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v2.4.0.6
Document and Entity Information Document (USD $)
12 Months Ended
Dec. 31, 2012
Jun. 30, 2012
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-K  
Document Period End Date Dec. 31, 2012  
Document Fiscal Year Focus 2012  
Document Fiscal Period Focus FY  
Amendment Flag false  
Entity Common Stock, Shares Outstanding 0  
Entity Well-known Seasoned Issuer No  
Entity Voluntary Filers Yes  
Entity Current Reporting Status No  
Entity Public Float   $ 0
v2.4.0.6
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Current assets        
Cash and cash equivalents $ 99,857 $ 68,620 $ 37,258 $ 27,754
Restricted cash 0 743    
Trade and other receivables, net 7,279 8,319    
Related party receivables 1,798 748    
Inventories 6,572 5,132    
Prepaid expenses 17,828 19,149    
Other current assets 2,692 4,165    
Total current assets 136,026 106,876    
Property and equipment, net 637,324 655,360    
Goodwill 404,858 404,858    
Intangible assets, net 83,556 86,120    
Other long-term assets 32,950 30,576    
Total assets 1,294,714 1,283,790    
Current liabilities        
Trade and other payables 4,483 5,752    
Related party payables 131 0    
Accrued expenses 43,733 41,782    
Passenger deposits 169,463 159,312    
Derivative liabilities 278 112    
Current portion of long-term debt 0 0    
Total current liabilities 218,088 206,958    
Long-term debt 518,358 518,500    
Other long-term liabilities 9,635 13,694    
Total liabilities 746,081 739,152    
Commitments and contingencies         
Members' equity        
Contributed capital 564,372 563,365    
Accumulated deficit (15,739) (18,727)    
Total members' equity 548,633 544,638 529,568 504,674
Total liabilities and members' equity $ 1,294,714 $ 1,283,790    
v2.4.0.6
Consolidated Statements of Income and Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2011
Sep. 30, 2011
Jun. 30, 2011
Mar. 31, 2011
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenue                      
Passenger ticket                 $ 477,606 $ 437,582 $ 400,368
Onboard and other                 51,529 48,313 48,873
Total revenue 117,226 [1] 159,013 [1] 131,480 [1] 121,416 [1],[2] 107,934 [1] 151,340 [1] 122,849 [1] 103,772 [1] 529,135 485,895 449,241
Cruise operating expense                      
Commissions, transportation and other                 185,446 150,580 124,671
Onboard and other                 12,811 12,035 12,640
Payroll, related and food                 78,150 73,098 69,415
Fuel                 42,573 40,592 32,240
Other ship operating                 43,707 38,524 39,067
Other                 9,153 14,044 6,479
Total cruise operating expense                 371,840 328,873 284,512
Other operating expense                      
Selling and administrative                 75,061 72,279 77,376
Depreciation and amortization                 40,624 39,222 36,523
Total operating expense                 487,525 440,374 398,411
Operating income (2,803) 29,824 8,573 6,016 605 28,049 11,260 5,607 41,610 45,521 50,830
Non-operating income (expense)                      
Interest income                 434 222 100
Interest expense                 (36,287) (31,497) (38,753)
Other income (expense)                 (2,674) (2,928) (130)
Total non-operating expense                 (38,527) (34,203) (38,783)
Income before income taxes                 3,083 11,318 12,047
Income tax benefit (expense)                 (95) 139 (292)
Net income (14,524) 20,979 (3,825) 358 (6,473) 19,459 (3,002) 1,473 2,988 11,457 11,755
Other comprehensive income, net of tax:                      
Gain on change in derivative fair value                 0 2,814 8,911
Total comprehensive income                 $ 2,988 $ 14,271 $ 20,666
[1] Our revenues are seasonal based on the demand for cruises. Demand is the strongest for cruises during the Northern Hemisphere’s summer months and holidays. Additionally, no dividends were declared for the years ending December 31, 2012 or 2011.
[2] We increased our passenger ticket revenue and commissions, transportation and other expenses by $1.6 million during the three months ended March 31, 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. The amounts recorded were deemed immaterial to previously issued unaudited quarterly financial statements and had no impact on net income or cash flows. Accordingly, we will reflect the revision in the fiscal 2012 periods in future filings.
v2.4.0.6
Consolidated Statements of Members' Equity (USD $)
In Thousands, unless otherwise specified
Total
Contributed capital [Member]
Accumulated deficit [Member]
Accumulated other comprehensive income (loss) [Member]
Balances at beginning of period at Dec. 31, 2009 $ 504,674 $ 558,338 $ (41,939) $ (11,725)
Increase (Decrease) in Partners' Capital [Roll Forward]        
Net income 11,755 0 11,755 0
Gain related to changes in derivative fair value 8,911 0 0 8,911
Capital contributions 1,988 1,988 0 0
Modification of liability classified awards to equity 86 86 0 0
Stock-based compensation 2,154 2,154 0 0
Balances at end of period at Dec. 31, 2010 529,568 562,566 (30,184) (2,814)
Increase (Decrease) in Partners' Capital [Roll Forward]        
Net income 11,457 0 11,457 0
Gain related to changes in derivative fair value 2,814 0 0 2,814
Stock-based compensation 799 799 0 0
Balances at end of period at Dec. 31, 2011 544,638 563,365 (18,727) 0
Increase (Decrease) in Partners' Capital [Roll Forward]        
Net income 2,988 0 2,988 0
Gain related to changes in derivative fair value 0      
Stock-based compensation 1,007 1,007 0 0
Balances at end of period at Dec. 31, 2012 $ 548,633 $ 564,372 $ (15,739) $ 0
v2.4.0.6
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities      
Net income $ 2,988 $ 11,457 $ 11,755
Adjustments:      
Depreciation and amortization 40,624 39,222 36,523
Amortization of deferred financing costs 2,803 3,456 4,099
Accretion of debt discount 510 424 0
Stock-based compensation 1,007 799 2,154
Unrealized (gain) loss on derivative contracts (907) 732 728
Loss on disposals of property and equipment 303 1,174 0
Loss on early extinguishment of debt 4,487 7,502 0
Other, net (190) (115) (146)
Changes in operating assets and liabilities:      
Trade and other accounts receivable (15) 5,520 (2,588)
Prepaid expenses and other current assets 1,350 (5,861) (3,913)
Inventories (1,440) (2,796) (540)
Accounts payable and accrued expenses 1,817 1,878 (6,428)
Passenger deposits 8,540 12,286 9,213
Net cash provided by operating activities 61,877 75,678 50,857
Cash flows from investing activities      
Purchases of property and equipment (21,679) (31,017) (18,853)
Change in restricted cash 512 (16,668) 3,020
Acquisition of intangible assets 0 (4,443) 0
Net cash used in investing activities (21,167) (52,128) (15,833)
Cash flows from financing activities      
Repayment of debt (297,250) (208,286) (25,000)
Net proceeds from the issuance of debt 297,000 225,000 0
Debt issuance costs (7,250) (7,393) 0
Deferred payment to acquire intangible asset (2,000) 0 0
Costs associated with the early extinguishment of debt (76) (1,393) 0
Capital contributions 0 0 19
Net cash (used in) provided by financing activities (9,576) 7,928 (24,981)
Effect of exchange rate changes on cash and cash equivalents 103 (116) (539)
Net increase in cash and cash equivalents 31,237 31,362 9,504
Cash and cash equivalents      
Beginning of period 68,620 37,258 27,754
End of period $ 99,857 $ 68,620 $ 37,258
v2.4.0.6
General
12 Months Ended
Dec. 31, 2012
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
General
General
Description of Business
Seven Seas Cruises S. DE R.L. (“SSC”, “we” or “our”) is a Panamanian sociedad de responsibilidad limitada organized on November 7, 2007, and is owned by Classic Cruises, LLC (“CCL I”) and Classic Cruises II, LLC (“CCL II”). CCL I and CCL II are Delaware companies and each company owns 50% of SSC. Prestige Cruise Holdings, Inc. (“PCH”) owns both CCL I and CCL II. PCH is a 100%-owned subsidiary of our ultimate parent company, Prestige Cruises International, Inc. (“PCI”). PCI is controlled by funds affiliated with Apollo Global Management, LLC ("Apollo"). We commenced operations on February 1, 2008 upon the consummation of the Regent Seven Seas acquisition when we acquired substantially all the assets of Regent Seven Seas Cruises, Inc. (the “Regent Seven Seas Transaction”).
Basis for Preparation of Consolidated Financial Statements
The accompanying 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. All inter-company balances and transactions have been eliminated in consolidation.
v2.4.0.6
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2012
Accounting Policies [Abstract]  
Summary of Significant Acct Policies
Summary of Significant Accounting Policies
Accounting Policies
We follow accounting standards established by the Financial Accounting Standards Board (“FASB”) in our reporting of financial condition, results of operation, and cash flows. References to Generally Accepted Accounting Principles (“GAAP”) in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.
Use of Estimates
The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, accrued liabilities, intangibles, goodwill, and stock-based compensation. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Restricted Cash
As of December 31, 2012 and 2011, restricted cash totaled $20.2 million and $20.7 million, respectively, of which $0.0 million and $0.7 million, respectively, is included in current assets and is related to agreements with our credit card service providers that require us to escrow a certain percentage of passenger deposits. The December 31, 2012 and 2011 balances include $20.2 million and $20.0 million respectively, classified within ‘other long-term assets, related to required collateral to secure obligations under the Federal Maritime Commission (“FMC”), credit card processing agreements and surety bonds for our sales office located in the United Kingdom.
As of December 31, 2012 and 2011, we had outstanding and undrawn letters of credit of $20.0 million. These agreements are collateralized by the restricted cash and automatically renew each year.
In 2011, we entered into an agreement with a new credit card service provider. Under the terms of this new agreement, we are required to escrow a certain percentage of passenger deposits if our parent company exceeds certain specified ratios relating to liquidity, long-term debt to EBITDA (as defined in the credit agreement) and fixed coverage charges. As of December 31, 2012 and 2011, we had no funds in escrow under this agreement.


