<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 333-46897-01
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SIX FLAGS OPERATIONS INC.
(formerly Premier Parks Operations Inc.)
(Exact name of Registrant as specified in its charter)
DELAWARE 73-6137714
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11501 NORTHEAST EXPRESSWAY, OKLAHOMA CITY, OKLAHOMA 73131
(Address of principal executive offices, including zip code)
(405) 475-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
At August 1, 2000, Six Flags Operations Inc. had outstanding 1,000 shares
of Common Stock, par value $.05 per share.
This Registrant meets with the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
SIX FLAGS OPERATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............... $ 86,670,000 $ 118,011,000
Accounts receivable ..................... 70,390,000 26,728,000
Inventories ............................. 44,582,000 23,590,000
Prepaid expenses and other current assets 28,569,000 13,391,000
-------------- --------------
Total current assets .................. 230,211,000 181,720,000
Other assets:
Debt issuance costs ..................... 24,924,000 27,388,000
Deposits and other assets ............... 60,344,000 64,416,000
-------------- --------------
Total other assets .................... 85,268,000 91,804,000
Property and equipment, at cost ........... 2,494,801,000 2,259,195,000
Less accumulated depreciation ........... 261,608,000 207,040,000
-------------- --------------
Total property and equipment .......... 2,233,193,000 2,052,155,000
Investment in theme parks ................. 97,126,000 92,332,000
Intangible assets, principally goodwill ... 1,344,660,000 1,346,102,000
Less accumulated amortization ........... 120,184,000 92,997,000
-------------- --------------
1,224,476,000 1,253,105,000
-------------- --------------
Total assets .......................... $3,870,274,000 $3,671,116,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS (CONTINUED)
SIX FLAGS OPERATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .............................. $ 107,983,000 $ 36,572,000
Accrued liabilities ........................... 65,808,000 73,350,000
Accrued interest payable ...................... 18,183,000 15,387,000
Deferred income ............................... 51,653,000 6,037,000
Due to affiliate .............................. 90,098,000 100,291,000
Current maturities of long-term debt .......... 211,958,000 2,055,000
--------------- ---------------
Total current liabilities ................... 545,683,000 233,692,000
Long-term debt .................................. 1,193,739,000 1,195,184,000
Other long-term liabilities and minority interest 35,832,000 41,760,000
Deferred income taxes ........................... 127,455,000 158,650,000
--------------- ---------------
Total liabilities ........................... 1,902,709,000 1,629,286,000
--------------- ---------------
Stockholder's equity:
Common stock of $.05 par value, 1,000 shares
authorized, issued and outstanding at
June 30, 2000 and December 31, 1999 ........ -- --
Capital in excess of par value ................ 2,012,331,000 2,012,506,000
Retained earnings (accumulated deficit) ....... (10,378,000) 47,047,000
Accumulated other comprehensive income (loss)
-foreign currency translation adjustments ... (34,388,000) (17,723,000)
--------------- ---------------
Total stockholder's equity .................. 1,967,565,000 2,041,830,000
--------------- ---------------
Total liabilities and stockholder's equity .. $ 3,870,274,000 $ 3,671,116,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS (CONTINUED)
SIX FLAGS OPERATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue:
Theme park admissions ............................. $ 188,526,000 $ 173,910,000
Theme park food, merchandise and other ............ 152,553,000 140,232,000
------------- -------------
Total revenue ................................. 341,079,000 314,142,000
------------- -------------
Operating costs and expenses:
Operating expenses ................................ 118,321,000 104,743,000
Selling, general and administrative ............... 61,395,000 53,744,000
Costs of products sold ............................ 32,355,000 31,078,000
Depreciation and amortization ..................... 44,289,000 38,041,000
------------- -------------
Total operating costs and expenses ............ 256,360,000 227,606,000
------------- -------------
Income from operations ........................ 84,719,000 86,536,000
------------- -------------
Other income (expense):
Interest expense .................................. (35,109,000) (33,079,000)
Interest income ................................... 470,000 2,819,000
Equity (loss) in operations of theme parks ........ (193,000) (656,000)
Other income (expense), including minority interest (122,000) 41,000
------------- -------------
Total other income (expense) .................. (34,954,000) (30,875,000)
------------- -------------
Income before income taxes .................... 49,765,000 55,661,000
Income tax expense .................................. 22,108,000 25,156,000
------------- -------------
Income before extraordinary loss .............. 27,657,000 30,505,000
------------- -------------
Extraordinary loss on extinguishment of debt, net of
income tax benefit of $4,104,000 in 1999 ........ -- (6,158,000)
------------- -------------
Net income .................................... $ 27,657,000 $ 24,347,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS (CONTINUED)
SIX FLAGS OPERATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue:
