ITEM 1. BUSINESS
GENERAL
Club Corporation International ("ClubCorp" or the "Company") is a holding company incorporated under the laws of the State of Nevada that, through its subsidiaries, owns, operates, and/or manages country clubs, city clubs, city/athletic clubs, athletic clubs, resorts, certain related real estate, golf clubs, and public golf courses through sole ownership, partial ownership (including joint venture interests) and management agreements. The Company's primary sources of revenue include membership dues, fees, and deposits, food and beverage sales, revenues from golf operations and lodging facilities. The Company also receives management fees with respect to facilities that it manages for third parties. See "Operations-Management Services".
Historically, the Company also operated in the financial services segment through Franklin Federal Bancorp, a Federal Savings Bank ("Franklin"). On August 7, 1996, Franklin entered into an agreement to sell certain assets and transfer certain liabilities of Franklin to Norwest Corporation pending regulatory approval. The sale was consummated on January 2, 1997 for $90.0 million. ClubCorp's gain on the sale, net of taxes and minority interest, was $25.1 million.
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
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"), which became effective on January 1, 1993, 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 may invest in participation interests in the Common Stock through payroll deductions of 1% to 6% of their pre-tax compensation, subject to certain limitations. Prior to July 1, 1995, eligible employees invested through payroll deductions of 1% to 6% of their after-tax 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, and Company contributions vest over time. Any contributions by the Company over the 20% minimum are within the discretion of the Board of Directors of ClubCorp, and are based on improvement in the value of the Common Stock during the 12-month period ending on September 30 of each year in accordance with a schedule approved by the Board of Directors, which is subject to change.
All contributions to the Plan are invested in Common Stock (except for contributions temporarily invested pending investment in Common Stock). The Plan purchases 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, an independent financial advisory firm (the "Financial Advisor"). See Item 5, "Market for Registrant's Common Equity and Related Stockholder Matters". Because the Plan invests primarily in Common Stock, the value of each eligible employee's participation interests in the 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. No employee participating in the Plan, however, has any right to vote the Common Stock or to receive a distribution of Common Stock from the Plan.
OPERATIONS
Background and Philosophy - ---------------------------
Robert H. Dedman, Sr. founded the Company in 1957 under the name Country Clubs, Inc. to develop Brookhaven Country Club in the north Dallas area. During the succeeding 15 years, the Company expanded its country club operations and began to develop city, city/athletic and athletic clubs. In the early 1980s, the Company further expanded its operations by entering the resort industry, and in 1986 the Company began operating public golf facilities.
The Company conducts its business through various subsidiaries of ClubCorp, including the following:
Club Corporation of America ("CCA"), which conducts the Company's private club, golf club, and public golf operations; and
Club Resorts Holding, Inc. ("Club Resorts"), which conducts the Company's resort operations.
Mr. Dedman founded the Company based upon his belief that an opportunity existed for any company that could provide quality services and professional management to private clubs. Management believes that the Company's opportunities have grown as a result of a general trend in the private club industry toward professionally managed clubs and that this trend will continue in the future.
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 11 executive officers possess an average of 23 years of experience with the Company. The Company has also attempted to attract and retain qualified, dedicated managers for its clubs, resorts, golf clubs, and public golf facilities, 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's commitment to value is also reflected in its policy of monitoring satisfaction levels through frequent surveys of members and guests. In addition, employees are regularly surveyed to help management develop appropriate training and education programs, increase job satisfaction levels and improve the quality of service.
ClubCorp has invested over 40 years seeking to perfect its development, management, operations, and membership skills, with results evident in some of the world's foremost private clubs.
Nature of Operations - ----------------------
The Company operates private clubs, resorts, golf clubs, and public golf facilities 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 "-Corporate Services and Other". With respect to its wholly-owned operations, in some cases the Company owns the real property where the private club, resort, golf club, or public golf facility is operated, and in other cases the Company leases the real property from third parties.
The Company operated 220 private club, resort, golf club, and public golf facilities at December 31, 1997, serving approximately 220,000 members. 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 Company's primary sources of revenue include membership dues, fees, and deposits, food and beverage sales, revenues from golf operations, and lodging facilities. The Company also receives management fees with respect to facilities that it manages for third parties. The Company receives membership deposits that constitute an important source of cash flows. Membership deposits represent advance initiation deposits paid by members and are generally refundable in 30 years from the date of acceptance as a member. The difference between the amount of the membership deposit paid and the present value of the obligation is recognized as revenue upon acceptance.
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. For a tabular presentation of certain statistical information relating to memberships in the Company's private clubs, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-General-Regional Information; Other Operating Information". 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 and customers. For a tabular presentation of certain statistical information relating to the Company's resorts, golf clubs, and public golf operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-General-Regional Information; Other Operating Information". 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".
Private Clubs - --------------
The Company's private clubs generally fall into one of four categories: city, athletic, country and city/athletic clubs. The Company's city, city/athletic and athletic clubs are primarily located in city business centers or downtown areas.
City clubs typically include dining rooms and lounge areas and meeting and board room facilities. With private settings in the best metropolitan locations, city clubs provide superior food, service, and a sophisticated atmosphere in which members can entertain business associates, family, and friends, host special events, or simply relax in comfort. Some of the notable city clubs operated by the Company include The Metropolitan Club in Illinois, The Columbia Tower Club in Washington, and The City Club of San Francisco in California.
The Company's athletic clubs generally include a combination of the following facilities: racquetball and squash courts, jogging tracks, exercise areas, weight machines, aerobic studios, swimming pools, wellness programs, saunas and whirlpools, eating facilities and, occasionally, tennis and basketball courts. Many athletic clubs also offer personalized training and massage services. Some of the notable athletic clubs operated by the Company include The Athletic and Swim Club at Equitable Center in New York and The San Francisco Tennis Club in California.
The country clubs operated by the Company span a broad range of size, price, prestige and facilities. Generally, the Company's country clubs include a combination of one or more of the following facilities: dining rooms and lounge areas, meeting and board room facilities, grills and ballrooms, golf, tennis, swimming and fitness facilities and pro shops. Some of the notable country clubs operated by the Company include Gleneagles Country Club and Kingwood Country Club in Texas, Mission Hills Country Club and Indian Wells Country Club in California, and Firestone Country Club in Ohio.
City/athletic clubs combine all the ambiance and amenities of a city club with the facilities of the best athletic clubs. Offering members convenient locations, these clubs provide a variety of athletic activities, including racquet sports, exercise and fitness programs, and wellness programs. Some of the notable city/athletic clubs operated by the Company include The Rivers Club in Pittsburgh and The University Club in Texas.
The private club industry is highly competitive, but management believes that the Company's size and substantial experience allow it to compete effectively. The Company's private clubs compete primarily on the basis of featured facilities, memberships, quality and comprehensiveness of services, management experience, geographic breadth and financial resources. The number and quality of private clubs and other facilities with similar types of recreation in a particular area could have a material effect on the revenue of a private club. In addition, revenue will be affected by a number of factors, including the demand for golf and the availability of other forms of recreation.
