XNYS:SIX Six Flags Entertainment Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

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, 2012

 

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 ENTERTAINMENT CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

13-3995059

(State or Other Jurisdiction of

 

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

 

924 Avenue J East, Grand Prairie, TX 75050

(Address of Principal Executive Offices, Including Zip Code)

 

(972) 595-5000

(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 x  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 x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(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 by check mark whether the registrant has filed all documents and reports required to be filed under Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes x  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 July 26, 2012, Six Flags Entertainment Corporation had 53,092,349 outstanding shares of common stock, par value $0.025 per share.

 

 

 



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

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, 2012 (unaudited) and December 31, 2011

2

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Equity (unaudited)

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

9

 

 

 

 

Notes to Condensed Consolidated Financial Statements

11

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 5.

Other Information

36

 

 

 

Item 6.

Exhibits

38

 

 

 

Signatures

 

39

 



Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document and the documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.  Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.

 

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 statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements.  These risks and uncertainties include, but are not limited to, statements we make regarding: (i) the adequacy of cash flows from operations, available cash and available amounts under our credit facilities to meet our future liquidity needs, (ii) our ability to roll out our capital enhancements in a timely and cost effective manner, (iii) our ability to improve operating results by implementing strategic cost reductions, and organizational and personnel changes without adversely affecting our business, and (iv) 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 or other parks in the industry;

·                  adverse weather conditions such as excess heat or cold, rain, and storms;

·                  general financial and credit market conditions;

·                  economic conditions (including customer spending patterns);

·                  competition with other theme parks and other entertainment alternatives;

·                  pending, threatened or future legal proceedings; and

·                  other factors that are described in “Item 1A. Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”).

 

A more complete discussion of these factors and other risks applicable to our business is contained in “Item 1A. Risk Factors” of the 2011 Annual Report.  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.  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 do not intend to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

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, if applicable, are available free of charge through our website at www.sixflags.com.  References to our website in this Quarterly Report 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.  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 Securities and Exchange Commission (“SEC”).  Copies are also available, without charge, by sending a written request to Six Flags Entertainment Corporation, 924 Avenue J East, Grand Prairie, TX 75050, Attn:  Investor Relations.

 

1



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

127,810

 

$

231,427

 

Accounts receivable

 

63,234

 

18,461

 

Inventories

 

37,668

 

20,973

 

Prepaid expenses and other current assets

 

51,134

 

38,668

 

Total current assets

 

279,846

 

309,529

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Debt issuance costs

 

11,906

 

13,026

 

Restricted-use investment securities

 

15,646

 

513

 

Deposits and other assets

 

8,675

 

10,477

 

Total other assets

 

36,227

 

24,016

 

 

 

 

 

 

 

Property and equipment, at cost

 

1,603,495

 

1,544,351

 

Accumulated depreciation

 

(319,361

)

(252,514

)

Total property and equipment

 

1,284,134

 

1,291,837

 

Goodwill

 

630,248

 

630,248

 

Intangible assets, net of accumulated amortization

 

384,157

 

392,548

 

Total assets

 

$

2,614,612

 

$

2,648,178

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

57,137

 

$

23,823

 

Accrued compensation, payroll taxes and benefits

 

27,496

 

59,441

 

Accrued insurance reserves

 

35,840

 

34,128

 

Accrued interest payable

 

1,375

 

1,071

 

Other accrued liabilities

 

44,613

 

29,834

 

Deferred income

 

106,220

 

38,156

 

Current portion of long-term debt

 

10,324

 

35,296

 

Total current liabilities

 

283,005

 

221,749

 

 

 

 

 

 

 

Long-term debt

 

945,418

 

921,940

 

Other long-term liabilities

 

74,715

 

76,180

 

Deferred income taxes

 

220,214

 

220,734

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

456,361

 

440,427

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $1.00 par value

 

 

 

Common stock, $0.025 par value, 140,000,000 shares authorized; 53,078,459 and 54,641,885 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

1,327

 

1,366

 

Capital in excess of par value

 

874,889

 

832,112

 

Accumulated deficit

 

(197,123

)

(20,088

)

Accumulated other comprehensive loss

 

(48,050

)

(49,912

)

Total Six Flags Entertainment Corporation stockholders’ equity

 

631,043

 

763,478

 

Noncontrolling interests

 

3,856

 

3,670

 

Total equity

 

634,899

 

767,148

 

Total liabilities and equity

 

$

2,614,612

 

$

2,648,178

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

Item 1.    Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share and per share data)

 

 

 

Three Months Ended
June 30,

 

 

 

2012

 

2011

 

Theme park admissions

 

$

203,120

 

$

183,563

 

Theme park food, merchandise and other

 

157,917

 

140,651

 

Sponsorship, licensing and other fees

 

9,959

 

10,579

 

Accommodations revenue

 

3,916

 

3,880

 

Total revenues

 

374,912

 

338,673

 

Operating expenses (excluding depreciation and amortization shown separately below)

 

128,143

 

120,453

 

Selling, general and administrative (including stock-based compensation of $15,124 and $13,361 in 2012 and 2011, respectively, and excluding depreciation and amortization shown separately below)

 

75,698

 

74,062

 

Costs of products sold

 

29,934

 

27,317

 

Depreciation

 

31,998

 

36,979

 

Amortization

 

3,917

 

4,515

 

Loss on disposal of assets

 

812

 

1,938

 

Interest expense

 

11,535

 

16,507

 

Interest income

 

(83

)

(245

)

Equity in loss of investee

 

250

 

1,091

 

Other expense, net

 

244

 

503

 

Restructure recovery

 

(47

)

(1,254

)

Income from continuing operations before reorganization items, income taxes and discontinued operations

 

92,511

 

56,807

 

Reorganization items, net

 

495

 

334

 

Income from continuing operations before income taxes and discontinued operations

 

92,016

 

56,473

 

 

 

 

 

 

 

Income tax expense

 

1,194

 

3,396

 

 

 

 

 

 

 

Income from continuing operations before discontinued operations

 

90,822

 

53,077

 

 

 

 

 

 

 

Loss from discontinued operations

 

(17

)

(66

)

 

 

 

 

 

 

Net income

 

90,805

 

53,011

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

(18,540

)

(18,048

)

 

 

 

 

 

 

Net income attributable to Six Flags Entertainment Corporation

 

$

72,265

 

$

34,963

 

Net income applicable to Six Flags Entertainment Corporation common stockholders

 

$

72,265

 

$

34,963

 

Weighted average number of common shares outstanding — basic:

 

53,799

 

54,994

 

Weighted average number of common shares outstanding —diluted:

 

56,705

 

56,743

 

 

 

 

 

 

 

Net income per average common share outstanding — basic:

 

 

 

 

 

Income from continuing operations applicable to Six Flags Entertainment Corporation common stockholders

 

$

1.34

 

$

0.64

 

Loss from discontinued operations applicable to Six Flags Entertainment Corporation common stockholders

 

 

 

Net income applicable to Six Flags Entertainment Corporation common stockholders

 

$

1.34

 

$

0.64

 

 

 

 

 

 

 

 

 

Net income per average common share outstanding — diluted:

 

 

 

 

 

Income from continuing operations applicable to Six Flags Entertainment Corporation common stockholders

 

$

1.27

 

$

0.62

 

Loss from discontinued operations applicable to Six Flags Entertainment Corporation common stockholders

 

 

 

Net income applicable to Six Flags Entertainment Corporation common stockholders

 

$

1.27

 

$

0.62

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.60

 

$

0.03

 

 

 

 

 

 

 

Amounts attributable to Six Flags Entertainment Corporation:

 

 

 

 

 

Income from continuing operations

 

$

72,282

 

$

35,029

 

Loss from discontinued operations

 

(17

)

(66

)

Net income

 

$

72,265

 

$

34,963

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Item 1.    Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share and per share data)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Theme park admissions

 

$

232,571

 

$

209,899

 

Theme park food, merchandise and other

 

182,534

 

163,584

 

Sponsorship, licensing and other fees

 

17,667

 

18,491

 

Accommodations revenue

 

8,498

 

8,034

 

Total revenues

 

441,270

 

400,008

 

Operating expenses (excluding depreciation and amortization shown separately below)

 

206,715

 

197,708

 

Selling, general and administrative (including stock-based compensation of $32,133 and $27,664 in 2012 and 2011, respectively, and excluding depreciation and amortization shown separately below)

 

121,927

 

117,754

 

Costs of products sold

 

35,661

 

32,887

 

Depreciation

 

68,991

 

76,501

 

Amortization

 

8,419

 

9,028

 

Loss on disposal of assets

 

2,455

 

3,915

 

Interest expense

 

23,129

 

33,278

 

Interest income

 

(314

)

(496

)

Equity in loss of investee

 

570

 

2,247

 

Other (income) expense, net

 

(537

)

147

 

Restructure (recovery) costs

 

(47

)

25,348

 