Trade and Other Accounts Receivable
As of December 31, 2012 and 2011, trade accounts receivable primarily consisted of $4.2 million and $5.0 million, respectively, for processed credit card transactions in transit and $3.8 million and $3.2 million, respectively, for onboard receivables from concessionaires and passengers. As of December 31, 2012 we had a bad debt allowance of $0.1 million. There was no allowance for bad debts as of December 31, 2011.
As of December 31, 2012 and 2011, other accounts receivable was $1.0 million and $0.1 million, respectively.
Inventories
Inventories consist of hotel consumables, medical supplies, deck and engine supplies, and fuel and oil on-board the ships and are carried at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Improvement costs that add value to our ships are capitalized as additions to the ship and depreciated over the lesser of the ships’ remaining service lives or the improvements’ estimated useful lives. The remaining estimated cost and accumulated depreciation (i.e. book value) of replaced or refurbished ship components are written off and any resulting losses are recognized in the consolidated statements of operations.
Depreciation of the ships is computed net of projected residual values of 15% using the straight-line method over their original estimated service lives of 30 years. Depreciation of property and equipment not associated with the ships is computed using the straight-line method over their estimated useful lives of 3 to 5 years. Leasehold improvements are depreciated using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Capitalized vessel improvement costs have a useful life of 1 to 20 years. Spare parts for the ships are classified as property and equipment in the consolidated balance sheets. Property under capital lease is initially recorded at the lower of the present value of minimum lease payments or fair value. Depreciation expense attributed to property under capital leases is included within depreciation and amortization expense in the consolidated statements of operations.
Dry-dock costs are scheduled maintenance activities that require the ships to be taken out of service and are expensed as incurred. Dry-docks are required to maintain each vessel’s Class certification and are necessary for our ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. Typical dry-dock costs include dry docking fees and wharfage services provided by the dry dock facility, hull inspection and certification related activities, external hull cleaning and painting below the waterline including pressure cleaning and scraping, additional below the waterline work such as maintenance and repairs on propellers and replacement of seals, cleaning and maintenance on holding tanks and sanitary discharge systems, related outside contractor services including travel and related expenses and freight and logistics costs related to dry-dock activities. Repair and maintenance activities are charged to expense as incurred.
Debt Issuance Costs
Debt issuance costs, primarily loan origination and related fees, are deferred and amortized over the term of the related debt. During 2012, we recorded $6.8 million in debt issuance costs related to the refinancing of our first lien credit agreement. During 2011, we recorded $7.8 million in debt issuance costs related to the senior secured notes issued in May 2011. We recorded no new debt issuance costs during 2010. 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.
During 2012, in connection with the refinancing of our first lien credit agreement we wrote off $4.4 million in previously recorded deferred financing costs. Approximately $6.1 million of previously recorded deferred financing costs were written off in 2011 in connection with the payment of the outstanding second lien term loan. These costs are included within other income (expense) in the consolidated statements of operations (see Note 5).
Amortization expenses related to deferred debt issuance costs totaled $2.8 million, $3.5 million and $4.1 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in interest expense in the consolidated statements of operations.


Goodwill
We record goodwill as the excess of the purchase price over the estimated fair value of net assets acquired, including identifiable intangible assets. Goodwill associated with the Regent Seven Seas Transaction is attributable to numerous factors including providing us with entry into the luxury cruise line business with a developed workforce who had knowledge in the luxury cruise business, a fully developed travel agent distribution network, positive past passenger experiences and a developed business plan with proven performance. We assess goodwill for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently when events or circumstances dictate.
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. The impairment review for goodwill consists of a two-step process of first determining the fair value of the Reporting Unit and comparing it to the carrying value of the net assets allocated to the Reporting Unit. If the fair value of the Reporting Unit exceeds the carrying value, no further analysis or write-down of goodwill 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 intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.
Identifiable Intangible Assets
We have acquired certain intangible assets of which value has been assigned to them based on our estimates. Intangible assets that have an indefinite life are not amortized, but are subject to an annual impairment test, or more frequently, when events or circumstances change.
In 2012, we adopted new authoritative accounting guidance that allows us to first assess qualitative factors to determine whether it is necessary to perform a qualitative analysis prior to the 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. The indefinite-life intangible asset quantitative impairment test consists of a comparison of the fair value of the indefinite-life intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired. 
 
