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v2.4.0.8
Document and Entity Information Document
9 Months Ended
Sep. 30, 2013
Document and Entity Information [Abstract]  
Entity Registrant Name Seven Seas Cruises S. DE R.L.
Entity Central Index Key 0001534814
Current Fiscal Year End Date --12-31
Entity Filer Category Non-accelerated Filer
Document Type 10-Q
Document Period End Date Sep. 30, 2013
Document Fiscal Year Focus 2013
Document Fiscal Period Focus Q3
Amendment Flag false
Entity Common Stock, Shares Outstanding 0
v2.4.0.8
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Sep. 30, 2012
Dec. 31, 2011
Current assets        
Cash and cash equivalents $ 145,778 $ 99,857 $ 113,973 $ 68,620
Restricted cash 367 0    
Trade and other receivables, net 7,001 7,279    
Related party receivables 0 1,798    
Inventories 6,289 6,572    
Prepaid expenses 25,385 17,828    
Other current assets 2,930 2,692    
Total current assets 187,750 136,026    
Property and equipment, net 646,747 637,324    
Goodwill 404,858 404,858    
Intangible assets, net 82,042 83,556    
Other long-term assets 31,721 32,950    
Total assets 1,353,118 1,294,714    
Current liabilities        
Trade and other payables 2,918 4,483    
Related party payables 2,559 131    
Accrued expenses 46,509 43,733    
Passenger deposits 187,885 169,463    
Derivative liabilities 0 278    
Current portion of long-term debt 2,237 0    
Total current liabilities 242,108 218,088    
Long-term debt 517,196 518,358    
Other long-term liabilities 11,040 9,635    
Total liabilities 770,344 746,081    
Commitments and contingencies          
Members' equity        
Contributed capital 564,934 564,372    
Accumulated earnings (deficit) 18,559 (15,739)    
Accumulated other comprehensive loss (719) 0    
Total members' equity 582,774 548,633    
Total liabilities and members' equity $ 1,353,118 $ 1,294,714    
v2.4.0.8
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Revenue        
Passenger ticket $ 149,771 $ 143,152 $ 392,983 $ 372,806
Onboard and other 16,185 15,861 40,026 39,082
Total revenue 165,956 159,013 433,009 411,888
Cruise operating expense        
Commissions, transportation and other 50,355 53,832 139,564 141,100
Onboard and other 4,651 4,852 11,126 10,260
Payroll, related and food 20,502 20,316 59,922 58,337
Fuel 9,855 9,203 31,384 31,751
Other ship operating 11,212 12,249 32,927 32,620
Other 1,262 912 3,783 8,037
Total cruise operating expense 97,837 101,364 278,706 282,105
Other operating expense        
Selling and administrative 18,216 17,257 59,765 55,258
Depreciation and amortization 9,064 10,568 27,432 30,111
Total operating expense 125,117 129,189 365,903 367,474
Operating income 40,839 29,824 67,106 44,414
Non-operating income (expense)        
Interest income 67 135 206 360
Interest expense (9,375) (9,290) (29,066) (25,356)
Other income (expense) 1,272 174 (3,924) (1,840)
Total non-operating expense (8,036) (8,981) (32,784) (26,836)
Income before income taxes 32,803 20,843 34,322 17,578
Income tax benefit (expense) 85 136 (24) (65)
Net income 32,888 20,979 34,298 17,513
Loss on change in derivative fair value (719) 0 (719) 0
Total comprehensive income $ 32,169 $ 20,979 $ 33,579 $ 17,513
v2.4.0.8
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities    
Net income $ 34,298 $ 17,513
Adjustments:    
Depreciation and amortization 27,432 30,111
Amortization of deferred financing costs 1,529 2,232
Accretion of debt discount 520 346
Stock-based compensation 572 676
Unrealized gain (loss) on derivative contracts 455 (1,574)
Loss on disposals of property and equipment 0 303
Write-off deferred financing costs and debt discount 2,500 4,487
Prepayment penalty, excluded from loss on early extinguishment of debt (2,093) 0
Other, net (133) (185)
Changes in operating assets and liabilities:    
Trade and other accounts receivable 2,076 1,271
Prepaid expenses and other current assets (7,051) 83
Inventories 283 (1,876)
Accounts payable and accrued expenses 3,463 6,450
Passenger deposits 18,144 9,838
Net cash provided by operating activities 81,995 69,675
Cash flows from investing activities    
Purchases of property and equipment (32,262) (19,547)
Change in restricted cash 7,585 509
Acquisition of non-compete (165) 0
Net cash used in investing activities (24,842) (19,038)
Cash flows from financing activities    
Repayment of long-term debt 0 (293,500)
Proceeds from refinancing of long-term debt 0 297,000
Repayment of long-term debt (9,239) (6,860)
Payments on other financing obligations (2,000) (2,000)
Costs associated with the early extinguishment of debt 0 (76)
Net cash used in financing activities (11,239) (5,360)
Effect of exchange rate changes on cash and cash equivalents 7 76
Net increase in cash and cash equivalents 45,921 45,353
Cash and cash equivalents    
Beginning of period 99,857 68,620
End of period $ 145,778 $ 113,973
v2.4.0.8
General
9 Months Ended
Sep. 30, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
General
General
Basis of Presentation
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, and is also the parent of Oceania Cruises, Inc. (“OCI”). 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.
The accompanying 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 and rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“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, 2012.
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, 2013 reported in our consolidated financial statements or notes thereto. There have been no significant changes in our financial position or results of operations and 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, 2012.
The accompanying consolidated balance sheet at September 30, 2013 and the consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012 are unaudited, and, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation.
Significant Accounting Policies
Property and Equipment
As of January 1, 2013, we changed our estimate for all our ships' projected residual values. The change was triggered as we obtained recent sales information for luxury cruise ships that occurred in the three month period ended March 31, 2013. This new information, in conjunction with other comparable sale data points, was used in our analysis, which includes our consideration of anticipated technological changes, long-term cruise and vacation market conditions and replacement cost of similarly built vessels. As a result, we increased each ship's projected residual value from 15% to 30%. The change in estimate has been applied prospectively as of January 1, 2013. The effect of the change on both operating income and net income for the three and nine month period ended September 30, 2013 is approximately $1.3 million and $4.0 million, respectively, of reduced depreciation expense. The estimated impact of this change for full year 2013 is a reduction of depreciation expense of approximately $5.3 million. We periodically review and evaluate these estimate and judgments based on historical experiences and new factors and circumstances. As part our ongoing reviews, our estimates may change in the future. If such a change is necessary, depreciation expense could be materially higher or lower.
Other
During 2012, we increased our passenger ticket revenue and commissions, transportation and other expenses by $1.6 million during the nine months ended September 30, 2012. There was no impact to the consolidated statements of income and comprehensive income for the three months ended September 30, 2012. This revision relates to certain included costs that were originally recorded as a reduction of passenger ticket revenue and should have been recorded as commissions, transportation and other costs. We assessed the materiality of these errors on the previously issued financial statements in accordance with ASC 250-10-S99, the Securities and Exchange Commission ("SEC") guidance, Staff Accounting Bulletin No. 99, Materiality ("SAB 99") and the amounts recorded were deemed immaterial qualitatively and quantitatively to previously issued unaudited quarterly financial statements and had no impact on net income or cash flows.


