1
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 June 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 July 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 JUNE 30, 1998
INDEX
PAGE NO.
--------
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income -
For the Three Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Income -
For the Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 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 18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
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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 JUNE 30, 1998 AND 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
---- ----
Revenues $126,963 $249,736
Operating expenses:
Operating costs 73,431 143,735
Selling, general and administrative 29,922 45,952
Depreciation and amortization 10,600 15,707
-------- --------
Operating income 13,010 44,342
Interest expense (7,661) (7,342)
Interest income 6,524 5,933
Other gains (losses) 34 143,067
-------- --------
Income before provision for income taxes 11,907 186,000
Provision for income taxes 4,585 64,068
-------- --------
Net income $ 7,322 $121,932
======== ========
Net income per share $ 0.22 $ 3.79
======== ========
Net income per share - assuming dilution $ 0.22 $ 3.75
======== ========
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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
---- ----
Revenues $ 234,984 $ 434,804
Operating expenses:
Operating costs 139,787 259,636
Selling, general and administrative 61,295 87,461
Depreciation and amortization 20,430 28,246
--------- ---------
Operating income 13,472 59,461
Interest expense (14,557) (14,924)
Interest income 12,944 11,714
Other gains (losses) 3,362 142,609
--------- ---------
Income before provision for income taxes 15,221 198,860
Provision for income taxes 5,860 68,312
--------- ---------
Income before cumulative effect of accounting change 9,361 130,548
Cumulative effect of accounting change, net of taxes -- (7,537)
--------- ---------
Net income $ 9,361 $ 123,011
========= =========
Income per share:
Income before cumulative effect of accounting change $ 0.29 $ 4.06
Cumulative effect of accounting change, net of taxes -- (0.23)
--------- ---------
Net income $ 0.29 $ 3.83
========= =========
Income per share - assuming dilution:
Income before cumulative effect of accounting change $ 0.28 $ 4.02
Cumulative effect of accounting change, net of taxes -- (0.23)
--------- ---------
Net income $ 0.28 $ 3.79
========= =========
Dividends per share $ 0.30 $ 0.60
========= =========
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
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, December 31,
1998 1997
----- ----
ASSETS
Current assets:
Cash $ 10,104 $ 8,712
Trade receivables, less allowance of $4,748 and $4,031, respectively 87,978 82,152
Inventories 21,954 23,206
Other assets 35,976 37,311
----------- -----------
Total current assets 156,012 151,381
----------- -----------
Property and equipment, net of accumulated depreciation 577,692 550,267
Intangible assets, net of accumulated amortization 98,092 84,419
Investments 77,298 73,991
Long-term notes and interest receivable 219,849 233,112
Other assets 27,687 24,392
----------- -----------
Total assets $ 1,156,630 $ 1,117,562
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,125 $ --
Accounts payable and accrued liabilities 101,084 127,694
----------- -----------
Total current liabilities 102,209 127,694
----------- -----------
Long-term debt 462,142 388,397
Deferred income taxes 32,964 32,579
Other liabilities 32,399 42,710
Minority interest 12,196 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,
32,807 and 32,741 shares issued and outstanding, respectively 328 327
Additional paid-in capital 500,394 498,504
Retained earnings 16,349 16,837
Other stockholders' equity (2,351) 556
----------- -----------
Total stockholders' equity 514,720 516,224
----------- -----------
Total liabilities and stockholders' equity $ 1,156,630 $ 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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
1998 1997
---- ----
Cash Flows from Operating Activities:
Net income $ 9,361 $ 123,011
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 (19,155) --
Write-off of Z Music note receivable 23,616 --
Gain on sale of television station -- (144,259)
Depreciation and amortization 20,430 28,246
Deferred income taxes 387 (1,927)
Noncash interest income (12,470) (11,135)
Changes in:
Trade receivables (5,351) (21,096)
Accounts payable and accrued liabilities (25,519) (168)
Income taxes payable (222) 70,325
Other assets and liabilities (10,176) (18,723)
--------- ---------
Net cash flows provided by (used in) operating activities (19,099) 31,811
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (21,279) (23,429)
Acquisition of businesses, net of cash acquired (22,462) (6,525)
Proceeds from sale of property and equipment 6,113 --
Proceeds from sale of investments 20,130 --
Purchase of Word Entertainment -- (119,901)
Proceeds from sale of television station, net of direct selling costs -- 156,301
Investments in, advances to and distributions from affiliates (9,691) (9,027)
Other investing activities (4,376) (1,656)
--------- ---------
Net cash flows used in investing activities (31,565) (4,237)
--------- ---------
Cash Flows from Financing Activities:
Repayment of long-term debt (984) (38,531)
Proceeds from issuance of long-term debt 500 420
Net borrowings under revolving credit agreements 62,095 28,666
Proceeds from exercise of stock options 294 529
Dividends paid (9,849) (19,283)
--------- ---------
Net cash flows provided by (used in) financing activities 52,056 (28,199)
--------- ---------
Net change in cash 1,392 (625)
Cash, beginning of period 8,712 13,720
--------- ---------
Cash, end of period $ 10,104 $ 13,095
========= =========
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 ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares outstanding 32,806 32,136 32,802 32,134
Effect of dilutive stock options 448 344 425 349
------ -------- ------- --------
Weighted average shares outstanding -
assuming dilution 33,254 32,480 33,227 32,483
======= ======== ======= ========
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 six month periods ended June 30, 1998 and
1997.