Other intangible assets assigned finite useful lives are amortized on a straight-line basis over their estimated useful lives or based on the assets pattern of cash flows. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on market and operational factors.
Derivatives and Hedging Activities
We enter into various hedge contracts to manage and limit our exposure to fluctuations in foreign currency exchange rates, interest rates and fuel prices. We record our derivatives as assets and liabilities and recognize these hedges at estimated fair market value. If the derivative does not qualify as a hedge under these guidelines or is not designated as a hedge, changes in the fair market value of the derivative are recognized in other income (expense) in the consolidated statements of operations.
We designate at inception those derivatives which qualify for hedge accounting. These derivative instruments that hedge the variability of cash flows related to forecast transactions are designated as cash flow hedges. For these derivatives, the effective portion of the changes in the fair market value of the hedges are recognized as a component of accumulated other comprehensive income (loss) in the members’ equity section of the consolidated balance sheets and subsequently reclassified into the same line item as the forecast transaction when it is settled. Any ineffective portion of the changes in the fair market value of the hedge is recognized as a component of other income (expense) in the consolidated statements of operations.
Cash flows for the hedging instruments are classified in the same category as the cash flow from the hedged items. If for any reason hedge accounting is discontinued, then any cash flow subsequent to the date of discontinuance will be classified consistent with the nature of the instrument. To qualify for hedge accounting, the hedging relationship between the hedging instruments and hedged items must be highly effective over a period of time in achieving the offset of changes in cash flows attributable to the hedged risk at the inception date. On an ongoing basis, we assess whether the derivative used in the hedging transactions is highly effective in offsetting changes in cash flow of the hedge item. If it is determined that a derivative is no longer highly effective as a hedge, the change in fair value of the derivative is recognized in earnings immediately and reported in other income (expense) in the consolidated statements of operations.

Revenue and Expense Recognition
Passenger ticket revenue consists of gross revenue recognized from the sale of passenger tickets net of dilutions, such as shipboard credits and certain included passenger shipboard event costs. Also included is gross revenue for air and related ground transportation.
Onboard and Other Revenue consists of revenue derived from the sale of goods and services rendered onboard the ships (net of related concessionaire costs), travel insurance (net of related costs), and cancellation fees. Also, included in Onboard and Other Revenue are gross revenues from pre-and post-cruise hotel accommodations, shore excursions, land packages and related ground transportation.
Certain of our sales include free unlimited shore excursions (“FUSE”) or a free hotel stay or land package, which have no revenues attributable to them. The costs for FUSE and free hotel stays are included in commissions, transportation and other expenses in the consolidated statements of operations.
 
Cash collected in advance for future cruises is recorded as passenger deposit liabilities. Deposits for sailings traveling more than 12 months in the future are classified as long-term liabilities and included in other long-term liabilities in the consolidated balance sheets. We recognize the revenue associated with these cash collections when the sailing occurs. For cruises that occur over multiple months, the revenue is prorated and recognized proportionately in each month based on the overall length of the cruise. Cancellation fee revenues and associated commission expenses and travel insurance, if any, are recognized at the date of cancellation as it is both earned and realized.
Other ship operating expense includes port, deck and engine, certain entertainment-related expenses and hotel consumables expenses. Other expense consists primarily of dry dock, charter hire and ship insurance costs.
During 2012, we received insurance proceeds for repairs to one of our ships. In connection with this incident, approximately $0.7 million of insurance receivables were netted against related costs recorded in other ship operating expenses. There were no revenues in 2012 related to this incident as the losses exceeded the insurance recoverable.
In October 2010, one of our ships was unexpectedly taken out of service due to unplanned repairs. In connection with this incident, approximately $2.9 million of insurance recoveries in excess of refunds paid to passengers received from the insurance carrier were recorded as other revenues in the onboard and other revenue line item in the consolidated statements of operations. Additionally, approximately $5.9 million of insurance recoveries were netted against related costs of $3.7 million recorded in commissions, transportation and other expense, $0.2 million recorded in onboard and other expense and $2.0 million recorded in other operating expense in the consolidated statements of operations.
During 2010, we also received insurance proceeds for unplanned repairs to one of our ships. In connection with this incident, approximately $2.9 million of insurance recoveries were netted against related costs recorded in other ship operating expenses. There were no revenues in 2010 related to this incident as the losses exceeded the insurance recoverable.
Advertising Costs
Advertising costs are expensed as incurred and included in selling and administrative expense in the consolidated statements of operations. Advertising expense amounted to $23.0 million, $22.5 million and $22.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount to estimated undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds its fair value. During 2012, 2011 and 2010 there have been no impairment charges recorded on our long-lived assets.

Income Taxes
We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Foreign Currency Transactions
The functional currency of our U.S. and foreign subsidiaries is the U.S. dollar based on our primary economic environment. Foreign currency transaction gains and losses are recognized upon settlement of foreign currency transactions in other income (expense) in the consolidated statements of operations. For unsettled foreign currency transactions, gains and losses are recognized for changes between the transaction exchange rate and month-end exchange rate. Income and expense items are recorded at weighted-average exchange rates prevailing during the year.
Stock-Based Employee Compensation
Stock-based compensation expense is measured and recognized at fair value of employee stock option awards. We recognize compensation expense for all share-based compensation awards using the fair value method. Compensation expense for awards is recognized over the awards’ vesting periods.
For liability classified awards, we re-measure the fair value of the options at each reporting period until the award is settled. We estimate expected forfeitures when calculating compensation cost. If the actual forfeitures that occur are significantly different from the estimate, then we revise our estimates.
The fair value of each stock option is estimated on grant date using the Black-Scholes option pricing model. The estimated fair value of stock options, less estimated forfeitures, is amortized over the vesting period using the graded-vesting method. The expected volatility is based on a combination of historical volatility for peer companies. The risk-free interest rate is based on U.S. Treasury securities with a remaining term equal to the expected option’s life at grant date. The expected term is based on the average of contractual life, vested period of the options and expected employee exercise behavior. We review forfeiture rate assumptions on an annual basis and revise in subsequent periods if actual forfeitures differ from estimates.
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 best 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. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we have previously made.
New Accounting Pronouncements
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. The adoption did not 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. The adoption did not 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. The adoption did not 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. The adoption did not 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. 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 will not materially impact our consolidated financial statements.
There are no other recently issued accounting pronouncements not yet adopted that we expect to have a material effect on the presentation or disclosure of our future consolidated operating results, cash flows or financial condition.
v2.4.0.6
Property and Equipment, net
12 Months Ended
Dec. 31, 2012
Property, Plant and Equipment [Abstract]  
Property and Equipment, net
Property and Equipment, net
Property and equipment consists of the following:
(in thousands)

As of December 31,
 

2012

2011
Ships

$
781,960


$
769,768

Furniture, equipment, and other

8,181


7,243

Less: Accumulated depreciation and amortization

(152,817
)

