S-1 1 d619102ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on January 22, 2014

Registration Statement No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Prestige Cruises International, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Republic of Panama   4400   98-0622952

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

8300 NW 33rd Street, Suite 100

Miami, Florida 33122

(305) 514-2300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jill Guidicy

General Counsel

Prestige Cruises International, Inc.

8300 NW 33rd Street, Suite 100 Miami, Florida 33122

Phone: (305) 514-2300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copy to:

David S. Huntington, Esq.

Tracey A. Zaccone, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019-6064

(212) 373-3000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed
Maximum Aggregate

Offering Price (1)(2)

 

Amount of

Registration Fee

Ordinary shares, par value $.01 per share

  $250,000,000   $32,200

 

 

(1) Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purposes of computing the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated January 22, 2014

LOGO

Prestige Cruises International, Inc.

Ordinary Shares

 

 

This is the initial public offering of ordinary shares, par value $0.01 per share, of Prestige Cruises International, Inc. We are offering             ordinary shares.

Prior to this offering, there has been no public market for our ordinary shares. We expect the initial public offering price will be between $         and $         per share. We expect to apply for listing of our ordinary shares on the                  under the symbol “             .”

We have granted the underwriters an option for a period of 30 days to purchase from us an aggregate of up to             additional ordinary shares to cover over-allotments, if any.

 

 

Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 19 to read about certain factors you should consider before buying our ordinary shares.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to us before expenses

   $         $     

The underwriters expect to deliver the shares on or about             , 2014.

 

 

Prospectus dated                     , 2014.


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TABLE OF CONTENTS

 

 

     Page  

Prospectus Summary

     1   

Risk Factors

     19   

Use of Proceeds

     35   

Dividend Policy

     36   

Capitalization

     37   

Dilution

     38   

Selected Consolidated Financial Data

     40   

Unaudited Pro Forma Consolidated Financial Data

     42   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46   

Business

     65   

Management

     86   

Executive Compensation

     91   

Director Compensation

     108   

Principal Shareholders

     110   

Certain Relationships and Related Party Transactions

     112   

Description of Certain Indebtedness

     114   

Description of Capital Stock

     120   

Shares Eligible for Future Sale

     125   

Material U.S. Federal Income Tax Considerations

     126   

Certain Panamanian Tax Consequences

     129   

Underwriting

     130   

Legal Matters

     135   

Experts

     135   

Additional Information

     135   

Index to Consolidated Financial Statements

     F-1   

Neither we nor the underwriters have authorized anyone to provide you with different or additional information other than that contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, nor can provide any assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We and the underwriters are offering to sell, and seeking offers to buy, our ordinary shares only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus or such other date stated in this prospectus, regardless of the time of delivery of this prospectus or any sale of our ordinary shares, and our business, financial condition, results of operations and/or prospects may have changed since those dates.

Until             , 2014 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligations to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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TERMS USED IN THIS PROSPECTUS

Unless otherwise indicated by the context, references in this prospectus to (i) the “Company,” “we,” “our,” “us,” “PCI” and “Prestige” refer to Prestige Cruises International, Inc., a Panamanian corporation, together with its consolidated subsidiaries. Prestige Cruises International, Inc. is the parent of Prestige Cruise Holdings, Inc. (“PCH”), which in turn is the parent of Oceania Cruises, Inc. (“Oceania”) and the parent of Seven Seas Cruises S. DE R.L. (“Regent”).

Unless otherwise indicated, the following terms have the meanings set forth below:

 

    Adjusted EBITDA refers to EBITDA as adjusted and described in footnote 10 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    Adjusted EBITDA Margin refers to Adjusted EBITDA as a percentage of total revenue;

 

    APCD or Available Passenger Cruise Days refers to a measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period. See footnote 9 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    Apollo or our sponsor refers collectively to Apollo Global Management, LLC and its affiliates and/or affiliated funds;

 

    Berths refers to double occupancy capacity per suite, in accordance with cruise industry practice, even though many suites can accommodate three or more passengers;

 

    CAGR refers to compound annual growth rate;

 

    Charter refers to the hire of a ship for a specified period of time;

 

    CLIA refers to Cruise Lines International Association, Inc. a marketing and training organization formed in 1975 to promote cruising. CLIA North America is composed of 26 cruise lines. CLIA’s website can be found at www.cruising.org;

 

    Drydock refers to a dock that can be kept dry for use during the inspection or repairing of ships, and also refers to the scheduled or unscheduled removal of a vessel from regular service for maintenance or inspection in a drydock;

 

    EBITDA refers to net income (loss) excluding depreciation and amortization, net interest expense and income tax benefit (expense). See footnote 10 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    EPS refers to earnings (loss) per share;

 

    GAAP refers to generally accepted accounting principles in the United States of America set forth in the opinions and pronouncements of the Accounting Principles Board of the Public Company Accounting Oversight Board and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entities as have been approved by a significant segment of the accounting profession;

 

    Gross Cruise Cost refers to the sum of cruise operating expenses and selling and administrative expenses;

 

    Gross Tons refers to a unit of enclosed passenger space on a cruise ship, such that one gross ton equals 100 cubic feet or 2.831 cubic meters;

 

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    Gross Yield refers to total revenues, excluding charter per APCD. See footnote 9 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    IMO refers to the International Maritime Organization, a United Nations agency that sets international standards for shipping;

 

    MARPOL refers to the International Convention for the Prevention of Pollution from Ships, an international environmental regulation;

 

    Major North American Cruise Brands refers to Carnival Cruise Lines, Celebrity Cruises, Holland America, Norwegian Cruise Line, Oceania Cruises, Princess Cruises, Regent Seven Seas and Royal Caribbean International;

 

    Net Cruise Cost refers to Gross Cruise Cost excluding commissions, transportation and other expenses and onboard and other expenses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    Net Debt refers to our outstanding senior secured indebtedness less cash and cash equivalents;

 

    Net Per Diem refers to Net Revenue divided by Passenger Days Sold. We utilize Net Per Diems to manage our business on a day-to-day basis. We believe that it is the most relevant measure of our performance as it reflects the revenues earned by us, net of our most significant variable costs. See footnote 9 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    Net Revenue refers to total revenues, less charter revenue less commissions, transportation and other expenses and onboard and other expenses;

 

    Net Revenue Adjusted EBITDA Margin refers to Adjusted EBITDA divided by net revenue;

 

    Net Yield refers to Net Revenue divided by APCD. See footnote 9 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    Occupancy Percentage refers to the ratio of Passenger Days Sold to APCD;

 

    Oceania, Oceania Cruises or OCI refers to Oceania Cruises, Inc., a Panamanian corporation and a subsidiary of Prestige Cruise Holdings, Inc.;

 

    PCH refers to Prestige Cruise Holdings, Inc., a Panamanian corporation and a subsidiary of Prestige Cruises International, Inc.;

 

    PCI, Prestige, the Company, we, our or us refers to Prestige Cruises International, Inc., together with its consolidated subsidiaries;

 

    PCS refers to Prestige Cruise Services, LLC, a subsidiary of Oceania Cruises, Inc.;

 

    PDS or 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. See footnote 9 in “Prospectus Summary—Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operational and Financial Metrics, including Non-GAAP Measures;”

 

    Public Cruise Companies refers to Carnival Corp., Norwegian Cruise Line Holdings Ltd. and Royal Caribbean Cruises Ltd.;

 

    Regent, Regent Seven Seas or SSC refers to Seven Seas Cruises S. DE R.L. and its subsidiaries;

 

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    Regent Seven Seas Transaction refers to the transaction that closed on January 31, 2008, pursuant to which Seven Seas Cruises S. DE R.L. purchased substantially all of the assets of Regent Seven Seas Cruises, Inc. and the equity of certain of its affiliated companies and joint ventures from Carlson Cruises Worldwide, Inc. and Vlasov Shipping Corporation;

 

    SOLAS refers to the International Convention for the Safety of Life at Sea, a body of international regulations dealing with ship and operational safety standards; and

 

    STCW refers to the Standard of Training Certification and Watchkeeping for mariners.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements include statements other than those that directly or exclusively relate to 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). 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 the Seven Seas Explorer, on terms that are favorable or consistent with our expectations;

 

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

 

    continued borrowing availability under our Secured Credit Facilities (as defined herein) and compliance with our covenants;

 

    changes in interest rates, foreign currency rates, fuel costs or other cruise operating costs;

 

    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 Secured Credit Facilities, 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;

 

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    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; and

 

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

The above examples are not exhaustive and speak only as of the date of this prospectus. These and other factors are more fully discussed in the “Risk Factors” section and elsewhere in this prospectus. These risks could cause actual results to differ materially from those implied by forward-looking statements in this prospectus.

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. 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 this prospectus, particularly in “Risk Factors.”

MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes market share and industry data and forecasts that we obtained from industry publications, third-party surveys and internal company surveys. Industry publications, including those from the Cruise Lines International Association, Inc. (“CLIA”) and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. All CLIA information, obtained from the CLIA website “www.cruising.org,” relates to CLIA member lines, which currently include 26 of the major North American cruise lines, including both Regent and Oceania. CLIA member lines cumulatively represented 97% of the North American cruise capacity as of September 30, 2013. All other references to third-party information are to information that is publicly available at nominal or no cost. We use the most currently available industry and market data to support statements as to our market position.

Although we believe that the industry publications and third-party sources are reliable, we have not independently verified any of the data from industry publications or third-party sources. Similarly, while we believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we are not aware of any misstatements regarding any industry data presented herein, our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights information about us and the offering contained elsewhere in this prospectus. It is not complete and may not contain all the information that may be important to you. You should read this entire prospectus carefully before making an investment decision, including the sections entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Our Company

We are the market leader in the Upscale segment, which is comprised of the Upper Premium and Luxury segments, of the $29 billion cruise industry, and we are focused on providing our guests with extraordinary experiences. These experiences are characterized by gourmet cuisine, high quality service, luxurious accommodations and distinctive itineraries to “must see” destinations worldwide. Our cruise vacations are tailored to the preferences of affluent individuals globally, who are generally 55 years of age and older. This target market, referred to as the baby-boomers in the United States, is both the largest and fastest growing U.S. demographic. Our focus on this demographic allows us to deliver a vacation lifestyle that our guests can expect, enjoy and are willing to pay a premium price to experience. Our cruise vacations are exclusive and upscale and are designed to encourage our guests to form an emotional attachment to our ships and staff, creating a long-lasting affinity for our brands.

Our brands, Oceania and Regent, are comprised of eight cruise ships, with a ninth under construction for Regent. Oceania operates in the Upper Premium segment and Regent operates in the Luxury segment. We believe we have successfully positioned our two brands as the cruise lines of choice with the fast growing baby-boomer demographic. Our brands occupy a leading position in the Upscale segment, representing approximately 46% of the combined berth capacity of the Upscale segment as of September 30, 2013. We believe our two-brand strategy is key to maintaining our market leading position, as it allows us to offer products in the Upscale segment with distinct brand promises to a growing global demographic.

We focus on providing destination-oriented vacations combined with distinctive onboard experiences, such as gourmet cuisine, spacious and comfortable public areas, high levels of service and luxurious in-suite amenities. Our ships have limited guest capacity per ship, ranging from 490 to 1,250 guests, and are significantly smaller than the typical 2,000 to 5,000 passenger ships operated by the Contemporary and Premium segment brands. Our stateroom accommodations are large and luxurious, consistent with an upscale and exclusive cruise experience, with over 87% of the suites and staterooms on our ships featuring private balconies. Our onboard dining is a central highlight of our cruise experience and features multiple open seating gourmet dining venues where guests may dine when, where and with whom they wish. Our ships are staffed with a crew-to-guest ratio of approximately 1 to 1.7, further promoting a high level of service. This luxury-focused product offering drives our industry leading Net Yields.

We focus on deploying our ships to high demand and in-season locations worldwide. Our smaller ship size allows us to travel to more remote ports around the world, thereby meeting our guests’ demand for experiencing the most sought after destinations. The duration of our cruises varies from seven to 180 days, featuring worldwide itineraries that visit approximately 350 ports each year, including destinations such as Scandinavia, Russia, the Mediterranean, the Greek Isles, Alaska, Canada and New England, Asia, Tahiti and the South Pacific, Australia and New Zealand, Africa, India, South America, the Panama Canal and the Caribbean. We also have the only cruise line (Oceania) to offer a port-intensive 180 day “Around the World” cruise that circumnavigates the globe. Our ships are designed to be classic and refined, providing a comfortable cruise experience featuring the gourmet cuisine, highly attentive service and elegant surroundings that our target market is seeking, rather than the extravagant and flashy onboard features found on many larger ships catering to the mass market. We

 

 

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believe this key advantage will allow us to continue to grow our Net Yields across our entire fleet, and not just from new ship introductions, and to experience a more consistent and predictable return on invested capital over the useful life of our ships.

Our affluent and mostly retired or semi-retired guests plan their cruise vacations well ahead of sail date, which gives us high visibility into our future revenues. On average, our guests book seven to nine months in advance of sail date, which provides us ample lead time to effectively plan our sales and marketing initiatives and optimize our industry leading Net Yields. Because of the more all-inclusive nature of our product offerings, we generate a larger share of our overall revenue at time of booking compared to the rest of the industry, which provides us with even greater visibility into our total revenues. Another key differentiating factor is our disciplined and transparent go-to-market strategy. Unlike most cruise lines that discount inventory regularly to fill capacity (“price to fill”), our strategy to maximize revenue is to increase marketing efforts (“market to fill”) as the cruise date approaches. In order to accelerate sales, we clearly articulate to customers and travel agents that our prices are subject to increase as the cruise date approaches, as well as the specific dates on which those increases may occur. This strategy allows us to maintain and improve our high price point, which is fundamental in the Upscale segment.

Our senior management team has delivered consistent revenue, EBITDA and net income growth, producing measurable improvements in all three growth phases of the cruise industry. Frank J. Del Rio launched a new brand with the introduction of Oceania in 2003 and leads the company as our Chairman and CEO. We acquired Regent in 2008 and improved our results following the acquisition, including generating $18.0 million in cost synergies and increasing occupancy and yields. We also completed a newbuild program with the successful launch of Oceania’s Marina in January 2011 and Oceania’s Riviera in April 2012. We are committed to maintaining a disciplined growth strategy to maximize shareholder value by profitably growing our business while continuing to reduce our debt and increase our return on invested capital.

Our operating structure is integrated, with both of our brands sharing a single headquarter location and back office functions. This approach creates a culture of institutionalizing best practices, driving efficiencies and taking advantage of scale. Our brands maintain separate sales and marketing teams as well as dedicated reservation centers, which allows each brand to maintain and effectively communicate its unique identity and brand promise. This balanced approach leverages best-in-class operations to deliver consistently outstanding experiences to our guests while keeping our overhead expenditures low and our competitive position strong. This strategy also allows us to leverage our scale in order to develop international source markets effectively and permits other efficiencies such as implementing a common reservation system, shared data center and a common pool of well trained and experienced onboard crew and officers.

For the twelve months ended September 30, 2013, we generated total revenue of $1.2 billion, Net Revenue of $787.2 million, Adjusted EBITDA of $253.4 million and Adjusted EBITDA Margin of 21.6%. In comparing our Adjusted EBITDA Margin to other cruise lines, it is important to note that our more inclusive product offering results in higher Commissions, transportation and other expense. Accordingly, we believe a more appropriate margin analysis is Net Revenue Adjusted EBITDA Margin, which is Adjusted EBITDA divided by Net Revenue, which was 32.2% for the twelve months ended September 30, 2013. See “Prospectus Summary—Summary Consolidated Financial Information” for a reconciliation of Adjusted EBITDA to net income.

Our Brands

Oceania

Oceania was formed in 2003 by Frank J. Del Rio, now Chairman and CEO of our company, to focus on the under-penetrated midsize ship cruise market. Oceania specializes in offering destination-oriented cruise vacations,

 

 

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gourmet culinary experiences, elegant accommodations and personalized service at a compelling value. Oceania owns and operates a five ship fleet, comprised of three 684 guest R-Class ships: Regatta, Insignia and Nautica, and two new 1,250 guest O-Class ships: Marina and Riviera, which joined the fleet in 2011 and 2012, respectively.

Oceania provides an Upper Premium midsize ship cruise experience designed primarily for affluent baby-boomers. The line positions itself as the affordable cruising alternative between the Luxury ($500 plus per person per diems) and Premium ($150 to $250 per person per diems) segments of the cruise industry. Affluent guests, who historically have been loyal cruise customers on small and midsize ships, have seen the number of these type of ships diminish in recent years as the major cruise operators have focused on building ever larger ships (2500+ passengers) in the Premium cruise category.

In 2011 and 2012, Oceania took delivery of the first two O-Class vessels, Marina and Riviera, with a capacity of 1,250 guests each. We believe the O-Class ships are the world’s finest vessels designed and purpose-built for the Upper Premium market, expanding upon the popular elements featured on Oceania’s original fleet of vessels, with an emphasis on large suites and staterooms and an exceptional epicurean experience. The overall mix of suite and balcony stateroom accommodations on the O-Class ships of 95% positions these vessels to generate higher Net Yields than the R-Class ships, with 68% balcony staterooms.

Oceania is ranked as one of the world’s best cruise lines by Condé Nast Traveler, Travel + Leisure, Departures, Travel Age West and Cruise Critic. Oceania ships received Best Dining, Best Public Rooms and Best Cabins from Cruise Critic Cruisers’ Choice Awards in 2013. Oceania also is the only cruise line to have had one of its ships receive a perfect “100” score for “Dining” in the Condé Nast Traveler Reader’s Choice Awards.

Regent

Regent is recognized as one of the world’s top luxury lines, featuring six-star service, oversized balcony suite staterooms and the cruise industry’s most inclusive product offering. Regent is a leading luxury cruise company and traces its origins to 1992, when Seven Seas Cruise Line merged with Diamond Cruise to become Radisson Seven Seas Cruises. In 2006, the cruise line was re-branded by its then-owner Carlson Company as Regent Seven Seas Cruises. Regent currently operates three award-winning, all-suite ships, comprised of Seven Seas Navigator, the all-balcony Seven Seas Mariner and the all-balcony Seven Seas Voyager, totaling 1,890 aggregate berths. Regent offers the industry’s most all-inclusive cruise vacation experience, including free air transportation, a pre-cruise hotel night stay, premium wines and top shelf liquors, gratuities, internet access and unlimited shore excursions.

Regent is currently building a 750 passenger ship, Seven Seas Explorer, for delivery in the summer of 2016, which we believe will further elevate the position of the Regent brand. The all-suite, all-balcony ship will feature sophisticated designer suites ranging from 300 to 3,500 square feet with an industry leading space ratio of 89.3 and a crew-to-guest ratio of 1 to 1.4. The ship will include six open-seating gourmet restaurants, Regent’s signature nine-deck open atrium, a two-story theater, three boutiques and an expansive Canyon Ranch SpaClub®. Operationally, the vessel will be a green ship, employing the most advanced environmental systems and state-of-the-art technology.

Regent focuses on providing guests with a high level of personal service, imaginative world-wide itineraries, unique shore excursions and land tours, world-class accommodations and top-rated cuisine. Regent is consistently ranked among the top luxury cruise lines by various travel publications. In 2011, 2012 and 2013, Regent was named the Best Luxury Cruise Line by Virtuoso, one of America’s largest travel agency networks, which caters to the highly affluent traveler. In 2012, Condé Nast Traveler awarded the brand “Best Cabins” and it received the “Best for Luxury” award from the Cruise Critic Editor’s Pick Awards. Regent also was honored with “World’s Best Service” from Travel + Leisure’s World’s Best Awards in 2013.

 

 

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Our Industry

We believe that the cruise industry demonstrates the following positive fundamentals:

Strong Growth with Low Penetration and Significant Upside

Cruising represents a small but fast growing sector of the overall global vacation market. Cruising is a vacation alternative with broad appeal, as it offers a wide range of products, destinations and experiences from offerings in the Contemporary (large ships / low ticket prices) to Luxury (small ships / high ticket prices) segments to suit the various preferences of vacationing consumers of all ages, wealth levels and nationalities. According to CLIA, only 24% of the U.S. population has taken a cruise. However, CLIA estimates that during 2012, approximately 17 million global passengers went on a cruise, an increase of 5.4% over the preceding year. According to CLIA, the number of cruise passengers originating from North America has increased each year since 1995 as cruising has evolved from a niche vacation experience to a leisure holiday with broad appeal across all demographic and psychographic groups. Despite this consistent growth, the cruise industry still has low penetration levels compared to similar land-based vacations. Based on industry research, in 2012, 57.2 million people visited Orlando, Florida and 39.7 million people visited Las Vegas, Nevada. We believe this data highlights the continued growth potential for ocean going cruising. The future growth of the Contemporary and Premium segments, along with the normal aspirational life cycle of consumer preferences, is especially important for our company, because the vast majority of our first time guests are not first time cruisers. Accordingly, increases in the number of guests in the Contemporary and Premium segments will increase the pool of potential first time guests for our two brands.

 

LOGO

Attractive Demographics of Target Market

Long-term demographics are favorable for the cruise industry, in particular for the Upscale segment. Historically, people 55 years of age and older have had the highest disposable income levels and the most leisure time, making them prime candidates for Upscale cruising given the longer itineraries and higher per diems of cruises in that category. According to U.S. Census Bureau data, in 2010, the 55 years and older age group was comprised of 77 million individuals, representing approximately 25% of the U.S. population. This group is expected to increase to 87 million by 2015 and 106 million by 2025. These individuals control $12.7 trillion of wealth and represent approximately 31% of the global high net worth individual population. The demographics in Europe are expected to follow a similar growth trend.

 

 

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International Growth in Emerging Markets

Significant growth opportunities exist for sourcing guests from Europe and other international markets, as the percentage of guests from outside North America who have taken cruises is far lower than the percentage of North Americans. Emerging markets in Asia and the Pacific Rim also hold strong potential for us to source future cruise passengers. As recently as seven years ago, no international cruise lines serviced these regions. However, a number of cruise lines in the Contemporary and Premium segments, which typically includes cruises of seven days or less, have a more casual ambiance, and offer the lowest prices, have recently deployed ships in Asia for seasonal or year-round operations. The increase in personal wealth in these and other emerging markets is particularly beneficial to the cruise industry, as historically, when the living standards improve in a country, the population first focuses on buying physical assets (e.g., houses, cars, etc.) and then focuses on buying aspirational experiences, such as travel. Overall, the growth in cruising outside of North America has been increasing at a considerably faster pace than within North America.

Multiple Segments

The cruise industry’s brands have been historically segmented into the Contemporary, Premium, Upper Premium and Luxury categories. Collectively, we refer to the Upper Premium and Luxury categories as the Upscale segment. The Premium segment typically includes cruises that range from seven to fourteen days. Premium cruises emphasize higher quality offerings, more personal comfort and greater worldwide itineraries, with higher average pricing than the Contemporary cruises. Upper Premium is a niche market segment created by Oceania in 2003 and defined by an experience that straddles the Premium and Luxury segments but with smaller ships than those operated by the Premium lines, higher space and higher crew-to-guest ratios, more refined culinary programs, higher service standards and a greater destination-oriented focus than the Premium segment. The Luxury segment is characterized by the smallest vessel size, unique itineraries, the largest stateroom accommodations, gourmet culinary programs, highly personalized service and a more inclusive offering. These exclusive attributes, combined with limited supply growth and a growing worldwide target population, provide Upscale operators with significant pricing leverage as compared to the other segments of the cruise industry.

High Barriers to Entry

The cruise industry is characterized by high barriers to entry, including the existence of well-known and established consumer brands, the cost, time and personal relationships required to develop strong travel agent network partnerships necessary for success, the large capital expenditures required to build new and sophisticated ships, the limited number of ship builders with experience in constructing passenger ships and the long lead time necessary to construct new ships. Based on recently announced newbuilds and depending on the intended industry segment, the cost to build a new cruise ship can range from $340 million to $1.3 billion, or $195,000 to $741,000 per berth. The ultimate cost depends on the ship’s size and product offering, with the Upper Premium and Luxury segments having the highest cost per berth in the industry, ranging from $443,000 to $741,000 per berth. The Luxury segment in particular has demonstrated high barriers to entry with our competitors having participated in the market for an average of approximately 24 years. We believe that the newbuild pipeline in the Upscale segment is relatively favorable compared to the broader industry, with few deliveries scheduled through 2016 other than Regent’s newbuild.

Our Competitive Strengths

We believe that the following business model attributes enable us to successfully execute our strategy:

Lifestyle Brand

Prestige’s two brands, Regent and Oceania, both have long and venerable histories. We believe the two brands are well known within the affluent 55 and older age group in North America as offering a sophisticated

 

 

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experience. We partner with several fine luxury brands, including Lalique, Hermes, Bulgari, Canyon Ranch and Bon Appetit, to further add caché to the lifestyle experiences we deliver onboard our cruises. Consistent with our upscale image, we believe our two brands will continue to enjoy resiliency in economic downturns and achieve above-market Net Yields during normal economic conditions.

High Quality Fleet

Our two-brand fleet, which currently consists of eight ships, is designed to provide guests with the highest quality cruise experience. Our accommodations are large and luxurious with over 87% of our staterooms and suites featuring private balconies. Capacity per ship is limited and ranges from 490 to 1,250 guests, providing each guest a unique and highly personalized experience, with space ratios of 44.26 to 68.68, which are among the highest in the industry. Our cruises are staffed at a crew-to-guest ratio of approximately 1 to 1.7, further promoting a high level of personalized service. Seven Seas Mariner and Seven Seas Voyager feature all suite, all balcony accommodations, and Marina and Riviera, 95% of whose accommodations feature balconies, are the only ships at sea to feature suites designed and furnished by Ralph Lauren Home and noted interior designer Dakota Jackson. We expect delivery of our newbuild Seven Seas Explorer in the summer of 2016, which we believe will be the most luxurious ocean-going ship ever built.

Differentiated Product Offering

We believe that our destination-focused worldwide itineraries of varying lengths, augmented by exciting shore excursions and other land based programs and a diverse set of onboard enrichment programs, further differentiate our two brands from our competitors. We also focus on deploying our ships to high demand and in-season locations worldwide. We cruise to more remote ports around the world to meet passengers’ demands to experience new, exotic and out-of-the-way destinations. We feature itineraries that call on “must see” destinations, many of which include overnight stays in port, allowing guests to enjoy greater local immersion. A competitive advantage of our smaller ship size is that we can access smaller ports that are off-limits to larger ships. Our onboard dining is a central highlight of our cruise experience, with multiple open seating dining venues where guests may dine when, where and with whom they wish. We continue to receive awards for our onboard dining and, in 2013 received “Best Dining” from both Condé Nast Traveler Reader’s Choice Awards and Cruise Critic Cruisers Choice Awards. We also feature the only hands-on instructional culinary centers at sea onboard Oceania’s Marina and Riviera. Our state-of-the-art spa facilities on each vessel feature the highly renowned Canyon Ranch SpaClub®. We believe that these high quality product offerings positions us well compared to other cruise operators and provides us with the opportunity to continue growing our capacity and Net Yields.

Loyal and Repeat Customer Base

Our target customer is 55 years of age or older, has a net worth of over $1.0 million, is well educated and is a seasoned world traveler. This target audience has reached an age and wealth status where the convenience, comfort and luxury amenities of an upscale cruise product are extremely appealing.

Our award-winning service, innovative itineraries, gourmet cuisine and luxurious onboard amenities have resulted in nearly perfect passenger satisfaction ratings. In 2013, approximately 98% of guests that responded to our survey reported that their cruise experience met or exceeded their expectations, and that they will “definitely” or “probably” return. Furthermore, for the nine months ended September 30, 2013, repeat guests accounted for approximately 41% of total guests on a Passenger Days Sold basis. Our ability to consistently deliver a high quality, high value product, resulting in high guest satisfaction, continues to be a competitive advantage.

 

 

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Experienced Management Team and Shareholder

We are led by a management team with extensive cruise and leisure industry experience. The team includes Frank J. Del Rio as Chairman and CEO with 20 years of industry experience, Robert J. Binder as Vice Chairman and President with 23 years of industry experience, Kunal S. Kamlani as President of PCH, Regent and Oceania with 19 years of experience in the financial services and leisure industries, T. Robin Lindsay as Executive Vice President of Vessel Operations with 34 years of industry experience and Jason M. Montague as Executive Vice President and Chief Financial Officer with 13 years of industry experience.

Our principal shareholder and sponsor Apollo has experience investing in the cruise, leisure and travel related industries. Apollo is a leading global alternative asset manager. In addition to holding a controlling interest in us, Apollo is a significant shareholder and controls the board of Norwegian Cruise Line Holdings Ltd., one of the leading global cruise line operators. Apollo also has current investments in other travel and leisure companies, including Caesars Entertainment and Great Wolf Resorts, and has in the past invested in Vail Resorts, Wyndham International and other hotel properties.

Cash Flow Generation

Our business model allows us to generate a significant amount of free cash flow with high revenue visibility. We encourage our target customers to book their cruise vacations as early as possible in the sales cycle and to prepay for certain optional services. We begin to sell our inventory up to 20 months prior to sail date, with deposits generally due within seven days of booking and final payment collected 90 to 150 days before sailing. This payment model results in passenger deposits being a source of cash, provides strong visibility into our future revenues and corresponding cash flows and gives us ample time to adjust selling price and sales and marketing initiatives to minimize acquisition costs and maximize Net Yields. Moreover, we benefit from favorable U.S. tax status, as our income is primarily derived from the operation of cruise ships in international waters and is therefore generally exempt from U.S. federal income taxes. As a result of these factors, we generate significant free cash flow, a portion of which can be used for debt reduction and capacity expansion.

Superior Value Proposition

A substantial number of cruise customers purchase large balcony staterooms measuring over 200 square feet in size on cruise lines in the Contemporary and Premium segments. We believe that after factoring in additional onboard spending for items that would be included in our ticket price, these passengers are currently paying per diems similar to what we charge, but in our opinion, receive a lower quality product, with inferior cuisine, standard itinerary offerings, diminished personalized service due to significantly lower crew-to-guest ratios and markedly lower space ratios. According to our research, there are approximately 22,297 large balcony staterooms measuring over 200 square feet in the North American cruise industry. Our market share of this type of stateroom was only 10% in 2012. We believe our brands are well positioned for future capacity growth given each brand’s market positioning and strong value proposition.

Our Business Strategy

The following are the key components of our business strategy:

Disciplined Growth

Our goal is to grow with discipline, and we are constantly evaluating various strategies for further increasing our passenger capacity and, accordingly, our total revenues and net income with a specific focus on increasing our return on invested capital. These strategies include further penetration into emerging international markets and potential acquisitions of niche cruise operators, similar to the successful acquisition of Regent in 2008. Other possibilities include additional newbuild programs, similar to the additions of Marina and Riviera to

 

 

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the Oceania fleet in 2011 and 2012, respectively, as well as the scheduled delivery of the Seven Seas Explorer to the Regent fleet in the summer of 2016. Each ship that has joined our fleet has had a significant positive impact on our financial results with limited incremental overhead.

High Visibility and Differentiated Revenue Management Strategy

We have implemented a differentiated price enhancing revenue management strategy that encourages our target market to book early to obtain the most attractive value offering, with bookings made up to 20 months in advance of sail date. This timeline provides us with greater visibility into our future revenues and gives us ample time to adjust sales, marketing and pricing initiatives as necessary. Due to the more inclusive nature of our product offerings, a greater percentage of our Net Revenue is comprised of net ticket revenue as compared to Contemporary and Premium segment cruise lines, which must wait until the actual sailing to gain visibility into much of their revenues, as their onboard revenue represents a greater portion of their total revenue. On average, our guests book seven to nine months in advance of sail date. Based on our research, we believe the industry average booking curve is five months or less.