Loss from continuing operations before reorganization items, income taxes and discontinued operations

 

(25,699

)

(98,309

)

Reorganization items, net

 

1,049

 

834

 

Loss from continuing operations before income taxes and discontinued operations

 

(26,748

)

(99,143

)

 

 

 

 

 

 

Income tax benefit

 

(2,562

)

(3,689

)

 

 

 

 

 

 

Loss from continuing operations before discontinued operations

 

(24,186

)

(95,454

)

 

 

 

 

 

 

Loss from discontinued operations

 

(52

)

(102

)

 

 

 

 

 

 

Net loss

 

(24,238

)

(95,556

)

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

(18,606

)

(17,966

)

 

 

 

 

 

 

Net loss attributable to Six Flags Entertainment Corporation

 

$

(42,844

)

$

(113,522

)

Net loss applicable to Six Flags Entertainment Corporation common stockholders

 

$

(42,844

)

$

(113,522

)

Weighted average number of common shares outstanding — basic and diluted:

 

54,196

 

55,308

 

 

 

 

 

 

 

Net loss per average common share outstanding — basic and diluted:

 

 

 

 

 

Loss from continuing operations applicable to Six Flags Entertainment Corporation common stockholders

 

$

(0.79

)

$

(2.05

)

Loss from discontinued operations applicable to Six Flags Entertainment Corporation common stockholders

 

 

 

Net loss applicable to Six Flags Entertainment Corporation common stockholders

 

$

(0.79

)

$

(2.05

)

 

 

 

 

 

 

Cash dividends declared per common share

 

$

1.20

 

$

0.06

 

 

 

 

 

 

 

Amounts attributable to Six Flags Entertainment Corporation:

 

 

 

 

 

Loss from continuing operations

 

$

(42,792

)

$

(113,420

)

Loss from discontinued operations

 

(52

)

(102

)

Net loss

 

$

(42,844

)

$

(113,522

)

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Item 1.    Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

 

 

Three Months Ended
June 30,

 

 

 

2012

 

2011

 

Net income

 

$

90,805

 

$

53,011

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustment

 

(3,685

)

627

 

Defined benefit retirement plan

 

(167

)

 

Change in cash flow hedging

 

(383

)

 

Net other comprehensive (loss) income

 

(4,235

)

627

 

 

 

 

 

 

 

Comprehensive income

 

86,570

 

53,638

 

Comprehensive income attributable to noncontrolling interests

 

(18,540

)

(18,048

)

Comprehensive income attributable to Six Flags Entertainment Corporation

 

$

68,030

 

$

35,590

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

Item 1.    Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Net loss

 

$

(24,238

)

$

(95,556

)

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustment

 

2,845

 

4,661

 

Defined benefit retirement plan

 

(333

)

 

Change in cash flow hedging

 

(650

)

 

Net other comprehensive income

 

1,862

 

4,661

 

 

 

 

 

 

 

Comprehensive loss

 

(22,376

)

(90,895

)

Comprehensive income attributable to noncontrolling interests

 

(18,606

)

(17,966

)

Comprehensive loss attributable to Six Flags Entertainment Corporation

 

$

(40,982

)

$

(108,861

)

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

Item 1.   Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

(in thousands, except share data)

 

 

 

Preferred stock

 

Common stock

 

Capital in

 

Retained
earnings

 

Accumulated
other

 

Total Six Flags

 

Non-

 

 

 

 

 

Shares
issued

 

Amount

 

Shares issued

 

Amount

 

excess
of par value

 

(Accumulated
deficit)

 

comprehensive
income (loss)

 

Entertainment
Corporation

 

controlling
interests

 

Total

 

Balances at January 1, 2012

 

 

 

54,641,885

 

$

1,366

 

$

832,112

 

$

(20,088

)

$

(49,912

)

$

763,478

 

$

3,670

 

$

767,148

 

Issuance of common stock

 

 

 

501,280

 

13

 

9,357

 

9

 

 

9,379

 

 

9,379

 

Restricted stock unit grants

 

 

 

 

 

31,346

 

 

 

31,346

 

 

31,346

 

Stock-based compensation

 

 

 

 

 

31,917

 

 

 

31,917

 

 

31,917

 

Dividends declared to common stockholders

 

 

 

 

 

 

(66,838

)

 

(66,838

)

 

(66,838

)

Repurchase of common stock

 

 

 

(2,077,483

)

(52

)

(30,534

)

(67,815

)

 

(98,401

)

 

(98,401

)

Employee Stock Purchase Plan

 

 

 

12,777

 

 

691

 

 

 

691

 

 

691

 

Fresh start valuation adjustment for SFOT units and SFOG units purchased

 

 

 

 

 

 

453

 

 

453

 

 

453

 

Net loss attributable to Six Flags Entertainment Corporation

 

 

 

 

 

 

(42,844

)

 

(42,844

)

 

(42,844

)

Net other comprehensive income

 

 

 

 

 

 

 

1,862

 

1,862

 

 

1,862

 

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

186

 

186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2012

 

 

 

53,078,459

 

$

1,327

 

$

874,889

 

$

(197,123

)

$

(48,050

)

$

631,043

 

$

3,856

 

$

634,899

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

Item 1.       Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

(in thousands, except share data)

 

 

 

Preferred stock 

 

Common stock

 

Capital in

 

Retained
earnings

 

Accumulated
other

 

Total Six Flag

 

Non-

 

 

 

 

 

Shares
issued

 

Amount

 

Shares issued

 

Amount

 

excess
of par value

 

(Accumulated
deficit)

 

comprehensive
income (loss)

 

Entertainment
Corporation

 

controlling
interests

 

Total

 

Balances at January 1, 2011

 

 

 

55,728,218

 

$

 

697

 

$

 

818,799

 

$

 

48,404

 

$

 

(4,192

)

$

 

863,708

 

$

 

4,455

 

$

 

868,163

 

Issuance of common stock

 

 

 

28,723

 

1

 

149

 

 

 

150

 

 

150

 

Stock-based compensation

 

 

 

 

 

15,156

 

 

 

15,156

 

 

15,156

 

Dividends declared to common stockholders

 

 

 

 

 

 

(3,346

)

 

(3,346

)

 

(3,346

)

Repurchase of common stock

 

 

 

(1,165,814

)

(15

)

(17,135

)

(24,353

)

 

(41,503

)

 

(41,503

)

Two-for-one common stock split

 

 

 

 

682

 

(682

)

 

 

 

 

 

Employee stock purchase plan

 

 

 

9,400

 

0

 

352

 

 

 

352

 

 

352

 

Fresh start valuation adjustment for SFOT units purchased

 

 

 

 

 

 

280

 

 

280

 

 

280

 

Net loss attributable to Six Flags Entertainment Corporation

 

 

 

 

 

 

(113,522

)

 

(113,522

)

 

(113,522

)

Net other comprehensive income

 

 

 

 

 

 

 

4,661

 

4,661

 

 

4,661

 

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

(28

)

(28

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2011

 

 

 

54,600,527

 

$

 

1,365

 

$

 

816,639

 

$

 

(92,537

)

$

 

469

 

$

 

725,936

 

$

 

4,427

 

$

 

730,363

 

 

See accompanying notes to condensed consolidated financial statements.

 

8



Table of Contents

 

Item 1.   Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Cash flow from operating activities:

 

 

 

 

 

Net loss

 

$

(24,238

)

$

(95,556

)

Adjustments to reconcile net loss to net cash provided by operating activities before reorganization activities:

 

 

 

 

 

Depreciation and amortization

 

77,410

 

85,529

 

Stock-based compensation

 

32,133

 

27,664

 

Interest accretion on notes payable

 

592

 

925

 

Reorganization items, net

 

1,049

 

834

 

Amortization of debt issuance costs

 

1,188

 

3,951

 

Other, including loss on disposal of assets

 

2,775

 

3,476

 

Increase in accounts receivable

 

(44,643

)

(28,300

)

Increase in inventories, prepaid expenses and other current assets

 

(29,411

)

(23,803

)

Decrease in deposits and other assets

 

1,154

 

4,731

 

Increase in accounts payable, deferred income, accrued liabilities and other long-term liabilities

 

117,013

 

96,246

 

Increase in accrued interest payable

 

304

 

6,875

 

Deferred income tax benefit

 

(1,129

)

(8,905

)

 

 

 

 

 

 

Total adjustments

 

158,435

 

169,223

 

 

 

 

 

 

 

Net cash provided by operating activities before reorganization activities

 

134,197

 

73,667

 

 

 

 

 

 

 

Cash flow from reorganization activities:

 

 

 

 

 

Net cash used in reorganization activities

 

(996

)

(15,828

)

 

 

 

 

 

 

Total net cash provided by operating activities

 

133,201

 

57,839

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(65,799

)

(60,142

)

Property insurance recovery

 

1,494

 

536

 

Maturities of restricted-use investments

 

 

2,473

 

Purchase of restricted-use investments

 

(15,133

)

 

Proceeds from sale of assets

 

156

 

54

 

 

 

 

 

 

 

Net cash used in investing activities

 

(79,282

)

(57,079

)

 

(continued)

 

9



Table of Contents

 

Item 1.   Financial Statements (Continued)

 

SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Cash flow from financing activities:

 

 

 

 

 

Repayment of borrowings

 

$

(2,086

)

$

(9,060

)

Proceeds from borrowings

 

 

8,000

 

Payment of debt issuance costs

 

(1,437

)

(549

)

Payment of cash dividends

 

(64,445

)

(3,278

)

Net proceeds from issuance of common stock

 

10,071

 

381

 

Stock repurchase

 

(98,401

)

(41,503

)

Purchase of redeemable noncontrolling interests

 

(2,033

)

(948

)

 

 

 

 

 

 

Net cash used in financing activities

 

(158,331

)

(46,957

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

795

 

1,260

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(103,617

)

(44,937

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

231,427

 

187,061

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

127,810

 

$

142,124

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

21,045

 

$

21,528

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

6,427

 

$

5,044

 

 

See accompanying notes to condensed consolidated financial statements.