(121,651
)
Property and equipment, net

$
637,324


$
655,360


For the year ended December 31, 2012, there was approximately $21.7 million of capitalized improvements, including ship improvements and refurbishments completed on the Seven Seas Navigator, Seven Seas Voyager and Seven Seas Mariner. Approximately $0.3 million of property and equipment, net, was written-off as disposals, net of insurance reimbursements of $0.2 million.
Depreciation expense on assets in service was $37.6 million, $36.4 million, and $33.7 million for the years ended December 31, 2012, 2011, and 2010 respectively. Repair and maintenance expenses, excluding dry-dock expenses, were $12.0 million, $9.7 million, and $12.6 million for the years ended December 31, 2012, 2011 and 2010, respectively and are recorded in other ship operating expenses on the consolidated statements of operations. Dry-docking expenses, recorded within other expenses on the consolidated statement of operations were $4.0 million, $8.1 million, and $0.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Unamortized computer software costs amounted to $0.7 million and $0.7 million as of December 31, 2012 and 2011, respectively.
v2.4.0.6
Goodwill and Intangible Assets
12 Months Ended
Dec. 31, 2012
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets
Goodwill and Identifiable Intangible Assets
Goodwill
In 2012 and 2011, we completed our annual goodwill impairment test and determined there was no impairment. We performed our annual impairment testing as of September 30, 2012. We elected not to perform a qualitative assessment and instead performed the two-step quantitative goodwill impairment test. Based on the discounted cash flow model, we determined that the fair value of goodwill exceeded the carrying value and is therefore not impaired. 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.

The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties which require significant judgments when making assumptions of expected revenues, operating costs, selling and administrative expenses, capital expenditures, as well as assumptions regarding the cruise vacation industry competition and business conditions, among other factors. It is reasonably possible that changes in our assumptions and projected operating results above could lead to impairment of our goodwill. There were no triggering events that occurred between our impairment testing date and reporting date.

 
Identifiable Intangible Assets
Specific to the Regent Seven Seas Transaction in 2008, we recorded identifiable intangible assets consisting of Trade names, Customer Relationships, Non-Competition Agreements, Backlog and Customer Database. The Trade names acquired in this transaction, “Seven Seas Cruises” and “Luxury Goes Exploring” were determined to have indefinite lives.
In 2011, we amended our agreement with Regent Hospitality Worldwide, which granted us exclusive and perpetual licensing rights to use the “Regent” trade name and trademarks (Regent licensing rights) in conjunction with cruises, subject to the terms and conditions stated in the agreement. The original 10 year license agreement to use the “Regent” trade name and trademarks was originally accounted for as an operating lease and is exclusive from the acquired trade names of “Seven Seas Cruises” and “Luxury Goes Exploring.”
The Regent licensing rights required an immediate payment of $5.1 million and deferred payments of $4.0 million over two years. The immediate payment of $5.1 million included payment for accrued royalty fees under the previous agreement. The payment was applied first to the liability for previously owed royalty fees with the remainder applied to the intangible asset and legal fees for $4.5 million. The $4.0 million deferred payments have been recorded net of a discount of $0.6 million relating to the present value of the deferred payments associated with the amended license agreement and are being accreted through February 2013. The resulting $7.9 million intangible asset is being amortized over an estimated useful life of 40 years. The amendment and subsequent capitalization of the Regent licensing rights had no impact on the acquired trade names as part of the Regent Seven Seas Transaction, as both transactions were separate and unrelated. As of December 31, 2012, the outstanding balance was $2.0 million, which was paid in February 2013. This liability is recorded in accrued expenses in the accompanying consolidated balance sheets.
Our identifiable intangible assets, except the trade names acquired in the 2008 Regent Seven Seas Transaction noted above, are subject to amortization over their estimated lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on market factors and operational considerations. Identifiable intangible assets not subject to amortization, such as trade names, are reviewed for impairment whenever events or circumstances indicate, but at least annually, by comparing the estimated fair value of the intangible asset with its carrying value.
We elected not to perform a qualitative assessment and instead performed the annual quantitative impairment test of our trade names as of September 30, 2012 using the relief-from-royalty method. 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 derive the fair value at September 30, 2012. The discount rate used was the same rate used in our goodwill impairment test. Based on the discounted cash flow model, we determined the fair value of our trade names exceeded their carrying value and are therefore not impaired. 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 our trade name.

As of December 31, 2012 and 2011, the net balance of identifiable intangible assets was $83.6 million and $86.1 million, respectively. The following tables provide information on the gross carrying amounts, accumulated amortization, and net balances of these identifiable intangible assets as of December 31, 2012 and 2011.
 
(in thousands)

2012
 

Gross Carrying
Amount

Accumulated
Amortization

Net
Regent licensing rights

$
7,892


$
(361
)

$
7,531

Customer relationships

14,205


(11,640
)

2,565



22,097


(12,001
)

10,096

Intangible assets not subject to amortization:






Trade names

73,460




73,460



$
95,557


$
(12,001
)

$
83,556

 
(in thousands)

2011
 

Gross Carrying
Amount

Accumulated
Amortization

Net
Regent licensing rights

$
7,892


$
(164
)

$
7,728

Customer relationships

14,205


(9,273
)

4,932



22,097


(9,437
)

12,660

Intangible assets not subject to amortization:






Trade names

73,460




73,460



$
95,557


$
(9,437
)

$
86,120


Intangible amortization expense for the years ended December 31, 2012, 2011 and 2010 was $2.6 million, $2.5 million, and $2.4 million, respectively. The following table provides information about the future estimated amortization expense over the next five years for the identifiable intangible assets:
 
(in thousands)
 
 
Year ended December 31,
 
 
2013
 
$
2,565

2014
 
395

2015
 
197

2016
 
197

2017
 
197

 
 
$
3,551

v2.4.0.6
Debt
12 Months Ended
Dec. 31, 2012
Debt Disclosure [Abstract]  
Debt
    Debt
Debt consists of the following:

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

 
$
293,500

$300 million term loan, currently LIBOR plus 5.00% due through 2018
(a)
 
293,358

 

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

 
225,000

 
 
 
518,358

 
518,500

Less: Current portion of long-term debt

 

 

Long-term portion, net of original issue discount
 
 
$
518,358

 
$
518,500


(a) Net of $2.9 million of original issue discount, which includes $0.1 million of accretion and is classified as long-term.
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 credit facility, with a syndicate of financial institutions. We repaid the outstanding loan balance of $293.5 million, 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 income and comprehensive income 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 unrelated 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 loan-to-value ratio and upon the aggregate unused and uncanceled commitments under the revolving credit facility. Our current commitment fee is 0.5%. The 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 to 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.
Senior Secured Notes
In May 2011, we issued $225.0 million of senior secured notes (the “Notes”) at a rate of 9.125% through a private placement with registration rights. The Notes are due on May 15, 2019, with interest payments due semi-annually beginning in November 2011. The net proceeds from the Notes after the initial purchasers’ discount and estimated fees and expenses of $7.4 million, were approximately $217.6 million. We used $140.7 million of the proceeds from the offering to repay the second lien term loan, $29.0 million to pay down our first lien term loan and the remainder as unrestricted cash. We registered the Notes with the U.S. Securities and Exchange Commission (“SEC”) in May 2012. We have the ability to redeem the Notes prior to the due date. Refer to "Note 16. Consolidating Financial Information" detail of guarantor financial statements.






