Attached files

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EX-31.3 - PEO FINANCE CERT - UCDP FINANCE INCdex313.htm
EX-31.4 - PFO FINANCE CERT - UCDP FINANCE INCdex314.htm
EX-21.1 - LIST OF SUBSIDIARIES - UCDP FINANCE INCdex211.htm
EX-32.1 - PEO UCDP CERT - UCDP FINANCE INCdex321.htm
EX-12.1 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - UCDP FINANCE INCdex121.htm
EX-14.2 - GENERAL ELECTRIC COMPANY CODE OF CONDUCT - UCDP FINANCE INCdex142.htm
EX-31.1 - PEO UCDP CERT - UCDP FINANCE INCdex311.htm
EX-32.2 - PFO UCDP CERT - UCDP FINANCE INCdex322.htm
EX-32.4 - PFO FINANCE CERT - UCDP FINANCE INCdex324.htm
EX-31.2 - PFO UCDP CERT - UCDP FINANCE INCdex312.htm
EX-32.3 - PEO FINANCE CERT - UCDP FINANCE INCdex323.htm
EX-10.58 - NBC UNIVERSAL ANNUAL INCENTIVE PLAN - UCDP FINANCE INCdex1058.htm
EX-10.21 - SECOND AMENDED AND RESTATED PARTNERS' AGREEMENT DATED AS OF DECEMBER 9, 2004 - UCDP FINANCE INCdex1021.htm
EX-14.1 - UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD AND UCDP FINANCE, INC. CODE OF CONDUCT - UCDP FINANCE INCdex141.htm
Table of Contents

 

 

UNITED STATES

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 December 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number 333-108661-01

 

 

UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD.

UCDP FINANCE, INC.

(Exact name of registrants as specified in their charters)

 

 

 

Florida

Florida

 

59-3128514

42-1581381

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

1000 Universal Studios Plaza

Orlando, FL 32819-7610

(407) 363-8000

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

None   None

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    x  Yes    ¨  No

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.    x  Yes    ¨  No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

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

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

As of March 14, 2011 there were 100 shares of common stock of UCDP Finance, Inc., outstanding, all of which were held by affiliates; not applicable to Universal City Development Partners, Ltd. UCDP Finance, Inc. is a wholly owned subsidiary of Universal City Development Partners, Ltd. and was formed for the sole purpose of acting as a co-issuer of the Registrants’ 8  7/8% Senior Notes due in 2015 and 10  7/8% Senior Subordinated Notes due in 2016. UCDP Finance, Inc. meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 


Table of Contents

Table of contents

 

PART I   

Item 1.

  

Business

     5   

Item 1A.

  

Risk Factors

     21   

Item 1B.

  

Unresolved Staff Comments

     35   

Item 2.

  

Properties

     35   

Item 3.

  

Legal Proceedings

     36   

Item 4.

  

(Removed and Reserved)

     36   
PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     37   

Item 6.

  

Selected Financial Data

     37   

Item 7.

  

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

     43   

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     60   

Item 8.

  

Financial Statements and Supplementary Data

     61   

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     97   

Item 9A.

  

Controls and Procedures

     97   

Item 9B.

  

Other Information

     97   
PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

     98   

Item 11.

  

Executive Compensation

     102   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     109   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     109   

Item 14.

  

Principal Accounting Fees and Services

     120   
PART IV   

Item 15.

  

Exhibits, Financial Statement Schedules

     121   
  

Index to Exhibits

     121   
  

Signatures

     128   

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements appearing in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made in reliance upon the protections provided by such acts for forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, our Partners’ plans for us, business trends and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” or future or conditional verbs, such as “will,” “should,” “could” or “may” and variations of such words or similar expressions, are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will be achieved.

Because these forward-looking statements are subject to numerous risks and uncertainties, our actual results may differ materially from those expressed in or implied by such forward-looking statements. Some of the risks and uncertainties that may cause such differences include, but are not limited to:

 

   

the global economic environment, including the effects of the global economic downturn and its duration, severity and impact on overall consumer activity;

 

   

the substantial indebtedness of us and of our subsidiaries;

 

   

the Consultant’s (as defined herein) right to exercise his put option starting in June 2017 and the impact of such right on our ability to refinance our existing indebtedness when it matures, including debt under our renewed senior secured credit agreement and the indentures governing the notes;

 

   

competition within the Orlando theme park market;

 

   

our dependence on Universal City Studios Productions (formerly known as Vivendi Universal Entertainment or “VUE”) and its affiliates;

 

   

the loss of material intellectual property rights used in our business;

 

   

the occurrence of a change of control as defined in our material agreements;

 

   

the risks inherent in deriving substantially all of our revenues from one location;

 

   

the dependence of our business on air travel;

 

   

geopolitical or environmental events that could impact travel to Florida;

 

   

the loss of key distribution channels for ticket sales;

 

   

publicity associated with accidents occurring at theme parks;

 

   

the seasonality of our business; and

 

   

risks related to unfavorable outcomes of our legal proceedings.

There may also be other factors that may cause our actual results to differ materially from those expressed in or implied by any forward-looking statements contained in this report.

 

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All forward-looking statements included in this report are made only as of the date of this report, and we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. You should read this document and the documents that we incorporate by reference into this report completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future, except as required by law. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

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PART I

Item 1. Business.

Certain definitions and financial presentation

In this annual report on Form 10-K, unless otherwise indicated or the context otherwise requires: “UCDP” refers to Universal City Development Partners, Ltd., a Florida limited partnership. “UCDP Finance” refers to UCDP Finance, Inc., a Florida corporation and a wholly owned subsidiary of UCDP. The “registrants” refers to UCDP and UCDP Finance, collectively. “Universal Orlando”, “we”, “us”, “our” or the “Company” refers to the registrants and their respective subsidiaries. “Holding I” refers to Universal City Florida Holding Co. I, a Florida general partnership, and “Holding II” refers to Universal City Florida Holding Co. II, a Florida general partnership. “Holdings” or “UCHC” refers collectively to Holding I and Holding II. “Universal Orlando Resort” refers to the resort in Orlando, Florida, which includes our two theme parks (Universal Studios Florida and Universal’s Islands of Adventure), our entertainment complex (Universal CityWalk), and the three themed hotels owned by UCF Hotel Venture. “UCF Hotel Venture” refers to Loews Portofino Bay Hotel at Universal Orlando® Resort (or “Loews Portofino Bay Hotel”), Hard Rock Hotel® and Loews Royal Pacific Resort at Universal Orlando® Resort (or “Loews Royal Pacific Resort”), in which Universal City Studios Productions LLLP has an indirect noncontrolling interest and from which we derive revenue related to lease payments reflected in the Other Revenue line item on our consolidated statements of income, although we do not own the hotel assets. “CityWalk” refers to Universal CityWalk located at Orlando, Florida. “Universal CPM” refers to Universal City Property Management II LLC, one of the partners in Holdings. “NBCUniversal” refers to NBCUniversal Media, LLC, the indirect parent of Universal Studios Company LLC and Universal City Studios Productions LLLP, and “NBCU” refers to NBCUniversal and its affiliates. “USC” refers to Universal Studios Company LLC, an indirect wholly-owned subsidiary of NBCUniversal and the indirect parent of Universal City Studios Productions LLLP. “Universal City Studios Productions” or “UCSP” refers to Universal City Studios Productions LLLP, the parent company of Universal CPM and UCDP’s manager (formerly known as Vivendi Universal Entertainment or “VUE”). “GE” refers to the General Electric Company, who indirectly owns 49% of NBCUniversal, while “Comcast”refers to Comcast Corporation, who indirectly owns 51% of NBCUniversal. “Blackstone” refers collectively to Blackstone UTP Capital LLC, Blackstone UTP Capital A LLC, Blackstone UTP Offshore LLC and Blackstone Family Media Partnership III LLC and their sole members, who hold each of their respective interests in and are the remaining partners in Holdings. The “Partners” refers to UCDP’s ultimate owners, Universal CPM and Blackstone, on a combined basis. “Universal Parks & Resorts Vacations” refers to UCDP’s subsidiary Universal City Travel Partners d/b/a Universal Parks & Resorts Vacations. “Universal Orlando Online Merchandise Store” or “UOOMS” refers to a subsidiary of UCDP. Universal Parks & Resorts Vacations and UOOMS guarantee the 2015 notes and the 2016 notes (each as defined below). “Universal Parks & Resorts” or “UPR” refers to a division of UCSP. Our organizational and ownership structure is graphically depicted below under “Item 1. Ownership and organizational structure.” The “2004 senior secured credit agreement” and the “2004 senior secured credit facilities” refer to UCDP’s Amended and Restated Credit Agreement dated as of December 9, 2004, as amended, and the credit facilities provided thereunder, respectively. The terms “renewed senior secured credit agreement” and “renewed senior secured credit facilities” refer to the amendment and restatement of the 2004 senior secured credit agreement and the facilities provided thereunder, respectively, which are included in our consolidated financial statements included elsewhere in this report. The “2015 notes” or “senior notes” refers to the 87/8% senior notes issued by the registrants which are included in our consolidated financial statements included elsewhere in this report. The “2016 notes” or “senior subordinated notes” refers to the 10 7/8% senior subordinated notes issued by the registrants which are included in our consolidated financial statements included elsewhere in this report. We sometimes refer to the 2015 notes and the 2016 notes in this report together as the “notes”, while the holders of the notes are referred to as “noteholders.” The “April 2010 notes” refers to the 11 3/4% senior notes issued by UCDP which were included in our consolidated balance sheets and interest expense associated therewith was included in our statement of operations, in each case, prior to the refinancing thereof in November 2009. The “May 2010 notes” refers to the floating rate senior notes and the 8 3/8% senior notes issued by Holdings and its affiliates which were not included in our consolidated financial statements. The April 2010 notes and the May 2010 notes were redeemed or repurchased during the year ended December 31, 2009 as described more fully in note 5 to our audited consolidated financial statements included elsewhere in this report. The term “Partnership Agreement Amendment” refers to the amendment of UCDP’s partnership agreement executed as of October 18, 2009 in connection with the amendment to the Consultant Agreement (as defined herein).

For a detailed description of certain potential transactions between our partners, see Item 1A. Risk Factors – Risks related to the right of first refusal and drag along right between our partners.

 

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This report on Form 10-K contains financial measures not prepared in accordance with United States generally accepted accounting principles, including EBITDA (as defined herein by reference to UCDP’s Annual Incentive Plan) and Covenant EBITDA. All references to Covenant EBITDA refer to net income (loss) before interest, taxes and depreciation and amortization and certain other adjustments permitted by the definition of EBITDA in our renewed senior secured credit agreement and the indentures governing the notes. For further explanation of EBITDA and Covenant EBITDA and a reconciliation of EBITDA and Covenant EBITDA from Net Income and from Net Cash And Cash Equivalents Provided By Operating Activities, see “Item 6. Selected Financial Data.

Market and industry data

This report includes market and industry data that we obtained from periodic industry publications and internal company and in-park surveys. This report includes market share and industry data that we prepared primarily based on management’s knowledge of the industry and industry data. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we are not aware of any misstatements regarding any market or industry data presented herein, we cannot assure you of the accuracy and completeness of such information. We have not independently verified any of the data from third party sources nor have we ascertained the underlying economic assumptions relied upon therein.

Trademarks and copyrights

Universal Studios Florida, Universal’s Islands of Adventure, Universal Studios, Universal Orlando, Universal CityWalk, Universal Parks & Resorts Vacations, TWISTER...Ride It Out, E.T. Adventure, JAWS, Revenge of the Mummy, Pteranodon Flyers, The Lost Continent, Poseidon’s Fury, The Eighth Voyage of Sindbad, Halloween Horror Nights, CityWalk and Red Coconut Club are registered trademarks of Universal Studios. Hollywood Rip Ride Rockit, CityWalk’s Rising Star, Disaster! A Major Motion Picture Ride...Starring You!, Bob Marley’s—A Tribute to Freedom, the groove, and Universal Express Plus are service marks of Universal Studios. HARRY POTTER, character names and related indicia are trademarks and copyrights of Warner Bros. Entertainment, Inc. Harry Potter Publishing Rights are copyrights of JKR. The Simpsons are trademarks and copyrights of Twentieth Century Fox Film Corporation. The Amazing Adventures of Spider-Man, Spider-Man, The Incredible Hulk Coaster, Dr. Doom’s Fearfall, Storm Force Accelatron, Marvel Super Hero Island and Marvel Super Hero character names and likenesses are trademarks and copyrights of Marvel and copyrights of Universal Studios. Barney and A Day in the Park with Barney are trademarks and copyrights of Lyons Partnership, L.P. The names and characters Barney, Baby Bop, BJ and Super-Dee-Duper are trademarks of Lyons Partnership, L.P. Barney and BJ are Reg. U.S. Pat. & Tm. Off. Jurassic Park, Jurassic Park River Adventure, Camp Jurassic, and Jurassic Park Discovery Center are registered trademarks of Universal Studios/Amblin. Dudley Do Right’s Ripsaw Falls is a trademark and copyright of Ward Prods. Popeye & Bluto’s Bilge Rat Barges and all Popeye characters are trademarks and copyrights of KFS, Inc. and trademarks of Hearst Holdings, Inc. Dr. Seuss properties are trademarks and copyrights of Dr. Seuss Enterprises, L.P. T2 and Terminator are registered trademarks of StudioCanal Image S.A. Men In Black and Alien Attack are trademark and copyrights of Columbia Pictures Industries, Inc. Beetlejuice and all related characters and elements are trademarks and copyrights of Warner Bros. Entertainment, Inc. Nickelodeon, SpongeBob SquarePants, Rugrats, SpongeBob SquarePants created by Stephen Hillenberg. Rugrats created by Klasky Csupo, Inc. Woody Woodpecker’s KidZone and Woody Woodpecker’s Nuthouse Coaster are registered trademarks of Walter Lantz. Shrek 4-D is the trademark and copyright of DreamWorks Animation, LLC. Hard Rock Hotel, Hard Rock Cafe and Hard Rock Live are registered trademarks of Hard Rock Cafe International (USA), Inc. Pat O’Brien’s is a copyright of Pat O’Brien’s Bar, Inc. Emeril’s is the registered trademark of Emeril Lagasse. Jimmy Buffett’s Margaritaville is the registered trademark of Jimmy Buffett. Latin Quarter is the trademark of Latin Quarter Entertainment, Inc. NASCAR is a registered trademarks of NASCAR, Inc. Bubba Gump Shrimp Co. Restaurant & Market is a registered trademark and copyright of Par, Plc. Cinnabon is the registered trademark of Cinnabon, Inc. Starbucks is a registered trademark of Starbucks Coffee Company. Blue Man Group is a registered trademark of Blue Man Productions, Inc. Fossil is the registered trademark of Fossil, Inc. Fresh Produce is the registered trademark of Fresh Produce Sportswear, Inc. Quiet Flight is the registered trademark of Seal Trademarks Pty. NBA City is the registered trademark of NBA Properties, Inc. Walt Disney World, The Magic Kingdom, EPCOT, Disney’s Hollywood Studios and Disney’s Animal Kingdom are registered trademarks and service marks of Disney Enterprises, Inc. Wet ’n Wild is the registered trademark of Wet ’n Wild, Inc. SeaWorld, Discovery Cove, Aquatica and Busch Gardens are registered trademarks of SeaWorld Parks & Entertainment. Macy’s Thanksgiving Day Parade & Related Characters are copyrights of Macy’s East, Inc.

 

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Ownership and organizational structure

The following chart sets forth our ownership and organizational structure as of January 31, 2011:

LOGO

Note: Certain percentages in the chart above do not reflect indirect ownership. Additionally NBCUniversal Media, LLC was formerly known as NBC Universal, Inc., while Universal City Studios Productions LLLP was formerly known as Vivendi Universal Entertainment LLLP.

In January 1987, Universal City Florida Partners, or “UCFP,” a Florida general partnership, was formed to develop, operate and own Universal Studios Florida. In June 1992, Universal City Development Partners, a Florida general partnership, was formed for the purpose of developing and operating Universal’s Islands of Adventure and CityWalk, which were completed and opened to the public in 1999. In January 2000, Universal City Development Partners converted into a Delaware limited partnership and changed its name to Universal City Development Partners, LP, or “UCDP-DEL,” and UCFP was merged with and into UCDP-DEL. In June 2002, UCDP-DEL was merged with and into a newly formed Florida limited partnership. UCDP is the surviving entity of that merger. UCDP Finance is a Florida corporation formed in 2003 that serves as co-issuer of the notes. Holding I and Holding II are holding companies and do not have any material assets or operations other than ownership of partnership interests in UCDP and cash.

 

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The Blackstone Group L.P.

Affiliates of the Blackstone Group L.P. own a 50% interest in UCDP, UCDP Finance, Holding I, and Holding II. The Blackstone Group is a leading global alternative asset manager and provider of financial advisory services founded in 1985 and headquartered in New York. Blackstone manages the largest institutional private equity fund ever raised, an approximately $22 billion fund raised in 2005. Since its inception, Blackstone has raised approximately $49 billion for private equity investing and has invested in over 150 separate private equity transactions. In addition to private equity investments, Blackstone's core businesses include real estate investments, hedge fund solutions, credit-oriented funds and closed-end mutual funds. The Blackstone Group also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services.

Universal City Studios Productions

Universal City Studios Productions (formerly known as Vivendi Universal Entertainment or “VUE”) is an indirect wholly owned subsidiary of USC, which is in turn an indirect wholly owned subsidiary of NBCUniversal. Through NBCUniversal Holdings, Comcast owns 51% of NBCUniversal while GE owns the remaining 49%. NBCUniversal indirectly owns Universal City Studios Productions, which indirectly owns a 50% interest in UCDP, UCDP Finance, Holding I, and Holding II.

General

We own and operate two theme parks, Universal Studios Florida and Universal’s Islands of Adventure, and CityWalk, a dining, retail and entertainment complex, at Universal Orlando Resort, a multi-day vacation destination. Universal Orlando Resort also includes three themed hotels, Loews Portofino Bay Hotel at Universal Orlando, Hard Rock Hotel® and Loews Royal Pacific Resort at Universal Orlando, each of which are located within walking distance of our theme parks and CityWalk. These hotels are owned by UCF Hotel Venture, in which Universal City Studios Productions has an indirect noncontrolling interest. The results of the UCF Hotel Venture are not contained in our consolidated financial statements. We derive our revenue related to the three themed hotels owned by UCF Hotel Venture from lease payments reflected in the other revenue line item of our consolidated statements of income. The resort is located in Orlando, Florida. Our theme parks combine well-known movie, TV, comic and story book characters with exciting and technologically advanced rides and attractions.

Universal Studios Florida

Universal Studios Florida is a movie-and-television-based theme park designed to allow guests to become part of their favorite movies and television shows. Universal Studios Florida features more than 20 rides, attractions and shows along with facades of famous film locations. Some of our current rides and shows are:

 

   

Hollywood Rip Ride RockitSM: This high-tech, customizable, multi-sensory entertainment coaster has staked its claim as the most technologically advanced roller coaster in the world. The groundbreaking combination of audio and special effects engineering, sophisticated on- and off-board video and one-of-a-kind personalization takes guests on a roller coaster experience unlike any other. This coaster, which is our newest, opened in summer 2009.

 

   

The Simpsons Ride™: Guests careen and crash their way through Krustyland in the wild and hilarious The Simpsons Ride™. This attraction opened in May 2008 and was voted “Best New Attraction” by Theme Park Insider.com for 2008 in addition to winning the 2008 THEA Award for Outstanding Achievement—Attraction.

 

   

Disaster! A Major Motion Picture... Starring You!SM: Guests take a harrowing trip into the world of disaster movies.

 

   

Revenge of the Mummy®: Guests plunge into total darkness, as they face fireballs, beetles and an army of mummies on a psychological thrill ride. This indoor coaster won Amusement Today’s Golden Ticket Award for Best Indoor Coaster in 2010.

 

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Shrek 4-D™: Guests join Shrek®, Donkey and Princess Fiona on a “4-D” adventure that picks up where DreamWorks’ original Oscar® winning movie left off.

 

   

JAWS®: A multi-sensory water-based ride adventure which brings guests face to face with a three ton great white shark during a boat ride off the coast of Amity.

 

   

E.T. Adventure®: Guests climb aboard star bound bicycles to help E.T.® save his dying planet and continue the saga of one of the world’s most beloved screen characters.

 

   

Terminator 2: 3D®: A cyber-adventure attraction that puts guests in the middle of the action with live stunts and high-tech special effects.

 

   

TWISTER... Ride It Out®: The attraction that puts guests a mere 20 feet away from the awesome spectacle of a five-story tornado, including intensifying winds and pounding rain in an indoor vortex.

 

   

MEN IN BLACK™ Alien Attack™: The world’s first life-size, ride-through interactive video game, in which guests zap aliens and compete with each other for high scores.

 

   

Beetlejuice’s Graveyard Revue™: A revue-style show featuring the official Universal monsters such as Frankenstein®, Dracula® and The Wolfman® singing and dancing to rock ’n roll classics. This show was redesigned during 2006 and won the “Big E” Entertainment Award presented by IAAPA for Best Overall Production, given to shows within various production budget ranges.

 

   

A Day in the Park with Barney™: A sing-along interactive show where children can see Barney®, Baby Bop and BJ® live every day.

The streets of Universal Studios Florida feature facades recreating famous movie locations in San Francisco, New York and Hollywood. These facades recreate the “backlot” and are used as locations for filmed entertainment productions. We believe Universal Studios Florida also appeals to younger children with attractions such as Woody Woodpecker’s KidZone® and A Day in the Park with Barney, featuring an interactive show and play area for pre-schoolers. Attractions such as Beetlejuice’s Graveyard Revue provide entertainment for all ages.

As of December 31, 2010, food and beverage facilities at Universal Studios Florida included 2 full service restaurants, 4 cafeteria-style facilities and 13 fast-food locations providing more than 3,000 seats. The park also has more than 25 food snack carts. Each October, Universal Studios Florida typically hosts Halloween Horror Nights, which won the Golden Ticket Award for Best Halloween Event in 2010. Some of our attractions and other facilities may close periodically for maintenance, re-theming, or to adjust to varying attendance levels.

Universal’s Islands of Adventure

With more than 20 rides, attractions and shows, Universal’s Islands of Adventure is an award-winning theme park that combines advanced technology, innovative ride design and popular themes and characters to provide guests with exciting entertainment experiences drawn from the great stories of comics, movies, myths and books. In November 2010, the park was awarded four Themed Entertainment Association Thea Awards related to its Wizarding World of Harry PotterTM themed area. Additionally, Universal’s Islands of Adventure won the 2006 Applause Award that is given out every two years by the International Association of Amusement Parks and Attractions to the theme park whose management, operations and creative accomplishments have inspired the amusement industry with their thought, originality and sound business development, and was selected as the “Best Theme Park” by Theme Park Insider in four of the last nine years including 2010.

 

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Visitors enter Universal’s Islands of Adventure through a Port of Entry® where they begin their journey through the themed islands of the park. In this area, visitors find numerous street merchants, shops and restaurants. Once through the Port of Entry, our guests have a panoramic view across a large central lagoon surrounded by six distinct and individually themed islands:

 

   

The Wizarding World of Harry Potter™: Having opened in June 2010, a themed-island inspired by J.K. Rowling’s compelling stories and characters, which is faithful to the visual landscapes of the highest-grossing movie franchise in film history, provides a one-of-a-kind opportunity to experience the magical world of Harry and his friends. The fully immersive, themed island with multiple rides and attractions enables guests to experience some of the most iconic locations found in the books and the films, including the village of Hogsmeade and even Hogwarts castle itself. The themed island includes the groundbreaking attraction, Harry Potter and the Forbidden Journey™, which has opened to rave reviews as evidenced by it winning Theme Park Insider’s Best New Attraction award for 2010 as well as Amusement Today’s Golden Ticket Award for Best New Ride for 2010.

 

   

Seuss Landing™: The beloved characters of Dr. Seuss come to life in Seuss Landing™ with rides and attractions such as The Cat In The Hat, Caro-Seuss-el, One Fish, Two Fish, Red Fish, Blue Fish, If I Ran The Zoo and The High In The Sky Seuss Trolley Train Ride!.

 

   

The Lost Continent®: In The Lost Continent, visitors participate in rides and attractions featuring epic heroes and their many adventures, including Poseidon’s Fury®, an expedition of explorers that rediscovers a legendary lost underwater city; and The Eighth Voyage of Sindbad® stunt show, a live-action stunt showcase, which combines stunts, pyrotechnic effects and high seas heroics. The marketplace at The Lost Continent surrounds visitors with games of skill and chance, numerous themed shops, and live entertainment.

 

   

Jurassic Park®: Visitors to Jurassic Park encounter the mysteries and wonders of a prehistoric world. The Jurassic Park River Adventure® takes guests on a raft ride tour through Jurassic Park’s dinosaur habitats. Camp Jurassic® provides children with a prehistoric playground of dinosaur net traps while the Pteranodon Flyers® coaster ride soars overhead. The Jurassic Park Discovery Center® features entertaining and educational hands-on activities designed for the whole family to enjoy.

 

   

Toon Lagoon®: In Toon Lagoon, a line-up of popular comic strip and cartoon characters comes to life on rides and attractions such as Popeye and Bluto’s Bilge-Rat Barges®, where passengers white-water raft around Popeye’s island in pursuit of Popeye®, Bluto, Olive Oyl and Swee’ Pea; and Dudley Do-Right’s Ripsaw Falls®, a high-speed log flume ride featuring appearances by the cast of characters from the Dudley Do-Right animated television series.

 

   

Marvel Super Hero Island®: Visitors to Marvel Super Hero Island® discover superheroes and arch villains locked in battle in a place where good always triumphs over evil. Marvel Super Hero Island® employs a combination of motion simulation and theatrical production techniques to create a unique theme park experience for our guests with such rides as The Amazing Adventures of Spider-Man®, voted “Best Dark Ride” by Amusement Today in 2010, the Incredible Hulk Coaster®, which launches riders upward 150 feet and reaches top speeds of 67 miles per hour, and Dr. Doom’s Fearfall®, where guests skyrocket 150 feet straight up and then plunge back to earth in less than 3 seconds.

As of December 31, 2010, food and beverage facilities at Universal’s Islands of Adventure included 2 full service restaurants, 5 cafeteria-style facilities and 19 fast-food locations providing almost 3,500 seats. The park also has more than 20 food snack carts. Universal’s Islands of Adventure also features Mythos, our award winning sit down restaurant that was named “Best Theme Park Restaurant” by Theme Park Insider in 2008 for the sixth straight year. Some of our attractions and other facilities may close periodically for maintenance, re-theming, or to adjust to varying attendance levels.

