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v2.4.0.6
Document and Entity Information Document
9 Months Ended
Sep. 30, 2012
Entity Information [Line Items]  
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, 2012
Document Fiscal Year Focus 2012
Document Fiscal Period Focus Q3
Amendment Flag false
Entity Common Stock, Shares Outstanding 0
v2.4.0.6
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Sep. 30, 2011
Dec. 31, 2010
Current assets        
Cash and cash equivalents $ 113,973 $ 68,620 $ 105,797 $ 37,258
Restricted cash 234 743    
Trade and other receivables, net 7,797 8,319    
Related party receivables 0 748    
Inventories 7,007 5,132    
Prepaid expenses 19,070 19,149    
Other current assets 3,150 4,165    
Total current assets 151,231 106,876    
Property and equipment, net 645,210 655,360    
Goodwill 404,858 404,858    
Intangible assets, net 84,197 86,120    
Other long-term assets 33,456 30,576    
Total assets 1,318,952 1,283,790    
Current liabilities        
Trade and other payables 1,249 5,752    
Related party payables 1,250 0    
Accrued expenses 50,800 41,782    
Passenger deposits 172,739 159,312    
Derivative liabilities 193 112    
Current portion of long-term debt 2,970 0    
Total current liabilities 229,201 206,958    
Long-term debt 519,066 518,500    
Other long-term liabilities 7,858 13,694    
Total liabilities 756,125 739,152    
Commitments and contingencies         
Members' equity        
Contributed capital 564,041 563,365    
Accumulated deficit (1,214) (18,727)    
Total members' equity 562,827 544,638    
Total liabilities and members' equity $ 1,318,952 $ 1,283,790    
v2.4.0.6
Consolidated Statements of Income and Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenue        
Passenger ticket $ 143,152 $ 135,939 $ 371,273 $ 339,392
Onboard and other 15,861 15,401 39,082 38,568
Total revenue 159,013 151,340 410,355 377,960
Cruise operating expense        
Commissions, transportation and other 53,832 47,710 139,567 114,934
Onboard and other 4,852 4,950 10,260 10,202
Payroll, related and food 20,316 18,824 58,337 54,010
Fuel 9,203 9,570 31,751 30,182
Other ship operating 12,249 9,878 32,620 28,825
Other 912 6,525 8,037 12,848
Total cruise operating expense 101,364 97,457 280,572 251,001
Other operating expense        
Selling and administrative 17,257 16,334 55,258 54,506
Depreciation and amortization 10,568 9,500 30,111 27,537
Total operating expense 129,189 123,291 365,941 333,044
Operating income 29,824 28,049 44,414 44,916
Non-operating income (expense)        
Interest income 135 75 360 138
Interest expense (9,290) (7,973) (25,356) (23,385)
Other income (expense) 174 (807) (1,840) (3,904)
Total non-operating expense (8,981) (8,705) (26,836) (27,151)
Loss before income taxes 20,843 19,344 17,578 17,765
Income tax benefit (expense) 136 115 (65) 165
Net Income 20,979 19,459 17,513 17,930
Other comprehensive income, net of tax:        
Loss on change in derivative fair value 0 0 0 (2,814)
Total comprehensive income $ 20,979 $ 19,459 $ 17,513 $ 15,116
v2.4.0.6
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash flows from operating activities    
Net Income $ 17,513 $ 17,930
Adjustments:    
Depreciation and amortization 30,111 27,537
Amortization of deferred financing costs 2,232 2,686
Accretion of debt discount 346 295
Stock-based compensation 676 600
Unrealized loss (gain) on derivative contracts (1,574) 627
Property, Plant and Equipment, Disposals (303) (925)
Gains (Losses) on Extinguishment of Debt 4,487 7,502
Other, net 185 126
Trade and other accounts receivable (1,271) (6,360)
Prepaid expenses and other current assets 83 (4,091)
Inventories 1,876 3,174
Accounts payable and accrued expenses 6,450 3,284
Passenger deposits 9,838 15,440
Net cash provided by operating activities 69,675 75,795
Cash flows from investing activities    
Purchases of property and equipment (19,547) (21,956)
Change in restricted cash (509) 16,652
Acquisition of intangible assets 0 (4,445)
Net cash used in investing activities (19,038) (43,053)
Cash flows from financing activities    
Repayment of debt (293,500) (180,786)
Proceeds from the issuance of senior secured notes 297,000 225,000
Debt issuance costs (6,784) (7,022)
Deferred intangible asset payment (2,000) 0
Costs associated with the early extinguishment of debt (76) (1,393)
Net cash (used in) provide by financing activities (5,360) 35,799
Effect of exchange rate changes on cash and cash equivalents 76 (2)
Net increase in cash and cash equivalents 45,353 68,539
Cash and cash equivalents    
Beginning of period 68,620 37,258
End of period $ 113,973 $ 105,797
v2.4.0.6
Basis of Presentation
9 Months Ended
Sep. 30, 2012
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
Basis of Presentation
Seven Seas Cruises S. DE R.L. (“SSC”, “Company”, “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 wholly-owned subsidiary of our ultimate parent company, Prestige Cruises International, Inc. (“PCI”). PCI is controlled by funds affiliated with Apollo Global Management, LLC.
The accompanying interim consolidated financial statements include the accounts of SSC and its wholly-owned subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States. The financial information presented as of any date other than December 31 has been prepared from the books and records of the Company that are unaudited. Financial information as of December 31 has been derived from SSC’s audited financial statements, but does not include all disclosures required by generally accepted accounting principles.
The accompanying Consolidated Balance Sheet at September 30, 2012 and the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 and Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 are unaudited, and, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2011 and notes thereto included in the fifth amendment to our registration statement on Form S-4 (333-178244) filed with the Securities and Exchange Commission on May 7, 2012. Our operations are seasonal, and results from our interim periods are not necessarily indicative of the results to be expected for the entire year.
New Accounting Pronouncements - As of September 30, 2012, we adopted Financial Accounting Standards Board ASU 2012-02, Intangibles - Goodwill and Other (Topic 350). This updated standard allows a company to perform a qualitative analysis prior to its quantitative impairment test for indefinite-lived intangible assets other than goodwill. If this analysis does not result in a more likely than not conclusion that impairment exists, then no further action is required. We do not believe the adoption will materially impact our consolidated financial statements.
As of January 1, 2012, we adopted Financial Accounting Standards Board ASU 2011-08, Intangibles - Goodwill and Other (Topic 350). This updated standard allows a company to perform a qualitative analysis prior to its two step impairment test for goodwill. If this analysis does not result in a more likely than not conclusion that impairment exists, then performing the two step impairment test is no longer required. We do not believe the adoption will materially impact our consolidated financial statements.
As of January 1, 2012, we adopted Financial Accounting Standards Board ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This updated standard has changed the presentation of our financial statements as it required presentation of comprehensive income in either a single continuous statement of comprehensive income or in two separate, but consecutive statements. We have elected to present this information on a single continuous statement. We do not believe the adoption will materially impact our consolidated financial statements.
As of January 1, 2012 we adopted Financial Accounting Standards Board ASU 2011-04, Fair Value Measurement (Topic 820). This standard increased the disclosure requirements for each class of assets and liabilities that is not measured at fair value in the balance sheet, but for which fair value is disclosed within the notes to the financial statements. We do not believe the adoption will materially impact our consolidated financial statements.