Theme park admissions ............................. $ 200,875,000 $ 188,228,000
Theme park food, merchandise and other ............ 171,097,000 164,494,000
------------- -------------
Total revenue ................................. 371,972,000 352,722,000
------------- -------------
Operating costs and expenses:
Operating expenses ................................ 177,068,000 157,523,000
Selling, general and administrative ............... 93,347,000 88,052,000
Costs of products sold ............................ 34,823,000 34,271,000
Depreciation and amortization ..................... 85,685,000 73,550,000
------------- -------------
Total operating costs and expenses ............ 390,923,000 353,396,000
------------- -------------
Loss from operations .......................... (18,951,000) (674,000)
------------- -------------
Other income (expense):
Interest expense .................................. (65,173,000) (65,512,000)
Interest income ................................... 1,242,000 5,584,000
Equity (loss) in operations of theme parks ........ (1,058,000) (1,313,000)
Other income (expense), including minority interest 135,000 (198,000)
------------- -------------
Total other income (expense) .................. (64,854,000) (61,439,000)
------------- -------------
Loss before income taxes ...................... (83,805,000) (62,113,000)
Income tax benefit .................................. 26,380,000 15,361,000
------------- -------------
Loss before extraordinary loss ................ (57,425,000) (46,752,000)
Extraordinary loss on extinguishment of debt, net of
income tax benefit of $4,104,000 in 1999 ........ -- (6,158,000)
------------- -------------
Net loss ...................................... $ (57,425,000) $ (52,910,000)
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS (CONTINUED)
SIX FLAGS OPERATIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) ................. $ 27,657,000 $ 24,347,000 $(57,425,000) $(52,910,000)
Other comprehensive income (loss)--
Foreign currency translation
adjustment ...................... (6,194,000) (7,265,000) (16,665,000) (18,797,000)
------------ ------------ ------------ ------------
Comprehensive income (loss) ....... $ 21,463,000 $ 17,082,000 $(74,090,000) $(71,707,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS (CONTINUED)
SIX FLAGS OPERATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss ............................................ $ (57,425,000) $ (52,910,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ..................... 85,685,000 73,550,000
Equity (loss) in operations of theme parks ........ 1,058,000 1,313,000
Minority interest ................................. 132,000 198,000
Extraordinary loss on early extinguishment of debt -- 10,261,000
Interest accretion on notes payable ............... -- 2,333,000
Interest accretion on restricted-use investments .. -- (5,038,000)
Amortization of debt issuance costs ............... 2,464,000 1,992,000
Deferred income taxes ............................. (27,195,000) (28,437,000)
Increase in accounts receivable ................... (43,662,000) (34,427,000)
Increase in inventories and prepaid expenses ...... (36,170,000) (22,931,000)
(Increase) decrease in deposits and other assets .. 4,072,000 (206,000)
Increase in accounts payable and accrued expenses . 95,853,000 76,775,000
Increase in accrued interest payable .............. 2,796,000 (2,314,000)
------------- -------------
Total adjustments ................................. 85,033,000 73,069,000
------------- -------------
Net cash provided by operating activities ......... 27,608,000 20,159,000
------------- -------------
Cash flow from investing activities:
Additions to property and equipment ................. (250,127,000) (266,232,000)
Investment in theme parks ........................... (5,852,000) (20,144,000)
Acquisition of theme park companies, net of cash
acquired ......................................... -- (81,702,000)
------------- -------------
Net cash used in investing activities ............. (255,979,000) (368,078,000)
------------- -------------
Cash flow from financing activities:
Repayment of long-term debt ......................... (92,542,000) (430,048,000)
Proceeds from borrowings ............................ 301,000,000 70,000,000
Payment of debt issuance costs ...................... (10,193,000) 49,652,000
Increase in payable to parent company ............... (175,000) 671,811,000
Capital contributions (returned) received ........... -- (168,000)
------------- -------------
Net cash provided by financing activities ......... 198,090,000 361,247,000
Effect of exchange rate changes on cash ........... (1,060,000) (3,326,000)
------------- -------------
Increase (decrease) in cash and cash equivalents .. (31,341,000) 10,002,000
Cash and cash equivalents at beginning of period ...... 118,011,000 80,167,000
------------- -------------
Cash and cash equivalents at end of period ............ $ 86,670,000 $ 90,169,000
============= =============
Supplementary cash flow information:
Cash paid for interest .............................. $ 59,913,000 $ 63,501,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
-7-
<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL -- BASIS OF PRESENTATIOn
Six Flags Operations Inc. owns and operates regional theme amusement and
water parks. As of June 30, 2000, the Company and its subsidiaries own or
operate 33 parks, including 25 domestic parks, one park in Mexico and seven
parks in Europe. The Company is also managing the construction and development
of a theme park in Europe.
