UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 333-108661
UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD.
UCDP FINANCE, INC.
(Exact name of Registrant as specified in its charter)
| Florida Florida (State or other jurisdiction of incorporation or organization) |
59-3128514 42-1581381 (I.R.S. Employer Identification No.) |
1000 Universal Studios Plaza
Orlando, FL 32819-7610
407-363-8000
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
113/4% Senior Notes due 2010.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes o No ý
UCDP Finance, Inc. is a wholly-owned subsidiary of Universal City Development Partners, Ltd. Universal City Development Partners, Ltd. has no outstanding common equity which is not held by an affiliate.
DOCUMENTS INCORPORATED BY REFERENCE
None.
UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD.
UCDP FINANCE, INC.
FORM 10-K
DECEMBER 31, 2004
TABLE OF CONTENTS
| PART I | ||||
| Item 1. | Business | 3 | ||
| Item 2. | Properties | 22 | ||
| Item 3. | Legal Proceedings | 22 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 24 | ||
PART II |
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| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 25 | ||
| Item 6. | Selected Financial Data | 25 | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 27 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 38 | ||
| Item 8. | Financial Statements and Supplementary Data | 39 | ||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 66 | ||
| Item 9A. | Controls and Procedures | 66 | ||
| Item 9B. | Other Information | 66 | ||
PART III |
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| Item 10. | Directors and Executive Officers of the Registrant | 67 | ||
| Item 11. | Executive Compensation | 72 | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 78 | ||
| Item 13. | Certain Relationships and Related Transactions | 79 | ||
| Item 14. | Principal Accountant Fees and Services | 84 | ||
PART IV |
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| Item 15. | Exhibits and Financial Statement Schedules | 85 | ||
Index to Exhibits |
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Signatures |
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Certifications |
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Certain definitions
All references in this Form 10-K to "Universal Orlando", "we", "us", "our", the "Company" or "UCDP" refer to Universal City Development Partners, Ltd. "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, CityWalk and the three themed hotels owned by UCF Hotel Venture (in which Vivendi Universal Entertainment has an indirect minority interest and which are not part of our financial statements). The Portofino Bay Hotel, a Loews Hotel (or "The Portofino Bay Hotel"), The Hard Rock Hotel (or "The Hard Rock Hotel") and The Royal Pacific Resort, a Loews Hotel (or "The Royal Pacific Resort") comprise the UCF Hotel Venture. "CityWalk" refers to Universal CityWalk located at Orlando, Florida. "Holding I" refers to Universal City Florida Holding Co. I, limited partner of UCDP. "Holding II" refers to Universal City Florida Holding Co. II, general partner of UCDP. "Holdings" refers collectively to Holding I and Holding II. "UCDP Finance" refers to UCDP Finance, Inc., a wholly owned subsidiary of UCDP. "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 majority 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 Partners L.P., Blackstone UTP Capital Partners A L.P., Blackstone UTP Offshore Capital Partners L.P. and Blackstone Family Media Partnership III L.P. and their subsidiaries 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 Parks & Resorts" refers to a division of Vivendi Universal Entertainment. Our organizational structure is graphically depicted below.
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Trademarks and Copyrights
Universal Studios Florida, Universal's Islands of Adventure, Universal Studios, Universal Orlando, TWISTER…Ride It Out, Earthquake—The Big One, E.T. Adventure, JAWS, Halloween Horror Nights, CityWalk, CityJazz and A Vacation from the Ordinary are registered trademarks of Universal Studios. Bob Marley A Tribute to Freedom, the groove, The Flying Unicorn, Revenge of the Mummy and Universal Parks & Resorts Vacations are service marks of Universal Studios. Universal elements and all related indicia are trademarks and copyrights 2005 of Universal Studios and copyrights 2005 of Universal Orlando. The Amazing Adventures of Spider-Man, Spider-Man, The Incredible Hulk Coaster, Hulk, Marvel Super Hero Island and Marvel Super Hero character names and likenesses are trademarks and copyrights 2005 of Marvel and copyrights 2005 of Universal Studios. Barney and A Day in the Park with Barney are copyrights 2005 of Lyons Partnership, L.P. The names and characters Barney, Baby Bop and BJ are trademarks of Lyons Partnership, L.P. Barney and BJ are Reg. U.S. Pat. & Tm. Off. Back to the Future and Back To The Future The Ride are registered trademarks and copyrights 2005 of Universal Studios/U Drive J.V. Jurassic Park is a registered trademark 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 2005 of KFS, Inc. and trademarks of Hearst Holdings, Inc. Dr. Seuss properties are trademarks and copyrights of Dr. Seuss Enterprises, L.P. T2, Terminator and the depiction of the Endoskeleton are registered trademarks of StudioCanal Image S.A. Men In Black and Alien Attack are trademarks and copyrights 2005 of Columbia Pictures Industries, Inc. Beetlejuice and Beetlejuice's Graveyard Revue are trademarks and copyrights 2005 of The Geffen Film Company and Universal Studios. Animal Planet and Animal Planet Live! are registered trademarks of Discovery Communications, Inc. and copyrights 2005 of Discovery Communications, Inc. Fear Factor is a trademark and copyright of Endemol Nederland B.V., Inc. Nickelodeon and Nickelodeon Studios are copyrights 2005 of Viacom International Inc. Jimmy Neutron Boy Genius, Jimmy Neutron's Nicktoon Blast, all related titles, logos and characters are trademarks of Viacom International Inc. Jimmy Neutron's Nicktoon Blast is a copyright 2005 of Universal Studios. Woody Woodpecker's KidZone and Woody Woodpecker's Nuthouse Coaster are registered trademarks of Walter Lantz. 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 2005 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. MOTOWN is the registered trademark of Motown Record Company L.P. NASCAR Café is the registered trademark of National Association for Stock Car Auto Racing, Inc. Cinnabon is the registered trademark of Cinnabon, Inc. Shrek and Shrek 4-D are the trademarks and copyrights of DreamWorks Animation, LLC. Starbucks is a registered trademark of Starbucks US Brands Corporation. Dapy and Glow! are the registered trademarks of Spencer Gifts, LLC. Fossil is the registered trademark of Fossil, Inc. Fresh Produce is the registered trademark of Fresh Produce, Inc. Quiet Flight is the registered trademark of Quiet Flight Surf Shop, Inc. Walt Disney World, The Magic Kingdom, EPCOT, Disney-MGM 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 and Discovery Cove are registered trademarks of SeaWorld Inc. Busch Gardens is a registered trademark of Anheuser-Busch Inc. The Endangered Species Store is the registered trademark of Kupono Investment, Inc. NBA City is the registered trademark of NBA Properties, Inc.
