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EX-32.2 - EXHIBITSECTION906CERTIFICATION - Seven Seas Cruises S. DE R.L.exhibit322section906cerifi.htm
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EX-32.1 - EXHIBIT SECTION906CERTIFICATION - Seven Seas Cruises S. DE R.L.exhibit321section906certif.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-178244
Seven Seas Cruises S. DE R.L.
(Exact Name of Registrant as Specified in Its Charter)
Republic of Panama
 
 
 
75-3262685
(State or Other Jurisdiction
of Incorporation)
 
 
 
(I.R.S. Employer
Identification No.)
8300 NW 33rd Street, Suite 100
Miami, FL 33122
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (305) 514-2300

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x* No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
    
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
x
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
* The registrant has not been subject to the filing requirements of Section 15(d) of the Securities Exchange Act of 1934 since December 31, 2012. The registrant is a voluntary filer and accordingly has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period it was required to file such reports and during the past 90 days, notwithstanding that the registrant is no longer required to file such reports.





SEVEN SEAS CRUISES S. DE R.L.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2014
TABLE OF CONTENTS





 
 
Page
 
 
 
PART I. Financial Information
 
Item 1.
Financial Statements
2 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 
 
Item 1A.

Item 6.
 



1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

SEVEN SEAS CRUISES S. DE R.L.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
 
June 30,
 
December 31,
 
2014
 
2013
 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
143,757

 
$
138,526

Restricted cash
59

 
367

Trade and other receivables, net
8,937

 
7,706

Inventories
8,260

 
7,352

Prepaid expenses
21,883

 
21,266

Other current assets
2,765

 
3,007

Total current assets
185,661

 
178,224

Property and equipment, net
656,388

 
651,286

Goodwill
404,858

 
404,858

Intangible assets, net
80,874

 
81,324

Other long-term assets
24,397

 
36,776

Total assets
$
1,352,178

 
$
1,352,468

 
 
 
 
Liabilities and Members' Equity
 
 
 
Current liabilities
 
 
 
Trade and other payables
$
3,341

 
$
5,798

Related party payables
819

 
1,560

Accrued expenses
42,677

 
48,154

Passenger deposits
234,699

 
194,173

Current portion of long-term debt
2,218

 
2,679

Total current liabilities
283,754

 
252,364

Long-term debt
466,385

 
516,833

Other long-term liabilities
15,512

 
8,896

Total liabilities
765,651

 
778,093

Commitments and contingencies

 

Members' equity

 

Contributed capital
564,959

 
564,830

Retained earnings
20,345

 
6,843

Accumulated other comprehensive income
1,223

 
2,702

Total members' equity
586,527

 
574,375

Total liabilities and members' equity
$
1,352,178

 
$
1,352,468




The accompanying notes are an integral part of these consolidated financial statements.
2



SEVEN SEAS CRUISES S. DE R.L.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
Passenger ticket
 
$
128,784

 
$
129,774

 
$
247,681

 
$
243,212

Onboard and other
 
14,160

 
12,962

 
27,532

 
23,841

Total revenue
 
142,944

 
142,736

 
275,213

 
267,053

 
 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
 
Commissions, transportation and other
 
44,482

 
49,293

 
84,741

 
89,209

Onboard and other
 
4,189

 
3,795

 
8,466

 
6,475

Payroll, related and food
 
19,871

 
20,084

 
39,417

 
39,420

Fuel
 
10,093

 
10,052

 
20,754

 
21,529

Other ship operating
 
10,811

 
12,075

 
20,181

 
21,714

Other
 
4,862

 
1,272

 
8,414

 
2,521

Total cruise operating expense
 
94,308

 
96,571

 
181,973

 
180,868

Other operating expense
 
 
 
 
 
 
 
 
Selling and administrative
 
19,750

 
19,269

 
42,114

 
41,549

Depreciation and amortization
 
9,793

 
9,115

 
19,080

 
18,368

Total operating expense
 
123,851

 
124,955

 
243,167

 
240,785

Operating income
 
19,093

 
17,781

 
32,046

 
26,268

 
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
 
Interest income
 
47

 
64

 
128

 
139

Interest expense
 
(8,168
)
 
(9,643
)
 
(16,742
)
 
(19,691
)
Other income (expense)
 
748

 
(1,711
)
 
(1,741
)
 
(5,195
)
Total non-operating expense
 
(7,373
)
 
(11,290
)
 
(18,355
)
 
(24,747
)
Income before income taxes
 
11,720

 
6,491

 
13,691

 
1,521

Income tax expense
 
(15
)
 
(30
)
 
(189
)
 
(109
)
Net income
 
11,705

 
6,461

 
13,502

 
1,412

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 

 

Change in fair value of derivatives
 
(1,603
)
 

 
(1,374
)
 

Cash flow hedge reclassified into earnings
 

 

 
(105
)
 

Total comprehensive income
 
$
10,102

 
$
6,461

 
$
12,023

 
$
1,412




The accompanying notes are an integral part of these consolidated financial statements.
3



SEVEN SEAS CRUISES S. DE R.L.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
13,502

 
$
1,412

Adjustments:

 

Depreciation and amortization
19,080

 
18,368

Amortization of deferred financing costs
1,101

 
1,016

Accretion of debt discount
293

 
360

Stock-based compensation
581

 
429

Change in fair value of derivative contracts
135

 
1,203

Loss on early extinguishment of debt, excluding prepayment penalty
2,008

 
2,500

Prepayment penalty excluded from loss on early extinguishment of debt

 
(2,093
)
Other, net
317

 
(1
)
Changes in operating assets and liabilities:
 
 
 
Trade and other accounts receivable
(1,230
)
 
(2,472
)
Prepaid expenses and other current assets
(1,705
)
 
(1,366
)
Inventories
(908
)
 
(485
)
Accounts payable and accrued expenses
(7,100
)
 
2,282

Passenger deposits
47,509

 
40,259

Net cash provided by operating activities
73,583

 
61,412

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(24,045
)
 
(4,955
)
Change in restricted cash
12,326

 
7,970

Other
(75
)
 
(127
)
Net cash (used in) provided by investing activities
(11,794
)
 
2,888

Cash flows from financing activities
 
 
 
Repayment of long-term debt
(51,480
)
 

Debt related costs
(4,621
)
 
(959
)
Payments on other financing obligations

 
(2,000
)
PCI offering costs
(321
)
 

Net cash used in financing activities
(56,422
)
 
(2,959
)
Effect of exchange rate changes on cash and cash equivalents
(136
)
 
(191
)
Net increase in cash and cash equivalents
5,231

 
61,150

Cash and cash equivalents


 


Beginning of period
138,526

 
99,857

End of period
$
143,757

 
$
161,007




The accompanying notes are an integral part of these consolidated financial statements.
4



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1.General

Description of Business

Seven Seas Cruises S. DE R.L. (“SSC”, “we” or “our”) is a Panamanian sociedad de responsibilidad limitada organized on November 7, 2007, and is owned by Classic Cruises, LLC (“CCL I”) and Classic Cruises II, LLC (“CCL II”). CCL I and CCL II are Delaware companies and each company owns 50% of SSC. Prestige Cruise Holdings, Inc. (“PCH”) owns both CCL I and CCL II. PCH is a 100% owned subsidiary of our ultimate parent company, Prestige Cruises International, Inc. (“PCI”). PCI is controlled by funds affiliated with Apollo Global Management, LLC ("Apollo"). We commenced operations on February 1, 2008 upon the consummation of the Regent Seven Seas acquisition when we acquired substantially all the assets of Regent Seven Seas Cruises, Inc. (the “Regent Seven Seas Transaction”).

The accompanying unaudited interim consolidated financial statements include the accounts of SSC and its 100% owned subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to ensure the information presented is not misleading. These unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Due to the seasonality of our business, our results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for our fiscal year ending December 31, 2014. There have been no significant changes in our financial position, results of operations or cash flows as a result of the adoption of new accounting pronouncements or to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The accompanying consolidated balance sheet at June 30, 2014 and the consolidated statements of income and comprehensive income for the three and six months ended June 30, 2014 and 2013 and the consolidated statements of cash flows for the six months ended June 30, 2014 and 2013 are unaudited, and, in the opinion of management, contain all adjustments necessary for fair presentation, consisting of only normal recurring adjustments.

Significant Accounting Policies

Restricted Cash

As of June 30, 2014 and December 31, 2013, restricted cash was $0.3 million and $12.7 million, respectively, of which $0.3 million and $12.3 million were classified in other long-term assets on the consolidated balance sheets at June 30, 2014 and December 31, 2013, respectively. During March 2014, $12.0 million was released as we were no longer required to cash collateralize a letter of credit for the benefit of one of our credit card processors.

New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 amends the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. The amendments require expanded disclosures for discontinued operations that would provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations and disclosure of the pretax profit or loss of individually significant components of an entity that do not qualify for discontinued operations reporting. ASU No. 2014-08 is to be applied prospectively to all disposals (or classifications as held for sale) of components of an

5


entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of ASU No. 2014-08 is not expected to have a material impact on our results of operations, cash flows or financial position.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligation and recognition of revenue as the entity satisfies the performance obligations. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. ASU No. 2014-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the guidance to determine the potential impact of adopting ASU No. 2014-09 on its results of operations, cash flows and financial position.

In June 2014, the FASB issued ASU No. 2014-12 "Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The Company has determined that ASU No. 2014-12 will not have an impact on it results of operations, cash flows or financial position.

There are no other recently issued accounting pronouncements not yet adopted that we expect to have a material effect on the presentation or disclosure of our future consolidated operating results, cash flows or financial position.

