February 15, 2008
VIA FEDERAL EXPRESS & EDGAR
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn: Michael Fay
Joseph Foti
Re: Six Flags, Inc.
Form 10-K: for the fiscal year ended December 31, 2006
Form 10-Q: for the quarterly period ended June 30, 2007
Commission File No. 1-13703
Ladies and Gentlemen:
I am in receipt of the additional comment letter dated February 6, 2008 of
the staff (the "Staff") of the Securities and Exchange Commission regarding the
Form 10-K for the year ended December 31, 2006 of Six Flags, Inc. ("Six Flags"
or the "Company"). Set forth below are our responses to your numbered comments.
Prior Comment 2
1. Your response acknowledges our view that EITF Topic D-98 should be applied
to redeemable minority interests, although we are still unclear as to why
the absence of presentation of the limited partnership units based on
their current redemption amount is reasonable in light of your particular
facts and circumstances. You solely state your understanding "that the
Staff has communicated that the earnings per share impact of such a
redemption feature could be calculated based on the difference between the
redemption amount and the fair value of the units." It appears that you
are implicitly relying on the guidance in paragraphs 18 -19 of EITF Topic
D-98 whereby only a redeemable "common stock" ownership interest would be
treated in this manner for earnings per share purposes. Therefore, it is
unclear to us whether you believe that your SFOG and SFOT limited
partnership units are similar in features and characteristics to your
outstanding common stock.
In this regard, please provide us a detailed analysis of the
characteristics of the limited partnership units of the SFOG and SFOT
partnership parks that demonstrates whether the units are more akin to the
features and characteristics being possessed by your common shareholders
or more akin to a preferred ownership interest. As part of your analysis,
completely and clearly describe the liquidation, voting,
dividend/distribution, and any other significant contractual rights of the
unit holders. In this regard, we note the unit holders are entitled to
minimum annual distributions. Further, payment of the distributions on the
limited partnership units as well as other obligations (capital
expenditures, etc.) that are guaranteed by the parent appear to indicate
that the units may be more akin to a "preferred" ownership interest.
Our requested analysis is in response to your understanding that "the
earnings per share impact of such a redemption feature could be calculated
based on the difference between the redemption amounts and the fair value
of the units." In the absence of your redeemable minority interest in
limited partnership units being similar to a common ownership interest, we
believe that you would be required to include the entire adjustment to the
periodic redemption amount in the calculation of earnings per unit
consistent with the guidance in paragraph 18 of EITF Topic D-98.
Accordingly, you would need to adjust the carrying value of the limited
partnership units up to their maximum redemption value using one of the
methods described in paragraph 16 of Topic D-98, with those periodic
redemption adjustments impacting earnings (loss) per unit.
To respond to the comment, we will expand on the history and
structure of the limited partnerships, and analyze whether the
limited partnership units are akin to common stock.
Background on the History and Structure of the Limited Partnerships
The limited partnership structure was chosen for SFOG and SFOT
decades ago for reasons that are very common to the decision to
utilize the limited partnership form of doing business. First, it
allowed for the limited partners to be the source of equity capital,
while at the same time limiting their liability to the extent of
their investment. Second, the partnership structure provided a more
efficient form of doing business from a tax perspective as
earnings/losses flow through to the partners and earnings can be
distributed while only being subject to one level of income tax at
the partner level. In a corporate structure, losses cannot be
utilized by the shareholders for tax purposes and earnings are
subject to tax at the corporate level and then once again at the
shareholder level upon distribution. The limited partnership
structure also accommodated the business objective of Six Flags to
continue to manage the first two parks in the Six Flags chain. As the
original limited partnerships approached their maturity in 1997, the
limited partnership agreements were amended in connection with an
auction process to extend their life to 2027 in the case of SFOG, and
2028 in the case of SFOT, and allow Six Flags to continue to be the
managing party via the newly created general partnership interests.
Within each of SFOG and SFOT, the limited partnership units are
identical, regardless of whether they are owned by the third-party
limited partners, the outside general partners or the Six Flags
subsidiaries. Under the terms of the overall agreement with the
limited partners, each limited partnership unit is entitled to a pro
rata share of annual distributions of $58,234,000. Additionally, the
Company is obligated to ensure that the partnerships spend an average
of 6% of revenues during rolling five-year periods on capital
expenditures. To the extent that the partnerships are unable to meet
their required annual distributions to each limited partner or the
required amount of capital expenditures, the Company's general
partner subsidiaries are obligated to provide the necessary cash to
meet the commitments.
