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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended June 30, 2009

 

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.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

(Exact Name of Registrant as Specified in Its Charter)

 

 

1540 Broadway, 15th Fl., New York, NY 10036

(Address of Principal Executive Offices, Including Zip Code)

 

(212) 652-9403

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o		Accelerated filer  o
Non-accelerated filer  x (Do not check if a smaller reporting company)		Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At August 10, 2009, Six Flags, Inc. had 98,273,546 outstanding shares of common stock, par value $0.025 per share.

 

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

FORM 10-Q

 

INDEX

 

Cautionary Note Regarding Forward-Looking Statements		1
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008	3
	Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended June 30, 2009 and 2008	5
	Condensed Consolidated Statements of Operations (unaudited) for the Six Months Ended June 30, 2009 and 2008	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Six Months Ended June 30, 2009 and 2008	7
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2009 and 2008	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4T.	Controls and Procedures	55
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 3.	Defaults Upon Senior Securities	60
Item 6.	Exhibits	61
Signatures

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document and the documents incorporated herein by reference contain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.  Examples of forward-looking statements include, but are not limited to, our ability to successfully consummate a restructuring plan.

 

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.  Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.  Our actual results may differ materially from those contemplated by the forward-looking statements.  We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance.  These risks and uncertainties include, but are not limited to, statements we make regarding: (i) our ability to develop, prosecute, confirm and consummate one or more chapter 11 plans of reorganization (See “Chapter 11 Reorganization” herein), (ii) the potential adverse impact of the chapter 11 filing on our global operations, management and employees, (iii) risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for us to propose and confirm a plan of reorganization, to appoint a chapter 11 trustee or to convert the cases to chapter 7 cases, (iv) customer response to the chapter 11 filing, (v) the adequacy of cash flows from operations, available cash and available amounts under our credit facilities to meet our future liquidity needs, or (vi) our continued viability, our operations and results of operations.  Additional important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and include the following:

 

·             factors impacting attendance, such as local conditions, contagious diseases, events, disturbances and terrorist activities;

·             accidents occurring at our parks;

·             adverse weather conditions;

·             competition with other theme parks and other entertainment alternatives;

·             changes in consumer spending patterns;

·             pending, threatened or future legal proceedings; and

·             other factors that are described in “Risk Factors,” or are included with the Company’s filings with the United States Bankruptcy Court for the District of Delaware.

 

A more complete discussion of these factors and other risks applicable to our business is contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, our Current Reports on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 7, 2009 and July 23, 2009 and Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

Any forward-looking statement made by us in this document, or on our behalf by our directors, officers or employees related to the information contained herein, speaks only as of the date of this Quarterly Report on Form 10-Q.  Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.  We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

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Available Information

 

Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available free of charge through our website at www.sixflags.com. References to our website in this Quarterly Report on Form 10-Q are provided as a convenience and do not constitute an incorporation by reference of the information contained on, or accessible through, the website. Therefore, such information should not be considered part of this Quarterly Report on Form 10-Q. These reports, and any amendments to these reports, are made available on our website as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. Copies are also available, without charge, by sending a written request to Six Flags, Inc., 1540 Broadway, New York, NY 10036, Attn:  Secretary.

 

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PART I — FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2009			December 31, 2008 (As Adjusted Note 2m)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	128,838,000		$	210,332,000
Accounts receivable		44,566,000			20,057,000
Inventories		37,317,000			24,909,000
Prepaid expenses and other current assets		45,116,000			41,450,000
Total current assets		255,837,000			296,748,000
Other assets:
Debt issuance costs		13,955,000			31,194,000
Restricted-use investment securities		2,646,000			16,061,000
Deposits and other assets		67,850,000			66,167,000
Total other assets		84,451,000			113,422,000
Property and equipment, at cost		2,709,515,000			2,654,939,000
Less accumulated depreciation		1,152,785,000			1,094,466,000
Total property and equipment		1,556,730,000			1,560,473,000
Intangible assets, net of accumulated amortization		1,060,005,000			1,059,486,000
Total assets		$	2,957,023,000		$	3,030,129,000

 

See accompanying notes to condensed consolidated financial statements.

 

3

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Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

		June 30, 2009			December 31, 2008 (As Adjusted Note 2m)
		(Unaudited)
LIABILITIES and STOCKHOLDERS’ DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Accounts payable		$	22,425,000		$	25,060,000
Accrued compensation, payroll taxes and benefits		22,888,000			22,934,000
Accrued insurance reserves		12,850,000			33,929,000
Accrued interest payable		6,937,000			42,957,000
Other accrued liabilities		23,946,000			45,001,000
Deferred income		62,727,000			17,594,000
Liabilities from discontinued operations		1,400,000			1,400,000
Current portion of long-term debt		295,488,000			253,970,000
Total current liabilities not subject to compromise		448,661,000			442,845,000
Long-term debt		858,487,000			2,044,230,000
Liabilities from discontinued operations		6,450,000			6,730,000
Other long-term liabilities		76,977,000			74,337,000
Deferred income taxes		116,238,000			121,710,000
Total liabilities not subject to compromise		1,506,813,000			2,689,852,000
Liabilities subject to compromise		1,399,372,000			—
Total liabilities		2,906,185,000			2,689,852,000
Redeemable noncontrolling interests		373,469,000			414,394,000
Mandatorily redeemable preferred stock (redemption value of $287,500,000 plus accrued and unpaid dividends of $26,055,000 and $15,633,000 as of June 30, 2009 and December 31, 2008, respectively)		313,311,000			302,382,000
Stockholders’ deficit:
Preferred stock, $1.00 par value		—			—
Common stock, $0.025 par value, 210,000,000 shares authorized and 97,769,169 and 97,726,233 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		2,444,000			2,443,000
Capital in excess of par value		1,492,935,000			1,491,494,000
Accumulated deficit		(2,081,885,000		)	(1,813,978,000		)
Accumulated other comprehensive loss		(49,436,000		)	(56,458,000		)
Total stockholders’ deficit		(635,942,000		)	(376,499,000		)
Total liabilities and stockholders’ deficit		$	2,957,023,000		$	3,030,129,000

 

See accompanying notes to condensed consolidated financial statements.

