UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-178244

Seven Seas Cruises S. DE R.L.

(Exact Name of Registrant as Specified in Its Charter)



Republic of Panama				75-3262685
(State or Other Jurisdiction of Incorporation)				(I.R.S. Employer Identification No.)

8300 NW 33^rd Street, Suite 100

Miami, FL 33122

(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (305) 514-2300

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x* No ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

* The registrant has not been subject to the filing requirements of Section 15(d) of the Securities Exchange Act of 1934 since December 31, 2012. The registrant is a voluntary filer and accordingly has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period it was required to file such reports and during the past 90 days, notwithstanding that the registrant is no longer required to file such reports.

SEVEN SEAS CRUISES S. DE R.L.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS



		Page

PART I. Financial Information
Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35

PART II.
Item 1A.	Risk Factors	36
Item 6.	Exhibits	36
Signatures		38

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SEVEN SEAS CRUISES S. DE R.L.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)



	June 30,		December 31,
	2014		2013

Assets
Current assets
Cash and cash equivalents	$	143,757	$	138,526
Restricted cash	59		367
Trade and other receivables, net	8,937		7,706
Inventories	8,260		7,352
Prepaid expenses	21,883		21,266
Other current assets	2,765		3,007
Total current assets	185,661		178,224
Property and equipment, net	656,388		651,286
Goodwill	404,858		404,858
Intangible assets, net	80,874		81,324
Other long-term assets	24,397		36,776
Total assets	$	1,352,178	$	1,352,468

Liabilities and Members' Equity
Current liabilities
Trade and other payables	$	3,341	$	5,798
Related party payables	819		1,560
Accrued expenses	42,677		48,154
Passenger deposits	234,699		194,173
Current portion of long-term debt	2,218		2,679
Total current liabilities	283,754		252,364
Long-term debt	466,385		516,833
Other long-term liabilities	15,512		8,896
Total liabilities	765,651		778,093
Commitments and contingencies
Members' equity
Contributed capital	564,959		564,830
Retained earnings	20,345		6,843
Accumulated other comprehensive income	1,223		2,702
Total members' equity	586,527		574,375
Total liabilities and members' equity	$	1,352,178	$	1,352,468

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

SEVEN SEAS CRUISES S. DE R.L.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013

Revenue
Passenger ticket	$	128,784		$	129,774		$	247,681		$	243,212
Onboard and other	14,160			12,962			27,532			23,841
Total revenue	142,944			142,736			275,213			267,053

Cruise operating expense
Commissions, transportation and other	44,482			49,293			84,741			89,209
Onboard and other	4,189			3,795			8,466			6,475
Payroll, related and food	19,871			20,084			39,417			39,420
Fuel	10,093			10,052			20,754			21,529
Other ship operating	10,811			12,075			20,181			21,714
Other	4,862			1,272			8,414			2,521
Total cruise operating expense	94,308			96,571			181,973			180,868
Other operating expense
Selling and administrative	19,750			19,269			42,114			41,549
Depreciation and amortization	9,793			9,115			19,080			18,368
Total operating expense	123,851			124,955			243,167			240,785
Operating income	19,093			17,781			32,046			26,268

Non-operating income (expense)
Interest income	47			64			128			139
Interest expense	(8,168		)	(9,643		)	(16,742		)	(19,691		)
Other income (expense)	748			(1,711		)	(1,741		)	(5,195		)
Total non-operating expense	(7,373		)	(11,290		)	(18,355		)	(24,747		)
Income before income taxes	11,720			6,491			13,691			1,521
Income tax expense	(15		)	(30		)	(189		)	(109		)
Net income	11,705			6,461			13,502			1,412

Other comprehensive income:
Change in fair value of derivatives	(1,603		)	—			(1,374		)	—
Cash flow hedge reclassified into earnings	—			—			(105		)	—
Total comprehensive income	$	10,102		$	6,461		$	12,023		$	1,412

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

Table of Contents

SEVEN SEAS CRUISES S. DE R.L.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)



