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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
__________________
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file numbers 33-89818, 33-96568, 333-08041 and 333-57107
CLUBCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2626719
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3030 LBJ FREEWAY, SUITE 700 DALLAS, TEXAS 75234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 243-6191
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at December 29, 1998 (the most recent date on
which an appraisal was performed), based on the most recent appraised price of
the Registrant's Common Stock, was $75,920,117.
The number of shares of the Registrant's Common Stock outstanding as of
February 28, 1999 was 84,629,809.
TABLE OF CONTENTS
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
ClubCorp, Inc. ("ClubCorp" (RM) or the "Company"), formerly ClubCorp
International, Inc., is a holding company incorporated under the laws of the
State of Delaware that, through its subsidiaries, owns, operates or manages
country clubs, golf clubs, public golf courses, city clubs, city/athletic clubs,
athletic clubs, resorts and certain related real estate through sole ownership,
partial ownership (including joint venture interests) and management agreements.
The Company's operations are organized into three principal business segments
according to the type of facility or service: resorts, country club and golf
facilities and city clubs. The Company's primary sources of revenue include
membership dues, membership fees and deposits, food and beverage sales, revenues
from golf operations and lodging.
ClubCorp is the world's largest owner and operator of golf courses,
golf-related private clubs and resorts and city clubs. As of December 29, 1998,
the Company's operations and ventures spanned 32 states and 13 countries. The
Company's portfolio of 225 facilities included (i) 127 private golf clubs,
public golf facilities and destination resorts, with a total of 176 golf courses
and (ii) 98 city, athletic and city/athletic clubs, and its membership base
exceeded 200,000 memberships. Notable resorts and clubs in the Company's
portfolio include Pinehurst (RM) Resort and Country Club in North Carolina
("Pinehurst"), The Homestead (RM) Resort in Virginia ("The Homestead"), Barton
Creek Resort and Country Club in Austin, Texas ("Barton Creek"), Firestone (RM)
Country Club in Akron, Ohio ("Firestone"), Mission Hills Country Club near Palm
Springs, California ("Mission Hills"), The Metropolitan Club in Chicago and the
Tower Club in Singapore. Golf Digest, Golf Travel and other golf industry
publications consistently rank golf courses at Pinehurst, Barton Creek and The
Homestead among the best in the United States.
The predecessor corporation to ClubCorp was organized in 1957 under the
name Country Clubs, Inc. All references herein to ClubCorp shall also include
Country Clubs, Inc. and its successor corporations. For purposes of this
document, references to the "Company" include ClubCorp's various subsidiaries.
However, each of ClubCorp and its subsidiaries is careful to maintain its
separate legal existence, and general references to the Company should not be
interpreted in any way to reduce the legal distinctions between subsidiaries or
between ClubCorp and its subsidiaries.
STOCK INVESTMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, pursuant to Section 15(d) thereof, because the
Company has filed a registration statement on Form S-1, which became effective
October 24, 1994 pursuant to the Securities Act of 1933 (the "Registration
Statement"). The Registration Statement registered participation interests in
the ClubCorp Stock Investment Plan (the "Plan") and the Company's common stock,
$.01 par value per share (the "Common Stock"), to be sold to the Plan. Employees
eligible to participate in the Plan were able to invest in participation
interests in the Common Stock through payroll deductions of 1% to 6% of their
pretax compensation, subject to certain limitations. The Company contributes an
amount on such employee's behalf of at least 20% and up to an additional 30%,
for a maximum potential total of 50%, of the eligible employee's contributions
to the Plan with the Company contributions vesting over time. Any contributions
by the Company over the 20% minimum are within the discretion of the Board of
Directors.
The Plan was amended and restated into an employee stock ownership plan
effective generally as of January 1, 1999, known as the ClubCorp Employee Stock
Ownership Plan (the "Amended Plan"). Eligible employees continue to have the
opportunity to invest 1% to 6% of their pretax compensation in the Amended Plan,
subject to the same certain limitations. The participating subsidiaries'
matching contributions and vesting schedule remained the same.
Funds that were in the Plan before January 1, 1999, remain in the Amended
Plan. Generally, contributions to the Amended Plan will be invested in Common
Stock. A participant may elect to diversify a portion of their account assets
into other investments upon meeting certain age and participation requirements.
The Amended Plan allows for the transfer of these assets to a Company sponsored
individual investment plan. In addition, upon termination, retirement or
permanent disability, a participant or beneficiary may demand distribution of
Common Stock in his account in lieu of cash. Pass-through voting rights for
Common Stock held on behalf of participants is only permitted for certain
events, not including annual Board of Director elections, but is required for
certain corporate transactions.
All contributions to the Plan were invested, and a substantial portion of
the contributions to the Amended Plan likely will be invested, in Common Stock
(except for contributions temporarily invested pending investment in Common
Stock). The Plan purchased, and the Amended Plan likely will purchase, Common
Stock from ClubCorp and certain of its stockholders at fair market value, which
is determined quarterly by the Company using a formula based on certain
financial measures (the "Formula Price") and confirmed as within the range of
fair market value by Houlihan, Lokey, Howard and Zukin Financial Advisors, Inc.,
an independent financial advisory firm (the "Financial Advisor"). See Item 5,
"Market for Registrant's Common Equity and Related Stockholder Matters". Because
the Amended Plan invests primarily in Common Stock, the value of each eligible
employee's participation interests in the Amended Plan depends on the value of
the Common Stock from time to time, which in turn is dependent on the financial
success of the Company. However, in general, no employee participating in the
Plan or Amended Plan, however, has any right to vote the Common Stock or to
receive a distribution of Common Stock from the Plan or Amended Plan.
OPERATIONS
Background and Philosophy
- ---------------------------
ClubCorp was founded in 1957 to develop Brookhaven Country Club in the
north Dallas area. In the mid-1960s, the Company established its first city club
on the belief that it could profitably expand its operations by applying its
club management skills and member-oriented philosophy to a related line of
business. The Company commenced international operations in 1980 and recently
extended its international presence by acquiring a 29.9% interest in the PGA
European Tour Courses, PLC ("ETC") and opening the Tower Club in Singapore. In
the mid-1980s, the Company entered the resort industry when it capitalized on a
turn-around opportunity by acquiring Pinehurst and further diversified its
participation in the golf industry when it began developing, owning and
operating public golf facilities in 1986.
Mr. Dedman established ClubCorp on the belief that private clubs
represented a significant business opportunity for a company that could combine
professional development and management skills with the dedication to personal
service necessary to attract and retain members. This commitment to
professionalism and personal service is reflected in the Company's
member-oriented philosophy: create lasting value for members, guests, employees
and financial partners by providing facilities and services that exceed
expectations and engender pride in belonging. ClubCorp's management and
employees recognize that the Company is in a relationship business where member
and guest satisfaction are essential to long-term growth and profitability. The
Company is committed to maintaining its leadership position in the golf-related
and city club segments by creating an environment where members, guests and
employees are treated with respect, trust and honesty. ClubCorp's policy is not
to restrict membership in its facilities on the basis of race, religion, gender
or other immutable characteristics.
In directing the Company's growth since its formation, Mr. Dedman has
emphasized quality service and facilities, endeavoring to exceed the
expectations of the Company's members and guests. Senior management believes
that the Company's success depends greatly upon the motivation, training and
experience of its employees. See "-Employees".
From the beginning of the Company, Mr. Dedman focused on assembling an
experienced management team to lead the Company. ClubCorp's nine executive
officers possess an average of 21 years of experience with the Company. The
Company has also attempted to attract and retain qualified, dedicated managers
for its resorts, country club and golf facilities and city clubs, and these
managers possess an average of nine years of experience with the Company. The
Company provides an extensive, proprietary system of in-house training and
education for all of its employees that is designed to improve the quality of
services provided to members and guests.
The Company believes that a factor in its attaining a leadership position
in the industry is the Company's member-oriented philosophy. Underlying this
philosophy are progressive human resource values and goals which the Company
believes have resulted in superior customer service. The Company's managers and
employees participate in extensive, internally developed and administered
training and educational programs. The Company is committed to creating an
environment where members, guests and employees are treated with respect, trust
and honesty. Management believes that the Company's member-oriented philosophy
and culture set it apart from many of its competitors that focus on short-term
returns which may jeopardize member satisfaction and long-term profitability.
Nature of Operations
- ----------------------
The Company operates resorts, country club and golf facilities and city
clubs through sole ownership, partial ownership and management agreements. In
addition, the Company performs various corporate services internally and for
third parties and develops and sells real estate. See "-International
Operations, Real Estate and Other Services". With respect to its wholly-owned
operations, in some cases the Company owns the real property where the resort,
country club and golf facility and city facility is operated, and in other cases
the Company leases the real property from third parties.
The Company operated 225 resort, country club and golf facilities and city
clubs at December 29, 1998, serving approximately 200,000 memberships.
Management believes that the Company's existing club, resort and other property
locations, and its base of club members, represent a significant value to the
Company. For example, certain of the Company's country clubs that were developed
many years ago are now located in highly populated areas where development of a
new facility would be prohibitively expensive.
The success of the Company's private club and golf club business is
dependent on the Company's ability to attract new members, retain existing
members and maintain or increase levels of club usage. The success of the
Company's resort, golf club and public golf operations is also dependent on
levels of usage by the Company's guests. Although the Company devotes a large
amount of resources to promote its facilities and services, many of the factors
affecting club membership and usage are beyond the control of the Company. Local
and federal government laws, including income tax regulations applicable to the
Company and its club members and guests, can adversely influence membership
activity. See "-Government Regulation". Changes in consumer tastes and
preferences, local, regional and national economic conditions, including levels
of disposable income, weather and demographic trends can also have an adverse
impact on club membership and usage. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Seasonality of Demand;
Fluctuations in Quarterly Results".
The Company's operations are organized into three principal business
segments according to the type of facility or service: resorts, country club and
golf facilities and city clubs. Lines of business not assigned to a principal
business segment include international operations and real estate.