 

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Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED)

 

		2009			2008 (As Adjusted Note 2m)
Revenue:
Theme park admissions		$	162,670,000		$	184,495,000
Theme park food, merchandise and other		129,651,000			146,714,000
Sponsorship, licensing and other fees		9,757,000			14,474,000
Total revenue		302,078,000			345,683,000
Operating costs and expenses:
Operating expenses (including stock-based compensation of $1,175,000 in 2008)		126,548,000			127,499,000
Selling, general and administrative (including stock-based compensation of $602,000 in 2009 and $1,456,000 in 2008)		78,043,000			84,589,000
Costs of products sold		26,522,000			30,204,000
Depreciation		35,353,000			33,912,000
Amortization		234,000			280,000
Loss (gain) on disposal of assets		3,227,000			(63,000		)
Total operating costs and expenses		269,927,000			276,421,000
Income from operations		32,151,000			69,262,000
Other income (expense):
Interest expense (contractual interest expense was $41,530,000 in 2009)		(35,659,000		)	(47,427,000		)
Interest income		118,000			218,000
Equity in operations of partnerships		460,000			130,000
Net gain on debt extinguishment		—			107,743,000
Other income (expense)		(16,275,000		)	420,000
Total other income (expense)		(51,356,000		)	61,084,000
Income (loss) from continuing operations before reorganization items, income taxes and discontinued operations		(19,205,000		)	130,346,000
Reorganization items		(78,725,000		)	—
Income (loss) from continuing operations before income taxes and discontinued operations		(97,930,000		)	130,346,000
Income tax benefit (expense)		234,000			(2,753,000		)
Income (loss) from continuing operations before discontinued operations		(97,696,000		)	127,593,000
Discontinued operations		(948,000		)	(14,122,000		)
Net income (loss)		(98,644,000		)	113,471,000
Less: Net income attributable to noncontrolling interests		(17,536,000		)	(20,562,000		)
Net income (loss) attributable to Six Flags, Inc.		$	(116,180,000	)	$	92,909,000
Net income (loss) applicable to Six Flags, Inc. common stockholders		$	(121,616,000	)	$	87,417,000
Weighted average number of common shares outstanding — basic		97,483,000			97,319,000
Weighted average number of common shares outstanding — diluted		97,483,000			155,202,000
Net income (loss) per average common share outstanding — basic:
Income (loss) from continuing operations applicable to Six Flags, Inc. common stockholders		$	(1.24	)	$	1.04
Discontinued operations applicable to Six Flags, Inc. common stockholders		(0.01		)	(0.14		)
Net income (loss) applicable to Six Flags, Inc. common stockholders		$	(1.25	)	$	0.90
Net income (loss) per average common share outstanding — diluted:
Income (loss) from continuing operations applicable to Six Flags, Inc. common stockholders		$	(1.24	)	$	0.72
Discontinued operations applicable to Six Flags, Inc. common stockholders		(0.01		)	(0.09		)
Net income (loss) applicable to Six Flags, Inc. common stockholders		$	(1.25	)	$	0.63
Amounts attributable to Six Flags, Inc.:
Income (loss) from continuing operations		$	(115,232,000	)	$	107,031,000
Discontinued operations		(948,000		)	(14,122,000		)
Net income (loss)		$	(116,180,000	)	$	92,909,000

 

See accompanying notes to condensed consolidated financial statements.

 

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Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED)

 

		2009			2008 (As Adjusted Note 2m)
Revenue:
Theme park admissions		$	185,892,000		$	215,626,000
Theme park food, merchandise and other		149,001,000			172,381,000
Sponsorship, licensing and other fees		19,085,000			25,900,000
Total revenue		353,978,000			413,907,000
Operating costs and expenses:
Operating expenses (including stock-based compensation of $3,067,000 in 2008)		202,552,000			207,042,000
Selling, general and administrative (including stock-based compensation of $1,441,000 in 2009 and $3,156,000 in 2008)		113,100,000			124,375,000
Costs of products sold		31,233,000			36,338,000
Depreciation		70,260,000			67,995,000
Amortization		458,000			560,000
Loss on disposal of assets		6,540,000			4,591,000
Total operating costs and expenses		424,143,000			440,901,000
Loss from operations		(70,165,000		)	(26,994,000		)
Other income (expense):
Interest expense (contractual interest expense was $80,867,000 in 2009)		(74,996,000		)	(95,795,000		)
Interest income		539,000			483,000
Equity in operations of partnerships		649,000			(1,786,000		)
Net gain on debt extinguishment		—			107,743,000
Other income (expense)		(17,944,000		)	(2,881,000		)
Total other income (expense)		(91,752,000		)	7,764,000
Loss from continuing operations before reorganization items, income taxes and discontinued operations		(161,917,000		)	(19,230,000		)
Reorganization items		(78,725,000		)	—
Loss from continuing operations before income taxes and discontinued operations		(240,642,000		)	(19,230,000		)
Income tax benefit (expense)		3,164,000			(4,474,000		)
Loss from continuing operations before discontinued operations		(237,478,000		)	(23,704,000		)
Discontinued operations		(1,964,000		)	(14,976,000		)
Net loss		(239,442,000		)	(38,680,000		)
Less: Net income attributable to noncontrolling interests		(17,536,000		)	(19,966,000		)
Net loss attributable to Six Flags, Inc.		$	(256,978,000	)	$	(58,646,000	)
Net loss applicable to Six Flags, Inc. common stockholders		$	(267,907,000	)	$	(69,631,000	)
Weighted average number of common shares outstanding — basic and diluted		97,477,000			96,505,000
Net loss per average common share outstanding — basic and diluted:
Loss from continuing operations applicable to Six Flags, Inc. common stockholders		$	(2.73	)	$	(0.56	)
Discontinued operations applicable to Six Flags, Inc. common stockholders		(0.02		)	(0.16		)
Net loss applicable to Six Flags, Inc. common stockholders		$	(2.75	)	$	(0.72	)
Amounts attributable to Six Flags, Inc.:
Loss from continuing operations		$	(255,014,000	)	$	(43,670,000	)
Discontinued operations		(1,964,000		)	(14,976,000		)
Net loss		$	(256,978,000	)	$	(58,646,000	)

 

See accompanying notes to condensed consolidated financial statements.

 

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Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008 (As adjusted Note 2m)			2009			2008 (As adjusted Note 2m)
Net income (loss)		$	(98,644,000	)	$	113,471,000		$	(239,442,000	)	$	(38,680,000	)
Other comprehensive income (loss):
Foreign currency translation adjustment		8,651,000			2,750,000			5,511,000			734,000
Defined benefit retirement plan		1,380,000			6,000			3,745,000			(230,000		)
Change in cash flow hedging		(646,000		)	16,230,000			(2,234,000		)	12,281,000
Comprehensive income (loss)		(89,259,000		)	132,457,000			(232,420,000		)	(25,895,000		)
Comprehensive income attributable to noncontrolling interests		(17,536,000		)	(20,562,000		)	(17,536,000		)	(19,966,000		)
Comprehensive income (loss) attributable to Six Flags, Inc.		$	(106,795,000	)	$	111,895,000		$	(249,956,000	)	$	(45,861,000	)

 

See accompanying notes to condensed consolidated financial statements.