 

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CityWalk

CityWalk is a diverse collection of restaurants, retail outlets, nightclubs and a 20-screen cineplex located between the entrances to both Universal Studios Florida and Universal’s Islands of Adventure. The 30-acre complex offers free general admission, except for parking fees and cover charges for admission to various night clubs or shows. Easily accessible by foot or boat from the three on-site hotels and our theme parks, CityWalk’s restaurants and storefronts offer a selection of daytime dining and shopping opportunities. In the evening, as guests emerge from our theme parks, CityWalk provides a comprehensive array of nighttime entertainment facilities, including dance clubs and live entertainment. Patrons of CityWalk can enjoy:

 

   

A wide variety of table service restaurants including Emeril’s® of Orlando, Hard Rock Cafe® Orlando, Jimmy Buffett’s® Margaritaville®, Latin Quarter™, The Sports Grille by NASCAR, NBA City and Bubba Gump Shrimp Co. Restaurant & Market®, along with numerous fast-food venues featuring various themes designed to cater to a wide variety of tastes.

 

   

Nightclubs such as Bob Marley’s—A Tribute to FreedomSM, the grooveSM, CityWalk’s Rising Star, Pat O’Brien’s® Orlando and the Red Coconut Club® that offer guests an array of music from reggae to blues, as well as other live entertainment and dancing; Jimmy Buffett’s® Margaritaville® and Latin Quarter™ also turn into nightclubs after 11:00 p.m.

 

   

Hard Rock Live® Orlando concert venue, which has featured many popular recording artists.

 

   

Retail stores, such as Island Clothing Co., Fresh Produce®, Fossil® and Quiet Flight® Surf Shop.

 

   

A 20-screen movie theater which ranks in the top five in Orlando market share, based on revenues as reported by Rentrak Corporation. In December 2009, the theater introduced an IMAX screen featuring IMAX’s digital projection system as well as its sound system.

 

   

A 1,015 seat Sharp AQUOS theater houses the Blue Man Group show, one of seven permanently based Blue Man Group productions produced throughout the world. The Blue Man Group show combines music, comedy and multimedia theatrics to produce a totally unique form of entertainment.

As of December 31, 2010, there were 38 facilities at CityWalk. We owned and operated 15 of these facilities and leased 23 to third parties and affiliated entities. Pursuant to a management agreement, we manage one of the facilities that we lease to a third party. We also have an ownership interest in the form of joint ventures for five of the entities that lease establishments from us.

Intellectual property

UCDP licenses the right to use a substantial number of intellectual properties as walk-around characters and as themed elements in rides, attractions, food and retail outlets as well as on merchandise developed by or for us. UCDP’s rights to use third party intellectual property are of critical importance to our operations and currently cost us a minimum of $10.8 million (plus volume-based fees) annually. We have acquired the right to use the majority of this intellectual property pursuant to the terms of UCDP’s partnership agreement which has been confirmed by the Universal License Agreement. UCDP also licenses certain intellectual property rights directly from unaffiliated third parties, including certain rights to the characters and other intellectual property contained in the Harry Potter™ books and motion pictures, which are licensed directly to UCDP pursuant to the WB Agreement, and various elements based on The Simpsons™, including certain characters and elements licensed to us pursuant to the Fox Agreement. The Universal License Agreement and our partnership agreement were amended on May 25, 2007, in connection with the execution of the WB Agreement. References to the Universal License Agreement and our partnership agreement are to those documents as amended in connection with the WB Agreement.

Certain of UCDP’s license agreements and the indentures governing the notes have change of control provisions. The change of control provisions are the result of negotiations among UCDP and the other parties to such agreements. Any decision related to entering into a transaction that would constitute a change of control (as defined in such agreements) would require the approval and/or participation of the partners; accordingly, the timing, terms and decisions with respect to any such transaction are outside of our control. There are various consequences to us if a change of control occurs under UCDP’s license agreements, including, in some circumstances, termination of the applicable license agreement. Under certain circumstances, a given event could trigger the change of control provisions of some of the license agreements without triggering the change of control provisions of the indentures governing the notes. For example, if Blackstone were to increase its combined voting power in Holding I and Holding II to greater than 50% of each of such entities, this event would trigger the change of control provisions of the WB Agreement. At 100% combined voting power in Holding I and Holding II, the event would also trigger the change of control provisions of UCDP’s partnership agreement, as confirmed through the Universal License Agreement. Also, if Blackstone or an entity with more than 50% of UCDP’s capital stock owned by Blackstone acquired an ownership interest in Universal CPM, this event would trigger the change of control provisions of both UCDP’s partnership agreement, as confirmed through the Universal License Agreement, and the WB Agreement, without triggering the change of control provisions of the indentures governing the notes.

 

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Universal License Agreement

The Universal License Agreement confirms the grant to UCDP, pursuant to UCDP’s partnership agreement, of a non-exclusive right to use the name “Universal” in connection with the operation of our theme parks and the non-exclusive right to use all proprietary and creative elements controlled by the Universal License Parties, including rights licensed by the third parties to the Universal License Parties and then sublicensed by the Universal Licensed Parties to UCDP. The rights under UCDP’s partnership agreement, as confirmed by the Universal License Agreement, are granted to UCDP without cost, except for reimbursement of costs paid by the Universal License Parties to unaffiliated third parties to obtain or maintain third party licenses, and are subject to third party contractual limitations. UCDP’s partnership agreement, as confirmed by the Universal License Agreement, also provides that UCDP will be informed of the status of negotiations relating to potential acquisitions of proprietary creative elements for possible new attractions at our theme parks.

UCDP’s partnership agreement, as confirmed by the Universal License Agreement, provides that UCDP’s right to use the Universal name in connection with Universal Orlando continues indefinitely at no cost to us until the latest of (i) 30 months after a change of control, as described in UCDP’s partnership agreement, (ii) 30 months after any termination of the WB Agreement prior to its scheduled expiration, or (iii) the expiration of the WB agreement in accordance with its terms. Our right to use the creative and proprietary elements controlled by the Universal License Parties continues at no cost to us (other than the special fees we pay to Universal City Studios Productions), subject to third party contractual limitations, until the later of the expiration or termination of the WB Agreement in accordance with its terms or, if sooner, the date that neither we nor a permitted successor or assign is a party to the WB Agreement, or the date such intellectual property rights would otherwise cease to be licensed to us. The Universal License Parties are required to continue to license new and additional intellectual properties to us for as long as we or our permitted successor or assign remains a party to the WB Agreement and such WB Agreement remains in effect. Following the expiration or termination of the WB Agreement in accordance with its terms, the Universal License Parties must continue to license to us existing intellectual property and those that are planned to be utilized at the time of such expiration or termination, for so long as we continue to operate our theme parks at a substantially similar standard, even if the Universal License Parties no longer have an ownership interest in us. If, however, Blackstone or a third party unaffiliated with the Universal License Parties acquires all of the partnership interests in us then following the expiration or termination of the WB Agreement in accordance with its terms, the Universal License Parties are not required to grant us a license to any new intellectual property rights that they may acquire or develop in the future that may be or become useful or necessary for the operation of our theme parks.

Intellectual properties licensed to UCDP under the Universal License Agreement include the following:

 

   

The Amazing Adventures of Spider-Man®; Doctor Doom’s Fearfall®; The Incredible Hulk Coaster®; and Storm Force Accelatron® licensed by Marvel Characters, Inc.

 

   

The Cat in the Hat™ , If I Ran the Zoo™, One Fish, Two Fish, Red Fish, Blue Fish™, The High in the Sky Seuss Trolley Train Ride!™, Caro-Seuss-el™ and all other Dr. Seuss-related thematic elements licensed by Dr. Seuss Enterprises, L.P.

 

   

Shrek®, as seen in Shrek 4-D™, licensed by DreamWorks Animation, LLC.

 

   

Popeye & Bluto’s Bilge-Rat Barges® and Olive Oyl™ licensed by King Features Syndicate, a division of The Hearst Corporation.

 

   

Dudley Do-Right’s Ripsaw Falls® licensed by Jay Ward Productions, Inc.

 

   

Various Nickelodeon elements licensed by MTV Networks.

The intellectual property rights UCDP licenses from others vary in term, with some lasting for as long as the relevant attraction is operational and others expiring periodically over the next several years. The intellectual property rights granted to UCDP pursuant to UCDP’s partnership agreement, as confirmed by the Universal License Agreement, and our other third party license agreements generally include the right to use all creative elements, trademarks, trade names and characters in theming for rides and attractions and in retail outlets, and, in some cases, to feature them as walk-around characters. Most of UCDP’s license agreements are subject to customary approval rights concerning the design of merchandise and marketing materials using the themed elements owned by the licensors. Most of UCDP’s intellectual property rights, whether acquired directly or pursuant to UCDP’s partnership agreement, as confirmed by the Universal License Agreement, require the payment of basic license and royalty fees to unaffiliated third parties on merchandise manufactured by or for us that include the licensed elements and are generally terminable if UCDP breaches by failing to maintain quality standards or failing to use the properties in accordance with the license.

 

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While some intellectual properties used at our theme parks and the full scope of our present use of some intellectual properties may not, in all cases, be covered by formal licenses, we believe UCDP’s rights to use these intellectual properties are secured on the basis of custom, practice and knowledge of the relevant intellectual property owners. We believe that UCDP’s rights to the intellectual properties we use at our theme parks are sufficient for the current operation of our business.

The following is a brief description of the material terms of the material license agreements entered into by USC or its affiliates through which UCDP sublicenses the right to use certain of its themed elements:

Marvel

USC has a license agreement with Marvel Characters, Inc. (“Marvel”) pursuant to which UCDP holds a sublicense to use properties and elements owned by Marvel. Marvel receives an annual license fee and a guaranteed annual royalty fee for all merchandise themed with Marvel characters. Pursuant to the license agreement, the Marvel properties are entitled to certain levels of advertising and publicity in connection with the marketing of our theme parks. Our use of the Marvel elements for theming, promotions and other purposes are subject to Marvel’s reasonable approval. We have geographical exclusivity east of the Mississippi River with regard to the specific Marvel characters we utilize. The license for the Marvel properties does not prohibit its assignment and is for the duration of our use of attractions themed around Marvel characters.

On December 31, 2009, the Walt Disney Company acquired Marvel Entertainment. We believe our agreement with Marvel stands and that the transaction will not impact our ability to use characters and attractions currently in use. In addition, we do not expect the transaction to have any impact on our guest experience.

In addition, the applicable NBCU subsidiary executed an agreement with Disney Enterprises, Inc. that maintains the confidentiality of our confidential business information provided pursuant to our and our affiliates’ agreements with Marvel and prevents inappropriate disclosure of our confidential information that could be used by the Parks and Resorts business of The Walt Disney Company, or for any of the theme parks or resorts of The Walt Disney Company (or any of its subsidiaries’ or licensees’), for anticompetitive purposes. After two years, such agreement is terminable by either party on six months notice.

Dr. Seuss

USC has a license agreement with Dr. Seuss Enterprises, L.P. (“Dr. Seuss Enterprises”) pursuant to which we obtain the right to use characters owned by Dr. Seuss Enterprises. USC has theme park exclusivity in certain territories, including the United States, for use of the Dr. Seuss elements with the provision that USC will not develop or operate more than three theme parks based on Dr. Seuss elements in the United States, as well as a non-exclusive license to make and sell Dr. Seuss themed merchandise. Dr. Seuss Enterprises is paid a guaranteed yearly merchandise royalty that varies with the paid attendance at our theme parks for the applicable year. The license will continue for so long as the Dr. Seuss properties are used in our theme parks and is assignable to a successor owner of theme parks containing Dr. Seuss elements.

DreamWorks

The term of the license agreement that USC had with DreamWorks, L.L.C. (“DreamWorks”) and DreamWorks Animation, LLC, pursuant to which we held a sublicense allowing us to incorporate certain properties and elements owned or controlled by DreamWorks into our theme parks, was terminated on January 31, 2006; however the agreement provides for certain rights to be retained by USC pursuant to the “Post-Term Exploitation of Properties” section of the agreement. Pursuant to this section, we continue to hold a sublicense which allows us to continue to operate our Shrek 4-D™ attraction, use certain strolling characters, and develop and sell merchandise based upon DreamWorks properties we used prior to January 31, 2006, for so long as we continue to pay to DreamWorks the applicable annual fees and merchandise royalties for such use.

 

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King Features

Universal City Studios LLC, a subsidiary of USC, has a license agreement with King Features Syndicate, a division of The Hearst Corporation, pursuant to which we obtain the right to use certain characters, such as Popeye®, Bluto™ and Olive Oyl™. We have a license to use the King Features elements for our theme park attractions, advertising, publicity and marketing, subject to reasonable approval rights of King Features, until 2019, with options to renew in ten-year successive increments so long as we continue to operate a Popeye® themed attraction. The license is assignable and Universal City Studios LLC has theme park exclusivity within the United States and Canada with respect to the use of the characters and a non-exclusive right to manufacture and sell related merchandise. King Features receives an annual fee and a guaranteed annual royalty fee for all merchandise themed with King Features characters.

The following is a brief description of the material terms of the WB Agreement, which UCDP licenses directly from Warner Bros. Consumer Products, Inc.:

Harry Potter

Pursuant to the WB Agreement, UCDP has directly licensed certain rights to the characters and other intellectual property contained in the Harry Potter™ books and motion pictures. This license is used, among other purposes, for appropriately themed attractions, merchandise stores and food venues which have been incorporated in a new themed area at Universal’s Islands of Adventure that includes a re-themed portion of one of its existing “islands” and additional undeveloped real estate. This themed-island opened in June 2010. Under the terms of the agreement, we have the right to use the licensed property until approximately nine years after the scheduled grand opening date of the attractions. We also have the ability to extend the term for two successive five-year renewal periods. Our use of the licensed property for the attractions, theming, promotions, merchandise and other purposes is subject to the sole approval of WB. The agreement provides us with the exclusive right to use the licensed property in theme parks, amusement parks, water parks and stand-alone themed venues similar to those found in a theme park within a 250-mile radius around Universal’s Islands of Adventure. UCDP will pay WB various license fees, merchandise royalty payments, and other payments throughout the term of the agreement.

The WB Agreement is terminable, subject to applicable cure periods, if we fail to maintain quality standards, fail to invest minimum required capital, fail to use the properties in accordance with the license, or upon other customary events of default. In addition, if we sell Universal’s Islands of Adventure, or if 50% of UCDP is not owned by UCSP or its affiliates, the agreement is terminable unless the buyer of Universal’s Islands of Adventure or of the interests in UCDP meets certain financial and reputation tests. In addition, Universal’s Islands of Adventure must either continue to be managed by NBCU or continue to be operated under the NBCU License Agreement. Our partnership agreement has been amended to provide that NBCU will execute the NBCU License Agreement with us, on the same financial terms as set forth in our existing partnership agreement and the Universal License Agreement, if, following such sale or change in control, we will no longer be managed by NBCU. In the event that, following such sale or change in control, in accordance with the WB Agreement, the name of the Universal’s Islands of Adventure theme park no longer contains the word “Universal” or “Universal’s”, then The Wizarding World of Harry Potter™, Jurassic Park® , Seuss Landing™ and Marvel Super Hero Island® themed areas of Universal’s Islands of Adventure need to be operated under the NBCU License Agreement, or the name of the theme park and resort must include the name of another major recognized theme park operator, major established motion picture and television studio or another name approved by WB. In the event of termination by WB due to our default, a sale of Universal’s Islands of Adventure or a change of control of UCDP for which the foregoing requirements are not satisfied, payments due with respect to the remaining term of the agreement will be accelerated and due immediately.

 

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Competitive strengths

World-class entertainment resort. We believe that we offer our guests an outstanding resort and entertainment experience anchored by two distinct theme parks featuring innovative rides, shows and attractions based on blockbuster movies and pop culture’s most incredible and timeless stories. Universal Studios Florida is a working production studio as well as a highly acclaimed movie-and-television-based theme park featuring attractions such as The Simpsons Ride™, Shrek 4-D™ and Revenge of the Mummy®. Universal’s Islands of Adventure is one of the world’s most technologically advanced theme parks and features five uniquely themed islands, each with its own adventure. Its marquee attractions include Jurassic Park River Adventure®, The Amazing Adventures of Spider-Man® and The Incredible Hulk Coaster®.

In summer 2009, Universal Studios Florida opened one of the most radically innovative coasters ever created, Hollywood Rip Ride RockitSM. In June 2010, we revealed The Wizarding World of Harry Potter™ at Universal’s Islands of Adventure, a sixth themed island that brings one of the most popular stories of our time to life. Included within this themed island are Hogsmeade™ and Harry Potter and the Forbidden Journey™, a groundbreaking new ride that was named Best New Attraction by Theme Park Insider and which helped propel Universal’s Islands of Adventure to Best Theme Park (also by Theme Park Insider). In addition, Harry Potter and the Forbidden JourneyTM won Amusement Today’s Golden Ticket Award for Best New Ride for 2010.

Universal Orlando Resort also includes CityWalk, a 30-acre nighttime entertainment complex that features restaurants, shops, clubs, and a 20-screen cineplex. The destination’s three on-site hotels include Loews Portofino Bay Hotel, Hard Rock Hotel® and Loews Royal Pacific Resort. In 2008, The World Travel Awards, referred to by The Wall Street Journal as the “Oscars of the Travel Industry”, named Universal Orlando as the World’s Leading Theme Park.

Orlando, Florida location. Our theme parks are located in Orlando, Florida, widely recognized to be the theme park capital of the world, with seven major theme parks and the largest annual theme park attendance in the United States. According to a July 2007 Forbes report, Orlando is the third most visited city in the U.S. Theme park attendance in Orlando has grown significantly since 1990 from 33.8 million to an estimated 63.5 million in 2009 for a compound annual growth rate of approximately 3.4%. We believe this growth was fueled by the introduction of new theme parks and attractions, continued investment in Orlando’s infrastructure and industry-wide marketing activities.

Globally recognizable brands. We have obtained licenses from some of the most recognized entertainment companies in the world, allowing us to create a diverse and compelling collection of globally recognized movie, TV, comic and story book characters that appeal to kids of all ages. Major licensors include Marvel Entertainment for Spider-Man™ and The Incredible Hulk™, Twentieth Century Fox for The Simpsons™, DreamWorks Animation for Shrek® and Madagascar®, Universal Pictures for The Mummy, Amblin Entertainment for Jurassic Park®, E.T.®, and JAWS® and characters from Dr. Seuss Enterprises and Nickelodeon Studios. In June 2010, under license from Warner Bros., we introduced The Wizarding World of Harry Potter™ themed island based on the hugely successful film and book series by J.K. Rowling. We believe our collection of characters, brands and themes and our well-established legacy with feature-film production and Hollywood provide us with highly effective means of attracting consumers to our theme parks.

Capital investment. Since 1990, we have invested approximately $3.8 billion in our theme parks and resort infrastructure, including $2.3 billion invested in connection with the opening of Universal’s Islands of Adventure, CityWalk and related resort infrastructure, in addition to amounts invested on our recent attractions including The Simpsons Ride™, Hollywood Rip Ride RockitSM and The Wizarding World of Harry Potter™. We believe that this capital investment has created a world-class theme park vacation destination with some of the most exciting and technologically advanced rides and attractions for our guests.

Our strategy

Our vision is to be recognized as a leading multi-day entertainment vacation destination, particularly suited for families with school age children and young adults. To this end, we intend to continue to capitalize on our competitive strengths by pursuing the following strategies:

Provide innovative entertainment experiences based on globally recognized brand stories. It is our goal to provide guests with innovative and immersive theme park experiences that bring their favorite stories and characters to life. In order to cater to the evolving entertainment desires of our guests, we plan to continue the development of relevant, technologically advanced, thrill and theme-based rides and attractions. As part of this strategy, we introduced The Simpsons Ride™ attraction in spring of 2008 and Hollywood Rip Ride RockitSM, which allows guests to select their own sound track to customize their exhilarating ride experience, in summer 2009. Recognized as an industry leader in technologically advanced rides and attractions, Universal Orlando received the Best Theme Park Attraction Award in 2008 from the Themed Entertainment Association and the Best New Theme Park Attraction Award by Theme Park Insider for The Simpsons Ride™ . Theme Park Insider also awarded Best New Attraction to Revenge of the Mummy® in 2004, and Best Overall Attraction to The Amazing Adventures of Spider-Man® in 2002, 2003 and 2004. In June 2010, we opened Harry Potter and the Forbidden Journey™, a groundbreaking new ride that has received worldwide media coverage while winning prestigious awards including the Best New Attraction by Theme Park Insider.

Inspired by J.K. Rowling’s compelling stories and characters, and faithful to the visual landscapes of the highest-grossing movie franchise in film history, The Wizarding World of Harry Potter™ provides a one-of-a-kind opportunity to experience the magical world of Harry and his friends. The fully immersive, themed island with multiple rides and attractions enables guests to experience some of the most iconic locations found in the books and the films, including the village of Hogsmeade and even Hogwarts castle itself.

To complement our menu of rides and attractions, we also provide fun and interactive live stage shows such as Beetlejuice’s Graveyard Review™ and The Eighth Voyage of Sindbad® stunt show as well as a variety of street entertainment to create a high level of energy and excitement throughout our theme parks. Building on our legacy of providing guests with experiences featuring a collection of globally recognized characters and brands, we also provide compelling food and merchandise offerings based on well-recognized restaurants such as Emeril’s® Restaurant Orlando, Bubba Gump Shrimp Co. Restaurant & Market®, Hard Rock Cafe® Orlando and Jimmy Buffett’s® Margaritaville®, along with branded products by such companies as Starbucks® Coffee, Cinnabon®, Oakley® Sunglasses and Billabong. We maintain our theme parks as a safe and comfortable environment with attractive and appealing surroundings based on feedback from our guests. Tracking studies conducted in our major market areas allow us to track awareness and perception of our core brand attributes and response to our marketing and sales initiatives. Frequent guest satisfaction surveys enable us to monitor performance in order to improve guest service and hospitality. This information also allows us to monitor and adapt to changes and opportunities in our marketplace.

Promote Universal Orlando Resort as a premier vacation destination. We use a number of media and distribution channels to promote Universal Orlando Resort as a multi-day theme park destination. Our media campaigns are developed and executed based on distinct segment insights for audiences within Florida, in the United States outside of Florida (the “outer U.S.”) and in each of our primary international markets.

According to a 2010 report of the U.S. Travel Association, “Travelers’ Use of the Internet,” approximately 74% of all U.S. adults, or 168 million individuals, use the Internet. Further, 72% of these U.S. adult Internet users are travelers, which translates into approximately 122 million travelers online. Approximately 76% of these individuals, or nearly 93 million U.S. adults, used the Internet to plan trips during the past 12 months. Therefore, we continue to focus our efforts on expanding and improving our online capabilities and our data- and technology-enabled marketing and sales programs. We expect these efforts will enable us to improve the relevancy and the efficiency of our online communications.

In addition, we utilize strategic channels to increase marketing power. We have regional offices in our top markets and we promote our products through top travel wholesalers that sell Orlando as a destination. We work with top travel agency chains throughout the United States, including the American Automobile Association (“AAA”), American Express Travel, Travelocity, Expedia, Orbitz, Travelsavers and Vacation.com. Universal Parks & Resorts Vacations, our subsidiary travel company, expands our overall marketing and sales reach by promoting complete vacation packages that include airline seats, hotels, theme park tickets, car rentals and other travel components to consumers and travel agencies. We also use a number of sales and distribution channels within the state of Florida, such as Guest Service or hotel concierge desks, timeshare sales offices and receptive operators, to reach guests while on vacation and ensure we remain on their Central Florida itinerary.

We also benefit from our association with NBCU and a variety of corporate sponsorships that continue to provide us with significant media exposure and promotional support in exchange for access, programming content and special offerings, but without substantial cash expenditure on our part. Promotional tie-ins with Universal movie and DVD releases, a cooperative direct marketing campaign with American Express and participation in the “My Coke Rewards” program are examples of this type of involvement.

Capitalize on appeal to families with school age children and young adults. We believe our attractive mix of high energy, exhilarating experiences combined with contemporary themes positions us well with this audience.

Develop effective ticket sales strategies for each market segment. Through in-park surveys, we track our theme park attendance from three distinct points of origin: visitors from the outer U.S., international visitors and Florida residents. Our largest market segment is visitors from the outer U.S., representing approximately 39% of our admissions in 2010. We have actively pursued this market segment by employing national media and promotional campaigns, partnering with travel agencies and enhancing our Internet marketing with the goal of increasing prepaid multi-day ticket sales. In 2010, approximately 33% of our admissions were international visitors. Given their extended time in market, we encourage these international guests to buy prepaid multi-day tickets by using a number of incentives, such as extended length of stay tickets and bundling with other area attractions such as Wet ‘n Wild®, SeaWorld®, Aquatica™ and Busch Gardens®. We also partner with a number of major tour operators, particularly in the United Kingdom. In 2010, approximately 28% of our admissions were Florida residents. We have a series of special events to attract Florida residents to our theme parks during non-peak periods. Examples of these events include Halloween Horror Nights®, Grinchmas™, Mardi Gras and the Macy’s Holiday Parade™. To capitalize on the strength of these events, we have introduced a range of annual ticket programs designed to maximize attendance and encourage loyalty from the Florida market.

Maximize the overall visitor experience. We seek to expand our portfolio of products to enhance the guest experience while maximizing financial results. We devote considerable effort toward developing innovative products that provide our guests with added convenience, enhanced flexibility and increased value. For instance, our Universal ExpressSM Plus (“UEP”) reduces our guests’ wait times at certain attractions and shows and affords our guests added convenience while yielding an incremental revenue stream for us. Additionally, we have developed the FlexPay program, which allows guests to purchase annual tickets while paying for them in installments throughout the year, thus providing guests with enhanced flexibility while increasing our base of annual ticket holders. We also offer the Universal Meal Deal ticket, which permits guests to enjoy all the food they can eat at certain restaurants within our theme parks. This product provides our guests with increased value while helping to keep guests on property for their dining needs.

Competition

The U.S. theme park industry is comprised of over 400 parks and attractions located all over the continental United States, including local amusement parks, larger regional parks, which tend to focus on roller coasters and other “iron rides”, and larger scale destination theme parks. Theme park attendance and nearby hotel occupancy generally peak during school vacation periods over the summer and during early winter and spring holiday periods.

The Orlando theme park market is extremely competitive, with seven major theme parks in the metro-Orlando area. The Walt Disney Company owns four of these: Disney’s Magic Kingdom®, Epcot®, Disney’s Hollywood Studios™ and Disney’s Animal Kingdom®. The Magic Kingdom, Disney’s original Orlando theme park, benefits from strong brand recognition of its flagship icon, Mickey Mouse. Epcot is a tour through the countries of the world, Disney’s Hollywood Studios™ is a movie-based theme park and Disney’s Animal Kingdom is an animal based theme park featuring both live and imaginary animal attractions. Due partly to its longer operating history within the theme park industry, Disney has the highest level of unaided awareness in the theme park industry and commands the majority market share. Additionally, Anheuser-Busch InBev historically operated a local SeaWorld® park in Orlando, which was sold to an affiliate of Blackstone on December 1, 2009. In addition to the seven major theme parks, Orlando is also home to four water parks with which we compete. Additionally, LEGOLAND® Florida announced plans to open a theme park in late 2011 in Winter Haven, Florida, which is approximately one hour southwest of Orlando.

