UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File Number: 001-35784

 

 

 

 NORWEGIAN CRUISE LINE HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

  

 

 

Bermuda 98-0691007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

7665 Corporate Center Drive, Miami, Florida 33126

(Address of principal executive offices) (zip code)

 

(305) 436-4000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant is a 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 12b-2 of the Exchange Act). 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

 

There were 203,302,279 ordinary shares outstanding as of October 27, 2014. 

 

 
 
 

 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 33
   
SIGNATURES 35

 

 
Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Revenue                    
Passenger ticket  $659,117   $583,923   $1,655,666   $1,400,470 
Onboard and other   247,900    213,962    681,306    569,479 
Total revenue   907,017    797,885    2,336,972    1,969,949 
Cruise operating expense                    
Commissions, transportation and other   143,194    140,086    374,716    347,650 
Onboard and other   69,389    61,744    172,780    153,431 
Payroll and related   115,968    90,695    321,386    247,543 
Fuel   79,881    77,035    236,753    225,115 
Food   44,819    37,596    125,236    101,232 
Other   58,047    48,946    197,133    164,899 
Total cruise operating expense   511,298    456,102    1,428,004    1,239,870 
Other operating expense                    
Marketing, general and administrative   97,111    77,606    263,584    236,923 
Depreciation and amortization   63,786    56,097    188,885    158,699 
Total other operating expense   160,897    133,703    452,469    395,622 
Operating income   234,822    208,080    456,499    334,457 
Non-operating income (expense)                    
Interest expense, net   (32,284)   (26,627)   (95,316)   (257,969)
Other income (expense)   3,242    (626)   3,305    1,168 
Total non-operating income (expense)   (29,042)   (27,253)   (92,011)   (256,801)
                     
Net income before income taxes   205,780    180,827    364,488    77,656 
Income tax benefit (expense)   (2,502)   (7,933)   3,761    (11,177)
Net income   203,278    172,894    368,249    66,479 
Net income attributable to non-controlling interest   2,200    2,036    4,288    857 
Net income attributable to Norwegian Cruise Line Holdings Ltd.  $201,078   $170,858   $363,961   $65,622 
Weighted-average shares outstanding                    
Basic   203,220,218    204,425,308    204,444,469    202,279,989 
Diluted   208,507,181    210,703,244    209,992,647    208,673,608 
Earnings per share                    
Basic  $0.99   $0.84   $1.78   $0.32 
Diluted  $0.97   $0.82   $1.75   $0.32 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Net income  $203,278   $172,894   $368,249   $66,479 
Other comprehensive income (loss):                    
Shipboard Retirement Plan   95    117    284    351 
Cash flow hedges:                    
Net unrealized gain (loss)   (37,801)   16,798    (44,360)   (12,619)
Amount realized and reclassified into earnings   1,819    (1,539)   1,825    (3,623)
Total other comprehensive income (loss)   (35,887)   15,376    (42,251)   (15,891)
Total comprehensive income   167,391    188,270    325,998    50,588 
Comprehensive income attributable to non-controlling interest   1,781    2,233    3,826    445 
Total comprehensive income attributable to Norwegian Cruise Line Holdings Ltd.  $165,610   $186,037   $322,172   $50,143 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

 

   September 30,
2014
   December 31,
2013
 
Assets          
Current assets:          
Cash and cash equivalents  $55,869   $56,467 
Accounts receivable, net   25,936    18,260 
Inventories   51,263    43,715 
Prepaid expenses and other assets   57,568    64,482 
Total current assets   190,636    182,924 
Property and equipment, net   6,319,933    5,647,670 
Goodwill and tradenames   611,330    611,330 
Other long-term assets   252,150    209,054 
Total assets  $7,374,049   $6,650,978 
           
Liabilities and Shareholders’ Equity          
Current liabilities:          
Current portion of long-term debt  $381,565   $286,575 
Accounts payable   99,884    86,788 
Accrued expenses and other liabilities   280,590    253,752 
Due to Affiliate   36,928    36,544 
Advance ticket sales   504,057    411,829 
Total current liabilities   1,303,024    1,075,488 
Long-term debt   3,082,346    2,841,214 
Due to Affiliate   36,978    55,128 
Other long-term liabilities   67,717    47,882 
Total liabilities   4,490,065    4,019,712 
Commitments and contingencies (Note 9)          
Shareholders’ equity:          
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 205,788,004 and 205,160,340 shares issued at September 30, 2014 and December 31, 2013, respectively   206    205 
Additional paid-in capital   2,826,395    2,822,864 
Accumulated other comprehensive income (loss)   (58,479)   (16,690)
Retained earnings (deficit)   166,490    (197,471)
Treasury shares (2,486,350 ordinary shares at cost)   (82,000)    
Total shareholders’ equity controlling interest   2,852,612    2,608,908 
Non-controlling interest   31,372    22,358 
Total shareholders’ equity   2,883,984    2,631,266 
Total liabilities and shareholders’ equity  $7,374,049   $6,650,978 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   Nine Months Ended
September 30,
 
   2014   2013 
Cash flows from operating activities          
Net income  $368,249   $66,479 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization expense   213,306    180,143 
Loss (gain) on derivatives   129    (195)
Deferred income taxes, net   (3,238)   11,026 
Write-off of deferred financing fees       36,357 
Share-based compensation expense   9,551    21,283 
Changes in operating assets and liabilities:          
Accounts receivable, net   (7,676)   (2,655)
Inventories   (7,548)   (6,220)
Prepaid expenses and other assets   (4,276)   (1,558)
Accounts payable   13,096    19,433 
Accrued expenses and other liabilities   33,529    (5,480)
Advance ticket sales   85,602    79,730 
Net cash provided by operating activities   700,724    398,343 
Cash flows from investing activities          
Additions to property and equipment   (864,837)   (835,765)
Net cash used in investing activities   (864,837)   (835,765)
Cash flows from financing activities          
Repayments of long-term debt   (765,948)   (2,229,821)
Repayments to Affiliate   (18,521)   (98,171)
Proceeds from long-term debt   1,101,287    2,359,310 
Proceeds from the issuance of ordinary shares, net       473,017 
Proceeds from the exercise of share options   3,081    1,268 
Purchases of treasury shares   (82,000)    
NCLC partnership tax distributions   (3,853)    
Deferred financing fees and other   (70,531)   (56,721)
Net cash provided by financing activities   163,515    448,882 
Net increase (decrease) in cash and cash equivalents   (598)   11,460 
Cash and cash equivalents at beginning of period   56,467    45,500 
Cash and cash equivalents at end of period  $55,869   $56,960 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(in thousands)

