10-Q 1 ucdp10qq309.htm UCDP 10Q ucdp10qq309.htm  
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 27, 2009
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                      
 
Commission file number 333-108661
 
 
 
UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD.
UCDP FINANCE, INC.
(Exact name of registrants as specified in their charters)
 
FLORIDA
 
59-3128514
FLORIDA
 
42-1581381
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
1000 UNIVERSAL STUDIOS PLAZA
ORLANDO, FL
 
32819-7610
(Address of principal executive offices)
 
(Zip Code)
 
(407) 363-8000
(Registrants’ telephone number, including area code)
 
Indicate by check mark whether the Registrants (1) have 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) have been subject to such filing requirements for the past 90 days.   Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o    No  o
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
  
o
 
  
 
  
Accelerated filer
  
o
 
 
Non-accelerated filer (Do not check if a smaller reporting company)
  
x
 
  
 
  
Smaller reporting company
  
o
 
 
  
   
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. As of October 20, 2009, there were 100 shares of common stock of UCDP Finance, Inc., outstanding. Not applicable to Universal City Development Partners, Ltd.
 
 
 
 
 

 
 

 

 

TABLE OF CONTENTS
 
   
 
PAGE
PART I. FINANCIAL INFORMATION
 
   
ITEM 1. Financial Statements
3
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
23
ITEM 4. Controls and Procedures
25
   
PART II. OTHER INFORMATION
 
   
ITEM 1. Legal Proceedings
26
ITEM 1A. Risk Factors
26
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
26
ITEM 3. Defaults upon Senior Securities
26
ITEM 4. Submission of Matters to a Vote of Security Holders
26
ITEM 5. Other Information
26
ITEM 6. Exhibits
26
SIGNATURES
27
 
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’ 113/4% senior notes due 2010. UCDP Finance, Inc. does not and will not conduct any operations or hold any assets of any kind and will not have any future revenues. UCDP Finance, Inc. met the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
 
 
 
 
 
 

 

 
PART I — FINANCIAL INFORMATION
 
ITEM1.
Financial Statements
 
Universal City Development Partners, Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

   
September 27,
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 81,538     $ 87,798  
Accounts receivable, net
    25,607       27,521  
Receivables from related parties
    2,154       7,489  
Inventories, net
    43,402       42,565  
Prepaid expenses and other assets
    14,477       8,899  
Deferred finance costs, net
    4,779       -  
Assets held for sale
    17,637       17,637  
                 
Total current assets
    189,594       191,909  
                 
Property and equipment, at cost:
               
Land and land improvements
    478,418       475,021  
Buildings and building improvements
    1,405,507       1,381,492  
Equipment, fixtures and furniture
    1,147,633       1,112,537  
Construction in process
    183,854       157,117  
                 
Total property and equipment, at cost:
    3,215,412       3,126,167  
Less accumulated depreciation
    (1,497,903 )     (1,426,192 )
                 
Property and equipment, net
    1,717,509       1,699,975  
                 
Other assets:
               
Investments in unconsolidated entities
    11,000       11,939  
Intangible assets, net
    51,593       52,955  
Deferred finance costs, net
    -       11,948  
Other assets
    7,761       6,551  
                 
Total other assets
    70,354       83,393  
                 
Total assets
  $ 1,977,457     $ 1,975,277  
                 
 
 
 
 
Continued on next page.
 
 
 
 
3
 

 
 

 

 
Universal City Development Partners, Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(Unaudited)


   
September 27,
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
 
LIABILITIES AND PARTNERS’ EQUITY
           
Current liabilities:
           
Accounts payable and accrued liabilities
  $ 141,089     $ 126,148  
Unearned revenue
    51,633       45,508  
Due to related parties
    11,484       11,696  
Interest rate swap liability, at fair value
    1,495       9,176  
Current portion of capital lease and financing obligations
    4,321       5,822  
Current portion of long-term borrowings
    1,008,584       -  
                 
Total current liabilities
    1,218,606       198,350  
                 
        Long-term liabilities:
               
Long-term borrowings
    -       1,007,960  
Deferred special fee payable to affiliates
    94,204       91,967  
Capital lease and financing obligations, net of current portion
    25,405       27,929  
Other
    7,139       6,725  
                 
Total long-term liabilities
    126,748       1,134,581  
                 
                 
Equity:
               
Partners' equity:
               
Vivendi Universal Entertainment
    313,251       319,770  
Blackstone
    313,251       319,770  
Accumulated other comprehensive loss
    (512 )     (3,976 )
                 
Total Partners’ equity
    625,990       635,564  
Noncontrolling interest in UCRP
    6,113       6,782  
                 
Total equity
    632,103       642,346  
                 
Total liabilities and equity
  $ 1,977,457     $ 1,975,277  
                 

 
 
See accompanying notes.
 
 
 
 
4

 
 

 



 
Universal City Development Partners, Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)







             
      Three Months Ended    
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
   
September 27, 2009
   
September 28, 2008
 
 
    (In thousands)  
Operating revenues:
                       
     Theme park passes
  $ 120,056     $ 132,412     $ 311,072     $ 348,846  
     Theme park food and beverage
    27,311       32,677       72,357       88,165  
     Theme park merchandise
    23,860       29,351       63,664       79,499  
     Other theme park related
    23,322       26,459       63,841       80,242  
     Other
    30,026       41,418       93,172       114,738  
                                 
Total operating revenues
    224,575       262,317       604,106       711,490  
                                 
Costs and operating expenses:
                               
     Theme park operations
    43,523       47,215       127,244       135,266  
     Theme park selling, general and administrative
    28,620       37,669       92,865       122,370  
     Theme park cost of products sold
    25,349       32,152       70,017       88,526  
     Special fee payable to Vivendi Universal Entertainment and consultant fee
    14,665       16,663       38,568       45,107  
     Depreciation and amortization
    26,186       26,458       79,015       83,861  
     Other
    25,209       30,551       77,209       95,773  
                                 
Total costs and operating expenses
    163,552       190,708       484,918       570,903  
                                 
Operating income
    61,023       71,609       119,188       140,587  
                                 
Other expense (income):
                               
     Interest expense
    26,043       26,096       77,239       75,797  
     Interest income
    (69 )     (920 )     (158 )     (2,520 )
 Net change in fair value of interest rate swaps and amortization of accumulated other comprehensive loss
    (2,006 )     -       (4,217 )     -  
     Income from investments in unconsolidated entities
    (272 )     (745 )     (1,601 )     (2,816 )
                                 
Total other expense, net
    23,696       24,431       71,263       70,461  
                                 
Net income
    37,327       47,178       47,925       70,126  
                                 
Less: net income attributable to the noncontrolling interest in UCRP
    197       268       1,409       1,882  
                                 
Net income attributable to the Partners
  $ 37,130     $ 46,910     $ 46,516     $ 68,244  
                                 

 
 

 
See accompanying notes.
 
