UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

FORM 10-Q

 

 

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2004

 

OR

 

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from              to

 

Commission File Number: 1-13703

 

SIX FLAGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

11501 Northeast Expressway, Oklahoma City, Oklahoma 73131

(Address of Principal Executive Offices, including Zip Code)

 

(405) 475-2500

(Registrant’s Telephone Number, including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

At November 1, 2004, Six Flags, Inc. had outstanding 93,041,528 shares of Common Stock, par value $.025 per share.

 

 

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

 

Some of the statements contained in or incorporated by reference in this Quarterly Report on Form 10-Q constitute forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act.  The words ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends’’ and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including the following:

 

•                  Factors impacting attendance, such as local conditions, events, disturbances and terrorist activities;

•                  Accidents occurring at our parks;

•                  Adverse weather conditions;

•                  Competition with other theme parks and other recreational alternatives;

•                  General economic conditions (including consumer spending patterns); and

•                  Pending, threatened or future legal proceedings.

 

A more complete discussion of these and other applicable risks is contained under the caption “Business – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2003.  See “Available Information” below.

 

We caution the reader that these risks may not be exhaustive.  We operate in a continually changing business environment, and new risks emerge from time to time.  We cannot predict such risks nor can we assess the impact, if any, of such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those projected in any forward-looking statements.  Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Available Information

 

Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through our website (www.sixflags.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.

 

2

 

PART I — FINANCIAL INFORMATION

 

Item 1 — Financial Statements

 

SIX FLAGS, INC.

 

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	177,459,000		98,189,000
Accounts receivable		62,468,000			27,836,000
Inventories		32,405,000			23,694,000
Prepaid expenses and other current assets		28,399,000			31,093,000
Restricted-use investment securities		—			317,913,000
Total current assets		300,731,000			498,725,000
Other assets:
Debt issuance costs		43,380,000			55,062,000
Deposits and other assets		32,035,000			28,104,000
Total other assets		75,415,000			83,166,000
Property and equipment, at cost		2,860,333,000			2,808,079,000
Less accumulated depreciation		817,817,000			718,059,000
Total property and equipment		2,042,516,000			2,090,020,000
Assets held for sale		—			770,689,000
Intangible assets, net of accumulated amortization		1,232,063,000			1,240,171,000
Total assets		$	3,650,725,000		4,682,771,000

 

See accompanying notes to consolidated financial statements.

 

3

 

SIX FLAGS, INC.

 

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2004			December 31, 2003
		(Unaudited)
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	42,089,000		28,754,000
Accrued liabilities		79,265,000			60,639,000
Accrued interest payable		41,319,000			47,846,000
Deferred income		21,201,000			6,441,000
Debt called for prepayment		—			301,200,000
Current portion of long-term debt		16,355,000			19,011,000
Total current liabilities		200,229,000			463,891,000
Long-term debt		2,104,460,000			2,354,194,000
Minority interest		83,741,000			64,793,000
Liabilities from discontinued operations		—			69,130,000
Other long-term liabilities		34,374,000			43,311,000
Deferred income taxes		11,713,000			44,283,000
Mandatorily redeemable preferred stock (redemption value of $287,500,000)		281,964,000			281,119,000
Stockholders’ equity:
Preferred stock of $1.00 par value		—			—
Common stock of $.025 par value		2,326,000			2,315,000
Capital in excess of par value		1,750,741,000			1,747,425,000
Accumulated deficit		(794,112,000		)	(422,357,000	)
Deferred compensation		(2,844,000		)	—
Accumulated other comprehensive income (loss)		(21,867,000		)	34,667,000
Total stockholders’ equity		934,244,000			1,362,050,000
Total liabilities & stockholders’ equity		$	3,650,725,000		4,682,771,000

 

See accompanying notes to consolidated financial statements.

 

4

 

SIX FLAGS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(UNAUDITED)

 

		2004			2003
Revenue:
Theme park admissions		$	286,596,000		300,821,000
Theme park food, merchandise and other		240,813,000			244,371,000
Total revenue		527,409,000			545,192,000
Operating costs and expenses:
Operating expenses		145,480,000			141,693,000
Selling, general and administrative		57,680,000			55,081,000
Noncash compensation (primarily selling, general and administrative)		160,000			25,000
Costs of products sold		43,221,000			42,445,000
Depreciation		37,161,000			35,140,000
Amortization		323,000			263,000
Total operating costs and expenses		284,025,000			274,647,000
Income from operations		243,384,000			270,545,000
Other income (expense):
Interest expense		(46,668,000		)	(52,417,000	)
Interest income		1,873,000			873,000
Minority interest in earnings		(25,814,000		)	(26,526,000	)
Early repurchase of debt		(490,000		)	—
Other income (expense)		(14,802,000		)	(1,001,000	)
Total other income (expense)		(85,901,000		)	(79,071,000	)
Income from continuing operations before income taxes		157,483,000			191,474,000
Income tax expense		101,116,000			74,440,000
Income from continuing operations		56,367,000			117,034,000
Discontinued operations, inclusive of tax expense of $20,135,000 in 2003		—			23,139,000
Net income		$	56,367,000		140,173,000
Net income applicable to common stock		$	50,874,000		134,679,000
Weighted average number of common shares outstanding - basic		93,042,000			92,617,000
Weighted average number of common shares outstanding - diluted		106,831,000			106,409,000
Net income per average common share outstanding - basic:
Income from continuing operations		$	0.55		1.20
Discontinued operations, inclusive of tax expense		—			0.25
Net income		$	0.55		1.45
Net income per average common share outstanding - diluted:		$
Income from continuing operations		0.53			1.10
Discontinued operations, inclusive of tax expense		—			0.22
Net income		$	0.53		1.32

 

See accompanying notes to consolidated financial statements.

 

5

 

SIX FLAGS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(UNAUDITED)

 

		2004			2003
Revenue:
Theme park admissions		$	499,922,000		520,682,000
Theme park food, merchandise and other		428,711,000			429,744,000
Total revenue		928,633,000			950,426,000
Operating costs and expenses:
Operating expenses		366,173,000			349,254,000
Selling, general and administrative		171,698,000			177,462,000
Noncash compensation (primarily selling, general and administrative)		482,000			76,000
Costs of products sold		79,061,000			75,978,000
Depreciation		110,313,000			105,664,000
Amortization		976,000			789,000
Total operating costs and expenses		728,703,000			709,223,000
Income from operations		199,930,000			241,203,000
Other income (expense):
Interest expense		(148,453,000		)	(160,619,000	)
Interest income		2,635,000			1,426,000
Minority interest in earnings		(41,696,000		)	(39,927,000	)
Early repurchase of debt		(31,862,000		)	(27,592,000	)
Other income (expense)		(19,373,000		)	(1,347,000	)
Total other income (expense)		(238,749,000		)	(228,059,000	)
Income (loss) from continuing operations before income taxes		(38,819,000		)	13,144,000
Income tax expense		28,898,000			8,899,000
Income (loss) from continuing operations		(67,717,000		)	4,245,000
Discontinued operations, inclusive of tax benefit of $57,387,000 in 2004 and tax expense of $4,067,000 in 2003		(287,561,000		)	13,554,000
Net income (loss)		$	(355,278,000	)	17,799,000
Net income (loss) applicable to common stock		$	(371,756,000	)	1,320,000
Weighted average number of common shares outstanding - basic and diluted:		93,034,000			92,617,000
Net income (loss) per average common share outstanding - basic and diluted:
Loss from continuing operations		$	(0.90	)	(0.13	)
Discontinued operations, inclusive of tax benefit		(3.10		)	0.14
Net income (loss)		$	(4.00	)	0.01

 

See accompanying notes to consolidated financial statements.