 

   Ordinary
Shares
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income (Loss)
   Retained
Earnings
(Deficit)
   Treasury
Shares
   Non-
controlling
Interest
   Total
Shareholders’
Equity
 
Balance, December 31, 2012  $25   $2,327,097   $(17,619)  $(299,185)  $   $8,466   $2,018,784 
                                    
Share-based compensation       31,264                19    31,283 
Transactions with Affiliates, net       (52)                   (52)
Corporate Reorganization       (20,176)               20,176     
Proceeds from the issuance of ordinary shares, net   179    472,838                    473,017 
Proceeds from the exercise of share options   1    1,267                        1,268 
Other comprehensive loss           (15,479)           (412)   (15,891)
Net income               65,622        857    66,479 
Transfers to non-controlling interest       6,915                (6,915)    
Balance, September 30, 2013  $205   $2,819,153   $(33,098)  $(233,563)  $   $22,191   $2,574,888 
                                    
Balance, December 31, 2013  $205   $2,822,864   $(16,690)  $(197,471)  $   $22,358   $2,631,266 
                                    
Share-based compensation       9,551                    9,551 
Transactions with Affiliates, net       (59)                   (59)
NCLC partnership tax distributions                       (3,853)   (3,853)
Proceeds from the exercise of share options   1    3,080                    3,081 
Purchases of treasury shares                   (82,000)       (82,000)
Other comprehensive loss           (41,789)           (462)   (42,251)
Net income               363,961        4,288    368,249 
Transfers to non-controlling interest       (9,041)               9,041     
Balance, September 30, 2014  $206   $2,826,395   $(58,479)  $166,490   $(82,000)  $31,372   $2,883,984 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

 

Unless otherwise indicated or the context otherwise requires, references in this report to (i) the “Company,” “we,” “our,” “us” and “NCLH” refer to Norwegian Cruise Line Holdings Ltd. and/or its subsidiaries, (ii) “NCLC” refers to NCL Corporation Ltd. and/or its subsidiaries, (iii) “Norwegian Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, (iv) “Apollo” refers to Apollo Global Management, LLC and its subsidiaries and the “Apollo Funds” refers to one or more of AIF VI NCL (AIV), L.P., AIF VI NCL (AIV II), L.P., AIF VI NCL (AIV III), L.P., AIF VI NCL (AIV IV), L.P., AAA Guarantor-Co-Invest VI (B), L.P., Apollo Overseas Partners (Delaware) VI, L.P., Apollo Overseas Partners (Delaware 892) VI, L.P., Apollo Overseas Partners VI, L.P. and Apollo Overseas Partners (Germany) VI, L.P., (v) “TPG Global” refers to TPG Global, LLC, “TPG” refers to TPG Global and its affiliates and the “TPG Viking Funds” refers to one or more of TPG Viking, L.P., TPG Viking AIV I, L.P., TPG Viking AIV II, L.P., and TPG Viking AIV III, L.P. and/or certain other affiliated investment funds, each an affiliate of TPG, (vi) “Genting HK” refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates) (Genting HK owns NCLH’s ordinary shares indirectly through Star NCLC Holdings Ltd. (“Star NCLC”)), and (vii) “Affiliate(s)” or “Sponsor(s)” refers to Genting HK, the Apollo Funds and/or the TPG Viking Funds. References to the “U.S.” are to the United States of America, “dollars” or “$” are to U.S. dollars and “euros” or “€” are to the official currency of the Eurozone.

 

1.Corporate Reorganization

 

In February 2011, NCLH, a Bermuda limited company, was formed with the issuance to the Sponsors of, in aggregate, 10,000 ordinary shares, with a par value of $.001 per share. On January 24, 2013, NCLH consummated the IPO. In connection with the consummation of the IPO, the Sponsors’ ordinary shares in NCLC were exchanged for the ordinary shares of NCLH at a share exchange ratio of 1.0 to 8.42565 and NCLH became the owner of 100% of the ordinary shares (representing a 97.3% economic interest) and parent company of NCLC (the “Corporate Reorganization”). Accordingly, NCLH contributed $460.0 million to NCLC and the historical financial statements of NCLC became those of NCLH. The Corporate Reorganization was effected solely for the purpose of reorganizing our corporate structure. NCLH had not prior to the completion of the Corporate Reorganization conducted any activities other than those incidental to its formation and to preparations for the Corporate Reorganization and IPO. The Corporate Reorganization resulted in all parties being in the same economic position as they were immediately prior to the IPO. As the economic position of the investors did not change as part of the Corporate Reorganization it is considered a non-substantive merger from an accounting perspective.

 

NCLC is treated as a partnership for U.S. federal income tax purposes, and the terms of the partnership (including the economic rights with respect thereto) are set forth in the amended and restated tax agreement for NCLC, as further amended. Economic interests in NCLC are represented by the partnership interests established under the tax agreement, which we refer to as “NCL Corporation Units.” The NCL Corporation Units held by NCLH (as a result of its ownership of 100% of the ordinary shares of NCLC) represent a 98.0% economic interest in NCLC as of September 30, 2014, and the remaining 2.0% economic interest is in the form of Management NCL Corporation Units held by management (or former management). As a result of the aforementioned transactions and certain Secondary Offerings, the Sponsors owned 55.9% of NCLH’s ordinary shares as of September 30, 2014.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and, in our opinion, contain all normal recurring adjustments necessary for a fair statement of the results for the periods presented.

 

Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during the summer months. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which are included in our most recently filed Annual Report on Form 10-K.

 

Shareholders’ Equity

 

In connection with the Corporate Reorganization, previously granted profits interests to employees were exchanged for Management NCL Corporation Units (“Units”), which, upon vesting, represent a proportionate share of the economic interests in NCLC. The effect of this change was a $20.2 million increase in the non-controlling interest.