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4. OTHER GAINS (LOSSES):
During the three months ended June 30, 1998, the Company sold its investment in
the Texas Rangers Baseball Club, Ltd. for $15,109 in cash and recognized a gain
of the same amount.
The Company recorded a gain of $8,538 during the three months ended June 30,
1998 primarily related to the settlement of contingencies from the sale of
television stations KHTV in Houston and KSTW in Seattle.
The Company recognized a loss of $23,616 during the three months ended June 30,
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 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. SUBSEQUENT EVENT:
The Company expects to receive approximately $370,000 as a result of the
acquisition of Charter Communications by Marcus Cable Company, L.P., a company
controlled 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 participation rights. The note and 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.
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6. FINANCIAL REPORTING BY BUSINESS SEGMENTS:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Hospitality and attractions $ 75,599 $ 97,352 $ 137,040 $ 154,656
Broadcasting and music 50,455 51,760 93,895 96,462
Cable networks 909 100,624 4,049 183,686
--------- --------- --------- ---------
Total $ 126,963 $ 249,736 $ 234,984 $ 434,804
========= ========= ========= =========
Depreciation and amortization:
Hospitality and attractions $ 7,043 $ 9,212 $ 13,730 $ 15,795
Broadcasting and music 1,948 1,815 3,589 3,693
Cable networks 443 3,739 884 7,072
Corporate 1,166 941 2,227 1,686
--------- --------- --------- ---------
Total $ 10,600 $ 15,707 $ 20,430 $ 28,246
========= ========= ========= =========
Operating income:
Hospitality and attractions $ 14,421 $ 14,911 $ 18,185 $ 16,319
Broadcasting and music 7,233 8,644 12,696 10,583
Cable networks (2,613) 27,674 (5,671) 45,277
Corporate (6,031) (6,887) (11,738) (12,718)
--------- --------- --------- ---------
Total $ 13,010 $ 44,342 $ 13,472 $ 59,461
========= ========= ========= =========
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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 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, and Word Entertainment ("Word"), the Company's contemporary
Christian music company. The cable networks segment primarily consists 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 six month periods ended June 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
June 30,
--------------------------------------------------------------------
Actual Actual Pro Forma
1998 % 1997 % 1997 %
---- --- ---- --- ---- ---
Revenues:
Hospitality and attractions $ 75,599 59.5 $ 97,352 39.0 $ 97,352 64.2
Broadcasting and music 50,455 39.8 51,760 20.7 51,760 34.1
Cable networks 909 0.7 100,624 40.3 2,539 1.7
--------- ------- --------- ------- --------- -------
Total revenues 126,963 100.0 249,736 100.0 151,651 100.0
--------- ------- --------- ------- --------- -------
Operating expenses:
Operating costs 73,431 57.8 143,735 57.6 89,896 59.3
Selling, general & administrative 29,922 23.6 45,952 18.4 36,304 23.9
Depreciation and amortization:
Hospitality and attractions 7,043 9,212 9,212
Broadcasting and music 1,948 1,815 1,815
Cable networks 443 3,739 534
Corporate 1,166 941 941
--------- ------- --------- ------- --------- -------
Total depreciation and amortization 10,600 8.4 15,707 6.2 12,502 8.3
--------- ------- --------- ------- --------- -------
Total operating expenses 113,953 89.8 205,394 82.2 138,702 91.5
--------- ------- --------- ------- --------- -------
Operating income (loss):
Hospitality and attractions 14,421 19.1 14,911 15.3 14,911 15.3
Broadcasting and music 7,233 14.3 8,644 16.7 8,644 16.7
Cable networks (2,613) -- 27,674 27.5 (3,719) --
Corporate (6,031) -- (6,887) -- (6,887) --
--------- ------- --------- ------- --------- -------
Total operating income $ 13,010 10.2 $ 44,342 17.8 $ 12,949 8.5
========= ======= ========= ======= ========= =======
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Six Months Ended
June 30,
----------------------------------------------------------------
Actual Actual Pro Forma
1998 % 1997 % 1997 %
---- --- ---- --- ---- ---
Revenues:
Hospitality and attractions $ 137,040 58.3 $ 154,656 35.6 $ 154,656 60.2
Broadcasting and music 93,895 40.0 96,462 22.2 96,462 37.6
Cable networks 4,049 1.7 183,686 42.2 5,639 2.2