 

6

 

SIX FLAGS, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(UNAUDITED)

 

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2004			2003			2004			2003
Net income (loss)		$	56,367,000		$	140,173,000		$	(355,278,000	)	$	17,799,000
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		4,210,000			2,060,000			(17,363,000		)	44,507,000
Net change in fair value of derivative instruments		(349,000		)	28,000			(785,000		)	(5,497,000		)
Reclassifications of amounts taken to operations		1,440,000			1,792,000			(38,386,000		)	6,552,000
Comprehensive income (loss)		$	61,668,000		$	144,053,000		$	(411,812,000	)	$	63,361,000

 

See accompanying notes to consolidated financial statements.

 

7

 

SIX FLAGS, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(UNAUDITED)

 

		2004			2003
Cash flow from operating activities:
Net income (loss)		$	(355,278,000	)	$	17,799,000
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		111,289,000			106,453,000
Minority interest in earnings		41,696,000			39,927,000
Partnership and joint venture distributions		(22,748,000		)	(23,789,000		)
Noncash compensation		482,000			76,000
Interest accretion on notes payable		383,000			10,040,000
Early repurchase of debt		31,862,000			27,592,000
Loss on discontinued operations		256,545,000			1,194,000
Amortization of debt issuance costs		6,081,000			6,238,000
Other including loss on disposal of assets		19,543,000			1,001,000
Increase in accounts receivable		(34,632,000		)	(41,627,000		)
(Increase) decrease in inventories, prepaid expenses and other current assets		(6,017,000		)	9,164,000
Decrease in deposits and other assets		1,698,000			4,695,000
Increase in accounts payable, deferred income, accrued liabilities and other long-term liabilities		45,345,000			38,300,000
Increase (decrease) in accrued interest payable		(6,527,000		)	8,488,000
Deferred income tax expense		24,937,000			5,984,000
Total adjustments		469,937,000			193,736,000
Net cash provided by operating activities		114,659,000			211,535,000
Cash flow from investing activities:
Additions to property and equipment		(82,088,000		)	(87,947,000		)
Purchase of identifiable intangible assets		(500,000		)	—
Capital expenditures of discontinued operations		(2,169,000		)	(12,706,000		)
Acquisition of theme park assets		—			(5,764,000		)
Purchase of restricted-use investments		—			(342,000		)
Maturities of restricted-use investments		317,913,000			75,111,000
Proceeds from sale of discontinued operations		314,456,000			—
Proceeds from sale of assets		12,866,000			14,000
Net cash provided by (used in) investing activities		560,478,000			(31,634,000		)
Cash flow from financing activities:
Repayment of long-term debt		(988,786,000		)	(694,694,000		)
Proceeds from borrowings		411,000,000			670,800,000
Payment of cash dividends		(15,633,000		)	(15,633,000		)
Payment of debt issuance costs		(2,448,000		)	(9,070,000		)
Net cash used in financing activities		(595,867,000		)	(48,597,000		)
Effect of exchange rate changes on cash		—			(97,000		)
Increase in cash and cash equivalents		79,270,000			131,207,000
Cash and cash equivalents at beginning of year		98,189,000			31,307,000
Cash and cash equivalents at end of period		$	177,459,000		$	162,514,000
Supplemental cashflow information:
Cash paid for interest		$	148,514,000		$	135,793,000
Cash paid for income taxes		$	2,894,000		$	2,505,000

 

See accompanying notes to consolidated financial statements.

 

8

 

SIX FLAGS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      General — Basis of Presentation

 

We own and operate regional theme and water parks.  As used in this Report, unless the context requires otherwise, the terms “we,” “our” or “Six Flags” refer to Six Flags, Inc. and its consolidated subsidiaries.  As used herein, Holdings refers only to Six Flags, Inc., without regard to its subsidiaries.

 

As of September 30, 2004, we owned or operated 30 parks, including 28 domestic parks, one park in Mexico and one in Canada.  As of that date, we also managed one park in Europe.  In April 2004 we sold in two separate transactions our seven wholly-owned parks in Europe and Six Flags Worlds of Adventure in Ohio.  The accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2003 and the nine months ended September 30, 2004 reflect the results of the sold facilities for the periods prior to April 8, 2004 as discontinued operations.  See Note 3.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on our results of operations and our financial position. Those comments should be read in conjunction with these notes.  Our annual report on Form 10-K for the year ended December 31, 2003 includes additional information about us, our operations and our financial position, and should be referred to in conjunction with this quarterly report on Form 10-Q.  The information furnished in this report reflects all adjustments (which are normal and recurring, except for the deferred tax asset valuation allowance discussed below and the write-off of our investment and related intangible assets relating to the park we manage in Spain (See Note 3)), which are, in the opinion of management, necessary to present a fair statement of the results for the periods presented.

 

Results of operations for the three- and nine-month periods ended September 30, 2004 are not indicative of the results expected for the full year.  In particular, our theme park operations contribute a significant majority of their annual revenue during the period from Memorial Day to Labor Day each year, while expenses are incurred year-round.

 

Basis of Presentation

 

The consolidated financial statements include our accounts, our majority and wholly owned subsidiaries, and limited partnerships and limited liability companies in which we beneficially own 100% of the interests.

 

We also consolidate the partnerships and joint ventures that own Six Flags Over Texas, Six Flags Over Georgia, Six Flags White Water Atlanta and Six Flags Marine World as we have determined that we have the most significant economic interest as we receive a majority of these entity’s expected losses or expected residual returns and have the ability to make decisions that significantly affect the results of the activities of these entities.  The equity interests owned by nonaffiliated parties in these entities are reflected in the accompanying consolidated balance sheets as minority interest.  The portion of earnings  or loss from these parks owned by non-affiliated parties in these entities is reflected as minority interest in the accompanying consolidated statements of operations and in the consolidated statements of cash flows. The 2003 consolidated financial statements have been reclassified to consolidate these entities in order to enhance the comparability to the 2004 presentation.

 

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Long-Lived Assets

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to future net cash flows expected to be generated by the asset or group of assets.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

Derivative Instruments

 

In February 2000, we entered into three interest rate swap agreements that effectively convert $600,000,000 of the term loan component of the Credit Facility (see Note 4(b)) into a fixed rate obligation.  The terms of the agreements, as subsequently extended, each of which has a notional amount of $200,000,000, began in March 2000 and expire from March 2005 to June 2005.  Our term loan borrowings bear interest based upon LIBOR plus a fixed margin.  Our interest rate swap arrangements were designed to “lock-in” the LIBOR component at rates, after a February 2001 amendment and prior to a subsequent March 6, 2003 amendment, ranging from 5.13% to 6.07% (with an average of 5.46%) and after March 6, 2003, 2.065% to 3.50% (with an average of 3.01%). The counterparties to these transactions are major financial institutions, which minimizes the credit risk.

