S-4/A 1 ds4a.htm AMENDMENT NO. 1 TO FORM S-4 Amendment No. 1 to Form S-4
Table of Contents

As filed with the Securities and Exchange Commission on March 19, 2010

Registration No. 333-164431

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 1

TO THE

FORM S-4

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD.

UCDP FINANCE, INC.

(Exact name of registrants as specified in their charters)

 

 

Florida

Florida

 

7900

9995

 

59-3128514

42-1581381

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

Guarantors

LISTED ON SCHEDULE A HERETO

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)

 

Tracey L. Stockwell

Senior Vice President and

Chief Financial Officer

Universal Orlando

1000 Universal Studios Plaza

Orlando, FL 32819-7610

(407) 363-8000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies To:

Judith A. Luengas

Vice President, Legal Affairs and

General Counsel

Universal Orlando

1000 Universal Studios Plaza

Orlando, FL 32819-7610

(407) 363-8000

 

LizabethAnn R. Eisen

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

(212) 474-1000

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective time of this Registration Statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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   ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i)(Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d)(Cross-Border Third-Party Tender Offer)  ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amounts
to be
Registered
  Proposed Maximum
Offering Price
Per Unit(1)
  Proposed Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee

8 7/8% Senior Notes due 2015

  $400,000,000   100%   $400,000,000   $28,520.00(2)

10 7/8% Senior Subordinated Notes due 2016

  $225,000,000   100%   $225,000,000   $16,042.50(2)

Guarantees of 8 7/8% Senior Notes due 2015

  N/A   N/A   N/A   N/A(3)

Guarantees of 10 7/8% Senior Subordinated Notes due 2016

  N/A   N/A   N/A   N/A(3)
 
 
(1) Estimated solely for the purposes of determining the registration fee pursuant to Rule 457(f)(2) under the Securities Act of 1933.
(2) Previously paid by the Registrants in connection with the initial filing of this Registration Statement.
(3) No additional consideration will be received for the guarantees and, pursuant to Rule 457(n), no additional fee is required.

 

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

SCHEDULE A

TABLE OF ADDITIONAL REGISTRANTS

Exact Name of Registrant Guarantor as Specified in its Charter(1)

  

State or Other Jurisdiction
of Incorporation or
Organization

  

Primary Standard Industrial
Classification Code
Number

  

IRS Employer
Identification
Number

Universal City Travel Partners

   Florida    7900    59-3345457

Universal Orlando Online Merchandise Store

   Florida    7900    27-0470373

 

(1) The address of each Registrant Guarantor is c/o Universal City Development Partners, Ltd., 1000 Universal Studios Plaza, Orlando, FL 32819-7610 and the telephone number is (407) 363-8000.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not complete the exchange offer and issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities and it is not soliciting an offer to buy these securities in any state where the offer is not permitted.

 

Subject to completion, dated March 19, 2010

Prospectus

UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD.

UCDP FINANCE, INC.

Offer to Exchange

Up to $400,000,000 Principal Amount Outstanding of

8 7/8% Senior Notes due 2015

for

a Like Principal Amount of

8 7/8% Senior Notes due 2015 and the guarantees thereof

that have been registered under the Securities Act of 1933

and

Up to $225,000,000 Principal Amount Outstanding of

10 7/8% Senior Subordinated Notes due 2016

for

a Like Principal Amount of

10 7/8% Senior Subordinated Notes due 2016 and the guarantees thereof

that have been registered under the Securities Act of 1933

 

 

We are offering to exchange registered 8 7/8% Senior Notes due 2015 and the guarantees thereof (the “senior exchange notes”) for our outstanding unregistered 8 7/8% Senior Notes due 2015 and the guarantees thereof (the “senior original notes” and, together with the senior exchange notes, the “senior notes”) and registered 10 7/8% Senior Subordinated Notes due 2016 and the guarantees thereof (the “senior subordinated exchange notes” and, together with the senior exchange notes, the “exchange notes”) for our outstanding unregistered 10 7/8% Senior Subordinated Notes due 2016 and the guarantees thereof (the “senior subordinated original notes” and, together with the senior original notes, the “original notes” or, together with the senior subordinated exchange notes, the “senior subordinated notes”). We sometimes refer to the original notes and the exchange notes in this prospectus together as the “notes.” Universal City Development Partners, Ltd. and UCDP Finance, Inc. are co-issuers of the original notes and the exchange notes. The terms of the senior exchange notes and the guarantees thereof are substantially identical to the terms of the senior original notes, and the terms of the senior subordinated exchange notes are substantially identical to the terms of the senior subordinated original notes, in each case except that the exchange notes are registered under the Securities Act of 1933, as amended, or the “Securities Act”, and the transfer restrictions and registration rights and related additional interest provisions applicable to the original notes do not apply to the exchange notes (except that any additional interest that accrues on the original notes through the expiration date (as defined herein) will also accrue on the exchange notes without duplication). The original notes may only be tendered in an amount equal to $2,000 in aggregate principal amount or in integral multiples of $1,000 in excess thereof. This offer will expire at 5:00 p.m., New York City time, on                     , 2010, unless we extend it. The exchange notes will not trade on any established exchange. The original notes are, and the exchange notes will be, irrevocably and unconditionally guaranteed by our domestic subsidiaries that guarantee our obligations under our senior secured credit facilities (the “guarantors”).

 

 

Each broker-dealer that receives exchange notes for its own account pursuant to the this offer to exchange must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for notes where such notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The issuers and the guarantors have agreed that, for a period of 180 days after the consummation of this offer to exchange (the “expiration date”), they will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of distribution.”

See “Risk factors” beginning on page 22 for a discussion of certain risks that you should consider before participating in this exchange offer.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in this exchange offer or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is                     , 2010


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In making your decision whether to exchange your original notes for exchange notes, you should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with any other information. If you receive any other information, you should not rely on it.

We are offering to exchange the senior original notes for senior exchange notes, and senior subordinated original notes for senior subordinated exchange notes, only in places where offers and exchanges are permitted.

The notes may not be offered or sold in or into the United Kingdom by means of any document except in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995. All applicable provisions of the Financial Services and Markets Act 2000 must be complied with in respect of anything done in relation to the notes in, from or otherwise involving or having an effect in the United Kingdom.

The notes have not been and will not be qualified under the securities laws of any province or territory of Canada. The notes are not being offered or sold, directly or indirectly, in Canada or to or for the account of any resident of Canada in contravention of the securities laws of any province or territory thereof.

You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

Table of contents

 

Summary

   1

Risk factors

   22

Use of proceeds

   38

Capitalization

   39

Selected historical financial data

   40

Unaudited pro forma financial information

   44

Management’s discussion and analysis of financial condition and results of operations

   47

Industry overview

   65

Business

   68

Management of UCDP

   83

Certain relationships and related transactions, and director independence

   96

Description of the UCDP partnership agreement

   103

Description of other debt

   107

The exchange offer

   109

Description of the senior notes

   117

Description of the senior subordinated notes

   163

Description of book-entry system

   213

Certain U.S. federal income tax consequences

   215

Plan of distribution

   216

Legal matters

   217

Experts

   218

Index to consolidated financial statements

   F-1

Until                     , 2010 (90 days after the date of this prospectus), all dealers effecting transactions in the exchange notes, whether or not participating in the exchange offer, may be required to deliver a prospectus.


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Certain definitions and financial presentation

In this prospectus, 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 “issuers” refers to UCDP and UCDP Finance, collectively. “Universal Orlando”, “we”, “us”, “our” or the “Company” refers to the issuers and their respective subsidiaries. “Holding I” refers to Universal City Florida Holding Co. I, a Florida general partnership formed in 1995, and “Holding II” refers to Universal City Florida Holding Co. II, a Florida general partnership formed in 1995. “Holdings” or “UCHC” refers collectively to Holding I and Holding II. “Finance” refers to UCFH I Finance, Inc., and UCFH II Finance, Inc., collectively. “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® (or “Hard Rock Hotel®”) and Loews Royal Pacific Resort at Universal Orlando® Resort (or “Loews Royal Pacific Resort”), in which Vivendi Universal Entertainment has an indirect noncontrolling interest and from which we derive revenue related to lease payments reflected in the other revenue line item, 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. “NBC Universal” refers to NBC Universal, Inc., the indirect parent of Universal Studios, Inc. and Vivendi Universal Entertainment, and “NBCU” refers to NBC Universal and its affiliates. “USI” refers to Universal Studios, Inc., an indirect wholly-owned subsidiary of NBC Universal and the indirect parent of Vivendi Universal Entertainment. “Vivendi Universal Entertainment” or “VUE” refers to Vivendi Universal Entertainment LLLP, the parent company of Universal CPM and UCDP’s manager. “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. “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” refers to a subsidiary of UCDP which was formed on June 30, 2009. Universal Parks & Resorts Vacations and Universal Orlando Online Merchandise Store guarantee the notes. “Universal Parks & Resorts” refers to a division of Vivendi Universal Entertainment. Our organizational and ownership structure is graphically depicted below under “Summary—Organizational and ownership 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 “April 2010 notes” refers to the 11 3/4% senior notes issued by UCDP which are included in our consolidated financial statements included elsewhere in this prospectus. The “May 2010 notes” refers to the floating rate senior notes and the 8 3/8% senior notes issued by Holdings and Finance which are not included in our consolidated financial statements included elsewhere in this prospectus. These long-term borrowings, substantially all of which were renewed or refinanced on November 6, 2009, are described more fully in note 5 to our audited consolidated financial statements included elsewhere in this prospectus. 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, as described under “Description of other debt.” The term “Transactions” means, collectively, the offering of the original notes, the amendment and restatement of the 2004 senior secured credit agreement and the borrowing of additional term loans in connection therewith on or about the issue date of the original notes, the repayment of certain of our and our affiliates’ outstanding indebtedness with the proceeds of the foregoing and the payment of related fees and expenses. 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).

This prospectus 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 (loss) and from net cash and cash equivalents provided by operating activities, see “Summary—Summary historical, pro forma financial and other data.

 

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Cautionary notice regarding forward-looking statements

Certain statements appearing in this prospectus are “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, business trends and other information that is not historical information and, in particular, appear under the headings “Summary,” “Management’s discussion and analysis of financial condition and results of operations,” “Industry overview” and “Business.” When used in this prospectus, 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 risks and uncertainties relating to the global recession 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 indebtedness when it matures, including the notes;

 

   

competition within the Orlando theme park market;

 

   

our dependence on Vivendi Universal Entertainment and its affiliates;

 

   

the risks related to the pending joint venture among Comcast, GE and NBC Universal;

 

   

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

 

   

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

 

   

the dependence of our business on air travel;

 

   

the loss of key distribution channels for ticket sales;

 

   

publicity associated with accidents occurring at theme parks;

 

   

the seasonality of our business;

 

   

risks related to unfavorable outcomes of our legal proceedings; and

 

   

the additional risks set forth in this prospectus, including under the heading “Risk factors.

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 prospectus.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, except as required by law.

 

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Trademarks and copyrights

Universal Studios Florida, Universal’s Islands of Adventure, Universal Studios, Universal Orlando, Universal CityWalk, Universal Parks & Resorts Vacations, A Vacation From the Ordinary, TWISTER...Ride It Out, E.T. Adventure, JAWS, Revenge of the Mummy, Pteranodon Flyers, Dueling Dragons, 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, The Fairly OddParents, Hey Arnold!, Rugrats, The Adventures of Jimmy Neutron Boy Genius, Jimmy Neutron’s Nicktoon Blast and all related titles, logos, and characters are trademarks of Viacom International, Inc. SpongeBob SquarePants created by Stephen Hillenberg. The Fairly OddParents created by Butch Hartman. Hey Arnold! Created by Craig Bartlett. 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. The Endangered Species Store is the registered trademark of Theme Stores, Inc. 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.

Market and industry data

This prospectus includes market and industry data that we obtained from periodic industry publications and internal company surveys. This prospectus 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.

 

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Summary

This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it may not contain all of the information important to you or that you should consider before deciding whether to exchange your original notes for exchange notes. For a more complete understanding of this offering, we encourage you to read this prospectus in its entirety. You should read the following summary together with the more detailed information, including “Risk factors” and the consolidated financial statements and the notes to those statements, included elsewhere in this prospectus.

Overview

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 world-class vacation destination. Universal Orlando Resort also includes three themed hotels, Loews Portofino Bay Hotel, Hard Rock Hotel® and Loews Royal Pacific Resort, each of which is located within walking distance of our theme parks and CityWalk. These hotels are owned by UCF Hotel Venture, which has invested in excess of $580.0 million in these properties and in which Vivendi Universal Entertainment has an indirect noncontrolling interest. Our theme parks combine well-known movie, TV, comic and story book characters with exciting, technologically advanced rides and attractions. We have invested over $3.7 billion in our facilities since 1990, with estimated overall expenditures of $360 million to $380 million for our recent and coming projects including The Simpsons Ride, Hollywood Rip Ride RockitSM , The Wizarding World of Harry Potter, and certain system enhancements primarily including the reengineering of our website and online ticket store. For the year ended December 31, 2009, we had paid admissions of 9.3 million guests and on a pro forma basis after giving effect to the Transactions, we had revenues of $802.9 million, net income of $26.0 million and EBITDA of $258.5 million.

The four principal areas that make up Universal Orlando Resort are:

 

   

Universal Studios Florida®. Universal Studios Florida is a movie-and-television-based theme park designed to allow guests to become a part of their favorite movies and television shows. Universal Studios Florida features a total of 20 rides, shows and attractions along with facades of famous film locations. Some of our most popular rides and shows include Revenge of the Mummy®, Shrek 4-D, JAWS®, The Simpsons Ride, Men In Black Alien Attack, Twister…Ride It Out®, E.T. Adventure®, Terminator 2: 3D® and Jimmy Neutron’s Nicktoon Blast. In summer 2009, we opened Hollywood Rip Ride RockitSM, a high-tech, customizable, multi-sensory entertainment coaster that towers 17 stories over the theme park. Universal Studios Florida is also a working motion picture/TV studio. Universal Studios Florida opened in 1990.