 
 
 
5



 

 
 

 

Universal City Development Partners, Ltd. and Subsidiaries
Condensed Consolidated Statement of Comprehensive Income and Changes in Partners’ Equity
(Unaudited)






   
UCDP's Partners
                   
   
Vivendi Universal Entertainment
   
Blackstone
   
Accumulated Comprehensive Income (Loss)
   
Noncontrolling Interest in UCRP
   
Total Equity
   
Comprehensive Income
 
                                     
                                     
   
(In thousands)
 
Balance at December 31, 2008
  $ 319,770     $ 319,770     $ (3,976 )   $ 6,782     $ 642,346        
Distributions to noncontrolling interest in UCRP
    -       -       -       (2,078 )     (2,078 )   $ -  
Amortization of accumulated other comprehensive loss from interest rate swaps previously designated as hedges
    -       -       3,464       -       3,464       3,464  
Distributions to Partners
    (29,777 )     (29,777 )     -       -       (59,554 )     -  
Net income
    23,258       23,258       -       1,409       47,925       47,925  
                                                 
Balance as of September 27, 2009
  $ 313,251     $ 313,251     $ (512 )   $ 6,113     $ 632,103     $ 51,389  


 


 
 
See accompanying notes.
 
 
 
 
6

 
 

 

Universal City Development Partners, Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

       
      Nine Months Ended  
   
September 27, 2009
   
September 28, 2008
 
     
(In thousands)
 
             
Cash flows from operating activities
           
             
Net cash and cash equivalents provided by operating activities
  $ 161,910     $ 197,754  
                 
Cash flows from investing activities
               
Property and equipment acquisitions
    (102,770 )     (98,037 )
Proceeds relating to capital reimbursements
    2,054       2,136  
                 
Net cash and cash equivalents used in investing activities
    (100,716 )     (95,901 )
                 
Cash flows from financing activities
               
Partner distribution for tax liability
    (33,368 )     (11,610 )
Partner distributions
    (26,186 )     (25,526 )
Distributions of noncontrolling interest in UCRP
    (2,078 )     (2,582 )
Partner contributions
    -       28,676  
Payments on long-term borrowings, capital lease and financing obligations
    (5,822 )     (375 )
Payments for financing costs
    -       (4,295 )
                 
Net cash and cash equivalents used in financing activities
    (67,454 )     (15,712 )
                 
Net (decrease) increase in cash and cash equivalents
    (6,260 )     86,141  
Cash and cash equivalents at beginning of period
    87,798       127,874  
                 
Cash and cash equivalents at end of period
  $ 81,538     $ 214,015  
                 
Supplemental disclosures of noncash information
               
(Decrease)/increase of property and equipment in accrued liabilities
  $ (5,529 )   $ 597  
                 
(Decrease)/increase in interest rate swap liability
  $ (7,681 )   $ 32  
                 
Disposal of fully depreciated assets
  $ 5,942     $ 13,539  
                 
 
  

 
See accompanying notes.
 
 
 
 
 
7
 

 
 

 

Universal City Development Partners, Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 27, 2009
(Unaudited)
 
1. General
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to those rules and regulations. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of the management, necessary to present fairly the financial position and the results of operations for the interim periods. The results for the interim periods are not necessarily indicative of the results that can be expected for a full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 and the notes thereto, filed with the Securities and Exchange Commission under cover of Form 10-K.
 
The accompanying unaudited condensed consolidated financial statements include the consolidated amounts of Universal City Development Partners, Ltd. ( “UCDP”); Universal City Travel Partners d/b/a Universal Parks & Resorts Vacations (“UPRV”); UCDP Finance, Inc. ("UCDP Finance"); Universal Orlando Online Merchandise Store ("UOMS"); and Universal City Restaurant Partners, Ltd. (“UCRP”) (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated upon consolidation.
 
Through Universal City Florida Holding Co. I (“Holding I”) and Universal City Florida Holding Co. II (“Holding II”, collectively with Holding I, “Holdings”), the Company’s ultimate owners, each having a 50% interest, are Universal City Property Management II LLC (“Universal CPM”) and Blackstone Capital Partners (“Blackstone”) (collectively, the “Partners”). Universal CPM is a wholly owned subsidiary of Vivendi Universal Entertainment LLLP (“VUE”), an affiliate of Universal Studios, Inc. (“USI”), which is an indirect subsidiary of NBC Universal, Inc. (“NBC Universal”).
 
Period End
 
The three months ended September 27, 2009 and September 28, 2008 each contained 91 days. The nine months ended September 27, 2009 contained 270 days, while the nine months ended September 28, 2008 contained 272 days.
 
Seasonality
 
Based on the seasonality of attendance, the results for the three and nine months ended September 27, 2009 and September 28, 2008 are not necessarily indicative of results for the full year.
 
Reclassifications
 
The noncontrolling interest in UCRP (formerly known as minority interest) has been reclassified to conform to current accounting guidance. See discussion below under the caption “Recent Accounting Pronouncements”.
 
 
Inventories
 
The major components of inventories are as follows (in thousands):
 

 
 
   
September 27,
   
December 31,
 
   
2009
   
2008
 
     
Merchandise
  $ 12,469     $ 12,421  
Food and beverage
    3,343       3,962  
Operating supplies and maintenance parts
    29,279       28,156  
Less: reserves
    (1,689 )     (1,974 )
                 
Total
  $ 43,402     $ 42,565  
                 

 
8
 

 
 

 

 
Intangible Assets
 
Intangible assets primarily consist of the rights to use certain characters and trademarks. Intangible assets are recorded at net present value and amortized on a straight-line basis over periods ranging from 10 to 20 years, which have a weighted-average amortizable life of 11 years. Intangible assets totaled $51,593,000 and $52,955,000, respectively, as of September 27, 2009 and December 31, 2008. This included $16,058,000 and $14,696,000 in accumulated amortization, respectively, as of September 27, 2009 and December 31, 2008. Amortization expense amounted to $405,000 and $519,000, respectively, during the three months ended September 27, 2009 and September 28, 2008, and $1,362,000 and $1,633,000, respectively, during the nine months ended September 27, 2009 and September 28, 2008. Amortization of existing intangible assets will be approximately $1,768,000 for 2009 and $5,255,000 for each of the following five years.
 
Change in Estimate
 
Due to the construction and renovation of new rides and attractions, portions of existing rides and attractions will be disposed of prior to their original estimated useful life. As a result, depreciation of the existing rides and attractions will be accelerated to reflect their remaining useful life. For the three months ended September 27, 2009 and September 28, 2008, and the nine months ended September 27, 2009 and September 28, 2008, the Company incurred additional depreciation expense of $956,000, $334,000, $2,809,000 and $2,537,000 respectively, relating to accelerating the life of various ride and show assets.
 
 
 
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 in the case of long-term borrowings and LIBOR yield curves as discussed in note 3 in the case of interest rate swaps, and the related carrying amounts are as follows (in thousands):
 

   
September 27, 2009
   
December 31, 2008
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
                         
Long-term borrowings including current portions
  $ 1,008,584     $ 998,820     $ 1,007,960     $ 760,240  
Interest rate swap liabilities
    1,495       1,495       9,176       9,176  
                                 
Total
  $ 1,010,079     $ 1,000,315     $ 1,017,136     $ 769,416  
                                 
 

 
 
 
Recent Accounting Pronouncements
 
In April 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. FAS 142-3, "Determination of the Useful Life of Intangible Assets, which was primarily codified into Topic 350 "Intangibles – Goodwill and Other" in the Accounting Standards Codification ("ASC"). This guidance 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 the Company on January 1, 2009. Although future transactions involving intangible assets may be impacted by this guidance, it did not impact the Company’s financial statements as the Company did not acquire any intangible assets during the nine months ended September 27, 2009.
 