 

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During the nine months ended September 30, 2014, following the consummation of the Secondary Offering, additional performance-based Units vested and therefore became eligible to participate in the earnings of NCLC, and as a result, a proportionate amount of equity was allocated to the non-controlling interest.   Each Unit holder has the right, subject to the same time-based and performance-based vesting requirements of the profits interests, to exchange Units for NCLH’s ordinary shares at a rate equal to one ordinary share for every Unit. When such an exchange occurs, this results in the exchange of non-controlling interest to controlling interest.  Accordingly, upon the exchange of a Unit for an ordinary share of NCLH, a portion of the non-controlling interest balance is reclassified to Additional Paid-in Capital. During the nine months ended September 30, 2014, there was $9.0 million transferred to non-controlling interest.

 

During the nine months ended September 30, 2014, Management NCL Corporation Unit holders were distributed funds for partnership tax payments of $3.9 million of which $3.6 million of these distributions will be repaid to the Company upon a future exchange of Units.

 

On April 29, 2014, NCLH’s Board of Directors authorized, and NCLH announced, a three-year share repurchase program for up to $500.0 million. Under the program, NCLH may make repurchases in the open market, in privately negotiated transactions, in accelerated repurchase programs or in structured share repurchase programs, and any repurchases may be made pursuant to Rule 10b5-1 plans. During the nine months ended September 30, 2014, NCLH repurchased approximately 2.5 million ordinary shares under its share repurchase program for $82.0 million, which shares are reflected as treasury shares at cost on the consolidated balance sheet as of September 30, 2014.

 

The Consolidated Statements of Changes in Shareholders’ Equity for the period ended September 30, 2013 has been revised for an immaterial change of approximately $1.2 million to correctly present the activities within additional paid-in capital and non-controlling interest, with no change in the ending balances.

 

Earnings Per Share

 

A reconciliation between basic and diluted earnings per share was as follows (in thousands, except share and per share data):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Net income attributable to Norwegian Cruise Line Holdings Ltd.  $201,078   $170,858   $363,961   $65,622 
Net income  $203,278   $172,894   $368,249   $66,479 
                     
Basic weighted-average shares outstanding   203,220,218    204,425,308    204,444,469    202,279,989 
Dilutive effect of awards   5,286,963    6,277,936    5,548,178    6,393,619 
Diluted weighted-average shares outstanding   208,507,181    210,703,244    209,992,647    208,673,608 
Basic earnings per share  $0.99   $0.84   $1.78   $0.32 
Diluted earnings per share  $0.97   $0.82   $1.75   $0.32 

 

Revenue and Expense Recognition

 

Revenue and expense includes taxes assessed by governmental authorities that are directly imposed on a revenue-producing transaction between a seller and a customer. The amounts included in revenue and expense on a gross basis were $51.5 million and $44.3 million for the three months ended September 30, 2014 and 2013, respectively, and $134.0 million and $111.9 million for the nine months ended September 30, 2014 and 2013, respectively.

 

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3.Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2014 was as follows (in thousands):

 

   Accumulated
Other
Comprehensive
Income (Loss)
   Change
Related to
Cash Flow
Hedges
   Change
Related to
Shipboard
Retirement
Plan
 
Accumulated other comprehensive income (loss) at beginning of period  $(16,690)  $(10,532)  $(6,158)
Current period other comprehensive loss before reclassifications   (43,875)   (43,875)    
Amounts reclassified   2,086    1,806(1)   280(2)
Accumulated other comprehensive income (loss) at end of period  $(58,479)  $(52,601)(3)  $(5,878)

 

(1)We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the Consolidated Statements of Operations.
(2)Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.
(3)Includes $14.6 million of losses expected to be reclassified into earnings in the next 12 months.

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2013 was as follows (in thousands):

 

   Accumulated
Other
Comprehensive
Income (Loss)
   Change
Related to
Cash Flow
Hedges
   Change
Related to
Shipboard
Retirement
Plan
 
Accumulated other comprehensive income (loss) at beginning of period  $(17,619)  $(7,872)  $(9,747)
Current period other comprehensive loss before reclassifications   (12,292)   (12,292)    
Amounts reclassified   (3,187)   (3,529)(1)   342(2)
Accumulated other comprehensive income (loss) at end of period  $(33,098)  $(23,693)  $(9,405)

 

(1)We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the Consolidated Statements of Operations.
(2)Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.

 

4.Property and Equipment, Net

 

The balance as of September 30, 2014 reflects the delivery of Norwegian Getaway in January 2014.

 

5.Related Party Disclosures

 

In March 2014, the Selling Shareholders sold 15,000,000 ordinary shares of NCLH in the Secondary Offering. We did not receive any proceeds from this offering. As of September 30, 2014, the relative ownership percentages of NCLH’s ordinary shares were approximately as follows: Genting HK (28.0%), the Apollo Funds (20.0%), the TPG Viking Funds (7.9%), and public shareholders (44.1%). As of September 30, 2014, NCLH had a 98.0% economic interest in NCLC.

 

6.Income Tax Benefit (Expense)

 

NCLH is treated as a corporation for U.S. federal income tax purposes. The income tax benefit in 2014 primarily related to a change in our corporate entity structure which was completed in 2013. For the year ended December 31, 2013, the tax provision reflected an interest expense deduction based on a method supported by the information available at such time. During the first quarter of 2014, we received additional information which allowed us to elect another acceptable tax method, resulting in a tax benefit of $11.1 million which is included in the consolidated statement of operations for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, income tax expense was $11.2 million. Income tax expense for the nine months ended September 30, 2013 includes a one-time expense of $4.2 million due to a change in U.S. tax status from a partnership to a corporation in connection with our IPO and a benefit of $2.6 million in connection with our prepayments of debt, and a $9.6 million expense from our U.S. operations.

 

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During 2013, we implemented a restructuring plan to provide a global tax platform for international expansion. As part of the plan, the Company became a tax resident of the United Kingdom. As such, it qualifies for relief from U.S. Branch Profits taxes under the US-UK Tax Treaty. In addition, the restructuring resulted in additional interest and depreciation deductions which reduced the Company’s overall income tax expense. Its effect has been included as a reduction of $5.3 million to income tax expense for the nine months ended September 30, 2013.