The following schedule represents the maturities of long-term debt (in thousands):
For the twelve months ending December 31,
 
 
2013
 
 
$

2014
 
 
3,000

2015
 
 
3,000

2016
 
 
3,000

2017
 
 
3,000

Thereafter
 
 
509,250

Total
 
 
$
521,250


Interest expense on third-party debt, including interest rate swaps was $32.1 million, $26.6 million and $34.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Debt Covenants
Our credit agreements contain a number of covenants that impose operating and financial restrictions, including requirements that we maintain a maximum loan-to-value ratio, a minimum interest coverage ratio (applicable only to our revolving credit facility) and restrictions on our and our subsidiaries’ ability to, among other things, incur additional indebtedness, issue preferred stock, pay dividends on or make distributions with respect to our capital stock, restrict certain transactions with affiliates, and sell certain key assets, principally our ships. As of December 31, 2012, we are in compliance with all covenants.
The loan-to-value ratio is calculated by dividing the indebtedness outstanding under the senior secured credit facilities by the aggregate amount of the most recent vessel valuations. The interest coverage ratio is calculated by dividing the trailing four consecutive fiscal quarters' EBITDA, as defined in the credit agreement, by cash interest expense for such period.
All debt is collateralized by our ships. We believe our cash on hand, expected future operating cash inflows, additional borrowings under our existing credit facility and our ability to issue debt securities or raise additional equity, including capital contributions, will be sufficient to fund operations, debt payment requirements and capital expenditures, and to maintain compliance with covenants under our senior secured credit facilities over the next twelve-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.
v2.4.0.6
Derivative Instruments, Hedging Activities and Fair Value Measurements
12 Months Ended
Dec. 31, 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 have used 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 December 31, 2012 and 2011.
Foreign Currency Exchange Risk
During 2012 and 2011, we entered into foreign currency swaps with an aggregate notional amount of €1.8 million ($2.3 million) and €3.9 million ($5.2 million), respectively, to limit the exposure to foreign currency exchange rates, for euro denominated payments related to vessel dry-dock and other operational expenses. The foreign currency swaps do not qualify for hedge accounting; therefore, the changes in fair values 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 December 31, 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 December 31, 2012, we have hedged the variability in future cash flows for estimated fuel consumption requirements occurring through 2014. As of December 31, 2012 and 2011, we have entered into the following fuel swap agreements:
 
 
Fuel Swap Agreements
 
 
As of December 31, 2012
 
As of December 31, 2011
 
 
(in barrels - estimated consumption)
2012
 

 
156,300

2013
 
207,975

 

2014
 
108,750

 

 
 
 
 
 
 
 
 
 
 
 
 
Fuel Swap Agreements
 
 
As of December 31, 2012
 
As of December 31, 2011
 
 
(% hedged - estimated consumption)
2012
 
%
 
39
%
2013
 
56
%
 
%
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 mark-to-market exposure and $3.0 million. At December 31, 2012, the fair market value of our derivative liability related to this counterparty was approximately $0.3 million. As of December 31, 2012 and 2011, 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.
At December 31, 2012 and 2011, 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
 
December 31, 2012
 
December 31, 2011
 
 
 
 
 
 
Fuel hedges
Other current assets
 
$
747

 
$
489

Fuel hedges
Other long-term assets
 
816

 

 
Total Derivatives Assets
 
$
1,563

 
$
489

 
 
 
 
 
 
Foreign currency swap
Current liabilities - Derivative liabilities
 
$

 
$
112

Fuel hedges
Current liabilities - Derivative liabilities
 
278

 

 
Total Derivatives Liabilities
 
$
278

 
$
112




We had no derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements as of December 31, 2012.
The effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the year ended December 31, 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, net

$
(2,814
)

N/A

$

Total
$
2,814




$
(2,814
)



$



The effect of derivative instruments qualifying and designated as hedging instruments on the consolidated financial statements for the year ended December 31, 2010 was:
(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
$
8,911


 Interest expense, net

$
(8,911
)

N/A

$

Total
$
8,911




$
(8,911
)



$


The effect of derivative instruments not designated as hedging instruments on the consolidated financial statements for the years ended December 31, 2012, 2011 and 2010 was:

Location of Gain (Loss) Recognized in Income on Derivative Instruments

Amount of Gain (Loss) Recognized in Income on Derivative Instruments


For the Years Ended December 31,
(in thousands)

2012

2011

2010








Foreign currency swaps
Other income (expense)

$
(26
)

$
(112
)

$
(480
)
Fuel hedges
Other income (expense)

2,106


4,505


401

Total


$
2,080


$
4,393


$
(79
)


Fair Value Measurements
U.S. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions which market participants would use in pricing the asset or liability based on the best available information under the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly.
Level 3 Inputs – Inputs that are unobservable for the asset or liability.

Fair Value of Financial Instruments
We use quoted prices in active markets when available to determine the fair value of our financial instruments. The fair value of our financial instruments that are not measured at fair value on a recurring basis are:
(in thousands)
 
Carrying Value as of December 31,
 
Fair Value as of December 31,
 
 
2012
 
2011
 
2012
 
2011
Long-term bank debt
(a)
$
293,358

 
$
293,500

 
$
321,972

 
$
275,338

Senior secured notes
 
225,000

 
225,000

 
239,063

 
226,133

Total
 
$
518,358

 
$
518,500

 
$
561,035

 
$
501,471

 
 
 
 
 
 
 
 
 
(a) 2012 carrying value is net of $2.9 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. 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 December 31, 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)
$
1,563