	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities
Net income	$	13,502		$	1,412
Adjustments:
Depreciation and amortization	19,080			18,368
Amortization of deferred financing costs	1,101			1,016
Accretion of debt discount	293			360
Stock-based compensation	581			429
Change in fair value of derivative contracts	135			1,203
Loss on early extinguishment of debt, excluding prepayment penalty	2,008			2,500
Prepayment penalty excluded from loss on early extinguishment of debt	—			(2,093		)
Other, net	317			(1		)
Changes in operating assets and liabilities:
Trade and other accounts receivable	(1,230		)	(2,472		)
Prepaid expenses and other current assets	(1,705		)	(1,366		)
Inventories	(908		)	(485		)
Accounts payable and accrued expenses	(7,100		)	2,282
Passenger deposits	47,509			40,259
Net cash provided by operating activities	73,583			61,412
Cash flows from investing activities
Purchases of property and equipment	(24,045		)	(4,955		)
Change in restricted cash	12,326			7,970
Other	(75		)	(127		)
Net cash (used in) provided by investing activities	(11,794		)	2,888
Cash flows from financing activities
Repayment of long-term debt	(51,480		)	—
Debt related costs	(4,621		)	(959		)
Payments on other financing obligations	—			(2,000		)
PCI offering costs	(321		)	—
Net cash used in financing activities	(56,422		)	(2,959		)
Effect of exchange rate changes on cash and cash equivalents	(136		)	(191		)
Net increase in cash and cash equivalents	5,231			61,150
Cash and cash equivalents
Beginning of period	138,526			99,857
End of period	$	143,757		$	161,007

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

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1.General

Description of Business

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

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

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

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

Significant Accounting Policies

Restricted Cash

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

New Accounting Pronouncements

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

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

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

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

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

Note 2. Property and Equipment, net

Property and equipment consists of the following:



	June 30,			December 31,
(in thousands)	2014			2013
Ships	$	841,888		$	823,195
Furniture, equipment, and other	12,485			11,645
Less: Accumulated depreciation and amortization	(197,985		)	(183,554		)
Property and equipment, net	$	656,388		$	651,286

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

Note 3. Debt

Debt consists of the following:



	June 30,			December 31,
(in thousands)	2014			2013
$300 million term loan, 3.75% and 4.75% for 2014 and 2013, respectively, due through 2018	$	244,770		$	296,250
$225 million senior secured notes, 9.125%, due 2019	225,000			225,000
Total debt	469,770			521,250
Less: Original issue discount	(1,167		)	(1,738		)
Less: Current portion of long-term debt and discount	(2,218		)	(2,679		)
Long-term portion	$	466,385		$	516,833

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

Term Loans

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

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

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

Debt Covenants

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

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



(in thousands)
For the twelve months ended June 30,
2015	$	2,460
2016	2,460
2017	2,460
2018	2,460
2019	459,930
Thereafter	—
Total	$	469,770

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

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

Foreign Currency Exchange Risk

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

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

Fuel Price Risk

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

As of June 30, 2014 and December 31, 2013, we have entered into the following fuel swap agreements:



	Fuel Swap Agreements
	June 30, 2014		December 31, 2013
	(in barrels)
2014	129,000		188,850
2015	97,800		37,500

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

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

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



		Fair Value
(in thousands)	Balance Sheet Location	June 30, 2014		December 31, 2013
Foreign currency collar	Other long-term assets	$	1,328	$	2,702
	Total Derivatives Assets	$	1,328	$	2,702

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



		Fair Value
(in thousands)	Balance Sheet Location	June 30, 2014		December 31, 2013
Fuel hedges	Other current assets	$	574	$	813
Fuel hedges	Other long-term assets	58		58
	Total Derivatives Assets	$	632	$	871

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



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

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



(in thousands)	Amount of Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion excluded from Effectiveness Testing)
Foreign currency collar	$	(1,374	)	N/A	$	—	Other income (expense)	105
Total	$	(1,374	)		$	—		$	105

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

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



	Location of Gain (Loss) Recognized in Income on Derivative Instruments	Amount of Gain (Loss) Recognized in Income on Derivative Instruments
		Three Months Ended June 30,
(in thousands)		2014		2013
Fuel hedges	Other income (expense)	655		(1,676		)
Total		$	655	$	(1,676	)



	Location of Gain (Loss) Recognized in Income on Derivative Instruments	Amount of Gain (Loss) Recognized in Income on Derivative Instruments
		Six Months Ended June 30,
(in thousands)		2014		2013
Foreign currency swaps	Other income (expense)	$	—	$	(5	)
Fuel hedges	Other income (expense)	168		(1,100		)
Total		$	168	$	(1,105	)

Fair Value Measurements

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


•	Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.


•	Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly.


•	Level 3 Inputs – Inputs that are unobservable for the asset or liability.