 

   

Universal’s Islands of Adventure®. Universal’s Islands of Adventure opened in 1999 and, in 2006, won the Applause Award, which 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. At Universal’s Islands of Adventure, guests take a journey through five distinct and individually themed islands: Seuss Landing, The Lost Continent®, Toon Lagoon®, Jurassic Park® and Marvel Super Hero Island®. With 20 rides, shows and attractions, Universal’s Islands of Adventure combines advanced technology and innovative ride design with well-known characters to provide guests with exciting entertainment experiences. Some of our most popular rides and attractions include The Amazing Adventures of Spider-Man® and The Incredible Hulk Coaster®. Also, in spring 2010, we anticipate opening a sixth themed island, The Wizarding World of Harry Potter.

 

   

CityWalk®. CityWalk is a diverse collection of restaurants, retail outlets and nightclubs and includes a 20-screen cineplex. CityWalk’s 37 facilities are located between the entrances to Universal Studios

 

 

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Florida and Universal’s Islands of Adventure. We own and operate 14 of these facilities and lease 23 to third parties and affiliated entities (one of which we operate). We also have an ownership interest in four of the entities that lease land or facilities from us at CityWalk. CityWalk’s facilities include NBA City, The Sports Grille by NASCAR, Emeril’s® Restaurant Orlando, Bubba Gump Shrimp Co. Restaurant & Market®, AMC Universal Cineplex 20®, and Jimmy Buffett’s® Margaritaville®. In 2007, CityWalk opened the 1,015 seat Sharp AQUOS theater which houses the Blue Man Group show, one of seven permanently based Blue Man Group productions worldwide. Additionally, CityWalk contains the Hard Rock Live® Orlando concert venue, which has featured many popular recording artists. CityWalk was opened in 1999 in conjunction with the opening of Universal’s Islands of Adventure.

 

   

Hotels. Universal Orlando Resort also includes three on-site themed hotels. These hotels are owned by UCF Hotel Venture, a joint venture indirectly owned approximately 50% by Loews Hotel Holding Corp., 25% by Universal Studios Hotel LLC, a subsidiary of Vivendi Universal Entertainment, and 25% by Rank Hotels Orlando, Inc., a subsidiary of Seminole Hard Rock Entertainment, Inc. The hotels, Loews Portofino Bay Hotel, Hard Rock Hotel® and Loews Royal Pacific Resort, have a total of 2,400 rooms and approximately 130,000 square feet of meeting space. All three hotels are within walking distance of our two theme parks and CityWalk. Hotel guests enjoy express access privileges to designated rides and attractions at our theme parks and preferred seating at certain restaurants in the parks and at CityWalk. Although we own the land on which these hotels are located and we are responsible for sales, marketing and promotional activities relating to the hotels, we do not own the hotels and we derive only a small portion of our total operating revenues from them.

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 spring 2010, we will reveal The Wizarding World of Harry Potter at Universal’s Islands of Adventure, a sixth themed island that will bring one of the most popular stories of our time to life.

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 64.6 million in 2008 for a compound annual growth rate of approximately 3.7%. 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.

 

 

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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 spring 2010, under license from Warner Bros., we will introduce 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 $3.7 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, and a portion of the $325 million to $345 million of estimated overall expenditures for our recent and coming 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.

Experienced management team. UCDP has assembled an experienced senior management team. John Sprouls, UCDP’s Chief Executive Officer, has 13 years of experience with the Universal theme park business. Bill Davis, UCDP’s President and Chief Operating Officer, has 36 years of theme park experience, including senior roles with Busch Entertainment Corporation (now known as SeaWorld Parks & Entertainment). Thomas Williams, Chairman and Chief Executive Officer of Universal Parks & Resorts, a division of Vivendi Universal Entertainment, has a substantial role in the oversight and strategic direction of Universal Orlando and was formerly UCDP’s President and Chief Executive Officer. Mr. Williams is based in Orlando and has almost 40 years of experience in the hospitality and leisure industries. UCDP’s senior management team has an average of 22 years of experience and leadership in the theme park industry. We believe that UCDP’s current management team’s experience will help UCDP continue to grow.

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.

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 will provide a one-of-a-kind opportunity to experience the magical world of Harry and his friends. The fully immersive, themed

 

 

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island with multiple rides and attractions will enable 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 2008 report of the Travel Industry Association, “Travelers’ Use of the Internet,” approximately 72% of all U.S. adults, or 156.8 million individuals, use the Internet. Further, 71% of these U.S. adult Internet users are travelers, which translates into 112 million travelers online. Approximately 80% of these individuals, or 90 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 2009, our website received over 10 million visitors, with Internet ticket transactions of approximately $119 million. Over 60% of this amount resulted from multi-day tickets.

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.

 

 

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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 37% of our admissions in 2009. 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 2009, approximately 33% of our admissions were international visitors, approximately 50% of whom came from the United Kingdom. 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 2009, approximately 30% 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.

Recent developments

On December 3, 2009, Comcast Corporation, a Pennsylvania corporation (“Comcast”), General Electric Company, a New York corporation (“GE”), NBC Universal, a Delaware corporation, and Navy, LLC, a Delaware limited liability company (“NewCo”), entered into a Master Agreement (the “Master Agreement”) pursuant to which they will form a joint venture. The joint venture will consist of the businesses of NBC Universal, including its cable networks, filmed entertainment, televised entertainment, theme parks and unconsolidated investments, and Comcast’s cable networks including E!, Versus and the Golf Channel, ten regional sports networks and certain digital media properties. In connection with the closing of the transaction, NBC Universal will borrow approximately $9.1 billion from third party lenders, and the proceeds of this debt financing will be distributed to GE. In addition, in connection with the closing of the transaction, Comcast will make a payment of approximately $6.5 billion in cash to GE, subject to certain adjustments based on various events between signing and closing. On December 3, 2009, GE also entered into a Stock Purchase Agreement (“Stock Purchase Agreement”) with Vivendi SA (“Vivendi”) pursuant to which, at or prior to the closing of the Comcast joint venture, GE will acquire Vivendi’s 20% interest in NBC Universal for approximately $5.8 billion. The new joint venture initially will be 51% owned by Comcast and 49% owned by GE.

Upon consummation of the transactions contemplated by the Master Agreement and the Stock Purchase Agreement as currently contemplated, we would continue to be owned 50% by VUE, a wholly-owned subsidiary of NBC Universal. Accordingly, we do not believe the transactions will constitute a change of control under any of our material agreements. In addition, we do not expect the transactions contemplated by the Master Agreement or the Stock Purchase Agreement to have a direct impact on guest experience at our theme parks. However, we cannot predict what changes, if any, Comcast will implement in our business and operations. In addition, in

 

 

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connection with the pending transactions, some of our vendors, customers and strategic partners may delay or defer decisions relating to their ongoing and future relationships with us, which could negatively affect our revenues, earnings and cash flows and adversely affect our prospects which could be detrimental to our debtholders.

The consummation of the transactions contemplated by the Master Agreement is subject to receipt of various regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and receipt of approvals from the Federal Communications Commission and certain international agencies. The transaction is also subject to completion of GE’s purchase of Vivendi’s 20% interest, satisfaction of customary closing conditions and completion of the $9.1 billion financing described above. The Master Agreement may be terminated by either party: if the transaction has not closed by December 3, 2010 (subject to up to two 90-day extensions, if necessary to obtain certain governmental approvals); if any law or final, non-appealable order prohibits the closing of the transaction; upon a material uncured breach by the other party of its representations, warranties or covenants that would cause a closing condition not to be satisfied; or if after 30 days notice to the other party that the closing conditions have been met, the closing has not occurred because of the other party’s failure to comply with its obligation to close the transaction. There can be no assurance when, or if, the transaction will close.

Upon consummation of the transactions contemplated by the Master Agreement, GE and Comcast will enter into an operating agreement for the joint venture (“Operating Agreement”). Pursuant to this Operating Agreement, GE will be entitled to cause the joint venture to redeem one-half of GE’s interest after three and a half years and its remaining interest after seven years. The joint venture’s obligation to complete those purchases will be subject to the joint venture’s leverage ratio not exceeding 2.75x EBITDA of the joint venture (calculated as provided in the Operating Agreement) and the joint venture continuing to have investment-grade status. If the joint venture is not required to meet GE’s redemption requests because it does not meet these conditions, Comcast will be required to backstop the joint venture’s obligations, up to a maximum of $2.875 billion for the first redemption and a total backstop obligation of $5.750 billion. Comcast also has certain rights to purchase GE’s interest in the joint venture at specified times.

Pursuant to the Operating Agreement, the joint venture board of directors will initially consist of three Comcast designees and two GE designees. GE’s representation right will be reduced to one director if GE’s ownership interest in the joint venture falls below 20%, and GE will lose its representation right if GE’s ownership interest in the joint venture falls below 10%. The Operating Agreement requires board of director approval for certain matters (whether or not otherwise required by law), and board decisions will be made by majority vote, except that GE will have veto rights with respect to material expansion of the joint venture’s scope of business or purpose, a liquidation or voluntary bankruptcy of the joint venture and certain acquisitions, issuances or repurchases of equity, distributions to equity holders, debt incurrences, loans made outside of the ordinary course of business and tax related actions. The veto rights generally expire when GE’s ownership interest in the joint venture falls below 20%. The Operating Agreement prohibits GE from transferring its ownership interest in the joint venture for three and a half years and Comcast from transferring its ownership interest for approximately four years. After these respective periods, GE and Comcast will each have the right to sell its interest in the joint venture and certain rights to request the registration of its share for sale in one or more public offerings, subject, in the case of GE, to Comcast’s right to purchase the shares. In certain circumstances, if Comcast were to sell its shares, GE would have the opportunity to participate in the sale, and in some cases, Comcast would have the right to require GE to participate in the sale.

We have a number of ongoing relationships with GE. See “Certain relationships and related transactions, and director independence” for more information. GE and Comcast are still evaluating the extent, if any, to which GE’s relationships with us will continue after the transactions are consummated. 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, including in advance of the transactions being

 

 

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consummated) or, in some cases, we may lose the benefits of the GE relationships, such as our sponsorship agreement with GE Money. See “Business—Corporate sponsorships—GE Money Bank.

There could be a long time between announcement of the transactions contemplated by the Master Agreement and consummation thereof. Certain aspects of the internal reorganizations to be implemented in connection with the transactions are still being finalized. Although we currently do not anticipate that these reorganizations will adversely impact us, we cannot be sure that will be the case. In addition, uncertainty around the transactions may adversely impact our business.

On December 1, 2009, an affiliate of Blackstone closed its acquisitions of SeaWorld® and certain other parks from Anheuser-Busch InBev. Affiliates of the Blackstone Group L.P. own a 50% interest in UCDP, UCDP Finance, Holding I, Holding II, UCFH I Finance and UCFH II Finance. See “—The Blackstone Group L.P.” Blackstone’s interests in SeaWorld® and the Aquatica™ water park might conflict with Blackstone’s interest in us. See “Risk factors—Risks related to our partners—Blackstone and Vivendi Universal Entertainment control us and may have conflicts of interest with us or you in the future.” We have key ticket products that 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 the recent transactions. See “Risk factorsRisks related to our business—The theme park industry competes with numerous vacation and entertainment alternatives; the Orlando theme park market is extremely competitive.” This transaction, along with the joint venture described above, could create uncertainty in our relationships with our vendors, customers and strategic partners which could negatively affect our business and operations.

We urge you to consider the foregoing information as you read about our business, including the risks associated therewith.

 

 

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Ownership and organizational structure

The following chart sets forth our ownership and organizational structure as of December 31, 2009.

LOGO

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 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.

The Blackstone Group L.P.

Affiliates of the Blackstone Group L.P. own a 50% interest in UCDP, UCDP Finance, Holding I, Holding II, UCFH I Finance and UCFH II Finance. 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, a $21.7 billion fund raised in 2005. Since its inception, Blackstone has raised approximately $45 billion for private equity investing and has invested in over 85 separate private equity transactions. In addition to private equity investments, Blackstone’s core businesses include real estate investments, corporate debt investments, asset management, corporate advisory services and restructuring and reorganization advisory services.

 

 

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Vivendi Universal Entertainment LLLP

Vivendi Universal Entertainment is an indirect wholly owned subsidiary of Universal Studios, Inc., which is in turn an indirect wholly owned subsidiary of NBC Universal. General Electric Company (“GE”) beneficially owns 80% of NBC Universal and Vivendi S.A. controls the remaining 20%. NBC Universal indirectly owns Vivendi Universal Entertainment, which indirectly owns a 50% interest in UCDP, UCDP Finance, Holding I, Holding II, UCFH I Finance and UCFH II Finance. For certain changes contemplated in the ownership of NBC Universal, see “—Recent developments.”

Additional information

UCDP is a Florida limited partnership. UCDP Finance, a wholly owned subsidiary of UCDP, is a Florida corporation and serves as co-issuer of the notes. UCDP Finance does not have any operations or assets of any kind and will not have any revenues. UCDP Finance will likely not have the ability to service the interest and principal obligations on the notes. 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 prospectus and should not be considered to be a part of this prospectus. We have included our website address as an inactive textual reference only.

 

 

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The exchange offer

You should consider carefully all the information set forth in this prospectus and, in particular, should evaluate the specific factors under the section “Risk factors” prior to deciding whether to exchange your original notes for exchange notes. The following summary contains basic information about the exchange offer and is not intended to be complete. For a more complete understanding of the exchange notes, please refer to “Description of the senior notes”, “Description of the senior subordinated notes” and “The exchange offer.”