As of January 1, 2012 we adopted Financial Accounting Standards Board ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. This standard delays the presentation requirements for reclassifying items out of accumulated other comprehensive income (loss) as noted in Financial Accounting Standards Board ASU 2011-12. We do not believe the impact will materially impact our consolidated financial statements.
In December 2011, the Financial Accounting Standards Board issued 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. It will be effective for financial statements issued for fiscal periods beginning on or after January 1, 2013. We do not believe the impact will materially impact our consolidated financial statements.
v2.4.0.6
Property and Equipment, net
9 Months Ended
Sep. 30, 2012
Property, Plant and Equipment [Abstract]  
Property and Equipment, net
Property and Equipment, net
During the nine months ended September 30, 2012, property and equipment, net decreased $10.2 million. Capital expenditures totaled $5.4 million and $10.1 million for the three months ended September 30, 2012 and 2011, respectively, and $19.5 million and $22.0 million for the nine months ended September 30, 2012 and 2011, respectively. Depreciation expense on assets in service was $9.8 million and $8.7 million for the three months ended September 30, 2012 and 2011, respectively, and $27.9 million and $25.4 million for the nine months ended September 30, 2012 and 2011, respectively.
v2.4.0.6
Debt
9 Months Ended
Sep. 30, 2012
Debt Disclosure [Abstract]  
Debt
    Debt

