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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 1-13079
GAYLORD ENTERTAINMENT COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 73-0664379
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Gaylord Drive
Nashville, Tennessee 37214
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(615) 316-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of October 31, 1998
----- ----------------------------------
Common Stock, $.01 par value 32,808,448 shares
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GAYLORD ENTERTAINMENT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PAGE NO.
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
For the Three Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Income -
For the Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II - Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
--------- ---------
Revenues $ 134,904 $ 245,481
Operating expenses:
Operating costs 81,163 159,044
Selling, general and administrative 31,168 43,732
Merger costs -- 22,645
Restructuring charge -- 13,654
Depreciation and amortization 11,171 14,460
--------- ---------
Operating income (loss) 11,402 (8,054)
Interest expense (8,116) (5,809)
Interest income 6,519 5,847
Other gains (losses) 1,811 (1,399)
--------- ---------
Income (loss) before provision for income taxes 11,616 (9,415)
Provision (benefit) for income taxes 4,473 (51,731)
--------- ---------
Net income $ 7,143 $ 42,316
========= =========
Net income per share $ 0.22 $ 1.30
========= =========
Net income per share - assuming dilution $ 0.22 $ 1.30
========= =========
Dividends per share $ 0.15 $ 0.30
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
--------- ---------
Revenues $ 369,888 $ 680,285
Operating expenses:
Operating costs 220,950 418,680
Selling, general and administrative 92,463 131,193
Merger costs -- 22,645
Restructuring charge -- 13,654
Depreciation and amortization 31,601 42,706
--------- ---------
Operating income 24,874 51,407
Interest expense (22,673) (20,733)
Interest income 19,463 17,561
Other gains (losses) 5,173 141,210
--------- ---------
Income before provision for income taxes 26,837 189,445
Provision for income taxes 10,333 16,581
--------- ---------
Income before cumulative effect of accounting change 16,504 172,864
Cumulative effect of accounting change, net of taxes -- (7,537)
--------- ---------
Net income $ 16,504 $ 165,327
========= =========
Income per share:
Income before cumulative effect of accounting change $ 0.50 $ 5.36
Cumulative effect of accounting change, net of taxes -- (0.23)
--------- ---------
Net income $ 0.50 $ 5.13
========= =========
Income per share - assuming dilution:
Income before cumulative effect of accounting change $ 0.50 $ 5.31
Cumulative effect of accounting change, net of taxes -- (0.23)
--------- ---------
Net income $ 0.50 $ 5.08
========= =========
Dividends per share $ 0.45 $ 0.90
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sept. 30, Dec. 31,
1998 1997
----------- ----------
ASSETS
Current assets:
Cash $ 13,909 $ 8,712
Trade receivables, less allowance of $5,160 and $4,031, respectively 97,455 82,152
Inventories 25,458 23,206
Other assets 40,429 37,311
----------- ----------
Total current assets 177,251 151,381
----------- ----------
Property and equipment, net of accumulated depreciation 583,301 550,267
Intangible assets, net of accumulated amortization 98,553 84,419
Investments 77,309 73,991
Long-term notes and interest receivable 225,949 233,112
Other assets 51,386 24,392
----------- ----------
Total assets $ 1,213,749 $1,117,562
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,125 $ --
Accounts payable and accrued liabilities 115,186 127,694
----------- ----------
Total current liabilities 116,311 127,694
----------- ----------
Long-term debt 500,839 388,397
Deferred income taxes 34,627 32,579
Other liabilities 32,289 42,710
Minority interest 12,660 9,958
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,
32,808 and 32,741 shares issued and outstanding, respectively 328 327
Additional paid-in capital 500,434 498,504
Retained earnings 18,571 16,837
Other stockholders' equity (2,310) 556
----------- ----------
Total stockholders' equity 517,023 516,224
----------- ----------
Total liabilities and stockholders' equity $ 1,213,749 $1,117,562
=========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
1998 1997
-------- ---------
Cash Flows from Operating Activities:
Net income $ 16,504 $ 165,327
Amounts to reconcile net income to net cash flows
provided by (used in) operating activities:
Cumulative effect of accounting change, net of taxes -- 7,537
Gain on sale of investments (20,118) --
Write-off of Z Music note receivable 23,616 --
Gain on sale of television station -- (144,259)
Write-down of television program rights -- 11,740
Depreciation and amortization 31,601 42,706
Deferred income taxes 2,050 (70,919)
Noncash interest income (18,705) (16,701)
Changes in:
Trade receivables (7,511) (14,948)
Accounts payable and accrued liabilities (21,305) 42,962
Other assets and liabilities (14,707) (7,151)