Fair Value of Financial Instruments

We use quoted prices in active markets when available to determine the fair value of our financial instruments. The fair value of our financial instruments that are not measured at fair value on a recurring basis are:



(in thousands)		Carrying Value				Fair Value
		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Long-term bank debt	(a)	$	243,603	$	294,512	$	244,496	$	309,738
Senior secured notes		225,000		225,000		246,656		249,188
Total		$	468,603	$	519,512	$	491,152	$	558,926

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

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

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

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

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

The following table presents information about our financial instrument assets that are measured at fair value on a recurring basis:



(in thousands)		As of June 30, 2014								As of December 31, 2013
Description		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets
Derivative financial instruments	(a)	$	1,960	$	—	$	1,960	$	—	$	3,573	$	—	3,573		$	—
Total Assets		$	1,960	$	—	$	1,960	$	—	$	3,573	$	—	$	3,573	$	—

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

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

Non-recurring Measurements of Non-financial Assets

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

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

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

Note 5. Commitments and Contingencies

Contingencies – Litigation

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

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

Other

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

Note 6. Accumulated Other Comprehensive Income

The following schedule represents the changes in accumulated other comprehensive income by component for the three months and six months ended June 30, 2014:



(in thousands)	Change related to Cash Flow Hedges
	Three Months Ended June 30, 2014			Six Months Ended June 30, 2014
Beginning balance	$	2,826		$	2,702
Other comprehensive income before reclassifications	(1,603		)	(1,374		)
Amount reclassified from accumulated other comprehensive income to other income (expense)	—			(105		)
Net current-period other comprehensive income	(1,603		)	(1,479		)
Ending balance	$	1,223		$	1,223

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

Note 7. Condensed Consolidating Financial Information

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

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

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

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

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

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Condensed Consolidating Balance Sheets
	June 30, 2014
(in thousands)	Parent		Subsidiaries Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	141,051	$	2,706		$	—		$	143,757
Restricted cash	59		—			—			59
Trade and other receivables, net	8,657		280			—			8,937
Inventories	8,260		—			—			8,260
Prepaid expenses	21,068		815			—			21,883
Intercompany receivable	264,809		—			(264,809		)	—
Other current assets	2,765		—			—			2,765
Total current assets	446,669		3,801			(264,809		)	185,661
Property and equipment, net	122,363		534,025			—			656,388
Goodwill	404,858		—			—			404,858
Intangible assets, net	80,874		—			—			80,874
Other long-term assets	24,397		—			—			24,397
Investment in subsidiaries	271,956		—			(271,956		)	—
Total assets	$	1,351,117	$	537,826		$	(536,765	)	$	1,352,178

Liabilities and Members' Equity
Current liabilities
Trade and other payables	$	2,574	$	767		$	—		$	3,341
Related party payables	1,413		(594		)	—			819
Intercompany payables	—		264,809			(264,809		)	—
Accrued expenses	41,789		888			—			42,677
Passenger deposits	234,699		—			—			234,699
Current portion of long-term debt	2,218		—			—			2,218
Total current liabilities	282,693		265,870			(264,809		)	283,754
Long-term debt	466,385		—			—			466,385
Other long-term liabilities	15,512		—			—			15,512
Total liabilities	764,590		265,870			(264,809		)	765,651
Commitments and contingencies
Members' equity
Contributed capital	564,959		134,036			(134,036		)	564,959
Retained earnings	20,345		137,920			(137,920		)	20,345
Accumulated other comprehensive income	1,223		—			—			1,223
Total members' equity	586,527		271,956			(271,956		)	586,527
Total liabilities and members' equity	$	1,351,117	$	537,826		$	(536,765	)	$	1,352,178

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Condensed Consolidating Balance Sheets
	December 31, 2013
(in thousands)	Parent		Subsidiaries Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	137,494	$	1,032		$	—		$	138,526
Restricted cash	367					—			367
Trade and other receivables, net	7,503		203			—			7,706
Inventories	4,955		2,397			—			7,352
Prepaid expenses	18,661		2,605			—			21,266
Intercompany receivable	262,359		795			(263,154		)	—
Other current assets	3,007		—			—			3,007
Total current assets	434,346		7,032			(263,154		)	178,224
Property and equipment, net	107,519		543,767			—			651,286
Goodwill	404,858		—			—			404,858
Intangible assets, net	81,324		—			—			81,324
Other long-term assets	36,776		—			—			36,776
Investment in subsidiaries	284,139		—			(284,139		)	—
Total assets	$	1,348,962	$	550,799		$	(547,293	)	$	1,352,468