 

FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  It requires an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value.  If certain conditions are met, a derivative may be specifically designated as a hedge for accounting purposes.  The accounting for changes in the fair value of a derivative (that is gains and losses) depends on the intended use of the derivative and the resulting designation.

 

During the first nine months of 2004 and 2003, we have designated all of the interest rate swap agreements as cash-flow hedges.

 

We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and our strategy for undertaking various hedge transactions.  This process includes linking all derivatives that are designated as cash-flow hedges to forecasted transactions. We also assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

 

Changes in the fair value of a derivative that is effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income (loss), until operations are affected by the variability in cash flows of the designated hedged item.  Changes in fair value of a derivative that is not designated as a hedge are recorded in operations on a current basis.

 

During the first nine months of 2004 and 2003, there were no gains or losses reclassified into operations as a result of the discontinuance of hedge accounting treatment for any of our derivatives.

 

By using derivative instruments to hedge exposures to changes in interest rates, we are exposed to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of

 

10

 

the derivative contract.  To mitigate this risk, the hedging instruments are placed with counterparties that we believe are minimal credit risks.

 

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or currency exchange rates.  The market risk associated with interest rate swap agreements is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

 

We do not hold or issue derivative instruments for trading purposes.  Changes in the fair value of derivatives that are designated as hedges are reported on the consolidated balance sheet in “Accumulated other comprehensive income (loss)” (“AOCL”).  These amounts are reclassified to interest expense when the forecasted transaction takes place.

 

From February 2001 through September 2004, the critical terms, such as the index, settlement dates, and notional amounts, of the derivative instruments were substantially the same as the provisions of our hedged borrowings under the Credit Facility.  As a result, no ineffectiveness of the cash-flow hedges was recorded in the consolidated statements of operations.

 

As of September 30, 2004, approximately $2,504,000 of net deferred losses on derivative instruments accumulated in AOCL are expected to be reclassified to operations during the next 12 months.  Transactions and events expected to occur over the next 12 months that will necessitate reclassifying these derivatives’ losses to operations are the periodic payments that are required to be made on outstanding borrowings.  The maximum term over which we are hedging exposures to the variability of cash flows for commodity price risk is 8 months.

 

Income Taxes

 

As of December 31, 2003, we had a net deferred tax liability of $44.3 million.  During the nine months ended September 30, 2004, less than expected financial reporting results, including losses previously recorded on the sale of the Cleveland and European assets, caused aggregate deferred tax assets (primarily consisting of net operating loss carryovers) to exceed deferred tax liabilities (primarily consisting of cumulative accelerated tax depreciation). We are required to reduce our deferred tax assets with a valuation allowance to the extent management determines that it is more likely than not that our net deferred tax assets ultimately will not be realized.  It was determined that a valuation allowance should be applied to our U.S. net deferred tax assets attributable to losses beginning in the third quarter of 2004.  As a result, our third quarter 2004 results with respect to U.S. business were affected by the establishment of a $39.2 million valuation allowance.  Management anticipates that valuation allowances also will be recorded to reduce deferred tax assets resulting from future losses.  With respect to foreign operations, gross tax assets were utilized to reduce gross deferred tax liabilities in Canada and Mexico.  The net deferred tax liabilities in those jurisdictions were not reduced by the Company’s net deferred tax assets in the U.S. because U.S. tax benefits cannot be utilized in those jurisdictions.  Should we subsequently determine that we will not be able to utilize all or part of our gross tax assets to offset our gross deferred tax liabilities, an additional valuation allowance will be required.  If, on the other hand,  we determine in a future period that we will be able to utilize net operating losses that were previously offset with a valuation allowance, the valuation allowance would be reduced or reversed in that period.

 

11

 

Income (Loss) Per Share

 

The following table reconciles the weighted average number of common shares outstanding used in the calculations of basic and diluted income (loss) per share for the three and nine month periods ended September 30, 2004 and 2003, respectively.  For the three months ended September 30, 2004 and 2003, diluted income per average share is calculated using net income as the effect of the preferred stock is dilutive. The effect of potential common shares issuable upon the exercise of employee stock options on the weighted average number of shares on a diluted basis for the three and nine months ended September 30, 2004 did not include the effects of the potential exercise of 6,653,000 and 6,548,000 options, respectively, as the option price was in excess of the average common stock price for the period.  The effect of potential common shares issuable upon the exercise of employee stock options on the weighted average number of shares on a diluted basis for the three and nine months ended September 30, 2003 did not include the effects of the potential exercise of 7,350,000 options, as the option price was in excess of the average common stock price for the period.  Additionally, the weighted average number of shares of Common Stock on a diluted basis for the nine-month periods does not include the effect of the potential conversion of the Company’s convertible preferred stock as the effect of such conversion and the resulting decrease in preferred stock dividends is antidilutive.  Our Preferred Income Equity Redeemable Shares (“PIERS”), which are shown as mandatorily redeemable preferred stock on our consolidated balance sheets, were issued in January 2001 and are convertible into 13,789,000 shares of common stock.

 

 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2004		2003		2004		2003
Weighted average number of common shares outstanding – basic		93,042,000		92,617,000		93,034,000		92,617,000
Effect of potential common shares issuable upon the exercise of employee stock options		—		3,000		—		—
Effect of potential common shares issuable upon  conversion of preferred stock		13,789,000		13,789,000		—		—
Weighted average number of common shares outstanding – diluted		106,831,000		106,409,000		93,034,000		92,617,000

 

Stock Compensation

 

We apply the intrinsic-value based method of accounting prescribed by APB Opinion No. 25 and related interpretations in accounting for our stock option plans.  Under this method, compensation expense for unconditional employee stock options is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price.  For employee stock options that are conditioned upon the achievement of performance goals, compensation expense, as determined by the extent that the quoted market price of the underlying stock at the time that the condition for exercise is achieved exceeds the stock option exercise price, is recognized over the service period.  For stock options issued to nonemployees, we recognize compensation expense at the time of issuance based upon the fair value of the options issued.  At September 30, 2004, there were 6,653,400 stock options outstanding, of which 2,589,400 options had an exercise price of $17.50 per share and 2,704,000 options had an exercise price of $25.00 per share.  At September 30, 2003, there were 7,445,010 stock options outstanding, of which 2,906,600 options had an exercise price of $17.50 per share and 3,078,000 options had an exercise price of $25.00 per share.