 

Background

On November 6, 2009, we completed a private placement of the original notes. In connection with that private placement, we entered into a registration rights agreement relating to the senior exchange notes (the “Senior Registration Rights Agreement”) and a registration rights agreement relating to the senior subordinated exchange notes (the “Senior Subordinated Registration Rights Agreement” and, together with the senior registration rights agreement, the “Registration Rights Agreements”) in which we agreed, among other things, to complete an exchange offer.

 

The Exchange Offer

We are offering to exchange our senior exchange notes and the guarantees thereof, which have been registered under the Securities Act, for a like principal amount of our outstanding, unregistered senior original notes and the guarantees thereof and our senior subordinated exchange notes and the guarantees thereof, which have been registered under the Securities Act, for a like principal amount of our outstanding, unregistered senior subordinated original notes and the guarantees thereof.

 

  As of the date of this prospectus, $400.0 million in aggregate principal amount of our senior original notes is outstanding and $225.0 million in aggregate principal amount of our senior subordinated original notes is outstanding.

 

Resale of Exchange Notes

We believe the exchange notes issued pursuant to the exchange offer in exchange for the original notes may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:

 

   

you are acquiring the exchange notes in the ordinary course of your business;

 

   

you have not engaged in, do not intend to engage in and have no arrangement or understanding with any person to participate in the distribution of the exchange notes; and

 

   

you are not our affiliate as defined in Rule 405 of the Securities Act.

 

  Each participating broker-dealer that receives exchange notes for its own account pursuant to the exchange offer in exchange for original notes that were acquired as a result of market-making or other trading activity must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. See “Plan of distribution.”

 

 

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Consequences of Failure to Exchange

Original notes that are not tendered in the exchange offer or are not accepted for exchange will continue to bear legends restricting their transfer. You will not be able to offer or sell the original notes:

 

   

except pursuant to an exemption from the requirements of the Securities Act; or

 

   

if the original notes are registered under the Securities Act.

 

  After the exchange offer is closed, we will no longer have an obligation to register the original notes, except for some limited circumstances. See “Risk factorsRisks related to the exchange notes and our indebtedness—If you fail to exchange your original notes, they will continue to be restricted securities and may become less liquid.

 

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on                     , 2010, unless we decide to extend the exchange offer, in which case the term “expiration date” shall mean the latest date and time to which the exchange offer is extended.

 

Conditions to the Exchange Offer

We will not be required to consummate the exchange offer and will be entitled to terminate the exchange offer if prior to the expiration date:

 

   

any law, statute, rule or regulation is proposed, adopted or enacted which, in our reasonable judgment, might materially impair our ability to proceed with the exchange offer; or

 

   

any governmental approval has not been obtained, which approval we, in our reasonable judgment, consider necessary for the completion of the exchange offer as contemplated in this prospectus.

 

Special Procedures for Beneficial Holders

If you beneficially own original notes that are registered in the name of a broker, dealer, commercial bank, trust company, or other nominee and you wish to tender in the exchange offer, you should contact such registered holder promptly and instruct such person to tender on your behalf. If you wish to tender in the exchange offer on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your original notes, either arrange to have the original notes registered in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take a considerable amount of time.

 

Withdrawal Rights

You may withdraw your tender of original notes at any time before the expiration date.

 

Federal Income Tax Consequences

The exchange of your original notes for exchange notes should not be a taxable event for U.S. Federal income tax purposes.

 

Exchange Agent

The Bank of New York Mellon Trust Company, N.A. is serving as the exchange agent in connection with the exchange offer.

 

 

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Terms of the exchange notes

The form and terms of the exchange notes to be issued in the exchange offer are the same as the form and terms of the original notes except that the exchange notes will be registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not be entitled to any other exchange or registration rights. For a more complete understanding of the exchange notes, please refer to “Description of the senior notes” and “Description of the senior subordinated notes.”

 

Issuers

Universal City Development Partners, Ltd. and UCDP Finance, Inc.

 

Securities offered

$400.0 million aggregate principal amount of 8.875% senior notes due 2015.

 

  $225.0 million aggregate principal amount of 10.875% senior subordinated notes due 2016.

 

Guarantees

The senior exchange notes will be guaranteed on an unsecured senior basis and the senior subordinated exchange notes will be guaranteed on an unsecured senior subordinated basis by Universal Parks & Resorts Vacations and Universal Orlando Online Merchandise Store, each of which is a subsidiary of UCDP (the “guarantors”).

 

Maturity

Senior exchange notes: November 15, 2015.

 

  Senior subordinated exchange notes: November 15, 2016.

 

Interest

Senior exchange notes: 8.875% per annum.

 

  Senior subordinated exchange notes: 10.875% per annum.

 

Interest payment dates

May 15 and November 15 of each year, commencing May 15, 2010.

 

Optional redemption

We may redeem some or all of the senior exchange notes at any time after November 15, 2012 at the redemption prices set forth in “Description of the senior notes—Optional redemption.” We may also redeem up to 35% of the aggregate principal amount of the senior exchange notes using the proceeds from certain equity offerings completed before November 15, 2012. In addition, prior to November 15, 2012, we may redeem the senior exchange notes, in whole or from time to time in part, at a redemption price equal to 100% of the principal amount of the senior exchange notes plus accrued and unpaid interest, if any, to the applicable redemption date plus the applicable “make-whole” premium set forth in “Description of the senior notes—Optional redemption.”

 

 

We may redeem some or all of the senior subordinated exchange notes at any time after November 15, 2013 at the redemption prices set forth in “Description of the senior subordinated notes—Optional redemption.” We may also redeem up to 35% of the aggregate principal amount of the senior subordinated exchange notes using the proceeds from certain equity offerings completed before November 15, 2012. In addition, prior to November 15, 2013 we may redeem the senior subordinated exchange notes, in whole or from time to time in part, at a redemption price equal to 100% of the principal amount of the senior subordinated exchange notes plus accrued and unpaid interest, if any, to the applicable redemption date

 

 

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plus the applicable “make-whole” premium set forth in “Description of the senior subordinated notes—Optional redemption.”

 

Change of control; certain asset sales

If we experience specific kinds of changes of control we will be required to make an offer to purchase the exchange notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date. See “Description of the senior notes—Change of control” and “Description of the senior subordinated notes—Change of control.” If we sell assets under certain circumstances, we will be required to make an offer to purchase the exchange notes at their face amount, plus accrued interest and unpaid interest to the purchase date. See “Description of the senior notes—Certain covenants—Asset Sales” and “Description of the senior subordinated notes—Certain covenants—Asset Sales.”

 

Ranking

The senior exchange notes will be unsecured senior obligations of the issuers and will:

 

   

rank senior in right of payment to all of the issuers’ existing and future obligations and other obligations that are, by their terms, expressly subordinated in right of payment to the senior exchange notes, including the senior subordinated notes and special fees owed to VUE;

 

   

rank equal in right of payment to all of the issuers’ existing and future senior obligations and other obligations that are not, by their terms, expressly subordinated in right of payment to the senior exchange notes, including our renewed senior secured credit facilities and our obligations in respect of the Consultant Agreement; and

 

   

be effectively subordinated to all of the issuers’ existing and future secured debt (including obligations under our renewed senior secured credit facilities and our obligations in respect of the Consultant Agreement), to the extent of the value of the assets securing such debt, and structurally subordinated to the obligations of any of our subsidiaries that do not guarantee the senior notes.

 

  The senior subordinated exchange notes are not expressly subordinated in right of payment to our obligations under the Consultant Agreement, but are effectively subordinated to our obligations thereunder to the extent of the value of the assets securing such obligations.

 

  Similarly, the senior exchange note guarantees will be unsecured senior obligations of the guarantors and will:

 

   

rank senior in right of payment to all of the guarantors’ existing and future debt and other obligations that are, by their terms, expressly subordinated in right of payment to such guarantees, including the guarantors’ guarantees under the senior subordinated notes;

 

   

rank equal in right of payment to all of the guarantors’ existing and future senior debt and other obligations that are not, by their

 

 

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terms, expressly subordinated in right of payment to such guarantees, including the guarantors’ guarantees of the renewed senior secured credit facilities; and

 

   

be effectively subordinated to all of the guarantors’ existing and future secured debt (including such guarantors’ guarantees under our renewed senior secured credit facilities), to the extent of the value of the assets securing such debt, and structurally subordinated to the obligations of any of our subsidiaries that do not guarantee the senior notes.

 

  The senior subordinated exchange notes will be unsecured senior subordinated obligations of the issuers and will:

 

   

be subordinated in right of payment to all of the issuers’ existing and future senior debt, including our renewed senior secured credit facilities and the senior notes;

 

   

rank equal in right of payment to all of the issuers’ future senior subordinated debt and other obligations that are not by the terms of the senior subordinated exchange notes expressly made senior;

 

   

be effectively subordinated to all of the issuers’ existing and future secured debt (including obligations under our renewed senior secured credit facilities and our obligations in respect of the Consultant Agreement), to the extent of the value of the assets securing such debt, and structurally subordinated to the obligations of any of our subsidiaries that do not guarantee the senior subordinated notes; and

 

   

rank senior in right of payment to all of the issuers’ future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the senior subordinated exchange notes, including the special fees owed to VUE.

 

  Similarly, the senior subordinated exchange note guarantees will be unsecured senior subordinated obligations of the guarantors and will:

 

   

be subordinated in right of payment to all of the guarantors’ existing and future senior debt, including the guarantors’ guarantees under our renewed senior secured credit facilities and the senior notes;

 

   

rank equal in right of payment to all of the guarantors’ future senior subordinated debt and other obligations that are not by the terms of the senior subordinated exchange notes expressly made senior;

 

   

be effectively subordinated to all of the guarantors’ existing and future secured debt (including such guarantors’ guarantees under our renewed senior secured credit facilities), to the extent of the value of the assets securing such debt, and structurally subordinated to the obligations of any of our subsidiaries that do not guarantee the senior subordinated notes; and

 

   

rank senior in right of payment to all of the applicable guarantors’ future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the guarantees of the senior subordinated notes.

 

 

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  As of December 31, 2009, the exchange notes were effectively subordinated to $937.0 million of indebtedness (including $900.0 million of secured indebtedness under our renewed senior secured credit facilities, $32.5 million in liabilities on our financing obligations and capital leases, and $4.5 million under our obligations in respect of the Consultant Agreement). The senior exchange notes and related guarantees were ranked senior to the $225.0 million principal amount of senior subordinated notes. The senior subordinated exchange notes and related guarantees were ranked junior to approximately $1,337.0 million of senior indebtedness, including the renewed senior secured credit facilities and the senior notes. An additional $75.0 million was available for future borrowings under the revolving portion of our renewed senior secured credit facilities from time to time, all of which would be secured and effectively senior to the notes.

 

Certain covenants

The indenture governing the senior notes and the indenture governing the senior subordinated notes, among other things, restrict the issuers’ ability and the ability of the issuers’ restricted subsidiaries to:

 

   

make certain distributions, investments and other restricted payments;

 

   

incur or guarantee additional debt or issue preferred stock;

 

   

transfer or sell assets;

 

   

create certain liens;

 

   

pay dividends and repurchase capital stock;

 

   

merge, consolidate or sell substantially all of their assets;

 

   

enter into certain transactions with affiliates; and

 

   

enter into agreements that restrict dividends from subsidiaries.

 

  The indenture governing the senior notes and the indenture governing the senior subordinated notes also require each of the issuers’ future wholly-owned domestic restricted subsidiaries that guarantees certain other indebtedness of the issuers to guarantee the notes.

 

  These covenants are subject to important qualifications. See “Description of the senior notes—Certain covenants” and “Description of the senior subordinated notes—Certain covenants.”

 

No public market

The exchange notes will be new issues of securities and there is currently no established trading market for them. The initial purchasers of the original notes advised us that they intend to make a market in the exchange notes. Such initial purchasers are not obligated, however, to make a market in the exchange notes, and any such market making may be discontinued by such initial purchasers in their discretion at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the exchange notes. See “Plan of distribution.

 

Use of Proceeds

We will not receive any cash proceeds upon the completion of the exchange offer.

 

 

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Risk factors

Despite our competitive strengths discussed elsewhere in this prospectus, investing in the notes involves substantial risks and uncertainties. Some of the more significant risks and uncertainties associated with our business include general economic conditions, particularly the duration, severity and impact on consumer behavior of the global recession, our substantial indebtedness and our ability to service that indebtedness, competition within the Orlando theme park market and the resources of our competitors, our dependence on certain material intellectual property rights used in our business and our dependence on a single location for substantially all of our revenues. The risks described under the heading “Risk factors” immediately following this summary may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. See “Risk factors” for a discussion of the foregoing and other risks you should consider before deciding whether to exchange your original notes for the exchange notes.

 

 

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Summary historical, pro forma financial and other data

The following table sets forth certain of our historical, pro forma financial and other data. The summary historical financial data for the fiscal years ended December 31, 2009, 2008 and 2007, and as of December 31, 2009 and 2008, have been derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

The summary pro forma consolidated financial data gives effect to the Transactions and the Partnership Agreement Amendment in the manner described under “Unaudited pro forma financial information.” No pro forma balance sheet is presented as the Transactions are reflected in the historical financial data as of December 31, 2009.

The unaudited pro forma financial data is presented for informational purposes only, and does not purport to represent what our results of operations would actually have been if the Transactions and the Partnership Agreement Amendment had occurred on the dates indicated, nor does it purport to project our results of operations or financial condition that we may achieve in the future.