Note 2.    Property and Equipment, net

Property and equipment consists of the following:

 
June 30,
 
December 31,
(in thousands)
 
2014
 
2013
Ships
 
$
841,888

 
$
823,195

Furniture, equipment, and other
 
12,485

 
11,645

Less: Accumulated depreciation and amortization
 
(197,985
)
 
(183,554
)
Property and equipment, net
 
$
656,388

 
$
651,286


During the six months ended June 30, 2014, property and equipment, net increased $5.1 million. Capital expenditures, net of retirements totaled $19.5 million for the six months ended June 30, 2014. The capitalized additions included ship improvements and refurbishments completed during the Seven Seas Mariner drydock. Depreciation expense on assets in service was $9.7 million and $8.2 million for the three months ended June 30, 2014 and 2013, respectively, and $18.6 million and $16.6 million for the six months ended June 30, 2014 and 2013, respectively.


6


Note 3.    Debt

Debt consists of the following:

 
June 30,
 
December 31,
(in thousands)
 
2014
 
2013
$300 million term loan, 3.75% and 4.75% for 2014 and 2013, respectively, due through 2018
 
$
244,770

 
$
296,250

$225 million senior secured notes, 9.125%, due 2019
 
225,000

 
225,000

Total debt
 
469,770

 
521,250

Less: Original issue discount
 
(1,167
)
 
(1,738
)
Less: Current portion of long-term debt and discount
 
(2,218
)
 
(2,679
)
Long-term portion
 
$
466,385

 
$
516,833


Interest expense on third-party debt was $7.2 million (net of capitalized interest of $0.4 million) and $8.7 million for the three months ended June 30, 2014 and 2013, respectively, and $14.8 million (net of capitalized interest of $0.7 million) and $17.8 million for the six months ended June 30, 2014 and 2013, respectively. There was no capitalized interest in 2013.

Term Loans

On February 7, 2014, we amended our existing $340.0 million credit facility, consisting of a $300.0 million term loan and a $40.0 million revolving credit facility. In conjunction with this amendment, $50.3 million of the term loan was prepaid such that the outstanding balance on the term loan of $296.3 million was reduced to $246.0 million. The interest rate margin on the amended term loan is 2.75% compared to 3.50% on the previously existing term loan and the LIBOR floor was reduced from 1.25% to 1.00%. The amended term loan requires quarterly payments of principal equal to $0.6 million beginning March 2014, with the remaining unpaid amount due and payable at maturity. Borrowings under the amended term loan are pre-payable in whole or in part at any time without penalty, but are subject to a prepayment premium in the event of a refinancing of the term loan within twelve months of the amendment date. There were no changes to the terms of the $40.0 million revolving credit facility, the financial covenants or the maturity date of the credit facility. We paid $1.5 million of accrued interest, $1.2 million in arranger fees to participating creditors and $0.2 million in legal fees, in conjunction with the amendment.

We applied ASC 470-50 Debt - Modifications and Extinguishments to this transaction. After evaluating the criteria as applicable to syndicated loans, the repricing resulted in an extinguishment of debt for certain creditors whose balances were entirely repaid and in a debt modification for certain creditors whose terms were not substantially different before and after the amendment. The new fees paid and the previously existing deferred financing costs were proportionally allocated between modification and extinguishment. Of the $1.4 million in new fees, $1.2 million of the amendment fees were capitalized and are being amortized over the remaining term of the debt. Previously existing deferred financing costs and debt discount of $1.6 million and $0.4 million, respectively, allocated to the extinguishment were included in the calculation of loss on early extinguishment of debt, which resulted in a loss of $2.0 million and was recorded within other income (expense) in the consolidated statement of income and comprehensive income for the six months ended June 30, 2014.

As of June 30, 2014 and December 31, 2013, the total undrawn amount available under the revolving credit facility was $40.0 million.


7


Debt Covenants

Our credit agreements and senior secured notes contain a number of covenants that impose operating and financial restrictions, including requirements that we maintain a minimum liquidity level, a maximum loan-to-value ratio, a minimum interest coverage ratio (applicable only to our revolving credit facility, if drawn) and restrictions on our and our subsidiaries’ ability to, among other things, incur additional indebtedness, incur liens on assets, make certain investments, issue disqualified stock and preferred stock, make restricted payments, pay dividends or make distributions, enter into certain transactions with affiliates, and consolidate or sell certain key assets. As of June 30, 2014, we are in compliance with all financial covenants.

The following schedule represents the maturities of long-term debt:

(in thousands)
 
 
For the twelve months ended June 30,
 
 
2015
 
$
2,460

2016
 
2,460

2017
 
2,460

2018
 
2,460

2019
 
459,930

Thereafter
 

Total
 
$
469,770


Note 4.    Derivative Instruments, Hedging Activities and Fair Value Measurements

We are exposed to market risks attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We manage these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies as described below. The financial impacts of these hedging instruments are primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the amount, term and conditions of the derivative instrument with the underlying risk being hedged. We do not hold or issue derivative financial instruments for trading or other speculative purposes. We monitor our derivative positions using techniques including market valuations and sensitivity analyses.

Foreign Currency Exchange Risk

Our exposure to foreign currency exchange rate risks relates to our Euro denominated installment payments on our newbuild ship contract, vessel drydock and other operational expenses. We have entered into foreign currency swaps and collars to limit the exposure to movements in foreign currency exchange rates.

During August 2013, we entered into a foreign currency collar option with an aggregate notional amount €274.4 million ($375.7 million at June 30, 2014) to limit our exposure to foreign currency exchange rates for Euro denominated payments related to the ship construction contract for Seven Seas Explorer. The notional amount of the collar represents 80% of the construction contract of the vessel due at delivery. This foreign currency collar option was designated as a cash flow hedge at the inception of the instrument and will mature June 2016. The change in fair value of the effective portion of the derivative was recorded as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. Ineffective portions of the changes in fair value of the instrument will be recognized in other income (expense) in the statement of income and other comprehensive income. We recorded $0.0 million and $0.1 million of ineffectiveness for the three months and six months ended June 30, 2014, respectively. There was no ineffectiveness recorded in 2013.


8


Fuel Price Risk

Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our vessels. We use fuel derivative swap agreements to mitigate the financial impact of fluctuations in fuel prices. The fuel swaps do not qualify for hedge accounting; therefore, the changes in fair value of these fuel derivatives are recorded in other income (expense) in the accompanying consolidated statements of income and comprehensive income. As of June 30, 2014, we have hedged the variability in future cash flows for estimated fuel consumption requirements occurring through 2015.

As of June 30, 2014 and December 31, 2013, we have entered into the following fuel swap agreements:
 
 
Fuel Swap Agreements
 
 
June 30, 2014
 
 December 31, 2013
 
 
(in barrels)
2014
 
129,000

 
188,850

2015
 
97,800

 
37,500

 
 
 
 
 
 
 
Fuel Swap Agreements
 
 
June 30, 2014
 
December 31, 2013
 
 
(% hedged - estimated consumption)
2014
 
69
%
 
51
%
2015
 
26
%
 
10
%

We have certain fuel derivative contracts that are subject to margin requirements. For these specific fuel derivative contracts, we may be required to post collateral if the mark-to-market exposure assessed at our parent company level exceeds $3.0 million, on any business day. The amount of collateral required to be posted is an amount equal to the difference between the mark-to-market exposure and $3.0 million. At June 30, 2014, the fair market value of our derivative liability related to this counterparty was zero and we were not required to post any collateral for our fuel derivative instruments.

At June 30, 2014 and December 31, 2013, the fair values and line item captions of derivative instruments designated as hedging instruments under FASB ASC 815-20 were:

 
 
 
Fair Value
(in thousands)
Balance Sheet Location
 
June 30, 2014
 
December 31, 2013
Foreign currency collar
Other long-term assets
 
$
1,328

 
$
2,702

 
Total Derivatives Assets
 
$
1,328

 
$
2,702


At June 30, 2014 and December 31, 2013, the fair values and line item captions of derivative instruments not designated as hedging instruments under FASB ASC 815-20 were:

 
 
 
Fair Value
(in thousands)
Balance Sheet Location
 
June 30, 2014
 
December 31, 2013
Fuel hedges
Other current assets
 
$
574

 
$
813

Fuel hedges
Other long-term assets
 
58

 
58

 
Total Derivatives Assets
 
$
632

 
$
871



9


The effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the three months ended June 30, 2014, was as follows:

(in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion excluded from Effectiveness Testing)
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion excluded from Effectiveness Testing)
Foreign currency collar
$
(1,603
)
 
N/A
 
$

 
Other income (expense)
 

Total
$
(1,603
)
 
 
 
$

 
 
 
$


The effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the six months ended June 30, 2014, was as follows:

(in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion excluded from Effectiveness Testing)
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion excluded from Effectiveness Testing)
Foreign currency collar
$
(1,374
)
 
N/A
 
$

 
Other income (expense)
 
105

Total
$
(1,374
)
 
 
 
$

 
 
 
$
105


We had no derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the three and six months ended June 30, 2013.

The effect of derivative instruments not designated as hedging instruments on the consolidated financial statements for the three and six months ended June 30, 2014 and 2013 was:

 
Location of Gain (Loss) Recognized in Income on Derivative Instruments
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments
 
 
Three Months Ended June 30,
(in thousands)
 
2014
 
2013
Fuel hedges
Other income (expense)
 
655

 
(1,676
)
Total
 
 
$
655

 
$
(1,676
)


10


 
Location of Gain (Loss) Recognized in Income on Derivative Instruments
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments
 
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013
Foreign currency swaps
Other income (expense)
 
$

 
$
(5
)
Fuel hedges
Other income (expense)
 
168

 
(1,100
)
Total
 
 
$
168

 
$
(1,105
)

Fair Value Measurements

U.S GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions which market participants would use in pricing the asset or liability based on the best available information under the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly.
Level 3 Inputs – Inputs that are unobservable for the asset or liability.