 

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Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED)

 

		2009			2008 (As Adjusted Note 2m)
Cash flow from operating activities:
Net loss		$	(239,442,000	)	$	(38,680,000	)
Adjustments to reconcile net loss to net cash used in operating activities before reorganization items:
Depreciation and amortization		70,718,000			68,555,000
Stock-based compensation		1,441,000			6,223,000
Interest accretion on notes payable		2,785,000			3,607,000
Net gain on debt extinguishment		—			(107,743,000		)
Reorganization items, net		78,725,000			—
(Gain) loss on discontinued operations		(280,000		)	12,085,000
Amortization of debt issuance costs		2,567,000			2,819,000
Other including loss on disposal of assets		15,463,000			6,990,000
Increase in accounts receivable		(25,925,000		)	(34,122,000		)
Increase in inventories, prepaid expenses and other current assets		(15,883,000		)	(22,027,000		)
(Increase) decrease in deposits and other assets		(1,680,000		)	4,514,000
Increase in accounts payable, deferred income, accrued liabilities and other long-term liabilities		75,662,000			84,507,000
Increase (decrease) in accrued interest payable		13,856,000			(13,965,000		)
Deferred income tax benefit		(5,867,000		)	(412,000		)
Total adjustments		211,582,000			11,031,000
Net cash used in operating activities before reorganization activities		(27,860,000		)	(27,649,000		)
Cash flow from reorganization activities:
Cash used in reorganization activities		(10,840,000		)	—
Total net cash used in operating activities		(38,700,000		)	(27,649,000		)
Cash flow from investing activities:
Additions to property and equipment		(69,047,000		)	(80,923,000		)
Property insurance recovery		2,133,000			8,712,000
Purchase of identifiable intangible assets		—			(168,000		)
Acquisition of theme park assets		—			(473,000		)
Maturities of restricted-use investments		15,274,000			—
Purchase of restricted-use investments		(1,859,000		)	(3,308,000		)
Gross proceeds from sale of assets		387,000			483,000
Net cash used in investing activities		(53,112,000		)	(75,677,000		)
Cash flow from financing activities:
Repayment of borrowings		(4,156,000		)	(117,579,000		)
Proceeds from borrowings		73,007,000			263,750,000
Purchase of redeemable minority interests		(58,461,000		)	—
Payment of cash dividends		—			(5,211,000		)
Payment of debt issuance costs		(489,000		)	(98,000		)
Net cash provided by financing activities		9,901,000			140,862,000
Effect of exchange rate changes on cash		417,000			345,000
Increase (decrease) in cash and cash equivalents		(81,494,000		)	37,881,000
Cash and cash equivalents at beginning of year		210,332,000			28,388,000
Cash and cash equivalents at end of period		$	128,838,000		$	66,269,000

 

See accompanying notes to condensed consolidated financial statements.

 

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Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED)

 

		2009			2008 (As Adjusted Note 2m)
Supplemental cash flow information:
Cash paid for interest		$	64,512,000		$	103,337,000
Cash paid for income taxes		$	2,920,000		$	4,670,000

 

See accompanying notes to condensed consolidated financial statements.

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Item 1.     Financial Statements (Continued)

 

SIX FLAGS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Chapter 11 Reorganization

 

As used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our,” “Company” 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.

 

On June 13, 2009, Holdings, Six Flags Operations Inc. (“SFO”) and Six Flags Theme Parks Inc. (“SFTP”) and certain of SFTP’s domestic subsidiaries (the “SFTP Subsidiaries” and, collectively with Holdings, SFO and SFTP, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Filing”) under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (Case No. 09-12019).  The entities that own our interests in Six Flags Over Texas (“SFOT”) and Six Flags Over Georgia (including Six Flags White Water Atlanta) (“SFOG”) and our Canadian and Mexican parks are not debtors in the Chapter 11 Filing.

 

In anticipation of the Chapter 11 Filing, the Debtors entered into a Plan Support Agreement (the “Support Agreement”), dated June 13, 2009, with certain participating lenders (the “Participating Lenders”), who are parties to the Second Amended and Restated Credit Agreement, dated as of May 25, 2007 (as amended, modified or otherwise supplemented from time to time, the “Credit Agreement”), among Holdings, SFO, SFTP (as the primary borrower), certain of SFTP’s foreign subsidiaries party thereto, the lenders thereto (the “Lenders”), the agent banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”).  The Debtors’ proposed joint chapter 11 plan of reorganization (the “Plan”), as outlined in the Support Agreement, has the unanimous support of the Lenders’ steering committee and the Administrative Agent.

 

The Plan will provide for the restructuring of the Debtors’ balance sheets.  Except for the Credit Agreement obligations (and swap obligations secured ratably therewith, collectively the “Credit Agreement Obligations”), all claims against or interests in SFTP and the subsidiaries of SFTP included in the Chapter 11 Filing (collectively, the “SFTP Debtors”) will be unimpaired.  The Credit Agreement Obligations will be altered by the Plan and each holder thereof will receive distributions equal to its Credit Agreement Obligations’ claims comprised of its ratable share of the New Term Loan (as defined below) and shares of New Common Stock (as defined below) for the balance of such claims.  SFO will retain its equity in SFTP and the holders of general unsecured claims against SFO, including the $400 million aggregate principal amount of SFO’s unsecured 12.25% senior notes (plus accrued and unpaid interest) due 2016 (the “2016 Notes”) issued pursuant to that certain Indenture, dated as of June 16, 2008, among SFO, Holdings and HSBC Bank USA, National Association, shall receive, in the aggregate, shares of New Common Stock having a value equal to the residual enterprise value of the SFTP Debtors after satisfaction in full of the claims against them (including the Credit Agreement Obligations).  Holdings shall retain its equity interests in SFO and holders of general unsecured claims against Holdings, including the approximately $868 million aggregate principal amount  (plus accrued and unpaid interest) of the following unsecured senior notes, shall receive, in the aggregate, shares of New Common Stock having a value equal to the residual enterprise value of Holdings’ direct and indirect interests in Six Flags Over Georgia and Six Flags Over Texas (collectively, the “Partnership Parks”): (i) Holdings’ unsecured 8.875% senior notes due 2010 (the “2010 Notes”) issued pursuant to that certain Indenture, dated as of

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

February 11, 2002, between Holdings and The Bank of New York (“BONY”), (ii) Holdings’ unsecured 9.75% senior notes due 2013 (the “2013 Notes”) issued pursuant to that certain Indenture dated as of April 13, 2003, between Holdings and BONY, (iii) Holdings’ unsecured 9.625% senior notes due 2014 (the “2014 Notes”) issued pursuant to that certain Indenture, dated as of December 5, 2008, between Holdings and BONY, and (iv) Holdings’ unsecured 4.5% convertible senior notes due 2015 (the “2015 Notes”) issued pursuant to that certain Indenture, dated as of November 19, 2004, between Holdings and BONY (collectively, the 2010 Notes, the 2013 Notes, the 2014 Notes and the 2015 Notes, “Holdings’ Notes”) and the 2016 Notes (on account of Holdings’ guaranty of the 2016 Notes). In addition, Holdings’ and SFTP’s guarantee claims, which include, among other things, claims arising under the guaranty by Holdings and SFTP of obligations owed to Time Warner Inc. (“Time Warner”) and certain of its affiliates under a loan made by a subsidiary of Time Warner to the Company up to a maximum aggregate amount of $10 million , shall be discharged and replaced by new guarantees of such obligations.