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 vacation destination. Universal Orlando Resort also includes three themed hotels, The Portofino Bay Hotel, a Loews Hotel, The Hard Rock Hotel and The Royal Pacific Resort, a Loews Hotel, 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 minority interest. The resort
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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. We have made significant investments in our facilities in recent years with expenditures in excess of $2.3 billion for our expansion, including the construction of Universal's Islands of Adventure, CityWalk and related resort infrastructure. In addition, in excess of $580.0 million has been invested in the development of the three on-site resort hotels by UCF Hotel Venture. As a result, we believe Universal Orlando Resort has been transformed from a single-day, one theme park attraction to a multi-day resort destination.
Universal Studios Florida
Universal Studios Florida is a movie-based theme park designed to allow guests to become part of their favorite movies. Universal Studios Florida features a total of 19 rides, attractions and shows (with one being expanded currently and another, Fear Factor Live, now under construction) along with facades of famous film locations. Some of our current rides and shows are:
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 Nickelodeon Studios®, kids can get a behind-the-scenes tour every day to learn how Nick's popular shows are made, while Animal Planet Live! and Beetlejuice's Rock 'n Roll Graveyard Revue provide entertainment for all ages.
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Food and beverage facilities at Universal Studios Florida include two full service restaurants, four cafeteria-style facilities, for a total of more than 3,800 seats, and 10 fast-food stands.
Universal's Islands of Adventure
With 16 rides, attractions and shows, Universal's Islands of Adventure was selected as the "World's Top Theme Park" by Theme Park Insider in 2002, 2003 and 2004. 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 movies, myth 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, all of which opened in 1999:
Food and beverage facilities at Universal's Islands of Adventure include two full service restaurants, five cafeteria-style facilities, providing a total of more than 3,600 seats, and 18 fast-food and beverage stands.
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.
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The 30 acre complex offers free general admission, except for cover charges for admission to various night clubs or shows. Parking is free after 6:00 p.m. 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:
There are 29 facilities at CityWalk. We own and operate 13 of these facilities and lease 16 to third parties and affiliated entities. We manage three of the facilities that we lease to third parties pursuant to management agreements. We also have an ownership interest in three of the entities that lease establishments from us.
Recent events
On December 9, 2004, we refinanced our credit facility with JPMorgan Chase (the 2004 Amendment) resulting in amended and restated senior secured credit facilities consisting of a $550.0 million term loan (the Term Loan) and $100.0 million revolving credit facility. In addition we may borrow up to $200 .0 million of incremental term loans from time to time. Part of the proceeds were used to refinance our existing term loan of approximately $507.4 million. Our refinanced loan requires annual principal payments of 1.0% with $517.0 million due in 2011. Additionally, certain covenants were modified. The proceeds of the 2004 Amendment combined with available cash allowed us to pay distributions to Holdings of approximately $92.1 million. Total fees and expenses associated with the 2004 Amendment were approximately $11.0 million.
Concurrent with this transaction, Vivendi Universal Entertainment and Blackstone entered into an agreement pursuant to which Blackstone acknowledged, as between the partners, that the equity distribution restrictions on the payment of Universal's Islands of Adventure special fees were satisfied. In addition, Holdings used $70.0 million of its proceeds to purchase from Vivendi Universal Entertainment the right to receive the most recently accrued $70.0 million of deferred special fees from us relating to Universal's Islands of Adventure. Further, $50.0 million of the next most recently accrued deferred special fees related to Universal's Islands of Adventure and Universal Studios Florida were forgiven and treated as an equity contribution by both Vivendi Universal Entertainment and Blackstone.
In addition, Blackstone and NBC Universal agreed that subject to the restrictions contained in our senior secured credit agreement, our notes and applicable law, Blackstone and NBC Universal will cause us to make partnership distributions as follows: first, to enable Holdings to pay all accrued and unpaid interest on the $450.0 million principal amount of notes they issued concurrently with the 2004 Amendment as it becomes due; and second, (i) to fund the cash needs of Holdings, (ii) at the option of NBC Universal, to enable Holdings to purchase accrued receivables relating to special fees, (iii) to
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make distributions to the partners and (iv) for other uses as determined by Holdings; provided, that it is currently anticipated that no such distribution will be made unless, after giving effect thereto we would be permitted to make at least $50.0 million in distributions to Holdings under the terms of the indenture governing our notes. This understanding may be modified at any time at the discretion of Blackstone or NBC Universal.