After meeting the minimum annual distributions, to the extent there
is additional cash available for distribution, the outside general
partners are entitled to $100. Then, the Company's general partner
subsidiaries are entitled to a management fee equal to 3% of revenues
plus interest plus the amount of any management fee not paid from
prior years plus interest. After the management fee, any available
cash is distributed 92.5% to the Company's general partner subsidiary
and 7.5% to the limited partners in the case of SFOT, and 95% to the
Company's general partner subsidiary and 5% to the limited partners
in the case of SFOG, as an additional management incentive.
The Company's general partner subsidiaries have an obligation to
annually offer to purchase up to 5% of the outstanding limited
partnership units, accumulating each year to the extent units are not
purchased in any given year. The purchase obligation is the greater
of (i) the weighted average EBITDA, as defined in the agreements, for
the previous four years times 8.0 for SFOG and 8.5 for SFOT and (ii)
a total equity value of $250 million for SFOG and $374.8 million for
SFOT.
The limited partners have identical voting rights, although those
rights are somewhat limited due to the general partners having
management control, and the limited partners are entitled to all of
the net proceeds from the partnerships' dissolution in 2027 or later
as permitted by the overall agreement on a pari passu basis.
The Limited Partnership Units as In-Substance Common Stock
Assuming the Company's minority interests related to SFOT and SFOG
fall within Topic D-98, we believe that the limited partnership units
with their 99% ownership interests must be viewed as the sole class
of common stock with regard to the limited partnerships.
To analyze whether the limited partnership units are akin to common
stock, one must first compare the limited partnerships to
corporations. In this regard, it is important to note that there is
no corporate structural equivalent to the general partners. Their
unlimited liability and management powers are not found in the
ownership of common stock, and common stock is usually the instrument
offered to raise the equity capital of a corporate entity, not merely
a nominal position. Accordingly, the general partner subsidiaries'
interests should be viewed as the functional equivalents of
management contracts with supporting financial guarantees and
incentive management distributions, and the limited partners as the
common stock investors. The outside general partners of SFOG and SFOT
should be viewed in the same manner, as their role is to replace the
Company's general partner subsidiaries if there were to be a breach
of the Company's obligations and the Company's general partner
subsidiaries were removed. The above perspective is consistent with
the history of the parties and the reason for the use of the limited
partnership structure (i.e., equity capitalization by third parties
while retaining Six Flags as the managing party and preserving income
tax efficiency for the partners). It is also consistent with the
motivation behind most limited partnership structures.
Additional guidance for evaluating the overall question of whether
the limited partnership units are akin to common or preferred stock
would appear to be EITF 02-14 "Whether an Investor Should Apply the
Equity Method of Accounting to Investments Other Than Common Stock",
which in paragraphs 6 and 7 addresses the qualities that make an
instrument "in-substance common stock". While EITF 02-14 provides
specific tests for considering whether an instrument is "in-substance
common stock", the tests were unfortunately written for a
corporation, and not a limited partnership. Nevertheless, they
provide some guidance for consideration, whereas there would
otherwise be none.
The first test under EITF 02-14 is whether the limited partnership
units are subordinate in a manner similar to common stock. The
limited partnership units are subordinate to all of the liabilities
of the partnerships and are entitled to all of the proceeds upon
liquidation of SFOG and SFOT. The general partners receive no value
allocation in liquidation. As such, the limited partner units have
rights upon liquidation equal to common stockholders.
A second test for in-substance common stock is that the instruments
must bear the risks and rewards of ownership akin to common stock.
Like common stock, each limited partnership unit has a limitation on
liability that cannot exceed the investor's investment. The limited
partners inherently benefit from the gains of the business and suffer
the effect of losses. While the limited partnership units under the
Company's circumstances have a right under the overall agreement to
put their interests at certain times to the general partners, that
right only limits the extent of the risk of loss to those individuals
and is not relevant to the risk of loss inherent in the ownership
units themselves (i.e., even if put, the limited partnership units
retain all of the benefits and burdens of ownership of the
partnership). It is up to the limited partners as to whether they
wish to stay in the game or sell their interests under the put
contract. Those individuals who retain ownership of the units will
bear the risks and rewards of that ownership, just as they would if
their interests were structured as the common stock of corporate
entities instead of units in a limited partnership.