New Accounting Pronouncements
As of January 1, 2013, we adopted Financial Accounting Standards Board ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. It requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In 2013, this pronouncement was enhanced by ASU 2013-1. This update clarifies that ordinary receivables are not within the scope of ASU 2011-11 and it applies only to derivatives, repurchase agreements, reverse purchase agreements and other securities lending transactions. The adoption did not materially impact our consolidated financial statements.
In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. It requires an entity to present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. Entities must also cross-reference to other disclosures currently required under GAAP for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. This standard was effective beginning January 1, 2013. Refer to Footnote 6: Other Comprehensive Income for details.    
In July 2013, the Financial Accounting Standards Board issued ASU 2013-10, Inclusion of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We adopted this guidance as of July 17, 2013, and it did not have a material impact on our consolidated financial statements.
There are no other recently issued accounting pronouncements not yet adopted or recently issued pronouncements that we expect to have a material effect on the presentation or disclosure of our future consolidated operating results, cash flows or financial condition.
v2.4.0.8
Property and Equipment, net
9 Months Ended
Sep. 30, 2013
Property, Plant and Equipment [Abstract]  
Property and Equipment, net
Property and Equipment, net
During the nine months ended September 30, 2013, property and equipment, net decreased $9.4 million. Depreciation expense was $8.2 million and $9.8 million for the three months ended September 30, 2013 and 2012, respectively, and $25.0 million and $27.9 million for the nine months ended September 30, 2013 and 2012, respectively. Capital expenditures totaled $27.3 million and $5.1 million for the three months ended September 30, 2013 and 2012, respectively and $32.1 million and $19.7 million for the nine months ended September 30, 2013 and 2012, respectively.
v2.4.0.8
Debt
9 Months Ended
Sep. 30, 2013
Debt Disclosure [Abstract]  
Debt
    Debt
 