-------- ---------
Net cash flows provided by (used in) operating activities (8,575) 16,294
-------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (35,941) (36,188)
Acquisition of businesses, net of cash acquired (31,891) (6,525)
Proceeds from sale of property and equipment 6,152 17
Proceeds from sale of investments 20,130 --
Purchase of Word Entertainment -- (120,017)
Proceeds from sale of television station, net of direct selling costs -- 155,469
Investments in, advances to and distributions from affiliates (10,539) (10,150)
Other investing activities (10,947) (8,496)
-------- ---------
Net cash flows used in investing activities (63,036) (25,890)
-------- ---------
Cash Flows from Financing Activities:
Repayment of long-term debt (4,413) (149,762)
Proceeds from issuance of long-term debt 500 420
Net borrowings under revolving credit agreements 95,159 176,169
Proceeds from exercise of stock options 332 11,467
Purchase of treasury stock -- (1,709)
Dividends paid (14,770) (29,017)
-------- ---------
Net cash flows provided by financing activities 76,808 7,568
-------- ---------
Net change in cash 5,197 (2,028)
Cash, beginning of period 8,712 13,720
-------- ---------
Cash, end of period $ 13,909 $ 11,692
======== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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GAYLORD ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of Gaylord
Entertainment Company and subsidiaries (the "Company") and have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the financial information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments necessary for
a fair statement of the results of operations for the interim periods have been
included. The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
2. INCOME PER SHARE:
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," during 1997. SFAS No. 128
establishes standards for computing and presenting earnings per share. Under the
standards established by SFAS No. 128, earnings per share is measured at two
levels: basic earnings per share and diluted earnings per share. Basic earnings
per share is computed by dividing net income by the weighted average number of
common shares outstanding during the period. 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 stock options.
The weighted average number of common shares outstanding is calculated as
follows:
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
Weighted average shares outstanding 32,808 32,438 32,804 32,236
Effect of dilutive stock options 307 166 386 290
------ ------ ------ ------
Weighted average shares outstanding -
assuming dilution 33,115 32,604 33,190 32,526
====== ====== ====== ======
3. 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 substantially equivalent
to net income for the three month and nine month periods ended September 30,
1998 and 1997.
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4. OTHER GAINS (LOSSES):
During 1998, the Company sold its investment in the Texas Rangers Baseball Club,
Ltd. for $16,072 in cash and recognized a gain of the same amount.
The Company recorded a gain of $8,538 during the second quarter of 1998
primarily related to the settlement of contingencies arising from the sales of
television stations KHTV in Houston and KSTW in Seattle.
The Company recognized a loss of $23,616 during the second quarter of 1998
related to the write-off of a note receivable from Z Music, Inc. The Company is
foreclosing on the note receivable and expects to take a controlling interest in
the assets of Z Music, Inc. The Company is in the process of restructuring the
operations of Z Music, Inc., including changing the mode of transmission from an
analog to a digital signal, to reduce operating expenses.
5. NOTES RECEIVABLE:
The Company expects to receive approximately $370,000 as a result of the
acquisition of Charter Communications by investor Paul G. Allen. The estimated
proceeds of $370,000 include $240,000 as prepayment in full of the Company's
promissory note from an affiliate of Charter Communications and $130,000
representing the value of contractual equity participation rights. The note and
equity participation rights were received by the Company in connection with the
sale of the Company's cable television systems to Charter Communications in
1995. The transaction will result in a pretax gain of approximately $145,000 and
is expected to close in the fourth quarter of 1998. The proceeds will be used to
reduce outstanding indebtedness under the Company's revolving line of credit.
6. PANDORA ACQUISITION:
In July 1998, the Company purchased 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, for approximately $16,950 in cash. The acquisition was financed
through borrowings under the revolving credit agreement and has been accounted
for using the purchase method of accounting. The operating results of Pandora
have been included in the condensed consolidated financial statements from the
date of acquisition. The purchase price allocation has been completed on a
preliminary basis, subject to adjustment should additional facts about Pandora
become known.