 

10



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.              Chapter 11 Reorganization

 

On June 13, 2009, Six Flags, Inc. (“SFI”), Six Flags Operations Inc. (“SFO”) and Six Flags Theme Parks Inc. (“SFTP”) and certain of SFTP’s domestic subsidiaries (collectively with SFI, SFO and SFTP, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Chapter 11 Filing”).  SFI’s subsidiaries that own interests in Six Flags Over Texas (“SFOT”) and Six Flags Over Georgia (including Six Flags White Water Atlanta) (“SFOG” and together with SFOT, the “Partnership Parks”) and the parks in Canada and Mexico were not debtors in the Chapter 11 Filing.

 

On April 30, 2010 (the “Effective Date”), the Debtors emerged from Chapter 11 by consummating a restructuring through a series of transactions contemplated by the Debtors’ Modified Fourth Amended Joint Plan of Reorganization (the “Plan”).  See Note 1(a) to the Consolidated Financial Statements in the 2011 Annual Report for a detailed explanation of the Plan.  The following summarizes the reorganization transactions under the Plan:

 

·                  Name Change.  On the Effective Date, but after the Plan became effective and prior to the distribution of securities under the Plan, SFI changed its corporate name to Six Flags Entertainment Corporation.  As used herein, the terms “we,” “our,” “Six Flags” and “Company” refer collectively to Six Flags Entertainment Corporation and its consolidated subsidiaries, and “Holdings” refers only to Six Flags Entertainment Corporation, without regard to the respective subsidiaries.  As used herein, “SFI” means Six Flags, Inc. as a Debtor or prior to its name change to Six Flags Entertainment Corporation.

 

·                  Common Stock.  Pursuant to the Plan, all of SFI’s common stock, preferred stock purchase rights, preferred income equity redeemable shares and any other ownership interest in SFI including all options, warrants or rights, contractual or otherwise (including, but not limited to, stockholders agreements, registration rights agreements and rights agreements) were cancelled as of the Effective Date.

 

On the Effective Date, Holdings issued an aggregate of 54,777,778 shares of common stock at $0.025 par value to holders of unsecured claims against SFI, certain holders of the 12-1/4% Senior Notes due 2016, certain accredited investors that held unsecured claims, and certain equity purchasers.  The share amount has been retroactively adjusted to reflect the June 2011 two-for-one stock split as described in Note 2.

 

On June 21, 2010, the common stock commenced trading on the New York Stock Exchange under the symbol “SIX.”

 

·                  Financing at Emergence.  On the Effective Date, we entered into two exit financing facilities:  (i) an $890.0 million senior secured first lien credit facility comprised of a $120.0 million revolving loan facility and a $770.0 million term loan facility (the “Exit First Lien Facility”) and (ii) a $250.0 million senior secured second lien term loan facility (the “Exit Second Lien Facility”).

 

Also on the Effective Date, SFOG Acquisition A, Inc., SFOG Acquisition B, L.L.C., SFOT Acquisition I, Inc. and SFOT Acquisition II, Inc. (collectively, the “TW Borrowers”) entered into a credit agreement with TW-SF, LLC comprised of a $150.0 million multi-draw term loan facility (the “TW Loan”) for use with respect to the Partnership Parks “put” obligations.

 

See Note 6 for a discussion of these facilities and subsequent amendments, early repayments, and terminations from debt extinguishment transactions.

 

11



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

As required by accounting principles generally accepted in the United States (“GAAP”), we adopted fresh start accounting effective May 1, 2010 following the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852, Reorganizations (“FASB ASC 852”).

 

Under fresh start accounting, the total Company value was adjusted to reorganization value and was allocated to our assets and liabilities based on their respective estimated fair values using the principles of purchase accounting contained in FASB ASC Topic 805, Business Combinations.  The difference between our estimated fair value and our identifiable assets and liabilities was recognized as goodwill.  Liabilities existing as of the Effective Date, other than deferred taxes, were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates.  Deferred taxes were determined in conformity with applicable income tax accounting standards.  The implementation of the Plan and the application of fresh start accounting resulted in financial statements that are not comparable to financial statements in periods prior to emergence.  See Note 1(b) to the Consolidated Financial Statements in the 2011 Annual Report for a detailed explanation of the impact of emerging from Chapter 11 and applying fresh start accounting on our financial position.

 

2.             General — Basis of Presentation

 

We own and operate regional theme, water and zoological parks and are the largest regional theme park operator in the world.  Of the 19 parks we currently own or operate, 17 parks are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada.

 

On May 5, 2011, Holdings’ Board of Directors approved a two-for-one stock split of Holdings’ common stock effective in the form of a stock dividend of one share of common stock for each outstanding share of common stock.  The record date for the stock split was June 15, 2011 and the additional shares of common stock were distributed on June 27, 2011.  In accordance with the provisions of our stock benefit plans and as determined by Holdings’ Board of Directors, the number of shares available for issuance, the number of shares subject to outstanding equity awards and the exercise prices of outstanding stock option awards were adjusted to equitably reflect the effect of the two-for-one stock split.  All share and per share amounts presented in the condensed consolidated financial statements and Notes have been retroactively adjusted to reflect the stock split.

 

“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains a discussion of our results of operations and our financial position and should be read in conjunction with the condensed consolidated financial statements and Notes.  The 2011 Annual Report and the quarterly report on Form 10-Q for the quarter ended March 31, 2012 include additional information about us, our operations and our financial position, and should be referred to in conjunction with this Quarterly Report.  The information furnished in this Quarterly 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 six-month period ended June 30, 2012 are not indicative of the results expected for the full year.  In particular, our park operations contribute a substantial majority of their annual revenue during the period from Memorial Day to Labor Day each year, while expenses are incurred year round.

 

a.              Consolidated GAAP Presentation

 

Our accounting policies reflect industry practices and conform to GAAP.

 

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, SFOG and HWP Development, LLC, a joint venture in which we own an approximate 49% interest (“HWP”), as a subsidiary in our consolidated financial statements, as we have determined that we have the power to direct the activities of those entities that most significantly impact the entities’ economic performance and we have the obligation to absorb losses and receive benefits from the entities that can be potentially significant to these entities.  The equity interests owned by non-affiliated parties in SFOT and SFOG are reflected in the condensed consolidated balance sheets as redeemable noncontrolling interests.  The equity interests owned by non-affiliated parties in HWP are reflected in the condensed consolidated balance sheets as noncontrolling interests.  The portion of earnings or loss from each of the entities attributable to non-affiliated parties is reflected as net income (loss) attributable to noncontrolling interests in the condensed consolidated statements of operations.  See Note 8.

 

12



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

b.              Accounting for the Chapter 11 Filing

 

We follow the accounting prescribed by FASB ASC 852, which provides guidance for periods subsequent to a Chapter 11 filing regarding 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.

 

Because the former stockholders of SFI owned less than 50% of the voting shares after SFI emerged from bankruptcy, we adopted fresh start accounting whereby our assets and liabilities were recorded at their estimated fair value using the principles of purchase accounting contained in FASB ASC Topic 805, Business Combinations.  The difference between our estimated fair value and our identifiable assets and liabilities was recognized as goodwill.  See Note 1(b) to the Consolidated Financial Statements in the 2011 Annual Report for a detailed explanation of the impact of emerging from Chapter 11 and applying fresh start accounting on our financial position.

 

c.               Reorganization Items

 

FASB ASC 852 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 (in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Costs and expenses directly related to the reorganization

 

$

1,049

 

$

834

 

 

Costs and expenses directly related to the reorganization primarily include fees associated with advisors to the Debtors, certain creditors and the Creditors’ Committee (as such term is defined in the Plan).

 

Net cash paid for reorganization items, constituting professional fees and finance fees, during the six months ended June 30, 2012 and 2011 totaled $1.0 million and $15.8 million, respectively.