Golf Clubs - -----------
The Company's golf clubs generally include a combination of the following facilities: golf courses, driving ranges, and food and beverage concessions. Generally, these clubs offer both private and public play. Some of the notable golf clubs operated by the Company include Timarron Golf Club in Texas and Queen's Harbour in Florida.
The private and public golf industries are highly fragmented. The Company competes with a number of regional and national golf management companies. With the rising popularity of golf, the Company expects the number of competitors in the industry to increase over the next few years. The Company's golf clubs compete on the basis of price, quality and comprehensiveness of service, memberships, management experience, geographic breadth, featured facilities and financial strength. The Company believes that its substantial experience in operating golf facilities will enable it to compete effectively in this area.
Public Golf - ------------
The Company's public golf facilities generally include a combination of the following facilities: golf courses, driving ranges, and food and beverage concessions. Some of the public golf courses operated by the Company include Kingwood Cove in Texas and Cook's Creek Golf Course in Ohio.
The public golf industry is highly fragmented. The Company competes with a number of regional and national golf management companies. With the rising popularity of golf, the Company expects the number of competitors in this industry to increase over the next few years. The Company's public golf operations compete on the basis of price, quality and comprehensiveness of service, management experience, featured facilities and financial strength. The Company believes that its substantial experience in operating golf facilities will enable it to compete effectively in the public golf market.
Resorts - -------
The Company's resorts typically offer lodging facilities, dining and lounge areas, meeting rooms and golf, tennis and other recreational activities associated with resorts. The Company seeks to create and maintain a significant golf component at its resorts. In some cases, memberships in a resort's country club facilities are offered primarily to those living in the surrounding community. Some of the notable resorts operated by the Company include the Pinehurst Resort and Country Club (Pinehurst) in North Carolina, the Homestead Resort (Homestead) in Virginia, and the Barton Creek Country Club and Conference Resort in Texas. Pinehurst is the largest and oldest "golf" resort in the world. Homestead is the oldest resort in the country. Both of these properties have received the distinction of being listed on the National Register of Historic Cities. In addition, Pinehurst will host the 1999 United States Open.
The resort industry is highly competitive, and the Company competes with numerous hotel and resort companies engaged in the lodging, travel and resort businesses, some of which have substantially greater financial and other resources than the Company. The principal competitive factors in the resort industry include featured facilities, quality of services, geographic breadth and financial resources. The Company believes that its substantial experience in providing quality services to both members and guests allow it to compete effectively in the resort industry.
Management Services - --------------------
In addition to operations that are solely or partially owned by the Company, the Company provides professional management and consulting services to third parties who own private clubs and public golf facilities. Fees for the Company's management and consulting services accounted for $9.4 million of operating revenues (1.1% of the Company's total operating revenues) during 1997, $8.2 million of operating revenues (1.0% of the Company's total operating revenues) during 1996 and $10.3 million of operating revenues (1.4% of the Company's total operating revenues) during 1995. In calculating revenues from management and consulting services, the Company includes only the fees received by the Company for such services and does not include revenues of the facilities under management.
For its services, the Company generally receives a monthly base management fee, as well as one or more performance-related fees based upon such factors as the property's net operating income or operating cash flows, gross receipts, membership sales or new member deposits. Generally, the owner is responsible for all operating and other expenses. Other terms of the Company's management agreements vary depending on the nature and extent of the services provided. Management agreements generally provide for an initial term of two to four years, with renewal options for successive one to five year terms. In addition, most of the management agreements may be terminated without cause upon advance written notice, provided the terminating party pays a specified termination fee. The agreements may be terminated for cause upon the occurrence of certain events, including nonperformance of the obligations specified under such management agreements.
Corporate Services and Other - -------------------------------
Additional subsidiaries of ClubCorp provide operating and support services within the organization and to third parties. These subsidiaries include:
Associate Clubs International, Inc., which is responsible for the Company's Associate Clubs Program, a program that provides club members with access to other clubs operated by the Company;
ClubCorp Realty, which conducts real estate development and sales operations and offers real estate marketing and brokerage services, zoning, subdivision and platting services and other real estate consulting services;
Associate Clubs Publications Inc., which publishes the Company's Private Clubs magazine; and
ClubCorp Financial Management Company, which provides primarily accounting and information technology services related to facility management.
During 1997, 1996 and 1995, these corporate services generated approximately $35.6 million, $38.8 million and $34.0 million, respectively, in operating revenues for the Company.
Expansion and Development - ---------------------------
The Company is pursuing a strategy to increase the number of private clubs, resorts, golf clubs and public golf facilities that it operates both domestically and internationally. The Company evaluates specific growth opportunities based upon existing market conditions and economic factors, and intends to pursue opportunities that it perceives to be favorable as they arise.
The success of the Company's 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 Company seeks to finance each project separately and anticipates that sources of capital for new developments and acquisitions will include cash flows from operations, equity participations, and owner/developer and third party financing.
The Company also intends to continue to pursue growth opportunities related to city and city/athletic clubs through acquisitions, mergers between the Company's clubs and those owned by third parties, management contracts with ownership options, relocations of existing clubs, and development of new clubs.
Sales and Marketing - ---------------------
The Company advertises and markets its clubs, resorts, golf clubs, and public golf facilities through diverse media. Among other things, the Company sponsors the Associate Clubs 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 over 188,000 members at the majority of the Company's clubs and resorts, and which advertises the Company's other 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 also 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 1997 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 Resort and Country Club will host the 1999 United States Open.
The Company 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 enable the Company to bring distinctive tournaments and events, such as the United States 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 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 cost of these renovations is expected to be approximately $3.0 million over the next five years. The Company believes it is operating in substantial compliance with applicable laws and regulations governing its operations.
Competition - -----------
The Company competes with local fine dining establishments and other city clubs in its city club business. The competition in the city club business is largely fragmented, and no competitor is dominant in a material portion of the Company's markets. The number and quality of city clubs and/or fine dining establishments in a particular area can affect the revenue of a particular city club.
The Company competes with other country clubs, golf clubs, public golf courses and resorts in its country club, golf club, public golf and resort business. Similarly, competition is fragmented and no competitor is dominant in a significant portion of the markets where the Company maintains these facilities. The number and quality of competing facilities in a particular market can affect the revenue of a particular facility.
The Company also competes for the purchase, lease, and/or management of golf courses with American Golf Corporation, a national golf course management company. In addition, the Company competes for the purchase of golf courses with national and regional golf course management companies and real estate investment trusts that each own several golf courses 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 the 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 31, 1997, the Company employed approximately 14,000 full-time, 5,000 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 31, 1997, approximately 600 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 31, 1997, 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 and ASSOCIATE CLUBS, 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.
ITEM 2. PROPERTIES
The Company operated 220 club, resort, golf club, and public golf facilities as of December 31, 1997. The ownership of these facilities is described under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-General". The Company leases its executive offices in Dallas, Texas and an office in Singapore in connection with its operations in Southeast Asia.
With respect to leased properties, 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.