 

12

 

No compensation cost has been recognized for the unconditional stock options in the consolidated financial statements.  Had we determined compensation cost based on the fair value at the grant date for all our unconditional stock options under SFAS 123, “Accounting for Stock Based Compensation,” and as provided for under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123,” our net income (loss) applicable to common stock would have been changed to the pro forma amounts below:

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2004			2003			2004			2003
		(In thousands)
Net income (loss) applicable to common stock:
As reported		$	50,874		$	134,679		$	(371,756	)	$	1,320
Add:  Noncash compensation		160			25			482			76
Add:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(706		)	(3,470		)	(1,658		)	(9,896		)
Pro forma		$	50,328		$	131,234		$	(372,932	)	$	(8,500	)
Net income (loss) per weighted average common share outstanding – basic:
As reported		$	.55		$	1.45		$	(4.00	)	$	.01
Pro forma		$	.54		$	1.42		$	(4.01	)	$	(.09	)
Net income (loss) per weighted average common share outstanding – diluted:
As reported		$	.53		$	1.32		$	(4.00	)	$	.01
Pro forma*		$	.52		$	1.29		$	(4.01	)	$	(.09	)

 

*                                         Pro forma diluted net income per average share for the three months ended September 30, 2004 and 2003 is calculated using net income adjusted for noncash compensation and total stock-based employee compensation expense determined under the fair value based method for all awards.

 

2.                                      Preferred Stock

 

In January 2001, we issued 11,500,000 PIERS, for proceeds of $277,834,000, net of the underwriting discount and offering expenses of $9,666,000.  We used the net proceeds of the offering to fund our acquisition in that year of the former Sea World of Ohio, to repay borrowings under the working capital revolving credit portion of our senior credit facility (see Note 4(b)) and for working capital.  Each PIERS represents one one-hundredth of a share of our 7¼% mandatorily redeemable preferred stock (an aggregate of 115,000 shares of preferred stock).  The  PIERS accrue cumulative dividends (payable, at our option, in cash or shares of common stock) at 7¼% per annum (approximately $20,844,000 per annum).

 

Prior to August 15, 2009, each of the PIERS is convertible at the option of the holder into 1.1990 common shares (equivalent to a conversion price of $20.85 per common share), subject to adjustment in certain circumstances (the “Conversion Price”). At any time on or after February 15, 2004 and at the then applicable conversion rate, we may cause the PIERS, in whole or in part, to be automatically converted if for 20 trading days within any period of 30 consecutive trading days, including the last day of such period, the closing price of our common stock exceeds 120% of the then prevailing Conversion Price. On

 

13

 

August 15, 2009, the PIERS are mandatorily redeemable in cash equal to 100% of the liquidation preference (initially $25.00 per PIERS), plus any accrued and unpaid dividends.

 

3.                                      Disposition of Theme Parks

 

On April 8, 2004, we sold substantially all of the assets used in the operation of Six Flags World of Adventure near Cleveland, Ohio (other than the marine and land animals located at that park and certain assets related thereto) for a cash purchase price of $144.3 million.  In a separate transaction, on the same date, we sold all of the stock of Walibi S.A., our wholly-owned subsidiary that owned the seven parks we owned in Europe.  The purchase price was approximately $200 million, of which Euro 10.0 million ($12.1 million as of April 8, 2004) was received in the form of a nine and one-half year note from the buyer, and $11.6 million represented the assumption of certain debt by the buyer, with the balance paid in cash.  Net cash proceeds from these transactions have primarily been used to pay down debt and to fund investments in our remaining parks.  Through September 30, 2004, approximately $248,289,000 of debt had been repaid with such proceeds, not including the debt assumed by the buyer of our European parks.

 

Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” our consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities of the parks sold as discontinued operations. The assets and liabilities of such operations have been classified as “Assets held for sale” and “Liabilities from discontinued operations” on the December 31, 2003 consolidated balance sheet and consist of the following:

 

 

The net income (loss) from discontinued operations was classified on the consolidated statements of operations for the three and nine months ended September 30, 2003 and the nine months ended September 30, 2004 as “Discontinued operations, inclusive of tax.” Summarized results of discontinued operations are as follows:

 

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		Three Months Ended September 30,				Nine Months Ended September 30,
		2003				2004					2003
		(in thousands)
Operating revenue		$	110,251			$			3,286		$	173,264
Loss on sale of discontinued operations		$	—			$		(310,281		)	$		—
Income (loss) from discontinued operations before income taxes		43,274				(34,667				)	17,621
Income tax (expense) benefit		(20,135			)	57,387					(4,067				)
Net results of discontinued operations		$		23,139		$	(287,561			)	$			13,554

 

Our long-term debt is at the consolidated level and is not reflected at each individual park. Thus, we have not allocated a portion of interest expense to the discontinued operations.

 

During the third quarter of 2004 we commenced discussions with the owner of the park we manage in Spain to terminate the management agreement and to transfer our 5% investment in the equity of the park for nominal consideration.  Although there can be no assurances, we expect the transaction to occur in the fourth quarter of 2004.  By virtue of the foregoing, we recognized losses at September 30, 2004 of approximately $6.7 million and $7.7 million, representing the carrying amount of our investment in the park and certain intangible assets related to non-compete agreements and licenses, respectively.  These losses were recorded in other income (expense) in the accompanying 2004 consolidated statements of operations.

 

4.                                      Long-Term Indebtedness

 

(a)                                  On April 1, 1998, Holdings issued at a discount $410,000,000 principal amount at maturity of 10% Senior Discount Notes due 2008 (the Senior Discount Notes).  In December 2002, we repurchased $9,000,000 principal amount of Senior Discount Notes.  On April 9, 2003, we commenced a tender offer for all $401,000,000 outstanding Senior Discount Notes.  On April 16, and May 8, 2003, we purchased an aggregate of $397,405,000 principal amount of Senior Discount Notes (99.1% of outstanding) pursuant to the tender offer.  The balance of the Senior Discount Notes was redeemed on May 16, 2003.  The tender offer price was funded by a portion of the proceeds of an offering by Holdings in April 2003 of $430,000,000 principal amount of 9¾% Senior Notes due 2013.  See Note 4(f).  The redemption price was funded by the balance of such proceeds, together with cash on hand.  A gross loss of $27,592,000 due to the early purchase and redemption of the Senior Discount Notes, together with a related $10,484,000 tax benefit, was recognized in the second quarter of 2003.

 

(b)                                 On November 5, 1999, Six Flags Theme Parks Inc. (SFTP), a direct wholly owned subsidiary of Six Flags Operations Inc., our principal direct subsidiary, entered into a senior credit facility (the Credit Facility), which was amended and restated on July 8, 2002 and further amended on November 25, 2003, January 14, 2004, March 26, 2004 and November 5, 2004.  The Credit Facility includes a $300,000,000 five-year revolving credit facility (none of which was outstanding at September 30, 2004 and 2003, respectively), a $100,000,000 multicurrency reducing revolver facility (none of which was outstanding at September 30, 2004 and 2003, respectively) and a $655,000,000 six-year term loan ($653,363,000 of which was outstanding at September 30, 2004 and $600,000,000 of which was outstanding at September 30, 2003).  Borrowings under the five-year revolving credit facility (US

 

15

 