Resorts
- -------
The Company's five destination resorts typically offer lodging and
conference facilities, dining and lounge areas, golf, tennis and recreational
facilities and other resort amenities. Golf Digest, Golf Travel and other golf
industry publications consistently rank golf courses at Pinehurst, Barton Creek
and The Homestead among the best in the United States. Pinehurst, the largest
golf resort in the world, with eight golf courses, will host the 1999 United
States Golf Association Open Championship (the "U.S. Open"). In 1998, the
Company's resort segment had operating revenues of $172.6 million and segment
operating income of $16.8 million. See Note 10 to the Consolidated Financial
statements of the Company included in Item 8.
Country Club and Golf Facilities
- ------------------------------------
The Company's portfolio includes 109 private country clubs, golf clubs or
public golf facilities. The Company's private country clubs generally provide at
least one golf course and a combination of one or more of the following: dining
rooms, lounge areas, meeting rooms, grills and ballrooms, tennis courts,
swimming pools and pro shops. The Company's private country clubs include
Firestone, home of the NEC World Series of Golf, one of the three tournaments in
the new World Golf Championship, Mission Hills, home of the Nabisco Dinah Shore
Classic, Indian Wells Country Club near Palm Springs, California, home of the
Bob Hope Chrysler Classic, Gleneagles Country Club near Dallas and Kingwood
Country Club near Houston. The Company's golf clubs generally offer both private
and public play, a driving range and food and beverage concessions. Golf clubs
include Timarron Country Club near Dallas and Golden Bear Club at Indigo Run in
South Carolina. ClubCorp's public golf facilities are daily fee facilities that
offer a "member for the day" experience and generally provide the same
facilities and services as golf clubs. The Company's public golf facilities
include Kingwood Cove Golf Club near Houston and Teal Bend Golf Club in
Sacramento. In 1998, the Company's country club and golf facilities segment had
operating revenues of $375.1 million and segment operating income of $57.3
million. See Note 10 to the Consolidated Financial Statements of the Company
included in Item 8.
City Clubs
- -----------
The Company's 93 city clubs consist of city clubs, athletic clubs and
city/athletic clubs. City clubs provide private and sophisticated settings in
metropolitan locations for dining, business or social entertainment. Athletic
clubs provide an array of facilities, which generally include racquetball and
squash courts, jogging tracks, exercise areas, weight machines, aerobic studios,
swimming pools and, occasionally, tennis and basketball courts. City/athletic
clubs combine the ambiance and amenities of a city club with the facilities of
premier athletic clubs. The Company's city clubs include The Metropolitan Club
in Chicago, The Columbia Tower Club in Seattle, The City Club of San Francisco,
The Athletic and Swim Club at Equitable Center in New York City and The
University Club in Houston. In 1998, the Company's city clubs segment had
operating revenues of $255.5 million and segment operating income of $24.2
million. See Note 10 to the Consolidated Financial Statements of the Company
included in Item 8.
International Operations, Real Estate and Other Services
- --------------------------------------------------------------
International Operations and Real Estate
- --------------------------------------------
ClubCorp International, Inc. operates seven golf facilities and five city
clubs outside the United States. The Company's international operations include
the Tower Club in Singapore, the Drift Golf Club in Surrey, England and the
Capital Club in Beijing. In addition, the Company acquired a 29.9% interest in
ETC in March 1998. ETC owns and manages six golf facilities, with courses in
England, Sweden, Spain and Portugal, many of which have hosted premier golf
tournaments, including the British Masters.
ClubCorp develops and sells residential real estate adjacent to its golf
facilities, and sells ownership shares at destination golf clubs through its
Owner's Club program.
In 1998, the Company's international operations and real estate business
had combined operating revenues of $29.7 million and an operating loss of ($6.7)
million.
Other Services
- ---------------
ClubCorp performs a number of services on a company-wide basis, including
certain centralized marketing and purchasing functions and publishing Private
Clubs (RM), an award winning bi-monthly magazine directed at club members and
resort guests which showcases ClubCorp's facilities.
Expansion and Development
- ---------------------------
The Company continually evaluates opportunities to increase the number of
resorts, golf facilities and city clubs that it owns and operates both
domestically and internationally, through acquisitions, joint ventures and
development. In particular, management believes that there is significant demand
in many international markets for upscale, non-exclusionary clubs that embody
the Company's member-oriented philosophy. ClubCorp's executive officers
routinely participate in the evaluation of strategic opportunities. An example
of the Company's implementation of its external growth strategy is its 1998
joint venture agreement with Jack Nicklaus' Golden Bear International, Inc. The
joint venture was formed to build and operate a variety of private and public
golf facilities, including "The Bear's Best", a series of courses that will
feature replicas of the best Nicklaus-designed golf holes.
On January 26, 1999, as part of the Company's external growth strategy,
ClubCorp entered into a definitive agreement to acquire approximately 3.3
million shares or 16% of the outstanding common stock of ClubLink Corporation of
Ontario, Canada, for approximately $22.2 million. This acquisition, combined
with the approximately 4.5% of ClubLink stock previously held, and expected
participation in a planned rights offering by ClubLink, is expected to bring
ClubCorp's total investment to approximately 25%. In addition, in a stock
purchase agreement, ClubCorp intends to acquire a 50% interest in ClubLink's
U.S. golf holdings, which include loans to or investments in, GolfSouth LLC and
the Links Group Inc. encompassing 33 golf courses located primarily in the
eastern United States.
In addition, ClubCorp joined with American Golf Corporation ("AGC"), a
national golf course management company, on February 11, 1999 to acquire the
Cobblestone Golf Group ("Cobblestone") from The Meditrust Companies, in a stock
purchase agreement, for a total purchase price of approximately $393.0 million.
The transaction is expected to close in the second quarter of 1999. Upon
closing of the transaction, ClubCorp and AGC will divide Cobblestone's portfolio
of 45 premier golf facilities. Through this transaction, ClubCorp will acquire
22 country club and golf facilities located in Texas, Florida, Georgia,
California and North Carolina.
The success of the Company's external growth strategy will depend upon the
availability of suitable properties on acceptable terms, the availability of
adequate financing, and other factors beyond the Company's control. The Company
has a committed staff to constantly evaluate development and acquisition
opportunities. The success of the Company's external growth strategy also will
depend on the Company's ability to effectively integrate acquired facilities and
development projects into existing operations, including achieving synergies
between new and existing operations and instilling its member-oriented
philosophy.
Management believes that many of its facilities have unused capacity and
that the Company has the experience and management skills necessary to increase
the utilization of these facilities while maintaining member satisfaction. Some
of the Company's facilities are at, or near, capacity. For some of these
facilities, management believes it can grow revenues by adding additional
amenities, such as additional golf courses.
Sales and Marketing
- ---------------------
The Company advertises and markets its resorts, country club and golf
facilities and city clubs through diverse media. Among other things, the Company
sponsors the Associate Clubs (RM) Program, which provides members of clubs
owned, leased or managed by the Company with access to other clubs. In addition,
the Company publishes Private Clubs magazine, which reaches the majority of the
members at the Company's clubs and resorts plus the Company's affiliate clubs
and resorts, and which advertises the Company's facilities. Regular features
include unusual destinations and travel tips, profiles of members who are
business leaders, investment advice, club profiles, wine reviews, recipes from
club chefs, golf and tennis tips, solutions to health and fitness concerns and
humor. Private Clubs magazine has won numerous awards including several 1997
Maggie Awards.
The Company hosts a number of professional golf tournaments, which are
intended to provide community and charitable involvement and publicity for the
Company's facilities. Some of the most notable tournaments the Company hosted
during 1998 were the National Equipment Corporation ("NEC") World Series of Golf
at Firestone Country Club, the Bob Hope Chrysler Classic at Indian Wells Country
Club, the Nabisco Dinah Shore Classic at Mission Hills Country Club and the J.C.
Penney's Ladies Professional Golf Association Skins Game at Stonebriar Country
Club. In addition, Pinehurst will host the 1999 U. S. Open and Pinehurst
Championship Management, the sports marketing division of ClubCorp, was selected
to manage the 2001 United States Women's Open Championship at the Pine Needles
Golf Resort in Southern Pines, North Carolina.
The Company believes it has established a strong rapport with numerous
professional organizations including the following:
- - United States Golf Association;
- - Professional Golf Association and Ladies Professional Golf Association
Tours;
- - American Junior Golf Association;
- - Golf Course Owners Association;
- - Club Managers Association of America;
- - National Club Association;
- - International Health, Racquet & Sports Club Association; and
- - National Restaurant Association.
These special relationships have enabled the Company to bring distinctive
tournaments and events, such as the U. S. Open and the PGA Tour Championship, as
well as numerous other prestigious events, to the Company's clubs and resorts
throughout the world. The Company hosts many United States Tennis Association
events, including the Rolex Indoor Collegiate Tennis Tournament and the American
Junior Golf Association Tennis Tournament at Daufuskie Island Club & Resort,
along with other athletic activities such as swimming, diving, lawn bowling and
croquet. In addition, the Company's clubs have been recognized for their
culinary artistry. Many have earned distinctive awards from the American
Culinary Federation.
Government Regulation
- ----------------------
The Company's operations are subject to numerous laws and government
regulations, including environmental, occupational health and safety, labor and
alcoholic beverage control laws and laws relating to access for disabled
persons. Changes to these laws or regulations could adversely affect the
Company. The Company has in place policies designed to bring or keep its
properties in compliance with all current federal, state and local environmental
laws.
Operations at the Company's golf courses involve the use and storage of
various hazardous materials such as herbicides, pesticides, fertilizers, motor
oil and gasoline. Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real property may become liable for the
costs of removing such hazardous substances that are released on, or in, its
property and for remediation of its property. Such laws often impose liability
regardless of whether a property owner or operator knew of, or was responsible
for, the release of hazardous materials. In addition, the presence of such
hazardous substances, or the failure to remediate the surrounding soil when such
substances are released, may adversely affect the ability of a property owner to
sell such real estate or to pledge such property as collateral for a loan. The
Company has not been informed by the Environmental Protection Agency or any
state or local governmental authority of any non-compliance or violation of any
environmental laws, ordinances or regulations likely to be material to the
Company, and the Company believes that it is in substantial compliance with all
such laws, ordinances and regulations applicable to its properties and
operations. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Factors That May Affect Future Operating
Results".