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 10 of the Notes to Consolidated Financial Statements included under Item 8.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
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), 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.
The table below sets forth the quarterly Formula Price for the Common Stock during the years ended December 31, 1996 and 1997, respectively.
The Financial Advisor has been engaged by the trustees of the Plan to confirm the fairness of the Formula Price for purposes of the 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 that the Formula Price falls within the range of fair market value of the Common Stock on the date of each appraisal and on each December 31. All purchases of Common Stock by the Plan are made on or shortly after an appraisal date at the Formula Price as confirmed by the Financial Advisor. 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 will adjust the Formula Price so that it falls within the range of fair market value as determined by the Financial Advisor. See Item 1, "Business-Stock Investment Plan".
As of February 28, 1998, there were approximately 320 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.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are the selected consolidated financial and operating data for each of the years in the five-year period ended December 31, 1997. 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).
__________________
(1) The sale of Franklin Federal Bancorp was consummated on January 2, 1997 for $90.0 million. ClubCorp's gain on the sale, net of taxes and minority interest, was $25.1 million. In addition, the Company decreased the valuation allowance on its deferred tax asset. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". (2) The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121 for the year ended December 31, 1995. In adopting SFAS 121, the Company recorded an impairment loss of $23.0 million on long-lived assets which is reported separately as a component of income (loss) from continuing operations. (3) The Company acquired Mission Hills Country Club and the Homestead Resort in the last quarter of 1993. These properties significantly impacted the Company's operating revenues in 1994, generating $13.7 and $30.8 million, respectively, in operating revenues in 1994. Franklin had a net loss of $12.7 million in 1994 due to rising interest rates and lower of cost or market adjustments on whole loan adjustable rate mortgages. In order to maintain compliance with capital ratios, Franklin effected shrinkage chiefly through the liquidation of assets designated as available for sale and the retirement of short-term liabilities, primarily FHLB advances. Hospitality properties acquired in 1994 accounted for the increase in long-term debt. (4) The Company adopted SFAS 109 on January 1, 1993. In adopting SFAS 109, the Company recorded a cumulative effect of the change in accounting for income taxes, included in income, and a deferred tax asset, included in other assets, equal to $27.0 million (5) The Company disposed of its financial services segment on January 2, 1997; therefore, the segment is presented as discontinued operations. (6) As a means of providing liquidity to the trustees of the Plan, which became effective January 1, 1993, to meet their fiduciary obligations to distribute cash to Plan participants requesting withdrawals, ClubCorp has provided a redemption right to the trustees to cause the Company to redeem Common Stock at the most recent appraised price. The value (Redemption Value) of this redemption right has been accounted for as a reduction of stockholders' equity. The Redemption Value is calculated as the product of the most recent appraised price multiplied by the number of shares of Common Stock held by the benefit plan.
ITEM 7.
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 weeks. The financial statements included in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and related notes begin on Page of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and executive officers of ClubCorp:
(1) Member of Investment Committee (2) Member of Executive Committee (3) Member of Audit Committee (4) Member of Treasury Stock Committee
The Board of Directors of ClubCorp is currently comprised of 13 directors. All directors of ClubCorp hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Officers for 1998 will be appointed by ClubCorp's Board of Directors during 1998, effective January 1, 1998.
Robert H. Dedman, Sr. has been Chairman of the Board and Chief Executive Officer of ClubCorp since its inception in 1957. Mr. Dedman is a director of United Meridian Corporation and an advisory director of Stewart Information Services, Inc. The following members of Mr. Dedman's family are also directors and/or officers of the Company: Nancy M. Dedman (wife), Robert H. Dedman, Jr. (son), Patricia Dedman Dietz (daughter) and Mark W. Dietz (son-in-law).
James E. Maser has been associated with the Company since 1965 and has been a director since 1971, serving as Vice Chairman of the Board since 1989.
Robert H. Dedman, Jr. joined the Company in 1980 and served as Director of Corporate Planning from 1980 until 1984. From 1984 until 1987, Mr. Dedman was an Associate at Salomon Brothers Inc., specializing in mergers and acquisitions. Mr. Dedman returned to the Company in 1987 as Chief Financial Officer of ClubCorp. Since 1989, Mr. Dedman has served as President, Chief Operating Officer and director of ClubCorp and as Chairman of the Board and Chief Executive Officer of CCA. Mr. Dedman also serves as Chairman of the Board of Club Resorts.
James P. McCoy, Jr. joined the Company in 1973, and served as Vice President and Treasurer during 1983. He has been a director of ClubCorp since 1994. From 1983 to 1986, Mr. McCoy was the Manager of Corporate Financial Services for Merrill Lynch. Mr. McCoy returned in 1986 as the Treasurer of ClubCorp and has been the Chief Financial Officer of ClubCorp since 1988.
James M. Hinckley joined the Company in 1970, and since that time he has held various positions and offices with the Company. Mr. Hinckley has been a director of ClubCorp since 1989. Mr. Hinckley has also been the President of Club Resorts and Chief Operating Officer since February 1992. On January 1, 1995, Mr. Hinckley became President and Chief Operating Officer of all of ClubCorp's domestic operating subsidiaries.
Terry A. Taylor has been Senior Vice President, Secretary and Chief Legal Officer of ClubCorp since 1990, and has been a director of ClubCorp since January 1994.
Mark W. Dietz has been a director of ClubCorp since 1986 and an Executive Vice President of ClubCorp since January 1995. Mr. Dietz is married to Patricia Dedman Dietz.
Albert E. Chew, III joined the Company in 1988 as Director of Human Resources for Club Resorts. In 1992, Mr. Chew was elected as a Vice President of ClubCorp. Mr. Chew has served as a director of ClubCorp since January 1994 and became Senior Vice President of ClubCorp in 1995. In 1997, Mr. Chew became Executive Vice President of ClubCorp.
Richard S. Poole joined the Company in 1960 and has been a director of ClubCorp since 1969. Mr. Poole served as Executive Vice President of ClubCorp from 1987 through 1989. Since 1989, Mr. Poole has served in various executive capacities with the Company and, beginning in 1995, has resumed serving as Executive Vice President of ClubCorp.
Jerry W. Dickenson joined the Company in 1969 and has been a director of ClubCorp since 1972. Mr. Dickenson served as Executive Vice President of ClubCorp from 1987 through 1989 and in 1995. Mr. Dickenson was the Chairman of the Board of Club Resorts from 1987 through 1994.
Nancy M. Dedman has been a director of ClubCorp since its inception in 1957.
Patricia Dedman Dietz has been a director of ClubCorp since 1982. Ms. Dietz has been a psychotherapist in private practice for the last 14 years.