In March 2008, the FASB issued Statements of Financial Accounting Standards ("SFAS") No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”, which was primarily codified into Topic 815 "Derivatives and Hedging" in the ASC. This guidance 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 the Company on January 1, 2009. The Company’s adoption of the standard did not have a material impact on its financial position, results of operations or cash flows as it is primarily disclosure related.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51”, which was primarily codified into Topic 810 "Consolidations" in the ASC. This guidance established new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is effective for fiscal years beginning on or after December 15, 2008. As such, the new accounting guidance became effective for the Company on January 1, 2009. This accounting standard impacts the presentation of noncontrolling interests in certain of the Company’s investments in consolidated entities. Specifically, it impacted the Company’s financial statements by reclassifying the noncontrolling interest in UCRP (formerly known as minority interest) from the liability section into the equity section of the Condensed Consolidated Balance Sheets. As a result, the net income attributable to the noncontrolling interest in UCRP is no longer excluded from the determination of net income (or loss) on the Condensed Consolidated Statements of Operations. The determination of the income attributable to noncontrolling interest in UCRP continues to be calculated based on the underlying ownership percentage. The adoption resulted in the reclassification of $6,782,000 of noncontrolling interest in UCRP from minority interest to Partners’ equity on the December 31, 2008 Condensed Consolidated Balance Sheet and the presentation of net income of $197,000, $268,000, $1,409,000 and $1,882,000 attributable to the noncontrolling interest in UCRP in the Condensed Combined Statements of Operations for the three months ended September 27, 2009 and September 28, 2008 and the nine months ended September 27, 2009 and September 28, 2008, respectively. The application of this guidance is reflected in the re-issued historical consolidated financial statements of UCDP included in the Current Report on Form 8-K filed by UCDP and UCDP Finance on June 29, 2009.
 
 
9
 
 

 
 

 

 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations", which was primarily codified into Topic 805 "Business Combinations" in the ASC. This standard modifies certain aspects of how the 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 the Company’s accounting for business combinations completed on or after January 1, 2009, it did not impact the Company’s financial statements as the Company did not enter into any business combinations during the nine months ended September 27, 2009.
 
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events, which was primarily codified into Topic 855 "Subsequent Events" in the ASC. This guidance establishes principles and requirements for subsequent events. Specifically, it sets forth guidance 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 the Company on June 28, 2009. The Company’s adoption of the standard resulted in additional disclosures surrounding the Company’s subsequent events (see note 9 below).
 
In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments, which was primarily codified into Topic 825 "Financial Instruments" in the ASC. This standard extends the disclosure requirements concerning the fair value of financial instruments to interim financial statements of publicly traded companies. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and as such, became effective for the Company on June 28, 2009. The Company’s adoption of the standard resulted in additional disclosures surrounding the interim fair values of the Company’s financial instruments, under the caption “Financial Instruments” above.
 
In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R), which has not yet been codified in the ASC. This guidance is a revision 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 will require 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 will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company is currently evaluating the impact on its financial statements, if any, upon adoption.
 
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles", which was primarily codified into Topic 105 "Generally Accepted Accounting Standards" in the ASC. This standard will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles ("GAAP"), superseding existing FASB, American Institute of Certified Public Accountants ("AICPA"), Emerging Issues Task Force ("EITF"), and related accounting literature. This standard 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 will be effective for financial statements issued for reporting periods that end after September 15, 2009. Beginning in the third quarter of 2009, this guidance impacts the Company's financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.
 
Liquidity
 
As of September 27, 2009, the Company had indebtedness totaling $499,584,000 under its Senior Notes due in April 2010 (the "April 2010 notes"). Additionally, $509,000,000 of debt under the term loan component of the senior secured credit agreement would become due on April 1, 2010 unless the April 2010 notes (as defined in note 2) and Holdings' Senior Notes due in May 2010 ("the May 2010 notes") are refinanced or repaid prior to such date. The Company will be required to refinance this debt prior to the stated maturity date. Balances relating to the April 2010 notes and the term loan component of the senior secured credit agreement are classified as current liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 27, 2009 as they either mature within a year or the maturity date could accelerate to within a year. Accordingly, the Company and Holdings intend to refinance the April 2010 notes, the May 2010 notes and the term loan component under the Company's senior secured credit agreement. However, no assurances can be made regarding their ability to satisfy their liquidity and working capital requirements (see note 9). The Company’s liquidity could also be negatively impacted by its arrangement with the Consultant as more fully described in note 8.
 
10

 
 

 
 
2. Long-Term Borrowings
 
Indebtedness consisted of the following (in thousands, except percentages):
 

               
As of September 27,
   
As of December 31,
 
   
Interest Rate
   
Maturity Date
   
2009
   
2008
 
         
Senior secured credit facility
 
LIBOR + 300 bps (1)
      (2)     $ 509,000     $ 509,000  
UCDP fixed rate senior notes (“April 2010 notes”)
    11.75%    
April 1, 2010
      500,000       500,000  
                                 
Gross principal payable
                    1,009,000       1,009,000  
Unamortized discounts
                    (416 )     (1,040 )
                                 
Total debt
                  $ 1,008,584     $ 1,007,960  
                                 
 
 
(1) The LIBOR interest rate on the term loan under the senior secured credit facilities is subject to a 3.00% floor.
(2) The maturity date of theterm loan under thesenior secured credit facilities is June 9, 2011; however, it is repayable in full at April 1, 2010, if the April 2010 notes and the May 2010 notes are not refinanced or repaid in full prior to such date.


As of September 27, 2009 and December 31, 2008, the Company had $100,000,000 available under its revolving credit facilities.
 
3. Interest Rate Swaps
 
The Company is exposed to market risks relating to fluctuations in interest rates. The Company may mitigate this risk by paying down additional outstanding balances on its variable rate loans, refinancing with fixed rate permanent debt or obtaining cash flow hedge instruments. The Company utilizes interest rate swap agreements as a risk management tool to manage a portion of its interest rate exposures. The principal objective of the swap agreements is to minimize the risks and costs associated with financial activities. The Company does not use financial instruments for trading purposes. The Company specifically designates interest rate swap hedges of outstanding debt instruments and recognizes interest differentials in the period they occur.
 