When we launch new itineraries, we clearly articulate to potential customers and travel agents that prices are subject to increase as the cruise date approaches, as well as the specific dates on which those price increases may occur. We believe the travel agent community favors our pricing strategy as it allows them to provide value to their customers in a completely transparent manner, resulting in early bookings. This early booking cycle allows us to make more informed decisions about pricing, inventory management and marketing efforts.

Focus on Occupancy and Maximize Net Yields

We concentrate on improving our early booking occupancy rates to drive higher Net Yields. We execute targeted and high frequency marketing campaigns that communicate a distinct message of our differentiated value-packed cruise offerings in both North American and select international markets. To increase the effectiveness of our targeted marketing programs, we recently transformed our Miami call center from an inbound-only reservation center to one that also makes outbound calls to high potential targeted customers. This dual prong strategy allows us to maximize the revenue potential from each customer contact (“leads”) generated by our various marketing campaigns. We expect that this strategic change and other initiatives in our sales organization and distribution channels will help drive sustainable growth in the number of guests carried and in Net Yields achieved.

Due to our brands’ clear positioning and our target market focus on an older and more affluent clientele, we do not carry many families with children or groups of individuals that travel three or four to a stateroom. Conversely, we have a small but increased number of elderly guests who prefer to travel as “singles,” or one to a stateroom. Because 100% occupancy is based on two persons in a stateroom, we tend to report occupancies that are somewhat lower than those of the Premium and Contemporary cruise lines, while still sailing close to full in terms of cabin occupancy.

Improve Operating Efficiency and Lower Costs

We focus on driving continued financial performance through a variety of business improvement initiatives. These initiatives focus on reducing costs while also improving the overall product quality we deliver to our customers. For example, when we acquired Regent in 2008, we were able to achieve $18 million in annual cost savings through rationalizing overhead and institutionalizing best practices across the two brands.

Our business improvement initiatives focus on various cost containment programs such as contract negotiations, global purchasing and logistics, fuel consumption efficiencies and optimal itinerary deployments. We hedge our fuel purchases in order to provide greater visibility and certainty of our fuel expenses. As of September 30, 2013, we had

 

 

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hedged approximately 75% of estimated fuel consumption for the remainder of 2013, and approximately 40% and 10% of our estimated fuel consumption for 2014 and 2015, respectively. In addition, we expect benefits derived from economies of scale from additional newbuilds will further drive operating efficiencies over the medium and long term.

Expand and Strengthen Our Product Distribution Channels

We have three primary sales channels that we constantly strive to optimize: “Retail/Travel Agent,” “International” and “Meetings, Incentives and Charters.” As part of this optimization, we continue to invest in our brands by enhancing our technology platforms across these channels, including through websites and other global distribution systems, as well as our inbound and outbound reservations department that travel agents and customers use to book cruise vacations. We strive to continually deliver efficient and timely marketing information across multiple technological and legacy type platforms.

 

    Retail/Travel Agent. We make substantial investments to facilitate our travel agent partners’ success with improvements in booking technologies, transparent pricing strategies, effective marketing tools, improved communication and cooperative marketing initiatives. We have also implemented automated communication, training and booking tools specifically designed to improve our efficiency with the travel agency community and our guests including aggressive call center quality monitoring. We have sales force teams dedicated to each of our two brands who work closely with our travel agency partners on maximizing their marketing and sales effectiveness through product training, education and the sharing of “best-practices.”

 

    International. We have an international sales office in Southampton, United Kingdom that services Europe and various general sales agents covering Latin America, Australia and Asia. Since the expansion of our fleet in 2011, we have made a concerted effort to diversify the sourcing of our passengers worldwide. In 2010, 20.2% of our passengers were sourced from outside the United States. In 2012, we grew that amount to 25.3%. For the twelve months ended September 30, 2013, 26.6% of our passengers were sourced from outside the United States. We believe there remains significant opportunity to grow passenger sourcing in many major markets such as Europe and Australia as well as in emerging markets in the Asia Pacific region.

 

    Meetings, Incentives and Charters. This channel focuses on full ship charters as well as partial ship groups for corporate meeting and incentive travel. These sales often have very long lead times and can fill a significant portion of a ship’s capacity, or even an entire sailing, in one transaction. In addition, full ship charters and/or large groups strengthens base-loading, which allows us to fill a particular sailing earlier than usual which in turn allows us to reduce sales and marketing spend on both the sailing with the large group as well as surrounding sailings.

Our Fleet

Collectively, our two brands operate eight ships with 6,442 berths in aggregate. We also have one newbuild, Seven Seas Explorer, with 750 berths on order for delivery in the summer of 2016. Our current fleet has a maximum of 2,351,330 capacity days that will grow 11.6% to 2,625,080 after delivery of the Seven Seas Explorer in the summer of 2016.

Oceania operates five ships. The R-Class ships, Regatta, Insignia and Nautica are identical highly-rated 5-star ships featuring country club style accommodations and amenities. Capacity on each ship is limited to 684 guests and our cruises are staffed at a crew-to-guest ratio of approximately 1 to 1.7. These ships provide 68% of suites and staterooms with private balconies. Recently, Oceania successfully executed a fleet expansion program with the additions of two O-Class ships, Marina and Riviera, in 2011 and 2012, respectively. The O-Class vessels are staffed at a crew-to-guest ratio of approximately 1 to 1.6 and 95% of the staterooms are suites and have private balconies. Oceania’s fleet has grown 122% since 2010 to 4,552 berths in aggregate and operating a maximum annual capacity of 1,661,480 capacity days. Oceania is the world’s largest Upper Premium cruise line.

 

 

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Regent currently operates three six-star luxury cruise ships, Seven Seas Navigator, Seven Seas Mariner and Seven Seas Voyager, with 1,890 berths in aggregate, featuring world-class accommodations and amenities. Regent operates at a maximum capacity of 689,850 capacity days. Capacity on each ship is limited and ranges from 490 to 700 guests and cruises are staffed at a crew-to-guest ratio of approximately 1 to 1.6. All ships offer all-suite accommodations with 90-100% of the suites featuring private balconies. Delivery of the 750 guest newbuild, Seven Seas Explorer, is expected in the summer of 2016. The all-suite, all-balcony Seven Seas Explorer will feature sophisticated designer suites ranging from 300 square feet to 3,500 square feet with an industry leading space ratio of 89.3 gross tons per guest and a crew-to-guest ratio of 1 to 1.4. The ship will include six open-seating gourmet restaurants, Regent’s signature nine-deck open atrium, a two-story theater, three boutiques and an expansive Canyon Ranch SpaClub®. Operationally, it will be a green ship, employing the most advanced environmental systems and state-of-the-art technology. Upon delivery of the Seven Seas Explorer, Regent will be the world’s largest luxury cruise line.

The following table describes the features of our ships:

 

    

Marina,
Riviera

  

Regatta,
Insignia,
Nautica

  

Seven Seas
Explorer

  

Seven

Seas
Voyager

  

Seven

Seas
Mariner

  

Seven

Seas
Navigator

Berths

   1,250    684    750    700    700    490

Balconies

   95%    68%    100%    100%    100%    90%

Gross tonnage

  

66,084

  

30,277

   67,000    42,363    48,075    28,803

Space ratio (1)

   52.86    44.26   

89.33

   60.52    68.68   

58.78

Accommodations (sq ft)

   174-2,000    160-982    300-3,500    350-1,403    301-2,002    301-1,173

Crew-to-guest ratio

   1:1.6    1:1.7    1:1.4    1:1.6    1:1.6    1:1.4

Country of registry

   Marshall Islands    Marshall Islands    Marshall Islands    Bahamas    Bahamas    Bahamas

Restaurants

   6    4    6    4    4    3

Year built

   2011, 2012    1998, 1998, 2000    (2)    2003    2001    1999

 

(1) Space ratio refers to a unit of enclosed space per passenger on the ship measured in cubic feet, and represents gross tonnage divided by the number of double occupancy berths.
(2) The Seven Seas Explorer is currently under construction, with delivery expected in the summer of 2016.

 

 

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Our Corporate Structure

The following chart shows our corporate structure immediately following the consummation of this offering:

LOGO

 

 

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Our Sponsor

Our principal shareholder and sponsor, Apollo Global Management, LLC, is a leading global alternative asset manager with offices in New York, Los Angeles, London, Frankfurt, Luxembourg, Singapore, Hong Kong and Mumbai. As of September 30, 2013, Apollo had assets under management of $113.0 billion invested in its private equity, credit markets and real estate businesses. In addition to holding a controlling interest in us, Apollo is a significant shareholder and controls the board of Norwegian Cruise Line Holdings Ltd., one of the leading global cruise line operators. Apollo also has current investments in other travel and leisure companies, including Caesars Entertainment and Great Wolf Resorts, and has in the past invested in Vail Resorts, Wyndham International and other hotel properties.

Additional Information

Prestige is a company incorporated under the laws of Panama. Our registered offices are located at Plaza 2000 Building, 16th Floor, 50th Street, Panama, Republic of Panama. Our principal executive offices are located at 8300 NW 33rd Street, Suite 100, Miami, FL 33122. Our telephone number is (305) 514-2300. Our websites are www.rssc.com and www.oceaniacruises.com. The information that appears on our website is not part of, and is not incorporated by reference into, this prospectus.

 

 

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THE OFFERING

 

Issuer

Prestige Cruises International, Inc.

 

Ordinary shares offered by us

            shares, or             shares if the underwriters exercise in full their option to purchase additional shares.

 

Ordinary shares to be outstanding after this offering

            shares, or             shares if the underwriters exercise in full their option to purchase additional shares.

 

Over-allotment option

We have granted the underwriters an option for a period of 30 days to purchase from us of up to             additional ordinary shares to cover any over-allotments.

 

Use of proceeds

We estimate that we will receive net proceeds from the sale of our ordinary shares in this offering of approximately $         million, after deducting the underwriting discount and estimated offering expenses, assuming the ordinary shares are offered at $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and assuming that the underwriters do not exercise their option to purchase additional shares. We intend to use the net proceeds that we receive (i) to redeem $         million of Regent’s outstanding Senior Secured Notes, (ii) to repay $         million of the Oceania Term Loan and $                 million of the Regent Term Loan, and (iii) for future capital expenditures and general corporate purposes. See “Use of Proceeds.”

 

Listing

We have applied to list the common shares on                  under the symbol “            .”

 

Dividend policy

We currently do not intend to pay dividends following this offering. The agreements governing our debt instruments limit our ability to pay cash dividends to our shareholders above specified levels. In addition, any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our Board of Directors deems relevant. See “Dividend Policy.”

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” beginning on page 19 of this prospectus and all other information set forth in this prospectus before investing in our ordinary shares.

The number of ordinary shares to be outstanding after this offering is based on                  ordinary shares outstanding as of the date of this prospectus and the                  ordinary shares we are offering. This number of shares excludes              ordinary shares issuable upon the exercise of outstanding options at a weighted-average exercise price of $                 per share as of the date of this prospectus, of which                  were exercisable, and up to                  ordinary shares reserved for future issuance under our equity incentive plans following this

 

 

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offering. The number of ordinary shares reserved for future issuance will be reduced by options to purchase                 ordinary shares that we granted effective immediately following the pricing of this offering with an exercise price equal to the initial public offering price. Of these grants, our directors and named executive officers received options to purchase                 ordinary shares.

Except as otherwise indicated herein, all information in this prospectus, including the number of ordinary shares that will be outstanding after this offering, reflects or assumes:

 

    an initial public offering price of $         per ordinary share;

 

    the underwriters do not exercise their option to purchase up to             additional ordinary shares from us;

 

    the stock split that we intend to effectuate prior to this offering, whereby each issued and outstanding ordinary share will be converted into             shares; and

 

    no exercise of the outstanding options described above.

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

In the tables below, the summary consolidated financial information as of December 31, 2012 and 2011 and for each of the three years ended December 31, 2012, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial information as of December 31, 2010 has been derived from our audited consolidated financial statements not included in this prospectus. The summary consolidated financial information as of September 30, 2013 and for the nine months ended September 30, 2013 and 2012 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of September 30, 2012 has been derived from our unaudited consolidated financial statements not included in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year.

Solely for the convenience of the reader, the tables below also provide certain of our financial data for the twelve months ended September 30, 2013, which have been calculated by adding the results for the year ended December 31, 2012 and the nine months ended September 30, 2013, and subtracting the results for the nine months ended September 30, 2012.

We utilize a variety of operational and financial metrics, which are defined below, to evaluate our performance and financial condition. We use certain non-GAAP financial measures, such as EBITDA, Adjusted EBITDA, Net Per Diems and Net Yields, to enable us to analyze our performance and financial condition. We utilize 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 GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, they may not be comparable to measures used by other companies within our industry. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

The historical results set forth below do not necessarily indicate results expected for any future period, and should be read in conjunction with “Risk Factors,” “Selected Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

 

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(in thousands, except per share data)   Twelve
Months
Ended
September 30,

2013
    Nine Months Ended
September 30,
    Year Ended December 31,  
    2013     2012     2012     2011     2010  

Statement of operations data:

         

Revenues:

         

Passenger ticket

  $ 994,751      $ 779,309      $ 731,629      $ 947,071      $ 834,868      $ 642,068   

Onboard and other

    161,197        124,007        114,023        151,213        134,270        107,025   

Charter

    18,779        14,046        9,004        13,737        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,174,727        917,362        854,656        1,112,021        969,138        749,093   

Cruise operating expenses:

           

Commissions, transportation and other

    325,701        247,248        252,801        331,254        271,527        192,285   

Onboard and other

    43,065        33,732        31,085        40,418        36,854        28,981   

Payroll, related and food

    177,819        133,918        124,693        168,594        153,754        122,801   

Fuel

    104,391        77,978        75,272        101,685        92,921        57,913   

Other ship operating

    99,964        74,694        70,538        95,808        86,022        68,517   

Other

    14,026        8,368        16,310        21,968        26,305        16,085   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cruise operating expenses

    764,966        575,938        570,699        759,727        667,383        486,582   

Selling and administrative

    170,633        131,871        114,985        153,747        145,802        134,676   

Depreciation and amortization

    87,731        62,683        67,955        93,003        79,269        56,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,023,330        770,492        753,639        1,006,477        892,454        677,864   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    151,397        146,870        101,017        105,544        76,684        71,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income (expense):

         

Interest expense, net of capitalized interest

    (142,774     (106,470     (95,347     (131,651     (101,560     (91,325

Interest income

    552        367        567        752        670        513   

Other income (expense) (1)

    9,333        6,651        20,274        22,956        (45,901     (42,179
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

    (132,889     (99,452     (74,506     (107,943     (146,791     (132,991
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    18,508        47,418        26,511        (2,399     (70,107     (61,762

Income tax benefit (expense)

    181        183        (211     (213     335        (358
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 18,689      $ 47,601      $ 26,300      $ (2,612   $ (69,772   $ (62,120
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

         

Basic

    $ 3.51      $ 1.94      $ (0.19   $ (5.14   $ (4.60

Diluted

    $ 2.45      $ 1.94      $ (0.19   $ (5.14   $ (4.60

Balance sheet data (at end of period):

       

Cash and cash equivalents

    $ 263,781      $ 253,303      $ 139,556      $ 147,212      $ 117,635   

Total restricted cash (2)

      51,693        65,588        63,692        58,168        40,768   

Property and equipment, net

      2,016,783        2,050,064        2,035,449        1,644,971        1,181,262   

Total assets

      2,983,085        3,013,632        2,872,110        2,479,581        1,939,146   

Total passenger deposits (2)

      428,265        364,347        365,296        336,203        291,977   

Long-term debt (3)

      1,618,585        1,717,712        1,695,656        1,328,518        830,724   

Total debt (3)

      1,685,940        1,839,884        1,713,216        1,350,840        855,724   

Related party notes payable

      698,985        649,714        661,304        615,143        572,736   

Total liabilities

      2,946,508        2,999,041        2,885,453        2,489,409        1,916,804   

Total stockholders’ equity (deficit)

      36,577        14,593        (13,343     (9,828     22,342   

 

 

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Table of Contents
(in thousands, except operating data)   Twelve
Months
Ended
September 30,

2013
    Nine Months Ended
September 30,
    Year Ended December 31,  
    2013     2012     2012     2011     2010  

Cash flow data:

         

Net cash provided by operating activities

    $ 200,309      $ 167,192      $ 188,068      $ 186,317      $ 89,766   

Net cash provided by (used in) investing activities

      (26,734     (549,116     (539,501     (603,733     (179,173

Net cash (used in) provided by financing activities

      (49,381     487,920        343,621        447,193        57,743   

Operating data:

           

Passenger Days Sold (4)

    1,966,601        1,488,703        1,395,793        1,873,691        1,688,958        1,305,578   

Available Passenger Cruise Days (5)

    2,092,920        1,571,934        1,464,536        1,985,522        1,836,722        1,406,298   

Occupancy (6)

    94.0     94.7     95.3     94.4     92.0     92.8

Net Per Diem (7)

  $ 400.28      $ 418.04      $ 402.47      $ 387.80      $ 391.22      $ 404.29   

Gross Yield (8)

    552.31        574.65        577.42        553.15        527.65        532.67   

Net Yield (9)

    376.12        395.90        383.58        365.96        359.75        375.33   

Adjusted EBITDA (10)

    253,370        216,171        190,138        227,337        182,196        152,246   

Capital Expenditures

    47,145        38,814        471,436        478,962        535,531        158,836   

 

(1) Other income (expense) consists of a variety of non-operating items including but not limited to foreign transaction gains and losses, gain (loss) on early extinguishment of debt and realized and unrealized gain (loss) on derivative instruments.
(2) Total restricted cash represents reserve requirements for credit card and vendor agreements. Total passenger deposits represent cash collected in advance for future cruises.
(3) Includes the debt discount of $31.0 million and $32.8 million as of September 30, 2013 and December 31, 2012, respectively.
(4) 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.
(5) 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.
(6) Occupancy is calculated by dividing Passenger Days Sold by APCD.
(7) Net Per Diem represents Net Revenue divided by Passenger Days Sold.
(8) Gross Yield refers to total revenue, excluding charter per APCD.
(9) Net Yield refers to Net Revenue per APCD.

 

     We utilize Net Revenue, Net Per Diem and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs. The table below illustrates the calculation of Net Revenue, Net Per Diem, Gross Yield and Net Yield.

 

(in thousands, except operating data)    Twelve
Months
Ended
September 30,

2013
     Nine Months Ended
September 30,
     Year Ended December 31,  
      2013      2012      2012      2011      2010  

Passenger ticket revenue

   $ 994,751       $ 779,309       $ 731,629       $ 947,071       $ 834,868       $ 642,068   

Onboard and other revenue

     161,197         124,007         114,023         151,213         134,270         107,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue, excluding charter

     1,155,948         903,316         845,652         1,098,284         969,138         749,093   

Less:

                 

Commissions, transportation and other expense

     325,701         247,248         252,801         331,254         271,527         192,285   

Onboard and other expense

     43,065         33,732         31,085         40,418         36,854         28,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Revenue

   $ 787,182       $ 622,336       $ 561,766       $ 726,612       $ 660,757       $ 527,827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Passenger Days Sold

     1,966,601         1,488,703         1,395,793         1,873,691         1,688,958         1,305,578   

Available Passenger Cruise Days

     2,092,920         1,571,934         1,464,536         1,985,522         1,836,722         1,406,298   

Net Per Diem

   $ 400.28       $ 418.04       $ 402.47       $ 387.80       $ 391.22       $ 404.29   

Gross Yield

     552.31         574.65         577.42         553.15         527.65         532.67   

Net Yield

     376.12         395.90         383.58         365.96         359.75         375.33   

 

(10) Adjusted EBITDA refers to 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 permitted in calculating covenant compliance under the indenture governing the Senior Secured Notes (as defined herein) and our Secured Credit Facilities (as defined herein).

 

 

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     We believe EBITDA and 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. EBITDA is defined as net income (loss) excluding depreciation and amortization, net interest expense and income tax benefit (expense). This non-GAAP financial measure has certain material limitations, including:

 

    It does not include net interest expense. As we have borrowed money for general corporate purposes, interest expense is a necessary element of our costs and ability to generate profits and cash flows; and

 

    It does not include depreciation and amortization expense. As we use capital assets, depreciation and amortization are necessary elements of our costs and ability to generate profits and cash flows. Management compensates for these limitations by using EBITDA, as defined, 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 expense (benefit), net, are reviewed separately by management.

 

     We believe 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.

 

     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 the agreements governing our indebtedness. 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.

The following table provides a reconciliation of net income (loss) to Adjusted EBITDA:

 

(in thousands)    Twelve
Months
Ended
September 30,

2013
    Nine Months Ended
September 30,
    Year Ended December 31,  
     2013     2012     2012     2011     2010  

Net income (loss)

   $ 18,689      $ 47,601      $ 26,300      $ (2,612   $ (69,772   $ (62,120

Interest income

     (552     (367     (567     (752     (670     (513

Interest expense, net of capitalized interest

     142,774        106,470        95,347        131,651        101,560        91,325   

Depreciation and amortization

     87,731        62,683        67,955        93,003        79,269        56,606   

Income tax (benefit) expense, net

     (181     (183     211        213        (335     358   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     248,461        216,204        189,246        221,503        110,052        85,656   

Other (income) expense

     (9,333     (6,651     (20,274     (22,956     45,901        42,179   

Equity-based compensation/ transactions (a)

     1,860        1,084        1,353        2,129        2,153        5,111   

Fuel hedge gain (b)

     876        392        4,308        4,792        10,553        2,011   

Loss on disposal (c)

     279        —          492        771        1,174        —       

Newbuild (d)

     —          —          11,088        11,088        4,051        1,859   

Other addback expenses per credit agreement (e)

     11,227        5,142        3,925        10,010        8,312        15,430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 253,370      $ 216,171      $ 190,138      $ 227,337      $ 182,196      $ 152,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Equity-based compensation/transactions represent stock compensation expense in each period.
  (b) Fuel hedge gain represents the realized gain 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 drydocks.
  (d) Newbuild represents costs incurred specific to new ships that we have contracted to build.
  (e) Other addback expenses per credit agreement represents the net impact of time out of service as a result of unplanned repairs to vessels; expenses associated with consolidating corporate headquarters; certain professional fees and other costs associated with raising capital through debt and equity offerings; certain litigation fees; restructuring fees representing expenses associated with personnel changes, lease termination; management fees paid to Apollo per our management agreement; and other corporate reorganizations to improve efficiencies. In February 2011, Regent amended the Regent license agreement to perpetually license the “Regent” name; as such it will not incur any future license fees.

 

 

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RISK FACTORS

An investment in our ordinary shares involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the following risk factors and the cautionary statement referred to under “Cautionary Statement Regarding Forward-Looking Statements” in evaluating us and our business before purchasing our ordinary shares. If any of the risks discussed in this prospectus materialize, our business, financial condition and results of operations could be materially adversely affected. If this were to occur, the value of our ordinary shares could decline and you may lose all or part of your investment.

Risks Related to Our Business

Adverse economic conditions in North America and throughout the world and related factors such as fluctuating or increasing fuel prices, declines in the securities and real estate markets, and perceptions of these conditions could decrease the level of disposable income of consumers or consumer confidence and adversely affect our financial condition and results of operations.

Our revenues are highly concentrated from North American passengers, comprising 83% and 86% of our total cruise revenues for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively. Adverse changes in the perceived or actual economic climate, such as higher fuel prices, stock and real estate market declines and/or volatility, more restrictive credit markets, higher unemployment and underemployment rates, higher taxes and changes in governmental policies, both in North America and worldwide, could reduce consumers’ discretionary income or consumer confidence. Consequently, this may negatively affect demand for cruise vacations in North America and worldwide, which are a discretionary purchase. Decreases in demand could result in price discounting which, in turn, could reduce the profitability of our business. In addition, these conditions could also impact our suppliers, which could result in disruptions in our suppliers’ services and financial losses for us.

An increase in the supply of cruise ships without a corresponding increase in passenger demand could adversely affect our financial condition and results of operations.

Historically, cruise capacity has grown to meet the growth in demand. According to CLIA, North American cruise passenger capacity included 221 ships with approximately 339,000 berths as of December 31, 2012. Upscale cruise companies account for 24 of the 221 ships and 3.3% of total berths. In order to profitably utilize this capacity, the North American cruise industry will need to increase the portion of the U.S. population that has cruised at least once, which was approximately 24% in 2012, according to CLIA. If there is an industry-wide increase in capacity without a corresponding increase in public demand, we, as well as the entire cruise industry, could experience reduced occupancy rates and/or be forced to discount our prices, which could adversely affect our financial condition and results of operations.

We face intense competition from other cruise companies as well as non-cruise vacation alternatives, and we may not be able to compete effectively, which could adversely affect our financial condition and results of operations.

We face intense competition from other cruise companies, particularly in North America, where the cruise market is mature and developed. The North American cruise industry is highly concentrated among three companies. As of December 31, 2012, Carnival Corporation, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. together account for 82% of North American cruise passenger berth capacity. We compete against these operators principally on the quality of our ships, our differentiated product offering, selection of our itineraries and value proposition of our cruises. In addition, Carnival Corporation and Royal Caribbean Cruises Ltd. have multiple brands with various price points and ships deployed in numerous geographic regions. In addition to their increased scale and diversification, they may have greater financial, technological, sales and marketing resources than we do. We also face competition for many itineraries from other cruise operators as well as competition from non-cruise vacation alternatives. In the event we do not compete effectively, our financial condition and results of operations could be adversely affected.

 

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Table of Contents

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments.

We are highly leveraged with a high level of floating rate debt, and our level of indebtedness could limit cash flow available for our operations and could adversely affect our financial condition, prospects and flexibility. As of September 30, 2013, we had $2,570.1 million of total debt, which consisted of $895.7 million under term loan facilities used to finance the Marina and Rivera newbuilds, $296.3 million under the Regent Term Loan (as defined herein), $225.0 million of outstanding Senior Secured Notes, $300.0 million under Oceania’s Term Loan and $853.2 million of related party debt. In addition, as of September 30, 2013, Regent had $40.0 million and Oceania had $75.0 million in available borrowings under their respective revolving credit facilities. Our related party debt will be capitalized prior to the consummation of this offering. See “Unaudited Pro Forma Consolidated Financial Data.”

Our substantial indebtedness could:

 

    limit our ability to borrow money for working capital, capital expenditures, development projects, debt service requirements, strategic initiatives or other purposes;

 

    make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;

 

    require us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our outstanding debt, thereby reducing funds available to us for other purposes;

 

    limit our flexibility in planning for, or reacting to, changes in our operations or business;

 

    make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

    make us more vulnerable to downturns in our business or the economy and in the industry in which we operate;

 

    limit our ability to make strategic acquisitions or exploit business opportunities;

 

    limit our ability to borrow additional funds or dispose of assets, among other financial and restrictive covenants in the agreements governing our indebtedness; and

 

    make our credit card processors seek more restrictive terms in respect of our credit card arrangements.

Any of the factors listed above could materially and adversely affect our business and our results of operations. Furthermore, our interest expense could increase if interest rates rise, since certain portions of our debt bear interest at floating rates. If we do not have sufficient cash flows to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.

We may be able to incur significant additional indebtedness in the future. Although the agreements governing our indebtedness contain limitations on the incurrence of certain additional indebtedness, these limitations are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these limitations could be substantial. If we incur new indebtedness, the related risks, including those described above, could intensify.

 

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Table of Contents

We may not be able to generate sufficient cash to service all of our indebtedness, and we may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

Our ability to satisfy our debt obligations will depend upon, among other things:

 

    our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and

 

    our ability to borrow additional debt or to access available borrowings under our Secured Credit Facilities, the availability of which depends on, among other things, our compliance with the covenants in Regent’s Senior Secured Notes and our Secured Credit Facilities.

We cannot assure you that our business will generate sufficient cash flows from operations, or that we will be able to access available borrowings under our Secured Credit Facilities or otherwise in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our indebtedness will depend upon numerous factors, including but not limited to the condition of the capital markets, our financial condition at such time, credit ratings and the performance of our industry in general. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In the absence of operating results or resources sufficient to service our indebtedness, we could also face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Some or all of our assets may be illiquid and may have no readily ascertainable market value, however, and we may not be able to consummate such dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations when due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives.

The agreements governing our indebtedness contain restrictions that will limit our flexibility in operating our business.

The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours would likely contain, a number of covenants that impose operating and financial restrictions on us, including requirements under our newbuild debt that we maintain a minimum liquidity balance, a maximum debt to EBITDA ratio, a minimum EBITDA to debt service ratio and a maximum debt to adjusted equity ratio, requirements under our Secured Credit Facilities that we maintain a maximum loan-to-value ratio, a minimum interest coverage ratio (applicable only to revolving credit facilities) and restrictions under Regent’s Senior Secured Notes and our Secured Credit Facilities on our and our subsidiaries’ ability to, among other things:

 

    incur or guarantee additional indebtedness or issue preferred shares;

 

    grant liens on assets;

 

    pay dividends or make distributions to our shareholders;

 

    repurchase or redeem capital stock or subordinated indebtedness;

 

    make investments or acquisitions;

 

    restrict the ability of our subsidiaries to pay dividends or to make other payments to us;

 

    enter into transactions with our affiliates;

 

    merge or consolidate with other companies or transfer all or substantially all of our assets;

 

    transfer or sell assets;

 

    pledge the capital stock issued by the guarantors of our indebtedness; and

 

    designate our subsidiaries as unrestricted subsidiaries.

 

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Table of Contents

In addition, our ability to meet those financial covenants can be affected by events beyond our control, and there can be no assurance that we will meet those covenants. A failure to comply with these financial covenants could result in an event of default under the facilities or the existing agreements, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. In the event of any default under Regent’s Senior Secured Notes and our Secured Credit Facilities or our other indebtedness, the holders of our indebtedness thereunder:

 

    will not be required to lend any additional amounts to us, if applicable;

 

    could, in certain circumstances, elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or

 

    could require us to apply all of our available cash to repay such indebtedness.

Additionally, under the terms of the agreements governing our indebtedness, certain holders could bring actions against us that would cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the holders of our indebtedness under Regent’s Senior Secured Notes and our Secured Credit Facilities could proceed against the collateral granted to them to secure that indebtedness. As a result of these restrictions, we would be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.

The impact of disruptions in the global credit markets may adversely affect our ability to borrow and could increase our counterparty credit risks, including those under our Secured Credit Facilities, derivative instruments, contingent obligations and insurance contracts.

There can be no assurance that we will be able to borrow additional money on terms as favorable as our current debt, on commercially acceptable terms, or at all.

Economic downturns, including failures of financial institutions and any related liquidity crisis, can disrupt the capital and credit markets. Such disruptions could cause counterparties under our Secured Credit Facilities, derivative instruments, contingent obligations and insurance contracts to be unable to perform their obligations or to breach their obligations to us under our contracts with them, or result in failures of financial institutions to fund required borrowings under our Secured Credit Facilities and to pay us amounts that may become due under our derivative contracts and other agreements. We could also be limited in obtaining funds to pay amounts due to our counterparties under our derivative contracts and to pay amounts that may become due under other agreements. If we were to elect to replace any counterparty for its failure to perform its obligations under such instruments, we would likely incur significant costs to replace the counterparty. Any failure to replace any counterparties under these circumstances, however, may result in additional costs to us.