On March 24, 1998, the company then known as Premier Parks Inc. ("Premier
Operations") merged (the "1998 Merger") with an indirect wholly owned subsidiary
thereof, pursuant to which Premier Operations became a wholly owned subsidiary
of Premier Parks Holdings Corporation ("Holdings") and the holders of shares of
common stock of Premier Operations became, on a share-for-share basis, holders
of common stock of Holdings. On the 1998 Merger date, Premier Operations' name
was changed to Premier Parks Operations Inc., and Holdings' name was changed to
Premier Parks Inc.
On April 1, 1998, Holdings purchased all of the outstanding capital stock
of Six Flags Entertainment Corporation ("SFEC" and, together with its
subsidiaries "Six Flags"). On November 5, 1999, SFEC and Premier Operations
consummated a merger (the "1999 Merger"), in which Premier Operations was the
surviving corporation. On June 30, 2000, Premier Parks Inc. changed its name to
Six Flags, Inc. and Premier Parks Operations Inc. changed its name to Six Flags
Operations Inc. References herein to the "Company," or "SF Operations" mean for
all periods or dates, Six Flags Operations Inc. and its consolidated
subsidiaries. As used herein, Holdings refers only to Six Flags, Inc., without
regard to its subsidiaries.
The 1999 Merger was accounted for as a reorganization of interests under
common control in a manner similar to a pooling of interests. The effect of the
1999 Merger was to reflect the assets and liabilities of Six Flags as if
contributed to SF Operations by Holdings on April 1, 1998, the SFEC purchase
date. Accordingly, the financial statements for the three months and six months
ended June 30, 1999 include the results of SFEC and the results of SF Operations
for each period.
In connection with the 1998 Merger, SF Operations and Holdings entered
into a shared services agreement pursuant to which certain corporate,
administrative and other general services provided by Holdings are charged to SF
Operations, either on the basis of their respective revenues or on other
relative bases. Allocation of these charges are reflected in the accompanying
consolidated financial statements.
During May 1999, in separate transactions, the Company purchased 100% of
the capital stock of the companies that owned Reino Aventura, a theme park
located in Mexico City, and purchased the assets used in the operation of
Splashtown, a water park near Houston. On November 15, 1999, the Company
purchased Warner Bros. Movie World Germany, near Dusseldorf, Germany, and
entered into a joint venture with Warner Bros. to develop and manage a new
Warner Bros. Movie World theme park scheduled to open in Madrid, Spain in 2002.
(See Note 2.)
The accompanying consolidated financial statements for the three months
and six months ended June 30, 1999 include the results of the parks acquired in
May 1999 only from the respective dates of their acquisition and do not included
the results of Movie World Germany which was acquired in November 1999. (See
Note 2.)
Management's Discussion and Analysis of Financial Condition and Results of
Operations which
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<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
follows these notes contains additional information on the results of operations
and the financial position of the Company. Those comments should be read in
conjunction with these notes. The Company's annual report on Form 10-K for the
year ended December 31, 1999 includes additional information about the Company,
its operations and its financial position, and should be referred to in
conjunction with this quarterly report on Form 10-Q. The information furnished
in this report reflects all adjustments (all of which are normal and recurring)
which are, in the opinion of management, necessary to present a fair statement
of the results for the periods presented.
Results of operations for the three-month and six-month periods ended June
30, 2000 are not indicative of the results expected for the full year. In
particular, the Company's theme park operations contribute most of their annual
revenue during the period from Memorial Day to Labor Day each year.
START-UP COSTS
As of January 1, 1999, the Company adopted the provisions of AICPA
Statement of Position No. 98-5, "Accounting for Start-Up Activities." Generally,
the statement requires the write-off of previously capitalized start-up costs
and precludes the future capitalization of these types of costs. Start-up costs
include pre-opening costs and professional fees and other costs associated with
incorporating or otherwise starting a business. The effect of the adoption of
the provisions of the statement was not material to the financial position,
operations or cash flow of the Company and is included in depreciation and
amortization.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB No. 101 was
amended in March 2000 to delay the effective date until periods beginning after
April 1, 2000. The Company has elected to adopt the provisions of SAB 101 as of
January 1, 2000. The provisions of SAB No. 101 do not have an impact on the
accounting policies that the Company utilizes to prepare its annual financial
statements and therefore, the adoption did not have an impact on the Company's
annual financial statements. However, the provisions of SAB No. 101 did change
the accounting policies that the Company uses to recognize revenue from
multi-admission tickets and season passes during the year. The Company's
accounting policy as of January 1, 2000 recognizes the revenue for
multi-admission tickets and season passes over the operating season rather than
upon receipt.