The Company is also subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's personnel receive the federal minimum wage, and recently adopted
increases in the minimum wage have increased the Company's labor costs. In
addition, the Company is subject to certain state "dram-shop" laws, which
provide a person injured by an intoxicated individual the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated individual. The Company is also subject to the Americans with
Disabilities Act of 1990, which, among other things, may require certain minor
renovations to various of the Company's properties to meet federally mandated
access and use requirements. The Company believes it is operating in
substantial compliance with applicable laws and regulations governing its
operations.
The Company has operations in a number of states which regulate the
licensing of resorts and restaurants, including liquor license grants, by
requiring registration, disclosure statements and compliance with specific
standards of conduct. While the Company believes that it is, and will continue
to be, in substantial compliance with these requirements, there can be no
assurance that these requirements will not change or that any such change will
not adversely affect the Company.
Competition
- -----------
The Company operates in a highly competitive industry. The Company's
resorts and clubs compete primarily on the basis of price, management expertise,
featured facilities, quality and breadth of services. With respect to resorts,
the Company competes on a national and international level with numerous hotel
and resort companies. Competition in this part of the industry is intense and
there can be no assurance that such competition will not adversely affect
revenues, costs or operating income of the Company's resorts. The Company's city
clubs compete on a local and regional level with fine dining establishments and
other clubs and the Company's country club and golf facilities compete on a
local and regional level with other country club and golf facilities. The level
of competition in these lines of business varies from region to region and is
subject to change as existing facilities are renovated or new facilities are
developed. An increase in the number or quality of similar clubs and other
facilities in a particular region could significantly increase competition,
which could have a material adverse effect on the Company's results from that
region. The Company's results of operations also could be affected by a number
of additional competitive factors, including the availability of, and demand
for, alternative forms of recreation. In addition, many of the Company's
destination resort and public golf facility competitors have substantially
greater financial and other resources than the Company.
The Company also competes for the purchase, lease and management of golf
courses with national and regional golf course management companies, including
AGC, real estate investment trusts and, less frequently, with individuals and
small ventures that typically own one or more golf courses. In the acquisition
of golf courses, companies compete primarily on the basis of price and their
reputation for operating golf courses.
In the operation of its facilities, the Company competes on the basis of
its reputation to deliver value through the quality of the facility and quality
of services provided to its members and guests. The Company believes it competes
favorably with respect to these factors. The Company has a program, known as
"Associate Clubs", that allows members of a club in one market to utilize
Company clubs in different markets, thus enhancing the value of club membership.
Because of the large number of facilities maintained by the Company, a member is
provided access to a wide number of facilities. The Company believes this
program affords it a competitive advantage over competitors that do not maintain
similar programs and over other competitors that have similar programs, but
fewer facilities.
EMPLOYEES
As of December 29, 1998, the Company employed approximately 14,000
full-time, 6,000 part-time and 1,000 seasonal employees in its operations.
The success of the Company's business is dependent in part on the Company's
ability to attract and retain experienced management and other employees on
economical terms. Management believes that the Company's employees represent an
important asset; however, the Company is not dependent upon any single employee,
or a few employees, whose loss would have a material adverse effect on the
Company. Although the Company believes that its labor relations are good,
increased labor and benefit costs or a deterioration in the Company's labor
relations could adversely affect the Company's operating results. As of December
29, 1998, approximately 740 of the employees engaged in the Company's operations
were covered by three collective bargaining agreements, which will expire March
31, 1999, December 31, 1999 and June 1, 2002.
CUSTOMERS
The Company is not dependent upon a single customer, or a few customers,
whose loss would have a material adverse effect on the Company. In addition, as
of December 29, 1998, there is no customer to which the Company has sales equal
to 10.0% or more of the Company's consolidated revenues and whose loss would
have a material adverse effect on the Company as a whole.
INTELLECTUAL PROPERTY
The Company has registered various service marks, including the names
CLUBCORP, CCA, CLUB RESORTS, ASSOCIATE CLUBS and PINEHURST with the United
States Patent and Trademark Office, and has applied with the United States
Patent and Trademark Office for the registration of various other service marks.
In addition, the Company has registered certain of its service marks in a number
of foreign countries. The Company regards its service marks as valuable assets
and intends to protect such service marks vigorously against infringement.
ITEM 2. PROPERTIES
The Company operated 225 resort, country club and golf facilities, and city
clubs as of December 29, 1998. The following table provides a profile of the
composition of the Company's portfolio of facilities from December 27, 1995 to
December 29, 1998.
ADDITIONS, DIVESTITURES AND RECLASSIFICATIONS OF FACILITIES (1)
CITY/
COUNTRY GOLF PUBLIC CITY ATHLETIC ATHLETIC
RESORTS CLUBS CLUBS GOLF CLUBS CLUBS CLUBS INTERNATIONAL TOTAL
-------- -------- ------ ------- ------ --------- --------- -------------- ------
AT DECEMBER 27, 1995 9 75 10 30 76 20 7 9 236
Facilities added during 1996 1 4 2 1 1 - - 4 13
Facilities divested during 1996 - (6) - (3) (5) (1) (2) (5) (22)
Reclassifications during 1996 - (1) 1 - (1) 1 - -
-------- -------- ------ ------- ------ --------- --------- -------------- ------
AT DECEMBER 25, 1996 10 72 13 28 71 20 5 8 227
Facilities added during 1997 - 1 - - 1 - - 3 5
Facilities divested during 1997 (3) (3) (1) (2) (2) - (1) - (12)
Reclassifications during 1997 - - - - - - - - -
-------- -------- ------ ------- ------ --------- --------- -------------- ------
AT DECEMBER 31, 1997 7 70 12 26 70 20 4 11 220
Facilities added during 1998 1 2 - 1 3 - - 8 15
Facilities divested during 1998 (1) (2) - (2) (3) - (1) (1) (10)
Reclassifications during 1998 (2) 5 (4) 1 (1) 1 - - -
-------- -------- ------ ------- ------ --------- --------- -------------- ------
AT DECEMBER 29, 1998 5 75 8 26 69 21 3 18 225
======== ======== ====== ======= ====== ========= ========= ============== ======
____________________________
(1) Facilities added includes acquisitions of owned, leased, partially owned
or managed facilities, joint ventures and other investments, such as ETC.
Facilities divested includes sales of owned or partially owned facilities and
other investments and terminated leases and management agreements that are not
renewed or replaced.
Facilities divested include expired or terminated lease arrangements or
management agreements which generally have shorter terms than leases, joint
venture agreements or other forms of ownership. The Company generally includes a
termination clause in its management agreements which imposes a financial
penalty, paid to the Company by the managed owner, to discourage early
termination of management agreements.
The Company owns, leases or manages the facilities in its portfolio. The
following table summarizes the number and reclassifications in the type of the
Company's facilities operated for the periods indicated:
WHOLLY OWNED
------------------------
PARTIALLY FACILITIES
OWNED LEASED OWNED MANAGED UNDER
FACILITIES FACILITIES FACILITIES FACILITIES CONSTRUCTION TOTAL
----------- ----------- ----------- ----------- ------------- ------
AT DECEMBER 27, 1995 79 108 6 43 - 236
Facilities added during 1996 4 - - 1 8 13
Facilities divested during 1996 (1) (7) - (14) - (22)
Reclassifications during 1996 2 (1) 1 (2) - -
----------- ----------- ----------- ----------- ------------- ------
AT DECEMBER 25, 1996 84 100 7 28 8 227
Facilities added during 1997 1 - 1 1 2 5
Facilities divested during 1997 (4) (4) (1) (3) - (12)
Reclassifications during 1997 1 1 4 - (6) -
----------- ----------- ----------- ----------- ------------- ------
AT DECEMBER 31, 1997 82 97 11 26 4 220
Facilities added through 1998 1 2 6 1 5 15
Facilities divested through 1998 (1) (4) - (4) (1) (10)
Reclassifications through 1998 3 1 (1) - (3) -
----------- ----------- ----------- ----------- ------------- ------
AT DECEMBER 29, 1998 85 96 16 23 5 225
=========== =========== =========== =========== ============= ======
The Company leases its executive offices in Dallas, Texas, an office in
Singapore in connection with its operations in Southeast Asia and an office in
England in connection with its operations in England.
With respect to leased facilities, the Company generally pays a monthly
base rent, as well as charges for real estate taxes, common area maintenance and
various other items. In some cases, the Company must also pay a percentage of
gross receipts or positive net cash flow. In most instances, the Company has
full authority over the operation of the leased facilities, operating on a fully
net basis, except in some cases where the owner remains responsible for major
structural repairs or for property insurance or real estate taxes.
Certain real and personal property and equipment of ClubCorp's subsidiaries
are pledged as collateral on their long-term debt. See Note 8 of the Notes to
Consolidated Financial Statements included under Item 8.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain pending or threatened litigation and
other claims. Management, after review and consultation with legal counsel,
believes the Company has meritorious defenses to these legal matters and that
any potential liability from these matters would not materially affect the
Company's financial condition and results of operations. See Note 13 of the
Notes to Consolidated Financial Statements included under Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public market for the Common Stock. In connection
with certain employee benefit plans (including the Plan and the Amended Plan),
the Board of Directors of ClubCorp has periodically established a formula price
for the Common Stock (the "Formula Price"). The Formula Price is based upon a
multiple of the Company's recurring cash flows from operations, with certain
exceptions for specific assets, including certain long-term investments valued
at the lower of cost or market. See Item 1, "Business - Stock Investment Plan
and Employee Stock Ownership Plan".
The table below sets forth the quarterly Formula Price for the Common Stock
during the years ended December 31, 1997 and December 29, 1998.