 
September 30,
 
December 31,
(in thousands)
 
2013
 
2012
$300 million term loan, 4.75% and 6.25% as of September 30, 2013 and December 31, 2012, respectively, due through 2018
 
$
296,250

 
$
296,250

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

 
225,000

Total debt
 
521,250

 
521,250

Less: Original issue discount
 
(1,817
)
 
(2,892
)
Less: Current portion of long-term debt and discount
 
(2,237
)
 

Long-term portion
 
$
517,196

 
$
518,358


Interest expense on third-party debt was $8.8 million and $8.3 million for the three months ended September 30, 2013 and 2012, respectively, and was $26.6 million and $22.1 million for the nine months ended September 30, 2013 and 2012, respectively.
Term Loan
On February 1, 2013, we amended our previously existing $340.0 million credit agreement, consisting of a $300.0 million term loan and $40.0 million revolving credit facility. Interest on our term loan is calculated based upon LIBOR, with a floor of 1.25%, plus an applicable margin. In conjunction with this amendment, the applicable margin on the outstanding balance of $296.3 million was repriced to 3.5% from either 4.75% or 5.0% based on a leverage ratio in the original term loan. We paid $3.7 million of accrued interest, $3.0 million for a prepayment penalty, $1.3 million in arranger fees and $0.2 million in legal fees in connection with the amendment. There was no change to the terms of the revolving credit facility or the maturity date of the term loan. There was also no impact on financial covenants, liquidity or debt capacity.


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. This repricing resulted in a debt modification for certain creditors whose terms were not substantially different before and after the amendment. The new fees paid and previously existing deferred financing costs were proportionally allocated between modification and extinguishment. Of the $4.5 million in fees, $3.2 million of the amendment fees were capitalized and are being amortized over the remaining term of the debt. New fees and previously existing deferred financing costs allocated to the extinguishment were included in the calculation of gain or loss on early extinguishment of debt, which resulted in a loss of $3.7 million and was recorded within other income (expense) in the consolidated statement of income and comprehensive income for the nine months ended September 30, 2013.

Our credit agreement contains a number of covenants that impose operating and financial restrictions, including restrictions on us and our subsidiaries' ability to, among other things, incur additional indebtedness, pay dividends on or make distributions with respect to our capital stock, restrict certain transactions with affiliates, and sell certain key assets, primarily our ships. All of our debt is collateralized by our vessels. We believe that based on our cash on hand and expected future operating cash inflows, we will have sufficient cash flow to fund operations, meet our debt service requirements, and maintain compliance with the financial covenants under our credit agreements over the next twelve-month period.


On July 5, 2013, we entered into a definitive contract with Italy’s Fincantieri shipyard to build a luxury cruise ship to be named the Seven Seas Explorer. Under the terms of the contract, we will pay approximately $450.0 million to Fincantieri for the new vessel. During July 2013, we made a payment of approximately $22.0 million to Fincantieri for the initial installment payment for Seven Seas Explorer.
On July 31, 2013, we entered into a loan agreement providing for borrowings of up to $440.0 million with a syndicate of financial institutions to finance 80% of the contract cost of Seven Seas Explorer plus the export credit agency premium. Borrowings under this loan agreement will bear interest, at our election, at either (i) a fixed rate of 3.43% per year, or (ii) LIBOR plus 2.8% per year. Our commitment fee is 1.1% per year on the undrawn maximum loan amount. Guarantees under this loan agreement are provided by us and PCH. The twelve year fully amortizing loan requires semi-annual principal and interest payments commencing six months following the draw-down date.
The following schedule represents the maturities of debt (in thousands):
For the twelve months ending September 30,
 
 
2014
 
 
$
2,250

2015
 
 
3,000

2016
 
 
3,000

2017
 
 
3,000

Thereafter
 
 
510,000


 
 