 
 
September 30,
 
December 31,
(in thousands)
 
 
2012
 
2011
$425 million term loan, currently LIBOR plus 1.75%, due through 2014
 
 
$

 
$
293,500

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

 
225,000

$300 million term loan, currently LIBOR plus 5.00% due through 2018
(a)
 
297,036

 

 
 
 
522,036

 
518,500

Less: Current portion of long-term debt
(a)
 
2,970

 

Long-term portion
 
 
$
519,066

 
$
518,500

 
 
 
 
 
 

(a) Net of $3.0 million of original issue discount, of which $2.9 million is classified as long-term and $0.1 million is classified as current.
Interest expense on third-party debt, including interest rate swaps in 2011, was $8.3 million and $6.8 million for the three months ended September 30, 2012 and 2011, respectively, and $22.1 million and $19.7 million for the nine months ended September 30, 2012 and 2011, respectively.
Term Loans
In August of 2012, we terminated our previously existing $465.0 million credit facility, consisting of both a $425.0 million term loan and a $40.0 million revolving facility, with a syndicate of financial institutions. We repaid the outstanding loan balance of $293.5 million in addition to accrued interest of $1.0 million and third party fees of $0.1 million. We also wrote off approximately $4.4 million of previously recorded deferred financing costs associated with the terminated credit facility. The repayment of the debt met the liability derecognition criteria in ASC Topic 405, Extinguishment of Liabilities, and as such, a loss of $4.5 million on early extinguishment of debt was recorded and is included in other income (expense) in our consolidated statements of operations and within operating activities in our consolidated statements of cash flows.
Concurrent with the termination of the previously existing credit facility, we entered into a $340.0 million credit agreement consisting of a $300.0 million term loan and a $40.0 million revolving credit facility with a syndicate of financial institutions. Borrowings under the term loan and revolving credit facility bear interest at LIBOR with a floor of 1.25% and an applicable margin of either 4.75% or 5.0% based on the Total Senior Secured Bank Leverage Ratio. The margin is currently 5.0%. In addition, we are required to pay a commitment fee of either 0.375% or 0.5% based on a certain financial ratio and upon the aggregate unused and uncanceled commitments under the revolving credit facility. Our current commitment fee is 0.5%. The credit term loan matures on December 21, 2018, at which time all outstanding amounts under the term loan will be due and payable. The revolving credit facility matures on August 21, 2017, at which time all outstanding amounts under the revolving credit facility will be due and payable. The proceeds from the credit agreement were used to repay the first lien term loan, as discussed above.
The $340.0 million credit agreement included an original issue debt discount of $3.0 million. This amount is recorded as a reduction to the gross debt and is being accreted over the agreement term using the effective interest method. We have presented the debt net of the original debt discount in our consolidated balance sheets. The discount is not considered an asset separable from the debt and we have allocated the discount between current and non-current long-term debt. Additionally, we recorded $6.8 million in debt issuance costs. Deferred debt issuance costs are amortized to income using the effective interest method and are included net of amortization within other current assets and other assets in the accompanying consolidated balance sheets.
The 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.
The following schedule represents the maturities of long-term debt (in thousands):
For the twelve months ending September 30,
 
 
2013
 
 
$
3,000

2014
 
 
3,000

2015
 
 
3,000

2016
 
 
3,000

Thereafter
 
 
513,000


 
 