 

7.Fair Value Measurements and Derivatives

 

Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

 

Fair Value Hierarchy

 

The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:

 

Level 1 Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
   
Level 2 Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
   
Level 3 Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.

  

Derivatives

 

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. The determination of ineffectiveness is based on the amount of dollar offset between the cumulative change in fair value of the derivative and the cumulative change in fair value of the hedged transaction at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge, or if the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. In addition, the ineffective portion of our highly effective hedges is recognized in earnings immediately and reported in other income (expense) in our consolidated statements of operations. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent features in our derivative agreements.

 

We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives and our revolving credit facility, is not considered significant, as we primarily conduct business with large, well-established financial institutions that we have established relationships with and that have credit risks acceptable to us or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant counterparties.

 

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The following table sets forth our derivatives measured at fair value and discloses the balance sheet location (in thousands):

 

      Asset   Liability 
  Balance Sheet location  September 30,
2014
   December 31,
2013
   September 30,
2014
   December 31,
2013
 
Fuel swaps designated as hedging instruments                       
   Prepaid expenses and other assets  $   $5,024   $   $666 
                        
   Other long-term assets       6,869        9 
                        
   Accrued expenses and other liabilities   17        10,506     
                        
   Other long-term liabilities   32        5,608     
Fuel collars designated as hedging instruments                       
   Prepaid expenses and other assets       452    68    195 
                        
Fuel options not designated as hedging instruments                       
   Prepaid expenses and other assets           68    195 
Foreign currency options designated as hedging instruments                       
    Accrued expenses and other liabilities                       9,815  
Foreign currency forward contracts designated as hedging instruments                                    
    Prepaid expenses and other assets           2,624              
                                     
    Accrued expenses and other liabilities                       6,582  
                                     
    Other long-term liabilities     166             11,277        
Foreign currency collar designated as a hedging instrument                                    
    Prepaid expenses and other assets           12,502              
Interest rate swaps designated as hedging instruments                                    
    Accrued expenses and other liabilities                 3,459       1,707  
                                     
    Other long-term liabilities                 1,388       1,374  

  

The fair values of swap and forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and we had no derivatives or financial instruments categorized as Level 1 or Level 3.

 

 

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Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties. We are not required to post cash collateral related to our derivative instruments. The following table discloses the amounts recognized within assets and liabilities (in thousands):

 

September  30, 2014  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Liabilities  $32,374   $(215)  $32,159   $(4,847)  $27,312 

 

December 31, 2013  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Assets  $27,471   $(1,065)  $26,406   $(15,126)  $11,280 
Liabilities   19,478        19,478    (19,478)    

 

Fuel Swaps

 

As of September 30, 2014, we had fuel swaps maturing through December 31, 2017 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 717,000 metric tons of our projected fuel purchases. The effects on the consolidated financial statements of the fuel swaps which were designated as cash flow hedges were as follows (in thousands): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain (loss) recognized in other comprehensive income – effective portion  $(27,777)  $13,500   $(25,938)  $132 
Loss recognized in other income (expense) – ineffective portion   (51)   (83)   (16)   (182)
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   578    (2,081)   (1,345)   (5,080)

 

Fuel Collars and Options

 

As of September 30, 2014, we had fuel collars and options maturing through December 31, 2014 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 9,000 metric tons of our projected fuel purchases. The effects on the consolidated financial statements of the fuel collars which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain (loss) recognized in other comprehensive income – effective portion  $(127)  $427   $(436)  $(1,108)
Gain (loss) recognized in other income (expense) – ineffective portion   4    (51)   111    (29)
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   370    332    1,111    1,150 

  

The effects on the consolidated financial statements of the fuel options which were not designated as hedging instruments were as follows (in thousands):

  

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain (loss) recognized in other income (expense)  $(59)  $430   $127   $1,011 

 

Foreign Currency Forward Contract

 

As of September 30, 2014, we had a foreign currency forward contract which is used to mitigate the financial impact of volatility in foreign currency exchange rates related to a ship construction contract denominated in euros. The notional amount of our foreign currency forward contract was €289.0 million, or $365.0 million based on the euro/U.S. dollar exchange rate as of September 30, 2014. The effects on the

 

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consolidated financial statements of the foreign currency forward contract which was designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Loss recognized in other comprehensive income  – effective portion  $(11,199)  $   $(12,187)  $(7,886)
Gain (loss) recognized in other income (expense) – ineffective portion           (1)   66 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   (63)   (32)   (180)   (52)

 

The effects on the consolidated financial statements of the foreign currency forward contracts which were not designated as hedging instruments were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain recognized in other income (expense)  $   $   $   $20 

 

Foreign Currency Options

 

We had foreign currency options that matured through January 2014, which consisted of call options with deferred premiums. These options were used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. If the spot rate at the date the ships were delivered was less than the strike price under these option contracts, we would have paid the deferred premium and would not exercise the foreign currency options. The effects on the consolidated financial statements of the foreign currency options which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain (loss) recognized in other comprehensive income  – effective portion  $   $1,179   $(1,157)  $(3,174)
Gain (1oss) recognized in other income (expense) – ineffective portion       13    (241)   (307)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   330    177    938    294 

 

Foreign Currency Collar

 

We had a foreign currency collar that matured in January 2014. The collar was used to mitigate the volatility of foreign currency exchange rates related to a ship construction contract denominated in euros.

 

The effects on the consolidated financial statements of the foreign currency collar which was designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain (loss) recognized in other comprehensive income – effective portion  $   $4,518   $(1,588)  $2,243 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   (91)       (242)    

 

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Interest Rate Swaps

 

As of September 30, 2014, we had interest rate swap agreements to mitigate our exposure to interest rate movements and to manage our interest expense. The notional amount of outstanding debt associated with the interest rate swap agreements was $627.5 million. The effects on the consolidated financial statements of the interest rate swaps which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Gain (loss) recognized in other comprehensive income – effective portion  $1,302   $(2,826)  $(3,054)  $(2,826)
Loss recognized in other income (expense) - ineffective portion       (334)       (334)
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net   695    65    1,543    65 

 

Long-Term Debt

 

As of September 30, 2014 and December 31, 2013, the fair value of our long-term debt, including the current portion, was $3,571.3 million and $3,146.4 million, which was $107.4 million and $18.6 million higher, respectively, than the carrying values. The difference between the fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates. The fair value of our long-term debt was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities. The calculation of the fair value of our long-term debt is considered a Level 2 input.