Robert H. Johnson joined the Company in 1975 and has been a director of ClubCorp since 1988. Mr. Johnson served as President and Chief Operating Officer of CCA from 1986 through 1994. On January 1, 1995, Mr. Johnson became President and Chief Operating Officer of The International Group of ClubCorp.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ----------------------------------
Summary Compensation Table - ----------------------------
The following table sets forth the compensation paid by ClubCorp to its chief executive officer and its four other most highly compensated executive officers (collectively, the "Named Executive Officers") during the years ended December 31, 1997, 1996 and 1995:
_______________________________
(1) The Company's subsidiaries operate primarily on a 52/53 week fiscal year. For 1997, the fiscal year was comprised of 53 weeks. Salary for 1997, 1996, and 1995 includes 53, 52, and 52 weeks, respectively. (2) There was no other annual compensation equal to the lesser of $50,000 or 10% of the total annual salary and bonus reported for each named executive officer in 1997, 1996, or 1995. (3) No restricted stock was awarded for 1997, 1996 or 1995 and there were no unvested restricted stock awards as of December 31, 1997 with the exception of the bonus mentioned in (5) below for 1996. (4) Reflects the dollar value of payouts in 1996 and 1995 (based upon the Formula Price at the date of the payout) relating to restricted stock awarded for periods prior to 1995, as follows: Robert H. Dedman, Sr. - 9,415 shares in 1995 and 1996; Robert H. Dedman, Jr. - 7,494 shares in 1995 and 1996; James M. Hinckley - 6,619 shares in 1995 and 6,618 shares in 1996; James E. Maser - 6,840 shares in 1995 and 1996, and Robert H. Johnson - 6,282 shares in 1995 and 1996. (5) In 1996, Mr. Johnson elected to be paid 80% of his bonus in cash and 20% in restricted stock. The portion of Mr. Johnson's bonus paid in stock is reported at the fair market value (based upon the Formula Price at the date of the payout) of $9,533. (6) Represents amounts paid to Mr. Dedman for services rendered as a director of Franklin. (7) Consists of $705 in 1997, $676 in 1996, and $840 in 1995 in Basic Matching Contributions and Discretionary Matching Contributions made by ClubCorp on Mr. Dedman's behalf pursuant to the Plan and $8,300 in 1996 and $13,500 in 1995 paid to Mr. Dedman for services rendered as a director of Franklin. (8) Represents Basic Matching Contributions and Discretionary Matching Contributions made by ClubCorp on Mr. Hinckley's, Mr. Maser's, and Mr. Johnson's behalf, respectively, pursuant to the Plan.
SAR Exercise and Value Table - --------------------------------
The following table summarizes for each Named Executive Officer the aggregated SAR exercises during the fiscal year ended December 31, 1997 and the value of all SARs for each Named Executive Officer as of December 31, 1997:
___________________________
(1) Based upon the difference between the fair market value of the Common Stock on the date of grant and on December 31, 1997. The Formula Price as of December 31, 1997 was $14.21 per share. The fair market value per share of the Common Stock as of January 1, 1988, 1989 and 1990 was $6.17, $6.50 and $7.24, respectively. (2) These SARs were awarded under the Club Corporation of America Stock Appreciation Rights Program. They vest over a 10-year period with 10% of each SAR vesting on each anniversary of the date of grant. Except under certain circumstances, such as termination of the executive's employment, no payout may be made until a SAR is fully vested (i.e., 10 years after the date of grant). At the time of payout, the Company may pay the value of the SAR in the form of cash or an equivalent number of shares of Common Stock (based upon the fair market value of the Common Stock on the date of payment).
Aggregated Option Exercises and Fiscal Year-End Option Value Table - --------------------------------------------------------------------------
The Company did not grant any stock options or SARs to any of the Named Executive Officers during 1997. The following table summarizes for each Named Executive Officer, each exercise of stock options during the fiscal year ended December 31, 1997 and the fiscal year-end value of unexercised options:
_________________________
(1) The Club Corporation International Executive Stock Option Plan (the "Option Plan") was adopted August 31, 1995. The Option Plan provides for granting of options to purchase shares of Common Stock to key management personnel at a price not less than the fair market value at the date of grant. The options fully vest 120 days prior to their expiration date. The Option Plan provides for accelerated vesting, not to exceed 10% per year, if the employee maintains a certain performance level as defined in the Option Plan. Each of the named executive officers met the required performance level defined in the Option Plan for 1996 and 1997. Thus, 20% of the shares granted are vested and exercisable. (2) Based upon the difference between the fair market value of the underlying securities and the exercise price of the option. The Formula Price as of December 31, 1997 was $14.21 per share. The exercise price of the option was $10.14.
COMPENSATION OF DIRECTORS
Directors who are not officers of the Company receive $200 for each ClubCorp board meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, ClubCorp had no Compensation Committee or other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers were made by the Chairman of the Board and the President of ClubCorp.
EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
The Company does not have any material employment agreements with its officers or employees. The Company does have non-disclosure and noncompetition agreements with the majority of its salaried employees, excluding the Chairman of the Board and Chief Operating Officer and certain other executive officers. In addition, the Company does not maintain key-man life insurance policies on any of its officers or employees.
INDEMNIFICATION
ClubCorp and many of its subsidiaries, including CCA and Club Resorts, have adopted charter and/or bylaw provisions that require such corporations to indemnify, to the maximum extent permissible under applicable law, each of their directors, officers, employees and agents against any liability that they may incur in connection with or resulting from any threatened, pending or completed legal proceeding inquiry or investigation by reason of the fact that any such person is or was a director, officer, employee or agent of the corporation.