Revolver) must be repaid in full for thirty consecutive days each year.  The interest rate on borrowings under the Credit Facility can be fixed for periods ranging from one to six months.  At our option the interest rate is based upon specified levels in excess of the applicable base rate or LIBOR.  At September 30, 2004, the weighted average interest rate for borrowings under the term loan was 5.40%. The multicurrency facility permits optional prepayments and reborrowings and requires quarterly mandatory reductions in the initial commitment (together with repayments, to the extent that the outstanding borrowings thereunder would exceed the reduced commitment) of 2.5% of the committed amount thereof commencing on December 31, 2004, 5.0% commencing on March 31, 2006, 7.5% commencing on March 31, 2007 and 18.75% commencing on March 31, 2008.  This facility and the U.S. Revolver terminate on June 30, 2008. The term loan facility requires quarterly repayments of 0.25% of the outstanding amount thereof commencing on September 30, 2004 and 24.0% commencing on September 30, 2008.  The term loan matures on June 30, 2009, provided however, that the maturity of the term loan will be shortened to (i) August 1, 2008, if we do not prior to such date repay or refinance our 9 ½% senior notes due 2009 (see 4(d)), or (ii) December 31, 2008, if prior to such date our outstanding preferred stock is not redeemed or converted into common stock.  A commitment fee of .50% of the unused credit of the facility is due quarterly in arrears.  The principal borrower under the facility is SFTP, and borrowings under the Credit Facility are guaranteed by Holdings, Six Flags Operations and all of Six Flags Operations’ domestic subsidiaries and are secured by substantially all of Six Flags Operations’ domestic assets and a pledge of Six Flags Operations’ capital stock.  See Note 1 regarding interest rate hedging activities with respect to a portion of the term loan component of the Credit Facility.

 

On November 25, 2003, we entered into an amendment to the Credit Facility pursuant to which we amended the covenants relating to the leverage ratio through 2005 and the fixed charge coverage ratio through June 30, 2007 in order to provide us with additional financial flexibility.  In addition, pursuant to the amendment we are permitted to enter into fixed-to-floating rate debt swap agreements so long as our total floating rate debt does not exceed 50% of our total debt as of the swap date. In exchange for our lenders’ consent to the amendment, we agreed to an increase of 0.25% in the interest rates we are charged on our borrowings under the Credit Facility.

 

On November 5, 2004, we entered into an additional amendment to the Credit Facility which further relaxed the leverage ratio through 2006 and the fixed charge coverage ratio through 2007.  In exchange for our lenders’ consent to the amendment, we agreed to a further increase of 0.25% in certain circumstances in the interest rates we are charged on our borrowings under the Credit Agreement.  We also agreed to pay a 1% prepayment penalty if we refinance all or any portion of the term loans outstanding under the Credit Facility prior to November 4, 2005.

 

On January 14, 2004, we completed a $130,000,000 increase of the term loan portion of the Credit Facility and used all of the proceeds of the additional loan to redeem the remaining balance of our 9 ¾% Senior Notes due 2007 then outstanding.  See 4(c) below.  In March 2004, we amended the term loan in order to permit the sales of the discontinued operations.  In April 2004, we permanently repaid $75,000,000 of the term loan from a portion of the proceeds of the sale of the discontinued operations and recognized a gross loss of $1,181,000, together with a related $449,000 tax benefit, for the write off of debt issuance costs.

 

The Credit Facility contains restrictive covenants that, among other things, limit the ability of Six Flags Operations and its subsidiaries to dispose of assets; incur additional indebtedness or liens; repurchase stock; make investments; engage in mergers or consolidations; pay dividends (except that (i) dividends of up to $75,000,000 in the aggregate (of which $8,900,000 had been dividended prior to September 30, 2004) may be made from cash from operations in order to enable us to pay amounts in respect of any refinancing or repayment of Holdings’ senior notes and (ii) subject to covenant compliance, dividends will be permitted to allow Holdings to meet cash interest obligations with respect to its Senior Notes, cash dividend payments on our PIERS and our obligations to the limited partners in Six Flags Over Georgia and Six Flags Over Texas) and engage in certain transactions with subsidiaries and affiliates.  In addition, the Credit Facility requires that Six Flags Operations comply with certain specified financial ratios and tests.

 

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(c)                                  On June 30, 1999, Holdings issued $430,000,000 principal amount of 9¾% Senior Notes due 2007 (the 2007 Senior Notes). In December 2002, we had repurchased $7,000,000 principal amount of the 2007 Senior Notes.  In January 2004, we redeemed the 2007 Senior Notes in full from the proceeds of the December 2003 issuance of our 9 5/8% Senior Notes due 2014 (see 4(g) below) and the proceeds of the $130.0 million increase in our term loan (see 4(b) above).  A gross loss of $25,178,000 due to the redemption of the 2007 Senior Notes, together with a related $9,567,000 tax benefit, was recognized in the first quarter of 2004.

 

(d)                                 On February 2, 2001, Holdings issued $375,000,000 principal amount of 9 ½% Senior Notes due 2009 (the 2009 Senior Notes). As of September 30, 2004, we had repurchased $26,000,000 principal amount of the 2009 Senior Notes.  A gross loss of $1,321,000 due to this repurchase, together with a related $502,000 tax benefit, was recognized in the first nine months of 2004.  The 2009 Senior Notes are senior unsecured obligations of Holdings, are not guaranteed by subsidiaries and rank equal to the other Senior Notes of Holdings.  The 2009 Senior Notes require annual interest payments of approximately $33,155,000 (9½% per annum) and, except in the event of a change in control of Holdings and certain other circumstances, do not require any principal payments prior to their maturity in 2009.  The 2009 Senior Notes are redeemable, at Holding’s option, in whole or in part, at any time on or after February 1, 2005, at varying redemption prices beginning at 104.75% and reducing annually until maturity.  The net proceeds of the 2009 Senior Notes were used to repurchase senior notes of Six Flags Operations and to repay borrowings under the multicurrency revolving portion of the Credit Facility (see Note 4(b)).

 

The indenture under which the 2009 Senior Notes were issued limits our ability to dispose of assets; incur additional indebtedness or liens; pay dividends; engage in mergers or consolidations; and engage in certain transactions with affiliates, among other things.

 

(e)                                  On February 11, 2002, Holdings issued $480,000,000 principal amount of 8 7/8% Senior Notes due 2010 (the 2010 Senior Notes).  As of September 30, 2004, we had repurchased $77,000,000 principal amount of the 2010 Senior Notes.  A gross loss of $1,365,000 due to this repurchase, together with a related $519,000 tax benefit, was recognized in the first nine months of 2004.  The 2010 Senior Notes are senior unsecured obligations of Holdings, are not guaranteed by subsidiaries and rank equal to the other Senior Notes of Holdings.  The 2010 Senior Notes require annual interest payments of approximately $35,766,000 (8 ⁷/₈% per annum) and, except in the event of a change in control of Holdings and certain other circumstances, do not require any principal payments prior to their maturity in 2010.  The 2010 Senior Notes are redeemable, at Holding’s option, in whole or in part, at any time on or after February 1, 2006, at varying redemption prices beginning at 104.438% and reducing annually until maturity.  The indenture under which the 2010 Senior Notes were issued contains covenants substantially similar to those relating to the other Senior Notes of Holdings. The net proceeds of the 2010 Senior Notes were used to fund the redemptions of senior notes of Holdings and Six Flags Operations.