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<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provisions of SAB No. 101 allow companies to either restate results or
account for the change as a cumulative effect. The Company has elected to
restate its 1999 interim results of operations. The following sets forth the
results for the three months and six months ended June 30, 1999 as originally
reported and as so restated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1999
---------------------------------- --------------------------------
(IN THOUSANDS)
AS ORIGINALLY AS ORIGINALLY
REPORTED: AS RESTATED: REPORTED: AS RESTATED:
---------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues....................... $333,515 $314,142 $387,164 $352,722
Net income (loss) ............. 36,359 24,347 (31,556) (52,910)
</TABLE>
2. ACQUISITION OF THEME PARKS
On May 4, 1999, the Company acquired all of the capital stock of the
companies that own and operate Reino Aventura (subsequently renamed Six Flags
Mexico), a theme park located in Mexico City, for a cash purchase price of
approximately $59,600,000. The Company funded the acquisition from existing
cash. Approximately $14,575,000 of costs in excess of the fair value of the net
assets acquired were recorded as goodwill. The transaction was accounted for as
a purchase.
On May 13, 1999, the Company acquired the assets of Splashtown water park
located in Houston, Texas for a cash purchase price of approximately
$20,400,000. The Company funded the acquisition from existing cash.
Approximately $10,530,000 of costs in excess of the fair value of the net assets
acquired were recorded as goodwill. The transaction was accounted for as a
purchase.
On November 15, 1999, the Company purchased the partnership that owns
Warner Bros. Movie World Germany, near Dusseldorf, Germany, and entered into a
joint venture with Warner Bros. to design, develop and manage a new Warner Bros.
Movie World theme park scheduled to open in Madrid, Spain in 2002. At the same
time, the Company entered into a long-term license agreement for exclusive theme
park usage in Europe, Mexico, South America and Central America of the Looney
Tunes, Hanna-Barbera, Cartoon Network and D.C. Comics characters. The aggregate
cost of the transactions was $180,269,000, which was funded by borrowings under
the Company's 1999 credit facility (the "Credit Facility"). See Note 3(c).
Approximately $42,800,000 of the aggregate costs were allocated to goodwill and
intangible assets. The transaction was accounted for as a purchase.
In June 2000, the Company acquired the remaining minority interest in
Walibi, S.A. held by third parties for an aggregate cost of approximately
$1,023,000. The purchase price was allocated primarily to goodwill.
3. LONG-TERM INDEBTEDNESS
(a) On January 31, 1997, SF Operations issued $125,000,000 of senior notes
due January 2007 (the "1997 Notes"). The 1997 Notes are senior unsecured
obligations of SF Operations. The 1997 Notes bear interest at 9 3/4% per annum
payable semiannually and, except in the event of a change of control of SF
Operations and certain other circumstances, do not require any principal
payments prior to their maturity in 2007. The 1997 Notes are redeemable, at SF
Operations' option, in
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<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
whole or in part, at any time on or after January 15, 2002, at varying
redemption prices. The 1997 Notes are guaranteed on a senior, unsecured, joint
and several basis by all of SF Operations' principal domestic subsidiaries.
The indenture limits the ability of SF Operations and its subsidiaries to
dispose of assets; incur additional indebtedness or liens; pay dividends; engage
in mergers or consolidations; and engage in certain transactions with
affiliates.
All obligations under the 1997 Notes and the related indenture remained as
obligations of SF Operations and were not assumed by Holdings after the 1998
Merger.
(b) On April 1, 1998, SFEC, which was subsequently merged into SF
Operations, issued $170,000,000 principal amount of 8 7/8% Senior Notes (the
"SFEC Notes"). The SFEC Notes are guaranteed on a fully subordinated basis by
Holdings. The SFEC Notes require annual interest payments of approximately
$15,100,000 (8 7/8% per annum) and, except in the event of a change of control
of SF Operations and certain other circumstances, do not require any principal
payments prior to their maturity in 2006. The SFEC Notes are redeemable, at the
Company's option, in whole or in part, at any time on or after April 1, 2002, at
varying redemption prices. The net proceeds of the SFEC Notes, together with
other funds, were invested in restricted-use securities, which were used to
repay in full on December 15, 1999 pre-existing notes of SFEC in a principal
amount of $192,250,000 at that time.
The indenture under which the SFEC Notes were issued limits the ability of
SF Operations and its subsidiaries to dispose of assets; incur additional
indebtedness or liens; pay dividends; engage in mergers or consolidations; and
engage in certain transactions with affiliates.
(c) On November 5, 1999, Six Flags Theme Parks Inc., a wholly-owned
subsidiary of the Company ("SFTP"), entered into the Credit Facility and, in
connection therewith, SFEC merged into SF Operations and SFTP became a
subsidiary of SF Operations. The Credit Facility includes a $300,000,000
five-year revolving credit facility ($210,000,000 of which was outstanding at
June 30, 2000), a $300,000,000 five-and-one-half-year multicurrency reducing
revolver facility (of which $291,000,000 was outstanding at June 30, 2000) and a
$600,000,000 six-year term loan (all of which was outstanding at June 30, 2000).