Increases in fuel prices or other cruise operating costs could have an adverse impact on our financial condition and results of operations.

Fuel costs accounted for 13.5% and 13.4% of our total cruise operating expenses for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, as compared to 13.9% and 11.9% for the years ended December 31, 2011 and 2010, respectively. Economic, market and political conditions in certain parts of the world make it challenging to predict the future prices and availability of fuel. Future increases in fuel prices would increase our cost of cruise ship operations. We could also experience increases in other cruise operating costs, such as food, crew, port, repairs and maintenance, insurance and security costs, due to market forces and economic or political instability beyond our control. Despite any fuel hedges we are currently a party to or may enter into in the future, increases in fuel prices or other cruise operating costs could have a material adverse effect on our financial condition and results of operations if we are unable to recover these increased costs through price increases charged to our guests. Conversely, significant declines in fuel prices could result in margin calls under certain of our fuel hedges, which could create a short-term liquidity risk. While we anticipate

 

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Table of Contents

that the costs of any such margin calls would be recouped over time as a result of lower fuel costs, any such margin calls may affect our ability to comply with the covenant obligations under Regent’s Senior Secured Notes and our Secured Credit Facilities

Conducting business internationally may result in increased costs and risks.

We operate our business internationally and plan to continue to develop our international presence. Operating internationally exposes us to a number of risks, including political risks, risks of increases in duties and taxes, risks relating to anti-bribery laws, as well as risks that laws and policies affecting cruising, vacation or maritime businesses, or governing the operations of foreign-based companies may change. Additional risks include interest rate movements, imposition of trade barriers, restrictions on repatriation of earnings, withholding and other taxes on remittances and other payments by subsidiaries, and changes in and application of foreign taxation structures, including value added taxes. Furthermore, we operate in waters and call at ports that have experienced political and civil unrest, insurrection and armed hostilities. If we are unable to address these risks adequately, our financial condition and results of operations could be adversely affected.

Operating internationally also exposes us to numerous and sometimes conflicting legal and regulatory requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We must adhere to policies designed to promote legal and regulatory compliance as well as applicable laws and regulations. However, we might not be successful in ensuring that our employees, agents, representatives and other third parties with which we associate throughout the world properly adhere to them. Failure by us, our employees or any of these third parties to adhere to our policies or applicable laws or regulations could result in penalties, sanctions, damage to our reputation and related costs, which in turn could negatively affect our results of operations and cash flows.

Our efforts to expand our business into new markets may not be successful.

While our historical focus has been to serve the North American cruise market, we are expanding our focus to increase our international guest sourcing. Since the expansion of our fleet in 2011, we have worked to diversify the sourcing of our passengers worldwide. In 2010, 20.2% of our passengers were sourced from outside the United States, which grew to 25.3% in 2012. For the twelve months ended September 30, 2013, 26.6% of our passengers were sourced from outside the United States. We believe there remains significant opportunity to expand our passenger sourcing into major markets such as Europe and Australia, as well as into emerging markets in the Asia Pacific region. Expansion into new markets requires significant levels of investment. There can be no assurance that these markets will develop as anticipated or that we will have success in these markets, and if we do not, we may be unable to recover our investment spent to expand our business into these markets, which could adversely impact our business, financial condition and results of operations.

Fluctuations in foreign currency exchange rates could affect our financial results.

We have historically and may in the future enter into ship construction contracts denominated in euros. While we have entered into foreign currency swaps and collar options to manage a portion of the currency risk associated with such contracts, we are exposed to fluctuations in the euro exchange rate for the portions of the ship construction contracts that have not been hedged. Additionally, if the shipyard is unable to perform under the related ship construction contract, any foreign currency hedges that were entered into to manage the currency risk would need to be terminated. Termination of these contracts could result in a significant loss and materiality adversely affect our results of operations.

Delays in our shipbuilding program and ship repairs, maintenance and refurbishments could adversely affect our results of operations and financial condition.

The new construction, refurbishment, repair and maintenance of our cruise ships are complex processes and involve risks similar to those encountered in other large and sophisticated equipment construction, refurbishment

 

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and repair projects. Our ships are subject to the risk of mechanical failure or accident, which we have occasionally experienced and have had to repair. If there is a mechanical failure or accident in the future, we may be unable to procure spare parts when needed or make repairs without incurring material expense or suspension of service, especially if a problem affects certain specialized maritime equipment, such as the radar, a pod propulsion unit, the electrical/power management system, the steering gear or the gyro system.

In addition, availability, work stoppages, insolvency or financial problems in the shipyards’ construction, refurbishment or repair of our ships, or other “force majeure” events that are beyond our control and the control of shipyards or subcontractors, could also delay or prevent the newbuild delivery, refurbishment, repair and maintenance of our ships. Any termination or breach of contract following such an event may result in, among other things, the forfeiture of prior deposits or payments made by us, potential claims and impairment of losses. A significant delay in the delivery of a new ship, or a significant performance deficiency or mechanical failure of a new ship could also have an adverse effect on our business. The consolidation of the control of certain European cruise shipyards could result in higher prices for refurbishment and repairs due to reduced competition. Also, the lack of qualified shipyard repair facilities could result in the inability to repair and maintain our ships on a timely basis. These potential events and the associated losses, to the extent that they are not adequately covered by contractual remedies or insurance, could adversely affect our results of operations and financial condition.

We rely on external distribution channels for passenger bookings. Major changes in the availability of external distribution channels could undermine our customer base.

The majority of our passengers book their cruises through independent travel agents, wholesalers and tour operators. In the event that the travel agent distribution channel is adversely impacted by an economic downturn, this could reduce the distribution channels available for us to market and sell our cruises and we could be forced to use alternative distribution channels we are not accustomed to. If this were to occur, it could have an adverse impact on our financial condition and results of operations.

Additionally, independent travel agents, wholesalers and tour operators generally sell and market our cruises on a non-exclusive basis. Although we offer commissions and other incentives to them for booking our cruises, there can be no guarantee that our competitors will not offer higher commissions and incentives in the future. Travel agents may face increasing pressure from our competitors, particularly in the North American market, to sell and market our competitors’ cruises exclusively. If such exclusive arrangements were introduced, there can be no assurances that we will be able to find alternative distribution channels to ensure that our customer base would not be affected.

We rely on third parties to provide hotel management services for our vessels and certain other services, and we are exposed to risks facing such providers. In certain circumstances, we may not be able to replace such third parties or we may be forced to replace them at an increased cost to us.

We rely on external third parties to provide hotel management services for our vessels and certain other services that are vital to our business. If these service providers suffer financial hardship or are otherwise unable to continue providing such services, we cannot guarantee that we will be able to replace such service providers in a timely manner, which may cause an interruption in our operations. To the extent that we are able to replace such service providers, we may be forced to pay an increased cost for equivalent services. Both the interruption of operations and the replacement of the third-party service providers at an increased cost could adversely impact our financial condition and results of operations.

 

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We rely on scheduled commercial airline services for passenger and crew connections. Increases in the price of, or major changes or reduction in, commercial airline services could undermine our customer base or disrupt our operations.

A number of our passengers and crew depend on scheduled commercial airline services to transport them to ports of embarkation for our cruises. Increases in the price of airfare due to increases in fuel prices, fuel surcharges, changes in commercial airline services as a result of strikes, weather or other events, or the lack of availability due to schedule changes or a high level of airline bookings could adversely affect our ability to deliver guests and crew to or from our cruise ships and thereby increase our cruise operating expenses which would, in turn, have an adverse effect on our financial condition and results of operations.

Acts of terrorism, acts of piracy, armed conflict and threats thereof, and other international events impacting the security of travel could adversely affect the demand for cruises and as a result adversely affect our financial condition and results of operations.

Past acts of terrorism and piracy have had an adverse effect on tourism, travel and the availability of air service and other forms of transportation. The threat or possibility of future terrorist acts, an increase in or outbreak of additional hostilities or armed conflict abroad or the possibility thereof, an increase in the activity of pirates operating off the western coast of Africa or elsewhere, political unrest and instability, the issuance of government travel advisories, and other geopolitical uncertainties have had in the past and may again in the future have an adverse impact on the demand for cruises and consequently the pricing for cruises. Decreases in demand and reduced pricing in response to such decreased demand would adversely affect our financial condition and results of operations by reducing our profitability.

Our revenues are seasonal, owing to variations in passenger fare rates and occupancy levels at different times of the year. We may not be able to generate revenues that are sufficient to cover our expenses during certain periods of the year.

The demand for our cruises is seasonal, with greatest demand for cruises generally occurring during the third quarter. This seasonality in demand has resulted in fluctuations in our revenues and results of operations. The seasonality of our results is increased due to ships being taken out of service for drydocks, which we typically schedule during off-peak demand periods for such ships. Accordingly, seasonality in demand and drydock periods could adversely affect our ability to generate sufficient revenues to cover the expenses we incur during certain periods of the year.

Future epidemics and viral outbreaks may have an adverse effect on our financial condition and results of operations.

Public perception about the safety of travel and adverse publicity related to passenger or crew illness, including incidents of H1N1 flu, stomach flu, or other contagious diseases, may impact demand for cruises and result in cruise cancellations and employee absenteeism. Such events could decrease our future sales and increase our operating expenses, adversely affecting our financial condition and results of operations.

Adverse incidents and publicity involving cruise ships may have an adverse effect on our financial condition and results of operations.

The operation of cruise ships carries an inherent risk of loss caused by adverse events at sea or in port and by weather conditions. Adverse incidents could involve collisions, groundings, fire, oil spills, other maritime or environmental mishaps, mechanical failure, missing passengers, inappropriate crew or passenger behavior, onboard crimes, human errors, terrorism, piracy, political action and civil unrest or insurrection.

Adverse incidents such as these could result in increased costs, lost sales, injuries, loss of life or property or reputational damage. We could be forced to cancel a cruise or a series of cruises due to such events, resulting in

 

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reimbursements to passengers, increased port-related costs and lost revenue. If there is a significant accident, mechanical failure or similar problem involving a ship, we may have to place a ship in an extended drydock period for repairs. This could result in material lost revenue and/or expenditures, and there can be no assurance that insurance proceeds would compensate us fully or at all for our losses. We have experienced unscheduled drydocks in the past and there can be no assurances that we will not experience unexpected drydocks in the future. Any such event involving our cruise ships or other cruise ships may adversely affect passengers’ perceptions of safety, negatively affect future industry performance or result in increased governmental or other regulatory oversight. Such incidents also may lead to litigation against us. We may suffer penalties, fines and damages from judgments or settlements of any ongoing or future claims against us. Anything that damages our reputation (whether or not justified), including adverse publicity about passenger safety, could adversely impact demand and reduce our sales. Such incidents may have a material adverse impact on our financial condition and results of operations.

There can be no assurance that all risks are insured against or that any particular claim will be fully paid. Such losses, to the extent that they are not adequately covered by contractual remedies or insurance, could affect our financial condition and results of operations. We have been and may continue to be subject to calls, or premiums, in amounts based not only on our own claim records, but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity coverage for tort liability. Our payment of these calls could result in significant expenses to us, which could reduce our cash flows. If we were to sustain significant losses in the future, our ability to obtain insurance coverage or coverage at commercially reasonable rates could be materially adversely affected.

Data security breaches, denial of service attacks, and/or disruptions to our information technology, telecommunications, and/or other networks could have an adverse impact on our financial results.

The integrity and reliability of our information technology, telecommunications, and other networks are crucial to our operations and financial results. Disruptions to these networks could impair our operations and have an adverse impact on our financial results, negatively affect our reputation and customer demand. In addition, certain networks are dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability. Among other things, actual or threatened natural disasters (e.g., hurricanes, earthquakes, tornadoes, fires, floods) or similar events, information systems failures, computer viruses, denial or service attacks, and other cyber-attacks may cause disruptions to our information technology, telecommunications, and other networks. While we have and continue to invest in business continuity, disaster recovery and data restoration plans, we cannot completely insulate ourselves from disruptions that could result in adverse effects on our operations and financial results. We do not carry business interruption insurance for our ships based on our evaluation of the risks involved and protective measures already in place, as compared to the cost of insurance. We carry business interruption insurance for certain of our shoreside operations, subject to limitations, exclusions and deductibles.

In the event of a data security breach of our systems and/or third-party systems, we may incur costs associated with the following: breach response, notification, forensics, regulatory investigations, public relations, consultants, credit identity monitoring, credit freezes, fraud alert, credit identity restoration, credit card cancellation, credit card reissuance or replacement, regulatory fines and penalties, vendor fines and penalties, legal fees and damages. Denial of service attacks may result in costs associated with, among other things, the following: response, forensics, public relations, consultants, data restoration, legal fees and settlement. In addition, data security breaches or denial of service attacks may cause business interruption, information technology disruption, disruptions as a result of regulatory investigation, digital asset loss related to corrupted or destroyed data, damage to our reputation, damages to intangible property, and other intangible damages, such as loss of consumer confidence, all of which could impair our operations and have an adverse impact on our financial results. While we have and continue to invest in data and information technology security initiatives, we cannot completely insulate ourselves from the risks of data security breaches and denial of service attacks that could result in adverse effects on our operations and financial results. We carry privacy liability and network security insurance to partially cover us in the event of an attack.

 

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Unavailability of ports of call may adversely affect our results of operations and financial condition.

We believe that attractive port destinations are a major reason why passengers choose to go on a particular cruise versus an alternative vacation option. The availability of ports, including the specific port facility at which our guests will embark and disembark, is affected by a number of factors, including, but not limited to, existing capacity constraints, security, safety and environmental concerns, adverse weather conditions and natural disasters, financial limitations on port development, political instability, exclusivity arrangements that ports may have with our competitors, local governmental regulations and fees, local community concerns about port development and other adverse impacts on their communities from additional tourists, and sanctions programs implemented by the Office of Foreign Assets Control of the United States Treasury Department or other regulatory bodies. Any limitations on the availability of ports of call or on the availability of shore excursion and other service providers at such ports could adversely affect our results of operations and financial condition.

The loss of key personnel, our inability to recruit or retain qualified personnel or the diversion of our key personnel’s attention could adversely affect our results of operations.

We rely upon the ability, expertise, judgment, discretion, integrity and good faith of our senior management team. Our success is dependent upon our personnel and key consultants and our ability to recruit and retain high quality employees. We must continue to recruit, retain and motivate management and other employees sufficient to maintain our current business and support our projected growth. The loss of services of any of our key management, in particular, Mr. Frank J. Del Rio, our Chief Executive Officer, could have a material adverse effect on our business. See “Management” and “Executive Compensation” for additional information about our management personnel.

The leadership of our Chief Executive Officer and other executive officers has been a critical element of our success. The death or disability of Mr. Frank J. Del Rio or other extended or permanent loss of his services, or any negative market or industry perception with respect to him or arising from his loss, could have a material adverse effect on our business. Our other executive officers and other members of senior management have substantial experience and expertise in our business and have made significant contributions to our growth and success. The unexpected loss of services of one or more of these individuals could also adversely affect us. We are not protected by key person or similar life insurance covering members of our senior management. We have employment agreements with certain of our executive officers, but these agreements do not guarantee that any given executive will remain with us.

A failure to keep pace with developments in technology could impair our operations or competitive position.

Our business continues to demand the use of sophisticated systems and technology. These systems and technologies must be refined, updated and replaced with more advanced systems on a regular basis in order for us to meet our customers’ demands and expectations. If we are unable to do so on a timely basis or within reasonable cost parameters, or if we are unable to appropriately and timely train our employees to operate any of these new systems, our business could suffer. We also may not achieve the benefits that we anticipate from any new system or technology, such as fuel abatement technologies, and a failure to do so could result in higher than anticipated costs or could impair our operating results.

Our sponsor controls us, and the interests of our sponsor may conflict with or differ from our interests or the interests of our public shareholders.

Prior to this offering, Apollo beneficially owned approximately 59% of our outstanding ordinary shares, and immediately after giving effect to this offering, Apollo will own approximately         % of our outstanding ordinary shares (without giving effect to the exercise of the underwriters’ option to purchase additional shares). The PCI Stockholders’ Agreement (as defined herein) gives Apollo effective control over our affairs and policies, subject to certain limitations. Apollo also controls the election of our Board of Directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other material transactions. In addition, three of our directors are affiliated with Apollo. As a result, Apollo, through

 

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the PCI Stockholders’ Agreement and its voting and board control, has the ability to control our policies and business, including the election of our directors, the approval of significant transactions such as mergers and tender offers and the sale of all or substantially all of our assets. Apollo also has the authority, subject to the terms of the agreements governing our indebtedness, to issue additional debt, implement debt repurchase programs, pay dividends, pay advisory fees (including to itself or its affiliates) and make other key decisions, and they may do so at any time. The interests of Apollo and its affiliates could conflict with or differ from our interests or the interests of our public shareholders.

Furthermore, Apollo is in the business of making investments in companies, and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. For example, Apollo is a significant shareholder and controls the board of Norwegian Cruise Line Holdings Ltd., which, though it does not compete with us in the Luxury segment, competes with us indirectly as a cruise operator. Any such investment may increase the potential for conflicts of interest. There are no agreements that govern the outcome of any conflicts of interests among us and any affiliates of Apollo. There is no assurance that when conflicts of interest arise, any or all of these affiliates will act in our best interests or that any conflict of interest will be resolved in our favor. Moreover, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be viewed favorably to us. Apollo may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Certain provisions of the PCI Stockholders’ Agreement may also make it more difficult to reissue additional equity capital in the future, if needed. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

Risks Related to the Regulatory Environment in Which We Operate

Future changes in applicable tax laws, or our inability to take advantage of favorable tax regimes, may have an adverse impact on our financial condition and results of operations.

As we generally derive revenue from shipboard activity in international waters and not in a particular jurisdiction, our exposure to income tax is limited in some instances. We do, however, submit to the income tax regimes of the jurisdictions in which we operate and pay taxes as required by those regimes.

It is possible that certain states, countries or ports of call that our ships visit may decide to assess new taxes or fees or change existing taxes or fees specifically applicable to the cruise industry and its employees and/or guests, which could adversely affect our financial condition and results of operations.

Provided that we satisfy certain complex stock ownership tests (as described below), income that is considered to be derived from the international operation of ships, as well as certain income that is considered to be incidental to such income (“Shipping Income”), is currently exempt from U.S. federal income taxes under Section 883 of the Internal Revenue Code of 1986, as amended (the “Code”). The U.S.-source portion of our Shipping Income (if we do not qualify for the exemption under Section 883 of the Code) and the U.S.-source portion of our income that is not Shipping Income are generally subject to U.S. federal corporate income tax on a net basis (generally at a 35% rate) and possible state and local taxes, and our effectively connected earnings and profits generally are subject to an additional branch profits tax of 30%. See “Business—Taxation—U.S. Federal Income Taxation of Regent and Oceania Shipping Income.”

We believe substantially all of our income derived from the international operation of ships is properly categorized as Shipping Income, and that our income other than Shipping Income is not currently, nor is it expected to become, a material amount. It is possible, however, that a material amount of our income does not actually qualify (or will not qualify) as Shipping Income.

Even if our interpretation of Section 883 is correct, the exemption for Shipping Income is not applicable in any year in which we do not satisfy complex stock ownership tests. While we believe that we have satisfied the

 

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ownership tests and expect to continue to do so absent a material change in our ownership, the application of these tests is subject to some uncertainty and there is no assurance that our view is correct. Further, for the exemption for Shipping Income to apply, we must satisfy the Substantiation Requirements (as defined herein). While we expect we will satisfy such requirements, we can give no assurance that we will be able to do so. Additionally, any change in our operations could change the amount of our income that is considered Shipping Income under Section 883. Finally, any change in the tax laws governing our operations, including Section 883 of the Code and the regulations thereunder, could increase the amount of our income that is subject to tax. Any of the foregoing risks could significantly increase our exposure to U.S. federal income and branch profits taxes.

The Seven Seas Navigator and Seven Seas Voyager were operated by subsidiaries that were strategically and commercially managed in the United Kingdom (“UK”) and these subsidiaries had elected to enter the UK tonnage tax regime. Effective February 4, 2013, both ships exited the UK tonnage tax regime upon transfer of the ships to U.S. subsidiaries.

We are subject to complex laws and regulations, including environmental laws and regulations, which could adversely affect our operations. Any changes in the current laws and regulations could lead to increased costs or decreased revenue and adversely affect our business prospects, financial condition and results of operations.

Increasingly stringent federal, state, local and international laws and regulations on environmental protection, and the health and safety of workers could affect our operations. Many aspects of the cruise industry are subject to governmental regulation by the U.S. Environmental Protection Agency, the International Maritime Organization, (the “IMO”), the Council of the European Union, and the U.S. Coast Guard, as well as international treaties such as the International Convention for the Safety of Life at Sea (“SOLAS”), the International Convention for the Prevention of Pollution from Ships (“MARPOL”) and the Standard of Training Certification and Watchkeeping for Seafarers (“STCW”). For example, international regulations regarding ballast water and shipboard/shoreside security have been adopted. Additionally, the U.S. federal and various state, foreign and international regulatory agencies have enacted or are considering new environmental regulations or policies, such as requiring the use of low sulfur fuels, increasing fuel efficiency requirements, restricting diesel engine emissions and managing cruise ship waste. Compliance with such laws and regulations may entail significant expenses for ship modifications and changes in operating procedures, which could adversely impact our operations as well as our competitors’ operations. For example, in 2010, Alaska issued a final permit that regulates discharges of treated wastewater from cruise ships for the summer tourist seasons running from 2010 to 2012. The permit requires cruise companies to gather data on performance of new shipboard environmental control systems that will allow a scientific review committee to advise state officials on improving the regulations. These issues are, and we believe will continue to be, an area of focus by the relevant authorities throughout the world. This could result in the enactment of more stringent regulation of cruise ships that would subject us to increasing compliance costs in the future.

We may be subject to taxation under the laws of certain jurisdictions.

We may be subject to state, local and non-U.S. income or non-income taxes in various jurisdictions, including those in which we transact business, own property or reside. We may be required to file tax returns in some or all of those jurisdictions. Our state, local or non-U.S. tax treatment may not conform to the U.S. federal income tax treatment of Section 883 of the Code discussed above. We may be required to pay non-U.S. taxes on dispositions of foreign property and operations involving foreign property may give rise to non-U.S. income or other tax liabilities in amounts that could be substantial. For example, we operated Seven Seas Navigator and Seven Seas Voyager under long-term charter agreements by subsidiaries that were strategically and commercially managed in the UK. These charter agreements are subject to the ongoing review of the taxing authorities in these jurisdictions and such review could result in the imposition of additional taxes in such jurisdictions.

 

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The various tax regimes to which we are currently subject result in a relatively low effective tax rate on our world-wide income. These tax regimes, however, are subject to change. Moreover, we may become subject to new tax regimes and may be unable to take advantage of favorable tax provisions afforded by current or future law.

Litigation, enforcement actions, fines or penalties could adversely impact our financial condition or results of operations and damage our reputation.

Our business is subject to various U.S. and international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees or agents could damage our reputation and/or lead to litigation or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines. In certain circumstances, it may not be economical to defend against such matters, and a legal strategy may not ultimately result in us prevailing in a matter. Such events could lead to an adverse impact on our financial condition or results of operations.

As a result of any ship-related or other incidents, litigation claims, enforcement actions and regulatory actions and investigations, including, but not limited to, those arising from personal injury, loss of life, loss of or damage to personal property, business interruption losses or environmental damage to any affected coastal waters and the surrounding area, may be asserted or brought against various parties including us and/or our cruise brands. The time and attention of our management may also be diverted in defending such claims, actions and investigations. Subject to applicable insurance coverage, we may also incur costs both in defending against any claims, actions and investigations and for any judgments, fines, civil or criminal penalties if such claims, actions or investigations are adversely determined.

Risks Related to the Offering and to Our Ordinary Shares

There has been no prior market for our ordinary shares, and an active trading market for our ordinary shares may not develop, which could impede your ability to sell your ordinary shares and depress the market price of your ordinary shares.

Prior to this offering, there has been no public market for our ordinary shares, and we cannot assure you that an active and liquid public market for our ordinary shares will develop or be sustained after this offering or that investors will in the future be able to sell the ordinary shares they purchase in this offering should they desire to do so. The failure of an active trading market to develop could affect your ability to sell your ordinary shares and depress the market price of your ordinary shares. We will negotiate with the representatives of the underwriters to determine the initial public offering price, which will be based on numerous factors and may bear no relationship to the price at which the ordinary shares will trade upon completion of this offering. See “Underwriting.” The market price of the ordinary shares may fall below the initial public offering price.

The price of our shares may fluctuate substantially, and your investment may decline in value.

The trading price of our ordinary shares could be volatile and subject to wide fluctuations in response to various factors, many of which are beyond our control, including those described in this “Risk Factors” section. Further, the stock markets in general, and the stock exchange and the market for travel and leisure-related companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. We cannot assure you that trading prices and valuations of our ordinary shares will be sustained. These broad market and industry factors may materially and adversely affect the market price of our ordinary shares, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions in the countries where we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our ordinary shares. In the past, following periods of volatility in the market price of a company’s securities, that company is often subject to securities class-action litigation. This kind of litigation, regardless of the outcome, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.

 

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We are a “controlled company” within the meaning of the rules of                 and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon the closing of this offering, Apollo will continue to control a majority of our ordinary shares. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of                 . Under the rules of                 , a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of our Board of Directors consists of independent directors;

 

    the requirement that we have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the nominating and governance committee and compensation committee.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will be required to have any independent directors on our Nominating and Governance Committee and Compensation Committee, and we will not be required to have an annual performance evaluation of the Nominating and Governance Committee and Compensation Committee. See “Management.” Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to the general corporate governance requirements (without giving effect to the “controlled company” exemptions) of                 .

Because the price you will pay for our ordinary shares is above our net tangible book value per ordinary share, you will experience an immediate and substantial dilution upon the completion of this offering.

The initial public offering price of our ordinary shares is substantially higher than what the net tangible book value per ordinary share will be immediately after this offering. If you purchase our ordinary shares in this offering, you will experience immediate dilution of approximately $             in the net tangible book value per ordinary share from the price you pay for our ordinary shares, representing the difference between (1) the assumed initial public offering price of $             per ordinary share, which is the midpoint of the range shown on the cover of this prospectus, and (2) the pro forma net tangible book value per ordinary share of $             at September 30, 2013, after giving effect to this offering. For additional information on discussion of the effect of a change in the price of this offering see “Dilution.”

As a shareholder of our Company, you may have greater difficulties in protecting your interests than as a shareholder of a U.S. corporation.

We are a Panamanian corporation (“sociedad anónima”). Under Panamanian law, the protections afforded to minority shareholders are different from, and much more limited than, those in the United States and some other Latin American countries. For example, the legal framework with respect to shareholder disputes is less developed under Panamanian law than under U.S. law and there are different procedural requirements for bringing shareholder lawsuits, including shareholder derivative suits. As a result, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company. In addition, Panamanian law does not afford minority shareholders as many protections for investors through corporate governance mechanisms as in the United States and provides no mandatory tender offer or similar protective mechanisms for minority shareholders in the event of a change in control.

 

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If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our ordinary shares may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. We are in the process of designing, implementing and testing the internal control over financial reporting in order to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). In the past, material weaknesses in our internal control over financial reporting have been identified relating to derivatives and stock compensation, which have been remediated. In the future, if we identify material weaknesses in our internal control over financial reporting, or if we are unable to comply with the requirements of Section 404 in a timely manner, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our ordinary shares could be negatively affected.

The market price for our ordinary shares could be subject to wide fluctuations, and you could lose all or part of your investment.

The market price for our ordinary shares could be volatile and subject to wide fluctuations in response to factors including the following:

 

    actual or anticipated fluctuations in our quarterly results;

 

    the public reaction to our press releases, other public announcements and filings with the SEC;

 

    sales of large blocks of our ordinary shares, or the expectation that such sales may occur, including sales by our directors, officers, Apollo or other significant shareholders;

 

    market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

    announcements of new itineraries or services or the introduction of new ships by us or our competitors;

 

    changes in financial estimates by securities analysts;

 

    conditions in the cruise industry;

 

    price and volume fluctuations in the stock markets generally;

 

    announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

    our involvement in a significant acquisition, strategic alliance or joint venture;

 

    changes in government and environmental regulation;

 

    additions or departures of key personnel;

 

    changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events;

 

    changes in accounting standards, policies, guidance, interpretations or principles; or

 

    potential litigation.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our shares.

 

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The substantial number of ordinary shares that will be eligible for sale in the near future may cause the market price of our ordinary shares to decline.

Immediately after the completion of this offering, we will have an aggregate of             ordinary shares issued and outstanding (without giving effect to the exercise of the underwriters’ option to purchase additional shares). Our ordinary shares sold in this offering will be eligible for immediate resale in the public market without restrictions, and those held by Apollo and key employees may also be sold in the public market in the future subject to applicable lock-up agreements as well as the restrictions contained in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). If Apollo sells a substantial amount of our ordinary shares after the expiration of the lock-up period, the prevailing market price for our ordinary shares could be adversely affected. See “Shares Eligible for Future Sale.”

We may issue our ordinary shares or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of ordinary shares, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those ordinary shares or other securities in connection with any such acquisitions and investments.

We may use the proceeds of this offering in ways with which you may not agree.

Although we currently intend to use the proceeds of this offering to repay outstanding indebtedness and to pay expenses associated with this offering, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase the price of our ordinary shares.

We do not intend to pay dividends on our ordinary shares at any time in the foreseeable future.

We do not currently intend to pay dividends to our shareholders and our Board of Directors may never declare a dividend. You should not anticipate receiving dividends with respect to ordinary shares that you purchase in the offering. The agreements governing our indebtedness limit or prohibit, and any of our future debt arrangements may restrict, among other things, the ability of our subsidiaries to pay distributions to us and our ability to pay cash dividends to our shareholders. In addition, any determination to pay dividends in the future will be entirely at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial condition, business opportunities, contractual restrictions, restrictions imposed by applicable law and other factors that our Board of Directors deems relevant. We are not legally or contractually required to pay dividends. Accordingly, if you purchase ordinary shares in this offering, it is likely that in order to realize a gain on your investment, the price of our ordinary shares will have to appreciate. This may or may not occur. In addition, we are a holding company and would depend upon our subsidiaries for their ability to pay distributions to us to finance any dividend or pay any other of our obligations. Investors seeking dividends should not purchase our ordinary shares. See “Dividend Policy.”

Enforcement of civil liabilities against us by our shareholders and others may be difficult.

We are a corporation (“sociedad anónima”) incorporated under the laws of Panama. In addition, certain of our subsidiaries are organized outside the United States. A substantial portion of our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process upon us or upon such persons within the United States or to enforce judgments obtained in U.S. courts against us or them predicated upon the civil liability provisions of the U.S. federal securities laws. Furthermore, we have been advised by counsel in Panama that Panamanian courts will not enforce a U.S. federal securities law that is either penal or contrary to the public policy of Panama. An action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign

 

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capacity, may not be entertained by a Panamanian court. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. federal securities laws, may not be available under Panamanian law or enforceable in a Panamanian court, as they may be contrary to Panamanian public policy. Further, no claim may be brought in Panama against us or our directors and officers in the first instance for violations of U.S. federal securities laws, because these laws have no extraterritorial jurisdiction under Panamanian law and do not have force of law in Panama. A Panamanian court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Panama law.