 

Pursuant to the Support Agreement, the Participating Lenders agreed, subject to the terms and conditions contained in the Support Agreement, to support the Debtors’ proposed financial restructuring, and further agreed not to transfer the claims of the Participating Lenders unless the transferee agreed to be bound by the Support Agreement (the “Lender Claims), subject to certain exceptions.  In accordance with the terms set forth in the Support Agreement, the Debtors filed the Chapter 11 Filing on June 13, 2009.

 

The Support Agreement may be terminated, subject to certain exceptions, if: (i) a plan (the “Qualified Plan”) in form and substance reasonably satisfactory to Participating Lenders holding more than 60% of the Lender Claims and a disclosure statement (the “Disclosure Statement”) related to the Qualified Plan, shall not have been filed by August 15, 2009, (such Qualified Plan and Disclosure Statement were filed on July 22, 2009) (ii) the Disclosure Statement shall not have been approved by the Bankruptcy Court by October 15, 2009, (iii) the Bankruptcy Court shall not have entered an order (the “Confirmation Order”) confirming a Qualified Plan by December 31, 2009, (iv) a Qualified Plan shall not have been consummated by February 15, 2010, (v) the Debtors shall take any action, subject to certain exceptions, inconsistent with the covenants set forth in the Support Agreement, (vi) an examiner with expanded powers or a trustee shall have been appointed in the chapter 11 case or if such case is dismissed, or if the case is converted to one under chapter 7, (vii) a Confirmation Order is reversed on appeal or vacated, (viii) the Bankruptcy Court does not enter, by certain deadlines after the petition date, interim and final orders governing the use by the Debtors of the Lenders’ cash collateral and granting adequate protection to the Lenders, in form and substance reasonably satisfactory to the Administrative Agent (such final order was entered in advance of those obligations on July 30, 2009) (the “Cash Collateral Order”), (ix) the occurrence of a termination event under the Cash Collateral Order, unless such termination event is waived, or (x) there shall have occurred any event, development or circumstance since the petition date (other than certain events noted therein related to the Chapter 11 Filing) that shall have resulted or could reasonably be expected to result in a material adverse change in the business, condition (financial or otherwise), income, operations or prospects of the Debtors.

 

On July 22, 2009, the Debtors filed with the Bankruptcy Court the Disclosure Statement and a Qualified Plan.  Under the Plan, the holders of claims under the Credit Agreement Obligations existing as of the date of the Chapter 11 Filing (the “Prepetition Credit Agreement Claims”) against the SFTP Debtors will convert these claims into (i) approximately 92% of new common stock (the “New Common Stock”) to be issued by Holdings after its reorganization (“Reorganized SFI”), subject to dilution by a new long-term incentive plan for officers, directors and employees of Holdings (the “Long-Term Incentive Plan”), and (ii) a new term loan in an aggregate amount of $600 million (the “New Term Loan”).  Prepetition Credit Agreement Claims against SFO will be discharged and exchanged for a new guaranty of the obligations under the New Term Loan by SFO after its reorganization.  All other secured claims against the Debtors that are allowed by the Bankruptcy Court, if any, will either be paid in full or reinstated, in the Debtors’ discretion.  Allowed unsecured claims against all of the Debtors (other than

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Holdings and SFO) will be paid in full or be reinstated (but solely to the extent such claims are allowed by the Bankruptcy Court).  Claims against SFTP, SFO, and Holdings, respectively, based on a guaranty of the obligations of SFOG Acquisition A, Inc., SFOG Acquisition B, L.L.C., SFOT Acquisition I, Inc. and SFOT Acquisition II, Inc., each a subsidiary of Holdings, to Time Warner and certain affiliates of Time Warner under a certain promissory note and a certain subordinated indemnity agreement will be discharged and exchanged for new guarantees of such obligations (as may be amended in connection with the emergence of the Debtors from bankruptcy).  The holders of allowed unsecured claims against SFO (which includes claims arising under the 2016 Notes) will convert their claims against SFO into approximately 7% of the New Common Stock to be issued by Reorganized SFI (subject to dilution by the Long-Term Incentive Plan).  The holders of allowed unsecured claims against Holdings (which includes claims arising under Holdings’ Notes and Holdings’ guaranty of the 2016 Notes) will convert their claims against Holdings into approximately 1% of the New Common Stock to be issued by Reorganized SFI (subject to dilution by the Long-Term Incentive Plan).  All existing equity interests in Holdings will be canceled under the Plan.  All existing equity interests in Holdings’ direct subsidiary SFO will be cancelled, and 100% of the newly-issued common stock of SFO will be issued to Holdings on the effective date of the reorganization in consideration for Holdings’ distribution of the New Common Stock in Reorganized SFI to certain holders of allowed claims, as described above.  The existing equity interests in all Debtors (other than Holdings and SFO) will remain unaltered by the Plan.

 

Based upon the Debtors’ estimate of the allowed claims in the reorganization cases, the Plan hopes to provide a yet undetermined percentage to holders of Prepetition Credit Agreement Claims against SFTP, a 100% recovery for the holders of all other secured claims, a 100% recovery for the holders of unsecured claims against all Debtors (other than SFO and Holdings) and no recovery for holders of equity interests in Holdings prior to the Chapter 11 Filing.  The Plan also hopes to provide a yet undetermined percentage to the holders of unsecured claims against SFO and Holdings.  These projections are based on assumptions described in the Disclosure Statement and are not guaranteed.  See “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” contained in Item 1A of the 2008 Annual Report and Part II, Item 1A of this Quarterly Report on Form 10-Q.  The Plan is supported by the Debtors and the Participating Lenders.

 

Chapter 11 Financing

 

The Debtors will be permitted to use the Lenders’ cash collateral pursuant to the Cash Collateral Order with the following key terms: (i) monthly payment of an amount equal to interest accrued on the Credit Agreement Obligations at the non-default LIBOR-based rates set forth in the Credit Agreement (with an additional 2% in respect of default interest accruing), (ii) the prompt payment, following submission of invoices, of agency fees, letter of credit fees, and fees and expenses of counsel and financial advisors to the Administrative Agent, (iii) the Debtors’ diligent prosecution of the Plan, and (iv) additional reasonable covenants regarding use of cash collateral outside the ordinary course of business acceptable to the steering committee comprised of the Participating Lenders.  Such covenants include, for example, a prohibition on the Company’s granting of any mortgages, security interests, or liens in the cash collateral or any portion thereof to any parties not subject to the Cash Collateral Order pursuant to Section 364(d) of the Bankruptcy Code.  Additionally, subject to approval of the Lenders, the Company shall have the ability to renew and/or extend the maturity date of existing letters of credit prior to the effective date of the Plan without any increase in the amount available to be drawn thereunder.  The Debtors shall also have the ability to obtain a post-petition bi-lateral letter of credit facility in an amount to be agreed (secured solely by cash collateral) to address post-filing incremental letter of credit

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

requirements arising subsequent to the June 13, 2009 commencement of the Chapter 11 Filing (the “Petition Date”).