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7. FINANCIAL REPORTING BY BUSINESS SEGMENTS:
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
-------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues:
Hospitality and attractions $ 74,846 $ 107,364 $ 211,886 $ 262,020
Broadcasting and music 59,216 48,726 153,111 145,188
Cable networks 842 89,391 4,891 273,077
--------- --------- --------- ---------
Total $ 134,904 $ 245,481 $ 369,888 $ 680,285
========= ========= ========= =========
Depreciation and amortization:
Hospitality and attractions $ 7,373 $ 8,339 $ 21,103 $ 24,134
Broadcasting and music 2,163 1,588 5,752 5,281
Cable networks 465 3,680 1,349 10,752
Corporate 1,170 853 3,397 2,539
--------- --------- --------- ---------
Total $ 11,171 $ 14,460 $ 31,601 $ 42,706
========= ========= ========= =========
Operating income (loss):
Hospitality and attractions $ 12,039 $ 18,126 $ 30,224 $ 34,445
Broadcasting and music 8,044 (4,514) 20,740 6,069
Cable networks (2,251) 22,310 (7,922) 67,587
Corporate (6,430) (7,677) (18,168) (20,395)
Merger costs and
restructuring charge -- (36,299) -- (36,299)
--------- --------- --------- ---------
Total $ 11,402 $ (8,054) $ 24,874 $ 51,407
========= ========= ========= =========
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SEGMENTS
The Company operates in the following business segments: hospitality and
attractions; broadcasting and music; and cable networks. The hospitality and
attractions segment primarily consists of the Opryland Hotel located in
Nashville, Tennessee and the Company's Nashville-based attractions. The
broadcasting and music segment includes the Company's television station, radio
stations, music publishing business, Word Entertainment ("Word"), the Company's
contemporary Christian music company, and 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. The Company acquired Pandora in July 1998 for approximately $17
million in cash. The cable networks segment consists primarily of CMT
International, a country music video cable network operated in Latin America and
the Pacific Rim. CMT International ceased its European operations on March 31,
1998. The Company's unallocated corporate expenses are reported separately.
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RESULTS OF OPERATIONS
The following tables contain unaudited selected summary financial data for the
three month and nine month periods ended September 30, 1998 and 1997 (amounts in
thousands). The Nashville Network ("TNN"), the United States and Canadian
operations of Country Music Television ("CMT") and certain other related
businesses (collectively, the "Cable Networks Business") formerly owned by the
Company were acquired by CBS Corporation (the "CBS Merger") on October 1, 1997.
The unaudited selected summary pro forma financial data is presented as if the
CBS Merger had occurred on January 1, 1997. The tables also show the percentage
relationships to total revenues and, in the case of segment operating income,
its relationship to segment revenues.
Three Months Ended September 30,
----------------------------------------------------------------------------------
Actual Actual Pro Forma
1998 % 1997 % 1997 %
--------- ------ ---------- ------ --------- ------
Revenues:
Hospitality and attractions $ 74,846 55.5 $ 107,364 43.7 $ 107,364 67.5
Broadcasting and music 59,216 43.9 48,726 19.9 48,726 30.6
Cable networks 842 0.6 89,391 36.4 2,975 1.9
--------- ------ ---------- ------ --------- ------
Total revenues 134,904 100.0 245,481 100.0 159,065 100.0
--------- ------ ---------- ------ --------- ------
Operating expenses:
Operating costs 81,163 60.1 159,044 64.8 110,450 69.5
Selling, general & administrative 31,168 23.1 43,732 17.8 34,659 21.8
Merger costs -- -- 22,645 9.2 22,645 14.2
Restructuring charge -- -- 13,654 5.6 13,654 8.6
Depreciation and amortization:
Hospitality and attractions 7,373 8,339 8,339
Broadcasting and music 2,163 1,588 1,588
Cable networks 465 3,680 536