The partners of Holdings entered into an amended and restated partners' agreement pursuant to which (a) from the date of the agreement until January 1, 2006, each of Vivendi Universal Entertainment and Blackstone agree not to sell their ownership interests in Holdings, (b) from January 1, 2006 to December 31, 2007, each of Vivendi Universal Entertainment and Blackstone shall be permitted to sell their ownership interest in Holdings to a third party provided the other party be permitted to require the third party to purchase such other party's interest in Holdings at the same price as such third party is paying to Vivendi Universal Entertainment or Blackstone, as applicable, and (c) after December 31, 2007, neither party may sell its interest in Holdings without first offering the other party the opportunity to purchase such interest at a cash price specified by the party desiring to sell its interest. If either party makes such offer to sell to the other party after December 31, 2007, the other party shall have 90 days to accept such offer. If the other party declines the opportunity to purchase, the offering party shall market both parties' interest in Holdings to third parties, and both parties are required to sell their interests if a third party offers a price that is at least 90% of the price for both parties' interests that is imputed from the offer made by the first party to the second party (i.e., as long as VUE and Blackstone each own 50% of Holdings, then both parties are required to sell to a third party that offers at least 180% of the price quoted by either party to the other party). If the interests in Holdings are not sold to a third party in connection with the marketing process, then the offering party shall be prohibited from making another offer to the other party for a period of one year from expiration date of the 90-day offer period, and during such period, the other party may agree to sell its ownership interest without restriction. A transfer by Vivendi Universal Entertainment and Blackstone to the other of its interest in Holdings is not a "change of control" for the purposes of our notes and our amended and restated credit facilities and the notes of Holdings, but the sale by Vivendi Universal Entertainment and Blackstone of both of their interests to a third party would be a "change of control".
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. 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 a separate License Agreement (the Universal License Agreement) with Universal Studios, Inc. and Universal City Studios LLLP, an indirect, wholly-owned subsidiary of Vivendi Universal Entertainment, and certain of their affiliates, collectively referred to as the "Universal License Parties." UCDP also licenses various intellectual property rights directly from unaffiliated third parties.
The Universal License Agreement grants UCDP 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 third party licensed rights. The rights under 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. The Universal License Agreement also provides that UCDP will be informed of the status of negotiations relating to potential acquisitions of proprietary creative elements for possible new attractions at our theme parks.
Under the Universal License Agreement, UCDP's right to use the Universal name in connection with Universal Orlando continues indefinitely at no cost to us until 30 months after the date that (i) Universal CPM is no longer a wholly owned subsidiary of Universal Studios, Inc., Vivendi Universal Entertainment or any of their respective affiliates or (ii) neither Vivendi Universal Entertainment,
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Universal Studios, Inc., nor any wholly-owned subsidiary of Universal Studios, Inc. or Vivendi Universal Entertainment, is a partner in or is a partner in a partnership which is a partner in UCDP, unless otherwise consented to by Vivendi Universal Entertainment or Universal Studios, Inc. The right to use the creative and proprietary elements controlled by the Universal License Parties continues at no cost to UCDP, subject to third party contractual limitations, until such time as Universal Studios, Inc., Vivendi Universal Entertainment or any of their affiliates ceases to have a partnership interest in Holding II, UCDP's general partner, provided that such license will not expire with respect to any creative and proprietary elements then licensed to UCDP for so long as we continue to operate our theme parks to a standard substantially consistent with the standard they were operated at the time Universal Studios, Inc. or any of their affiliates ceased to have a partnership interest in Holding II.
Intellectual properties licensed to UCDP under the Universal License Agreement include the following:
UCDP licensed intellectual property rights vary in term, some lasting for as long as the relevant attraction is operational with others expiring periodically over the next several years. The intellectual property rights granted to UCDP pursuant to the Universal License Agreement and UCDP's 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 to feature 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 the Universal License Agreement, require the payment of basic license and royalty fees to unaffiliated third parties on merchandise manufactured by or for UCDP that include the licensed elements and are generally terminable if UCDP breaches by failing to maintain quality standards or 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 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 it uses at our theme parks are sufficient for the current operation of our business.
The following is a brief description of some 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:
Dr. Seuss
Universal Studios, Inc. has a license agreement with Dr. Seuss Enterprises, L.P. pursuant to which we obtain the right to use characters owned by Dr. Seuss Enterprises. Universal Studios, Inc. has world wide theme park exclusivity for use of the Dr. Seuss elements with the proviso 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.
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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
Universal Studios, Inc. has a license agreement with DreamWorks, L.L.C. and DreamWorks Animation, LLC pursuant to which we hold a sublicense allowing us to incorporate certain properties and elements owned or controlled by DreamWorks into our theme parks, including our attractions, live events, restaurants, costumed characters and promotional activities. We also have the right to manufacture and sell merchandise using DreamWorks elements, subject to pre-existing third-party arrangements with DreamWorks. DreamWorks has reasonable approval rights over creative and design aspects, location, advertising, promotions and merchandising in connection with properties owned or controlled by DreamWorks and used in connection with our theme parks. Under the license agreement, DreamWorks receives an annual exclusivity fee and certain additional fees payable to DreamWorks during the relevant year. Additional fees payable to DreamWorks include: an initial permanent attraction fee; an annual fee per theme park for each permanent DreamWorks attraction after the initial year the attraction is opened (with certain increases depending on how many DreamWorks attractions are at a single theme park); an annual fee per live event based on a DreamWorks property; a one-time fee per theme park for use of certain walk-around characters and for any restaurant opened that is based on a DreamWorks theme; and fees (as negotiated between DreamWorks and us) for other uses. DreamWorks also receives merchandise royalties from DreamWorks merchandise we manufacture for sale at our theme parks. Shrek 4-D™ is currently our only permanent attraction solely dedicated to a DreamWorks property governed by this agreement. The term of the agreement continues through 2010, with varying renewal periods.
