-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EBVpq5jmMcYteZZKMy3VfG6L80XSkPBHrDtdphvpGuuonzvHQvEtcU9RMpjreYFl 5nfLhhn42vRYDlspbF0Zdw== 0000950120-99-000116.txt : 19990414 0000950120-99-000116.hdr.sgml : 19990414 ACCESSION NUMBER: 0000950120-99-000116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIX FLAGS ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000901508 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 223136577 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-61338 FILM NUMBER: 99592472 BUSINESS ADDRESS: STREET 1: 122 E 42ND ST STREET 2: 49TH FL CITY: NEW YORK STATE: NY ZIP: 10168 BUSINESS PHONE: 2125994690 MAIL ADDRESS: STREET 1: 122 E 42ND ST STREET 2: 49TH FL CITY: NEW YORK STATE: NY ZIP: 10168 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: JANUARY 3, 1999 --------------- 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 ------------ SIX FLAGS ENTERTAINMENT CORPORATION ------------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 22-3136577 -------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11501 NORTHEAST EXPRESSWAY OKLAHOMA CITY, OKLAHOMA 73131 -------------------------------- -------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (405) 475-2500 -------------- Securities registered pursuant to Sec. 12(b) of the Act: None --------- Securities registered pursuant to Sec. 12(g) of the Act: None --------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates (assuming, solely for the purposes of this Form, that all the directors of the Registrant are affiliates) of the Registrant: None. All of the capital stock of the Company is held by its parent, Premier Parks Inc. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest most practicable date: The number of shares of Common Stock of the Registrant outstanding as of March 1, 1999 was 1,000. The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with reduced disclosure format. PART I ITEM 1. BUSINESS INTRODUCTION ------------ Six Flags Entertainment Corporation ("SFEC"), through its direct and indirect wholly-owned subsidiaries, S.F. Holdings, Inc. ("Holdings"), Six Flags Theme Parks Inc. ("SFTP" and, collectively with SFEC, Holdings and their subsidiaries, "Six Flags" or the "Company"), operates six regional theme parks, as well as three separately gated water parks and a wildlife safari animal park. SFEC and Holdings are holding companies, which have no significant operations independent of their ownership of SFTP. As the operator of a leading national system of regional theme parks for over thirty years, Six Flags has established a nationally recognized brand name and identity. On a pro forma basis, assuming the Company's interests in Six Flags Over Georgia and Six Flags Over Texas had been transferred on January 1, 1998, the Company's total revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") for the year ended January 3, 1999 would have been approximately $521.1 million and $149.6 million, respectively. Each of the parks is located in or near a major metropolitan area: Six Flags Great Adventure and Six Flags Wild Safari Animal Park -- New York/Philadelphia; Six Flags Magic Mountain and Six Flags Hurricane Harbor -- Los Angeles (collectively, "Six Flags California"); Six Flags Great America -- Chicago/Milwaukee; Six Flags Hurricane Harbor -- Dallas/Fort Worth; Six Flags Houston and Six Flags WaterWorld -- Houston (collectively, "Six Flags Houston"); Six Flags St. Louis - St. Louis; and Six Flags Fiesta Texas - San Antonio. Four of these parks are located in one of the top ten markets in the United States in terms of population. On April 1, 1998, Premier Parks Inc. ("Premier") acquired (the "Acquisition") 100% of the equity of SFEC for a cash purchase price of $965 million (plus an approximate $11 million adjustment) from Time Warner Entertainment Company and Boston Ventures. Premier also assumed or refinanced a total of approximately $1,032.1 million of Company debt outstanding at that date. As part of the Acquisition, the parties entered into a long-term licensing agreement that gives Premier and the Company the exclusive theme park rights in the U.S. (excluding the Las Vegas, Nevada Metropolitan area) and Canada of Warner Bros. and DC Comics animated characters. These characters include Bugs Bunny, Daffy Duck, Tweety Bird, Yosemite Sam, Batman, Superman and others.(1) As part of the Acquisition, Six Flags transferred to Premier all of its interest in the limited partnerships (the "Co-Venture Partnerships") that own Six Flags Over Texas and Six Flags Over Georgia (the "Co-Venture Parks") for a cash payment of approximately $46.0 million and the payment of $165.6 million of SFEC debt. The parks (other than the Six Flags Wild Safari Animal Park) are designed to provide a full day of entertainment, offering a broad selection of state-of-the-art thrill rides (or water rides ------------------------------- (1) Looney Tunes, Bugs Bunny, Daffy Duck, Tweety Bird and Yosemite Sam are copyrights and trademarks of Warner Bros., a division of Time Warner Entertainment Company, L.P. ("TWE"). Batman and Superman are copyrights and trademarks of DC Comics, a partnership between TWE and a subsidiary of Time Warner Inc. Six Flags Great Adventure, Six Flags Great America, Six Flags and all related indicia are federally registered trademarks of Six Flags Theme Parks Inc., a subsidiary of the Company. Fiesta Texas and all related indicia are trademarks of Fiesta Texas, Inc., a subsidiary of the Company. -1- and activities in the case of the three water parks), themed areas, concerts, shows, restaurants, theaters, game venues and merchandise outlets. The 1996 and 1997 fiscal years consisted of 52 weeks each and ended December 29, 1996 and December 28, 1997, respectively. The 1998 fiscal year consisted of 53 weeks and ended January 3, 1999. DESCRIPTION OF PARKS -------------------- SIX FLAGS FIESTA TEXAS Six Flags Fiesta Texas, the 39th largest theme park in North America based on 1998 attendance, is located on approximately 206 acres of land in San Antonio, Texas. The San Antonio, Texas market provides the park with a permanent resident population of 1.7 million people within 50 miles and 3.0 million people within 100 miles. The San Antonio market is the number 38 DMA in the United States. Based upon in-park surveys, approximately 34.8% of the visitors to the park in 1998 resided within a 50-mile radius of the park, and 44.8% resided within a 100-mile radius. Following the 1998 season, Premier purchased the 40% minority interest in Six Flags Fiesta Texas and title to the park for $45.0 million in cash. Six Flags Fiesta Texas' principal competitor is Sea World of Texas located in San Antonio. In addition, the park competes to a lesser degree with Six Flags Houston, the Company's park located in Houston, Texas, approximately 200 miles from the park. SIX FLAGS GREAT ADVENTURE AND SIX FLAGS WILD SAFARI ANIMAL PARK Six Flags Great Adventure, the 11th largest theme park in North America, and the separately gated adjacent Six Flags Wild Safari Animal Park, are located in Jackson, New Jersey, approximately 70 miles south of New York City and 50 miles east of Philadelphia. The New York and Philadelphia markets provide the parks with a permanent resident population of 12.4 million people within 50 miles and 25.9 million people within 100 miles. The New York and Philadelphia markets are the number 1 and number 4 DMAs in the United States, respectively. Based upon in-park surveys, approximately 53.9% of the visitors to the parks in 1998 resided within a 50-mile radius of the park, and 86.2% resided within a 100-mile radius. The Company owns a site of approximately 2,200 acres, of which approximately 125 acres are currently used for the theme park operations, and approximately 350 adjacent acres are used for the wildlife safari park, home to 55 species of 1,200 exotic animals which can be seen over a four and one-half mile drive. Approximately 1,640 acres remain undeveloped. Six Flags Great Adventure's principal competitors are Hershey Park, located in Hershey, Pennsylvania, approximately 150 miles from the park; and Dorney Park, located in Allentown, Pennsylvania, approximately 75 miles from the park. SIX FLAGS GREAT AMERICA Six Flags Great America, the 19th largest theme park in North America, is located in Gurnee, Illinois, between Chicago, Illinois and Milwaukee, Wisconsin. The Chicago and Milwaukee markets provide the park with a permanent resident population of 7.8 million people within 50 miles and 12.0 million people within 100 miles. The Chicago and Milwaukee markets are the number 3 and number 31 DMAs in the United States, respectively. Based upon in-park surveys, approximately 66.6% of the visitors to the park in 1998 resided within a 50-mile radius of the park, and 82.0% resided within a 100-mile radius. -2- The Company owns a site of approximately 440 acres of which 86 are used for the theme park operations, and approximately 106 usable acres are in a separate parcel available for expansion and complementary uses. Six Flags Great America currently has no direct theme park competitors in the region, but does compete to some extent with Kings Island, located near Cincinnati, Ohio, approximately 350 miles from the park; Cedar Point, located in Sandusky, Ohio, approximately 340 miles from the park; and Six Flags St. Louis, the Company's park located outside St. Louis, Missouri, approximately 320 miles from the park. SIX FLAGS HOUSTON AND SIX FLAGS WATERWORLD Six Flags Houston, the 30th largest theme park in North America, and the separately gated adjacent Six Flags WaterWorld, are located in Houston, Texas on the grounds of an entertainment and sports complex that includes the Houston Astrodome. The Houston, Texas market provides the parks with a permanent resident population of 4.3 million people within 50 miles and 5.2 million people within 100 miles. The Houston market is the number 11 DMA in the United States. Based upon in-park surveys, approximately 63.6% of the visitors to the theme park in 1998 resided within a 50-mile radius of the park, and 69.9% resided within a 100-mile radius. The Company owns a site of approximately 90 acres used for the theme park, and approximately 14 acres used for the water park. Six Flags Houston indirectly competes with Sea World of Texas and the Company's Six Flags Fiesta Texas, both located in San Antonio, Texas, approximately 200 miles from the park. Six Flags WaterWorld competes with Splashtown and Water Works, two nearby water parks. SIX FLAGS HURRICANE HARBOR Six Flags Hurricane Harbor, the 7th largest water park in the United States, is located in Arlington, Texas, between Dallas and Fort Worth, Texas. The Dallas/Fort Worth market provides the park with a permanent resident population of 4.5 million people within 50 miles and 5.6 million people within 100 miles. The Dallas/Fort Worth market is the number 8 DMA in the United States. The Company owns directly approximately 47 acres, of which approximately 18 acres are currently used for Hurricane Harbor and 31 acres remain undeveloped. Six Flags Hurricane Harbor has no direct competitors in the area other than a municipal water park. SIX FLAGS MAGIC MOUNTAIN AND SIX FLAGS HURRICANE HARBOR Six Flags Magic Mountain, the 15th largest theme park in North America, and the separately gated adjacent Six Flags Hurricane Harbor, the 15th largest water park in the United States, are located in Valencia, California, in the northwest section of Los Angeles County. The Los Angeles, California market provides the parks with a permanent resident population of 9.8 million people within 50 miles and 15.8 million people within 100 miles. The Los Angeles market is the number 2 DMA in the United States. Based upon in-park surveys, approximately 44.5% of the visitors to the theme park in 1998 resided within a 50-mile radius of the parks, and 67.0% resided within a 100-mile radius. The Company owns a site of approximately 260 acres with 160 acres used for the theme park, and approximately 12 acres used for the pirate-themed water park. Six Flags Magic Mountain's principal competitors include Disneyland in Anaheim, California, located approximately 60 miles from the park, Universal Studios Hollywood in Universal City, California, located approximately 20 miles from the park, Knott's Berry Farm in Buena Park, California, located approximately 50 miles from the park, and Sea -3- World of California in San Diego, California, located approximately 150 miles from the park. In early 1999, a new park, Legoland, opened approximately 120 miles from Magic Mountain. Six Flags Hurricane Harbor's only direct competitor in the area is Raging Waters, approximately 50 miles from the water park. SIX FLAGS ST. LOUIS Six Flags St. Louis, the 36th largest theme park in North America, is located in Eureka, Missouri, about 35 miles west of St. Louis, Missouri. The St. Louis market provides the park with a permanent resident population of 2.6 million people within 50 miles and 3.7 million people within 100 miles. The St. Louis market is the number 21 DMA in the United States. Based upon in-park surveys, approximately 55.3% of the visitors to the park in 1998 resided within a 50-mile radius of the park, and 65.1% resided within a 100-mile radius. The Company owns a site of approximately 497 acres used for the theme park operations. Six Flags St. Louis competes with Kings Island and The Beach, located near Cincinnati, Ohio, approximately 350 miles from the park; Cedar Point, located in Sandusky, Ohio, approximately 515 miles from the park; Silver Dollar City, located in Branson, Missouri, approximately 250 miles from the park; and Six Flags Great America, the Company's park located near Chicago, Illinois, approximately 320 miles from the park. MARKETING AND PROMOTION ----------------------- The Company attracts visitors through locally oriented multi-media marketing and promotional programs for each of its parks. These programs are tailored to address the different characteristics of their respective markets and to maximize the impact of specific park attractions and product introductions. All marketing and promotional programs are updated or completely revamped each year to address new developments. Marketing programs are supervised by Premier's Senior Vice President for Marketing, with the assistance of senior management and in-house marketing staff, as well as its national advertising agency. The Company also develops partnership relationships with well-known national and regional consumer goods companies and retailers to supplement its advertising efforts and to provide attendance incentives in the form of discounts and/or premiums. The Company has also arranged for popular local radio and television programs to be filmed or broadcast live from its parks. Group sales and pre-sold tickets provide the Company with a consistent and stable base of attendance, representing over 35.2% of aggregate attendance in 1998 at the Company's parks. Each park has a group sales and pre-sold ticket manager and a well-trained sales staff dedicated to selling multiple group sales and pre-sold ticket programs through a variety of methods, including direct mail, telemarketing and personal sales calls. The Company has also developed effective programs for marketing season pass tickets. Season pass sales establish a solid attendance base in advance of the season, thus reducing exposure to inclement weather. Additionally, season pass holders often bring paying guests and generate "word-of-mouth" advertising for the parks. During 1998, 22.1% of visitors to the Company's parks utilized season passes. A significant portion of the Company's attendance is attributable to the sale of discount admission tickets. The Company offers discounts on season and multi-visit tickets, tickets for specific dates and tickets to affiliated groups such as businesses, schools and religious, fraternal and similar -4- organizations. The increased in-park spending which results from such attendance is not offset by incremental operating expenses, since such expenses are relatively fixed during the operating season. The Company also implements promotional programs as a means of targeting specific market segments and geographic locations not reached through its group or retail sales efforts. The promotional programs utilize coupons, sweepstakes, reward incentives and rebates to attract additional visitors. These programs are implemented through direct mail, telemarketing, direct response media, sponsorship marketing and targeted multi-media programs. The special promotional offers are usually for a limited time and offer a reduced admission price or provide some additional incentive to purchase a ticket, such as combination tickets with a complementary location. LICENSES -------- Pursuant to a license agreement (the "License Agreement") among Warner Bros., DC Comics, Premier and SFTP, Premier and its subsidiaries, including the Company, have the exclusive right on a long-term basis to use Warner Bros. and DC Comics animated characters in theme parks throughout the United States (other than the Las Vegas metropolitan area) and Canada. In particular, the License Agreement entitles the Company to use, subject to customary approval rights of Warner Bros. and, in limited circumstances, approval rights of certain third parties, all animated and comic book characters that Warner Bros. and DC Comics have the right to license, including as of the date hereof, Batman, Superman, Bugs Bunny, Daffy Duck, Tweety Bird and Yosemite Sam, and includes the right to sell merchandise using the characters. The license fee is fixed (without regard to the number of the Company's parks) until 2005, and thereafter the license fee will be subject to periodic scheduled increases and will be payable on a per-theme park basis. In addition, the Company will be required to pay a royalty fee on merchandise that uses the licensed characters manufactured by or for the Company where a fee has not been paid by the manufacturer. Warner Bros. has the right to terminate the License Agreement under certain circumstances, including if any persons involved in the movie or television industries obtain control of the Company and upon a default by Premier under an indemnity agreement in favor of Time Warner Inc. ("Time Warner") executed in connection with the Acquisition. PARK OPERATIONS --------------- The Company currently operates in geographically diverse markets in the United States. Each of the Company's parks is operated to the extent practicable as a separate operating division of the Company in order to maximize local marketing opportunities and to provide flexibility in meeting local needs. Each park is managed by a general manager who reports to one of Premier's Executive Vice Presidents (each of whom reports to the Chief Operating Officer) and is responsible for all operations and management of the individual park. Local advertising, ticket sales, community relations and hiring and training of personnel are the responsibility of individual park management in coordination with corporate support teams. Each of the Company's theme parks is managed by a full-time, on-site management team under the direction of the general manager. Each such management team includes senior personnel responsible for operations and maintenance, marketing and promotion, human resources and merchandising. Park management compensation structures are designed to provide incentives (including stock options and cash bonuses) for individual park managers to execute the Company's strategy and to maximize revenues and operating cash flow at each park. The Company's parks are generally open daily from Memorial Day through Labor Day. In addition, most of the Company's parks are open during weekends prior to and following their daily -5- seasons, primarily as a site for theme events (such as Hallowscream and Oktoberfest). Certain of the parks have longer operating seasons. Typically, the parks charge a basic daily admission price, which allows unlimited use of all rides and attractions, although in certain cases special rides and attractions require the payment of an additional fee. CAPITAL IMPROVEMENTS -------------------- The Company regularly makes capital investments in the development and implementation of new rides and attractions at its parks. The Company purchases both new and used rides. In addition, the Company rotates rides among its parks to provide fresh attractions. The Company believes that the introduction of new rides is an important factor in promoting each of the parks in order to achieve market penetration and encourage longer visits, which lead to increased attendance and in-park spending. In addition, the Company generally adds theming to acquired parks and enhances the theming and landscaping of its existing parks in order to provide a complete family oriented entertainment experience. Capital expenditures are planned on a seasonal basis with most expenditures made during the off-season. Expenditures for materials and services associated with maintaining assets, such as painting and inspecting rides are expensed as incurred and therefore are not included in capital expenditures. The Company's level of capital expenditures are directly related to the optimum mix of rides and attractions given park attendance and market penetration. These targeted expenditures are intended to drive significant attendance growth at the parks and to provide an appropriate complement of entertainment value, depending on the size of a particular market. As an individual park begins to reach an appropriate attendance penetration for its market, management generally plans a new ride or attraction every two to four years in order to enhance the park's entertainment product. The Company believes that there are ample sources for rides and other attractions, and the Company is not dependent on any single source. Certain of these manufacturers are located outside the United States. MAINTENANCE AND INSPECTION -------------------------- The Company's rides are inspected daily by maintenance personnel during the operating season. These inspections include safety checks as well as regular maintenance and are made through both visual inspection of the ride and test operation. Senior management of Premier and the individual parks evaluate the risk aspects of each park's operation. Potential risks to employees and staff as well as to the public are evaluated. Contingency plans for potential emergency situations have been developed for each facility. During the off-season, maintenance personnel examine the rides and repair, refurbish and rebuild them where necessary. This process includes x-raying and magnafluxing (a further examination for minute cracks and defects) steel portions of certain rides at high-stress points. In addition to the Company's maintenance and inspection procedures, the Company's liability insurance carrier performs a periodic inspection of each park and all attractions and related maintenance procedures. The result of insurance inspections are written evaluation and inspection reports, as well as written suggestions on various aspects of park operations. State inspectors also conduct annual ride inspections before the beginning of each season. Other portions of each park are also subject to inspections by local fire marshals and health and building department officials. Furthermore, the Company uses Ellis & Associates as water safety consultants at its