ClubCorp maintains an executive liability and indemnification insurance policy with an annual limit of liability of $5,000,000. The insurance policy generally covers the wrongful acts of the directors and officers of ClubCorp and its subsidiaries (excluding FFFC and Franklin). The policy coverage is subject to a number of exclusions, which include: (1) violations of federal or state securities laws; (2) violations of federal or state antitrust laws; (3) violations of federal or state environmental laws; (4) violations of ERISA; (5) libel or slander; and (6) stockholder derivative actions. The Company purchases such insurance policy on an annual basis, with the current policy period expiring on October 19, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial ownership of ClubCorp's Common Stock, as of December 31, 1997, by (i) each Named Executive Officer, (ii) each person or group known by ClubCorp to be the beneficial owner of more than 5.0% of the outstanding Common Stock, (iii) each director of ClubCorp and (iv) all directors and executive officers of ClubCorp as a group:
____________________ * less than 1.0%
(1) Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. All beneficial owners of more than 5.0% of the Common Stock can be contacted at 3030 LBJ Freeway, Suite 700, Dallas, Texas 75234. Percentages are based on 85,003,839 shares of Common Stock outstanding as of December 31, 1997. (2) Includes 128,864 shares pledged to a not-for-profit institution. (3) Excludes 14,568,096 shares owned by trusts for the benefit of Robert H. Dedman, Jr. and 14,662,396 shares owned by trusts for the benefit of Patricia Dedman Dietz, for which James E. Maser, and Jerry W. Dickenson, among others, serve as trustees and share voting and investment power. (4) Excludes 3,775,673 shares owned by the Plan for the benefit of the participants in the Plan, for which James E. Maser and Albert E. Chew, III serve as the Trustees and share voting and investment power. (5) Includes 14,568,096 shares owned by trusts for the benefit of Robert H. Dedman, Jr. (see note (3) above), and 9,246 shares owned by Robert H. Dedman, Jr.'s wife, Rachael Dedman. Excludes 14,662,396 shares owned by trusts for the benefit of Patricia Dedman Dietz and 60,410 shares owned by trusts for the benefit of the Dietz's minor children, Christina Dedman, Jonathan Dedman, and Jeffrey Patrick Dedman, for which Robert H. Dedman, Jr. serves as a trustee and shares voting and investment power (6) Includes 619,533 shares owned by Mark W. Dietz's wife, Patricia Dedman Dietz, 14,662,396 shares owned by trusts for the benefit of Mrs. Dietz (see note (3) above) and 60,410 shares owned by trusts for the benefit of the Dietz's minor children, Christina Dedman, Jonathan Dedman, and Jeffrey Patrick Dedman, for which Mr. Dietz is a trustee and shares voting and investment power. (7) Consists of shares owned by Nancy M. Dedman's husband, Robert H. Dedman, Sr. (8) Includes 11,511 shares owned by Patricia Dedman Dietz's husband, Mark W. Dietz, 14,662,396 shares owned by trusts for Mrs. Dietz's benefit (see note (3) above), and 60,410 shares owned by trusts for the benefit of the Dietz's minor children, Christina Dedman, Jonathan Dedman, and Jeffrey Patrick Dedman, for which Mrs. Dietz is a trustee and shares voting and investment power. Excludes 14,568,096 shares owned by trusts for the benefit of Robert H. Dedman, Jr., for which Mrs. Dietz is a trustee and shares voting and investment power. Robert H. Dedman, Sr. and his family currently own approximately 90.3% of the Common Stock. The holders of a majority of the Common Stock can elect all of ClubCorp's directors and approve or disapprove certain fundamental corporate transactions, including a merger or sale of all of the Company's assets. The transfer of a substantial portion of Mr. Dedman's Common Stock, including a transfer upon his death, could result in a change in control of the Company and could affect the management or direction of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the period from January 1, 1997 to March 13, 1998, Robert H. Dedman, Jr., the President, Chief Operating Officer and a director of ClubCorp, sold 18,328 shares of Common Stock, and a trust for his benefit sold 149,931 shares of Common Stock, for consideration of approximately $250,000 and $1,875,000, respectively. A trust for the benefit of Patricia Dedman Dietz, a director of ClubCorp, sold 133,019 shares of Common Stock for consideration of approximately $1,673,000. James P. McCoy, Jr., Chief Financial Officer, Senior Vice President, and director of ClubCorp, sold 6,300 shares of Common Stock for consideration of approximately $75,000. Jerry W. Dickenson, a director of ClubCorp, sold 7,128 shares of Common Stock for consideration of approximately $85,000. A trust for the benefit of James E. Maser, Vice Chairman of the Board, sold 10,841 shares of Common Stock for consideration of approximately $129,000. Linda Dedman Scarborough, sister of Robert H. Dedman, Sr., sold 4,680 shares of Common Stock for consideration of approximately $62,000. All of such sales were made at the then-current Formula Price and were purchased by either the Plan or the Company. See Item 5, "Market for Registrant's Common Equity and Related Stockholder Matters".
During 1997, the Company incurred approximately $62,000 in expenses for the benefit of Robert H. Dedman, Sr. which were reimbursed by Mr. Dedman.
On June 15, 1995, Robert H. Dedman, Chairman of the Board and Chief Executive Officer, made loans of $3.0 million and $5.0 million, respectively, to two subsidiaries. The promissory notes bear interest at a variable rate which is a bank's prime rate. Payments of principal and interest are due in monthly installments based on a five year amortization of the original note balances. The notes are due in full on June 15, 2000. One note is unsecured. The second is secured by a deed of trust on the property. For 1997, payments were made of approximately $1,966,000 representing principal repayments of approximately $1,524,000 and interest of approximately $442,000.
On July 28, 1997, Robert H. Dedman, Chairman of the Board and Chief Executive Officer, made an additional loan of approximately $2.6 million to one of the above subsidiaries. The note bears interest at a variable rate which is a bank's prime rate. Payments of principal and interest are due in monthly installments based on a five year amortization of the original note balance. The note is due in full on June 30, 2002 and is secured by a deed of trust on the property. For 1997, payments were made of approximately $266,000 representing principal repayments of approximately $177,000 and interest of approximately $89,000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) The following audited Consolidated Financial Statements of ClubCorp and its subsidiaries as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995 are included in this Annual Report on Form 10-K, beginning on Page :
Independent auditors' report
Consolidated balance sheet
Consolidated statement of operations
Consolidated statement of stockholders' equity
Consolidated statement of cash flows
Notes to consolidated financial statements
(a)(2) The following financial statement schedule is included in this Annual Report on Form 10-K, beginning on Page S-1:
Independent auditors' report on financial statement schedule
Schedule II Valuation and qualifying accounts
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or the notes thereto.
(a)(3) See Index to Exhibits on page 40. Exhibits 10.4 through 10.7 and Exhibits 10.19 and 10.20 are compensatory plans.
(b) Reports on Form 8-K
Form 8-K was filed on April 3, 1997 relating to a change in fiscal year.
(c) Exhibits See Index to Exhibits on page 40.
(d) Financial Statement Schedule
The financial statement schedule required by paragraph (d) of Item 14 is presented on page S-2.
SUPPLEMENTAL INFORMATION
The Registrant has not furnished to its security holders an annual report covering the Registrant's last fiscal year or any proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders other than a proxy for the election of officers and directors at the annual shareholders meeting if the security holder did not plan to attend.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLUB CORPORATION INTERNATIONAL
By: * ------------------------------------ Robert H. Dedman, Sr. Chairman of the Board and Chief Executive Officer
By: * ------------------------------------ James P. McCoy, Jr. Chief Financial Officer/ Chief Accounting Officer
Date: March 27, 1998 ----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
____________________ * Power of Attorney and Unanimous Written Consent of the Board of Directors authorizing James P. McCoy, Jr. to sign this annual report on Form 10-K on behalf of the directors and certain officers of the Company are being filed with the Securities and Exchange Commission.
_______________________ * Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-83496).
** Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-89818).
+ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
^ Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-96568).
^^ Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 333-08041).
~ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1996.
# Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal period ended June 11, 1997.
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal period ended September 3, 1997.
INDEPENDENT AUDITORS' REPORT - ------------------------------
The Board of Directors Club Corporation International
We have audited the accompanying consolidated balance sheet of Club Corporation International and subsidiaries (ClubCorp) as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of ClubCorp's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ClubCorp as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in note 1, ClubCorp changed its method of accounting for the impairment of long-lived assets in 1995 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
KPMG Peat Marwick LLP
Dallas, Texas February 27, 1998
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying Notes 2, 3, 4, 11 and 12 for supplemental disclosure of non-cash activities. See accompanying notes to consolidated financial statements.