 

Reporting Requirements

 

As a result of the Chapter 11 Filing, the Debtors are now required to file various documents with, and provide certain information to, the Bankruptcy Court, including statements of financial affairs, schedules of assets and liabilities, and monthly operating reports in forms prescribed by federal bankruptcy law, as well as certain financial information on an unconsolidated basis. Such materials will be prepared according to requirements of federal bankruptcy law.  While they accurately provide then-current information required under federal bankruptcy law, they are nonetheless unconsolidated, unaudited, and are prepared in a format different from that used in Six Flags, Inc.’s consolidated financial statements filed under the securities laws.  Accordingly, the Company believes that the substance and format do not allow meaningful comparison with its regular publicly-disclosed consolidated financial statements.  Moreover, the materials filed with the Bankruptcy Court are not prepared for the purpose of providing a basis for an investment decision relating to the Company’s securities, or for comparison with other financial information filed with the SEC.

 

Reasons for Bankruptcy

 

For several years, the Debtors have faced a number of challenges, most significantly their over-leveraged balance sheet, which have impaired their ability to achieve profitability.  Under the direction of the previous board of directors of Holdings’ and the management team, the Company had amassed more than $2.5 billion of debt and preferred income equity redeemable shares (“PIERS”) obligations by the end of 2005 in order to acquire theme parks and conduct various capital expenditure programs.  Faced with a highly leveraged balance sheet, in 2006 the newly constituted board of directors approved substantial changes to senior management, including several park presidents (formerly referred to as general managers), and new management began to effectuate a series of long-term operating initiatives.  By 2008, the new management team achieved several key strategic objectives, including diversifying and growing revenues, and increasing operational efficiency and operating cash flows, which it had set out to achieve by the end of its third year.

 

In addition, the new management team also worked to reduce the Company’s debt obligations.  This was achieved by, among other means, selling ten parks for approximately $400 million in gross proceeds, entering into the Credit Agreement that reduced interest costs and extended maturities and completing an exchange offer that exchanged $530.6 million of Holdings’ Notes for $400.0 million of 2016 Notes, resulting in reduced debt and interest, and extended maturities.  Despite these significant achievements, the Company remained highly leveraged and had substantial indebtedness and PIERS obligations.

 

The PIERS required mandatory redemption by August 15, 2009 at 100% of the liquidation preference in cash, which amounted to approximately $287.5 million, plus accrued and unpaid dividends of approximately $31.3 million.  Because the Debtors were not going to be able to satisfy this obligation and a default of the PIERS obligations would also have caused a default under the Credit Agreement, the Debtors sought to refinance or restructure the PIERS before the mandatory redemption date.  A default under the Credit Agreement, in turn, would have permitted the lenders thereunder to accelerate the Debtors’ obligations under the Credit Agreement.  Such an acceleration under the Credit Agreement would have also triggered cross-defaults under Holdings’ Notes, resulting in most, if not all, of the Debtors’ long-term debt becoming due and payable immediately.

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Recognizing the need for a comprehensive solution for these financial issues, prior to commencing the Chapter 11 Filing, the Debtors attempted to effect out-of-court exchange offers designed to reduce unsecured debt and interest expense requirements, leave in place its favorable Credit Agreement, and improve financial and operational flexibility to allow the Company to compete more effectively and generate long-term growth (the “Exchange Offers”).  Accordingly, Holdings (i) announced the commencement of an exchange offer and consent solicitation on April 17, 2009 to exchange the 2010 Notes, 2013 Notes and 2014 Notes for common stock and (ii) announced the commencement of an exchange offer and consent solicitation on May 6, 2009 to exchange the 2015 Notes for common stock.  The consummation of the Exchange Offers with respect to such Holdings’ Notes was conditioned on, among other things, the valid participation of at least 95% of the aggregate principal amount of each issue of Holdings’ Notes.  Holdings also contemplated soliciting consents from the holders of the PIERS to amend the terms of the PIERS to provide for the automatic conversion of the PIERS into common stock and filed a preliminary proxy statement with the SEC with respect to, among other things, the PIERS solicitation.

 

In connection with the Debtors’ efforts to appropriately evaluate all potential restructuring alternatives, in March 2009, the Debtors entered into negotiations with Avenue Capital Management (“Avenue”) in its capacity as the largest holder of the 2016 Notes, a significant holder of Holdings’ Notes, and a lender under the Credit Agreement, in an attempt to de-lever their balance sheet through a restructuring transaction that had the potential to result in a pre-negotiated chapter 11 filing. Negotiations with Avenue focused on the conversion of the 2016 Notes into the bulk of the equity of reorganized Holdings and were dependent upon reinstatement of the favorable terms of the Credit Agreement. Reinstatement of the Credit Agreement was a critical element of these negotiations because, if the Company was left with the full balance of the Credit Agreement but was unable to reinstate its terms, the Company would have faced the prospect of paying much higher “market” rates of interest on approximately $1.1264 billion outstanding under the Credit Agreement. The Company estimates that its annual interest costs would have increased by at least $40 million, further exacerbating the Company’s liquidity and future financial covenant challenges.

 

After several months of negotiations, the Company and Avenue were unable to reach an agreement to meet the Debtors’ liquidity and financial needs under the Credit Agreement.  The Debtors then consummated discussions with the Participating Lenders and ultimately entered into the Support Agreement.

 

Notifications

 

Shortly after the Petition Date, the Debtors began notifying current or potential creditors of the Chapter 11 Filing. Subject to certain exceptions under the Bankruptcy Code, the Chapter 11 Filing automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a claim arising prior to the Petition Date are enjoined unless and until the Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods furnished and services provided after the Petition Date in the ordinary course of business.  The deadline for the filing of proofs of claims against the Debtors has not yet been established by the Bankruptcy Court.

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Creditors’ Committee

 

As required by the Bankruptcy Code, the United States Trustee for the District of Delaware appointed a statutory committee of unsecured creditors (the “Creditors’ Committee”).  The Creditors’ Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors.  There can be no assurance that the Creditors’ Committee will support the Debtors’ positions on matters to be presented to the Bankruptcy Court in the future or on any plan of reorganization.  Disagreements between the Debtors and the Creditors’ Committee could protract the court proceedings, negatively impact the Debtors’ ability to operate and delay the Debtors’ emergence from bankruptcy.

 

Executory Contracts — Section 365

 

Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions.  Any description of an executory contract or unexpired lease in this Form 10-Q, including where applicable, the Debtors’ express termination rights or a quantification of our obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights the Debtors have under Section 365 of the Bankruptcy Code.  Claims may arise as a result of rejecting any executory contract.

 

Plan of Reorganization

 

In order to successfully emerge from bankruptcy, the Debtors will need to propose and obtain confirmation by the Bankruptcy Court of a plan of reorganization that satisfies the requirements of the Bankruptcy Code.  A plan of reorganization would, among other things, resolve the Debtors obligations arising prior to the Petition Date, set forth the revised capital structure of the newly reorganized entities and provide for corporate governance subsequent to exit from bankruptcy.