$
521,250

v2.4.0.8
Derivative Instruments, Hedging Activities and Fair Value Measurements
9 Months Ended
Sep. 30, 2013
Derivative Instruments, Hedging Activities and Fair Value Measurements [Abstract]  
Derivative Instruments, Hedging Activities and Fair Value Measurements
Derivative Instruments, Hedging Activities and Fair Value Measurements
We are exposed to market risks attributable to changes in fuel prices, foreign currency exchange rates and interest rates. 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.
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. As of September 30, 2013, we have hedged the variability in future cash flows for forecast fuel consumption occurring through December 2015. As of September 30, 2013 and December 31, 2012, we have entered into the following fuel swap agreements:
 
 
Fuel Swap Agreements
 
 
As of September 30, 2013
 
As of December 31, 2012
 
 
(in barrels)
2013
 
66,000

 
207,975

2014
 
156,450

 
108,750

2015

37,500



 
 
 
 
 
 
 
Fuel Swap Agreements
 
 
As of September 30, 2013
 
As of December 31, 2012
 
 
(% hedged - estimated consumption)
2013
 
75
%
 
56
%
2014
 
42
%
 
29
%
2015

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 September 30, 2013, the fair market value of our derivative liability related to this counterparty was $0.0 million. As of September 30, 2013 and December 31, 2012, we were not required to post any collateral for our fuel derivative instruments, as the exposure at our parent company level did not exceed $3.0 million.
Foreign Currency Exchange Rate Risk
Our exposure to foreign currency exchange rate risk relates to our euro-denominated ship construction contract, ship drydocks and other operational expenses. We enter into foreign currency forward contracts and collar options to limit the exposure to movements in the foreign currency exchange rates related to these risks. The majority of our operational foreign currency forward contracts do not qualify for hedge accounting; therefore, the changes in the fair value of these foreign currency derivatives are recorded in other income (expense) in the accompanying consolidated statements of income and comprehensive income. As of September 30, 2013 and December 31, 2012, we had no outstanding operational foreign currency forward contracts related to drydock or other operational expenses.
During the third quarter of 2013, we entered into a foreign currency collar option with an aggregate notional amount of €274.4 million ($365.8 million as of September 30, 2013), to hedge a portion of our foreign currency exposure related to the construction contract for Seven Seas Explorer. This foreign currency collar option was designated as a cash flow hedge at the inception of the instrument and will mature in 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. There was no ineffectiveness recorded as of September 30, 2013. Ineffective portions of future changes in fair value of the instrument will be recognized in other income (expense) in the statement of income and comprehensive income.




At September 30, 2013 and December 31, 2012, the fair values and line item captions of derivative instruments designated as hedging instruments under FASB ASC 815-20 were:


Fair Value as of
(in thousands)
Balance Sheet Location
September 30, 2013

December 31, 2012





Foreign currency collar
Other long-term liabilities
$
719


$


Total liabilities
$
719


$



At September 30, 2013 and December 31, 2012, the fair values and line item captions of derivative instruments not designated as hedging instruments under FASB ASC 815-20 were:
 
 
 
Fair Value as of
(in thousands)
Balance Sheet Location
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
Fuel hedges
Other current assets
 
$
774

 
$
747

Fuel hedges
Other long-term assets
 
56

 
816

 
Total derivative assets
 
$
830

 
$
1,563

 
 
 
 
 
 
Fuel hedges
Current liabilities - Derivative liabilities
 
$

 
$
278

 
Total derivative liabilities
 
$

 
$
278



The effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the three and nine months ended September 30, 2013 were:
(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
$
(719
)

N/A

$


N/A

$

Total
$
(719
)



$




$


We had no derivative instruments qualifying and designated as hedging instruments for the three and nine months ended September 30, 2012.