CLUB CORPORATION INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------- Consolidation - ------------- The consolidated financial statements include the accounts of Club Corporation International (Parent) and its subsidiaries (collectively ClubCorp) except for certain subsidiaries of Franklin Federal Bancorp, a Federal Savings Bank (Franklin). On January 2, 1997, Franklin sold certain assets and transferred certain liabilities to Norwest Corporation. Thus, Franklin is classified as a discontinued operation (Note 2) and Franklin's assets, liabilities, income (loss) from operations and cash flow activity are segregated in the accompanying financial statements. Unless otherwise indicated, all financial information in the Notes to the Consolidated Financial Statements excludes the discontinued operation.
Investments in affiliates are accounted for on the equity method. Under the equity method, original investments are recorded at cost and are adjusted by the ClubCorp's share of the undistributed earnings or losses of these affiliates (Note 4). All material intercompany balances and transactions have been eliminated.
No minority interest is recorded for minority stockholders of two city clubs, two resort subsidiaries and two real estate development subsidiaries because of deficit capital positions and a joint venture partner's deficit capital position. The deficit capital position of the joint venture partner is included as a reduction of other liabilities. Minority stockholders' share of these entities' cumulative and 1997 losses which approximate $7,409,000 and $1,177,000, respectively, have been charged to ClubCorp. Future earnings of these subsidiaries will be credited to ClubCorp to the extent of minority interest losses previously absorbed.
Nature of operations - ---------------------- Club Corporation International is a holding company incorporated under the laws of the State of Nevada that, through its subsidiaries, has operated in two distinct business segments, hospitality and financial services. The hospitality segment involves the operation of private clubs (including city, city/athletic, athletic and country clubs), resorts, golf clubs and public golf facilities through sole ownership, partial ownership (including joint venture interests) and management agreements. ClubCorp's primary sources of revenue in its hospitality segment include membership dues and fees, membership deposits, food and beverage sales and revenues from golf operations and lodging facilities. The Company also receives management fees with respect to facilities that it manages for third parties.
The financial services segment is presented as discontinued operations for financial reporting purposes.
Fiscal year - ------------ Effective January 1, 1997, ClubCorp changed its fiscal year from a calendar year ending December 31 to a 52/53 week fiscal year ending on the last Wednesday of December. The hospitality segment subsidiaries were previously reported on a 52/53 week fiscal year with acquisitions, divestitures and other material transactions of the hospitality segment during the period from December 25, 1996 to December 31, 1996 and December 27, 1995 to December 31, 1995 recorded in these statements. The current year is comprised of the 53 weeks ended December 31, 1997. The accounts of Franklin are included for all of calendar years 1996 and 1995.
Estimates - --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents - ---------------------------- ClubCorp's policy is to invest cash in excess of operating requirements in income producing investments. For purposes of the consolidated statement of cash flows, cash and cash equivalents include cash on hand and interest-bearing deposits in financial institutions, substantially all of which have maturities of three months or less.
Impairment of long-lived assets and intangible assets - ----------------------------------------------------------- In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121 requires, among other things, that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
ClubCorp adopted SFAS 121 for the year ended December 31, 1995 which resulted in an impairment loss of $23,000,000 from assets to be held and used. An additional impairment loss of $2,800,000 was recorded for the year ended December 31, 1996. The impairment losses are reported separately in the consolidated statement of operations.
ClubCorp assessed the recoverability of long-lived assets by determining whether the fixed asset balance plus any intangibles for each property could be recovered over its remaining life through undiscounted future operating cash flows. Fair value, for purposes of calculating impairment, was measured based on discounted future operating cash flows using a risk-adjusted discount rate. Events or changes in circumstances identified indicating that the carrying amount of certain long-lived assets may not be recoverable were primarily decreases in the market values of assets and current period cash flow deficits combined with historical cash flow deficits and forecasts of continuing deficits. In 1996 and 1995, impaired assets identified were property and equipment including land and land improvements, buildings, leasehold improvements, and furniture and equipment for certain properties. No intangible assets were associated with these properties. ClubCorp believes that no impairment has occurred related to any of its intangible assets.
Identifiable intangibles represent primarily the excess cost over fair value of net assets of businesses acquired and public golf leasehold interests which are amortized using the straight-line method over 5 to 40 years.
Property and equipment - ------------------------ Property and equipment is stated at cost. Land and land improvements include nondepreciable golf course improvements including fairways, roughs and trees.
ClubCorp capitalizes costs which both materially add value and appreciably extend the useful life of an asset. With respect to golf course improvements, only costs associated with original construction, complete replacements, or the addition of new trees, sandtraps, fairways or greens are capitalized. All other related costs are expensed as incurred.
Depreciation is provided primarily using the straight-line method based on the following estimated useful lives:
Leasehold improvements and assets under capital leases are amortized over the period of the respective leases using the straight-line method.
Inventories - ----------- Inventories, which consist primarily of food and beverage and merchandise held for resale, are stated at the lower of cost (first-in, first-out method) or market value.
Real estate held for sale - ----------------------------- Real estate held for sale consists primarily of land, land development costs and related amenities if they are to be left with the project upon completion. Costs are allocated to project components based on the specific identification method whenever possible. Otherwise, costs are allocated based on their relative sales value. At December 31, 1997 and December 31, 1996, real estate held for sale was $28,180,000 and $34,869,000, respectively, and is included in other non-current assets in the accompanying financial statements.
Sales of real estate generally are accounted for under the full accrual method. Under that method, gain is not recognized until the collectibility of the sales price is reasonably assured and the earnings process is virtually complete. One real estate subsidiary has a project that is accounted for under the percentage-of-completion method since the subsidiary has material obligations under sales contracts to provide improvements after the property is sold. Under the percentage-of-completion method, the gain on the sale is recognized as the related obligations are fulfilled.
Income taxes - ------------- Income taxes are accounted for using the asset and liability method. Under this method deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Deferred membership dues - -------------------------- Deferred membership dues represents lifetime membership dues and prepaid dues. Deferred membership dues are recognized as income using the straight-line method over 20 years, the estimated average life of a lifetime membership. Prepaid dues are recognized as income over the prepayment period.
Foreign currency translation - ------------------------------ Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the current exchange rate in effect at year-end. All foreign income and expenses are translated at the weighted average exchange rates during the year.
Translation gains and losses are reported separately as a component of stockholders' equity. Realized foreign currency transaction gains and losses are reflected in the statement of operations.
Treasury stock - --------------- Purchases of treasury stock are recorded at the cost of the shares acquired. When treasury stock is subsequently issued, the difference between the cost of shares issued, using the average cost method, and the sales price is charged or credited to additional paid-in capital.
Stock-based compensation - ------------------------- Stock-based compensation is accounted for using Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees". Under APB 25 if the exercise price of the options is greater than or equal to the market price at the date of grant, no compensation expense is recorded. Effective fiscal year-end 1996, ClubCorp adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-based Compensation" (Note 9).
Revenue recognition - -------------------- Revenue from green fees, lodging, cart rentals, food and beverage sales and merchandise sales are generally recognized at the time of sale or when the service is provided.