Provisions in our constitutional documents may prevent or discourage takeovers and business combinations that our shareholders might consider to be in their best interests.

Following the consummation of this offering, our by-laws will contain provisions that may delay, defer, prevent or render more difficult a takeover attempt that our shareholders consider to be in their best interests. As a result, these provisions may prevent our shareholders from receiving a premium to the market price of our shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts in the future. These provisions include (subject to the PCI Stockholders’ Agreement):

 

    the ability of our Board of Directors to designate one or more series of preference shares and issue preference shares without shareholder approval;

 

    a classified board of directors;

 

    the sole power of a majority of our Board of Directors to fix the number of directors;

 

    the power of our Board of Directors to fill any vacancy on our Board of Directors in most circumstances, including when such vacancy occurs as a result of an increase in the number of directors or otherwise; and

 

    advance notice requirements for nominating directors or introducing other business to be conducted at shareholder meetings.

Additionally, our by-laws will contain provisions that prevent third parties, other than Apollo, from acquiring beneficial ownership of more than 4.9% of our outstanding shares without the consent of our Board of Directors, and will provide for the lapse of rights, and sale, of any shares acquired in excess of that limit. The effect of these provisions, as well as the significant ownership of ordinary shares by Apollo, may preclude third parties from seeking to acquire a controlling interest in us in transactions that shareholders might consider to be in their best interests, and may prevent shareholders from receiving a premium above market price for their shares. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement” and “Description of Capital Stock.”

Any issuance of preferred shares could make it difficult for another company to acquire us or could otherwise adversely affect holders of our ordinary shares, which could depress the price of our ordinary shares.

Our Board of Directors has the authority to issue preferred shares and to determine the preferences, limitations and relative rights of shares of preferred shares and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders, subject to the PCI Stockholders’ Agreement. Our preferred shares could be issued with voting, liquidation, dividend and other rights superior to the rights of our ordinary shares. The potential issuance of preferred shares may delay or prevent a change in control of us, discouraging bids for our ordinary shares at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our ordinary shares. See “Description of Capital Stock.”

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of our ordinary shares in this offering of approximately $             million, after deducting the underwriting discount and estimated offering expenses, assuming the ordinary shares are offered at $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and assuming that the underwriters do not exercise their option to purchase additional shares.

We intend to use the net proceeds from this offering (i) to redeem $             million of Regent’s outstanding Senior Secured Notes, (ii) to repay $             million of the Oceania Term Loan and $                 million of the Regent Term Loan and (iii) for future capital expenditures and general corporate purposes.

As of September 30, 2013, we had $225.0 million in aggregate principal amount of Senior Secured Notes outstanding, which bear interest at an annual rate of 9.125% and mature on May 15, 2019. As of September 30, 2013, we had approximately $300.0 million in principal amount outstanding under the Oceania Term Loan, which bears interest at LIBOR with a floor of 1% plus an applicable margin of 5.75% and matures in July 2020. As of September 30, 2013, we had approximately $296.3 million in principal amount outstanding under the Regent Term Loan, which bears interest at LIBOR with a floor of 1.25% plus an applicable margin and matures in December 2018.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $             million (or $             million if the underwriters exercise in full their option to purchase additional shares), assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the underwriting discount and estimated offering expenses.

 

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DIVIDEND POLICY

We have no current plans to pay dividends on our ordinary shares. The agreements governing our indebtedness prohibit, among other things, our ability to pay cash dividends to our shareholders above specified levels. Our future dividend policy will also depend on the requirements of any future financing agreements to which we may be a party and other factors considered relevant by our Board of Directors. In addition, any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our Board of Directors deems relevant.

We did not declare or pay any dividends on our ordinary shares in 2010, 2011, 2012, or during the nine months ended September 30, 2013.

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2013:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect to (i) the restructuring and capitalization of our related party debt and (ii) the issuance of the ordinary shares in this offering and the application of the net proceeds therefrom, as described under “Use of Proceeds.”

You should read this table together with the information contained in this prospectus, including “Use of Proceeds,” “Selected Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and our historical financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2013  
(in thousands, except share and per share data)    Actual     As adjusted (1)  

Cash and cash equivalents

   $ 263,781     
  

 

 

   

 

 

 

Oceania Term Loan, First Lien, due through 2020

   $ 300,000     

Oceania Marina Newbuild Debt, due through 2023

     424,123     

Oceania Riviera Newbuild Debt, due through 2024

     471,611     

Regent Term Loan, First Lien, due through 2018

     296,250     

Regent Senior Secured Notes, due 2019

     225,000     
  

 

 

   

 

 

 

Total third party debt (2)

     1,716,984     

Related party notes payable (3)

     853,159     

Shareholders’ Equity:

    

Ordinary shares, $.01 par value; 100,000,000 shares authorized and 13,572,765 shares issued and outstanding;                      shares authorized and                      shares issued and outstanding, as adjusted

     136     

Additional paid-in capital

     306,651     

Accumulated other comprehensive loss

     (211,201  

Accumulated deficit

     (59,009  
  

 

 

   

 

 

 

Total shareholders’ equity

     36,577     
  

 

 

   

 

 

 

Total capitalization

   $ 2,606,720      $     
  

 

 

   

 

 

 

 

(1) Each $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, as applicable, the amount of our as adjusted long-term debt, additional paid-in capital and total stockholders’ equity by approximately $            million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay.
(2) Excludes the debt discount of $31.0 million as of September 30, 2013.
(3) Excludes the related unamortized discount of $154.2 million as of September 30, 2013.

 

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DILUTION

If you invest in our ordinary shares in this offering, your investment will be immediately diluted to the extent of the difference between the initial public offering price per ordinary share and the net tangible book value per ordinary share upon completion of this offering. Dilution results from the fact that the per share offering price of the ordinary shares is substantially in excess of the net tangible book value per share attributable to the ordinary shares held by existing owners.

Our net tangible book value as of September 30, 2013 was $             million, or $             per share, based on 13,572,765 shares outstanding as of September 30, 2013. Net tangible book value per ordinary share is equal to our total tangible assets less total liabilities, divided by the number of issued and outstanding ordinary shares as of the most recent quarter for which financial statements are available.

After giving effect to (a) our sale of                 ordinary shares in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range per share of ordinary shares set forth on the cover of this prospectus, and after deducting the underwriting discount and estimated offering expenses, and (b) our issuance of                 ordinary shares upon the exercise of outstanding options and our receipt of the aggregate exercise price therefrom since September 30, 2013, our net tangible book value as of September 30, 2013 would have been approximately $             million, or $             per share. This represents an immediate increase in net tangible book value of $             per share to our existing shareholders and an immediate dilution of $             per share to new investors purchasing ordinary shares in this offering at the assumed initial public offering price. The following table illustrates the per share dilution on a per share basis:

The following table illustrates the per share dilution on a per ordinary share basis:

 

Assumed initial public offering price per share

   $                    
  

 

 

 

Net tangible book value per share as of September 30, 2013

  

Increase in net tangible book value per share attributable to existing shareholders

  

Increase in net tangible book value attributable to exercise of stock options

  

Net tangible book value per share after giving effect to this offering

  
  

 

 

 

Dilution per share to new investors in this offering

   $     
  

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per ordinary share would increase or decrease, as applicable, our net tangible book value after giving effect to this offering by $             million, or by $             per ordinary share, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us.

If the underwriters’ option to purchase additional ordinary shares from us is exercised in full, the net tangible book value per ordinary share, as adjusted to give effect to this offering, would be $             per share, and the dilution in net tangible book value per share to new investors in this offering would be $             per share.

 

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The following table summarizes as of September 30, 2013, on an adjusted basis, the number of ordinary shares purchased from us, the total consideration paid to us and the average price per share paid by existing shareholders and by new investors purchasing ordinary shares in this offering (before deducting the estimated underwriting discount and estimated offering expenses) based upon an assumed initial public offering price of $             per share, which is the midpoint of the price range per share of ordinary shares set forth on the cover of this prospectus, before deducting the underwriting discount and estimated offering expenses:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing shareholders

                       $                                     $                

New investors in this offering

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

                       $                          $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Each $1.00 increase or decrease in the assumed offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by investors in this offering and total consideration paid by all shareholders by $             million, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional ordinary shares from us. If the underwriters’ option to purchase additional ordinary shares were exercised in full, our existing shareholders would own         % and our new investors in this offering would own         % of the total number of our ordinary shares outstanding upon the completion of this offering.

The dilution information above is for illustration purposes only. Our net tangible book value following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our shares and other terms of this offering determined at pricing.

The number of our ordinary shares that will be outstanding after this offering is based on                 ordinary shares outstanding as of the date of this prospectus, and excludes                 ordinary shares issuable upon the exercise of options to purchase our ordinary shares outstanding as of the date of this prospectus, with a weighted-average exercise price of $             per share.

As of the date of this prospectus, there are options outstanding to purchase a total of             shares of ordinary shares with a weighted average exercise price of $             per share and there are             shares available for future awards. To the extent that any of these additional options are exercised, there will be further dilution to new public investors. See “Capitalization,” “Executive Compensation—Equity Incentive Plan Awards” and the notes to our consolidated financial statements included elsewhere in this prospectus.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial data as of the dates and for the periods indicated. The selected consolidated financial data for the years ended December 31, 2012, 2011 and 2010 and as of December 31, 2012 and 2011 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data for the years ended December 31, 2009 and 2008 and as of December 31, 2010, 2009, and 2008 have been derived from our audited consolidated financial statements not included in this prospectus. We derived the selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2012 and the selected consolidated balance sheet data as of September 30, 2013 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year.

The historical results set forth below do not necessarily indicate results expected for any future period, and should be read in conjunction with, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

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(in thousands, except per share data)    Nine Months Ended
September 30,
    Year Ended December 31,  
   2013     2012     2012     2011     2010     2009     2008  

Statement of operations data:

              

Revenues:

              

Passenger ticket

   $ 779,309      $ 731,629      $ 947,071      $ 834,868      $ 642,068      $ 529,646      $ 599,032   

Onboard and other

     124,007        114,023        151,213        134,270        107,025        94,116        117,844   

Charter

     14,046        9,004        13,737        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     917,362        854,656        1,112,021        969,138        749,093        623,762        716,876   

Cruise operating expenses:

              

Commissions, transportation and other

     247,248        252,801        331,254        271,527        192,285        143,372        154,520   

Onboard and other

     33,732        31,085        40,418        36,854        28,981        28,746        36,361   

Payroll, related and food

     133,918        124,693        168,594        153,754        122,801        113,203        115,653   

Fuel

     77,978        75,272        101,685        92,921        57,913        44,220        58,494   

Other ship operating

     74,694        70,538        95,808        86,022        68,517        61,732        64,641   

Other

     8,368        16,310        21,968        26,305        16,085        37,016        18,091   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cruise operating expenses

     575,938        570,699        759,727        667,383        486,582        428,289        447,760   

Selling and administrative

     131,871        114,985        153,747        145,802        134,676        116,989        106,061   

Depreciation and amortization

     62,683        67,955        93,003        79,269        56,606        62,528        65,626   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     770,492        753,639        1,006,477        892,454        677,864        607,806        619,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     146,870        101,017        105,544        76,684        71,229        15,956        97,429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income (expense):

              

Interest expense, net of capitalized interest

     (106,470     (95,347     (131,651     (101,560     (91,325     (91,048     (93,229

Interest income

     367        567        752        670        513        143        2,320   

Other income (expense) (1)

     6,651        20,274        22,956        (45,901     (42,179     12,902        (7,359
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

     (99,452     (74,506     (107,943     (146,791     (132,991     (78,003     (98,268
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     47,418        26,511        (2,399     (70,107     (61,762     (62,047     (839

Income tax (expense) benefit, net

     183        (211     (213     335        (358     171        (555
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 47,601      $ 26,300      $ (2,612   $ (69,772   $ (62,120   $ (61,876   $ (1,394
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

              

Basic

   $ 3.51      $ 1.94      $ (0.19   $ (5.14   $ (4.60   $ (4.63   $ (0.42

Diluted

   $ 2.45      $ 1.94      $ (0.19   $ (5.14   $ (4.60   $ (4.63   $ (0.42

 

(in thousands)    As of
September 30,

2013
     As of December 31,  
      2012     2011     2010      2009      2008  

Balance sheet data:

               

Cash and cash equivalents

   $ 263,781       $ 139,556      $ 147,212      $ 117,635       $ 149,838       $ 95,050   

Total assets

     2,983,085         2,872,110        2,479,581        1,939,146         1,837,955         1,818,722   

Total passenger deposits

     428,265         365,296        336,203        291,977         247,484         195,841   

Long-term debt (2)

     1,618,585         1,695,656        1,328,518        830,724         878,036         938,750   

Total debt (2)

     1,685,940         1,713,216        1,350,840        855,724         903,036         963,750   

Related party notes payable

     698,985         661,304        615,143        572,736         499,152         430,996   

Total liabilities

     2,946,508         2,885,453        2,489,409        1,916,804         1,817,980         1,795,332   

Total stockholders’ equity (deficit)

     36,577         (13,343     (9,828     22,342         19,975         23,390   

 

(1) Other income (expense) consists of a variety of non-operating items including but not limited to foreign transaction gains and losses, gain (loss) on early extinguishment of debt and realized and unrealized gain (loss) on derivative instruments.
(2) Includes the debt discount of $31.0 million and $32.8 million as of September 30, 2013 and December 31, 2012, respectively.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following tables present unaudited pro forma balance sheet data as of September 30, 2013 and the pro forma statement of operations data for the nine months ended September 30, 2013 and the year ended December 31, 2012. We derived the unaudited pro forma consolidated financial data from our unaudited interim consolidated financial statements and our audited financial statements included elsewhere in this prospectus. The pro forma balance sheet and the statement of operations presented are not necessarily indicative of what our actual results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future results of operations.

The unaudited pro forma consolidated financial data is presented to give effect to the restructuring and capitalization of our related party debt. The unaudited pro forma consolidated balance sheet assumes that the restructuring and capitalization of our related party debt occurred on September 30, 2013. The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2013 and the year ended December 31, 2012 assumes that the restructuring and capitalization of our related party debt occurred on January 1, 2012.

You should read the following table in conjunction with “Prospectus Summary,” “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical financial statements and the notes thereto included elsewhere in this prospectus.

 

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     As of September 30, 2013  
(in thousands)    Unaudited     Pro Forma
Adjustments (1)
    Pro Forma
Adjusted
 
     (unaudited)  

Balance sheet data:

      

Assets:

      

Current assets:

      

Cash and cash equivalents

   $ 263,781        $ 263,781   

Restricted cash

     39,075          39,075   

Trade and other receivables, net

     14,895          14,895   

Inventories

     14,984          14,984   

Prepaid expenses

     52,686          52,686   

Other current assets

     14,168          14,168   
  

 

 

   

 

 

   

 

 

 

Total current assets

     399,589          399,589   

Property and equipment, net

     2,016,783          2,016,783   

Goodwill

     404,858          404,858   

Intangible assets, net

     82,042          82,042   

Other long-term assets

     79,813          79,813   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,983,085        $ 2,983,085   
  

 

 

   

 

 

   

 

 

 

Liabilities and stockholders’ equity:

      

Current liabilities:

      

Accounts payable

   $ 7,087        $ 7,087   

Accrued expenses

     99,700          99,700   

Passenger deposits

     410,262          410,262   

Derivative liabilities

     7,779          7,779   

Current portion of long-term debt

     67,355          67,355   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     592,183          592,183   

Long-term debt

     1,618,585          1,618,585   

Related party notes payable (2)

     698,985      $ (698,985     —     

Other long-term liabilities

     36,755          36,755   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     2,946,508        (698,985     2,247,523   
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Ordinary shares (1)

     136       

Additional paid-in capital (1)

     306,651       

Accumulated deficit (1)

     (211,201     83,841        (127,360

Accumulated other comprehensive loss

     (59,009    
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     36,577       
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,983,085       
  

 

 

   

 

 

   

 

 

 

 

(1) The Pro Forma column in the balance sheet data table reflects (i) the restructuring and capitalization of our related party debt as of September 30, 2013, (ii) the impact on related party interest expense as reported in interest expense, net of capitalized interest on our consolidated statement of operations for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, and (iii) the effects to accumulated deficit on the consolidated balance sheet as of September 30, 2013 as a result of such pro forma adjustment to related party interest expense on the consolidated statement of operations for the nine months ended September 30, 2013, and the year ended December 31, 2012, respectively.
(2) The pro forma adjustment to related party notes payable in the balance sheet data table gives effect to the Pro Forma adjustments discussed in note 1 above. The related party debt consists of approximately $828.9 million plus related accrued interest of $24.3 million, less related unamortized discounts of $154.2 million, as of September 30, 2013.

 

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     Nine Months Ended September 30, 2013  
(in thousands)    Unaudited     Pro Forma
Adjustments
     Pro
Forma
Adjusted
 
     (unaudited)  

Statement of operations data:

       

Revenues:

       

Passenger ticket

   $ 779,309         $ 779,309   

Onboard and other

     124,007           124,007   

Charter

     14,046           14,046   
  

 

 

   

 

 

    

 

 

 

Total Revenue

     917,362           917,362   

Cruise operating expenses:

       

Commissions, transportation and other

     247,248           247,248   

Onboard and other

     33,732           33,732   

Payroll, related and food

     133,918           133,918   

Fuel

     77,978           77,978   

Other ship operating

     74,694           74,694   

Other

     8,368           8,368   
  

 

 

   

 

 

    

 

 

 

Total cruise operating expenses

     575,938           575,938   

Selling and administrative

     131,871           131,871   

Depreciation and amortization

     62,683           62,683   
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     770,492           770,492   
  

 

 

   

 

 

    

 

 

 

Operating income

     146,870           146,870   
  

 

 

   

 

 

    

 

 

 

Non-operating income (expense):

       

Interest expense, net of capitalized
interest (3)

     (106,470   $ 37,680         (68,790

Interest income

     367           367   

Other income (expense)

     6,651           6,651   
  

 

 

   

 

 

    

 

 

 

Total non-operating expense

     (99,452     37,680         (61,772
  

 

 

   

 

 

    

 

 

 

Income before income taxes

     47,418        37,680         85,098   

Income tax benefit

     183           183   
  

 

 

   

 

 

    

 

 

 

Net income

   $ 47,601      $ 37,680       $ 85,281   
  

 

 

   

 

 

    

 

 

 

 

(3) The pro forma adjustments in the statement of operations data table to interest expense, net of capitalized interest gives effect to (i) the pro forma adjustments discussed in note 1 above, (ii) related party interest expense of approximately $24.3 million and $30.9 million for the nine months ended September 30, 2013 and for the year ended December 31, 2012, respectively, and (iii) debt discount accretion of approximately $13.4 million and $15.3 million for the nine months ended September 30, 2013 and for the year ended December 31, 2012, respectively.

 

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     Year Ended December 31, 2012  
(in thousands)    Audited     Pro Forma
Adjustments
     Pro Forma
Adjusted
 
           (unaudited)  

Statement of operations data:

       

Revenues:

       

Passenger ticket

   $ 947,071         $ 947,071   

Onboard and other

     151,213           151,213   

Charter

     13,737           13,737   
  

 

 

   

 

 

    

 

 

 

Total Revenue

     1,112,021           1,112,021   

Cruise operating expenses:

       

Commissions, transportation and other

     331,254           331,254   

Onboard and other

     40,418           40,418   

Payroll, related and food

     168,594           168,594   

Fuel

     101,685           101,685   

Other ship operating

     95,808           95,808   

Other

     21,968           21,968   
  

 

 

   

 

 

    

 

 

 

Total cruise operating expenses

     759,727           759,727   

Selling and administrative

     153,747           153,747   

Depreciation and amortization

     93,003           93,003   
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     1,006,477           1,006,477   
  

 

 

   

 

 

    

 

 

 

Operating income

     105,544           105,544   
  

 

 

   

 

 

    

 

 

 

Non-operating income (expense):

       

Interest expense, net of capitalized interest (3)

     (131,651   $ 46,161         (85,490

Interest income

     752           752   

Other income (expense)

     22,956           22,956   
  

 

 

   

 

 

    

 

 

 

Total non-operating expense

     (107,943     46,161         (61,782
  

 

 

   

 

 

    

 

 

 

(Loss) income before income taxes

     (2,399     46,161         43,762   

Income tax expense

     (213        (213
  

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (2,612   $ 46,161       $ 43,549   
  

 

 

   

 

 

    

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is intended to clarify the results of our operations, certain changes in our financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included elsewhere in this prospectus. Our actual results could differ materially from those discussed below. This discussion should be read in conjunction with, and is qualified by reference to, the other related information contained in this prospectus, including the consolidated financial statements and the related notes thereto and the description of our business as well as the risk factors discussed in “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

Key Operational and Financial Metrics, including Non-GAAP Measures

We utilize a variety of operational and financial metrics, which are defined below, to evaluate our performance and financial condition. We use certain non-GAAP financial 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 utilize 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 GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, they may not be comparable to measured used by other companies within our industry. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our financial condition and results of operations together with the reconciliation of these non-GAAP measures set forth in the footnotes to “Prospectus Summary—Summary Consolidated Financial Information.”

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 permitted in calculating covenant compliance under the indenture governing the Senior Secured Notes and our Secured Credit Facilities. We believe 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. We believe 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 the agreements governing our indebtedness. 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 that cause our cruise revenue and expense to vary.

 

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

Gross Yield represents total revenue, excluding charter per APCD.

Net Cruise Cost represents Gross Cruise Cost excluding commissions, transportation and other expense, and onboard and other expense.

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.

Net Per Diem represents Net Revenue divided by Passenger Days Sold. We utilize Net Per Diem to manage our business on a day-to-day basis, as we believe that it is the most relevant measure of our pricing performance as it reflects the revenues earned by us, net of our most significant variable costs. Other cruise lines use Net Yield to analyze business, which is a similar measurement that divides Net Revenue by APCD instead of Passenger Days Sold. The distinction is significant as other cruise companies focus more on potential onboard sales, resulting in a bias to fill each bed to maximize onboard revenue at the expense of passenger ticket revenue. Conversely, as our product has all-inclusive elements, we derive nearly all of our revenue from passenger ticket revenue. Hence it is far more important for us to maintain a pricing discipline focusing on passenger ticket revenue rather than to discount cruises in order to achieve higher occupancy to drive potential onboard revenues. We believe that this pricing discipline drives our revenue performance, our relatively long booking window, and allows us to maintain a positive relationship with the travel agency community.

Net Revenue represents total revenue, excluding charter revenue less commissions, transportation and other expense, and onboard and other expense.

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.

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 as applicable), 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 hotel accommodations are included in commissions, transportation and other expense in the consolidated statements of operations.

 

    Charter revenue consists of charter hire fees, net of commissions, to bareboat charter with a third party. The charter agreement constitutes an operating lease and charter revenue is recognized on a straight-line basis over the charter term.

 

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    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 shore excursions and 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, loss on disposals of ship related assets and passenger claims.

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.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: “Basis of Presentation and Summary of Significant Accounting Policies” in our audited consolidated financial statements included elsewhere in this prospectus, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations, and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that we believe reflect current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions, which could have a material impact on our financial position or results of operations.

 

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Asset Impairment

Goodwill

We record goodwill as the excess of the purchase price over the estimated fair value of net assets acquired, including identifiable intangible assets. We assess goodwill for impairment in accordance with ASC 350, Intangibles—Goodwill and Other, which requires that goodwill be tested for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently when events or circumstances dictate, as defined by ASC 350. As our two cruise brands have similar economic characteristics, we have determined that we have only one Reporting Unit.

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, determined using the discounted cash flow method, 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 first step of the impairment review requires that we determine the fair value of the Reporting Unit and compare 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 of its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.

Our annual goodwill impairment test date is September 30, which coincides with our annual budget/forecasting cycle and the end of our seasonally highest quarter. As of September 30, 2013, we did not have any impairment on goodwill, indefinite-lived intangible assets or other long-lived assets.

The principal assumptions we use in the discounted cash flow model are projected operating results, discount rate, weighted-average cost of capital and terminal value. Cash flows are calculated using projected operating results as a base. To that base we added estimated future years’ cash flows, considering the global economic environment as well as internal projections based on projected occupancy levels, cost structure and other variables. We discounted the projected cash flows using a rate equivalent to our weighted-average cost of capital. Based on the discounted cash flow model, we determined that the fair value of the Reporting Unit exceeded the carrying value and is therefore not impaired.

The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties that require significant judgments when making assumptions of expected revenues, operating costs, selling and administrative expenses, capital expenditures, as well as assumptions regarding the competition and business conditions within the cruise vacation industry, among other factors. It is possible that changes in our assumptions and projected operating results could lead to impairment of our goodwill.

Identifiable Intangible Assets

Regent recorded identifiable intangible assets consisting of trade names, customer relationships, non-competition agreements, backlog and customer database. The trade names acquired include “Seven Seas Cruises” and “Luxury Goes Exploring” were determined to have indefinite lives. During 2011, Regent amended its agreement with Regent Hospitality Worldwide, which granted exclusive and perpetual licensing rights to use the “Regent” trade name and trademarks in conjunction with cruises. The amended and restated trademark license agreement allows us to use the Regent trade name and trademark rights, in conjunction with cruises, in perpetuity, subject to the terms and conditions stated in the agreement. The Regent licensing rights are being amortized over an estimated useful life of 40 years.

Our identifiable intangible assets, except the trade names acquired and noted above, are subject to amortization over their estimated lives and are reviewed for impairment whenever events or changes in

 

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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 perform our annual impairment review of our trade names as of September 30 using the relief-from-royalty method. The royalty rate used is based on comparable royalty agreements in the tourism and hospitality industry. The discount rate used was the same rate used in our goodwill impairment test.

Ship Accounting

Upon acquisition of our ships, excluding newbuilds, we record the acquisition cost at the estimated fair value of the ship, which is calculated based on a market approach that takes into consideration recent transactions of similar ships, conditions of the cruise market at the date of valuation and the price a willing third party would pay for a ship with similar characteristics. Our ships represent our most significant asset and are stated at cost less accumulated depreciation. Depreciation of the ships is computed net of projected residual values of 30% using the straight-line method over their original estimated service lives ranging from 20 to 30 years. Service life is based on when the assets were originally placed in service. We did not extend the life of the Regent ships we acquired at the time of the Regent Seven Seas Transaction. Our service life and residual value estimates take into consideration the impact of anticipated technological changes, long-term cruise and vacation market conditions, and historical useful lives of similarly built ships.

As of January 1, 2013, we changed our estimate for all our ships’ projected residual values. The change was triggered as we obtained recent sales information for luxury cruise ship sales that occurred during the three months ended March 31, 2013. As a result, we increased each ship’s projected residual value ranging from 10-15% to 30%. The change in estimate has been applied prospectively. The effect of the change on both operating income and net loss for the nine months ended September 30, 2013 is approximately $12.3 million of reduced depreciation expense. The estimated impact of this change for full year 2013 is a reduction of depreciation expense of approximately $16.4 million. We periodically review and evaluate these estimates and judgments based on historical experiences and new factors and circumstances. As part of our ongoing reviews, our estimates may change in the future. If such a change is necessary, depreciation expense could be materially higher or lower.

Improvement costs that add value to the ships and have a useful life greater than one year are capitalized as additions to the ships and are depreciated over the lesser of the ships’ remaining service lives or the improvements’ estimated useful lives. Improvement costs are related to new components that have been added to, replaced or refurbished on the ship. The remaining estimated cost and accumulated depreciation (i.e. book value) of replaced ship components are written off and any resulting losses are recognized in the consolidated statements of operations. Examples of significant capitalized improvement costs are electrical system upgrades, such as the upgrade of stabilizers, electrical system generators and the refurbishment of major mechanical systems such as diesel engines, boilers, and generators, along with new stateroom and guest facility equipment. Given the very large and complex nature of our ships, our accounting estimates related to ships and determination of ship improvement costs to be capitalized require considerable judgment of management and are inherently uncertain.

Drydock costs are scheduled maintenance activities that require the ships to be taken out of service and are expensed as incurred. Drydocks are required to maintain each vessel’s Class certification. Class certification is necessary in order for our cruise ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. Typical drydock costs include drydock fees and wharfage services provided by the drydock 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 drydock activities. Repair and maintenance activities are charged to expense as incurred.

 

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We review our ships for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of these assets based on our estimate of its undiscounted future cash flows. If estimated future cash flows are less than the carrying value of an asset, an impairment charge is recognized for the difference between the asset’s estimated fair value and its carrying value. We perform our ship impairment reviews on an individual ship basis utilizing an undiscounted cash flow analysis. The principle assumptions used in the undiscounted cash model are projected operating results, including net per diems, net cruise costs, projected occupancy, available passenger days, and projected growth. We have not recognized any impairment losses on any of our ships.

We believe our estimates and judgments with respect to our ships are reasonable. However, should certain factors or circumstances cause us to revise our estimates of ship service lives, projected residual value or the lives of major improvements, depreciation expense could be materially higher or lower. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amount we expense each year as repair and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we had reduced our estimated average service life of our ships by one year, depreciation expense for 2012 would have increased by $2.4 million. If our ships were estimated to have no residual value, depreciation expense for 2012 would have increased by $12.3 million.

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.

Executive Overview

We reported total revenue, total cruise operating expense, operating income and net income (loss) as shown in the following table:

 

(in thousands, except per share data)    Nine Months Ended
September 30,
     Year Ended
December 31,
 
   2013      2012      2012     2011     2010  

Total revenue

   $ 917,362       $ 854,656       $ 1,112,021      $ 969,138      $ 749,093   

Total cruise operating expenses

     575,938         570,699         759,727        667,383        486,582   

Operating income

     146,870         101,017         105,544        76,684        71,229   

Net income (loss)

     47,601         26,300         (2,612     (69,772     (62,120

Earnings (loss) per share:

            

Basic

   $ 3.51       $ 1.94       $ (0.19   $ (5.14   $ (4.60

Diluted

   $ 2.45       $ 1.94       $ (0.19   $ (5.14   $ (4.60

Revenue increased $62.7 million, or 7.3%, to $917.4 million for the nine months ended September 30, 2013 compared to $854.7 million for the nine months ended September 30, 2012. The increase was due to additional capacity in 2013 as PDS increased 6.7% due to Riviera beginning revenue generating sailings in May 2012. Additionally, there were no drydocks for the nine months ended September 30, 2013 compared to one drydock for the nine months ended September 30, 2012.

 

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Net Yield increased 3.2% to $395.90 for the nine months ended September 30, 2013 from $383.58 for the nine months ended September 30, 2012, primarily due to a decrease in air costs.

Net Cruise Cost per APCD, excluding fuel cost and other expense, increased to $216.60, or 2.3%, for the nine months ended September 30, 2013 from $211.82 for the nine months ended September 30, 2012, primarily driven by increased sales and marketing expenses.

Fuel expense, net of settled fuel hedges, increased $6.6 million to $77.6 million for the nine months ended September 30, 2013 from $71.0 million for the nine months ended September 30, 2012. The increase was driven by a 5.7% increase in consumption due to the addition of Riviera, offset by a 2.0% decrease in our average cost of fuel per metric ton.

Adjusted EBITDA was $216.2 million for the nine months ended September 30, 2013, compared to $190.1 million for the nine months ended September 30, 2012.