King Features
Universal City Studios LLLP, a subsidiary of Universal Studios. Inc., has a license agreement with King Features, a division of The Hearst Corporation, pursuant to which we obtain the right to use certain characters, such as Popeye®, Bluto™ and Olive Oyl™. We have a license to use the King Features elements for our theme park attractions, advertising, publicity and marketing, subject to reasonable approval rights of King Features, until 2019, with options to renew in ten-year successive increments so long as we continue to operate a Popeye® themed attraction. The license is assignable and Universal City Studios 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, of which 662/3% is considered an advance guarantee against a merchandise royalty.
Marvel
Universal Studios, Inc. has a license agreement with Marvel Characters, Inc. pursuant to which we hold 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.
Guests to our theme parks
Guests to our theme parks can be divided into three distinct segments: U.S. visitors from outside of Florida, international visitors and Florida residents. Our largest market segment is U.S. visitors from
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outside of Florida, representing 47% of our admissions in 2004. We have actively pursued this market segment by employing media campaigns (such as our "A Vacation from the Ordinary" television commercials), partnering with travel agencies and enhancing our Internet marketing with the goal of increasing prepaid multi-day pass sales. In 2004, 29% of our admissions were international visitors, approximately 61% of whom came from the United Kingdom. We encourage these international guests to buy prepaid multi-day passes by using a number of incentives, such as extended length of stay tickets and coupons for food and merchandise. We also partner with a number of major tour operators, particularly in the United Kingdom. In 2004, 24% 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®", "Grinchmas™", "Mardi Gras" and the "Macy's Holiday Parade". To capitalize on the strength of these events, we have introduced annual pass programs in a further effort to maximize attendance from the Florida market.
Marketing and promotion
Our sales and marketing strategy targets families with children 10 years of age or older. We also target active, outgoing people of all ages who would be motivated to attend without children. We utilize various sales and marketing channels to increase the number of visitors to our theme parks, including national television advertising, internet sales channels, our subsidiary travel company, Universal City Travel Partners d/b/a Universal Parks & Resorts Vacations, sales to timeshare operators and the establishment of national joint marketing partnerships. Our sales and marketing expense for 2004 was $75.2 million. In addition, we also benefit from significant marketing spending by corporate sponsors on our behalf.
National television advertising
We spend approximately $25.0 million annually on national television advertising, with our marketing activities in this area heavily weighted toward the key vacation planning period of February to May. We launched a new national marketing campaign at the beginning of 2002 to advertise Universal Orlando as "A Vacation from the Ordinary." This message continued through 2004 and was aimed at building awareness for the resort as a whole (and not just our theme parks), especially to visitors from outside of Florida. We believe the campaign was successful in driving increases in awareness, which led to attendance growth from many of our targeted markets.
Internet sales
Approximately 55% of our theme park guests use the Internet to gather information about us and Internet sales account for approximately 27% of our pass revenue. We have made extensive modifications to our website to help ensure strong brand linkage and ease of navigation. Additionally, we are building our customer relationship management capabilities to further enhance our ability to market our message online. Through our affiliate relationship with Vivendi Universal Entertainment and InterActive Corp., we are gaining access to significant Internet resources, which we believe will enhance our ability to deliver our marketing message to qualified households and sell more tickets to our theme parks.
Universal Parks & Resorts Vacations
Our subsidiary, Universal Parks & Resorts Vacations, serves as our own travel agency and accounted for approximately 8% of our total pass revenue. Universal Parks & Resorts Vacations primarily sells travel packages to consumers. This includes organizing vacation packages, including theme park passes to Universal Studios Florida and Universal's Islands of Adventure, reservations for air travel and hotel accommodations and rental car transportation. In addition, Universal Parks & Resorts Vacations operates its own travel website, operates guest service desks at more than 40 locations, primarily at key hotels in Orlando, and is expanding its presence on the Internet with more than 15 third party website relationships, such as AAA.com.
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Timeshare operators and other distribution channels
A significant portion of our pass sales is generated through our relationships with timeshare operators in the Orlando area. Many timeshare operators purchase passes from us at a discounted price in order to offer those passes to consumers as a reward for taking a tour of their timeshare properties. We also sell discounted passes to timeshare operators for sale to renters of their timeshare properties. Pass sales from the timeshare sales channel constitute approximately 13% of our annual paid admissions. A majority of these passes are sold by a small group of major timeshare operators in the Orlando area. In addition, we have several other primary distribution channels, including AAA, which has approximately 70 distribution locations across North America and accounts for approximately 5% of annual paid admissions, hotel guest service desks which account for approximately 6% of annual paid admissions and other key domestic and international travel operators.
Corporate sponsorships
We enter into sponsorship agreements and benefit from sponsorship agreements entered into by Vivendi Universal Entertainment and its 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. This sponsorship agreement continues through December 31, 2012.
Kodak
The Eastman Kodak Company has been granted the right to market itself as the "Official Imaging Products" of our theme parks and CityWalk, designated as a sponsor of Woody Woodpecker's Nuthouse Coaster® at Universal Studios Florida and The Flying Unicorn® at Universal's Islands of Adventure and has been granted exclusive product sales, advertising and promotion rights at Universal Studios Florida, Universal's Islands of Adventure and those portions of CityWalk wholly owned or controlled by us or our affiliates. Kodak also has a right of first refusal to provide and operate all "image capturing businesses" at our theme parks at its sole expense plus a concession fee payable to us. In return, Kodak pays annual sponsorship fees, establishes an annual marketing fund benefiting us as well as certain other affiliates of Vivendi Universal Entertainment and has constructed image capture kiosks at our theme parks. This sponsorship agreement continues through December 31, 2005.