Corporate 1,170 853 853
--------- ------ ---------- ------ --------- ------
Total depreciation and amortization 11,171 8.3 14,460 5.9 11,316 7.1
--------- ------ ---------- ------ --------- ------
Total operating expenses 123,502 91.5 253,535 103.3 192,724 121.2
--------- ------ ---------- ------ --------- ------
Operating income (loss):
Hospitality and attractions 12,039 16.1 18,126 16.9 18,126 16.9
Broadcasting and music 8,044 13.6 (4,514) (9.3) (4,514) (9.3)
Cable networks (2,251) -- 22,310 25.0 (3,295) --
Merger costs -- -- (22,645) -- (22,645) --
Restructuring charge -- -- (13,654) -- (13,654) --
Corporate (6,430) -- (7,677) -- (7,677) --
--------- ------ ---------- ------ --------- ------
Total operating income (loss) $ 11,402 8.5 $ (8,054) (3.3) $ (33,659) (21.2)
========= ====== ========== ====== ========= ======
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Nine Months Ended September 30,
----------------------------------------------------------------------------------
Actual Actual Pro Forma
1998 % 1997 % 1997 %
--------- ------ ---------- ------ --------- ------
Revenues:
Hospitality and attractions $ 211,886 57.3 $ 262,020 38.5 $ 262,020 63.0
Broadcasting and music 153,111 41.4 145,188 21.4 145,188 34.9
Cable networks 4,891 1.3 273,077 40.1 8,614 2.1
--------- ------ ---------- ------ --------- ------
Total revenues 369,888 100.0 680,285 100.0 415,822 100.0
--------- ------ ---------- ------ --------- ------
Operating expenses:
Operating costs 220,950 59.7 418,680 61.5 270,887 65.2
Selling, general & administrative 92,463 25.0 131,193 19.3 102,424 24.6
Merger costs -- -- 22,645 3.3 22,645 5.4
Restructuring charge -- -- 13,654 2.0 13,654 3.3
Depreciation and amortization:
Hospitality and attractions 21,103 24,134 24,134
Broadcasting and music 5,752 5,281 5,281
Cable networks 1,349 10,752 1,591
Corporate 3,397 2,539 2,539
--------- ------ ---------- ------ --------- ------
Total depreciation and amortization 31,601 8.6 42,706 6.3 33,545 8.1
--------- ------ ---------- ------ --------- ------
Total operating expenses 345,014 93.3 628,878 92.4 443,155 106.6
--------- ------ ---------- ------ --------- ------
Operating income (loss):
Hospitality and attractions 30,224 14.3 34,445 13.1 34,445 13.1
Broadcasting and music 20,740 13.5 6,069 4.2 6,069 4.2
Cable networks (7,922) -- 67,587 24.8 (11,153) --
Merger costs -- -- (22,645) -- (22,645) --
Restructuring charge -- -- (13,654) -- (13,654) --
Corporate (18,168) -- (20,395) -- (20,395) --
--------- ------ ---------- ------ --------- ------
Total operating income (loss) $ 24,874 6.7 $ 51,407 7.6 $ (27,333) (6.6)
========= ====== ========== ====== ========= ======
PERIODS ENDED SEPTEMBER 30, 1998 COMPARED TO PERIODS ENDED SEPTEMBER 30, 1997
Revenues
Total Revenues - Total revenues decreased $110.6 million, or 45.0%, to $134.9
million in the third quarter of 1998, and decreased $310.4 million, or 45.6%, to
$369.9 million for the first nine months of 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 $24.2 million, or 15.2%,
during the third quarter of 1998, and would have decreased $45.9 million, or
11.0%, for the first nine months of 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
revenues of the Cable Networks Business, the Opryland theme park, and KSTW from
the 1997 results, total revenues increased $4.0 million, or 3.1%, in the third
quarter of 1998, and increased $16.6 million, or 4.7%, in the first nine months
of 1998.
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Hospitality and Attractions - Revenues in the hospitality and attractions
segment decreased $32.5 million, or 30.3%, to $74.8 million in the third quarter
of 1998, and decreased $50.1 million, or 19.1%, to $211.9 million for the first
nine months of 1998. The decreases are 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 $4.4 million, or 5.5%, in the third quarter of
1998, and increased $0.2 million, or 0.1%, for the first nine months of 1998.