Fair Value of Financial Instruments

We use quoted prices in active markets when available to determine the fair value of our financial instruments. The fair value of our financial instruments that are not measured at fair value on a recurring basis are:
(in thousands)
 
Carrying Value
 
Fair Value
 
 
June 30,
2014
 
December 31,
2013
 
June 30,
2014
 
December 31,
2013
Long-term bank debt
(a)
$
243,603

 
$
294,512

 
$
244,496

 
$
309,738

Senior secured notes
 
225,000

 
225,000

 
246,656

 
249,188

Total
 
$
468,603

 
$
519,512

 
$
491,152

 
$
558,926

 
 
 
 
 
 
 
 
 
(a) The carrying value is net of $1.2 million and $1.7 million of original issue discount as of June 30, 2014 and December 31, 2013, respectively.

Long-term bank debt: Level 2 inputs were used to calculate the fair value of our long-term bank debt, which was estimated using the present value of expected future cash flows and incorporates our risk profile. The valuation also takes into account debt maturity and interest rate based on the contract terms.

As previously reported at March 31, 2014, we corrected our fair value disclosure for long-term bank debt at December 31, 2013, from $292.6 million to $309.7 million. This revision relates to the correction of the discount rate used to fair value the debt. There was no impact to the consolidated balance sheet or statement of income and comprehensive income for the year ended December 31, 2013. We assessed the materiality of this disclosure error on the previously issued financial statements and concluded that the error was immaterial qualitatively and quantitatively to the previously issued financial statements.

Senior secured notes: Level 2 inputs were used to calculate the fair value of our senior secured notes, which was estimated using quoted market prices.

11



Other financial instruments: Due to their short-term maturities and no interest rate, currency or price risk, the carrying amounts of cash and cash equivalents, passenger deposits, accrued interest, and accrued expenses approximate their fair values. We consider these inputs to be Level 1 as all are observable and require no judgment for valuation.

The following table presents information about our financial instrument assets that are measured at fair value on a recurring basis:
(in thousands)
 
As of June 30, 2014
 
As of December 31, 2013
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
(a)
$
1,960

 
$

 
$
1,960

 
$

 
$
3,573

 
$

 
 
3,573

 
$

Total Assets
 
$
1,960

 
$

 
$
1,960

 
$

 
$
3,573

 
$

 
 
$
3,573

 
$


(a) As of June 30, 2014, derivative financial instruments assets of $0.6 million and $1.4 million are classified as other current assets and other long-term assets, respectively, in the consolidated balance sheets. As of December 31, 2013, $0.8 million was classified as other current assets and $2.8 million was classified as other long-term assets in the consolidated balance sheets.

Our derivative financial instruments consist of fuel swaps and a foreign currency exchange collar. Fair value is derived using the valuation models that utilize the income value approach. These valuation models take into account the derivative contract terms, such as maturity, and inputs, such as forward fuel prices, forward exchange rates, discount rates, creditworthiness of the counterparty and ourselves, as well as other data points. The data sources utilized in these valuation models that are significant to the fair value measurement are classified as Level 2 sources in the fair value input level hierarchy.

Non-recurring Measurements of Non-financial Assets

Goodwill and indefinite-lived intangible assets not subject to amortization are reviewed for impairment on an annual basis or earlier if there is an event or change in circumstances that would indicate that the carrying value of these assets could not be fully recovered. For goodwill, if the carrying amount of the reporting unit exceeds the estimated discounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the reporting unit to its estimated fair value. For indefinite-lived intangible assets, if the carrying amount of the asset exceeds the estimated discounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value.

Other long-lived assets, such as our ships, are reviewed for impairment whenever events or changes in circumstances indicate an asset's carrying amount may not be recoverable. If the carrying amount exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing its carrying amount to its estimated fair value. The estimation of fair value measured by undiscounted or discounted expected future cash flows would be considered Level 3 inputs.

Our annual impairment tests are performed as of September 30th. As of June 30, 2014, there were no events or changes in circumstances that would indicate that the carrying amount of our long-lived assets, goodwill and indefinite-lived intangible assets would not be recoverable.

Note 5.    Commitments and Contingencies

Contingencies – Litigation

On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our judgment

12


to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. The majority of claims are covered by insurance and we believe the outcome of such claims, net of estimated insurance recoveries, will not have a material adverse impact on our financial condition, results of operations or cash flows.

Other

As mandated by the Federal Maritime Commission ("FMC") for sailings from U.S. ports, the availability of passenger deposits received for future sailings is restricted until the completion of the related sailing in accordance with FMC regulations. We met this obligation as of June 30, 2014 by posting a $22.0 million surety bond. Our surety bond obligation will increase to $30.0 million in April 2015.

Note 6. Accumulated Other Comprehensive Income

The following schedule represents the changes in accumulated other comprehensive income by component for the three months and six months ended June 30, 2014:
(in thousands)
 
Change related to Cash Flow Hedges
 
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Beginning balance
 
$
2,826

 
$
2,702

Other comprehensive income before reclassifications
 
(1,603
)
 
(1,374
)
Amount reclassified from accumulated other comprehensive income to other income (expense)
 

 
(105
)
Net current-period other comprehensive income
 
(1,603
)
 
(1,479
)
Ending balance
 
$
1,223

 
$
1,223


The gain or loss on the foreign currency collar is deferred, classified as accumulated other comprehensive income and will be reclassified into earnings when the ship is placed into service and amortized over its estimated useful life. At June 30, 2013, the balance in accumulated other comprehensive income was zero. We do not expect any amounts to be reclassified out of accumulated other comprehensive income within the next twelve months.

Note 7. Condensed Consolidating Financial Information

Our $225 million senior secured notes are collateralized by our vessels and guaranteed fully and unconditionally, jointly and severally by all our subsidiaries (the "Guarantors" and each a "Guarantor"). These Guarantors are 100% owned subsidiaries of SSC.

The following condensed consolidating financial statements for SSC and the Guarantors present condensed consolidating statements of income (loss) and comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013, condensed consolidating balance sheets as of June 30, 2014 and December 31, 2013 and condensed consolidating statements of cash flows for the six months ended June 30, 2014 and 2013, using the equity method of accounting, as well as elimination entries necessary to consolidate the parent company and all of its subsidiaries.

On February 4, 2013, Seven Seas Voyager and Seven Seas Navigator exited the UK tonnage tax regime and are no longer required to abide by certain UK specific regulations. Also on this date, we transferred these ships to new legal entities domiciled in the United States. The new vessel-owning subsidiaries are each a Guarantor. These transactions had no impact on our subsidiary guarantor financial statements within our condensed consolidating

13


financial statements. Previously, SSC had charter hire agreements in place with the two UK subsidiaries, which previously owned Seven Seas Voyager and Seven Seas Navigator. These agreements required SSC to pay a daily hire fee to the subsidiary to administratively manage the vessels. The costs incurred by the vessel owning subsidiaries included deck and engine, crew payroll and expenses, vessel insurance and depreciation. These charter hire agreements were novated to the new legal entities. On January 1, 2014, these charter hire agreements were terminated. As a result, charter hire fees, crew payroll and deck and engine expenses are no longer recorded to the vessel owning subsidiaries. In addition to the vessel owning subsidiaries, we have a sales and marketing office that is a Guarantor.

Each subsidiary guarantee will be automatically released upon any one or more of the following circumstances: the subsidiary is sold or sells all of its assets; the subsidiary is declared “unrestricted” for covenant purposes; the subsidiary’s guarantee of other indebtedness is terminated or released; the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied; or the subsidiary transfers ownership of a mortgaged vessel in connection with a permitted reflagging transaction.


14


Condensed Consolidating Balance Sheets
 
 
 
 
 
 

June 30, 2014
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Assets

 

 

 

Current assets


 

 

 

Cash and cash equivalents
$
141,051

 
$
2,706

 
$

 
$
143,757

Restricted cash
59

 

 

 
59

Trade and other receivables, net
8,657

 
280

 

 
8,937

Inventories
8,260

 

 

 
8,260

Prepaid expenses
21,068

 
815

 

 
21,883

Intercompany receivable
264,809

 

 
(264,809
)
 

Other current assets
2,765

 

 

 
2,765

Total current assets
446,669

 
3,801

 
(264,809
)
 
185,661

Property and equipment, net
122,363

 
534,025

 

 
656,388

Goodwill
404,858

 

 

 
404,858

Intangible assets, net
80,874

 

 

 
80,874

Other long-term assets
24,397

 

 

 
24,397

Investment in subsidiaries
271,956

 

 
(271,956
)
 

Total assets
$
1,351,117

 
$
537,826

 
$
(536,765
)
 
$
1,352,178




 


 


 


Liabilities and Members' Equity

 

 

 

Current liabilities

 

 

 

Trade and other payables
$
2,574

 
$
767

 
$

 
$
3,341

Related party payables
1,413

 
(594
)
 

 
819

Intercompany payables

 
264,809

 
(264,809
)
 

Accrued expenses
41,789

 
888

 

 
42,677

Passenger deposits
234,699

 

 

 
234,699

Current portion of long-term debt
2,218

 

 

 
2,218

Total current liabilities
282,693

 
265,870

 
(264,809
)
 
283,754

Long-term debt
466,385

 

 

 
466,385

Other long-term liabilities
15,512

 

 

 
15,512

Total liabilities
764,590

 
265,870

 
(264,809
)
 
765,651

Commitments and contingencies


 


 


 


Members' equity

 

 

 

Contributed capital
564,959

 
134,036

 
(134,036
)
 
564,959

Retained earnings
20,345

 
137,920

 
(137,920
)
 
20,345

Accumulated other comprehensive income
1,223

 