Borrowings under the five-year revolving credit facility must be repaid in full
for thirty consecutive days each year. The interest rate on borrowings under the
Credit Facility can be fixed for periods ranging from one to six months. At the
Company's option the interest rate is based upon specified levels in excess of
the applicable base rate or LIBOR. In February 2000, the Company entered into
interest rate swap agreements that effectively convert the term loan component
of the Credit Facility into a fixed rate obligation through the term of the swap
agreements, ranging from December 2001 to March 2002. Giving effect to such
agreements, the effective rate on the term loan borrowings at June 30, 2000 was
9.93%.
The multicurrency facility, which permits optional prepayments and
reborrowings, requires quarterly mandatory repayments of 2.5% of the outstanding
amount thereof commencing on December 31, 2001, 5.0% commencing on December 31,
2002, 7.5% commencing on December 31, 2003 and 20.0% commencing on December 31,
2004. The term loan facility requires quarterly repayments of 0.25% of the
outstanding amount thereof commencing on December 31, 2001 and 24.25% commencing
on December 31, 2004. A commitment fee of .50% of the unused credit of the
facility is due quarterly in arrears. The principal borrower under the facility
is SFTP, and borrowings under the Credit Facility are guaranteed by Holdings, SF
Operations and all of SF Operations' domestic subsidiaries and are secured by
substantially all of SF Operations' domestic assets.
The Credit Facility contains restrictive covenants that, among other
things, limit the ability of SF Operations and its subsidiaries to dispose of
assets; incur additional indebtedness or liens; repurchase
-11-
<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock; make investments; engage in mergers or consolidations; pay dividends,
except that (subject to covenant compliance) dividends will be permitted to
allow Holdings to meet cash interest obligations with respect to its Senior
Notes, cash dividend payments on its Premium Income Equity Securities and its
obligations to the limited partners in the partnerships that own the Six Flags
Over Texas and Six Flags Over Georgia theme parks, and engage in certain
transactions with subsidiaries and affiliates. In addition, the Credit Facility
requires that SF Operations comply with certain specified financial ratios and
tests.
On November 5, 1999, the Company borrowed $892,000,000 under the Credit
Facility principally to repay all amounts outstanding under the Company's then
existing credit facilities and to provide funds to consummate the November 1999
transactions with Warner Bros. described in Note 2.
4. COMMITMENTS AND CONTINGENCIES
In December 1998, a final judgment of $197,300,000 in compensatory damages
was entered against SFEC, SFTP, Six Flags Over Georgia, Inc. and Time Warner
Entertainment Company, L.P. (TWE), and a final judgment of $245,000,000 in
punitive damages was entered against TWE and $12,000,000 in punitive damages was
entered against the Six Flags entities. In July 2000 the judgments were upheld
by the Georgia Court of Appeals. TWE has indicated that it intends to appeal the
judgments to the Georgia Supreme Court. The judgments arose out of a case
entitled SIX FLAGS OVER GEORGIA, LLC ET AL V. TIME WARNER ENTERTAINMENT COMPANY,
LP ET AL based on certain disputed partnership affairs prior to Holdings'
acquisition of Six Flags at Six Flags Over Georgia, including alleged breaches
of fiduciary duty. The sellers in the Six Flags acquisition, including Time
Warner, Inc., have agreed to indemnify the Company from any and all liabilities
arising out of this litigation.
The Company is party to various legal actions arising in the normal course
of business. Matters that are probable of unfavorable outcome to the Company and
which can be reasonably estimated are accrued. Such accruals are based on
information known about the matters, the Company's estimates of the outcomes of
such matters and its experience in contesting, litigating and settling similar
matters. None of the actions are believed by management to involve amounts that
would be material to consolidated financial position, operations, or liquidity
after consideration of recorded accruals.
5. INVESTMENT IN THEME PARKS
The Company has an investment in the Six Flags Marine World theme park and
an investment in a theme park being constructed in Spain. The Spanish park is
not yet in operation and has not contributed to the Company's operations. The
Company receives contingent revenue related to the operations of Six Flags
Marine World. The revenue is earned after the theme park reaches a minimum
amount of net revenues, typically in the third quarter of the year. The Company
does not recognize in equity from operations of theme parks any revenue until
the minimum net revenue is achieved. The Company does recognize in equity from
operations of theme parks a charge for the depreciation of the property and
equipment that the Company has placed in service at Six Flags Marine World.
6. BUSINESS SEGMENTS
The Company manages its operations on an individual park location basis.