MasterCard
MasterCard has been granted exclusive marketing and advertising rights as the "Official Card" of our theme parks and certain other Universal properties owned by our affiliates. In return, MasterCard pays annual sponsorship fees and has committed to certain minimum marketing and promotional expenditures benefiting us as well as certain other affiliates of Vivendi Universal Entertainment. This sponsorship agreement continues through December 31, 2007.
JPMorgan Chase Bank
JPMorgan Chase Bank has been granted the right to market itself as the "Official Bank" or the "Official Bank Sponsor" of, and to install and operate ATM machines at, Universal Studios Florida,
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Universal's Islands of Adventure and CityWalk and certain other Universal properties owned by our affiliates. JPMorgan Chase Bank is also designated as 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 been given exclusive marketing, advertising and associational rights in the retail banking products and services categories with respect to UCDP's theme parks, CityWalk and certain other Universal properties owned by affiliates. In return, JPMorgan Chase Bank pays annual sponsorship and ATM fees and has committed to certain minimum marketing and promotional expenditures benefiting us as well as certain other Universal affiliates. This sponsorship agreement continues through November 27, 2007. In addition to this sponsorship agreement, JPMorgan Chase Bank has entered into a domestic marketing alliance agreement with UCDP and other Universal affiliates to create a co-branded credit card. We share revenue from card acquisition and card usage and participate in joint advertising and marketing programs. This alliance continues through November 27, 2007.
Nestle Waters
Nestle Waters has been granted the right to market itself as the "Official Bottled Water of Universal Studios Florida, Universal's Islands of Adventure and CityWalk," and 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 Vivendi Universal Entertainment. The sponsorship agreement continues 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 by local customers by coordinating special events. Halloween Horror Nights® in October covers approximately 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 late 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 stimulate customers who do not live in the Orlando area but are close enough to drive.
We also attempt to reduce variable expenses by making a number of operational adjustments during non-peak periods. For example, we reduce our operating hours based on anticipated attendance, opening at 9 a.m. and closing as early as 5 p.m. Also, attractions, shows, restaurants and stores are operated at reduced capacity.
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, such as 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.
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Capital improvements
We regularly make capital investments in new rides and attractions and the enhancement of existing rides and attractions. We believe these investments are critical in maintaining our position of having technologically advanced theme parks and to effectively compete with our competitors. We currently plan to invest approximately between $40.0 million and $50.0 million on an annual basis 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.
In order to ensure the creative content of Universal movies is successfully translated into our newly developed rides and attractions, a worldwide creative team from Vivendi Universal Entertainment, Universal Creative, provides design and oversight for all new capital initiatives in our theme parks. For our rides and attractions that are also developed for other Universal theme parks, research and development costs are allocated pro rata among the various Universal theme parks that are building the same ride or attraction.
Maintenance and inspection
We maintain and develop our rides in accordance with standards developed by ASTM International for the design, manufacture, testing, operation, maintenance and inspection of amusement rides and devices. ASTM International is a not-for-profit organization that provides a global forum for the development and publication of voluntary consensus standards for design, materials, products, systems and services that are widely accepted within our industry. We use a computerized maintenance management system to manage our maintenance program, which includes daily, 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." We have a memorandum of understanding with the FDA pursuant to which our inspection and maintenance personnel conduct up to two consultations per year 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.
Federal legislation has been proposed to grant the federal Consumer Products Safety Commission jurisdiction to regulate fixed amusement park rides and attractions. Such regulation could result in increased costs for compliance and the unavailability of rides in the event of an incident investigation.
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-MGM 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 their flagship icon, Mickey Mouse. Epcot is a tour through the countries of the world, Disney-MGM 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. In addition, Anheuser Busch has a Sea World® water park and the Discovery Cove® dolphin swim experience in Orlando. 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. In the past three years, however, Disney's market share has started to erode as families with older children seek more relevant theme park alternatives providing action and thrill-oriented rides and attractions.
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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.
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.
Each of our theme parks contains over 20 stores for guests to purchase memorabilia, souvenirs and apparel, many of which are located at the exits for some of our most popular rides and attractions. In addition, carts and vending programs provide us with the ability to increase our merchandise offering to accommodate peak attendance periods. Each of Universal Studios Florida and Universal's Islands of Adventure contains one major store facility near the park exit to accommodate end-of-the-day purchases.
Pass sales
In connection with our strategy to maximize incremental revenue and profit opportunities, we regularly review our pass price levels and mix of pass category sales to capitalize on opportunities to implement selective price adjustments. We currently offer a number of pass options to our theme park guests. A one-day pass ($59.75) entitles the guest to visit either Universal Studios Florida or Universal's Islands of Adventure for an entire day. A two-day pass ($104.95) entitles the guest to visit both of our theme parks for two full days with the ability to travel freely between the theme parks, and also includes an optional third day free for guests willing to use all three days within a 7-day period. A three-day pass ($119.95) entitles a guest to visit both of our theme parks freely over three full days at any time. The Orlando FlexTicket ($184.95) entitles a guest to visit both of our theme parks over two weeks. The Orlando FlexTicket can also be used over those same two weeks at Wet n Wild® and Sea World® Orlando. There is also a five-park Orlando FlexTicket ($224.95) which also includes Busch Gardens® Tampa Bay. We also have two annual pass options. The first annual pass option ($179.95) entitles a guest to unlimited visits to both of our theme parks for a full year with no restrictions and includes free parking. The second annual pass option ($119.95) is similar, but includes blackout dates and does not include free parking. In 2004, revenue from sales of one-day passes accounted for 51% of our revenue from pass sales, two-day passes accounted for 28% of our revenue from pass sales and three-day passes accounted for 2% of our revenue from pass sales. The Orlando FlexTickets accounted for 8% of our revenue from pass sales and both kinds of annual passes accounted for approximately 7% of our revenue from pass sales. Prices are exclusive of Florida state and local sales tax (currently 6.5%), which is applicable to all ticket sales.