The Company follows ASC Topic 815 "Derivatives and Hedging" to account for its interest rate swaps. These standards establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measure those assets at fair value. The fair values are the estimated amounts that the Company would pay or receive upon termination of the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparties. Changes in the underlying market value of swap arrangements that qualify as cash flow hedging activities are recognized as other comprehensive income (loss) in the accompanying consolidated statements of comprehensive income and changes in partners’ equity. Changes in the underlying market value of swap arrangements that do not qualify as hedging activities are recognized as a change in the fair value of interest rate swaps in the accompanying consolidated statements of operations. Additionally, the accumulated other comprehensive income (loss) related to interest rate swaps that become ineffective is amortized on a straight-line basis, over the remaining life of the interest rate swap, through the change in the fair value of interest rate swaps in the accompanying consolidated statements of operations. In the fourth quarter of 2008, the Company’s interest rate swap agreements became ineffective as they no longer accomplished the predetermined goals of the hedging process as documented contemporaneously by the Company when entering into the hedging transaction. Accordingly, the accounting treatment for these interest rate swaps is different during the three and nine months ended September 27, 2009 as compared to the three and nine months ended September 28, 2008. The following table summarizes the notional values and fair values of our derivative financial instruments as of September 27, 2009 (in thousands, except percentages):
 
 
 
Notional value
 
Expiration date
 
Fair value
   
Interest rate
 
Accounting Treatment
 
Terms
                       
$ 200,000  
November 20, 2009
  $ (1,279 )     4.77 %
Statement of operations
 
Fixed
                             
  125,000  
October 15, 2009
    (216 )     4.41 %
Statement of operations
 
Fixed
$ 325,000       $ (1,495 )              
                             
 

 
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The following table summarizes the changes in fair value of the Company's interest rate swaps (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
   
September 27, 2009
   
September 28, 2008
 
         
   
Recorded in statement of operations
   
Recorded in other comprehensive income
   
Recorded in statement of operations
   
Recorded in other comprehensive income
   
Recorded in statement of operations
   
Recorded in other comprehensive income
   
Recorded in statement of operations
   
Recorded in other comprehensive (loss) income
 
 
 
 
                                                 
Swap #7 (1)
  $ 1,165     $ -     $ -     $ 503     $ 2,802     $ -     $ -     $ (79 )
Swap #8 (1)
    1,980       -       -       613       4,879       -       -       47  
Amortization of accumulated other comprehensive loss (1)
    (1,139 )     1,139       -       -       (3,464 )     3,464       -       -  
                                                                 
Total
  $ 2,006     $ 1,139     $ -     $ 1,116     $ 4,217     $ 3,464     $ -     $ (32 )
                                                                 
 
(1) Swaps #7 and #8 became ineffective in the fourth quarter of 2008.
 
 
The Company is exposed to credit loss in the event of nonperformance by the other party to its derivative financial instruments. The Company limits this exposure by entering into agreements directly with a number of major financial institutions that meet its credit standards and that are expected to satisfy their obligations under these contracts. The Company views derivative financial instruments as a risk management tool in the prudent operation of its business.
 
 
The Company utilizes  ASC Topic 820 "Fair Value Measurements and Disclosures" in relation to its accounting for assets and liabilities carried at fair value. This standard, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The standard also clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, this guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;  
Level 2. Inputs, other than quoted prices included within Level 1, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
The Company’s derivative financial instruments as of September 27, 2009 are valued using inputs that fall within Level 2 of the three-tier hierarchy. Furthermore, as of September 27, 2009 and December 31, 2008, respectively, the Company did not have assets or liabilities valued using inputs that fall within Level 1 or Level 3 of the three-tier hierarchy. Information to determine the fair values of the interest rate swap agreements is provided to the Company by the counterparty. The Company believes the LIBOR yield curves are the primary significant input used by the counterparty to determine the fair value information. LIBOR yield curves are considered Level 2 observable market inputs. Additionally, in making the fair value determination, the Company monitors the credit and nonperformance risk associated with its derivative counterparties and believes they are not material to the interest rate swap agreements and do not require a credit adjustment at September 27, 2009 or December 31, 2008.
 
 
12
 
 
 

 
 

 

4. Accounts Payable and Accrued Liabilities
The following presents major components of accounts payable and accrued liabilities (in thousands) as of:
 

   
September 27, 2009
   
December 31, 2008
 
             
Accounts payable
  $ 8,476     $ 10,920  
Capital expenditures
    31,188       36,717  
Marketing and advertising
    7,069       4,832  
Interest
    35,603       19,897  
Compensation and benefits
    22,837       27,301  
Operating accruals
    11,880       15,043  
Consulting fees
    4,940       4,443  
Property and sales tax
    14,168       1,972  
Other
    4,928       5,023  
                 
Total
  $ 141,089     $ 126,148  

 
 
5. Capital leases and financing obligations
 
Intangible assets and equipment, fixtures and furniture included approximately $42,267,000 and $42,788,000, related to financing obligations and capital leases as of September 27, 2009 and December 31, 2008, respectively. This included $1,282,000 and $761,000 in accumulated depreciation and amortization as of September 27, 2009 and December 31, 2008, respectively. At September 27, 2009, future minimum payments due under financing obligations and capital leases totaled approximately $29,726,000 (net of $11,490,000 in interest). Future minimum payments include $18,000, $4,328,000, $4,023,000, $3,725,000, $3,609,000, and $14,023,000, due in 2009, 2010, 2011, 2012, 2013, and years subsequent to 2013, respectively.
 
 
6. Comprehensive income
 
Comprehensive income is as follows (in thousands):
 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
   
September 27, 2009
   
September 28, 2008
 
                                 
Net Income
  $ 37,327     $ 47,178     $ 47,925     $ 70,126  
                                 
Amortization of accumulated other comprehensive loss from interest rate swaps previously designated as hedges
    1,139       -       3,464       -  
Change in fair value of interest rate swaps designated as hedges
    -       1,116       -       (32 )
                                 
Comprehensive income
    38,466       48,294       51,389       70,094  
Less: comprehensive income attributable to the noncontrolling interest in UCRP
    197       268       1,409       1,882  
                                 
Comprehensive income attributable to the Partners
  $ 38,269     $ 48,026     $ 49,980     $ 68,212  
                                 

 
 
 
 
 
13

 
 

 

 
7. Related Party Transactions
 
Under the terms of UCDP’s partnership agreement, a special fee is payable to Vivendi Universal Entertainment through Universal CPM equal to 5% of certain revenue, as defined, generated by Universal Studios Florida and Universal’s Islands of Adventure. During the three months ended September 27, 2009 and September 28, 2008, the Company paid fees to Vivendi Universal Entertainment of $9,130,000 and $10,325,000, respectively, while during the nine months ended September 27, 2009 and September 28, 2008, the Company paid fees of $24,800,000 and $28,063,000, respectively, to Vivendi Universal Entertainment. In addition, at September 27, 2009 and December 31, 2008, respectively, the amount due to related parties included $9,807,000 and $8,861,000 related to the current portion of special fees payable to Vivendi Universal Entertainment. At September 27, 2009 and December 31, 2008, the Company had long-term deferred special fees payable to Holdings of approximately $94,204,000 and $91,967,000, respectively.
 
Subsequent to the Company’s refinancings in December 2004, the most restrictive quarterly covenant for payment of the special fee is 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 senior secured credit agreement). As these ratios were met as of September 27, 2009, payments of $9,807,000 in special fees will be made during the fourth quarter of 2009.
 
 
 
8. Commitments and Contingencies
 
Settlement of Assessment Disputes
 
In June 2009, the Company settled all of the property tax assessment disputes described below for an amount that is not material to its financial statements. The following description of these disputes is provided solely for historical background information.
 