FORMULA
1997 PRICE
- ---- --------
First Quarter $ 11.94
Second Quarter 13.27
Third Quarter 13.64
Fourth Quarter 14.21
1998
- ----
First Quarter $ 14.44
Second Quarter 15.04
Third Quarter 15.56
Fourth Quarter 16.60
The Financial Advisor has been engaged by the trustees of the Plan and the
Amended Plan to confirm the fairness of the Formula Price for purposes of the
Plan and the Amended Plan. The Financial Advisor performs an independent
appraisal of the Company four times each year, following delivery of the
Company's financial statements after the end of each quarter. Based upon such
appraisals, the Financial Advisor confirms whether or not the Formula Price
falls within the range of fair market value of the Common Stock on the date of
each appraisal and at each fiscal year end. If there is any discrepancy between
the Formula Price and the range of fair market value of the Common Stock as
determined by the Financial Advisor, the Company expects that it would adjust
the Formula Price so that it falls within the range of fair market value as
determined by the Financial Advisor. All purchases of Common Stock by the Plan
were made, and it is expected that all purchases of Common Stock by the Amended
Plan will be made, on or shortly after an appraisal date at the Formula Price as
confirmed by the Financial Advisor. See Item 1, "Business - Stock Investment
Plan and Employee Stock Ownership Plan".
As of February 28, 1999, there were approximately 330 holders of record of the
Common Stock.
ClubCorp has never paid cash dividends on the Common Stock. Management expects
to continue its policy of retaining earnings for use in the Company's business,
and, accordingly, does not expect to pay cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are the selected consolidated income statement and
balance sheet data for each of the years in the five-year period ended
December 29, 1998. The table presented below should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", as well as Item 8, "Financial Statements and Supplementary Data"
(dollars in thousands, except per share data).
December 31, December 31, December 31, December 31, December 29,
1994 (1) 1995 (1) (2) 1996 (1) (2) 1997 (1) (3) 1998 (1) (3)
-------------- -------------- -------------- -------------- --------------
INCOME STATEMENT DATA:
Continuing operations (4):
Operating revenues $ 698,984 $ 752,479 $ 771,177 $ 827,597 $ 851,336
Operating income $ 43,143 $ 10,310 $ 47,141 $ 65,444 $ 66,821
Income (loss) from continuing operations
before extraordinary item $ 23,933 ($17,623) $ 16,867 $ 87,864 $ 39,512
Income (loss) from continuing
operations before extraordinary
item per share (diluted) $ 0.28 ($0.20) $ 0.20 $ 1.02 $ 0.45
BALANCE SHEET DATA:
Continuing operations (4):
Total assets $ 2,043,406 $ 1,830,449 $ 1,554,597 $ 1,028,674 $ 1,110,158
Long-term debt (including current portion) $ 285,128 $ 313,461 $ 343,917 $ 255,857 $ 274,550
Membership deposits $ 56,971 $ 68,729 $ 74,202 $ 83,066 $ 95,460
Stockholders' equity $ 313,482 $ 284,095 $ 290,552 $ 388,615 $ 409,036
______________
(1) The Company reports its financial results on a 52/53 week basis, with
the first three quarters consisting of 12 weeks each and the fourth quarter
consisting of either 16 weeks (1994, 1995, 1996, and 1998) or 17 weeks (1997).
Prior to 1997, the Company reported its year-end results at and as of December
31, with acquisitions, divestitures and other material transactions that
occurred between the last day of the 52/53 week period and December 31 being
recorded in that year. Effective January 1, 1997, the Company changed its
reporting year from December 31 to the last day of the 52/53 week period.
(2) The Company adopted Statement of Financial Accounting Standards No. 121
for the year ended December 31, 1995. In accordance with SFAS 121, the Company
recorded impairment losses of $23.0 million in 1995 and $2.8 million in 1996 on
long-lived assets.
(3) The Company has substantial net operating loss carryforwards ("NOLs")
for federal income tax purposes. The Company has experienced a trend of
increasing taxable income from its continuing operations, which has increased
the Company's estimate of future taxable income. Based on these new estimates,
the Company decreased its valuation allowance on its deferred tax assets by
approximately $14.2 million and $66.6 million at December 29, 1998 and December
31, 1997. The Company's estimated valuation allowance is based on a number of
assumptions, one or more of which may prove to be incorrect. There can be no
assurance that the actual value the Company realizes from its NOLs will not
differ materially from the Company's estimate. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 15 to
the Consolidated Financial Statements of the Company.
(4) Continuing operations includes the Company's three principal business
segments (resorts, country club and golf facilities and city clubs). From 1988
through 1996, the Company operated in the financial services industry through
Franklin Federal Bancorp, a Federal Savings Bank ("Franklin"). The Company sold
Franklin for $90.0 million in a transaction that was consummated on January 2,
1997. The Company's gain on the sale, net of taxes and minority interest, was
$25.1 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Acquisition and Sale of Franklin Federal Bancorp".
Because the Company has disposed of its financial services operations, this
segment is classified as discontinued operations. See Note 2 to the Consolidated
Financial Statements of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Item 6, "Selected Financial Data" as well as Item 8, "Financial Statements and
Supplementary Data".
General
The Consolidated Financial Statements of the Company are presented on a
52/53 week fiscal year, with the first three quarters consisting of 12 weeks
each and the fourth quarter consisting of 16 or 17 weeks. The financial
statements included in Item 8 for the year ended December 29, 1998 are comprised
of 52 weeks, with the first three quarters consisting of 12 weeks each and the
fourth quarter consisting of 16 weeks.
The Company operates its business activities through sole ownership
(including lease arrangements), partial ownership (including joint venture
arrangements) and management agreements. The Company seeks to achieve growth in
revenues, earnings, and cash flows through effective management of existing
facilities and through the acquisition of new facilities via purchases, joint
ventures, leases and management agreements.
The Company continually evaluates opportunities to increase the number of
resorts, country club and golf facilities and city clubs that it owns and
operates both domestically and internationally, through acquisitions, joint
ventures and development. ClubCorp's executive officers routinely participate in
the evaluation of strategic opportunities.
The Company continually seeks to improve financial performance of existing
facilities by determining an optimum business plan. Management attempts to
create operating efficiencies and maximize operating revenues and cash inflows
through member enhancement and utilization programs. If efforts to improve the
facility performance to financial partners' and Company standards are not
successful or financial partners' and Company goals are not being achieved, then
restructuring its ownership position, leasing agreements, and borrowing
arrangements are considered. Facilities generally are divested when management
determines they will be unable to provide a positive contribution to
profitability, when they no longer represent a strategic facility in the
Company's network of affiliated clubs and resorts, when members and financial
partners no longer support the facility or, in the case of leases, joint
ventures and management agreements, when their contractual terms expire without
being renewed or are terminated.
The Company employs "same store" analysis techniques for a variety of
management purposes. Each of the Company's facilities is classified in one of
two categories: developing or mature. Facilities are initially classified as
developing, except for management agreements which are considered mature. At the
beginning of each year, the Company reviews its developing facilities and
determines which facilities, if any, should be reclassified as mature.
Facilities are generally moved from developing to mature after they have been
operated for a full year by ClubCorp. Facilities divested during a period are
removed from the mature classification for all periods presented. The Company
does not reclassify mature facilities as developing facilities.
The distinction between developing and mature facilities allows ClubCorp to
separately analyze the operating results of its established and new facilities.
Management believes this ability provides an important analysis tool because it
allows the Company to assess the results of its organic growth strategies by
tracking the performance of its mature facilities without the distortions that
would be caused by the inclusion of developing properties, including any
distortion caused by initial operating losses at turn-around facilities.
Other Operating Information
The Company operated thirteen facilities in ten foreign countries,
including Canada, at December 29, 1998. One facility is located in the
Philippines, two are in Mexico, two are in South Africa, one is in Panama, one
is in England, one is in Ecuador, two are in Singapore, one is in China, one is
in Germany and one is in Canada. In addition, the Company acquired a 29.9%
interest in ETC in March 1998. ETC owns and manages six golf facilities, with
courses in England, Sweden, Spain and Portugal. The Company does not include
its Canadian facility in international operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 29, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated Operations
Operating revenues increased 2.9% to $851.3 million in 1998 from $827.6
million in 1997 primarily due to increased usage at mature resorts and country
club and golf facilities, acquisitions and increases at developing facilities.
Operating revenues at mature facilities increased 2.6% to $765.1 million in 1998
from $745.4 million in 1997.
Operating costs and expenses, representing direct operating costs, facility
rentals, maintenance, and depreciation and amortization, increased 2.7% to
$713.1 million in 1998 from $694.2 million in 1997, reflecting an increase in
operating costs and expenses at mature and developing facilities. Operating
costs and expenses at mature facilities increased to $659.4 million in 1998 from
$653.4 million in 1997 or 0.9% due primarily to increased costs of sales for
food and beverage and golf operations offset by a decrease in cash flow based
rent at city clubs and the Company's success in controlling expenses.
Interest expense decreased to $28.9 million in 1998 from $34.0 million in
1997, or 15.0%, primarily due to the refinancing of approximately $174.9 million
in existing debt and to a lesser extent, 1997 and 1998 divestitures, which
resulted in a decrease in the Company's weighted average interest rate from 8.5%
to 6.6%.
Other income of $1.0 million in 1998 was due to the partial reversal of an
accrual for pending litigation in the ordinary course of business.
Income tax (provision) benefit increased to $(5.2) million in 1998 from
$41.3 million in 1997 mainly due to decrease of $14.2 million and $66.6 million
in 1998 and 1997, respectively, in the Company's valuation allowance on its
deferred tax assets, primarily related to net operating loss carryforwards. See
"- Factors That May Affect Future Operating Results" and Note 15 to the
Company's Consolidated Financial Statements.
Income from continuing operations before extraordinary item decreased to
$39.5 million in 1998 from $87.9 million in 1997 due primarily to decreases of
$14.2 million and $66.6 million in the Company's valuation allowance on its
deferred tax assets. If the Company had not made these adjustments to the
valuation allowance of its deferred tax assets, income from continuing
operations before extraordinary item would have been $25.3 million in 1998 and
$21.3 million in 1997.