 

Other

 

The carrying amounts reported in the consolidated balance sheets of all financial assets and liabilities other than our long-term debt approximate fair value.

 

8.Employee Benefits and Share Option Plans

 

Share Option Awards

 

The following is a summary of option activity under our share option plan for the nine months ended September 30, 2014:

 

   Number of Share Option
Awards
 
   Time-
Based
Options
   Performance-
Based
Options
 
Outstanding as of  December 31, 2013   3,242,643    1,572,516 
Granted   2,473,115     
Exercised   (95,365)   (72,175)
Forfeited or expired   (71,890)   (2,866)
Outstanding as of September 30, 2014   5,548,503    1,497,475 

 

During the nine months ended September 30, 2014 we granted approximately 2.5 million of options at a weighted-average exercise price of $32.16. 

 

9.Commitments and Contingencies

 

Ship Construction Contracts 

 

We have orders with Meyer Werft for four Breakaway Plus Class Ships for delivery in the fall of 2015, spring of 2017, spring of 2018 and fall of 2019. These ships will be the largest in our fleet, reaching approximately 164,600 Gross Tons and up to 4,200 Berths each and will be

 

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similar in design and innovation to our Breakaway Class Ships. The combined contract cost of these four ships is approximately €3.0 billion, or $3.8 billion based on the euro/U.S. dollar exchange rate as of September 30, 2014. We have export credit financing in place that provides financing for 80% of their contract prices.

 

In connection with the contracts to build the ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.  

 

Litigation

 

In July 2009, a class action complaint was filed against NCL (Bahamas) Ltd. in the United States District Court, Southern District of Florida, on behalf of a purported class of crew members alleging inappropriate deductions of their wages pursuant to the Seaman’s Wage Act and wrongful termination resulting in a loss of retirement benefits. In December 2010, the Court denied the plaintiffs’ Motion for Class Certification. In February 2011, the plaintiffs filed a Motion for Reconsideration as to the Court’s Order on Class Certification which was denied. The Court tried six individual plaintiffs’ claims, and in September 2012 awarded wages aggregating approximately $100,000 to such plaintiffs. In October 2013, the United States Court of Appeals for the Eleventh Circuit affirmed the Court’s rulings as to the denial of Class Certification and the trial verdict. The Plaintiffs filed a petition for a writ of certiorari in the United States Supreme Court seeking review of the appellate court’s decision which was denied in March 2014. We are vigorously defending this action and are not able at this time to estimate the impact of these proceedings.

 

In May 2011, a class action complaint was filed against NCL (Bahamas) Ltd. in the United States District Court, Southern District of Florida, on behalf of a purported class of crew members alleging inappropriate deductions of their wages pursuant to the Seaman’s Wage Act and breach of contract. In July 2012, this action was stayed by the Court pending the outcome of the litigation commenced with the class action complaint filed in July 2009. We are vigorously defending this action and are not able at this time to estimate the impact of these proceedings.

 

In the normal course of our business, various other claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount. Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other reasonably possible contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery. 

 

10.Subsequent Events

 

Plan of Merger

 

On September 2, 2014, NCLH entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) with Portland Merger Sub, Inc., a corporation organized under the laws of the Republic of Panama and a wholly-owned direct subsidiary of NCLC (“Merger Sub”), Prestige Cruises International, Inc., (“Prestige”) and Apollo Management, L.P., a Delaware limited partnership, as the stockholders’ representative.  At the Effective Time (as defined in the Merger Agreement) and subject to the terms and conditions contemplated in the Merger Agreement, Merger Sub will merge with and into Prestige (the “Merger”), and upon consummation of the Merger, Merger Sub will cease to exist and Prestige will continue as the surviving corporation and wholly-owned subsidiary of NCLC. The Merger is expected to close within the fourth quarter of 2014. For more on the Merger, we refer you to our Definitive Information Statement on Schedule 14C filed with the SEC on October 16, 2014.

 

Compensatory Arrangements of Certain Officers

 

Prior to our initial public offering in January of 2013, members of our management and former management were granted profits interests in NCLC, which were converted into units in NCLC in connection with our initial public offering (the “Management Units”). Subject to the terms of the Amended and Restated United States Tax Agreement for NCLC (as further amended, the “Tax Agreement”) and the Exchange Agreement for NCLC that forms a part of the Tax Agreement (as amended, the “Exchange Agreement”), each vested Management Unit may currently be exchanged for one ordinary share of NCLH.

 

On October 17, 2014, the NCLH’s Compensation Committee approved a series of actions intended to result in our named executive officers and other holders of Management Units exchanging their Management Units for ordinary shares of NCLH so that NCLH may become the sole member and 100% owner of the economic interests in NCLC.

 

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

 

Cautionary Statement Concerning Forward-Looking Statements

 

Certain statements in this report constitute forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts in this report, 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), are forward-looking statements. Many, but not all of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend” and “future” and for similar words. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which 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:

 

the effects of costs incurred in connection with the Merger and the integration of the Prestige business into NCLH;

 

the debt we incur or assumes in connection with the Merger;

 

the ability to realize the anticipated benefits of the Merger;

 

our assumption of certain potential liabilities relating to Prestige’s business;

 

the diversion of management’s attention away from operations as a result of the integration of Prestige’s business into our business;

 

the effect that the Merger may have on employee relations;

 

general guest uncertainty related to the Merger;

 

the adverse impact of general economic and related factors, such as fluctuating or increasing levels of unemployment, underemployment and fuel prices, declines in the securities and real estate markets and perceptions of these conditions can decrease the level of disposable income of consumers or 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 could affect the combined company’s ability to compete effectively;

 

our substantial indebtedness, including the inability to generate the necessary amount of cash to service our existing debt, and to repay our credit facilities;