The Orlando theme parks compete with other theme parks around the country as well as other forms of entertainment and recreation around the world. These include sports and outdoor activities and other vacation travel (cruises, beaches, etc.). Other principal competitive factors of a theme park include location, price, uniqueness and quality of the rides and attractions, entertainment value, general atmosphere and cleanliness.

Guests to our theme parks

Guests to our theme parks can be divided into three distinct points of origin: U.S. visitors from outside of Florida, international visitors and Florida residents. As measured internally through guest surveys, we believe our largest market is U.S. visitors from outside of Florida, representing approximately 39% of our admissions in 2010. We have actively pursued this market by enhancing our Internet marketing, increasing our outer-U.S. advertising spend, and partnering with travel agencies with the goal of increasing advance multi-day ticket sales. In 2010, based on our survey data, we believe approximately 33% of our admissions were international visitors. We market to these international guests primarily with advance multi-day tickets through cooperative print, consumer advertising and online media campaigns with our marketing partners. We also partner with a number of major tour operators, particularly in the United Kingdom. In 2010, based on our survey data, we believe approximately 28% of our admissions were Florida residents. We have a series of special events to attract Florida residents to our theme parks during the non-peak seasons. Examples of these events include Halloween Horror Nights®, Mardi Gras, Grinchmas™ and the Macy’s Holiday Parade™. To capitalize on the strength of these events, we have introduced annual ticket programs in a further effort to maximize attendance from the Florida market. The following table summarizes our paid attendance by point of origin during our last three fiscal years ended December 31, (in millions):

 

     2010      2009      2008  

Outer U.S.

     4.3         3.5         4.1   

International

     3.7         3.1         3.5   

Florida

     3.2         2.7         3.0   

 

Source: In-park guest surveys

Marketing and sales

In order to increase the number of visitors to our theme parks, we utilize various sales and marketing channels, including Internet sales channels, our subsidiary travel company (Universal Parks & Resorts Vacations), sales to timeshare operators, the establishment of joint marketing partnerships and other niche channels such as group sales. In addition, we also benefit from significant marketing spending by corporate sponsors on our behalf. Our sales and marketing expense for 2010 was $96.1 million. Our marketing activities are heavily weighted toward the key vacation planning period of February to May.

 

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Internet sales

As measured internally through in-park surveys, in 2010 approximately 55% of our theme park guests visited our website to gather information about us, and Internet sales account for approximately 20% of our 2010 theme park ticket revenue. We have increased our focus on improving and advancing our on-line presence and e-commerce capabilities by making graphical, copy, navigational and functional modifications that we believe will strengthen brand linkage and increase ticket conversions in our online ticket store. Our online strategy also includes efforts to continuously optimize search engine marketing and display advertising to increase brand recognition, traffic to the website and online sales.

Universal Parks & Resorts Vacations

Our subsidiary, Universal Parks & Resorts Vacations, serves as our own wholesale and consumer direct travel company and accounted for approximately 6% of our 2010 theme park ticket revenue. Universal Parks & Resorts Vacations primarily sells travel packages directly to consumers and through travel industry sales. This involves organizing vacation packages, including theme park tickets to Universal Studios Florida and Universal’s Islands of Adventure, reservations for air transportation, hotel accommodations and rental car transportation. In addition, Universal Parks & Resorts Vacations operates its own travel website and guest service desks at more than 20 locations, primarily at key hotels in Orlando.

Timeshare operators and other distribution channels

A significant portion of our ticket revenue is generated through our relationships with timeshare operators in the Orlando area. Many timeshare operators purchase tickets from us at a discounted price in order to offer those tickets to consumers as a reward for taking a tour of their timeshare properties. We also sell discounted tickets to timeshare operators for sale to visitors of their timeshare properties. Ticket sales from the timeshare sales channel constituted approximately 8% of our 2010 theme park ticket revenue. A majority of these tickets are sold by a small group of major timeshare operators in the Orlando area. Due to the upheaval in the credit markets since 2008 in conjunction with the timeshare industry’s reliance on access to credit, certain timeshare operators have experienced a significant downturn in their business. A continuation or worsening of these circumstances could adversely impact this important distribution channel, which could in turn adversely impact our business. In addition to the timeshare channel, we have several other primary distribution channels, including AAA, which has more than 60 regional clubs that we use across North America. Sales from these AAA locations accounted for approximately 4% of 2010 theme park ticket revenue. Sales from hotel guest service desks accounted for approximately 4% of 2010 theme park ticket revenue. We also utilize several key domestic and international travel operators as distribution channels for our theme park tickets. A dispute with one of our key distribution channels could adversely affect our business.

Corporate sponsorships

We enter into sponsorship agreements and benefit from sponsorship agreements entered into by Universal City Studios Productions and NBCUniversal and their affiliates with national and international companies that provide us with significant marketing exposure but do not require significant cash expenditure on our part. The following is a brief summary of some of the major sponsorship agreements that benefit our business.

The Coca-Cola Company

The Coca-Cola Company has been granted certain designations, such as, the “Official Soft Drink, Fruit Juice and Sports Drinks of Universal Studios Florida, Universal’s Islands of Adventure and CityWalk,” and has been given exclusive marketing, advertising and associational rights in the soft drink, sports drink and juice categories with respect to Universal Studios Florida, Universal’s Islands of Adventure and CityWalk and has exclusive product availability with respect to soft drinks, juices and sports drinks sold at Universal Studios Florida, Universal’s Islands of Adventure and those portions of CityWalk wholly owned or controlled by us or our affiliates. In return, Coca-Cola pays annual sponsorship fees and established a marketing fund for joint promotional activities benefiting us as well as certain other affiliates of Universal Parks & Resorts. This sponsorship agreement continues through December 31, 2012.

 

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GE Money Bank

Effective January 1, 2008, GE Money Bank became the “Official Financial Services Provider” or the “Official Financial Services Sponsor” of Universal Studios Florida, Universal’s Islands of Adventure and CityWalk and certain other Universal properties owned by our affiliates. However, on January 28, 2011, Comcast closed its transaction with GE in which Comcast acquired control of the business of NBC Universal, Inc. (now named NBCUniversal Media, LLC or “NBCUniversal”), and as part of that transaction, GE notified us that they elected to terminate their sponsorship agreement. That agreement set forth certain wind down provisions which the parties are currently following, and the termination is not expected to have a material effect on our business.

American Express

American Express has joined our family of sponsors and has been granted exclusive marketing and promotional rights as the “Official Payment Services Products Provider” of our theme parks, certain other Universal theme park properties and certain other entities owned by our affiliates. In return, American Express pays annual sponsorship and benefits fees and has committed to mutually agreed marketing and promotional programs benefiting us as well as our affiliates. American Express is the sponsor of the VIP tours at our theme parks. This agreement has an initial term through December 31, 2014.

Nestle Waters

Nestle Waters North America has been granted the right to market itself as the “Official Bottled Water” of Universal Studios Florida, Universal’s Islands of Adventure and CityWalk, has been designated as a sponsor of Shrek 4-D™ and has exclusive product availability with respect to bottled water at Universal Studios Florida, Universal’s Islands of Adventure and those portions of CityWalk wholly owned or controlled by us or our affiliates. Nestle Waters pays annual sponsorship fees and has committed to minimum marketing and promotional expenditures benefiting us as well as certain other affiliates of Universal Parks & Resorts. The sponsorship agreement has an initial term through December 31, 2012.

Seasonality

Our business is seasonal. Though the weather in Orlando allows us to admit customers on almost every day of the year, our attendance follows a seasonal pattern which coincides closely with holiday and school schedules. We address this seasonality by attempting to attract business during non-peak times and by reducing variable expenses during non-peak times.

We attempt to increase attendance during traditionally slow months in a number of ways. For instance, we try to increase attendance from local customers by coordinating special events. Halloween Horror Nights® in October covers more than 20 nights and significantly increases our local attendance. In another effort to boost local attendance and mitigate the effects of seasonality, we host our Mardi Gras special event every Saturday from early February to early April. Other initiatives include renting the parks to corporate customers for after-hour events, providing discount ticket offers to Florida residents and packaging hotel-inclusive special deals to attract customers who do not live in the Orlando area but are close enough to drive.

We also attempt to reduce variable expenses by making a number of operational adjustments during non-peak periods. For example, we reduce our operating hours based on anticipated attendance, opening at 9 a.m. and closing as early as 5 p.m. Also, certain attractions, shows, restaurants and stores are operated at reduced capacity or closed during seasonally slow times. Some of our attractions and other facilities may close periodically for maintenance, re-theming, or to adjust to varying attendance levels.

 

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We also carefully tailor our staffing levels. For example, we only hire enough full-time employees to provide a full schedule during our non-peak periods. Increased labor requirements are handled through casual and seasonal employees, overtime and other approaches, such as having our full-time employees who do not normally work in the park, including our maintenance and support staff, fulfill shifts in the parks during peak times, or hiring employees from retirement communities. We also minimize our labor requirements by categorizing days, for purposes of staffing, based on estimated attendance at our theme parks. For each potential operating hour combination we have low, medium and high attendance levels, and we develop staffing grids to meet the capacity requirements of each particular situation.

The Atlantic Ocean hurricane season begins in June and ends in November of each year. Historically, tropical weather systems have had little impact on Orlando theme parks. From 1991 to 2003, our parks had been closed only once due to the inclement weather caused by hurricanes. However, we closed our parks on four days as a result of hurricanes during 2004 and 2005. We experienced no closures from 2006 through 2010.

Capital improvements

We make annual capital investments to provide ongoing support for our existing park attractions and infrastructure, and also to fund the development of new park attractions and infrastructure. We believe these investments are critical in maintaining our position of having technologically advanced theme parks and to effectively compete with our competitors. These costs can vary from one year to the next, depending on the timing of the construction cycles. For instance, during 2009 and 2008, we made purchases totaling $127.2 million and $142.9 million, respectively, for capital projects (excluding capitalized interest and payments on previously accrued liabilities), while in 2010 similar expenditures amounted to only $73.1 million. During the year ended December 31, 2008, our capital expenditures in excess of the amount permitted by the capital covenant in our 2004 senior secured credit agreement were funded through partner equity contributions. We estimate our 2011 expenditures (excluding capitalized interest, capital lease purchases and payments on previously accrued liabilities) will be approximately $75.0 million. As of December 31, 2010, our total capital investment in The Wizarding World of Harry Potter™ (which opened in the spring of 2010), Hollywood Rip Ride RockitSM (which opened in the summer of 2009), The Simpsons Ride™ (which opened in the spring of 2008), and certain system enhancements primarily including the reengineering of our website and online ticket store was approximately $385.0 million. This includes all capital expenditures to build these attractions, excluding capitalized interest. This also takes into account the net present value of all license fee payments made during the initial terms of the applicable licenses, while excluding license payments made during renewal periods or merchandise royalties.

In order to ensure the creative content of the licensed movies and television shows is successfully translated into our newly developed rides and attractions, a worldwide creative team from Universal Parks & Resorts, Universal Creative, provides design and oversight for all new capital initiatives in our theme parks. For our rides and attractions that are also developed for other Universal theme parks, research and development costs are allocated pro rata among the various Universal theme parks that are building the same ride or attraction.

Maintenance and inspection

We maintain and develop our rides in accordance with standards developed by ASTM International for the design, manufacture, testing, operation, maintenance and inspection of amusement rides and devices. ASTM International is a not-for-profit organization that provides a global forum for the development and publication of voluntary consensus standards for design, materials, products, systems and services that are widely accepted within our industry. We use a computerized maintenance management system to manage our maintenance program, which includes daily, weekly, monthly and yearly inspections and extensive preventative maintenance.

 

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Our in-house inspectors are certified by the National Association of Amusement Ride Safety Officials. Our in-house inspectors conduct regular inspections and file annual inspection affidavits with the State of Florida Department of Agriculture and Consumer Services, or the “FDA.” UCDP has a memorandum of understanding with the FDA pursuant to which our inspection and maintenance personnel conduct an annual consultation at our theme parks with FDA officials and representatives from other major Florida theme parks. During those site visits, our in-house inspectors consult with the FDA on our ride safety programs and conduct an educational seminar for the FDA inspectors on recent developments in amusement ride technology and safety. We also report certain ride injuries to the FDA pursuant to the memorandum of understanding.

Park operations

Although our theme parks are open almost every day of the year, we adjust our hours of operation, as well as our staffing levels, based on expected attendance. The management of the day-to-day operation of our theme parks by our management team is overseen by UCDP’s manager, Universal City Studios Productions, pursuant to the terms of UCDP’s partnership agreement.

Principal products

Ticket sales

In connection with our strategy to maximize revenue and profit opportunities, we regularly review our ticket price levels and sales mix to capitalize on opportunities to implement selective price and product adjustments. We offer a number of ticket options to our theme park guests. Historically, we offered two types of one-day tickets. The first one-day ticket entitled the guest to visit either Universal Studios Florida or Universal’s Islands of Adventure for an entire day. The second type of one-day ticket entitled the guest to visit both Universal Studios Florida and Universal’s Islands of Adventure for an entire day. In January 2010, we reconfigured our ticket offerings as one-day, two-day, three-day, four-day, and seven-day tickets. Each of the tickets is valid for admission to Universal Studios Florida and/or Universal’s Islands of Adventure, one park per day, during the specified number of days. However, all of these tickets are valid for a 14-day period including first day of use. In addition to expanding the product offerings, we also added an option for the guest to upgrade access to both parks on the same day. The ability to visit both parks on the same day adds flexibility to the ticket and is offered at an additional charge.

Universal Orlando also offers several two-park annual ticket products. The first annual ticket option (Premier Pass) entitles a guest to unlimited visits to both of our theme parks for a full year with no restrictions and includes free valet parking, free kennel use, and after 4:00 PM Universal Express PlusSM (“UEP”) ride access. The second annual ticket option (Preferred Pass) also includes unlimited visits for a full year with no restrictions and includes free self parking. The third annual ticket option (Power Pass) provides access to both of our theme parks but includes blockout dates and does not include free parking. We offer the FlexPay option for certain annual ticket products, which allows them to pay equal monthly installments on their credit card.

In addition to our ticket products featuring Universal Studios Florida and Islands of Adventure, we also offer ticket products in conjunction with other Central Florida attractions. The 5-park Orlando FlexTicket™ entitles a guest to 14 days of unlimited admission to both of our theme parks as well as to Wet ‘n Wild®, SeaWorld® and Aquatica™. The 6-park Orlando FlexTicket Plus entitles a guest to 14 days of unlimited admission to Busch Gardens® Tampa Bay in addition to the five parks listed previously.

 

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Revenues from our tickets were $586.7 million, $419.0 million and $455.9 million during 2010, 2009 and 2008, respectively.

Merchandise, food and beverage sales

In addition to our ticket sales, we derive revenue from the sale of theme park merchandise, food and beverage. Revenues from these products during the past three fiscal years are set forth in the table below (in millions):

 

     Fiscal year ended December 31,  
     2010      2009      2008  

Theme park food and beverage

   $ 127.5       $ 94.7       $ 112.3   

Theme park merchandise

   $ 140.6       $ 82.7       $ 99.6   

Geographic financial summary

We operate exclusively in the theme park industry. Substantially all revenues were the result of sales directly related to our theme parks, which are located in Orlando, Florida. Accordingly, all revenues and long-lived assets were earned and reside in the United States. For additional information about our revenues and long-lived assets, please refer to our consolidated financial statements and notes thereto included elsewhere in this report.

Employees

As of December 31, 2010, we had approximately 16,000 employees on our payroll of whom approximately 14,800 were hourly employees and approximately 1,200 were salaried employees. Certain of our executive officers are employed and compensated by Universal City Studios Productions, but they work for us in operating Universal Orlando. We reimburse Universal City Studios Productions or its affiliates for the value of any compensation paid to such employees allocated to us by an affiliate of Universal City Studios Productions. We currently have no employees that are represented by a union. We consider relations with our employees to be satisfactory.

Environmental and other regulations

We are subject to various federal, state and local environmental laws and regulations, including those governing water discharges, air emissions, soil and groundwater contamination, the installation and operation of underground and above ground storage tanks, and the disposal of waste and hazardous materials. In the event of any violations of or liabilities under any of these environmental laws or instances of noncompliance with environmental permits required at our facilities or other regulations such as those dealing with consumer product safety, we could incur substantial costs, including cleanup costs, fines and civil or criminal penalties. Currently, we do not expect the costs of these environmental requirements to have a material impact on our results of operations, financial condition or cash flows.

Additional information

Our principal executive offices are located at 1000 Universal Studios Plaza, Orlando, FL 32819-7610 and our telephone number at that address is (407) 363-8000. Our website address is www.universalorlando.com. The information on our website is not incorporated into this annual report and should not be considered to be a part of this report. We have included our website address as an inactive textual reference only.

 

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Item 1A. Risk Factors.

You should carefully consider the risks described below, together with the other information contained in this report. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially affect our business operations. If any of the events described in the risk factors below actually occurs, our business, financial condition, operating results and prospects could be materially adversely affected, which in turn could adversely affect our ability to repay our obligations, including our long-term indebtedness.

Risks related to our business

Recent instability in general economic conditions throughout the world could reduce consumer discretionary spending which could impact our profitability and liquidity while increasing our exposure to counterparty risk.

Unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures, and higher prices for consumer goods can reduce spending for leisure travel and family entertainment. Unfavorable economic conditions can also impact our ability to raise theme park ticket prices to counteract increased energy, labor, and other costs. Therefore, a continued economic recessionary environment would likely continue to negatively impact our results of operations. We remain cautious of current economic conditions domestically and in our key international markets (including foreign currency exchange rates, which affect the relative prices for our international guests and therefore impact attendance from that market), as recessionary fears have continued. Factors such as continued unfavorable economic conditions, a significant decline in demand for family entertainment, or continued instability of the credit and capital markets could adversely impact our results, which in turn, could trigger a downgrade in our credit rating. These factors could also negatively impact our ability to obtain financing, our profitability and our liquidity generally. These conditions could also hinder the ability of those with which we do business, including vendors, customers and tenants, to satisfy their obligations to us. Our exposure to credit losses will depend on the financial condition of our vendors, customers and tenants and other factors beyond our control, such as deteriorating conditions in the world economy or in the theme park industry. The unprecedented levels of disruption and volatility in the credit and financial markets have increased our possible exposure to vendor, customer and tenant credit risk because it has made it harder for them to access sufficient capital to meet their liquidity needs. This market turmoil coupled with a reduction of business activity generally increases our risks related to our status as an unsecured creditor of most of our vendors, customers and tenants. Credit losses, if significant, would have a material adverse effect on our business, financial condition and results of operations. Moreover, these issues could also increase the counterparty risk inherent in our business, including with our suppliers, vendors and financial institutions with which we enter into hedging agreements and long-term debt agreements such as our renewed senior secured credit agreement. The financial stability of these counterparties could adversely affect us. In this difficult economic environment, our credit evaluations may be inaccurate and we cannot assure you that credit performance will not be materially worse than anticipated, and, as a result, materially and adversely affect our results of operations, financial position and cash flows.

Failure to comply with regulations, or changes in regulations or new regulations, applicable to our business could limit our ability to conduct our business and could increase our operating costs.

We are subject to various federal, state and local regulations of our business. These regulations include those relating to environmental protection, privacy and data protection laws and regulations, and the regulation of the safety of consumer products, ride safety and theme park operations. We are also subject to regulation by state and local authorities relating to health, sanitation, safety and fire standards and liquor licenses and federal and state laws governing our relationships with employees, federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities such as the Americans With Disabilities Act of 1990, as amended. Failure to comply with the laws and regulatory requirements applicable to our business could result in revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Changes in any of these regulatory areas may increase our costs and adversely affect the profitability of our business.

 

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Attendance at our theme parks is influenced by general economic and other conditions.

Attendance at our theme parks is heavily dependent upon consumer spending on travel and other leisure activities. Because consumer spending on travel and other leisure activities is discretionary, this is usually the first type of spending to be curtailed by consumers during economic downturns such as the current one. As a result, we have historically experienced weaker attendance during economic downturns and during other events affecting travel and leisure activities. In addition, during economic downturns, if people travel to our theme parks, they generally spend less on merchandise, food and beverage while at the park. Any further deterioration in the already weakened general economic conditions, increases in the cost of travel (including the cost of fuel), additional outbreaks or escalation of war, or terrorist or political events that diminish consumer spending and confidence could reduce attendance and in-park spending at our theme parks.

Our parks are subject to numerous environmental and other regulations which could impact our operating results.

We are subject to various federal, state and local environmental laws and regulations, including those governing water discharges, air emissions, soil and groundwater contamination, the installation and operation of underground and above ground storage tanks, and the disposal of waste and hazardous materials. In the event of any violations of or liabilities under any of these environmental laws or instances of noncompliance with environmental permits required at our facilities, we could incur substantial costs, including cleanup costs, fines and civil or criminal penalties.

Our business is largely dependent on air travel.

We estimate that approximately half of the visitors to our theme parks travel to Orlando by air. An increase in the price of jet fuel may serve to increase the price of air travel and reduce the number of visitors traveling by air. In addition, the continuing economic difficulties facing the airline industry may result in a reduction in scheduled flights to Orlando and an increase in the price of air travel which in turn may have a negative effect on the number of visitors to Orlando. In addition, another terrorist attack in the United States or in one of our major international attendance markets or the mere threat of a terrorist attack is likely to result in a decline in air travel. A significant decline in visitors traveling to Orlando by air would negatively affect attendance at our theme parks, possibly dramatically.

We are subject to the risks inherent in deriving substantially all of our revenue from one location.

Substantially all of our revenue is derived from the operation of our two theme parks and CityWalk in Orlando, Florida. This subjects us to a number of risks. Our business is and will continue to be influenced by local economic, financial and other conditions affecting the Orlando area. This may include prolonged or severe inclement weather in the Orlando area, a catastrophic event such as a hurricane or tornado, or the occurrence or threat of a terrorist attack in the Orlando area, any of which could significantly reduce attendance at our theme parks and CityWalk. In addition, the partial or total destruction of our theme parks or CityWalk requiring any of them to be closed for an extended period of time would have a material adverse effect on our ability to generate revenue.

Armed conflicts, acts of terrorism and other world events affecting the safety and security of travel could adversely impact the demand for family entertainment or leisure travel which could affect our future sales and profitability.

Our business has been impacted in the past by geopolitical events such as the terrorist attacks in the United States on September 11, 2001 and the wars in Iraq and Afghanistan. Occurrences such as these have historically had an impact on the demand for family entertainment and leisure travel. Decreases in the demand for our products and services could lead to price discounting, which could reduce our ability to generate revenue.

 

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Events such as the United States’ military operations in the Middle East, ongoing unrest in the Middle East and North Africa and the oil spill in the Gulf of Mexico could negatively impact our parks by, for example, driving up the prices of gas and air travel which would have a negative impact on attendance at our theme parks.

The United States and certain of its allies are currently engaged in military operations in the Middle East. This military action could exacerbate the risks identified above and have a number of other consequences, many of which would likely have a negative impact on attendance at our theme parks and, as a result, our prospects. Military operations such as those in Iraq and Afghanistan and the ongoing civil unrest in the Middle East and North Africa could increase the price of crude oil, which in turn would increase the price of gasoline and jet fuel. Similarly, events such as the oil spill in the Gulf of Mexico and the resulting impacts on further oil exploration could also cause an increase in gasoline and jet fuel prices. According to the Energy Information Association (“EIA”) of the U.S. Department of Energy, gas prices had increased in Florida to an average of $3.46 per gallon as of February 28, 2011. Similarly, according to the EIA, the price of gas increased to as much as $4.06 per gallon in Florida in 2008. If gas prices continue to rise to these high levels or increase substantially beyond current levels, it may cause significant numbers of domestic consumers to forego taking a vacation, which could negatively affect our attendance, as approximately 30% of our visitors drive more than 200 miles to our theme parks and approximately half of our visitors travel by air to our theme parks. Furthermore, the current military operations in Iraq and Afghanistan may increase the likelihood of another major terrorist attack in the United States or one or more of our key international markets. The threat or occurrence of a terrorist attack could serve to discourage many consumers from travel or otherwise participating in leisure activities.

Risks related to our insurance.

Historically, most of our insurance was arranged by GE through global programs for its businesses via licensed insurers issuing enforceable insurance policies, for which we were allocated charges for premium payments, which we believe were generally less expensive than what we could have otherwise obtained on a standalone basis. The insurance included multi-layered property coverage that provided coverage for replacement costs per occurrence (subject to sub-limits such as wind-storm and terrorism). Our deductible varied from year to year based upon a financial analysis of then-current premiums, market conditions and cost of capital. The multi-layered property coverage insured our real and personal properties (other than land) against physical damage resulting from a variety of hazards including terrorism and business interruption. The insurance program also included workers’ compensation, public/general and automobile liability, accident and other forms of insurance. For many of our insurance policies we are subject to high deductibles. Due to the recent transaction in which Comcast assumed control over NBCUniversal, this arrangement, under which we obtained insurance coverage, is likely to be impacted which could result in higher costs for similar insurance coverage.

Loss of key distribution channels for ticket sales or the loss of key ticket products may reduce our revenues.

Approximately 40% of our annual theme park ticket sales are generated by third party distribution channels, the majority of which are concentrated among approximately 40 third party customers. As an example, approximately 8% of our annual theme park ticket sales are derived from timeshare operators, which are dominated by a few major operators in the Orlando area. Due to the upheaval in the credit markets since 2008 in conjunction with the timeshare industry’s reliance on access to credit, certain timeshare operators have experienced a significant downturn in their business. Continuation or worsening of these circumstances could adversely impact this important distribution channel. Other significant distribution channels include key domestic and international travel operators. In addition, we also have key ticket products such as the Orlando FlexTicket™ which entitles a guest to visit both of our theme parks as well as Wet ‘n Wild®, SeaWorld®, Aquatica™ and Busch Gardens® Tampa Bay. A loss of any key distribution channel or ticket product could have a negative effect on our ticket sales.

 

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The theme park industry competes with numerous vacation and entertainment alternatives; the Orlando theme park market is extremely competitive.