 

Automatically, upon commencing the Chapter 11 Filing, the Debtors under the Bankruptcy Code have the exclusive right for 120 days after the Petition Date to file a plan of reorganization and, if they do so, 60 additional days to obtain necessary acceptances of their plan.  On July 22, 2009, the Debtors filed the Plan with the Bankruptcy Court.  If the Debtors’ exclusivity period lapsed, any party in interest would be able to file a plan of reorganization for any of the Debtors.  In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in order to become effective.

 

A plan of reorganization will be deemed accepted by holders of claims against and equity interests in the Debtors if (1) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept the plan, and (2) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests has voted to accept the plan.  Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, however, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests.  A class of claims or equity interests that does not receive or retain any property under the plan on account of such claims or interests is deemed to have voted to reject the plan.  The precise requirements and evidentiary showing for confirming a plan, notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e.,

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be “crammed down” even if the stockholders receive no recovery if the proponent of the plan demonstrates that (1) no class junior to the common stock is receiving or retaining property under the plan, and (2) no class of claims or interests senior to the common stock is being paid more than in full.

 

Reorganization Costs

 

The Debtors have incurred and will continue to incur significant costs associated with the reorganization.  The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Debtors’ results of operations.  See Note 2d “Reorganization Items” below for additional information.

 

Risks and Uncertainties

 

The ability of the Debtors, both during and after the Bankruptcy Court proceedings, to continue as a going concern, is dependent upon, among other things, (i) the ability of the Debtors to maintain adequate liquidity, including the generation of cash from operations, and (ii) the ability of the Debtors to confirm a plan of reorganization under the Bankruptcy Code.  Uncertainty as to the outcome of these factors raises substantial doubt about the Debtors’ ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments to reflect or provide for the consequences of the bankruptcy proceedings, except for unsecured claims allowed by the Bankruptcy Court.  See Note 2d “Reorganization Items” below for additional information. In particular, such financial statements do not purport to show (a) as to assets, their realization value on a liquidation basis or their availability to satisfy liabilities, (b) as to liabilities arising prior to the Petition Date, the amounts that may be allowed for claims or contingencies, or the status and priority thereof, (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Debtors, or (d) as to operations, the effects of any changes that may be made in the underlying business.  A plan of reorganization would likely cause material changes to the amounts currently disclosed in the condensed consolidated financial statements.

 

Negative events associated with the Debtors’ Chapter 11 Filing could adversely affect revenues and the Debtors’ relationship with customers, as well as with vendors and employees, which in turn could adversely affect the Debtors’ operations and financial condition, particularly if the Bankruptcy Court proceedings are protracted.  Also, transactions outside of the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit the Debtors’ ability to respond timely to certain events or take advantage of certain opportunities.   Because of the risks and uncertainties associated with the Bankruptcy Court proceedings, the ultimate impact that events that occur during these proceedings will have on the Debtors’ business, financial condition and results of operations cannot be accurately predicted or quantified, and until such issues are resolved, there remains substantial doubt about the Debtors’ ability to continue as a going concern.

 

As a result of the Chapter 11 Filing, realization of assets and liquidation of liabilities are subject to uncertainty.  While operating as a debtor-in-possession under the protection of chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.  Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

Impact on Net Operating Loss Carryforwards

 

Our ability to utilize our net operating loss carryforwards (“NOLs”) will be limited by Section 382 of the Internal Revenue Code of 1986, as amended, after we consummate a debt restructuring that results in an ownership change.  In general, following an ownership change, a limitation is imposed on the amount of pre-ownership change NOLs that may be used to offset taxable income in each year following the ownership change.   Under a special rule that may be elected for an ownership change pursuant to a chapter 11 reorganization, the amount of this annual limitation is equal to the “long-term tax-exempt rate” (published monthly by the IRS) for the month in which the ownership change occurs, multiplied by the value of our stock immediately after, rather than immediately before, the ownership change.  By taking into account the value of our stock immediately after the chapter 11 reorganization, the limitation is increased as a result of the cancellation of debt that occurs pursuant to the chapter 11 reorganization.  Because we expect to elect this treatment, an annual limitation will be imposed on the amount of our pre-ownership change NOLs that can be utilized to offset our taxable income after consummation of the chapter 11 reorganization.  Any portion of the annual limitation that is not used in a particular year may be carried forward and used in subsequent years.  The annual limitation is increased by certain built-in income and gains recognized (or treated as recognized) during the five years following the ownership change (up to the total amount of built-in income and gain that existed at the time of the ownership change).  Built-in income for this purpose includes the amount by which our tax depreciation expense during this five year period is less than it would be if our assets had a tax basis on the date of the ownership change equal to their fair market value.  Because most of our assets are theme park assets, which are depreciated on an accelerated basis over a seven-year recovery period, we expect any NOL limitation for the five years following an ownership change to be substantially increased by built-in income and to result in a carryforward of excess limitation to future periods.  Nevertheless, because the value of our outstanding common stock is low, the annual limitation resulting from an ownership change will be correspondingly low and, even after being increased by built-in-income, the cumulative limitation is expected to be substantially less than the amount of our NOLs.  A significant amount of our NOLs is therefore expected to expire unused as a result of an ownership change.  This may require an additional valuation allowance on our deferred tax assets.

 

2.              General — Basis of Presentation

 

We own and operate regional theme and water parks.  Of the 20 parks we own or operate, 18 are located in the United States. Of the other two, one is located in Mexico City, Mexico and the other is located in Montreal, Canada.  During the second quarter of 2008, we decided that we would not re-open our New Orleans Park, which sustained very extensive damage during Hurricane Katrina in late August 2005 and has not re-opened since.  We have recorded appropriate provisions for impairment and liabilities related to the abandonment of the New Orleans park operations.  The condensed consolidated financial statements as of and for all periods presented reflect the assets, liabilities and results of the facilities sold and held for sale as discontinued operations.  See Notes 3 and 7.

 

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. That discussion should be read in conjunction with the condensed consolidated financial statements and these notes.  Our Annual Report on Form 10-K for the year ended December 31, 2008 (the

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

“2008 Annual Report”) 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) that 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-month and six-month periods ended June 30, 2009 are not indicative of the results expected for the full year.  In particular, our 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.

 

The accompanying condensed consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 Filing.  In particular, the financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities, (2) as to liabilities arising prior to the Petition Date, the amounts that may be allowed for claims or contingencies, or the status and priority thereof, (3) as to shareholders’ equity accounts, the effect of any changes that may be made in our capitalization, or (4) as to operations, the effect of any changes that may be made to our business.

 

a.      Consolidated U.S. GAAP Presentation

 

Our accounting policies reflect industry practices and conform to U.S. generally accepted accounting principles.

 

The condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries.