SEGMENT AND OTHER INFORMATION
Resorts
The following tables present certain summary financial data and lodging
data for the Company's resorts segment for 1997 and 1998 (dollars in thousands,
except facility and lodging data):
Mature Resorts Total Resorts
-------------------- ------------------
1997 1998 1997 1998
--------- --------- -------- --------
Number of facilities 4 4 7 5
Operating revenues $156,217 $163,607 $168,099 $172,624
Operating costs and expenses 136,757 140,575 156,615 155,835
-------- -------- -------- --------
Segment operating income $ 19,460 $ 23,032 $ 11,484 $ 16,789
========= ========= ======== ========
Lodging data (3 resorts) (1)
Room nights available 407,011 396,217
Occupancy rate 52.3% 54.3%
Average daily room rate per occupied room $ 173 $ 184
Average daily revenue per occupied room $ 643 $ 712
____________________
(1) Lodging data is comprised of data from Pinehurst, The Homestead and
Barton Creek.
Resorts' operating revenues increased 2.7% primarily due to increases at
mature properties offset by the effect of divestitures. Mature resorts'
operating revenues increased 4.7%, reflecting increases of 2.0 percentage points
in the occupancy rate, 10.7% in the average daily revenue per occupied room, and
6.4% in the average daily room rate per occupied room. Pinehurst, which will
host the 1999 U. S. Open, experienced significant increases in operating
revenues in anticipation of this event. Total resorts' operating costs and
expenses decreased slightly due to the effect of divestitures.
The difference in resorts' operating revenues, operating costs and
expenses, and segment operating income between mature resorts and total resorts
is primarily attributable to the Company's operations at Daufuskie Island Club &
Resort ("Daufuskie"). ClubCorp purchased Daufuskie at the end of 1996 for
nominal consideration as a turn-around opportunity. Daufuskie had operating
losses of approximately $6.3 and $6.8 million for 1998 and 1997, respectively.
Country Club and Golf Facilities
The following tables present certain summary financial and membership
information for the Company's country club and golf facilities segment for 1997
and 1998 (dollars in thousands, except facility and membership data):
Mature Country Total Country
Club and Club and
Golf Facilities Golf Facilities
--------------------- ---------------------
1997 1998 1997 1998
-------- ----------- -------- -----------
Number of facilities 98 98 108 109
Operating revenues $342,124 $ 354,415 $355,381 $ 375,100
Operating costs and expenses 289,420 297,127 302,212 317,785
-------- ----------- -------- -----------
Segment operating income $ 52,704 $ 57,288 $ 53,169 $ 57,315
======== =========== ======== ===========
Membership information (66 clubs) (1):
Memberships at beginning of period 67,657 69,526
Memberships added during period 12,532 12,916
Memberships lost during period 10,663 11,113
-------- -----------
Memberships at end of period 69,526 71,329
======== ===========
____________________
(1) Number of facilities includes all types of country club and golf
facilities (country clubs, golf clubs and public facilities) and all types of
Company ownership. Membership information is comprised of the mature clubs where
the Company received membership initiation deposits or fees and membership dues.
Total country club and golf facilities' operating revenues increased 5.5%
in 1998 compared to 1997 primarily due to increased usage at mature facilities,
acquisitions, and increases at developing facilities. Mature country club and
golf facilities' operating revenues increased 3.6% due to the reopening of
several courses at existing facilities which were closed for renovation during
the prior year and the acquisition of golf pro shops previously owned by golf
professionals.
Total country club and golf facilities' operating costs and expenses
increased 5.2% due to increased costs and expenses at mature facilities,
acquisitions, and increases at developing facilities. Total mature country and
golf facilities' operating costs and expenses increased 2.7% primarily due to
increased costs of sales for food and beverage and golf operations and payroll
increases.
City Clubs
The following tables present certain summary financial and membership
information for the Company's city clubs segment for 1997 and 1998 (dollars in
thousands, except facility and membership data):
Mature City Clubs Total City Clubs
------------------------ ------------------------
1997 1998 1997 1998
-------- -------- -------- --------
Number of facilities 89 89 94 93
Operating revenues $247,052 $247,092 $249,470 $255,524
Operating costs and expenses 227,221 221,733 229,920 231,351
-------- -------- -------- --------
Segment operating income $ 19,831 $ 25,359 $ 19,550 $ 24,173
======== ======== ======== ========
Membership information (78 clubs) (1):
Memberships at beginning of period 108,753 110,729
Memberships added during period 23,660 25,186
Memberships lost during period 21,684 22,219
-------- --------
Memberships at end of period 110,729 113,696
======== ========
____________________
(1) Number of facilities includes all types of city clubs (city clubs,
athletic clubs and city/athletic clubs) and all types of Company ownership.
Membership information is comprised of the mature clubs where the Company
received membership initiation deposits or fees and membership dues.
Total city clubs' operating revenues increased 2.4% from 1997 to 1998 due
primarily to acquisitions and increases at facilities in development as mature
city clubs' operating revenues remained constant. Mature city clubs' operating
costs and expenses decreased 2.4% from 1997 to 1998 due to a reduction in cash
flow based rent.
International Operations and Real Estate
Operating revenues for international operations increased to $7.4 million
in 1998 from $4.9 million in 1997 primarily due to acquisitions and increased
equity earnings from an investment in Singapore. Operating costs and expenses
for international operations increased to $13.0 million in 1998 from $8.2
million in 1997 primarily due to increased start up and pre-opening expenses at
developing facilities.
Real estate operating revenues decreased to $22.3 million in 1998 from
$33.7 million in 1997, or 33.8%, primarily due to decreased sales of real estate
in Colorado, Texas, and California, the timing of certain sales at Owner's Clubs
and a divestiture.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 25, 1996
Consolidated Operations
Operating revenues increased 7.3% to $827.6 million in 1997 from $771.2
million during 1996 due primarily to increases at mature resorts, improvement in
net enrollment at mature country club and golf facilities and city clubs, and an
additional week of operations. The subsidiaries of the Company operate primarily
on a 52/53 week fiscal year. 1997 included 53 weeks. Operating revenues of
mature facilities increased to $728.3 million from $676.9 million, an increase
of 7.6%, due to improving membership trends, an additional week of operations
and inflationary price increases.
Operating costs and expenses, representing direct operating costs, facility
rentals, maintenance, and depreciation and amortization, increased to $694.2
million in 1997 from $662.7 million in 1996 or 4.8%. Operating costs and
expenses at mature facilities increased 4.9% to $636.9 million in 1997 from
$607.2 million in 1996, mainly due to increases in costs of sales for food and
beverage and golf operations, payroll cost increases, and bonus accruals for
facility level management.
Selling, general and administrative expenses increased to $68.0 million
from $61.3 million or 10.9% due primarily to increased costs for international
new business and development.
Other income of $1.1 million in 1997 is due to the partial reversal of an
accrual for pending litigation in the ordinary course of business.
Income tax benefit (provision) increased to $41.3 million in 1997 from
$(2.6) million in 1996 due to a decrease in the valuation allowance of $66.6
million on its deferred tax assets in 1997, primarily related to net operating
loss carryforwards. See "- Factors That May Affect Future Operating Results".
Income from continuing operations before extraordinary item increased to
$87.9 million in 1997 from $16.9 million in 1996 due to the Company's success in
controlling costs and growing revenues and a $66.6 million decrease in the
valuation allowance on the Company's deferred tax assets. If the Company had
not made this adjustment to the valuation allowance on its deferred tax assets,
income from continuing operations before extraordinary item would have been
$21.3 million in 1997. See "- Factors That May Affect Future Operating
Results".
SEGMENT AND OTHER INFORMATION
Resorts
The following tables present certain summary financial data and lodging
data for the Company's resorts segment for 1996 and 1997 (dollars in thousands,
except facility and lodging data):
Mature Resorts Total Resorts
-------------------- ------------------
1996 1997 1996 1997
--------- --------- -------- --------
Number of facilities 6 6 10 7
Operating revenues $136,950 $155,984 $148,393 $168,099
Operating costs and expenses 123,877 136,890 135,707 156,615
-------- -------- -------- --------
Segment operating income $ 13,073 $ 19,094 $ 12,686 $ 11,484
========= ========= ======== ========
Lodging data (4 resorts) (1)
Room nights available 472,074 467,822
Occupancy rate 49.7% 53.7%
Average daily room rate per occupied room $ 140 $ 149
Average daily revenue per occupied room $ 546 $ 584
_____________________
(1) Lodging data is comprised of data from Pinehurst, The Homestead, Barton
Creek and Quail Hollow.
Resorts' operating revenues increased 13.3% primarily due to the
acquisition of one resort late in 1996 and increases at mature properties.
Mature resorts' operating revenues increased 13.9%, reflecting increases of 4.0
percentage points in the occupancy rate, 7.0% in the average daily revenue per
occupied room, and 6.4% in the average daily room rate per occupied room.
Pinehurst, which will host the 1999 U. S. Open, experienced significant
increases in operating revenues in anticipation of this event.
The difference in 1997 operating revenues, operating costs and expenses,
and segment operating income between mature resorts and total resorts is
primarily attributable to the Company's operations at Daufuskie. ClubCorp
purchased Daufuskie at the end of 1996 for nominal consideration as a
turn-around opportunity. Daufuskie had an operating loss of approximately $6.8
million in 1997.