The effect of derivative instruments not designated as hedging instruments on the consolidated financial statements for the three and nine months ended September 30, 2013 and 2012 were:
 
Location of Gain (Loss) Recognized in Income on Derivative Instruments
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments
(in thousands)
 
For the Three Months ended September 30,
 
 
2013
 
2012
 
 
 
 
 
 
Foreign currency swap
Other income (expense)
 
$

 
$
(19
)
Fuel hedges
Other income (expense)
 
899

 
4,241

Total
 
 
$
899

 
$
4,222


 
Location of Gain (Loss) Recognized in Income on Derivative Instruments
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments
(in thousands)
 
For the Nine Months Ended September 30,
 
 
2013
 
2012
 
 
 
 
 
 
Foreign currency swap
Other income (expense)
 
$

 
$
(26
)
Fuel hedges
Other income (expense)
 
(206
)
 
2,839

Total
 
 
$
(206
)
 
$
2,813




Fair Value Measurements
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 as of
 
                        Fair Value as of
 
 
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
Long-term bank debt
(a)
$
294,432

 
$
293,358

 
$
285,347

 
$
321,972

Senior secured notes
 
225,000

 
225,000

 
245,025

 
239,063

Total
 
$
519,432

 
$
518,358

 
$
530,372

 
$
561,035

 
 
 
 
 
 
 
 
 
(a) The carrying value of the long-term bank debt is net of $1.8 million and $2.9 million of original issue discount as of September 30, 2013 and December 31, 2012, respectively.


Long-term bank debt: Level 2 inputs were used to calculate the fair value of our long-term debt which was estimated using the present value of expected future cash flows, which incorporates our risk profile. The valuation also takes into account debt maturity and interest rate based on the contract terms.
Senior secured notes: Level 1 inputs were used to calculate the fair value of our Notes, which was estimated using quoted market prices.
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 as of September 30, 2013 and December 31, 2012. 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 and liabilities that are measured at fair value on a recurring basis:
(in thousands)
 
As of September 30, 2013
 
As of December 31, 2012
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
(a)
$
830

 
$

 
$
830

 
$

 
$
1,563

 
$

 
$
1,563

 
$

Total Assets
 
$
830

 
$

 
$
830

 
$

 
$
1,563

 
$

 
$
1,563

 
$

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
$
719

 
$

 
$
719

 
$

 
$
278

 
$

 
$
278

 
$

Total liabilities
 
$
719

 
$

 
$
719

 
$

 
$
278

 
$

 
$
278

 
$

(a) As of September 30, 2013, derivative financial instruments of $774,000 and $56,000 are classified as other current assets and other long-term assets, respectively, in the consolidated balance sheets. As of December 31, 2012, $747,000 was classified as other current assets and $816,000 was classified in other long-term assets.
    

Our derivative financial instruments in the table above consist of fuel hedge swaps and a foreign exchange collar. Fair value is derived using the valuation models that utilize the income value approach. These valuation models take into account the contract terms, such as maturity, and inputs, such as forward fuel prices, forward exchange rates, discount rates, creditworthiness of the counter-party and us, 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. If the carrying amount 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 vessels, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value measured by undiscounted or discounted expected future cash flows would be considered Level 3 inputs.
We performed our annual goodwill impairment test as of September 30, 2013. We bypassed the qualitative assessment and performed the two-step goodwill impairment test comparing estimated fair value to the carrying value of allocated net assets. Based on the discounted cash flow model, we determined that estimated fair value of the reporting unit exceeded the carrying value and, therefore, we did not proceed to step two of the impairment test. The fair value exceeded its carrying value by 62% as of September 30, 2013. The principal assumptions used in our cash flow model related to forecasting future operating results include discount rate, net revenue yields, net cruise costs including fuel prices, capacity changes, weighted-average cost of capital for comparable publicly-traded companies and terminal values, which are all considered level 3 inputs. Cash flows were calculated using our 2013 projected operating results as a base. To that base we added projected future years' cash flows, considering the macro-economic factors and internal occupancy level projections, cost structure and other variables. We discounted the projected future years' cash flows using a rate equivalent to our weighted-average cost of capital.
We performed our annual indefinite-lived intangible assets impairment test on our trade name as of September 30, 2013 using the relief-from-royalty method. We bypassed the qualitative assessment and performed the quantitative impairment test comparing the asset's estimated fair value to its carrying value. The royalty rate used is based on comparable royalty agreements in the tourism and hospitality industry, which was applied to the projected revenue to estimate the royalty savings and discounted to fair value. The discount rate used was identical to the rate used in our goodwill quantitative test. Based on the results of the discounted cash flow model, we determined that estimated fair value of our trade name exceeded its carrying value by 86% as of September 30, 2013 and no further action was necessary.
The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties that require significant judgments when developing assumptions of expected revenues, operating costs, selling and administrative expenses, capital expenditures and future impact of competitive forces. It is reasonably possible that changes in our assumptions and projected operating results used in our cash flow model could lead to an impairment of goodwill and or tradename.
v2.4.0.8
Commitments and Contingencies
9 Months Ended
Sep. 30, 2013
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
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 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, if any, 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 or results of operations and 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 meet this obligation by posting a $15.0 million surety bond. Our surety bond obligation will increase to $22.0 million in April 2014 and $30.0 million in April 2015.