--------- ------ --------- ------- --------- -------
Total revenues 234,984 100.0 434,804 100.0 256,757 100.0
--------- ------ --------- ------- --------- -------
Operating expenses:
Operating costs 139,787 59.5 259,636 59.7 160,437 62.5
Selling, general & administrative 61,295 26.1 87,461 20.1 67,765 26.4
Depreciation and amortization:
Hospitality and attractions 13,730 15,795 15,795
Broadcasting and music 3,589 3,693 3,693
Cable networks 884 7,072 1,055
Corporate 2,227 1,686 1,686
--------- ------ --------- ------- -------- -------
Total depreciation and amortization 20,430 8.7 28,246 6.5 22,229 8.6
--------- ------ --------- ------- -------- -------
Total operating expenses 221,512 94.3 375,343 86.3 250,431 97.5
--------- ------ --------- ------- -------- -------
Operating income (loss):
Hospitality and attractions 18,185 13.3 16,319 10.6 16,319 10.6
Broadcasting and music 12,696 13.5 10,583 11.0 10,583 11.0
Cable networks (5,671) -- 45,277 24.6 (7,858) --
Corporate (11,738) -- (12,718) -- (12,718) --
--------- ------ --------- ------- -------- -------
Total operating income $ 13,472 5.7 $ 59,461 13.7 $ 6,326 2.5
========= ====== ========= ======= ======== =======
PERIODS ENDED JUNE 30, 1998 COMPARED TO PERIODS ENDED JUNE 30, 1997
Revenues
Total Revenues - Total revenues decreased $122.8 million, or 49.2%, to $127.0
million in the second quarter of 1998, and decreased $199.8 million, or 46.0%,
to $235.0 million for the first six 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 $24.7 million, or 16.3%,
during the second quarter of 1998, and would have decreased $21.8 million, or
8.5%, for the first six 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 $1.7 million, or 1.4%, in the second
quarter of 1998, and increased $12.5 million, or 5.6%, in the first six months
of 1998.
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Hospitality and Attractions - Revenues in the hospitality and attractions
segment decreased $21.8 million, or 22.3%, to $75.6 million in the second
quarter of 1998, and decreased $17.6 million, or 11.4%, to $137.0 million for
the first six 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 $0.7 million, or 1.0%, in the second quarter of
1998, and increased $4.4 million, or 3.3%, for the first six months of 1998. The
increase for the first six months of 1998 relates primarily to increased
revenues from the Company's investment in the Oklahoma City Redhawks baseball
team of $3.7 million and consulting and other services fee revenues related to
the Opry Mills partnership of $2.5 million. This increase is partially offset by
a decrease in Opryland Hotel revenues of $2.5 million, or 2.4%, to $105.5
million in the first six 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 six months of 1998 compared to
82.2% in the first six months of 1997. The hotel sold 383,900 rooms in the first
six months of 1998 compared to 408,900 rooms sold in the same period of 1997,
reflecting a 6.1% decrease from 1997. The hotel's average guest room rate
increased to $139.17 in the first six months of 1998 from $131.36 in the first
six months of 1997. The hotel's occupancy rate is anticipated to be 80-81% for
the year ended December 31, 1998, which is below the historical average rate but
considerably above the industry average rate. Because the operations of the
Opryland Hotel are significant to the Company's overall results, diluted
earnings per share for the year ended December 31, 1998 are anticipated to be
within the range of $0.85 to $0.90 per share, excluding the Charter Transaction
gain, if any. See "Recent Developments -- Charter Transaction"
Broadcasting and Music - Revenues in the broadcasting and music segment
decreased $1.3 million, or 2.5%, to $50.5 million in the second quarter of 1998,
and decreased $2.6 million, or 2.7%, to $93.9 million for the first six months
of 1998. The decreases are primarily the result of the June 1997 sale of
television station KSTW. Excluding the revenues of KSTW from 1997, revenues in
the broadcasting and music segment increased $4.1 million, or 8.8%, in the
second quarter of 1998, and increased $9.7 million, or 11.5%, for the first six
months of 1998. The increase for the first six months of 1998 results primarily
from increased revenues from Word of $6.6 million and increased revenues from
the Company's Dallas area television station KTVT of $3.5 million related
primarily to carriage of the 1998 Winter Olympics.