Country Club and Golf Facilities
The following tables present certain summary financial and membership
information for the Company's country club and golf facilities segment for 1996
and 1997 (dollars in thousands, except facility and membership data):
Mature Country Total Country
Club and Club and
Golf Facilities Golf Facilities
------------------- --------------------
1996 1997 1996 1997
-------- ----------- -------- ----------
Number of facilities 96 96 113 108
Operating revenues $301,359 $ 325,216 $326,586 $ 355,381
Operating costs and expenses 261,599 272,838 289,846 302,212
-------- ----------- -------- ----------
Segment operating income $ 39,760 $ 52,378 $ 36,740 $ 53,169
======== =========== ======== ==========
Membership information (62 clubs) (1):
Memberships at beginning of period 63,368 63,777
Memberships added during period 9,695 12,684
Memberships lost during period 9,286 10,027
-------- -----------
Memberships at end of period 63,777 66,434
======== ===========
____________________
(1) Number of facilities includes all types of country club and golf
facilities (country clubs, golf clubs and public facilities) and all types of
Company ownership. Membership information is comprised of the mature clubs where
the Company received membership initiation deposits or fees and membership dues.
Total country club and golf facilities' operating revenues increased 8.8%
in 1997 compared to 1996 primarily due to acquisitions, the opening of new golf
courses or other amenities at certain facilities, improving membership trends at
mature facilities and an additional week of operations. Mature country club
and golf facilities' operating revenues increased 7.9%.
Total country club and golf facilities' operating costs and expenses
increased 4.3% in 1997 compared to 1996 primarily due to acquisitions and
increases at mature facilities. Mature facilities' operating costs and expenses
increased 4.3% due to increases in costs of sales for food and beverage and golf
operations, payroll increases and incentive bonus accruals.
City Clubs
The following tables present certain summary financial and membership
information for the Company's city clubs segment for 1996 and 1997 (dollars in
thousands, except facility and membership data):
Mature City Clubs Total City Clubs
------------------------ ------------------------
1996 1997 1996 1997
-------- -------- -------- --------
Number of facilities 93 93 96 94
Operating revenues $238,618 $247,100 $249,689 $249,470
Operating costs and expenses 221,694 227,221 233,066 229,920
-------- -------- -------- --------
Segment operating income $ 16,924 $ 19,879 $ 16,623 $ 19,550
======== ======== ======== ========
Membership information (81 clubs) (1):
Memberships at beginning of period 113,185 112,361
Memberships added during period 21,547 26,262
Memberships lost during period 22,371 23,578
-------- --------
Memberships at end of period 112,361 115,045
======== ========
____________________
(1) Number of facilities includes all types of city clubs (city clubs,
athletic clubs and city/athletic clubs) and all types of Company ownership.
Membership information is comprised of the mature clubs where the Company
received membership initiation deposits or fees and membership dues.
Total city clubs' operating revenues increased remained constant in 1997
compared to 1996 primarily due to improving membership trends at mature
facilities and an additional week of operations offset by the effect of
divestitures. Total city clubs' operating costs and expenses decreased 1.4% due
to a reduction in cash flow based rent at mature properties and the effect of
divestitures.
International Operations and Real Estate
Operating revenues for international operations increased to $4.9 million
in 1997 from $0.8 million in 1996 primarily due to an increase in initiation
fees from membership sales. Operating costs and expenses for international
operations increased to $8.2 million in 1997 from $3.4 million in 1996 due
primarily to increased start up and pre-opening expenses at developing
facilities.
Real estate operating revenues increased to $33.7 million in 1997 from
$30.8 million in 1996 or 9.4% primarily due to increased sales of real estate in
Texas.
SEASONALITY OF DEMAND; FLUCTUATIONS IN QUARTERLY RESULTS
The Consolidated Financial Statements of the Company are presented on a
52/53 week fiscal year. The first three quarters consist of 12 weeks each and
the fourth quarter includes 16 or 17 weeks. The financial statements included in
Item 8 for the year ended December 29, 1998 are comprised of 52 weeks, with the
first three quarters consisting of 12 weeks each and the fourth quarter
consisting of 16 weeks. The timing of fiscal quarter ends, seasonal weather
conditions and other short-term variations cause financial performance to vary
by quarter. The Company has historically generated a disproportionate share of
its operating revenue in the second, third and fourth quarters of each year. The
timing of purchases or leases of new operating properties and investment gains
and losses also cause the Company's results of operations to vary significantly
from quarter to quarter.
The Company's results can also be affected by non-seasonal and severe
weather patterns. Extended periods of extremely hot, cold or rainy weather in a
given region can be expected to reduce the Company's golf-related revenue for
that region. Similarly, extended periods of low rainfall can affect the cost
and availability of water needed to irrigate the Company's golf courses and can
adversely affect results for facilities in the region affected.
INFLATION
Inflation has not had a significant impact on the Company. As operating
expenses increase, the Company, to the extent the value of services rendered to
members is not adversely impacted and as industry standards dictate, attempts to
offset the adverse effects of increased costs by increasing prices.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations and capital
expenditures primarily through cash flows from operations and long-term debt.
The Company distinguishes capital expenditures to refurbish and replace existing
property and equipment (i.e., capital replacements) from discretionary capital
expenditures such as the expansion of existing facilities (i.e., capital
expansions) and acquisition or development of new facilities and investments in
joint ventures. Most capital expenditures other than capital replacements are
considered discretionary and could be curtailed in periods of low liquidity.
Capital replacements are planned expenditures made each year to maintain high
quality standards of facilities for the purpose of meeting existing members'
expectations and to attract new members. Capital replacements have ranged from
3.8% to 7.1% of operating revenues during the last three years. Capital
expansions are discretionary expenditures which create new amenities or enhance
existing amenities at facilities. Development of the Company's new facilities
and planned expansions at existing properties are expected to require capital
expenditures of approximately $73.1 and $60.7 million, respectively, over the
next two years to be financed with external financing of ClubCorp, Inc. and cash
flows from operations.
On May 27, 1998, the Company entered into an agreement with a group of
banks for a five-year $300.0 million unsecured senior revolving credit facility.
The Company's obligations under this facility are guaranteed by certain of its
subsidiaries. The interest rate is determined using a LIBOR-based pricing
matrix as defined in the agreement. The Company used the facility to refinance
approximately $174.9 million in existing debt and related accrued interest of
certain of its subsidiaries. In conjunction with this refinancing, unamortized
loan costs and discounts on long-term debt totaling $1.8 million are shown in
the accompanying Consolidated Statement of Operations as an extraordinary item -
loss on extinguishment of debt. The Company is also using the facility for
working capital, capital expenditures, and acquisitions. The amount outstanding
under this agreement, including letters of credit of $14.7 million, as of
December 29, 1998, and March 22, 1999, was $204.9 and $233.9 million,
respectively, at an interest rate of LIBOR plus 0.625%.
The Company has committed to provide updated technology to all of its
facilities. This technology will include installation of point-of-sale hardware
and software, replacement of computer hardware and software to provide network
capabilities, the purchase of new accounting software and hardware, and the
installation of electronic time management systems which will interface with
accounting software. In January of 1998, the Company signed an agreement with
Oracle Corporation to purchase new software for its accounting, purchasing, and
human resources applications. The decision to upgrade technology was made
primarily to better enable management to improve operating efficiencies and
profits and to exceed member expectations by re-engineering processes using
enterprise resource planning software. Executive management has pledged to
allocate the necessary resources to develop additional technology applications
and tools that will allow the properties to operate more effectively and
efficiently and to increase the value of membership in conjunction with service
excellence. Completion of the technology upgrade, including conversion of the
existing software, is expected to require approximately $12.0 to $18.0 million
in additional expenditures, of which $9.0 to $15.0 million will be capitalized.
The Company expects to fund these additional expenditures through capital leases
with a bank over a four to five year period and cash flows from operations.
Net cash flows from continuing operations decreased $29.0 million for the
year ended December 29, 1998 due primarily to capital expenditures made during
1998, including investments in joint ventures (i.e., ETC), acquisitions, capital
replacements, capital expansions, and development of real estate ventures and
facilities.
As of March 22, 1999, the Company was in the final stages of negotiations
to acquire three properties and to build one property. The Company is
considering several ownership structures for the properties including lease
arrangements, sole ownership, and partial ownership (including joint venture
interests). The consummation of the acquisition of these properties is expected
to require approximately $15.0 to $20.0 million in capital expenditures, to be
funded primarily by cash flows from operations and external financing of
ClubCorp, Inc. The eventual outcome of the negotiations cannot be accurately
predicted at this time.
On January 26, 1999, ClubCorp entered into a definitive agreement to
acquire approximately 3.3 million shares or 16% of the outstanding common stock
of ClubLink Corporation of Ontario, Canada, for approximately $22.2 million.
This acquisition, combined with approximately 4.5% of ClubLink stock previously
held, and expected participation in a planned rights offering by ClubLink, will
bring ClubCorp's total investment to approximately 25%. ClubCorp's
participation in the planned rights offering is expected to require an
additional investment of approximately $8.0 to $9.0 million. In addition, in a
stock purchase agreement, ClubCorp intends to acquire a 50% interest in
ClubLink's U.S. golf holdings, which include loans to or investments in,
GolfSouth LLC and the Links Group Inc. encompassing 33 golf courses located
primarily in the eastern United States. This purchase is expected to require
approximately $15.0 million to be funded through cash flows from operations and
external financing of ClubCorp, Inc.
On February 11, 1999, ClubCorp joined with American Golf Corporation
("AGC"), a national golf course management company, to acquire the Cobblestone
Golf Group ("Cobblestone") from The Meditrust Companies, in a stock purchase
agreement, for a purchase price of approximately $393.0 million. The
transaction is expected to close in the second quarter of 1999. Upon closing of
the transaction, ClubCorp and AGC will divide Cobblestone's portfolio of 45
premier golf facilities. Through this transaction, ClubCorp will acquire 22
golf facilities located in Texas, Florida, Georgia, California, and North
Carolina. The purchase is expected to require approximately $210.0 million to
be funded with external financing of ClubCorp, Inc.
Membership dues, which are generally billed monthly, are expected to cover
the costs of providing future membership services. Membership deposits
represent advance initiation deposits for the right to become a member and
generally are refundable a fixed number of years (generally 30 years) from the
date of acceptance as a member. Management does not consider maturities of
membership deposits over the next five years to be significant. The difference
between the amount of the membership deposit and the present value of the
obligation is deferred and recognized as revenue on a straight-line basis over
the expected average life of an active membership. The membership deposit
liability accretes to interest expense over the refundable term using the
interest method.