 

 

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The information set forth below should be read in conjunction with “Selected historical financial data,” “Unaudited pro forma financial information,” “Management’s discussion and analysis of financial condition and results of operations” and “Risk factors,” together with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Historical   Pro Forma
    Year ended December 31,   Year ended
December 31,
2009

(Dollars in thousands)

  2009   2008   2007  

Statement of operations data:

       

Operating revenues:

       

Theme park tickets

  $ 419,026   $ 455,935   $ 450,844   $ 419,026

Theme park food and beverage

    94,655     112,270     115,188     94,655

Theme park merchandise

    82,695     99,634     101,599     82,695

Other theme park related(1)

    86,658     104,380     102,825     86,658

Other(2)

    119,819     151,133     161,387     119,819
                       

Total operating revenues

    802,853     923,352     931,843     802,853

Costs and operating expenses:

       

Theme park operations

    176,947     184,371     177,556     176,947

Theme park selling, general and administrative

    124,216     153,205     153,053     124,216

Theme park cost of products sold

    92,645     113,536     113,610     92,645

Special fee payable to Vivendi Universal Entertainment and consultant fee

    51,913     58,305     57,996     53,633

Depreciation and amortization

    106,051     111,130     110,327     106,051

Other

    102,058     122,374     128,503     102,058
                       

Total costs and operating expenses

    653,830     742,921     741,045     655,550
                       

Operating income

    149,023     180,431     190,798     147,303

Total other expense, net

    125,532     102,542     96,137     121,269
                       

Net income

    23,491     77,889     94,661     26,034

Less: net income attributable to the noncontrolling interest in UCRP

    1,577     2,149     2,773     1,577
                       

Net income attributable to the Partners

  $ 21,914   $ 75,740   $ 91,888   $ 24,457
                       

 

 

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    Historical     Pro Forma

(Dollars in thousands, except other operational data)

  Year ended December 31,     Year ended
December 31,
2009
  2009   2008     2007    

Other data:

       

EBITDA(3)

  $ 260,238   $ 292,085      $ 302,852      $ 258,518

Covenant EBITDA(3)

    259,845     297,906        312,075        258,125

Net cash and cash equivalents provided by operating activities

    65,973     191,333        241,518        n/a

Net cash and cash equivalents used in investing activities

    134,043     134,874        49,721        n/a

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

    25,429     (96,535     (130,540     n/a

Capital expenditures

    143,433     137,010        60,912        n/a

Ratio of earnings to fixed charges(4)

    1.1x     1.7x        1.9x        1.1x

Other operational data:

       

Turnstile admissions in thousands(5)

    10,157     11,357        11,514        10,157

Paid admissions in thousands(6)

    9,297     10,564        10,758        9,297

Theme park ticket revenue per paid admission

  $ 45.07   $ 43.16      $ 41.91      $ 45.07

Theme park food, beverage and merchandise revenue per turnstile admission

  $ 17.46   $ 18.66      $ 18.83      $ 17.46

Other theme park related revenue per turnstile admission

  $ 8.53   $ 9.19      $ 8.93      $ 8.53

 

     Historical
     As of December 31,

(Dollars in thousands)

   2009    2008    2007

Balance sheet data:

        

Total cash and equivalents

   $ 45,157    $ 87,798    $ 127,874
                    

Total assets

     1,969,604      1,975,277      1,986,022
                    

Total long-term indebtedness (including current portion)

     1,504,730      1,007,960      1,007,126
                    

Other long-term obligations(7)

     27,415      119,896      118,721
                    

Total equity

     255,011      642,346      643,582
                    

 

     Year ended
     December 31,
2009
   December 31,
2009
          (pro forma)

Ratios:

     

Total indebtedness/Covenant EBITDA

   5.78x    5.83x

Covenant EBITDA/Cash interest expense(8)

   2.79x    2.21x

 

(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.
(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 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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(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 (loss) plus fixed charges. Fixed charges include interest expense (including amortization of deferred financing 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 long-term capital lease and financing obligations and long-term deferred special fees.
(8) Cash interest expense consists of net interest expense less amortization of deferred financing costs, accretion of bond discounts, interest on special fees payable to affiliates of Vivendi Universal Entertainment, and interest on financing obligations. Cash interest expense on a pro forma basis was calculated based upon the interest rates on our renewed senior secured credit facilities and the notes. See “Unaudited pro forma financial information.”

The following is a reconciliation of net cash provided by operating activities to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Historical  
     Year ended December 31,  

(Dollars in thousands)

   2009     2008     2007  

Net cash and cash equivalents provided by operating activities

   $ 65,973      $ 191,333      $ 241,518   

Adjustments:

      

Interest expense

     108,388        102,669        107,906   

Interest income

     (201     (2,654     (7,269

Amortization of deferred finance costs

     (8,645     (6,939     (5,164

Interest on financing obligations

     (2,346     (2,380     (1,166

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

     91,967        (4,359     (6,735

Gain on sale of assets held for sale

     5,155        —          2,776   

Distributions from investments in unconsolidated entities

     (3,161     (3,691     (3,681

Income from investments in unconsolidated entities

     1,586        2,673        1,724   

Loss from impairment of investments in unconsolidated entities

     (444     —          —     

Accretion of bond discount

     (1,219     (834     (837

Income attributable to the noncontrolling interest in UCRP

     (1,577     (2,149     (2,773

Net change in working capital accounts (9)

     4,762        18,416        (23,447
                        

EBITDA

     260,238        292,085        302,852   

Adjustments to arrive at Covenant EBITDA:

      

Income attributable to the noncontrolling interest in UCRP

     1,577        2,149        2,773   

Income from investments in unconsolidated entities

     (1,586     (2,673     (1,724

Distributions from investments in unconsolidated entities

     3,161        3,691        3,681   

Gain on sale of assets held for sale

     (5,155     —          (2,776

Interest income

     201        2,654        7,269   

Other

     1,409        —          —     
                        

Covenant EBITDA

   $ 259,845      $ 297,906      $ 312,075   
                        

 

 

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Note: 2008 and 2007 reconciliations are shown for illustrative purposes only as results for those years 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.

 

(9) 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 (net), prepaid expenses and other assets, other long-term assets, accounts payable and accrued liabilities, unearned revenue, due to related parties, and other long-term liabilities.

The following is a reconciliation of net income attributable to the Partners to EBITDA and Covenant EBITDA for each of the periods presented above:

 

    Historical     Pro forma  
    Year ended December 31,     Year ended
December 31,
2009
 

(Dollars in thousands)

  2009     2008     2007    

Net income attributable to the Partners

  $ 21,914      $ 75,740      $ 91,888      $ 24,457   

Adjustments:

       

Interest expense

    108,388        102,669        107,906        133,411   

Expenses associated with debt refinancing

    25,023        —          —          —     

Loss on extinguishment of debt

    4,263        —          —          —     

Depreciation and amortization

    106,051        111,130        110,327        (5,200

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

    (5,200     5,200        —          106,051   

Interest income

    (201     (2,654     (7,269     (201
                               

EBITDA (as defined)

    260,238        292,085        302,852        258,518   

Adjustments to arrive at Covenant EBITDA:

       

Income attributable to the noncontrolling interest in UCRP

    1,577        2,149        2,773        1,577   

Income from investments in unconsolidated entities

    (1,586     (2,673     (1,724     (1,586

Distributions from investments in unconsolidated entities

    3,161        3,691        3,681        3,161   

Gain on sale of assets held for sale

    (5,155     —          (2,776     (5,155

Interest income

    201        2,654        7,269        201   

Other

    1,409        —          —          1,409   
                               

Covenant EBITDA

  $ 259,845      $ 297,906      $ 312,075      $ 258,125   
                               

Note: 2008 and 2007 reconciliations are shown for illustrative purposes only as results for those years 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.

 

 

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Risk factors

You should carefully consider the risks described below, together with the other information contained in this prospectus, before you make a decision to exchange any original notes for exchange notes. 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. In addition, our business is subject to uncertainties as a result of the transactions described under “Summary—Recent developments” and those transactions and their impact on us are outside of our control. 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 the notes. In such case, you may lose all or part of your original investment.

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 continue to be cautious of current economic conditions domestically and in our key international markets, as recessionary fears have continued to proliferate. 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 soundness 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 business, financial position and results of operations.

Changes in regulations or new regulations applicable to our business 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.

 

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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.

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 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 demand. In addition, the recent 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. In addition, the partial or total destruction of our theme parks requiring either 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 U.S. 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 profitability.

The United States is currently engaged in military operations in the Middle East, which could drive up the price of gas and air travel and increase the chance of another terrorist attack in the United States or key international markets, each of 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.

 

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The military operations in Iraq and Afghanistan could further increase the price of crude oil, which in turn would increase the price of gasoline and jet fuel. According to the Energy Information Administration of the U.S. Department of Energy, the price of gas increased to as much as $4.06 per gallon in Florida in 2008. If gas prices return to these high levels or increase substantially, it may cause significant numbers of domestic consumers to forego taking a vacation, which could negatively affect our attendance, as approximately 25% 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. 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.

Most of our insurance is arranged by GE through global programs for its businesses via licensed insurers issuing enforceable insurance policies, for which we are allocated charges for premium payments, which we believe are generally less expensive than what we could otherwise obtain on a standalone basis. See “Summary—Recent developments.” The insurance includes multi-layered property coverage that presently provides for coverage for replacement costs per occurrence (subject to sub-limits such as wind-storm and terrorism). Our deductible varies from year to year based upon a financial analysis of then-current premiums, market conditions and cost of capital. The multi-layered property coverage insures 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 includes 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.

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

Approximately 41% of our annual theme park ticket sales are generated by third party distribution channels, the majority of which are concentrated among 40 third party customers. As an example, approximately 9% of our annual theme park ticket sales are derived from time-share operators, which are dominated by a few major operators in the Orlando area. Due to the recent upheaval in the credit markets in conjunction with the timeshare industry’s reliance on access to credit, certain timeshare operators have experienced a significant downturn in their business. Continuation 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.

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 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®. Additionally, on March 1, 2008, Anheuser-Busch InBev opened its Aquatica water park, which along with SeaWorld® was subsequently acquired by Blackstone on December 1, 2009. Affiliates of the Blackstone Group L.P. own a 50% interest in UCDP, UCDP Finance, Holding I, Holding II, UCFH I Finance and UCFH II Finance. See “Summary—The Blackstone Group L.P.” Blackstone’s interests in SeaWorld® and the Aquatica water park might conflict with Blackstone’s interest in us. See “—Risks related to our partners—Blackstone and Vivendi Universal Entertainment control us and may have conflicts of interest with us or you in

 

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the future.” All of these theme parks are located within a 10-mile radius of our theme parks. 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. 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.

The close proximity to us of so many of our direct competitors has various other adverse consequences on our business. For example, 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. Also, it has the effect of increasing competition for market share among the major competitors.

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. 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.

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 will 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 or require us to make significant additional payments to third parties for infringing their intellectual property rights. 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 was 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 Vivendi Universal Entertainment 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

 

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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 LLLP 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, payments due with respect to the remaining term of the Fox Agreement will 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 “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 the aforementioned 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, Vivendi Universal Entertainment. 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 Vivendi Universal Entertainment were to cease acting as our manager, we could lose the services of those executives.

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

 

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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 resulting in our reputation being harmed.

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 system disruptions could occur. This could lead to adverse publicity, loss of sales and profits, or cause us to incur significant costs to reimburse third parties for damages, which could impact profits.

Risks related to our partners

Risks related to the right of first refusal agreement between our partners.

Pursuant to a right of first refusal provision in the partners’ agreement between Blackstone and Vivendi Universal Entertainment, as amended, (the “partners’ agreement”), if either Blackstone or Vivendi Universal Entertainment 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 Blackstone exercises its rights under this provision by accepting a binding offer, it may result in 100% control and ownership of us being acquired by Blackstone, which could pose a number of risks to our business. This event could impact our continued use of the “Universal” name and certain intellectual property as discussed below in “Risks related to use of the “Universal” name and certain intellectual property.” These same risks would be present if a third party unaffiliated with Vivendi Universal Entertainment were to acquire control of us. In addition, we face risks related to a change of control under certain of our business agreements.

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 Universal Studios, Inc., Universal City Studios LLLP, an indirect, wholly owned subsidiary of Vivendi Universal Entertainment, Universal CPM and USI Asset Transfer LLC, a direct, wholly owned subsidiary of Vivendi Universal Entertainment (collectively referred to as the “Universal License Parties”), is dependent on 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 on 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 “Business—Intellectual property.” Our 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 the occurrence of certain change of control events (as described in UCDP’s partnership agreement), (ii) 30 months after any termination of the WB

 

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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 USI, Vivendi Universal Entertainment, 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 the expiration of the WB Agreement and 30 months after the date of termination of the WB Agreement, and could cause us to lose such right even earlier if NBCU does not enter into a new license agreement upon such change of control granting us the right to continue to use the “Universal” name in accordance with NBCU’s obligations under our partnership agreement. See “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, 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 those intellectual properties that are currently licensed 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, and 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. However, in a situation where Blackstone or a third party unaffiliated with the Universal License Parties acquires all of the partnership interests in us, 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 “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 or a sale of Universal’s Islands of Adventure or a change of control of us for which the foregoing requirements are not satisfied, payments due with respect to the remaining term of the WB Agreement will be accelerated and due immediately.

We also rely on Vivendi Universal Entertainment and its affiliates for management oversight, advisory and other services. In its capacity as our manager, Vivendi Universal Entertainment 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. Most of our insurance is arranged by GE through global programs for its businesses via licensed insurers issuing enforceable policies. These and the numerous other arrangements with affiliates of Vivendi Universal Entertainment 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 Vivendi Universal Entertainment gains control of us pursuant to the right of first refusal or otherwise. For a description of these arrangements and the right of first refusal, see “Certain relationships and related transactions, and director independence” and “Description of the UCDP partnership agreement—Right of first refusal.”