parks in order to train life guards and audit safety procedures. -6- INSURANCE --------- The Company maintains insurance of the type and in amounts that it believes are commercially reasonable and that are available to businesses in its industry. The Company maintains multi-layered general liability policies that provide for excess liability coverage of up to $100.0 million per occurrence. With respect to liability claims arising out of occurrences on and after July 1, 1998, there is no self-insured retention by the Company. However, with respect to claims arising out of occurrences prior to July 1, 1998, the self-insured portion is the first $2.0 million of loss per occurrence. The Company also maintains fire and extended coverage, workers' compensation, business interruption and other forms of insurance typical to businesses in its industry. The fire and extended coverage policies insure the Company's real and personal properties (other than land) against physical damage resulting from a variety of hazards. COMPETITION ----------- The Company's parks compete directly with other theme parks, water and amusement parks and indirectly with all other types of recreational facilities and forms of entertainment within their market areas, including movies, sports attractions and vacation travel. Accordingly, the Company's business is and will continue to be subject to factors affecting the recreation and leisure time industries generally, such as general economic conditions and changes in discretionary consumer spending habits. Within each park's regional market area, the principal factors affecting competition include location, price, the uniqueness and perceived quality of the rides and attractions in a particular park, the atmosphere and cleanliness of a park and the quality of its food and entertainment. The Company believes its parks feature a sufficient variety of rides and attractions, restaurants, merchandise outlets and family orientation to enable it to compete effectively. SEASONALITY ----------- The operations of the Company are highly seasonal, with more than 85% of park attendance in 1998 occurring in the second and third calendar quarters and the most active period falling between Memorial Day and Labor Day. The great majority of the Company's revenues are collected in the second and third quarters of each year. ENVIRONMENTAL AND OTHER REGULATION ---------------------------------- The Company's operations are subject to increasingly stringent federal, state and local environmental laws and regulations including laws and regulations governing water discharges, air emissions, soil and groundwater contamination, the maintenance of underground storage tanks and the disposal of waste and hazardous materials. In addition, its operations are subject to other local, state and federal governmental regulations including, without limitation, labor, health, safety, zoning and land use and minimum wage regulations applicable to theme park operations, and local and state regulations applicable to restaurant operations at the park. The Company believes that it is in substantial compliance with applicable environmental and other laws and regulations and, although no assurance can be given, it does not foresee the need for any significant expenditures in this area in the near future. In addition, portions of the undeveloped areas at some of its parks are classified as wetlands. Accordingly, the Company may need to obtain governmental permits and other approvals prior to conducting development activities that affect these areas, and future development may be limited in some or all of these areas. -7- EMPLOYEES --------- At March 1, 1999, the Company employed approximately 908 full-time employees, and the Company employed approximately 18,000 seasonal employees during the 1998 operating season. In this regard, the Company competes with other local employers for qualified student and other candidates on a season-by-season basis. As part of the seasonal employment program, the Company employs a significant number of teenagers, which subjects the Company to child labor laws. Approximately 19% of the Company's full-time and approximately 12% of its seasonal employees are subject to labor agreements with local chapters of national unions. These labor agreements expire in December 1999 (Six Flags Great Adventure) and January 2000 (Six Flags St. Louis). The Company has not experienced any strikes or work stoppages by its employees, and the Company considers its employee relations to be good. ITEM 2. PROPERTIES Set forth below is a brief description of the Company's real estate at March 1, 1999: Six Flags Fiesta Texas, San Antonio, Texas -- 206 acres (fee ownership) Six Flags Great Adventure & Wild Safari Animal Park, Jackson, New Jersey -- 2,200 acres (fee ownership)(2) Six Flags Great America, Gurnee, Illinois -- 440 acres (fee ownership)(2) Six Flags Houston, Houston, Texas -- 90 acres (fee ownership)(2) Six Flags Hurricane Harbor, Arlington, Texas -- 47 acres (fee ownership)(2) Six Flags Hurricane Harbor, Valencia, California -- 12 acres (fee ownership)(2) Six Flags Magic Mountain, Valencia, California -- 248 acres (fee ownership)(2) Six Flags St. Louis, Eureka, Missouri -- 497 acres (fee ownership)(2) Six Flags WaterWorld, Houston, Texas -- 14 acres (fee ownership)(2) In addition, the Company leases certain office space and also certain of the rides and attractions at its parks. See Note 14 to Notes to Consolidated Financial Statements. The Company considers its properties to be well-maintained, in good condition and adequate for their present uses and business requirements. ITEM 3. LEGAL PROCEEDINGS The nature of the industry in which the Company operates tends to expose it to claims by visitors for injuries. Historically, the great majority of these claims have been minor. While the Company believes that it is adequately insured against the claims currently pending against it and any potential liability, if the number of such events resulting in liability significantly increased, or if the Company becomes subject to damages that cannot by law be insured against, such as punitive damages, there may be a material adverse effect on its operations. ------------------- (2) The Company has granted to its lenders under the Six Flags credit agreement a mortgage on this property. -8- In December 1998, a final judgment of $197.3 million in compensatory damages was entered against SFEC, SFTP, Six Flags Over Georgia, Inc. and TWE, and a final judgment of $245.0 million in punitive damages was entered against TWE and of $12.0 million in punitive damages was entered against the referenced Six Flags entities. TWE has indicated that it intends to appeal the judgments. The judgments arose out of a case entitled Six Flags Over Georgia, LLC et al. v. Time Warner Entertainment Company, L.P. et al. based on certain disputed partnership affairs prior to the Six Flags Acquisition at Six Flags Over Georgia, including alleged breaches of fiduciary duty. The sellers in the Six Flags Acquisition, including Time Warner, have agreed to indemnify Premier and the Company from any and all liabilities arising out of this litigation. -9- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's Common Stock is owned by Premier, and during the three years ended January 3, 1999, there has been no public market for the Common Stock. The Company paid no cash dividends during the three years ended January 3, 1999. The indenture relating to the Company's 8 % Senior Notes Due 2006 (the "SFEC Senior Notes") limit the payment of cash dividends to common stockholders. See Note 8 to Notes to Consolidated Financial Statements. -10- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL ------- The Company's revenues are derived principally from the sale of tickets for entrance to its parks, parking and corporate sponsorships (approximately 52.1%, 60.3% and 59.6% in the years ended January 3, 1999 (fiscal 1998), December 28, 1997 (fiscal 1997) and December 29, 1996 (fiscal 1996), respectively) and the sale of food, merchandise, gasoline, games and attractions inside its parks, as well as sponsorship and other income (approximately 47.9%, 39.7% and 40.4% in the fiscal years 1998, 1997 and 1996, respectively). The fiscal year 1998 revenue percentage for entrance, parking and corporate sponsorships includes entrance revenues only. The Company's principal costs of operations include salaries and wages, fringe benefits, advertising, outside services, maintenance, utilities and insurance. The Company's expenses are relatively fixed. Costs for full-time employees, maintenance, utilities, advertising and insurance do not vary significantly with attendance, thereby providing the Company with a significant degree of operating leverage as attendance increases and fixed costs per visitor decrease. Prior to the Acquisition, the Company, through two subsidiaries, was the general partner in the Co-Venture Partnerships. For the 1997 and 1997 periods, the Company accounted for the Co-Venture Parks as co-ventures, i.e., their revenues and expenses (excluding partnership depreciation) were included in the Company's consolidated statements of operations and the net amounts distributed to the limited partners were deducted as expenses. Except for the limited partnership units in the Georgia park owned by the Company prior to the Acquisition, the Company had no rights or title to the Co-Venture Parks' assets or to the proceeds from any sale of the Co-Venture Parks' assets or liabilities during the periods presented. Accordingly, the Company's 1997 consolidated balance sheet did not include any of the Co-Venture Parks' assets. The investment in the Co-Venture Parks included in the Company's 1997 consolidated balance sheet represented (i) the Company's interest in the estimated future cash flows from the operations of the Co-Venture Parks, which was amortized over the life of the partnership agreements, and (ii) the value of Limited Partnership units purchased pursuant to the tender offer relating to the Georgia park. The Co-Venture Parks contributed revenues of $7.2 million, $176.8 million and $152.0 million to the Company in the fiscal years 1998 (through April 1, 1998, the date of Premier's acquisition of SFEC), 1997 and 1996, respectively. In connection with the Acquisition, Six Flags transferred its interests in the Co-Venture Parks to Premier. Accordingly, cash flows from these parks are not available to service the debt of Six Flags (including the SFEC Senior Notes and the Six Flags Credit Facility) and the Company has no interest in the revenues or cash flows of the Co-Venture Parks. The discussion below excludes the results of the Co-Venture Parks which were transferred to Premier as part of the Acquisition. Due to the change of control resulting from the Acquisition, the Company recognized $46.1 million of substantial noncash compensation expense in fiscal 1998 immediately prior to Premier's purchase of the Company by virtue of the vesting of certain restricted stock and stock options. Such expense is non-recurring and was included in SFEC's Pre-Acquisition results (prior to Premier's purchase). -11- YEAR ENDED JANUARY 3, 1999 ------------------------------------- POST-ACQUISITION PRE-ACQUISITION 278-DAY PERIOD 93-DAY PERIOD ENDED ENDED JANUARY 3, 1999(1) MARCH 31, 1998(2) ------------------ ----------------- Revenues: Theme park admissions $256,316 $ 15,047 Theme park food, merchandise and other 241,412 8,356 ------- ------- Total revenue . . . . 497,728 23,403 ------- ------- Operating costs and expense: Operating expenses . 172,750 56,307 Selling, general and administrative . . . 61,471 54,711 Costs of products sold 69,643 2,757 Depreciation and amortization . . . . 71,896 17,629 Total operating costs and expenses . . . . 375,760 131,404 ------- ------- Income (loss) from operations . . . . . 121,968 (108,001) ------- ------- Other income (expense): Interest expense, net (58,658) (22,508) Equity in operations of theme park partnerships . . . . -- (13,152) Minority interest in (earnings) loss . . . 36 -- Other expense . . . . (151) -- -------- ------- Total other income (expense) . . . . . (58,773) (35,660) -------- ------- Income (loss) before taxes . . . . . . . 63,195 (143,661) Income tax benefit (expense) . . . . . . (34,513) -- -------- --------- Net income (loss) . . $ 28,682 $(143,661) ======== ========= EBITDA . . . . . . . . . $193,864 $ (90,372) -------- --------- YEAR ENDED JANUARY 3, 1999 ---------------------------------------- CO-VENTURE PRO FORMA COMPANY ADJUSTMENTS(3) ADJUSTMENTS(4) PRO FORMA -------------- -------------- --------- Theme park admissions . . . . $ -- $ -- $271,363 Theme park food, merchandise and other . . . . . . -- -- 249,768 -------- --------- -------- Total revenue . . . -- -- 521,131 -------- --------- -------- Operating costs and expense: Operating expenses . -- (10,628) 218,429 Selling, general and administrative . . -- (35,433) 80,749 Costs of products sold . . . . . . . -- -- 72,400 Depreciation and amortization . . . -- -- 89,525 Total operating costs and expenses. -- (46,061) 461,103 -------- -------- -------- Income (loss) from operations . . . . . -- 46,061 60,028 -------- -------- -------- Other income (expense): Interest expense, net . . . . . . . -- -- (81,166) Equity in operations of theme park partnerships . . . 13,152 -- -- Minority interest in (earnings) loss . . -- -- 36 Other expense . . . -- -- (151) ------- ------- ------- Total other income (expense) . . . . 13,152 -- (81,281) ------- ------- ------- Income (loss) before taxes . . . . . . 13,152 46,061 (21,253) Income tax benefit (expense) . . . . . . (4,998) 33,613 (5,898) --------- -------- -------- Net income (loss) . $ 8,154 $ 79,674 $(27,151) ========= ======== ========= EBITDA . . . . . . . . $ -- $ 46,061 $149,553 ========= ======== ========= YEAR ENDED DECEMBER 28, 1997 ---------------------------------- PRE-ACQUISITION YEAR ENDED CO-VENTURE DECEMBER 28, 1997 ADJUSTMENTS(5) ----------------- -------------- Theme park admissions $368,139 $(93,946) Theme park food, merchandise and other 340,527 (82,848) -------- -------- Total revenue . . . . 708,666 (176,794) -------- -------- Operating costs and expense: Operating expenses . 330,033 (100,445) Selling, general and administrative . . . 113,326 (17,474) Costs of products sold 101,239 (24,137) Depreciation and amortization . . . . 84,493 (12,107) Total operating costs and expenses . . . . 629,091 (154,163) ------- ------- Income (loss) from operations . . . . . 79,575 (22,631) ------- ------- Other income (expense): Interest expense, net (84,430) 1,574 Equity in operations of theme park partnerships . . . . -- -- Minority interest in (earnings) loss . . . 1,147 -- Other expense . . . . -- -- ------- ------- Total other income (expense) . . . . . (83,283) 1,574 -------- ------- Income (loss) before taxes . . . . . . . $ (3,708) $(21,057) Income tax benefit (expense) . . . . . . . -- -- -------- -------- Net income (loss) . . $ (3,708) $(21,057) ======== ======== EBITDA . . . . . . . . . $164,068 $(34,738) ======== ======== YEAR ENDED DECEMBER 28, 1997 ----------------------------- PRO FORMA COMPANY ADJUSTMENTS(6) PRO FORMA -------------- --------- Theme park admissions $ -- $274,193 Theme park food, merchandise and other -- 257,679 -------- ------- Total revenue . . . . -- 531,872 -------- ------- Operating costs and expense: Operating expenses . 7,333 236,921 Selling, general and administrative . . . -- 95,852 Costs of products sold -- 77,102 Depreciation and amortization . . . . -- 72,386 Total operating costs and expenses . . . . 7,333 482,261 ------- ------- Income (loss) from operations . . . . . (7,333) 49,611 ------- ------- Other income (expense): Interest expense, net -- (82,856) Equity in operations of theme park partnerships . . . . -- -- Minority interest in (earnings) loss . . . -- 1,147 Other expense . . . . -- -- ------- -------- Total other income (expense) . . . . . -- (81,709) ------- -------- Income (loss) before taxes . . . . . . . (7,333) (32,098) Income tax benefit (expense). . . . . . . -- -- ------- ------- Net income (loss) . . $(7,333) $(32,098) ======== ======== EBITDA . . . . . . . . . $(7,333) $121,997 ======== ======== (1) Represents results from and after April 1, 1998, and does not include results of the Co-Venture Parks. (2) Represents actual results for the period prior to the Acquisition (the "1998 Pre-Acquisition Period"). (3) Adjustments eliminate the results of the Co-Venture Parks in the 1998 Pre-Acquisition Period. (4) Adjustments eliminate the compensation expense arising by virtue of the vesting of certain restricted stock and stock options resulting from the Acquisition (expense was included in the 1998 Pre-Acquisition Period). Excludes additional depreciation and amortization and interest expense resulting from the Acquisition. (5) Adjustments eliminate the results of the Co-Venture Parks in the 1997 period. (6) Adjustment reverses the amount by which expenses were reduced in 1997 as a result of the elimination of certain accruals established in years prior to 1997. -12- RESULTS OF OPERATIONS --------------------- YEARS ENDED JANUARY 3, 1999 AND DECEMBER 28, 1997 Revenues. Adjusted revenues aggregated $521.1 million for fiscal 1998 compared to $708.7 million (actual) and $531.9 million (adjusted) for fiscal 1997. The 2.0% decrease in adjusted revenues compared to 1997 adjusted revenues resulted from an approximate 5.6% decline in attendance during the 1998 season, which was partially offset by higher spending per guest in fiscal 1998. Operating, Selling, General and Administrative. Adjusted operating expenses for fiscal 1998 declined $111.6 million and $18.5 million, respectively, compared to the actual and adjusted amounts for fiscal 1997. The 7.8% decline compared to adjusted operating expenses for 1997 resulted from lower compensation, outside services and repair and maintenance expenses resulting from improved operating efficiencies achieved during fiscal 1998. Adjusted selling, general and administrative expenses for fiscal 1998 declined $32.6 million and $15.1 million, respectively, compared to the actual and adjusted levels for fiscal 1997. The 15.8% decline compared to the adjusted selling, general and administrative expenses in fiscal 1998 resulted primarily from reduced corporate-level expenditures, including reduced staffing, and, to a lesser extent, lower advertising expense. Costs of Products Sold. Adjusted costs of products sold in fiscal 1998 declined $28.8 million and $4.7 million, respectively, compared to the actual and adjusted amounts for fiscal 1997. The 6.1% decrease compared to the adjusted amounts for fiscal 1998 resulted from lower sales volume from the decline in attendence, as well as increased efficiencies. Depreciation, Amortization and Interest Expense. Adjusted depreciation and amortization expense for fiscal 1998 increased $5.0 million and $17.1 million, respectively, compared to the actual and the adjusted amounts for fiscal 1997. The increase in depreciation and amortization expense resulted from the increase in the carrying value of property and equipment and intangible assets resulting from the purchase accounting used in conjunction with the Acquisition. Interest expense, net for fiscal 1998 decreased $1.7 million compared to the adjusted amount for fiscal 1997. This decrease is primarily due to the lower effective interest rate associated with the Company's debt subsequent to the Acquisition. Income Taxes. Adjusted income tax benefit was $6.9 million for fiscal 1998 as compared to no tax expense (actual and adjusted) for fiscal 1997. At January 3, 1999, the Company reported that it had carryforwards of approximately $236.0 million of net operating losses ("NOLs") for regular Federal income tax purposes. The NOLs are subject to review and potential disallowance by the Internal Revenue Service upon audit of the Federal income tax returns of the Company and its subsidiaries. In addition, the use of such NOLs is, and, as a result of the Acquisition, the use of all of such NOLs will become, subject to limitations on the amount of taxable income that can be offset with such NOLs. Accordingly, no assurance can be given as to the timing or amount of the availability of such NOLs to the Company and its subsidiaries. See Note 9 to Notes to Consolidated Financial Statements YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 Revenues. Revenues aggregated $708.7 million in fiscal 1997, compared to $680.9 million in fiscal 1996. The 4.1% increase in revenues is attributable to higher spending per guest, partially offset by decreased attendance. The average ticket spending per guest increased 8.1% as a result of selected price increases and reductions in ticket discounts. Average in-park spending per guest increased 4.4% primarily from gains in -13- food service, stemming from improved processes, quality and service and increases in games, attractions and parking spending. Attendance declined by 2.5% primarily due to the postponement of the linear induction motor ("LIM") coasters at three of the Company's parks, poor early-season weather and increased competition in the San Antonio market. The declines were offset, in part, by a substantial increase in attendance in 1997 at the Georgia park after a low attendance level at that park in 1996 due largely to the effects of the Atlanta Olympics during that summer. All three LIM's were operational during the 1998 season. Operating, General and Administrative. Operating, general and administrative expenses were $443.4 million in fiscal 1997, compared to $419.8 million in fiscal 1996. As a percentage of revenues, these expenses constituted 62.6% for 1997 and 61.6% for 1996. The increase over 1996 expenses related primarily to increased distributions to the limited partners of the Georgia park along with higher compensation and maintenance expenses, which were partially offset by reduced advertising costs and the reversal of expense accruals of approximately $7.3 million during 1997 that were no longer deemed necessary. Limited partner distributions increased as a result of the new arrangements entered into in March 1997 with respect to the Georgia Co-Venture Partnership. The higher compensation costs resulted from higher average seasonal wage rates, additional operating hours in 1997, and a return to full staffing at the Georgia park after reduced requirements in 1996. Higher maintenance costs were incurred to repair major rides and facilities to enhance park operations. Advertising costs were down due to lower spending by the Georgia park, which incurred much higher advertising expense levels in 1996 as a result of the Olympics. Additionally, the postponed opening of the LIM coasters resulted in reduced advertising costs at three of the Company's parks. Costs of Products Sold. Costs of products sold were $101.2 million for fiscal 1997 compared to $106.0 million for fiscal 1996. Costs of products sold as a percentage of theme park food, merchandise and other decreased from 31.9% in 1996 to 29.7% in 1997. The $4.7 million or 4.5% decrease from 1996 resulted primarily from centralized procurement of key food items and a shift in sales to higher margin food products sold. Depreciation, Amortization and Interest Expense. Depreciation and amortization expense was $84.5 million for fiscal 1997, compared to $87.4 million in fiscal 1996. The decrease resulted from lower amortization of the investment