTVT in Dallas and a pretax loss of $12,201
related to the closing of Unison Records.
During the first quarter of 1998, the Company recognized a pretax gain
of $3,296 on the sale of investments. During the second quarter of 1998, the
Company recognized a pretax gain related to the sale of its investment in the
Texas Rangers Baseball Club, Ltd. of $15,109; a pretax loss of $23,616 related
to the write-off of a note receivable from Z Music; and pretax gains totaling
$8,538 primarily related to the settlement of contingencies arising from the
prior sales of television stations KHTV in Houston and KSTW in Seattle. In the
fourth quarter of 1998, the Company recorded a pretax gain of $15,000 related to
a long-term note receivable and a pretax charge of $9,200 related to the
termination of an operating lease for a satellite transponder.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gaylord Entertainment Company:
We have audited the accompanying consolidated balance sheets of Gaylord
Entertainment Company (a Delaware corporation) and its subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 consolidated 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 9, 2000
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CORPORATE DATA
MARKET INFORMATION
The Common Stock of Gaylord Entertainment is listed on the New
York Stock Exchange under the symbol GET. The approximate number of record
holders of the company's Common Stock on March 13, 2000, was 2,764.
STOCK PRICE AND DIVIDEND INFORMATION
The table below sets forth the high and low sales prices for the company's
Common Stock and the amount of cash dividends paid per share of Common Stock for
each quarter of 1998 and 1999.
High Low Dividend
---- --- --------
1998
1st Quarter $36.81 $29.88 $0.15
2nd Quarter 37.50 32.00 0.15
3rd Quarter 34.19 25.25 0.15
4th Quarter 30.75 22.00 0.20
1999
1st Quarter $31.13 $24.25 $0.20
2nd Quarter 33.00 23.38 0.20
3rd Quarter 31.44 28.31 0.20
4th Quarter 33.06 28.25 0.20
In February 2000, the Board of Directors voted to discontinue the
payment of dividends.
38