Our theme parks compete with other theme, water and amusement parks in Orlando and around the country and with other types of recreational facilities and other forms of entertainment, including cruise ships, other vacation travel, major sports attractions and other major entertainment activities. Our business is also subject to factors that affect the recreation, vacation and leisure industries generally, such as general economic conditions, consumer confidence and changes in consumer spending habits. The Orlando theme park market is extremely competitive. There are currently seven major theme parks in the Orlando area, including our competitors: Walt Disney World’s Magic Kingdom®, Epcot®, Disney’s Hollywood Studios, Disney’s Animal Kingdom® and Blackstone’s SeaWorld® and Aquatica™. Affiliates of the Blackstone Group L.P. own a 50% interest in UCDP, UCDP Finance, Holding I, and Holding II. See “Item 1. Business.—The Blackstone Group L.P.” Blackstone’s interests in SeaWorld® and the Aquatica™ water park might conflict with Blackstone’s interest in us. See “Item 1A. Risk Factors.—Risks related to our partners—Blackstone and Universal City Studios Productions control us and may have conflicts of interest with us or you in the future.” All of these theme parks are located within a 10-mile radius of our theme parks, which has the effect of increasing competition for market share among the major competitors. Some of these theme parks, particularly those affiliated with The Walt Disney Company, enjoy better name recognition than our theme parks do. This puts us at a disadvantage in our attempts to attract guests to our theme parks over those of our competitors. As a result, we offer significant commissions to travel agents and wholesalers in order to provide them with an incentive to encourage their customers to purchase tickets to our theme parks rather than those of our competitors in the Orlando area. Additionally, because our sponsorship relationships change over time, the sponsorship relationships that we may have in the future may not benefit our business to the extent they do currently by providing marketing exposure for us.

There is the risk of accidents or other incidents occurring at theme parks, including those owned by other theme park operators, which may create negative publicity which may reduce attendance and thereby negatively impact our results of operations.

Our theme parks feature “thrill rides.” There are inherent risks involved with these sorts of rides and attractions. An accident or an injury at our theme parks or at another theme park may result in negative publicity which could reduce attendance and thereby negatively impact our results of operations, financial position and cash flows. We purchase insurance to protect us in the event of an accident or certain other losses, however we are subject to high deductibles and our insurance may not cover all types of incidents. Additionally, we cannot be assured that negative events unrelated to attractions, such as the outbreak of infectious disease or other health concerns, will not occur at our theme parks or at another theme park. Any of these events could negatively impact our results of operations.

 

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If we are unable to adequately protect the right to use the intellectual property of the themed elements of our rides and attractions, we may be required to re-theme certain rides and attractions, which would be expensive and time consuming. In addition, if there is an uncured event of default under certain of our intellectual property agreements and such agreements are terminated, we may suffer negative consequences such as acceleration of payments due thereunder.

The use of themed elements in our rides and attractions is dependent upon our obtaining and maintaining intellectual property licenses granting us the rights to use those elements. Failure to protect our existing intellectual property rights may result in the loss of those rights, require us to make significant additional payments to third parties for infringing their intellectual property rights, and negatively impact our ability to obtain intellectual property licenses in the future. The loss of the right to use a particular themed element means that we would be unable to operate the rides or attractions that utilize the relevant element. This may require us to re-theme those rides or attractions which may involve taking the relevant ride or attraction out of service and may require significant capital expenditures. Any of those actions could negatively impact our results of operations, name recognition and growth prospects. In addition, if there were an event of default that we failed to cure under one of our intellectual property agreements, and such agreement was terminated, we may become subject to accelerated payments. For example, the License Agreement (the “WB Agreement”) between Warner Bros. Consumer Products Inc. (“WB”) and UCDP, pursuant to which UCDP licenses certain rights to the characters and other intellectual property contained in the Harry Potter™ books and motion pictures, is terminable, subject to applicable cure periods, if we fail to maintain quality standards, fail to invest minimum required capital, fail to use the properties in accordance with the license, or upon other customary events of default. In addition, if we sell Universal’s Islands of Adventure, or if 50% of UCDP is not owned by Universal City Studios Productions (formerly known as Vivendi Universal Entertainment or “VUE”) or its affiliates, the agreement is terminable unless the buyer of Universal’s Islands of Adventure or of the interests in UCDP meets certain financial and reputation tests. In addition, Universal’s Islands of Adventure must either continue to be managed by NBCU or continue to be operated under a license from NBCU that enables NBCU to maintain the quality and reputation of Universal’s Islands of Adventure (the “NBCU License Agreement”). Our partnership agreement has been amended to provide that NBCU will execute the NBCU License Agreement with us, on the same financial terms as set forth in our existing partnership agreement and the Universal License Agreement, if, following a sale or change in control, we will no longer be managed by NBCU. In the event that, following a sale or change in control, in accordance with the WB Agreement, the name of the Universal’s Islands of Adventure theme park no longer contains the word “Universal” or “Universal’s”, then The Wizarding World of Harry Potter™, Jurassic Park®, Seuss Landing™ and Marvel Super Hero Island® and other themed areas of Universal’s Islands of Adventure need to be operated under the NBCU License Agreement, or the name of the theme park and resort must include the name of another major recognized theme park operator, major established motion picture and television studio or another name approved by WB. In the event of termination by WB due to our default, a sale of Universal’s Islands of Adventure or a change of control of UCDP for which the foregoing requirements are not satisfied, payments due with respect to the remaining term of the agreement will be accelerated and due immediately. In addition, we license various elements based on The Simpsons™, including certain characters under the License Agreement ( the “Fox Agreement”) among UCDP, Universal City Studios LLC and Twentieth Century Fox Licensing & Merchandising (“Fox”). The Fox Agreement would be terminable in the event of our breach, or in certain cases following a change of control to which Fox did not consent. If Fox were to terminate the Fox Agreement under such circumstances, payments due with respect to the remaining term of the Fox Agreement would continue to be due and payable as and when they would have become due and payable, except that if the breach is a result of a change of control, then 50% of such remaining payments allocated to us shall be due and payable as and when they would have become due and payable. See “Item 1. Business.—Intellectual property.”

The use of, and ability to create derivative works from, copyrighted material is important in our business. If an author claims a right to terminate a copyright for a work from which we have created derivative works for use in our business, our ability to create new derivative works from any such work in the future could be compromised or the costs we incur to preserve our rights to continue to create derivative works from any such work could increase.

Copyright is the right to prevent others from copying protected expression in a work of authorship. Under the U.S. Copyright Act, the owner of a copyright enjoys a number of rights, including the right to prepare derivative works based upon the copyrighted work. Bona fide individual authors and their heirs have a statutory right to terminate their earlier assignments and licenses in certain copyrighted works by sending notice within a statutorily-defined window of time. The timing requirements with respect to such notice period mean that notice is required years in advance of the statutory termination date. For example, we license our rights to the Incredible Hulk™ (“Hulk”) from Marvel and we are aware that the estate of Jack Kirby (the “Kirby Estate”) has claimed a right to terminate rights that allegedly were granted by Jack Kirby to Marvel Entertainment, Inc. or its predecessor (“Marvel”) for the Hulk. Certain Marvel-related entities subsequently filed suit against the Kirby Estate, seeking a declaratory judgment that such termination of rights is invalid and of no legal force or effect. If the Kirby Estate is successful in its claim of termination, such termination would only be effective after 2018.

The loss of key personnel could hurt our operations.

Our success depends upon the continuing contributions of our executive officers and other key operating personnel. The complete or partial loss of their services could adversely affect our business. Our Chief Executive Officer and other executives are employees of, and have employment agreements with, Universal City Studios Productions. We cannot be certain that we will be able to retain their services or to find adequate replacements for them in the event we were to lose their services. If Universal City Studios Productions were to cease acting as our manager, we could lose the services of those executives.

 

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Our business is seasonal and bad weather can adversely impact attendance at our theme parks.

Our business is seasonal. Attendance at our theme parks follows a seasonal pattern which coincides closely with holiday and school schedules. Some of our attractions and other facilities may close periodically for maintenance, re-theming, or to adjust to varying attendance levels. Because many of the attractions at our theme parks are outdoors, attendance at our theme parks is adversely affected by bad weather. Prolonged bad or mixed weather conditions during our seasonal peak attendance periods may reduce attendance, causing a more severe decline in revenues than if those conditions occurred during a low attendance period. In addition, temporary but severe weather conditions, such as a hurricane, can adversely impact attendance at our theme parks.

We rely heavily on information technology in our operations, and any material failure, inadequacy, interruption or breach of security of that technology could harm our ability to effectively operate our business and subject us to financial liability, potentially damaging our reputation.

We rely heavily on information systems across our operations. Our ability to effectively manage our business depends significantly on the reliability and capacity of these systems. Despite our considerable efforts and technology to secure our computer network, security could be compromised, confidential information, such as customer credit card numbers, could be misappropriated, or disruptions could occur in our systems, including our ride systems. This could lead to adverse publicity, decreased ride efficiency and/or increased maintenance costs, loss of sales and profits, or cause us to incur significant costs to reimburse third parties for damages, which could impact our results of operations, financial position and cash flows.

Risks related to our Partners

Risks related to the right of first refusal and drag along right between our partners.

Pursuant to a right of first refusal provision in the partners’ agreement between Blackstone and certain affiliates of Universal City Studios Productions (the “NBCU Parties”), as amended, (the “partners’ agreement”), if either Blackstone or the NBCU Parties desires to sell its ownership interest in Holding I and Holding II, it shall, subject to certain conditions, make a binding offer, specifying the proposed sale price, to sell to the other its entire interest in each of Holding I and Holding II. The non-offering partner will then have 90 days after receipt of an offer to accept the offer to sell. If the offer is not accepted, the offering party has the right to market both parties’ interests in Holdings to third parties, and both partners are required to sell their interests if a third party offers a price that is at least 90% of the price for both partners’ interests that is imputed from the offer made by the first party to the second party (i.e., as long as the NBCU Parties and Blackstone each own 50% of Holdings, then both parties are required to sell to a third party that offers at least 180% of the price quoted by either party to the other party) (such third-party sale option, the “Drag-Along Option”). If the interests in Holdings are not sold to a third party pursuant to the Drag-Along Option by the earlier of the date that is 270 days from the end of the initial offer period and the date on which both the offering party and the other party agree in writing to abandon the third party sale, then the offering party shall be prohibited from making another offer to the other party for a period of one year from the expiration date of the Initial Offer Period, and during such year, the other party may agree to sell its ownership interest without being subject to the offer provisions in the partners’ agreement. If Blackstone exercises its rights under these provisions, it may result in 100% control and ownership of us being acquired by Blackstone or by a third party, which could pose a number of risks to our business. Ownership of 100% and control by Blackstone or a third party could impact our continued use of the “Universal” name and certain intellectual property following the latest of (i) 30 months after a change of control, as described in UCDP’s partnership agreement, (ii) 30 months after any termination of the WB Agreement prior to its scheduled expiration, or (iii) the expiration of the WB Agreement in accordance with its terms as further discussed above in “If we are unable to adequately protect the right to use the intellectual property of the themed elements of our rides and attractions, we may be required to re-theme certain rides and attractions, which would be expensive and time consuming. In addition, if there is an uncured event of default under certain of our intellectual property agreements and such agreements are terminated, we may suffer negative consequences such as acceleration of payments due thereunder” and below in “Risks related to our reliance on our strategic partners and their affiliates, including our use of the ‘Universal’ name and certain intellectual property.” In addition, we face risks related to a change of control under certain of our business agreements.

UCDP was informed on March 9, 2011 that Blackstone triggered the right of first refusal and offered to sell its interest in UCDP to the NBCU Parties, who have until June 12, 2011 to accept Blackstone’s offer or be subject to the drag-along provisions in the partners’ agreement. We will cooperate to facilitate a sale pursuant to the terms of the partners’ agreement, including bearing the transaction costs of any such sale, but any decision regarding the timing and terms of a sale is outside of our control. Accordingly, although Blackstone has triggered the right of first refusal, we cannot make assurances that a sale of Blackstone’s or NBCU’s ownership interest in UCDP will occur or, if it does, the timing, terms or impact on UCDP of any such sale.

 

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Risks related to our reliance on our strategic partners and their affiliates, including our use of the “Universal” name and certain intellectual property.

Our continued use of the “Universal” name and our future access to new intellectual property from USC, Universal City Studios LLC, an indirect, wholly owned subsidiary of Universal City Studios Productions, Universal CPM and USI Asset Transfer LLC, a direct, wholly owned subsidiary of Universal City Studios Productions (collectively referred to as the “Universal License Parties”), is dependent upon there not being a change of control as described in UCDP’s partnership agreement and as confirmed by the License Agreement dated as of March 28, 2002, as amended May 25, 2007 and January 15, 2010 (the “Universal License Agreement”) among UCDP and the Universal License Parties. In addition, a change of control could have other negative consequences for us, including potential termination of the WB Agreement, acceleration of payments due under certain of our license agreements and the loss of significant benefits we enjoy from our relationship with certain of our affiliates. Accordingly, a change of control under our license agreements could impair our name recognition and growth prospects and negatively impact our results of operations.

We license the right to use the “Universal” name and a substantial number of intellectual properties as street entertainment characters and as themed elements in rides and attractions from the Universal License Parties. See “Item 1. Business.—Intellectual property.” Our right to use the “Universal” name in connection with Universal Orlando continues indefinitely at no cost to us (other than the special fees that we pay to Universal City Studios Productions) until the latest of (i) 30 months after the occurrence of certain change of control events (as described in UCDP’s partnership agreement), (ii) 30 months after any termination of the WB Agreement prior to its scheduled expiration, or (iii) the expiration of the WB Agreement in accordance with its terms. Under UCDP’s partnership agreement, a change of control occurs when (a) Universal CPM is no longer a wholly owned subsidiary of USC, Universal City Studios Productions, or any of their respective affiliates, or (b) the Universal License Parties do not own any interest in us. A change of control under our WB Agreement such as Blackstone or a third party unaffiliated with the Universal License Parties acquiring all of the partnership interests in us, would cause us to lose our right to use the “Universal” name on the earlier of (1) the expiration of the WB Agreement or (2) 30 months after the date of termination of the WB Agreement. See “Item 1. Business.—Intellectual property—Harry Potter.” A change of control under our license agreements, such as Blackstone or a third party unaffiliated with the Universal License Parties acquiring all of the partnership interests in us, would not necessarily constitute a change of control under the indentures governing the notes. If we are unable to use the “Universal” name, and if we are unable to partner with another similar, recognizable brand, the name recognition of our theme parks could be impaired.

Our right to use the creative and proprietary elements controlled by the Universal License Parties continues at no cost to us (other than the special fees that we pay to Universal City Studios Productions), subject to third party contractual limitations, until the later of the expiration or termination of the WB Agreement in accordance with its terms or, if sooner, the date that neither we nor a permitted successor or assign is a party to the WB Agreement, or the date such intellectual property rights would otherwise cease to be licensed to us. The Universal License Parties are required to continue to license new and additional intellectual properties to us for as long as we or our permitted successor or assign remains a party to the WB Agreement and such WB Agreement remains in effect. Following the expiration or termination of the WB Agreement in accordance with its terms, the Universal License Parties must continue to license to us existing intellectual property and those that are planned to be utilized at the time of such expiration or termination, for so long as we continue to operate our theme parks at a substantially similar standard, even if the Universal License Parties no longer have an ownership interest in us. If, however, Blackstone or a third party unaffiliated with the Universal License Parties acquires all of the partnership interests in us, then following the expiration or termination of the WB Agreement in accordance with its terms, the Universal License Parties are not required to grant us a license to any new intellectual property rights that they may acquire or develop in the future that may be or become useful or necessary for the operation of our theme parks. See “Item 1. Business.—Intellectual property.” Our inability to acquire proprietary and creative elements for possible new attractions could impair the growth prospects of our theme parks. The Universal License Parties could also claim that our theme parks were not being operated to a sufficiently high standard after Blackstone or a third party unaffiliated with the Universal License Parties acquired all of the partnership interests in us, and revoke the license completely. If this were to occur, we may be unable to operate our theme parks for an extended period of time, and may not be able to continue operating our theme parks at all. In addition, the WB Agreement is terminable if the Universal License Parties fail to remain involved either as a 50% owner or through certain license arrangements, unless WB consents to the assignment or the entity to which Universal’s Islands of Adventure or our partnership interests are transferred meets other tests designed to ensure the financial capability of the buyer and to maintain the reputation of our theme parks. In the event of termination by WB due to our default, a sale of Universal’s Islands of Adventure or a change of control of us for which the above requirements are not satisfied, payments due with respect to the remaining then-applicable term of the WB Agreement will be accelerated and due immediately.

 

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We also rely on Universal City Studios Productions and its affiliates for management oversight, advisory and other services. In its capacity as our manager, Universal City Studios Productions or its direct wholly owned subsidiary, Universal CPM, provides creative services in relation to development of our rides and attractions and the UPR merchandise team provides merchandising services. In addition, certain of our senior executives are NBCU employees. These and the numerous other arrangements with affiliates of Universal City Studios Productions and, indirectly, NBCU and GE, such as savings we derive from access to favorable purchasing agreements and volume purchasing and other corporate programs, provide us with significant benefits that may be reduced or lost completely if Blackstone or a third party unaffiliated with Universal City Studios Productions gains control of us pursuant to the right of first refusal or drag along right described above or otherwise. On March 9, 2011, UCDP was notified that Blackstone triggered its right of first refusal and offered to sell its interest in UCDP to the NBCU Parties; however, we cannot make assurances that a sale of Blackstone’s or NBCU’s Ownership interest in UCDP will occur, or if it does, the timing, terms or impact on UCDP of any such sale. Additionally, our Partners, their subsidiaries or their affiliates may from time to time, depending upon market conditions, seek to purchase debt securities issued by us in open market or privately negotiated transactions or by other means. In addition, the recent transaction in which Comcast assumed control over NBCUniversal could impact certain of these arrangements. For a description of these arrangements and the right of first refusal, see “Item 13. Certain Relationships and Related Transactions, and Director Independence”.

If the equity holders of Holding I and Holding II that are controlled by Blackstone default on certain indebtedness, Blackstone’s equity interests in Holding I and Holding II will be subject to foreclosure.

On November 6, 2009, the equity holders of Holding I and Holding II that are controlled by Blackstone entered into a credit agreement with JPMorgan Chase Bank, N.A., Bank of America, N.A. and the other lenders party thereto with respect to a senior secured term loan (the “Margin Loan”) in the amount of $305.0 million. The proceeds of the Margin Loan were used to refinance term loans made to such equity holders by JPMorgan Chase Bank, N.A. and Bank of America, N.A. concurrently with the consummation of the amendment of our 2004 senior secured credit agreement, to pre-fund interest and amortization reserves with respect to the term loans thereunder and to pay related fees and expenses. The obligations of the borrowers under the Margin Loan are secured by their equity interests in Holding I and Holding II and are guaranteed by NBCUniversal on a deficiency basis, subject to the terms of the guarantee. The Margin Loan has a five-year maturity. The only assets of the borrowers are their equity interests in Holding I and Holding II. If the borrowers default on, or are unable to refinance the Margin Loan prior to expiration, the borrowers’ equity interests in Holding I and Holding II will be subject to foreclosure by the lenders. Any such foreclosure will not constitute a change in control for purposes of our renewed senior secured credit facilities or the notes.

Potential deadlock between the partners of our general partner could prevent us from executing certain aspects of our business strategy.

Major decisions by Holding II regarding our business generally require the consent of representatives of both Blackstone and Universal City Studios Productions. This creates a potential for deadlocks. Any deadlock could delay us from taking certain actions in the future which would be beneficial to our business and may prevent or delay us from executing certain aspects of our business strategy.

Blackstone and Universal City Studios Productions control us and may have conflicts of interest with us or you in the future.

Blackstone and Universal City Studios Productions, together, beneficially own 100% of our equity interests. As a result, Blackstone and Universal City Studios Productions have control over our decisions to enter into any corporate transaction and will have the ability to prevent any transaction that requires the approval of equity holders, regardless of whether or not noteholders believe that any such transactions are in their own best interests. For example, Blackstone and Universal City Studios Productions could, subject to the terms of the indentures governing the notes, cause us to distribute our cash resources to them or make distributions to service the Margin Loan rather than invest such resources in our business. In addition, Blackstone and Universal City Studios Productions may have interests adverse to parties with which we would like to enter into sponsorship relationships, and thus certain sponsorship relationships that would provide us with significant marketing exposure may be unavailable to us.

 

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Furthermore, on December 1, 2009 an affiliate of Blackstone closed its acquisitions of SeaWorld® and certain other parks from Anheuser-Busch InBev. As noted previously, we have key ticket products, which allow guests to visit SeaWorld® and other parks owned by affiliates of Blackstone. Our ability to offer these products, such as the Orlando Flex Ticket™ which we offer under an agreement that will be subject to renewal in December 2011, could be impacted by these recent events. See “Risks related to our business—The theme park industry competes with numerous vacation and entertainment alternatives; the Orlando theme park market is extremely competitive.”

The joint venture among Comcast, GE and NBCUniversal may affect how our business is managed and may affect our relationships with GE and other vendors, customers and strategic partners.

On January 28, 2011, Comcast closed its transaction with GE in which Comcast acquired control of the business of NBCUniversal. We cannot predict what future changes, if any, Comcast will implement in our business and operations. Moreover, GE will have veto rights with respect to any material expansion of the joint venture’s scope of business or purpose, certain acquisitions, issuances or repurchases of equity, debt incurrences and loans made outside of the ordinary course of business which could adversely affect our business’ growth prospects. We have a number of ongoing relationships with GE. See “Item 13. Certain relationships and related transactions, and director independence” for more information. To the extent those relationships do not continue, in some cases, such as with respect to our insurance, we will be required to find a replacement (which may require us to incur additional expense) or, in some cases, we may lose the benefits of the GE relationships, such as our sponsorship agreement with GE Money Bank. See “Item 1. Business—Corporate sponsorships—GE Money Bank.

Risks related to our indebtedness

Our ability to generate sufficient cash to service all of our indebtedness depends on many factors, some of which are beyond our control.

Our ability to generate cash depends on many factors, some of which are beyond our control. We estimate our cash debt service for 2011, based on the amount of indebtedness outstanding as of December 31, 2010, to be approximately $195.6 million based on the current interest rates on our renewed senior secured credit facilities and the notes, of which $60.0 million represents debt service on fixed-rate obligations. Accordingly, we will have to generate significant cash flows from operations to meet our debt service requirements. Our ability to make scheduled payments or to refinance our indebtedness, including the notes and the renewed senior secured credit facilities, depends on our ability to generate cash from operations in the future. This is subject, in part, to general economic, financial, competitive, legislative, regulatory, social, political and other factors. In addition, Blackstone and Universal City Studios Productions may have interests adverse to parties with which we would like to enter into sponsorship relationships, and thus certain sponsorship relationships may be unavailable to us. Additionally, because our sponsorship relationships change over time, the sponsorship relationships that we may have in the future may not benefit our business to the extent they do currently by providing marketing exposure for us.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our renewed senior secured credit agreement, or otherwise, in an amount sufficient to enable us to fund planned capital expenditures, pay our indebtedness, including the notes, or to fund our other liquidity needs. If we cannot pay our indebtedness, we may need to refinance our indebtedness. The Consultant Agreement caps UCDP’s ability to incur secured borrowings to an amount equal to the greater of $975.0 million and 3.75x UCDP’s Covenant EBITDA (as defined in the renewed senior secured credit facilities). This cap may make it more difficult to refinance our indebtedness, including the notes.

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes. In addition, we are highly leveraged and have substantial debt service obligations.

As of December 31, 2010, the notes were effectively subordinated to $931.6 million of indebtedness (including amounts owed on our renewed senior secured credit facilities, financing obligations and capital leases and amounts owed via the Consultant Agreement). As of December 31, 2010, the aggregate amount of our gross outstanding indebtedness was $1,548.9 million, including the renewed senior secured credit facilities, the notes and our obligations under capital leases and financing arrangements. An additional $75.0 million is available for future borrowings under the revolving portion of the renewed senior secured credit facilities and, in addition, we may borrow, subject to certain conditions (including limitations in the Consultant Agreement), up to $150.0 million of uncommitted incremental term loans under the renewed senior secured credit facilities from time to time, all of which would be secured and effectively senior to our noteholders. Furthermore, the Consultant (as defined in “Item 7. Management’s discussion and analysis of financial condition and results of operations.”) has a lien on certain of our assets to secure his interests under the Consultant Agreement, including a mortgage on our real property up to $400.0 million, and the notes are effectively subordinated to his interests to the extent of the value of those assets. As a result of the foregoing, although we do not classify our obligations to the Consultant as indebtedness, we are highly leveraged. This level of indebtedness and our other obligations could have important consequences to you, including the following:

 

   

it may limit our ability to borrow money for working capital, capital expenditures, acquisitions, debt service requirements and general corporate or other purposes;

 

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it may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;

 

   

we will be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

   

it may make us more vulnerable than less leveraged companies to a downturn in our business or the economy;

 

   

the debt service requirements of our indebtedness could make it more difficult to generate cash;

 

   

a substantial portion of our cash flow from operations will be dedicated to the repayment of our indebtedness, including indebtedness we may incur in the future, and will not be available for other purposes; and

 

   

there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.

Our substantial debt obligations could also have other important consequences to you. For example, our failure to comply with the restrictive covenants in the renewed senior secured credit agreement, which limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could harm our business and could result in our bankruptcy.

Federal and state statutes allow courts, under specific circumstances, to void the notes and guarantees, subordinate claims in respect of the notes and guarantees and require noteholders to return payments received.

Certain of the existing domestic subsidiaries of the registrants guarantee the notes and certain of their future domestic subsidiaries may guarantee the notes. The issuance of the notes and the incurrence of the guarantees may be subject to review under state and federal laws if a bankruptcy, liquidation or reorganization case or a lawsuit, including in circumstances in which bankruptcy is not involved, were commenced at some future date by, or on behalf of, our unpaid creditors. Under the federal bankruptcy laws and comparable provisions of state fraudulent transfer laws, a court may void or otherwise decline to enforce the notes or guarantees or subordinate the notes or guarantees to our existing and future indebtedness. While the relevant laws may vary from state to state, a court might do so if it found that when we issued the notes and incurred the guarantees or, in some states, when payments became due under the notes or guarantees, we received less than reasonably equivalent value or fair consideration and either:

 

   

we were insolvent or rendered insolvent by reason of such incurrence;

 

   

we were engaged in a business or transaction for which our remaining assets constituted unreasonably small capital; or

 

   

we intended to incur, or believed that we would incur, debts beyond our ability to pay such debts as they mature.

The court might also void the notes or guarantees, without regard to the above factors, if the court found that we issued the notes or incurred the guarantees with actual intent to hinder, delay or defraud our creditors. In addition, any payment by us pursuant to the notes or guarantees could be voided and required to be returned to us or to a fund for the benefit of our creditors.

A court would likely find that we did not receive reasonably equivalent value or fair consideration for the notes or guarantees if we did not substantially benefit directly or indirectly from the issuance of the notes. If a court were to void the notes or guarantees, you would no longer have a claim against us and sufficient funds to repay the notes may not be available from other sources. In addition, the court might direct you to repay any amounts that you already received from us.