 

We also consolidate the partnerships and joint ventures that own SFOT and SFOG, as we have determined that we have the most significant economic interest since we receive a majority of these entities’ 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 non-affiliated parties in SFOT and SFOG are reflected in the accompanying condensed consolidated balance sheets as redeemable noncontrolling interests.  The portion of earnings or loss from each of the parks attributable to non-affiliated parties is reflected as net income (loss) attributable to noncontrolling interests in the accompanying condensed consolidated statements of operations.

 

While operating as debtors-in-possession, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as permitted in the ordinary course of business.  These dispositions and settlements may be in amounts other than those reflected in the condensed consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the condensed consolidated financial statements.

 

b.      Liquidity and Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern.  This assumes a continuing of operations and the realization of assets and liabilities in the ordinary course of business.  The condensed consolidated financial statements do not include any adjustments that might result if we were forced to discontinue operations.  See Note 1 “Chapter 11 Reorganization” regarding the impact of the Chapter 11 Filing and the proceedings in Bankruptcy Court on the Company’s liquidity and its status as a going concern.

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

 

c.      Accounting for the Chapter 11 Filing

 

We follow the accounting prescribed by American Institute of Certified Public Accountants Statement of Position No. 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), which provides guidance for periods subsequent to a chapter 11 filing, among other things, the presentation of liabilities that are and are not subject to compromise by the Bankruptcy Court proceedings, as well as the treatment of interest expense and presentation of costs associated with the proceedings.

 

In accordance with SOP 90-7, debt discounts or premiums as well as debt issuance costs should be viewed as valuations of the related debt.  When the debt has become an allowed claim and the allowed claim differs from the carrying amount of the debt, the recorded amount should be adjusted to the allowed claim.  We have written-off costs that are associated with unsecured debt that is included in liabilities subject to compromise at June 30, 2009.  See Note 2d “Reorganization Items”.  Premiums and discounts as well as debt issuance cost on debts that are not subject to compromise, such as fully secured claims, have not been adjusted.

 

Because Holdings’ existing stockholders are expected to own less than 50% of the voting shares after Holdings emerges from bankruptcy, we expect to apply “Fresh-Start Reporting,” in which our assets and liabilities will be recorded at their estimated fair value using the principles of purchase accounting contained in Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business Combinations,” with the difference between our estimated fair value and our identifiable assets and liabilities being recognized as goodwill.

 

d.      Reorganization Items

 

SOP 90-7 requires separate disclosure of reorganization items such as realized gains and losses from the settlement of liabilities subject to compromise, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing the Debtors under the Bankruptcy Code.  The Debtors’ reorganization items consist of the following:

 

		Three months ended June 30 , 2009			Six months ended June 30, 2009
		(in thousands)
Write-off of unamortized debt issuance costs, premiums and discounts associated with unsecured debt subject to compromise		$	67,581		$	67,581
Professional fees directly related to reorganization		11,144			11,144
Total reorganization items		$	78,725		$	78,725

 

Professional fees directly related to the reorganization include fees associated with advisors to the Debtors, certain creditors and the Creditors’ Committee.

 

  Net cash paid for reorganization items, entirely constituting professional fees, as of June 30, 2009 totaled $10,840,000.

 

e.      Liabilities Subject to Compromise

 

Liabilities subject to compromise refers to unsecured obligations that will be accounted for under a plan of reorganization. Generally, actions to enforce or otherwise effect payment of liabilities arising

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

 

before the date of filing of the plan of reorganization are stayed.  SOP 90-7 requires liabilities that are subject to compromise to be reported at the claim amounts expected to be allowed, even if they may be settled for lesser amounts. These liabilities represent the estimated amount of claims expected to be allowed on known or potential claims to be resolved through the bankruptcy process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of collateral securing the claims, proofs of claim, or other events.  Liabilities subject to compromise also include certain items that may be assumed under the plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  The Company has not included the Credit Agreement Obligations as liabilities subject to compromise as these secured liabilities are expected to be fully recovered by the Lenders.  The Bankruptcy Court has granted final approval of many of the Debtors’ “first day” motions covering, among other things, human resource obligations, supplier relations, insurance, customer relations, business operations, certain tax matters, cash management, post-petition utilities, case management and retention of professionals.  Obligations associated with these matters are not classified as liabilities subject to compromise.

 

 The Debtors may reject pre-petition executory contracts and unexpired leases with respect to the Debtors’ operations, with the approval of the Bankruptcy Court. Damages resulting from rejection of executory contracts and unexpired leases are generally treated as general unsecured claims and will be classified as liabilities subject to compromise. Holders of such pre-petition claims will be required to file proofs of claims by a bar date to be determined by the Bankruptcy Court.  A bar date is the date by which claims against the Debtors must be filed if the claimants wish to receive any distribution in the chapter 11 cases.  The Debtors will notify all known claimants subject to the bar date of their need to file a proof of claim with the Bankruptcy Court. Differences between liability amounts estimated by the Debtors and claims filed by creditors will be investigated and, if necessary, the Bankruptcy Court will make a final determination of the allowable claim. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a plan of reorganization. Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.

 

 Liabilities subject to compromise consist of the following:

 

		June 30, 2009				December 31, 2008
		(in thousands)
Accounts payable and other accrued expenses		$		75,968		$	—
Accrued interest payable		49,877				—
Unsecured debt		988,305				—
Unsecured convertible notes		280,000				—
Other long-term liabilities		5,222				—
Total liabilities subject to compromise		$	1,399,372			$		—

 

Liabilities subject to compromise include trade accounts payable related to purchases prior to the Petition Date, which generally have not been paid.  As a result, the Company’s cash flows from operations were favorably affected by the stay of payments related to these liabilities.

 

f.       PARC Note

 

We recorded the $37.0 million note that we received pursuant to the sale of seven parks in April 2007 (the “PARC Note”) at an estimated fair value of $11.4 million, reflecting the risk of collectability due to the PARC Note’s subordination to other obligations.  We will not recognize interest income from the PARC Note until the entire carrying amount has been recovered, in accordance with the guidance of

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

 

SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” As of June 30, 2009, we have collected payments in the amount of $6.9 million leaving the PARC Note receivable balance at $4.5 million.  See Note 7.

 

g.      Income Taxes

 

Income taxes are accounted for under the asset and liability method.  At December 31, 2008, we had recorded a valuation allowance of $598,510,000 due to uncertainties related to our ability to utilize some of our deferred tax assets before they expire.  The valuation allowance was increased by $96,754,000 through June 30, 2009, in respect of the net loss before income taxes generated during the first six months of 2009.  In addition, we decreased the valuation allowance by $3,565,000 through June 30, 2009 related to other comprehensive income (loss).

 

We classify interest and penalties attributable to income taxes as part of income tax expense.  As of June 30, 2009, we have a liability of approximately $4,150,000 accrued for interest and penalties.

 

h.      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.

 

i.       Derivative Instruments and Hedging Activities

 

We account for derivatives and hedging activities in accordance with the Financial Accounting Standards Board (“FASB”) SFAS No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” which 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 (e.g., gains and losses) depends on the intended use of the derivative and the resulting designation.

 

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 other expense in our condensed consolidated statements of operations on a current basis.