Cable Networks - Revenues in the cable networks segment decreased $99.7 million
to $0.9 million for the second quarter of 1998, and decreased $179.6 million to
$4.0 million in the first six 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 $1.6 million
for the second quarter and first six months of 1998. The decreases are the
result of CMT International ceasing its European operations effective March 31,
1998.
Operating Expenses
Total Operating Expenses - Total operating expenses decreased $91.4 million, or
44.5%, to $114.0 million in the second quarter of 1998, and decreased $153.8
million, or 41.0%, to $221.5 million for the first six months of 1998. On a pro
forma basis, assuming the CBS Merger had occurred on January 1, 1997, total
operating expenses would have decreased $24.7 million, or 17.8%, during the
second quarter of 1998, and would have decreased $28.9 million, or 11.5%, for
the first six months of 1998. Operating costs, as a percentage of revenues,
decreased to 59.5% during the first six months of 1998 as compared to 62.5%
during the first six 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, decreased to 26.1% in the first six
months of 1998 from 26.4% in the first six 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 $70.3 million, or 48.9%, to $73.4
million in the second quarter of 1998, and decreased $119.8 million, or 46.2%,
to $139.8 million for the first six months of 1998. On a pro forma basis,
assuming the CBS Merger had occurred on January 1, 1997, operating costs would
have decreased $16.5 million, or 18.3%, during the second quarter of 1998, and
would have decreased $20.7 million, or 12.9%, for the first six months of 1998.
The decreases are primarily the result of the December 1997 closing of the
Opryland theme park and the June 1997 sale of television station KSTW. Excluding
the operating costs of the Cable Networks Business, the Opryland theme park, and
KSTW from the 1997 results, operating costs decreased $1.1 million, or 1.4%, in
the second quarter of 1998, and increased $0.5 million, or 0.4%, for the first
six months of 1998. The increase for the first six months of 1998 is primarily
attributable to increased operating costs of Word of $3.8 million related to
increased sales volume levels and the operating costs of the newly-opened
Wildhorse Saloon in Orlando, Florida of $1.0 million. Additionally, operating
costs increased $1.0 million for the first six 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 six months of 1998 by decreased operating
expenses of $5.3 million related to the European operations of CMT
International, which ceased operations effective March 31, 1998, and decreased
operating costs at the Opryland Hotel of $1.3 million.
Selling, General and Administrative - Selling, general and administrative
expenses decreased $16.0 million, or 34.9%, to $29.9 million in the second
quarter of 1998, and decreased $26.2 million, or 29.9%, to $61.3 million in the
first six 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 $6.4 million, or 17.6%, during the second quarter of 1998, and
would have decreased $6.5 million, or 9.5%, for the first six 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 $1.6 million, or
5.6%, in the second quarter of 1998, and increased $4.3 million, or 7.5%, in the
first six months of 1998. The increase for the first six months of 1998 is
primarily attributable to higher selling, general and administrative expenses of
Word and Blanton Harrell Entertainment, an artist management company, of $2.8
million and the recognition of a valuation reserve of $2.7 million related to a
long-term note receivable from Z Music, Inc. prior to the write-off of the
note receivable 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
$1.3 million in the first six months of 1998.
Depreciation and Amortization - Depreciation and amortization decreased $5.1
million, or 32.5%, to $10.6 million in the second quarter of 1998, and decreased
$7.8 million, or 27.7%, to $20.4 million in the first six months of 1998. On a
pro forma basis, assuming the CBS Merger had occurred on January 1, 1997,
depreciation and amortization would have decreased $1.9 million, or 15.2%,
during the second quarter of 1998, and would have decreased $1.8 million, or
8.1%, for the first six 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 $0.7
million, or 7.0%, in the second quarter of 1998, and increased $1.2 million, or
6.4%, in the first six months of 1998.