$
525,000

v2.4.0.6
Derivative Instruments, Hedging Activities and Fair Value Measurements
9 Months Ended
Sep. 30, 2012
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 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.
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 use interest rate swap agreements to modify our exposure to interest rate fluctuations and to manage our interest expense. During 2008, we entered into an interest rate swap agreement with a notional amount of $400.0 million to limit the interest rate exposure related to our long-term debt. This interest rate swap, which matured on February 14, 2011, was designated as a cash flow hedge and the change in fair value of the effective portion of the interest rate swap was recorded as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheet. There were no interest rate swaps outstanding as of September 30, 2012 and December 31, 2011.
Foreign Currency Exchange Risk
Our exposure to foreign currency exchange rate risk relates to our euro denominated vessel dry-dock and other operational expenses. We enter into foreign currency swaps to limit the exposure to movements in the foreign currency exchange rates. The foreign currency swaps do not qualify for hedge accounting; therefore, the changes in fair value of these foreign currency derivatives are recorded in other income (expense) in the accompanying consolidated statements of income and comprehensive income. There were no outstanding foreign currency swap agreements as of September 30, 2012. The total aggregate notional amount of outstanding foreign currency swap agreements as of December 31, 2011 was €3.9 million ($5.2 million).
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 September 30, 2012, we have hedged the variability in future cash flows for forecast fuel consumption occurring through 2014. As of September 30, 2012 and December 31, 2011, we have entered into the following fuel swap agreements:
 
 
Fuel Swap Agreements
 
 
As of September 30, 2012
 
As of December 31, 2011
 
 
(in barrels)
2012
 
76,200

 
156,300

2013
 
203,025

 

2014
 
108,750

 

 
 
 
 
 
 
 
 
 
 
 
 
Fuel Swap Agreements
 
 
As of September 30, 2012
 
As of December 31, 2011
 
 
(% hedged)
2012
 
75
%
 
39
%
2013
 
55
%
 
%
2014
 
29
%
 
%



We have certain fuel derivative contracts that are subject to margin requirements. For these specific fuel derivative contracts, on any business day, we may be required to post collateral if the mark-to-market exposure assessed at our parent company level exceeds $3.0 million. The amount of collateral required to be posted is an amount equal to the difference between the exposure (cost of liquidating and terminating the contract) and $3.0 million. As of September 30, 2012 and December 31, 2011, we were not required to post any collateral for our fuel derivative instruments as the exposure did not exceed $3.0 million.
At September 30, 2012 and December 31, 2011, the fair values and line item captions of derivative instruments recorded were as follows:
Derivatives not designated as hedging instruments under FASB ASC 815-20
 
 
 
 
 
 
 
 
 
Fair Value as of
 
Fair Value as of
(in thousands)
Balance Sheet Location
 
September 30, 2012
 
December 31, 2011
 
 
 
 
 
 
Fuel hedges
Other current assets
 
$
1,130

 
$
489

Fuel hedges
Other long-term assets
 
1,015

 

 
Total Derivatives Assets
 
$
2,145

 
$
489

 
 
 
 
 
 
Foreign currency swap
Current liabilities - Derivative liabilities
 
$

 
$
112

Fuel hedges
Current liabilities - Derivative liabilities
 
193

 

 
Total Derivatives Liabilities
 
$
193

 
$
112




We had no derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements as of September 30, 2012. Also, there was no effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the three months ended September 30, 2011.
The effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the nine months ended September 30, 2011 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)
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$
(2,814
)
 
 Interest expense
 
$
(2,814
)
 
N/A
 
$

Total
$
(2,814
)
 
 
 
$
(2,814
)
 
 
 
$



The effect of derivative instruments not designated as hedging instruments on the consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 was as follows:
 
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,
 
 
2012
 
2011
 
 
 
 
 
 
Foreign currency swap
Other income (expense)
 
$
(19
)
 
$

Fuel hedges
Other income (expense)
 
4,241

 
678

Total
 
 
$
4,222

 
$
678

 
 
 
 
 
 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income on Derivative Instruments
 
Amount of Gain (Loss) Recognized in Income on Derivative Instruments
 
 
For the Nine Months Ended September 30,
(in thousands)
 
2012
 
2011
 
 
 
 
 
 
Foreign currency swap
Other income (expense)
 
$
(26
)
 
$

Fuel hedges
Other income (expense)
 
2,839

 
3,419

Total
 
 
$
2,813

 
$
3,419






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 as follows:
(in thousands)
 
Carrying Value as of
 
                        Fair Value as of
 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
Long-term bank debt
(a)
$
297,036

 
$
293,500

 
$
321,365

 
$
275,338

Senior secured notes
 
225,000

 
225,000

 
235,406

 
226,133

Total
 
$
522,036

 
$
518,500

 
$
556,771

 
$
501,471

 
 
 
 
 
 
 
 
 
(a) Net of $3.0 million of original issue discount on the new $300 million term loan.