 

d.              Income Taxes

 

Income taxes are accounted for under the asset and liability method.  At December 31, 2011, we had recorded a valuation allowance of $426.6 million due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating loss and other tax carryforwards, before they expire.  In determining the effective tax rate for interim periods, we consider the expected changes in our valuation allowance from current year originating or reversing timing differences between financial accounting and tax purposes and the taxable income or loss expected for the current year.  For interim periods, we also account for the tax effect of significant non-recurring items in the period in which they occur as well as changes in the valuation allowance relating to a change in the assessment of the probability of utilization of the deferred income tax assets.

 

We classify interest and penalties attributable to income taxes as part of income tax expense.  As of June 30, 2012, we have no accrued interest and penalties liability.

 

e.               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 not considered to be fully recoverable, any 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.

 

13



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

With our adoption of fresh start accounting on April 30, 2010 upon emergence from Chapter 11, assets have been revalued based on the fair values of long-lived assets.

 

f.                 Derivative Instruments and Hedging Activities

 

We account for derivatives and hedging activities in accordance with FASB ASC Topic 815, Derivatives and Hedging.  This accounting guidance 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 (income) expense, net in our condensed consolidated statements of operations on a current basis.  See Note 4.

 

g.              Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share is computed by dividing net income (loss) applicable to Holdings’ common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per common share is computed by dividing net income (loss) applicable to Holdings’ common stockholders by the weighted average number of common shares outstanding during the period and the effect of all dilutive common stock equivalents.  In periods where there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock equivalents would be antidilutive.  These computations have been retroactively adjusted to reflect the June 2011 two-for-one stock split as described in Note 2.

 

For the six-month periods ended June 30, 2012 and 2011, stock options were excluded from the computation of diluted loss per common share as the effect of the exercise of such options is antidilutive.

 

For the three-month period ended June 30, 2012, the computation of diluted earnings per share included the effect of 2,906,000 dilutive stock options and excluded the effect of 300,000 antidilutive stock options.  For the three-month period ended June 30, 2011, the computation of diluted earnings per share included the effect of 1,749,000 dilutive stock options and excluded the effect of 309,000 antidilutive stock options.  Earnings per common share for the three-month periods ended June 30, 2012 and 2011 was calculated as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

 

 

2012

 

2011

 

Net income attributable to Six Flags Entertainment Corporation common stockholders

 

72,265

 

$

34,963

 

Weighted average common shares outstanding - basic

 

53,799

 

54,994

 

Effect of dilutive stock options

 

2,906

 

1,749

 

Weighted average common shares outstanding - diluted

 

56,705

 

56,743

 

Earnings per share — basic

 

$

1.34

 

$

0.64

 

Earnings per share — diluted

 

$

1.27

 

$

0.62

 

 

h.              Reclassifications

 

Reclassifications have been made to certain amounts reported in 2011 to conform to the 2012 presentation.

 

14



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

i.                 Stock Benefit Plans

 

Pursuant to the Plan, on the Effective Date, the Six Flags Entertainment Corporation Long-Term Incentive Plan became effective (the “Long-Term Incentive Plan”).  Pursuant to the Long-Term Incentive Plan, Holdings may grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, deferred stock units, performance and cash-settled awards and dividend equivalent rights (collectively, “Awards”) to select employees, officers, directors and consultants of Holdings and its affiliates.  The Long-Term Incentive Plan originally provided for the issuance of no more than 9,666,666 shares of common stock of Holdings, as adjusted to reflect Holdings’ two-for-one stock split in June 2011.  In May 2012, our stockholders approved an amendment to the Long-Term Incentive Plan that, among other things, increased the number of shares available for issuance under the Long-Term Incentive Plan by 4,400,000 shares from 9,666,666 to 14,066,666.

 

As of June 30, 2012, options to purchase approximately 5,500,000 shares of common stock of Holdings, approximately 2,002,000 shares of non-vested restricted stock awards or restricted stock units and approximately 2,000 deferred stock units were outstanding under the Long-Term Incentive Plan and approximately 3,720,000 shares were available for future grant.

 

Stock Options

 

Options granted under the Long-Term Incentive Plan are designated as either non-qualified stock options or incentive stock options.  Options are generally granted with an exercise price equal to the fair market value of the common stock of Holdings on the date of grant.  While certain stock options are subject to acceleration in connection with a change in control, options are generally cumulatively exercisable in four equal annual installments commencing one year after the date of grant with a 10-year term.  Generally, the unvested portion of stock option awards is forfeited upon termination of employment.  Stock option compensation is recognized over the vesting period using the graded vesting terms of the respective grant.

 

15



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

The estimated fair value of the majority of our options granted 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 term assumption at the time of grant.  The simplified method was used to calculate the expected term (estimated period of time outstanding) because our historical data from our pre-confirmation equity grants is not representative or sufficient to be used to develop an expected term assumption.  Expected volatility was based on the historical volatility of similar companies’ common stock for a period equal to the stock option’s expected term, 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.

 

In August 2011, stock option grants were made to the vast majority of full-time employees.  Given the then current share limitations of the Long-Term Incentive Plan, certain of the option grants to officers were made contingent upon stockholder approval of an amendment to the plan increasing the number of available shares.  This increase in the number of available shares received overwhelming stockholder approval at the May 2012 annual stockholders meeting, satisfying the stockholder approval contingency of such options.  The accounting measurement date for these grants was May 2, 2012.  At that date, the strike prices of the options were less than the prevailing trading price for the underlying shares, and as such the options were valued as in-the-money options.  Due to limitations in the Black-Scholes model related to options treated as in-the-money, we elected to value the options using the Hull-White I lattice model with a simplified assumption for the early settlement to value these options.  The inherent advantage of Hull-White I lattice model relative to the Black-Scholes model is that option exercises are modeled as being dependent on the evolution of the stock price and not solely on the amount of time that has passed since the grant date.  The Hull-White I lattice model uses all of the same assumptions as the Black-Scholes model and also assumes a post-vesting cancellation rate, which treats a cancelled option as (i) exercised immediately if it is in-the-money or (ii) worthless if it is out-of-the-money.  The post-vesting cancellation rate assumption that was used in the valuation of these options was 0%.

 

The following weighted-average assumptions were utilized in the valuation models for the stock options granted in the six-month periods ended June 30, 2012 and 2011 are as follows:

 

 

 

June 30,

 

 

 

2012

 

2011

 

Risk-free interest rate

 

1.72

 

2.41

 

Expected term (in years)

 

7.15

 

6.25

 

Expected volatility

 

41.97

%

43.49

%

Expected dividend yield

 

4.79

%

0.47

%

 

The following table summarizes stock option activity for the six months ended June 30, 2012:

 

 

 

Shares

 

Weighted
Avg.
Exercise
Price ($)

 

Weighted
Avg.
Remaining
Contractual
Term

 

Aggregate
Intrinsic Value
($)

 

Balance at January 1, 2012

 

5,732,000

 

21.99

 

 

 

 

 

Granted

 

303,000

 

36.44

 

 

 

 

 

Exercised

 

(490,000

)

19.16

 

 

 

 

 

Canceled or exchanged

 

 

 

 

 

 

 

Forfeited

 

(44,000

)

30.84

 

 

 

 

 

Expired

 

(1,000

)

31.14

 

 

 

 

 

Balance at June 30, 2012

 

5,500,000

 

22.96

 

8.42

 

171,703,000

 

Vested and expected to vest at June 30, 2012

 

5,384,000

 

22.89

 

8.41

 

168,432,000

 

Options exercisable at June 30, 2012

 

345,000

 

21.27

 

8.25

 

11,367,000

 

 

16



Table of Contents

 

SIX FLAGS ENTERTAINMENT CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

The weighted average grant date fair value of the options granted during the six months ended June 30, 2012 and 2011 was $18.50 and $13.94, respectively.

 

The total intrinsic value of options exercised for the six months ended June 30, 2012 and 2011 was $13.5 million and $0.1 million, respectively.  The total fair value of options that vested during the six months ended June 30, 2012 and 2011 was $1.1 million and $0.1 million, respectively.

 

As of June 30, 2012, there was $23.1 million of unrecognized compensation expense related to option awards.  The weighted average period over which that cost is expected to be recognized is 2.7 years.

 

Cash received from the exercise of stock options during the six months ended June 30, 2012 and 2011 was $9.4 million and $0.4 million, respectively.

 

Stock, Restricted Stock Awards and Restricted Stock Units

 

Stock, restricted stock awards, and restricted stock units granted under the Long-Term Incentive Plan may be subject to transfer and other restrictions as determined by the compensation committee of Holdings’ Board of Directors.  Generally, the unvested portion of restricted stock awards and restricted stock unit awards is forfeited upon termination of employment.  The fair value of stock, restricted stock awards and restricted stock unit awards 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.