 

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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 million, the proceeds of which were used to refinance term loans made to the equity holders of Holding I and Holding II that are controlled by Blackstone 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 NBC Universal on a deficiency basis, subject to the terms of the guarantee. The Margin Loan has a five-year maturity. It is anticipated that the only assets of the borrowers will be their equity interests in Holding I and Holding II. If the borrowers default on, or are unable to refinance the Margin Loan, 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 Vivendi Universal Entertainment. This creates a potential for deadlocks. Any deadlock could delay us from taking certain actions in the future which would be beneficial to the business and may prevent or delay us from executing certain aspects of its business strategy.

Blackstone and Vivendi Universal Entertainment control us and may have conflicts of interest with us or you in the future.

Their conflicts of interest may make unavailable to us certain sponsorship relationships that would provide us with significant marketing exposure. Blackstone and Vivendi Universal Entertainment, together, beneficially own 100% of our equity interests.

As a result, Blackstone and Vivendi Universal Entertainment 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 Vivendi Universal Entertainment could cause us to distribute our cash resources to them or make distributions to service the loan to the Blackstone entities guaranteed by NBC Universal rather than invest such resources in our business. In addition, Blackstone and Vivendi Universal Entertainment 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, 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.

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.”

 

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The pending joint venture among Comcast, GE and NBC Universal may constrain our operations until it is consummated , may affect how our business is managed if it is ultimately consummated, and may affect our relationships with GE and other vendors, customers and strategic partners and trigger a change of control under certain agreements.

On December 3, 2009, Comcast, GE, NBC Universal and NewCo entered into a Master Agreement pursuant to which they will form a joint venture and GE entered into a Stock Purchase Agreement with Vivendi pursuant to which, at or prior to the closing of the joint venture, GE will acquire Vivendi’s 20% interest in NBC Universal. See “Summary—Recent developments.” Upon consummation of the transactions contemplated by the Master Agreement and the Stock Purchase Agreement as currently contemplated, we would continue to be owned 50% by VUE, a wholly-owned subsidiary of NBC Universal. However, certain aspects of the transaction structuring are still being negotiated and finalized. Accordingly, our ownership could change. If VUE ceases to own its interest in us, directly or indirectly, it could trigger a change of control under certain agreements which could negatively affect our revenues, earnings and cash flows and adversely affect our prospects, which could be detrimental to our debt holders.

We cannot predict what changes, if any, Comcast will implement in our business and operations if the pending transactions are consummated. In addition, uncertainty around the transactions (and the impact upon us) could adversely impact our business. 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 or loans made outside of the ordinary course of business and tax-related actions, which could adversely affect our business’ growth prospects.

In addition, in connection with the pending transactions, some of our vendors, customers and strategic partners may delay or defer decisions relating to their ongoing and future relationships with us, which could negatively affect our revenues, earnings and cash flows and adversely affect our prospects, which could be detrimental to our debtholders.

We have a number of ongoing relationships with GE. See “Certain relationships and related transactions, and director independence” for more information. GE and Comcast are still evaluating the extent, if any, to which GE’s relationships with us will continue after the transactions are consummated. 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, including in advance of the transactions being consummated) or, in some cases, we may lose the benefits of the GE relationships, such as our sponsorship agreement with GE Money. See “Business—Corporate sponsorships—GE Money Bank.

Even if the transactions contemplated by the Master Agreement are ultimately consummated, there could be a long time between their announcement and consummation, which could be as late as June 2011. The Master Agreement requires that until the closing of the transactions the parties must conduct the businesses that will be transferred to NewCo (including our business) in the ordinary course consistent with past practice and use commercially reasonable efforts to preserve those businesses and to keep available certain senior management and key employees.

Certain material transactions outside of the ordinary course of business are prohibited prior to the closing of the transaction without the consent of the other party, such as material mergers, acquisitions and dispositions, certain new material contracts, material increases in the compensation of certain employees and related party transactions. These covenants may impact our ability to operate our business during the pendency of the transactions contemplated by the Master Agreement.

 

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Risks related to the exchange notes and our indebtedness

If you fail to exchange your original notes, they will continue to be restricted securities and may become less liquid.

Original notes which you do not tender or we do not accept will, following the exchange offer, continue to be restricted securities, and you may not offer to sell them except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities law. We will issue exchange notes in exchange for the original notes pursuant to the exchange offer only following the satisfaction of the procedures and conditions set forth in “The exchange offer—Procedures for tendering.” These procedures and conditions include timely receipt by the exchange agent of the original notes and of a properly completed and duly executed letter of transmittal.

Because we anticipate that most holders of original notes will elect to exchange their original notes, we expect that the liquidity of the market for any original notes remaining after the completion of the exchange offer will be substantially limited. Any original notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount at maturity of the original notes outstanding. Following the exchange offer, if you do not tender your original notes you generally will not have any further registration rights, and your original notes will continue to be subject to certain transfer restrictions. Accordingly, the liquidity of the market for the original notes could be adversely affected.

There is no public market for the exchange notes, and we cannot assure you that a market for the exchange notes will develop or that you will be able to sell your exchange notes.

The exchange notes are new issues of securities for which there is no established public market. We do not intend to have the exchange notes listed on a national securities exchange. The initial purchasers of the original notes have advised us that they currently intend to make a market in the exchange notes, as permitted by applicable laws and regulations. However, such initial purchasers are not obligated to make a market in the exchange notes, and they may discontinue their market-making activities at any time without notice. Therefore, we cannot assure you that an active market for the exchange notes will develop or, if developed, that it will continue. In addition, subsequent to their initial issuance, the exchange notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar notes, our performance and other factors.

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. Our cash debt service for 2009, based on the amount of indebtedness that would have been outstanding after giving pro forma effect to the Transactions as if they occurred on January 1, 2009, was approximately $127.4 million based on the interest rates on our renewed senior secured credit facilities and the notes, of which $60.0 million represents debt service on fixed-rate obligations (including variable rate debt subject to interest rate swap agreements). 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 Vivendi Universal Entertainment 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

 

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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 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.

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 note holders to return payments received.

Certain of the existing domestic subsidiaries of the issuers guarantee the original notes and will guarantee the exchange notes and certain of their future domestic subsidiaries may guarantee the notes. The issuance of the exchange 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:

 

   

were insolvent or rendered insolvent by reason of such incurrence;

 

   

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

 

   

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. 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.

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

 

   

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

 

   

we could not pay our 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.

 

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This provision may not be effective to protect the guarantees from being voided under fraudulent transfer law, or may eliminate the guarantor’s obligations or reduce the guarantor’s obligations to an amount that effectively makes the guarantee 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.

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, 2009, the notes were effectively subordinated to $900.0 million of secured indebtedness under our renewed senior secured credit facilities. As of December 31, 2009, the aggregate amount of our gross outstanding indebtedness was $1,557.5 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 “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 our agreement with him (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 obligation 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;

 

   

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 obligations could 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 or prospects and could result in our bankruptcy.

 

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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.

As of December 31, 2009, the exchange notes were effectively subordinated to $937.0 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. See “Description of other debt,” “Description of the senior notes—Certain covenants” and “Description of the senior subordinated notes—Certain covenants.”

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 will initially guarantee 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.

 

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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 will 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. See “Description of the senior subordinated notes—Subordination of the senior subordinated notes.

As of December 31, 2009, we had approximately $1,337.0 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. See “Description of other debt,” “Description of the senior notes—Certain covenants” and “Description of the senior subordinated notes—Certain covenants.”

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. See “Description of the senior subordinated notes—Ranking.”

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. See “Description of the senior subordinated notes—Ranking.”

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

 

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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 no fees have yet been paid based on Universal Studios Singapore’s results, as the park just opened in March 2010. Fees with respect to Universal Studios Japan and Universal Studios Singapore are paid by an affiliate of Vivendi Universal Entertainment 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 2009, 2008 and 2007, the fees incurred by us payable to the Consultant under the Consultant Agreement were approximately $17.5 million, $19.6 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 3.75 times 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. This could make any financing in the future more difficult. We cannot predict whether the Consultant will exercise his payment 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 “Certain relationships and related transactions, and director independence—Consultant agreement.

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, Vivendi Universal Entertainment or an entity with more than 50% of its capital stock owned collectively by Blackstone or Vivendi Universal Entertainment, 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. 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

 

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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 recession 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 recessionary 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 “Certain relationships and related transactions, and director independence—Consultant agreement.” In light of the current global economic recession and liquidity crisis in the financial markets, we would have difficulty finding alternative financing.

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 2008 and 2009, U.S. 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, 2009 of $1,525.0 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.

 

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Use of proceeds

The exchange offer is intended to satisfy our obligations under the Senior Registration Rights Agreement to use our reasonable best efforts to exchange the senior original notes for the senior exchange notes in a transaction registered with the Securities and Exchange Commission, and our obligations under the Senior Subordinated Registration Rights Agreement to use our reasonable best efforts to exchange the senior subordinated original notes for the senior subordinated exchange notes in a transaction registered with the Securities and Exchange Commission. We will not receive any cash proceeds from the issuance of the exchange notes or the exchange offer.

 

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Capitalization

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2009. You should read this table in conjunction with the information set forth under “Risk factors,” “Use of proceeds,” “Selected historical financial data,” “Unaudited pro forma financial information” and “Management’s discussion and analysis of financial condition and results of operations,” as well as our consolidated financial statements and related notes included elsewhere in this prospectus.

 

(Dollars in millions)

   December 31,
2009

Cash and cash equivalents

   $ 45.2
      

Debt, capital leases and financing obligations:

  

Renewed senior secured credit facilities(1)

   $ 886.9

Senior notes(2)

     395.5

Senior subordinated notes(3)

     222.3

Capital leases and financing obligations

     32.5
      

Total debt, capital leases and financing obligations

     1,537.2

Partners’ equity

     249.1
      

Total capitalization

   $ 1,786.3
      

 

(1) Represents the $900.0 million aggregate principal amount of the renewed senior secured credit facilities net of $13.1 million of unamortized discounts. The renewed senior secured credit facilities bear interest at a floating rate based, at our option, on either a base rate or LIBOR in each case plus a specified margin as discussed within “Description of other debt”. The term loans under the renewed senior secured credit facilities mature in November 2014.
(2) Represents the $400.0 million aggregate principal amount of the senior notes net of $4.5 million of unamortized discounts.
(3) Represents the $225.0 million aggregate principal amount of the senior subordinated notes net of $2.7 million of unamortized discounts.

 

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Selected historical financial data

The following table sets forth certain of our historical financial and other data. The selected historical financial and other data for the fiscal years ended December 31, 2009, 2008 and 2007, and as of December 31, 2009 and 2008, have been derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The selected historical financial and other data for the years ended December 31, 2006 and 2005, and as of December 31, 2007, 2006 and 2005, have been derived from our audited consolidated financial statements and the related notes thereto which are not included in this prospectus. The information set forth below should be read in conjunction with “Risk factors,” “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 prospectus.

The information set forth below should be read in conjunction with “Risk factors,” “Unaudited pro forma financial information,” “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 prospectus.

 

    Year ended December 31,

(Dollars in thousands)

  2009   2008   2007   2006   2005

Statement of operations data:

         

Operating revenues:

         

Theme park tickets

  $ 419,026   $ 455,935   $ 450,844   $ 420,654   $ 436,015

Theme park food and beverage

    94,655     112,270     115,188     108,612     105,195

Theme park merchandise

    82,695     99,634     101,599     91,421     87,723

Other theme park related(1)

    86,658     104,380     102,825     84,245     69,994

Other(2)

    119,819     151,133     161,387     150,454     151,669
                             

Total operating revenues

    802,853     923,352     931,843     855,386     850,596

Costs and operating expenses:

         

Theme park operations

    176,947     184,371     177,556     168,431     167,143

Theme park selling, general and administrative

    124,216     153,205     153,053     149,075     142,472

Theme park cost of products sold

    92,645     113,536     113,610     105,023     101,560

Special fee payable to Vivendi Universal Entertainment and consultant fee

    51,913     58,305     57,996     53,408     53,084

Depreciation and amortization

    106,051     111,130     110,327     111,210     117,308

Other

    102,058     122,374     128,503     123,263     127,704
                             

Total costs and operating expenses

    653,830     742,921     741,045     710,410     709,271
                             

Operating income

    149,023     180,431     190,798     144,976     141,325

Total other expense, net

    125,532     102,542     96,137     100,479     103,639
                             

Net income

    23,491     77,889     94,661     44,497     37,686

Less: net income attributable to the noncontrolling interest in UCRP

    1,577     2,149     2,773     2,537     2,418
                             

Net income attributable to the Partners

  $ 21,914   $ 75,740   $ 91,888   $ 41,960   $ 35,268
                             

 

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    Year ended December 31,  

(Dollars in thousands, except other operational data)

  2009   2008     2007     2006     2005  

Other data:

         

EBITDA (3)

  $ 260,238   $ 292,085      $ 302,852      $ 258,133      $ 258,217   

Covenant EBITDA(3)

    259,845     297,906        312,075        260,620        260,613   

Net cash and cash equivalents provided by operating activities

    65,973     191,333        241,518        165,921        117,813   

Net cash and cash equivalents used in investing activities

    134,043     134,874        49,721        44,292        32,303   

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

    25,429     (96,535     (130,540     (101,845     (62,556

Capital expenditures

    143,433     137,010        60,912        45,313        38,374   

Ratio of earnings to fixed charges(4)

    1.1x     1.7x        1.9x        1.4x        1.4x   

Other operational data:

         

Turnstile admissions in thousands(5)

    10,157     11,357        11,514        11,209        11,498   

Paid admissions in thousands(6)

    9,297     10,564        10,758        10,468        10,772   

Theme park ticket revenue per paid admission

  $ 45.07   $ 43.16      $ 41.91      $ 40.18      $ 40.48   

Theme park food, beverage and merchandise revenue per turnstile admission

  $ 17.46   $ 18.66      $ 18.82      $ 17.85      $ 16.78   

Other theme park related revenue per turnstile admission

  $ 8.53   $ 9.19      $ 8.93      $ 7.52      $ 6.09   
    As of December 31,  

(Dollars in thousands)