 
$

 
$
1,563

 
$

 
$
489

 
$

 
$
489

 
$

Total Assets
 
$
1,563

 
$

 
$
1,563

 
$

 
$
489

 
$

 
$
489

 
$

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
(b)
$
278

 
$

 
$
278

 
$

 
$
112

 
$

 
$
112

 
$

Total liabilities
 
$
278

 
$

 
$
278

 
$

 
$
112

 
$

 
$
112

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) As of December 31, 2012, derivative financial instruments assets of $0.7 million and $0.8 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 December 31, 2012, derivative financial instruments liabilities of $0.3 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 its carrying amount may not be recoverable. If the carrying amount exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing its carrying amount to its 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 increase in 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. As a result of our impairment review, we determined the revised carrying amount is recoverable and not impaired.
v2.4.0.6
Stock-Based Employee Compensation
12 Months Ended
Dec. 31, 2012
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Employee Compensation
Share-Based Employee Compensation
In 2008, PCI adopted the 2008 Stock Option Plan (“Plan”) whereby its board of directors may grant stock options to officers, key employees, consultants and directors. The Plan authorized grants of options of up to 4,720,000 in 2012, 4,500,000 in 2011 and 3,624,694 shares of common stock in 2010. Options granted primarily vest proportionally over 3 years, 50% based on performance conditions and 50% based on employee service conditions. The contractual term of options granted during the years ended December 31, 2012 and 2011 is 8 years.
On December 31, 2012, we modified approximately 489,000 performance based stock options of equity classified awards, including those options modified in December 2011. The modification was due to the change in expectation from improbable to probable that we would meet the performance condition. No other terms of the options were changed. We revalued these awards and recorded the full expense as of December 31, 2012.
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, 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 $0.8 million for the year ended December 31, 2012.
In December 2011, the Board of Directors modified approximately 344,000 performance based stock options recorded as equity classified awards. These equity classified awards would have been forfeited due to failure to achieve the specified performance condition. The Board of Directors modified the performance conditions of these options to allow the options to vest provided that performance targets are met in 2012. This modification was accounted for as a cancellation and a replacement grant. The replacement grant was treated as a new issuance and the fair value was remeasured at the date of modification.
During June 2009, a special award of 1,000,000 options with a grant date fair value of $3.4 million was granted to our Chief Executive Officer and Chairman of the Board. Our portion of the allocated expense was approximately $1.7 million. These options vest over a 4 year period, 50% after the first 24 months, 25% after 36 months and 25% after 48 months. The contractual term of the special award options is 8 years.
To determine fair value of PCI Common Stock, we used a weighted average of the market and income valuation approaches. Weightings were assigned to the income approach and market approaches, which produced an indication of the invested capital value on a freely tradable basis at the valuation dates. These weightings were based on (i) a minority investor placing considerable weight on the Income Approach value because it relies directly on PCI’s forecasted operating results and market-derived rates of return and (ii) to a lesser extent, the Market Approach, because it reflects current market pricing and earnings and relies on an analysis of PCI’s direct competitors, which are considered to be alternative investments to an investment in PCI.
For the market approach, we analyzed comparable publicly-traded companies (the “Peer Group”). The data obtained from the Peer Group was converted to various standard valuation multiples. We used the enterprise value/revenue multiple and enterprise value/EBITDA multiple for the Peer Group. We considered these metrics to be the best indicators of free cash flows and the standard multiples used in a market valuation approach. These multiples were applied to the revenue and EBITDA of PCI, with equal weighting, to derive an enterprise value.
For the income approach, we used the discounted cash flow model to calculate the value of PCI’s total invested capital (debt and equity). An estimated cash flow growth rate was determined to reflect our estimate of PCI’s long-term prospects, to which we further applied a discount rate ranging from 12.5% to 14.3% in 2012, 2011 and 2010.
In order to compute PCI’s discount rate for the cash flow model, a PCI-specific weighted-average cost of capital (“WACC”) was determined. PCI’s WACC is based on its capital structure consisting of both equity and debt. PCI’s debt-to-capital ratio is projected to be 50% based on the expected long-term capital structure. The WACC was therefore weighted evenly between the cost of capital for debt and equity. The cost of debt capital was determined by considering a range of market rates for S&P BB and BBB rated corporate bonds with similar terms. The remaining component of WACC, the cost of equity, is based on:
(1)
Risk-free rate of return—The risk-free rate is based on the yield of a 20-year treasury bond (the range was between 2.5% and 4.1%);
(2)
Equity risk premium—The equity risk premium is based on a compilation of equity risk premiums as compiled by various sources, such as Ibbotson & Associates, Pratt Range, Fama & French, etc. (5.75% was used throughout 2012 and 2011);
(3)
Industry Beta—Industry Beta is based on PCI’s comparable companies (the range was between x2.21 and x2.56); and
(4)
Size premium—Size premium is based on PCI’s market capitalization (the range was between 1.7% and 1.9%).
The differences between the rights, restrictions and preferences of the holders of common stock, warrants, and notes may result in potentially different future outcomes for each class. Therefore, to estimate the value of the common stock, it is necessary to allocate PCI’s enterprise value among the various classes of warrants, notes and common stock. To perform this allocation among the various instruments, we utilized the Black-Scholes option pricing model. From the common stock value derived in the Black-Scholes option pricing model, we added a further discount for lack of marketability (“DLOM”) of PCI’s common stock. We based the DLOM on the likelihood, timing and size of an IPO, forecasted dividends, and potential for industry consolidation. The DLOM used was 15% for 2012, 2011 and 2010.
Total compensation expense for the options issued during 2012, 2011 and 2010, was calculated at the PCI level. The fair value of each stock option grant is estimated on the date of grant 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 stock options, less estimated forfeitures, is amortized over the vesting period using the graded-vesting method. The Company was allocated 100% of the compensation expenses associated with awards to employees who provide services exclusively to the Company. For awards to employees who provide services to both us and Oceania Cruises, Inc. (“OCI”), our sister company, compensation costs are allocated on an agreed percentage ranging from 47% to 53% for 2012, 2011 and 2010. Total compensation expense recognized for employee stock options was $1.0 million, $0.8 million and $2.2 million for the years ended December 31, 2012, 2011 and 2010, respectively, which is included within selling and administrative expense in the consolidated statements of operations. The total unrecognized compensation cost related to non-vested awards is $0.5 million for the year ended December 31, 2012. The weighted average period over which it is expected to be recognized is 1.5 years.


The assumptions used in the Black-Scholes model to fair value equity awards are as follows:
 


2012

2011

2010
Expected dividend yield

%

%

%
Expected stock price volatility

36.37% - 61.66%


40.0% - 54.6%


52.7% - 61.7%

Risk-free interest rate

0.25% - 0.86%


0.12% - 1.28%


0.7% - 1.53%

Expected option life

2-5 years


1-3 years


2-3 years


Since our common stock is not publicly traded, it is not practical to estimate the expected volatility of our share price. Therefore, the expected volatility is based on a combination of historical volatility for peer companies. The risk-free interest rate is based on U.S. Treasury securities with a remaining term equal to the expected option’s life assumed at the date of grant. The expected term is based on the average of contractual life, vested period of the options and expected employee exercise behavior. The estimated forfeiture rate represents an estimate which will be revised in subsequent periods if actual forfeitures differ from those estimates. The weighted average fair value of stock options granted during 2012, 2011 and 2010 was approximately $1.82 per share, $1.19 per share and $3.89 per share, respectively.
Stock option activity is summarized in the following table:
 

 
Number
of Options
 
Weighted -
Average
Exercise Price ($)
 
Weighted-
Average
Remaining
Contractual
Term (in years)
Outstanding at January 1, 2012
 
1,595,983

 
$
14.49

 
5.79
Granted
 
661,585

 
6.26

 

Exercised
 
(21
)
 
9.50

 

Forfeited or expired
 
(407,273
)
 
18.53

 

Outstanding at December 31, 2012
 
1,850,274

 
10.52

 
5.23
Vested and expected to vest at December 31, 2012
 
1,846,702

 
10.53

 
5.22
Options exercisable at December 31, 2012
 
1,423,659

 
11.89

 
4.88

The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was $1.1 million, $2.5 million and $1.7 million, respectively. At December 31, 2012, 2011 and 2010, the aggregate intrinsic value of options vested and expected to vest is $0.4 million, $0.0 million and $1.3 million, respectively. The aggregate intrinsic value of options exercisable at December 31, 2012, 2011 and 2010 is $0.1 million, $0.0 million and $0.4 million, respectively. There were no exercises of options that resulted in a material amount of cash received during 2012.
v2.4.0.6
Members' Equity
12 Months Ended
Dec. 31, 2012
Equity [Abstract]  
Members' Equity
Members’ Equity
 