The increase for the first nine months of 1998 relates primarily to increased
revenues from the Oklahoma City Redhawks baseball team of $5.8 million and
consulting and other services fee revenues related to the Opry Mills partnership
of $3.8 million. This increase is partially offset by a decrease in Opryland
Hotel revenues of $9.4 million, or 5.5%, to $160.3 million in the first nine
months of 1998 principally because of reduced revenues from convention groups
and a slowdown in the tourism market. The hotel's occupancy rate decreased to
76.3% in the first nine months of 1998 compared to 83.9% in the first nine
months of 1997. The hotel sold 578,400 rooms in the first nine months of 1998
compared to 632,200 rooms sold in the same period of 1997, reflecting an 8.5%
decrease from 1997. The hotel's average guest room rate increased to $140.06 in
the first nine months of 1998 from $134.19 in the first nine months of 1997. The
hotel's occupancy rate is anticipated to be 80-81% for the year ended December
31, 1998, which is below its historical average rate but considerably above the
industry average rate.
Broadcasting and Music - Revenues in the broadcasting and music segment
increased $10.5 million, or 21.5%, to $59.2 million in the third quarter of
1998, and increased $7.9 million, or 5.5%, to $153.1 million for the first nine
months of 1998. The Company sold television station KSTW in June 1997. Excluding
the revenues of KSTW from 1997, revenues in the broadcasting and music segment
increased $20.2 million, or 15.2%, for the first nine months of 1998. The
increase for the first nine months of 1998 results primarily from increased
revenues from Word of $14.9 million, increased revenues from the Company's
Dallas area television station KTVT of $1.4 million, and revenues from Pandora
subsequent to its date of acquisition of $3.3 million.
Cable Networks - Revenues in the cable networks segment decreased $88.5 million
to $0.8 million in the third quarter of 1998, and decreased $268.2 million to
$4.9 million for the first nine months of 1998 due to the effects of the CBS
Merger. On a pro forma basis, assuming the CBS Merger had occurred on January 1,
1997, revenues in the cable networks segment would have decreased $2.1 million
in the third quarter of 1998, and decreased $3.7 million for the first nine
months of 1998. The decreases are primarily the result of CMT International
ceasing its European operations effective March 31, 1998.
Operating Expenses
Total Operating Expenses - Total operating expenses decreased $130.0 million, or
51.3%, to $123.5 million in the third quarter of 1998, and decreased $283.9
million, or 45.1%, to $345.0 million for the first nine months of 1998. On a pro
forma basis, assuming the CBS Merger had occurred on January 1, 1997, total
operating expenses would have decreased $69.2 million, or 35.9%, during the
third quarter of 1998, and would have decreased $98.1 million, or 22.1%, for the
first nine months of 1998. Operating costs, as a percentage of revenues,
decreased to 59.7% during the first nine months of 1998 as compared to 65.2%
during the first nine months of 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, increased to 25.0% in the first nine
months of 1998 from 24.6% in the first nine months of 1997 on a pro forma basis,
assuming the CBS Merger had occurred on January 1, 1997.
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Operating Costs - Operating costs decreased $77.9 million, or 49.0%, to $81.2
million in the third quarter of 1998, and decreased $197.7 million, or 47.2%, to
$221.0 million for the first nine months of 1998. On a pro forma basis, assuming
the CBS Merger had occurred on January 1, 1997, operating costs would have
decreased $29.3 million, or 26.5%, in the third quarter of 1998, and would have
decreased $49.9 million, or 18.4%, for the first nine months of 1998. The
decreases on a pro forma basis are primarily the result of the December 1997
closing of the Opryland theme park and the June 1997 sale of television station
KSTW. In addition, the Company recorded a nonrecurring charge to operations of
$11.7 million during the third quarter of 1997 for the write-down to net
realizable value of certain program rights at television station KTVT. Excluding
the write-down of television program rights, and the operating costs of the
Cable Networks Business, the Opryland theme park, and KSTW from the 1997
results, operating costs increased $2.7 million, or 3.5%, in the third quarter
of 1998, and increased $3.4 million, or 1.6%, for the first nine months of 1998.
The increase for the first nine months of 1998 is primarily attributable to
increased operating costs of Word of $8.1 million related to increased sales and
the operating costs of the newly-opened Wildhorse Saloon in Orlando, Florida of
$2.3 million. The acquisition of Pandora in July 1998 increased operating costs
by $2.9 million in the first nine months of 1998. Additionally, operating costs
increased $1.6 million for the first nine months of 1998 related to the Opryland
Lodging Group. The Opryland Lodging Group was formed in 1998 to take advantage
of the Company's talent and expertise in the convention hotel industry and
expand the Opryland Hotel concept into other cities. These increases were
partially offset during the first nine months of 1998 by decreased operating
expenses of $8.3 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 of $3.0 million.