Results of Operations

The following table sets forth our operating data as a percentage of total revenue:

 

(in thousands)    Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2013         2012         2012         2011         2010    

Revenues:

          

Passenger ticket

     85.0     85.6     85.2     86.1     85.7

Onboard and other

     13.5        13.3        13.6        13.9        14.3   

Charter

     1.5        1.1        1.2        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cruise operating expenses:

          

Commissions, transportation and other

     27.0     29.6     29.8     28.0     25.7

Onboard and other

     3.7        3.6        3.6        3.8        3.9   

Payroll, related and food

     14.6        14.6        15.2        15.9        16.4   

Fuel

     8.5        8.8        9.1        9.6        7.7   

Other ship operating

     8.1        8.3        8.6        8.9        9.1   

Other

     0.9        1.9        2.0        2.7        2.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cruise operating expenses

     62.8        66.8        68.3        68.9        65.0   

Selling and administrative

     14.4        13.5        13.8        15.0        18.0   

Depreciation and amortization

     6.8        8.0        8.4        8.2        7.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     84.0        88.2        90.5        92.1        90.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     16.0        11.8        9.5        7.9        9.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income (expense):

          

Interest expense, net of capitalized interest

     (11.6     (11.2     (11.8     (10.5     (12.2

Interest income

     —          0.1        0.1        0.1        0.1   

Other income (expense)

     0.7        2.4        2.1        (4.7     (5.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

     (10.8     (8.7     (9.7     (15.1     (17.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     5.2        3.1        (0.2     (7.2     (8.2

Income tax (expense) benefit, net

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     5.2     3.1     (0.2 )%      (7.2 )%      (8.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our Passenger Days Sold, APCD and Occupancy for the years ended December 31, 2012, 2011 and 2010 and the nine months ended September 30, 2013 and 2012.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2013     2012     2012     2011     2010  

Passenger Days Sold

     1,488,703        1,395,793        1,873,691        1,688,958        1,305,578   

APCD

     1,571,934        1,464,536        1,985,522        1,836,722        1,406,298   

Occupancy

     94.7     95.3     94.4     92.0     92.8

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 for the years ended December 31, 2012, 2011 and 2010 and the nine months ended September 30, 2013 and 2012.

 

    Nine Months Ended
September 30,
    Year Ended
December 31,
 
(in thousands, except operating data)   2013     2012     2012     2011     2010  

Passenger ticket revenue

  $ 779,309      $ 731,629      $ 947,071      $ 834,868      $ 642,068   

Onboard and other revenue

    124,007        114,023        151,213        134,270        107,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue, excluding charter

    903,316        845,652        1,098,284        969,138        749,093   

Less:

         

Commissions, transportation and other expense

    247,248        252,801        331,254        271,527        192,285   

Onboard and other expense

    33,732        31,085        40,418        36,854        28,981   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Revenue

  $ 622,336      $ 561,766      $ 726,612      $ 660,757      $ 527,827   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Passenger Days Sold

    1,488,703        1,395,793        1,873,691        1,688,958        1,305,578   

APCD

    1,571,934        1,464,536        1,985,522        1,836,722        1,406,298   

Net Per Diem

  $ 418.04      $ 402.47      $ 387.80      $ 391.22      $ 404.29   

Gross Yield

    574.65        577.42        553.15        527.65        532.67   

Net Yield

    395.90        383.58        365.96        359.75        375.33   

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 for the years ended December 31, 2012, 2011 and 2010 and the nine months ended September 30, 2013 and 2012.

 

    Nine Months Ended
September 30,
    Year Ended
December 31,
 
(in thousands, except APCD data)   2013     2012     2012     2011     2010  

Total cruise operating expense

  $ 575,938      $ 570,699      $ 759,727      $ 667,383      $ 486,582   

Selling and administrative expense

    131,871        114,985        153,747        145,802        134,676   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Cruise Cost

    707,809        685,684        913,474        813,185        621,258   

Less:

         

Commissions, transportation and other expense

    247,248        252,801        331,254        271,527        192,285   

Onboard and other expense

    33,732        31,085        40,418        36,854        28,981   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cruise Cost

    426,829        401,798        541,802        504,804        399,992   

Less:

         

Fuel

    77,978        75,272        101,685        92,921        57,913   

Other

    8,368        16,310        21,968        26,305        16,085   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cruise Cost, excluding Fuel and Other

  $ 340,483      $ 310,216      $ 418,149      $ 385,578      $ 325,994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

APCD

    1,571,934        1,464,536        1,985,522        1,836,722        1,406,298   

Gross Cruise Cost per APCD

  $ 450.28      $ 468.19      $ 460.07      $ 442.74      $ 441.77   

Net Cruise Cost per APCD

    271.53        274.35        272.88        274.84        284.43   

Net Cruise Cost, excluding Fuel and Other, per APCD

    216.60        211.82        210.60        209.93        231.81   

 

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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenue

Total revenue increased $62.7 million, or 7.3%, to $917.4 million for the nine months ended September 30, 2013, from $854.7 million for the nine months ended September 30, 2012. This increase was mainly due to the following factors:

 

    Passenger ticket revenue increased $47.7 million, or 6.5%, to $779.3 million in for the nine months ended September 30, 2013 from $731.6 million for the nine months ended September 30, 2012, primarily due to additional capacity in 2013 as PDS increased 6.7% due to Riviera beginning revenue generating sailings in May 2012. Additionally, there were no drydocks for the nine months ended September 30, 2013 compared to one drydock for the nine months ended September 30, 2012.

 

    Onboard and other revenue increased $10.0 million, or 8.8%, to $124.0 million for the nine months ended September 30, 2013 from $114.0 million for the nine months ended September 30, 2012, driven by a $7.6 million increase due to a 6.7% increase in PDS and a $2.4 million due to pricing increases.

 

    Charter revenue increased $5.0 million to $14.0 million for the nine months ended September 30, 2013 from $9.0 million for the nine months ended September 30, 2012 due to Insignia bareboat charter to an unrelated party for a period of two years commencing in April 2012.

Cruise Operating Expense

Total cruise operating expense increased $5.2 million, or 0.9%, to $575.9 million for the nine months ended September 30, 2013, from $570.7 million for the nine months ended September 30, 2012. The increase was mainly due to the following factors:

 

    Payroll, related and food increased $9.2 million, or 7.4%. The increase was primarily due to costs associated with additional capacity in 2013 as PDS increased 6.7%.

 

    Other ship operating increased $4.2 million, or 5.9%, primarily driven by increased deck, engine and port costs as a result of capacity growth with the addition of Riviera in May 2012.

 

    Fuel increased $2.7 million, or 3.6%, driven by a 5.7% increase in consumption due to the addition of Riviera, offset by a 2.0% decrease in our average fuel cost per Metric Ton to $724 per Metric Ton for the nine months ended September 30, 2013, from $739 per Metric Ton for the nine months ended September 30, 2012.

 

    Onboard and other increased $2.6 million, or 8.5%, due primarily to the 6.7% increase in PDS.

The increase was partially offset by the following factors:

 

    Other decreased $7.9 million, or 48.7%, primarily due to expenses associated with one drydock during the nine months ended September 30, 2012 compared to none during the same period in 2013.

 

    Commissions, transportation and other decreased $5.6 million, or 2.2%, primarily due to decreased air costs and air participation.

Selling and Administrative Expense

Selling and administrative expense for the nine months ended September 30, 2013 increased $16.9 million or 14.7% to $131.9 million, from $115.0 million for the nine months ended September 30, 2012. The increase was primarily due to marketing expenses of $9.1 million, general and administrative costs totaling $6.6 million which were primarily attributable to employee cost and professional fees and $1.2 million in sales expenses.

 

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Depreciation and Amortization Expense

Depreciation and amortization expense for the nine months ended September 30, 2013 decreased $5.3 million, or 7.8%, to $62.7 million from $68.0 million for the nine months ended September 30, 2012. In 2013, we increased each ship’s projected residual value as a result of our change in the estimated residual values on January 1, 2013, which resulted in $12.3 million of reduced depreciation expense compared to 2012. This decrease was primarily offset by $5.5 million in additional depreciation during 2013 on Riviera, as it was placed in service in May 2012. The remaining $1.5 million offset is due to vessel refurbishment additions for drydocks in May 2012 and November 2012.

Non-Operating Income (Expense)

Interest expense, net of capitalized interest, increased $11.1 million, or 11.7%, to $106.5 million for the nine months ended September 30, 2013, from $95.3 million for the nine months ended September 30, 2012. The increase was primarily driven by the addition of the Riviera Loan (as defined herein), debt discount amortization specific to bifurcated embedded derivatives, a higher fixed interest rate under our interest rate swap agreement related to the Marina Loan, the refinancing of the Oceania First Lien Term Loan and Oceania Second Lien Term Loan in July 2013 with a loan bearing a higher average interest rate and the refinancing of the Regent Term Loan in August 2012 with a higher interest rate bearing loan.

Other income (expense) decreased $13.6 million, or 67.2%, to $6.7 million for the nine months ended September 30, 2013, from income of $20.3 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, we recorded a $13.0 million gain on derivative instruments, offset by a $3.7 million loss on the early extinguishment of Regent’s first lien term loan and a $1.9 million loss on early extinguishment of Oceania’s First Lien Term Loan (as defined herein), a $0.5 million loss related to fuel hedge contracts and a $0.2 million loss on foreign transactions. For the nine months ended September 30, 2012, we recorded a $10.1 million gain on derivative instruments and had a $9.9 million gain on our foreign currency hedge contracts, an $8.2 million gain related to fuel hedge contracts offset by a $4.5 million loss on the early extinguishment of Regent’s first lien term loan and a $3.4 million loss on foreign currency transactions.

Net Yield

Net Yield increased 3.2% to $395.90 for the nine months ended September 30, 2013 from $383.58 for the nine months ended September 30, 2012 primarily due to a decrease in air costs.

Net Cruise Cost per APCD

Net Cruise Cost per APCD decreased to $271.53, or 1.0%, in 2013 from $274.35 in 2012, due to the addition of Riviera and there being no drydocks for the nine months ended September 30, 2013 compared to one drydock for the nine months ended September 30, 2012. Net Cruise Cost, excluding fuel cost and other expense, per APCD increased to $216.60, or 2.3%, for the nine months ended September 30, 2013 from $211.82 for the nine months ended September 30, 2012, primarily driven by increased sales and marketing expenses.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue

Total revenue increased $142.9 million, or 14.7%, to $1,112.0 million in 2012, from $969.1 million in 2011. This increase was mainly due to the following factors:

 

   

Passenger ticket revenue increased $112.2 million, or 13.4%, to $947.1 million in 2012, from $834.9 million in 2011, driven by a $91.0 million increase due to a 10.9% increase in PDS and

 

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$21.2 million due to pricing increases. The increase in PDS was attributable to revenue generating sailings on Riviera beginning in May 2012, and two drydocks in 2012 compared to three in 2011.

 

    Onboard and other revenue increased $16.9 million, or 12.6%, to $151.2 million in 2012 from $134.3 million in 2011, driven by a $14.6 million increase due to a 10.9% increase in PDS and $2.3 million increase due to pricing increases.

 

    Charter revenue increased $13.7 million due to Insignia bareboat charter in April 2012. There were no bareboat charters in 2011.

Cruise Operating Expense

Total cruise operating expense increased $92.3 million, or 13.8%, to $759.7 million in 2012, from $667.4 million in 2011. The increase was mainly due to the following factors:

 

    Commissions, transportation and other increased $59.7 million, or 22.0%, primarily due to $35.7 million for higher air costs due to increased prices as well as additional capacity associated with the addition of Riviera and $6.9 million for additional product costs associated with the increased inclusive product offerings we added to our European cruise packages in light of the softer European market, while $17.1 million of the increase and costs associated with increased revenues were primarily due to an increase in PDS.

 

    Onboard and other increased $3.6 million, or 9.7%, due primarily to the revenue generating sailings Riviera beginning May 2012 and an increase of 10.9% in PDS.

 

    Payroll, related and food increased $14.8 million, or 9.7%. The increase was driven by the addition of Riviera to our fleet in April 2012, offset by the chartering of Insignia in April 2012. The remainder is due to an increase in hotel services costs due to higher passenger volume and higher food costs per PDS, which is based on changes to the Consumer Price Index.

 

    Fuel increased $8.8 million, or 9.4%, driven by a 3.3% increase in consumption due to the addition of Riviera and a 6.0% increase in our average fuel cost per Metric Ton to $734 per Metric Ton in 2012 from $692 per Metric Ton in 2011.

 

    Other ship operating increased $9.8 million, or 11.4%, primarily driven by increased capacity with the addition of Riviera partially offset by the chartering of Insignia in 2012.

The increase was partially offset by the following factors:

 

    Other decreased $4.3 million, or 16.5%, primarily due to expenses associated with two drydocks in 2012 compared to three in 2011.

Selling and Administrative Expense

Selling and administrative expense for 2012 increased by $7.9 million, or 5.4%, to $153.7 million from $145.8 million for 2011. The increase was primarily due to higher employee costs totaling $9.8 million, which was partially offset by a $1.1 million decrease in sales and marketing costs and a $0.8 million decrease in certain general and administrative costs.

Depreciation and Amortization Expense

Depreciation and amortization expense for 2012 increased $13.7 million, or 17.3%, to $93.0 million from $79.3 million for 2011. The increase was mainly driven by increased depreciation for the addition of Riviera in April 2012.

 

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Non-Operating Income (Expense)

Interest expense, net of capitalized interest, increased $30.1 million, or 29.6%, to $131.7 million in 2012, from $101.6 million in 2011. The increase was primarily driven by the incurrence of the Riviera Loan (as defined herein) and additional interest expense relating to debt discount amortization specific to embedded derivatives. Additionally, in August 2012 the Regent Term Loan was refinanced with a new term loan bearing a higher interest rate margin.

Other income (expense) increased $68.9 million, or 150.0%, to $23.0 million in 2012, from a loss of $45.9 million in 2011. In 2012, we had a net $6.3 million gain on fuel hedges, a net $9.9 million gain of foreign currency hedges and a $15.0 million gain on a bifurcated embedded derivative. These gains were offset by a $4.6 million loss on extinguishment of debt due to the Regent financing transaction and $3.6 million of foreign transaction losses. In 2011, we had a net gain of $9.2 million on fuel hedges, a net loss of $47.1 million on foreign currency hedges primarily due to the foreign currency collars for the Oceania newbuilds, and a $7.6 million loss on extinguishment of debt related to refinancing transactions.

Net Yield

Net Yield increased 1.7% to $365.96 in 2012 from $359.75 in 2011 due to higher cruise fare and onboard and other revenues. The increase in revenues were due to higher occupancy and increases in our ticket prices partially offset by additional product costs associated with the increased inclusive product offerings we added to our European cruise packages in light of the softer European market.

Net Cruise Cost per APCD

Net Cruise Cost per APCD decreased by 0.7% to $272.88 in 2012 from $274.84 in 2011. Net Cruise Cost, excluding fuel cost and other expense, per APCD increased by 0.3% to $210.60 in 2012 from $209.93 in 2011, primarily driven by increased other ship operating costs.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue

Total revenue in 2011 increased $220.0 million, or 29.4%, to $969.1 million from $749.1 million in 2010. The increase was attributable to higher passenger ticket and onboard and other revenues.

 

    Passenger ticket revenue increased $192.8 million, or 30.0%, to $834.9 million in 2011 from $642.1 million in 2010, driven by a $188.8 million increase due to a 29.4% increase in PDS revenue generating sailings on Marina beginning in February 2011, and a $4.0 million increase due to ticket pricing.

 

    Onboard and other revenue increased $27.2 million, or 25.5%, to $134.3 million in 2011 from $107.0 million in 2010 primarily driven by a $31.5 million increase due to a 29.4% increase in PDS. In 2010 we received a $2.9 million insurance recovery resulting from a ship’s unexpected time out of service for repairs. There was no similar insurance recovery in 2011.

Cruise Operating Expense

Total cruise operating expense increased $180.8 million, or 37.2%, to $667.4 million in 2011 from $486.6 million in 2010. The increase was primarily due to the following factors:

 

   

Commission, transportation and other increased $79.2 million, or 41.2%, primarily due to $37.9 million for higher air costs due to increased capacity with the introduction of Marina in 2011 and $5.1 million for additional product costs associated with the increased inclusive product offerings we added

 

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to our European cruise packages in light of a softer European market, including Regent’s launching of its free hotel program, totaling approximately $3.2 million. Commissions expense increased by $30.8 million due to increases in passenger ticket revenue primarily associated with the introduction of Marina. The remaining increase of $4.4 million was primarily due to the addition of Marina in February 2011 and an increase in PDS.

 

    Onboard and other increased $7.9 million, or 27.2%, due primarily to the addition of Marina beginning February 2011 and an increase of 29.4% in PDS.

 

    Payroll, related & food increased $31.0 million, or 25.2%, primarily driven by $19.7 million due to the launch of Marina and higher food costs per PDS, which was driven by changes to the Consumer Price Index.

 

    Fuel expense increased $35.0 million, or 60.4%, driven by a 21.6% increase in consumption due to the addition of Marina and a 32.0% increase in our average cost per Metric Ton to $692 per Metric Ton in 2011 compared to $524 per Metric Ton in 2010.

 

    Other ship operating increased by $17.5 million, or 25.5%, primarily driven by the launch of Marina in February 2011 and additional port expenses due to changes in itinerary mix.

 

    Other expenses increased $10.2 million, or 63.5%, primarily attributable an increase of $5.3 million in drydock expenses, $3.7 million increase in pre-opening expense relating to the launch of Marina, and a $1.2 million increase in loss on disposals of property plant and equipment.

Selling and Administrative Expense

Selling and administrative expense for 2011 increased $11.1 million, or 8.2%, to $145.8 million from $134.7 million for 2010 primarily due to an $11.1 million increase in sales and marketing expenses and a $3.1 million on general and administrative expenses, offset by a $3.1 million reduction in Regent’s trade name royalty fees due to our acquisition of the rights to the trade name in the Regent Seven Seas Transaction. The increase in sales and marketing costs is primarily related to marketing initiatives associated with Marina and Riviera.

Depreciation and Amortization Expense

Depreciation and amortization expense for 2011 increased by $22.7 million to $79.3 million in 2011, compared to $56.6 million for 2010, mainly driven by the addition of Marina in 2011 and capital improvements to our ships made during 2011 drydocks.

Non-Operating Income (Expense)

Interest expense, net of capitalized interest, increased $10.2 million, or 11.2%, to $101.6 million in 2011 from $91.3 million in 2010. The increase was mainly due to the incurrence of the Marina Loan (as defined herein) in 2011.

Other expense increased $3.7 million to $45.9 million in 2011 from $42.2 million in 2010. In 2011, we had a net gain of $9.2 million on fuel hedges, a net loss of $47.1 million on foreign currency hedges primarily due to the foreign currency collars for the Oceania newbuilds, and a $7.6 million loss on extinguishment of debt related to refinancing transactions. In 2010, we had a net gain of $1.1 million on fuel hedges offset by a $43.3 million loss on the foreign currency collars for the Marina and Riviera.

Net Yield

Net Yield decreased by 4.2% to $359.75 for 2011 from $375.33 for 2010, primarily driven by increased capacity of 30.6% associated with the delivery of Marina in 2011.

 

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Net Cruise Cost per APCD

Net Cruise Cost per APCD decreased by 3.4% to $274.84 in 2011, from $284.43 in 2010. Net Cruise Cost, excluding fuel cost and other expense, per APCD decreased by 9.4% to $209.93 in 2011, from $231.81 in 2010, primarily driven by increased capacity due to Marina.

Liquidity and Capital Resources

The following tables summarize our net cash flows and key metrics related to our liquidity:

 

     Nine Months Ended
September 30,
    Percent Change  
(in thousands)    2013     2012     2013 vs. 2012  

Net cash provided by operating activities

   $ 200.3      $ 167.2        19.8

Net cash used in investing activities

     (27.5     (549.1     (95.0

Net cash used in (provided by) financing activities

     (48.6     487.9        (110.0

Working capital deficit (1)

     (192.6     (245.8     (21.6

 

     Years Ended December 31,     Percent Change  
       2012 vs.
2011
    2011 vs.
2010
 
     2012     2011     2010      

Net cash provided by operating activities

   $ 188.1      $ 186.3      $ 89.8        1.0     107.5

Net cash (used in) investing activities

     (539.5     (603.7     (179.2     (10.6     236.9   

Net cash provided by financing activities

     343.6        447.2        57.7        (23.2     675.0   

Working capital deficit (1)

     (267.4     (272.7     (208.7     (1.9     30.7   

 

  (1) Total changes in current assets and liabilities

Sources and Uses of Cash—Operating Activities

Net cash provided by operating activities increased by $33.1 million to $200.3 million for the nine months ended September 30, 2013, from $167.2 million for the nine months ended September 30, 2012, primarily due to an increase in net income adjusted for non-cash items (such as depreciation, amortization, stock compensation, and an unrealized loss on derivative contracts) of $30.3 million and in passenger deposits of $34.9 million, offset by a decrease in other working capital of $32.1 million.

The net increase of $1.8 million in cash provided by operating activities during 2012 compared to 2011 was primarily due to a reduction in net loss adjusted for non-cash items (such as depreciation, amortization, stock compensation, and an unrealized loss on derivative contracts) of $12.4 million, offset by a decrease in passenger deposits of $15.2 million and an increase in other working capital of $4.6 million.

The net increase of $96.6 million in cash provided by operating activities during 2011 compared to 2010 was primarily due to a reduction in net loss adjusted for non-cash items (such as depreciation, amortization, stock compensation, and an unrealized loss on derivative contracts) of $36.5 million, of which $21.6 million is attributable to an increase in depreciation and amortization resulting from the addition of Marina to our fleet during 2011, and an increase in other working capital of $60.1 million.

Sources and Uses of Cash—Investing Activities

Net cash used in investing activities decreased by $521.6 million to $27.5 million for the nine months ended September 30, 2013, compared to net cash used in investing activities of $549.1 million for the nine months ended September 30, 2012. The decrease was primarily due to $431.8 million relating to the purchase of Riviera in 2012. Additionally, in 2012 we had a settlement of a foreign currency collar associated with the Riviera new build that resulted in the payment of $70.3 million. The decrease was offset by an increase in restricted cash of $19.4 million. There were no settled hedges for the nine months ended September 30, 2013.

 

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Net cash used in investing activities decreased by $64.2 million to $539.5 million in 2012, from $603.7 million in 2011. The decrease was primarily due to lower capital expenditures in 2012 and the change in restricted cash.

Net cash used in investing activities increased by $424.6 million to $603.7 million from $179.2 million in 2010. During 2011 we launched Marina and settled $63.1 million of derivative contracts related to the financing of the Marina newbuild, compared to none in 2010.

Sources and Uses of Cash—Financing Activities

Net cash provided by financing activities decreased by $536.5 million to $48.6 million used in financing activities for the nine months ended September 30, 2013, from $487.9 million provided by financing activities for the nine months ended September 30, 2012. In 2013, we had $282.5 million in proceeds from debt issuance, net of debt issuance costs and original issue discount, for the Regent and OCI bank debt refinancing offset by $329.0 million in repayments for the OCI refinancing and a Marina semi-annual principal payment. In 2012, we had $805.7 million in proceeds from debt issuance, net of debt issuance costs and original issue discount related to the drawdown of the Riviera newbuild loan and the refinancing of the Regent Term Loan offset by $315.8 million repayments of bank debt for the Regent refinancing and a Marina semi-annual principal payment.

Net cash provided by financing activities decreased by $103.6 million to $343.6 million in 2012, from $447.2 million in 2011. We had an additional $178.2 million in debt repayments in 2012 compared to 2011, which includes $67.2 million in prepayments on the Oceania O-class debt. We also repaid $34.6 million on the Oceania First Lien Term Loan due April 2012.

Net cash provided by financing activities increased by $389.5 million to $447.2 million in 2011 from $57.7 million in 2010. The increase was primarily due to the proceeds received from the issuance of $760.7 million of long-term debt in 2011 relating to financing the Marina newbuild and Regent’s Senior Secured Notes, offset by $265.6 million repayment of bank debt and proceeds received in 2010 from the issuance of $108.3 million in related party notes.

Funding Sources and Future Commitments

As of September 30, 2013, our liquidity was $378.8 million, consisting of $263.8 million in cash and cash equivalents and $115.0 million available under our revolving credit facilities. We had a working capital deficit of $192.6 million as of September 30, 2013, as compared to a working capital deficit of $267.4 million as of December 31, 2012. Similar to others in our industry, we operate with a substantial working capital deficit. This deficit is mainly attributable to the following: (1) passenger deposits are normally paid in advance with a relatively low level of accounts receivable, (2) rapid turnover results in a limited investment in inventories, and (3) voyage-related accounts payable usually become due after receipt of cash from related bookings. Passenger deposits remain a liability until the sailing date, however the cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our revolving credit facilities and other cash from operations. This cash can be used to fund operating expenses for the applicable future sailing, pay down our credit facilities, fund down payments on new vessels or other uses.

We have contractual obligations, of which our debt maturities represent our largest funding requirement. As of September 30, 2013, we have $2,570.1 million in future debt maturities, excluding the debt discount and the unamortized discount on related party debt of $31.0 million and $154.2 million, respectively.

The agreements governing our indebtedness contain a number of covenants that impose operating and financial restrictions, including requirements under our newbuild debt that we maintain a minimum liquidity balance, a maximum debt to EBITDA ratio, a minimum EBITDA to debt service ratio and a maximum debt to

 

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adjusted equity ratio, requirements under our Secured Credit Facilities that we maintain a maximum loan-to-value ratio, a minimum interest coverage ratio (applicable only to revolving credit facilities) and restrictions under Regent’s Senior Secured Notes and our Secured Credit Facilities 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 September 30, 2013, we are in compliance with all financial covenants.

Our operating companies credit agreements include various restrictions on the ability to make dividends and distributions to their parent entities and ultimately to us. The following are restricted net assets of our subsidiaries at September 30, 2013, December 31, 2012 and December 31, 2011, respectively: $576.4 million, $458.6 million and $442.9 million.

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

On February 1, 2013, Regent amended its $340.0 million Regent Credit Facility (as defined herein), consisting of the $300.0 million Regent Term Loan (as defined herein) and the $40.0 million Regent Revolving Credit Facility (as defined herein). In conjunction with this amendment, the outstanding balance of the Regent Term Loan of $296.3 million was repriced with a margin of 3.5%. There was no change to the $40.0 million Regent Revolving Credit Facility or the maturity date of the Regent Term Loan. There was no impact on covenants, liquidity or debt capacity.

On July 2, 2013, Oceania entered into a new $375.0 million first lien credit facility (the “Oceania Credit Facility”) consisting of a $300.0 million first lien term loan (the “Oceania Term Loan”), which bears interest at a rate of LIBOR with a floor of 1.0% plus a margin of 5.75%, and a $75.0 million revolving credit facility (the “Oceania Revolving Credit Facility”), which includes an original issue discount of 1%. The maturity date of the Oceania Term Loan is July 2, 2020 and the maturity date of the Oceania Revolving Credit Facility is July 2, 2018. As part of this financing transaction, Oceania repaid its outstanding $231.7 million Oceania First Lien Term Loan and $75.0 million Oceania Second Lien Term Loan.

On July 5, 2013, Regent entered into a definitive contract with Italy’s Fincantieri shipyard to build a luxury cruise ship to be named Seven Seas Explorer. Under the terms of the contract, SSC will pay approximately $450.0 million to Fincantieri for the new vessel. Financing for the project was arranged by Credit Agricole Corporate and Investment Bank with support from SACE SpA, Italy’s export credit agency providing borrowings up to $440.0 million. During July 2013, SSC made a payment of approximately $22.0 million to Fincantieri for the initial installment payment for Seven Seas Explorer.

On July 31, 2013, Regent entered into a loan agreement providing for borrowings of up to $440.0 million with a syndicate of financial institutions to finance 80% of the contract cost of the Seven Seas Explorer newbuild plus the export credit premium. The twelve-year fully amortizing loan requires semi-annual principal and interest payments commencing six months following the draw-down date. Borrowings under this loan agreement will bear interest, at the election of Regent, at either (i) a fixed rate of 3.43% per year, or (ii) 2.8% per year plus the LIBOR rate for the applicable interest period. Regent is required to pay various fees to the lenders under this loan agreement, including a commitment fee of 1.1% per annum on the undrawn loan amount. Obligations under the loan agreement are guaranteed by SSC and PCH.

On August 19, 2013, and in connection with the construction of Seven Seas Explorer, we entered into a foreign currency collar with a notional amount of €274.4 million ($365.8 million as of September 30, 2013) to limit our exposure to foreign currency exchange rates for euro denominated payments due at the time the ship will be delivered to us. The maturity date of the collar is June 20, 2016.

 

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Contractual Obligations

As of December 31, 2012, our contractual obligations with initial or remaining terms in excess of one year, including interest expense on long-term debt obligations, were:

 

     Payments Due By Period  
(in thousands)    Total      Less than 1
year
     1 - 3 years      3 - 5 years      More than 5
years
 

Interest on long-term debt (1)

   $ 370,796       $ 72,907       $ 128,751       $ 97,843       $ 71,295   

Consulting agreement (2)

     1,197         772         425         —           —     

Operating lease obligations

     1,758         820         906         32         —     

Maintenance contract obligations (3)

     23,664         6,454         10,440         6,770         —     

Regent licensing rights (4)

     2,000         2,000         —           —           —     

Long-term debt (5)

     1,745,994         22,322         491,807         185,120         1,046,745   

Capital lease obligation (6)

     12,455         1,122         2,329         2,448         6,556   

Promissory Notes (7)

     828,859         —           —           429,795         399,064   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,986,723       $ 106,397       $ 634,658       $ 722,008       $ 1,523,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Long-term debt obligations mature at various dates through fiscal year 2024 and bear interest at fixed and variable rates. The various agreements governing our debt possess variable rate interest calculated based upon LIBOR, plus the applicable margins (the “All In Rate”). At December 31, 2012, the All In Rate was between 1.47% to 9.125% for all periods. Amounts are based on existing debt obligations and do not consider potential refinancing of expiring debt obligations.
(2) Amounts due to former Regent President Mark S. Conroy relating to his independent contractor agreement with Prestige Cruise Services, LLC.
(3) Amounts include obligations under the maintenance agreement with Wartsila Corporation, a third party vendor for certain equipment purchases and monthly maintenance fees signed on March 1, 2012 for a term of sixty months and a software maintenance contract with a third party.
(4) Amounts represent obligations under the terms of the Regent trademark license agreement.
(5) Amounts represent debt obligations with initial terms in excess of one year. The contractual obligation under long-term debt does not reflect any excess cash flow payments we may be required to make pursuant to our Secured Credit Facilities (as defined herein).
(6) Amounts represent capital lease obligations with initial term in excess of one year.
(7) Amounts represent redemption obligations relating to issued promissory notes.

On July 5, 2013, SSC entered into a definitive contract with Italy’s Fincantieri shipyard to build a luxury cruise ship to be named the Seven Seas Explorer. Under the terms of the contract, SSC will pay approximately $450.0 million to Fincantieri for the new vessel. During July 2013, SSC made a payment of approximately $22.0 million to Fincantieri for the initial installment payment for Seven Seas Explorer.

On July 31, 2013, SSC entered into a loan agreement providing for borrowings of up to $440.0 million to finance 80% of the construction contract for the Seven Seas Explorer. SSC is required to pay various fees to the lenders under this loan agreement, including a commitment fee of 1.10% per annum on the undrawn loan amount payable semi-annually until the delivery of the vessel.