 

(f)                                    On April 16, 2003, Holdings issued $430,000,000 principal amount of 9 ¾% Senior Notes due 2013 (the 2013 Senior Notes).  As of September 30, 2004, we had repurchased $42,000,000 principal amount of the 2013 Senior Notes. A gross loss of $1,980,000 due to this repurchase, together with a related $752,000 tax benefit, was recognized in the first nine months of 2004.  The 2013 Senior Notes are senior unsecured obligations of Holdings, are not guaranteed by subsidiaries and rank equal to the other Holdings Senior Notes.  The 2013 Senior Notes require annual interest payments of approximately $37,830,000 (9 3/4% per annum) and, except in the event of a change in control of the Company and certain other circumstances, do not require any principal payments prior to their maturity in 2013.  The 2013 Senior Notes are redeemable, at Holdings’ option, in whole or in part, at any time on or after April 15, 2008, at varying redemption prices beginning at 104.875% and reducing annually until maturity.  The indenture under which the 2013 Senior Notes were issued contains covenants substantially similar to those relating to the other Senior Notes of Holdings. All of the net proceeds of

 

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the 2013 Senior Notes were used to fund the tender offer and redemption of the Senior Discount Notes (see Note 4(a)).

 

(g)                                 On December 5, 2003, Holdings issued $325,000,000 principal amount of 9 5/8% Senior Notes due 2014 (the 2014 Senior Notes). As of September 30, 2004, we had repurchased $16,350,000 principal amount of the 2014 Senior Notes.  A gross loss of $837,000 due to this repurchase, together with a related $318,000 tax benefit, was recognized in the first nine months of 2004.  The 2014 Senior Notes are senior unsecured obligations of Holdings, are not guaranteed by subsidiaries and rank equal to the other Holdings Senior Notes.  The 2014 Senior Notes require annual interest payments of approximately $29,708,000 (9 5/8% per annum) and, except in the event of a change in control of the Company and certain other circumstances, do not require any principal payments prior to their maturity in 2014.  The 2014 Senior Notes are redeemable, at Holdings’ option, in whole or in part, at any time on or after June 1, 2009, at varying redemption prices beginning at 104.813% and reducing annually until maturity.  The indenture under which the 2014 Senior Notes were issued contains covenants substantially similar to those relating to the other Senior Notes of Holdings. All of the net proceeds of the 2014 Senior Notes were used to redeem a portion of the 2007 Senior Notes (see Note 4(c)).

 

5.                                      Commitments and Contingencies

 

On April 1, 1998 we acquired all of the capital stock of Six Flags Entertainment Corporation for $976,000,000, paid in cash.  In addition to our obligations under outstanding indebtedness and other securities issued or assumed in the Six Flags acquisition, we also guaranteed in connection therewith certain contractual obligations relating to the partnerships that own the two Partnership Parks, Six Flags Over Texas and Six Flags Over Georgia.  Specifically, we guaranteed the obligations of the general partners of those partnerships to (i) make minimum annual distributions of approximately $53,200,000 (as of 2004 and subject to annual cost of living adjustments thereafter) to the limited partners in the Partnership Parks (including in respect of limited partnership units we own) and (ii) make minimum capital expenditures at each of the Partnership Parks during rolling five-year periods, based generally on 6% of such park’s revenues.  Cash flow from operations at the Partnership Parks is used to satisfy these requirements first, before any funds are required from us.  We also guaranteed the obligation of our subsidiaries to purchase a maximum number of 5% per year (accumulating to the extent not purchased in any given year) of the total limited partnership units outstanding as of the date of the agreements (the “Partnership Agreements”) that govern the partnerships (to the extent tendered by the unit holders).  The agreed price for these purchases is based on a valuation for each respective Partnership Park equal to the greater of (i) a value derived by multiplying such park’s weighted-average four-year EBITDA (as defined in the Partnership Agreements) by a specified multiple (8.0 in the case of the Georgia park and 8.5 in the case of the Texas park) or (ii) $250.0 million in the case of the Georgia park and $374.8 million in the case of the Texas park.  Our obligations with respect to Six Flags Over Georgia and Six Flags Over Texas will continue until 2027 and 2028, respectively.

 

As we purchase units relating to either Partnership Park, we are entitled to the minimum distribution and other distributions attributable to such units, unless we are then in default under the applicable agreements with our partners at such Partnership Park.  On September 30, 2004, we owned approximately 25.3% and 37.5%, respectively, of the limited partnership units in the Georgia and Texas partnerships. No units were tendered in 2004. The maximum unit purchase obligations for 2005 at both parks will aggregate approximately $215.5 million.

 

In October, 2004, the settlement of a purported class action litigation in the California Superior Court for Los Angeles County became effective.  The plaintiffs in the litigation had alleged that security and other practices at our parks in Valencia, California, discriminated against visitors on the basis of race, color, ethnicity, national origin and/or physical appearance, and had asserted claims under California statutes and common law.  Under the terms of the settlement, we paid $5,625,000 into a settlement fund, provided 7,000 free tickets to the Valencia park, and accepted certain injunctive relief,

 

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in exchange for a complete, class-wide release of all claims within the scope of the master complaint, other than claims by sixteen individuals who requested exclusion from the class.  We have received a payment of $1.5 million from one of the two applicable insurance companies.  We have commenced legal action against the other insurer.

 

On May 2, 2004, a fatality occurred on a roller coaster at Six Flags New England, and on September 1, 2004 a lawsuit was commenced against us and the ride manufacturer on behalf of the decedent’s estate and members of his immediate family.  The park is covered by our multi-layered general liability insurance coverage of up to $100.0 million per occurrence, with a $2.5 million self-insurance retention.  At this time we do not believe that the impact of this incident, including the resulting lawsuit, will have a material adverse effect on our consolidated financial position, operations or liquidity.

 

We maintain multi-layered general liability policies that provide for excess liability coverage of up to $100,000,000 per occurrence.  For incidents arising after November 15, 2003, our self-insured retention is generally $2,500,000 per occurrence ($2,000,000 per occurrence for the twelve months ended November 15, 2003 and $1,000,000 per occurrence for the twelve months ended on November 15, 2002) for our domestic parks and a nominal amount per occurrence for our international parks.  Our self-insured retention after November 15, 2003 is $750,000 for workers compensation claims ($500,000 for the period from November 15, 2001 to November 15, 2003).  For most incidents prior to November 15, 2001, our policies did not provide for a self-insured retention.  Based upon reported claims and an estimate for incurred, but not reported claims, we accrue a liability for our self-insured retention contingencies.

 

We are party to various other legal actions arising in the normal course of business.  Matters that are probable of unfavorable outcome to us and which can be reasonably estimated are accrued.  Such accruals are based on information known about the matters, our estimate of the outcomes of such matters and our experience in contesting, litigating and settling similar matters.  None of the legal actions are believed by management to involve amounts that would be material to our consolidated financial position, results of operations, or liquidity after consideration of recorded accruals.

 

6.                                      Minority Interest, Partnerships and Joint Ventures

 

Minority interest represents the third parties’ share of the assets of the four parks that are less than wholly-owned, Six Flags Over Texas, Six Flags Over Georgia (including Six Flags White Water Atlanta which is owned by the partnership that owns Six Flags Over Georgia) and Six Flags Marine World. Minority interest in earnings shown is reduced by depreciation and other non-operating expenses of $1,371,000 and $1,528,000, respectively, for the quarters ended September 30, 2004 and 2003 and $4,113,000 and $4,328,000, respectively, for the nine months ended September 30, 2004 and 2003.