 

During the year ended December 31, 2010 a performance award was established that, based on the EBITDA performance of the Company in 2010 and 2011, resulted in an additional 1,456,000 shares of restricted stock units being granted to certain key employees in February 2012.  These restricted stock units will vest upon the completion of the Company’s 2012 audit if the Company achieves its EBITDA performance target in 2012.  If the EBITDA performance target is not achieved by the Company, 50% of such restricted stock units will be immediately forfeited.  Currently, we believe achievement of the 2012 EBITDA performance target is probable.  We will continue to evaluate the probability of achieving the performance condition.  If achievement of the 2012 EBITDA performance condition becomes improbable, we will adjust the appropriate expense to reflect the immediate 50% forfeiture condition.

 

An additional performance award was established based on the EBITDA performance of the Company in 2012 - 2015.  The aggregate payout under the performance award to key employees if the target is achieved in 2015 would be 1,400,000 shares but could be more or less depending on the level of achievement and the timing thereof.  There has been no stock-based compensation expense recorded for this performance award because it is not deemed probable that we will achieve the specified performance targets as of June 30, 2012.  Based on the closing market price of Holdings’ common stock on June 30, 2012, the total unrecognized compensation expense related to this award at target achievement in 2015 is $75.9 million that will be expensed over the service period if it becomes probable of achieving the performance condition.  We will continue to evaluate the probability of achieving the performance condition going forward and record the appropriate expense if necessary.

 

The following table summarizes stock, restricted stock award, and restricted stock unit activity for the six months ended June 30, 2012:

 

 

 

Shares

 

Weighted Average
Grant Date Fair Value ($)

 

Non-vested balance at January 1, 2012

 

548,000

 

18.74

 

Granted

 

1,467,000

 

45.84

 

Vested

 

(13,000

)

36.19

 

Forfeited

 

 

 

Cancelled

 

 

 

Non-vested balance at June 30, 2012

 

2,002,000

 

38.49

 

 

The weighted average grant date fair value per share of stock, restricted stock awards, and restricted stock units granted during the six months ended June 30, 2012 and 2011 was $45.84 and $35.13, respectively.

 

The total grant date fair value of the stock, restricted stock awards, and restricted stock units granted during the six months ended June 30, 2012 and 2011 was $67.3 million and $0.8 million, respectively.  The total fair value of restricted stock awards and restricted stock units that vested during the six months ended June 3012 and 2011 was $0.5 million and $0.9 million, respectively.

 

As of June 30, 2012, there was $21.4 million of total unrecognized compensation expense related to stock, restricted stock awards, and restricted stock units which is expected to be recognized over a weighted-average period

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

of 0.9 years.

 

Deferred Share Units

 

Non-employee directors can elect to receive the value of their annual cash retainer as a deferred share unit award (DSU) under the Long-Term Incentive Plan whereby the non-employee director is granted DSUs in an amount equal to such director’s annual cash retainer divided by the closing price of Holdings’ common stock on the date of the annual stockholders meeting.  Each DSU represents the Company’s obligation to issue one share of common stock and the shares are delivered approximately thirty days following the cessation of the non-employee director’s service as a director of the Company.

 

DSUs vest quarterly consistent with the manner in which non-employee directors’ cash retainers are paid.  The fair value of the DSUs 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.

 

During the six months ended June 30, 2012, approximately 2,000 DSUs were granted at a weighted-average grant date fair value of $48.40 per unit.  The total grant date fair value of DSUs granted during the six months ended June 30, 2012 was $0.1 million.  During the six months ended June 30, 2011, no DSUs were granted.

 

As of June 30, 2012, there was $18,000 of total unrecognized compensation expense related to DSUs, which is expected to be recognized over a weighted-average period of 0.25 years.

 

Dividend Equivalent Rights

 

On February 8, 2012, Holdings’ Board of Directors granted dividend equivalent rights (DERs) to holders of unvested stock options.  At February 8, 2012, approximately 5.0 million unvested stock options were outstanding.  As stockholders are paid cash dividends, the DERs will accrue dividends which will be distributed to stock option holders upon the vesting of their stock option award.  Holdings will distribute the accumulated accrued dividends pursuant to the DER, in either cash or shares of common stock.  Holders of stock options for fewer than 1,000 shares of stock will receive their accumulated accrued dividends in cash.  Generally, holders of stock options for 1,000 shares of stock or greater will receive their accumulated accrued dividends in shares of common stock.  In addition, Holdings’ Board of Directors granted similar DERs payable in shares of common stock if and when any shares are granted under the stock-based compensation performance award program based on the EBITDA performance of the Company in 2012 - 2015.

 

The DER grants to participants with 1,000 or more unvested stock options and the DER grants related to the performance award were granted contingent upon stockholder approval at the Company’s 2012 Annual Meeting of Stockholders of the Company’s proposal to amend the Long-Term Incentive Plan to increase the number of shares for issuance under the Long-Term Incentive Plan from 9,666,666 to 14,066,666.  On May 2, 2012, our stockholders approved the Long-Term Incentive Plan amendment to increase the number of shares available for issuance.  Accordingly, we recorded $1.7 million of stock-based compensation for the DER grants during the three-month period ended June 30, 2012.

 

Employee Stock Purchase Plan

 

On September 15, 2010, Holdings’ Board of Directors adopted the Six Flags Entertainment Corporation Employee Stock Purchase Plan (the “ESPP”) under Section 423 of the Internal Revenue Code.  On May 4, 2011, our stockholders approved the ESPP and the ESPP became effective.  The ESPP allows eligible employees to purchase Holdings’ common stock at 90% of the lower of the market value of the common stock at the beginning or end of each successive six-month offering period.  Amounts accumulated through participants’ payroll deductions (“purchase rights”) are used to purchase shares of common stock at the end of each purchase period.  Pursuant to the ESPP, no more than 1,000,000 shares of common stock of Holdings may be issued, as adjusted to reflect the two-for-one stock split in June 2011.  Holdings’ common stock may be issued by either authorized and unissued shares, treasury shares or shares purchased on the open market.  At June 30, 2012, we had 968,000 shares available for purchase pursuant to the ESPP.

 

In accordance with FASB ASC Topic 718, Stock Based Compensation, stock-based compensation related to the purchase rights was recognized based on their intrinsic value for the six-month offering periods ended June 30, 2012 and 2011.  During the six-month period ended June 30, 2012 and 2011, we recognized $0.2 million and $0.1 million of stock-based compensation expense relating to the ESPP, respectively.

 

No purchase rights are outstanding under the ESPP since the June 30, 2012 purchase date.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

During the three-month and six-month periods ended June 30, 2012 and 2011, stock-based compensation expense consisted of the following (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Long-Term Incentive Plan

 

$

14,968

 

$

13,241

 

$

31,917

 

$

27,544

 

Employee Stock Purchase Plan

 

156

 

120

 

216

 

120

 

Total Stock-Based Compensation

 

$

15,124

 

$

13,361

 

$

32,133

 

$

27,664

 

 

3.                                Disposition of Parks

 

As of June 30, 2012 and December 31, 2011, there were no assets or liabilities held for sale related to any of our parks that were sold in previous years, excluding contingent liabilities discussed in Note 7.

 

The following table summarizes our income (loss) from discontinued operations for the three-month and six-month periods ended June 30, 2012 and 2011 (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Operating revenue

 

$

 

$

 

$

 

$

 

Increase in contingent liabilities from sale indemnities

 

(17

)

(66

)

(52

)

(102

)

Loss from discontinued operations

 

$

(17

)

$

(66

)

$

(52

)

$

(102

)

 

Our long-term debt is not directly associated with discontinued operations, and we have not allocated a portion of our interest expense to the discontinued operations.

 

4.                                      Derivative Financial Instruments

 

In March 2012, we entered into a floating-to-fixed interest rate agreement in order to limit exposure to an increase in the LIBOR interest rate on $470.0 million of the Term Loan B (see Note 6).  Our Term Loan B borrowings bear interest based on LIBOR + an applicable margin.  The interest rate agreement capped the LIBOR component of the interest rate at 1.00%.  The term of the agreement began in March 2012 and expires in March 2014.  Upon executing the agreement, we designated and documented the interest rate agreement as a cash flow hedge.

 

By utilizing a derivative instrument to hedge our exposure to LIBOR rate changes, we are exposed to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  To mitigate this risk, the hedging instrument was placed with a counterparty that we believe poses minimal credit risk.  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 the interest rate cap agreement 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 or other speculative purposes.