Selling, General and Administrative - Selling, general and administrative
expenses decreased $12.6 million, or 28.7%, to $31.2 million in the third
quarter of 1998, and decreased $38.7 million, or 29.5%, to $92.5 million for the
first nine months of 1998. On a pro forma basis, assuming the CBS Merger had
occurred on January 1, 1997, selling, general and administrative expenses would
have decreased $3.5 million, or 10.1%, during the third quarter of 1998, and
would have decreased $10.0 million, or 9.7%, for the first nine months of 1998.
The decreases are 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 $2.1 million, or
7.4%, in the third quarter of 1998, and increased $6.7 million, or 7.8%, for the
first nine months of 1998. The increase for the first nine months of 1998 is
primarily attributable to higher selling, general and administrative expenses of
Word and Blanton-Harrell Entertainment, an artist management company, of $5.5
million and the recognition of a valuation reserve of $3.4 million related to a
long-term note receivable from Z Music, Inc. as discussed below. Corporate
general and administrative expenses, consisting primarily of senior management
salaries and benefits, legal, human resources, accounting, and other
administrative costs, decreased $3.0 million in the first nine months of 1998.
Merger Costs and Restructuring Charge - In connection with the CBS Merger, the
Company recognized nonrecurring merger costs and a restructuring charge in the
third quarter of 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 Merger. The restructuring charge
included estimated costs for employee severance and termination benefits, asset
write-downs, and other costs associated with the restructuring.
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Depreciation and Amortization - Depreciation and amortization decreased $3.3
million, or 22.7%, to $11.2 million in the third quarter of 1998, and decreased
$11.1 million, or 26.0%, to $31.6 million for the first nine months of 1998. On
a pro forma basis, assuming the CBS Merger had occurred on January 1, 1997,
depreciation and amortization would have decreased $0.1 million, or 1.3%, during
the third quarter of 1998, and would have decreased $1.9 million, or 5.8% for
the first nine months of 1998. The decreases are 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 $2.4 million, or
27.7%, in the third quarter of 1998, and increased $3.7 million, or 13.1%, for
the first nine months of 1998. The increase for the first nine months of 1998 is
primarily attributable to the depreciation expense of new acquisitions and
capital expenditures.
Operating Income
Total Operating Income - Total operating income increased $19.5 million to $11.4
million in the third quarter of 1998, and decreased $26.5 million to $24.9
million for the first nine months of 1998 primarily due to the effects of the
CBS Merger. On a pro forma basis, assuming the CBS Merger had occurred on
January 1, 1997, total operating income would have increased $45.1 million in
the third quarter of 1998, and would have increased $52.2 million for the first
nine months of 1998. Excluding the operating loss of the Opryland theme park
during the first nine months of 1997, hospitality and attractions segment
operating income decreased $6.0 million for the first nine months of 1998
primarily related to lower operating income produced by the Opryland Hotel.
Excluding the operating income of KSTW and the write-down of television program
rights at KTVT during the first nine months of 1997, broadcasting and music
segment operating income increased $3.3 million for the first nine months of
1998 primarily related to greater operating income generated by Word and
television station KTVT. Excluding the operating income of the Cable Networks
Business from 1997, the operating loss of the cable networks segment decreased
$3.2 million for the first nine months of 1998 primarily as a result of CMT
International ceasing its European operations effective March 31, 1998. Because
of the lower operating income of the Opryland Hotel and lower than anticipated
advertising revenues of television station KTVT, diluted earnings per share for
the year ended December 31, 1998 are anticipated to be within the range of $0.74
to $0.78 per share, excluding nonrecurring gains and losses.
Interest Expense
Interest expense increased $2.3 million to $8.1 million in the third quarter of
1998, and increased $1.9 million to $22.7 million for the first nine months of
1998. The increase for the first nine months of 1998 is primarily attributable
to higher average debt levels as compared to the same period of 1997. 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 6.7% in the first nine months of 1998 compared to 6.6% in the
first nine months of 1997.