In October 2012, PCH entered into a software license agreement with a third-party vendor. This agreement grants PCH a non-exclusive, perpetual, royalty-free license to use the software, which is shared between us and OCI. Our portion of the license fee is $1.1 million, of which $0.3 million was paid during 2012 and $0.5 million was paid during the nine months ended September 30, 2013. The balance is expected to be paid before the end of 2013.
On January 31, 2013 our former President stepped down from his role and became a consultant to us. We entered into a separation agreement and an independent contractor agreement (“Agreements”) with our former president. Severance of $0.7 million was paid for the year ended December 31, 2012 pursuant to his then-existing employment agreement. The Agreements have terms of 24 months and have been treated as an intangible asset. At inception the non-compete clause within the Agreement was valued at $0.6 million and represents an intangible asset in accordance with ASC 350 - Intangibles. The intangible asset has a finite useful life and is being amortized over the term of the Agreements. For the nine months ended September 30, 2013, we paid $0.2 million under the Agreements. Our estimated amortization expense is $0.3 million and $0.3 million for the years ended December 31, 2013 and 2014, respectively.
On March 22, 2013, our Chairman and Chief Executive Officer agreed to amend and extend his executive employment agreement with PCI through December 31, 2016. The amendment modifies certain terms of his existing employment agreement.
v2.4.0.8
Other Comprehensive Income
9 Months Ended
Sep. 30, 2013
Equity [Abstract]  
Other Comprehensive Income
Other Comprehensive Income

The following schedule represents the changes in accumulated other comprehensive loss by component for the three and nine month periods ended September 30, 2013 (in thousands):





Gains and Losses on Cash Flow Hedges
Beginning balance



$

Other comprehensive income before reclassifications



(719
)
Amount reclassified from accumulated other comprehensive income




Net current-period other comprehensive loss



(719
)
Ending balance



$
(719
)

The amount estimated to be reclassified from accumulated other comprehensive income for the twelve month period ending September 30, 2014 is $0.
v2.4.0.8
Consolidating Financial Information
9 Months Ended
Sep. 30, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Consolidating Financial Information
Consolidating Financial Information
Our $225.0 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 the Company.
The following condensed consolidating financial statements for Seven Seas Cruises S. DE R.L. and the Guarantors present condensed consolidating statements of income and comprehensive income for three and nine months ended September 30, 2013 and 2012, condensed consolidating balance sheets as of September 30, 2013 and December 31, 2012 and condensed consolidating statements of cash flows for the nine months ended September 30, 2013 and 2012, 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 will no longer be 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 financial statements. Previously, Seven Seas Cruises S. DE R.L had charter hire agreements in place with the two UK subsidiaries, which previously owned Seven Seas Voyager and Seven Seas Navigator. These agreements required Seven Seas Cruises S. DE R.L. 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, depreciation and interest related to the terms loans. These charter hire agreements have been novated to the new legal entities. In addition to the vessel owning subsidiaries, we have a sales and marketing office that is a Guarantor.
Our vessel-owning subsidiaries were parties to our first lien term loan as both borrowers and guarantors. The applicable outstanding debt related to the first lien term loan is included in the Guarantor accounts as well as the related interest expense and deferred financing costs through August 2012. In August 2012, Seven Seas Cruises S. DE R.L. repaid its first lien term loan and concurrently entered into a new credit agreement. As a result of this transaction, our vessel-owning subsidiaries are only guarantors on the new credit agreement. In 2011, Seven Seas Cruises S. DE R.L repaid the second lien term loan. As the loan was repaid by Seven Seas Cruises S. DE R.L., the parent company, each subsidiary remains responsible for its portion of the related debt to Seven Seas Cruises S. DE R.L. and such obligation was recorded as an intercompany payable at the subsidiary level and eliminated within the condensed consolidating balance sheets.
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.
During the first quarter of 2013, we determined that we did not properly classify $1.5 million of depreciation expense in our condensed consolidating financial information footnote in our nine months ended September 30, 2012 and year ended December 31, 2012. We should have presented the $1.5 million of vessel refurbishment depreciation expense in the Parent column instead of in the Subsidiaries Guarantors column. These revisions have no impact on the consolidated balance sheet, statement of income and comprehensive income or statement of cash flows for any period presented. In accordance with accounting guidance found in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), we assessed the materiality of the errors and concluded that the error was not material qualitatively and quantitatively to any of our previously issued financial statements. We will revise our previously issued financial statements in future filings.
During the third quarter of 2013, we determined that we did not properly classify $244.3 million of re-payment of debt in our condensed consolidating financial information footnote in our third quarter of 2012 interim period. We should have presented the $244.3 million of re-payment of debt in the statement of cash flows in the Parent column instead of in the Subsidiaries Guarantors column.  These revisions have no impact on the consolidated balance sheet, statement of income and comprehensive income or statement of cash flows for any period presented. In accordance with accounting guidance found in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), we assessed the materiality of the error and concluded that the error was not material to any of our previously issued financial statements.