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The table below sets forth certain information relating to our pass sales in 2004:
| (Visitors, attendance and revenue in millions) |
Total number of unique visitors |
Attendance per visitor |
Average attendance |
Price(1) |
Revenue(1) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Type of pass | ||||||||||||
| One-day | 4.9 | 1.00 | 4.9 | $ | 47.32 | $ | 232.9 | |||||
| Two-day | 1.5 | 2.36 | 3.6 | 83.57 | 129.0 | |||||||
| Three-day | 0.1 | 2.81 | 0.3 | 84.78 | 9.2 | |||||||
| Orlando FlexTicket | 0.4 | 2.64 | 1.2 | 86.48 | 37.8 | |||||||
| Annual pass | 0.3 | 4.83 | 1.5 | 97.12 | 30.0 | |||||||
| Other | 0.3 | 2.78 | 0.6 | 87.00 | 13.2 | |||||||
| Total | 7.5 | 1.61 | (2) | 12.1 | $ | 60.73 | (2) | $ | 452.1 | |||
Employees
As of December 31, 2004, we had approximately 13,600 employees on our payroll of whom approximately 12,500 were hourly employees and approximately 1,100 were salaried employees. Certain of our executive officers are employed and compensated by Vivendi Universal Entertainment, but they work for us in operating Universal Orlando. We reimburse Vivendi Universal Entertainment or its affiliates for the value of any compensation paid to such employees allocated to us by an affiliate of Vivendi Universal Entertainment. We have in the past loaned certain of our full-time employees to other theme parks affiliated with Vivendi Universal Entertainment theme parks to assist in their grand openings and may continue to do so if any such theme parks open in the future. For a further explanation of some of these arrangements, see "Item 13: Certain relationships and related party transactions." We currently have no employees that are represented by a union. We consider relations with our employees to be good.
Environmental and other regulations
We are subject to various federal, state and local environmental laws and regulations, including those governing water discharges, air emissions, soil and groundwater contamination, the installation and operation of underground and above ground storage tanks, and the disposal of waste and hazardous materials. In the event of any violations of or liabilities under any of these environmental laws or instances of noncompliance with environmental permits required at our facilities, we could incur substantial costs, including cleanup costs, fines and civil or criminal penalties. Currently, we do not expect the costs of these environmental requirements to have a material impact on our business, results of operations or financial condition.
In addition, our operations are subject to other federal, state and local governmental regulations including labor, health, safety, zoning and land use and employment regulations applicable to theme park operations, and local and state regulations applicable to restaurant operations and alcoholic beverage service. In particular, our rides and facilities are subject to the Americans with Disabilities Act. On July 23, 2004, the Architectural and Transportation Barriers Compliance Board published new guidelines under the Americans with Disabilities Act to address access for persons with disabilities in recreational facilities, including rides and attractions within amusement park facilities. The guidelines, which are currently under review by the Department of Justice, are not mandatory but may serve as a minimum baseline for enforceable standards maintained by the Department of Justice. Representatives
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of Universal Orlando participated in an industry committee which participated in developing these guidelines and we are including them in our new construction requirements.
In November 2002, Florida voters adopted a constitutional amendment prohibiting smoking in an enclosed indoor workplace, other than stand-alone bars. The Florida legislature adopted a law enforcing the amendment on July 1, 2003. The law applies to many of the establishments at CityWalk which operate as restaurants until 11:00 p.m. and then convert to nightclubs until 2:00 a.m., and has an indirect impact on CityWalk's nightclubs.
As a result of the NBC Universal Transaction, we have additional environmental management personnel, policies and procedures, and related resources to assist us in assessing and monitoring our environmental, health and safety compliance. In the course of conducting our monitoring and due diligence activities, we have identified, and are beginning to address, certain areas of noncompliance with applicable environmental, health and safety requirements. For example, we have recently filed applications for issuance or modification of certain permits based on current or projected facility operations, and are in the process of upgrading certain employee health and safety programs at our facilities. Although no assurances can be given, we do not expect the costs of achieving compliance in these areas to have a material impact on our business, results of operations or financial condition in the near future.
Geographic Financial Summary
We operate exclusively in the theme park industry. Substantially all revenues were the result of sales directly related to our theme parks, which are located in Orlando, Florida. Accordingly all revenues and long-lived assets were earned and reside in the United States.
Risk Factors
You should carefully consider the risks described below, together with the other information contained in this report. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially affect our business operations. If any of the events described in the risk factors below actually occurs, our business, financial condition, operating results and prospects could be materially adversely affected, which in turn could adversely affect our ability to operate. In such case, you may lose all or part of your original investment.
Risks related to 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. As a result, we have historically experienced weaker attendance during economic downturns and during other events affecting travel and leisure activities. Any substantial deterioration in general economic conditions, increases in the cost of travel, outbreaks of war or terrorist or political events that diminish consumer spending and confidence could reduce attendance 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
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negative effect on the number of visitors to Orlando. In addition, another terrorist attack in the United States 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 attendance.
The United States is currently engaged in military operations in Iraq and elsewhere, which could drive up the price of gas and air travel and increase the chance of another terrorist attack in the United States, 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 Iraq. 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. The military operations in Iraq could further increase the price of crude oil, which in turn would increase the price of gasoline and jet fuel. A substantial increase in the price of gasoline and jet fuel 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 may increase the likelihood of another major terrorist attack in the United States. The threat or occurrence of a terrorist attack could serve to discourage many consumers from travel or otherwise participating in leisure activities.