2008 Assessments
 
On December 5, 2008, UCDP filed complaints in state circuit court challenging the 2008 assessments by the Orange County Property Appraiser (the “Property Appraiser”) of certain real and tangible personal property owned by UCDP. On February 2, 2009, the Property Appraiser answered the complaints and also moved to dismiss the discriminatory assessment counts asserted by UCDP. On February 16, 2009, the Orange County Tax Collector (the “Tax Collector”) similarly answered the complaints and moved to dismiss the discriminatory assessment counts asserted by UCDP. UCDP paid the full assessments with respect to the 2008 real and personal property on November 26, 2008.
 
2007 Assessments
 
On September 18, 2007, UCDP filed petitions to the Orange County Value Adjustment Board (“VAB”) seeking review and adjustment of the 2007 assessments by the Property Appraiser of certain real and tangible personal property owned by UCDP. The Special Magistrates recommended that UCDP’s petitions be denied as to the Universal Studios Florida (“USF”) and Universal’s Islands of Adventure (“UIOA”) tangible personal property and real property and recommended that the assessment as to UCDP’s parking garages be reduced. The VAB approved and adopted the Special Magistrates’ recommendations on February 26, 2008. On April 24, 2008, UCDP filed complaints challenging these assessments in state circuit court. On June 4, 2008, the Tax Collector answered the complaints. On June 16, 2008, the Property Appraiser answered the complaints. Both the Property Appraiser and the Tax Collector also moved to dismiss UCDP’s discriminatory assessment claims. On November 12, 2008, the court consolidated UCDP’s complaint involving the 2007 assessments of the parking garages with a similar complaint that UCDP filed involving the 2006 assessments. On February 11, 2009, the court granted the defendants’ motions to dismiss the discriminatory assessment count in UCDP’s complaint involving the parking garages, and it granted UCDP leave to amend that count. On March 16, 2009, UCDP filed its amended complaint, and both the Property Appraiser and the Tax Collector subsequently answered UCDP’s amended complaint. In addition, in late 2008, the Property Appraiser and Tax Collector filed a Joint Motion for Summary Judgment as to Count I of UCDP’s complaint involving its tangible personal property. On March 26, 2009, the court denied that Joint Motion. UCDP paid the full assessment with respect to the 2007 real and personal property on November 30, 2007.
 
14
 

 
 

 

2006 Assessments
 
In the second quarter of 2007, UCDP received and recorded a refund of approximately $1.0 million (the “2006 Refund”) with respect to an adjustment of the 2006 assessments by the Property Appraiser reducing the assessed property values of certain real and tangible personal property owned by UCDP.
 
Meanwhile, on April 17, 2007, the Property Appraiser filed a complaint in state circuit court challenging the reduced 2006 tangible personal property assessments. On May 16, 2007, UCDP filed two complaints challenging the Property Appraiser’s 2006 assessments for (i) real property at USF and UIOA, and for (ii) UCDP’s parking garages. The Property Appraiser and the Tax Collector answered UCDP’s complaints and also moved to dismiss UCDP’s discriminatory assessment claims. On November 12, 2008, the court consolidated UCDP’s complaint involving the 2006 assessments of the parking garages with a similar complaint that UCDP filed involving the 2007 assessments. On February 11, 2009, the court granted the defendants’ motions to dismiss the discriminatory assessment count in UCDP’s complaint involving the parking garages, and it granted UCDP leave to amend that count. On March 16, 2009, UCDP filed its amended complaint, and both the Property Appraiser and the Tax Collector subsequently answered UCDP’s amended complaint.
 
Back Assessments
 
On December 21, 2006, the Property Appraiser concluded an audit of UCDP’s 2003, 2004 and 2005 tangible personal property returns, asserting that UCDP underreported its tangible personal property in each of those years. The Property Appraiser issued back assessments resulting in back taxes, interest and penalties being charged by the Tax Collector. On February 19, 2007, UCDP filed a complaint in state circuit court challenging the legality of the back assessments and seeking other relief. On April 25, 2007, the Court dismissed the portions of UCDP’s complaint pertaining to the back assessments on UIOA, and it also dismissed UCDP’s due process claim. On May 14, 2007, UCDP re-filed the complaint (“UCDP’s Re-filed Back Assessment Complaint”) as to UIOA. On February 15, 2008, the court denied the Property Appraiser’s motion to dismiss UCDP’s Re-filed Back Assessment Complaint. The Property Appraiser and Tax Collector appealed the denial of the dismissal of UCDP’s Re-filed Back Assessment Complaint. UCDP opposed the appeal, and on July 3, 2008, the Court denied the appeal.
 
Other
 
The Company is threatened with or involved in various other legal actions and claims incidental to the conduct of its business. Management does not expect these legal actions and claims to have a material impact to the Company’s results of operations, financial position or cash flows.
 
Consultant Agreement
 
The Company has an agreement (the “Consultant Agreement”) with Steven Spielberg (the “Consultant”) under which it pays a fee for consulting services and exclusivity equal to a percentage of the Company’s gross revenues from the attractions and certain other facilities owned or operated, in whole or in part, by the Company. 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 the Company, or any of its partners or any of their affiliates, other than in Universal City, California. At present, the only theme park that is a comparable project is Universal Studios Japan in Osaka, Japan. It is possible that comparable projects will be created in the future that would fall under the Consultant Agreement. For instance, Vivendi Universal Entertainment has entered into licensing arrangements for Universal theme parks in Singapore and Dubai. The Consultant may also be entitled to participate in certain sales of equity by the Company’s Partners and to participate in certain real estate development activities of the Company’s partners or their affiliates. Although the Consultant Agreement has no expiration date, starting in June 2010, 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 revenue streams in the Orlando parks and any comparable projects that have been open at that time for at least one year, which fair market value could be significant. If the Consultant exercises the option and the parties cannot agree on the fair market value of the buyout option, the fair market value will be determined by a binding appraisal procedure. The Company represented under the agreement that the Consultant’s interest in each of the Company’s parks and in any comparable projects will have priority over the interests of all financiers, lenders and others who may have an interest in that park or project. The Company’s obligations under the agreement are guaranteed by Universal Studios, Inc., as successor to MCA Inc., and Universal Studios, Inc.’s obligations under that guarantee have in turn been assumed by Vivendi Universal Entertainment. Vivendi Universal Entertainment has indemnified the Company against any liability under the Consultant Agreement related to any comparable project that is not owned or controlled by the Company. Under the terms of Holdings’ May 2010 notes, the April 2010 notes and the senior secured credit agreement, a lien to secure the Company’s obligations under the Consultant Agreement would be a permitted lien. This event would adversely impact the Company’s liquidity.
 
 
 
9. Subsequent Event

UCDP currently is pursuing alternatives to address the maturity of the April 2010 notes and the Holdings May 2010 notes.  The alternatives may include additional term loan borrowings by UCDP under UCDP's existing senior secured credit agreement, reductions in the amount of its revolving borrowing availability thereunder and the offering by UCDP of new senior and/or senior subordinated notes for cash, with the intention of any such transactions being to refinance the April 2010 notes and the Holdings May 2010 notes.  The proceeds of any such refinancing would be expected to be used by UCDP to purchase, redeem or otherwise retire all of its April 2010 and to pay dividends and deferred special fees to UCDP's direct parent companies in a sufficient amount so that they can purchase, redeem or otherwise retire all of the May 2010 notes and to pay fees and expenses related to the refinancing.  The timing, structure and completion of any transaction will depend on market conditions. There can be no assurance of the timing of any refinacing transaction or that it will be successfully completed.
 