Liabilities and Members' Equity
Current liabilities
Trade and other payables	$	3,968	$	1,830		$	—		$	5,798
Related party payables	1,985		(425		)	—			1,560
Intercompany payables	795		262,359			(263,154		)	—
Accrued expenses	45,258		2,896			—			48,154
Passenger deposits	194,173		—			—			194,173
Derivative liabilities	2,679		—			—			2,679
Total current liabilities	248,858		266,660			(263,154		)	252,364
Long-term debt	516,833		—			—			516,833
Other long-term liabilities	8,896		—			—			8,896
Total liabilities	774,587		266,660			(263,154		)	778,093
Commitments and contingencies
Members' equity
Contributed capital	564,830		134,036			(134,036		)	564,830
Retained earnings	6,843		150,103			(150,103		)	6,843
Accumulated other comprehensive income	2,702		—			—			2,702
Total members' equity	574,375		284,139			(284,139		)	574,375
Total liabilities and members' equity	$	1,348,962	$	550,799		$	(547,293	)	$	1,352,468

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Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
	Three Months Ended June 30, 2014
(in thousands)	Parent			Subsidiaries Guarantors			Eliminations			Consolidated
Revenue
Passenger ticket	$	128,784		$	—		$	—		$	128,784
Onboard and other	14,159			1			—			14,160
Related Party Revenue	—			3,873			(3,873		)	—
Total revenue	142,943			3,874			(3,873		)	142,944

Cruise operating expense
Commissions, transportation and other	44,455			1,785			(1,758		)	44,482
Onboard and other	4,189			—			—			4,189
Payroll, related and food	19,871			—			—			19,871
Fuel	10,093			—			—			10,093
Other ship operating	10,811			—			—			10,811
Other	3,641			1,221			—			4,862
Total cruise operating expense	93,060			3,006			(1,758		)	94,308
Other operating expense
Selling and administrative	19,860			2,005			(2,115		)	19,750
Depreciation and amortization	4,916			4,877			—			9,793
Total operating expense	117,836			9,888			(3,873		)	123,851
Operating income (loss)	25,107			(6,014		)	—			19,093

Non-operating income (expense)
Interest income	46			1			—			47
Interest expense	(8,168		)	—			—			(8,168		)
Other income (expense)	716			32			—			748
Equity in losses of subsidiaries	(5,988		)	—			5,988			—
Total non-operating income (expense)	(13,394		)	33			5,988			(7,373		)
Income (loss) before income taxes	11,713			(5,981		)	5,988			11,720
Income tax expense	(8		)	(7		)	—			(15		)
Net income (loss)	11,705			(5,988		)	5,988			11,705

Other comprehensive income (loss):
Change in fair value of derivatives	(1,603		)	—			—			(1,603		)
Total comprehensive income (loss)	$	10,102		$	(5,988	)	$	5,988		$	10,102

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Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
	Three Months Ended June 30, 2013
(in thousands)	Parent			Subsidiaries Guarantors			Eliminations			Consolidated
Revenue
Passenger ticket	$	129,774		$	—		$	—		$	129,774
Onboard and other	12,952			10			—			12,962
Related Party Revenue	—			27,910			(27,910		)	—
Total revenue	142,726			27,920			(27,910		)	142,736

Cruise operating expense
Commissions, transportation and other	49,250			1,528			(1,485		)	49,293
Onboard and other	3,791			4			—			3,795
Payroll, related and food	16,743			3,341			—			20,084
Fuel	10,052			—			—			10,052
Other ship operating	7,659			4,416			—			12,075
Other	24,235			1,217			(24,180		)	1,272
Total cruise operating expense	111,730			10,506			(25,665		)	96,571
Other operating expense
Selling and administrative	19,404			2,110			(2,245		)	19,269
Depreciation and amortization	4,239			4,876			—			9,115
Total operating expense	135,373			17,492			(27,910		)	124,955
Operating income	7,353			10,428			—			17,781

Non-operating income (expense)
Interest income	63			1			—			64
Interest expense	(9,643		)	—			—			(9,643		)
Other income (expense)	(1,718		)	7			—			(1,711		)
Equity in earnings of subsidiaries	10,428			—			(10,428		)	—
Total non-operating expense	(870		)	8			(10,428		)	(11,290		)
Income before income taxes	6,483			10,436			(10,428		)	6,491
Income tax expense	(22		)	(8		)	—			(30		)
Net income	6,461			10,428			(10,428		)	6,461
Total comprehensive income	$	6,461		$	10,428		$	(10,428	)	$	6,461