in the Co-Venture Parks related to the Georgia Co-Venture Park as a result of the amendments in 1997 to the structure of the Georgia Co-Venture Partnership. Interest expense, net, increased $7.9 million in 1997, as compared to 1996, primarily due to the increased average borrowings in 1997 and higher interest expense incurred by the Co-Venture Parks, partially offset by a decrease in average borrowing rates. Income Taxes. The relationship between income (loss) before taxes and income tax expense is principally affected by the amortization of the excess of costs over net assets acquired, which is non-deductible for income tax purposes. The income tax expense recorded for fiscal 1996 principally represented a valuation allowance on the Company's deferred tax assets. LIQUIDITY, CAPITAL COMMITMENTS AND RESOURCES -------------------------------------------- At January 3, 1999, the Company's indebtedness (including $182.9 million carrying value of SFEC's Zero Coupon Senior Notes (the "Old SFEC Notes"), which will be repaid on or prior to December 15, 1999 in full from the proceeds of the SFEC Senior Notes issued in connection with the Acquisition, together with other funds, all of which have been deposited in escrow (and invested in restricted-use investment securities) and including $36.2 million fair market value adjustment to the Senior Subordinated Notes of SFTP arising as a result of Premier's -14- acquisition of SFEC) aggregated $1,083.9 million ($901.9 million excluding the Old SFEC Notes), of which approximately $1.0 million (excluding the Old SFEC Notes) matures prior to December 31, 1999. Based on interest rates at January 3, 1999 for floating rate debt, annual interest payments for 1999 on this indebtedness will total approximately $77.5 million. See Note 8 to Notes to Consolidated Financial Statements for additional information regarding the Company's indebtedness. During the period from April 1, 1998 to January 3, 1999, net cash provided by operating activities was $87.7 million. Net cash used in investing activities in 1998 totaled $69.5 million, consisting primarily of capital expenditures and the purchase of restricted use investments, offset by proceeds from the sale of the Company's interests in the Co-Venture Parks to Premier. Net cash provided by financing activities in 1998 was $9.2 million, representing proceeds of borrowings under the Six Flags credit facilities, capital contributions received from Premier and proceeds of the public offering of the SFEC Senior Notes issued in connection with the Acquisition and described in Note 8 to Notes to Consolidated Financial Statements, offset in part by debt payments and the payment of certain debt issuance costs. As more fully described in Note 6 to Notes to Consolidated Financial Statements, in connection with the Acquisition, the Company guaranteed certain obligations relating to the Co-Venture Parks. Among such obligations are (i) minimum distributions of approximately $47.3 million in 1999 to partners in the Co-Venture Parks (approximately $14.1 million of which will be distributed to Premier in respect of its present ownership interest in the limited partners), (ii) up to approximately $43.75 million of minimum limited partnership unit purchase obligations for 1999 with respect to both parks and (iii) minimum capital expenditures for that year at both parks of approximately $14.6 million. Cash flows from operations at the Co-Venture Parks will be used to satisfy these requirements, before any funds are required from the Company. 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 reduces paid attendance and, therefore, revenue at any of its theme parks. On October 30, 1998, the Company purchased the 40% remaining minority interest in Six Flags Fiesta Texas and title to the park for approximately $45.0 million in cash. The Company believes that, based on historical and anticipated operating results, cash flows from operations, available cash and available amounts under the Premier and Six Flags Credit Facilities will be adequate to meet the Company's future liquidity needs, including anticipated requirements for working capital, capital expenditures and scheduled debt 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. MARKET RISKS AND SENSITIVITY ANALYSES ------------------------------------- Six Flags is exposed to market risks relating to fluctuations in interest rates. The objective of financial risk management at Six Flags is to minimize the negative impact of interest rate fluctuations on the Company's earnings, cash flows and equity. Six Flags does not acquire market risk sensitive instruments for trading purposes. The following analysis present the sensitivity of the market value, earnings and cash flows of Six Flags' financial instruments to hypothetical changes in interest rates as if these changes occurred at January 3, 1999. The range of changes chosen for this analysis reflect the Company's view of changes which are -15- reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate assumptions. These forward looking disclosures are selective in nature and only address the potential impacts from financial instruments. They do not include other potential effects which could impact the Company's business as a result of these changes in interest rates. INTEREST RATE AND DEBT SENSITIVITY ANALYSIS At January 3, 1999, Six Flags had debt (excluding the Old SFEC Notes) totaling $901.0 million, of which $491.2 million represents fixed-rate debt and $409.8 million represents floating-rate debt. For fixed-rate debt, interest rate changes affect the fair market value but do not impact book value earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors remain constant. Assuming other variables remain constant (such as debt levels), the cash flows impact resulting from a one percentage point increase in interest rates would be approximately $4.1 million. 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." SFAS No. 133 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. 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. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. It is expected that the Company will adopt the provision of SFAS No. 133 as of January 1, 2000. If the provisions of SFAS No. 133 were to be applied as of January 3, 1999, it would not have a material effect on the Company's financial position as of such date, or the results of operations for the year then ended. In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 establishes standards for the financial report of start-up costs and organization costs. It requires that those costs be expensed as incurred. The effect of the implementation of SOP 98-5 is accounted for as a cumulative effect of a change in accounting principle. The Company is required to adopt the provisions of SOP 98-5 in the first quarter of 1999 and does not anticipate that the adoption of the provision of SOP 98-5 will have a material effect on the Company's financial position as of that date or the results of operations for the year then ended. IMPACT OF YEAR 2000 ISSUE ------------------------- The Company's Year 2000 Project (the "Project") is in process. The Project is addressing the Year 2000 issue caused by computer programs being written utilizing two digits rather than four to define an applicable year. As a result, the Company's computer equipment, software and devices with embedded technology that are time sensitive may misinterpret the actual date beginning on January 1, 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, but not limited to, a temporary inability to process transactions. -16- The Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the Year 2000 and thereafter. In planning and developing the Project, the Company has considered both its information technology ("IT") and its non-IT systems. The term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, telephone systems, scanning equipment and other miscellaneous systems. Those items not to be considered as IT technology include alarm systems, fax machines, monitors for park operations or other miscellaneous systems. Both IT and non-IT systems may contain embedded technology, which complicates the Company's Year 2000 identification, assessment, remediation and testing efforts. Based upon its identification and assessment efforts to date, the Company is in the process of replacing the computer equipment and upgrading the software it currently uses to become Year 2000 compliant. In addition, in the ordinary course of replacing computer equipment and software, the Company plans to obtain replacements that are in compliance with Year 2000. The Company has initiated correspondence with its significant vendors and service providers to determine the extent such entities are vulnerable to Year 2000 issues and whether the products and services purchased from such entities are Year 2000 compliant. The Company expects to receive a favorable response from such third parties and it is anticipated that their significant Year 2000 issues will be addressed on a timely basis. With regard to IT, non-IT systems and communications with third parties, the Company anticipates that the Project will be completed in November 1999. As noted above, the Company is in the process of replacing certain computer equipment and software because of the Year 2000 issue. The Company estimates that the total cost of such replacements will be no more than $1.0 million. Substantially all of the personnel being used on the Project are existing Company employees. Therefore, the labor costs of its Year 2000 identification, assessment, remediation and testing efforts, as well as currently anticipated labor costs to be incurred by the Company with respect to Year 2000 issues of third parties, are expected to be less than $0.8 million. The Company has not yet developed a most reasonably likely worst case scenario with respect to Year 2000 issues, but instead has focused its efforts on reducing uncertainties through the review described above. The Company has not developed Year 2000 contingency plans other than as described above, and does not expect to do so unless merited by the results of its continuing review. The Company presently does not expect to incur significant operational problems due to the Year 2000 issue. However, if all Year 2000 issues are not properly and timely identified, assessed, remediated and tested, there can be no assurance that the Year 2000 issue will not materially impact the Company's results of operations or adversely affect its relationships with vendors or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material impact on the Company's systems or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the information appearing under the subheading "Market Risks and Sensitivity Analyses" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation" on page 15 of this Report. -17- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed in Item 14 are included in this Report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. -18- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules The following consolidated financial statements of Six Flags Entertainment Corporation and subsidiaries, the notes thereto, the related reports thereon of independent auditors, and financial statement schedules are filed under Item 8 of this Report: PAGE ---- Independent Auditors' Reports F-2 Consolidated Balance Sheets -- January 3, 1999 and December 28, 1997 F-5 Consolidated Statements of Operations Period from April 1, 1998 to January 3, 1999, Period from December 29, 1997 to March 31, 1998, and Years December 28, 1997 and December 29, 1996 F-6 Consolidated Statements of Stockholders' Equity (Deficit) Period from April 1, 1998 to January 3, 1999, Period from December 29, 1997 to March 31, 1998, and Years December 28, 1997 and December 29, 1996 F-7 Consolidated Statements of Cash Flows Period from April 1, 1998 to January 3, 1999, Period from December 29, 1997 to March 31, 1998, and Years December 28, 1997 and December 29, 1996 F-8 Notes to Consolidated Financial Statements F-9 Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they either are not required under the related instructions, are inapplicable, or the required information is shown in the financial statements or notes thereto. (a)(3) See Exhibit Index. (b) Reports on Form 8-K ------------------- None. (c) Exhibits See Item 14(a)(3) above. -19- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 12, 1999 SIX FLAGS ENTERTAINMENT CORPORATION By: /s/ Kieran E. Burke -------------------------------- Kieran E. Burke Chairman of the Board and Chief Executive Officer -20- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the following capacities on the dates indicated. Signature Title Date --------- ----- ---- /s/ Kieran E. Burke Chairman of the Board, April 12, 1999 ------------------- Chief Executive Officer Kieran E. Burke (Principal Executive Officer) and Director /s/ Gary Story President, Chief Operating April 12, 1999 -------------------- Officer and Director Gary Story /s/ James F. Dannhauser Chief Financial Officer April 12, 1999 -------------------- (Principal Financial and James F. Dannhauser Accounting Officer) and Director -21- SIX FLAGS ENTERTAINMENT CORPORATION Index to Consolidated Financial Statements
Page Independent Auditors' Report F-2 Independent Auditors' Report F-4 Consolidated Balance Sheets - January 3, 1999 and December 28, 1997 F-5 Consolidated Statements of Operations - Period from April 1, 1998 to January 3, 1999; Period from December 29, 1997 to March 31, 1998; and Years ended December 28, 1997 and December 29, 1996 F-6 Consolidated Statements of Stockholder's Equity (Deficit) - Period from April 1, 1998 to January 3, 1999; Period from December 29, 1997 to March 31, 1998; and Years ended December 28, 1997 and December 29, 1996 F-7 Consolidated Statements of Cash Flows - Period from April 1, 1998 to January 3, 1999; Period from December 29, 1997 to March 31, 1998; and Years ended December 28, 1997 and December 29, 1996 F-8 Notes to Consolidated Financial Statements F-9
F-1 Independent Auditors' Report The Board of Directors and Stockholder Six Flags Entertainment Corporation: We have audited the accompanying consolidated balance sheet of Six Flags Entertainment Corporation and subsidiaries (Six Flags) (a wholly-owned subsidiary of Premier Parks Inc.) as of January 3, 1999, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows for the periods from April 1, 1998 to January 3, 1999 (1998 Post-Acquisition period), and from December 29, 1997 to March 31, 1998 1998 Pre-Acquisition period). These consolidated financial statements are the responsibility of Six Flags' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1998 Post-Acquisition period consolidated financial statements referred to above present fairly, in all material respects, the financial position of Six Flags Entertainment Corporation and subsidiaries as of January 3, 1999, and the results of their operations and their cash flows for the 1998 Post-Acquisition period, in conformity with generally accepted accounting principles. Further, in our opinion, the consolidated financial statements referred to above for the 1998 Pre-Acquisition period present fairly, in all material respects, the results of operations and cash flows for the 1998 Pre-Acquisition period, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective April 1, 1998, Premier Parks Inc. acquired all the outstanding stock of Six Flags Entertainment Corporation in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. F-2 As discussed in Note 2 to the consolidated financial statements, Six Flags changed its method of accounting for its share of the operations of the Partnership Parks and its method of accounting for off-season expenses. KPMG LLP Oklahoma City, Oklahoma March 22, 1999 F-3 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Six Flags Entertainment Corporation We have audited the accompanying consolidated balance sheet of Six Flags Entertainment Corporation as of December 28, 1997 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 28, 1997 and December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the accounting principles used in significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Six Flags Entertainment Corporation at December 28, 1997 and the consolidated results of its operations and its cash flows for the years ended December 28, 1997 and December 29, 1996 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York February 14, 1998 F-4 SIX FLAGS ENTERTAINMENT CORPORATION Consolidated Balance Sheets
January 3, December 28, Assets 1999 1997 -------------- -------------- Current assets: Cash and cash equivalents $ 46,112,000 $ 16,805,000 Accounts receivable 10,399,000 3,258,000 Receivable from affiliate -- 4,000,000 Inventories 13,685,000 22,389,000 Prepaid expenses and other current assets 5,981,000 3,848,000 Restricted-use investment securities 183,342,000 -- -------------- -------------- Total current assets 259,519,000 50,300,000 -------------- -------------- Other assets: Debt issuance costs 12,346,000 20,171,000 Deposits and other assets 51,284,000 5,165,000 -------------- -------------- Total other assets 63,630,000 25,336,000 -------------- -------------- Property and equipment, at cost 928,420,000 768,256,000 Less accumulated depreciation 35,507,000 276,119,000 -------------- -------------- 892,913,000 492,137,000 -------------- -------------- Investment in theme park partnerships -- 201,809,000 Less accumulated amortization -- 112,714,000 -------------- -------------- -- 89,095,000 -------------- -------------- Intangible assets, principally goodwill 1,197,855,000 278,551,000 Less accumulated amortization 36,914,000 70,729,000 -------------- -------------- 1,160,941,000 207,822,000 -------------- -------------- Total assets $2,377,003,000 $ 864,690,000 ============== ============== Liabilities and Stockholder's Equity (Deficit) Current liabilities: Accounts payable $ 12,664,000 $ 21,055,000 Accrued interest payable 13,547,000 3,431,000 Accrued insurance 28,727,000 15,608,000 Other accrued liabilities 30,662,000 24,351,000 Short-term borrowings -- 30,503,000 Current portion of long-term debt 184,370,000 26,130,000 -------------- -------------- Total current liabilities 269,970,000 121,078,000 Long-term debt 900,474,000 753,369,000 Other long-term liabilities 46,946,000 12,570,000 Deferred income taxes 99,333,000 -- -------------- -------------- Total liabilities 1,316,723,000 887,017,000 -------------- -------------- Stockholder's equity (deficit): Class A convertible preferred stock ($.01 par value per share; no shares authorized, issued or outstanding at January 3, 1999; 6,100,000 shares authorized; 5,100,000 shares issued and outstanding at December 28, 1997; $273,499,000 aggregate liquidation preference at December 28, 1997) -- 51,000 Class B convertible preferred stock ($.01 par value per share; no shares authorized, issued or outstanding at January 3, 1999; 4,900,000 shares authorized, issued and outstanding at December 28, 1997; $196,000,000 aggregate liquidation preference at December 28, 1997) -- 49,000 Class A common stock ($.01 par value per share; no shares authorized, issued or outstanding at January 3, 1999; 6,100,000 shares authorized; 51 shares issued and outstanding at December 28, 1997) -- -- Class B common stock ($.01 par value per share; no shares authorized, issued or outstanding at January 3, 1999; 20,000,000 shares authorized; 49 shares issued and outstanding at December 28, 1997) -- -- Common stock ($.05 par value per share; 1,000 shares authorized, issued and outstanding at January 3, 1999; none authorized, issued, or outstanding at December 28, 1997) -- -- Additional paid-in capital 1,031,598,000 40,217,000 Retained earnings (accumulated deficit) 28,682,000 (59,867,000) Unearned compensation reserved stock awards -- (2,777,000) -------------- -------------- Total stockholder's equity (deficit) 1,060,280,000 (22,327,000) -------------- -------------- Total liabilities and stockholder's equity (deficit) $2,377,003,000 $ 864,690,000 ============== ==============
See accompanying notes to consolidated financial statements. F-5 SIX FLAGS ENTERTAINMENT CORPORATION Consolidated Statements of Operations
Period from Period from April 1, 1998 December 29, Year ended Year ended to 1997 to December 28, December 29, January 3, 1999 March 31, 1998 1997 1996 --------------- -------------- ------------- ------------- Theme park admissions $ 256,316,000 $ 15,047,000 $ 368,139,000 $ 348,845,000 Theme park food, merchandise and other 241,412,000 8,356,000 340,527,000 332,031,000 ------------- ------------- ------------- ------------- Total revenue 497,728,000 23,403,000 708,666,000 680,876,000 ------------- ------------- ------------- ------------- Operating costs and expenses: Operating expenses 172,750,000 56,307,000 330,033,000 308,809,000 Selling, general and administrative 61,471,000 54,711,000 113,326,000 110,947,000 Costs of products sold 69,643,000 2,757,000 101,239,000 105,988,000 Depreciation and amortization 71,896,000 17,629,000 84,493,000 87,417,000 ------------- ------------- ------------- ------------- Total operating costs and expenses 375,760,000 131,404,000 629,091,000 613,161,000 ------------- ------------- ------------- ------------- Income (loss) from operations 121,968,000 (108,001,000) 79,575,000 67,715,000 ------------- ------------- ------------- ------------- Other income (expense): Interest expense, net (58,658,000) (22,508,000) (84,430,000) (76,530,000) Equity in operations of theme park partnerships -- (13,152,000) -- -- Minority interest in (earnings) loss 36,000 -- 1,147,000 (1,297,000) Other income (expense) (151,000) -- -- -- ------------- ------------- ------------- ------------- Total other income (expense) (58,773,000) (35,660,000) (83,283,000) (77,827,000) ------------- ------------- ------------- ------------- Income (loss) before income taxes 63,195,000 (143,661,000) (3,708,000) (10,112,000) Income tax expense (34,513,000) -- -- (5,137,000) ------------- ------------- ------------- ------------- Net income (loss) $ 28,682,000 $(143,661,000) $ (3,708,000) $ (15,249,000) ============= ============= ============= =============
See accompanying notes to consolidated financial statements. F-6 SIX FLAGS ENTERTAINMENT CORPORATION Consolidated Statements of Stockholder's Equity (Deficit) Period from April 1, 1998 to January 3, 1999, Period from December 29, 1997 to March 31, 1998, and Years ended December 28, 1997 and December 29, 1996
Preferred Stock A Preferred Stock B Common Stock ---------------------- ---------------------- -------------- Shares Shares Shares Issued Amount Issued Amount Issued Amount ---------- -------- ---------- -------- ------ ------ Balances at December 31, 1995 5,100,000 $ 51,000 4,900,000 $ 49,000 100 $ -- Net loss -- -- -- -- -- -- Reserved stock awards -- -- -- -- -- -- Amortization of unearned compensation -- -- -- -- -- -- ---------- -------- ---------- -------- ----- ---- Balances at December 29, 1996 5,100,000 51,000 4,900,000 49,000 100 -- Net loss -- -- -- -- -- -- Reserved stock awards -- -- -- -- -- -- Amortization of unearned compensation -- -- -- -- -- -- Capital contribution -- -- -- -- -- -- ---------- -------- ---------- -------- ----- ---- Balances at December 28, 1997 5,100,000 51,000 4,900,000 49,000 100 -- Net loss -- -- -- -- -- -- Amortization of unearned compensation -- -- -- -- -- -- ---------- -------- ---------- -------- ----- ---- Balances at March 31, 1998 5,100,000 51,000 4,900,000 49,000 100 -- Acquisition of SFEC by Premier (5,100,000) (51,000) (4,900,000) (49,000) 900 -- Contributions by Premier -- -- -- -- -- -- Net income -- -- -- -- -- -- ---------- -------- ---------- -------- ----- ---- Balances at January 3, 1999 -- $ -- -- $ -- 1,000 $ -- ========== ======== ========== ======== ===== ====