Revenues from membership dues are generally billed monthly and recognized in the period earned. The monthly dues are expected to cover the cost of providing future membership services. Membership deposits represent advance initiation deposits paid by members and are generally refundable in 30 years from the date of acceptance as a member. The difference between the amount of the membership deposit paid and the present value of the obligation is recognized as revenue upon acceptance. The membership deposit liability accretes over 30 years using the interest method. The accretion is recorded to interest expense in the accompanying statement of operations. At year-end 1997, the amount of membership deposits contractually due and payable during the next 5 years is not significant.
Divestiture of subsidiaries - ----------------------------- Gain (loss) on divestitures includes gains and losses from the disposition of assets and subsidiaries. Subsidiaries are divested when management determines they will be unable to provide a positive contribution to cash flows in future periods. Gains from divestitures are generally recognized in the period in which operations cease and losses are recognized when they become apparent.
Earnings per share - -------------------- In February 1997, FASB issued SFAS No. 128, "Earnings per Share", which establishes new standards for computing and presenting basic and diluted earnings per share. ClubCorp implemented these standards at year-end 1997 with no impact on the earnings per share calculation for the periods presented in the accompanying statement of operations.
Earnings per share is computed using the weighted average number of common shares outstanding of 85,283,231, 85,601,163, and 86,141,082 for basic and 85,946,231, 85,854,088 and 86,141,082 for diluted for 1997, 1996 and 1995, respectively. The weighted average shares outstanding used in the calculation of diluted earnings per share includes options to purchase common stock (Note 9).
Segment disclosures - -------------------- In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 establishes standards for reporting information about operating segments in interim and annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The disclosures required by SFAS 131 will be reflected in ClubCorp's 1998 consolidated financial statements.
Reclassifications - ----------------- Certain amounts previously reported have been reclassified to conform with the current year presentation.
NOTE 2. DISCONTINUED OPERATIONS - ---------------------------------- On August 7, 1996, Franklin entered into an agreement to sell certain assets and transfer certain liabilities of Franklin to Norwest Corporation pending regulatory approval. The sale was consummated on January 2, 1997 for $89,968,000. ClubCorp's gain on the sale, net of income taxes and minority interest, is $25,146,000 for the year ended December 31, 1997.
In January 1997, Franklin paid $62,500,000 in dividends to its shareholders. ClubCorp used a majority of its dividend to repay long-term debt.
The financial services assets, financial services liabilities and income (loss) from discontinued operations are segregated in the accompanying financial statements, net of minority interest. The condensed balance sheet and statement of operations of the discontinued segment are as follows (dollars in thousands):
Statement of Operations -------------------------
In 1996, in conjunction with the sale, Franklin's Board of Directors made a decision to sell the fixed-rate mortgage-backed securities and use the funds to prepay the Federal Home Loan Bank (FHLB) advances. A write down of the portfolio was recognized due to the decision to sell the fixed-rate mortgage-backed securities and the decline in their value deemed other than temporary. Losses recognized as of December 31, 1996 on the sale of fixed-rate mortgage-backed securities and write down on the remaining securities to be sold totaled $21,500,000. The proceeds on the sale of these investments allowed Franklin to prepay a majority of the FHLB advances.
NOTE 3. ACQUISITIONS - ---------------------- During 1997, ClubCorp purchased the stock of a golf club and substantially all the assets of a country club and a hotel. The hotel is an addition to an existing resort subsidiary of the Parent.
During 1996, ClubCorp purchased substantially all the assets of three golf clubs, two country clubs and two resorts. ClubCorp previously leased one of the resorts.
During 1995, ClubCorp purchased substantially all of the assets of four country clubs, a fitness and tennis center and the remaining 49% minority interest of stock in a corporation which operates eight public golf facilities. ClubCorp previously consolidated the public golf subsidiary.
These acquisitions were accounted for using the purchase method and, accordingly, the acquired assets and liabilities were recorded based on their estimated fair values at the dates of acquisition. A summary of the combined assets and liabilities on the acquisition dates is as follows (dollars in thousands):
The deposit on purchase is an advance payment made in 1995 on the purchase of a golf club. The purchase was finalized during 1996.
The following unaudited proforma financial information for ClubCorp assumes the acquisitions in 1997 and 1996 occurred at the beginning of their respective acquisition year and the preceding year. This proforma summary does not necessarily reflect the results of operations as they would have occurred or the results which may occur in the future (dollars in thousands, except per share data):
NOTE 4. INVESTMENTS IN AFFILIATES - ------------------------------------- During 1997, ClubCorp entered into joint venture agreements to build and operate a golf course and a hotel and to operate a country club. In addition, ClubCorp sold the interest in a resort joint venture for cash and a note receivable.
ClubCorp's other investments in affiliates include joint ventures for the operation of four real estate developments, three country clubs, two golf clubs and two city clubs.
ClubCorp does not have operational or financial control over these entities; therefore the entities are accounted for using the equity method and the investment balances are included in other non-current assets in the accompanying financial statements.
A summary of the significant financial information of affiliated companies accounted for on the equity method is as follows (dollars in thousands):
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS - ------------------------------------------------- Fair value estimates are made at a specific point in time, based on relevant information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time ClubCorp's entire holdings of a particular financial instrument. Because no market exists for certain financial instruments, fair value estimates are based on management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates. At December 31, 1997 and 1996, ClubCorp's estimate of fair value approximates the carrying value of its financial instruments.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and cash equivalents - ---------------------------- The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these instruments.
Long-term debt - --------------- Fair values for fixed rate and other obligations are based on the discounted value of contractual cash flows using ClubCorp's incremental borrowing rates for similar types of debt arrangements. The fair value calculated at December 31, 1997 and 1996 approximates the carrying value. ClubCorp's fluctuating rate and capital lease obligations' carrying amounts approximate fair value.
Membership deposits - -------------------- The carrying amount of membership deposits is the present value of the future obligations and therefore approximates fair value.
NOTE 6. PROPERTY AND EQUIPMENT - ---------------------------------- Property and equipment consists of the following at year-end (dollars in thousands):
NOTE 7. CURRENT LIABILITIES - ------------------------------ Current liabilities consist of the following at year-end (dollars in thousands):
NOTE 8. LONG-TERM DEBT AND OPERATING LEASES - ------------------------------------------------- Long-term borrowings are summarized below with weighted average interest rates of 8.4% and 8.5% at year-end 1997 and 1996, respectively, and the range of maturity dates in parentheses (dollars in thousands):
Certain real and personal property and equipment of the Parent's subsidiaries are pledged as collateral on their long-term debt.
As the result of operating performance of certain subsidiaries, at December 31, 1997 and subsequently, certain subsidiaries were not in compliance with debt covenants due to non-payment of principal due and covenants relating to financial ratios on long-term debt totaling $3,996,000 and $2,730,000, respectively.
A subsidiary of Parent maintains an external bridge financing agreement with a financial institution. The bridge financing arrangement is a "guidance line", styled as a promissory note, and is due on a short-term basis up to a maximum of $75,000,000. Borrowings are generally renewed as they become due; therefore, the subsidiary does not expect to be required to repay the outstanding borrowings within the next twelve months. As of December 31, 1997 and 1996, $7,080,000 and $65,799,000, respectively, is outstanding and included in the current portion of long-term debt in the accompanying financial statements. An additional $4,703,000 and $8,653,000 in 1997 and 1996, respectively, is considered outstanding under this agreement for loan guarantees and unused letters of credit. ClubCorp repaid $49,475,000 in January 1997 with the proceeds from the sale of Franklin (Note 2).