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Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
	Six Months Ended June 30, 2014
(in thousands)	Parent			Subsidiaries Guarantors			Eliminations			Consolidated
Revenue
Passenger ticket	$	247,681		$	—		$	—		247,681
Onboard and other	27,531			1			—			27,532
Related party revenue	—			9,374			(9,374		)	—
Total revenue	275,212			9,375			(9,374		)	275,213

Cruise operating expense
Commissions, transportation and other	84,678			5,207			(5,144		)	84,741
Onboard and other	8,464			2			—			8,466
Payroll, related and food	39,417			—			—			39,417
Fuel	20,754			—			—			20,754
Other ship operating	20,180			1			—			20,181
Other	5,842			2,572			—			8,414
Total cruise operating expense	179,335			7,782			(5,144		)	181,973
Other operating expense
Selling and administrative	42,332			4,012			(4,230		)	42,114
Depreciation and amortization	9,326			9,754			—			19,080
Total operating expense	230,993			21,548			(9,374		)	243,167
Operating income (loss)	44,219			(12,173		)	—			32,046

Non-operating income (expense)
Interest income	125			3			—			128
Interest expense	(16,742		)	—			—			(16,742		)
Other income (expense)	(1,739		)	(2		)	—			(1,741		)
Equity in losses of subsidiaries	(12,183		)	—			12,183			—
Total non-operating income (expense)	(30,539		)	1			12,183			(18,355		)
Income before income taxes	13,680			(12,172		)	12,183			13,691
Income tax expense	(178		)	(11		)	—			(189		)
Net income (loss)	13,502			(12,183		)	12,183			13,502

Other comprehensive income (loss):
Change in fair value of derivatives	(1,374		)	—			—			(1,374		)
Cash flow hedge reclassified into earnings	(105		)	—			—			(105		)
Total comprehensive income (loss)	$	12,023		$	(12,183	)	$	12,183		$	12,023

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Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)
	Six Months Ended June 30, 2013
(in thousands)	Parent			Subsidiaries Guarantors			Eliminations			Consolidated
Revenue
Passenger ticket	$	243,212		$	—		$	—		$	243,212
Onboard and other	23,831			10			—			23,841
Related Party Revenue	—			55,548			(55,548		)	—
Total revenue	267,043			55,558			(55,548		)	267,053

Cruise operating expense
Commissions, transportation and other	89,166			3,526			(3,483		)	89,209
Onboard and other	6,457			18			—			6,475
Payroll, related and food	32,758			6,662			—			39,420
Fuel	21,529			—			—			21,529
Other ship operating	14,253			7,461			—			21,714
Other	48,258			2,358			(48,095		)	2,521
Total cruise operating expense	212,421			20,025			(51,578		)	180,868
Other operating expense
Selling and administrative	41,350			4,169			(3,970		)	41,549
Depreciation and amortization	8,614			9,754			—			18,368
Total operating expense	262,385			33,948			(55,548		)	240,785
Operating income	4,658			21,610			—			26,268

Non-operating income (expense)
Interest income	137			2			—			139
Interest expense	(19,691		)	—			—			(19,691		)
Other income (expense)	(5,136		)	(59		)	—			(5,195		)
Equity in earnings of subsidiaries	21,533			—			(21,533		)	—
Total non-operating income (expense)	(3,157		)	(57		)	(21,533		)	(24,747		)
Income before income taxes	1,501			21,553			(21,533		)	1,521
Income tax expense	(89		)	(20		)	—			(109		)
Net income	1,412			21,533			(21,533		)	1,412
Total comprehensive income	$	1,412		$	21,533		$	(21,533	)	$	1,412

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Condensed Consolidating Statements of Cash Flows
	Six Months Ended June 30, 2014
(in thousands)	Parent			Subsidiaries Guarantors			Eliminations		Consolidated
Net cash provided by operating activities	$	71,884		$	1,699		$	—	$	73,583
Cash flows from investing activities
Purchases of property and equipment	(24,033		)	(12		)	—		(24,045		)
Change in restricted cash	12,326			—			—		12,326
Other	(75		)	—			—		(75		)
Net cash used in investing activities	(11,782		)	(12		)	—		(11,794		)
Cash flows from financing activities
Repayment of long-term debt	(51,480		)	—			—		(51,480		)
Debt related costs	(4,621		)	—			—		(4,621		)
PCI offering costs	(321		)	—			—		(321		)
Net cash used in financing activities	(56,422		)	—			—		(56,422		)
Effect of exchange rate changes on cash and cash equivalents	(123		)	(13		)	—		(136		)
Net increase in cash and cash equivalents	3,557			1,674			—		5,231
Cash and cash equivalents
Beginning of period	137,494			1,032			—		138,526
End of period	$	141,051		$	2,706		$	—	$	143,757