There were no material members’ equity transactions during 2012 or 2011. In 2010, PCI issued shares to one of our vendors in lieu of payment on our behalf relating to 2009 expenses totaling $2.0 million. Refer to Note 7: Share-Based Employee Compensation for description of how the fair value of PCI shares was derived.
v2.4.0.6
Related Party Transactions
12 Months Ended
Dec. 31, 2012
Related Party Transactions [Abstract]  
Related Party Transactions
Related Party Transactions
During April 2011, our Chief Executive Officer was released from providing a limited personal guarantee to a certain credit card processor in the event of default by us.
In 2008, we entered into a shared services agreement with an affiliated entity, which provides for the sharing of costs relating to general and administrative functions with our parent company and other affiliated companies. The shared services annual agreement expired on January 31, 2012, but was automatically renewed. General and administrative costs, including costs for employees who provide services to both SSC and OCI, our sister company, are allocated based on an agreed percentage derived from company specific drivers. Payments made on our behalf by affiliated entities or payments we make on behalf of affiliated entities are reimbursed and settled on a monthly basis. As of December 31, 2012 and 2011, there was approximately $1.8 million and $0.7 million, respectively, in related party receivables that related to amounts paid by us on the behalf of an affiliated entity.
In 2008, we entered into an agreement with Oceania Cruises (Ireland) Limited, a 100%-owned subsidiary of OCI, to process certain credit card transactions on behalf of us either alone or jointly, with others, or by or through agents, brokers or subcontractors. During 2011, we changed our credit card processor and, as a result, only a limited amount of credit card transactions are being processed by Oceania Cruises (Ireland) Limited. Prior to June 30, 2011 our fee arrangement was variable as it was based on a percentage of the credit card transactions processed. Beginning July 1, 2011, fee arrangement is a fixed monthly amount. The total payments under the agreement for the years ended December 31, 2012, 2011 and 2010 were $0.1 million, $4.9 million, and $10.0 million, respectively, and are recorded in commissions, transportation and other in the accompanying consolidated statements of income and comprehensive income.
Capital Lease
A related party entered into an office lease for the combined headquarters of OCI and us. The lease, which extends through 2022, is classified as a capital lease. A portion of the capital lease is assumed by us in accordance with our use of the space under the terms of our intercompany agreement. As of December 31, 2012 and 2011, the capital lease asset was $2.5 million, net of accumulated depreciation and amortization of $0.4 million, and $2.4 million, net of accumulated depreciation and amortization of $0.1 million, respectively. The capital lease asset is included in property and equipment, net in the accompanying consolidated balance sheet. At December 31, 2012, and 2011, the capital lease liability was $3.6 million and $3.7 million, respectively, of which $0.7 million, and $0.6 million, respectively, was included in accrued expenses, and the remainder was in other long-term liabilities in the accompanying consolidated balance sheet. Interest expense for years ended December 31, 2012 and 2011 was $0.4 million and $0.3 million and is included in interest expense in the accompanying consolidated statements of operations. Amortization expense for the years ended December 31, 2012, and 2011 was $0.2 million, and $0.1 million, respectively, and is included in depreciation and amortization expense in the consolidated statements of operations.
The following schedule represents the future minimum lease payments under our capital lease obligation as of December 31, 2012:
 
(in thousands)

2013
$
561

2014
575

2015
590

2016
604

2017
619

Thereafter
3,278

Total minimum lease payments
6,227

Less: Amount representing interest (a)
2,579

Present value of total minimum lease payments (b)
$
3,648


 
 
(a)
Amount necessary to reduce total minimum lease payments to present value calculated at SSC’s incremental borrowing rate at lease inception.
(b)
Reflected in the accompanying consolidated balance sheet under accrued expenses and other long-term liabilities of $0.7 million and $2.9 million, respectively.
v2.4.0.6
Income Taxes
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

We had income tax expense for the year ended December 31, 2012 of $0.1 million. We had an income tax benefit for the year ended December 31, 2011 of $0.1 million. We had income tax expense for the year ended December 31, 2010 of $0.3 million.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2012 and 2011, relate primarily to net operating losses, depreciable assets, and book expenses not currently deductible for tax purposes. As of December 31, 2012 and 2011, we had recorded deferred tax assets of approximately $17.5 million and $11.3 million, respectively, for which a full valuation reserve has been recorded. The increase in the valuation reserve of $6.2 million is primarily due to net operating loss carryforwards generated in 2012. There were no amounts charged to costs and expenses or to other accounts, which impacted the deferred tax asset valuation. Additionally, we recorded deferred tax liabilities of $1.7 million and $1.9 million for 2012 and 2011, respectively, which are recorded in other long-term liabilities.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we have recorded a full valuation allowance on our deferred tax assets.
As of December 31, 2012, we have federal, state, and foreign net operating loss carryforwards of approximately $44.0 million, $0.7 million, and $0.2 million, respectively. The federal and state net operating loss carryforwards at December 31, 2012 expire between 2028 and 2032 and the foreign net operating loss carryforwards have no expiration.
We have analyzed our filing positions in all of the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified tax returns in France, the United Kingdom, and the United States as “major” tax jurisdictions, as defined. The only periods subject to examination for our returns are the 2010 and 2011 tax years for France, 2010 through 2012 tax years for the United Kingdom and 2009 through 2012 tax years for the United States. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any material adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded.

The following table presents our rollforward of Deferred Tax Assets Valuation Allowance:
(in thousands)
Balance at beginning of period
 
Charged to costs and expenses (1)
 
Balance at end of period
December 31, 2012
$11,333
 
$6,209
 
$17,542
December 31, 2011
7,321
 
4,012
 
11,333
December 31, 2010
5,277
 
2,044
 
7,321

(1) Increases in valuation allowance related to the generation of net operating losses and other deferred tax assets. No write-offs were recorded during the years presented.






United States Federal Income Tax
We derive our income from the international operation of ships. Under Section 883 of the Internal Revenue Code (“Section 883”), certain foreign corporations, though engaged in the conduct of a trade or business within the United States, are exempt from U.S. federal income and branch profit taxes on gross income derived from or incidental to the international operation of ships. Applicable U.S. Treasury Regulations provide that a foreign corporation will qualify for the benefits of Section 883 if, in relevant part, (i) the foreign country in which the corporation is organized grants an equivalent exemption for income from the operation of ships of sufficiently broad scope to corporations organized in the U.S., and (ii) the foreign corporation is a controlled foreign corporation (a “CFC”) for more than half of the taxable years and more than 50% of its stock is owned by qualified U.S. persons for more than half of the taxable year (the “CFC test”). Our 2011 tax returns were filed with tax authorities under Section 883 and our 2012 tax returns will also be filed under Section 883.
For U.S. federal income tax purposes, SSC and its non-U.S. subsidiaries are disregarded as entities separate from our Parent. We rely on our parent corporation, PCH, to meet the requirements necessary to qualify for the benefits of Section 883. PCH is organized as a company in Panama, which grants an equivalent tax exemption to U.S. corporations, and is thus classified as a qualified foreign country for purposes of Section 883. PCH is currently classified as a CFC and we believe we meet the ownership and substantiation requirements of the CFC test under the regulations. Therefore, we believe most of our income and the income of our ship-owning subsidiaries, which is derived from or incidental to the international operation of ships, is exempt from U.S. federal income taxation under Section 883. In 2005, final regulations became effective under Section 883, which, among other things, narrow somewhat the scope of activities that are considered by the U.S. Internal Revenue Service to be incidental to the international operation of ships. The activities listed in the regulations as not being incidental to the international operation of ships include income from the sale of air and land transportation, shore excursions and pre- and post-cruise tours. To the extent the income from these activities is earned from sources within the United States that income is subject to U.S. taxation.
 