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, 2012 and December 31, 2011.
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, 2012
 
As of December 31, 2011
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
(a)
$
2,145

 
$

 
$
2,145

 
$

 
$
489

 
$

 
$
489

 
$

Total Assets
 
$
2,145

 
$

 
$
2,145

 
$

 
$
489

 
$

 
$
489

 
$

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
(b)
$
193

 
$

 
$
193

 
$

 
$
112

 
$

 
$
112

 
$

Total liabilities
 
$
193

 
$

 
$
193

 
$

 
$
112

 
$

 
$
112

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) As of September 30, 2012, derivative financial instruments assets of $1.1 million and $1.0 million are classified as other current assets and other long-term assets, respectively, in the consolidated balance sheets. As of December 31, 2011, $0.5 million was classified as other current assets.
(b) As of September 30, 2012, derivative financial instruments liabilities of $0.2 million are classified as current liabilities-derivative liabilities in the consolidated balance sheets. As of December 31, 2011, $0.1 million was classified as current liabilities-derivative liabilities.
Our derivative financial instruments consist of an interest rate swap, foreign currency exchange contracts and fuel hedge swaps. 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 interest rates, forward fuel prices, 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. 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 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 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. During the second quarter of 2012, the Seven Seas Navigator underwent a dry-dock, in which improvements were made. Due to the costs added to its carrying value, we performed an impairment review utilizing an undiscounted cash flow analysis. The principle assumptions used in the undiscounted cash model were projected operating results, including net per diems, net cruise costs, projected occupancy, available passenger days, and projected growth. Upon performing the impairment review, we determined that the revised carrying amount of the vessel is recoverable and therefore not impaired as of September 30, 2012.
In 2012, we adopted new authoritative accounting guidance that allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. We would perform the two-step test if our qualitative assessment determined it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. We may also elect to bypass the qualitative assessment and proceed directly to step one of the quantitative test. When performing the two-step process, if the fair value of the reporting unit exceeds its carrying value, no further analysis or impairment is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the implied fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair values. If necessary, goodwill is then written down to its implied fair value.
We performed our annual goodwill impairment test as of September 30, 2012. 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 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 54% as of September 30, 2012. The principal assumptions used in our cash flow model related to forecasting future operating results, includes 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 2012 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, 2012 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 exceeded carrying value and no further action was necessary. The fair value of our trade name exceeded its carrying value by 81% as of September 30, 2012.
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.
v2.4.0.6
Commitments and Contingencies
9 Months Ended
Sep. 30, 2012
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 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
During February 2012, we made a $2.0 million payment for previously acquired intangible assets related to Regent licensing rights acquired in 2011. As of September 30, 2012, we have a remaining liability of $2.0 million due in February 2013.
During March 2012, management signed a 5-year maintenance agreement with a vendor. The cost of future maintenance contract obligations as of September 30, 2012 is approximately $13.7 million. The contract consists of multiple cost components. Monthly variable maintenance fees are based on engine usage over the contract term. Monthly fixed fees are based on a per vessel basis. We are also required to purchase a certain amount of capital equipment and spare parts. Equipment will be recorded as property and equipment upon receipt and maintenance fees are recorded as repair and maintenance expenses. As of September 30, 2012 we pre-paid $0.2 million for capital equipment, which is recorded in Prepaid expenses in the accompanying consolidated balance sheet.