 

 
1,223

Total members' equity
586,527

 
271,956

 
(271,956
)
 
586,527

Total liabilities and members' equity
$
1,351,117

 
$
537,826

 
$
(536,765
)
 
$
1,352,178



15


Condensed Consolidating Balance Sheets

December 31, 2013
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Assets

 

 

 

Current assets

 

 

 

Cash and cash equivalents
$
137,494

 
$
1,032

 
$

 
$
138,526

Restricted cash
367

 


 

 
367

Trade and other receivables, net
7,503

 
203

 

 
7,706

Inventories
4,955

 
2,397

 

 
7,352

Prepaid expenses
18,661

 
2,605

 

 
21,266

Intercompany receivable
262,359

 
795

 
(263,154
)
 

Other current assets
3,007

 

 

 
3,007

Total current assets
434,346

 
7,032

 
(263,154
)
 
178,224

Property and equipment, net
107,519

 
543,767

 

 
651,286

Goodwill
404,858

 

 

 
404,858

Intangible assets, net
81,324

 

 

 
81,324

Other long-term assets
36,776

 

 

 
36,776

Investment in subsidiaries
284,139

 

 
(284,139
)
 

Total assets
$
1,348,962

 
$
550,799

 
$
(547,293
)
 
$
1,352,468



 

 

 

Liabilities and Members' Equity

 

 

 

Current liabilities

 

 

 

Trade and other payables
$
3,968

 
$
1,830

 
$

 
$
5,798

Related party payables
1,985

 
(425
)
 

 
1,560

Intercompany payables
795

 
262,359

 
(263,154
)
 

Accrued expenses
45,258

 
2,896

 

 
48,154

Passenger deposits
194,173

 

 

 
194,173

Derivative liabilities
2,679

 

 

 
2,679

Total current liabilities
248,858

 
266,660

 
(263,154
)
 
252,364

Long-term debt
516,833

 

 

 
516,833

Other long-term liabilities
8,896

 

 

 
8,896

Total liabilities
774,587

 
266,660

 
(263,154
)
 
778,093

Commitments and contingencies

 

 

 

Members' equity

 

 

 

Contributed capital
564,830

 
134,036

 
(134,036
)
 
564,830

Retained earnings
6,843

 
150,103

 
(150,103
)
 
6,843

Accumulated other comprehensive income
2,702

 

 

 
2,702

Total members' equity
574,375

 
284,139

 
(284,139
)
 
574,375

Total liabilities and members' equity
$
1,348,962

 
$
550,799

 
$
(547,293
)
 
$
1,352,468



16


Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
 
Three Months Ended June 30, 2014
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Revenue
 
 
 
 
 
 
 
Passenger ticket
$
128,784

 
$

 
$

 
$
128,784

Onboard and other
14,159

 
1

 

 
14,160

Related Party Revenue

 
3,873

 
(3,873
)
 

Total revenue
142,943

 
3,874

 
(3,873
)
 
142,944

 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
Commissions, transportation and other
44,455

 
1,785

 
(1,758
)
 
44,482

Onboard and other
4,189

 

 

 
4,189

Payroll, related and food
19,871

 

 

 
19,871

Fuel
10,093

 

 

 
10,093

Other ship operating
10,811

 

 

 
10,811

Other
3,641

 
1,221

 

 
4,862

Total cruise operating expense
93,060

 
3,006

 
(1,758
)
 
94,308

Other operating expense
 
 
 
 
 
 
 
Selling and administrative
19,860

 
2,005

 
(2,115
)
 
19,750

Depreciation and amortization
4,916

 
4,877

 

 
9,793

Total operating expense
117,836

 
9,888

 
(3,873
)
 
123,851

Operating income (loss)
25,107

 
(6,014
)
 

 
19,093

 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
46

 
1

 

 
47

Interest expense
(8,168
)
 

 

 
(8,168
)
Other income (expense)
716

 
32

 

 
748

Equity in losses of subsidiaries
(5,988
)
 

 
5,988

 

Total non-operating income (expense)
(13,394
)
 
33

 
5,988

 
(7,373
)
Income (loss) before income taxes
11,713

 
(5,981
)
 
5,988

 
11,720

Income tax expense
(8
)
 
(7
)
 

 
(15
)
Net income (loss)
11,705

 
(5,988
)
 
5,988

 
11,705

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in fair value of derivatives
(1,603
)
 

 

 
(1,603
)
Total comprehensive income (loss)
$
10,102

 
$
(5,988
)
 
$
5,988

 
$
10,102


17


Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
 
Three Months Ended June 30, 2013
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Revenue
 
 
 
 
 
 
 
Passenger ticket
$
129,774

 
$

 
$

 
$
129,774

Onboard and other
12,952

 
10

 

 
12,962

Related Party Revenue

 
27,910

 
(27,910
)
 

Total revenue
142,726

 
27,920

 
(27,910
)
 
142,736

 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
Commissions, transportation and other
49,250

 
1,528

 
(1,485
)
 
49,293

Onboard and other
3,791

 
4

 

 
3,795

Payroll, related and food
16,743

 
3,341

 

 
20,084

Fuel
10,052

 

 

 
10,052

Other ship operating
7,659

 
4,416

 

 
12,075

Other
24,235

 
1,217

 
(24,180
)
 
1,272

Total cruise operating expense
111,730

 
10,506

 
(25,665
)
 
96,571

Other operating expense
 
 
 
 
 
 
 
Selling and administrative
19,404

 
2,110

 
(2,245
)
 
19,269

Depreciation and amortization
4,239

 
4,876

 

 
9,115

Total operating expense
135,373

 
17,492

 
(27,910
)
 
124,955

Operating income
7,353

 
10,428

 

 
17,781

 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
63

 
1

 

 
64

Interest expense
(9,643
)
 

 

 
(9,643
)
Other income (expense)
(1,718
)
 
7

 

 
(1,711
)
Equity in earnings of subsidiaries
10,428

 

 
(10,428
)
 

Total non-operating expense
(870
)
 
8

 
(10,428
)
 
(11,290
)
Income before income taxes
6,483

 
10,436

 
(10,428
)
 
6,491

Income tax expense
(22
)
 
(8
)
 

 
(30
)
Net income
6,461

 
10,428

 
(10,428
)
 
6,461

Total comprehensive income
$
6,461

 
$
10,428

 
$
(10,428
)
 
$
6,461



18


Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
 
Six Months Ended June 30, 2014
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Revenue
 
 
 
 
 
 
 
Passenger ticket
$
247,681

 
$

 
$

 
247,681

Onboard and other
27,531

 
1

 

 
27,532

Related party revenue

 
9,374

 
(9,374
)
 

Total revenue
275,212

 
9,375

 
(9,374
)
 
275,213

 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
Commissions, transportation and other
84,678

 
5,207

 
(5,144
)
 
84,741

Onboard and other
8,464

 
2

 

 
8,466

Payroll, related and food
39,417

 

 

 
39,417

Fuel
20,754

 

 

 
20,754

Other ship operating
20,180

 
1

 

 
20,181

Other
5,842

 
2,572

 

 
8,414

Total cruise operating expense
179,335

 
7,782

 
(5,144
)
 
181,973

Other operating expense
 
 
 
 
 
 
 
Selling and administrative
42,332

 
4,012

 
(4,230
)
 
42,114

Depreciation and amortization
9,326

 
9,754

 

 
19,080

Total operating expense
230,993

 
21,548

 
(9,374
)
 
243,167

Operating income (loss)
44,219

 
(12,173
)
 

 
32,046

 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
125

 
3

 

 
128

Interest expense
(16,742
)
 

 

 
(16,742
)
Other income (expense)
(1,739
)
 
(2
)
 

 
(1,741
)
Equity in losses of subsidiaries
(12,183
)
 

 
12,183

 

Total non-operating income (expense)
(30,539
)
 
1

 
12,183

 
(18,355
)
Income before income taxes
13,680

 
(12,172
)
 
12,183

 
13,691

Income tax expense
(178
)
 
(11
)
 

 
(189
)
Net income (loss)
13,502

 
(12,183
)
 
12,183

 
13,502

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in fair value of derivatives
(1,374
)
 

 

 
(1,374
)
Cash flow hedge reclassified into earnings
(105
)
 

 

 
(105
)
Total comprehensive income (loss)
$
12,023

 
$
(12,183
)
 
$
12,183

 
$
12,023


19


Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
 
Six Months Ended June 30, 2013
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Revenue
 
 
 
 
 
 
 
Passenger ticket
$
243,212

 
$

 
$

 
$
243,212

Onboard and other
23,831

 
10

 

 
23,841

Related Party Revenue

 
55,548

 
(55,548
)
 

Total revenue
267,043

 
55,558

 
(55,548
)
 
267,053

 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
Commissions, transportation and other
89,166

 
3,526

 
(3,483
)
 
89,209

Onboard and other
6,457

 
18

 

 
6,475

Payroll, related and food
32,758

 
6,662

 

 
39,420

Fuel
21,529

 

 

 
21,529

Other ship operating
14,253

 
7,461

 

 
21,714

Other
48,258

 
2,358

 
(48,095
)
 
2,521

Total cruise operating expense
212,421

 
20,025

 
(51,578
)
 
180,868

Other operating expense
 
 
 
 
 
 
 
Selling and administrative
41,350

 
4,169

 
(3,970
)
 
41,549

Depreciation and amortization
8,614

 
9,754

 

 
18,368

Total operating expense
262,385

 
33,948

 
(55,548
)
 
240,785

Operating income
4,658

 
21,610

 

 
26,268

 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
137

 
2

 

 
139

Interest expense
(19,691
)
 

 

 
(19,691
)
Other income (expense)
(5,136
)
 
(59
)
 