Our dependence on Universal Studios, Inc. and its affiliates; risks related to a change of control.
We license the right to use a substantial number of intellectual properties as street entertainment characters and as themed elements in rides and attractions from Universal Studios, Inc. and its affiliates. See "Item 1: Business—Intellectual property." If Blackstone or any other third party unaffiliated with Universal Studios, Inc. were to acquire all of the partnership interests in us, we may not be able to take advantage of this license arrangement in the future to the same degree as we currently do and may lose this license completely if we fail to maintain certain quality standards. Our license to use the "Universal" name would expire 30 months after such a transfer of control to Blackstone, unless Vivendi Universal Entertainment otherwise consents. Universal Studios, Inc. and its affiliates are required to continue to license those intellectual properties currently licensed to us after Universal Studios, Inc. or its affiliates no longer have an ownership interest in us for so long as we operate our theme parks at a substantially similar standard. However, in a situation where Blackstone or a third party unaffiliated with Universal Studios, Inc. acquires all of the partnership interests in us, Universal Studios, Inc. and its affiliates are not required to grant us a license to any new intellectual property rights that they may acquire in the future that may be or become useful or necessary for the operation of our theme parks. Universal Studios, Inc. could also claim that our theme parks were not being operated to a sufficiently high standard after Blackstone or a third party unaffiliated with Universal Studios, Inc. acquired all of the partnership interests in us and revoke the license completely.
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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.
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 provides creative services in relation to development of our rides and attractions. Most of our insurance is arranged by GE through global programs for its businesses via licensed insurers issuing enforceable policies. We have numerous other arrangements with affiliates of Vivendi Universal Entertainment and, indirectly, NBC Universal and GE, which 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 better understanding of these arrangements, see "Item 13: Certain relationships and related party transactions." Although Vivendi Universal Entertainment is required by the terms of the partners' agreement to provide us with the same level of services for a transitional twelve-month period if Blackstone were to acquire all of our partnership interests in us pursuant to the right of first refusal, there can be no guarantee that Vivendi Universal Entertainment and Blackstone will reach agreement regarding the provision of such services beyond this twelve-month period or that Blackstone will thereafter find a third party with the experience and expertise to provide comparable services to those provided by Vivendi Universal Entertainment and its affiliates. In addition, the costs of the services currently provided by Vivendi Universal Entertainment may be significantly more expensive if they were purchased from a third party.
Risks related to the right of first refusal agreement between our partners.
Pursuant to a right of first refusal provision in an amended and restated partners' agreement entered into between Blackstone and Vivendi Universal Entertainment concurrently with the consummation of the offering of the original notes, at any time after December 31, 2007, if either Blackstone or Vivendi Universal Entertainment desires to sell its ownership interest in Holding I and Holding II, it shall 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. See "Business—Recent events". 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. In addition, pursuant to the same agreement, from January 1, 2006 to December 31, 2007, each of Blackstone and Vivendi Universal Entertainment shall be permitted, without the consent of the other party, to sell their ownership interests in Holding I and Holding II to a third party, provided that the other party is permitted to participate in such sale on an equitable basis. Our license to use the "Universal" name would expire 30 months after such a transfer of control to Blackstone, unless Vivendi Universal Entertainment otherwise consents. These same risks would be present if a third party unaffiliated with Vivendi Universal Entertainment were to acquire control of us.
Our debt agreements contain restrictions that limit our flexibility in operating the business.
Our senior secured credit agreement and the indenture under which our notes are issued contain a number of significant covenants that, among other things, restrict our ability to:
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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 the business.
In addition, we are required under our 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, 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 senior secured credit agreement and the lenders could elect to declare all amounts borrowed under our 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 senior secured credit agreement. If any of our indebtedness were to be accelerated, our assets may not be sufficient to repay in full that indebtedness.
Loss of key distribution channels for pass sales may reduce our revenues.
Approximately 44% of our pass sales are generated by third party distribution channels, the majority of which are concentrated among 40 third-party customers. As an example, approximately 13% of our total pass sales are derived from time-share operators, which are dominated by a few major operators. Other significant distribution channels include AAA, which has approximately 70 distribution locations across North America, guest service desk locations operated by Universal Parks & Resorts Vacations at more than 40 stand-alone properties throughout Orlando and other key domestic and international travel operators. The loss of any key distribution channel could have a negative effect on our pass 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-MGM Studios, Disney's Animal Kingdom® and Anheuser Busch's Sea World®. 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. 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 passes 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 occurring at theme parks, which may create negative publicity which may reduce attendance.
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.
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We may not be able to adequately protect our right to use the intellectual property of the themed elements of our rides, which may require us to re-theme certain rides.
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 expenditure.
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. A number of executive officers are employees of, and have employment agreements with, Vivendi Universal Entertainment, including Robert Gault, UCDP's President and Chief Executive Officer, and Thomas Williams, Chairman and Chief Executive Officer of Universal Parks & Resorts. 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 executive officers.
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. Because many of the attractions at our theme parks are outdoors, attendance at our theme parks is adversely affected by bad weather. Prolonged bad or mixed weather conditions during our seasonal peak attendance periods may reduce attendance causing a more severe decline in revenues than if those conditions occurred during a low attendance period. In addition, temporary but severe weather conditions, such as a hurricane, can adversely impact attendance at our theme parks.
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, our general partner, regarding our business generally require the consent of the representatives of both Blackstone and Vivendi Universal Entertainment who are members of our Park Advisory Board. 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.