Interest Income
Interest income increased $0.7 million to $6.5 million in the third quarter of
1998, and increased $1.9 million to $19.5 million for the first nine months of
1998. Interest income primarily results from noncash interest income earned on a
long-term note receivable. See "Recent Developments -- Charter Transaction"
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Other Gains (Losses)
During 1998, the Company sold its investment in the Texas Rangers Baseball Club,
Ltd. for $16.1 million in cash and recognized a gain of the same amount. In
addition, the Company recorded a gain of $8.5 million during the second quarter
of 1998 primarily related to the settlement of contingencies arising from the
sales of television stations KHTV in Houston and KSTW in Seattle.
During the second quarter of 1998, the Company recognized a loss of $23.6
million related to the write-off of a note receivable from Z Music, Inc. The
Company is foreclosing on the note receivable and expects to take a controlling
interest in the assets of Z Music, Inc. The Company is in the process of
restructuring the operations of Z Music, Inc., including changing the mode of
transmission from an analog to a digital signal, to reduce operating expenses.
In June 1997, the Company sold KSTW, its Tacoma-Seattle, Washington television
station, for $160.0 million in cash. The sale resulted in a pretax gain of
$144.3 million, which is included in other gains (losses) in the condensed
consolidated statements of income.
Income Taxes
The provision for income taxes was $4.5 million for the third quarter of 1998
and $10.3 million for the first nine months of 1998 compared to a benefit of
$51.7 million for the third quarter of 1997 and a provision of $16.6 million for
the first nine months of 1997. During the third quarter of 1997, the Company
recorded a deferred tax benefit of $55.0 million related to the revaluation of
certain reserves as a result of the CBS Merger. The effective tax rate on income
before provision for income taxes was 38.5% for the first nine months of 1998
compared to 8.8% for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an unsecured revolving loan (the "Revolver") which provides for
borrowings of up to $600 million until its maturity in July 2002. At October 31,
1998, the Company had approximately $116 million in available borrowing capacity
under the Revolver. The terms and conditions of the Revolver require the Company
to maintain certain financial ratios and minimum stockholders' equity levels and
subject the Company to limitations on, among other things, mergers and sales of
assets, additional indebtedness, capital expenditures, investments,
acquisitions, liens, and transactions with affiliates. The proceeds to the
Company from the Charter Transaction will be used to reduce outstanding
indebtedness under the Revolver. See "Recent Developments -- Charter
Transaction"
The Company currently projects capital expenditures of approximately $45 million
for 1998, of which $35.9 million had been spent as of September 30, 1998. The
Company's management believes that the net cash flows from operations, together
with the amount expected to be available for borrowing under the Revolver, will
be sufficient to satisfy anticipated future cash requirements of the Company on
both a short-term and long-term basis.
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YEAR 2000
Without programming modifications, certain computer programs will not operate
properly when using the two-digits used in date calculations for the year 2000.
These computer programs interpret the "00" used in date calculations to
represent the year 1900. During 1996, the Company formed an internal task force
to determine the Company's information technology and systems risks associated
with the year 2000. The purpose of the task force is to assess, test and correct
the Company's hardware, software and equipment to ensure these systems operate
properly in the year 2000. The task force has substantially completed its
assessment of the Company's systems, has identified the Company's hardware,
software and equipment that will not operate properly in the year 2000 and, is
taking the appropriate action to ensure compliance. In certain instances,
hardware, software and equipment that will not operate properly in the year 2000
are being replaced. As of September 30, 1998, the task force has determined that
the majority of the Company's systems, in certain circumstances following
already completed programming changes, will operate properly in the year 2000.
As of September 30, 1998, sixty-one of the Company's sixty-three internally
developed software applications are considered year 2000 compliant.
The Company expects that programming changes and software replacement for
systems that are not year 2000 compliant will be completed during the first and
second quarters of 1999. The Company plans to test all of its systems to ensure
their proper operation in the year 2000. The Company expects that the testing
phase of its year 2000 remediation effort will be substantially completed by the
end of the second quarter of 1999.