The amounts of long-term debt maturing in each of the 4 years subsequent to 1998 are as follows (dollars in thousands):
The provisions of certain subsidiary lending agreements limit the amount of dividends that may be paid to Parent. Under the most restrictive of these limitations, at December 31, 1997, approximately $85,000,000 of retained earnings was available for the declaration of dividends to Parent.
The amount of cash paid for interest in 1997, 1996 and 1995 was approximately $24,700,000, $26,000,000 and $24,700,000, respectively.
ClubCorp leases operating facilities under agreements ranging from 1 to 45 years. These agreements normally provide for minimum rentals plus executory costs. In some cases, ClubCorp must pay contingent rent generally based on a percentage of gross receipts or positive cash flow as defined in the lease agreements. Future minimum lease payments required at December 31, 1997 under operating leases for buildings and recreational facilities with initial noncancelable lease terms in excess of one year are as follows (dollars in thousands):
Total facility rental expense (including contingent rent) during 1997, 1996 and 1995 was $32,018,000, $35,816,000 and $39,647,000, respectively. Contingent rent during 1997, 1996 and 1995 was $7,840,000, $7,565,000 and $11,727,000, respectively.
NOTE 9. BENEFIT PLANS - ------------------------ ClubCorp maintains a qualified contributory profit sharing plan covering substantially all eligible employees of its various domestic subsidiaries that elect to participate. The profit sharing plan allows participants to contribute a maximum of 6% of their annual compensation. Participant contributions are matched by the participating subsidiary ranging from 20% of the participant's contributions to 50% based on improvements in the value of ClubCorp's common stock.
All of the assets of the plan are invested in ClubCorp common stock, except for temporary investments of cash. Since ClubCorp's common stock is not publicly traded, ClubCorp has granted the trustees of the plan the right to require ClubCorp to purchase ClubCorp common stock held by the plan (3,775,673 and 3,590,793 shares at December 31, 1997 and 1996, respectively) at the current appraised value ($14.21 and $12.04 at December 31, 1997 and 1996, respectively) as necessary in order to meet the requirements of the Employee Retirement Income Security Act and the plan. Accordingly, the redemption value of ClubCorp's common stock held by the benefit plan has been reclassified out of stockholders' equity in the accompanying consolidated balance sheet. This redemption right has never been exercised by the trustees, and management does not believe that the trustees have any intention to exercise the redemption right in the foreseeable future.
ClubCorp maintains a second qualified contributory profit sharing plan for all eligible employees of certain domestic subsidiaries. The plan allows participants to invest their contributions among five investment fund options.
The Club Corporation International Executive Stock Option Plan was adopted August 31, 1995. Under the plan, 4,000,000 options to purchase shares of common stock may be granted to key management personnel at a price not less than fair market value at the date of grant. The options fully vest 120 days prior to their expiration date. The plan provides for accelerated vesting, not to exceed 10% per year, if the employee maintains a certain performance level as defined in the plan. Employees are required to maintain a minimum ownership level of company stock holdings, as set forth in the plan, to sell stock acquired from exercised options. In August 1995, 2,945,000 options were granted at $10.14 per share with an expiration date of December 31, 2009. In January 1996, 190,000 options were granted at $10.01 per share with an expiration date of December 31, 2010 and in January 1997, an additional 150,000 options were granted at $12.04 per share with an expiration date of December 31, 2011.
ClubCorp applies APB 25 in accounting for the plan, therefore no compensation expense has been recognized for the options. In accordance with the requirements of SFAS 123, the fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following assumptions for the 1997, 1996 and 1995 grants: risk-free interest rates of 5.8%, 5.6% and 6.6%, respectively, an expected volatility of 25%, an expected life of 10 years and zero dividend yield. A summary of the status of the options outstanding as of December 31, 1997, 1996 and 1995 and changes during the years ending on those dates is as follows:
If compensation cost for the plan had been determined based on the fair value at the grant dates for the options consistent with the method of SFAS 123, ClubCorp's net income (loss) and net income (loss) per share would have been reduced to the following pro forma amounts (dollars in thousands, except per share amounts):
NOTE 10. COMMITMENTS AND CONTINGENCIES - ------------------------------------------ ClubCorp is subject to certain pending or threatened litigation and other claims. Management, after review and consultation with legal counsel, believes ClubCorp has meritorious defenses to these matters and that any potential liability from these matters would not materially affect ClubCorp's consolidated financial statements.
NOTE 11. INTEREST AND INVESTMENT INCOME - -------------------------------------------- Interest and investment income consists of the following (dollars in thousands):
NOTE 12. INCOME TAXES - ------------------------ Income (loss) from continuing operations before income taxes and minority interest consists of the following (dollars in thousands):
The income tax (provision) benefit consists of the following (dollars in thousands):
The differences between income taxes computed using the U.S. statutory Federal income tax rate of 35% and actual income tax provision as reflected in the accompanying consolidated statement of operations are (dollars in thousands):
To fully realize the deferred tax asset ClubCorp will need to generate future taxable income of approximately $353,000,000 by 2012. Based on the Company's historical pre-tax earnings, adjusted for significant nonrecurring items such as gains (losses) on divestitures, management believes it is more likely than not ClubCorp will realize the benefit of the deferred tax assets, net of the valuation allowance, existing at December 31, 1997. 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 $66,566,000 for the year ended December 31, 1997. 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 ClubCorp will generate any specific level of continuing earnings. ClubCorp also has approximately $6,600,000 of tax credits available to offset regular taxes payable which expire in varying amounts from 1998 to 2003.
ClubCorp's net operating loss carryforwards at December 31, 1997, after current year utilization of net operating loss carryforwards, were approximately $556,092,000 and $136,174,000 for regular tax and alternative minimum tax, respectively. These net operating loss carryforwards are available to offset future taxable income and will expire from 2004 to 2010.
The Company's federal income tax returns for 1991 through 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.
The components of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows (dollars in thousands):
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------------ The hospitality segment's operations for the first three quarters consist of 12 weeks each and the fourth quarter includes 16 weeks in 1996 and 17 weeks in 1997.
Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. Selected quarterly financial data are summarized as follows (dollars in thousands, except per share data):
As discussed in Note 12, ClubCorp recorded a significant tax adjustment in the fourth quarter of 1997.
INDEPENDENT AUDITORS' REPORT ----------------------------
The Board of Directors Club Corporation International:
Under date of February 27, 1998, we reported on the consolidated balance sheet of Club Corporation International and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which are included in the annual report on Form 10-K for the fiscal year ended December 31, 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas February 27, 1998
(A) Accounts receivable charged off. (B) Utilization and disallowance of net operating loss carryforward. (C) Generation of net operating loss.