On October 18, 2009, UCDP amended the Consultant Agreement (the “2009 Amendment”). Under the existing Consultant Agreement, starting in June 2010, the Consultant had 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 in the Orlando parks and any comparable projects that were open at that time for at least one year (the “Put Payment”). Under the terms of the 2009 Amendment, the earliest exercise date for the Put Payment is June 2017. If the Put Payment is exercised, the Consultant is precluded from competing or consulting with another theme park for a period of five years and allows UCDP the right to use ideas generated during the term of the Consultant Agreement without further payment. In addition, the 2009 Amendment establishes a formula-based method to determine the amount of the Put Payment and modified terms related to comparable projects so that in addition to the existing comparable park, the four contemplated 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. The 2009 Amendment also provides the Consultant a second-priority lien over UCDP's real and tangible personal property to secure UCDP's periodic and one-time payment obligations and caps UCDP's ability to incur secured borrowings to an amount equal to the greater of $975 million and 3.75x UCDP’s EBITDA. In connection with the 2009 Amendment, NBCU will guarantee its obligations under the Consultant Agreement and UCDP amended its partnership agreement to increase the special fee paid thereunder through 2017 from 5.0% to 5.25%. The effectiveness of the 2009 Amendment, the related guarantee and the amendment to UCDP's partnership agreement are each subject to certain conditions, including consent of the requisite lenders under UCDP's existing senior secured credit facilities.
 

Subsequent events were evaluated through October 20, 2009 for the balance sheet date as of September 27, 2009 and for the periods ending September 27, 2009.  October 20, 2009 is also the issuance date of the financial statements.
 
 
 
15

 
 

 

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Overview Related to Financial Results

On a year-to-date basis through September 27, 2009, we experienced a decrease of 14% in our paid attendance and a corresponding decrease in EBITDA (as defined) of $27.0 million when compared to the same period of 2008. We believe these decreases were primarily driven by the downturn in the global economy. Additionally, due to the timing of UCDP's fiscal calendar, the nine months ended September 27, 2009 had two less days than the nine months ended September 28, 2008. Total theme park spending on a per guest basis through the first nine months of 2009 was consistent with the first nine months of 2008, but the reduced volume contributed to a $107.4 million shortfall in revenue, or 15%, when compared to the same period of 2008. Our ability to reduce operating costs, which decreased by $86.0 million in the first nine months of 2009 compared to the same period in 2008, helped partially offset the revenue shortfall. As a result, net income decreased by $22.2 million compared to the first nine months of 2008. We finished the third quarter of 2009 with $181.5 million in available cash and cash equivalents, including $100.0 million of availability under our revolving credit. We owed $1,008.6 million on our indebtedness at September 27, 2009, all of which was current. Additionally, cash paid for capital expenditures during the nine months ended September 27, 2009 totaled $102.8 million as we opened the Hollywood Rip Ride RockitSM coaster in summer 2009 and continued progress on The Wizarding World of Harry PotterTM.
 
 
Seasonality
 
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, hurricanes have had little impact on Orlando theme parks. Since opening in 1990, our parks have been closed only five days due to the inclement weather caused by hurricanes, four of which occurred during the 2004 and 2005 hurricane seasons.
 
 
Based on the seasonality of our attendance, the results for the three and nine months ended September 27, 2009 and September 28, 2008 are not necessarily indicative of results for the full year.
 
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 condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. Results could differ significantly from those estimates under different assumptions and conditions. We believe that the application of these accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including our critical accounting policies, see Note 2 in our audited consolidated financial statements for the year ended December 31, 2008 filed with the Securities and Exchange Commission under cover of Form 10-K. Besides what is disclosed within this document, there have been no material developments with respect to the critical accounting policies discussed in detail in our Form 10-K within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Litigation
 
From time to time, we are involved in legal proceedings and, as required, we accrue the low end of the estimated range of probable costs for the resolution of these claims. These estimates are developed in consultation with outside counsel and are 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. See "Note 8" in "Part 1, Item 1. Financial Statements" in this document for more detailed information on litigation exposure.
 
 
Period end
 
The three months ended September 27, 2009 and September 28, 2008 each contained 91 days. The nine months ended September 27, 2009 contained 270 days, while the nine months ended September 28, 2008 contained 272 days.
 
 
 
Recent accounting pronouncements
 
See “Note 1. General” in “Part I – Item 1. Financial Statements” for a detailed description of recent accounting pronouncements.
 
16

 
 

 

Results of Operations:
 
Three Months Ended September 27, 2009 Compared to Three Months Ended September 28, 2008 (in thousands except per capita amounts and percentages):
 
 
   
Three Months Ended
   
% Change
 
   
September 27, 2009
   
September 28, 2008
   
Favorable/
(unfavorable)
 
Operational Data:
                 
Paid theme park admissions
    2,710       3,048       (11.1 )%
Turnstile theme park admissions
    2,958       3,262       (9.3 )%
Theme park pass revenue per paid admission
  $ 44.30     $ 43.44       2.0 %
Theme park food, beverage and merchandise revenue per turnstile admission
    17.30       19.02       (9.0 )%
Other theme park related revenue per turnstile admission
    7.88       8.11       (2.8 )%
                         
Statement of operations data:
                       
Operating revenues:
                       
Theme park pass revenue
  $ 120,056     $ 132,412       (9.3 )%
Theme park food and beverage
    27,311       32,677       (16.4 )%
Theme park merchandise
    23,860       29,351       (18.7 )%
Other theme park related
    23,322       26,459       (11.9 )%
Other
    30,026       41,418       (27.5 )%
                         
Total operating revenues
    224,575       262,317       (14.4 )%
                         
Costs and operating expenses:
                       
Theme park operations
    43,523       47,215       7.8 %
Theme park selling, general and administrative
    28,620       37,669       24.0 %
Theme park cost of products sold
    25,349       32,152       21.2 %
Special fee payable to Vivendi Universal Entertainment and consultant fee
    14,665       16,663       12.0 %
Depreciation and amortization
    26,186       26,458       1.0 %
Other
    25,209       30,551       17.5 %
                         
Total costs and operating expenses
    163,552       190,708       14.2 %
                         
Operating income
    61,023       71,609       (14.8 )%
                         
Non-operating expense, net
    23,696       24,431       3.0 %
                         
Net income
    37,327       47,178       (20.9 )%
                         
Less: net income attributable to the noncontrolling interest in UCRP
    197       268       26.5 %
                         
Net income attributable to the Partners
  $ 37,130     $ 46,910       (20.8 )%
                         
 

Paid Theme Park Admissions decreased 11% during the third quarter of 2009 compared to the third quarter of 2008, which we believe was primarily due to the downturn in the global economy. Also during the third quarter of 2009, our domestic market experienced high-single digit percentage attendance declines compared to the prior year, while our international market experienced mid-teen digit percentage attendance declines. This lower volume, when coupled with a 2% drop in total per capita spending, resulted in a $37.7 million, or 14%, decrease in our total Operating Revenue versus the same period of 2008. Theme Park Pass Revenue Per Paid Admission increased 2% as a result of selective price changes to maximize yield. Theme Park Food, Beverage and Merchandise Revenue Per Turnstile Admission decreased 9% primarily due to lower guest spending. Other Theme Park Related Revenue Per Turnstile Admission decreased 3% as demand for our Universal Express Plus product was negatively impacted by the lower volume. As compared to the third quarter of 2008, our Other Revenue category was unfavorable by $11.4 million, or 28%, primarily due to $5.9 million in lower rental income from the three on-site hotels as well as $3.3 million in reduced sales at our travel company. Both of these items were adversely impacted by the reduced attendance levels.
 