The provisions of certain subsidiary lending and other agreements limit the
amount of dividends that may be paid to ClubCorp. Under the most restrictive of
these limitations, at December 29, 1998, approximately $110.0 million of
retained earnings was available for the declaration of dividends.
As a means of providing liquidity to the trustees of the Amended Plan to
meet their fiduciary obligations to distribute cash to participants requesting
withdrawals, ClubCorp has provided the trustees the right (the "Redemption
Right") to cause the Company to redeem Common Stock, held in trust on behalf of
the Amended Plan, at the most recent appraised price as necessary to meet
certain requirements. Withdrawals by participants and terminations by and/or
resignations from the Company of participants in excess of anticipated levels
could give rise to the exercise of withdrawal rights in substantial amounts and
place significant demands on the liquidity of the Company. In such an event, the
resources available to meet business expansion or other working capital needs
could be adversely affected. As of December 29, 1998, the value of the
Redemption Right was $65.3 million. The most recent appraised price of the
Common Stock was $16.60 as of December 29, 1998. The Redemption Right has never
been exercised by the Plan, although the Company has repurchased Common Stock
into treasury from certain stockholders. The Company does not expect that the
Redemption Right will be exercised to a significant extent in 1999.
The Company maintains a first right of refusal with the majority of its
stockholders and, accordingly, it has historically purchased shares from
stockholders when offered for sale back to the Company. During fiscal years
1996, 1997 and 1998, treasury stock purchases of ClubCorp from stockholders,
sales of stock (which were primarily to the Plan), and other shares issued were
as follows (dollars in millions):
December 31, December 31, December 29,
1996 1997 1998
-------------- --------------- ---------------
Purchase of treasury stock $ (4.4) $ (5.6) $ (7.6)
Stock issued in connection with purchases
by benefit plan 0.3 - 0.2
Stock issued in connection with bonus plans 1.1 0.7 1.0
Stock issued in connection with exercise of
stock options - - 0.5
-------------- -------------- --------------
$ (3.0) $ (4.9) $ (5.9)
============== ============== ==============
See the Consolidated Statement of Stockholders' Equity included in Item 8 for a
summary of stockholder equity transactions.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than statements of historical fact should be
considered "forward-looking statements" for purposes of these provisions,
including statements that include projections of, or expectations about,
earnings, revenues or other financial items, statements about the plans and
objectives of management for future operations, statements concerning proposed
new products or services, statements regarding future economic conditions or
performance, statements regarding Year 2000 issues, and statements of
assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential" or "continue," or
the negative thereof or other comparable terminology. Although the Company
believes that the expectations reflected in its forward-looking statements are
reasonable, it can give no assurance that such expectations or any of its
forward-looking statements will prove to be correct. Actual results and
developments are likely to be different from, and may be materially different
from, those expressed or implied by the Company's forward-looking statements.
Forward-looking statements are subject to inherent risks and uncertainties, some
of which are summarized in this section.
Enhanced enrollment and retention of members and increased utilization of
existing facilities by members and guests are core components of the Company's
organic growth strategy. Management believes that providing its members and
guests with high quality, personalized service will increase demand for
ClubCorp's services. The Company seeks to achieve a high level of member
satisfaction by creating and executing business plans for each facility. The
Company provides incentives to club and resort managers to exceed business plan
goals by linking their compensation to member and guest satisfaction as well as
the financial performance of the facility. The Company's success depends on its
ability to attract and retain members at its clubs and maintain or increase
usage of its facilities. The Company has experienced varying levels of
membership enrollment and attrition rates and, in certain areas, decreased
levels of usage of its facilities during its operating history. Although
management devotes substantial efforts to ensuring that members and guests are
satisfied, many of the factors affecting club membership and facility usage are
beyond the Company's control and there can be no assurance that the Company will
be able to maintain or increase membership or facility usage. Significant
periods where attrition rates exceed enrollment rates, or where facilities'
usage is below historical levels would have a material adverse effect on the
Company's business, operating results, and financial condition.
Changes in membership levels and facilities' usage can be caused by a
number of factors. In the past, federal tax law changes in the treatment of
business entertainment expenses and real estate expenses have adversely affected
general industry demand and membership and facilities usage. There can be no
assurance that similar changes that would have an adverse effect on revenues
will not occur in the future. A substantial portion of the Company's revenue is
derived from discretionary or leisure spending by the Company's members and
guests and such spending can be particularly sensitive to changes in general
economic conditions. A significant adverse shift in general economic
conditions, whether regional or national, would likely have a material adverse
effect on the Company's business, operating results, and financial condition.
Changes in consumer tastes and preferences, particularly those affecting the
popularity of golf and private dining, and other social and demographic trends,
could also have an adverse effect on the Company.
The Company has policies in place designed to bring its properties in
substantial compliance with current federal, state and local environmental laws
and laws relating to access for disabled persons. The Company is not subject to
any recurring costs associated with managing hazardous materials or pollution.
In addition, management does not believe that the Company will incur expenses
for infrequent or non-recurring cleanup, based upon the Company's due diligence
inspection, employee training, standards of operations and on-site assessments
performed and maintained for each facility. However, the Company is in the
process of replacing approximately 11 underground storage tanks with aboveground
contained storage systems. It is unlikely that any remediation will be required.
The Company is permitted under various state laws to recover a portion of its
costs of remediation through various state superfunds created to address
environmental cleanups. The Company is not subject to any remediation mandates
related to previously contaminated sites. See Item 1,
"Business-Operations-Government Regulation".
ClubCorp files a consolidated federal income tax return. See Note 15 of the
Notes to the Consolidated Financial Statements. ClubCorp's federal and state
income taxes are as follows (dollars in millions):
December 31, December 31, December 29,
1996 1997 1998
-------------- -------------- --------------
Income tax (provision) benefit:
Federal
Current $ 0.1 $ (0.7) $ (0.2)
Deferred (1.2) 44.1 (2.9)
-------------- -------------- --------------
(1.1) 43.4 (3.1)
State (1.5) (2.1) (2.1)
-------------- -------------- --------------
$ (2.6) $ 41.3 $ (5.2)
============== ============== ==============
The Company operates in 32 states and, as a result, its operations are
subject to tax by many state and local taxing authorities. The Company generates
substantial taxable income in various states including Ohio, North Carolina and
Florida. As state and local taxing authorities raise tax rates and change tax
codes to increase tax revenues, the Company has experienced increased exposure
to state and local income taxes over the past few years.
Since the acquisition of Franklin in 1988, ClubCorp has reduced or
eliminated its current federal tax liability (to 2% of alternative minimum
taxable income) by using net operating loss carryforwards that resulted from
Franklin's operations. ClubCorp has estimated net operating loss carryforwards
at the end of 1998 of $485.9 million and $70.9 million for regular and
alternative minimum taxes, respectively. As a result, the Company will be able
to continue to reduce its estimated tax liability to 2% of alternative minimum
taxable income until such alternative minimum tax net operating losses are fully
utilized or expire. These net regular and alternative minimum tax operating
losses expire from 2004 to 2010 and 2007 to 2010, respectively. These estimates
are based upon certain assumptions concerning the Company's 1998 operations from
an alternative minimum tax perspective and may be revised at the time the
Company prepares its federal income tax return.
The Company has substantial regular net operating loss carryforwards
available. Based on the Company's historical pretax earnings, adjusted for
significant nonrecurring items such as gains (losses) on divestitures,
management believes it is more likely than not the Company will realize the
benefit of the deferred tax assets, net of the valuation allowance, existing at
December 29, 1998. The Company has experienced a trend of increasing taxable
income from its continuing operations which in turn has increased estimates of
future taxable income. Based on these new estimates, the Company decreased its
valuation allowance by $14.2 million for the year ended December 29, 1998. The
Company's federal income tax returns for 1991 and 1992 were examined by the
Internal Revenue Service. In connection with the closing of this audit, in
1998, the Company reduced its regular net operating losses and valuation
allowance by $45.0 million, 8.1% of year end 1997 net operating losses. The
assumptions used to estimate the realizability of the deferred tax assets are
subjective in nature and involve uncertainties and matters with significant
judgment. There can be no assurance that the Company will generate any specific
level of continuing earnings. The Company will receive benefits in the form of
tax credits in the future to the extent of alternative minimum taxes paid.
In addition to the regular and alternative minimum tax NOLs, the Company
has approximately $166.4 million regular and $150.3 million alternative minimum
tax Separate Return Limitation Year ("SRLY") NOLs which expire in 2003. The
Company's December 29, 1998 deferred tax asset does not include any value for
its SRLY NOLs.
The Company's federal income tax returns for 1993 and 1994 are under
examination by the Internal Revenue Service. Because many types of transactions
are susceptible to varying interpretations under federal income tax laws and
regulations, the net operating loss carryforwards and net deferred tax asset
reported in the Consolidated Financial Statements could change at a later date
upon final determination by the taxing authorities. Management believes the
Company will prevail on any significant interpretation issues.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires that the costs of start-up activities, including
organizational costs, be expensed as incurred. SOP 98-5 will be effective for
the Company in its fiscal year ending in 1999. Due to the nature of the
operations of the Company, the effect of the implementation of SOP 98-5 will not
have a significant impact on the financial position or results of operations of
the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities and such
instruments be measured at their fair value. The Statement is effective for
years beginning after June 15, 1999. Based on the Company's current operations,
the effect of implementation of this new statement is not expected to have a
significant effect on the Company's financial position or results of operations.
YEAR 2000 READINESS DISCLOSURE
A. State of Readiness
Assessment
The Year 2000 issue affects computers, software and other equipment the
Company uses, operates or maintains for use in its operations. While ClubCorp
has commenced a company-wide upgrade of its computer systems that is designed to
address internal Year 2000 issues, this upgrade is not expected to be completed
by December 31, 1999. IT Systems (defined below) that will not be upgraded in
time are being reprogrammed to accommodate the century date change. MCI
Systemhouse is leading the initiative to remediate and then to test the
reprogrammed systems to validate that they are Year 2000 ready. It is expected
that the testing of reprogrammed systems will be completed during the third
quarter of 1999.