Retained Additional Earnings Stockholder's Paid-in (Accumulated Unearned Equity Capital Deficit) Compensation (Deficit) -------------- ------------ ---------- ------------- Balances at December 31, 1995 $ 35,749,000 $(40,910,000) $(4,152,000) $ (9,213,000) Net loss -- (15,249,000) -- (15,249,000) Reserved stock awards 234,000 -- (234,000) -- Amortization of unearned compensation -- -- 891,000 891,000 -------------- ------------ ---------- -------------- Balances at December 29, 1996 35,983,000 (56,159,000) (3,495,000) (23,571,000) Net loss -- (3,708,000) -- (3,708,000) Reserved stock awards 234,000 -- (234,000) -- Amortization of unearned compensation -- -- 952,000 952,000 Capital contribution 4,000,000 -- -- 4,000,000 -------------- ------------ ---------- -------------- Balances at December 28, 1997 40,217,000 (59,867,000) (2,777,000) (22,327,000) Net loss -- (143,661,000) -- (143,661,000) Amortization of unearned compensation -- -- 260,000 260,000 -------------- ------------ ---------- -------------- Balances at March 31, 1998 40,217,000 (203,528,000) (2,517,000) (165,728,000) Acquisition of SFEC by Premier 958,914,000 203,528,000 2,517,000 1,164,859,000 Contributions by Premier 32,467,000 -- -- 32,467,000 Net income -- 28,682,000 -- 28,682,000 -------------- ------------ ---------- -------------- Balances at January 3, 1999 $1,031,598,000 $ 28,682,000 $ -- $1,060,280,000 ============== ============ ========== ==============
See accompanying notes to consolidated financial statements. F-7 SIX FLAGS ENTERTAINMENT CORPORATION Consolidated Statements of Cash Flows
Period from Period from April 1, 1998 December 29, Year ended Year ended to 1997 to December 28, December 29, January 3, 1999 March 31, 1998 1997 1996 ------------- -------------- ------------- ------------- Cash flows from operating activities: Net income (loss) $ 28,682,000 $(143,661,000) $ (3,708,000) $ (15,249,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 71,896,000 17,629,000 84,493,000 87,417,000 Equity in operations of theme park partnerships -- 13,152,000 -- -- Minority interest in earnings (loss) (36,000) -- (1,147,000) 1,297,000 Interest accretion on notes payable 9,521,000 11,932,000 44,444,000 39,580,000 Interest accretion on restricted-use investments (7,267,000) -- -- -- Amortization of debt issuance costs 1,480,000 1,027,000 4,108,000 4,108,000 Deferred income taxes 34,513,000 -- -- 5,137,000 (Increase) decrease in accounts receivable (9,073,000) 1,742,000 3,301,000 401,000 (Increase) decrease in inventories, prepaid expenses and other current assets 6,714,000 (24,852,000) (1,941,000) (4,519,000) (Increase) decrease in deposits and other assets (6,721,000) -- (3,332,000) 578,000 Increase (decrease) in accounts payable and accrued expenses (55,562,000) 69,302,000 (15,648,000) 8,481,000 Increase (decrease) in accrued interest payable 13,547,000 (1,068,000) 690,000 805,000 Other, net -- 18,000 (957,000) 566,000 ------------- ------------- ------------- ------------- Total adjustments 59,012,000 88,882,000 114,011,000 143,851,000 ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities 87,694,000 (54,779,000) 110,303,000 128,602,000 ------------- ------------- ------------- ------------- Cash flows from investing activities: Additions to property and equipment (56,415,000) (25,335,000) (67,675,000) (75,627,000) Investment in theme park partnerships -- (131,518,000) (84,057,000) (5,548,000) Transfer of interests in theme park partnerships to Premier 208,082,000 -- -- -- Acquisition of theme park assets (45,049,000) -- -- -- Proceeds from sale of property and equipment -- -- 2,000,000 -- Purchase of restricted-use investments (176,075,000) -- -- -- ------------- ------------- ------------- ------------- Net cash used in investing activities (69,457,000) (156,853,000) (149,732,000) (81,175,000) ------------- ------------- ------------- ------------- Cash flows from financing activities: Repayment of long-term debt (589,436,000) (30,503,000) (117,521,000) (93,881,000) Proceeds from borrowings 580,000,000 240,000,000 128,168,000 41,673,000 Contributions of equity 32,467,000 4,000,000 -- -- Payment of debt issuance costs (13,826,000) -- -- -- ------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities 9,205,000 213,497,000 10,647,000 (52,208,000) ------------- ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents 27,442,000 1,865,000 (28,782,000) (4,781,000) Cash and cash equivalents at beginning of period 18,670,000 16,805,000 45,587,000 50,368,000 ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period $ 46,112,000 $ 18,670,000 $ 16,805,000 $ 45,587,000 ============= ============= ============= ============= Supplementary cash flow information: Cash paid for interest $ 41,377,000 $ 11,257,000 $ 36,089,000 $ 34,284,000 ============= ============= ============= ============= Cash paid for income taxes $ -- $ -- $ 3,479,000 $ -- ============= ============= ============= =============
See accompanying notes to consolidated financial statements. F-8 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies (a) Description of Business Six Flags Entertainment Corporation ("SFEC," and together with its subsidiaries, the "Company" or "Six Flags") owns 100% of the common stock of S.F. Holdings, Inc. ("SF Holdings") which owns 100% of the common stock of Six Flags Theme Parks Inc. ("SFTP"). Prior to April 1, 1998, Six Flags operated twelve "Six Flags" branded theme parks in eight locations throughout the United States. For all periods presented, nine of the theme parks, Six Flags Great Adventure and Wild Safari Animal Park (New York-Philadelphia), Six Flags Great America (Chicago-Milwaukee), Six Flags Magic Mountain and Six Flags Hurricane Harbor (Los Angeles), Six Flags AstroWorld and Six Flags Waterworld (Houston), Six Flags St. Louis (St. Louis) and Six Flags Hurricane Harbor (Dallas-Ft. Worth) were owned by Six Flags. Six Flags Fiesta Texas, located in San Antonio, Texas, was leased by a limited partnership of which a subsidiary of Six Flags is a general partner and manages the park. On October 30, 1998, Six Flags purchased the minority interest in the limited partnership and title to the park. Two parks - Six Flags Over Texas (Dallas-Ft. Worth) and Six Flags Over Georgia (Atlanta) (the "Partnership Parks") - are owned by limited partnerships of which the managing general partner was (prior to April 1, 1998) a wholly-owned subsidiary of Six Flags. On April 1, 1998, Premier Parks Inc. ("Premier") purchased all of the stock of SFEC (the "Acquisition"). At that time, Six Flags' interests in the Partnership Parks were transferred to Premier. See Note 3. (b) Basis of Presentation As discussed above, Premier purchased SFEC on April 1, 1998. In accordance with Securities & Exchange Commission Staff Accounting Bulletin No. 54 ("SAB No. 54"), SFEC has "pushed down" Premier's purchase price in revaluing the assets and liabilities of SFEC. According to the provisions of SAB No. 54, purchase transactions that result in an entity becoming substantially wholly-owned require a new basis of accounting for the purchased assets and liabilities. As a result of the purchase, SFEC recorded the following purchase price adjustments as of April 1, 1998 (amounts in thousands): Increase (Decrease) ------------------- Current assets $ (15,621) Debt issuance costs (19,597) Property and equipment 322,183 Intangible assets 1,006,606 Deposit and other assets 14,299 Accrued liabilities 26,599 Long-term debt 51,592 Deferred income taxes 64,820 Stockholder's equity 1,164,859 F-9 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements The consolidated financial statements of SFEC for the period from December 29, 1997 to March 31, 1998 (the 1998 Pre-Acquisition period) and as of December 28, 1997 and for the years ended December 28, 1997 and December 29, 1996 reflect the accounting basis used by SFEC prior to its acquisition by Premier. The financial statements of SFEC subsequent to April 1, 1998 (the 1998 Post-Acquisition period) reflect the accounting basis for the purchased assets and liabilities used by SFEC subsequent to its acquisition by Premier. The vertical line that separates the SFEC consolidated financial statements emphasizes that the new basis of accounting used by SFEC after the purchase by Premier is not comparable to the basis of accounting used by SFEC prior to the purchase by Premier. Additionally, the accompanying notes to SFEC's consolidated financial statements disclose: (1) the relationship between Premier and SFEC; (2) that SFEC does not guarantee any of Premier's debt, or pledge assets or stock as security for Premier's debt; and (3) that SFEC's ability to pay dividends is restricted by its and its subsidiaries' debt agreements. The 1996 and 1997 fiscal years each consisted of 52 weeks. The 1998 fiscal year consisted of 53 weeks. The 1996 fiscal year ended on December 29, 1996, while the 1997 and 1998 fiscal years ended on December 28, 1997 and January 3, 1999, respectively. The Company's accounting policies reflect industry practices and conform to generally accepted accounting principles. The consolidated financial statements include the accounts of SFEC, its wholly-owned subsidiaries, limited partnerships and limited liability companies in which the Company beneficially owns 100% of the interests, and partnerships that the Company serves as sole general partner and owns a majority of the limited partnership interests. Intercompany transactions and balances have been eliminated in consolidation. (c) Cash Equivalents Cash equivalents of $33,188,000 and $9,651,000 at January 3, 1999 and December 28, 1997, respectively, consist of short-term highly liquid investments with a remaining maturity as of purchase date of three months or less, which are readily convertible into cash. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with remaining maturities as of their purchase date of three months or less to be cash equivalents. (d) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and primarily consist of products for resale including merchandise and food and miscellaneous supplies including repair parts for rides and attractions amounting to $8,051,000 as of December 28, 1997. F-10 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (e) Advertising Costs Production costs of commercials and programming are charged to operations in the year first aired. The costs of other advertising, promotion, and marketing programs are charged to operations in the year incurred. Advertising and promotions expense was $35,900,000, $7,872,000, $61,100,000, and $64,600,000 during 1998 Post-Acquisition period, 1998 Pre-Acquisition period, 1997, and 1996, respectively. (f) Debt Issuance Costs The Company capitalizes costs related to the issuance of debt. The amortization of such costs is recognized as interest expense under a method approximating the interest method over the life of the respective debt issue. (g) Depreciation and Amortization Rides and attractions are depreciated using the straight-line method over 5-25 years. Buildings and improvements are depreciated over their estimated useful lives of approximately 30 years by use of the straight-line method. Furniture and equipment are depreciated using the straight-line method over 5-10 years. Maintenance and repairs are charged directly to expense as incurred, while betterments and renewals are generally capitalized in the property accounts. When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized. (h) Investment in Theme Park Partnerships Prior to acquisition by Premier, the Company managed two parks (the Partnership Parks) in which the Company did not own a controlling interest. On April 1, 1998, the Company transferred its investment in theme park partnerships to Premier in exchange for $46,000,000 in cash and payment of $165,686,000 of Company borrowings. See Note 13. In 1997 and 1996, Six Flags accounted for its investment in theme park partnerships as co-ventures, i.e., the revenues and expenses (excluding partnership depreciation) were included in Six Flags' consolidated statements of operations and the net amounts distributed to the limited partners were deducted as expenses. Except for the limited partnership units purchased pursuant to the tender offers described in Note 6, Six Flags had no rights or title to the Partnership. Park assets or to the proceeds from any sale of the Partnership Parks' assets. Six Flags' 1997 consolidated balance sheet does not include any of the Partnership Parks' assets. The investment in theme park partnerships included in the 1997 consolidated balance sheet represented (i) Six Flags' interest in the estimated future cash flows from the operations of the Partnership Parks and was F-11 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements amortized over the life of the partnership agreements, and (ii) the value of limited partnership units purchased pursuant to the SFOG tender offer. The SFOT tender offer was made subsequent to December 28, 1997. These two parks contributed revenues of $176,794,000 and $151,987,000 to Six Flags in the fiscal years 1997 and 1996, respectively. For the period from December 29, 1997 to March 31, 1998, the Company accounted for its investment in these two parks using the equity method of accounting. See Note 2. The equity method of accounting recognizes the Company's share of the activity of the Partnership Parks in the accompanying consolidated statements of operations in the caption "equity in operations of theme park partnerships." The equity method of accounting differs from the consolidation method of accounting used for the theme parks in which the Company owns a controlling interest. In the consolidation method of accounting, the activities of the consolidated parks are reflected in each revenue and expense caption rather than aggregated into one caption. (i) Intangible Assets Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on the straight-line basis over the expected period to be benefited, generally 25 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquisition. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average borrowing rate. The goodwill associated with acquisitions made by Six Flags prior to the Acquisition was being amortized on the straight-line basis over periods not exceeding 40 years. (j) Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to future net cash flows expected to be generated by the asset or group of assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (k) Interest Expense Recognition Interest on notes payable is generally recognized as expense on the basis of stated interest rates adjusted to reflect amortization of premiums or accretion of discounts. Such amortization or accretion is recognized over the term of the notes using the effective-interest method. F-12 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (l) Income Taxes Income taxes are accounted for under the asset and liability method as computed on a stand-alone basis. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective with the Acquisition, the Company and Premier entered into a tax sharing agreement, whereby the Company will pay to Premier the Company's portion of Premier's current tax expense. (m) Investment Securities Restricted-use investment securities at January 3, 1999 consist of U.S. Treasury securities. The securities which are scheduled to mature in 1999 are restricted to provide a redemption fund for Company indebtedness also maturing in 1999. The Company classifies its investment securities as held-to-maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. There are no other securities held by the Company. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. (n) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (o) Reclassifications Reclassifications have been made to certain amounts reported in 1997 and 1996 to conform with the 1998 presentation. F-13 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (2) Accounting Changes (a) Accounting for Investment in Theme Park Partnerships Prior to the Acquisition by Premier, Six Flags, through two subsidiaries, was the general partner in two theme park limited partnerships. Six Flags accounted for the parks as co-ventures, i.e., the revenues and expenses (excluding partnership depreciation) were included in Six Flags' consolidated statements of operations and the net amounts distributed to the limited partners were deducted as operating expenses. Except for the limited partnership units purchased pursuant to the tender offers described in Note 6, Six Flags had no rights or title to the Partnership Parks' assets or to the proceeds from any sale of the Partnership Parks' assets. Six Flags' 1997 consolidated balance sheet does not include any of the Partnership Parks' assets. On April 1, 1998, Six Flags changed its method of accounting for the Partnership Parks to the equity method of accounting as prescribed by Accounting Principles Board Opinion 18 and related interpretations. The change was applied retroactively to the beginning of Six Flags' 1998 fiscal year, and accordingly, the consolidated statements of operations for the 1998 Pre-Acquisition period reflects Six Flags' interests in the operations of the Partnership Parks on the equity method. Six Flags' interests in the Partnership Parks were transferred to Premier on April 1, 1998 and therefore, the consolidated statement of operations for the 1998 Post-Acquisition period ended January 3, 1999, does not include results of Premier's ownership interests in the Partnership Park partnerships. Six Flags changed its accounting for the Partnership Parks to reflect in operations revenues and costs and expenses of only those parks controlled by Six Flags through majority ownership. This accounting change had no cumulative effect on Six Flags' accumulated deficit as of December 28, 1997 and no effect on net loss for 1997 and 1996. The unaudited pro forma effect assuming the equity method of accounting for the Partnership Parks was applied retroactively for all periods presented is as follows:
Year ended Year ended December 28, December 29, 1997 1996 ------------ ----------- Revenues, as reported $708,666,000 680,876,000 Revenues, pro forma $531,872,000 528,889,000 ============ =========== Operating costs and expenses, as reported $629,091,000 613,161,000 Operating costs and expenses, pro forma $474,928,000 464,693,000 ============ =========== Interest expense, net, as reported $ 84,430,000 76,530,000 Interest expense, net, pro forma $ 82,856,000 74,979,000 ============ ===========
F-14 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements
Year ended Year ended December 28, December 29, 1997 1996 ------------ ----------- Equity in operations of theme park partnerships, as reported $ -- -- Equity in operations of theme park partnerships, pro forma $21,057,000 1,968,000 =========== =========== Net loss, as reported $(3,708,000) (15,249,000) Net loss, pro forma $(3,708,000) (15,249,000) =========== ===========
(b) Accounting for Off-Season Expenses On April 1, 1998, Six Flags changed its method of accounting for off-season expenses related to park operations. Prior to acquisition by Premier, Six Flags deferred interim period costs related to park operations and charged such costs to interim periods based on estimated annual revenues, substantially all of which were generated in the second and third quarters of the year. No costs were deferred at the end of a fiscal year. The change was applied retroactively to the beginning of Six Flags' 1998 fiscal year to conform with Premier's accounting policy for off-season expenses. This accounting change had no cumulative effect on Six Flags' accumulated deficit as of December 28, 1997 and would not have had any effect on net loss for 1997 and 1996. The change had the effect of increasing the net loss for the 1998 Pre-Acquisition period by approximately $96,654,000. (3) Acquisition of SFEC On April 1, 1998, Premier acquired all of the outstanding capital stock of SFEC for $976,000,000, paid in cash. In addition, Premier repaid at closing, assumed or refinanced approximately $1,032,717,000 of Company debt (including approximately $285,000,000 in aggregate principal amount at maturity (carrying value of $321,167,000 as of January 3, 1999) of Six Flags 12 1/4 % Series A Senior Subordinated Discount Notes due 2005 (the "SFTP Notes") and approximately $164,703,000 accreted value at April 1, 1998 (carrying value of $182,377,000 as of January 3, 1999) of SFEC Zero Coupon Notes (the "Old SFEC Notes")). Premier funded the Acquisition with the proceeds of concurrent public offerings and bank facilities (including a new $472,000,000 credit facility of Six Flags (the "Six Flags Credit Facility") and $170,000,000 of 8 7/8% Senior Notes due 2006 of SFEC (the "SFEC Notes")). See Note 8. The proceeds of the SFEC Notes, together with cash contributed by Premier, were deposited in escrow and invested in restricted-use investments to provide for the repayment in full at or prior to maturity in December 1999 of the Old SFEC Notes. Pursuant to the Acquisition, Six Flags transferred to Premier all of its interests in the limited partnerships that own the Partnership F-15 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements Parks, for $46,000,000 in cash and Premier's payment of $165,686,000 of SFEC debt. Also in connection with the Acquisition, Premier and Warner Bros. Consumer Products Division entered into a long-term licensing agreement that gives Premier (and its subsidiaries, including Six Flags and Premier Parks Operations Inc.) the exclusive theme park usage rights in the U.S. and Canada (excluding the Las Vegas, Nevada metropolitan area) for all Warner Bros. and DC Comics animated cartoon and comic book characters. The following summarized unaudited pro forma results of operations for the years ended January 3, 1999 and December 28, 1997, assume that the Acquisition and the related financings occurred as of December 30, 1996 (the first day of the 1997 fiscal year). Year ended Year ended January 3, December 28, 1999 1997 ---------- ------------ (Unaudited) (In thousands) Total revenues $521,131 531,872 Net loss (30,776) (55,314) (4) Fair Value of Financial Instruments The recorded amounts for cash and cash equivalents, accounts receivable, receivable from affiliate, accounts payable and accrued liabilities approximate fair value because of the short maturity of these financial instruments. As of January 3, 1999, the fair value of the Company's restricted-use investments was approximately $184,930,000. The fair value was determined using quoted market prices. The fair value estimates, methods, and assumptions relating to the Company's debt financial instruments are discussed in Note 8. (5) Property and Equipment Property and equipment, at cost, are classified as follows: January 3, December 28, 1999 1997 ------------ ----------- Land $ 94,945,000 50,582,000 Buildings and improvements 334,249,000 263,475,000 Rides and attractions 405,129,000 389,798,000 Equipment 59,415,000 9,033,000 Construction-in-process 34,682,000 55,368,000 ------------ ----------- Total 928,420,000 768,256,000 Less accumulated depreciation 35,507,000 276,119,000 ------------ ----------- $892,913,000 492,137,000 ============ =========== F-16 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (6) Investment in Theme Park Partnerships Six Flags Over Georgia On March 18, 1997, Six Flags, Time Warner Inc. and Time Warner Entertainment Company, L.P. (TWE) completed arrangements pursuant to which a subsidiary of Six Flags (SFOG II) will manage the Six Flags Over Georgia Park through 2026. Under the agreements governing the new arrangements (the "Georgia Agreements"), the Six Flags Over Georgia Park is owned by a newly formed limited partnership ("Six Flags Over Georgia II") of which SFOG II is the managing general partner. The key elements of these arrangements are as follows: (i) the limited partner (which is not affiliated with Six Flags) will receive minimum annual distributions of $18,500,000 commencing in 1997, increasing each year thereafter in proportion to increases in the cost of living; thereafter, SFOG II will be entitled to receive from available cash (after provision for reasonable reserves and after capital expenditures per annum of approximately 6% of prior year revenues) a management fee equal to 3% of the prior year's gross revenues; and, thereafter, any additional available cash will be distributed 95% to SFOG II and 5% to the limited partner; (ii) in the second quarter of 1997, a subsidiary of SFTP (the "SFTP-SFOG Subsidiary") and a subsidiary of SFEC (the "SFEC-SFOG Subsidiary") made a tender offer for partnership interests ("SFOG LP Units") in Six Flags Fund, Ltd. (L.P.), which owns 99% of the limited partner of Six Flags Over Georgia II, that valued the Six Flags Over Georgia Park at the greater of $250,000,000 or 8.0 times 1997 EBITDA of the Six Flags Over Georgia Park (the "SFOG Tender Offer Price"); (iii) commencing in 1998, and on an annual basis thereafter, the SFTP-SFOG Subsidiary and the SFEC-SFOG Subsidiary will offer to purchase additional SFOG LP Units at a price based on the greater of the SFOG Tender Offer Price or the EBITDA of the Six Flags Over Georgia Park for the prior four years (provided that no more than $50,000,000 of such SFOG LP Units will be acquired by the SFTP-SFOG Subsidiary); and (iv) in 2026, Six Flags and its affiliates will have the option to acquire the Six Flags Over Georgia Park at a price based on the Tender Offer Price, increased in proportion to the increase in the cost of living between December 1996 and December 2026. SFEC, SFTP, Time Warner Inc. and TWE have guaranteed certain of the obligations (including the minimum annual distributions noted in (i) above) of SFOG II and Six Flags Over Georgia II under the Georgia Agreements, and in consideration therefor, SFOG II agreed to assign to SFTP at least 90% of the cash distributions it received from time to time from Six Flags Over Georgia II. See Note 2. On May 6, 1997, in connection with the closing of the tender offer described above, the SFTP-SFOG Subsidiary and the SFEC-SFOG Subsidiary purchased approximately 17% and 8%, respectively, of SFOG LP Units for approximately $42,400,000 and $20,300,000, respectively. The purchase of SFOG LP Units entitles each such purchaser the right to receive minimum annual distributions and any residual distributions (5% of available cash after the minimum annual distributions and management fee distributions) in proportion to the percentage amounts purchased. The purchase of SFOG LP Units F-17 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements by the SFTP-SFOG Subsidiary was financed through a drawdown on Six Flags' secured revolving line of credit available for acquisitions under the Credit Agreement and the purchase of SFOG LP Units by the SFEC-SFOG Subsidiary was financed through loans from TWE, which were subsequently refinanced with demand loans. See Note 7. Purchases of SFOG LP units in the 1998 tender offer were less than $25,000. In connection with the purchase of the SFOG LP Units, approximately $49,800,000 of the excess of cost over net assets acquired associated with this investment was being amortized over 30 years. The net investment in SFOG LP Units was presented as part of the investment in theme park partnerships prior to the Acquisition. Accumulated amortization at December 28, 1997 amounted to $2,582,000. Six Flags Over Texas On November 24, 1997, Six Flags, Time Warner Inc. and TWE completed arrangements pursuant to which Six Flags Over Texas, Inc., a wholly-owned subsidiary of SFTP ("SFOT II"), will manage the Six Flags Over Texas Park through 2027. Under the agreements governing the new arrangements (the "Texas Agreements"), the Six Flags Over Texas Park will continue to be owned by Texas Flags Ltd., a limited partnership ("Six Flags Over Texas") of which SFOT II is the managing general partner. The key elements of these arrangements are as follows: (i) the limited partner (which is not affiliated with Six Flags) will receive minimum annual distributions of $27,700,000 commencing in 1998, increasing each year thereafter in proportion to increases in the cost of living; thereafter, SFOT II will be entitled to receive from available cash (after provision for reasonable reserves and after capital expenditures per annum of approximately 6% of prior year revenues) a management fee equal to 3% of the prior year's gross revenues; and, thereafter, any additional available cash will be distributed 92.5% to SFOT and 7.5% to the limited partner; (ii) in the first quarter of 1998, a subsidiary of SFTP (the "SFTP-SFOT Subsidiary") and a subsidiary of SFEC (the "SFEC-SFOT Subsidiary") commenced a tender offer for partnership interests ("SFOT LP Units") in Six Flags Over Texas, Ltd., which owns 99% of the limited partner of Six Flags Over Texas, that values the Six Flags Over Texas Park at the greater of $375,000,000 or 8.5 times 1998 EBITDA of the Six Flags Over Texas Park (the "SFOT Tender Offer Price"); (iii) commencing in 1999, and on an annual basis thereafter, the SFTP-SFOT Subsidiary and the SFEC-SFOT Subsidiary will offer to purchase additional SFOT LP Units at a price based on the greater of the SFOT Tender Offer price or the EBITDA of the Six Flags Over Texas Park for the prior four years; and (iv) in 2027, Six Flags and its affiliates will have the option to acquire the Six Flags Over Texas Park at a price based on the SFOT Tender Offer Price, increased in proportion to the increase in the cost of living between December 1997 and December 2027. SFEC, SFTP, Time Warner Inc. and TWE have guaranteed certain of the obligations (including the minimum annual distributions noted in (i) above) of SFOT under the Texas Agreements. See Note 2. F-18 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements In connection with the entering into the Texas Agreements, a subsidiary of SFEC loaned $10,725,000 to the Six Flags Over Texas Partnership during December 1997 as a prepayment of its obligations under the Texas Agreements. This amount has been included in the Company's investment in theme park partnerships as of December 28, 1997. The tender offer for SFOT LP Units closed on March 12, 1998. Six Flags purchased approximately 33% of these units for approximately $117,984,000 through the SFEC-SFOT Subsidiary and financed the purchase of such units through loans. The summarized results of the Partnership Parks for the period from December 29, 1997 to March 31, 1998 are as follows: Revenues $ 10,168,000 Expenses: Operating expenses 18,435,000 Selling, general and administrative 2,859,000 Costs of products sold 993,000 Depreciation and amortization 3,286,000 Interest expense, net 640,000 ------------ Total 26,213,000 ------------ Net loss $(16,045,000) ============ Changes in the investment in theme park partnerships for the year ended December 28, 1997 are as follows: Balance at beginning of period $ 19,135,000 Capital additions made by the theme parks 16,147,000 Operations, net of distributions to the limited partners 18,633,000 Distributions to Six Flags (24,126,000) Amortization (11,515,000) ------------ 18,274,000 ------------ Purchase of SFOG limited partnership units 62,678,000 Amortization (2,582,000) ------------ 60,096,000 ------------ Advance to SFOT 10,725,000 ------------ $ 89,095,000 ============ As of the Acquisition, the Company's investment in theme park partnerships was transferred to Premier in exchange for $46,000,000 in cash and Premier's payment of $165,686,000 of Company borrowings. See Note 13. F-19 (Continued) SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements The following summarized unaudited pro forma results of operations for the period from December 29, 1997 to March 31, 1998 and for the year ended December 28, 1997, assume the transfer of the Company's interests in the Partnership Parks had occurred on December 30, 1996 (the first day of SFEC's 1997 fiscal year): Period from December 29, Year ended 1997 to December 28, March 31, 1998 1997 -------------- ------------ (Unaudited) (in thousands) Revenues $ 23,403 531,872 Net loss (130,509) (24,765) (7) Short-Term Borrowings Short-term borrowings at January 3, 1999 and December 28, 1997 consist of the following:
January 3, December 28, 1999 1997 ---------- ------------ 8.5% Note payable to Chase Bank, due March 31, 1998 $ -- 19,778,000 7.2% Note payable to TWE, due March 31, 1998 -- 10,725,000 ---------- ------------ $ -- 30,503,000 ========== ============
The proceeds from the note payable to Chase Bank were used to purchase approximately 8% of SFOG LP Units pursuant to the tender offer for such units. The proceeds from the TWE note payable were loaned to Six Flags Over Texas Partnership in connection with the Texas Agreements. See Note 6. The weighted average interest rate of short-term borrowings outstanding as of December 28, 1997 was 8.5%. These short-term borrowings were refinanced in March 1998 at the time of the financing of the initial tender offer for SFOT LP units through a $165,000,000 facility. The new facility was paid in full at the time of the Acquisition by Premier in exchange for the interests in the theme park partnerships previously owned by SFEC. (Continued) F-20 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (8) Long-Term Debt At January 3, 1999 and December 28, 1997, long-term debt consists of:
January 3, December 28, 1999 1997 -------------- ------------ Long-term debt: Old Credit Agreement (a) $ -- 348,500,000 SFEC Notes (b) 170,000,000 -- SFEC Zero Coupon Notes (b) 182,877,000 161,074,000 SFTP Senior Subordinated Notes (c) 321,167,000 269,925,000 Credit Facility (d) 409,750,000 -- Other 1,050,000 -- -------------- ----------- 1,084,844,000 779,499,000 Less current portion, in 1999 primarily the SFEC Zero Coupon Notes (carrying value of $182,877,000 as of January 3, 1999) which have been prefunded with 184,370,000 26,130,000 restricted-use investments. See note (b) -------------- ----------- $ 900,474,000 753,369,000 ============== ===========
(a) In 1995, SFTP entered into a $600,000,000 credit agreement (the "Old Credit Agreement") with a group of lenders. The Old Credit Agreement consisted of a $345,000,000 Tranche A Senior Secured Term Loan Facility (the "Tranche A Term Facility"), a $130,000,000 Tranche B Senior Secured Term Loan Facility (the "Tranche B Term Facility") (together the "Term Facilities"), and a Senior Secured Revolving Credit Facility (the "Revolving Facility"). The Revolving Facility provided for revolving loans to SFTP and the issuance of letters of credit for the account of SFTP in an aggregate principal amount of up to $125,000,000, of which not more than $12,000,000 could be represented by letters of credit. The interest rates per annum applicable to the Tranche A Term Facility and Revolving Facility were LIBOR plus 2.50%, as adjusted semi-annually. The interest rate per annum applicable to the Tranche B Term Facility was LIBOR plus 3.00%, as adjusted semi-annually. The amounts outstanding under the Term Facilities were $307,500,000 at December 28, 1997. The amounts borrowed against the Revolving Facility as of December 28, 1997 were $41,000,000. As of December 28, 1997, the Company had $9,300,000 in letters of credit outstanding. SFTP was required to pay a per annum fee equal to 2.50%, plus a fronting fee of 0.25%, of the aggregate face amount of outstanding letters of credit under the Revolving Facility and a per annum fee equal to 0.50% on the undrawn portion of the commitments in respect of the Revolving Facility. In connection with the Acquisition, in April 1998, the Company satisfied all amounts then outstanding under the Old Credit Agreement and the Old Credit Agreement was terminated. (Continued) F-21 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (b) On April 1, 1998, SFEC issued $170,000,000 principal amount of SFEC Notes, which are senior obligations of SFEC. The SFEC Notes are guaranteed on a fully subordinated basis by Premier. 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 SFEC and certain other circumstances, do not require any principal payments prior to their maturity in 2006. The SFEC Notes are redeemable, at SFEC'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 to provide for the repayment in full on or before December 15, 1999 of the SFEC Zero Coupon Notes (with a carrying value of $182,877,000 at January 3, 1999). The indenture under which the SFEC Notes were issued limits the ability of SFEC 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) The SFTP Senior Subordinated Notes were issued in an aggregate principal amount of $285,000,000 at a discount and effective in 1999 require interest payments of approximately $34,900,000 per annum (12 1/2% per annum). The first interest payment was paid in December 1998. Except in certain circumstances, no principal payments are required prior to their maturity in 2005. The SFTP Senior Subordinated Notes are guaranteed on a senior subordinated basis by the principal operating subsidiaries of SFTP. The Notes are redeemable, at SFTP's option, in whole or in part, at any time on or after June 15, 2000, at varying redemption prices. As a result of the application of purchase accounting, the carrying value of the SFTP Senior Subordinated Notes was increased to $318,500,000, which was the estimated fair value at the Acquisition date, April 1, 1998. The premium that resulted from the adjustment of the carrying value will be amortized as a reduction to interest expense over the remaining term of the SFTP Senior Subordinated Notes and will result in an effective interest rate of approximately 9 3/4%. The indenture under which the SFTP Senior Subordinated Notes were issued limits the ability of SFTP 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 subsidiaries and affiliates. (d) On April 1, 1998, SFTP entered into the Credit Facility, pursuant to which it had outstanding $409,750,000 at January 3, 1999. The Credit Facility includes (i) a $100,000,000 five-year revolving credit facility used to refinance Six Flags bank indebtedness as of April 1, 1998 and for working capital and other general corporate purposes (of which $38,000,000 was outstanding on January 3, 1999); and (ii) a $372,000,000 term loan facility (the "Term Loan Facility") which was fully drawn on January 3, 1999. Borrowings under the Term Loan Facility will mature on November 30, 2004. However, aggregate principal payments and reductions of $1,000,000 are required during each of the first, second, third and fourth years; aggregate principal payments of $25,000,000 and $40,000,000 are required in years five and six, respectively, and $303,000,000 at maturity. Borrowings under the Credit Facility are secured by substantially all of the assets of (Continued) F-22 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements SFTP and its subsidiaries and a pledge of the stock of SFTP, and are guaranteed by such subsidiaries and SFEC. The Credit Facility contains restrictive covenants that, among other things, limit the ability of SFTP and its subsidiaries to dispose of assets; incur additional indebtedness or liens; pay dividends, (except that, subject to covenant compliance, dividends will be permitted to allow SFEC to meet cash pay interest obligations with respect to the SFEC Notes); repurchase stock; make investments; engage in mergers or consolidations and engage in certain transactions with subsidiaries and affiliates. In addition, the Credit Facility requires that SFTP comply with certain specified financial ratios and tests. Annual maturities of long-term debt during the five years subsequent to January 3, 1999, are as follows: 1999 $ 184,370,000 2000 1,493,000 2001 1,065,000 2002 7,000,000 2003 and thereafter 890,916,000 -------------- $1,084,844,000 ============== The following table reflects the condensed financial information of Premier (guarantor of the 8 7/8% SFEC Notes described in (b) above). (in thousands)
Assets: Liabilities and stockholders' equity: Cash and cash equivalents $ 320,411 Current liabilities $ 22,888 Restricted-use investment securities 22,734 ---------- Other current assets 38,067 Long-term debt 550,896 ---------- Total current assets 381,212 Other long-term liabilities 568 Other assets 21,757 Deferred income taxes 217 Restricted-use investments 111,576 Stockholders' equity 1,626,565 Investment in subsidiaries 1,432,883 ---------- Investment in theme park partnerships 226,324 Property and equipment, net 23,758 Intangible assets, net 3,624 ---------- Total liabilities and Total assets $2,201,134 stockholders' equity $2,201,134 ========== ==========
(Continued) F-23 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements
Revenue $ 340 Cash flow information: ---------- Cash flows from operating activities $ (17,367) Operating costs and expenses: ---------- Selling, general and administrative 9,351 Cash flows from investing activities: Noncash compensation 5,687 Additions to property and equipment (23,970) Depreciation and amortization 166 Investment in theme park partnerships (217,641) ---------- Total operating costs and expenses 15,204 Acquisitions of theme park companies (1,000,065) ---------- Loss from operations (14,864) Investment in subsidiaries (39,030) ---------- Other income (expense): Purchase of restricted-use investments (145,675) Interest expense (41,031) Maturities of restricted-use Interest income 20,593 investments 11,365 ---------- Equity in operations of theme park (1,415,016) partnerships 21,002 ---------- ---------- Total other income (expense) 564 Cash flows from financing activities: ---------- Loss before income Proceeds from borrowings 531,703 taxes (14,300) Net cash proceeds from issuance Income tax benefit (5,918) of stock 1,256,319 ---------- Payment of preferred dividends (11,644) Net loss $ (8,382) Payment of debt issuance costs (23,584) ========== ---------- 1,752,794 Net loss applicable ---------- to common stock $ (25,848) Increase in cash and cash equivalents $ 320,411 ========== ==========
As discussed in (a) to (d), the long-term debt of the Company has been issued by both SFEC and by one of its subsidiaries, SFTP. SFEC does not guarantee the SFTP Senior Subordinated Notes. SFEC is a holding company with limited assets other than its investment in SFTP and the restricted-use investments that will be used to repay the SFEC Zero Coupon Notes. Additionally, SFEC does not have any operating income or operating cash flow outside of interest payments on the SFEC Notes. The vast majority of the SFEC consolidated assets, liabilities, operations and cash flows are those of SFTP. As such, condensed information of SFEC and of consolidated SFTP is not presented. The debt indentures or credit facility agreements generally restrict the ability of the obligors to distribute assets to parent companies or in the case of SFEC to its stockholder. The following table discloses the amounts available for distribution (other than permitted payments in respect of shared administrative and other corporate expenses and tax sharing payments) at January 3, 1999 by each debt group based upon the most restrictive applicable limitation. Amount Available ------------- (in thousands) SFEC $ 111,226 SFTP 3,772 The fair value of the Company's long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company's investment bankers or based upon quoted market prices. The fair value of (Continued) F-24 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements the Company's long-term debt as of January 3, 1999 and December 28, 1997 was approximately $1,084,702,000 and $822,100,000, respectively. (9) Income Taxes Income tax expense allocated to operations for the 1998 Post-Acquisition period, 1998 Pre-Acquisition period, 1997 and 1996 consists of the following: Current Deferred Total ------- -------- ----- Post-Acquisition 1998: U.S. federal $ -- 29,972,000 29,972,000 State and local -- 4,541,000 4,541,000 ----------- ---------- ---------- $ -- 34,513,000 34,513,000 =========== ========== ========== Pre-Acquisition 1998: U.S. federal $ -- -- -- State and local -- -- -- ----------- ---------- ---------- $ -- -- -- =========== ========== ========== 1997: U.S. federal $ -- -- -- State and local -- -- -- ----------- ---------- ---------- $ -- -- -- =========== ========== ========== 1996: U.S. federal $ -- 4,369,000 4,369,000 State and local -- 768,000 768,000 ----------- ---------- ---------- $ -- 5,137,000 5,137,000 =========== ========== ========== (Continued) F-25 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements Income tax expense (benefit) differed from amounts computed by applying the U.S. federal income tax rate of 35% to income (loss) before income taxes as follows:
1998 1998 Post- Pre- Acquisition Acquisition Period Period 1997 1996 ----------- ----------- --------- --------- Computed "expected" federal income tax expense (benefit) $22,118,000 (50,281,000) (1,298,000) (3,539,000) Amortization of goodwill 10,480,000 777,000 2,866,000 2,287,000 Other, net 19,000 (60,000) (327,000) 68,000 Carryover of net operating losses -- 49,564,000 (1,241,000) 5,822,000 Effect of state and local income taxes, net of federal tax benefit 1,896,000 -- -- 499,000 ----------- ---------- ---------- ---------- $34,513,000 -- -- 5,137,000 =========== ========== ========== ==========
Substantially all of the Company's future taxable temporary differences (deferred tax liabilities) relate to the different financial accounting and tax bases resulting from the application of purchase method of accounting for business combinations and depreciation methods and periods for property and equipment. The Company's net operating loss carryforwards, alternative minimum tax carryforwards, accrued insurance expenses, and asset tax basis in excess of financial basis, represent future income tax deductions (deferred tax assets). The tax effects of these temporary differences as of January 3, 1999 and December 28, 1997, are presented below: January 3, December 28, 1999 1997 ------------ ------------ Deferred tax assets before valuation allowance $123,993,000 103,138,000 Less valuation allowance -- (15,921,000) ------------ ------------ Net deferred tax assets 123,993,000 87,217,000 Deferred tax liabilities 223,326,000 87,217,000 ------------ ------------ Net deferred tax liability $ 99,333,000 -- ============ ============ (Continued) F-26 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements The following details the material financial and tax differences comprising the deferred tax asset and deferred tax liability above.