Theme Park Operations was favorable by $3.7 million largely due to decreased maintenance, entertainment and operational costs resulting from our reduced attendance levels and management’s cost savings initiatives. Theme Park Selling, General and Administrative was favorable by $9.0 million, or 24%, due to reductions in marketing spend and management’s cost savings initiatives impacting departments throughout the Company. When compared to the third quarter of 2008, Theme Park Cost of Products Sold decreased 21% during the third quarter of 2009, which correlates to the decrease in Theme Park Food and Beverage Revenue and Theme Park Merchandise Revenue of 16% and 19%, respectively. Similarly, Special Fee Payable to Vivendi Universal Entertainment and Consultant Fee decreased 12%, which corresponds to the decrease in Total Operating Revenue of 14%. Other costs and operating expenses was favorable by $5.3 million principally due to reduced operating costs of $2.3 million and $1.6 million at our travel company and CityWalk, respectively. These reduced operating costs correlate to the lower revenues resulting from the unfavorable attendance trends as discussed previously. Non-operating Expenses was slightly favorable due to changes in the fair value of our interest rate swaps, which were offset partially by reduced interest income and lower income from our investments in unconsolidated joint ventures.
 
17

 
 

 

 
Nine Months Ended September 27, 2009 Compared to Nine Months Ended September 28, 2008 (in thousands except per capita amounts and percentages):
 
 
   
Nine Months Ended
   
% Change
 
   
September 27, 2009
   
September 28, 2008
   
Favorable/
(unfavorable)
 
Operational Data:
                 
Paid theme park admissions
    7,046       8,228       (14.4 )%
Turnstile theme park admissions
    7,705       8,838       (12.8 )%
Theme park pass revenue per paid admission
  $ 44.15     $ 42.40       4.1 %
Theme park food, beverage and merchandise revenue per turnstile admission
    17.65       18.97       (7.0 )%
Other theme park related revenue per turnstile admission
    8.29       9.08       (8.7 )%
                         
Statement of operations data:
                       
Operating revenues:
                       
Theme park pass revenue
  $ 311,072     $ 348,846       (10.8 )%
Theme park food and beverage
    72,357       88,165       (17.9 )%
Theme park merchandise
    63,664       79,499       (19.9 )%
Other theme park related
    63,841       80,242       (20.4 )%
Other
    93,172       114,738       (18.8 )%
                         
Total operating revenues
    604,106       711,490       (15.1 )%
                         
Costs and operating expenses:
                       
Theme park operations
    127,244       135,266       5.9 %
Theme park selling, general and administrative
    92,865       122,370       24.1 %
Theme park cost of products sold
    70,017       88,526       20.9 %
Special fee payable to Vivendi Universal Entertainment and consultant fee
    38,568       45,107       14.5 %
Depreciation and amortization
    79,015       83,861       5.8 %
Other
    77,209       95,773       19.4 %
                         
Total costs and operating expenses
    484,918       570,903       15.1 %
                         
Operating income
    119,188       140,587       (15.2 )%
                         
Non-operating expense, net
    71,263       70,461       (1.1 )%
                         
Net income
    47,925       70,126       (31.7 )%
                         
Less: net income attributable to the noncontrolling interest in UCRP
    1,409       1,882       25.1 %
                         
Net income attributable to the Partners
  $ 46,516     $ 68,244       (31.8 )%
                         
 

 
Paid Theme Park Admissions decreased 14% during the first nine months of 2009 compared to the same period of 2008. As discussed previously, we believe this was driven by the downturn in the global economy and, to a lesser extent, the two extra days in 2008 compared to 2009. On a year-to-date basis  in 2009, both our domestic and international markets experienced mid-teen percentage attendance declines relative to the comparable period of the prior year. Accordingly, our total Operating Revenue decreased $107.4 million, or 15%. Overall total per capita spending in the first nine months of 2009 was consistent with the first nine months of 2008. Theme Park Pass 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 7% primarily due to lower guest spending. Other Theme Park Related Revenue Per Turnstile Admission decreased 9%, principally due to a decrease in corporate special events revenue of $9.5 million and $3.3 million in reduced guest spending on our Universal Express Plus product, which typically decreases in periods of lower attendance. As compared to the first nine months of 2008, our Other Revenue category was unfavorable $21.6 million, or 19%, as reduced volume resulted in $7.4 million in lower revenue from our travel company, $7.3 million in lower revenue from our CityWalk operations, and $6.1 million in reduced rental income from the three on-site hotels.
 
Theme Park Operations was favorable by $8.0 million largely due to decreased maintenance, entertainment and operational costs resulting from our reduced attendance levels and management’s cost savings initiatives. Theme Park Selling, General and Administrative was favorable by $29.5 million, or 24%, due to reductions in marketing spend and management’s cost savings initiatives impacting departments throughout the Company. When compared to the first nine months of 2008, Theme Park Cost of Products Sold decreased 21% during the same period of 2009, which correlates to the decrease in Theme Park Food and Beverage Revenue and Theme Park Merchandise Revenue of 18% and 20%, respectively. Similarly, Special Fee Payable to Vivendi Universal Entertainment and Consultant Fee decreased 15%, which corresponds to the decrease in Total Operating Revenue of 15%. Compared to the first nine months of 2008, Other Costs and Operating Expenses was favorable $18.6 million, or 19%, due to reduced operating costs of $4.2 million relating to the lower number of corporate special events, in addition to reduced operating costs at our travel company and CityWalk of $5.7 million and $4.8 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 $0.8 million compared to 2008 as higher interest expense resulting from the amendment of our senior secured credit agreement in July 2008 combined with reduced interest income and lower income from our investments in unconsolidated joint ventures. These items were partially offset by favorable changes in the fair value of our interest rate swaps.
 