 

negative publicity surrounding the cruise industry;

 

changes in fuel prices and/or other cruise operating costs;

 

the risks associated with operating internationally, including changes in interest rates and/or foreign currency rates;

 

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

 

the continued borrowing availability under our credit facilities and compliance with our financial covenants;

 

our ability to incur significantly more debt despite our substantial existing indebtedness;

 

the impact of volatility and disruptions in the global credit and financial markets which may adversely affect our ability to borrow and could increase our counterparty credit risks, including those under our credit facilities, derivatives, contingent obligations, insurance contracts and new ship progress payment guarantees;

 

adverse events impacting the security of travel such as terrorist acts, acts of piracy, armed conflict and other international events;

 

the impact of any future changes relating to how external distribution channels sell and market our cruises;

 

our reliance on third parties to provide hotel management service to certain of our ships in connection with the Merger and certain other services;

 

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

 

the impact of the spread of epidemics and viral outbreaks;

 

the delivery schedules and estimated costs of new ships, the impact of delays, costs and other factors resulting from ship repairs, maintenance and refurbishment of the combined company’s ships;

 

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

 

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

 

the uncertain political environment in countries where we or Prestige operate;

 

the impact of weather and natural disasters;

 

accidents and other incidents affecting the health, safety, security and vacation satisfaction of guests or causing damage to ships, which could cause the modification of itineraries or cancellation of a cruise or series of cruises;

 

our ability to obtain insurance coverage on terms that are favorable or consistent with our expectations;

 

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

 

the ability to keep pace with developments in technology;

 

the impact of amendments to collective bargaining agreements for crew members and other employee relation issues;

 

the continued availability of attractive port destinations;

 

the ability to attract and retain key personnel and qualified shipboard crew, maintain good relations with employee unions, maintain or renegotiate our collective bargaining agreements on favorable terms and prevent any disruptions in work;

 

the control of our business by our Sponsors;

 

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

 

the effects of costs in connection with litigation, enforcement actions, fines or penalties;

 

increases in our future fuel costs related to implementing IMO regulations, which require the use of higher priced low sulfur fuels in certain cruising areas;

 

the implementation of regulations in the U.S. requiring U.S. citizens to obtain passports for travel to additional foreign destinations; and

 

other factors set forth under “Risk Factors” in our most recently filed Annual Report on Form 10-K and set forth herein under “Item 1A Risk Factors.”

 

The above examples are not exhaustive and new risks emerge from time to time. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we will operate in the future. These forward-looking statements speak only as of the date of this report. 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.

 

The interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2013, which are included in our most recently filed Annual Report on Form 10-K.

 

Terminology

 

For further information about our non-GAAP financial measures including a reconciliation to the most directly comparable GAAP financial measure, we refer you to “Results of Operations.”

 

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

 

Adjusted EBITDA. EBITDA adjusted for other income (expense) and other supplemental adjustments.

 

Adjusted EPS. Adjusted Net Income divided by the number of diluted weighted-average shares.

 

Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost less fuel expense adjusted for supplemental adjustments.

 

Adjusted Net Income. Net income adjusted for supplemental adjustments.

 

Berths. Double occupancy capacity per stateroom (single occupancy per studio stateroom) even though many staterooms can accommodate three or more passengers.
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Breakaway Class Ships. Norwegian Breakaway delivered in April 2013 and Norwegian Getaway delivered in January 2014.

 

Breakaway Plus Class Ships. The next generation of ships which are similar in design and innovation to Breakaway Class Ships.

 

Breakaway Two Credit Facility. €529.8 million Breakaway Two Credit Agreement, dated as of November 18, 2010, by and among Breakaway Two, Ltd. and a syndicate of international banks and related Guarantee by NCL Corporation Ltd., as amended.

 

Business Enhancement Capital Expenditures. Capital expenditures other than those related to new ship construction and ROI Capital Expenditures.

 

Capacity Days. Available Berths multiplied by the number of cruise days for the period.

 

Charter. The hire of a ship for a specified period of time.

 

Constant Currency. A calculation whereby foreign currency-denominated revenue and expenses in a period are converted at the U.S. dollar exchange rate of a comparable period in order to eliminate the effects of the foreign exchange fluctuations.

 

Dry-dock. A process whereby a ship is positioned in a large basin where all of the fresh/sea water is pumped out in order to carry out cleaning and repairs of those parts of a ship which are below the water line.

 

EBITDA. Earnings before interest, taxes, depreciation and amortization.

 

GAAP. Generally accepted accounting principles in the U.S.

 

Gross Cruise Cost. The sum of total cruise operating expense and marketing, general and administrative expense.

 

Gross Tons. A unit of enclosed passenger space on a cruise ship, such that one gross ton = 100 cubic feet or 2.831 cubic meters.

 

Gross Yield. Total revenue per Capacity Day.

 

IMO. International Maritime Organization, a United Nations agency that sets international standards for shipping.

 

Initial Public Offering (or “IPO”). The initial public offering of 27,058,824 ordinary shares, par value $.001 per share, of NCLH, which was consummated on January 24, 2013.

 

Management NCL Corporation Units. NCLC’s previously outstanding profits interests issued to management (or former management) of NCLC which have been converted into units in NCLC in connection with the Corporate Reorganization.

 

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

 

Net Cruise Cost Excluding Fuel. Net Cruise Cost less fuel expense.

 

Net Revenue. Total revenue less commissions, transportation and other expense and onboard and other expense.

 

Net Yield. Net Revenue per Capacity Day.

 

Norwegian NEXT program. A program which is designed to elevate the guest experience through new enhancements, experiences and transformations.

 

Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A percentage in excess of 100% indicates that three or more passengers occupied some staterooms.

 

Passenger Cruise Days. The number of passengers carried for the period, multiplied by the number of days in their respective cruises.

 

Revolving Loan Facility. $625.0 million senior secured revolving credit facility maturing on May 24, 2018.

 

ROI Capital Expenditures. Comprised of project-based capital expenditures which have a quantified return on investment.

 

SEC. Securities and Exchange Commission.

 

Secondary Offerings. NCLH’s secondary public offerings of NCLH’s ordinary shares in March 2014, December 2013 and August 2013.