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

Off-Balance Sheet Arrangements

None.

Quantitative and Qualitative Disclosures About Market Risk

General

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

 

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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. Our maximum exposure to counter parties for non-performance is limited to our mark-to-market exposure. We monitor our derivative positions using techniques including market valuations and sensitivity analyses. The turbulence in the credit and capital markets has increased the volatility associated with interest rates, foreign currency exchange rates and fuel prices. However, we have taken steps to mitigate these risks such as the interest rate swap agreements, foreign currency swaps or collars, and fuel hedge swap agreements described below.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates to our long-term debt obligations including future interest payments. We use interest rate swap agreements to modify our exposure to interest rate fluctuations and to manage our interest expense.

In July 2011, Oceania entered into three forward starting interest rate swap agreements to hedge the variability of the interest payments related to the outstanding variable-rate debt associated with Marina newbuild financing. The first swap, with an amortizing notional amount of $450.0 million at inception, was effective beginning January 19, 2012 and matured on January 19, 2013. The second swap, with an amortizing notional amount of $405.4 million became effective on January 19, 2013 and matures on January 19, 2014. The third swap, with an amortizing notional amount of $360.8 million becomes effective January 19, 2014 and matures on January 19, 2015.

In March 2013, Oceania entered into an additional forward starting interest rate swap agreement to hedge the variability of the interest payments related to the outstanding variable-rate debt associated with Marina newbuild financing. The swap, with an amortizing notional amount of $300.0 million at inception, is effective beginning January 20, 2015 and matures on January 19, 2016.

Also in March 2013, Oceania entered into two forward starting interest rate swap agreements to hedge the variability of the interest payments related to the outstanding variable-rate debt associated with Riviera newbuild financing. The first swap, with an amortizing notional amount of $422.4 million at inception, is effective beginning October 28, 2013 and matures on October 27, 2014. The second swap, with an amortizing notional amount of $377.6 million becomes effective on October 27, 2014 and matures on October 27, 2015.

All interest rate swaps are designated as cash-flow hedges and meet the requirements to qualify for hedge accounting treatment. The changes in fair value of the effective portion of the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss) on our consolidated balance sheets. The total notional amount of interest rate swap agreements effective and outstanding as of September 30, 2013 and December 31, 2012 was $383.1 million and $427.7 million, respectively.

Foreign Currency Exchange Risk

Our exposure to market risk for changes in foreign currency relates to our use of foreign currency swaps. These foreign currency swaps are used to limit the exposure to foreign currency exchange rates, for euro denominated payments related to the construction of newbuilds, payments related to drydock expenses and other operational expenses.

 

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During August 2013, Regent entered into a foreign currency collar option with an aggregate notional amount of €274.4 million ($365.8 million as of September 30, 2013) to hedge a portion of our foreign currency exposure related to the ship construction contract for of Seven Seas Explorer. The notional amount of the collar represents 80% of the contract cost 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 in June 2016. The change in fair value of the effective portion of the derivative was recorded as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. There was no ineffectiveness recorded as of September 30, 2013. Ineffective portions of future changes in fair value of the instrument will be recognized in other income (expense) in the statement of operations.

Fuel Price Risk

Our exposure to market risk for changes in fuel prices relates to the consumption of fuel on our vessels. We use fuel derivative swap agreements to mitigate the financial impact of fluctuations in fuel prices. As of September 30, 2013, we entered into fuel related swap agreements to hedge 170,100 barrels, or 75%, of our estimated fuel consumption for the remainder of 2013 and 400,800 barrels, or 40%, of our estimated 2014 fuel consumption and 101,100 barrels, or 10%, of our estimated 2015 fuel consumption. The fuel swaps do not qualify for hedge accounting; therefore, the changes in fair value of these instruments are recorded in other income (expense) in the consolidated statements of operations.

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 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. As of December 31, 2012 and 2011, we were not required to post any collateral for our fuel derivative instruments. As of September 30, 2013, our exposure was $0.0 million. Therefore, we would have had to incur an additional mark-to-market exposure of $3.0 million on our outstanding fuel derivative contracts in order for us to be required to post collateral.

Recently Adopted and Future Application of Accounting Standards

As of January 1, 2013, we adopted Financial Accounting Standards Board ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. It requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In 2013, this pronouncement was enhanced by ASU 2013-1, Balance Sheet Offsetting. This update clarifies that ordinary receivables are not within the scope of ASU 2011-11 and it applies only to derivatives, repurchase agreements, reverse purchase agreements and other securities lending transactions. The adoption did not materially impact our consolidated financial statements.

In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. It requires an entity to present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. Entities must also cross-reference to other disclosures currently required under GAAP for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. This standard was effective beginning January 1, 2013. See Note 6. “Accumulated Other Comprehensive Income” to our unaudited consolidated financial statements included elsewhere in this prospectus for impact.

In July 2013, the Financial Accounting Standards Board issued ASU 2013-10, Inclusion of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We adopted this guidance as of July 17, 2013, and it did not have a material impact on our consolidated financial statements.

 

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BUSINESS

Our Company

We are the market leader in the Upscale segment, which is comprised of the Upper Premium and Luxury segments, of the $29 billion cruise industry, and we are focused on providing our guests with extraordinary experiences. These experiences are characterized by gourmet cuisine, high quality service, luxurious accommodations and distinctive itineraries to “must see” destinations worldwide. Our cruise vacations are tailored to the preferences of affluent individuals globally, who are generally 55 years of age and older. This target market, referred to as the baby-boomers in the United States, is both the largest and fastest growing U.S. demographic. Our focus on this demographic allows us to deliver a vacation lifestyle that our guests can expect, enjoy and are willing to pay a premium price to experience. Our cruise vacations are exclusive and upscale and are designed to encourage our guests to form an emotional attachment to our ships and staff, creating a long-lasting affinity for our brands.

Our brands, Oceania and Regent, are comprised of eight cruise ships, with a ninth under construction for Regent. Oceania operates in the Upper Premium segment and Regent operates in the Luxury segment. We believe we have successfully positioned our two brands as the cruise lines of choice with the fast growing baby-boomer demographic. Our brands occupy a leading position in the Upscale segment, representing approximately 46% of the combined berth capacity of the Upscale segment as of September 30, 2013. We believe our two-brand strategy is key to maintaining our market leading position, as it allows us to offer products in the Upscale segment with distinct brand promises to a growing global demographic.

We focus on providing destination-oriented vacations combined with distinctive onboard experiences, such as gourmet cuisine, spacious and comfortable public areas, high levels of service and luxurious in-suite amenities. Our ships have limited guest capacity per ship, ranging from 490 to 1,250 guests, and are significantly smaller than the typical 2,000 to 5,000 passenger ships operated by the Contemporary and Premium segment brands. Our stateroom accommodations are large and luxurious, consistent with an upscale and exclusive cruise experience, with over 87% of the suites and staterooms on our ships featuring private balconies. Our onboard dining is a central highlight of our cruise experience and features multiple open seating gourmet dining venues where guests may dine when, where and with whom they wish. Our ships are staffed with a crew-to-guest ratio of approximately 1 to 1.7, further promoting a high level of service. This luxury-focused product offering drives our industry leading Net Yields.

We focus on deploying our ships to high demand and in-season locations worldwide. Our smaller ship size allows us to travel to more remote ports around the world, thereby meeting our guests’ demand for experiencing the most sought after destinations. The duration of our cruises varies from seven to 180 days, featuring worldwide itineraries that visit approximately 350 ports each year, including destinations such as Scandinavia, Russia, the Mediterranean, the Greek Isles, Alaska, Canada and New England, Asia, Tahiti and the South Pacific, Australia and New Zealand, Africa, India, South America, the Panama Canal and the Caribbean. We also have the only cruise line (Oceania) to offer a port-intensive 180 day “Around the World” cruise that circumnavigates the globe. Our ships are designed to be classic and refined, providing a comfortable cruise experience featuring the gourmet cuisine, highly attentive service and elegant surroundings that our target market is seeking, rather than the extravagant and flashy onboard features found on many larger ships catering to the mass market. We believe this key advantage will allow us to continue to grow our Net Yields across our entire fleet, and not just from new ship introductions, and to experience a more consistent and predictable return on invested capital over the useful life of our ships.

Our affluent and mostly retired or semi-retired guests plan their cruise vacations well ahead of sail date, which gives us high visibility into our future revenues. On average, our guests book seven to nine months in advance of sail date, which provides us ample lead time to effectively plan our sales and marketing initiatives and optimize our industry leading Net Yields. Because of the more all-inclusive nature of our product offerings, we generate a larger share of our overall revenue at time of booking compared to the rest of the industry, which

 

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provides us with even greater visibility into our total revenues. Another key differentiating factor is our disciplined and transparent go-to-market strategy. Unlike most cruise lines that discount inventory regularly to fill capacity (“price to fill”), our strategy to maximize revenue is to increase marketing efforts (“market to fill”) as the cruise date approaches. In order to accelerate sales, we clearly articulate to customers and travel agents that our prices are subject to increase as the cruise date approaches, as well as the specific dates on which those increases may occur. This strategy allows us to maintain and improve our high price point, which is fundamental in the Upscale segment.

Our senior management team has delivered consistent revenue, EBITDA and net income growth, producing measurable improvements in all three growth phases of the cruise industry. Frank J. Del Rio launched a new brand with the introduction of Oceania in 2003 and leads the company as our Chairman and CEO. We acquired Regent in 2008 and improved our results following the acquisition, including generating $18.0 million in cost synergies and increasing occupancy and yields. We also completed a newbuild program with the successful launch of Oceania’s Marina in January 2011 and Oceania’s Riviera in April 2012. We are committed to maintaining a disciplined growth strategy to maximize shareholder value by profitably growing our business while continuing to reduce our debt and increase our return on invested capital.

Our operating structure is integrated, with both of our brands sharing a single headquarter location and back office functions. This approach creates a culture of institutionalizing best practices, driving efficiencies and taking advantage of scale. Our brands maintain separate sales and marketing teams as well as dedicated reservation centers, which allows each brand to maintain and effectively communicate its unique identity and brand promise. This balanced approach leverages best-in-class operations to deliver consistently outstanding experiences to our guests while keeping our overhead expenditures low and our competitive position strong. This strategy also allows us to leverage our scale in order to develop international source markets effectively and permits other efficiencies such as implementing a common reservation system, shared data center and a common pool of well trained and experienced onboard crew and officers.

For the twelve months ended September 30, 2013, we generated total revenue of $1.2 billion, Net Revenue of $787.2 million, Adjusted EBITDA of $253.4 million and Adjusted EBITDA Margin of 21.6%. In comparing our Adjusted EBITDA Margin to other cruise lines, it is important to note that our more inclusive product offering results in higher Commissions, transportation and other expense. Accordingly, we believe a more appropriate margin analysis is Net Revenue Adjusted EBITDA Margin, which is Adjusted EBITDA divided by Net Revenue, which was 32.2% for the twelve months ended September 30, 2013. See “Prospectus Summary—Summary Consolidated Financial Information” for a reconciliation of Adjusted EBITDA to net income.

Our Brands

Oceania

Oceania was formed in 2003 by Frank J. Del Rio, now Chairman and CEO of our company, to focus on the under-penetrated midsize ship cruise market. Oceania specializes in offering destination-oriented cruise vacations, gourmet culinary experiences, elegant accommodations and personalized service at a compelling value. Oceania owns and operates a five ship fleet, comprised of three 684 guest R-Class ships: Regatta, Insignia and Nautica, and two new 1,250 guest O-Class ships: Marina and Riviera, which joined the fleet in 2011 and 2012, respectively.

Oceania provides an Upper Premium midsize ship cruise experience designed primarily for affluent baby-boomers. The line positions itself as the affordable cruising alternative between the Luxury ($500 plus per person per diems) and Premium ($150 to $250 per person per diems) segments of the cruise industry. Affluent guests, who historically have been loyal cruise customers on small and midsize ships, have seen the number of these type of ships diminish in recent years as the major cruise operators have focused on building ever larger ships (2500+ passengers) in the Premium cruise category.

 

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In 2011 and 2012, Oceania took delivery of the first two O-Class vessels, Marina and Riviera, with a capacity of 1,250 guests each. We believe the O-Class ships are the world’s finest vessels designed and purpose-built for the Upper Premium market, expanding upon the popular elements featured on Oceania’s original fleet of vessels, with an emphasis on large suites and staterooms and an exceptional epicurean experience. The overall mix of suite and balcony stateroom accommodations on the O-Class ships of 95% positions these vessels to generate higher Net Yields than the R-Class ships, with 68% balcony staterooms.

Oceania is ranked as one of the world’s best cruise lines by Condé Nast Traveler, Travel + Leisure, Departures, Travel Age West and Cruise Critic. Oceania ships received Best Dining, Best Public Rooms and Best Cabins from Cruise Critic Cruisers’ Choice Awards in 2013. Oceania also is the only cruise line to have had one of its ships receive a perfect “100” score for “Dining” in the Condé Nast Traveler Reader’s Choice Awards.

Regent

Regent is recognized as one of the world’s top luxury lines, featuring six-star service, oversized balcony suite staterooms and the cruise industry’s most inclusive product offering. Regent is a leading luxury cruise company and traces its origins to 1992, when Seven Seas Cruise Line merged with Diamond Cruise to become Radisson Seven Seas Cruises. In 2006, the cruise line was re-branded by its then-owner Carlson Company as Regent Seven Seas Cruises. Regent currently operates three award-winning, all-suite ships, comprised of Seven Seas Navigator, the all-balcony Seven Seas Mariner and the all-balcony Seven Seas Voyager, totaling 1,890 aggregate berths. Regent offers the industry’s most all-inclusive cruise vacation experience, including free air transportation, a pre-cruise hotel night stay, premium wines and top shelf liquors, gratuities, internet access and unlimited shore excursions.

Regent is currently building a 750 passenger ship, Seven Seas Explorer, for delivery in the summer of 2016, which we believe will further elevate the position of the Regent brand. The all-suite, all-balcony ship will feature sophisticated designer suites ranging from 300 to 3,500 square feet with an industry leading space ratio of 89.3 and a crew-to-guest ratio of 1 to 1.4. The ship will include six open-seating gourmet restaurants, Regent’s signature nine-deck open atrium, a two-story theater, three boutiques and an expansive Canyon Ranch SpaClub®. Operationally, the vessel will be a green ship, employing the most advanced environmental systems and state-of-the-art technology.

Regent focuses on providing guests with a high level of personal service, imaginative world-wide itineraries, unique shore excursions and land tours, world-class accommodations and top-rated cuisine. Regent is consistently ranked among the top luxury cruise lines by various travel publications. In 2011, 2012 and 2013, Regent was named the Best Luxury Cruise Line by Virtuoso, one of America’s largest travel agency networks, which caters to the highly affluent traveler. In 2012, Condé Nast Traveler awarded the brand “Best Cabins” and it received the “Best for Luxury” award from the Cruise Critic Editor’s Pick Awards. Regent also was honored with “World’s Best Service” from Travel + Leisure’s World’s Best Awards in 2013.

Our Industry

We believe that the cruise industry demonstrates the following positive fundamentals:

Strong Growth with Low Penetration and Significant Upside

Cruising represents a small but fast growing sector of the overall global vacation market. Cruising is a vacation alternative with broad appeal, as it offers a wide range of products, destinations and experiences from offerings in the Contemporary (large ships / low ticket prices) to Luxury (small ships / high ticket prices) segments to suit the various preferences of vacationing consumers of all ages, wealth levels and nationalities. According to CLIA, only 24% of the U.S. population has taken a cruise. However, CLIA estimates that during 2012, approximately 17 million global passengers went on a cruise, an increase of 5.4% over the preceding year.

 

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According to CLIA, the number of cruise passengers originating from North America has increased each year since 1995 as cruising has evolved from a niche vacation experience to a leisure holiday with broad appeal across all demographic and psychographic groups. Despite this consistent growth, the cruise industry still has low penetration levels compared to similar land-based vacations. Based on industry research, in 2012, 57.2 million people visited Orlando, Florida and 39.7 million people visited Las Vegas, Nevada. We believe this data highlights the continued growth potential for ocean going cruising. The future growth of the Contemporary and Premium segments, along with the normal aspirational life cycle of consumer preferences, is especially important for our company, because the vast majority of our first time guests are not first time cruisers. Accordingly, increases in the number of guests in the Contemporary and Premium segments will increase the pool of potential first time guests for our two brands.

 

LOGO

Attractive Demographics of Target Market

Long-term demographics are favorable for the cruise industry, in particular for the Upscale segment. Historically, people 55 years of age and older have had the highest disposable income levels and the most leisure time, making them prime candidates for Upscale cruising given the longer itineraries and higher per diems of cruises in that category. According to U.S. Census Bureau data, in 2010, the 55 years and older age group was comprised of 77 million individuals, representing approximately 25% of the U.S. population. This group is expected to increase to 87 million by 2015 and 106 million by 2025. These individuals control $12.7 trillion of wealth and represent approximately 31% of the global high net worth individual population. The demographics in Europe are expected to follow a similar growth trend.

International Growth in Emerging Markets

Significant growth opportunities exist for sourcing guests from Europe and other international markets, as the percentage of guests from outside North America who have taken cruises is far lower than the percentage of North Americans. Emerging markets in Asia and the Pacific Rim also hold strong potential for us to source future cruise passengers. As recently as seven years ago, no international cruise lines serviced these regions. However, a number of cruise lines in the Contemporary and Premium segments, which typically includes cruises of seven days or less, have a more casual ambiance, and offer the lowest prices, have recently deployed ships in Asia for seasonal or year-round operations. The increase in personal wealth in these and other emerging markets is particularly beneficial to the cruise industry, as historically, when the living standards improve in a country, the population first focuses on buying physical assets (e.g., houses, cars, etc.) and then focuses on buying aspirational experiences, such as travel. Overall, the growth in cruising outside of North America has been increasing at a considerably faster pace than within North America.

 

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Multiple Segments

The cruise industry’s brands have been historically segmented into the Contemporary, Premium, Upper Premium and Luxury categories. Collectively, we refer to the Upper Premium and Luxury categories as the Upscale segment. The Premium segment typically includes cruises that range from seven to fourteen days. Premium cruises emphasize higher quality offerings, more personal comfort and greater worldwide itineraries, with higher average pricing than the Contemporary cruises. Upper Premium is a niche market segment created by Oceania in 2003 and defined by an experience that straddles the Premium and Luxury segments but with smaller ships than those operated by the Premium lines, higher space and higher crew-to-guest ratios, more refined culinary programs, higher service standards and a greater destination-oriented focus than the Premium segment. The Luxury segment is characterized by the smallest vessel size, unique itineraries, the largest stateroom accommodations, gourmet culinary programs, highly personalized service and a more inclusive offering. These exclusive attributes, combined with limited supply growth and a growing worldwide target population, provide Upscale operators with significant pricing leverage as compared to the other segments of the cruise industry.

High Barriers to Entry

The cruise industry is characterized by high barriers to entry, including the existence of well-known and established consumer brands, the cost, time and personal relationships required to develop strong travel agent network partnerships necessary for success, the large capital expenditures required to build new and sophisticated ships, the limited number of ship builders with experience in constructing passenger ships and the long lead time necessary to construct new ships. Based on recently announced newbuilds and depending on the intended industry segment, the cost to build a new cruise ship can range from $340 million to $1.3 billion, or $195,000 to $741,000 per berth. The ultimate cost depends on the ship’s size and product offering, with the Upper Premium and Luxury segments having the highest cost per berth in the industry, ranging from $443,000 to $741,000 per berth. The Luxury segment in particular has demonstrated high barriers to entry with our competitors having participated in the market for an average of approximately 24 years. We believe that the newbuild pipeline in the Upscale segment is relatively favorable compared to the broader industry, with few deliveries scheduled through 2016 other than Regent’s newbuild.

Our Competitive Strengths

We believe that the following business model attributes enable us to successfully execute our strategy:

Lifestyle Brand

Prestige’s two brands, Regent and Oceania, both have long and venerable histories. We believe the two brands are well known within the affluent 55 and older age group in North America as offering a sophisticated experience. We partner with several fine luxury brands, including Lalique, Hermes, Bulgari, Canyon Ranch and Bon Appetit, to further add caché to the lifestyle experiences we deliver onboard our cruises. Consistent with our upscale image, we believe our two brands will continue to enjoy resiliency in economic downturns and achieve above-market Net Yields during normal economic conditions.

High Quality Fleet

Our two-brand fleet, which currently consists of eight ships, is designed to provide guests with the highest quality cruise experience. Our accommodations are large and luxurious with over 87% of our staterooms and suites featuring private balconies. Capacity per ship is limited and ranges from 490 to 1,250 guests, providing each guest a unique and highly personalized experience, with space ratios of 44.26 to 68.68, which are among the highest in the industry. Our cruises are staffed at a crew-to-guest ratio of approximately 1 to 1.7, further promoting a high level of personalized service. Seven Seas Mariner and Seven Seas Voyager feature all suite, all balcony accommodations, and Marina and Riviera, 95% of whose accommodations feature balconies, are the

 

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only ships at sea to feature suites designed and furnished by Ralph Lauren Home and noted interior designer Dakota Jackson. We expect delivery of our newbuild Seven Seas Explorer in the summer of 2016, which we believe will be the most luxurious ocean-going ship ever built.

Differentiated Product Offering

We believe that our destination-focused worldwide itineraries of varying lengths, augmented by exciting shore excursions and other land based programs and a diverse set of onboard enrichment programs, further differentiate our two brands from our competitors. We also focus on deploying our ships to high demand and in-season locations worldwide. We cruise to more remote ports around the world to meet passengers’ demands to experience new, exotic and out-of-the-way destinations. We feature itineraries that call on “must see” destinations, many of which include overnight stays in port, allowing guests to enjoy greater local immersion. A competitive advantage of our smaller ship size is that we can access smaller ports that are off-limits to larger ships. Our onboard dining is a central highlight of our cruise experience, with multiple open seating dining venues where guests may dine when, where and with whom they wish. We continue to receive awards for our onboard dining and, in 2013 received “Best Dining” from both Condé Nast Traveler Reader’s Choice Awards and Cruise Critic Cruisers Choice Awards. We also feature the only hands-on instructional culinary centers at sea onboard Oceania’s Marina and Riviera. Our state-of-the-art spa facilities on each vessel feature the highly renowned Canyon Ranch SpaClub®. We believe that these high quality product offerings positions us well compared to other cruise operators and provides us with the opportunity to continue growing our capacity and Net Yields.

Loyal and Repeat Customer Base

Our target customer is 55 years of age or older, has a net worth of over $1.0 million, is well educated and is a seasoned world traveler. This target audience has reached an age and wealth status where the convenience, comfort and luxury amenities of an upscale cruise product are extremely appealing.

Our award-winning service, innovative itineraries, gourmet cuisine and luxurious onboard amenities have resulted in nearly perfect passenger satisfaction ratings. In 2013, approximately 98% of guests that responded to our survey reported that their cruise experience met or exceeded their expectations, and that they will “definitely” or “probably” return. Furthermore, for the nine months ended September 30, 2013, repeat guests accounted for approximately 41% of total guests on a Passenger Days Sold basis. Our ability to consistently deliver a high quality, high value product, resulting in high guest satisfaction, continues to be a competitive advantage.

Experienced Management Team and Shareholder

We are led by a management team with extensive cruise and leisure industry experience. The team includes Frank J. Del Rio as Chairman and CEO with 20 years of industry experience, Robert J. Binder as Vice Chairman and President with 23 years of industry experience, Kunal S. Kamlani as President of PCH, Regent and Oceania with 19 years of experience in the financial services and leisure industries, T. Robin Lindsay as Executive Vice President of Vessel Operations with 34 years of industry experience and Jason M. Montague as Executive Vice President and Chief Financial Officer with 13 years of industry experience.

Our principal shareholder and sponsor Apollo has experience investing in the cruise, leisure and travel related industries. Apollo is a leading global alternative asset manager. In addition to holding a controlling interest in us, Apollo is a significant shareholder and controls the board of Norwegian Cruise Line Holdings Ltd., one of the leading global cruise line operators. Apollo also has current investments in other travel and leisure companies, including Caesars Entertainment and Great Wolf Resorts, and has in the past invested in Vail Resorts, Wyndham International and other hotel properties.

 

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Cash Flow Generation

Our business model allows us to generate a significant amount of free cash flow with high revenue visibility. We encourage our target customers to book their cruise vacations as early as possible in the sales cycle and to prepay for certain optional services. We begin to sell our inventory up to 20 months prior to sail date, with deposits generally due within seven days of booking and final payment collected 90 to 150 days before sailing. This payment model results in passenger deposits being a source of cash, provides strong visibility into our future revenues and corresponding cash flows and gives us ample time to adjust selling price and sales and marketing initiatives to minimize acquisition costs and maximize Net Yields. Moreover, we benefit from favorable U.S. tax status, as our income is primarily derived from the operation of cruise ships in international waters and is therefore generally exempt from U.S. federal income taxes. As a result of these factors, we generate significant free cash flow, a portion of which can be used for debt reduction and capacity expansion.

Superior Value Proposition

A substantial number of cruise customers purchase large balcony staterooms measuring over 200 square feet in size on cruise lines in the Contemporary and Premium segments. We believe that after factoring in additional onboard spending for items that would be included in our ticket price, these passengers are currently paying per diems similar to what we charge, but in our opinion, receive a lower quality product, with inferior cuisine, standard itinerary offerings, diminished personalized service due to significantly lower crew-to-guest ratios and markedly lower space ratios. According to our research, there are approximately 22,297 large balcony staterooms measuring over 200 square feet in the North American cruise industry. Our market share of this type of stateroom was only 10% in 2012. We believe our brands are well positioned for future capacity growth given each brand’s market positioning and strong value proposition.

Our Business Strategy

The following are the key components of our business strategy:

Disciplined Growth

Our goal is to grow with discipline, and we are constantly evaluating various strategies for further increasing our passenger capacity and, accordingly, our total revenues and net income with a specific focus on increasing our return on invested capital. These strategies include further penetration into emerging international markets and potential acquisitions of niche cruise operators, similar to the successful acquisition of Regent in 2008. Other possibilities include additional newbuild programs, similar to the additions of Marina and Riviera to the Oceania fleet in 2011 and 2012, respectively, as well as the scheduled delivery of the Seven Seas Explorer to the Regent fleet in the summer of 2016. Each ship that has joined our fleet has had a significant positive impact on our financial results with limited incremental overhead.

High Visibility and Differentiated Revenue Management Strategy

We have implemented a differentiated price enhancing revenue management strategy that encourages our target market to book early to obtain the most attractive value offering, with bookings made up to 20 months in advance of sail date. This timeline provides us with greater visibility into our future revenues and gives us ample time to adjust sales, marketing and pricing initiatives as necessary. Due to the more inclusive nature of our product offerings, a greater percentage of our Net Revenue is comprised of net ticket revenue as compared to Contemporary and Premium segment cruise lines, which must wait until the actual sailing to gain visibility into much of their revenues, as their onboard revenue represents a greater portion of their total revenue. On average, our guests book seven to nine months in advance of sail date. Based on our research, we believe the industry average booking curve is five months or less.

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occur. We believe the travel agent community favors our pricing strategy as it allows them to provide value to their customers in a completely transparent manner, resulting in early bookings. This early booking cycle allows us to make more informed decisions about pricing, inventory management and marketing efforts.

Focus on Occupancy and Maximize Net Yields

We concentrate on improving our early booking occupancy rates to drive higher Net Yields. We execute targeted and high frequency marketing campaigns that communicate a distinct message of our differentiated value-packed cruise offerings in both North American and select international markets. To increase the effectiveness of our targeted marketing programs, we recently transformed our Miami call center from an inbound-only reservation center to one that also makes outbound calls to high potential targeted customers. This dual prong strategy allows us to maximize the revenue potential from each customer contact (“leads”) generated by our various marketing campaigns. We expect that this strategic change and other initiatives in our sales organization and distribution channels will help drive sustainable growth in the number of guests carried and in Net Yields achieved.

Due to our brands’ clear positioning and our target market focus on an older and more affluent clientele, we do not carry many families with children or groups of individuals that travel three or four to a stateroom. Conversely, we have a small but increased number of elderly guests who prefer to travel as “singles,” or one to a stateroom. Because 100% occupancy is based on two persons in a stateroom, we tend to report occupancies that are somewhat lower than those of the Premium and Contemporary cruise lines, while still sailing close to full in terms of cabin occupancy.

Improve Operating Efficiency and Lower Costs

We focus on driving continued financial performance through a variety of business improvement initiatives. These initiatives focus on reducing costs while also improving the overall product quality we deliver to our customers. For example, when we acquired Regent in 2008, we were able to achieve $18 million in annual cost savings through rationalizing overhead and institutionalizing best practices across the two brands.

Our business improvement initiatives focus on various cost containment programs such as contract negotiations, global purchasing and logistics, fuel consumption efficiencies and optimal itinerary deployments. We hedge our fuel purchases in order to provide greater visibility and certainty of our fuel expenses. As of September 30, 2013, we had hedged approximately 75% of estimated fuel consumption for the remainder of 2013, and approximately 40% and 10% of our estimated fuel consumption for 2014 and 2015, respectively. In addition, we expect benefits derived from economies of scale from additional newbuilds will further drive operating efficiencies over the medium and long term.

Expand and Strengthen Our Product Distribution Channels

We have three primary sales channels that we constantly strive to optimize: “Retail/Travel Agent,” “International” and “Meetings, Incentives and Charters.” As part of this optimization, we continue to invest in our brands by enhancing our technology platforms across these channels, including through websites and other global distribution systems, as well as our inbound and outbound reservations department that travel agents and customers use to book cruise vacations. We strive to continually deliver efficient and timely marketing information across multiple technological and legacy type platforms.

 

   

Retail/Travel Agent. We make substantial investments to facilitate our travel agent partners’ success with improvements in booking technologies, transparent pricing strategies, effective marketing tools, improved communication and cooperative marketing initiatives. We have also implemented automated communication, training and booking tools specifically designed to improve our efficiency with the

 

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travel agency community and our guests, including aggressive call center quality monitoring. We have sales force teams dedicated to each of our two brands who work closely with our travel agency partners on maximizing their marketing and sales effectiveness through product training, education and the sharing of “best-practices.”

 

    International. We have an international sales office in Southampton, United Kingdom that services Europe and various general sales agents covering Latin America, Australia and Asia. Since the expansion of our fleet in 2011, we have made a concerted effort to diversify the sourcing of our passengers worldwide. In 2010, 20.2% of our passengers were sourced from outside the United States. In 2012, we grew that amount to 25.3%. For the twelve months ended September 30, 2013, 26.6% of our passengers were sourced from outside the United States. We believe there remains significant opportunity to grow passenger sourcing in many major markets such as Europe and Australia as well as in emerging markets in the Asia Pacific region.

 

    Meetings, Incentives and Charters. This channel focuses on full ship charters as well as partial ship groups for corporate meeting and incentive travel. These sales often have very long lead times and can fill a significant portion of a ship’s capacity, or even an entire sailing, in one transaction. In addition, full ship charters and/or large groups strengthens base-loading, which allows us to fill a particular sailing earlier than usual which in turn allows us to reduce sales and marketing spend on both the sailing with the large group as well as surrounding sailings.

Our Fleet

Collectively, our two brands operate eight ships with 6,442 berths in aggregate. We also have one newbuild, Seven Seas Explorer, with 750 berths on order for delivery in the summer of 2016. Our current fleet has a maximum of 2,351,330 capacity days that will grow 11.6% to 2,625,080 after delivery of the Seven Seas Explorer in the summer of 2016.