 
18

 
 

 

 
EBITDA
 
Earnings before interest expense, income taxes, depreciation and amortization or, EBITDA, is defined as net income excluding: (i) interest expense, net of interest income; and (ii) depreciation and amortization. Our management assesses operational performance using EBITDA (as defined) because it is used by some investors as a measure of our ability to service debt. In addition, it is the primary basis in the UCDP senior secured credit agreement to determine our quarterly compliance with our funded debt ratio and the interest coverage ratio, which is computed based on the trailing four quarters. We believe the UCDP senior secured credit agreement is a material agreement as it represents a critical component of our capital structure and an important source of our liquidity. Our failure to comply with the financial maintenance covenants in the UCDP senior secured credit agreement would result in an event of default occurring under the agreement which would give our lenders the right to accelerate all of the indebtedness then outstanding under that agreement. EBITDA (as defined) represents earnings before interest, taxes and depreciation and amortization and certain other adjustments permitted by the definition of EBITDA in the senior secured credit agreement. EBITDA (as defined) is not prepared in accordance with United States generally accepted accounting principles and should not be considered as an alternative for net income, net cash 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 a measure of profitability or liquidity. EBITDA (as defined), because it is before debt service, capital expenditures, and working capital needs, does not represent cash that is available for other purposes at our discretion. Our presentation of EBITDA (as defined) may not be comparable to similarly titled measures reported by other companies. The following is a reconciliation of net cash provided by operating activities to EBITDA (in thousands):
 

   
Three Months Ended
   
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
   
September 27, 2009
   
September 28, 2008
 
Net cash and cash equivalents provided by operating activities
  $ 88,653     $ 97,325     $ 161,910     $ 197,754  
                                 
Adjustments:
                               
Interest expense
    26,043       26,096       77,239       75,797  
Interest income
    (69 )     (920 )     (158 )     (2,520 )
Amortization of deferred finance costs
    (2,390 )     (1,966 )     (7,169 )     (4,549 )
Distributions from investments in unconsolidated entities
    (1,225 )     (772 )     (2,540 )     (2,504 )
Income from investments in unconsolidated entities
    272       745       1,601       2,816  
Deferred special fee and interest payable to affiliates
    (759 )     (1,409 )     (2,237 )     (3,773 )
Accretion of bond discount
    (209 )     (209 )     (624 )     (625 )
Interest on financing obligations
    (539 )     (596 )     (1,797 )     (1,773 )
Income attributable to the noncontrolling interest in UCRP
    (197 )     (268 )     (1,409 )     (1,882 )
Change in working capital
    (22,296 )     (19,482 )     (26,421 )     (33,359 )
                                 
EBITDA
  $ 87,284     $ 98,544     $ 198,395     $ 225,382  
                                 
 


 
The following is a reconciliation of net income attributable to the Partners to EBITDA (in thousands):
   
Three Months Ended
   
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
   
September 27, 2009
   
September 28, 2008
 
                         
Net income attributable to the Partners
  $ 37,130     $ 46,910     $ 46,516     $ 68,244  
                                 
Adjustments:
                               
Interest expense
    26,043       26,096       77,239       75,797  
Net change in fair value of interest rate swaps and amortization of accumulated other comprehensive loss
    (2,006 )     -       (4,217 )     -  
Depreciation and amortization
    26,186       26,458       79,015       83,861  
Interest income
    (69 )     (920 )     (158 )     (2,520 )
                                 
EBITDA
  $ 87,284     $ 98,544     $ 198,395     $ 225,382  
                                 
 


19
 

 
 

 

Liquidity and Capital Resources
 
Cash flows
 
 
 
The following table summarizes key aspects of our cash flows (in thousands):
 

   
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
 
                 
Net cash and cash equivalents provided by operating activities
  $ 161,910     $ 197,754  
                 
Net cash and cash equivalents used in investing activities
    100,716       95,901  
                 
Cash paid for capital expenditures
    102,770       98,037  
                 
Net cash and cash equivalents used in financing activities
    67,454       15,712  
                 

 
During the nine months ended September 27, 2009 and September 28, 2008, net cash provided by operating activities was $161.9 million and $197.8 million, respectively. This decrease in cash flow from operations of $35.8 million was largely due to the reduction in working capital of $6.9 million and the decrease in net income of $22.2 million, as discussed previously. The reduction in our working capital was chiefly driven by $7.8 million in reduced cash receipts from our guests as compared to 2008.
 
Net cash used in investing activities for the nine months ended September 27, 2009 and September 28, 2008, totaled $100.7 million and $95.9 million, respectively. For both years, the amount consisted primarily of capital expenditures. We make annual investments both to provide ongoing capital 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.
 
We estimate our capital expenditures, excluding capitalized interest, to be approximately $120.0 million during 2009. Our capital expenditures in excess of the amount permitted by the capital covenant in our senior secured credit agreement will be funded through partner equity contributions made in 2008. A large portion of this cost relates to the design and construction of the Hollywood Rip Ride RockitSM coaster, which opened in summer 2009, and The Wizarding World of Harry PotterSM themed area which we anticipate opening in spring 2010. We estimate our total anticipated capital investment in The Simpsons RideTM, which opened in May 2008, and the two attractions discussed above will range from $275.0 million to $310.0 million. This includes all capital expenditures to build these attractions except 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.
 
During the nine months ended September 27, 2009 and September 28, 2008, net cash used for financing activities was $67.5 million and $15.7 million, respectively. The current year amount is comprised principally of $33.4 million in distributions made to the Partners for their respective tax liabilities resulting from our net income in 2008, $26.2 million in distributions made to Holdings primarily to fund its interest payments, and $5.8 million in payments on our capital lease and financing obligations. The prior year amount consists primarily of $25.5 million in distributions to Holdings to fund its interest payments, $11.6 million in distributions to the Partners for their respective tax liabilities resulting from our net income in 2007, and $4.7 million in payments on our capital lease and financing obligations. The total of these items was offset partially by $28.7 million in contributions from the Partners in order to partially fund our capital expenditures and satisfy the capital covenant in our senior secured credit agreement.
 
 
20

 
 

 

 
Financial position
 
The following table summarizes key aspects in our financial position and liquidity (in thousands):
   
As of
 
   
September 27, 2009
   
December 31, 2008
 
                 
Cash and cash equivalents
  $ 81,538     $ 87,798  
                 
Unused portion of revolving credit facilities
    100,000       100,000  
                 
Current portion of long-term borrowings, capital lease and financing obligations
    1,012,905       5,822  
                 
Total long-term obligations (1)
    119,609       1,127,856  
                 
 
(1)
  Long-term obligations include long-term borrowings (excluding current portions), long-term capital lease and financing obligations, and long-term deferred special fees.
 
At September 27, 2009, our total debt was $1,008.6 million, which included $499.6 million outstanding under the bonds due in April 2010 ($500.0 million, net of a remaining discount of $0.4 million) and $509.0 million outstanding under the term loan component of our senior secured credit agreement. At September 27, 2009, we also had $181.5 million in cash and cash equivalents and unused revolving credit, consisting of $81.5 million in cash and cash equivalents and $100.0 million available under our revolving credit facilities. Our senior secured credit agreement and bonds contain certain customary limitations. We believe we were in compliance with all financial covenants as of September 27, 2009. The April 2010 notes are due in 2010, while our senior secured credit agreement calls for quarterly principal installments of 0.25% with the remainder due on June 6, 2011. During 2006, we made a voluntary prepayment in the amount of $30.0 million, effectively prepaying all of the principal amounts that would have been due up until the maturity date. As a result of the amendment in July 2008, the term loan component under our senior secured credit agreement is repayable in full on April 1, 2010, if the April 2010 notes and Holdings’ May 2010 notes are not refinanced or repaid in full prior to such date. It is highly unlikely that we will be able to generate enough cash to pay these balances in full prior to the specified due dates which would then necessitate refinancing these balances. Furthermore, our access to capital markets and our ability to issue various securities to raise capital could be affected by further reductions in our bond ratings, whic