 
(5,195
)
Equity in earnings of subsidiaries
21,533

 

 
(21,533
)
 

Total non-operating income (expense)
(3,157
)
 
(57
)
 
(21,533
)
 
(24,747
)
Income before income taxes
1,501

 
21,553

 
(21,533
)
 
1,521

Income tax expense
(89
)
 
(20
)
 

 
(109
)
Net income
1,412

 
21,533

 
(21,533
)
 
1,412

Total comprehensive income
$
1,412

 
$
21,533

 
$
(21,533
)
 
$
1,412


20


Condensed Consolidating Statements of Cash Flows
 
 
 
 

Six Months Ended June 30, 2014
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Net cash provided by operating activities
$
71,884

 
$
1,699

 
$

 
$
73,583

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
(24,033
)
 
(12
)
 

 
(24,045
)
Change in restricted cash
12,326

 

 

 
12,326

Other
(75
)
 

 

 
(75
)
Net cash used in investing activities
(11,782
)
 
(12
)
 

 
(11,794
)
Cash flows from financing activities
 
 
 
 
 
 
 
Repayment of long-term debt
(51,480
)
 

 

 
(51,480
)
Debt related costs
(4,621
)
 

 

 
(4,621
)
PCI offering costs
(321
)
 

 

 
(321
)
Net cash used in financing activities
(56,422
)
 

 

 
(56,422
)
Effect of exchange rate changes on cash and cash equivalents
(123
)
 
(13
)
 

 
(136
)
Net increase in cash and cash equivalents
3,557

 
1,674

 

 
5,231

Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
137,494

 
1,032

 

 
138,526

End of period
$
141,051

 
$
2,706

 
$

 
$
143,757


Condensed Consolidating Statements of Cash Flows

Six Months Ended June 30, 2013
(in thousands)
Parent
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Net cash provided by operating activities
$
60,615

 
$
797

 
$

 
$
61,412

Cash flows from investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
(4,945
)
 
(10
)
 

 
(4,955
)
Change in restricted cash
7,970

 

 

 
7,970

Other
(127
)
 

 

 
(127
)
Net cash provided by (used in) investing activities
2,898

 
(10
)
 

 
2,888

Cash flows from financing activities
 
 
 
 
 
 
 
Debt related costs
(959
)
 

 

 
(959
)
Payments on other financing obligations
(2,000
)
 

 

 
(2,000
)
Net cash used in financing activities
(2,959
)
 

 

 
(2,959
)
Effect of exchange rate changes on cash and cash equivalents
(154
)
 
(37
)
 

 
(191
)
Net increase in cash and cash equivalents
60,400

 
750

 

 
61,150

Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
98,815

 
1,042

 

 
99,857

End of period
$
159,215

 
$
1,792

 
$

 
$
161,007


21


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

Cautionary Note Concerning Factors That May Affect Future Results

The discussion under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report includes forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects and objectives of management for future operations (including development plans and objectives relating to our activities), made in this quarterly report are forward-looking. Many, but not all, of these statements can be found by looking for terms like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “could,” “will,” “may,” “might,” “forecast,” “estimate,” “intend,” and “future” and for similar words. Forward-looking statements reflect management's current expectations and do not guarantee future performance and may involve risks, uncertainties and other factors that are difficult to predict and many of which are beyond our control. These factors could cause our actual results, performance, or achievements to differ materially from the future results, performance, or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to:
adverse economic conditions that may affect consumer demand for cruises, such as declines in the securities and real estate markets, declines in disposable income and consumer confidence;
changes in cruise capacity, as well as capacity changes in the overall vacation industry;
intense competition from other cruise companies, as well as non-cruise vacation alternatives, which may affect our ability to compete effectively;
the delivery schedules and estimated costs of newbuilds, in particular Seven Seas Explorer, on terms that are favorable or consistent with our expectations;
our substantial leverage, including the inability to generate the necessary amount of cash to service our existing debt and the incurrence of substantial indebtedness in the future;
continued availability under our loan agreements and compliance with the covenants under our loan agreements and our senior secured notes;
changes in interest rates, fuel costs, or foreign currency rates;
the risks associated with operating internationally;
changes in general economic, business and geopolitical conditions;
the impact of changes in the global credit markets on our ability to borrow and our counterparty credit risks, including with respect to our loan agreements, derivative instruments, contingent obligations and insurance contracts;
the impact of problems encountered at shipyards, as well as any potential claim, impairment, loss, cancellation or breach of contract in connection with any contracts we have with shipyards;
the impact of any future changes relating to how travel agents sell and market our cruises;
the impact of any future increases in the price of, or major changes or reduction in, commercial airline services;
the impact of seasonal variations in passenger fare rates and occupancy levels at different times of the year;
adverse events impacting the security of travel that may affect consumer demand for cruises, such as terrorist acts, acts of piracy, armed conflict and other international events, including political hostilities or war;
the impact of the spread of contagious diseases;
the impact of mechanical failures or accidents involving our ships and the impact of delays, costs and other factors resulting from emergency ship repairs, as well as scheduled maintenance, repairs and refurbishment of our ships;

22


accidents, criminal behavior and other incidents affecting the health, safety, security and vacation satisfaction of passengers and causing damage to ships, which could, in each case, cause reputation harm, the modification of itineraries or cancellation of a cruise or series of cruises;
the continued availability of attractive port destinations;
our ability to attract and retain qualified shipboard crew members and key personnel;
the impact of any breaches in our data security or other disturbances to our information technology and other networks; and
changes involving the corporate, tax, environmental, health, safety and other regulatory regimes in which we operate.

The above examples are not exhaustive. From time to time, new risks emerge and existing risks increase in relative importance to our operations. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we will operate in the future. These forward-looking statements speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and in our risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 11, 2014.

Key Operational and Financial Metrics, including Non-GAAP

We use a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. We use certain non-GAAP measures, such as EBITDA, Adjusted EBITDA, Net Per Diems, Net Yields, and Net Cruise Costs to enable us to analyze our performance and financial condition. We use these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of our performance. Some of these measures are commonly used in the cruise industry to measure performance. We believe these non-GAAP measures provide expanded insight to measure revenue and cost performance, in addition to the standard United States GAAP based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, there exists the possibility that they may not be comparable to other companies within our industry. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

EBITDA is net income (loss) excluding depreciation and amortization, net interest expense, and income tax benefit (expense).

Adjusted EBITDA is net income (loss) excluding depreciation and amortization, interest income, interest expense, other income (expense), and income tax benefit (expense), and other supplemental adjustments in connection with the calculation of certain financial ratios in accordance with our debt agreements. Management believes Adjusted EBITDA, when considered along with other performance measures, is a useful measure as it reflects certain operating drivers of our business, such as sales growth, operating costs, selling and administrative expense, and other operating income and expense. Management believes Adjusted EBITDA can provide a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of our financial performance and prospects for the future. While Adjusted EBITDA is not a recognized measure under GAAP, management uses this financial measure to evaluate and forecast our business performance. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments, and tax payments, and it is subject to certain additional adjustments as permitted under our debt agreement. Our use of Adjusted EBITDA may not be comparable to other companies within our industry. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our business performance. In addition, capital expenditures, which impact depreciation and amortization, interest expense, and income tax benefit (expense), are reviewed separately by management.


23


Available Passenger Cruise Days (“APCD”) is our measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period. We use this measure to perform capacity and rate analysis to identify our main non-capacity drivers which cause our cruise revenue and expense to vary.

Gross Cruise Cost represents the sum of total cruise operating expense plus selling and administrative expense.

Gross Yield represents total revenue per APCD.

Net Cruise Cost represents Gross Cruise Cost excluding commissions, transportation and other expense, and onboard and other expense (each of which is described below under Description of Certain Line Items).

Net Cruise Cost, excluding Fuel and Other represents Gross Cruise Cost excluding commissions, transportation and other expense, onboard and other expense, fuel expense and other expense (each of which is described below under Description of Certain Line Items).

Net Per Diem represents Net Revenue divided by Passenger Days Sold.

Net Revenue represents total revenue less commissions, transportation and other expense, and onboard and other expense (each of which is described below under Description of Certain Line Items).

Net Yield represents Net Revenue per APCD.

Occupancy is calculated by dividing Passenger Days Sold by APCD.

Passenger Days Sold (“PDS”) represents the number of revenue passengers carried for the period multiplied by the number of days within the period of their respective cruises.

Critical Accounting Estimates

For a discussion of our critical accounting estimates, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 11, 2014.

Seasonality

Our revenues are seasonal and based on demand for cruises. Demand is strongest for cruises during the Northern Hemisphere's summer months and holidays. In order to mitigate the impact of the winter weather in the Northern Hemisphere and to capitalize on the summer season in the Southern Hemisphere, we deploy our ships to South America, Asia, Australia, the South Pacific and the Caribbean during the Northern Hemisphere winter months.

Financial Presentation

Description of Certain Line Items

Revenues
Our revenue consists of the following:

Passenger ticket revenue consists of gross revenue recognized from the sale of passenger tickets net of dilutions, such as shipboard credits and certain included passenger shipboard event costs. Also included is gross revenue for air and related ground transportation sales.
Onboard and other revenue consists of revenue derived from the sale of goods and services rendered onboard the ships (net of related concessionaire costs), travel insurance (net of related costs), and cancellation fees. Also included in Onboard and other revenue is gross revenue from pre- and post-cruise hotel accommodations, shore excursions, land packages, and ground transportation for which we assume the risks of loss for collections and cancellations. Certain of our cruises include free unlimited shore excursions (“FUSE”) and/or free pre-cruise hotel accommodations, and such free excursions and hotel accommodations have no revenue attributable to them. The costs for FUSE and free pre-cruise

24


hotel accommodations are included in commissions, transportation and other expense in the consolidated statements of income and comprehensive income.
Cash collected in advance for future cruises is recorded as a passenger deposit liability. Those deposits for sailings traveling more than 12 months in the future are classified as a long-term liability. We recognize the revenue associated with these cash collections in the period in which the cruise occurs. For cruises that occur over multiple periods, revenue is prorated and recognized ratably in each period based on the overall length of the cruise. Cancellation fee revenue, along with associated commission expense and travel insurance revenue, if any, are recorded in the period the cancellation occurs.