The Company has requested written documentation from vendors and suppliers with
whom the Company has a material relationship regarding their ability to operate
properly in the year 2000. In many cases, the Company is considering
alternatives related to vendors and suppliers that do not confirm their year
2000 readiness. There can be no assurance, however, that the Company's
significant vendors and suppliers will have remedied their year 2000 issues in a
timely manner. The failure of a significant supplier to remedy its year 2000
issues could have a material adverse effect on the Company's operations,
financial position or liquidity. The Company will continue to monitor its
significant vendors and suppliers to mitigate its risks.
Based upon the Company's current estimates, the costs of the Company's year 2000
remediation efforts will be between $7 million and $9 million. Included in the
Company's cost estimates are the costs of replacing hardware and software of
approximately $6 million, which are capitalized and amortized over their
estimated useful lives. Certain software replacements included in these cost
estimates were planned prior to the assessment of the year 2000 issue and were
accelerated as part of the Company's year 2000 remediation effort. The remaining
costs are expensed as incurred. These projected costs are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events. There can be no guarantee, however, that these cost estimates
will be achieved and actual results could differ materially. Management's
estimate of the Company's most reasonably likely worst case scenario involves
the replacement of hardware, software and equipment during the third and fourth
quarters of 1999 that are determined during the testing phase of the remediation
effort to not be correctable. The foregoing notwithstanding, management does not
currently believe that the costs of assessment, remediation, or replacement of
the Company's systems, or the potential failure of third parties' systems, will
have 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. Many of
the operations in the hospitality and attractions segment operate on a limited
basis during the first quarter of the year and conduct most of their business
during the summer tourism season. The first calendar quarter is also the weakest
quarter for most television and radio broadcasters, including the Company, as
advertising revenues are lower in the post-Christmas period. Revenues in the
music business are typically weakest in the first calendar quarter following the
Christmas buying season.
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RECENT DEVELOPMENTS
Charter Transaction
In July 1998, investor Paul G. Allen announced the acquisition of Charter
Communications for approximately $4.5 billion (the "Charter Transaction"). The
Company expects to receive approximately $370 million as a result of the Charter
Transaction. The estimated proceeds of $370 million include approximately $240
million as prepayment in full of the Company's promissory note from an affiliate
of Charter Communications and approximately $130 million representing the value
of contractual equity participation rights. The note and equity participation
rights were received by the Company in connection with the sale of its cable
television systems to Charter Communications in 1995. The transaction will
result in a pretax gain of approximately $145 million and is expected to close
in the fourth quarter of 1998.
Opryland Hotel - Texas
During the fourth quarter of 1998, the Company announced plans to develop a
1,500-room hotel and convention center in Grapevine, Texas, near Dallas. The
project is anticipated to cost $300 million, and the Company is seeking
financial partners. The hotel and convention center, which will be called
Opryland Hotel - Texas, is anticipated to open in the first quarter of 2003.
FORWARD-LOOKING STATEMENTS / RISK FACTORS
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
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 growth in the popularity of country music and country
lifestyles; growth in the popularity of Christian music and family values
lifestyles; the ability to control costs relating to the development of the Opry
Mills retail complex; the ability to integrate acquired operations into the
Company's businesses; the ability of the Opryland Lodging Group to develop
successfully hotel properties in other markets; the advertising market in the
United States in general and in the Company's Dallas television and 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; the impact of weather on construction
schedules; and consolidation in the broadcasting and cable distribution
industries.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable
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Part II - Other Information
Item 1. LEGAL PROCEEDINGS
Inapplicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Inapplicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
Item 5. OTHER INFORMATION
A proposal submitted by a stockholder in accordance with
applicable rules and regulations for presentation at the
Company's Annual Meeting of Stockholders in 1999 and received
at the Company's executive offices no later than December 2,
1998 will be considered for inclusion in the Company's Proxy
Statement and form of proxy relating to such annual meeting.
For other proposals of stockholders to be timely (but not
considered for inclusion in the Company's Proxy Statement), a
stockholder's notice should be delivered to or mailed and
received at the principal executive offices of the Company no
later than March 9, 1999 and should otherwise comply with the
advance notice provisions of the Company's by-laws.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits following the Signatures page.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GAYLORD ENTERTAINMENT COMPANY
Date: November 13, 1998 By: /s/ Joseph B. Crace
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Joseph B. Crace
Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
10 1997 Stock Option and Incentive Plan Amended and Restated as of August
15, 1998
27 Financial Data Schedule (for SEC use only)