 

In April 1997, we became manager of Marine World (subsequently renamed Six Flags Marine World), then a marine and exotic wildlife park located in Vallejo, California, pursuant to a contract with an agency of the City of Vallejo under which we are entitled to receive an annual base management fee of $250,000 and up to $250,000 annually in additional management fees based on park revenues.  In addition, we lease approximately 40 acres of land within the site for nominal rent and an initial term of 55 years (plus four ten-year and one four-year renewal options).  We have added theme park rides and attractions on the leased land, which is located within the existing park, in order to create one fully-integrated regional theme park at the site.  We are entitled to receive, in addition to the management fee, 80% of the cash flow generated by the combined operations at the park, after combined operating expenses and debt service on outstanding third party debt obligations relating to the park.  We also have an option through February 2007 to purchase the entire site at a purchase price equal to the greater of the then principal amount of the debt obligations of the seller (expected to aggregate $52,000,000) or the then fair market value of the seller’s interest in the park (based on a formula relating to the seller’s 20%

 

19

 

share of Marine World’s cash flow).  We have withdrawn the exercise notice we had previously delivered.

 

See note 5 for a description of the partnership arrangements applicable to Six Flags Over Texas and Six Flags Over Georgia (the Partnership Parks).

 

7.                                      Business Segments

 

We manage our operations on an individual park location basis.  Discrete financial information is maintained for each park and provided to our management for review and as a basis for decision making.  The primary performance measure used to allocate resources is earnings before interest, tax expense, depreciation and amortization (“EBITDA”).  All of our parks provide similar products and services through a similar process to the same class of customer through a consistent method.  As such, we have only one reportable segment - operation of theme parks.  The following tables present segment financial information and a reconciliation of the primary segment performance measure to loss from continuing operations before income taxes.  Park level expenses exclude all noncash operating expenses, principally depreciation and amortization, and all non-operating expenses.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(In thousands)
Theme park revenue		$	527,409		$	545,192		$	928,633		$	950,426
Theme park cash expenses		(240,170		)	(232,099		)	(597,214		)	(582,425		)
Aggregate park EBITDA		287,239			313,093			331,419			368,001
Minority interest in earnings - EBITDA		(27,185		)	(28,054		)	(45,809		)	(44,255		)
Corporate expenses		(6,211		)	(7,120		)	(19,718		)	(20,269		)
Non-cash compensation		(160		)	(25		)	(482		)	(76		)
Other income (expenses)		(15,292		)	(1,001		)	(51,235		)	(28,939		)
Minority interest in earnings – depreciation and other expense		1,371			1,528			4,113			4,328
Depreciation and amortization		(37,484		)	(35,403		)	(111,289		)	(106,453		)
Interest expense		(46,668		)	(52,417		)	(148,453		)	(160,619		)
Interest income		1,873			873			2,635			1,426
Income (loss) from continuing operations before income taxes		$	157,483		$	191,474		$	(38,819	)	$	13,144

 

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After giving effect to the discontinued operations, all of our parks are located in the United States except one park located in Mexico and one located in Canada. The assets and operations of the park in Madrid, which we manage (but do not own), are not included in these tables.  The following information reflects our long-lived assets and revenue by domestic and foreign categories as of and for the first nine months of 2004 and 2003.

 

2004:

 

		(In thousands)
		Domestic			Foreign			Total
Long-lived assets		$	3,144,969		$	129,610		$	3,274,579
Revenues		873,685			54,948			928,633

 

2003:

 

		(In thousands)
		Domestic			Foreign			Total
Long-lived assets.		$	3,235,212		$	126,586		$	3,361,798
Revenues		896,640			53,786			950,426

 

Long-lived assets include property and equipment and intangible assets.

 

8.                                      Pension Benefits

 

As part of the acquisitions of the former Six Flags, we assumed the obligations related to the SFTP Defined Benefit Plan (the Plan).  The Plan covered substantially all of SFTP’s employees.  Subsequent to that acquisition the Plan was amended to cover substantially all of our domestic full-time employees.  The Plan permits normal retirement at age 65, with early retirement at ages 55 through 64 upon attainment of ten years of credited service.  The early retirement benefit is reduced for benefits commencing before age 62.  Plan benefits are calculated according to a benefit formula based on age, average compensation over the highest consecutive five-year period during the employee’s last ten years of employment and years of service.  Plan assets are invested primarily in common stock and mutual funds.  The Plan does not have significant liabilities other than benefit obligations.  Under our funding policy, contributions to the Plan are determined using the projected unit credit cost method.  This funding policy meets the requirements under the Employee Retirement Income Security Act of 1974.

 

In December 2003, FASB Statement No. 132 (revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” was issued.  Statement 132 (revised) prescribes employers’ disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans.  The Statement retains and revises the disclosure requirements contained in the original Statement 132.  It also requires additional annual and quarterly disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other post retirement benefit plans.  The Statement generally is effective for fiscal years ending after December 15, 2003.  The following disclosures incorporate the requirements of Statement 132 (revised).

 

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Components of Net Periodic Benefit Cost

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Service cost		$	1,339		$	1,183		$	3,955		$	3,547
Interest cost		2,058			1,922			6,210			5,767
Expected return on plan assets		(2,079		)	(1,715		)	(6,053		)	(5,145		)
Amortization of prior service cost		76			76			226			226
Recognized net actuarial loss		643			815			1,969			2,445
Net periodic benefit cost		$	2,037		$	2,281		$	6,307		$	6,840

 

Weighted-average assumptions to determine net cost

 

Discount Rate		6.125	%	6.500	%	6.125	%	6.500	%
Rate of Compensation Increase		3.750	%	4.000	%	3.750	%	4.000	%
Expected Return on Plan Assets		8.750	%	9.000	%	8.750	%	9.000	%

 

Employer Contributions

 

In our 2003 consolidated financial statements, we disclosed that we expected to contribute $6,897,000 to our pension plans in 2004. In April 2004 the Pension Funding Equity Act was signed into law. This legislation reduced the amount of contributions required to be made to the Plan in fiscal year 2004 by $3,749,000. As a result, the contribution for fiscal year 2004 was $3,149,000. We contributed $1,250,000 to the Plan in the second quarter of 2004 and contributed the remaining amount of $1,899,000 in the third quarter of 2004.

 

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS

 

General

 

Results of operations for the three- and nine-month periods ended September 30, 2004 are not indicative of the results expected for the full year.  In particular, our theme park operations contribute a significant majority of their annual revenue during the period from Memorial Day to Labor Day each year while expenses are incurred year-round.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” which was subsequently reissued in December 2003 as Interpretation No. 46 – Revised (FIN 46). We adopted FIN 46 during the fourth quarter of 2003.  As a result, the results of Six Flags Over Georgia, Six Flags Over Texas, Six Flags Marine World and Six Flags White Water Atlanta, which were previously accounted for by the equity method, are now consolidated.  Those financial statements and this discussion and analysis reflect our retroactive reclassification of our prior year results upon the 2003 adoption of FIN 46 to enable meaningful year-to-year comparisons.