 

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The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an issuer or guarantor would be considered insolvent if:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of its assets;

 

   

the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

Each guarantee will contain a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. This provision may not be effective to protect the guarantees from being voided under fraudulent transfer laws, or may eliminate the guarantors’ obligations or reduce the guarantors’ obligations to an amount that effectively makes the guarantees worthless. In a 2009 Florida bankruptcy case, this kind of provision was found to be ineffective to protect the guarantees. To the extent a court voids the notes as fraudulent transfers or holds the notes unenforceable for any other reason, holders of notes would cease to have any direct claim against us. If a court were to take this action, our assets would be applied first to satisfy our liabilities, if any, before any portion of our assets could be applied to the payment of notes.

Despite our substantial indebtedness, we may still incur significantly more debt. Moreover, we may incur a significant amount of additional secured indebtedness. This could exacerbate the risks described above.

The terms of the indentures governing the notes and the renewed senior secured credit agreement permit us to incur significant additional indebtedness in the future. We have $75.0 million available for borrowing under the revolving credit portion of the renewed senior secured credit facilities and are permitted to borrow, subject to certain conditions (including limitations in the Consultant Agreement), up to $150.0 million of uncommitted incremental term loans under the renewed senior secured credit facilities from time to time. All of those borrowings would be effectively senior to the notes (to the extent of the value of the collateral securing such borrowings in the case of the senior notes). In addition, the Consultant has a lien on certain of our assets to secure his interests under the Consulting Agreement, including a mortgage on our real property up to $400.0 million, and the notes are effectively subordinated to his interests to the extent of the value of those assets. If new debt is added to our current debt levels, this would increase the risks described above. Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes.

The right of noteholders to receive payments on the notes will be effectively subordinated to the rights of our existing and future secured creditors.

Holders of our secured obligations, including indebtedness outstanding under our renewed senior secured credit agreement and our obligations in respect of the Consultant Agreement, will have claims that are prior to your claims as holders of the notes to the extent of the value of the assets securing those other obligations. Notably, our renewed senior secured credit agreement is secured by liens on substantially all of our assets and the assets of our existing and future domestic subsidiaries. In addition, the Consultant has a lien on certain of our assets to secure his interests under the Consultant Agreement and the notes are effectively subordinated to his interests to the extent of the value of those assets. The notes are effectively subordinated to all such secured indebtedness to the extent of the value of the collateral. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of secured indebtedness and other secured claims, such as the Consultant’s, will have a prior claim to the assets that constitute their collateral. Holders of the notes will participate ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as the notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the notes. As a result, holders of notes may receive less, ratably, than holders of our secured obligations.

 

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As of December 31, 2010, the notes were effectively subordinated to $931.6 million of indebtedness (including amounts owed on our renewed senior secured credit facilities, financing obligations and capital leases and amounts owed via the Consultant Agreement), and $75.0 million was available for additional secured borrowings under the revolving portion of our renewed senior secured credit facilities. In addition, we are permitted to borrow, subject to certain conditions (including limitations in the Consultant Agreement), up to $150.0 million of uncommitted incremental term loans under our renewed senior secured credit facilities from time to time. We are permitted to borrow significant additional indebtedness, including secured indebtedness, in the future under the terms of the indentures governing the notes and our renewed senior secured credit agreement.

Claims of creditors of our non-guarantor subsidiaries will have priority with respect to the assets and earnings of such subsidiaries over you.

None of our subsidiaries other than Universal Parks & Resorts Vacations and Universal Orlando Online Merchandise Store have guaranteed the notes. Claims of creditors of our subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, will generally have priority with respect to the assets and earnings of such subsidiaries over our claims or those of our creditors, including you, even if the obligations of those subsidiaries do not constitute senior indebtedness.

The right of noteholders to receive payments on the senior subordinated notes will be subordinated to the rights of the lenders under our renewed senior secured credit facilities, the holders of the senior notes and the Consultant, and to all of our other senior indebtedness, including any of our future senior debt.

The senior subordinated notes and the guarantees thereof rank junior in right of payment to all of our existing senior indebtedness, including borrowings under our renewed senior secured credit facilities and the senior notes, and will rank junior in right of payment to all of our future borrowings, except for any future indebtedness that expressly provides that it ranks equal or junior in right of payment to the senior subordinated notes and the guarantees thereof.

As of December 31, 2010, we had approximately $1,331.6 million of senior indebtedness outstanding on a consolidated basis (including amounts owed on our renewed senior secured credit facilities, the senior notes, financing obligations and capital leases and amounts owed via the Consultant Agreement), and $75.0 million was available for additional secured borrowings under the revolving portion of our renewed senior secured credit facilities. In addition, we are permitted to borrow, subject to certain conditions (including limitations in the Consultant Agreement), up to $150.0 million of uncommitted incremental term loans under our renewed senior secured credit facilities from time to time. We are permitted to borrow significant additional indebtedness, including senior indebtedness, in the future under the terms of the indentures governing the notes and our renewed senior secured credit agreement.

We may not be permitted to pay principal, premium, if any, interest or other amounts on account of the senior subordinated notes or the guarantees thereof in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under our renewed senior secured credit facilities and the senior notes, unless such senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to such senior indebtedness, we may not be permitted to pay any amount on account of the senior subordinated notes or the guarantees thereof for a designated period of time.

 

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Because of the subordination provisions in the senior subordinated notes and the guarantees thereof, in the event of a bankruptcy, liquidation, reorganization or similar proceeding relating to us, our assets will not be available to pay obligations under the senior subordinated notes or the guarantees until we have made all payments in cash on our senior indebtedness. Sufficient assets may not remain after all these payments of principal or interest when due. In addition, in the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to us, holders of the senior subordinated notes will participate with trade creditors and all other holders of our senior subordinated indebtedness, as the case may be, in the assets (if any) remaining after we have paid all of the senior indebtedness. However, because the indenture governing the senior subordinated notes requires that amounts otherwise payable to holders of the senior subordinated notes in a bankruptcy or similar proceeding be paid to holders of senior indebtedness instead, holders of senior subordinated notes may receive less, ratably, than holders of trade payables or other unsecured, unsubordinated creditors in any such proceeding. In any of these cases, we may not have sufficient funds to pay all creditors, and holders of the senior subordinated notes may receive less, ratably, than the holders of senior indebtedness.

Our ability to refinance our debt obligations, including the notes, could be adversely impacted by the Consultant’s right, starting in June 2017, to terminate the periodic payments under the Consultant Agreement and receive instead one payment equal to the fair market value of the Consultant’s interest in the Orlando parks and any comparable projects or, under certain circumstances, an alternative one-time payment.

We have a Consultant Agreement with a Consultant under which we pay a fee for consulting services and exclusivity equal to a percentage of our gross revenues from the attractions and certain other facilities owned or operated, in whole or in part, by us. The Consultant Agreement also provides that the Consultant is entitled to a fee based on a percentage of gross revenues of comparable projects, which are gated motion picture and television themed attractions owned or operated, in whole or in part, by us, or any of our partners or any of their affiliates, other than in Universal City, California. At present, the only operating theme parks that are deemed to be comparable projects are Universal Studios Japan in Osaka, Japan and Universal Studios Singapore on Sentosa Island, Singapore, which are not owned by us. The amount of fees paid by Universal Studios Japan to the Consultant have historically been between 70% and 80% of the fees paid to the Consultant by us, while fees based on Universal Studios Singapore’s results have only recently begun to be paid, as the park soft-opened in March 2010. Fees with respect to Universal Studios Japan and Universal Studios Singapore are paid by an affiliate of Universal City Studios Productions and are not paid by UCDP. In addition to the existing comparable parks, there are three contemplated comparable parks which are vested immediately for purposes of the consulting fee payments and it is possible that other comparable projects will be created in the future that would fall under the Consultant Agreement. In fiscal years 2010, 2009 and 2008, the fees incurred by us payable to the Consultant under the Consultant Agreement were approximately $24.4 million, $17.5 million and $19.6 million, respectively. The Consultant has a lien on certain of our assets to secure his interests under the Consultant Agreement, including a mortgage on our real property up to $400.0 million, and the notes are effectively subordinated to his interests to the extent of the value of those assets. The lien securing the Consultant’s interest is junior to the lien securing our renewed senior secured credit facilities. Under the terms of the notes and our renewed senior secured credit agreement, the lien securing our obligations under the Consultant Agreement is a permitted lien. The Consultant Agreement does not have an expiration date, but starting in June 2017, the Consultant has the right upon 90 days’ notice to terminate the periodic payments under the Consultant Agreement and receive instead one cash payment equal to the fair market value of the Consultant’s interest in the ongoing revenue streams or, under certain circumstances, an alternative one-time payment, in each case with respect to the Orlando parks and any comparable projects that have been opened at that time for at least one year, which amounts could be significant. The amount of such cash payment would be determined in a manner that includes fees paid with respect to Universal Studios Japan and Universal Studios Singapore and any other comparable parks that may open. Because this could increase the size of such cash payment even if a portion of such cash payment is not our responsibility in the first instance, it could make the financing of any such payment more difficult. In addition, the Consultant Agreement limits the amount of secured debt we may incur to the greater of $975.0 million and 3.75x our Covenant EBITDA (as defined in our renewed senior secured credit agreement). Accordingly, we may not be able to refinance our existing debt on a secured basis or make the payment to the Consultant. Upon the sale of any portion of Blackstone’s and/or the NBCU Parties’ respective interest in UCDP, the Consultant may have the right to sell in such sale an equal portion of his compensation rights under the Consultant Agreement to the prospective purchaser. This could make any financing in the future more difficult. We cannot predict whether the Consultant will exercise his payment option or his tag-along option or the timing of any such decision. Due to uncertainties in the amount and timing of such cash payment and our ability to make such a cash payment and the limits on our ability to incur additional senior secured debt, our ability to refinance our renewed senior secured credit agreement and the notes, and our ability to incur future indebtedness, is likely to be adversely impacted by this right of the Consultant. For more information about the Consultant Agreement, see “Item 13. Certain Relationships and Related Transactions, and Director Independence—Consultant agreement.

 

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We may not have the ability to raise the funds necessary to finance any change of control offer required by the indentures governing the notes.

Pursuant to the indentures governing the notes, we may need to refinance large amounts of our debt, including the notes and borrowings under our renewed senior secured credit agreement, upon the incurrence of specific kinds of change of control events. The indentures define a change of control as either (1) the sale, lease or transfer, in one or a series of related transactions, of all or substantially all of our assets and the assets of our subsidiaries, taken as a whole (other than to Blackstone, Universal City Studios Productions or an entity with more than 50% of its capital stock owned collectively by Blackstone or Universal City Studios Productions, each of which is referred to as a “Permitted Holder”), or (2) when the issuers of the notes become aware of an acquisition of more than 50% of the total voting power or economic interests in us by someone other than a Permitted Holder. See “Item 1A. Risk Factors.—Risks related to our Partners—Risks related to the right of first refusal and drag along right between our partners.” If a change of control occurs, we must offer to purchase all of the notes then outstanding for a price equal to 101% of the principal amount of the notes, plus any accrued and unpaid interest. We cannot assure you that there will be sufficient funds available for us to make any required repurchases of the notes upon a change of control. In addition, our renewed senior secured credit agreement may prohibit us from repurchasing the notes until we first repay outstanding indebtedness under our renewed senior secured credit agreement in full. If we fail to repurchase the notes in that circumstance, we will go into default under the indentures governing the notes and under our renewed senior secured credit agreement. Any future debt that we incur may also contain restrictions on repayment upon a change of control. If any change of control occurs, we cannot assure you that we will have sufficient funds to satisfy all of our debt obligations.

Our debt agreements and the Consultant Agreement contain restrictions that limit our flexibility in operating the business.

Our renewed senior secured credit agreement and the indentures governing the notes contain a number of significant covenants that, among other things, restrict our ability to:

 

   

incur additional indebtedness;

 

   

create liens on our assets;

 

   

issue dividends;

 

   

engage in mergers or acquisitions; and

 

   

make investments.

These restrictive covenants may not allow us the flexibility we need to operate the business in an effective and efficient manner and may prevent us from taking advantage of strategic opportunities that would benefit our business or addressing the effects of the global economic downturn and liquidity crisis in the financial markets.

In addition, we will be required under our renewed senior secured credit agreement to satisfy specified financial ratios and tests. Our ability to comply with those financial ratios and tests may be affected by events beyond our control, including the current depressed economic environment, and we may not be able to meet those ratios and tests. A breach of any of those covenants could result in a default under our renewed senior secured credit agreement and the lenders could elect to declare all amounts borrowed under our renewed senior secured credit agreement, together with accrued interest, to be immediately due and payable and could proceed against the collateral securing that indebtedness. Substantially all of our assets are pledged as collateral pursuant to the terms of our renewed senior secured credit agreement, and certain of our assets are subject to the Consultant’s second-priority lien. If any of our indebtedness were to be accelerated, our consolidated assets may not be sufficient to repay in full that indebtedness. In addition, as described above, the terms of the Consultant Agreement limit our ability to incur existing or subsequent senior secured debt. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Consultant agreement.” In light of current global economic conditions and the liquidity crisis in the financial markets, we could have difficulty finding alternative financing.

 

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Current turmoil in the credit and capital markets could impede our ability to refinance our long-term debt or prevent us from obtaining additional funds required to effectively operate our business, including funds from our renewed revolving credit facility.

Throughout the period from 2008 through 2010, United States and global credit markets experienced significant disruption, making it increasingly difficult for many businesses to obtain financing on acceptable or previously customary terms. Additionally, the volatility in equity markets due to rapid and wide fluctuations in value has resulted in a reduction of public offerings of equity securities. If these conditions persist or worsen, our borrowing costs may increase, and it may be more difficult to secure funding for our operations, including capital expenditures for theme park attractions. These risks could also impact our long-term debt ratings which would likely increase our cost of borrowing and/or make it more difficult for us to obtain funding. These factors are particularly important given our substantial long-term debt balance as of December 31, 2010 of $1,516.0 million (based on gross maturities and including current portions). Additionally, we can not assure you that we will be able to draw upon our renewed revolving credit facility if needed.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Universal Studios Florida, Universal’s Islands of Adventure, CityWalk, our film production studios, our guest parking structures, our employee parking lots, our executive offices and various administrative buildings as well as extensive landscaping and water systems, are located on 429 acres which we own in Orlando, Florida. In addition, we own approximately 137 acres on which the three themed hotels are located which are leased to UCF Hotel Venture under a long-term ground lease. During 2009, we sold approximately 12 acres of non-strategic land for $7.1 million with a cost basis of $1.4 million. After the reduction of related expenses, we recorded a gain of approximately $5.2 million. During 2010 and 2008, we did not complete any property sales.

We have approximately 104 acres of undeveloped land which has planning approval for additional hotels and other uses. The development of hotels on these vacant sites is subject to a right of first refusal by Loews Hotels to participate in the development. We have identified approximately 35+ acres of this undeveloped land that would not be necessary for the hotel development and are considering the sale of this land for retail, office or other uses. In addition, we have other smaller parcels of land that are not essential to our operations. As of December 31, 2010, we did not deem any potential sales of land as probable to occur within a year. Additionally, during the fourth quarter of 2010, one parcel of land that was previously classified as held for sale in the consolidated financial statements was reclassified as held and used in accordance with applicable accounting guidance. As a result of this reclassification, we incurred a $3.3 million charge to depreciation during the year ended December 31, 2010.

As of December 31, 2010, we leased four off-site retail stores including two stores at the Orlando Airport, one store at an Orlando-area resort, and one off-site liquidation retail store at the Festival Bay Mall in Orlando. In addition, we lease off-site office and warehouse space of approximately 280,000 square feet for merchandise inventory and entertainment props as well as 25,000 square feet for the manufacture of replacement prosthetic skins for some of our attractions. We believe that our facilities, whether owned or leased, are in satisfactory working order and are sufficient and adequate to meet our current and anticipated needs.

 

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Item 3. Legal Proceedings.

We are threatened with or involved in various legal actions and claims incidental to the conduct of our business. We do not expect these legal actions and claims to have a material impact to our results of operations, financial position or cash flows.

Item 4. (Removed and Reserved).

Not applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Not applicable.

Item 6. Selected Financial Data.

The following tables set forth certain of our financial and other data. The selected financial and other data for the fiscal years ended December 31, 2010, 2009 and 2008, and as of December 31, 2010 and 2009, have been derived from our audited consolidated financial statements and the related notes included elsewhere in this report. The selected historical financial and other data for the years ended December 31, 2007 and 2006, and as of December 31, 2008, 2007 and 2006, have been derived from our audited consolidated financial statements and the related notes thereto which are not included in this report. The selected historical financial and other data presented below include all adjustments that management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods indicated. This report contains financial measures not prepared in accordance with United States generally accepted accounting principles, including EBITDA and Covenant EBITDA. The information set forth below should be read in conjunction with “Item 1A. Risk Factors.”, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and our consolidated financial statements and the related notes included elsewhere in this report. Past financial performance should not be considered as a reliable indicator of future performance.

 

     Year ended December 31,  

(Dollars in

thousands)

   2010      2009      2008      2007      2006  

Statement of income data:

              

Operating revenues:

              

Theme park tickets

   $ 586,682       $ 419,026       $ 455,935       $ 450,844       $ 420,654   

Theme park food and beverage

     127,509         94,655         112,270         115,188         108,612   

Theme park merchandise

     140,625         82,695         99,634         101,599         91,421   

Other theme park related(1)

     108,796         86,658         104,380         102,825         84,245   

Other(2)

     164,863         119,819         151,133         161,387         150,454   
                                            

Total operating revenues

     1,128,475         802,853         923,352         931,843         855,386   

Costs and operating expenses:

              

Theme park operations

     206,519         176,947         184,371         177,556         168,431   

Theme park selling, general and administrative

     183,216         124,216         153,205         153,053         149,075   

Theme park cost of products sold

     133,018         92,645         113,536         113,610         105,023   

Special fee payable to Universal City Studios Productions and consultant fee

     74,766         51,913         58,305         57,996         53,408   

Depreciation and amortization

     123,484         106,051         111,130         110,327         111,210   

Other

     140,581         102,058         122,374         128,503         123,263   
                                            

Total costs and operating expenses

     861,584         653,830         742,921         741,045         710,410   
                                            

Operating income

     266,891         149,023         180,431         190,798         144,976   

Total other expense, net

     118,485         125,532         102,542         96,137         100,479   
                                            

Net income

     148,406         23,491         77,889         94,661         44,497   

Less: net income attributable to the noncontrolling interest in UCRP

     1,780         1,577         2,149         2,773         2,537   
                                            

Net income attributable to the Partners

   $ 146,626       $ 21,914       $ 75,740       $ 91,888       $ 41,960   
                                            

 

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     Year ended December 31,  

(Dollars in thousands,

except other

operational data)

   2010     2009      2008     2007     2006  

Other data:

           

EBITDA (3)

   $ 390,968      $ 260,238       $ 292,085      $ 302,852      $ 258,133   

Covenant EBITDA(3)

     393,516        259,845         297,906        312,075        260,620   

Net cash and cash equivalents provided by operating activities

     349,515        65,973         191,333        241,518        165,921   

Net cash and cash equivalents used in investing activities

     110,160        134,043         134,874        49,721        44,292   

Net cash and cash equivalents (used in) provided by financing activities

     (25,479 )     25,429         (96,535 )     (130,540 )     (101,845 )

Capital expenditures

     110,160        143,433         137,010        60,912        45,313   

Ratio of earnings to fixed charges(4)

     2.2x        1.1x         1.7x        1.9x        1.4x   

Other operational data:

           

Turnstile admissions in thousands(5)

     11,874        10,157         11,357        11,514        11,209   

Paid admissions in thousands(6)

     11,180        9,297         10,564        10,758        10,468   

Theme park ticket revenue per paid admission

   $ 52.48      $ 45.07       $ 43.16      $ 41.91      $ 40.18   

Theme park food, beverage and merchandise revenue per turnstile admission

   $ 22.58      $ 17.46       $ 18.66      $ 18.82      $ 17.85   

Other theme park related revenue per turnstile admission

   $ 9.16      $ 8.53       $ 9.19      $ 8.93      $ 7.52   

 

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     As of December 31,  

(Dollars in thousands)

   2010      2009      2008      2007      2006  

Balance sheet data:

              

Total cash and equivalents

   $ 259,033       $ 45,157       $ 87,798       $ 127,874       $ 66,617   
                                            

Total assets

     2,155,615         1,969,604         1,975,277         1,986,022         1,926,911   
                                            

Total long-term indebtedness (including current portion)

     1,495,168         1,504,730         1,007,960         1,007,126         1,006,364   
                                            

Other long-term obligations(7)

     27,110         27,415         119,896         118,721         80,873   
                                            

Total equity

     401,271         255,011         642,346         643,582         686,550   
                                            

 

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The following is a reconciliation of Net Cash And Cash Equivalents Provided By Operating Activities to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Year ended December 31,  

(Dollars in thousands)

   2010     2009     2008     2007     2006  

Net cash and cash equivalents provided by operating activities

   $ 349,515      $ 65,973      $ 191,333      $ 241,518      $ 165,921   

Adjustments:

          

Interest expense

     117,919        108,388        102,669        107,906        109,733   

Interest income

     (221 )     (201 )     (2,654 )     (7,269 )     (4,270 )

Amortization of deferred finance costs

     (3,519 )     (8,645 )     (6,939 )     (5,164 )     (5,374 )

Interest on financing obligations

     (2,284 )     (2,346 )     (2,380 )     (1,166 )     —     

Changes in deferred special fee payable and related interest payable to affiliates

     —          91,967        (4,359 )     (6,735 )     (6,168 )

Gain on sale of assets held for sale

     —          5,155        —          2,776        5,195   

Distributions from investments in unconsolidated entities

     (3,080 )     (3,161 )     (3,691 )     (3,681 )     (164 )

Income from investments in unconsolidated entities

     2,373        1,586        2,673        1,724        (711 )

Loss from impairment of investments in unconsolidated entities

     —          (444 )     —          —          —     

Accretion of bond discount

     (3,927 )     (1,219 )     (834 )     (837 )     (851 )

Income attributable to the noncontrolling interest in UCRP

     (1,780 )     (1,577 )     (2,149 )     (2,773 )     (2,537 )

Net change in working capital accounts (8)

     (64,028 )     4,762        18,416        (23,447 )     (2,641 )
                                        

EBITDA

     390,968        260,238        292,085        302,852        258,133   

Adjustments to arrive at Covenant EBITDA:

          

Income attributable to the noncontrolling interest in UCRP

     1,780        1,577        2,149        2,773        2,537   

Income from investments in unconsolidated entities

     (2,373 )     (1,586 )     (2,673 )     (1,724 )     711   

Distributions from investments in unconsolidated entities

     3,080        3,161        3,691        3,681        164   

Gain on sale of assets held for sale

     —          (5,155 )     —          (2,776 )     (5,195 )

Interest income

     221        201        2,654        7,269        4,270   

Other

     (160 )     1,409        —          —          —     
                                        

Covenant EBITDA

   $ 393,516      $ 259,845      $ 297,906      $ 312,075      $ 260,620   
                                        

 

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The following is a reconciliation of Net Income Attributable To The Partners to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Year ended December 31,  
(Dollars in thousands)    2010     2009     2008     2007     2006  

Net income attributable to the Partners

   $ 146,626      $ 21,914      $ 75,740      $ 91,888      $ 41,960   

Adjustments:

          

Interest expense

     117,919        108,388        102,669        107,906        109,733   

Expenses associated with debt refinancing

     3,160        25,023        —          —          —     

Loss on extinguishment of debt

     —          4,263        —          —          —     

Depreciation and amortization

     123,484        106,051        111,130        110,327        111,210   

Net change in fair value of interest rate swaps and amortization of accumulated other comprehensive loss

     —          (5,200 )     5,200        —          (500 )

Interest income

     (221 )     (201 )     (2,654 )     (7,269 )     (4,270 )
                                        

EBITDA

     390,968        260,238        292,085        302,852        258,133   

Adjustments to arrive at Covenant EBITDA:

          

Income attributable to the noncontrolling interest in UCRP

     1,780        1,577        2,149        2,773        2,537   

Income from investments in unconsolidated entities

     (2,373 )     (1,586 )     (2,673 )     (1,724 )     711   

Distributions from investments in unconsolidated entities

     3,080        3,161        3,691        3,681        164   

Gain on sale of assets held for sale

     —          (5,155 )     —          (2,776 )     (5,195 )

Interest income

     221        201        2,654        7,269        4,270   

Other

     (160 )     1,409        —          —          —     
                                        

Covenant EBITDA

   $ 393,516      $ 259,845      $ 297,906      $ 312,075      $ 260,620   
                                        

Note: Reconciliations for the years ended December 31, 2006 through 2008 are shown for illustrative purposes only as results for those periods were not subject to the same calculations of Covenant EBITDA as contained in the indentures governing the notes or the renewed senior secured credit facilities.

 

(1) Consists primarily of UEP sales, aged ticket sales, theme park corporate special events and the parking facility. We host special events for corporate guests whereby a portion of the theme park is rented for corporate functions. UEP is a ticket that allows guests to experience reduced wait times at certain attractions and shows.

 

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(2) Consists primarily of CityWalk, Universal Parks & Resorts Vacations and hotel rent received from our on-site hotels.
(3) We have included Covenant EBITDA because it is used by some investors as a measure of our ability to service debt, while we have also included EBITDA as it is a measure of Company operating performance under our Annual Incentive Plan. While EBITDA represents earnings before interest, taxes and depreciation and amortization, Covenant EBITDA includes certain other adjustments permitted by the definition of EBITDA in our renewed senior secured credit agreement and the indentures governing the notes. Some of these adjustments include exclusion of gains or losses from the sale of assets held for sale, exclusion of impairment charges on long lived assets and adjustments related to income and cash flows derived from investments in unconsolidated entities. Covenant EBITDA and EBITDA are not prepared in accordance with United States generally accepted accounting principles and should not be considered alternatives for Net Income, Net Cash And Cash Equivalents Provided By Operating Activities and other consolidated income or cash flow statement data prepared in accordance with United States generally accepted accounting principles or as measures of profitability or liquidity. Covenant EBITDA and EBITDA, because they are before debt service, capital expenditures and working capital needs, do not represent cash that is available for other purposes at our discretion. Our presentation of Covenant EBITDA and EBITDA may not be comparable to similarly titled measures reported by other companies. For these reasons, we have prepared a two step reconciliation between our generally accepted accounting principles (“GAAP”) financial measures, EBITDA as well as Covenant EBITDA. Covenant EBITDA is the primary basis in our renewed senior secured credit agreement to determine our quarterly compliance with our secured leverage ratio and the interest coverage ratio, which is computed based on the prior twelve months.
(4) The Ratio Of Earnings To Fixed Charges is computed by dividing earnings by fixed charges. For purposes of calculating the Ratio Of Earnings To Fixed Charges, earnings represents Net Income plus fixed charges. Fixed charges include Interest Expense (including Amortization Of Deferred Finance Costs) and the portion of operating rental expense that management believes represents the interest component of rent expense.
(5) Turnstile Admissions represent total admissions to our theme parks, which includes paid admissions and complimentary tickets.
(6) Paid Admissions represent the total paid admissions to our theme parks.
(7) Other Long-term Obligations include Capital Lease And Financing Obligations Net Of Current Portion and Deferred Special Fees Payable To Affiliates.
(8) Net change in working capital accounts represents changes in operating assets and liabilities, which includes Accounts Receivable (Net), Notes Receivable, Receivables From Related Parties, Inventories, Prepaid Expenses And Other Assets, Other Long-term Assets, Accounts Payable And Accrued Liabilities, Unearned Revenue, Payables To Related Parties, and Other Long-term Liabilities.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The following “Management’s discussion and analysis of financial condition and results of operations” (“MD&A”) is designed to help the reader understand our financial results, strategies and business environment from our viewpoint. The MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this report. This overview summarizes the MD&A, which includes the following sections:

 

   

Our operations—a brief description of our operations and our business environment.