The last test of in-substance common stock is that there is no
preferential transfer of value. In the case of the limited
partnership units, none have any preferential rights against each
other. They are identical, and share the benefits and burden of
ownership pari passu.
As the limited partnership units appear to meet, by analogy, all of
the qualities of in-substance common stock, it would appear
reasonable to conclude that the units are akin to common stock for
purposes of applying Topic D-98 to the Company's circumstances.
We note that the items mentioned by the Staff in the comment, such as
minimum annual distributions, the guarantee to maintain capital
expenditures and other support provided by the Company in its role as
manager (i.e., general partner), are not mentioned in EITF 02-14 or
any other authoritative literature that we are aware of as being
relevant to the question of whether an equity instrument is
in-substance common stock.
As to the guidance of Topic D-98, we note from discussion with our
external auditors that the Staff's view is that Topic D-98 should be
applied to redeemable minority common interests that do not fall
within the scope of SFAS 150 or SFAS 133. However, we also understand
that the Staff has communicated that the earnings per share impact of
such a redemption feature could be calculated based on the difference
between the redemption amount and the fair value of the units. In the
case of the SFOG and SFOT limited partnership units, the redemption
prices of the units do not currently exceed their fair value and have
not exceeded fair value in the past. Therefore the unit holders have
not received a preferential return that would impact the calculation
of earnings per share.
As discussed in our prior response letter, the Company's policy has
been to account for the minority interest and the redemption feature
using ARB 51 and to provide detailed disclosure of the redemption
contingency. For any units purchased by the Company, step acquisition
accounting is applied. As previously communicated the amounts paid by
the Company to purchase the minority units have not exceeded fair
value. In future filings, the Company will add to the historical
disclosure by formally and specifically indicating that the Company
reviews the operations of the two partnerships annually to determine
if the fair value of the partnership units is less than the
redemption amount. The disclosure will also indicate that earnings
per share (and the carrying amount of the units) will be adjusted in
the future if the redemption amount exceeds the fair value of the
units.
2. Please provide us a further analysis supporting your assertion that the
redemption price of the SFOG and SFOT limited partnership units do not
exceed their underlying fair value. For example, consider providing an
analysis for each of the partnership parks that quantifies on a per unit
basis the present value of the minimum distributions to be received and
the redemption amount under the two different valuation methods, along
with supporting calculations.
According to SFAS 157 "Fair Value Measurements," there is no better
evidence of fair value than what happens in a marketplace between
willing buyers and sellers. Please note that a long-term valuation
requires assumptions about discount rates, growth rates, terminal
values and numerous other factors that are subjective. Given the
history of the transactions between the Company, the limited partners
and the outside general partners, which support the Company's
position that the purchase price does not exceed fair value, we do
not believe valuation experts would be willing to assert a contrary
position. To do so would be to ignore the evidence that the valuation
profession considers to be the most persuasive. Accordingly, the
valuation analysis would have to have its assumptions established and
adjusted until the valuation analysis supported the same conclusion
as the marketplace participants (i.e., that the redemption price does
not exceed fair value).
Accordingly, we are unsure as to the application of the additional
information requested. For that reason, we respectfully request a
discussion with the Staff about the requested analyses.
3. Please confirm that in performing step acquisition accounting upon a
redemption of a limited partnership unit that you consider the difference
between the amount paid and the GAAP carrying amount of the limited
partnership units applying FASB Statement No. 141.
We confirm that in performing step acquisition accounting upon the
incremental purchase of a limited partnership unit, we consider the
difference between the amount paid and the GAAP carrying amount of
the limited partnership units applying FASB Statement No. 141.
If you have any questions regarding this letter or otherwise, please call me
at 212-652-9384.
Sincerely,
Six Flags, Inc.
By: /s/ Jeffrey R. Speed
-------------------------------------
Name: Jeffrey R. Speed
Title: Executive Vice President and
Chief Financial Officer