The Company has undertaken various initiatives intended to ensure that
prior to the completion of its company-wide upgrades, its IT Systems will
function properly with respect to dates in the Year 2000 and thereafter. The
term "IT Systems" includes information technology systems that the Company uses
in its business including accounting, data processing, time management, and
point-of-sale systems that use computer equipment and software. Non-information
technology ("Non-IT") equipment the Company uses, operates or maintains may also
be affected by embedded chip technology, such as microprocessors. An assessment
is currently underway to determine what Non-IT equipment may be impacted by Year
2000 issues. Although the upgrade of ClubCorp's computer systems is not
expected to be completed until the end of Year 2000, it is expected that
approximately 50% of the initiatives which management believes will be necessary
to fully address potential Year 2000 issues relating to IT and Non-IT exposures
should be materially completed on or about June 30, 1999. The Company's target
is to have the balance of the work completed no later than December 31, 1999.
IT System Remedial Initiative
As noted above, the Company is currently upgrading or replacing hardware
that is not Year 2000 ready, upgrading purchased software to compliant releases,
and remediating internally developed software. The Company expects this IT
Systems remediation effort to be completed during the third quarter of 1999. The
existing accounting systems that are not going to be replaced by December 31,
1999 are being reprogrammed to be Year 2000 ready since the company wide upgrade
is not expected to be completed until the end of Year 2000. Much of the work to
make the existing systems Year 2000 ready has been completed. The effort to
finish the remediation of the existing hardware and software is being led by MCI
Systemhouse with significant involvement by ClubCorp employees. The principal
effort involves recompiling programs using a Year 2000 compliant compiler.
ClubCorp expects the necessary modifications to the software and unit testing to
be completed during the second quarter of 1999 and system testing to be
completed during the third quarter of 1999. If the remediation of existing
hardware and software systems is not completed in a timely manner, Year 2000
issues could have a material adverse effect on the Company's operations and
results.
Non-IT Remedial Initiative
ClubCorp has undertaken an initiative to assess the impact of its
significant vendors, suppliers, landlords and other third-party relationships on
its business. As of December 29, 1998, the Company has compiled a list of
critical relationships. Letters are expected to be mailed by March 31, 1999 to
these critical third parties to assess the risk of a disruption in service and
the extent to which such a disruption would affect ClubCorp's operations. While
management does not believe it directly depends, to a significant extent, on any
third party's computer systems or ability to operate in general, there can be no
assurance that Year 2000 problems encountered by companies with whom the Company
does business will be resolved in a timely manner or that such other companies'
failure to resolve such problems would not have a material adverse effect on
ClubCorp.
The Company has evaluated its critical Non-IT Systems and believes that
certain systems and functions are mission critical including, but not limited to
the following: fire/life safety systems, electrical systems, communication
systems, air-conditioning/heating systems, security controls, vertical
transportation systems, voice grade communication systems, facility management
systems, hotel management systems and restaurant equipment.
Vendors or providers of these systems are included on ClubCorp's list of
critical relationships and will be assessed as described above. The Company has
set July 31, 1999 as the target date to complete the assessment of these third
party relationships.
Company Wide IT System Upgrade
ClubCorp has commenced a company wide upgrade of its computer systems and
accounting systems. ClubCorp is replacing its accounting systems with Oracle.
A combined team from ClubCorp and KPMG LLP is managing the Oracle installation.
Part of the IT System remedial process will include end to end testing of the
new systems to validate that these systems are Year 2000 ready as warranted.
The scope of this work will be initiated by MCI Systemhouse in conjunction with
the project installation team.
B. Cost
ClubCorp has begun, but has not yet completed, an analysis of problems and
costs (including loss of revenue) that would be reasonably likely to result from
the failure by the Company and certain third parties to complete efforts
necessary to achieve Year 2000 readiness on a timely basis.
In addition to the remaining cost of the company wide upgrade, the Company
estimates that the cost of upgrading current systems, upgrading purchased
software and remediating internally developed software will be approximately
$2.5 million. Management estimates that an additional $0.6 million will be
spent in hiring resources to assess and address the Year 2000 risk on the
Company's operations (additional personnel, attorneys and consultants).
C. Risk
In a reasonably likely worst case scenario, the Company's remediation of
existing IT Systems and Non-IT equipment may not be completed in a timely
manner, or Year 2000 problems of material third parties may not be resolved in a
timely manner. Such worst case scenarios could involve loss of revenues relating
to the loss of business as a result of the Company's inability to operate its
facilities through hardware, software or equipment failures due to Year 2000
problems. While management believes the Company does not directly depend to a
significant extent on any third party's computer systems, it does rely on
certain vendors and landlords to supply uninterrupted goods and services. The
estimated loss of revenue, if any, has not and may not be able to be identified
until after the Year 2000. As described above, active efforts have been and are
underway to assess and minimize any disruption in operations. The Company
relies extensively on computer systems to monitor and coordinate its operations.
If ClubCorp's computer systems cease to function, function improperly, or if its
vendors or customers cannot perform as agreed for a significant time period, it
is likely that the Company's operations and results will be adversely affected.
D. Contingency Plans
Management will develop contingency plans to be implemented as a part of
its efforts to identify and correct Year 2000 problems. The scheduled target
date for completion of the contingency plans is September 30, 1999. Many of the
Company's operations have contingency plans in place for natural disasters such
as earthquakes, floods, hurricanes and the like, which provide a basis for its
Year 2000 contingency plans. These plans may also include short term use of
backup equipment and software, increased work hours for Company personnel and/or
use of contract personnel and/or orderly shut down of the buildings and/or clubs
on December 31, 1999 and January 1, 2000 in order to perform tests of critical
systems.
E. Disclaimer
The discussion of ClubCorp's efforts and expectations relating to Year 2000
compliance are forward looking statements and the dates on which the Company
believes it will complete such efforts are based on its best estimates, which
were derived using numerous assumptions regarding future events, including the
continued availability of certain resources and other factors. There can be no
assurance that these estimates will prove to be accurate and the actual results
could differ materially from those currently anticipated. Specific factors that
could cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues, the ability to
identify, assess, remediate and test all relevant computer codes, and embedded
technology and similar uncertainties. In addition, the variability of
definitions of "compliance with Year 2000" relating to products and services
sold to or relied on by management may lead to claims whose impact on the
Company is currently not as estimable. In addition, the Company does not have
any control over external infrastructures, for example, failure of power grids
or economic perturbations that might overall impact its operations or revenues.
No assurance can be given that the aggregate cost of defending and resolving
such claims, if any, will not materially adversely affect the Company's results
of operations.
ACQUISITION AND SALE OF FRANKLIN FEDERAL BANCORP
From 1988 to 1996, the Company operated in the financial services segment
through Franklin Federal Bancorp, a Federal Savings Bank ("Franklin"). The
Company purchased Franklin with the intent to utilize certain of its real estate
holdings in its golf-related line of businesses. The Company sold Franklin for
$90.0 million in a transaction that was consummated on January 2, 1997. The
Company's gain on the sale, net of taxes and minority interest, was $25.1
million. Because the Company has disposed of its financial services operations,
this segment is presented as discontinued operations in the Consolidated
Financial Statements. See Note 2 of the Notes to Consolidated Financial
Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes and foreign currency
fluctuations. The Company is exposed to interest rate changes primarily as a
result of its senior revolving credit facility and long-term debt used to
maintain liquidity and fund capital replacements and discretionary capital
expenditures. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives, the Company borrows
primarily at variable rates and may enter into derivative financial instruments
such as interest rate swaps in order to mitigate its interest rate risk on a
related financial instrument. The Company does not enter into derivative or
interest rate transactions for speculative or trading purposes.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on its
core business. The Company has historically managed this risk through the
diversity of the foreign economies in which it operates and the relatively
limited amount of its investments in these foreign economies. The Company's
international operations represent less than 10% of the total assets of the
Company as of December 29, 1998.
The Company's interest rate risk is monitored using a variety of
techniques. The table below presents the principal and interest (for capital
leases only) amounts, weighted average interest rates and fair values required
by year of expected maturity to evaluate the expected cash flows and sensitivity
to interest rate changes (dollars in thousands).
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
------- ------- ------- ------- -------- ----------- --------- --------
Fixed rate debt $13,480 $32,935 $12,882 $10,897 $ 2,947 $ 10,708 $ 83,849 $ 79,930
Weighted average interest rate 8.27 %
Variable rate debt (primarily LIBOR) 5,153 -- -- -- 190,000 -- 195,153 195,153
Weighted average interest rate 5.93 %
Totals $18,633 $32,935 $12,882 $10,897 $192,947 $ 10,708 $ 279,002 $275,083
======= ======= ======= ======= ======== =========== ========= ========
The table below presents the notional amounts, pay rates, receive rates,
mark-to-market value, and maturity dates of the Company's interest rate swap
agreements (dollars in thousands).
Notional Amount $ 10,000 $ 4,539 $ 100,000 $ 5,000 $ 5,000 $ 10,000
Pay Rate 7.865% 5.98% 5.79% 5.63% 5.53% 5.25%
Receive Rate 90 day LIBOR 30 day LIBOR 30 day LIBOR 30 day LIBOR 30 day LIBOR 30 day LIBOR
Mark-to-Market Value $ (334) $ (90) $ (2,284) $ (81) $ (60) --
Maturity Date 01/18/00 08/01/01 06/30/03 09/02/03 09/02/03 09/02/03
Notional Amount $ 5,000
Pay Rate 5.43%
Receive Rate 30 day LIBOR
Mark-to-Market Value $ (39)
Maturity Date 09/02/03
As the tables incorporate only those exposures that exist as of December
29, 1998, they do not consider those exposures or positions which could arise
after that date. Moreover, because firm commitments are not presented in the
tables above, the informati