Condensed Consolidating Balance Sheets
 
As of September 30, 2013
(in thousands)
Parent

Subsidiary Guarantors

Eliminations

Consolidated
Assets








Current assets







Cash and cash equivalents
$
143,591


$
2,187


$


$
145,778

Restricted cash
367






367

Trade and other receivable, net
6,785


216




7,001

Inventories
3,916


2,373




6,289

Prepaid expenses
24,310


1,075




25,385

Intercompany receivable
279,961


547


(280,508
)


Other current assets
2,930






2,930

Total current assets
461,860


6,398


(280,508
)

187,750

Property and equipment, net
98,111


548,636




646,747

Goodwill
404,858






404,858

Intangible assets, net
82,042






82,042

Other long-term assets
31,721






31,721

Investment in subsidiaries
271,740




(271,740
)


Total assets
$
1,350,332


$
555,034


$
(552,248
)

$
1,353,118









Liabilities and Members' Equity







Current liabilities







Trade and other payables
$
2,168


$
750


$


$
2,918

Related party payables
2,595


(36
)



2,559

Intercompany payables
547


279,961


(280,508
)


Accrued expenses
43,890


2,619




46,509

Passenger deposits
187,885






187,885

Current portion of long-term debt
2,237






2,237

Total current liabilities
239,322


283,294


(280,508
)

242,108

Long-term debt
517,196






517,196

Other long-term liabilities
11,040






11,040

Total liabilities
767,558


283,294


(280,508
)

770,344

Commitments and Contingencies







Members' equity







Contributed capital
564,934


134,036


(134,036
)

564,934

Accumulated earnings
18,559


137,704


(137,704
)

18,559

Accumulated other comprehensive loss
(719
)





(719
)
Total members' equity
582,774


271,740


(271,740
)

582,774

Total liabilities and members' equity
$
1,350,332


$
555,034


$
(552,248
)

$
1,353,118



Condensed Consolidating Balance Sheets

As of December 31, 2012
(in thousands)
Parent

Subsidiary Guarantors

Eliminations

Consolidated
Assets







Current assets







Cash and cash equivalents
$
98,815


$
1,042


$


$
99,857

Trade and other receivable, net
7,076


203




7,279

Related party receivables
1,798






1,798

Inventories
4,350


2,222




6,572

Prepaid expenses
15,971


1,857




17,828

Intercompany receivable
369,828


40,910


(410,738
)


Other current assets
2,692






2,692

Total current assets
500,530


46,234


(410,738
)

136,026

Property and equipment, net
74,070


563,254




637,324

Goodwill
404,858






404,858

Intangible assets, net
83,556






83,556

Other long-term assets
32,950






32,950

Investment in subsidiaries
236,220




(236,220
)


Total assets
$
1,332,184


$
609,488


$
(646,958
)

$
1,294,714









Liabilities and Members' Equity







Current liabilities







Trade and other payables
$
3,557


$
926


$


$
4,483

Related party payables


131




131

Intercompany payables
40,910


369,828


(410,738
)


Accrued expenses
41,350


2,383




43,733

Passenger deposits
169,463






169,463

Derivative liabilities
278






278

Total current liabilities
255,558


373,268


(410,738
)