Discrete financial information is maintained for each park and provided to the
Company's management for review and as a basis for decision making. The primary
performance measure used to allocate resources is earnings before interest, tax
expense, depreciation and amortization ("EBITDA"). All of the Company's parks
provide similar products and services through a similar process to the same
class of customer through a consistent
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<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
method. As such, the Company has only one reportable segment--operation of theme
parks. The following tables present segment financial information, a
reconciliation of the primary segment performance measure to income (loss)
before income taxes and a reconciliation of theme park revenues to consolidated
total revenues. Park level expenses exclude all noncash operating expenses,
principally depreciation and amortization, and all non-operating expenses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Theme park revenue ..................... $ 363,088 $ 333,550 $ 396,694 $ 372,361
Theme park cash expenses ............... 223,229 203,729 321,436 294,069
--------- --------- --------- ---------
Aggregate park EBITDA .................. 139,859 129,821 75,258 78,292
Third-party share of EBITDA from parks
accounted for under the equity method (8,144) (5,698) (966) (1,342)
Amortization of investment in theme park
partnerships ......................... (1,025) (656) (2,050) (1,313)
Unallocated net expenses, including
corporate and other expenses ......... (1,997) 495 (6,431) (4,272)
Depreciation and amortization .......... (44,289) (38,041) (85,685) (73,550)
Interest expense ....................... (35,109) (33,079) (65,173) (65,512)
Interest income ........................ 470 2,819 1,242 5,584
--------- --------- --------- ---------
Income (loss) before income taxes ...... $ 49,765 $ 55,661 $ (83,805) $ (62,113)
========= ========= ========= =========
Theme park revenue ..................... $ 363,088 $ 333,550 $ 396,694 $ 372,361
Theme park revenue from parks accounted
for under the equity method ......... (22,009) (19,408) (24,722) (19,639)
--------- --------- --------- ---------
Consolidated total revenue ............. $ 341,079 $ 314,142 $ 371,972 $ 352,722
========= ========= ========= =========
</TABLE>
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<PAGE>
SIX FLAGS OPERATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Seven of the Company's parks are located in Europe and one is located in
Mexico. The Mexico park was acquired in May 1999 and one of the European parks
was acquired in November 1999. The following information reflects the Company's
long-lived assets and revenue by domestic and foreign categories as of and for
the six months ended June 30, 2000 and 1999, respectively:
2000:
---- (In thousands)
Domestic International Total
-------- ------------- -----
Long-lived assets.................. $3,052,037 $502,758 $3,554,795
Revenue............................ 313,466 58,506 371,972
1999:
---- (In thousands)
Domestic International Total
-------- ------------- -----
Long-lived assets.................. $2,914,946 $230,471 $3,145,417
Revenue............................ 323,721 29,001 352,722
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<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
Results of operations for the three-month and six-month periods ended June
30, 2000 are not indicative of the results expected for the full year. In
particular, the Company's theme park operations contribute most of their annual
revenue during the period from Memorial Day to Labor Day each year.
Results of operations for the three months and six months ended June 30,
2000 include the results of the three parks acquired in 1999. Results for the
three months and six months ended June 30, 1999 include the results of two of
the acquired parks from their respective dates of acquisition in May 1999 and do
not include the results of the Movie World Germany park acquired in November
1999.
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
Revenue in the second quarter of 2000 totaled $341.1 million compared to
$314.1 million for the second quarter of 1999. Revenues in the second quarter of
2000 increased 8.6% over the prior year period due in part to the inclusion of
the results of the parks acquired in 1999. The Company believes that revenues
in the 2000 quarter were adversely affected by unusually difficult weather,
particularly on weekends, in a large number of its major markets. In addition,
revenues at the Company's European parks were adversely impacted by a decline in
European currencies during the quarter. Revenue growth would have been
approximately $4.5 million higher had European currency exchange rates remained
at 1999 levels.
Operating expenses for the second quarter of 2000 increased $13.6 million
compared to expenses for the second quarter of 1999. The 13.0% increase resulted
primarily from the inclusion in the 2000 period of two consolidated parks
acquired in May 1999 and one acquired in November 1999. Excluding the acquired
parks from both periods, operating expenses in the 2000 period increased $5.2
million (5.1%) as compared to the prior-year period as a result of increased
compensation expense and increased show expenses.
Selling, general and administrative expenses for the second quarter of
2000 increased $7.7 million compared to comparable expenses for the second
quarter of 1999. Excluding the acquired parks from both periods, selling,
general and administrative expenses increased $0.3 million as compared to the
prior year period.
Costs of products sold in the 2000 period increased $1.3 million compared
to costs for the second quarter of 1999. As a percentage of theme park food,
merchandise and other revenue, costs of good sold represented 21.2% in the 2000
period as compared to 22.2% in the 1999 quarter.