 

As of September 30, 2004, we owned or operated 30 parks, including 28 domestic parks, one park in Mexico and one in Canada.  We also manage one park in Europe.  In April 2004 we sold in two separate transactions our seven wholly-owned parks in Europe and Six Flags Worlds of Adventure in Ohio.  The accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2003 and the nine months ended September 30, 2004 reflect the results of the sold facilities for the periods prior to their sale as discontinued operations.

 

Our revenue is primarily derived from the sale of tickets for entrance to our parks (approximately 53.8% of revenues in the first nine months of 2004 and 54.8% in the comparable period of 2003) and the sale of food, merchandise, games and attractions inside our parks.  Revenues in the first nine months of 2004 decreased 2.3% over the comparable period of 2003.  The decrease resulted from a 4.5% decrease in attendance offset in part by a 2.3% increase in per capita revenue.

 

Our principal costs of operations include salaries and wages, employee benefits, advertising, outside services, maintenance, utilities and insurance. Our expenses are relatively fixed. Costs for full-time employees, maintenance, utilities, advertising and insurance do not vary significantly with attendance.

 

We expect to make approximately $130 million of capital expenditures for the 2005 season, adding a wide array of attractions at many of our parks.  These additions include a major expansion to our New Jersey facility, which will include the introduction of a major new roller coaster, and the addition of a water park to our Chicago park.  We plan to showcase the new rides and attractions in the second year of the new marketing and advertising campaigns we launched in 2004.  We also plan to continue in 2005 the guest service enhancements we introduced in 2004.

 

Critical Accounting Policies

 

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Our

 

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Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”) and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 discussed our most critical accounting policies.  Although there have been no material subsequent developments with respect to any critical accounting policies discussed in those reports, the following includes additional information regarding one of our critical accounting policies.

 

Valuation of long-lived and intangible assets and goodwill

 

In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, as of January 1, 2002, we ceased amortizing approximately $1.2 billion of goodwill. We had recorded approximately $57.3 million of goodwill amortization (including equity method goodwill, exclusive of tax effect) on these amounts during 2001 and would have recorded a comparable amount of amortization during 2002 and 2003.  Had SFAS No. 142 been in effect during 2001, the net loss applicable to common stock for the year would have decreased to $27.3 million (or $0.31 per basic share).  In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and are required to perform an annual impairment review thereafter, which we do as of the end of each year, and more frequently upon the occurrence of certain events. To accomplish this, we identified our reporting units (North America and Europe) and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002.  We then determined the fair value of each reporting unit, compared it to the carrying amount of the reporting unit and compared the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which were measured as of the date of adoption.  The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation.  The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.  Based on the foregoing, we determined that $61.1 million of goodwill associated with our European reporting unit was impaired and, during 2002, we recognized a transitional impairment loss in that amount as the cumulative effect of a change in accounting principle in our consolidated statements of operations.  The loss was retroactively recorded in the first quarter of 2002, which was restated for this loss, in accordance with the requirements of SFAS No. 142.  For 2003 we determined the fair value of our North American

 

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assets by using the discounted cash flow method, that is, we estimated cash flow applicable to our North American unit (after deducting estimated capital expenditures), applied a multiple to such amount based on the stock price multiple for the industry, and discounted the result by an amount equal to our cost of capital.  Based on the foregoing, no impairment was required for 2003.  Our unamortized goodwill after impairment was $1,216.7 million at December 31, 2003.

 

As described above, the Company evaluates the carrying value of its long-lived assets using a discounted cash flow analysis that combines current net results (on a cash basis) with expected levels of future capital expenditures and then discounts the results, giving effect to the stock price multiple for the industry over a period of time.  If revenues decrease without a corresponding decrease in operating expenses and capital expenditures, this would increase the likelihood of goodwill impairment.  If valuations reflected in stock prices or theme park acquisitions decrease over time, this would also increase the likelihood of goodwill impairment.  If revenues increase faster than operating expenses and capital expenditures, this would decrease the likelihood of goodwill impairment.  The Company will perform its annual impairment review as of December 31, 2004.  However, based upon the 2003 and 2004 performance trends, there is currently an increased likelihood of goodwill impairment at the time of our annual impairment review.

 

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Summary of Operations

 

Summary data for the three and nine months ended September 30 were as follows (in thousands, except per capita revenue):

 

		Three Months Ended September 30,						Percentage		Nine Months Ended September 30,						Percentage
		2004			2003			Change		2004			2003			Change
Total revenue		$	527,409		$	545,192		(3.3	)%	$	928,633		$	950,426		(2.3	)%
Operating expenses		145,480			141,693			2.7		366,173			349,254			4.8
Selling, general and administrative		57,680			55,081			4.7		171,698			177,462			(3.3	)
Non-cash compensation		160			25			540.0		482			76			534.2
Costs of products sold		43,221			42,445			1.8		79,061			75,978			4.1
Depreciation and amortization		37,484			35,403			5.9		111,289			106,453			4.5
Income from operations		243,384			270,545			(10.0	)	199,930			241,203			(17.1	)
Interest expense, net		(44,795		)	(51,544		)	(13.1	)	(145,818		)	(159,193		)	(8.4	)
Minority interest		(25,814		)	(26,526		)	(2.7	)	(41,696		)	(39,927		)	4.4
Early repurchase of debt		(490		)	—			—		(31,862		)	(27,592		)	15.5
Other income (expense)		(14,802		)	(1,001		)	1,378.7		(19,373		)	(1,347		)	1,338.2
Income (loss) from continuing operations before income taxes		157,483			191,474			(17.8	)	(38,819		)	13,144			(395.3	)
Income tax expense		101,116			74,440			35.8		28,898			8,899			224.7
Income (loss) from continuing operations		$	56,367		$	117,034		(51.8	)	$	(67,717	)	$	4,245		(1,695.2	)
Other Data:
Attendance		16,974			17,836			(4.8	)%	29,745			31,146			(4.5	)%
Per capita revenue		$	31.07		$	30.57		1.6		$	31.22		$	30.51		2.3

 

Three months ended September 30, 2004 vs. three months ended September 30, 2003

 

Revenue in the third quarter of 2004 totaled $527.4 million compared to $545.2 million for the third quarter of 2003.  The decrease in the 2004 period results from a 4.8% decrease in attendance, offset in part by a 1.6% increase in per capita revenue.  We believe that the attendance decline is largely attributable to adverse weather in several of our major markets and the effects of a challenging economic environment for our target audience.

 

Operating expenses for the third quarter of 2004 increased $3.8 million (2.7%) compared to expenses for the third quarter of 2003.  The increase primarily reflects planned increases in salary and wage and fringe benefit expense (approximately $4.1 million) and repair and maintenance expenditures (approximately $0.4 million) as part of the implementation of our plan to enhance guest services generally.

 

Selling, general and administrative expenses for the third quarter of 2004 increased $2.6 million (4.7%) compared to comparable expenses for the third quarter of 2003.  The increase primarily relates to increased advertising expenses in the third quarter in 2004.

 

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