Oceania operates five ships. The R-Class ships, Regatta, Insignia and Nautica are identical highly-rated 5-star ships featuring country club style accommodations and amenities. Capacity on each ship is limited to 684 guests and our cruises are staffed at a crew-to-guest ratio of approximately 1 to 1.7. These ships provide 68% of suites and staterooms with private balconies. Recently, Oceania successfully executed a fleet expansion program with the additions of two O-Class ships, Marina and Riviera, in 2011 and 2012, respectively. The O-Class vessels are staffed at a crew-to-guest ratio of approximately 1 to 1.6 and 95% of the staterooms are suites and have private balconies. Oceania’s fleet has grown 122% since 2010 to 4,552 berths in aggregate and operating a maximum annual capacity of 1,661,480 capacity days. Oceania is the world’s largest Upper Premium cruise line.

Regent currently operates three six-star luxury cruise ships, Seven Seas Navigator, Seven Seas Mariner and Seven Seas Voyager, with 1,890 berths in aggregate, featuring world-class accommodations and amenities. Regent operates at a maximum capacity of 689,850 capacity days. Capacity on each ship is limited and ranges from 490 to 700 guests and cruises are staffed at a crew-to-guest ratio of approximately 1 to 1.6. All ships offer all-suite accommodations with 90-100% of the suites featuring private balconies. Delivery of the 750 guest newbuild, Seven Seas Explorer, is expected in the summer of 2016. The all-suite, all-balcony Seven Seas Explorer will feature sophisticated designer suites ranging from 300 square feet to 3,500 square feet with an industry leading space ratio of 89.3 gross tons per guest and a crew-to-guest ratio of 1 to 1.4. The ship will include six open-seating gourmet restaurants, Regent’s signature nine-deck open atrium, a two-story theater, three boutiques and an expansive Canyon Ranch SpaClub®. Operationally, it will be a green ship, employing the most advanced environmental systems and state-of-the-art technology. Upon delivery of the Seven Seas Explorer, Regent will be the world’s largest luxury cruise line.

 

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The following table describes the features of our ships:

 

     Marina,
Riviera
  Regatta,
Insignia,
Nautica
  Seven
Seas
Explorer
  Seven
Seas
Voyager
  Seven
Seas
Mariner
  Seven
Seas
Navigator

Berths

   1,250   684   750   700   700   490

Balconies

   95%   68%   100%   100%   100%   90%

Gross tonnage

   66,084   30,277   67,000   42,363   48,075   28,803

Space ratio (1)

   52.86   44.26   89.33   60.52   68.68   58.78

Accommodations (sq ft)

   174-2,000   160-982   300-3,500   350-1,403   301-2,002   301-1,173

Crew-to-guest ratio

   1:1.6   1:1.7   1:1.4   1:1.6   1:1.6   1:1.4

Country of registry

   Marshall
Islands
  Marshall
Islands
  Marshall
Islands
  Bahamas   Bahamas   Bahamas

Restaurants

   6   4   6   4   4   3

Year built

   2011, 2012   1998,
1998, 2000
  (2)   2003   2001   1999

 

(1) Space ratio refers to a unit of enclosed space per passenger on the ship measured in cubic feet, and represents gross tonnage divided by the number of double occupancy berths.
(2) The Seven Seas Explorer is currently under construction, with delivery expected in the summer of 2016.

Our Destinations

We deploy our fleet to worldwide destinations, allowing our brands to meet our customers’ demands for a global and differentiated travel experience. Our cruises feature worldwide itineraries that visit close to 350 ports each year, including destinations such as Scandinavia, Russia, Alaska, the Caribbean, the Panama Canal, South America, the Mediterranean, the Greek Isles, Africa, India, Asia, Canada and New England, Tahiti and the South Pacific, Australia and New Zealand.

The following map displays a subset of our global destinations.

 

LOGO

These destination-focused itineraries, complemented by a comprehensive shore excursion program (which is included in the all-inclusive fare for cruises on the Regent ships), differentiate our brands from many of our competitors. We call on “must-see” and exotic destinations, many of which include overnight stays in port, allowing guests to have more in-depth experiences than would otherwise be possible in only a single day port call.

 

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Oceania operates cruises primarily 10, 12 and 14 days in length, with a number of itineraries that last between 20 and 180 days, primarily offered during the winter season in North America. These varying cruise lengths are ideally suited to the aging baby-boomer generation’s time availability and economic parameters, creating strong appeal in this fast-growing market segment. Regent also offers several longer itineraries of up to 143 days, which is a staple of the Luxury segment. At the same time, Regent has expanded its addressable market and captured guest spending for a greater portion of their cruising life cycle by selling segments of these longer itineraries as shorter cruises (i.e., which last seven to 14 day) designed for more time-constrained customers. The deployment flexibility created by the use of longer itineraries translates off-peak seasons into more profitable portions of longer cruises.

Our multi-faceted operating strategy is aimed at delivering the most unique and differentiated upscale experiences for our travelers onboard and onshore, which are highly tailored to the individual while optimizing operational efficiencies. Given the relatively small size of our ships, we are able to access a greater number and variety of ports around the globe. We deploy the fleet to seasonal destinations, allowing us to service our guests’ demands for a global and differentiated travel experience while limiting our reliance on and exposure to one specific region.

Onboard Services and Programs

Oceania distinguishes itself by an onboard product which heavily emphasizes the culinary experience and has broad appeal to both epicureans and those who appreciate fine dining. Oceania has engaged Master Chef Jacques Pepin as its Executive Culinary Director. Pepin has cooked for several French heads of state and is known worldwide as one of the finest chefs of the modern era. Oceania also focuses on both comfort and service, with staff trained to deliver personalized and attentive service and a commitment to superior onboard accommodations and design that creates a country club casual ambiance for which the line is well known.

Regent distinguishes itself by its comprehensive all-inclusive onboard and onshore offerings and the onboard service designed to anticipate our guests’ needs. The core of the Regent guest experience centers on the ability to offer various options throughout our guests’ cruise and to have our guests’ needs met with best-in-class service in a relaxed atmosphere. We continually strive for innovative ways to enhance the onboard experience through new offerings. For example, we recently added top-shelf open bars, unlimited shore excursions and pre-cruise hotel packages as part of our all-inclusive product offering.

Onboard and Shore Excursion Program

We strive to make our guests feel more like seasoned travelers instead of tourists by innovating the traditionally uniform and regimented nature of cruising to make it fully customized and experiential. This aim is reflected in our onboard and onshore activity offerings, which include a wide variety of onboard personal enrichment programs featuring expert guest lecturers. These lecturers often have first-hand knowledge of the locales on an itinerary and come from diverse backgrounds including the United States Foreign Service, leading universities, the arts and journalism. All of these programs enrich the passenger experience and round out our portfolio of onboard offerings to address the varied interests and discriminating tastes of our guests. In the diverse world of upscale travel, we believe that we continue to differentiate ourselves and drive customer loyalty by providing such unique experiences.

Food and Dining

An important aspect of the dining experience aboard our ships is the diversity and quality of our selections as well as our open seating dining. Unlike large cruise ships, where dining times and tables are typically assigned in advance, guests on our ships may choose from a variety of onboard restaurants. There are three to four distinctive restaurants on Regent, four on the Oceania R-Class ships and six on the Oceania O-Class ships. Each restaurant’s open seating policy allows our guests the freedom to dine whenever, wherever and with whomever they wish.

 

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We also offer complimentary 24-hour room service, allowing guests the option of enjoying a private dinner in suite or on their private balcony. On Regent, top-shelf open bar is included in the all-inclusive fare and can be enjoyed at the onboard restaurants, in any of the bars or as part of the 24-hour room service.

Other Onboard Amenities

Our ships feature a state-of-the-art spa, wellness and fitness facility and full-service beauty salon operated by Canyon Ranch. The Canyon Ranch SpaClub® offers all the most popular spa treatments and physical facilities, such as body and skin-care treatment rooms, a well-equipped gym and weight room with cardio and weight training equipment, a juice bar, men’s and women’s locker rooms, thalassotherapy and sauna and steam rooms. We also serve a full range of Canyon Ranch’s Spa Cuisine for breakfast, lunch and dinner at the main dining rooms, casual dining venues, poolside and on the 24-hour room service menu for in-suite dining. On select voyages, Canyon Ranch healthy living experts offer onboard presentations and workshops addressing lifestyle change, healthy living and stress management.

Evening entertainment onboard our ships includes a nightclub with live music, a show lounge featuring a variety of production shows from Broadway revues to classical concerts and a casino. Each ship also includes a well-stocked library, an outdoor pool deck, an internet café, paddle tennis and a jogging track. Shopping is available at several onboard duty-free boutiques.

Pre- and Post-Cruise Activity / Guest Services

We are equipped to handle virtually all aspects of guest reservations and transportation requirements. A significant number of our guests elect to take advantage of our free air program, which includes a comprehensive package of air, meet and greet services and ground transfer to and from the ship. We also offer guests the opportunity to purchase pre- and post-cruise hotel accommodations and excursion packages.

Loyalty Program

We maintain loyalty programs designed to cultivate long-term customer relationships with our customers. The Oceania loyalty program, Oceania Club, and Regent loyalty program, Seven Seas Society®, collectively cover more than 300,000 households. The programs have evolved to offer a range of guest rewards tailored to customer preferences, including select cruise fare and onboard services discounts, onboard recognition, and additional amenities awarded in proportion to a member’s number of nights onboard.

The programs offer significant value to us, both directly and indirectly. Program members act as ambassadors for our brands, conveying the benefits of the platform to potential customers. In addition, repeat cruisers tend to reserve future cruises farther in advance than first-time cruisers, giving us earlier insight into future booking revenue. The program bases are extremely active, with members re-qualifying themselves frequently. Acquisition costs for our past guests are much lower than new guests, in part because after experiencing our world-class product, such individuals are simply more likely to return as compared to similar individuals without prior cruise experience on our brands. Customer loyalty is an important driver of our business; for the nine month period ended September 30, 2013 and the year ended December 31, 2012, approximately 41% and 42%, respectively, Passenger Days Sold were occupied by repeat guests.

Sales and Marketing

We have a U.S.-based sales team of 70 people as of September 30, 2013, including three representatives dedicated to Charter & Incentive (“C&I”) and three international account managers that collectively oversee important strategic relationships and develop marketing plans and budgets for marketing campaigns across key accounts. In addition to the U.S.-based sales team, we have a UK-based sales team consisting of 16 people as of September 30, 2013. This combined team sells our cruises to more than 4,250 producing travel agents, C&I clients and tour operators. We also utilize onboard sales consultants to directly book current passengers for their next itinerary. Additional international revenue comes from general sales agents located throughout the world, with the majority of sales coming from Australia, Germany, Spain and Mexico.

 

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We are also focused on increasing our sales and marketing efforts to complement our existing travel agency relationships and give us the flexibility to adapt to changing market conditions. We have an outbound call center located at our corporate headquarters in Miami, Florida, with 34 sales agents focused on optimizing leads created by other marketing programs and following up directly with potential future guests. This strategic business unit offers attractive occupancy growth potential as a sales generator.

Our sales efforts are supported by a robust and targeted marketing platform. We place a strong focus on product innovation, not only for stimulating repeat business, but also for driving new demand for our products, and our marketing effort supports that focus. Innovations in online capabilities provide more efficient methods for communicating with past and prospective guests, including the integration of print and online marketing efforts, which increase efficiencies and product exposure.

Ship Operations

Crew and Staff

Best-in-class guest service levels are paramount in the Upscale market, where travelers have discriminating tastes and high expectations for service quality. We have dedicated increasing attention and resources to ensure that our service offerings meet the demands of the most discriminating guests. Among other initiatives, we have implemented rigorous onboard training programs and HR and career development resources. In addition, to ensure that guests receive highly personalized service and attention to detail, we staff our ships to offer crew to guest ratios that range from 1 to 1.4 to 1 to 1.7, which is among the highest in the industry. We believe that our dedication to anticipating and meeting our guests’ every need differentiates our operations and fosters close relationships between our guests and crew, helping to build customer loyalty.

Logistics and Technology

Sophisticated and efficient maintenance and operations systems support the technical superiority and modern look of our fleet. We created a department to manage deck and engine operations in-house for both brands, which has resulted in higher quality maintenance and better cost control. Additionally, we have purchased source code from our reservation system developer to allow us more functionality and the ability to enhance the code to meet our increasing business needs.

Ship Maintenance

Each of our ships is taken out of service as necessary for a period of approximately ten days for scheduled maintenance work, repairs and improvements that are performed in drydock. We have regulatory requirements that require our ships to drydock periodically. Drydocks are typically performed during off-peak demand periods to minimize the effect on revenues.

Seasonality

The seasonality of the cruise industry generally results in the greatest demand for cruises during the summer months of the third quarter. This predictable seasonality in demand has resulted in quarterly fluctuations in our revenue and results of operations, which we expect will continue in the future.

Employees

As of September 30, 2013, we had a total of 1,615 officers, crew members and other employees, comprised of 996 officers and crew members onboard our fleet and 619 shoreside employees.

Insurance

We maintain marine insurance on the hull and machinery of our ships, which are maintained in amounts related to the estimated market value of each ship. The coverage for each of the hull and machinery policies is maintained with syndicates of insurance underwriters from the European and U.S. insurance markets.

 

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In addition to the marine insurance coverage in respect of the hull and machinery of our ships discussed above, we seek to maintain comprehensive insurance coverage at commercially reasonable rates and believe that our current coverage is adequate to protect against most of the accident-related risks involved in the conduct of our business. We carry:

 

    protection and indemnity insurance (that is, coverage for passenger, crew and third-party liabilities) on each ship, including insurance against risk of pollution liabilities;

 

    war risk insurance, including terrorist risk insurance, on each ship in an amount equal to the total insured hull value, subject to certain coverage limits, deductibles and exclusions. The terms of our marine war risk policies include provisions where underwriters can give seven days notice to the insured that the policies will be canceled, which is typical for policies in the marine industry;

 

    insurance for cash onboard;

 

    insurance for our shoreside property and general liability risks; and

 

    cyber insurance (privacy liability and network security insurance), which provides coverage for theft of personally identifiable non-public information in computer data and hard copy form, liability arising from failure to comply with state breach-notice laws and failure to comply with our privacy policies. Additionally, it provides third-party coverage in response to unauthorized access, theft of or destruction of data, denial of service attacks and virus transmission involving our computer systems resulting from computer security breaches.

All of our insurance coverage, including the coverage described above, is subject to market-standard limitations, exclusions and deductible levels. We will endeavor to continue to obtain insurance coverage in amounts and at premiums that are commercially acceptable to us.

The Athens Convention Relating to the Carriage of Passengers and Their Luggage by Sea (1974) and the Protocol to the Athens Convention Relating to the Carriage of Passengers and Their Luggage by Sea (1976) are generally applicable to passenger ships. The United States has not ratified the Athens Convention. However, with limited exceptions, the 1976 Protocol to the Athens Convention may be contractually enforced with respect to cruises that do not call at a U.S. port. The International Maritime Organization Diplomatic Conference agreed to a new protocol to the Athens Convention on November 1, 2002 (the “2002 Protocol”). The 2002 Protocol, which will be entered into force on April 23, 2014, establishes for the first time a level of compulsory insurance which must be maintained by passenger ship operators with a right of direct action against the insurer. We believe our ship’s entries with their respective protection and indemnity associations will provide the compulsory insurance; however, no assurance can be given that affordable and secure insurance markets will be available to provide the level and type of coverage required under the 2002 Protocol.

Properties

Information about our cruise ships, including their size and primary areas of operation, estimated expenditures and financing may be found under “—Our Fleet” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Our principal executive office is located in Miami, Florida. We are party to three real property leases: in Miami, Florida, where we lease 77,943 square feet for our executive office, in Omaha, Nebraska, where we lease approximately 17,641 square feet for our call center, and in Southampton, England, where we lease approximately 3,082 square feet for our international office. These leases expire at various times through 2020, subject to renewal options. We believe that our facilities are in good condition and are adequate for our current needs, and that we are capable of obtaining additional facilities as necessary.

 

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Trademarks

Under our ships operating under the Oceania brand, we own a number of registered trademarks in the United States and in foreign jurisdictions relating to, among other things, the names “Oceania Cruises,” and “Your World. Your Way,” “Regatta,” “Insignia” and the Oceania logo.

We own various U.S. and foreign trademark registrations, including registrations covering “Seven Seas Cruises,” “Seven Seas Navigator,” “Seven Seas Mariner,” “Seven Seas Voyager” and “Luxury Goes Exploring.” We also claim common law rights in trademarks and trade names used in conjunction with our ships, incentive programs, customer loyalty program, and specialty services rendered on board our ships.

The Regent ships have been operating under the Regent brand since 2006. In connection with the Regent Seven Seas Transaction, we entered into a trademark license agreement with Regent Hospitality Worldwide, Inc. granting us the right to use the “Regent” brand family of marks, which we amended in February 2011. The amended trademark license agreement allows Regent to use the Regent trade name, in conjunction with cruises, in perpetuity, subject to the terms and conditions stated in the agreement. In consideration for the rights and privilege to use the license under this agreement, Regent paid the licensor approximately $9.1 million.

Legal Proceedings

We are routinely involved in claims typical within the cruise industry. The majority of these claims are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount. We believe the outcome of such claims in the aggregate, net of expected insurance recoveries will not have a material adverse impact on our financial condition or results of operations.

Competition

We face intense competition from other cruise companies in North America where the cruise market is mature and developed. The North American cruise industry is highly concentrated among three companies. As of September 30, 2013, Carnival Corporation, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. together accounted for 82% of North American cruise passenger berth capacity. We also face competition for many itineraries from other cruise operators as well as competition from non-cruise vacation alternatives.

Governmental Regulations

Maritime—General

The international, national, state and local laws, regulations, treaties and other legal requirements applicable to our operations change regularly, depending on the itineraries of our ships and the ports and countries visited. Our ships, which are registered with and regulated by the Bahamas or the Marshall Islands, are required to comply with the international conventions that govern health, environmental, safety and security matters in relation to our guests, crew and ships. Regulatory authorities in the Bahamas and the Marshall Islands conduct periodic inspections or appoint ship classification societies to conduct periodic inspections on their behalf to verify compliance with these regulations. In addition, requirements of the European Union (“EU”), the United States and the other international ports that our ships visit apply to some aspects of our ship operations.

Our ships are also subject to periodic class surveys by ship classification societies, including drydock inspections, to verify that they have been maintained in accordance with the rules of the classification societies and that recommended maintenance and required repairs have been satisfactorily completed. Class certification is required for our cruise ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. Drydock frequency is a statutory requirement controlled under the International Convention for Safety of Life at Sea (“SOLAS”). Our ships qualify to drydock once or twice every five years. Drydock, which requires that the ship be temporarily taken out-of-service, typically lasts for an average of ten days. Significant drydock work includes repairs, maintenance, ship improvement projects and hull inspection and related activities, such as pressure cleaning and bottom painting, and maintenance of steering gear equipment, stabilizers, thruster equipment and tanks.

 

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As noted above, our ships are subject to inspection by the port regulatory authorities in the various countries that they visit. Such inspections include verification of compliance with the maritime safety, security, environmental, customs, immigration, health and labor regulations applicable to each port as well as with international requirements. For example, in U.S. ports, these authorities include the U.S. Coast Guard, U.S. Customs and Border Protection and U.S Public Health, and in Canada, such authorities include the Canadian Coast Guard and Public Health Agency of Canada. In EU ports, the Paris Memorandum of Understanding authorizes the enforcement of internationally accepted conventions through Port State Control inspections by the relevant authorities. For example, in Italian ports, these authorities include the Italian Coast Guard, Maritime Health and the State Police. In U.K. ports, these authorities include the Maritime and Coastguard Agency, the Department for Transport’s Transport Security team, and the Port Health Authority. Similar Memoranda of Understanding govern Port State Control inspections of our ships in most other areas of the world where we operate.

Maritime—Safety

The International Maritime Organization (“IMO”), a specialized agency of the United Nations, has adopted safety standards as part of SOLAS, which apply to all of our ships. SOLAS establishes requirements for vessel design, structural features, construction methods and materials, refurbishment standards, life-saving equipment, fire protection and detection, safe management and operation and security in order to help ensure the safety and security of our guests and crew. All of our crew undergo regular safety training exercises that meet all international maritime regulations.

SOLAS requires implementation of the International Safety Management Code (“ISM Code”), which provides an international standard for the safe management and operation of ships and for pollution prevention. The ISM Code is mandatory for passenger vessel operators. Our shoreside operations, shipboard operations and ships are regularly audited by national authorities and maintain the certificates of compliance required by the ISM Code.

Maritime—Security

Our ships are subject to various security requirements, including the International Ship and Port Facility Security Code (“ISPS Code,” a part of SOLAS); the U.S. Maritime Transportation Security Act of 2002, which addresses port and waterway security, and the U.S. Cruise Vessel Security and Safety Act, which will phase in through 2013 and applies to all of our ships that embark or disembark passengers in the United States. These maritime security regulations require that, among other things, (i) we implement specific security measures, (ii) conduct vessel security assessments, (iii) identify and deter security threats and (iv) develop security plans that may include guest, vehicle and baggage screening procedures, security patrols, establishment of restricted areas, personnel identification procedures, access control measures and installation of surveillance equipment. Our ships are regularly audited and maintain the certificates of compliance required by the ISPS Code.

Maritime—Environmental

We are subject to numerous international, national, state and local environmental laws, regulations and treaties that govern, among other things, air emissions, waste discharge, water management and disposal and the storage, handling, use and disposal of hazardous substances such as chemicals, solvents and paints. In addition to the existing legal requirements, we are committed to helping to preserve the environment, because a clean, unspoiled environment is a key element that attracts guests to our ships. If we violate or fail to comply with environmental laws, regulations or treaties, we could be fined, or otherwise sanctioned by regulators. However, more importantly preserving the environment for future generations to enjoy is our responsibility as stewards of the ocean. We have made, and will continue to make, capital and other expenditures to comply with environmental laws, regulations and treaties.

 

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Maritime—International

The environmental convention governing ships is the IMO International Convention for the Prevention of Pollution from Ships (“MARPOL”). This convention includes requirements designed to prevent and minimize both accidental and operational pollution by oil, sewage, garbage and air emissions. Many countries have ratified and adopted IMO Conventions that, among other things, impose liability for pollution damage, subject to defenses and to monetary limits. Monetary limits do not apply where the spill is caused by the owner’s actual fault or by the owner’s intentional or reckless conduct. All of our ships must carry an International Oil Pollution Prevention Certificate, an International Sewage Pollution Prevention Certificate, an International Air Pollution Prevention Certificate and a Garbage Management Plan. These certificates and plan are issued by the ship’s state of registry and evidence their compliance with the MARPOL regulations regarding oil, sewage and air pollution prevention. In jurisdictions that have not adopted the IMO Conventions, various national, regional or local laws and regulations have been established to address these issues and/or may have more stringent requirements.

Recently adopted amendments to MARPOL will make the Baltic Sea a “Special Area” where sewage discharges from passenger ships will be restricted. We are not certain as to when these amendments are expected to enter into effect. The underlying requirements may impact our operations unless suitable port waste facilities are available, or new technologies for onboard waste treatment are developed. Accordingly, the cost of complying with these requirements is not determinable at this time, however, we do not expect it to be material.

Maritime—U.S. Federal and State

The U.S. Act to Prevent Pollution from Ships, which implements the MARPOL convention, provides for severe civil and criminal penalties related to ship-generated pollution for incidents in U.S. waters within three nautical miles and in some cases within the 200-mile exclusive economic zone.

The U.S. Oil Pollution Act of 1990 (“OPA 90”) provides for strict liability for water pollution caused by oil pollution or possible oil pollution incidents in the 200-mile exclusive economic zone of the United States, subject to defined monetary limits. OPA 90 requires that in order for us to operate in U.S. waters, we must have Certificates of Financial Responsibility from the U.S. Coast Guard for each of our ships that operate in these waters. We have these certificates that demonstrate our ability to meet the maximum amount of OPA 90 related liability that our ships could be subject to for removal costs and damages, such as from an oil spill or a release of a hazardous substance.

The Clean Water Act of 1972 and other laws and regulations provide the U.S. Environmental Protection Agency (“EPA”) with the authority to regulate commercial vessels’ incidental discharges of ballast water, bilge water, gray water, anti-fouling paints and other substances during normal operations within the U.S. three mile territorial sea and inland waters. The U.S. National Pollutant Discharge Elimination System was designed to minimize pollution within U.S. territorial waters. For our affected ships, all of the requirements are laid out in the Vessel General Permit (“VGP”), which is an EPA requirement. The VGP establishes effluent limits for 26 specific discharges incidental to the normal operation of a vessel. In addition to these discharge and vessel specific requirements, the VGP includes requirements for inspections, monitoring, reporting and record-keeping.

Most U.S. states that border navigable waterways or sea coasts have also enacted environmental regulations that impose strict liability for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law and in some cases have no statutory limits of liability. The state of Alaska enacted legislation that prohibits certain discharges in designated Alaskan waters and requires that certain discharges be monitored to verify compliance with the standards established by the legislation. Both the state and federal environmental regimes in Alaska are more stringent than the federal regime under the Federal Water Pollution Control Act with regard to discharge from vessels. The legislation also provides that repeat violators of the regulations could be prohibited from operating in Alaskan waters.

 

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Maritime—EU

The EU has adopted a substantial and diverse range of environmental measures aimed at improving the quality of the environment. To support the implementation and enforcement of European environmental legislation, the EU has adopted directives on environmental liability and enforcement and a recommendation providing for minimum criteria for environmental inspections. The European Commission’s (“EC”) strategy is to reduce atmospheric emissions from seagoing ships. The EC strategy seeks to implement SOx Emission Control Areas set out in MARPOL as discussed below. In addition, the EC goes beyond the IMO by introducing requirements to use low sulfur (less than 0.1%) marine gas oil in EU ports.

Maritime—Low Sulfur Fuel

MARPOL specifies requirements for Emission Control Areas (“ECAs”) with stricter limitations on sulfur emissions in these areas. Ships operating in the Baltic Sea ECA, the North Sea/English Channel ECA and the North American ECA are required to use fuel with a sulfur content of no more than 1% or use alternative emission reduction methods, provided the alternatives are at least as effective in terms of emissions reductions. Beginning in January 2014, the area which extends approximately 50 miles off the coasts of Puerto Rico and the U.S. Virgin Islands will also become an ECA, but we do not believe this will result in a significant impact on our fuel costs. Other additional ECAs may also be established in the future, such as for areas around Australia, Hong Kong, Japan, the Mediterranean Sea and Mexico. From January 2015 and thereafter, the fuel sulfur content limit in ECAs will be further reduced to 0.1%. Compliance with these requirements will further increase our fuel costs.

The MARPOL global limit on fuel sulfur content outside of ECAs will be reduced to 0.5% from the current 3.5% global limit on and after January 2020. The 0.5% global standard will be subject to an IMO review by 2018 to determine the availability of fuel oil to comply with this standard, taking into account the global fuel oil market supply and demand, an analysis of trends in fuel oil markets and any other relevant issues. If the IMO determines that there is insufficient fuel to comply with the 0.5% standard in January 2020, then this requirement will be delayed to January 2025, at the latest. However, the European Union Parliament and Council have set 2020 as the final date for the 0.5% fuel sulfur limit to enter force, regardless of the 2018 IMO review results. This European Union Sulfur Directive will cover European Union Member State territorial waters that are within 12 nautical miles of their coastline. We believe that compliance with the 0.5% global standard could significantly increase our fuel costs. However, the magnitude of this increase is not reasonably determinable at this time due to the length of time until the global standard becomes effective and the other potential mitigating factors discussed below. The cost impacts from implementing progressively lower sulfur content requirements may be mitigated by the favorable impact of future changes in the supply and demand balance for marine and other fuels, future developments of and investments in sulfur emission abatement and propulsion technologies, including more advanced engines, more effective hull coatings and paints, exhaust gas cleaning systems and propeller design, more efficient shipboard systems, the use of alternative lower cost and lower emission fuels, such as liquefied natural gas (“LNG”) at sea and in port.

Maritime—Labor

In 2006, the International Labor Organization (“ILO”), an agency of the United Nations that develops and oversees international labor standards, adopted a new Consolidated Maritime Labor Convention (“MLC 2006”). MLC 2006 contains a comprehensive set of global standards based on those that are already found in 68 maritime labor Conventions and Recommendations adopted by the ILO since 1920. MLC 2006 includes a broad range of requirements, such as a broader definition of a seafarer, minimum age of seafarers, medical certificates, recruitment practices, training, repatriation, food, recreational facilities, health and welfare, hours of work and rest, accommodations, wages and entitlements. MLC 2006 added requirements not previously in effect, in the areas of occupational safety and health. MLC 2006 became effective in certain countries commencing August 2013. The International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (“STCW”), as amended, establishes minimum standards relating to training, certification and Watchkeeping for our seafarers.

 

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Maritime—Financial Requirements

Our ships that call on U.S. ports are regulated by the Federal Maritime Commission (“FMC”). 46 U.S.C. 44102, which is administered by the FMC, requires all of our ships that call on U.S. ports and embark or disembark guests in U.S. ports to establish financial responsibility for their liability to passengers for nonperformance of transportation, for personal injury and for loss of life. The FMC’s regulations require that a cruise line demonstrate its financial responsibility for nonperformance of transportation through a guarantee, escrow arrangement, surety bond or insurance. In February, 2013, the FMC approved amendments to the performance bond requirements that will increase the required guarantee requirements from $15 million to $30 million per operator over a two-year period, with $22 million required guarantee as of April 2014 and $30 million required guarantee as of April 2015. Once fully effective in April 2015, the guarantee requirements will be subject to additional consumer price index based adjustments. We do not anticipate that compliance with the new rules will have a material effect on our costs.

From time to time, various other regulatory and legislative changes have been or may in the future be proposed that may have an effect on our operations in the U.S. and the cruise industry in general.

Taxation

International Shipping Income

In many of the jurisdictions in which we operate as a non-resident ship operator, the shipping revenue derived therefrom is taxed on a “deemed international shipping income” basis, meaning that the tax is levied based on a statutorily prescribed percentage of “gross shipping income” derived from the relevant jurisdictions. We believe that “gross shipping income” consists of cruise package fares received from passengers. The applicability of U.S. federal income taxes to us is separately discussed below.

Revenue from Shipboard Activities

In most countries in which we operate, tax is payable on income derived within the respective jurisdictions. We believe that the majority of the onboard revenue generated from activities such as beverage and gift shop sales is derived while the ships are navigating in international waters. Consequently, we are of the view that onboard revenue generated from such activities is not taxable. The majority of the countries in which we operate adopt the definition of territorial waters in accordance with Article 3 of the 1982 United Nations Convention on the Law of the Sea whereby 12 nautical miles from the baseline of the respective countries is the limit for taxation purposes unless there are express domestic laws which state otherwise.

U.S. Federal Income Taxation of Regent and Oceania Shipping Income

The following discussion of the application to the Company of U.S. federal income tax laws is based upon current provisions of the Internal Revenue Code (the “Code”), legislative history, U.S. Treasury regulations, administrative rulings and court decisions. The following description is subject to change and any change could affect the continuing accuracy of this discussion (and any such change may also have retroactive effect).