Depreciation and amortization expense for the second quarter of 2000
increased $6.2 million compared to the second quarter of 1999. The increase
compared to the 1999 level was attributable to the Company's on-going capital
program and from additional depreciation and amortization expense ($2.7 million)
associated with the consolidated parks acquired in 1999. Interest expense, net
increased $4.4 million compared to the second quarter of 1999. The increase
compared to interest expense, net for the 1999 quarter resulted from higher
average interest rates on a higher average debt and reduced interest income from
lower average cash and cash equivalent and restricted-use investment balances
during 2000.
-15-
<PAGE>
Equity (loss) in operations of theme parks reflects the lease of Six
Flags Marine World and the management of that park. The loss from equity in
operations of theme parks compared to the second quarter of 1999 decreased by
$463,000.
Income tax expense was $22.1 million for the second quarter of 2000
compared to $25.2 million for the second quarter of 1999. The effective tax rate
for the second quarter of 2000 was 44.4% compared to a rate of 45.2% for the
second quarter of 1999. The Company's quarterly effective tax rate will vary
from period-to-period based upon the inherent seasonal nature of the theme park
business, as a result of permanent differences associated with goodwill
amortization for financial statement purposes and the deductible portion of the
amortization for tax purposes.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
Revenue in the first six months of 2000 totaled $372.0 million compared to
$352.7 million for the comparable period of 1999. Revenues in the 2000 period
increased 5.5% over the prior year period due to the inclusion of the results of
the parks acquired in 1999. The Company believes that revenues in the 2000
period were adversely affected by unusually difficult weather, particularly on
weekends, in a large number of its major markets. In addition, revenues at the
Company's European parks were adversely impacted by a decline in European
currencies during the period. Revenue growth would have been approximately $4.5
million higher had European currency exchange rates remained at 1999 levels.
Operating expenses for the six months ended June 30, 2000 increased $19.5
million compared to expenses for the first half of 1999. The 12.4% increase
resulted primarily from the inclusion in the 2000 period of two consolidated
parks acquired in May 1999 and one acquired in November 1999. Excluding the
acquired parks from both periods, operating expenses in the 2000 period
increased $5.5 million (3.6%) as compared to the prior-year period as a result
of increase compensation expense and increased show expenses.
Selling, general and administrative expenses for the first six months of
2000 increased $5.3 million compared to similar expenses for the first six
months of 1999. Excluding the acquired parks from both periods, selling, general
and administrative expenses decreased $6.0 million as compared to the prior year
period due in large measure to lower corporate expenses, as well as other
savings.
Costs of products sold in the 2000 period increased $0.6 million compared
to costs for the first six months of 1999. As a percentage of theme park food,
merchandise and other revenue, costs of good sold represented 20.4% in the 2000
period as compared to 20.8% in the 1999 period.
Depreciation and amortization expense for the first six months of 2000
increased $12.1 million compared to the comparable period of 1999. The
increase compared to the 1999 level was attributable to the Company's
on-going capital program and from additional depreciation and amortization
expense ($6.5 million) associated with the consolidated parks acquired in
1999. Interest expense, net increased $4.0 million compared to the first six
months of 1999. The increase compared to interest expense, net for the 1999
period resulted primarily from reduced interest income from lower average
cash and cash equivalent and restricted-use investment balances during 2000.
Equity in operations of theme parks reflects the share the lease of Six
Flags Marine World and the management of that park. The loss from equity in
operations of theme parks compared to the first six months of 1999 decreased by
$255,000.
Income tax benefit was $26.4 million for the six months ended June 30,
2000 compared to $15.4 million for the first six months of 1999. The effective
tax rate for the 2000 period was 31.5% compared to a rate of 24.7% for the
comparable period of 1999. The Company's quarterly effective tax rate
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<PAGE>
will vary from period-to-period based upon the inherent seasonal nature of the
theme park business, as a result of permanent differences associated with
goodwill amortization for financial statement purposes and the deductible
portion of the amortization for tax purposes.
LIQUIDITY, CAPITAL COMMITMENTS AND RESOURCES
At June 30, 2000, the Company's indebtedness aggregated $1,405.7 million,
of which approximately $212.0 million matures prior to June 30, 2001.
Substantially all of the short-term debt represents borrowings under the
revolving credit component of the Credit Facility which the Company expects to
pay down in full during the third quarter. See Note 3 to the Company's
Consolidated Financial Statements for additional information regarding the
Company's indebtedness.
During the six months ended June 30, 2000, net cash provided by operating
activities was $27.6 million. Net cash used in investing activities in the first
six months of 2000 totaled $256.0 million, consisting primarily of capital
expenditures and investments in theme parks. Net cash provided by financing
activities in the first six months of 2000 was $198.1 million, representing net
proceeds of borrowings under the Credit Facility described in Note 3(c) to the
Company's Consolidated Financial Statements.