  2009   2008     2007     2006     2005  

Balance sheet data:

         

Total cash and equivalents

  $ 45,157   $ 87,798      $ 127,874      $ 66,617      $ 46,833   
                                     

Total assets

    1,969,604     1,975,277        1,986,022        1,926,911        1,967,004   
                                     

Total long-term indebtedness (including current portion)

    1,504,730     1,007,960        1,007,126        1,006,364        1,041,313   
                                     

Other long-term obligations(7)

    27,415     119,896        118,721        80,873        75,121   
                                     

Total equity

    255,011     642,346        643,582        686,550        705,107   
                                     

 

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The following is a reconciliation of net cash provided by operating activities to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Year ended December 31,  

(Dollars in thousands)

   2009     2008     2007     2006     2005  

Net cash and cash equivalents provided by operating activities

   $ 65,973      $ 191,333      $ 241,518      $ 165,921      $ 117,813   

Adjustments:

          

Interest expense

     108,388        102,669        107,906        109,733        106,701   

Interest income

     (201     (2,654     (7,269     (4,270     (1,451

Amortization of deferred finance costs

     (8,645     (6,939     (5,164     (5,374     (5,251

Interest on financing obligations

     (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     22,169   

Gain on sale of assets held for sale

     5,155        —          2,776        5,195        2,180   

Distributions from investments in unconsolidated entities

     (3,161     (3,691     (3,681     (164     (529

Income from investments in unconsolidated entities

     1,586        2,673        1,724        (711     (178

Loss from impairment of investments in unconsolidated entities

     (444     —          —          —          —     

Accretion of bond discount

     (1,219     (834     (837     (851     (844

Income attributable to the noncontrolling interest in UCRP

     (1,577     (2,149     (2,773     (2,537     (2,418

Net change in working capital accounts (8)

     4,762        18,416        (23,447     (2,641     20,025   
                                        

EBITDA

     260,238        292,085        302,852        258,133        258,217   

Adjustments to arrive at Covenant EBITDA:

          

Income attributable to the noncontrolling interest in UCRP

     1,577        2,149        2,773        2,537        2,418   

Income from investments in unconsolidated entities

     (1,586     (2,673     (1,724     711        178   

Distributions from investments in unconsolidated entities

     3,161        3,691        3,681        164        529   

Gain on sale of assets held for sale

     (5,155     —          (2,776     (5,195     (2,180

Interest income

     201        2,654        7,269        4,270        1,451   

Other

     1,409        —          —          —          —     
                                        

Covenant EBITDA

   $ 259,845      $ 297,906      $ 312,075      $ 260,620      $ 260,613   
                                        

The following is a reconciliation of net income attributable to the Partners to EBITDA and Covenant EBITDA for each of the periods presented above:

 

   

Net income attributable to the Partners

   $ 21,914      $ 75,740      $ 91,888      $ 41,960      $ 35,268   

Adjustments:

          

Interest expense

     108,388        102,669        107,906        109,733        106,701   

Expenses associated with debt refinancing

     25,023        —          —          —          —     

Loss on extinguishment of debt

     4,263        —          —          —          —     

Depreciation and amortization

     106,051        111,130        110,327        111,210        117,308   

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

     (5,200     5,200        —          (500     391   

Interest income

     (201     (2,654     (7,269     (4,270     (1,451
                                        

EBITDA

     260,238        292,085        302,852        258,133        258,217   

Adjustments to arrive at Covenant EBITDA:

          

Income attributable to the noncontrolling interest in UCRP

     1,577        2,149        2,773        2,537        2,418   

Income from investments in unconsolidated entities

     (1,586     (2,673     (1,724     711        178   

Distributions from investments in unconsolidated entities

     3,161        3,691        3,681        164        529   

Gain on sale of assets held for sale

     (5,155     —          (2,776     (5,195     (2,180

Interest income

     201        2,654        7,269        4,270        1,451   

Other

     1,409        —          —          —          —     
                                        

Covenant EBITDA

   $ 259,845      $ 297,906      $ 312,075      $ 260,620      $ 260,613   
                                        

 

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Note: Reconciliations for 2005 through 2008 are shown for illustrative purposes only as results for those years 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.
(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 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 (loss) plus fixed charges. Fixed charges include interest expense (including amortization of deferred financing 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 long-term capital lease and financing obligations and long-term deferred special fees.
(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 (net), prepaid expenses and other assets, other long-term assets, accounts payable and accrued liabilities, unearned revenue, due to related parties, and other long-term liabilities.

 

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Unaudited pro forma financial information

We derived the unaudited pro forma financial data set forth below by the application of the pro forma adjustments to the historical consolidated financial statements included elsewhere in this prospectus.

No pro forma balance sheet is presented as the Transactions are reflected in the historical financial data as of December 31, 2009.

The unaudited pro forma statement of operations for the year ended December 31, 2009 gives pro forma effect to the Transactions and the Partnership Agreement Amendment as if they had each occurred on January 1, 2009.

The unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what our results of operations would actually have been if they had occurred on the date indicated nor do they purport to project our results of operations for any future period.

You should read our unaudited pro forma financial information and the accompanying notes in conjunction with all of the historical financial statements and related notes included in this prospectus and other financial information appearing elsewhere in this prospectus, including information contained in “Risk factors,” “Selected historical financial data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

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Universal City Development Partners, Ltd. and subsidiaries

Pro forma consolidated statement of operations

For the year ended December 31, 2009

(In thousands)

 

     Historical     Adjustments(1)     Pro forma  

Operating revenues:

      

Theme park tickets

   $ 419,026      $        $ 419,026   

Theme park food and beverage

     94,655          94,655   

Theme park merchandise

     82,695          82,695   

Other theme park related

     86,658          86,658   

Other

     119,819          119,819   
                        

Total operating revenues

     802,853       —          802,853   

Costs and operating expenses:

      

Theme park operations

     176,947          176,947   

Theme park selling, general and administrative

     124,216          124,216   

Theme park cost of products sold

     92,645          92,645   

Special fee payable to Vivendi Universal Entertainment and consultant fee

     51,913        1,720 (2)      53,633   

Depreciation and amortization

     106,051          106,051   

Other

     102,058          102,058   
                        

Total costs and operating expenses

     653,830        1,720        655,550   
                        

Operating income

     149,023        (1,720     147,303   

Other expense (income):

      

Interest expense

     108,388        25,023 (3)      133,411   

Interest income

     (201       (201

Expenses associated with debt refinancing

     25,023        (25,023 )(4)      —     

Loss on extinguishment of debt

     4,263        (4,263 )(4)      —     

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

     (1,586       (1,586

Gain on sale of assets held for sale

     (5,155       (5,155
                        

Total other expense, net

     125,532        (4,263     121,269   
                        

Net income (loss)

     23,491        2,543        26,034   

Less: net income attributable to the noncontrolling interest in UCRP

     1,577          1,577   
                        

Net income (loss) attributable to the Partners

   $ 21,914      $ 2,543      $ 24,457   
                        

 

(1) Approximately $63.8 million in professional and advisory fees and other fees were incurred as a direct result of the renewed senior secured credit facilities and the issuance of the original notes. This includes fees for professional and advisory services to our financial, legal and accounting advisors. It also includes UCDP’s portion of fees totaling $3.0 million paid to holders of the May 2010 notes and April 2010 notes. Approximately $28.0 million of such professional and advisory fees will be expensed as non-recurring fees and has not been included in the pro forma statements of operations. The remainder of such fees will be capitalized as deferred finance costs or discounts to long term borrowings as applicable.
(2) Represents incremental special fees payable to Vivendi Universal Entertainment resulting from the amendment of UCDP’s partnership agreement. This amendment, which was executed as of October 18, 2009, increased the applicable rate used to calculate the special fee payable to Vivendi Universal Entertainment through June 2017 from 5.0% to 5.25% of certain revenue, as defined.

 

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(3) Represents an adjustment to interest expense (including amortization of deferred finance costs and original issue discounts) assuming the Transactions occurred at January 1, 2009. Specifically, the adjustment includes adjustments to record (a) the interest expense relating to the notes and the term loans under the renewed senior secured credit facilities, (b) the elimination of the amortization of deferred finance costs and (c) the elimination of historical interest expense. The following table sets forth the calculation of the interest expense adjustments:

 

     Year ended
December 31,
2009
 

Senior notes

   $ 30,219   

Senior subordinated notes

     20,713   

Renewed senior secured credit facilities

     48,640   

New deferred finance cost amortization

     6,017   

Debt repaid

     (75,957

Removal of existing deferred finance cost amortization

     (2,078

Removal of interest on deferred special fee payable to affiliates

     (2,531
        

Total

   $ 25,023   
        

Exclusive of the impact of any discounts, the interest rate on the senior notes and senior subordinated notes is 8.875% and 10.875%, respectively. The interest rate on the term loans under the renewed senior secured credit facilities is 6.5% (based on a LIBOR floor of 2.25% plus 4.25%). The commitment fee on the unutilized portion of the revolving credit facility is 1.00%. None of the $75.0 million revolving credit has been utilized.

 

(4) Represents the removal of $4.3 million loss on the extinguishment of the April 2010 notes. Additionally, represents the removal of $25.0 million non-recurring professional and advisory fees. Note that the loss on extinguishment of the April 2010 notes includes professional and advisory fees of $2.9 million.

 

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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 prospectus. 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 owned and operated SeaWorld®. However, on October 7, 2009, Anheuser-Busch InBev announced that it would sell SeaWorld® to an affiliate of Blackstone and this transaction closed 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

 

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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. 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 2009, there were no storms that caused us to close our parks.

In 2009, approximately 52.2% 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 22.1% of our revenues. We analyze our theme park food, beverage and merchandise revenues based on revenue per turnstile admission. We derive less than 10% 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 Vivendi Universal Entertainment, a consultant fee, depreciation and amortization, and interest. 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, Vivendi Universal Entertainment. 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 CPM and Blackstone. Universal CPM is a wholly owned subsidiary of Vivendi Universal Entertainment, which in turn is an indirect subsidiary of NBC Universal. Furthermore, GE owns 80% of NBC Universal, while Vivendi S.A. (“Vivendi”) owns the remaining 20%. Our consolidated financial statements include the amounts of Universal City Development Partners, Ltd. (“UCDP Ltd.”), and all of its subsidiaries including: Universal Parks & Resorts Vacations (“UPRV”), Universal City Restaurant Partners, Ltd. (“UCRP”), Universal Orlando Online Merchandise Store (“UOMS”), and UCDP Finance, Inc. (collectively “UCDP”). All significant intercompany balances and transactions have been eliminated upon consolidation. UCDP 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 UOMS will not begin operations until 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 prospectus. These accounting policies have been discussed and reviewed with the representatives of Holdings and our audit committee, which consists of representatives from both Vivendi Universal Entertainment and Blackstone.

 

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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.

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 rides using a 20-year useful life.

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 2009, 2008 and 2007, we accelerated depreciation on certain assets, primarily in our Lost Continent Island, which will be disposed of as part of the construction of The Wizarding World of Harry Potter. As a result, additional depreciation expense of approximately $4.1 million, $4.0 million and $2.8 million was recorded during 2009, 2008 and 2007, respectively.

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, 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 new 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, 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. At December 31, 2008, we had a $2.0 million inventory provision, which included $1.2 million for slow-moving merchandise, $0.3 million for food supplies and $0.5 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 “Business section of this prospectus. 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 prospectus 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. Although future transactions involving intangible assets may be impacted by this guidance, it did not impact our financial statements as we did not acquire any intangible assets during the year ended December 31, 2009.

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 financial statements as we did not enter into any business combinations during the year ended 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

 

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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. We are currently evaluating the impact on our financial statements, if any, upon adoption.

In June 2009, the FASB issued accounting guidance that 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 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 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 our financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.

Results of operations

Overview

During 2009, we experienced a decrease of 12% in our paid attendance. This was driven by softness in both our domestic and international business as both markets experienced low-teen digit percentage declines to prior year. We believe these decreases were primarily driven by the downturn in the global economy. Total theme park spending on a per guest basis was consistent with 2008, but the reduced volume contributed to a $120.5 million shortfall in revenue, or 13%, when compared to 2008. Our ability to reduce operating costs, which decreased $89.1 million, or 12%, when compared to 2008, helped partially offset the revenue shortfall. As a result, operating income decreased $31.4 million in 2009 versus the prior year. EBITDA decreased $31.8 million when compared to 2008. During November 2009, we refinanced our indebtedness. At December 31, 2009, we had $120.2 million in cash and cash equivalents, including $75.0 million of availability under our revolving credit facility. We owed $1,525.0 million on our gross indebtedness at December 31, 2009, of which $9.0 million was current. Additionally, cash paid for capital expenditures during 2009 totaled $143.4 million, which primarily related to the Hollywood Rip Ride RockitSM coaster that opened in summer 2009 and continued progress on The Wizarding World of Harry Potter.

 

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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 operations 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 Vivendi Universal Entertainment 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 )% 
                    

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 Revenue 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 Universal ExpressSM Plus 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

 

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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 Vivendi Universal Entertainment and Consultant Fee decreased 11%, which corresponds to the decrease in Total Operating Revenue of 13%. Other Costs and Operating Expenses was favorable $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 the $5.2 million gain on the land sale.