Expenses

Cruise Operating Expense

Our cruise operating expense consists of the following:

Commissions, transportation and other consists of payments made to travel agencies that sell our product, costs associated with air and related ground transportation pre-sold to our guests, all credit card fees, and the costs associated with FUSE and pre-cruise hotel accommodations included as part of the overall cruise purchase price.
Onboard and other consists of costs related to land packages and ground transportation, as well as shore excursions and hotel accommodations costs not included in commissions, transportation and other.
Payroll, related and food consists of the costs of crew payroll and related expenses for shipboard personnel, as well as food expenses for both passengers and crew. We include food and payroll costs in a single expense line item as we contract with a single vendor to provide many of our hotel and restaurant services, including both food and labor costs, which are billed on a per-passenger basis. This per-passenger fee reflects the cost of both of the aforementioned expenses.
Fuel consists of fuel costs and related delivery and storage costs.
Other ship operating consists of port, deck and engine, certain entertainment-related expenses, and hotel consumables expenses.
Other consists primarily of drydock, ship insurance costs, and loss on disposals.

Selling and administrative expense

Selling and administrative expense includes advertising and promotional activities, shoreside personnel wages, benefits and expenses relating to our worldwide offices, professional fees, information technology support, our reservation call centers, and related support activities. Such expenditures are generally expensed in the period incurred.

Recently Adopted and Future Application of Accounting Standards

Refer to "Note 1. General" New Accounting Pronouncements in the notes to the consolidated financial statements.


25


Executive Overview

Second quarter 2014 revenue was $142.9 million, an increase of $0.2 million or 0.1% over the second quarter of 2013;

Adjusted EBITDA increased 4.6% to $29.8 million in the second quarter of 2014 from $28.5 million in the second quarter of 2013;

Net Yield increased 7.8% to $561.85 in the second quarter of 2014 from $521.24 in the second quarter of 2013;

Occupancy decreased by 1.5 percentage points to 95.4% for the second quarter of 2014 from 96.9% for the second quarter of 2013;

Available Passenger Cruise Days decreased to 167,790 in the second quarter of 2014 from 171,990 in the second quarter of 2013, due to 6 days of the 10-day scheduled Seven Seas Mariner drydock occurring during April 2014;

Net Cruise Cost, excluding Fuel and Other, per APCD, increased 0.5% in the second quarter of 2014 versus the same period 2013 due to fewer Available Passenger Cruise Days;

Fuel expense, net of settled fuel hedges was $9.8 million for the second quarter of 2014 compared to $10.1 million for the second quarter of 2013; and,

Other expense was $4.9 million for the second quarter of 2014 compared to $1.3 million in the second quarter of 2013 due to 6 days of the 10-day scheduled Seven Seas Mariner drydock occurring during April 2014.

26


Results of Operations

Operating results for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 are shown in the following table:
 
Three Months Ended June 30,
2014
 
2013
(in thousands)
 
 
% of Total Revenues
 
 
 
% of Total Revenues
Revenue

 

 

 

Passenger ticket
$
128,784

 
90.1
 %
 
$
129,774

 
90.9
 %
Onboard and other
14,160

 
9.9
 %
 
12,962

 
9.1
 %
Total revenue
142,944

 
100.0
 %
 
142,736

 
100.0
 %
 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
Commissions, transportation and other
44,482

 
31.1
 %
 
49,293

 
34.5
 %
Onboard and other
4,189

 
2.9
 %
 
3,795

 
2.7
 %
Payroll, related and food
19,871

 
13.9
 %
 
20,084

 
14.1
 %
Fuel
10,093

 
7.1
 %
 
10,052

 
7.0
 %
Other ship operating
10,811

 
7.6
 %
 
12,075

 
8.5
 %
Other
4,862

 
3.4
 %
 
1,272

 
0.9
 %
Total cruise operating expense
94,308

 
66.0
 %
 
96,571

 
67.7
 %
Other operating expense
 
 
 
 
 
 
 
Selling and administrative
19,750

 
13.8
 %
 
19,269

 
13.5
 %
Depreciation and amortization
9,793

 
6.9
 %
 
9,115

 
6.4
 %
Total operating expense
123,851

 
86.6
 %
 
124,955

 
87.5
 %
Operating income
19,093

 
13.4
 %
 
17,781

 
12.5
 %
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
47

 
 %
 
64

 
 %
Interest expense
(8,168
)
 
(5.7
)%
 
(9,643
)
 
(6.8
)%
Other income (expense)
748

 
0.5
 %
 
(1,711
)
 
(1.2
)%
Total non-operating expense
(7,373
)
 
(5.2
)%
 
(11,290
)
 
(7.9
)%
Income before income taxes
11,720

 
8.2
 %
 
6,491

 
4.5
 %
Income tax expense
(15
)
 
 %
 
(30
)
 
 %
Net income
$
11,705

 
8.2
 %
 
$
6,461

 
4.5
 %



27


Operating results for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 are shown in the following table:

 
Six Months Ended June 30,
2014
 
2013
(in thousands)
 
 
% of Total Revenues
 
 
 
% of Total Revenues
Revenue

 

 

 

Passenger ticket
$
247,681

 
90.0
 %
 
$
243,212

 
91.1
 %
Onboard and other
27,532

 
10.0
 %
 
23,841

 
8.9
 %
Total revenue
275,213

 
100.0
 %
 
267,053

 
100.0
 %
 
 
 
 
 
 
 
 
Cruise operating expense
 
 
 
 
 
 
 
Commissions, transportation and other
84,741

 
30.8
 %
 
89,209

 
33.4
 %
Onboard and other
8,466

 
3.1
 %
 
6,475

 
2.4
 %
Payroll, related and food
39,417

 
14.3
 %
 
39,420

 
14.8
 %
Fuel
20,754

 
7.5
 %
 
21,529

 
8.1
 %
Other ship operating
20,181

 
7.3
 %
 
21,714

 
8.1
 %
Other
8,414

 
3.1
 %
 
2,521

 
0.9
 %
Total cruise operating expense
181,973

 
66.1
 %
 
180,868

 
67.7
 %
Other operating expense
 
 
 
 
 
 
 
Selling and administrative
42,114

 
15.3
 %
 
41,549

 
15.6
 %
Depreciation and amortization
19,080

 
6.9
 %
 
18,368

 
6.9
 %
Total operating expense
243,167

 
88.4
 %
 
240,785

 
90.2
 %
Operating income
32,046

 
11.6
 %
 
26,268

 
9.8
 %
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest income
128

 
 %
 
139

 
0.1
 %
Interest expense
(16,742
)
 
(6.1
)%
 
(19,691
)
 
(7.4
)%
Other income (expense)
(1,741
)
 
(0.6
)%
 
(5,195
)
 
(1.9
)%
Total non-operating expense
(18,355
)
 
(6.7
)%
 
(24,747
)
 
(9.3
)%
Income before income taxes
13,691

 
5.0
 %
 
1,521

 
0.6
 %
Income tax expense
(189
)
 
(0.1
)%
 
(109
)
 
 %
Net income
$
13,502

 
4.9
 %
 
$
1,412

 
0.5
 %


28


The following table sets forth selected statistical information. Passenger Days Sold refers to the number of revenue passengers carried for the period multiplied by the number of days within the period in their respective cruises. Available Passenger Cruise Days refers to a measurement of capacity that represents double occupancy per suite multiplied by the number of cruise days for the period.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Passenger Days Sold
160,098

 
166,583

 
319,155

 
323,110

Available Passenger Cruise Days
167,790

 
171,990

 
335,090

 
342,090

Occupancy
95.4
%
 
96.9
%
 
95.2
%
 
94.5
%

Adjusted EBITDA was calculated as follows:
(in thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,

2014
 
2013
 
2014

2013
Net income
$
11,705

 
$
6,461

 
$
13,502

 
$
1,412

Interest income
(47
)
 
(64
)
 
(128
)
 
(139
)
Interest expense
8,168

 
9,643

 
16,742

 
19,691

Depreciation and amortization
9,793

 
9,115

 
19,080

 
18,368

Income tax expense, net
15

 
30

 
189

 
109

Other (income) expense
(748
)
 
1,711

 
1,738

 
5,195

Equity-based compensation/transactions (a)
391

 
178

 
581

 
429

Fuel hedge gain (loss) (b)
338

 
(84
)
 
408

 
64

Loss on disposal (c)
26

 

 
187

 

Other addback expenses per credit agreement (d)
137

 
1,471

 
416

 
2,808

Adjusted EBITDA
$
29,778

 
$
28,461

 
$
52,715

 
$
47,937


(a)
Equity-based compensation/transactions represent stock compensation expense in each period.
(b)
Fuel hedge gain (loss) represents the realized gain (loss) on fuel hedges triggered by the settlement of the hedge instrument and is included in other income (expense).
(c)
Loss on disposal primarily represents asset write-offs during vessel drydock periods.
(d)
Other addback expenses per credit agreement represents the net impact of expenses associated with professional fees and other costs associated with raising capital through debt and equity offerings and certain legal fees. Also included are costs associated with personnel changes and other corporate reorganizations to improve efficiencies.