Under Section 883 of the Code, certain foreign corporations, though engaged in the conduct of a trade or business within the United States, are exempt from United States federal income and branch profits taxes on (or in respect of) gross income derived from or incidental to the international operation of ships. U.S. Treasury regulations provide that a foreign corporation will qualify for the Section 883 exemption if, in relevant part: (i) the foreign country in which the foreign corporation is organized grants an “equivalent exemption” from tax for income from the international operation of ships of sufficiently broad scope to corporations organized in the U.S. (an “Equivalent Exemption”) and (ii) the foreign corporation is a “controlled foreign corporation” (a “CFC”) for more than half of the taxable year, 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”). In addition, the U.S. Treasury regulations require a

 

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foreign corporation and certain of its direct and indirect shareholders to satisfy detailed substantiation requirements (“Substantiation Requirements”) in order to establish that the foreign corporation meets the CFC Test.

For purposes of the CFC Test, a qualified U.S. person is defined as an individual who is a U.S. citizen or resident alien, a domestic corporation or one of certain domestic tax-exempt trusts. Stock owned by or for a domestic partnership, taxable domestic trust, estate, mutual insurance company or similar entity is treated for these purposes as owned proportionately by its partners, beneficiaries, grantors or other interest holders.

We believe that substantially all of Regent’s and Oceania’s income derived from the international operation of ships is properly categorized as Shipping Income, and that our income other than Shipping Income is not currently, nor is it expected to become, a material amount. It is possible, however, that a material amount of our income may not actually qualify (or will not qualify) as Shipping Income.

Even if our interpretation of Section 883 is correct, the exemption for Shipping Income is not applicable in any year in which we do not satisfy complex stock ownership tests, as described above. Additionally, any change in our operations could change the amount of our income that is considered Shipping Income under Section 883. Finally, any change in the tax laws governing our operations, including Section 883 of the Code and the regulations thereunder, could increase the amount of our income that is subject to tax. Any of the foregoing risks could significantly increase our exposure to U.S. federal income and branch profits tax.

The U.S.-source portion of our income that is not Shipping Income is generally subject to U.S. federal corporate income tax on a net basis (generally at a 35% rate) and possible state and local taxes, and our effectively connected earnings and profits generally are subject to an additional branch profits tax of 30%.

For U.S. federal income tax purposes, Regent and its non-U.S. subsidiaries are disregarded as entities separate from us and Oceania is treated as a corporation. Both Regent and Oceania rely on our ability as their parent corporation to meet the requirements necessary to qualify for the benefits of Section 883. We are 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. We are 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 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.

Taxation of Regent and Oceania’s International Shipping Income Where Section 883 of the Code is Inapplicable

We believe that, if the Shipping Income of Regent and Oceania were not exempt from U.S. federal income taxation under Section 883 of the Code, as described above, that income, as well as any other income from cruise operations that is not Shipping Income, to the extent derived from U.S. sources, generally would be taxed on a net basis under Section 882 of the Code (after allowance for deductions, assuming that a true and accurate federal income tax return is filed within the permitted time frame) at graduated U.S. federal corporate income tax rates (currently, a maximum of 35%), and possible state and local income taxes. We would also be subject to a 30% (unless a lower treaty rate applies) federal branch profits tax under Section 884 of the Code, generally on the portion of our earnings and profits that was derived from U.S. sources each year to the extent such earnings and profits were not properly viewed as reinvested and maintained in the U.S. business of Regent and Oceania. To the extent that our income derived from the use of our ships, or services related to the use of our ships, is not

 

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exempt under Section 883 of the Code or subject to net basis taxation under Section 882 of the Code, such income would be subject to a 4% gross basis tax under Section 887 of the Code. We believe that the income of Regent and Oceania generally would not be subject to the 4% gross basis tax under Section 887 of the Code.

Income of Regent and Oceania derived from U.S. sources includes 100% of its income, if any, from transportation that begins and ends in the United States, and 50% of its income from transportation that either begins or ends in the United States. Income from transportation that neither begins nor ends in the United States would not be taxable. There are indications in the legislative history of the transportation income source rules that suggest that a cruise that begins and ends in a U.S. port, but that calls on one or more foreign ports, will derive U.S. source income only from the first and last legs of such cruise. However, since there are no regulations or other IRS guidance with respect to these rules, the applicability of the transportation income source rules in the aforesaid manner is not free from doubt.

Certain State, Local and Non-U.S. Tax Matters

We may be subject to state, local and non-U.S. income or non-income taxes in various jurisdictions, including those in which we transact business, own property, or reside. We may be required to file tax returns in some or all of those jurisdictions. The state, local or non-U.S. tax treatment of Regent and Oceania may not conform to the U.S. federal income tax treatment discussed above. We may be required to pay non-U.S. taxes on dispositions of foreign property, or operations involving foreign property may give rise to non-U.S. income or other tax liabilities in amounts that could be substantial.

 

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MANAGEMENT

Directors and Executive Officers

Set forth below are the names and current positions of our executive officers and Board of Directors. All ages are as of January 22, 2014.

 

Name

   Age     

Position

Directors

     

Frank J. Del Rio

     59       Chief Executive Officer and Chairman of the Board of Directors

Adam M. Aron

     59       Director

Kevin E. Crowe

     31       Director

Russell W. Galbut

     61       Director

Daniel M. Holtz

     54       Director

Steve Martinez

     44       Director

Eric L. Press

     48       Director

Executive Officers & Senior Management

     

Robert J. Binder

     49       Vice Chairman and President

Jason M. Montague

     40       Executive Vice President and Chief Financial Officer

Kunal S. Kamlani

     41       President and Chief Operating Officer of PCH

T. Robin Lindsay

     56       Executive Vice President of Vessel Operations

Frank J. Del Rio is the founder of Oceania and has served as Chief Executive Officer and Chairman of the Board of Directors of Prestige or its predecessor since April 2007. Based in Miami, Florida, Mr. Del Rio is responsible for the financial and strategic development of Prestige. Between 2003 and 2007, Mr. Del Rio was instrumental in the development and growth of Oceania. Prior to founding Oceania, Mr. Del Rio played a vital role in the development of Renaissance Cruises, serving as Co-Chief Executive Officer, Executive Vice President and CFO from 1993 to April 2001. Mr. Del Rio holds a B.S. in Accounting from the University of Florida and is a Certified Public Accountant (inactive license). Mr. Del Rio brings a wealth of managerial and operational expertise to our Board as a result of his significant experience as CEO of our company and his long track record of success in the cruise industry.

Adam M. Aron has been a member of the Board of Directors of Prestige or its predecessor since April 2007. Since 2006, he has been Chairman of the board of directors and CEO of World Leisure Partners, Inc., a personal consultancy for matters related to travel and tourism and high-end real estate development, which acts in partnership with Apollo. Mr. Aron has previously served as Chairman of the board of directors and Chief Executive Officer of Vail Resorts, Inc. from 1996 to 2006; President and CEO of NCL Corporation Ltd. from 1993 to 1996; Senior Vice President of Marketing for United Airlines from 1990 to 1993; and Senior Vice President—Marketing for Hyatt Hotels Corporation from 1987 to 1990. Mr. Aron currently serves on the boards of directors of Cap Jaluca Properties Ltd., E-miles, Inc., Norwegian Cruise Line Holdings Ltd. and Starwood Hotels and Resorts Worldwide. Mr. Aron also serves on the boards of directors of a number of non-profit organizations. He is a member of the Council on Foreign Relations, Business Executives for National Security, and is a former member of the Young Presidents’ Organization. In addition, Mr. Aron formerly served as First Vice Chairman of the U.S. Travel Association and as Vice Chairman of the National Finance Committee of the Democratic Senatorial Campaign Committee for the 2008 election cycle. Mr. Aron was previously selected by the U.S. Secretary of Defense to participate in the Joint Civilian Orientation Conference in 2004, was appointed by the U.S. Secretary of Agriculture to serve on the board of directors of the National Forest Foundation from 2000 through 2006 and was a delegate to President Clinton’s White House Conference on Travel and Tourism. Mr. Aron received a M.B.A. with distinction from the Harvard Business School and a B.S. cum laude from Harvard College. Mr. Aron provides our Board with substantial knowledge of and expertise in the cruise, travel and hospitality industries. In addition, his directorships at other public companies provide him with broad experience on governance issues facing public companies.

 

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Kevin E. Crowe has been a member of the Board of Directors of Prestige since December 2009. Mr. Crowe joined Apollo in 2006 and is a Principal. Mr. Crowe currently serves on the board of directors of Nine Entertainment Co Holdings, Ltd. and Norwegian Cruise Line Holdings Ltd. He previously served as a director for Quality Distribution Inc. Prior to joining Apollo, Mr. Crowe was a member of the Financial Sponsors Group at Deutsche Bank. Mr. Crowe graduated from Princeton University with an A.B. in Economics and a certificate in Finance. Mr. Crowe brings to our Board experience in the issues facing public companies and multinational businesses, and his directorships at other public companies provide him with broad experience on governance issues facing public companies.

Russell W. Galbut has been a member of the Board of Directors of Prestige or its predecessor since April 2007. Mr. Galbut currently serves as the Managing Principal of Crescent Heights, one of America’s largest and most respected residential developers of quality condominiums. Having been active in the urban mixed-use real estate sector for over 30 years, Mr. Galbut and Crescent Heights are a “best in class” developer with a successful track record of new constructions and renovations. Crescent Heights has been active in over 15 markets from coast-to-coast and has developed over 35,000 residential units, including pioneering the condo hotel concept. After graduating from Cornell University with a degree in Hotel Management, Mr. Galbut became the youngest consultant with the then-accounting firm of Laventhal Krekstein, Horwath and Horwath. Mr. Galbut was a Florida licensed CPA from 1975 to 2004. In 1980, Mr. Galbut received his J.D. degree from the University of Miami School of Law. Besides serving on the boards of directors of Prestige and Crescent Heights, Mr. Galbut also serves on the board of directors of Gibraltar Private Bank and Trust. He also sits on several other charitable boards, including the National Board of the Simon Wiesenthal Institute and Colel Chabad, the largest free food bank in Israel. Mr. Galbut provides our Board with significant expertise in accounting, legal, corporate finance and transactional matters.

Daniel M. Holtz has been a member of the Board of Directors of Prestige or its predecessor since April 2007. Since 1998, Mr. Holtz has served as Managing Principal of Walden Capital Management, a Miami-based financial services company. Mr. Holtz currently serves on the boards of directors of Verifier Capital, L.L.C. and IWM Holdings, L.L.C. He is also involved in numerous non-profit and civic organizations, including serving as member of the Board of Trustees of Holtz Center for Maternal and Child Care at Jackson Memorial Hospital in Miami, Florida, the Museum of Contemporary Art in North Miami, Florida and the Aspen Art Museum in Aspen, Colorado. Mr. Holtz holds an undergraduate degree from the University of Florida. With his experience in the financial services industry as well as his directorships on other companies, Mr. Holtz brings to our Board extensive experience managing sophisticated businesses, insight into organizational and corporate governance issues, as well as financial acumen critical to a public company.

Steve Martinez has been a member of the Board of Directors of Prestige or its predecessor since April 2007. Mr. Martinez joined Apollo in 2000 and is a Senior Partner and Head of the Asia Pacific region. He has led investments at Apollo in a variety of sectors including leisure, media, shipping and industrials, and currently serves on the boards of directors of Norwegian Cruise Line Holdings Ltd., Veritable Maritime, Nine Entertainment Co Holdings, Ltd. and Rexnord Corporation. He has previously served on the boards of directors of Allied Waste Industries, Inc., Goodman Global, Inc., Hughes Telematics Inc., Jacuzzi Brands Corp. and Hayes-Lemmerz International, Inc. Prior to joining Apollo, Mr. Martinez was a member of the mergers and acquisitions department of Goldman Sachs & Co. with responsibilities in merger structure negotiation and financing. Before that, he worked at Bain & Company Tokyo, advising U.S. corporations on corporate strategies in Japan. Mr. Martinez received a M.B.A. from the Harvard Business School and a B.A. and B.S. from the University of Pennsylvania and the Wharton School of Business, respectively. Mr. Martinez brings to our Board extensive experience in the issues facing public companies and multinational business, including expertise in management, accounting, corporate finance and transactional matters. In addition, his directorships at other public companies provide him with broad experience on governance issues facing public companies.

Eric L. Press has been a member of the Board of Director of Prestige or its predecessor since April 2007. He is a partner at Apollo, where he has worked since 1998. From 1992 to 1998, Mr. Press was associated with the law firm of Wachtell, Lipton, Rosen & Katz LLP, specializing in mergers, acquisitions, restructurings and

 

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related financing transactions. From 1987 to 1989, Mr. Press was a consultant with The Boston Consulting Group, a management consulting firm focused on corporate strategy. Mr. Press also serves on the boards of directors of Apollo Commercial Real Estate Finance, Athene Group Ltd., Affinion Group, Inc., Caesars Entertainment Corporation, Noranda Aluminum, Inc. and Verso Paper Corp. Previously, he served on the boards of directors of Innkeepers USA Trust, Quality Distribution, Inc., Wyndham International, AEP Industries Inc. and Metals USA Holdings Corp. Mr. Press graduated magna cum laude from Harvard College with an A.B. in Economics, and from Yale Law School, where he was a Senior Editor of the Yale Law Review. Mr. Press brings to our Board extensive experience in the issues facing public companies and multinational business, including expertise in management, accounting, legal, corporate finance and transactional matters. In addition, his directorships at other public companies provide him with broad experience on governance issues facing public companies.

Robert J. Binder has served as the Vice Chairman and President of PCI since May 2011. He oversees the global expansion of our brands and is responsible for sales, marketing and branding efforts internationally. Mr. Binder has played a key role in the development and design of the new Oceania ships, the new restaurant concepts and the introduction of the Bon Apetit Culinary Center. He is co-founder of Oceania and previously served as President of Oceania. Before launching Oceania, Mr. Binder was the President of Meadowoods Consulting, which provided consulting services to the financial and travel services industries. From 1992 to 2001 he held several executive posts in the cruise industry. Mr. Binder has also held senior management positions at JP Morgan Chase, where he was a Strategic Planning Officer, and at Renaissance Cruises, where he was Vice President of Sales. Mr. Binder earned master’s degrees in both Finance and Marketing from Cornell University and did his undergraduate studies at Purdue University.

Jason M. Montague is our Executive Vice President and Chief Financial Officer, a position he has held since 2010. He is responsible for all day-to-day financial operations as well as the mid- and long-term strategic planning and financial development of Prestige and its two brands, Oceania and Regent. Part of the Oceania’s start-up team, Mr. Montague has seen the company through the purchase of its three R-Class vessels, the equity investment by Apollo, the financing for the Oceania-Class newbuilds and the acquisition and integration of Regent. Prior to joining Oceania, he operated a successful consulting practice focused on strategic planning and development of small to medium-sized companies. Before that, he held the position of Vice President Finance for Alton Entertainment Corporation, a brand equity marketer that was majority owned by the Interpublic Group of Companies. Mr. Montague holds a bachelor’s degree in Accounting from the University of Miami.

Kunal S. Kamlani is the President and Chief Operating Officer of PCH and has served as the President of Oceania since October 2011 and Regent since February 2013. Mr. Kamlani is responsible for revenue management, strategic marketing, sales, e-commerce, public relations and procurement for both Oceania and Regent. Mr. Kamlani rejoined us in September 2011 from Bank of America/Merrill Lynch, where he served as head of the multi-billion dollar Global Investment Solutions division with approximately 1,000 employees worldwide beginning in March 2010. Prior to that, Mr. Kamlani was Chief Financial Officer of PCH from August 2009 through March 2010. His past experiences also include serving as the Chief Operating Officer of Smith Barney and Vice President of corporate development for Starwood Hotels & Resorts. Mr. Kamlani earned his M.B.A. from Columbia University and a bachelor’s degree in Economics and Political Science from Colgate University.

T. Robin Lindsay has served as the Executive Vice President of Vessel Operations since April 2009 and oversees all marine, technical and hotel operations. Mr. Lindsay was instrumental in the extensive refurbishment and launch of Oceania’s Regatta, Insignia and Nautica and the development of the new Marina and Riviera. Mr. Lindsay possesses a substantial amount of experience in the luxury cruise industry and has overseen the design and construction of many of the industry’s most acclaimed luxury cruise ships. Prior to joining Oceania in 2003, Mr. Lindsay was the Senior Vice President of Vessel Operations at Silversea Cruises and, prior to that, Vice President of Operations at Radisson Seven Seas Cruises. Mr. Lindsay earned his B.S. degree from Louisiana Tech University.

 

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Board of Directors

Upon the consummation of this offering, our Board will consist of              directors,              of whom will be independent directors.

We intend to avail ourselves of the “controlled company” exception under the              rules, which eliminates the requirement that we have a majority of independent directors on our Board and that we have compensation and nominating and governance committees composed entirely of independent directors. We are required, however, to have an audit committee with one independent director during the 90-day period beginning on the date of effectiveness of the registration statement filed with the SEC in connection with this offering and of which this prospectus is part. After such 90-day period and until one year from the date of effectiveness of the registration statement, we are required to have a majority of independent directors on our Audit Committee. Beginning one year after the date of effectiveness of this registration statement, we are required to have an audit committee comprised entirely of independent directors. If at any time we cease to be a “controlled company” under the              rules, our Board will take all action necessary to comply with such rules, including appointing a majority of independent directors to the Board and establishing certain committees composed entirely of independent directors.

Committees of our Board of Directors

Board Committees

Upon consummation of this offering, our Board will have three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The charters for each of these committees will be available on our website upon the consummation of this offering.

Audit Committee

Upon the consummation of this offering, our Audit Committee will consist of Messrs.                     ,                      and                     . Our Board has determined that Mr.                      qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K. The purpose of the Audit Committee is to oversee our accounting and financial reporting processes and the audits of our financial statements, provide an avenue of communication among our independent auditors, management, our internal auditors and our Board, and prepare the audit-related report required by the SEC to be included in our annual proxy statement or annual report on Form 10-K.

The principal duties and responsibilities of our Audit Committee are to oversee and monitor the following:

 

    preparation of annual audit committee report to be included in our annual proxy statement;

 

    our financial reporting process and internal control system;

 

    the integrity of our financial statements;

 

    the independence, qualifications and performance of our independent auditor;

 

    the performance of our internal audit function; and

 

    our compliance with legal, ethical and regulatory matters.

The Audit Committee will have the power to investigate any matter brought to its attention within the scope of its duties. It will also have the authority to retain counsel and advisors to fulfill its responsibilities and duties. We intend to avail ourselves of the “controlled company” exemption under the              rules, which exempts us from the requirement that we have an audit committee composed entirely of independent directors.

Compensation Committee

Upon the consummation of this offering, our Compensation Committee will consist of Messrs.                     ,                      and                     .

 

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The principal duties and responsibilities of our Compensation Committee are as follows:

 

    to provide oversight and make recommendations to our Board on the development and implementation of the compensation policies, strategies, plans and programs for our key employees, executive officers and outside directors and disclosure relating to these matters and to establish and administer incentive compensation, benefit and related plans;

 

    to review and make recommendations to our Board regarding corporate goals and objectives, performance and the compensation of our chief executive officer, chief financial officer and the other executive officers of us and our subsidiaries; and

 

    to provide oversight and make recommendations to our Board concerning selection of officers, regarding performance of individual executives and related matters.

We intend to avail ourselves of the “controlled company” exemption under the             rules, which exempts us from the requirement that we have a compensation committee composed entirely of independent directors.

Nominating and Corporate Governance Committee

Prior to consummation of this offering, our Board will establish a Nominating and Corporate Governance Committee. We expect that the members of the Nominating and Corporate Governance Committee will be Messrs.                     ,                      and                     , who will be appointed to the committee promptly following this offering. The principal duties and responsibilities of the Nominating and Corporate Governance Committee will be as follows:

 

    to establish criteria for board and committee membership and recommend to our Board proposed nominees for election to the Board and for membership on committees of our Board;

 

    to make recommendations regarding proposals submitted by our stockholders; and

 

    to make recommendations to our Board regarding board governance matters and practices.

We intend to avail ourselves of the “controlled company” exception under the             rules, which exempts us from the requirement that we have a nominating and corporate governance committee composed entirely of independent directors.

Board Compensation

Our non-executive directors who hold a status as an investment professional of Apollo or a partner or senior partner with Apollo do not receive any annual retainer, meeting, committee or chair fees. Additionally, there are no automatic annual equity grants, rather grants are made from time to time as determined by our Board, and the last such grant was in 2010. Except for Mr. Aron, those non-executive directors that do not hold a status of investment professional of Apollo or partner or senior partner with Apollo receive an annual director fee of $50,000 or 5,000 stock options, at their discretion. For so long as Mr. Aron serves as a member of our Board, World Leisure Partners, Inc. will receive a $100,000 annual fee as payment for his service.

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee consists of Messrs.                 ,                  and                 . None of our executive officers serves as a member of a board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more executive officers serving on our Board or Compensation Committee. No interlocking relationship exists between any member of our Board or any member of the compensation committee (or other committee performing equivalent functions) of any other company.

Code of Business Conduct and Ethics

Our Board of Directors has adopted a Code of Business Conduct and Ethics that is applicable to all officers, directors and employees. Following the consummation of this offering, this Code will be available on our website.

 

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EXECUTIVE COMPENSATION

This section describes the material elements of compensation awarded to, earned by or paid to our executive officers identified in the Summary Compensation Table, which we refer to in this section as our “named executive officers” or “NEOs.” This section also provides a discussion of the process and rationale for the compensation decisions of the Board of Directors and its Compensation Committee and describes the role of various parties in determining our executive compensation programs. Unless otherwise specified, references throughout this “Executive Compensation” to the Board of Directors or the Compensation Committee are to the board or compensation committee of Prestige Cruise International, Inc. (“Prestige”).

The named executive officers for 2013 were:

 

Frank J. Del Rio

  

Chief Executive Officer and Chairman of the Board

Jason M. Montague

  

Executive Vice President, Chief Financial Officer

Robert J. Binder

  

Vice Chairman and President

Kunal S. Kamlani

  

President and Chief Operating Officer of PCH

T. Robin Lindsay

  

Executive Vice President of Vessel Operations

Mark S. Conroy

  

Former President of Regent

The Compensation Committee was established in 2007, following an investment by Apollo in the Company. Since its inception, the Compensation Committee has reviewed and determined the compensation plans in place for our named executive officers, including reviewing terms of employment agreements, setting performance goals, evaluating the competitiveness of our executive compensation program, and administering our benefit and incentive plans.

Executive Compensation Program Objectives and Philosophy

The Company’s executive compensation arrangements are guided by the following principles:

 

    We believe that a capable, experienced and highly motivated executive management team is critical to our success and to the creation of long-term shareholder value.

 

    We believe that the most effective executive compensation program is one that focuses on pay for performance and (i) rewards the achievement of annual, long-term and strategic goals and (ii) aligns the interests of our executives with those of our shareholders.

The Company’s 2013 executive compensation program was designed according to the above principles and had the primary aim of (1) attracting and retaining executives with the requisite skills and experience to help achieve our business objectives of developing and expanding business opportunities that improve long-term shareholder value; and (2) encouraging executives to achieve our business objectives by linking executive compensation to Company performance and long-term shareholder value.

Our compensation approach for our named executive officers in 2013 had three key elements, designed to be consistent with the Company’s compensation philosophy and business objectives: (1) base salary; (2) annual incentive bonuses; and (3) long-term equity awards, subject to both time and performance-based vesting requirements. In structuring executive compensation arrangements, our Compensation Committee carefully considers how each component of our compensation program meets our business objectives.

Base salary is intended to attract and retain highly qualified executives, by providing current cash compensation commensurate with expertise, experience, tenure, performance, potential and scope of responsibility. The annual incentive bonuses motivate our executives to perform and meet our short term business goals and annual financial objectives. The equity based component of our executive compensation approach fosters a long term view of the business and helps align officer interests with shareholder interests. Further, we believe that equity awards that vest based on time enhance the stability of our senior team and

 

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provide greater incentives for our named executive officers to remain with the Company. We believe that the combination of annual fixed pay and equity ownership provides our named executive officers with an appropriate mix of guaranteed current cash compensation, allowing them to stay focused on their duties, and long term compensation, encouraging them to work toward increasing long term shareholder value.

We believe that a substantial portion of an executive officer’s compensation should be at-risk, in accordance with our compensation philosophy that links executive compensation to the attainment of business objectives and earnings performance, over the near and long term, which in turn enables us to attract, retain and reward executive officers who contribute to our success. For the named executive officers as a group, excluding Mark S. Conroy, for fiscal 2013, on an annualized basis, base salary represents 48.5% of their total target direct compensation, annual bonus and non-equity incentive compensation combined represents 44.7% of their total target direct compensation, long-term incentives (stock options) represent 6.8% of their total target direct compensation and all other compensation represents 2.3% of their total target direct compensation. The Company believes that this is an appropriate mix of fixed and variable compensation intended to incentivize our named executive officers to focus on both continued improved annual operating performance and continued long-term growth of the Company. In determining the appropriate mix of compensation components for each of our named executive officers, our Compensation Committee annually assesses, among other factors, each named executive officer’s responsibilities, prior experience and value to the Company, as well as each named executive officer’s expected level of contribution toward achieving the Company’s long-term objectives.

Compensation Setting Process

Compensation Consultants; Review of Relevant Compensation Data

Consistent with past practice, in 2013 neither our Compensation Committee nor management retained a compensation consultant to review or recommend the amount or form of compensation paid to our executive officers, including our named executive officers, or our directors. We have not adopted a policy regarding compensation consultant independence. We will consider the implementation of such a policy if and when we decide to retain a compensation consultant to assist us with our executive compensation programs in the future.

Our Compensation Committee believes that, in order to effectively attract and retain high level executive talent, each element of the compensation program should establish compensation levels that take into account current market practices. Our Compensation Committee does not “benchmark” executive compensation at any particular level in comparison with other companies. Rather, our Compensation Committee familiarizes itself with compensation trends and competitive conditions through the review of non-customized third-party market surveys and other relevant publicly available data. In setting compensation levels for 2013, after determining the types and amount of compensation based on its own evaluation, our Compensation Committee considered publicly available compensation data solely to determine the relative strengths and weaknesses of our compensation packages on an aggregate basis. Our Compensation Committee also relied on its extensive experience managing portfolio companies and considered each executive’s level of responsibility for the overall operations of the Company, historical Company practices, long-term market trends, internal pay equity, expectations regarding future named executive officer contributions, our own performance, budget considerations and succession planning and retention strategies.

Role of Executive Officers in Compensation Decisions

The Compensation Committee makes all compensation decisions related to the CEO and equity-based compensation awards. The Compensation Committee, together with recommendations and input from our CEO, sets and determines the compensation for the other named executive officers.

Compensation Risk Assessment

The Company conducted a risk assessment of our compensation policies and practices and concluded that such policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company. In particular, the Compensation Committee believes that the design of our annual performance

 

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incentive program and long-term equity incentives provides a balanced approach and an effective and appropriate mix of incentives to ensure our executive compensation program is focused on long-term shareholder value creation. To strengthen the relationship between pay and performance, our annual cash incentive bonus plan and many of our equity grants are subject to the achievement of pre-established performance goals established independently of the plan participants. In addition, a portion of such variable pay is delivered through equity awards with both time-based and performance-based vesting schedules, and performance periods covering multiple years, thus emphasizing retention and long-term company performance while discouraging the taking of short-term risks at the expense of long-term results.

Compensation Elements

The three key compensation elements for our named executive officers identified above (base pay, annual performance bonus and long-term equity awards), as well as other elements of compensation, are discussed below.

Base Salary

Base Salary is intended to provide a baseline level of fixed compensation that reflects each named executive officer’s level of responsibility. Each named executive officer is party to an employment agreement that provides for a fixed base salary, subject to annual review. The initial base salary level for each named executive officer was negotiated in connection with the executive joining the Company or our affiliates or upon a change of his or her responsibilities. Decisions regarding adjustments to base salaries are made at the discretion of our Compensation Committee, though the salaries are generally subject only to increases, not decreases. In reviewing base salary levels for our named executive officers, the Compensation Committee annually considers and assesses, among other factors, a named executive officer’s current base salary, job responsibilities, leadership and experience, and value to our Company. In addition, as noted above, base salary levels are generally intended to be consistent with competitive market base salary levels, but are not specifically targeted or “benchmarked” against any particular company or group of companies.

The chart below indicates the annual base salary for each of our named executive officers in 2013.

 

     2013 Annual
Base Salary
 

Frank J Del Rio

   $ 1,597,200   

Jason M. Montague

   $ 475,000   

Robert J. Binder

   $ 300,000   

Kunal S. Kamlani

   $ 900,000   

T. Robin Lindsay

   $ 475,000   

Mark S. Conroy

   $ 550,000   

Annual Incentive Bonus

Each named executive officer, with the exception of Messrs. Kamlani and Conroy, is eligible to receive an annual cash bonus for fiscal 2013 in accordance with the Company’s 2013 management incentive compensation plan (the “MICP”), subject to the provisions of his employment agreement. The 2013 MICP provides for bonus payments upon the achievement of an EBITDA-based corporate performance goal. We use our annual incentive bonus program to incentivize and motivate our named executive officers by providing the opportunity to receive additional compensation tied to annual Company performance.

Each year, the Compensation Committee establishes the performance goal after careful review of the annual budget. For 2013, the Compensation Committee determined that the MICP bonus target would be an adjusted EBITDA of PCH and its consolidated subsidiaries, defined as earnings before interest, other income (expense),

 

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income taxes, depreciation and amortization, and MICP compensation expense adjusted for the impact from settled fuel hedges (“MICP EBITDA”). We believe the MICP EBITDA performance target is useful as it reflects certain operating drivers of our business, such as sales growth, operating costs, selling and administrative expenses and other operating income and expense. The MICP EBITDA target was $251.3 million for 2013. The Compensation Committee reserves the right to adjust the performance goal during the course of the year to take into consideration changes in deployment of the fleet, major unforeseen and uncontrollable events and other non-recurring and extraordinary costs and revenues experienced by us during the year. Taking into account the Company’s relevant recent historical experience with respect to achievement of MICP EBITDA targets as well as the then-current environment for the cruise industry and the 2013 annual budget, the Compensation Committee believed that the MICP EBITDA target for 2013, although not substantially certain to be achieved, was reasonably possible to be achieved.

The following chart sets forth the MICP EBITDA levels at which various levels of incentive payout would become available to our named executive officers for 2013, with the bonus percentage amounts expressed as a percentage of the named executive officer’s base salary for 2013. Between these points the payout is calculated on a sliding straight line basis. There is no maximum bonus for the named executive officers and the sliding straight line allocation between 91.7% and 100% will be applied to MICP EBITDA over 100% of performance target.

 

Name

   Percentage of
MICP EBITDA
goal Achieved
    Annual Incentive
Bonus
Percentage
 

Frank J. Del Rio

     76.2     —  
     80.9     15.3
     92.5     63.6
     100.0     100.0

Jason M. Montague

     76.2     —  
     80.9     11.5
     92.5     47.7
     100.0     75.0

Robert J. Binder

     76.2     —  
     80.9     13.0
     92.5     54.1
     100.0     85.0

Kunal S. Kamlani (1)

     —       —  

T. Robin Lindsay

     76.2     —  
     80.9     11.5
     92.5     47.7
     100.0     75.0

Mark S. Conroy (2)

     76.2     —  
     80.9     13.0
     92.5     54.1
     100.0     85.0