 

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2008 compared to 2007

The following table summarizes our results of operations during the years ended December 31, 2008 and 2007 (in thousands except per capita amounts and percentages):

 

     2008    2007    % Change
Favorable/
(Unfavorable)
 

Operational data:

        

Paid theme park admissions

     10,564      10,758    (1.8 )% 

Turnstile theme park admissions

     11,357      11,514    (1.4 )% 

Theme park ticket revenue per paid admission

   $ 43.16    $ 41.91    3.0

Theme park food, beverage and merchandise revenue per turnstile admission

   $ 18.66    $ 18.82    (0.9 )% 

Other theme park related revenue per turnstile admission

   $ 9.19    $ 8.93    2.9

Statement of operations data:

        

Operating revenues:

        

Theme park ticket revenue

   $ 455,935    $ 450,844    1.1

Theme park food and beverage

     112,270      115,188    (2.5 )% 

Theme park merchandise

     99,634      101,599    (1.9 )% 

Other theme park related

     104,380      102,825    1.5

Other

     151,133      161,387    (6.4 )% 
                    

Total operating revenues

     923,352      931,843    (0.9 )% 

Costs and operating expenses:

        

Theme park operations

     184,371      177,556    (3.8 )% 

Theme park selling, general and administrative

     153,205      153,053    (0.1 )% 

Theme park cost of products sold

     113,536      113,610    0.1

Special fee payable to Vivendi Universal Entertainment and consultant fee

     58,305      57,996    (0.5 )% 

Depreciation and amortization

     111,130      110,327    (0.7 )% 

Other

     122,374      128,503    4.8
                    

Total costs and operating expenses

     742,921      741,045    (0.3 )% 
                    

Operating income

     180,431      190,798    (5.4 )% 

Non-operating expenses, net

     102,542      96,137    (6.7 )% 
                    

Net income

     77,889      94,661    (17.7 )% 

Less: net income attributable to the noncontrolling interest in UCRP

     2,149      2,773    22.5
                    

Net income attributable to the Partners

   $ 75,740    $ 91,888    (17.6 )% 
                    

As previously described in the “Overview” section, Paid Theme Park Admissions decreased by 2% primarily due to the mid single-digit percentage reduction in guests from our domestic points of origin as the U.S. economy worsened throughout 2008. However, attendance from our international market showed strength during 2008 with increases in the low-double digits compared to 2007 thus partially offsetting the softness in our domestic business.

Despite the attendance shortfall, theme park related revenues increased $1.8 million during 2008 driven by growth in Theme Park Ticket Revenue of $5.1 million resulting from a price increase in August and other yield initiatives. As a result, Theme Park Ticket Revenue Per Paid Admission increased 3%. Theme Park Food, Beverage and Merchandise Revenue Per Turnstile Admission decreased 1% as guests began to reduce spending on these items as the economy worsened throughout 2008. Other Theme Park Related Revenue Per Turnstile Admission increased 3% stemming largely from strong park special event revenue which increased $2.1 million

 

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in 2008. Other theme park related items primarily include sales of UEP tickets, parking revenue, park special events, stroller rentals and aged ticket sales. Other revenue generating programs decreased $10.3 million or 6% as the economy continued to worsen.

The decrease in Other operating revenue was principally due to reduced revenue of $4.0 million at our CityWalk venues and $3.4 million in lower revenue at our travel company, Universal Parks & Resorts Vacations. Additionally, Other revenue was adversely impacted by $1.3 million in lower corporate sponsorship revenue. The results for 2008 were aided by an extra day due to the leap year.

Theme Park Operations increased $6.8 million, or 4%, year-over-year principally due to increased maintenance and operational costs from our newer attractions, The Simpsons Ride and Disaster! A Major Motion Picture...Starring You!SM. These increased costs were also partially due to increased utility costs as energy costs increased steadily throughout the year. Theme Park Selling, General and Administrative was consistent between 2008 and 2007 as increased costs relating to our investment in information technology initiatives were largely offset by decreases in our marketing expenses. Theme Park Cost of Products Sold was slightly favorable in absolute dollar terms, while as a percentage of revenue they increased from 52.4% in 2007 to 53.6% in 2008, which was chiefly attributable to increased commodity prices. Other costs and operating expenses decreased by $6.1 million, primarily due to $4.9 million in lower costs relating to our travel company’s decrease in revenues. Similarly, we incurred $0.7 million in lower costs relating to the lower CityWalk revenues. Non-operating Expenses increased by $6.4 million primarily due to $5.2 million in losses related to our interest rate swaps and lower interest income of $4.6 million, both of which were partially offset by decreased debt interest expense of $5.2 million as a result of interest rate reductions in 2008. Our interest rate swaps became ineffective in the fourth quarter of 2008 thus resulting in the aforementioned charge. Results from 2007 benefited from a gain from the sale of property of $2.8 million.

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 “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 2010 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 will 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. As of December 31, 2009, we had one parcel of land held for sale and are actively evaluating our land assets for optimization potential. On November 25, 2009, we sold a parcel of non-strategic land, which was previously classified as held for sale. In connection with this sale, we recorded a gain of approximately $5.2 million. 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.

Our current business structure is heavily leveraged. During 2009, we (i) issued the original 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, 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

 

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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). As of December 31, 2008, our total debt was $1,008.0 million which included $509.0 million outstanding under our 2004 senior secured credit agreement and $499.0 million outstanding under the April 2010 notes ($500.0 million, net of a remaining unamortized discount of $1.0 million). Our 2004 senior secured credit agreement was renewed and additional credit in the amount of $366 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, and of 50% of our excess cash flow for each fiscal year on or after December 31, 2010. 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.

In addition to there being no amounts drawn on the revolving credit facility under the renewed senior secured credit agreement as of December 31, 2009 or under the 2004 senior secured credit agreement as of December 31, 2008, 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. The interest rate applicable to borrowings under our 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 3.25%) or LIBOR (provided that LIBOR will never be less than 2.25%), in each case plus a specified margin. The specified margin for the term loans is 3.25% in the case of base rate loans and 4.25% 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. For more information, see “Description of other debt,” “Description of the senior notes” and “Description of the senior subordinated notes.”

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.

 

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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.

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

     As of
     December 31,
2009
   December 31,
2008

Cash and cash equivalents

   $ 45,157    $ 87,798
             

Unused portion of revolving credit facilities

     75,000      100,000
             

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

     14,098      5,822
             

Current portion of special fees

     8,903      8,861
             

Total long-term obligations(1)

     1,523,145      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 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 prospectus.

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 provided by operating activities to EBITDA and Covenant EBITDA for each of the periods presented above:

 

     Historical  
     Year ended December 31,  

(Dollars in thousands)

   2009     2008     2007  

Net cash and cash equivalents provided by operating activities

   $ 65,973      $ 191,333      $ 241,518   

Adjustments:

      

Interest expense

     108,388        102,669        107,906   

Interest income

     (201     (2,654     (7,269

Amortization of deferred finance costs

     (8,645     (6,939     (5,164

Interest on financing obligations

     (2,346     (2,380     (1,166

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

     91,967        (4,359     (6,735

Gain on sale of assets held for sale

     5,155        —          2,776   

Distributions from investments in unconsolidated entities

     (3,161     (3,691     (3,681

Income from investments in unconsolidated entities

     1,586        2,673        1,724   

Loss from impairment of investments in unconsolidated entities

     (444     —          —     

Accretion of bond discount

     (1,219     (834     (837

Income attributable to the noncontrolling interest in UCRP

     (1,577     (2,149     (2,773

Net change in working capital accounts (1)

     4,762        18,416        (23,447
                        

EBITDA

     260,238        292,085        302,852   

Adjustments to arrive at Covenant EBITDA:

      

Income attributable to the noncontrolling interest in UCRP

     1,577        2,149        2,773   

Income from investments in unconsolidated entities

     (1,586     (2,673     (1,724

Distributions from investments in unconsolidated entities

     3,161        3,691        3,681   

Gain on sale of assets held for sale

     (5,155     —          (2,776

Interest income

     201        2,654        7,269   

Other

     1,409        —          —     
                        

Covenant EBITDA

   $ 259,845      $ 297,906      $ 312,075   
                        

Note: 2008 and 2007 reconciliations are shown for illustrative purposes only as results for those years 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), notes receivable, receivables from related parties, inventories (net), prepaid expenses and other assets, other long-term assets, accounts payable and accrued liabilities, unearned revenue, due 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)

   2009     2008     2007  

Net income attributable to the Partners

   $ 21,914      $ 75,740      $ 91,888   

Adjustments:

      

Interest expense

     108,388        102,669        107,906   

Expenses associated with debt refinancing

     25,023        —          —     

Loss on extinguishment of debt

     4,263        —          —     

Depreciation and amortization

     106,051        111,130        110,327   

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

     (5,200     5,200        —     

Interest income

     (201     (2,654     (7,269
                        

EBITDA

     260,238        292,085        302,852   

Adjustments to arrive at Covenant EBITDA:

      

Income attributable to the noncontrolling interest in UCRP

     1,577        2,149        2,773   

Income from investments in unconsolidated entities

     (1,586     (2,673     (1,724

Distributions from investments in unconsolidated entities

     3,161        3,691        3,681   

Gain on sale of assets held for sale

     (5,155     —          (2,776

Interest income

     201        2,654        7,269   

Other

     1,409        —          —     
                        

Covenant EBITDA

   $ 259,845      $ 297,906      $ 312,075   
                        

Note: 2008 and 2007 reconciliations are shown for illustrative purposes only as results for those years 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.

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):

 

     2009    2008     2007  

Net cash and cash equivalents provided by operating activities

   $ 65,973    $ 191,333      $ 241,518   
                       

Net cash and cash equivalents used in investing activities

     134,043      134,874        49,721   
                       

Capital expenditures

     143,433      137,010        60,912   
                       

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

     25,429      (96,535     (130,540
                       

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 Transactions, 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. The decrease in cash flow from operations from 2007 to 2008, which totaled $50.2 million, or 21%, resulted from three primary factors. First, cash flows from operations during 2008 were negatively impacted by $10.4 million compared to 2007 as a result of the timing of payments for our marketing initiatives. Second, our cash flows from operations during 2008 were reduced by $10.5 million relative to 2007 due to payments related to our annual incentive and long-term

 

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growth plans (see “Management of UCDP—Compensation discussion and analysis” for further information). Lastly, our net income was $16.8 million lower during 2008 compared to 2007 for the reasons previously discussed.

Cash flows used in investing activities for 2009, 2008 and 2007 consisted primarily of capital expenditures. In 2009, 2008 and 2007, these capital expenditures were partially offset by proceeds from land sales, capital reimbursements and capital claims settlements which totaled $9.4 million, $2.1 million and $14.8 million, respectively. These proceeds are the result of discrete transactions that may or may not occur in the future. Cash flows related to investing activities in 2007 also contained a $3.7 million contribution related to our unconsolidated investment in Uniman, LLC (see note 4 in our consolidated financial statements included elsewhere in this prospectus for further discussion regarding this investment).

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. For instance, during 2009, 2008 and 2007, we made purchases totaling $127.2 million, $142.9 million and $80.0 million, respectively, for capital projects (excluding capitalized interest), while in 2006 similar expenditures amounted to only $40.6 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 2010 expenditures (excluding capitalized interest) to be approximately $75.0 million. A large portion of our estimated 2010 capital expenditures relate to the construction of The Wizarding World of Harry Potter themed island. We anticipate opening The Wizarding World of Harry Potter themed island in the spring of 2010. We estimate our total capital investment in The Wizarding World of Harry Potter™, 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 will range from $360.0 million to $380.0 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 2009 net cash provided by financing activities was $25.4 million, whereas in 2008 net cash used for financing activities was $96.5 million. The current year amount includes inflows of $995.2 million in net proceeds from the renewal of our senior secured credit facilities and issuance of original notes and contributions received from Holdings totaling $14.4 million. These items were offset by the following: 1) $500.0 million in payments on the April 2010 notes; 2) $356.6 million in distributions to Holdings enabling the repurchase of the May 2010 notes; 3) $49.1 million in payments on financing costs; 4) $36.8 million in distributions made to Holdings to fund its interest payments; 5) $33.4 million in distributions made to the Partners for their respective tax liabilities from our net income in 2008; and 6) $5.8 million in payments on financing obligations. In 2008 and 2007, the primary components of our financing outflows 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 as discussed previously. 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.

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

 

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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 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 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. On January 15, 2010, the Consultant made this election. 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 million and 3.75x UCDP’s Covenant EBITDA (as defined in the renewed senior secured credit agreement). Our obligations under the agreement are guaranteed by NBC Universal, Inc. and 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 us against any liability under the Consultant Agreement related to any comparable project that is not owned or controlled by us. 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 “Risk factors—Risks related to the exchange notes and 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.

Special fee requirements

Under our partnership agreement, a “special fee” is payable to Vivendi Universal Entertainment 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. For 2009, 2008 and 2007, the special fee amounted to $34.4 million, $38.7 million and $38.4 million, respectively. For 2009, 2008 and 2007, the interest incurred on the special fee payable to Vivendi Universal Entertainment and affiliates, including both the current and long term portions, was $2.8 million, $4.9 million and $7.5 million, respectively.

 

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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 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, 2009, thus allowing the special fee to be paid. Accordingly, during 2009, 2008 and 2007, we paid total fees of $34.6 million, $39.3 million and $38.5 million, respectively, to Vivendi Universal Entertainment. At December 31, 2009 and 2008, the current portion of our consolidated balance sheet included $8.9 million for each year, related to the special fees payable to Vivendi Universal Entertainment. Also, at December 31, 2008, we had accrued long-term special fees payable to an affiliate of Vivendi Universal Entertainment of $92.0 million. On November 6, 2009, we paid $94.5 million in special fees to an affiliate of Vivendi Universal Entertainment as part of the Transactions thus enabling Holdings to repay a portion of the May 2010 notes. Therefore, as of December 31, 2009, we had no special fees payable to an affiliate of Vivendi Universal Entertainment 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 2004 senior secured credit agreement and the April 2010 notes (which are no longer outstanding) contained 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 April 2010 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 2004 senior secured credit agreement contained the following financial covenants: a maximum total leverage ratio; a minimum interest coverage ratio; and a limitation on capital expenditures.

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

 

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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, 2009 and December 31, 2008.