Condensed Consolidating Statements of Cash Flows
	Six Months Ended June 30, 2013
(in thousands)	Parent			Subsidiaries Guarantors			Eliminations		Consolidated
Net cash provided by operating activities	$	60,615		$	797		$	—	$	61,412
Cash flows from investing activities
Purchases of property and equipment	(4,945		)	(10		)	—		(4,955		)
Change in restricted cash	7,970			—			—		7,970
Other	(127		)	—			—		(127		)
Net cash provided by (used in) investing activities	2,898			(10		)	—		2,888
Cash flows from financing activities
Debt related costs	(959		)	—			—		(959		)
Payments on other financing obligations	(2,000		)	—			—		(2,000		)
Net cash used in financing activities	(2,959		)	—			—		(2,959		)
Effect of exchange rate changes on cash and cash equivalents	(154		)	(37		)	—		(191		)
Net increase in cash and cash equivalents	60,400			750			—		61,150
Cash and cash equivalents
Beginning of period	98,815			1,042			—		99,857
End of period	$	159,215		$	1,792		$	—	$	161,007

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

Cautionary Note Concerning Factors That May Affect Future Results

The discussion under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report includes forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects and objectives of management for future operations (including development plans and objectives relating to our activities), made in this quarterly report are forward-looking. Many, but not all, of these statements can be found by looking for terms like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “could,” “will,” “may,” “might,” “forecast,” “estimate,” “intend,” and “future” and for similar words. Forward-looking statements reflect management's current expectations and do not guarantee future performance and may involve risks, uncertainties and other factors that are difficult to predict and many of which are beyond our control. These factors could cause our actual results, performance, or achievements to differ materially from the future results, performance, or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to:


•	adverse economic conditions that may affect consumer demand for cruises, such as declines in the securities and real estate markets, declines in disposable income and consumer confidence;


•	changes in cruise capacity, as well as capacity changes in the overall vacation industry;


•	intense competition from other cruise companies, as well as non-cruise vacation alternatives, which may affect our ability to compete effectively;


•	the delivery schedules and estimated costs of newbuilds, in particular Seven Seas Explorer, on terms that are favorable or consistent with our expectations;


•	our substantial leverage, including the inability to generate the necessary amount of cash to service our existing debt and the incurrence of substantial indebtedness in the future;


•	continued availability under our loan agreements and compliance with the covenants under our loan agreements and our senior secured notes;


•	changes in interest rates, fuel costs, or foreign currency rates;


•	the risks associated with operating internationally;


•	changes in general economic, business and geopolitical conditions;


•	the impact of changes in the global credit markets on our ability to borrow and our counterparty credit risks, including with respect to our loan agreements, derivative instruments, contingent obligations and insurance contracts;


•	the impact of problems encountered at shipyards, as well as any potential claim, impairment, loss, cancellation or breach of contract in connection with any contracts we have with shipyards;


•	the impact of any future changes relating to how travel agents sell and market our cruises;


•	the impact of any future increases in the price of, or major changes or reduction in, commercial airline services;


•	the impact of seasonal variations in passenger fare rates and occupancy levels at different times of the year;


•	adverse events impacting the security of travel that may affect consumer demand for cruises, such as terrorist acts, acts of piracy, armed conflict and other international events, including political hostilities or war;


•	the impact of the spread of contagious diseases;


•	the impact of mechanical failures or accidents involving our ships and the impact of delays, costs and other factors resulting from emergency ship repairs, as well as scheduled maintenance, repairs and refurbishment of our ships;


•	accidents, criminal behavior and other incidents affecting the health, safety, security and vacation satisfaction of passengers and causing damage to ships, which could, in each case, cause reputation harm, the modification of itineraries or cancellation of a cruise or series of cruises;


•	the continued availability of attractive port destinations;


•	our ability to attract and retain qualified shipboard crew members and key personnel;


•	the impact of any breaches in our data security or other disturbances to our information technology and other networks; and


•	changes involving the corporate, tax, environmental, health, safety and other regulatory regimes in which we operate.

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

Key Operational and Financial Metrics, including Non-GAAP

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

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

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

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

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

Gross Yield represents total revenue per APCD.