January 3, December 28, 1999 1997 ------------ ------------ Deferred tax assets: Property and equipment - tax basis in excess of financial basis $ -- 55,467,000 Net operating loss carryforwards 89,025,000 43,071,000 Other 34,968,000 4,600,000 ------------ ------------ $123,993,000 103,138,000 ============ ============ Deferred tax liabilities: Property and equipment - financial basis in excess of tax basis $217,515,000 33,736,000 Deferral related to tax and fiscal year difference -- 46,225,000 Other 5,811,000 7,256,000 ------------ ------------ $223,326,000 87,217,000 ============ ============
Because most of the Company's Post-Acquisition depreciable assets' financial carrying amounts and tax basis differences will reverse before the expiration of the Company's net operating loss carryforwards and taking into account the Company's projections of future taxable income over the same period, management believes that the Company will more likely than not realize the benefits of these net future deductions. As a result, no valuation allowance is deemed necessary as of January 3, 1999. As of January 3, 1999, the Company has approximately $236,000,000 of net operating loss carryforwards available for federal income tax purposes which expire through 2013. Additionally, the Company has approximately $4,728,000 of alternative minimum tax credits which have no expiration date. The Company has experienced an ownership change within the meaning of Internal Revenue Code Section 382 and the regulations thereunder as a result of the Acquisition by Premier. Due to this ownership change, no more than $49,200,000 of such net operating loss carryforwards may be used to offset taxable income in any year. Furthermore, the amount of such NOLs that can be used is limited to the cumulative taxable income of Six Flags. Notwithstanding these limitations, management believes that it is more likely than not that all of the Company's net operating loss carryforwards will be utilized by the Company before their expiration. (Continued) F-27 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements (10) Stockholders' Equity (a) Pre-Acquisition Capital Structure Prior to the Acquisition, SFEC's outstanding equity consisted of 5,100,000 shares of Class A Convertible Preferred Stock, par value of $.01 per share, 4,900,000 shares of Class B Convertible Preferred Stock, par value of $.01 per share, 51 shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and 49 shares of Class B Common Stock, par value $.01 per share ("Class B Common Stock"). The Class A Convertible Preferred Stock had a liquidation preference per share of $40 plus accrued and unpaid dividends to the liquidation date. Dividends accrued on the outstanding shares of Class A Convertible Preferred Stock on a daily basis at the rate of 12% per annum, compounded semi-annually on December 1 and June 1 of each year. Accrued and unpaid dividends for the Class A Convertible Preferred Stock were $69,500,000 at December 28, 1997. The Class B Convertible Preferred Stock had a liquidation preference per share of $40. No dividends accrued on the Class B Convertible Preferred Stock. SFEC's Class A Convertible Preferred Stock and Class A Common Stock were further divided into shares of voting stock (known as Class A-1 Convertible Preferred Stock and Class A-1 Common Stock, respectively) and non-voting stock (known as Class A-2 Convertible Preferred Stock and Class A-2 Common Stock, respectively). The non-voting shares of each such class were created for the benefit of certain regulated entities (each a "Regulated Holder") whose ability to own voting stock was restricted. Shares of Class A-1 Convertible Preferred Stock and Class A-1 Common Stock could have been exchanged by a Regulated Holder on a share-for-share basis for non-voting shares of such class. Shares of Class A-2 Convertible Preferred Stock and Class A-2 Common Stock could have been exchanged on a share-for-share basis for voting shares of each such class if such shares were held by a person other than by a Regulated Holder. Except for voting rights specifically accorded to a particular class under Delaware law, the shares of Class A-1 Common Stock and Class B Common Stock voted together as a single class on matters requiring stockholder action. Six Flags entered into an Employment Agreement ("the Agreement") with an Executive (the "Executive") whereby SFEC agreed to reserve for issuance a certain number of shares of Class B Common Stock (the "Reserved Shares"), as defined in the Agreement. The Reserved Shares were to become vested on December 31, 2000, subject to the Executive's employment having continued through such date or prior thereto if certain events occurred as defined in the Agreement, including change-of-control provisions. Six Flags has recognized compensation expense related to the Reserved Shares during the 1998 Pre-Acquisition period, 1997, and 1996. Under the Agreement, the Executive was also granted options to purchase shares of SFEC's Class B Common Stock. Included was an option to purchase an additional 163,936 shares of SFEC's Class B Common Stock (the "Tranche 1 Option"), and a second option to purchase an additional 327,872 shares of SFEC's Class B Common Stock (the "Tranche 2 Option"). The exercise price of the Tranche 1 Option was based on a September 1995 exercise price of $40.64 per share, increasing at a cumulative annual rate of 10%. The exercise price of the Tranche 2 Option was based on a September 1995 exercise price of $40.94 per share increasing at a cumulative (Continued) F-28 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements annual rate of 15%. On each September 15 while the Executive was employed under the Agreement, the number of shares of SFEC's Class B Common Stock reserved for issuance under the terms of the Tranche 1 Option decreased by 5,858.9 shares. At the same time, the Executive was granted a like number of additional Reserved Shares. In addition, SFEC granted additional options for the purchase of 327,872 shares of SFEC's Class B Common Stock to members of management of Six Flags and its subsidiaries. The terms of these options were similar to the Tranche 1 Option and Tranche 2 Option described above. The options were to become exercisable only if there was a triggering event, as defined in the stock option plan agreement. Accordingly, prior to the triggering event, these stock options had been treated as if they were unissued due to the uncertainty regarding the Executive's and other management employees' ability to exercise such options. As a result of the Acquisition causing the options and the Reserved Shares to vest, Six Flags recognized $46,061,000 of compensation expense associated with the options and the Reserved Shares during the 1998 Pre-Acquisition period. (b) Post-Acquisition Capital Structure As a component of the Acquisition, the capitalization of SFEC was modified. Post-Acquisition, SFEC's capital structure consists of 1,000 shares of $.05 common stock. All 1,000 shares of common stock have been issued, with all of the shares owned by Premier. All previously outstanding SFEC shares were retired. (11) Pension Benefits Six Flags maintains a noncontributory, defined benefit pension plan (the "Benefit Plan"). The Benefit Plan covers substantially all of Six Flags' full-time employees. Subsequent to January 3, 1999, the Benefit Plan was extended to cover substantially all of Premier's full-time employees. The Benefit Plan permits normal retirement at age 65, with early retirement at ages 55 through 64 upon attainment of ten years of credited service. The early retirement benefit is reduced for benefits commencing before age 62. Benefit Plan benefits are calculated according to a benefit formula based on age, average compensation over the highest consecutive five-year period during the employee's last ten years of employment and years of service. Benefit Plan assets are invested primarily in common stock and mutual funds. The Benefit Plan does not have significant liabilities other than benefit obligations. Under the Company's funding policy, contributions to the Benefit Plan are determined using the projected unit credit cost method. This funding policy meets the requirements under the Employee Retirement Income Security Act of 1974. (Continued) F-29 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements The following table sets forth the aggregate funded status of the Benefit Plan and the related amounts recognized in the Company's consolidated balance sheets:
Period from Period from April 1, 1998 December 29, to 1997 to January 3, March 31, 1999 1998 1997 ------------ ----------- ----------- Change in benefit obligation: Benefit obligation, beginning of period $ 68,712,000 68,912,000 58,702,000 Service cost 2,444,000 801,000 3,025,000 Interest cost 3,808,000 1,261,000 4,858,000 Actuarial (gain) loss 757,000 (1,987,000) 3,444,000 Benefits paid (1,063,000) (275,000) (1,117,000) ------------ ----------- ----------- Benefit obligation, end of period 74,658,000 68,712,000 68,912,000 ------------ ----------- ----------- Change in plan assets: Fair value of assets, beginning of period 85,236,000 77,024,000 60,471,000 Actual return on plan assets 3,097,000 8,488,000 13,584,000 Employer contributions -- -- 4,086,000 Benefits paid (1,063,000) (276,000) (1,117,000) ------------ ----------- ----------- Fair value of assets, end of period 87,270,000 85,236,000 77,024,000 ------------ ----------- ----------- Plan assets in excess of benefit obligations 12,612,000 16,524,000 8,112,000 Unrecognized net actuarial (gain) loss 3,317,000 (16,349,000) (7,943,000) Unrecognized prior service cost -- (1,046,000) (1,090,000) ------------ ----------- ----------- Prepaid (accrued) benefit cost (included in deposits and other assets as of January 3, 1999, other long-term liabilities as of December 28, 1997) $ 15,929,000 (871,000) (921,000) ============ =========== ===========
Net pension expense of the Benefit Plan for the 1998 Post-Acquisition period, the 1998 Pre-Acquisition period, 1997, and 1996 included the following components:
Period from Period from April 1, 1998 December 29, to 1997 to January 3, 1999 March 31, 1998 1997 1996 --------------- -------------- --------- --------- Service cost $ 2,444,000 801,000 3,025,000 3,133,000 Interest cost 3,808,000 1,261,000 4,858,000 4,436,000 Expected return on assets (5,657,000) (1,740,000) (5,496,000) (4,565,000) Amortization of: Prior service cost -- (44,000) (176,000) (176,000) Actuarial gain (loss) -- (53,000) -- 33,000 ----------- ---------- --------- --------- Net periodic cost $ 595,000 225,000 2,211,000 2,861,000 =========== ========== ========= =========
(Continued) F-30 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements Assumptions used in the determination the actuarial present value of the projected benefit obligations and net pension expense are as follows:
Period from Period from April 1, 1998 December 29, to 1997 to January 3, 1999 March 31, 1998 1997 1996 --------------- -------------- ---- ---- Weighted average discount rate 6.75% 7.25% 7.25% 7.75% Long-term rate of return 9.00% 9.00% 9.00% 9.00% Future compensation levels 4.50% 5.00% 5.00% 6.00%
(12) 401(k) Plan The Company has a qualified, contributory 401(k) plan (the "Six Flags Savings Plan"). Under the provisions of the Six Flags Savings Plan, employees of Six Flags completing one year of service (minimum 1,000 hours) and attaining age 21 are eligible to participate and may contribute up to 6% of compensation as a tax deferred basic contribution. Each participant may also elect to make additional contributions of up to 10% of compensation (up to 4% tax deferred). Tax deferred contributions to the savings plan may not exceed amounts defined by the Internal Revenue Service ($10,000 for 1998; $9,500 for 1997). Both the basic and additional contributions are at all times vested. Six Flags, at its discretion, may make matching contributions of up to 100% of its employees' basic contributions. Six Flags recognized contribution expense of $743,000, $247,000, $900,000, and $700,000 for the 1998 Post-Acquisition period, 1998 Pre-Acquisition period, 1997 and 1996, respectively. Six Flags' matching contributions to the savings plan are made in the first quarter of the succeeding year. During the first quarter of 1999, the Six Flags Savings Plan was merged into Premier's existing 401(k) plan. (13) Related Party Transactions Transactions with Time Warner Entertainment Company, L.P. and Affiliates prior to April 1, 1998 On December 31, 1997, TWE contributed $4,000,000 to Six Flags. This capital is reflected as an affiliate receivable as of December 28, 1997. On May 5, 1997, TWE loaned $19,500,000 to a subsidiary of Six Flags. The proceeds from this affiliate loan were used to purchase approximately 8% of SFOG LP Units pursuant to the tender offer for such units. On December 23, 1997, this affiliate loan, along with accrued interest, was refinanced with proceeds of a note payable to Chase Bank. On November 24, 1997, TWE loaned $10,725,000 to another Six Flags subsidiary. The proceeds of this affiliate loan were loaned to the Six Flags Over Texas Partnership in connection with the Texas Agreements. This loan was refinanced in March 1998 by a $165,000,000 credit facility with Chase Bank. (Continued) F-31 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements In 1996 and 1997, Six Flags reimbursed TWE and its affiliates $4,400,000 and $2,600,000, respectively, for royalties on merchandise, advertising and other expenses. During 1995, Six Flags entered into a license agreement (the "License Agreement") pursuant to which it obtained the exclusive right for a term of 55 years to theme park use in the United States and Canada (excluding the Las Vegas, Nevada metropolitan area) of all animated, cartoon and comic book characters that Warner Bros. and DC Comics have the right to license for such use during the term of the agreement, including all characters which, prior to the effectiveness of the License Agreement, already had been licensed by Warner Bros. and DC Comics to Six Flags for use in connection with Six Flags' theme parks. Under the License Agreement, Six Flags pays an annual license fee of $500,000 for each of the first ten years of the license term. Thereafter, the license fee will be subject to periodic scheduled increases and will be payable on a per-theme park basis. The annual license fees will also be increased by amounts equal to any third-party payments which may be payable by Warner Bros. or DC Comics as a result of the use of any licensed character by Six Flags. Six Flags entered into an amendment to the License Agreement ("Amendment No. 1") which provided the exclusive right for a period of three years ending December 31, 1998, to theme park use of elements contained in released versions of certain theatrical motion pictures and television shows, along with usage of the "Warner Bros. Backlot Logo" (the "Logo Usage"). Each separate motion picture, television series and/or Logo Usage may be utilized only in connection with live shows within Six Flags' parks. Six Flags was charged $400,000 in total for the years 1996 and 1997 and was charged $150,000 in 1998 for the rights granted pursuant to Amendment No. 1. In addition to the annual license fees described above, Six Flags is also required to pay royalties on sales of products incorporating the licensed characters at standard royalty rates for such products, subject to increase from time to time. Warner Bros. will be entitled to terminate the License Agreement prior to the expiration of the stated term if Six Flags, at any time during the term, is directly or indirectly controlled by a person that derives significant revenues from the production or distribution of motion pictures or engages in certain other businesses competitive with TWE. Six Flags also entered into a license agreement with TWE pursuant to which TWE granted Six Flags a 25-year license to use the trademarks and service marks relating to the "Home Box Office" and "HBO" names and the "HBO" logo for use in connection with operation of restaurants in Six Flags' theme parks. The TWE license is royalty-free for the first ten years of its term. Thereafter, annual royalties will be established every five years. Six Flags also entered into an agreement entitling Six Flags (i) to use the name "Time Warner" in connection with operating a retail merchandise outlet with the name "Time Warner Studio Store" at Six Flags' theme parks and for establishing a themed area in each of Six Flags' theme parks to be called "Time Warner Studios" and (ii) to stage a concert series in Six Flags' theme parks under the name "Warner Music Rock Review." Six Flags also entered into a license agreement with the Sports Illustrated division of Time Warner pursuant to which Time Warner granted Six Flags a ten-year royalty-free license to use the "Sports Illustrated" and "Sports Illustrated for Kids" trademarks and service marks in connection with the operation of a sports festival at Six (Continued) F-32 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements Flags' theme parks. The licensor under each of these additional license agreements has the right to terminate the license granted thereby if, during the stated term of any such license agreement, the Warner Bros. License Agreement is terminated for any reason. The licensor also has the right under certain circumstances to suspend the right of any Six Flags' theme parks to use the licenses granted thereby if the license is not sufficiently utilized in such theme park. The License Agreement and Amendment No. 1 thereto described above were superceded by the License Agreement entered into in connection with the Acquisition to include the parks owned and operated by Premier Parks Operations Inc. As it relates to Six Flags, the terms of the new License Agreement are substantially the same as those described above. Transactions with Premier Parks Inc. and Affiliates Subsequent to March 31, 1998 In connection with the Acquisition, SFEC, Premier and Premier Parks Operations Inc., also a direct subsidiary of Premier that owns or controls 19 parks ("PPO"), entered into a shared services agreement pursuant to which certain corporate, administrative and other general services provided by Premier are charged to SFEC and PPO, 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. Additionally, as of the Acquisition date, Six Flags transferred its ownership interests in the Six Flags Over Texas and Six Flags Over Georgia partnerships to Premier for total consideration of $211,686,000 (which consisted of $208,082,000 related to the interest in the Partnership Parks and $3,604,000 as a capital contribution used to retire the remaining Company borrowings associated with the purchase of the units of the Partnership Parks). On the same date, Premier contributed $10,750,000 to Six Flags to establish the restricted-use investment associated with the SFEC Zero Coupon Notes. Throughout the remainder of the year, Premier contributed an additional $18,113,000 to Six Flags for various corporate uses. (14) Commitments and Contingencies Total rental expense, including office space and park sites, was approximately $4,751,000, $1,867,000, $9,700,000 and $8,500,000 for the 1998 Post-Acquisition period, 1998 Pre-Acquisition period, 1997 and 1996, respectively. In December 1998, a final judgment of $197,300,000 in compensatory damages was entered against SFEC, SFTP, Six Flags Over Georgia, Inc. and TWE, and a final judgment of $245,000,000 in punitive damages was entered against TWE and of $12,000,000 in punitive damages was entered against the referenced Six Flags entities. TWE has indicated that it intends to appeal the judgments. The judgments arose out of a case entitled Six Flags Over Georgia, L.L.C. et al v. Time Warner Entertainment Company, L.P., et al based on certain disputed partnership affairs prior to the Acquisition at Six Flags Over Georgia, including alleged breaches of fiduciary duty. The sellers in the Acquisition, including Time Warner, Inc., have agreed to indemnify the Company from any and all liabilities arising out of this litigation. (Continued) F-33 SIX FLAGS ENTERTAINMENT CORPORATION Notes to Consolidated Financial Statements 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 condition, operations, or liquidity after consideration of recorded accruals. (15) Business Segments Both previous and current management managed the Company's operations on an individual park location basis. Discrete financial information is maintained for each park and provided to Company 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 method. As such, the Company has only one reportable segment - operation of theme parks. The following table presents segment financial information and a reconciliation of the primary segment performance measure to income (loss) before income taxes. Park level expenses exclude all non-cash operating expenses, principally depreciation and amortization.
Period from Period from April 1, 1998 December 29, to 1997 to January 3, 1999 March 31, 1998 1997 1996 --------------- -------------- ------- ------- (in thousands) Theme park revenues $ 497,728 33,571 707,578 680,796 Theme park cash expenses 292,356 82,280 505,903 504,767 --------- -------- ------- ------- Aggregate park EBITDA 205,372 (48,709) 201,675 176,029 Amortization of investment in theme park partnerships -- (393) -- -- Unallocated net expenses, including corporate (11,623) (54,422) (36,460) (22,194) Depreciation and amortization (71,896) (17,629) (84,493) (87,417) Interest expense, net (58,658) (22,508) (84,430) (76,530) --------- -------- ------- ------- Income (loss) before income taxes $ 63,195 (143,661) (3,708) (10,112) ========= ======== ======= ======= Theme park revenues $ 497,728 33,571 707,578 680,796 Theme park revenues from parks accounted for under the equity method -- (10,168) -- -- Other revenues -- -- 1,088 80 --------- -------- ------- ------- $ 497,728 23,403 708,666 680,876 ========= ======== ======= =======
(Continued) F-34 EXHIBIT INDEX PAGE ---- (3) Article of Incorporation and By-Laws: *(a) Amended and Restated Certificate of Incorporation of Registrant filed April 1, 1998. *(b) By-laws of Registrant, as amended. (4) Instruments Defining the Rights of Security Holders, Including Indentures: (a) Indenture dated as of April 1, 1998 between Premier Parks Inc., Six Flags Entertainment Corporation and The Bank of New York, as Trustee with respect to Six Flags' 8 7/8% Senior Notes due 2006 - incorporated by reference from Exhibit 4(q) to Premier Parks Inc.'s ("Premier") Registration Statement on Form S-3 (No. 333- 45859) declared effective on March 26, 1998. (b) Indenture dated as of June 25, 1995 between Six Flags Theme Parks Inc. and United States Trust Company, as Trustee with respect to SFTP's 12 1/4% Senior Subordinated Discount Notes due 2005 - incorporated by reference from Exhibit 4(t) to Premier's Form 10-K for the year ended December 31, 1998. (10) (a) Agreement and Plan of Merger dated as of February 9, 1998, by and among the Registrant, Six Flags Entertainment Corporation and others incorporated by reference from Exhibit 10(a) to Premier's Current Report on Form 8-K dated February 9, 1998. (b) Subordinated Indemnity Agreement dated February 9, 1998, among the Registrant, the subsidiaries of the Registrant named therein, Time Warner Inc., the subsidiaries of Time Warner Inc. named therein, Premier and the subsidiaries of Premier named therein - incorporated by reference from Exhibit 2(b) to Premier's Registration Statement on Form S-3 (No. 333-45859) declared effective on March 26, 1998. (c) Credit Agreement dated as of April 1, 1998 by and among Six Flags Theme Parks Inc., Six Flags Entertainment Corporation, S.F. Holdings, Inc., the subsidiary guarantors named therein, the lender parties thereto and the Bank of New York, as Administrative Agent and Lehman Brothers Inc. as Advisor, Arranger, and Syndication Agent - incorporated by reference from Exhibit 10(ar) to Premier's Form 10-K for the year ended December 31, 1998. (d) Overall Agreement dated as of February 15, 1997 among Six Flags Fund, Ltd. (L.P.), Salkin Family Trust, SFG, Inc., SFG-I, LLC, SFG-II, LLC, Six Flags Over Georgia, Ltd., SFOG II Inc., SFOG II Employee, Inc., SFOG Acquisition A, Inc., SFOG Acquisition B, Inc., Six Flags Over Georgia, Inc., Six Flags Series of Georgia, Inc., Six Flags Theme Parks, Inc., and Six Flags Entertainment Corporation - incorporated by reference from Exhibit 10(au) to Premier's Form 10-K for the year ended December 31, 1998. (e) Overall Agreement dated as of November 24, 1997 among Six Flags Over Texas Fund, Ltd., Flags' Directors, LLC, FD-II, LLC, Texas Flags, Ltd., SFOT Employee, Inc., SFOT Acquisition I, Inc., SFOT Acquisitions II, Inc., Six Flags Over Texas, Inc., Six Flags Theme Parks Inc., and Six Flags Entertainment Corporation - incorporated by reference from Exhibit 10(av) to Premier's Form 10-K for the year ended December 31, 1998. *(27) Financial Data Schedule --------------- * Filed herewith.