218,088

Long-term debt
518,358






518,358

Other long-term liabilities
9,635






9,635

Total liabilities
783,551


373,268


(410,738
)

746,081

Commitments and Contingencies







Members' equity







Contributed capital
564,372


134,036


(134,036
)

564,372

Accumulated deficit
(15,739
)

102,184


(102,184
)

(15,739
)
Total members' equity
548,633


236,220


(236,220
)

548,633

Total liabilities and members' equity
$
1,332,184


$
609,488


$
(646,958
)

$
1,294,714





Condensed Consolidating Statements of Income and Comprehensive Income
 
Three Months Ended September 30, 2013
(in thousands)
Parent

Subsidiary Guarantors

Eliminations

Consolidated
Revenue







Passenger ticket
$
149,771


$


$


$
149,771

Onboard and other
16,185






16,185

Related party revenue


27,534


(27,534
)


Total revenue
165,956


27,534


(27,534
)

165,956

Cruise operating expense







Commissions, transportation and other
50,312


1,128


(1,085
)

50,355

Onboard and other
4,650


1




4,651

Payroll, related and food
17,264


3,238




20,502

Fuel
9,855






9,855

Other ship operating
8,271


2,941




11,212

Other
24,532


1,176


(24,446
)

1,262

Total cruise operating expense
114,884


8,484


(25,531
)

97,837

Selling and administrative
18,405


1,814


(2,003
)

18,216

Depreciation and amortization
4,187


4,877




9,064

Total operating expense
137,476


15,175


(27,534
)

125,117

Operating income
28,480


12,359




40,839

Non-operating (expense) income







Interest income
65


2




67

Interest expense
(9,375
)





(9,375
)
Other income (expense)
1,148


124




1,272

Equity in earnings of subsidiaries
12,438




(12,438
)


Total non-operating income (expense)
4,276


126


(12,438
)

(8,036
)
Income before income taxes
32,756


12,485


(12,438
)

32,803

Income tax benefit (expense), net
132


(47
)



85

Net income
32,888


12,438


(12,438
)

32,888

Other comprehensive income:











Loss on change in derivative fair value
(719
)





(719
)
Total comprehensive income
$
32,169


$
12,438


$
(12,438
)

$
32,169

Condensed Consolidating Statements of Income and Comprehensive Income

Three Months Ended September 30, 2012
(in thousands)
Parent

Subsidiary Guarantors

Eliminations

Consolidated
Revenue







Passenger ticket
$
143,152


$


$


$
143,152

Onboard and other
15,850


11




15,861

Related party revenue


25,996


(25,996
)


Total revenue
159,002


26,007


(25,996
)

159,013

Cruise operating expense







Commissions, transportation and other
53,778


924


(870
)

53,832

Onboard and other
4,852






4,852

Payroll, related and food
17,054


3,262




20,316

Fuel
9,203






9,203

Other ship operating
8,878


3,371




12,249

Other
23,306


1,112


(23,506
)

912

Total cruise operating expense
117,071


8,669


(24,376
)

101,364

Selling and administrative
16,970


1,907


(1,620
)

17,257

Depreciation and amortization
4,281


6,287




10,568

Total operating expense
138,322


16,863


(25,996
)

129,189

Operating income
20,680


9,144




29,824

Non-operating (expense) income







Interest income
134


1




135

Interest expense
(8,242
)

(1,048
)



(9,290
)
Other income (expense)
3,089


(2,915
)



174

Equity in earnings of subsidiaries
5,169




(5,169
)


Total non-operating expense
150


(3,962
)

(5,169
)

(8,981
)
Income before income taxes
20,830


5,182


(5,169
)

20,843

Income tax benefit (expense), net
149


(13
)



136

Net income and comprehensive income
$
20,979


$
5,169


$
(5,169
)

$
20,979









Condensed Consolidating Statements of Income and Comprehensive Income

Nine Months Ended September 30, 2013
(in thousands)
Parent

Subsidiary Guarantors

Eliminations

Consolidated
Revenue







Passenger ticket
$
392,983


$


$


$
392,983

Onboard and other
40,026






40,026

Related party revenue


82,921


(82,921
)


Total revenue
433,009


82,921


(82,921
)

433,009

Cruise operating expense







Commissions, transportation and other
139,478


4,655


(4,569
)

139,564

Onboard and other
11,107


19




11,126