 

Selling Shareholders. The Apollo Funds and Star NCLC Holdings Ltd. (“Star NCLC”). Genting HK owns NCLH’s ordinary shares indirectly through Star NCLC, its wholly-owned subsidiary.

 

Shipboard Retirement Plan. An unfunded defined benefit pension plan for certain crew members which computes benefits based on years of service, subject to certain requirements.
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Non-GAAP Financial Measures

 

We use certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel and Adjusted EBITDA to enable us to analyze our performance. See “Terminology” for the definitions of these non-GAAP financial measures. We utilize Net Revenue 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. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance.

 

As our business includes the sourcing of passengers and deployment of vessels outside of North America, a portion of our revenue and expenses are denominated in foreign currencies, particularly euro and British Pound sterling, which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business.

 

We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We believe that Adjusted EBITDA is a useful measure in determining the Company’s performance as it reflects certain operating drivers of the Company’s business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or measures 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 includes other supplemental adjustments.

 

In addition, Adjusted Net Income and Adjusted EPS are supplemental financial measures used to demonstrate GAAP net income and earnings per share excluding certain charges. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance, and we believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparison to our historical performance. These charges vary from period to period; accordingly, our presentation of Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results.

 

You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the “Results of Operations” section.

 

Financial Presentation

 

Revenue from our cruise and cruise-related activities are categorized by us as “passenger ticket revenue” and “onboard and other revenue.” Passenger ticket revenue and onboard and other revenue vary according to the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the summer months.

 

Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent passengers purchase these items from us.

 

Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo. We record onboard revenue from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

  

Our cruise operating expense is classified as follows:

 

Commissions, transportation and other primarily consists of direct costs associated with passenger ticket revenue. These costs include travel agent commissions, air and land transportation expenses, related credit card fees, costs associated with service

 

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charges and certain port expenses.

 

Onboard and other primarily consists of direct costs that are incurred in connection with onboard and other revenue. These include costs incurred in connection with shore excursions, beverage sales and gaming.

 

Payroll and related consists of the cost of wages and benefits for shipboard employees.

 

Fuel includes fuel costs, the impact of certain fuel hedges and fuel delivery costs.

 

Food consists of food costs for passengers and crew.

 

Other consists of repairs and maintenance (including Dry-dock costs), ship insurance and other ship expenses.

 

Critical Accounting Policies

 

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2013 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Executive Quarterly Overview

 

On September 2, 2014, NCLH entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) with Portland Merger Sub, Inc., a corporation organized under the laws of the Republic of Panama and a wholly-owned direct subsidiary of NCLC (“Merger Sub”), Prestige Cruises International, Inc., (“Prestige”) and Apollo Management, L.P., a Delaware limited partnership, as the stockholders’ representative.  At the Effective Time (as defined in the Merger Agreement) and subject to the terms and conditions contemplated in the Merger Agreement, Merger Sub will merge with and into Prestige (the “Merger”), and upon consummation of the Merger, Merger Sub will cease to exist and Prestige will continue as the surviving corporation and wholly-owned subsidiary of NCLC. The Merger is expected to close within the fourth quarter of 2014. For more on the Merger, we refer you to our Definitive Information Statement on Schedule 14C filed with the SEC on October 16, 2014.

 

For the third quarter of 2014, we reported Adjusted Net Income of $232.2 million and Adjusted EPS of $1.11 which excludes $29.0 million of supplemental adjustments which consist of $20.3 million of transaction expenses related to the Merger (we refer you to our “Results of Operations” below for a calculation of Adjusted Net Income and Adjusted EPS). On a GAAP basis, net income attributable to Norwegian Cruise Line Holdings Ltd. and diluted earnings per share were $201.1 million and $0.97, respectively.

 

Three months ended September 30, 2014 (“2014”) compared to the three months ended September 30, 2013 (“2013”)

 

Total revenue increased 13.7% to $907.0 million in 2014 compared to $797.9 million in 2013. Net Revenue in 2014 increased 16.5% to $694.4 million from $596.1 million in 2013 primarily due to an increase in Capacity Days of 13.1% and a Net Yield increase of 3.0%. The increase in Capacity Days was primarily due to the delivery of Norwegian Getaway in January 2014. The Net Yield improvement was due to higher net ticket and onboard and other revenue. On a Constant Currency basis, Net Yield increased 2.6% in 2014 compared to 2013.

 

Operating income was $234.8 million in 2014 compared to $208.1 million in 2013 and Adjusted EBITDA (we refer you to our “Results of Operations” below for a calculation of Adjusted EBITDA) improved 20.5% to $326.7 million for the same period.

 

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Results of Operations

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Revenue                    
Passenger ticket   72.7%   73.2%   70.8%   71.1%
Onboard and other   27.3%   26.8%   29.2%   28.9%
Total revenue   100.0%   100.0%   100.0%   100.0%
Cruise operating expense                    
Commissions, transportation and other   15.8%   17.6%   16.0%   17.6%
Onboard and other   7.7%   7.7%   7.4%   7.8%
Payroll and related   12.8%   11.4%   13.8%   12.6%
Fuel   8.8%   9.7%   10.1%   11.4%
Food   4.9%   4.7%   5.4%   5.1%
Other   6.4%   6.1%   8.4%   8.4%
Total cruise operating expense   56.4%   57.2%   61.1%   62.9%
Other operating expense                    
Marketing, general and administrative   10.7%   9.7%   11.3%   12.0%
Depreciation and amortization   7.0%   7.0%   8.1%   8.1%
Total other operating expense   17.7%   16.7%   19.4%   20.1%
Operating income   25.9%   26.1%   19.5%   17.0%
Non-operating income (expense)                    
Interest expense, net   (3.6)%   (3.3)%   (4.1)%   (13.1)%
Other income (expense)   0.4%   (0.1)%   0.2%   %
Total non-operating income (expense)   (3.2)%   (3.4)%   (3.9)%   (13.1)%
                     
Net income before income taxes   22.7%   22.7%   15.6%   3.9%
Income tax benefit (expense)   (0.3)%   (1.0)%   0.2%   (0.6)%
Net income   22.4%   21.7%   15.8%   3.3%
Net income attributable to non-controlling interest   0.2%   0.3%   0.2%   %
Net income attributable to Norwegian Cruise Line Holdings Ltd.   22.2%   21.4%   15.6%   3.3%