In addition to its obligations under its outstanding indebtedness, the
Company has guaranteed the obligations of certain subsidiaries of Holdings to
(i) make minimum annual distributions of approximately $48.6 million (subject to
annual cost of living adjustments) to the limited partners in the Six Flags Over
Texas and Six Flags Over Georgia partnerships, (ii) make minimum capital
expenditures at each of the Partnership parks during rolling five-year periods,
based generally on 6% of such park's revenues, and (iii) purchase at specified
prices a maximum number of 5% per year (accumulating to the extent not purchased
in any given year) of limited partnership units outstanding (to the extent
tendered by the unit holders). Cash flows from operations at these partnership
parks will be used to satisfy the obligations described in clauses (i) and (ii)
above before any funds are required from Holdings. In addition, at June 30,
2000, Holdings had $70.2 million in a dedicated escrow account available to fund
those obligations.
The degree to which the Company is leveraged could adversely affect its
liquidity. The Company's liquidity could also be adversely affected by
unfavorable weather, accidents or the occurrence of an event or condition,
including negative publicity or significant local competitive events, that
significantly reduce paid attendance and, therefore, revenue at any of its theme
parks.
The Company believes that, based on historical and anticipated operating
results, cash flows from operations, available cash and available amounts under
the Credit Facility will be adequate to meet the Company's future liquidity
needs, including anticipated requirements for working capital, capital
expenditures and scheduled debt requirements, for at least the next several
years. The Company may, however, need to refinance all or a portion of its
existing debt on or prior to maturity or to seek additional financing.
To minimize the Company's exposure to changing foreign currency rates on
ride purchases, in the past the Company has entered into foreign exchange
forward contracts. The Company has not entered into any foreign exchange forward
contracts in 2000 related to ride purchase contracts from foreign vendors.
Additionally, the Company has not hedged its exposure to changes in foreign
currency rates related to its international parks.
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<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and in June 2000 issued SFAS 138, which
amended certain provisions of SFAS 133. SFAS 133, as amended, 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 statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge for accounting purposes. The accounting for changes in the
fair value of a derivative (that is gains and losses) depends on the intended
use of the derivative and the resulting designation. It is expected that the
Company will adopt the provisions of SFAS No. 133 and SFAS No. 138 as of January
1, 2001.
The Company has had limited involvement with derivative financial
instruments. The Company is currently evaluating the provisions of SFAS No. 133,
as amended. Based upon the Company's limited use of derivative financial
instruments, the Company does not believe that the adoption of SFAS No. 133 will
have a material impact on its consolidated financial position or future results
of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25." The Interpretation
clarifies the application of Opinion 25 for certain issues. The Company accounts
for stock based arrangements with employees based on Opinion 25. Among other
issues, the Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Interpretation is effective July 1, 2000, but certain
conclusions cover specific events that occur either after December 15, 1998 or
January 12, 2000. Certain employees of the Company receive options to purchase
stock of Holdings. The Company does not believe that the Interpretation will
have a material impact on its consolidated financial position or future results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included in "Quantitative and Qualitative Disclosures
About Market Risk" in Item 7A of the Company's 1999 Annual Report on Form 10-K
is incorporated herein by reference. Such information includes a description of
the Company's potential exposure to market risks, including interest rate risk
and foreign currency risk.
During the period January 1, 2000 through June 30, 2000, the value of
the Euro has declined approximately 5.5% in relation to the dollar. This
decline to date is less than the hypothetical 10% decline described and
evaluated in the 1999 Form 10-K. Although the Company may in the future enter
into transactions to hedge currency exchange risks in respect of specific
purchase contracts with foreign vendors, the Company has no current plans to
enter into hedging transactions with respect to its foreign operations
generally.
During the first six months, interest rates (as measured by LIBOR) have
increased by approximately 12%. As previously disclosed, the Company has
entered into interest swap arrangements with respect to its $600.0 million
term loan. At June 30, 2000, the balance of the Company's other indebtedness
represented fixed rate debt, other than $501.0 million outstanding under the
Credit Facility, of which $210.0 million represented debt under the revolving
credit facility which the Company intends to repay in full during the third
quarter of 2000.
Except as described above, there have been no material changes in the
Company's market risk exposure from that disclosed in the 1999 Form 10-K.
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<PAGE>
PART II -- OTHER INFORMATION
ITEMS 1--5
Not applicable.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of the Company's Certificate of
Incorporation dated June 26, 2000
27.1 Financial Data Schedule--June 30, 2000
(b) Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIX FLAGS OPERATIONS INC.
(Registrant)
Kieran E. Burke
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
James F. Dannhauser
CHIEF FINANCIAL OFFICER
Date: August 11, 2000
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