29


In the following table, Net Per Diem is calculated by dividing Net Revenue by Passenger Days Sold, Gross Yield is calculated by dividing total revenue by Available Passenger Cruise Days, and Net Yield is calculated by dividing Net Revenue by Available Passenger Cruise Days as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except Passenger Days Sold, Available Passenger Cruise Days, Net Per Diem, and Yield data)
2014
 
2013
 
2014
 
2013
Passenger ticket revenue
$
128,784

 
$
129,774

 
$
247,681

 
$
243,212

Onboard and other revenue
14,160

 
12,962

 
27,532

 
23,841

Total revenue
142,944

 
142,736

 
275,213

 
267,053

Less:

 

 

 

Commissions, transportation and other expense
44,482

 
49,293

 
84,741

 
89,209

Onboard and other
4,189

 
3,795

 
8,466

 
6,475

Net Revenue
$
94,273

 
$
89,648

 
$
182,006

 
$
171,369

 
 
 
 
 
 
 
 
Passenger Days Sold
160,098

 
166,583

 
319,155

 
323,110

Available Passenger Cruise Days
167,790

 
171,990

 
335,090

 
342,090

Net Per Diem
$
588.85

 
$
538.16

 
$
570.27

 
$
530.37

Gross Yield
$
851.92

 
$
829.91

 
$
821.31

 
$
780.65

Net Yield
$
561.85

 
$
521.24

 
$
543.16

 
$
500.95


In the following table, Gross Cruise Cost per Available Passenger Cruise Days is calculated by dividing Gross Cruise Cost by Available Passenger Cruise Days, and Net Cruise Cost per Available Passenger Cruise Days is calculated by dividing Net Cruise Costs by Available Passenger Cruise Days.
(in thousands, except APCD data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Total cruise operating expense
$
94,308

 
$
96,571

 
$
181,973

 
$
180,868

Selling and administrative expense
19,750

 
19,269

 
42,114

 
41,549

Gross Cruise Cost
114,058

 
115,840

 
224,087

 
222,417

Less:

 

 


 


Commissions, transportation and other expense
44,482

 
49,293

 
84,741

 
89,209

Onboard and other
4,189

 
3,795

 
8,466

 
6,475

Net Cruise Cost
65,387

 
62,752

 
130,880

 
126,733

Less:

 

 


 


Fuel
10,093

 
10,052

 
20,754

 
21,529

Other expense
4,862

 
1,272

 
8,414

 
2,521

Net Cruise Cost, excluding Fuel and Other
$
50,432

 
$
51,428

 
$
101,712

 
$
102,683

 

 


 


 


Available Passenger Cruise Days
167,790

 
171,990

 
335,090

 
342,090

Gross Cruise Cost per APCD
$
679.77

 
$
673.53

 
$
668.74

 
$
650.17

Net Cruise Cost per APCD
$
389.70

 
$
364.86

 
$
390.58

 
$
370.47

Net Cruise Cost, excluding Fuel and Other, per APCD
$
300.57

 
$
299.02

 
$
303.54

 
$
300.16


30



Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013

Revenue

Total revenue increased $0.2 million, or 0.1%, to $142.9 million for the three months ended June 30, 2014 from $142.7 million for the three months ended June 30, 2013. This increase was primarily due to the following:

Onboard and other revenue increased by $1.2 million, or 9.2%, to $14.2 million for the three months ended June 30, 2014 from $13.0 million for the three months ended June 30, 2013. The increase in Onboard and other revenue was attributable to an increase of $1.7 million in onboard and other spend partially offset by $0.5 million in fewer PDS due to 6 days of the 10-day scheduled Seven Seas Mariner drydock occurring during April 2014; and

Passenger ticket revenue decreased by $1.0 million, or 0.8% to $128.8 million for the three months ended June 30, 2014 from $129.8 million for the three months ended June 30, 2013 primarily caused by fewer PDS totaling $5.1 million due to 6 days of the 10-day scheduled Seven Seas Mariner drydock occurring during April 2014, partially offset by a $4.1 million increase in ticket prices.

Cruise Operating Expense

Total cruise operating expense decreased $2.3 million, or 2.3%, to $94.3 million for the three months ended June 30, 2014 from $96.6 million for the three months ended June 30, 2013, primarily due to the following decreases:

$4.8 million in Commission, transportation and other;
$1.3 million in Other ship operating costs; and
$0.2 million in Payroll, related and food costs due to lower occupancy primarily attributable to 6 days of the10-day scheduled Seven Seas Mariner drydock occurring during April 2014.

Partially offset by the following increases:

$3.6 million in Other expense primarily attributable to 6 days of the 10-day scheduled Seven Seas Mariner drydock occurring during April 2014; and
$0.4 million in Onboard and other resulting from increases in costs for destination services.

Selling and Administrative Expense

Selling and administrative expense increased by $0.5 million, or 2.5%, to $19.8 million for the three months ended June 30, 2014 from $19.3 million for the three months ended June 30, 2013. The increase was due to an increase of $0.3 million in marketing costs and an increase of $0.2 million in general and administrative costs.

Non-Operating Income (Expense)

Total non-operating expense decreased $3.9 million, or 34.7%, to $7.4 million for the three months ended June 30, 2014 from $11.3 million for the three months ended June 30, 2013. The decrease was due to the following:

Interest expense decreased $1.4 million or 15.3%, to $8.2 million for the three months ended June 30, 2014 from $9.6 million for the three months ended June 30, 2013, due to the amendment of our first lien credit facility in February 2014, which reduced our interest rate combined with the repayment of $51.5 million of principal; and
Other income (expense) decreased by $2.5 million, or 143.7%, to other income, net of $0.7 million for the three months ended June 30, 2014 from other expense, net of $1.7 million for the three months ended June 30, 2013. For the three months ended June 30, 2014, we recorded a net gain of $0.7 million on our fuel hedge contracts as compared to a net loss of $1.7 million on our fuel hedge contracts for the three months ended June 30, 2013.


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Net Yield

Net Yield increased by $40.61, or 7.8%, to $561.85 for the three months ended June 30, 2014 from $521.24 for the three months ended June 30, 2013, which was primarily due to increased pricing and a decrease in our Commissions, transportation and other expense.

Net Cruise Cost per APCD

Net Cruise Cost per APCD increased by $24.84, or 6.8%, to $389.70 for the three months ended June 30, 2014 from $364.86 for the three months ended June 30, 2013 primarily due to drydock costs. Net Cruise Cost, excluding fuel and other, per APCD increased by $1.55, or 0.5%, to $300.57 for the three months ended June 30, 2014 from $299.02 for the three months ended June 30, 2013 due to fewer APCD, which were attributable to 6 days of the 10-day scheduled Seven Seas Mariner drydock.

Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013

Revenue

Total revenue increased $8.2 million, or 3.1%, to $275.2 million for the six months ended June 30, 2014 from $267.1 million for the six months ended June 30, 2013. This increase was primarily due to the following:

Passenger ticket revenue increased $4.5 million, or 1.8%, to $247.7 million for the six months ended June 30, 2014, from $243.2 million for the six months ended June 30, 2013, as a result of a $7.5 million increase in ticket prices partially offset by a $3.0 million decrease due to lower PDS; and

Onboard and other revenue increased $3.7 million, or 15.5%, to $27.5 million for the six months ended June 30, 2014 from $23.8 million for the six months ended June 30, 2013, which was due to a $4.0 million increase in onboard and other spend and a $0.3 million decrease due to lower PDS.

Cruise Operating Expense

Total cruise operating expense increased $1.1 million, or 0.6%, to $182.0 million for the six months ended June 30, 2014 from $180.9 million for the six months ended June 30, 2013, primarily due to the following increases:

$5.9 million in Other expense primarily attributable to the 10-day scheduled Seven Seas Mariner drydock occurring during 2014; and
$2.0 million in Onboard and Other resulting primarily from increases in costs for destination services.

Partially offset by the following decreases:

$4.5 million in commission, transportation and other;
$0.8 million in fuel costs driven by lower prices and consumption; and
$1.5 million in other ship operating costs.

Selling and Administrative Expense

Selling and administrative expense increased by $0.6 million, or 1.4%, to $42.1 million for the six months ended June 30, 2014 from $41.5 million for the six months ended June 30, 2013. The increase was due to an increase of $0.8 million in marketing costs, offset by a reduction in general and administrative costs totaling $0.2 million.

Non-Operating Income (Expense)

Total non-operating expense decreased $6.4 million, or 25.8%, to $18.4 million for the six months ended June 30, 2014 from $24.7 million for the six months ended June 30, 2013. The decrease was due to the following:

Interest expense decreased $2.9 million, or 15.0%, to $16.7 million for the six months ended June 30, 2014 from $19.7 million for the six months ended June 30, 2013, due to the amendment of our first lien credit

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facility in February 2014, which reduced our interest rate combined with the repayment of $51.5 million of principal.
Other income (expense) decreased by $3.5 million, or 66.5%, to $1.7 million for the six months ended June 30, 2014 from $5.2 million for the six months ended June 30, 2013. For the six months ended June 30, 2014, we recorded a loss on the extinguishment of debt totaling $2.0 million as a result of amending our first lien credit facility and a gain on fuel hedges of $0.3 million. For the six months ended June 30, 2013, we had a loss on the extinguishment of debt of $3.7 million as a result of the repricing of our first lien term loan, a net loss of $1.1 million on our fuel hedge contracts and a $0.4 million foreign currency transaction loss.

Net Yield

Net Yield increased by $42.21, or 8.4%, to $543.16 for the six months ended June 30, 2014 from $500.95 for the six months ended June 30, 2013, which was primarily due to an increase in our ticket price and a decrease in costs.