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Operating Income
Total Operating Income - Total operating income decreased $31.3 million to $13.0
million in the second quarter of 1998, and decreased $46.0 million to $13.5
million in the first six 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 $0.1 million in the second
quarter of 1998, and would have increased $7.1 million during the first six
months of 1998. Excluding the operating loss of the Opryland theme park during
the first six months of 1997, hospitality and attractions segment operating
income increased $0.8 million for the first six months of 1998. Excluding the
operating income of KSTW during the first six months of 1997, broadcasting and
music segment operating income increased $2.5 million during the first six
months of 1998 primarily related to greater operating income generated by
television station KTVT. Excluding the operating income of the Cable Networks
Business from 1997, the operating loss of the cable networks segment decreased
$2.2 million in the first six months of 1998 primarily as a result of CMT
International ceasing its European operations effective March 31, 1998.
Interest Expense
Interest expense increased $0.3 million to $7.7 million in the second quarter of
1998, and decreased $0.4 million to $14.6 million for the first six months of
1998. The decrease for the first six months of 1998 is attributable to lower
average debt levels as compared to the same period of 1997, due primarily to the
financing of the Word acquisition in January 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 six months of 1998 compared to 6.5% in the first six months of 1997.
Interest Income
Interest income increased $0.6 million to $6.5 million in the second quarter of
1998, and increased $1.2 million to $12.9 million for the first six months of
1998. Interest income primarily results from noncash interest income earned on a
long-term note receivable. See "Recent Developments -- Charter Transaction"
Other Gains (Losses)
During the second quarter of 1998, the Company sold its investment in the Texas
Rangers Baseball Club, Ltd. for $15.1 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
from the sale 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 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.
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16
Income Taxes
The provision for income taxes was $4.6 million for the second quarter of 1998
and $5.9 million for the first six months of 1998 compared to $64.1 million for
the second quarter of 1997 and $68.3 million for the first six months of 1997.
The effective tax rate on income before provision for income taxes was 38.5% for
the first six months of 1998 compared to 34.4% for the first six 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 July 31,
1998, the Company had approximately $133 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 $21.3 million had been spent as of June 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.
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. The Company has assessed its computer systems to
determine which computer programs will not operate properly using the year 2000
dates. A plan to correct these programs has been developed and is scheduled to
be completed in the first and second quarters of 1999. The Company does not
expect the year 2000 concerns to have a material adverse effect on its results
of operations, financial position 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, Marcus Cable Company L.P., a company controlled by 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 $240 million as prepayment in full of the
Company's promissory note from an affiliate of Charter Communications and $130
million representing the value of contractual participation rights. The note and
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.
Pandora Acquisition
In July 1998, the Company purchased Pandora Investments, S.A., a Luxembourg
based company, which acquires, distributes and produces theatrical feature film
and television programming for the international market, for approximately $16
million in cash.
Opryland Hotel - Florida
During the third quarter of 1998, the Company announced plans to develop a
1,400-room hotel and convention center in Osceola County, Florida. The project
is anticipated to cost in excess of $300 million, and the Company has announced
its intention to seek financial partners. The hotel and convention center, which
will be called Opryland Hotel - Florida, is the first project of the Company's
new Opryland Lodging Group and is anticipated to open in the first quarter of
2002.
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 publicly release 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.
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18
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 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 successfully
develop 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 a convention and tourist destination; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable
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19
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
The Company held its Annual Meeting of Stockholders on May 8,
1998 (the "Annual Meeting"). At the Annual Meeting the
stockholders of the Company voted to elect two Class I
Directors, Edward L. Gaylord and Joe M. Rodgers, for
three-year terms and until their successors are duly elected
and qualified. The following table sets forth the number of
votes cast for and withheld/abstained with respect to each of
the nominees:
Withheld/
Nominee For Abstained
------- --- ---------
Edward L. Gaylord 29,069,143 1,172,944
Joe M. Rodgers 29,093,412 1,148,675
The stockholders of the Company also voted to ratify the
appointment of Arthur Andersen LLP as the independent public
accountants for the Company in 1998. A total of 30,221,229
votes were cast for such proposal, 7,003 votes were cast
against such proposal, and 13,855 votes abstained with
respect to such proposal.
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
June 30, 1998.
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20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GAYLORD ENTERTAINMENT COMPANY
Date: August 14, 1998 By: /s/ Joseph B. Crace
------------------------- ------------------------------------
Joseph B. Crace
Senior Vice President and
Chief Financial Officer
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21
INDEX TO EXHIBITS
27 Financial Data Schedule (for SEC use only)
21
5
1,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
10,104
0
92,726
4,748
21,954
156,012
577,692
0
1,156,630
102,209
463,267
0
0
328
514,392
1,156,630
234,984
234,984
0
221,512
0
0
14,557
15,221
5,860
9,361
0
0
0
9,361
0.29
0.28