 

We record derivative instruments on our condensed consolidated balance sheet at fair value.  Our derivatives are measured on a recurring basis using Level 2 inputs.  The fair value measurements of our derivatives are based on market prices that generally are observable for similar assets or liabilities at commonly quoted intervals.  Derivative assets and derivative liabilities that have maturity dates equal to or less than twelve months from the balance sheet date are included in prepaid and other current assets and other accrued liabilities, respectively.  Derivative assets and derivative liabilities that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets and other long-term liabilities, respectively.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

Derivatives recorded at fair value in our condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):

 

 

 

Derivative Assets

 

 

 

June 30,
2012

 

December 31,
2011

 

Derivatives Designated as Cash Flow Hedges

 

 

 

 

 

Interest rate contract – current

 

$

35

 

$

 

Interest rate contract – non-current

 

213

 

 

 

 

$

248

 

$

 

 

At June 30, 2012 and December 31, 2011, we held no derivative liabilities.  At June 30, 2012 and December 31, 2011, we held no derivatives not designated as hedging instruments.

 

Changes in the fair value of derivatives that are designated as hedges are reported on the condensed consolidated balance sheet in accumulated other comprehensive income (“AOCI”) when in qualifying effective relationships and directly in other (income) expense, net when they are not designated as hedges.  These amounts are reclassified to interest expense when the forecasted transaction takes place.

 

Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2012 and 2011 were as follows (in thousands):

 

Three Months Ended June 30, 2012 and 2011

 

Derivatives Designated

 

Loss Recognized in
OCI
(Effective Portion)

 

Loss
Reclassified from
AOCI into Operations
(Effective Portion)

 

Loss Recognized
in Operations on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

 

as Cash Flow Hedges

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contract

 

$

(383

)

$

 

$

 

$

 

$

 

$

 

Total

 

$

(383

)

$

 

$

 

$

 

$

 

$

 

 

Six Months Ended June 30, 2012 and 2011

 

Derivatives Designated

 

Loss Recognized in
OCI
(Effective Portion)

 

Loss
Reclassified from
AOCI into Operations
(Effective Portion)

 

Loss Recognized
in Operations on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

 

as Cash Flow Hedges

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contract

 

$

(650

)

$

 

$

 

$

 

$

 

$

 

Total

 

$

(650

)

$

 

$

 

$

 

$

 

$

 

 

As of June 30, 2012, approximately $173,000 of unrealized losses associated with our interest rate contract derivative instrument is expected to be reclassified from AOCI to operations during the next twelve months.  Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these unrealized losses to operations are the periodic interest payments that are required to be made on the Term Loan B.  For the three-month and six-month periods ended June 30, 2012, no hedge ineffectiveness was recorded for the interest rate agreement.

 

5.             Fair Value of Financial Instruments

 

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The following table and accompanying information present the

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

estimated fair values of our financial instruments at June 30, 2012 and December 31, 2011 and classification of such instruments in accordance with FASB ASC 820, Fair Value Measurements (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

Restricted-use investment securities

 

$

15,646

 

15,646

 

$

513

 

513

 

Derivative instruments

 

248

 

248

 

 

 

Long-term debt (including current portion)

 

(955,742

)

(948,442

)

(957,236

)

(951,306

)

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

·                  The carrying values of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments.

 

·                  Restricted-use investment securities: The carrying value of restricted-use investment securities consist of interest bearing bank accounts and approximates fair value because of their short term maturity and are considered a Level 2 fair value measurement.

 

·                  Derivative instrument:  The fair values of our derivative assets are based on market prices that generally are observable for similar assets at commonly quoted intervals and are considered a Level 2 fair value measurement.  Derivative assets that have maturity dates equal to or less than twelve months from the balance sheet date are included in prepaid and other current assets.  Derivative assets that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets.  See Note 4 for additional information on our derivative instruments held and related Company policies.

 

·                  Long-term debt: The fair value of our long-term debt is based upon quoted market prices and is considered a Level 1 fair value measurement.

 

6.           Long-Term Indebtedness

 

New Credit Facility

 

On December 20, 2011, we entered into a new $1,135.0 million credit agreement (the “New Credit Facility”), which replaced the Exit First Lien Facility, with several lenders including Wells Fargo Bank National Association, as administrative agent, and related loan and security documentation agents.  The New Credit Facility is comprised of a 5-year $200.0 million revolving credit loan facility (the “Revolving Loan”), a 5-year $75.0 million Tranche A Term Loan facility (the “Term Loan A”) and a 7-year $860.0 million Tranche B Term Loan facility (the “Term Loan B” and together with the Term Loan A, the “Term Loans”).  In certain circumstances, the Term Loan B can be increased by $300.0 million.  The proceeds from the $935.0 million Term Loans were used, along with $15.0 million of existing cash, to retire the $950.0 million senior term loan from the prior facility.  Interest on the New Credit Facility accrues based on pricing rates corresponding with SFTP’s senior secured leverage ratios as set forth in the credit agreement.

 

At June 30, 2012 and December 31, 2011, no advances under the Revolving Loan were outstanding (excluding letters of credit in the amount of $18.2 million and $31.2 million, respectively).  Interest on the Revolving Loan accrues at an annual rate of LIBOR + an applicable margin with an unused commitment fee based on our senior secure leverage ratio.  At June 30, 2012, the Revolving Loan unused commitment fee was 0.50%.  The principal amount of the Revolving Loan is due and payable on December 20, 2016.

 

At June 30, 2012 and December 31, 2011, $73.1 million and $75.0 million of the Term Loan A was outstanding, respectively.  Interest on the Term Loan A accrues at an annual rate of LIBOR + an applicable margin based on our senior secure leverage ratio.  At June 30, 2012 and December 31, 2011, the Term Loan A interest rate was 2.56% and 2.55%, respectively.  Beginning on March 31, 2012, the Term Loan A amortizes in quarterly installments as follows: (i) $937,500 per quarter in year 1, (ii) $1,875,000 per quarter in years 2 and 3, (iii) $2,812,500 per quarter in year 4 and (iv) $3,750,000 per quarter in year 5 with all remaining outstanding

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

principal due and payable on December 20, 2016.

 

At June 30, 2012 and December 31, 2011, the full amount of the $860.0 million Term Loan B was outstanding.  Interest on the Term Loan B accrues at an annual rate of LIBOR + an applicable margin, with a 1.0% LIBOR floor, based on our senior secure leverage ratio.  In March 2012, we entered into a floating-to-fixed interest rate agreement in order to limit exposure to an increase in the LIBOR interest rate on $470.0 million of the Term Loan B.  The interest rate agreement capped the LIBOR component of the interest rate at 1.00% (see Note 4).  At June 30, 2012 and December 31, 2011, the Term Loan B interest rate was 4.25%.  Beginning on March 31, 2013, the Term Loan B will amortize in quarterly installments of $2.2 million with all remaining outstanding principal due and payable on December 20, 2018.

 

Amounts outstanding under the New Credit Facility are guaranteed by Holdings, SFO and certain of the domestic subsidiaries of SFTP (collectively, the “Loan Parties”).  The New Credit Facility is secured by first priority liens upon substantially all existing and after-acquired assets of the Loan Parties.  The New Credit Facility agreement contains certain representations, warranties and affirmative covenants, including minimum interest coverage and a maximum senior leverage maintenance covenant.  In addition, the New Credit Facility agreement contains restrictive covenants that, subject to certain exceptions, limit or restrict, among other things, the ability of the Loan Parties to incur indebtedness, create liens, engage in mergers, consolidations and other fundamental changes, make investments or loans, engage in transactions with affiliates, pay dividends, make capital expenditures and repurchase capital stock.  The New Credit Facility agreement contains certain events of default, including payment, breaches of covenants and representations, cross defaults to other material indebtedness, judgment, and changes of control and bankruptcy events of default.

 

Exit First Lien Facility and Exit Second Lien Facility

 

On the Effective Date, Holdings, SFO and SFTP entered into the Exit First Lien Facility with several lenders.  The Exit First Lien Facility consisted of an $890.0 million senior secured credit facility comprised of the $120.0 million revolving loan facility, which could be increased to up to $150.0 million in certain circumstances, and a $770.0 million term loan facility.  On August 5, 2010, we made a discretionary $25.0 million prepayment on the term loan facility and recorded a $1.0 million net loss on the debt extinguishment.

 

On December 3, 2010, the Exit First Lien Facility was amended (the “First Lien Amendment”) to increase the Exit First Lien Facility to $1,070.0 million comprised of $120.0 million revolving loan facility, which could be increased up to $200.0 million in certain circumstances, and a $950.0 million term loan facility.  Interest on the Exit First Lien Facility accrued at an annual rate equal to LIBOR + 4.25% in the case of the revolving loan, with a 1.50% LIBOR floor and LIBOR + 3.75% in the case of the term loan facility, with a 1.50% LIBOR floor.  Interest on the term loan facility was subject to a 0.25% reduction based on the Company achieving certain rating agency levels or senior secured leverage ratio amounts.  In March 2011, we received this 0.25% reduction when our corporate rating was improved to BB- by Standard & Poor’s.  On December 20, 2011, in connection with the New Credit Facility, we repaid in full the $950.0 million term loan facility, terminated the Exit First Lien Facility, and recorded a $42.2 million loss on debt extinguishment for the year ended December 31, 2011.