 

   

Ownership and basis of presentation—a summary of our Company structure including our partners and subsidiaries and other factors impacting our financial presentation.

 

   

Critical accounting policies and estimates—a discussion of our accounting policies requiring critical estimates and judgment.

 

   

Results of operations—an analysis of our results of operations for the three-year fiscal period presented in our consolidated financial statements.

 

   

Liquidity, capital resources and financial position—a discussion of our sources and uses of cash, our financial position, and contractual obligations.

Our operations

We own and operate two theme parks (Universal’s Islands of Adventure and Universal Studios Florida), an entertainment complex (Universal CityWalk Orlando), and movie and production facilities, all located in Orlando, Florida. Our operations are heavily dependent on theme park attendance, which we consider our most important operating indicator. We use two different metrics to gauge theme park attendance: paid attendance and turnstile attendance, which includes complimentary attendance. Additionally, through in-park surveys, we track our theme park attendance from three distinct points of origin: international, Florida and the outer-U.S., which is the domestic market excluding the state of Florida. Theme park attendance is affected by macroeconomic, competitive and seasonal forces. As our entertainment product is a component of our customers’ discretionary spending, macroeconomic factors, such as consumer sentiment and foreign currency exchange rates, play an important role in our attendance. Consumer sentiment is an important economic indicator, especially in relation to our outer-U.S. market where travel costs are higher when compared to our Florida market. Oil and gas prices affect consumer sentiment for all of our markets due to their impact on discretionary income and travel costs. Foreign currency exchange rates affect the relative prices for our international guests and therefore impact attendance from that market.

Orlando has seven large theme parks in the metro area. As a result, our attendance is also affected by competitive forces. Our largest competitor is Walt Disney World, which contains four of the parks in Orlando. Additionally, Anheuser-Busch InBev historically operated a local SeaWorld® park in Orlando, which was sold to an affiliate of Blackstone on December 1, 2009. Due to the high level of competition in our market, theme park ticket pricing and the introduction of new attractions are factors significantly impacting theme park attendance.

Theme park attendance follows a seasonal pattern which coincides closely with holiday and school schedules. The year begins with the end of the peak Christmas and New Year’s holiday period. When children return to school, attendance levels subside. During the March to April timeframe, spring break and Easter vacation periods drive seasonally high attendance. Since the peak spring break period fluctuates from year to year between the end of the first quarter and the beginning of the second quarter, historical quarterly financial information might not be comparable. May is a traditionally slow attendance period. June marks the beginning of the summer attendance peak when local schools are out for the summer. This peak attendance period continues throughout the month of June, as schools outside of Florida finish their terms. The peak summer period includes the entire month of July and the first few weeks in August, when the local schools begin to go back into session. Attendance levels continue to decline through Labor Day, when schools outside of Florida begin. Excluding special events such as Rock the Universe in September and Halloween Horror Nights® in October, the period from September through November is seasonally slow, with an attendance spike around Thanksgiving week. Attendance falls again after Thanksgiving weekend, and does not pick up until the third week of December, when the peak Christmas and New Year’s holiday period begins. The Atlantic Ocean hurricane season begins in June and ends in November of each year. Historically, tropical weather systems have had little impact on Orlando theme parks. From 1991 to 2003, our parks had been closed only once due to the inclement weather caused by hurricanes. However, during the 2004 and 2005 seasons, we closed our parks on four days as a result of hurricanes. From 2006 through 2010, there were no storms that caused us to close our parks.

 

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In 2010, approximately 52% of our revenues were derived from theme park tickets. We analyze our theme park ticket revenue based on revenue per paid admission. Sales of food, beverage and merchandise constitute approximately 24% of our revenues. We analyze our theme park food, beverage and merchandise revenues based on revenue per turnstile admission. We derive less than 7% of our revenue from our CityWalk complex, which includes retail, dining, cinema and nightclub entertainment. Our primary operating costs include Theme Park Operations, Theme Park Selling, General and Administrative costs, Theme Park Cost of Products Sold, a Special Fee Payable to Universal City Studios Productions, the Consultant Fee, Depreciation and Amortization, in addition to Interest Expense. We also monitor EBITDA, Covenant EBITDA and certain of our debt covenant ratios as these items impact our ability to service our debt, make distributions to our partners (see the “Ownership and basis of presentation” section below) and make payments of special fees to our manager, Universal City Studios Productions. Covenant EBITDA is the primary basis in the UCDP senior secured credit agreement to determine our quarterly compliance with our secured leverage ratio and the interest coverage ratio, which is computed based on the prior twelve months. These items are discussed in greater detail within the section entitled “Liquidity, capital resources and financial position.”

Ownership and basis of presentation

Our ultimate owners, each having a 50% interest in us, are Universal City Property Management II, LLC (“Universal CPM”), a subsidiary of Universal City Studios Productions LLLP (“UCSP”, formerly known as Vivendi Universal Entertainment or “VUE”), which in turn is a subsidiary of NBCUniversal Media, LLC (“NBCUniversal”), and Blackstone Capital Partners (“Blackstone”). Through NBCUniversal Holdings, General Electric Company (‘GE”) owns 49% of NBCUniversal, while Comcast Corporation (“Comcast”) owns the remaining 51%. Our consolidated financial statements include the amounts of Universal City Development Partners, Ltd., and all of its subsidiaries including: Universal Parks & Resorts Vacations (“UPRV”), Universal City Restaurant Partners, Ltd. (“UCRP”), Universal Orlando Online Merchandise Store (“UOOMS”), and UCDP Finance, Inc. (collectively “UCDP”). All significant intercompany balances and transactions have been eliminated upon consolidation. Universal City Development Partners, Ltd. is our primary operating company, while UCDP Finance, Inc. facilitated the issuance of the notes. UPRV is our travel company that sells and coordinates vacation packages for some of our guests. UCRP operates a restaurant and merchandise store in the CityWalk complex, and UOOMS is our online merchandise store, which opened during the second quarter of 2010.

Critical accounting policies and estimates

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles. Results could differ significantly from those estimates under different assumptions and conditions. We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of all of our significant accounting policies, including the accounting policies discussed below, see note 2 to our consolidated financial statements included elsewhere in this report. These accounting policies have been discussed and reviewed with the representatives of Holdings and our audit committee, which consists of representatives from both Universal City Studios Productions and Blackstone.

Revenue recognition

Operating revenue primarily consists of sales related to theme park tickets, merchandise and food and beverage. Revenue from theme park tickets is recognized at the time tickets are redeemed. For tickets not redeemed, revenue is recorded after one year from the date of purchase, which coincides with our historical redemption patterns. Proceeds related to the sale of theme park or entertainment complex tickets are exempt from unclaimed property reporting within the State of Florida. Revenue from theme park annual tickets is recognized in equal installments over the life of the annual ticket. Revenue from food and beverage and merchandise is recognized at the time of sale. In addition to unredeemed tickets, we also defer revenue on admissions to CityWalk venues until redemption and on corporate sponsorships, which are recognized as revenue over the period of benefit. Revenue from hotel rent is recognized when earned.

 

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Property and equipment

Property and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of those assets. Changes in circumstances such as changes to our business model could result in an impairment of our property and equipment. In addition, it could also result in the actual useful lives differing from our estimates. We review our assumptions whenever a change in these circumstances occurs. We currently depreciate our major ride components using a 20-year useful life and our show elements, such as film, over 10 years. Had we used a 15-year useful life, our annual depreciation expense as it relates to our major ride components would have increased by approximately $11.9 million. Conversely, a useful life for our major ride components of 25 years would have reduced our annual depreciation expense by approximately $6.9 million.

We utilize one accounting impairment model for long-lived assets held for sale, whether previously held and used or newly acquired. We review our long-lived assets and identifiable intangibles for impairment indicators. If indicators are noted, we compare the carrying amount of the asset to its fair value based on undiscounted cash flows. If the carrying amount exceeds its fair value, an impairment loss is recognized to adjust the long lived asset to fair value. If we determine that the useful life of property and equipment should be shortened, such as finalizing the date a ride will be closed as part of developing a new ride, we would depreciate the net book value in excess of the salvage value, over the revised remaining useful life, thereby increasing depreciation expense. Our consolidated financial statements do not include any significant impairment adjustments related to property and equipment. During the years ended December 31, 2010, 2009 and 2008, we accelerated depreciation on certain assets, primarily in our Lost Continent Island, which were disposed of as part of the construction of The Wizarding World of Harry Potter™. As a result, additional depreciation expense of approximately $2.8 million, $4.1 million and $4.0 million was recorded during the years ended December 31, 2010, 2009 and 2008, respectively. During the year ended December 31, 2010, we also recorded an adjustment to increase depreciation expense by $3.3 million resulting from the reclassification of land assets that no longer qualified as held for sale in accordance with applicable accounting guidance (see note 2—Summary of significant accounting policies—Reclassifications).

Provision for inventory

Inventory, which primarily includes spare parts for the theme park rides, food and beverage and merchandise, is recorded at the lower of cost or market. Cost is determined using the average cost method. We periodically make judgments regarding the realizable value of certain slow-moving and obsolete inventory. For spare parts, these judgments are based on the usage of the parts on specific rides. If we decide to close down a ride as part of developing a new ride, or otherwise, we specifically review spare parts related to the ride being closed for impairment. For merchandise, these judgments are based primarily on the demand of our customers. The enactment of product safety regulations can also impact our provision for merchandise inventory. When the realizable value is less than the average cost, we record an inventory provision.

At December 31, 2010, we had a $3.0 million inventory provision, which included $1.6 million for slow-moving merchandise, $0.1 million for food supplies and $1.3 million for obsolete spare parts. At December 31, 2009, we had a $2.1 million inventory provision, which included $1.1 million for slow-moving merchandise, $0.2 million for food supplies and $0.8 million for obsolete spare parts.

 

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Litigation

We are currently involved in certain legal proceedings and other claims, including those discussed within the “Item 1. Business” section of this report. If we believe that costs from these matters are probable and the amount of the costs can be reasonably estimated, we will accrue the amount of the costs. Accordingly, we have accrued our estimate of the probable legal and settlement costs for the resolution of these claims. This estimate has been developed in consultation with outside counsel and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. As additional information becomes available, we will reassess any potential liability related to these matters and, if necessary, revise our estimates. See note 13 to our consolidated financial statements included elsewhere in this report for more detailed information on litigation related exposure.

Recent accounting pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and requires enhanced related disclosures. This guidance must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008. This guidance became effective for us on January 1, 2009. The adoption of this accounting guidance resulted in approximately $1.0 million in additional intangible assets and financing obligations being recorded during the year ended December 31, 2010.

In March 2008, the FASB issued guidance that expands the disclosure requirements for derivative instruments and hedging activities. Specifically, this guidance requires entities to provide enhanced disclosures addressing the following: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for fiscal years beginning after November 15, 2008. This guidance became effective for us on January 1, 2009. Our adoption of the standard did not have a material impact on our financial position, results of operations or cash flows as it is primarily disclosure related.

In December 2007, the FASB issued guidance that modifies certain aspects of how an acquiring entity recognizes and measures the identifiable assets, the liabilities assumed and the goodwill acquired in a business combination. This guidance is effective for fiscal years beginning after December 15, 2008. Although this guidance will impact our accounting for business combinations completed on or after January 1, 2009, it did not impact our consolidated financial statements as we did not enter into any business combinations during the years ended December 31, 2010 or December 31, 2009.

In May 2009, the FASB issued guidance that establishes principles and requirements for subsequent events. Specifically, the guidance sets forth parameters pertaining to the period after the balance sheet date during which management should consider events or transactions for potential recognition or disclosure, circumstances under which an event or transaction would be recognized after the balance sheet date and the required disclosures that should be made about events or transactions that occurred after the balance sheet date. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and as such, became effective for us on June 28, 2009. Our adoption of the standard did not have a material impact on our financial position, results of operations or cash flows.

In June 2009, the FASB issued revisions to pre-existing guidance pertaining to the consolidation and disclosures of variable interest entities. Specifically, it changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This guidance requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity is required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. As such, the guidance became effective for us on January 1, 2010. Our adoption of the standard did not have a material impact on our financial position, results of operations or cash flows as it did not result in the additional consolidation or deconsolidation of any variable interest entities.

 

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In June 2009, the FASB issued accounting guidance that has become the single source of authoritative nongovernmental GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. This guidance reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. This guidance is effective for financial statements issued for reporting periods that end after September 15, 2009. Beginning in the third quarter of 2009, this guidance impacts our consolidated financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.

Results of operations

Overview

Our 2010 results benefited significantly from the opening of The Wizarding World of Harry PotterTM, which opened on June 18, 2010. Prior to the opening of The Wizarding World of Harry PotterTM, our year-to-date Paid Theme Park Admissions was down 5% when compared to the same period of 2009. Paid Theme Park Admissions increased 40% during the last six months of 2010 when compared to the last six months of 2009 and, on a full-year basis, increased 20% versus 2009. In 2010 our Paid Theme Park Admissions was 11.2 million, which was the highest total since 2004 and the third highest in our 20-year history. Additionally in 2010, we set several all-time annual operating records for several metrics including Total Operating Revenues, EBITDA (as defined herein) and Net Income. When compared to 2009, Total Operating Revenues increased $325.6 million, or 41%, while EBITDA was up $130.7 million, or 50%. At December 31, 2010, we had $334.0 million in available cash and cash equivalents, including $259.0 million in Cash And Cash Equivalents and $75.0 million of availability under our revolving credit facility. In April 2010, we amended our renewed senior secured credit facilities, which reduced the interest rate applicable to the borrowings under the term loan. Additional details of this amendment are discussed in the section “Liquidity, capital resources and financial position”. We owed $1,516.0 million on our gross indebtedness as of December 31, 2010, of which $90.0 million was current.

2010 compared to 2009

The following table summarizes our results of operations during the years ended December 31, 2010 and 2009 (in thousands except per capita amounts and percentages):

 

     2010      2009      % Change
Favorable/
(unfavorable)
 

Operational Data:

        

Paid theme park admissions

     11,180         9,297         20.3

Turnstile theme park admissions

     11,874         10,157         16.9

Theme park ticket revenue per paid admission

   $ 52.48       $ 45.07         16.4

Theme park food, beverage and merchandise revenue per turnstile admission

   $ 22.58       $ 17.46         29.3

Other theme park related revenue per turnstile admission

   $ 9.16       $ 8.53         7.4

Statement of income data:

        

Operating revenues:

        

Theme park ticket revenue

   $ 586,682       $ 419,026         40.0

Theme park food and beverage

     127,509         94,655         34.7

Theme park merchandise

     140,625         82,695         70.1

Other theme park related

     108,796         86,658         25.5

Other

     164,863         119,819         37.6
                          

Total operating revenues

     1,128,475         802,853         40.6

Costs and operating expenses:

        

Theme park operations

     206,519         176,947         (16.7 )%

Theme park selling, general and administrative

     183,216         124,216         (47.5 )%

Theme park cost of products sold

     133,018         92,645         (43.6 )%

Special fee payable to Universal City Studios Productions and consultant fee

     74,766         51,913         (44.0 )%

Depreciation and amortization

     123,484         106,051         (16.4 )%

Other

     140,581         102,058         (37.7 )%
                          

Total costs and operating expenses

     861,584         653,830         (31.8 )%
                          

Operating income

     266,891         149,023         79.1 %

Non-operating expense, net

     118,485         125,532         5.6 %
                          

Net income

     148,406         23,491         NM   

Less: net income attributable to the noncontrolling interest in UCRP

     1,780         1,577         (12.9 )%
                          

Net income attributable to the Partners

   $ 146,626       $ 21,914         NM   
                          

NM – Not meaningful

 

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Our operating results for 2010 significantly benefited from the opening of The Wizarding World of Harry PotterTM, which opened on June 18, 2010. Our attendance and financial results improved considerably subsequent to the opening of this new content. Paid Theme Park Admissions for the full year increased 20% when compared to 2009. Our domestic markets experienced an increase of 21%, while our international markets experienced an increase of 19%. Total theme park spending on a per guest basis increased 19% versus 2009. As a result of the increased attendance and guest spending, Total Operating Revenues experienced year-over-year growth of $325.6 million, or 41%. Theme Park Ticket Revenue Per Paid Admission increased 16% as a result of new ticket offerings and selective price changes to maximize yield. Theme Park Food, Beverage, and Merchandise Revenue Per Turnstile Admission increased 29% primarily due to guest spending on new merchandise products and food and beverage offerings related to The Wizarding World of Harry PotterTM. Other Theme Park Related Revenue Per Turnstile Admission increased 7% over the prior year. This is primarily due to $13.0 million in additional guest spending on our UEP product and $6.9 million in increased parking revenues. Other Revenue increased $45.0 million, or 38%, when compared to 2009 due to $11.5 million in increased hotel rent and $28.4 million in higher revenues from our travel company. Rental income from the three on-site hotels includes two components, one of which is based on 1% of hotel revenues (base ground rent) while the other is earned in years in which the hotels achieve certain operating results (incremental ground rent). Our results in 2010 benefited from the $11.3 million in incremental ground rent in addition to base ground rent, whereas in 2009 we only received base ground rent. In 2010 we earned the maximum amount of incremental ground rent possible. Our travel company, which is a low margin business for us, has benefited from offering guests exclusive vacation packages which include certain perks, such as early park admission to experience The Wizarding World of Harry PotterTM.

Theme Park Operations increased $29.6 million, or 17%, largely due to incremental spend on entertainment, ride maintenance and other operating costs resulting from increased attendance, additional operating hours, the opening of The Wizarding World of Harry PotterTM, and the addition of the Hollywood Rip Ride Rockit® coaster which opened in August 2009. Theme Park Selling, General and Administrative increased $59.0 million, or 48%, primarily due to increased marketing spend of $37.4 million and growth in the anticipated payouts under our incentive compensation programs. In 2009, we reduced our marketing spend as part of our cost containment strategy, while in 2010 we have reinstated much of these marketing costs and incurred incremental marketing spend related to the launch of The Wizarding World of Harry PotterTM. While Theme Park Cost of Product Sold increased $40.4 million, Theme Park Cost of Product sold as a percentage of Theme Park Food and Beverage Revenue and Theme Park Merchandise Revenue decreased 2.6 percentage points to 49.6%, which is primarily as a result of increased volume which increased the absorption of certain costs of sales. Other Costs and Operating Expenses increased $38.5 million, or 38%, primarily due to increased operating costs of $24.2 million at our travel company and additional credit card fees of $4.8 million, both resulting from the increased volume. Non-Operating Expenses decreased $7.0 million year-over-year. This is due to several discrete transactions being recorded in 2009 including $29.3 million in expenses and losses incurred in connection with the November 2009 debt refinancing. These charges in 2009 were partially offset by a $5.2 million gain on a land sale as well as income associated with changes in the fair value of our interest rate swaps totaling $5.2 million. Finally, interest expense in 2010 increased $9.5 million due to our increased indebtedness resulting from the refinancing in November 2009 in which UCDP refinanced debt previously at the Holdings level.

 

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2009 compared to 2008

The following table summarizes our results of operations during the years ended December 31, 2009 and 2008 (in thousands except per capita amounts and percentages):

 

     2009      2008      % Change
Favorable/
(unfavorable)
 

Operational Data:

        

Paid theme park admissions

     9,297         10,564         (12.0 )%

Turnstile theme park admissions

     10,157         11,357         (10.6 )%

Theme park ticket revenue per paid admission

   $ 45.07       $ 43.16         4.4 %

Theme park food, beverage and merchandise revenue per turnstile admission

   $ 17.46       $ 18.66         (6.4 )%

Other theme park related revenue per turnstile admission

   $ 8.53       $ 9.19         (7.2 )%

Statement of income data:

        

Operating revenues:

        

Theme park ticket revenue

   $ 419,026       $ 455,935         (8.1 )%

Theme park food and beverage

     94,655         112,270         (15.7 )%

Theme park merchandise

     82,695         99,634         (17.0 )%

Other theme park related

     86,658         104,380         (17.0 )%

Other

     119,819         151,133         (20.7 )%
                          

Total operating revenues

     802,853         923,352         (13.1 )%

Costs and operating expenses:

        

Theme park operations

     176,947         184,371         4.0 %

Theme park selling, general and administrative

     124,216         153,205         18.9 %

Theme park cost of products sold

     92,645         113,536         18.4 %

Special fee payable to Universal City Studios Productions and consultant fee

     51,913         58,305         11.0 %

Depreciation and amortization

     106,051         111,130         4.6 %

Other

     102,058         122,374         16.6 %
                          

Total costs and operating expenses

     653,830         742,921         12.0 %
                          

Operating income

     149,023         180,431         (17.4 )%

Non-operating expense, net

     125,532         102,542         (22.4 )%
                          

Net income

     23,491         77,889         (69.8 )%

Less: net income attributable to the noncontrolling interest in UCRP

     1,577         2,149         26.6 %
                          

Net income attributable to the Partners

   $ 21,914       $ 75,740         (71.1 )%
                          

 

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Paid Theme Park Admissions decreased 12% when compared to 2008. As previously discussed we believe this was driven by the downturn in the global economy. Both our domestic and international markets experienced low-teen digit percentage declines to prior year. Accordingly, our Total Operating Revenues decreased $120.5 million, or 13%. Overall total per capita spending in 2009 was consistent with 2008. Theme Park Ticket Revenue Per Paid Admission increased 4% as a result of selective price changes to maximize yield. Theme Park Food, Beverage, and Merchandise Revenue Per Turnstile Admission decreased 6% primarily due to lower guest spending. Other Theme Park Related Revenue Per Turnstile Admission decreased 7%, principally due to a $10.7 million decrease in corporate special events revenue, $3.1 million in reduced guest spending on our UEP product, which typically decreases in periods of lower attendance, and $2.0 million in lower aged pass sales revenue. Other Revenue decreased $31.3 million, or 21%, year-over-year due to $11.3 million in reduced rental income from the three on-site hotels, decreased volume resulted in $10.1 million in lower revenue from our travel company and $9.0 million lower revenue from our CityWalk operations. Rental income from the three on-site hotels includes two components, one of which is based on 1% of hotel revenues (base ground rent) while the other is earned only in years in which the hotels achieve certain operating results (incremental ground rent). Our revenues only included base ground rent from the on-site hotels during the current year.

Theme Park Operations was favorable by $7.4 million largely due to decreased entertainment and operating costs resulting from our reduced attendance levels and management’s cost savings initiatives. Theme Park Selling, General and Administrative was favorable by $29.0 million, or 19%, due to reductions in marketing spend and management’s cost savings initiatives impacting departments throughout the Company. Theme Park Cost of Products Sold decreased 18% when compared to 2008, which corresponds to the decrease in Theme Park Food and Beverage Revenue and Theme Park Merchandise Revenue of 16% and 17%, respectively. As a percentage of revenue, Theme Park Cost of Products Sold decreased from 53.6% in 2008 to 52.2% in 2009, which resulted from a combination of reduced commodity prices and menu changes. Special Fee Payable to Universal City Studios Productions and Consultant Fee decreased 11%, which corresponds to the decrease in Total Operating Revenue of 13%. Other Costs and Operating Expenses was favorable by $20.3 million, or 17%, year-over-year due to reduced operating costs of $7.1 million at our travel company, in addition to reduced operating costs at our CityWalk operations and corporate special events of $5.3 million and $4.9 million, respectively. These reduced operating costs correlate to the lower revenues from each of these areas as discussed previously. Non-operating Expenses was unfavorable by $23.0 million compared to 2008. This was principally due to $29.3 million in expenses and losses incurred in connection with the debt refinancing and $5.7 million in higher interest expense resulting from the amendment of our 2004 senior secured credit agreement in July 2008 and our increased indebtedness during the last two months of 2009. These items were partially offset by $10.4 million in favorable changes in the fair value of our interest rate swaps and a $5.2 million gain on a land sale. See “Business—Properties”.

Other performance measures

We have included Covenant EBITDA because it is used by some investors as a measure of our ability to service debt, while we have also included EBITDA as it is a measure of Company operating performance under our Annual Incentive Plan. While EBITDA represents earnings before interest, taxes and depreciation and amortization, Covenant EBITDA includes certain other adjustments permitted by the definition of EBITDA in our renewed senior secured credit agreement and the indentures governing the notes. Some of these adjustments include exclusion of gains or losses from the sale of assets held for sale, exclusion of impairment charges on long lived assets and adjustments related to income and cash flows derived from investments in unconsolidated entities. Covenant EBITDA and EBITDA are not prepared in accordance with United States generally accepted accounting principles and should not be considered alternatives for Net Income, Net Cash And Cash Equivalents Provided By Operating Activities and other consolidated income or cash flow statement data prepared in accordance with United States generally accepted accounting principles or as measures of profitability or liquidity. Covenant EBITDA and EBITDA, because they are before debt service, capital expenditures and working capital needs, do not represent cash that is available for other purposes at our discretion. Our presentation of Covenant EBITDA and EBITDA may not be comparable to similarly titled measures reported by other companies. For these reasons, we have prepared a two step reconciliation between our GAAP financial measures, EBITDA as well as Covenant EBITDA. Covenant EBITDA is the primary basis in our renewed senior secured credit agreement to determine our quarterly compliance with our secured leverage ratio and the interest coverage ratio, which is computed based on the prior twelve months. See below for related reconciliations.