Contractual obligations

The following table reflects our estimated contractual obligations as of December 31, 2009 on an actual, historical basis:

 

     Payments due by fiscal period

(in millions)

   Total    2010    2011 to 2012    2013 to 2014    2015 and beyond

Contractual obligations:

              

Long-term borrowings (1)

   $ 1,525.0    $ 9.0    $ 18.0    $ 873.0    $ 625.0

Interest payment of long-term borrowings (2)

     626.0      118.2      234.7      223.1      50.0

Operating lease obligations

     12.6      3.8      6.5      2.3      —  

Purchase obligations (3)

     88.6      32.6      20.1      17.5      18.4

Special fee payable to Viviendi Universal Entertainment and affiliates

     8.9      8.9      —        —        —  

Other long-term liabilities (4)

     7.5      —        —        —        7.5
                                  

Total contractual obligations

   $ 2,268.6    $ 172.5    $ 279.3    $ 1,115.9    $ 700.9
                                  

 

(1) Amounts exclude discounts and therefore represent gross maturities.
(2) Interest due on the senior secured credit facilities was included at the current rate of 6.5%.
(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.

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) as of December 31, 2009:

 

     2010     2011     2012     2013     2014     Thereafter     Total    Fair Value

Debt (1):

                 

Fixed rate debt

   $ —        $ —        $ —        $ —        $ —        $ 625,000      $ 625,000    $ 615,563

Average interest rate

     n/a        n/a        n/a        n/a        n/a        9.6     n/a      n/a

Variable rate debt

   $ 9,000      $ 9,000      $ 9,000      $ 9,000      $ 864,000      $ —        $ 900,000    $ 905,625

Average interest rate (2)

     6.5     6.5     6.5     6.5     6.5     n/a        n/a      n/a
                                                             

Total gross debt

   $ 9,000      $ 9,000      $ 9,000      $ 9,000      $ 864,000      $ 625,000      $ 1,525,000    $ 1,521,188
                                                             

 

(1) Amounts exclude discounts and therefore represent gross maturities.
(2) Represents the current interest rate on the 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.

 

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As a result, we have $900.0 million of unhedged variable rate debt as of December 31, 2009. 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 $9.0 million. 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 operations. Our remaining interest rate swaps expired in the fourth quarter of 2009.

 

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Industry overview

The statements regarding industry outlook, trends, the future development of the theme park industry and other non-historical statements contained in this section are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, all of which are out of our control, and some of which are described in the “Risk factors” section.

General

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.

Total revenues of the U.S. theme park industry grew by 4% from $11.5 billion in 2006 to $12.0 billion in 2007. From 2001 to 2007, total revenues of the U.S. theme park industry grew approximately 25%.

Many participants in the industry use popular characters to market their parks and to provide an enhanced family entertainment experience. They feature the characters in advertising, as street entertainers and in attractions and retail outlets in an attempt to create brand association, increase attendance, support higher ticket prices and increase in-park spending. The guest experience is further enhanced by the use of technological advances which have included 3-D film, motion-based simulation and enhanced special effects.

Orlando and Southern California are uniquely positioned as the home of destination theme parks (where theme park visits make up a material component of visitors’ vacations). Destination theme parks offer a greater variety of packaged promotions to consumers than single-day theme parks.

Competitive environment

Companies in the theme park industry benefit from limited direct competition since the combination of a finite supply of real estate appropriate for theme park development, high initial capital investment, long development time and zoning restrictions provides theme park companies with a significant degree of protection from competitive new theme park openings. There are significant barriers to entry for the theme park industry. For example, the Walt Disney Company is currently spending approximately $1.1 billion to overhaul its California Adventure Park.

The theme park industry is highly consolidated, as 17 of the 25 most visited parks in 2008 were affiliated with three major brands, one of which is the Universal theme park brand.

Orlando theme parks

According to a July 2007 Forbes report, Orlando is the third most visited city in the United States. Orlando’s population of 2.1 million (as of 2008) is projected to grow by approximately 14% by 2013 (or 29% by 2018) making it the ninth fastest growing metropolitan area in the United States. In 2007, Orlando hosted over 48.7 million visitors, which represents 2% growth over 2006.

With seven major theme parks, Orlando is widely recognized as the theme park capital of the world. The Orlando market began to develop in 1971 with the opening of Walt Disney World’s Magic Kingdom. Over the next 30 years, seven major theme parks were built in Orlando, with the newest theme park, Universal’s Islands of Adventure, opening in 1999. These seven theme parks make up 53% of the top 20 North American parks’ attendance and have experienced a compounded annual growth rate of approximately 3% from 2003 to 2008 according to Themed Entertainment Association/Economic Research Associates (TEA/ERA).

 

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Orlando theme park market overview

The largest theme park operator in the Orlando market is The Walt Disney Company, with four major parks and 2008 annual attendance of approximately 47 million according to TEA/ERA. Walt Disney World continues to make substantial capital investments in the Orlando market and its parks draw a significant number of vacationing visitors to Orlando.

Orlando Theme Park Attendance (in millions)

LOGO

Orlando 2008 Theme Park Market Share (source: TEA/ERA)

LOGO

 

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Orlando market

Accommodations

In 2008, the greater Orlando area had approximately 112,000 hotel rooms, making Orlando one of the largest hotel markets in the country. Additionally, there were almost 24,000 timeshare units. Several major hotel chains are opening new hotels or expanding existing hotels in the near future. In 2009, two new resorts opened near Disney: the Hilton Bonnet Creek has 1,000 rooms and the Waldorf-Astoria has 497 rooms. Also, in 2010, Hilton is scheduled to open a 1,400-room resort at the Orlando Convention Center and the Peabody Hotel is scheduled to complete a 750 room expansion.

Passenger traffic

Orlando International Airport is the 22nd largest airport in the world, and the 11th largest in the United States, ranked by the number of passengers during 2008, according to the Greater Orlando Aviation Authority. Currently, Orlando International Airport provides non-stop service to approximately 90 destinations in the United States and 23 international cities and served 35.7 million passengers in 2008, representing an increase of 4.9 million, or 16%, from 2000.

Convention/group meeting visitors

The Orange County Convention Center has 2.1 million square feet of exhibition space, which makes it currently ranked second in the United States in terms of space behind McCormick Place in Chicago.

 

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Business

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 Vivendi Universal Entertainment has an indirect noncontrolling interest. The results of the UCF Hotel Venture are not contained in our 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. 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. Since 1999, we have invested $2.9 billion in our facilities, which includes $2.3 billion for the construction of Universal’s Islands of Adventure, CityWalk and infrastructure.

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 a total of 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.

 

   

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.

 

   

Jimmy Neutron’s Nicktoon Blast: A wild rocket chase through the world of some favorite Nicktoons®, such as SpongeBob SquarePants® and the Rugrats®.

 

   

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.

 

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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. At Jimmy Neutron’s Nicktoon Blast, kids can board rockets and blast off on a wild chase through the worlds of their favorite Nicktoons, while Beetlejuice’s Graveyard Revue provides entertainment for all ages.

As of December 31, 2009, food and beverage facilities at Universal Studios Florida included two full service restaurants, four cafeteria-style facilities and 14 fast-food locations providing approximately 3,200 seats. The park also has more than 35 food snack carts. 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 20 rides, attractions and shows, 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 three of the last six years. This park 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.

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 five distinct and individually themed islands:

 

   

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.

 

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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 2006, 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.

In addition, in spring 2010 we will open The Wizarding World of Harry Potter, 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, which will provide 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 will enable 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.

As of December 31, 2009, food and beverage facilities at Universal’s Islands of Adventure included two full service restaurants, four cafeteria-style facilities and 15 fast-food locations providing approximately 3,300 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.

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.

 

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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, 2009, there were 37 facilities at CityWalk. We owned and operated 14 of these facilities and leased 23 to third parties and affiliated entities. Pursuant to management agreements, 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 four 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 $9.7 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. Our parent entities, to our knowledge, have no present intention to enter into a change of control transaction (as defined in these agreements), although it is possible they may do so in the future. 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 its 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.

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

 

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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. The right to use the creative and proprietary elements controlled by the Universal License Parties continues at no cost to us, subject to third party contractual limitations, until the later of (a) the expiration or termination of the WB Agreement or, if sooner, the date that neither UCDP nor its permitted successor or assign is a party to the WB Agreement, or (b) the date such intellectual property rights would otherwise cease to be licensed to us.

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, including certain characters and elements used in the Jimmy Neutron’s Nicktoon Blast attraction.

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.

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.

 

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

Marvel

Universal Studios, Inc. 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.

In August 2009, The Walt Disney Company announced a transaction in which it would acquire Marvel Entertainment. We believe our agreement with Marvel stands and that the proposed transaction will not impact our ability to use characters and attractions currently in use. In addition, we do not expect the proposed 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

Universal Studios, Inc. 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. Universal Studios, Inc. has theme park exclusivity in certain territories, including the United States, for use of the Dr. Seuss elements with the provision that Universal Studios, Inc. 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 Universal Studios, Inc. 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 Universal Studios Inc. 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.

King Features

Universal City Studios LLLP, a subsidiary of Universal Studios, Inc., has a license agreement with King Features Syndicate, a division of The Hearst Corporation, pursuant to which we obtain the right to use certain

 

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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 LLLP 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 will be used, among other purposes, for appropriately themed attractions, merchandise stores and food venues which will be incorporated in a new themed area at Universal’s Islands of Adventure that will include a re-themed portion of one of its existing “islands” and additional undeveloped real estate. These attractions are expected to be open in spring 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 Vivendi 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.

Competition

The Orlando theme park market is extremely competitive, with the highest concentration of theme parks per square mile in the world. There are currently seven major theme parks in Orlando. 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, targets families with young children and benefits from strong brand recognition of its flagship icon, Mickey Mouse. Epcot is a tour through the

 

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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.

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 37% of our admissions in 2009. We have actively pursued this market by enhancing our Internet marketing and partnering with travel agencies with the goal of increasing advance multi-day ticket sales. In 2009, based on our survey data, we believe approximately 33% of our admissions were international visitors, approximately 50% of whom came from the United Kingdom. We market to these international guests primarily with advance multi-day tickets through cooperative print and online media campaigns with our marketing partners. We also partner with a number of major tour operators, particularly in the United Kingdom. In 2009, based on our survey data, we believe approximately 30% 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):

 

     2009    2008    2007

Outer U.S.  

   3.5    4.1    4.5

International

   3.1    3.5    3.2

Florida

   2.7    3.0    3.1

 

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 2009 was $55.7 million. Our marketing activities are heavily weighted toward the key vacation planning period of February to May.

Internet sales

As measured internally through in-park surveys, in 2009 approximately 65% of our theme park guests visited our website to gather information about us, and Internet sales account for approximately 25% of our 2009 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

 

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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 5% of our 2009 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 approximately 30 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 9% of our 2009 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 recent upheaval in the credit markets 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 approximately 50 regional clubs that we use across North America. Sales from these AAA locations accounted for approximately 3% of 2009 theme park ticket revenue. Sales from hotel guest service desks accounted for approximately 4% of 2009 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 Vivendi Universal Entertainment and NBC Universal 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, and was given the right to install and operate ATM machines at, Universal Studios Florida, Universal’s Islands of Adventure and CityWalk and certain other Universal properties owned by our affiliates. Since January 1, 2008, GE Money Bank has been the sponsor of the TWISTER...Ride it Out® attraction at Universal Studios Florida and the Jurassic Park River Adventure® attraction at Universal’s Islands of Adventure and has exclusive marketing, advertising and associational rights in the retail banking and financial services categories with respect to our theme parks, CityWalk and certain other Universal properties owned by our affiliates. In return, GE Money Bank pays annual sponsorship and ATM fees and has committed to participate in mutually agreed upon marketing and promotional programs requiring expenditures by us and other Universal affiliates for our collective benefit. In addition to this sponsorship agreement, GE Money Bank has entered into a co-branded credit card program agreement with Vivendi Universal Entertainment and other Universal affiliates to create a co-branded credit card which was launched in March 2008 and which is marketed in several locations, including Universal Orlando. We share revenue from card acquisition and card usage and participate in joint advertising and marketing programs. This agreement has an initial term through December 31, 2014. See “Summary—Recent developments.”

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.

 

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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.

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, hurricanes 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 2009.

Capital improvements

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. For instance, during 2009, 2008 and 2007, we made purchases totaling $127.2 million, $142.9 million and $80.0 million, respectively, for capital projects (excluding capitalized interest), while in 2006 similar expenditures amounted to only $40.6 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 2010 expenditures (excluding capitalized interest) to be approximately $75.0 million. A large portion of our estimated 2010 capital expenditures relate to the construction of The Wizarding World of Harry Potter themed island. We anticipate opening The Wizarding World of Harry Potter themed island in the spring of 2010. We estimate our total capital investment in The Wizarding World of Harry Potter, 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 will range from $360.0 million to $380.0 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

 

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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.

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, Vivendi Universal Entertainment, 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 Plus 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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The table below sets forth certain information relating to our ticket revenue in 2009 (visitors, attendance and revenue in millions):

 

Type of ticket

   Total number
of unique
visitors
   Attendance
per visitor
    Average
Attendance
   Price(1)     Revenue(1)    % of revenue  

One-day

   3.0    1.02      3.1    $ 63.03      $ 192.1    46

Two-day

   0.5    1.95      1.0      91.13        45.3    11

Seven-day

   0.9    2.51      2.3      91.76        83.0    20

Orlando FlexTicket

   0.3    2.48      0.7      96.72        26.5    6

Annual ticket

   0.4    4.34      1.6      116.26        41.8    10

Other

   0.3    2.23      0.7      92.75        30.3    7
                                     

Total

   5.4    1.72 (2)    9.3    $ 77.46 (2)    $ 419.0    100
                                     

 

(1) Net of discounts and commissions.