 

Also, on the Effective Date, Holdings, SFO and SFTP entered into Exit Second Lien Facility with several lenders.  The Exit Second Lien Facility consisted of a $250.0 million senior secured term loan facility.  On December 3, 2010, in connection with the First Lien Amendment, the Company repaid in full the $250.0 million second lien term loan and recorded a $17.5 million loss on debt extinguishment for the year ended December 31, 2010.

 

TW Loan

 

On the Effective Date, the TW Borrowers entered into the TW Loan with TW-SF, LLC.  The TW Loan provided the TW Borrowers with a $150.0 million multi-draw term loan facility.  The TW Loan was unconditionally guaranteed on a joint and several and senior unsecured basis by Holdings, SFO, SFTP and each of the direct and indirect domestic subsidiaries of Holdings who were guarantors under the Senior Credit Facility (collectively, the “TW Guarantors”) pursuant to the terms of a Guarantee Agreement (the “TW Guarantee Agreement”).  On December 3, 2010, the TW Loan agreement and TW Guarantee Agreement were amended to primarily conform to the new terms under the First Lien Amendment.  Under the TW Loan amendment, the TW Borrowers agreed to pay an unused commitment fee of 0.50% per year.  No borrowings occurred during 2011 under the TW Loan.  On December 20, 2011, in connection with the New Credit Facility, the TW Loan and the related TW Guarantee Agreement were terminated and we recorded a $4.3 million loss on debt extinguishment for the year ended December 31, 2011.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

HWP Refinance Loan

 

On November 5, 2007, HWP entered into a $33.0 million term loan (the “Refinance Loan”) retiring (i) the $31.0 million construction-term loan with Marshall Investments Corporation incurred December 17, 2004 and (ii) the term loan and revolving line of credit with BankFirst incurred April 20, 2006.  Borrowings under the Refinance Loan bear interest at 6.72%.  Monthly payments of principal and interest of $0.2 million are payable through November 1, 2017.  On December 1, 2017, all unpaid principal and interest is due and payable.  HWP is subject to various covenants under the Refinance Loan that place certain restrictions limiting or prohibiting engaging in certain types of transactions.  Pursuant to the Refinance Loan, HWP deposited into escrow $0.6 million and $0.5 million at June 30, 2012 and December 31, 2011, respectively, and will make additional monthly deposits to cover annual amounts owed for insurance, taxes and furniture, fixture and equipment purchases.

 

In connection with the issuance of the Refinance Loan, Holdings and the other joint venture partners provided a limited guarantee of the Refinance Loan, which becomes operative under certain limited circumstances, including the voluntary bankruptcy of HWP or its managing member and other specified events of default.  The limited guarantee will be released five years following full payment and discharge of the Refinance Loan.  As additional security for the Refinance Loan, we also provided a $1.0 million letter of credit to secure the Refinance Loan.

 

As a result of the Chapter 11 Filing, the Refinance Loan lender was permitted to accelerate payment thereof and therefore we classified the balance in current portion of long-term debt on the condensed consolidated balance sheets.  In July 2012, we received a waiver from the Refinance Loan lender and have reclassified the long-term portion of the Refinance Loan to long-term debt on the condensed consolidated balance sheet as of June 30, 2012.

 

Long-Term Indebtedness Summary

 

At June 30, 2012 and December 31, 2011, long-term debt consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

Term Loan A

 

$

73,125

 

$

75,000

 

Term Loan B

 

860,000

 

860,000

 

HWP Refinance Loan

 

31,335

 

31,546

 

Net discount

 

(8,718

)

(9,310

)

Long-term debt

 

955,742

 

957,236

 

Less current portion

 

(10,324

)

(35,296

)

Total long-term debt

 

$

945,418

 

$

921,940

 

 

7.           Commitments and Contingencies

 

Partnership Parks

 

On April 1, 1998, we acquired all of the capital stock of the former Six Flags Entertainment Corporation (a corporation that has been merged out of existence and that has always been a separate corporation from Holdings, “Former SFEC”) for $976.0 million, paid in cash.  In addition to our obligations under outstanding indebtedness and other securities issued or assumed in the Former SFEC acquisition, we also guaranteed in connection therewith certain contractual obligations relating to the Partnership Parks.  Specifically, we guaranteed the obligations of the general partners of those partnerships to (i) make minimum annual distributions (including rent) of approximately $65.1 million in 2012 (subject to cost of living adjustments) to the limited partners in the Partnership Parks (based on our ownership of units as of June 30, 2012, our share of the distribution will be approximately $28.3 million), (ii) make minimum capital expenditures at each of the Partnership Parks during rolling five-year periods, based generally on 6% of the Partnership Parks’ 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 amount 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 of the respective Partnership Parks equal to the greater of (i) a value

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

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 SFOG and 8.5 in the case of SFOT) or (ii) $250.0 million in the case of SFOG and $374.8 million in the case of SFOT (the “Specified Prices”).  As of June 2012, we owned approximately 30.5% and 53.0% of the Georgia limited partner interests and Texas limited partner interests, respectively.  The remaining redeemable units of approximately 69.5% and 47.0% of the Georgia limited partner and Texas limited partner, respectively, represent a current redemption value for the limited partnership units of approximately $348.2 million.  Our obligations with respect to SFOG and SFOT will continue until 2027 and 2028, respectively.

 

In 2027 and 2028, we will have the option to purchase all remaining units in the Georgia limited partner and the Texas limited partner, respectively, at a price based on the Specified Prices, increased by a cost of living adjustment.  Pursuant to the 2012 annual offer, we purchased 0.79 units from the Georgia partnership and 0.05 units from the Texas partnership for approximately $2.0 million in May 2012.  As we purchase additional units, we are entitled to a proportionate increase in our share of the minimum annual distribution.  The maximum unit purchase obligations for 2013 at both parks will aggregate approximately $348.2 million, representing approximately 69.5% of the outstanding units of SFOG and 47.0% of the outstanding units of SFOT.  Pursuant to the 2011 annual offer, we purchased 0.61 units from the Texas partnership for approximately $0.9 million in May 2011 and no units from the Georgia partnership.  With respect to the 2011 “put” obligations, no borrowing occurred during 2011 under the TW Loan, a $150 million multi-draw term loan facility, which was terminated on December 20, 2011, in connection with the New Credit Facility.  The $300 million accordion feature on the Term Loan B under the New Credit Facility is available for borrowing for future “put” obligations if necessary.  With respect to the 2012 “put” obligations, no borrowings occurred during 2012 under the Term Loan B accordion feature.

 

In connection with our acquisition of the Former SFEC, we entered into the Subordinated Indemnity Agreement with certain of the Company’s entities, Time Warner Inc. (“Time Warner”) and an affiliate of Time Warner, pursuant to which, among other things, we transferred to Time Warner (which has guaranteed all of our obligations under the Partnership Park arrangements) record title to the corporations which own the entities that have purchased and will purchase limited partnership units of the Partnership Parks, and we received an assignment from Time Warner of all cash flow received on such limited partnership units, and we otherwise control such entities.  Pursuant to our agreement with Time Warner, we have deposited into escrow $15.0 million as a source of funds in the event Timer Warner Inc. is required to honor its guarantee, which is reflected in restricted-use investment securities on our June 30, 2012 condensed consolidated balance sheet.  In addition, we issued preferred stock of the managing partner of the partnerships to Time Warner.  In the event of a default by us under the Subordinated Indemnity Agreement or of our obligations to our partners in the Partnership Parks, these arrangements would permit Time Warner to take full control of both the entities that own limited partnership units and the managing partner.  If we satisfy all such obligations, Time Warner is required to transfer to us the entire equity interests of these entities.

 

During the 2011 season, we incurred $11.2 million of capital expenditures at these parks and we intend to incur approximately $5.0 million of capital expenditures at these parks for the 2012 season, an amount in excess of the minimum required expenditure.  Cash flows from operations at the Partnership Parks will be used to satisfy the annual distribution and capital expenditure requirements, before any funds are required from us.  During the 2011 season, the two partnerships generated approximately $61.1 million of cash from operating activities after deduction of capital expenditures and excluding the impact of short-term intercompany advances from or payments to Holdings.  At June 30, 2012 and December 31, 2011, we had total loans receivable outstanding of $239.3 million from the partnerships that own the Partnership Parks, primarily to fund the acquisition of Six Flags White Water Atlanta, and to make capital improvements and distributions to the limited partners.