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

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

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

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

Net Yield represents Net Revenue per APCD.

Occupancy is calculated by dividing Passenger Days Sold by APCD.

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

Critical Accounting Estimates

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

Seasonality

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

Financial Presentation

Description of Certain Line Items

Revenues

Our revenue consists of the following:


•	Passenger ticket revenue consists of gross revenue recognized from the sale of passenger tickets net of dilutions, such as shipboard credits and certain included passenger shipboard event costs. Also included is gross revenue for air and related ground transportation sales.

•

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

hotel accommodations are included in commissions, transportation and other expense in the consolidated statements of income and comprehensive income.

•

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

Expenses

Cruise Operating Expense

Our cruise operating expense consists of the following:


•	Commissions, transportation and other consists of payments made to travel agencies that sell our product, costs associated with air and related ground transportation pre-sold to our guests, all credit card fees, and the costs associated with FUSE and pre-cruise hotel accommodations included as part of the overall cruise purchase price.


•	Onboard and other consists of costs related to land packages and ground transportation, as well as shore excursions and hotel accommodations costs not included in commissions, transportation and other.

•

Payroll, related and food consists of the costs of crew payroll and related expenses for shipboard personnel, as well as food expenses for both passengers and crew. We include food and payroll costs in a single expense line item as we contract with a single vendor to provide many of our hotel and restaurant services, including both food and labor costs, which are billed on a per-passenger basis. This per-passenger fee reflects the cost of both of the aforementioned expenses.


•	Fuel consists of fuel costs and related delivery and storage costs.


•	Other ship operating consists of port, deck and engine, certain entertainment-related expenses, and hotel consumables expenses.


•	Other consists primarily of drydock, ship insurance costs, and loss on disposals.

Selling and administrative expense

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

Recently Adopted and Future Application of Accounting Standards

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

Executive Overview


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


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


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


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


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


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


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


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

Results of Operations

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



	Three Months Ended June 30,
	2014					2013
(in thousands)				% of Total Revenues					% of Total Revenues
Revenue
Passenger ticket	$	128,784		90.1	%	$	129,774		90.9	%
Onboard and other	14,160			9.9	%	12,962			9.1	%
Total revenue	142,944			100.0	%	142,736			100.0	%

Cruise operating expense
Commissions, transportation and other	44,482			31.1	%	49,293			34.5	%
Onboard and other	4,189			2.9	%	3,795			2.7	%
Payroll, related and food	19,871			13.9	%	20,084			14.1	%
Fuel	10,093			7.1	%	10,052			7.0	%
Other ship operating	10,811			7.6	%	12,075			8.5	%
Other	4,862			3.4	%	1,272			0.9	%
Total cruise operating expense	94,308			66.0	%	96,571			67.7	%
Other operating expense
Selling and administrative	19,750			13.8	%	19,269			13.5	%
Depreciation and amortization	9,793			6.9	%	9,115			6.4	%
Total operating expense	123,851			86.6	%	124,955			87.5	%
Operating income	19,093			13.4	%	17,781			12.5	%

Non-operating income (expense)
Interest income	47			—	%	64			—	%
Interest expense	(8,168		)	(5.7	)%	(9,643		)	(6.8	)%
Other income (expense)	748			0.5	%	(1,711		)	(1.2	)%
Total non-operating expense	(7,373		)	(5.2	)%	(11,290		)	(7.9	)%
Income before income taxes	11,720			8.2	%	6,491			4.5	%
Income tax expense	(15		)	—	%	(30		)	—	%
Net income	$	11,705		8.2	%	$	6,461		4.5	%

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



	Six Months Ended June 30,
	2014					2013
(in thousands)				% of Total Revenues					% of Total Revenues
Revenue
Passenger ticket	$	247,681		90.0	%	$	243,212		91.1	%
Onboard and other	27,532			10.0	%	23,841			8.9	%
Total revenue	275,213			100.0	%	267,053			100.0	%

Cruise operating expense
Commissions, transportation and other	84,741			30.8	%	89,209			33.4	%
Onboard and other	8,466			3.1	%	6,475			2.4	%
Payroll, related and food	39,417			14.3	%	39,420			14.8	%
Fuel	20,754			7.5	%	21,529			8.1	%
Other ship operating	20,181			7.3	%	21,714			8.1	%
Other	8,414			3.1	%	2,521			0.9	%
Total cruise operating expense	181,973			66.1	%	180,868			67.7	%
Other operating expense
Selling and administrative	42,114			15.3	%	41,549			15.6	%
Depreciation and amortization	19,080			6.9	%	18,368			6.9	%
Total operating expense	243,167			88.4	%	240,785			90.2	%
Operating income	32,046			11.6	%	26,268			9.8	%