 

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The following is a reconciliation of Net Cash And Cash Equivalents Provided By Operating Activities to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Year ended December 31,  

(Dollars in thousands)

   2010     2009     2008  

Net cash and cash equivalents provided by operating activities

   $ 349,515      $ 65,973      $ 191,333   

Adjustments:

      

Interest expense

     117,919        108,388        102,669   

Interest income

     (221 )     (201 )     (2,654 )

Amortization of deferred finance costs

     (3,519 )     (8,645 )     (6,939 )

Interest on financing obligations

     (2,284 )     (2,346 )     (2,380 )

Changes in deferred special fee payable and related interest payable to affiliates

     —          91,967        (4,359 )

Gain on sale of assets held for sale

     —          5,155        —     

Distributions from investments in unconsolidated entities

     (3,080 )     (3,161 )     (3,691 )

Income from investments in unconsolidated entities

     2,373        1,586        2,673   

Loss from impairment of investments in unconsolidated entities

     —          (444 )     —     

Accretion of bond discount

     (3,927 )     (1,219 )     (834 )

Income attributable to the noncontrolling interest in UCRP

     (1,780 )     (1,577 )     (2,149 )

Net change in working capital accounts (1)

     (64,028 )     4,762        18,416   
                        

EBITDA

     390,968        260,238        292,085   

Adjustments to arrive at Covenant EBITDA:

      

Income attributable to the noncontrolling interest in UCRP

     1,780        1,577        2,149   

Income from investments in unconsolidated entities

     (2,373 )     (1,586 )     (2,673 )

Distributions from investments in unconsolidated entities

     3,080        3,161        3,691   

Gain on sale of assets held for sale

     —          (5,155 )     —     

Interest income

     221        201        2,654   

Other

     (160 )     1,409        —     
                        

Covenant EBITDA

   $ 393,516      $ 259,845      $ 297,906   
                        

Note: Reconciliation for the year ended December 31, 2008 is shown for illustrative purposes only as results for that period were not subject to the same calculations of Covenant EBITDA as contained in the indentures governing the notes or the renewed senior secured credit facilities.

 

(1) Net Change In Working Capital Accounts represents changes in operating assets and liabilities, which includes Accounts Receivable (net), Receivables From Related Parties, Inventories, Prepaid Expenses and Other Assets, Other Long-term Assets, Accounts Payable and Accrued Liabilities, Unearned Revenue, Payable To Related Parties, and Other Long-term Liabilities.

 

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The following is a reconciliation of Net Income Attributable to the Partners to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Year ended December 31,  
(Dollars in thousands)    2010     2009     2008  

Net income attributable to the Partners

   $ 146,626      $ 21,914      $ 75,740   

Adjustments:

      

Interest expense

     117,919        108,388        102,669   

Expenses associated with debt refinancing

     3,160        25,023        —     

Loss on extinguishment of debt

     —          4,263        —     

Depreciation and amortization

     123,484        106,051        111,130   

Net change in fair value of interest rate swaps and amortization of accumulated other comprehensive loss (1)

     —          (5,200 )     5,200   

Interest income

     (221 )     (201 )     (2,654 )
                        

EBITDA

     390,968        260,238        292,085   

Adjustments to arrive at Covenant EBITDA:

      

Income attributable to the noncontrolling interest in UCRP

     1,780        1,577        2,149   

Income from investments in unconsolidated entities

     (2,373 )     (1,586 )     (2,673 )

Distributions from investments in unconsolidated entities

     3,080        3,161        3,691   

Gain on sale of assets held for sale

     —          (5,155 )     —     

Interest income

     221        201        2,654   

Other

     (160 )     1,409        —     
                        

Covenant EBITDA

   $ 393,516      $ 259,845      $ 297,906   
                        

Note: Reconciliation for the year ended December 31, 2008 is shown for illustrative purposes only as results for that period were not subject to the same calculations of Covenant EBITDA as contained in the indentures governing the notes or the renewed senior secured credit facilities.

 

(1) See “Quantitative and qualitative disclosures about market risk” below.

 

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Liquidity, capital resources and financial position

In light of the difficult economic climate, our significant leverage and our reliance on discretionary consumer spending, our liquidity is subject to numerous risks as discussed in “Item 1A. Risk factors.”

Overview

We believe our ability to generate cash flows from operations is a key financial strength as well as our principal source of liquidity. We have generated positive cash flows from operations for each of the past five years, and we believe that we will continue to generate positive cash flows from operations in 2011 and in future years. In addition to the cash flow generated from our operations, our available cash and our unused revolving credit facility under our renewed senior secured credit agreement also provide liquidity. As such, we believe that we have financial resources necessary to meet business requirements for the next 12 months. Historically, our principal liquidity requirements have been for capital expenditures, special fee payments, debt retirements, working capital and consultant fee payments. Our strategy includes rationalizing our land holdings, which may involve sales from time to time of non-strategic land assets. However, we cannot assure you as to the timing, size or proceeds with respect to the sale of the other parcel and we may not be able to sell land assets on commercially reasonable terms or at all. Additionally, as of December 31, 2010, we had no land assets that qualified as held for sale in accordance with applicable accounting guidance.

Our current business structure is heavily leveraged. During 2009, we (i) issued notes totaling $625.0 million in aggregate principal amounts and (ii) entered into our renewed senior secured credit facilities consisting of term loans in the principal amount of $900.0 million and a revolving credit facility in an aggregate amount of up to $75.0 million. As of December 31, 2010, our total debt was $1,495.2 million. This included $876.5 million outstanding under our renewed senior secured credit agreement ($891.0 million, net of a remaining unamortized discount of $14.5 million), $396.1 million outstanding under the senior notes ($400.0 million, net of a remaining unamortized discount of $3.9 million), and $222.6 million outstanding under the senior subordinated notes ($225.0 million, net of a remaining unamortized discount of $2.4 million). As of December 31, 2009, our total debt was $1,504.7 million. This included $886.9 million outstanding under our renewed senior secured credit agreement ($900.0 million, net of a remaining unamortized discount of $13.1 million), $395.5 million outstanding under the senior notes ($400.0 million, net of a remaining unamortized discount of $4.5 million) and $222.3 million outstanding under the senior subordinated notes ($225.0 million, net of a remaining unamortized discount of $2.7 million). Our 2004 senior secured credit agreement was renewed and additional credit in the amount of $366.0 million was extended to us on November 6, 2009. The term loans under the renewed senior secured credit agreement call for quarterly principal installments of 0.25% with the remainder due on November 6, 2014. The term loans under the renewed senior secured credit facilities are subject to mandatory prepayments of 100% of the net cash proceeds from certain asset sales and from the sale or issuance of indebtedness, in each case subject to certain exceptions including the notes, and of 50% of our excess cash flow for each fiscal year on or after December 31, 2010. The excess cash flow for the year ended December 31, 2010 totaled $90.0 million which is required to be paid on or before March 31, 2011, which satisfies the quarterly principal installment requirement for all future quarters. The maturity date of the revolving credit facility under the renewed senior secured credit agreement is November 6, 2013. The senior notes will mature on November 15, 2015, and the senior subordinated notes will mature on November 15, 2016. Our renewed senior secured credit facilities and the notes are guaranteed by our existing, and certain of our future, domestic subsidiaries. Our access to capital markets and our ability to issue various securities to raise capital could be affected by our ratings. Additionally, our Partners, their subsidiaries or their affiliates may from time to time, depending upon market conditions, seek to purchase debt securities issued by us in open market or privately negotiated transactions or by other means.

 

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In addition to there being no amounts drawn on the revolving credit facility under the renewed senior secured credit agreement as of December 31, 2010 and December 31, 2009, we have never utilized any amounts of these revolving credit facilities. In addition, we may borrow up to $150.0 million of uncommitted incremental term loans from time to time. On April 30, 2010 we amended our renewed senior secured credit facilities, which resulted in a reduction of the interest rate provision of our term loan. Specifically, the floor on the LIBOR rate was reduced from 2.25% to 1.75%, while the margin was reduced from 4.25% to 3.75%. The interest rates under the revolving credit facilities were not impacted. The interest rate applicable to borrowings under our amended renewed senior secured credit agreement is based, at our option, on either a base rate (calculated as the highest of the prime rate in effect on such day, the sum of  1/2 of 1.00% plus the federal funds rate, and LIBOR plus 1.00%, provided that the base rate will never be less than 2.75%) or LIBOR (provided that LIBOR will never be less than 1.75%), in each case plus a specified margin. The specified margin for the term loans is 2.75% in the case of base rate loans and 3.75% in the case of LIBOR loans. The initial specified margin for the revolving facility is 3.25% in the case of base rate loans and 4.25% in the case of LIBOR loans. Any amounts payable under our renewed senior secured credit agreement not paid when due bear interest at a default rate of 2.00% above the rates otherwise applicable. In addition to paying interest on outstanding debt, we pay a commitment fee equal to (i) 0.75% per annum for any day on which more than 50% of the aggregate amount of the revolving credit facility commitments are drawn and (ii) 1.00% per annum for any other day.

Our renewed senior secured credit facilities contain various restrictive covenants. They prohibit us from prepaying other indebtedness, including the notes, and require us to maintain a minimum interest coverage ratio and maximum total leverage ratio. In addition, our renewed senior secured credit facilities, among other things, limit our ability to incur indebtedness or liens, make investments or declare or pay dividends. The indentures governing the notes, among other things: (i) limit our ability and the ability of our subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates and (ii) place restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets. However, all of these covenants are subject to significant exceptions.

With the proceeds from the senior notes, senior subordinated notes and the renewed senior secured credit facilities discussed above, the April 2010 notes were either tendered by the early settlement deadline of November 5, 2009 or redeemed by December 23, 2009. The Company recorded a loss on extinguishment of debt equal to $4.3 million as a result of the repurchase of the April 2010 notes which includes fees paid of $2.9 million. Additionally, the Company paid dividends and deferred special fees of approximately $356.6 million and $94.5 million, respectively, to Holdings which enabled Holdings to repurchase or redeem all of the May 2010 notes (including premiums and fees).

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our renewed senior secured credit facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Our ability to continue to fund these items and to continue to reduce debt could be adversely affected by the global recession, general slowdown in consumer spending or occurrence of other unfavorable events.

 

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The following table summarizes key aspects in our historical financial position and liquidity (in thousands):

 

     As of  
     December 31, 2010      December 31, 2009  

Cash and cash equivalents

   $ 259,033       $ 45,157   

Unused portion of revolving credit facilities

     75,000         75,000   

Current portion of long-term borrowings, capital lease and financing obligations

     95,801         14,098   

Current portion of special fees

     15,969         8,903   

Total long-term obligations (1)

     1,432,278         1,523,145   

 

(1) Long-term obligations include long-term borrowings (excluding current portions), long-term capital lease and financing obligations, but excludes amounts payable under the Consultant Agreement. For more information regarding capital lease and financing obligations, see note 8 to the consolidated financial statements included elsewhere in this report.

Cash flow summary

The following table summarizes key aspects of our cash flows for each of the last three fiscal years ended December 31 (in thousands):

 

     Year ended  
     December 31,
2010
    December 31,
2009
     December 31,
2008
 

Net cash and cash equivalents provided by operating activities

   $ 349,515      $ 65,973       $ 191,333   

Net cash and cash equivalents used in investing activities

     110,160        134,043         134,874   

Cash paid for capital expenditures

     110,160        143,433         137,010   

Net cash and cash equivalents (used in) provided by financing activities

     (25,479     25,429         (96,535

In 2010 and 2009, net cash provided by operating activities was $349.5 million and $66.0 million, respectively. The increase in cash flow from operations of $283.5 million was primarily due to the increase in net income of $124.9 million, the payment of deferred special fees in 2009 of $94.5 million, relating to the November 2009 debt refinance, and changes in working capital of $68.8 million. The increase in cash from working capital primarily consisted of increased cash flows of $51.7 million resulting from higher accrued liabilities and increased cash flows of $36.5 million resulting from higher cash receipts from guests which are reflected in our deferred revenue balances. The increase in accrued liabilities is primarily due to several volume-related factors including growth in our bonus accruals, sales tax payables, royalty liabilities and Consultant payable in addition to growth in our vacation and leave accruals. These items were partially offset by approximately $11.6 million in incremental cash spent on inventory purchases during the year ended December 31, 2010 as compared to the prior year.

 

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In 2009 and 2008, net cash provided by operating activities was $66.0 million and $191.3 million, respectively. This decrease in cash flow from operations of $125.4 million was largely due to the payment of deferred special fees in the amount of $94.5 million, relating to the November 2009 debt refinancing, and the decrease in net income of $54.4 million, partially offset by adjustments to reconcile net income to cash provided by operating activities of $25.0 million for expenses incurred in conjunction with the debt refinancing.

Cash flows used in investing activities in 2010, 2009 and 2008 consisted primarily of capital expenditures. In 2009 and 2008, these capital expenditures were partially offset by a combination of proceeds from land sales, capital reimbursements and capital claims settlements which totaled $9.4 million and $2.1 million, respectively. These proceeds are the result of discrete transactions that may or may not occur in the future.

We make annual capital investments to provide ongoing support for our existing park attractions and infrastructure, and also to fund the development of new park attractions and infrastructure. We believe these investments are critical in maintaining our position of having technologically advanced theme parks and to effectively compete with our competitors. These costs can vary from one year to the next, depending on the timing of the construction cycles. For instance, during 2009 and 2008, we made purchases totaling $127.2 million and $142.9 million, respectively, for capital projects (excluding capitalized interest, capital lease purchases and payments on previously accrued liabilities), while in 2010 similar expenditures amounted to only $73.1 million. During the year ended December 31, 2008, our capital expenditures in excess of the amount permitted by the capital covenant in our 2004 senior secured credit agreement were funded through partner equity contributions. We estimate our 2011 expenditures (excluding capitalized interest and payments on previously accrued liabilities) will be approximately $75.0 million. As of December 31, 2010, our total capital investment in The Wizarding World of Harry Potter™ (which opened in the spring of 2010), Hollywood Rip Ride RockitSM (which opened in the summer of 2009), The Simpsons Ride™ (which opened in the spring of 2008), and certain system enhancements primarily including the reengineering of our website and online ticket store was approximately $385.0 million. This includes all capital expenditures to build these attractions, excluding capitalized interest. This also takes into account the net present value of all license fee payments made during the initial terms of the applicable licenses, while excluding license payments made during renewal periods and merchandise royalties.

In 2010 net cash used for financing activities was $25.5 million. The amounts used during 2010 primarily related to payments of $14.8 million on our long-term obligations and payments totaling $8.6 million for financing costs that were incurred during the amendment of our renewed senior secured credit agreement or were accrued during our refinancing in November 2009. In 2009 net cash provided by financing activities was $25.4 million. This amount includes inflows of $995.2 million in net proceeds from the renewal of our senior secured credit facilities and issuance of notes and contributions received from Holdings totaling $14.4 million. These items were offset by the following: i) $500.0 million in payments on the April 2010 notes; ii) $356.6 million in distributions to Holdings enabling the repurchase of the May 2010 notes; iii) $49.1 million in payments on financing costs; iv) $36.8 million in distributions made to Holdings to fund its interest payments; v) $33.4 million in distributions made to the Partners for their respective tax liabilities from our net income in 2008; and vi) $5.8 million in payments on financing obligations. In 2008 the primary components of the cash flows used in financing activities, which totaled $96.5 million, related to distributions made to Holdings and payments on our long term obligations. Additionally, we paid $4.3 million in finance costs attributable to the amendment of our 2004 senior secured credit facilities in 2008. Also during 2008, we received approximately $28.7 million of Partner contributions in order to partially fund our capital expenditures and satisfy the capital covenant in our 2004 senior secured credit agreement.

 

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Consultant agreement

On October 18, 2009, we executed an amendment to an agreement (the “Consultant Agreement”) that we have with Steven Spielberg (the “Consultant”), under which we pay a fee for consulting services and exclusivity equal to a percentage of our gross revenues from the attractions and certain other facilities owned or operated, in whole or in part, by us. Under the terms of the Consultant Agreement, the Consultant is also entitled to a fee based on a percentage of gross revenues of comparable projects, which are gated motion picture and television themed attractions owned or operated, in whole or in part, by us, or any of our partners or any of their affiliates, other than in Universal City, California. At present, the only operating theme parks that are deemed to be comparable projects are Universal Studios Japan in Osaka, Japan and Universal Studios Singapore on Sentosa Island, Singapore.

The Consultant Agreement does not have an expiration date, but starting in June 2017, the Consultant has the right, upon 90 days’ notice, to terminate UCDP’s obligation to make periodic payments thereunder and receive instead one cash payment equal to the fair market value of the Consultant’s interest in the revenue streams or, under certain circumstances, an alternative one-time payment, in each case with respect to the Orlando parks and any comparable projects that were open at that time for at least one year (the “Put Payment”), which amounts could be significant. If the Put Payment is exercised, the Consultant will be precluded from competing or consulting with another theme park for a period of five years after exercise, and the Consultant Agreement allows UCDP the right to use ideas generated during the term of the Consultant Agreement without further payment. The Consultant Agreement contains a formula-based method that includes a risk premium of 6.5% with respect to the Orlando parks to determine the amount of the Put Payment. The Consultant Agreement allows the Consultant to make a one-time election to fix the values for certain, but not all, inputs into the aforementioned formula to establish a minimum amount for the one-time payment to the Consultant (the “Alternative Payment”) in the event that the date the Consultant gives notice to terminate his right to receive compensation under the Consultant Agreement is at least 90 days before March 31, 2018. Although the Consultant made this election on January 15, 2010, the actual amount of the Alternative Payment cannot be determined prior to the Consultant exercising his right to receive the Put Payment, as the Alternative Payment amount is dependent on a discount rate that will set 90 days after the date on which the Consultant exercises his right to receive the Put Payment. The discount rate is based on the actual treasury rate on such date plus a risk premium. However, based on a sensitivity analysis of possible treasury and comparable rates for the United States and Japan ranging from 0% to 15%, we estimate that the Alternative Payment for our parks could range from $160.0 million to $290.0 million, and the Alternative Payment for Universal Studios Japan could range from $135.0 million to $245.0 million. This range has been calculated based on hypothetical treasury rates, and we cannot assure you as to the timing or amount of the Put Payment or the Alternative Payment. These payments may be higher or lower than the range provided above and any such deviation could be material. Any such payment will only be finally determinable once the Consultant makes an election and the payment becomes due. In addition to the existing comparable parks, three contemplated comparable parks are vested immediately for purposes of the quarterly consulting fee payments but each such contemplated comparable park must still be open for at least one year at the time the Put Payment is exercised in order for such project to be included in the Put Payment. In addition, the Consultant has a second-priority lien over UCDP’s real and tangible personal property, including a mortgage on our real property up to $400.0 million, to secure UCDP’s periodic and one-time payment obligations and the notes are effectively subordinated to his interests to the extent of the value of those assets. The lien securing the Consultant’s interest is junior to the lien securing our renewed senior secured credit facilities. The Consultant Agreement caps UCDP’s ability to incur secured borrowings to an amount equal to the greater of $975.0 million and 3.75x UCDP’s Covenant EBITDA (as defined in the renewed senior secured credit agreement). Upon the sale of any portion of Blackstone’s and/or the NBCU Parties’ respective interest in UCDP, the Consultant may have the right to sell in such sale an equal portion of his compensation rights under the Consultant Agreement to the prospective purchasers. Our obligations under the agreement are guaranteed by NBCUniversal Media, LLC and USC, as successor to MCA Inc., and USC’s obligations under that guarantee have in turn been assumed by Universal City Studios Productions. Universal City Studios Productions has indemnified us against any liability under the Consultant Agreement related to any comparable project that is not owned or controlled by us. While UCDP remains ultimately liable for those obligations, historically the comparable parks have paid them directly to the Consultant; however, if they were not to pay, UCDP would be required to make the payments and seek indemnification from Universal City Studios Productions. Under the terms of the notes and the renewed senior secured credit agreement, the lien securing our obligations under the Consultant Agreement is a permitted lien. See “Item 1A. Risk factors—Risks related to our indebtedness— Our ability to refinance our debt obligations, including the notes, could be adversely impacted by the Consultant’s right, starting in June 2017, to terminate the periodic payments under the Consultant Agreement and receive instead one payment equal to the fair market value of the Consultant’s interest in the Orlando parks and any comparable projects or, under certain circumstances, an alternative one-time payment.

 

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Special fee requirements

Under our partnership agreement, a “special fee” is payable to Universal City Studios Productions through Universal CPM. The special fee has historically been calculated at 5.0% of certain gross operating revenues, as defined in our partnership agreement, generated from each of Universal Studios Florida and Universal’s Islands of Adventure. An amendment to our partnership agreement, which was executed as of October 18, 2009, increased the applicable rate used to calculate the special fee through June 2017 from 5.0% to 5.25% of certain gross operating revenues, as defined. During 2010, 2009 and 2008, the special fee amounted to $50.4 million, $34.4 million and $38.7 million, respectively. During 2010, 2009 and 2008 the interest incurred on the special fee payable to Universal City Studios Productions and affiliates, including both the current and long-term portions, was $0.4 million, $2.8 million and $4.9 million, respectively.

Historically, under the terms of our 2004 senior secured credit facilities and the April 2010 notes, the special fee related to both Universal Studios Florida and Universal’s Islands of Adventure could only be paid upon achievement of certain but different ratios (and that is still the case under our renewed senior secured credit agreement). The most restrictive quarterly covenant for payment of the special fee was a debt to EBITDA ratio (as defined in the April 2010 notes) of 5.0 to 1.0 or less related to the current special fees and 3.75 to 1.0 or less related to the deferred special fees (as defined in the 2004 senior secured credit agreement); now the most restrictive quarterly covenant is a fixed charge coverage ratio (as defined in the renewed senior secured credit agreement) greater than or equal to 1.1 to 1.0. These ratios were met as of each of our quarter end dates throughout the period from January 1, 2006 to December 31, 2010, thus allowing the special fee to be paid. Accordingly, in 2010, 2009 and 2008 we paid total fees of $43.7 million, $34.6 million and $39.3 million, respectively, to Universal City Studios Productions. At December 31, 2010 and December 31, 2009, the current portion of our consolidated balance sheet included $16.0 million and $8.9 million, respectively, related to special fees payable to Universal City Studios Productions. On November 6, 2009, we paid $94.5 million in special fees to an affiliate of Universal City Studios Productions as part of the refinancing transactions thus enabling Holdings to repay a portion of the May 2010 notes. Therefore, as of December 31, 2010 and December 31, 2009, we had no deferred special fees payable to an affiliate of Universal City Studios Productions on our consolidated balance sheet. Pursuant to certain subordination agreements, the special fee may not be paid if there is an event of default (or to the knowledge of our officers a default) under our renewed senior secured credit facilities or the notes.

Distributions

Under the renewed senior secured credit agreement, for years beginning on or after December 31, 2010, distributions may be made in an aggregate amount not to exceed 25% of excess cash flow if no event of default exists and the total leverage ratio is not greater than 5.5x. Additionally, the indentures governing the notes limit distributions that may be made to an amount equal to our Covenant EBITDA for the period from the beginning of the first fiscal quarter commencing on or after September 28, 2009 to the end of our most recently ended fiscal quarter for which internal financial statements are available less 1.75 times our consolidated interest expense. The notes also have an unrestricted basket of $50.0 million available as of the date of the refinancing.

The above restrictions do not apply to our ability to make a distribution to the Partners in an aggregate amount equal to our hypothetical federal income tax, as provided for in UCDP’s partnership agreement.

Covenant stipulations

Our renewed senior secured credit agreement and the notes contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to sell assets, incur additional indebtedness, repay other indebtedness (including the notes), pay certain distributions, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certain material agreements governing our indebtedness and change the business conducted by us and our subsidiaries. In addition, the renewed senior secured credit agreement contains the following financial covenants: a maximum total leverage ratio; a minimum interest coverage ratio; and a limitation on capital expenditures. We believe that we were in compliance in all material respects with all financial covenants as of December 31, 2010 and December 31, 2009.

 

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Contractual obligations

The following table reflects our estimated contractual obligations as of December 31, 2010 on an actual, historical basis:

 

     Payments due by fiscal period  

(in millions)

   Total      2011      2012 to 2013      2014 to 2015      2016 and beyond  

Contractual obligations:

              

Long-term borrowings (1)

   $ 1,516.0       $ 90.0       $ —         $ 1,201.0       $ 225.0   

Interest payment of long-term borrowings (2)

     490.4         105.6         209.4         154.0         21.4   

Operating lease obligations

     13.6         3.9         5.1         1.6         3.0  

Purchase obligations (3)

     108.0         51.7         21.0         19.1         16.2   

Special fee payable to Universal City Studios Productions and affiliates

     16.0         16.0         —           —           —     

Consultant fee (4)

     7.7         7.7            

Other long-term liabilities

     8.0         —           —           —           8.0   
                                            

Total contractual obligations

   $ 2,159.7       $ 274.9       $ 235.5       $ 1,375.7       $ 273.6   
                                            

 

(1) Amounts exclude discounts and therefore represent gross maturities.
(2) Interest due on the renewed senior secured credit facilities was included at the current rate of 5.5% and does not contemplate any principal payments related to the excess cash flow provisions outside of those made in March 2011 as such other amounts are not currently known.
(3) Amount includes various purchase obligations, including obligations for capital leases and financing obligations.
(4) Amounts exclude any potential obligation resulting from the Consultant’s right to receive one cash payment equal to the fair market value of the Consultant’s interest in the revenue streams or, under certain circumstances, an alternative one-time payment, in each case with respect to the Orlando parks and any comparable projects that have been open at that time for at least one year, which amounts could be significant. The earliest exercise date for this payment is June 2017.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The following is a schedule of our fixed and variable rate debt maturities and principal payments for each of the next five years, and thereafter (in thousands, except for percentages) as of December 31, 2010:

 

     2011     2012      2013      2014     2015     Thereafter     Total     Fair value  

Debt (1):

                  

Fixed rate debt

   $ —        $ —         $ —         $ —        $ 400,000     $ 225,000      $ 625,000      $ 666,400   

Average interest rate

     n/a        n/a         n/a         n/a        8.9     10.9 %     9.6 %     9.6

Variable rate debt

   $ 90,000      $ —         $ —         $ 801,000      $ —        $ —        $ 891,000      $ 899,900   

Average interest rate (2)

     5.5 %     n/a         n/a         5.5 %     n/a        n/a        5.5 %     5.5
                                                                  

Total gross debt

   $ 90,000      $ —         $ —         $ 801,000      $ 400,000      $ 225,000      $ 1,516,000      $ 1,566,300   
                                                                  

 

(1) Amounts exclude discounts and therefore represent gross maturities.
(2) Represents the current interest rate of the renewed senior secured credit facilities.