EX-3 2 EXHIBIT 3(A) Exhibit 3(a) AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SIX FLAGS ENTERTAINMENT CORPORATION FIRST: The name of the corporation is Six Flags Entertainment Corporation (hereinafter called the "Corporation"). SECOND: The registered office of the Corporation in the State of Delaware is located at Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the registered agent of the Corporation at such address is Corporation Service Company. THIRD: The purpose for which the Corporation is organized is to engage in any and all lawful acts and activity for which corporations may be organized under the General Corporation law of Delaware. The Corporation will have perpetual existence. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 1,000 shares, par value $.01 per share, designated Common Stock. FIFTH: Directors of the Corporation need not be elected by written ballot unless the bylaws of the Corporation otherwise provide. SIXTH: The Directors of the Corporation shall have the power to adopt, amend, and repeat the bylaws of the Corporation. SEVENTH: No contract or transaction between the Corporation and one or more of its directors, officers, or stockholders or between the Corporation and any person (as used herein "person" means other corporation, partnership, association, firm, trust, joint venture, political subdivision, or instrumentality) or other organization in which one or more of its directors, offices, or stockholders are directors, officers or stockholders, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contractor transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes the contract or transaction, and the board of directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders, or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the board of directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. EIGHTH: (a) To the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended, this Corporation shall indemnify any director or officer who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of this Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or office of this Corporation, or is or was serving in any capacity at the request of this Corporation for any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (any "Other Entity"), against liabilities, losses, judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees and disbursements). Persons who are not directors or officers of this Corporation (or otherwise entitled to indemnification pursuant to the preceding sentence) may be similarly indemnified in respect of service to this Corporation or to any Other Entity at the request of this Corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article VIII. ------------ (b) This Corporation shall, from time to time, reimburse or advance to any director or officer or other person entitled to indemnification hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding; provided, however, that if -------- ------- required by the General Corporation Law of the State of Delaware, such expenses incurred by or on behalf of any director or officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by this Corporation of an undertaking by or on behalf of such director or officer (or other person indemnified hereunder) to repay any such amount so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such director, officer or other person is not entitled to be indemnified for such expenses. (c) The rights to indemnification and reimbursement or advancement of expenses provided by or granted pursuant to, this Article VIII shall not be deemed exclusive of ------------ any other rights to which a person seeking indemnification or reimbursement or advancement of expense may have or hereafter be entitled, including without limitation any right arising under any statute, this Amended and Restated Certificate of Incorporation, the By-Laws, any agreement, any vote of stockholders or disinterested directors or otherwise, both as to action is his or her official capacity and as to action in another capacity while holding such office. (d) The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article VIII shall continue as to a person who ------------ has ceased to be a director or officer (or other person indemnified hereunder) and shall inure to the benefit of the heirs, executors, administrators, legatees and distributees of such person. (e) This Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of this Corporation, or is or was serving at the request of this Corporation as a director, officer, employee or agent of any Other Entity, against any liability asserted against such person's status as such, whether or not this Corporation would have the power to indemnify such person against such liability under the provisions of this Article VIII, the By-Laws or under Section 145 of the General ------------ Corporation Law of the State of Delaware, as amended, or any other provision of law. (f) The provisions of this Article VIII shall be ------------ a contract between this Corporation, on the one hand, and each director and officer who serves in such capacity at any time while this Article VIII is in effect and any other person ------------ entitled to indemnification hereunder, on the other hand, pursuant to which this Corporation and each such director, officer, or other person intend to be, and shall be, legally bound. No repeal or modification of this Article VIII shall ------------ affect any rights or obligations with respect to any state of facts then or theretofore existing, or arising thereafter but before notice of such repeal or modification is delivered to the persons so affected or any Proceeding theretofore or thereafter brought or threatened based on whole or in part upon any state of facts. Until notice of such repeal or modification is given to any person whose rights hereunder are adversely affected, such repeal or modification shall have no effect on such rights of such person hereunder. (g) The rights to indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article VIII shall be enforceable by any person ------------ entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expense is not appropriate shall be on this Corporation. Neither the failure of this Corporation (including its independent legal counsel, its stockholders or the disinterested directors) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by this Corporation (including its independent legal counsel, its stockholders or the disinterested directors) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. (h) Any director or officer of this Corporation serving in any capacity for (i) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by this Corporation or (ii) any employee benefit plan of this Corporation or any corporation referred to in clause (i) shall be deemed to be doing so at the request of this Corporation. NINTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach or fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or amendment of this Article Eleventh by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation arising from an act or omission occurring prior to the time of such repeal or amendment. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the foregoing provision of this Article Eleventh, a director shall not be liable to the Corporation or its stockholders to such further extent as permitted by any law hereafter enacted, including without limitation any subsequent amendment to the Delaware General Corporation Law. TENTH: The Corporation expressly elects not to be governed by Section 203 of the General Corporation Law of Delaware. EX-3 3 EXHIBIT 3(B) Exhibit 3(b) BY-LAWS of SIX FLAGS ENTERTAINMENT CORPORATION (A Delaware Corporation) As Amended and Restated as of June 23, 1995 ARTICLE I DEFINITIONS ----------- As used in these By-Laws, unless the context otherwise requires, the term: 1.1 "Affiliate shall have the meaning ascribed thereto in the Stockholders Agreement. 1.2 "Assistant Secretary" means an Assistant Secretary of the Corporation. 1.3 "Assistant Treasurer" means an Assistant Treasurer of the Corporation. 1.4 "Board" means the Board of Directors of the Corporation. 1.5 "By-Laws" means the initial By-Laws of the Corporation, as amended from time to time. 1.6 "CEO" shall mean the chief executive officer of the Corporation. 1.7 "Certificate of incorporation" means the initial certificate of incorporation of the corporation, as amended, supplemented or restated from time to time. 1.8 "Chairman" means the Chairman of the Board of Directors of the Corporation. Unless the Board designates another person, the CEO shall be the Chairman of the Board of Directors. 1.9 "Class A Stockholder" shall have the meaning ascribed thereto in the Stockholders Agreement. 1.10 "Corporation" means Six Flags Entertainment Corporation. 1.11 "Directors" means directors of the Corporation. 1.12 "Entire Board" means all directors of the Corporation in office, whether or not present at a meeting of the Board, but disregarding vacancies. 1.13 "General Corporation Law" means the General Corporation Law of the State of Delaware, as amended from time to time. 1.14 "Majority Class A-1 Holders" shall have the meaning ascribed thereto in the Stockholders Agreement. 1.15 "Majority Class B Holders" shall have the meaning ascribed thereto in the Stockholders Agreement. 1.16 "Office of the Corporation" means the executive office of the Corporation, anything in Section 131 of the General Corporation Law to the contrary notwithstanding. 1.17 "President" means the President of the corporation and its chief executive officer. 1.18 "Secretary" means the Secretary of the Corporation. 1.19 "Shares" shall have the meaning ascribed thereto in the Stockholders Agreement. 1.20 "Stockholders" means stockholders of the corporation. 1.21 "Stockholders Agreement" means the Stockholders and Registration Rights Agreement, dated as of June 23, 1995, by and among the Corporation and the Stockholders named therein. 1.22 "Supermajority Vote" shall have the meaning ascribed thereto in the Stockholders Agreement. 1.23 "Treasurer" means the Treasurer of the Corporation. 1.24 "Vice President" means a Vice President of the Corporation. ARTICLE 2 STOCKHOLDERS ------------ 2.1 Place of Meetings. Every meeting of Stockholders shall ----------------- be held at the office of the Corporation or at such other place within or without the State of Delaware as shall be specified or fixed in the notice of such meeting or in the waiver of notice thereof. 2.2 Annual Meeting. A meeting of Stockholders shall be -------------- held annually for the election of Directors and the transaction of other business at such hour and on such business day in April or May or as may be determined by the Board and designated in the notice of meeting. 2.3 Deferred Meeting for Election of Directors, Etc. If ------------------------------------------------ the annual meeting of Stockholders for the election of Directors and the transaction of other business is not held within the months specified in Section 2.2 hereof, the Board shall call a meeting of Stockholders for the election of Directors and the transaction of other business as soon thereafter as convenient. 2.4 Other Special Meetings. A special meeting of ---------------------- Stockholders (other than a special meeting for the election of Directors), unless otherwise prescribed by statute, may be called at any time by the Board or by the President or by the Secretary. At any special meeting of Stockholders only such business may be transacted as is related to the purpose or purposes of such meeting set forth in the notice thereof given pursuant to Section 2.6 hereof or in any waiver of notice thereof given pursuant to Section 2.7 hereof. 2.5 Fixing Record Date. For the purpose of ------------------ (a) determining the Stockholders entitled (i) to notice of or to vote at any meeting of Stockholders or any adjournment thereof, (ii) unless otherwise provided in the Certificate of Incorporation, to express consent to corporate action in writing without a meeting or (iii) to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock; or (b) any other lawful action, the Board may fix a record date,, which record date shall not precede the date upon which the resolution fixing the record date was adopted by the Board and which record date shall not be (x) in the case of clause (a) (i) above, more than sixty nor less than ten days before the date of such meeting, (y) in the case of clause (a)(ii) above, more than ten days after the date upon which the resolution fixing the record date was adopted by the Board and (z) in the case of clause (a)(iii) or (b) above, more than sixty days prior to such action. If no such record date is fixed: 2.5.1 the record date for determining Stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; 2.5.2 the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting (unless otherwise provided in the Certificate of Incorporation), when no prior action by the Board is required under the General Corporation Law, shall be the first day on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded; and when prior action by the Board is required under the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board adopts the resolution taking such prior action; and 2.5.3 the record date for determining stockholders for any purpose other than those specified in Sections 2.5.1 and 2.5.2 shall be at the close of business on the day on which the Board adopts the resolution relating thereto. When a determination of Stockholders entitled to notice of or to vote at any meeting of Stockholders has been made as provided in this section 2.5, such determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting. Delivery made to the Corporation's registered office in accordance with Section 2.5.2 shall be by hand or by certified or registered mail, return receipt requested. 2.6 Notice of Meetings of Stockholders. Except as ---------------------------------- otherwise provided in Sections 2.5 and 2.7 hereof, whenever under the provisions of any statute, the Certificate of Incorporation, these By-Laws or the Stockholders Agreement, Stockholders are required or permitted to take any action at a meeting, written notice shall be given stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by any statute, the Certificate of Incorporation, these By-Laws or the Stockholders Agreement, a copy of the notice of any meeting shall be given, personally or by mail, not less than tan nor more than sixty days before the date of the meeting, to each Stockholder entitled to notice of or to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage prepaid, directed to the Stockholder at his or her address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant-Secretary or of the transfer agent of the Corporation that the notice required by this section 2.6 has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted at the meeting as originally called. If, however, the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder of record entitled to notice of or to vote at the meeting. 2.7 Waivers of Notice. Whenever the giving of any notice ----------------- is required by statute, the Certificate of Incorporation, these By-Laws or the Stockholders Agreement, a waiver thereof, in writing, signed by the Stockholder or Stockholders entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance by a Stockholder at a meeting shall constitute a waiver of notice of such meeting, except when the Stockholder attends a meeting for the purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Stockholders need be specified in any written waiver of notice unless so required by statute, the Certificate of Incorporation, these By-Laws or the Stockholders Agreement. 2.8 List of Stockholders. The Secretary shall prepare and -------------------- make, or cause to be prepared and made, at least ten days before every meeting of Stockholders, a complete list of the Stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the name of each Stockholder. Such list shall be open to the examination of any Stockholder, the Stockholder's agent, or attorney, at the Stockholder's expense, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ton days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Stockholder who is present. The Corporation shall maintain the Stockholder list in written form or in another form capable of conversion into written form within a reasonable time. Upon the willful neglect or refusal of the Directors to produce such a list at any meeting for the election of Directors, they shall be ineligible for election to any office at such meeting. The stock ledger shall be the only evidence as to who are the Stockholders entitled to examine the stock ledger, the list of Stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of Stockholders. 2.9 Quorum of Stockholders; Adjournment. Except as ----------------------------------- otherwise provided by any statute, the Certificate of Incorporation or these By-Laws, the holders of a majority of each of the Class A Preferred Stock, the Class B Preferred Stock the Class A Common Stock and the Class B Common stock outstanding and entitled to vote at any-meeting of Stockholders, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at such meeting. When a quorum is once present to organize a meeting of Stockholders, it is not broken by the subsequent withdrawal of any Stockholders. The holders of a majority of the shares.of stock present in person or represented by proxy at any meeting of Stockholders, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the -------- ------- foregoing shall not limit the right of the corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2.10 Voting; Proxies. Unless otherwise provided in the --------------- Certificate of Incorporation, every Stockholder of record shall be entitled at every meeting of stockholders to one vote for each share of capital stock standing in his or her name on the record of Stockholders determined in accordance with Section 2.5 hereof. If the Certificate of Incorporation provides for more or less than one vote for any share on any matter, each reference in the By-Laws or the General Corporation Law to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. The provisions of Sections 212 and 217 of the General Corporation Law shall apply in determining whether any shares of capital stock may be voted and the persons, if any, entitled to vote such shares; but the Corporation shall be protected in assuming that the persons in whose names shares of capital stock stand on the stock ledger of the corporation are entitled to vote such shares. Holders of redeemable shares of stock are not entitled to vote after the notice of redemption is mailed to such holders and a sum sufficient to redeem the stocks has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares of stock. At any meeting of Stockholders (at which a quorum was present to organize the meeting), all matters, except as otherwise provided by statute or by the Certificate of Incorporation, by these By-Laws or by the Stockholders Agreement, shall be decided by a majority of the votes cast at such meeting by the holders of shares present in person or represented by proxy and entitled to vote thereon, whether or not a quorum is present when the vote is taken. All elections of Directors shall be by written ballot unless otherwise provided in the Certificate of Incorporation. In voting on any other question on which a vote by ballot is required by law or is demanded by any Stockholder entitled to vote, the voting shall be by ballot. Each ballot shall be signed by the Stockholder voting or the Stockholder's proxy and shall state the number of shares voted. on all other questions, the voting may be Each Stockholder entitled to vote at a meeting of Stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such Stockholder by proxy. The validity and enforceability of any proxy shall be determined in accordance with Section 212 of the General Corporation Law. A Stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary. 2.11 Voting Procedures and Inspectors of Election at ------------------------------------------------ Meetings of Stockholders. The Board, in advance of any meeting ------------------------ of stockholders, may appoint one or more inspectors to act at the meeting and make a written report thereof. The Board may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed or is able to act at a meeting, the person presiding at the meeting may appoint, and on the request of any Stockholder entitled to vote thereat shall appoint, one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall (a) ascertain the number of shares outstanding and the voting power of each, (b) determine the shares represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of their duties. Unless otherwise provided by the Board, the date and time of the opening and the closing of the polls for each matter upon which the Stockholders will vote at a meeting shall be determined by the person presiding at the meeting and shall be announced at the meeting. No ballot, proxies or votes, or any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by a Stockholder shall determine otherwise. 2.12 Organization. At each meeting of Stockholders, the ------------ President, or in the absence of the President, the Chairman, or if there is no Chairman or if there be one and the Chairman is absent, a Vice President, and in case more than one Vice President shall be present, that Vice President designated by the Board (or in the absence of any such designation, the most senior Vice President, based on age, present), shall act as chairman of the meeting. The Secretary, or in his or her absence one of the Assistant Secretaries, shall act as secretary of the meeting. In case none of the officers above designated to act as chairman or secretary of the meeting, respectively, shall be present, a chairman or a secretary of the meeting, as the case may be, shall be chosen by a majority of the votes cast at such meeting by the holders of shares of capital stock present in person or represented by proxy and entitled to vote at the meeting. 2.13 Order of Business. The order of business at all ----------------- meetings of Stockholders shall be as determined by the chairman of the meeting, but the order of business to be followed at any meeting at which a quorum is present may be changed by a majority of the votes cast at such meeting by the holders of shares of capital stock present in person or represented by proxy and entitled to vote at the meeting. 2.14 Written Consent of Stockholders Without Meeting. ----------------------------------------------- Unless otherwise provided in the certificate of Incorporation, any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or-an officer or agent of the corporation having custody-of the book in which proceedings of meetings of stockholders are recorded. Ever written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of-the earliest dated consent delivered in the manner required by this Section 2.14, written consents signed by a sufficient number of holders to take action are delivered to the Corporation as aforesaid. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those Stockholders have not consented in writing. ARTICLE 3 Directors --------- 3.1 General Powers. Except as otherwise provided in the -------------- Certificate of incorporation, the business and affairs of the corporation shall be managed by or under the direction of the Board. The Board may adopt such rules and regulations, not inconsistent with the Certificate of Incorporation, these By- Laws, the Stockholders Agreement or applicable laws, as it may deem proper for the conduct of its meetings and the management of the Corporation. In addition to the powers expressly conferred by these By-Laws, the Board may exercise all powers and perform all act that are not required, by these By-Laws, the Certificate of Incorporation, the Stockholders Agreement or by statute, to be exercised and performed by the Stockholders. 3.2 Number; Qualification; Term of Office. As provided in ------------------------------------- the Stockholders Agreement, and subject to Section 1.8 thereof, the Board shall consist of twelve (12) members, or such other even number of directors (the "Authorized Number") as may be agreed to by a Supermajority Vote, of whom (i) a number of Directors equal to fifty percent of the Authorized Number (the "Class A-1 Authorized Number") shall be designated by the Majority Class A-1 Holders (collectively the "Class A-1 Directors"--and each a Class A-1 Directory), (ii) a number of Directors equal to the Class A-1 Authorized Number minus one shall be designated by the Majority Class B Holders (collectively the "Class B Directors" and each a "Class B Director") and one Director, who shall be the CEO, appointed by a Supermajority Vote (the management Director"). Directors need not be Stockholders. Each Director shall hold office until a successor is elected and qualified or until the Director's death, resignation or removal. 3.3 Directors shall, except as otherwise required by statute or by the Certificate of Incorporation, be elected in accordance with Article IV, Section B, Part 5 and Article IV, Section C, Part 1 of the Certificate of Incorporation at a meeting of stockholders by the holders of shares entitled to vote in the election in accordance with the stockholders Agreement. 3.4 Newly Created Directorships and Vacancies. Unless ----------------------------------------- otherwise provided in the Certificate of incorporation, newly created Directorships resulting from an increase in the number of Directors and vacancies occurring in the Board for any other reason, including the removal of Directors with or without cause, shall be filled only by the Stockholders in accordance with the Stockholders Agreement. A Director elected to fill a vacancy shall be elected to hold office until a successor is elected and qualified, or until the Director's earlier death, resignation or removal. if at any time a vacancy is created on the Board by reason of the death, removal or resignation of any Class A-1 Director, Class B Director or Management Director, each Stockholder shall, within five days after the date such vacancy first occurs, take such action as is reasonably necessary, including the voting of its Shares, to elect a director or directors designated in accordance with Section 3.2 hereof to fill such vacancy or vacancies; provided that during such five- day period following the creation of the vacancy, the stockholders and the Board shall not transact any other business of the Corporation. 3.5 Resignation. Any Director may resign at any tine by ----------- written notice to the Corporation. Such resignation shall take effect at the time therein specified, and, unless otherwise specified in such resignation, the acceptance of such resignation shall not be necessary to make it effective. 3.6 Removal. Subject to the provisions of Section 141(k) ------- of the General Corporation Law, any or all of the Directors may be removed with or without cause by vote of the Stockholders in accordance with the Stockholders Agreement and the Certificate of incorporation. 3.7 Compensation. Each Director, in consideration of his ------------ or her service as such, shall be entitled to receive from the Corporation such amount per annum or such fees for attendance at Directors, meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable out-of- pocket expenses, if any, incurred by such Director in connection with the performance of his or her duties. Each Director who shall serve as a member of any committee of Directors in consideration of serving as such shall be entitled to such additional amount per annum or such fees for attendance at committee meetings, or both, as the Board may from time to time determine, together with reimbursement for the reasonable out-of- pocket expenses, if any, incurred by such Director in the performance of his or her duties. Nothing contained in this Section 3.7 shall preclude any Director from serving the Corporation or its subsidiaries in any other capacity and receiving proper compensation therefor. 3.8 Times and Places of Meetings. The Board may hold ---------------------------- meetings, both regular and special, either within or without the State of Delaware. The times and places for holding meetings of the Board may be fixed from time to time by resolution of the Board or (unless contrary to a resolution of the Board) in the notice of the meeting. Except as otherwise determined by the Board, all special and regular meetings of the Board shall be held at the principal offices of the Corporation. 3.9 Annual Meetings. On the day when and at the place ---------------- where the annual meeting of stockholders for the election of Directors is held, and as soon as practicable thereafter, the Board may hold its annual meeting, without notice of such meeting, for the purposes of organization, the election of officers and the transaction of other business. The annual meeting of the Board may be hold at any other time and place specified in a notice given as provided in Section 3.11 hereof for special meetings of the Board or in a waiver of notice thereof. 3.10 Regular Meetings. Regular meetings of the Board shall ---------------- be held at least quarterly and may be held without notice at such times and at such places as shall from time to time be determined by the Board. 3.11 Special Meetings. Special meetings of the Board may ---------------- be called by the CEO, a majority of the class A-1 Directors then in office or a majority of the class B Directors then in office on at least three business days' notice to each Director given by one of the means specified in section 3.14. Special meetings shall be called by the Chairman, President or Secretary in like manner and on like notice on the written request of a majority of the Class A-1 Directors or a majority of the Class B Directors then serving. 3.12 Telephone Meetings. Directors or members of any ------------------ committee designated by the Board may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment through which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.12 shall constitute attendance in person at such meeting. All actions by the Board shall be reflected in the minutes of such meeting. 3.13 Adjourned Meetings. A majority of the Directors ------------------ present at any meeting of the Board, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. At least one day's notice of any adjourned meeting of the Board shall be given to each Director whether or not present at the time of the adjournment, if such notice shall be given by one of the means specified in Section 3.14 hereof other than by mail, or at least three days' notice if by mail. Any business may be transacted at an adjourned meeting that might have been transacted at the meeting as originally called. 3.14 Notice Procedure. Subject to Sections 3.11 and 3.17 ---------------- hereof, whenever, under the provisions of any statute, the Certificate of Incorporation or these By-Laws, notice is required to be given to any Director, such notice shall be in writing and shall be delivered in person or sent by facsimile, telegram, telex, by registered or certified mail (postage prepaid, return receipt requested) or by reputable overnight courier to the Director at such Director's address as it appears on the records of the corporation (and shall be deemed to have been given as of the date so delivered or sent). 