Net Cruise Cost per APCD

Net Cruise Cost per APCD increased by $20.11, or 5.4%, to $390.58 for the six months ended June 30, 2014 from $370.47 for the six months ended June 30, 2013 primarily due to drydock costs. Net Cruise Cost, excluding fuel and other, per APCD increased by $3.38, or 1.1%, to $303.54 for the six months ended June 30, 2014 from $300.16 for the six months ended June 30, 2013, due to fewer APCD which were attributable to the 10-day scheduled Seven Seas Mariner drydock occurring during 2014.

Liquidity and Capital Resources

Sources and Uses of Cash

Net Cash Provided by Operating Activities

Net cash provided by operating activities increased by $12.2 million to $73.6 million for the six months ended June 30, 2014, from $61.4 million for the six months ended June 30, 2013. The change was primarily due to an increase in income and other non-cash income/expense totaling $13.8 million partially offset by a decrease in working capital of $1.7 million. The unfavorable change in working capital was primarily attributable to the timing of payments of trade and other payable resulting in a decrease of $9.4 million partially offset by an increase in passenger deposits of $7.3 million. The favorable change in income and other non-cash income/expense was primarily due to an increase in net income of $12.1 million, a decrease in write-offs/fees associated with the amendment to our term loan totaling $1.6 million, which included a reduction in the interest rate, a decrease in the unrealized loss on derivatives of $1.1 million and other changes in non-cash income/expense.

Net Cash Used in Investing Activities

Net cash used in investing activities increased $14.7 million to $11.8 million for the six months ended June 30, 2014 from net cash provided by investing activities of $2.9 million for the six months ended June 30, 2013. The change was primarily due to an increase in capital expenditures of $19.1 million due to the scheduled drydock of Sevens Seas Mariner in 2014, partially offset by the net change in restricted cash of $4.4 million resulting from the release of $12.0 million in restricted cash no longer required to cash collateralize an outstanding letter of credit during 2014 and the addition of $8.0 million held as collateral for a surety bond mandated by the Federal Maritime Commission during 2013.

Net Cash Used in Financing Activities

Net cash used in financing activities was $56.4 million for the six months ended June 30, 2014 compared to $3.0 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, we made principal payments of $51.5 million on our first lien term loan which included a $50.3 million prepayment and scheduled payments of $1.2 million. Additionally, we paid $4.6 million in debt related costs. During the six months ended June 30, 2013, we paid $2.0 million for previously acquired Regent licensing rights and $1.0 million in debt related costs.


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Funding Sources and Future Commitments

At June 30, 2014, our liquidity was $183.8 million, consisting of $143.8 million in cash and cash equivalents and $40.0 million available under our revolving credit facility. We had a working capital deficit of $98.1 million at June 30, 2014 as compared to a working capital deficit of $74.1 million at December 31, 2013. Similar to others in our industry, we operate with a substantial working capital deficit. This deficit is attributable to the following factors: (i) passenger deposits are normally paid in advance with a relatively low-level of accounts receivable, (ii) rapid turnover results in a limited investment in inventories, and (iii) voyage-related accounts payable usually become due after receipt of cash from related bookings. Passenger deposits remain a liability until the sailing date; however, the cash generated from these advance receipts, as allowed by certain jurisdictions, is used interchangeably with cash on hand from other sources, such as our revolving credit facility and other cash from operations. This cash can be used to fund operating expenses for the applicable future sailing, pay down our credit facility, fund payments on new vessels or other uses.

On February 7, 2014, we amended our existing $340.0 million credit facility, consisting of a $300.0 million term loan and a $40.0 million revolving credit facility. In conjunction with this amendment, $50.3 million of the term loan was prepaid such that the outstanding balance on the term loan of $296.3 million was reduced to $246.0 million. The interest rate margin on the amended term loan is 2.75% compared to 3.50% on the previously existing term loan and the LIBOR floor was reduced from 1.25% to 1.00%. There was no change to the terms of the $40.0 million revolving credit facility, the financial covenants or the maturity date of the credit facility. Also during the six months ended June 30, 2014, we made scheduled principal payments of $1.2 million on our first lien term loan.

We have contractual obligations of which our debt maturities represent our largest funding requirement. The only material change to our contractual obligations that occurred during the six months ended June 30, 2014 was a result of the amendment described in the preceding paragraph. As of June 30, 2014, we have $469.8 million in future debt maturities. See "Note 3. Debt" in the accompanying notes to consolidated financial statements.

The agreements governing our indebtedness contain a number of covenants that impose operating and financial restrictions, including requirements that we maintain a minimum liquidity level, a maximum loan-to-value ratio, a minimum interest coverage ratio (applicable only to our revolving credit facility, if drawn) and restrictions on our and our subsidiaries' ability to, among other things, incur additional indebtedness, incur liens on assets, make certain investments, issue disqualified stock and preferred stock, make restricted payments, pay dividends or make distributions, enter into certain transactions with affiliates, and consolidate or sell certain key assets. As of June 30, 2014, we are in compliance with all financial debt covenants.

On July 15, 2014, pursuant to the ship construction contract for our newbuild, Seven Seas Explorer, we made a payment of approximately $23.4 million to Fincantieri for the second installment payment.

We believe our cash on hand, expected future operating cash inflows, additional borrowings under our credit facility, our ability to issue debt securities, and our ability to raise additional equity, including capital contributions, will be sufficient over the next twelve-month period to fund operations, debt service requirements and capital expenditures, as well as maintain compliance with financial covenants under the agreements governing our indebtedness. There is no assurance; however, that cash flows from operations and additional fundings will be available in the future to fund our future obligations.

As a normal part of our business, depending on market conditions, pricing and our overall growth strategy, we may consider opportunities to enter into contracts for building additional ships. We may also consider the sale of ships, the purchase of existing ships, potential acquisitions and strategic alliances. If any of these were to occur, they would be financed through the incurrence of additional indebtedness, the issuance of additional capital contributions, or through cash flows from operations.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interest, certain derivative instruments or variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We manage these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. For a discussion of our hedging strategies on market risks see discussions below and Note 4. "Derivative Instruments, Hedging Activities and Fair Value Measurements" in the accompanying notes to the consolidated financial statements.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates to our long-term debt obligations including future interest payments. We have used interest rate swap agreements to modify our exposure to interest rate fluctuations and to manage our interest expense. There were no outstanding interest rate swap agreements as of June 30, 2014.

Foreign Currency Exchange Risk

Our exposure to foreign currency exchange rate risk relates to our Euro denominated installment payments related to our newbuild ship contract, vessel drydock and other operational expenses. We have entered into foreign currency swaps and collars to limit the exposure to movements in the foreign currency exchange rates.

During August 2013, we entered into a foreign currency collar option with an aggregate notional amount €274.4 million ($375.7 million at June 30, 2014) to limit our exposure to foreign currency exchange rates for Euro denominated payments related to the ship construction contract for Seven Seas Explorer. The notional amount of the collar represents 80% of the construction contract of the vessel due at delivery. This foreign currency collar option was designated as a cash flow hedge at the inception of the instrument and will mature June 2016. The estimated fair value of the foreign currency collar option at June 30, 2014 was approximately $1.3 million.

Fuel Price Risk

Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our vessels. Fuel expense, as a percentage of our total revenues, was approximately 7.5% for the six months ended June 30, 2014 and 8.1% for the six months ended June 30, 2013. We use fuel derivative swap agreements to mitigate the financial impact of fluctuations in fuel prices. At June 30, 2014, we had fuel swap agreements to pay fixed prices for fuel with an aggregate notional amount of approximately $19.9 million, maturing through 2015. These agreements hedge approximately 129,000 barrels, or 69%, of our estimated remaining fuel consumption for 2014 and 97,800 barrels, or 26%, of our estimated 2015 fuel consumption. The fuel swaps do not qualify for hedge accounting; therefore, the changes in fair value of these fuel derivatives are recorded in other income (expense) in the accompanying consolidated statements of income and comprehensive income. The estimated fair value of these contracts at June 30, 2014 was approximately $0.6 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


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Management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures and have concluded, as of June 30, 2014, that all were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the factors disclosed in "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2013. We caution the reader that the risk factors discussed in "Item 1A. Risk Factors" in our 2013 Annual Report on Form 10-K, and those described elsewhere in this report or other filings with the Securities and Exchange Commission, could cause future results to differ materially from those stated in any forward-looking statements.



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Item 6. Exhibits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INDEX TO EXHIBITS
 
 
 
 
 
 
 
 
 
 
 
Incorporated by Reference
 
Filed/Furnished Herewith
Exhibit Number
Exhibit Description
 
Form
 
Exhibit
 
Filing Date
 
10.1
Amended and Restated Executive Employment Agreement between Oceania Cruises, Inc., Prestige Cruises International, Inc. and Frank J. Del Rio, dated June 5, 2014.
 
8-K
 
10.1
 
June 10, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
 
 
 
 
 
31.1
Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
 
 
 
 
X
31.2
Certification of Chief Financial Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
 
 
 
 
X
Section 1350 Certifications
 
 
 
 
 
 
 
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. **
 
 
 
 
 
 
 
X
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. **
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
XBRL Documents
 
 
 
 
 
 
 
 
101.INS
XBRL Instance Document *
 
 
 
 
 
 
 
X
101.SCH
XBRL Taxonomy Schema *
 
 
 
 
 
 
 
X
101.CAL
XBRL Taxonomy Calculation Linkbase *
 
 
 
 
 
 
 
X
101.DEF
XBRL Taxonomy Definition Linkbase *
 
 
 
 
 
 
 
X
101.LAB
XBRL Taxonomy Label Linkbasev *
 
 
 
 
 
 
 
X
101.PRE
XBRL Taxonomy Presentation Linkbase *
 
 
 
 
 
 
 
X
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

** Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: August 12, 2014
Seven Seas Cruises S. DE R.L.
 
(Registrant)
 
 
 
/s/ Jason M. Montague
 
Jason M. Montague, Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 


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