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

 

We have recorded an $8,725,000 loss through the second quarter of 2009 in other expense because during the fourth quarter of 2008, our interest rate swaps no longer met the SFAS 133 probability test and hedge accounting treatment was discontinued.

 

j.       Income (Loss) Per Common Share

 

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 both the three and six months ended June 30, 2009 does not include 6,580,000 options, and for the three and six months ended June 30, 2008 does not include 6,884,000 options, as the effect of the exercise of these options would be antidilutive.  Additionally, the weighted average number of shares of common stock on a diluted basis for the three-month period ended June 30, 2009 and the six-month periods ended June 30, 2009 and 2008 does not include the effect of the potential conversion of our PIERS or 2015 Notes as the effect of such conversion and the resulting decrease in preferred stock dividends and interest expense, as the case may be, is antidilutive.  Our 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.  Our 2015 Notes are convertible into 44,094,000 shares of common stock, although we can satisfy conversions by delivering cash in lieu of shares. The following table reconciles the weighted average number of shares of common stock outstanding used in the calculations of basic and diluted income per share for the three months ended June 30, 2008.

 

		Three months ended
		June 30, 2008
					Weighted
					Average		Per
		Net			Shares		Share
		Income			Outstanding		Amount
Basic Earnings Per Share:
Net income		$	92,909,000
Preferred stock dividends and amortization of related issue costs		(5,492,000		)
		87,417,000			97,319,000		$	0.90
Diluted Earnings Per Share:
Effect of potential common shares issuable upon exercise of employee stock options		—			—
Effect of dilutive securities:
Preferred stock		5,492,000			13,789,000
Convertible notes		5,045,000			44,094,000
		$	97,954,000		155,202,000		$	0.63

 

PIERS dividends and amortization of related issue costs of $5,436,000 and $10,929,000 were included in determining net income (loss) applicable to common stock for the three and six months ended June 30, 2009, respectively.  PIERS dividends and amortization of related issue costs of $5,492,000 and

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

 

$10,985,000 were included in determining net income (loss) applicable to common stock for the three and six months ended June 30, 2008, respectively.

 

k.      Reclassifications

 

Reclassifications have been made to certain amounts reported in 2008 to conform to the 2009 presentation.

 

l.       Stock Benefit Plans

 

The Debtors, after emergence from bankruptcy, expect to implement the Long-Term Incentive Plan for management, selected employees and directors of the reorganized companies, providing incentive compensation in the form of new issuances of stock options and/or restricted stock in Holdings.

 

As a result of the Chapter 11 Filing, it is unlikely that the restricted stock or stock options granted to employees and directors in the past under the stock-based compensation arrangements described below will retain value comparable to their grant date fair value, as the Plan proposes that all existing stockholders of Holdings will not receive any compensation for their claims.

 

We maintain stock-based compensation arrangements under which employees and directors are awarded grants of restricted stock and stock options.  During the three months ended June 30, 2009 and 2008, stock-based compensation expense was $602,000 and $2,631,000, respectively.  During the six months ended June 30, 2009 and 2008, stock-based compensation expense was $1,441,000 and $6,223,000, respectively.

 

Under our various stock option and incentive plans (“Stock Incentive Plans”), our officers and non-employee directors may be awarded stock options, restricted stock and other stock-based awards.  As of June 30, 2009, options to purchase 6,580,000 shares of our common stock and approximately 1,769,000 shares of restricted stock were outstanding under the Stock Incentive Plans and approximately 3,763,000 shares were available for future grant.  50,000 stock options were granted during the six month period ended June 30, 2009 to our Chief Financial Officer pursuant to the terms of his employment agreement.  No stock options were granted during the six month period ended June 30, 2008.

 

Stock Options

 

Options granted under the Stock Incentive Plans may be designated as either incentive stock options or non-qualified stock options.  Options are generally granted with an exercise price equal to the market value of our common stock at the date of grant.  These option awards generally vest 20% per annum, commencing with the date of grant, and have a contractual term of either 7, 8 or 10 years.  In addition, our President and Chief Executive Officer was granted 475,000 options during the first quarter of 2006 that become exercisable only if certain market prices of our common stock are maintained for consecutive 90 day periods.  Stock option compensation is recognized over the vesting period using the graded vesting terms of the respective grant.

 

The estimated fair value of options granted without a market condition was calculated using the Black-Scholes option pricing valuation model.  This model takes into account several factors and assumptions.  The risk-free interest rate is based on the yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumption at the time of grant.  The expected term (estimated period of time outstanding) is estimated using the contractual term of the option and the historical effects of employees’ expected exercise and post-vesting employment termination behavior.  Expected volatility

 

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SIX FLAGS, INC.

(DEBTOR-IN-POSSESSION as of June 13, 2009)

Notes to Condensed Consolidated Financial Statements (Continued)

 

was calculated based on historical volatility for a period equal to the stock option’s expected life, calculated on a daily basis.  The expected dividend yield is based on expected dividends for the expected term of the stock options.  The fair value of stock options on the date of grant is expensed on a straight line basis over the requisite service period of the graded vesting term as if the award was, in substance, multiple awards.

 

The estimated fair value of options granted to our President and Chief Executive Officer with a market condition was calculated using the Monte Carlo option pricing valuation model. This model takes into account several factors and assumptions.  The risk-free interest rate is based on the yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumption at the time of grant.  The expected term (estimated period of time outstanding) is estimated using the contractual term of the option and the historical effects of employees’ expected exercise and post-vesting employment termination behavior.  Expected volatility was equal to the expected volatility utilized in the Black-Scholes option pricing valuation model described above.  The expected dividend yield is based on expected dividends for the expected term of the stock options.  The vesting hurdles were based on the market prices of our common stock pursuant to the terms of the option grants ($12 and $15) and the exercise multiple utilized was 1.75 which assumes that the option holder will exercise once the stock price has appreciated to 1.75 times the grant price.

 

The weighted-average assumptions used in the option pricing valuation models for options granted in the six months ended June 30, 2009 and 2008 are as follows:

 

		June 30,
		2009				2008
		Employees		Directors		Employees		Directors
Risk-free interest rate		1.79	%	—		—		—
Expected life (in years)		5.68		—		—		—
Expected volatility		68.47	%	—		—		—
Expected dividend yield		—		—		—		—

 

A summary of the status of our option awards as of June 30, 2009 and changes during the six months then ended is presented below:

 

		Shares		Weighted Avg. Exercise Price ($)		Weighted Avg. Remaining Contractual Term		Aggregate Intrinsic Value
Balance at January 1, 2009		6,884,000		6.57
Granted		50,000		0.33
Exercised		—		—
Canceled or exchanged		—		—
Forfeited		(80,000	)	7.74
Expired		(274,000	)	13.70
Balance at June 30, 2009		6,580,000		6.21		6.85		—
Vested and expected to vest at June 30, 2009		6,750,000		6.62		6.52		—
Options exercisable at June 30, 2009		3,686,000		6.84		6.65		—

 

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