We are exposed to market risks relating to fluctuations in interest rates. We may mitigate this risk by paying down additional outstanding balances on our variable rate loans, refinancing with fixed rate permanent debt or obtaining cash flow hedge instruments. As a result, we had $891.0 million and $900.0 million of unhedged variable rate debt as December 31, 2010 and December 31, 2009, respectively. Based on these variable-rate obligations, each 1.0% increase or decrease in the level of interest rates would, respectively, increase or decrease our annual interest expense and related cash payments by approximately $8.9 million and $9.0 million as of December 31, 2010 and 2009, respectively. The sensitivity analysis described above, contains certain simplifying assumptions (for example, it assumes a constant level of variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period). Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and our actual results will likely vary. In the fourth quarter of 2008, our interest rate swap agreements became ineffective in accordance with applicable accounting guidance which is more fully explained in note 6 of our consolidated financial statements. For the years ended December 31, 2009 and 2008, this resulted in $5.2 million of income and a $5.2 million charge, respectively, on the consolidated statement of income. Our remaining interest rate swaps expired in the fourth quarter of 2009.

 

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Item 8. Financial Statements and Supplementary Data.

Universal City Development Partners, Ltd. and subsidiaries

Index to consolidated financial statements

Contents

 

Report of independent registered public accounting firm

     62   

Consolidated balance sheets

     63   

Consolidated statements of income and comprehensive income

     65   

Consolidated statements of changes in equity

     66   

Consolidated statements of cash flows

     67   

Notes to consolidated financial statements

     69   

Terms used in the following consolidated financial statements and the accompanying notes have the meanings set forth in such notes, notwithstanding anything to the contrary contained elsewhere in this report.

 

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Report of independent registered public accounting firm

The Partners of Universal City Development Partners, Ltd.

We have audited the accompanying consolidated balance sheets of Universal City Development Partners, Ltd. and subsidiaries (UCDP) as of December 31, 2010 and 2009, and the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of UCDP’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of UCDP’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of UCDP’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal City Development Partners, Ltd. and subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst & Young LLP
Certified Public
Accountants

Orlando, Florida

March 14, 2011

 

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Universal City Development Partners, Ltd. and subsidiaries

Consolidated balance sheets

 

(In thousands)

   December 31, 2010     December 31, 2009  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 259,033      $ 45,157   

Accounts receivable, net

     30,745        25,144   

Receivables from related parties

     656        1,137   

Inventories

     55,009        42,984   

Prepaid expenses and other assets

     7,531        8,989   
                

Total current assets

     352,974        123,411   

Property and equipment, at cost:

    

Land and land improvements

     505,914        496,367   

Buildings and building improvements

     1,522,333        1,402,938   

Equipment, fixtures and furniture

     1,313,922        1,154,187   

Construction in process

     12,071        220,890   
                

Total property and equipment, at cost:

     3,354,240        3,274,382   

Less accumulated depreciation

     (1,640,786     (1,521,620
                

Property and equipment, net

     1,713,454        1,752,762   

Other assets:

    

Investments in unconsolidated entities

     9,213        9,920   

Intangible assets, net

     50,330        51,188   

Deferred finance costs, net

     21,081        24,600   

Other assets

     8,563        7,723   
                

Total other assets

     89,187        93,431   
                

Total assets

   $ 2,155,615      $ 1,969,604   
                

 

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Universal City Development Partners, Ltd. and subsidiaries

Consolidated balance sheets (Continued)

 

(In thousands)

   December 31, 2010      December 31, 2009  

LIABILITIES AND PARTNERS’ EQUITY

     

Current liabilities:

     

Accounts payable and accrued liabilities

   $ 124,662       $ 114,936   

Unearned revenue

     74,614         41,825   

Payables to related parties

     18,993         13,107   

Current portion of capital lease and financing obligations

     5,801         5,098   

Current portion of long-term borrowings

     90,000         9,000   
                 

Total current liabilities

     314,070         183,966   

Long-term liabilities:

     

Long-term borrowings

     1,405,168         1,495,730   

Capital lease and financing obligations, net of current portion

     27,110         27,415   

Other

     7,996         7,482   
                 

Total long-term liabilities

     1,440,274         1,530,627   

Equity:

     

Partners’ equity:

     

UCSP

     198,014         124,528   

Blackstone

     198,014         124,528   
                 

Total Partners’ equity

     396,028         249,056   

Noncontrolling interest in UCRP

     5,243         5,955   
                 

Total equity

     401,271         255,011   
                 

Total liabilities and equity

   $ 2,155,615       $ 1,969,604   
                 

See accompanying notes.

 

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Universal City Development Partners, Ltd. and subsidiaries

Consolidated statements of income and comprehensive income

 

     Year ended December 31,  
     2010     2009     2008  

(In thousands)

      

Operating revenues:

      

Theme park tickets

   $ 586,682      $ 419,026      $ 455,935   

Theme park food and beverage

     127,509        94,655        112,270   

Theme park merchandise

     140,625        82,695        99,634   

Other theme park related

     108,796        86,658        104,380   

Other

     164,863        119,819        151,133   
                        

Total operating revenues

     1,128,475        802,853        923,352   

Costs and operating expenses:

      

Theme park operations

     206,519        176,947        184,371   

Theme park selling, general and administrative

     183,216        124,216        153,205   

Theme park cost of products sold

     133,018        92,645        113,536   

Special fee payable to Universal City Studios Productions and consultant fee

     74,766        51,913        58,305   

Depreciation and amortization

     123,484        106,051        111,130   

Other

     140,581        102,058        122,374   
                        

Total costs and operating expenses

     861,584        653,830        742,921   
                        

Operating income

     266,891        149,023        180,431   

Other expense (income):

      

Interest expense

     117,919        108,388        102,669   

Interest income

     (221     (201     (2,654

Expenses associated with debt refinancing

     3,160        25,023        —     

Loss on extinguishment of debt

     —          4,263        —     

Net change in fair value of interest rate swaps and amortization of accumulated other comprehensive loss

     —          (5,200     5,200   

Income from investments in unconsolidated entities

     (2,373     (1,586     (2,673

Gain from sale of assets held for sale

     —          (5,155     —     
                        

Total other expense, net

     118,485        125,532        102,542   
                        

Net income

     148,406        23,491        77,889   

Less: net income attributable to the noncontrolling interest in UCRP

     1,780        1,577        2,149   
                        

Net income attributable to the Partners

   $ 146,626      $ 21,914      $ 75,740   
                        

Net income

   $ 148,406      $ 23,491      $ 77,889   

Other comprehensive income (loss):

      

Change in fair value of interest rate swaps designated as hedges

     —          —          (46

Amortization of accumulated other comprehensive loss from interest rate swaps previously designated as hedges

     —          3,976        1,176   
                        

Total other comprehensive income

     —          3,976        1,130   
                        

Comprehensive income

     148,406        27,467        79,019   

Less: net income attributable to the noncontrolling interest in UCRP

     1,780        1,577        2,149   
                        

Comprehensive income attributable to the Partners

   $ 146,626      $ 25,890      $ 76,870   
                        

See accompanying notes.

 

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Universal City Development Partners, Ltd. and subsidiaries

Consolidated statements of changes in equity

 

     UCDP’s Partners              
     UCSP     Blackstone     Accumulated
Comprehensive
Income (Loss)
    Noncontrolling
interest in UCRP
    Total Equity  

(In thousands)

                              

Balance at December 31, 2007

   $ 320,697      $ 320,697      $ (5,106   $ 7,294      $ 643,582   

Distributions to noncontrolling interest in UCRP

     —          —          —          (2,661     (2,661

Change in fair value of interest rate swaps designated as hedges

     —          —          (46     —          (46

Amortization of accumulated other comprehensive loss from interest rate swaps previously designated as hedges

         1,176          1,176   

Partner contributions for capital projects

     14,338        14,338        —            28,676   

Distributions to Holdings

     (53,135     (53,135     —          —          (106,270

Net income

     37,870        37,870        —          2,149        77,889   
                                        

Balance at December 31, 2008

     319,770        319,770        (3,976     6,782        642,346   
                                        

Distributions to noncontrolling interest in UCRP

     —          —          —          (2,404     (2,404

Amortization of accumulated other comprehensive loss from interest rate swaps previously designated as hedges

     —          —          3,976        —          3,976   

Contributions from Holdings

     7,200        7,200        —            14,400   

Distributions to Holdings

     (213,399     (213,399     —          —          (426,798

Net income

     10,957        10,957        —          1,577        23,491   
                                        

Balance at December 31, 2009

     124,528        124,528        —          5,955        255,011   
                                        

Distributions to noncontrolling interest in UCRP

     —          —          —          (2,492     (2,492

Contributions from Holdings

     173        173        —            346   

Net income

     73,313        73,313        —          1,780        148,406   
                                        

Balance at December 31, 2010

   $ 198,014      $ 198,014      $ —        $ 5,243      $ 401,271   
                                        

See accompanying notes.

 

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Universal City Development Partners, Ltd. and subsidiaries

Consolidated statements of cash flows

 

     Year ended December 31,  
     2010     2009     2008  

(In thousands)

      

Cash flows from operating activities

      

Net income

   $ 148,406      $ 23,491      $ 77,889   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

      

Depreciation

     119,612        104,284        108,978   

Amortization of intangible assets

     3,872        1,767        2,152   

Amortization of deferred finance costs

     3,519        8,645        6,939   

Accretion of bond discount

     3,927        1,219        834   

Interest on financing obligations

     2,284        2,346        2,380   

Distributions from investments in unconsolidated entities

     3,080        3,161        3,691   

Gain on sale of assets held for sale

     —          (5,155     —     

Loss on extinguishment of debt

     —          4,263        —     

Expenses associated with debt refinancing

     3,160        25,023        —     

Net change in fair value of interest rate swaps and amortization of accumulated other comprehensive loss

     —          (5,200     5,200   

Income from investments in unconsolidated entities

     (2,373     (1,586     (2,673

Loss due to impairment of unconsolidated entities

     —          444        —     

Changes in operating assets and liabilities:

      

Accounts receivable, net

     (5,601     2,377        6,504   

Receivables from related parties

     481        6,352        (2,565

Inventories, net

     (12,025     (419     (325

Prepaid expenses and other assets

     1,458        (90     (3,168

Other long-term assets

     (840     (1,172     2,463   

Accounts payable and accrued liabilities

     41,366        (10,295     (16,622

Unearned revenue

     32,789        (3,683     (1,173

Due to related parties

     5,886        1,411        723   

Deferred special fees payable to affiliates (1)

     —          (91,967     4,359   

Other long-term liabilities

     514        757        (4,253
                        

Net cash and cash equivalents provided by operating activities

     349,515        65,973        191,333   

Cash flows from investing activities

      

Property and equipment acquisitions

     (110,160     (143,433     (137,010

Proceeds relating to capital reimbursements

     —          2,279        2,136   

Proceeds relating to sale of assets held for sale

     —          7,111        —     
                        

Net cash and cash equivalents used in investing activities

   $ (110,160   $ (134,043   $ (134,874

 

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Universal City Development Partners, Ltd. and subsidiaries

Consolidated statements of cash flows (Continued)

 

     Year ended December 31,  
     2010     2009     2008  

(In thousands)

      

Cash flows from financing activities

      

Payment of partner distributions (2)

   $ —        $ (426,798   $ (117,880

Receipt of partner contributions for capital projects

     —          —          28,676   

Receipt of contributions from Holdings

     346      $ 14,400      $ —     

Distributions of noncontrolling interest in equity of UCRP

     (2,492     (2,404     (2,661

Proceeds from the 2015 and 2016 notes

     —          617,715        —     

Proceeds from the renewed senior secured credit facilities

     —          377,500        —     

Payments on long-term borrowings, capital lease and financing obligations

     (14,775     (505,840     (375

Payments of financing costs

     (8,558     (49,144     (4,295
                        

Net cash and cash equivalents (used in) provided by financing activities

     (25,479     25,429        (96,535

Net increase (decrease) in cash and cash equivalents

     213,876        (42,641     (40,076

Cash and cash equivalents at beginning of year

     45,157        87,798        127,874   
                        

Cash and cash equivalents at end of year

   $ 259,033      $ 45,157      $ 87,798   
                        

Supplemental disclosure of cash flow information

      

Cash paid for interest, including interest rate swaps

   $ 119,778      $ 138,138      $ 95,981   
                        

Supplemental disclosures of noncash information

      

Intangible assets financed through capital lease and financing obligations

   $ 3,014      $ —        $ —     
                        

Property and equipment financed through capital lease and financing obligations

     875        2,256        258   
                        

(Decrease)/increase of property and equipment in accrued liabilities

     (30,731     (2,525     11,900   
                        

(Increase)/decrease in interest rate swap liability

     —          9,176        4,070   
                        

Disposal of fully depreciated assets

     446        8,856        22,877   
                        

Disposal of fully amortized intangible assets

   $ —        $ 5,200      $ —     
                        

 

(1) Refer to note 5 for additional details on the deferred special fees payable to affiliates.
(2) Refer to note 11 for additional details on distributions.

See accompanying notes.

 

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Universal City Development Partners, Ltd. and subsidiaries

Notes to consolidated financial statements

1. Nature of business

Ownership

Universal City Development Partners, LP (“UCDP LP”) was a limited partnership organized in Delaware. Effective June 5, 2002, UCDP LP became organized in Florida and changed its legal name to Universal City Development Partners, Ltd. (“UCDP LTD” or the “Company”). Through Universal City Florida Holding Co. I (“Holding I”) and Universal City Florida Holding Co. II (“Holding II”, collectively with Holding I, “Holdings”), UCDP LTD’s ultimate owners (the “Partners”), each having a 50% interest in UCDP LTD are Universal City Property Management II, LLC (“Universal CPM”), a subsidiary of Universal City Studios Productions LLLP (“UCSP”, formerly known as “Vivendi Universal Entertainment” or “VUE”), which in turn is a subsidiary of NBCUniversal Media, LLC (“NBCUniversal”), and Blackstone Capital Partners (“Blackstone”). Through NBCUniversal Holdings, General Electric Company (“GE”) owns 49% of NBCUniversal, while Comcast Corporation (“Comcast”) owns the remaining 51%. Within these consolidated financial statements, “NBCU” refers to NBCUniversal and its affiliates. Both Partners share in profits and losses, contributions and distributions of UCDP LTD in accordance with their ownership percentage. Subject to certain exceptions, neither Partner may transfer or sell their respective partnership interests, sell, pledge or encumber significant assets, issue securities or admit any additional partner or change the primary business without the consent of the other Partner.

Operations

UCDP LTD owns and operates two themed attractions, Universal’s Islands of Adventure (“UIOA”) and Universal Studios Florida (“USF”); an entertainment complex, Universal CityWalk Orlando (“CityWalk”); and movie and television production facilities all located in Orlando, Florida.

2. Summary of significant accounting policies

Principles of consolidation

The accompanying consolidated financial statements include the amounts of UCDP LTD and all of its subsidiaries, Universal City Travel Partners d/b/a Universal Parks & Resorts Vacations (“UPRV”), UCDP Finance, Inc., Universal Orlando Online Merchandise Store (“UOOMS”) and Universal City Restaurant Partners, Ltd. (“UCRP”) (collectively, “UCDP”). All significant intercompany balances and transactions have been eliminated upon consolidation.

UCRP, a joint venture in which UCDP owns 50%, is deemed a variable interest entity in accordance with applicable accounting guidance. Furthermore, UCDP has been deemed to be the primary beneficiary in UCRP. Accordingly, the consolidated financial statements of UCDP include the results of UCRP for all years presented. UCRP operates a restaurant and merchandise outlet in CityWalk. Total assets of UCRP as of December 31, 2010 and 2009 were approximately $12,854,000 and $13,457,000, respectively. Total revenues of UCRP during the years ended December 31, 2010, 2009 and 2008, were approximately $22,828,000, $21,839,000 and $26,244,000, respectively, and were included in other operating revenues in the accompanying consolidated statements of income. UCRP does not carry any long term indebtedness. Additionally, UCRP has not received any financial support during the three-year period ending December 31, 2010.

Use of estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management of UCDP to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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.

 

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Reclassifications

Certain items in the prior years’ consolidated financial statements have been reclassified to conform to the 2010 presentation. Specifically, the Company historically classified a parcel of non-strategic land as held for sale in accordance with relevant accounting guidance. Due to changes in the facts and circumstances concerning the probability of sale, the Company reclassified this asset, which had a carrying value of $16,186,000, from “Assets Held For Sale” to “Land and Land Improvements” in the consolidated balance sheets. For a further discussion on the Company’s accounting policies related to assets held for sale refer to note 2, “Summary of significant accounting policies: Assets held for sale.

Period end

The results for the year ended December 31, 2008 included one extra day due to the leap year.

Cash and cash equivalents

Cash and cash equivalents consist of amounts held as bank deposits and marketable securities with original maturities of 90 days or less.

Accounts receivable and allowance for doubtful accounts

UCDP carries its accounts receivable at their net realizable value thereby making judgments regarding the collectability of outstanding accounts receivable (including those from related parties) and providing appropriate allowances when collectability becomes in doubt. In addition, UCDP provides a general allowance for outstanding receivables in good standing based on historical bad debt experience. The allowance for doubtful accounts was approximately $238,000 and $465,000, respectively, as of December 31, 2010 and December 31, 2009.

Inventories

Inventories, principally spare parts, merchandise and food, are stated at the lower of cost or market. Cost for each inventory classification is determined using the average cost method. UCDP records a provision for the value of inventory when the inventory has been deemed to have a realizable value that is less than the average cost. Substantially all of the Company’s inventories represent finished goods.

Investments in unconsolidated entities

In conjunction with the construction and operation of CityWalk, UCDP has joint venture relationships in which it shared in construction costs and the profits and losses, as defined in each separate agreement. After an evaluation under accounting standards which govern consolidation, where the venture is not considered to be a variable interest entity or UCDP is not considered to be the primary beneficiary or otherwise the controlling partner, the interest in the joint venture is accounted for under the equity method in the accompanying consolidated financial statements. The investment in unconsolidated entities is recorded as UCDP’s share of contributed capital, adjusted for profits and losses, distributions and contributions for each joint venture. A loss of $444,000 was recognized during the year ended December 31, 2009 relating to an investment in unconsolidated entities as cash flows expected from the investment were less than its carrying value. This loss is contained in Other Costs and Operating Expenses in the accompanying Consolidated Statements of Income and Comprehensive Income.

Property and equipment

Property and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of those assets as follows:

 

     Useful life
(in years)
 

Land improvements

     15   

Buildings and building improvements

     20-40   

Equipment, fixtures and furniture

     3-20   

 

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Property and equipment related to leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the initial lease term.

Maintenance and repairs are charged directly to expense as incurred. As noted previously, due to changes in the facts and circumstances concerning the probability of sale, the Company reclassified certain land assets from “Assets Held For Sale” to “Land and Land Improvements” in the consolidated balance sheets thus resulting in additional depreciation of $3,301,000 during the year ended December 31, 2010.

Impairment of long-lived assets and intangibles

The Company utilizes one accounting impairment model for long-lived assets held for sale, whether previously held and used or newly acquired.

UCDP reviews its held and used long-lived assets and identifiable intangibles for impairment indicators. If indicators are noted, the Company compares the carrying amount of the asset to its fair value based on undiscounted cash flows. If the carrying amount exceeds its fair value, an impairment loss is recognized to adjust the long lived asset to fair value. There were no material impairment losses recognized on UCDP’s long-lived assets or identifiable intangibles during the years ended December 31, 2010 and 2008.

Intangible assets

Intangible assets primarily consist of the rights to use certain characters and trademarks. Intangible assets are recorded at cost and amortized on a straight-line basis over a period ranging from 10 to 20 years, which results in a weighted average life of 13 years. Amortization of intangible assets typically begins upon the opening of the related attraction or themed area. The costs to periodically renew our intangible assets are expensed as incurred. Intangible assets totaled $50,330,000 and $51,188,000, respectively, as of December 31, 2010 and 2009. This included $15,135,000 and $11,263,000 in accumulated amortization, respectively, as of December 31, 2010 and 2009. Amortization expense amounted to $3,872,000, $1,767,000 and $2,152,000 during the years ended December 31, 2010, 2009 and 2008, respectively. Amortization of existing intangible assets will be approximately $5,896,000 for the year ending December 31, 2011 and $5,804,000 annually for the years ending December 31, 2012 through December 31, 2015.

Capital reimbursements

UCDP receives capital reimbursements for development costs on existing rides when UCSP licenses the technology and schematics for various components of those rides to other Universal theme parks. Under this arrangement, UCDP collected approximately $2,279,000 and $2,136,000, respectively, during the years ended December 31, 2009 and 2008, related to Universal licensed theme park projects in Singapore and Dubai. These reimbursements are accounted for by reducing the cost basis of the various asset components along with the corresponding adjustment to future depreciation over the remaining life of the asset. In instances where the individual asset components are, or become, fully depreciated, the remaining allocation is recorded as other income.

Financing obligations

Financing obligations represent the net present value of future payment obligations of certain intellectual property rights acquired under long-term contracts. These obligations increase monthly for imputed interest costs and decrease when payments are made. Financing obligations are reported on the consolidated balance sheet under capital lease and financing obligations.

Assets held for sale

At the time management deems a property as held for sale, the cost basis of the land and any improvements made to that parcel are reclassified to assets held for sale on the consolidated balance sheets and depreciation of the assets ceases. Additionally, land sold in any year presented would be reclassified to assets held for sale in each prior year presented. As of December 31, 2010 and 2009, no assets were considered held for sale.

Deferred finance costs

UCDP capitalizes certain costs related to the issuance of debt. The amortization of such costs is recognized as interest expense based on the effective interest method over the term of the respective debt issuance. Deferred finance costs totaled $21,081,000 and $24,600,000, respectively, as of December 31, 2010 and 2009.

 

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This included $4,075,000 and $556,000 in accumulated amortization, respectively, as of December 31, 2010 and December 31, 2009. Amortization expense amounted to $3,519,000, $8,645,000 and $6,939,000, respectively, during the years ended December 31, 2010, 2009 and 2008. As a result of the 2009 refinancing, $22,289,000 was capitalized as deferred finance costs during the year ended December 31, 2009 (see note 5). Additionally, the Company expensed $992,000 in deferred finance costs during the year ended December 31, 2009 as a result of extinguishment of the April 2010 notes. On July 25, 2008, UCDP amended the early maturity date feature in the senior secured credit facilities (see note 5). In conjunction with this amendment, UCDP paid a fee of $4,295,000, which was recorded in deferred finance costs during the year ended December 31, 2008.

Revenue recognition

Revenue from theme park ticket sales is recognized at the time tickets are redeemed. Revenue from unredeemed tickets is recognized after one year from the date of purchase which coincides with historical redemption patterns. Revenue from theme park annual ticket sales is recognized over the period of benefit, which is typically one year from the initial redemption date. Revenue from food and beverage and merchandise sales is recognized at the time of sale. Unearned revenue primarily consists of amounts received from the sale of theme park tickets, which have not yet been redeemed. In addition to unredeemed tickets, unearned revenue includes up-front payments related to CityWalk venues, advance sales from our travel company and corporate sponsorships, which are recognized into revenue over the period of benefit.

Other theme park related revenues

Other theme park related revenues consist primarily of Universal Express PlusSM (“UEP”) sales, aged ticket sales, theme park corporate special events and the parking facility. UCDP hosts special events for corporate guests whereby a portion of the theme park is rented for corporate functions. UEP is a ticket that allows guests to experience reduced wait times at certain rides and attractions. Revenue related to UEP tickets and the parking structure is recognized upon redemption or expiration date. Revenue attributable to theme park corporate special events is recognized at the date of the corporate function.

Other operating revenues

Other operating revenues, which consist primarily of sales generated by CityWalk, UPRV, UOOMS, UCRP, corporate special events, and hotel rent received from UCDP’s on-site hotels, are recognized as earned.

Advertising, sales and marketing costs

The costs of advertising, sales and marketing are charged to operations in the year incurred. Production costs of advertising are charged to operations at the first showing of the related advertisement. Total costs of advertising, sales and marketing amounted to approximately $96,090,000, $58,157,000 and $77,657,000, respectively, during the years ended December 31, 2010, 2009 and 2008 and are primarily included in theme park selling, general and administrative expenses in the accompanying consolidated statements of income.

Sales taxes

Revenues collected from the sale of theme park tickets, food and beverage and merchandise are reported net of related sales tax amounts in the statements of income, as the taxes collected are passed through to the applicable taxing authorities.

Theme park cost of products sold

Theme park cost of products sold consists of payroll and product costs related to the sale of food and beverage and merchandise at the theme parks.

 

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Other costs and operating expenses

Other costs and operating expenses consist primarily of costs incurred by CityWalk, UOOMS, UPRV, UCRP and corporate special events.

Financial instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments.

The estimated fair values of other financial instruments subject to fair value disclosures, determined based on quotes from major financial institutions, and the related carrying amounts are as follows (in thousands):

 

     December 31, 2010      December 31, 2009  
     Carrying value      Fair value      Carrying value      Fair value  

Long-term borrowings (including current portion)

   $ 1,495,168       $ 1,566,300       $ 1,504,730       $ 1,521,188   
                                   

Concentration of credit risk

Financial instruments that potentially subject UCDP to concentrations of credit risk consist primarily of accounts receivable and, historically, interest rate swaps. The credit risk associated with accounts receivable is limited by the volume of customers as well as the establishment of credit limits. Historically, UCDP was exposed to credit loss in the event of nonperformance by the counterparties to interest rate swap transactions. However, the Company is not currently party to any interest rate swap agreements. The counterparties to these contractual arrangements were major financial institutions that met UCDP’s credit standards with which UCDP also had other financial relationships.

Income taxes

No provision for income taxes has been recorded in the consolidated financial statements, as the owners are required to report their share of UCDP’s earnings or losses in their respective income tax returns. The Partners’ tax returns and the amounts of allocable income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to income or loss, the tax liability of the Partners could be changed accordingly.

Certain transactions of UCDP may be subject to accounting methods for income tax purposes which differ from the accounting methods used in preparing these consolidated financial statements in accordance with United States generally accepted accounting principles. Accordingly, the net income or loss of UCDP reported for income tax purposes may differ from the balances reported for those same items in the accompanying consolidated financial statements. The assets as reported in the consolidated financial statements at December 31, 2010 are $1,058,698,000 higher as compared to those reported for tax purposes, while the liabilities are approximately $35,649,000 higher as compared to those reported for tax purposes. The majority of the differences arise primarily due to the use of different estimated useful lives for property and equipment for income tax reporting purposes as compared to those used for financial reporting purposes.

 

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Litigation

UCDP is currently involved in certain legal proceedings and has accrued its estimate of the probable legal and settlement costs for the resolution of these claims. If UCDP believes that costs from these matters are probable and the amount of the costs can be reasonably estimated, it will accrue the estimated costs. If UCDP believes a material loss is less than probable but more than remote, it will disclose the nature of the matter and, if possible, disclose the estimate of the possible loss (see note 13).

Segments

UCDP operates and tracks its results in one reportable segment.

Recently issued accounting pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and requires enhanced related disclosures.&nbs