United Kingdom Corporation Tax
The Seven Seas Navigator and Seven Seas Voyager are operated by companies that are strategically and commercially managed in the United Kingdom (UK), which have elected to enter the UK tonnage tax regime. Companies to which the tonnage tax regime applies pay corporation tax on a notional profit by reference to the net tonnage of qualifying ships. Normal UK corporate income tax is not chargeable on these companies' relevant shipping income. The requirements for a company to qualify for the UK tonnage tax regime include being subject to UK corporate income tax, operating qualifying ships that are strategically and commercially managed in the UK, and fulfilling a seafarer training requirement. Our UK income from non-shipping activities that does not qualify under the UK tonnage tax regime remains subject to normal UK corporation tax.
Corporate tax rate reductions from 25% to 24%, effective April 1, 2012 and from 24% to 23% effective April 1, 2013 were enacted in the United Kingdom on July 17, 2012. The effect of tax rate changes on existing deferred tax balances is recorded in the period in which the tax rate change law is enacted. The effect of these tax rate changes was the recognition of a deferred tax benefit of $0.2 million for the year ended December 31, 2012.

Individual State Income Taxes
We are subject to various U.S. state income taxes generally imposed on each state's portion of the U.S. source income subject to federal income taxes. However, the state of Alaska imposes an income tax on its allocated portion of the total income of companies doing business in Alaska.

Panamanian and Other Foreign Income Taxes
Under Panamanian law, we are exempt from income tax on income from international transportation and should also be exempt from income tax in the other jurisdictions where the ships call if a tax treaty exists or when Panama grants a reciprocal exemption to countries who grant a reciprocal exemption to Panama. However, not all of the countries in which our ships call have income tax treaties or reciprocal exemption agreements with Panama. Accordingly, we may be subject to income tax in various countries depending on the tax laws of the specific countries upon which ports the ships call. In addition to or in place of income taxes, virtually all jurisdictions where our ships call impose taxes based on passenger counts, ship tonnage or some other measure. These taxes are recorded as other ship operating expenses in the accompanying consolidated statements of operations.
v2.4.0.6
Concentration Risk
12 Months Ended
Dec. 31, 2012
Risks and Uncertainties [Abstract]  
Concentration Risk
Concentration Risk
We contract with a single vendor to provide many of our hotel and restaurant services including both food and labor costs. We incurred expenses of $53.9 million, $50.0 million and $46.8 million for the years ended December 31, 2012, 2011 and 2010 respectively, which are recorded in payroll, related and food in our consolidated statements of income and comprehensive income.
v2.4.0.6
Commitments and Contingencies
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Leases
We have several non-cancelable operating leases, primarily for office space, that expire at various times through 2012 and 2016. Rental expense for operating leases amounted to approximately $1.2 million, $2.7 million, and $2.1 million for the years ended December 31, 2012, 2011, and 2010, respectively.
During 2011 a related party entered into an office lease for the combined headquarters of OCI and SSC (see Note 9 Related Party Transactions). As a result of combining our headquarters with OCI, we exited our leased facility in Fort Lauderdale, which was under a non-cancelable lease. This lease terminated in December 2012. As of December 31, 2011, we recorded $0.5 million in accrued expenses relating to early termination costs in our consolidated balance sheets for the remaining portion of the lease.
 
The following schedule represents our operating lease contractual obligations as of December 31, 2012:
 
(in thousands)
 
Years Ended December 31,
 
2013
$
744

2014
667

2015
233

2016
32

2017

Thereafter

 
$
1,676


Employment Agreements
We have entered into employee agreements with certain of our executive officers and key employees. These agreements provide for minimum salary levels, and in most cases, performance based bonuses that are payable if specified goals are attained. Some executive officers and key employees are also entitled to severance benefits upon termination or non-renewal of their contracts under certain circumstances. Additionally, if there is a change in control of SSC, some executive officers and key employees’ outstanding options will generally become fully vested and exercisable.
As of December 31, 2012, the approximate future minimum requirements under employment agreements, excluding discretionary and performance bonuses are as follows:
 
(in thousands)
 
Years Ended December 31,

2013
$
5,472

2014
1,512

2015
228


$
7,212



Equipment - Maintenance and Purchases
During 2012 we entered into a five year equipment maintenance and purchases agreement with a third party vendor. The contact was signed in March 2012 and has a term of sixty months. As of December 31, 2012, the approximate future minimum requirements under the agreement are as follows:
(in thousands)
 
Years Ended December 31,

2013
$
3,792

2014
2,967

2015
3,208

2016
3,257

2017
543

Thereafter


$
13,767



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
As mandated by the 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.

During March 2012, management signed a 5-year maintenance agreement with a vendor. The cost of future maintenance contract obligations as of December 31, 2012 is approximately $12.9 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 December 31, 2012 we incurred expenses of $2.4 million relating to this agreement, which is recorded in other ship operating expenses.

On September 26, 2012, PCH agreed with the president of SSC that he would step down from his role as president as of January 31, 2013 and become a consultant to SSC for a two year period. In connection with these arrangements, on November 9, 2012, we entered into a Separation Agreement and a Consulting Agreement with the president. The president will received amounts he is entitled to pursuant to his existing employment agreement. As of December 31, 2012, we have accrued $0.7 million in connection with the separation agreement.
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 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 in 2012.
v2.4.0.6
Supplemental Cash Flow Information
12 Months Ended
Dec. 31, 2012
Supplemental Cash Flow Elements [Abstract]  
Supplemental Cash Flow Information
Supplemental Cash Flow Information
For the years ended December 31, 2012, 2011 and 2010, we paid interest expense and related fees of $29.9 million, $28.0 million and $34.2 million, respectively.
For the year ended December 31, 2012, we had non-cash investing activities related to the acquisition of property and equipment totaling $1.4 million. For the year ended December 31, 2011, we had non-cash investing activities related to the acquisition of property and equipment totaling $5.3 million, of which $2.8 million relates to our capital lease. We also had non-cash investing activities related to acquisition of intangible assets of $3.4 million. For the year ended December 31, 2010, we had $13.9 million of non-cash investing activities relating to the acquisition of capital assets.
For the year ended December 31, 2012 and 2011, we had non-cash financing activities of $0.1 million and $3.7 million relating to our capital lease. There were no capital lease obligations recorded in 2010. For the year ended December 31, 2010, we had non-cash financing activities in connection with PCI’s issuance of common stock to our vendor in exchange for release of our $2.0 million obligation as described in Note 8: Members’ Equity. We had no similar transaction in 2012 or 2011.
v2.4.0.6
Quarterly Selected Financial Data
12 Months Ended
Dec. 31, 2012
Quarterly Financial Information Disclosure [Abstract]  
Quarterly Selected Financial Data
Quarterly Selected Financial Data (Unaudited)

 

(In thousands, except for per share data)
 

First Quarter

Second Quarter

Third Quarter

Fourth Quarter
 

2012