Non-operating income (expense)
Interest income	128			—	%	139			0.1	%
Interest expense	(16,742		)	(6.1	)%	(19,691		)	(7.4	)%
Other income (expense)	(1,741		)	(0.6	)%	(5,195		)	(1.9	)%
Total non-operating expense	(18,355		)	(6.7	)%	(24,747		)	(9.3	)%
Income before income taxes	13,691			5.0	%	1,521			0.6	%
Income tax expense	(189		)	(0.1	)%	(109		)	—	%
Net income	$	13,502		4.9	%	$	1,412		0.5	%

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Passenger Days Sold	160,098		166,583		319,155		323,110
Available Passenger Cruise Days	167,790		171,990		335,090		342,090
Occupancy	95.4	%	96.9	%	95.2	%	94.5	%

Adjusted EBITDA was calculated as follows:



(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net income	$	11,705		$	6,461		$	13,502		$	1,412
Interest income	(47		)	(64		)	(128		)	(139		)
Interest expense	8,168			9,643			16,742			19,691
Depreciation and amortization	9,793			9,115			19,080			18,368
Income tax expense, net	15			30			189			109
Other (income) expense	(748		)	1,711			1,738			5,195
Equity-based compensation/transactions (a)	391			178			581			429
Fuel hedge gain (loss) (b)	338			(84		)	408			64
Loss on disposal (c)	26			—			187			—
Other addback expenses per credit agreement (d)	137			1,471			416			2,808
Adjusted EBITDA	$	29,778		$	28,461		$	52,715		$	47,937


(a)	Equity-based compensation/transactions represent stock compensation expense in each period.


(b)	Fuel hedge gain (loss) represents the realized gain (loss) on fuel hedges triggered by the settlement of the hedge instrument and is included in other income (expense).


(c)	Loss on disposal primarily represents asset write-offs during vessel drydock periods.


(d)	Other addback expenses per credit agreement represents the net impact of expenses associated with professional fees and other costs associated with raising capital through debt and equity offerings and certain legal fees. Also included are costs associated with personnel changes and other corporate reorganizations to improve efficiencies.

In the following table, Net Per Diem is calculated by dividing Net Revenue by Passenger Days Sold, Gross Yield is calculated by dividing total revenue by Available Passenger Cruise Days, and Net Yield is calculated by dividing Net Revenue by Available Passenger Cruise Days as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except Passenger Days Sold, Available Passenger Cruise Days, Net Per Diem, and Yield data)	2014		2013		2014		2013
Passenger ticket revenue	$	128,784	$	129,774	$	247,681	$	243,212
Onboard and other revenue	14,160		12,962		27,532		23,841
Total revenue	142,944		142,736		275,213		267,053
Less:
Commissions, transportation and other expense	44,482		49,293		84,741		89,209
Onboard and other	4,189		3,795		8,466		6,475
Net Revenue	$	94,273	$	89,648	$	182,006	$	171,369

Passenger Days Sold	160,098		166,583		319,155		323,110
Available Passenger Cruise Days	167,790		171,990		335,090		342,090
Net Per Diem	$	588.85	$	538.16	$	570.27	$	530.37
Gross Yield	$	851.92	$	829.91	$	821.31	$	780.65
Net Yield	$	561.85	$	521.24	$	543.16	$	500.95

In the following table, Gross Cruise Cost per Available Passenger Cruise Days is calculated by dividing Gross Cruise Cost by Available Passenger Cruise Days, and Net Cruise Cost per Available Passenger Cruise Days is calculated by dividing Net Cruise Costs by Available Passenger Cruise Days.



(in thousands, except APCD data)	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Total cruise operating expense	$	94,308	$	96,571	$	181,973	$	180,868
Selling and administrative expense	19,750		19,269		42,114		41,549
Gross Cruise Cost	114,058		115,840		224,087		222,417
Less:
Commissions, transportation and other expense	44,482		49,293		84,741		89,209
Onboard and other	4,189		3,795		8,466		6,475
Net Cruise Cost	65,387		62,752		130,880		126,733
Less:
Fuel	10,093		10,052		20,754		21,529

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Seven Seas Cruises S. DE R.L. 10-Q