During April 2012, the President and Chief Operating Officer of PCH was granted 600,000 options to purchase PCI shares according to his employment contract. These options are time based and vest over 3 years on his employment anniversary date. The contractual term of these options is 8 years. Total compensation expense for these options was calculated at the PCI level. The fair value was estimated on the grant date using the Black-Scholes model which includes the fair value of PCI common stock determined at the approximate grant date. The estimated fair value of these stock options, less estimated forfeitures, totaled $1.4 million and is amortized over the vesting period using the graded-vesting method. As the President and Chief Operating Officer of PCH provides services to both us and Oceania Cruises, Inc., our sister company, the related compensation costs are allocated on an agreed percentage. The allocated compensation expense was approximately $0.3 million and 0.7 million for the three and nine months ended September 30, 2012, respectively.
v2.4.0.6
Accumulated Other Comprehensive Loss
9 Months Ended
Sep. 30, 2012
Equity [Abstract]  
Accumulated Other Comprehensive Loss
Note 6. Accumulated Other Comprehensive Loss
Our accumulated other comprehensive loss consists of the quarterly change in derivative fair value. There has been no activity during the three or nine months ended September 30, 2012. We recorded no activity for the three months ended September 30, 2011 and a loss of $2.8 million related to the change in derivative fair value for the nine months ended September 30, 2011.
v2.4.0.6
Consolidating Financial Information
9 Months Ended
Sep. 30, 2012
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Consolidating Financial Information
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 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, 2012 and 2011, condensed consolidating balance sheets as of September 30, 2012 and December 31, 2011 and condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2011, using the equity method of accounting, as well as elimination entries necessary to consolidate the parent company and all of its subsidiaries.
Seven Seas Cruises S. DE R.L. has charter hire agreements in place with certain subsidiaries, which own the vessels. These agreements require Seven Seas Cruises S. DE R.L. to pay a daily hire fee to the subsidiary to administratively manage the vessel. The costs incurred by the vessel owning subsidiaries include deck and engine crew payroll and expenses, vessel insurance, depreciation and interest related to the terms loans. In addition to the vessel owning subsidiaries, we have a sales and marketing office that is also 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 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.

Condensed Consolidating Balance Sheets
 
As of September 30, 2012
(in thousands)
Parent 'Issuer'
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
111,790

 
$
2,183

 
$

 
$
113,973

Restricted cash
234

 

 

 
234

Trade and other receivable, net
7,629

 
168

 

 
7,797

Related party receivables

 

 

 

Inventories
4,875

 
2,132

 

 
7,007

Prepaid expenses
18,082

 
988

 

 
19,070

Intercompany receivable
388,880

 
40,541

 
(429,421
)
 

Other current assets
3,110

 
40

 

 
3,150

Total current assets
534,600

 
46,052

 
(429,421
)
 
151,231

Property and equipment, net
71,510

 
573,700

 

 
645,210

Goodwill
404,858

 

 

 
404,858

Intangible assets, net
84,197

 

 

 
84,197

Other long-term assets
33,401

 
55

 

 
33,456

Investment in subsidiaries
227,559

 

 
(227,559
)
 

Total assets
$
1,356,125

 
$
619,807

 
$
(656,980
)
 
$
1,318,952

 
 
 
 
 
 
 
 
Liabilities and Members' Equity
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Trade and other payables
$
509

 
$
740

 
$

 
$
1,249

Related party payables
1,250

 

 

 
1,250

Intercompany payables
40,541

 
388,880

 
(429,421
)
 

Accrued expenses
48,172

 
2,628

 

 
50,800

Passenger deposits
172,739

 

 

 
172,739

Derivative liabilities
193

 

 

 
193

Current portion of long-term debt
2,970

 

 

 
2,970

Total current liabilities
266,374

 
392,248

 
(429,421
)
 
229,201

Long-term debt
519,066

 

 

 
519,066

Other long-term liabilities
7,858

 

 

 
7,858

Total liabilities
793,298

 
392,248

 
(429,421
)
 
756,125

Commitments and Contingencies
 
 
 
 
 
 
 
Members' equity
 
 
 
 
 
 
 
Contributed capital
564,041

 
134,036

 
(134,036
)
 
564,041

Accumulated (deficit) earnings
(1,214
)
 
93,523

 
(93,523
)
 
(1,214
)
Total members' equity
562,827

 
227,559

 
(227,559
)
 
562,827

Total liabilities and members' equity
$
1,356,125

 
$
619,807

 
$
(656,980
)
 
$
1,318,952



Condensed Consolidating Balance Sheets

As of December 31, 2011
(in thousands)
Parent 'Issuer'

Subsidiaries Guarantors

Eliminations

Consolidated
Assets







Current assets







Cash and cash equivalents
$
67,771


$
849


$


$
68,620

Restricted cash
743






743

Trade and other receivable, net
8,242


77




8,319

Related party receivables
748






748

Inventories
3,284


1,848




5,132

Prepaid expenses
17,637


1,512




19,149

Intercompany receivable
176,672


30,849


(207,521
)