3.15 Waiver of Notice. Whenever the giving of any notice is ---------------- required by statute, the Certificate of Incorporation or these By-Laws, a waiver thereof, in writing, signed by the person or persons entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance by a person at a meeting shall constitute a waiver of notice of such meeting except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Directors or a committee of Directors need be specified in any written waiver of notice unless so required by statute, the Certificate of Incorporation or these By-Laws. 3.16 Organization. At each meeting of the Board, the ------------ Chairman, or in the absence of the Chairman, the President, or in the absence of the President a chairman chosen by a majority of the Class A-1 Directors and a majority of the Class B Directors present, shall preside. The Secretary shall act as secretary at each meeting of the Board. In case the Secretary shall be absent from any meeting of the Board, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all Assistant Secretaries, the person presiding at the meeting may appoint any person to act as secretary of the meeting. 3.17 Quorum of Directors. The presence in person of a ------------------- majority of the Class A-1 Directors and a majority of the Class B Directors shall be necessary and sufficient to constitute a quorum for the transaction of business at any meeting of the Board, but a majority of a smaller number of each of the Class A-1 Directors and the Class B Directors present may adjourn any such meeting to a later date. 3.18 Board Action. No action required or permitted to be ------------ taken by the Board at any meeting may be taken by the Board unless a quorum is present. Except as otherwise expressly required by statute, the Certificate of Incorporation, the Stockholders Agreement or these By-Laws, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board; provided that if the matter being considered is a Supermajority Matter (as defined in the Stockholders Agreement), a Supermajority Vote shall be required for such action. Any such action also may be taken by unanimous written consent. 3.19 Action Without Meeting. Unless otherwise restricted by ---------------------- the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all Directors or members of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.20 Board Observers. Each Class A Stockholder that is not --------------- otherwise directly represented on the Board of Directors by a Class A Director and (i) in the case of an original Purchaser (as defined in the stockholders Agreement) which is a bank or an Affiliate thereof, that holds at least 50% of the Shares originally purchased by it, and (ii) in all cases (including the case of a Class A Stockholder that is an Affiliate of a bank) that either directly or in the aggregate with its Affiliates holds at least 5% of the issued and outstanding Shares, shall be entitled to designate a representative who may attend (but shall not be entitled to cast any votes and shall not count for quorum purposes) any meeting of the Board of Directors. The Company shall use its reasonable efforts to provide such representatives with notice of any meeting of the Board of Directors and copies of any materials distributed to the Board of Directors in connection with any such meeting simultaneously with any such notice or material being given failure by the Company to give such notice or to distribute such materials to such representatives shall not invalidate, delay or otherwise affect any such meeting or any action taken or resolution adopted thereat. The reasonable out-of-pocket expenses incurred in connection with such attendance by such representatives which are designated by a bank, Aetna (as defined in the Stockholders Agreement) or an Affiliate thereof shall be paid by the Corporation. ARTICLE 4 COMMITTEES OF THE BOARD ----------------------- The Board may, by resolution passed by a Supermajority Vote, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation, and may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of such committee. Any such committee, to the extent provided in the resolution of the Board passed as aforesaid, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation, and may authorize the seal of the Corporation to be impressed on all papers that may require it, but no such committee shall have the power or authority of the Board in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation under section 251 or section 252 of the General Corporation Law, recommending to the Stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders the dissolution or revocation of the dissolution of the corporation, or amending the By-Laws of the Corporation; or, without a Supermajority Vote, acting on any supermajority Matter; and, unless the resolution designating it expressly so provides, no such committee shall have the power and authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law. Unless otherwise specified in the resolution of the Board designating a committee or involving a supermajority Matter, at all meetings of such committee a majority of the total number of members of the committee shall constitute a quorum for the transaction of business, and the vote of a majority of the members of the committee present at any meeting at which there is a quorum shall be the act of the committee. No action by any committee of the Board shall be valid unless (i) taken at a meeting for which notice, sent as provided in Section 3.14 of these By-Laws, has been duly given to, or waived by, the members of such committee or (ii) effected by an action by unanimous written consent signed by each of the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting. Each committee shall keep regular minutes of its meetings. Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article 3 of these By-Laws. ARTICLE 5 OFFICERS -------- 5.1 Positions. The officers of the Corporation shall be a --------- President, a Secretary, a Treasurer and such other officers as the Board may appoint, including a Chairman, one or more vice Presidents and one or more Assistant Secretaries and Assistant Treasurers, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board. The Board may designate one or more Vice Presidents as Executive Vice Presidents and may use descriptive words or phrases to designate the standing, seniority or areas of special competence of the Vice Presidents elected or appointed by it. Any number of offices may be held by the same person unless the Certificate of Incorporation or these By-Laws otherwise provide. 5.2 Appointment. The officers of the Corporation shall be ----------- chosen by the Board (and, in the case of an appointment of a person who would be one of the three most senior executive officers of the Corporation, by supermajority Vote of the Board) at its annual meeting or at such other time or times as the Board shall determine. 5.3 Compensation. The compensation of all officers of the ------------ Corporation shall be fixed by the Board. No officer shall be prevented from receiving a salary or other compensation by reason of the fact that the officer is also a Director. 5.4 Term of Office. Each officer of the Corporation shall -------------- hold office for the term for which he or she is elected and until such officer's Successor is elected and qualified or until such officer's earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Such resignation shall take effect at the date of receipt of such notice or at such later time as is therein specified, and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. The resignation of an officer shall be without prejudice to the contract rights of the Corporation, if any. Any officer elected or appointed by the Board may be removed at any time, with or without cause, by vote of a majority of the entire Board, provided that the removal or suspension of any person who is one of the three most senior executive officers of the Corporation shall require a Supermajority Vote of the Board. Any vacancy occurring in any office of the Corporation shall be filled by the Board. The removal of an officer without cause shall be without prejudice to the officers contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. 5.5 Fidelity Bonds. The Corporation may secure the -------------- fidelity of any or all of its officers or agents by bond or otherwise. 5.6 Chairman. The Chairman, if one shall have been -------- appointed, shall preside at all meetings of the Board and shall exercise such powers and perform such other duties as shall be determined from time to time by the Board. 5.7 President. The President shall be the Chief Executive --------- Officer of the Corporation and shall have general supervision over the business of the Corporation, subject, however, to the control of the Board and of any duly authorized committee of Directors. The President shall preside at all meetings of the Stockholders and at all meetings of the Board at which the Chairman (if there be one) is not present. The President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-Laws to some other officer or agent of the corporation or shall be required by statute otherwise to be signed or executed and, in general, the President shall perform all duties incident to the office of President of a corporation and such other duties as may from time to time be assigned to the President by the Board; provided that any document or instrument relating to a Supermajority Matter (as defined in the Stockholders Agreement) must be approved by a Supermajority Vote of the Board as set forth in the stockholders Agreement prior to any such signing, execution or performance. 5.8 Vice Presidents. At the request of the President, or, --------------- in the President's absence, at the request of the Board, the Vice Presidents shall (in such order as may be designated by the Board or, in the absence of any such designation, in order of seniority based on age) perform all of the duties of the President and, in so performing, shall have all the powers of, and be subject to all restrictions upon, the President. Any Vice President may sign and execute in the name of the corporation deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall be expressly delegated by the Board or by these By-Laws to some other officer or agent of the Corporation, or shall be required by statute otherwise to be signed or executed, and each Vice President shall perform such other duties as from time to time may be assigned to such Vice President by the Board or by the President; provided that any document or instrument relating to a Supermajority Matter (as defined in the Stockholders Agreement) must be approved-by a supermajority Vote of the Board as set forth in the Stockholders Agreement prior to any such signing, execution or performance. 5.9 Secretary. The Secretary shall attend all meetings of --------- the Board and of the Stockholders and shall record all the proceedings of the meetings of the Board and of the stockholders in a book to be kept for that purpose, and shall perform like duties for committees of the Board, when required. The secretary shall give, or cause to be given, notice of all special meetings of the Board and of the stockholders and shall perform such other duties as may be prescribed by the Board or by the President, under whose supervision the secretary shall be. The Secretary shall have custody of the corporate seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to impress the same on any instrument requiring it, and when so impressed the seal may be attested by the signature of the Secretary or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to impress the seal of the Corporation and to attest the same by such officer's signature. The Secretary or an Assistant Secretary may also attest all instruments signed by the president or any Vice President. The Secretary shall have charge of all the books, records and papers of the Corporation relating to its organization and management, shall see that the reports, statements and other documents required by statute are properly kept and filed and, in general, shall perform all duties incident to the office of Secretary of a corporation and such other duties as may from time to time be assigned to the Secretary by the Board or by the President. 5.10 Treasurer. The Treasurer shall have charge and custody --------- of, and be responsible for, all funds, securities and notes of the Corporation; receive and give receipts for moneys due and payable to the Corporation from any sources whatsoever; deposit all such moneys and valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board; against proper vouchers, cause such funds to be disbursed by checks or drafts on the authorized depositories of the Corporation signed in such manner as shall be determined by the Board and be responsible for the accuracy of the amounts of all moneys so disbursed; regularly enter or cause to be entered in books or other records maintained for the purpose full and adequate account of all moneys received or paid for the account of the Corporation; have the right to require from time to time reports or statements giving such information as the Treasurer may desire with respect to any and all financial transactions of the Corporation from the officers or agents transacting the same; render to the President or the Board, whenever the President or the Board shall require the Treasurer so to do, an account of the financial condition of the Corporation and of all financial transactions of the corporation, exhibit at all reasonable times the records and books of account to any of the Directors upon application at the office of the Corporation where such records and books are kept; disburse the funds of the Corporation as ordered by the Board; and, in general, perform all duties incident to the office of Treasurer of a corporation and such other duties as may from time to time be assigned to the Treasurer by the Board or the President. 5.11 Assistant Secretaries and Assistant Treasurers. ---------------------------------------------- Assistant Secretaries and Assistant Treasurers shall perform such duties as shall be assigned to them by the Secretary or by the Treasurer, respectively, or by the Board or by the President. ARTICLE 6 CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. ---------------------------------------------- 6.1 Execution of Contracts. The Board, except as otherwise ---------------------- provided in these By-Laws, may prospectively or retroactively authorize any officer or officers, employee or employees or agent or agents, in the name and on behalf of the Corporation, to enter into any contract or execute and deliver any instrument, and any such authority may be general or confined to specific instances, or otherwise limited. 6.2 Loans. The Board may prospectively or retroactively ----- authorize the President or any other officer, employee or agent of the Corporation to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances the person so authorized may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and, when authorized by the Board so to do, may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances. Such authority conferred by the Board may be general or confined to specific instances, or otherwise limited. 6.3 Checks, Drafts, Etc. All checks, drafts and other -------------------- orders for the payment of money out of the funds of the Corporation and all evidences of indebtedness of the Corporation shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board. 6.4 Deposits. The funds of the Corporation not otherwise -------- employed shall be deposited from time to time to the order of the Corporation with such banks, trust companies investment banking firms, financial institutions or other depositories as the Board may select or as may be selected by an officer, employee or agent of the Corporation to whom such power to select may from time to time be delegated by the Board. ARTICLE 7 STOCK AND DIVIDENDS ------------------- 7.1 Certificates Representing Shares. The shares of -------------------------------- capital stock of the Corporation shall be represented by certificates in such form (consistent with the provisions of Section 158 of the General Corporation Law) as shall be approved by the Board. Such certificates shall be signed by the chairman, the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be impressed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles, if the certificate is countersigned by a transfer agent or registrar other than the corporation itself or its employee. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon any certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may, unless otherwise ordered by the Board, be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 7.2 Transfer of Shares. Transfers of shares of capital ------------------ stock of the Corporation shall be made only on the books of the Corporation by the holder thereof or by the holder's duly authorized-attorney appointed by a power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates representing such shares of capital stock properly endorsed for transfer and upon payment of all necessary transfer taxes. Every certificate exchanged, returned or surrendered to the corporation shall be marked "Cancelled," with the date of cancellation, by the Secretary or an Assistant Secretary or the transfer agent of the Corporation. A person in whose name shares of capital stock shall stand on the books of the corporation shall be deemed the owner thereof to receive dividends, to vote as such owner and for all other purposes as respects the Corporation. No transfer of shares of capital stock shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until such transfer shall have been entered on the books of the Corporation by an entry showing from and to whom transferred. 7.3 Transfer and Registry Agents. The Corporation may from ---------------------------- time to time maintain one or more transfer offices or agents and registry offices or agents at such place or places as may be determined from time to time by the Board. 7.4 Lost, Destroyed, Stolen and Mutilated Certificates. -------------------------------------------------- The holder of any shares of capital stock of the Corporation shall immediately notify the Corporation of any loss, destruction, theft or mutilation of the certificate representing such shares, and the Corporation may issue a new certificate to replace the certificate alleged to have been lost, destroyed, stolen or mutilated. The Board may, in its discretion, as a condition to the issue of any such new certificate, require the owner of the lost, destroyed, stolen or mutilated certificate, or his or her legal representatives, to make proof satisfactory to the Board of such loss, destruction, theft or mutilation and to advertise such fact in such manner as the Board may require, and to give the corporation and its transfer agents and registrars, or such of them as the Board may require, a bond in such form, in such sums and with such surety or sureties as the Board may direct, to indemnify the Corporation and its transfer agents and registrars against any claim that may be made against any of them on account of the continued existence of any such certificate so alleged to have been lost, destroyed, stolen or mutilated and against any expense in connection with such claim. 7.5 Rules and Regulations. The Board may make such rules --------------------- and regulations as it may deem expedient, not inconsistent with these By-Laws, the Certificate of Incorporation or the Stockholders Agreement, concerning the issue, transfer and registration of certificates representing shares of its capital stock. 7.6 Restriction on Transfer of Stock. A written -------------------------------- restriction on the transfer or registration of transfer of capital stock of the Corporation, if permitted by Section 202 of The General Corporation Law and noted conspicuously on the certificate representing such capital stock, may be enforced against the holder of the restricted capital stock or any successor or transferee of the holder, including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing such capital stock, a restriction, even though permitted by' Section 202 of the General corporation Law, shall be ineffective except against a person with actual knowledge of the restriction. A restriction on the transfer or registration of transfer of capital stock of the corporation may be imposed either by the Certificate of Incorporation or by an agreement along any n of stockholders or among such stockholders and the Corporation. No restriction so imposed shall be binding with respect to capital stock issued prior to the adoption of the restriction unless the holders of such capital stock are parties to an agreement or voted in favor of the restriction. The shares of Class A-1 Common Stock, Class A-2 Common Stock, Class B Common Stock, Class A-1 Convertible Preferred Stock, Class A-2 Convertible Preferred Stock and Class B Convertible Preferred Stock, in each case having a par value of $.01 per share, of the Corporation are subject to restrictions on their transferability as set forth in the Stockholders Agreement. 7.7 Dividends Surplus, Etc. Subject to the provisions of ----------------------- the Certificate of Incorporation, the Stockholders Agreement and of law, the Board: 7.7.1 may declare and pay dividends or make other distributions on the outstanding shares of capital stock in such amounts and at such time or times as it, in its discretion, shall deem advisable giving due consideration to the condition of the affairs of the corporation; 7.7.2 may use and apply, in its discretion, any of the surplus of the Corporation in purchasing or acquiring any shares of capital stock of the Corporation, or purchase warrants therefor, in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidences of indebtedness; and 7.7.3 may set aside from time to time out of such surplus or net profits such sum or sums as, in its discretion, it may think proper, as a reserve fund to meet contingencies, or for equalizing dividends or for the purpose of maintaining or increasing the property or business of the Corporation, or for any purpose it may think conducive to the best interests of the Corporation. ARTICLE 8 INDEMNIFICATION --------------- 8.1 Indemnity Undertaking. To the fullest extent permitted --------------------- by the General Corporation Law of the State Of Delaware (including, without limitation, Section 102(b)(7)), as amended from time to time, no Director of this Corporation shall be liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or amendment of this Section 8.1 or adoption of any provision of these By-Laws inconsistent with this Section 8.1 shall have prospective effect only and shall not adversely affect the liability of a Director of this Corporation with respect to any act or omission occurring at or before the time of such repeal, amendment or adoption of an inconsistent provision. To the fullest extent permitted by the General Corporation Law, the Corporation shall indemnify any Director or officer who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a Director or officer of the corporation, or is or was serving in any capacity at the request of the Corporation for any other corporation, any partnership, joint venture, trust, employee benefit plan or other enterprise (any "Other Entity"), against liabilities, excise taxes, amounts losses, judgements, fines, penalties, paid in settlement and costs, charges and expanses (including attorney fees and disbursements). Persons who are not directors or officers of the Corporation may be similarly indemnified in respect of service to the Corporation or to any Other Entity at the request of the corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article 8. 8.2 Advancement of Expenses. The Corporation shall, from ----------------------- time to time, reimburse or-advance to any Director or officer or other person entitled to indemnification hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding; provided, however that, if required by the General Corporation Law, such expenses incurred by or on behalf of any Director or officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by the Corporation of an undertaking by or on behalf of such Director or officer (or other person indemnified hereunder) to repay any such amount so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such Director, officer or other person is not entitled to be indemnified for such expenses. 8.3 Rights Not Exclusive. The rights to indemnification -------------------- and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article 8 shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled, including without limitation any right arising under any statute, the Certificate of Incorporation, these By-Laws, any agreement, any vote of stockholders or disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. 8.4 Continuation of Benefits. The rights to ------------------------ indemnification and reimbursement or advancement of expenses provided by, or granted pursuant to, this Article shall continue as to a person who has ceased to be a Director or officer (or other person indemnified hereunder) and shall inure to the benefit of the heirs, executors, administrators, legatees and distributees of such person. 8.5 Insurance. The Corporation shall have power to --------- purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of any other Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this or under Article 8, the Certificate of Incorporation or under section 145 of the General corporation Law or any other pro-vision of law. 8.6 Binding Effect. The provisions of this Article 8 shall -------------- be a contract between the Corporation, on the one hand and each Director and officer who serves in such capacity at any time while this Article 8 is in effect, and any other person entitled to indemnification on the other hand, pursuant to which the Corporation and each such Director, officer or other person intend to be and shall be legally bound. No repeal or modification of this Article 8 shall affect any rights or obligations with respect to any state of facts then or theretofore existing, or arising thereafter but before notice of such repeal or modification is delivered to the persons so affected or any Proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. Until notice of such repeal or modification is given to any person whose rights hereunder are adversely affected, such repeal or modification shall have no effect on such rights of such person hereunder. 8.7 Procedural Rights. The rights to indemnification and ----------------- reimbursement or advancement of expenses provided by, or granted pursuant to this Article 8 shall be enforceable by any person entitled to such indemnification or reimbursement or advancement of expenses in any court of competent jurisdiction. The burden of proving that such indemnification or reimbursement or advancement of expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its disinterested Directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or reimbursement or advancement of expenses is proper in the circumstances nor an actual determination by the Corporation (including its disinterested Directors, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or reimbursement or advancement of expenses shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing his or her right to such indemnification or reimbursement or advancement of expenses, in whole or in part, in any such proceeding. 8.8 Service Deemed at Corporation's Request. Any Director --------------------------------------- or officer of the Corporation serving in any capacity (a) another corporation of which a majority of the shares entitled to vote in the election of its directors is held, directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. ARTICLE 9 BOOKS AND RECORDS ----------------- 9.1 Books and Records. There shall be kept at the ----------------- principal office of the Corporation correct and complete records and books of account recording the financial transactions of the Corporation and minutes of the proceedings of the stockholders, the Board and any committee of the Board. The Corporation shall keep at its principal office, or at the office of the transfer agent or registrar of the Corporation, a record containing the names and addresses of all stockholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. 9.2 Form of Records. Any records maintained by the --------------- Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible written form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. 9.3 Inspection of Book and Records. Except as otherwise ------------------------------ provided by law and in the Stockholders Agreement, the Board shall determine from time to time whether, and, if allowed, when and under what conditions and regulations, the accounts, books, minutes and other records of the Corporation, or any of them, shall be open to the stockholders for inspection. ARTICLE 10 SEAL ---- The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. ARTICLE 11 FISCAL YEAR ----------- The fiscal year of the corporation shall be fixed, and may be changed, by resolution of the Board. ARTICLE 12 PROXIES AND CONSENTS -------------------- Unless otherwise directed by the Board, the Chairman, the President, any Vice President, the Secretary or the Treasurer, or any one of them, may execute and deliver on behalf of the corporation proxies respecting any and all shares or other ownership interests of any Other Entity owned by the Corporation appointing such person or persons as the officer executing the same shall deem proper to represent and vote the shares or other ownership interests so owned at any and all meetings of holders of shares or other ownership interests, whether general or special, and/or to execute and deliver consents respecting such shares or other ownership interests; or any of the aforesaid officers may attend any meeting of the holders of shares or other ownership interests of such Other Entity and thereat vote or exercise any or all other powers of the Corporation as the holder of such shares or other ownership interests. ARTICLE 13 AMENDMENTS ---------- These By-Laws may be amended or repealed and new By-Laws may be adopted by a vote of the Majority A-1 Holders and the Majority B Holders or by the Board in accordance with the stockholders Agreement. Any By-Laws adopted or amended by the Board may be amended or repealed by a vote of the majority A-1 Holders and the Majority B Holders. EX-27 4 FINANACIAL DATA SCHEDULE
5 12-MOS JAN-03-1999 JAN-03-1999 46,112,000 183,342,000 10,399,000 0 13,685,000 259,519,000 928,420,000 35,507,000 2,377,003,000 269,970,000 900,474,000 0 0 0 1,060,280,000 2,377,003,000 521,131,000 521,131,000 72,400,000 72,400,000 318,582,000 0 81,166,000 (80,466,000) 34,513,000 (114,979,000) 0 0 0 (114,979,000) 0 0
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