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.
Concurrently with the consummation of the 2004 Amendment, JPMorgan Chase Bank and another lender made loans to the equity holders of Holding I and Holding II that are controlled by Blackstone in the aggregate principal amount of $178.0 million and made commitments for additional loans of up to $52.0 million under a revolving credit facility. The obligations of the borrowers under the loans 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 loans will mature in five years. Blackstone and NBC Universal have agreed to cooperate to obtain refinancing of the loans, if not fully paid at that time, with credit enhancement provided by NBC Universal. It is anticipated that the only assets of the
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borrowers will be their equity interests in Holding I and Holding II. If the borrowers default on, or are unable to refinance, the loans, 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 senior secured credit facility or our notes.
Blackstone and Vivendi Universal Entertainment control us and may have conflicts of interest with us or you in the future.
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.
Available Information
We routinely file reports, as required, with the Securities and Exchange Commission (SEC), including but not limited to Forms 10-Q, Forms 10-K and Forms 8-K (and amendments thereto). The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Item 2. Properties
Universal Studios Florida, Universal's Islands of Adventure, CityWalk, our film production studios, our guest parking structures, our employee parking lots, our executive offices and various administrative buildings as well as extensive landscaping and water systems, are located on 443 acres which we own in Orlando, Florida. In addition, we own approximately 107 acres on which the three themed hotels are located which are leased to UCF Hotel Venture under a long-term ground lease.
We have approximately 140 acres of undeveloped land which has planning approval for two future hotels. The development of hotels on these vacant sites is subject to a right of first refusal by Loews Hotels to participate in the development.
On May 10, 2004 we sold approximately 16 acres for $3.8 million with a cost basis of $2.5 million resulting in a gain of $1.3 million. The proceeds from the land sale were used to prepay debt.
We lease four off-site retail stores, two stores at the Orlando Airport and two stores at area outlet malls. In addition, we lease off-site office and warehouse space of approximately 280,000 square feet for merchandise inventory and entertainment props as well as 25,000 square feet for the manufacture of replacement prosthetic skins for some of our attractions.
We believe that our facilities, whether owned or leased, are well maintained.
Item 3. Legal Proceedings
The following is a brief description of various claims, proceedings and lawsuits pending against us.
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In the course of completion of the construction of Universal's Islands of Adventure, CityWalk and related support facilities, a number of claims were asserted by design firms, contractors, subcontractors and material suppliers for compensation not included in the final contract payouts (the Capital Claims). Such claims involved alleged extra work, alleged costs incurred due to extended project duration, alleged acceleration and similar causes of action. The settlement of the case described below concluded the resolution of all of the material Capital Claims against us.
The general contractor of Seuss Landing at Universal's Islands of Adventure (the General Contractor), filed suit in July 2000 alleging breach of contract by us. The suit sought damages in excess of $25.0 million and foreclosure of its lien against the project. The General Contractor later voluntarily reduced its lien claim to approximately $20.7 million. We denied the substantive allegations of the claim and filed a counterclaim alleging fraudulent lien, breach of contract, breach of releases and other counts. The General Contractor later amended its complaint to add additional parties and additional claims. The parties have entered into a Mutual Release and Settlement Agreement effective as of June 11, 2004. We paid $9.6 million pursuant to the Settlement Agreement on June 21, 2004. The General Contractor has released the lien and the case has been dismissed. The settlement payment was within the amount accrued for the loss contingency.
On July 16, 2003, Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively, Marvel) served a Demand for Arbitration for two claims. First, Marvel specifically alleged that we failed to include Marvel Elements in at least 20% of our marketing exposure during the third and fourth years subsequent to the opening of Universal's Islands of Adventure (the Marketing Claim). In the second claim, Marvel alleged that we breached the license agreement with Marvel by failing to offer Marvel the Compensation Alternative, as defined in the license agreement, and failing to honor Marvel's election of the Compensation Alternative (the "Compensation Alternative Claim"). Marvel was also seeking discovery of any other financial arrangements with licensors at Universal's Islands of Adventure that might be relevant to the Compensation Alternative Claim. We denied all of the material allegations by Marvel and asserted numerous affirmative defenses. After selection of the arbitration panel, Marvel voluntarily withdrew the Marketing Claim, without prejudice. On October 29, 2004, Marvel sent a letter to the arbitration panel withdrawing the Compensation Alternative Claim and confirming the termination of the proceeding.
On November 13, 2003, Ride & Show Engineering, Inc. (Ride & Show) filed a complaint for patent infringement, injunctive relief and damages (the Complaint) in the United States District Court for the Central District of California, naming USJ Co., Ltd., and Universal City Studios LLLP d/b/a Universal Studios Recreation Group, affiliates of ours, as defendants. On February 12, 2004, the Plaintiff served a First Amended Complaint (the Amended Complaint) naming the above-referenced defendants as well as us and another company, Oriental Land Co., Ltd., as additional defendants. On September 24, 2003, a similar complaint was filed in the same court against other defendants, including entities that appear to be operators of amusement parks and amusement park rides, and designers and manufacturers of amusement park rides. The Amended Complaint alleges that the named defendants have infringed U.S. Patent No. 5,527,221 (the Patent) by operating, making, using, selling, advertising, and/or offering for sale in the United States amusement park rides that embody or otherwise practice one or more of the claims of such patent or by otherwise contributing to infringement or inducing others to infringe. The Amended Complaint does not include specific allegations concerning the location or manner of alleged infringement. However, plaintiff's counsel has advised us that the allegations of the Amended Complaint relate to rides located at our theme parks. We filed a motion seeking to either dismiss the action or to transfer it to the Middle District of Florida. On May 5