Other current assets
2,171


1,994




4,165

Total current assets
277,268


37,129


(207,521
)

106,876

Property and equipment, net
66,446


588,914




655,360

Goodwill
404,858






404,858

Intangible assets, net
86,120






86,120

Other long-term assets
27,416


3,160




30,576

Investment in subsidiaries
205,634




(205,634
)


Total assets
$
1,067,742


$
629,203


$
(413,155
)

$
1,283,790









Liabilities and Members' Equity







Current liabilities







Trade and other payables
$
5,250


$
502


$


$
5,752

Intercompany payables
30,849


176,672


(207,521
)


Accrued expenses
39,642


2,140




41,782

Passenger deposits
159,312






159,312

Derivative liabilities
112






112

Total current liabilities
235,165


179,314


(207,521
)

206,958

Long-term debt
274,245


244,255




518,500

Other long-term liabilities
13,694






13,694

Total liabilities
523,104


423,569


(207,521
)

739,152

Commitments and Contingencies







Members' equity







Contributed capital
563,365


129,702


(129,702
)

563,365

Accumulated (deficit) earnings
(18,727
)

75,932


(75,932
)

(18,727
)
Total members' equity
544,638


205,634


(205,634
)

544,638

Total liabilities and members' equity
$
1,067,742


$
629,203


$
(413,155
)

$
1,283,790





Condensed Consolidating Statements of Income and Comprehensive Income
 
Three Months Ended September 30, 2012
(in thousands)
Parent 'Issuer'
 
Subsidiaries 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 income (expense)
 
 
 
 
 
 
 
Interest expense
(8,242
)
 
(1,048
)
 

 
(9,290
)
Interest income
134

 
1

 

 
135

Other income (expense)
3,089

 
(2,915
)
 

 
174

Equity in earnings of subsidiaries
5,169

 

 
(5,169
)
 

Total non-operating income (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
20,979

 
5,169

 
(5,169
)
 
20,979

Comprehensive income
$
20,979

 
$
5,169

 
$
(5,169
)
 
$
20,979

Condensed Consolidating Statements of Income and Comprehensive Income

Three Months Ended September 30, 2011
(in thousands)
Parent 'Issuer'
 
Subsidiaries Guarantors
 
Eliminations
 
Consolidated
Revenue

 

 

 

Passenger ticket
$
135,939

 
$

 
$

 
$
135,939

Onboard and other
15,401

 

 

 
15,401

Related Party Revenue

 
24,713

 
(24,713
)
 

Total revenue
151,340

 
24,713

 
(24,713
)
 
151,340

Cruise operating expense

 

 

 

Commissions, transportation and other
47,493

 
899

 
(682
)
 
47,710

Onboard and other
4,950

 

 

 
4,950

Payroll, related and food
15,971

 
2,853

 

 
18,824

Fuel
9,570

 

 

 
9,570

Other ship operating
7,684

 
2,194

 

 
9,878

Other
28,120

 
1,086

 
(22,681
)
 
6,525

Total cruise operating expense
113,788

 
7,032

 
(23,363
)
 
97,457

Selling and administrative
16,260

 
1,424

 
(1,350
)
 
16,334

Depreciation and amortization
722

 
8,778

 

 
9,500

Total operating expense
130,770

 
17,234

 
(24,713
)
 
123,291

Operating income
20,570

 
7,479

 

 
28,049

Non-operating income (expense)

 

 

 

Interest expense
(6,111
)
 
(1,862
)
 

 
(7,973
)
Interest income
74

 
1

 

 
75

Other income (expense)
(745
)
 
(62
)
 

 
(807
)
Equity in earnings of subsidiaries
5,550

 

 
(5,550
)
 

Total non-operating expense
(1,232
)
 
(1,923
)
 
(5,550
)
 
(8,705
)
Income before income taxes
19,338

 
5,556

 
(5,550
)
 
19,344

Income tax benefit (expense), net
121

 
(6
)
 

 
115

Net income
19,459

 
5,550

 
(5,550
)
 
19,459

Comprehensive income
$
19,459

 
$
5,550

 
$
(5,550
)
 
$
19,459


Condensed Consolidating Statements of Income and Comprehensive Income