 

Insurance

 

We maintain insurance of the type and in amounts that we believe is commercially reasonable and that is available to businesses in our industry.  We maintain multi-layered general liability policies that provide for excess liability coverage of up to $100.0 million per occurrence.  For incidents arising after November 15, 2003, our self-insured retention is $2.5 million per occurrence ($2.0 million per occurrence for the twelve months ended November 15, 2003 and $1.0 million per occurrence for the twelve months ended November 15, 2002) for our domestic parks and a nominal amount per occurrence for our international parks.  Defense costs are in addition to these retentions.  In addition, for incidents arising after November 1, 2004 but prior to December 31, 2008, we have a one-time additional $0.5 million self-insured retention, in the aggregate, applicable to all claims in the policy year.  For incidents arising on or after December 31, 2008, our self-insured retention is $2.0 million, followed by a $0.5 million deductible per occurrence applicable to all claims in the policy year for our domestic parks and our park in Canada and a nominal amount per occurrence for our park in Mexico.  Our deductible after November 15, 2003 is

 

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Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

$0.75 million for workers’ compensation claims ($0.5 million deductible for the period from November 15, 2001 to November 15, 2003).  Our general liability policies cover the cost of punitive damages only in certain jurisdictions.  Based upon reported claims and an estimate for incurred, but not reported claims, we accrue a liability for our self-insured retention contingencies.  We also maintain fire and extended coverage, business interruption, terrorism and other forms of insurance typical to businesses in this industry.  The all peril property coverage policies insure our real and personal properties (other than land) against physical damage resulting from a variety of hazards.  Additionally, we maintain information security and privacy liability insurance in the amount of $10.0 million with a $0.25 million self-insured retention per event.

 

The majority of our current insurance policies expire on December 31, 2012.  We cannot predict the level of the premiums that we may be required to pay for subsequent insurance coverage, the level of any self-insurance retention applicable thereto, the level of aggregate coverage available or the availability of coverage for specific risks.

 

Litigation

 

We are party to various legal actions arising in the normal course of business, including the cases discussed below.  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 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.

 

On March 1, 2007, Safety Braking Corporation, Magnetar Technologies Corp. and G&T Conveyor Co. filed a Complaint for Patent Infringement (the “Patent Complaint”) in the United States District Court for the District of Delaware naming SFI, SFTP, and certain of our other subsidiaries as defendants, along with other industry theme park owners and operators.  The Patent Complaint alleges that we are liable for direct or indirect infringement of United States Patent No. 5,277,125 because of our ownership and/or operation of various theme parks and amusement rides.  The Patent Complaint does not include specific allegations concerning the location or manner of alleged infringement.  The Patent Complaint seeks damages and injunctive relief.  On or about July 1, 2008, the Court entered a Stipulation and Order of Dismissal of Safety Braking Corporation.  Thus, as of that date, only Magnetar Technologies Corp. and G&T Conveyor Co. remain as plaintiffs.  We have contacted the manufacturers of the amusement rides that we believe may be impacted by this case, requiring such manufacturers to honor their indemnification obligations with respect to this case.  We tendered the defense of this matter to certain of the ride manufacturers.

 

On January 6, 2009, a civil action against us was commenced in the State Court of Cobb County, Georgia.  The plaintiff sought damages for personal injuries, including an alleged brain injury, as a result of an altercation with a group of individuals on property next to SFOG on July 3, 2007.  Certain of the individuals were employees of the park and were off-duty at the time the altercation occurred.  The plaintiff, who had exited the park, claims that we were negligent in our security of the premises.  Four of the individuals who allegedly participated in the altercation are also named as defendants in the litigation.  Our motion to dismiss the action was denied.

 

In May 2011, we reached a confidential settlement with Jeffery R. Speed, our former Chief Financial Officer, in connection with an arbitration proceeding related to Mr. Speed’s termination of employment.  We recorded a $25.3 million restructuring charge for the six-month period ended June 30, 2011 to reflect the full settlement and related costs after consideration of amounts previously accrued.

 

HWP Guarantee

 

We guaranteed the payment of a $32.2 million construction term loan incurred by HWP for the purpose of financing the construction and development of a hotel and indoor water park joint venture project located adjacent to The Great Escape park near Lake George, New York, which opened in February 2006.  This joint venture (in which we own an approximate 49% interest) was not a debtor in the Chapter 11 Filing.  On November 5, 2007, the loan was refinanced with the $33.0 million Refinance Loan and the proceeds were used to repay the existing loan.  In connection with the refinancing, Holdings replaced the prior guarantee with a limited guarantee of the Refinance Loan, which becomes operative under certain limited circumstances, including the voluntary bankruptcy of HWP or its managing member.  The limited guarantee will be released five years following full payment and discharge of the loan, which matures on December 1, 2017.  The ability of HWP to repay the Refinance Loan will be dependent upon HWP’s ability to generate sufficient cash flow, which cannot be assured.  As additional security for the Refinance Loan, we have provided a $1.0 million letter of credit.  In the event Holdings is required to fund amounts under the

 

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guarantee or the letter of credit, our joint venture partners must reimburse us for their respective pro rata share or have their joint venture ownership diluted or forfeited.  As a result of the Chapter 11 Filing, the Refinance Loan lender was permitted to accelerate payment thereof.  In that event, we could lose our interest in the hotel and indoor water park.  In July 2012, the Refinance Loan lender waived the technical default that would have allowed them to accelerate the payment of the Refinance Loan.

 

Tax and other contingencies

 

At June 30, 2012 and December 31, 2011, we have accrued liabilities for tax and other indemnification contingencies of $7.8 and $7.9 million, respectively, related to certain parks sold in previous years that could be recognized as a recovery of losses from discontinued operations in the future if such liabilities are not requested to be paid.

 

8.             Noncontrolling Interests, Partnerships and Joint Ventures

 

Redeemable noncontrolling interests represent the third parties’ share of the assets of the three parks that are less than wholly owned, SFOT and SFOG (including Six Flags White Water Atlanta which is owned by the partnership that owns SFOG).  The following table presents a rollforward of redeemable noncontrolling interests in SFOT and SFOG (in thousands):

 

Balance at January 1, 2012

 

$

440,427

 

Purchase of redeemable units of SFOT and SFOG

 

(2,033

)

Fresh start accounting fair market value adjustment for purchased units

 

(453

)

Net income attributable to redeemable noncontrolling interests

 

18,420

 

Distributions to redeemable noncontrolling interests

 

 

Balance at June 30, 2012

 

$

456,361

 

 

See Notes 6 and 7 for a description of the partnership arrangements applicable to SFOT and SFOG, the accounts of which are included in our condensed consolidated financial statements.  The redemption value of the partnership units at June 30, 2012 and December 31, 2011 is approximately $348.2 million and $350.2 million, respectively.

 

Noncontrolling interests represent the non-affiliated parties’ share of the assets of HWP.  At June 30, 2012 and December 31, 2011, our ownership interest in the HWP joint venture is approximately 49%.  The following table presents a rollforward of noncontrolling interests in HWP (in thousands):

 

Balance at January 1, 2012

 

$

3,670

 

Net income attributable to noncontrolling interests

 

186

 

Distributions to noncontrolling interests

 

 

Balance at June 30, 2012

 

$

3,856

 

 

In June 2007, we acquired a 40% interest in a venture that owns 100% of dick clark productions, inc. (“DCP”).  The other investor in the venture, Red Zone Capital Partners II, L.P. (“Red Zone”), is managed by two of our former directors, Daniel M. Snyder and Dwight C. Schar.  During the fourth quarter of 2007, an additional third party investor purchased approximately 2.0% of the interest in DCP from us and Red Zone.  As a result, our ownership interest is approximately 39.2% at June 30, 2012 and December 31, 2011.  We have accounted for our investment under the equity method and have included our investment of $4.1 million and $4.7 million as of June 30, 2012 and December 31, 2011, respectively, in deposits and other assets in the condensed consolidated balance sheets.

 

9.             Business Segments

 

We manage our operations on an individual park location basis.  Discrete financial information is maintained for each park and provided to our corporate management for review and as a basis for decision making.  The primary performance measures used to allocate resources are park earnings before interest, tax expense, depreciation and amortization (Park EBITDA) and Park Free Cash Flow (Park EBITDA less park capital

 

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expenditures).  All of our parks provide similar products and services through a similar process to the same class of customer through a consistent method.  We also believe that the parks share common economic characteristics.  As such, we have only one reportable segment — theme parks.

 

The following table presents segment financial information and a reconciliation of the primary segment performance measure to income (loss) from continuing operations before income taxes for the three-month and six-month periods ended June 30, 2012 and 2011 (in thousands).  Park level expenses exclude all non-cash operating expenses, principally depreciation and amortization and all non-operating expenses.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Theme park revenues

 

$

374,912

 

$

338,673

 

$

441,270

 

$

400,008

 

Theme park cash expenses

 

(206,299

)

(198,175

)

(309,264

)

(300,511

)

Aggregate park EBITDA

 

168,613

 

140,498

 

132,006

 

99,497

 

Equity in income of investee — EBITDA

 

3,319

 

1,852

 

5,232

 

3,854

 

Corporate expenses

 

(12,352

)

(10,296

)

(22,906

)

(20,174

)

Stock-based compensation

 

(15,124

)

(13,361

)

(32,133

)

(27,664

)

Other (expense) income, net

 

(244

)

(503

)

537

 

(147

)

Equity in loss of investee — depreciation and other expense