 

The following table sets forth selected statistical information:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Passengers carried   516,409    449,615    1,506,518    1,223,271 
Passenger Cruise Days   3,609,294    3,170,169    10,079,345    8,461,719 
Capacity Days   3,143,592    2,779,658    9,113,991    7,700,482 
Occupancy Percentage   114.8%   114.0%   110.6%   109.9%

 

Net Revenue, Gross Yield and Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2014
Constant
Currency
   2013   2014   2014
Constant
Currency
   2013 
Passenger ticket revenue  $659,117   $657,300   $583,923   $1,655,666   $1,655,085   $1,400,470 
Onboard and other revenue   247,900    248,047    213,962    681,306    681,652    569,479 
Total revenue   907,017    905,347    797,885    2,336,972    2,336,737    1,969,949 
Less:                              
Commissions, transportation and other expense   143,194    144,488    140,086    374,716    377,663    347,650 
Onboard and other expense   69,389    69,537    61,744    172,780    173,126    153,431 
Net Revenue  $694,434   $691,322   $596,055   $1,789,476   $1,785,948   $1,468,868 
Capacity Days   3,143,592    3,143,592    2,779,658    9,113,991    9,113,991    7,700,482 
Gross Yield  $288.53   $288.00   $287.04   $256.42   $256.39   $255.82 
Net Yield  $220.90   $219.91   $214.43   $196.34   $195.96   $190.75 

 

Gross Cruise Cost, Net Cruise Cost, Net Cruise Cost Excluding Fuel and Adjusted Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except Capacity Days and per Capacity Day data):

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   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2014
Constant
Currency
   2013   2014   2014
Constant
Currency
   2013 
Total cruise operating expense  $511,298   $511,905   $456,102   $1,428,004   $1,429,418   $1,239,870 
Marketing, general and administrative expense   97,111    96,778    77,606    263,584    262,408    236,923 
Gross Cruise Cost   608,409    608,683    533,708    1,691,588    1,691,826    1,476,793 
Less:                              
Commissions, transportation and other expense   143,194    144,488    140,086    374,716    377,663    347,650 
Onboard and other expense   69,389    69,537    61,744    172,780    173,126    153,431 
Net Cruise Cost   395,826    394,658    331,878    1,144,092    1,141,037    975,712 
Less: Fuel expense   79,881    79,881    77,035    236,753    236,753    225,115 
Net Cruise Cost Excluding Fuel   315,945    314,777    254,843    907,339    904,284    750,597 
Less:                               
Non-cash compensation   7,008    7,008    4,057    14,696    14,696    22,584 
Expenses related to Secondary Offerings           1,400    2,075    2,075    1,400 
Merger transaction expenses (1)   20,268    20,268        20,268    20,268     
Other (2)   810    810    1,400    2,943    2,943    3,323 
Adjusted Net Cruise Cost
Excluding Fuel
  $287,859   $286,691   $247,986   $867,357   $864,302   $723,290 
Capacity Days   3,143,592    3,143,592    2,779,658    9,113,991    9,113,991    7,700,482 
                               
Gross Cruise Cost per Capacity Day  $193.54   $193.63   $192.00   $185.60   $185.63   $191.78 
Net Cruise Cost per Capacity Day  $125.92   $125.54   $119.40   $125.53   $125.20   $126.71 
Net Cruise Cost Excluding Fuel per Capacity Day  $100.50   $100.13   $91.68   $99.55   $99.22   $97.47 
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day  $91.57   $91.20   $89.21   $95.17   $94.83   $93.93 

 

(1)Included in the three and nine months ended September 30, 2014 are certain fees (legal, accounting and consulting) and integration costs related to the Merger.

 

(2)Included in the three months ended September 30, 2013 and 2014 are expenses primarily associated with the tax restructuring. Included in the nine months ended September 30, 2013 and 2014 are expenses primarily associated with the tax restructuring and costs related to the settlement of a 2007 breach of contract claim.

 

Adjusted Net Income and Adjusted EPS were calculated as follows (in thousands, except share and per share data):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Net income attributable to Norwegian Cruise Line Holdings Ltd.  $201,078   $170,858   $363,961   $65,622 
Net income attributable to non-controlling interest   2,200    2,036    4,288    857 
Net income   203,278    172,894    368,249    66,479 
Non-cash share-based compensation related to the IPO               18,527 
Non-cash compensation   7,008    4,057    14,696    4,566 
Taxes related to changes in corporate structure and debt prepayments, net   870    2,441    (5,304)   1,671 
Expenses related to Secondary Offerings       1,400    2,075    1,400 
Expenses related to debt prepayments (1)               160,573 
Merger transaction expenses (2)   20,268        20,268     
Other (3)   810    1,400    2,943    2,100 
Adjusted Net Income  $232,234   $182,192   $402,927   $255,316 
                     
Diluted weighted–average shares outstanding   208,507,181    210,703,244    209,992,647    208,673,608 
Diluted earnings per share  $0.97   $0.82   $1.75   $0.32 
Adjusted EPS  $1.11   $0.86   $1.92   $1.22 

 

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(1)The nine months ended September 30, 2013 consists of premiums, write-offs of deferred fees and other expenses related to prepayments of debt.
(2)Included in the three and nine months ended September 30, 2014 are certain fees (legal, accounting and consulting) and integration costs related to the Merger.
(3)Included in the three and nine months ended September 30, 2014 and the nine months ended September 30, 2013 are expenses primarily associated with the tax restructuring. The nine months ended September 30, 2014 also includes costs related to the settlement of a 2007 breach of contract claim.

 

EBITDA and Adjusted EBITDA were calculated as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
Net income attributable to Norwegian Cruise Line Holdings Ltd.  $201,078   $170,858   $363,961   $65,622 
Interest expense, net   32,284    26,627    95,316    257,969 
Income tax (benefit) expense   2,502    7,933    (3,761)   11,177 
Depreciation and amortization expense   63,786    56,097    188,885    158,699 
EBITDA   299,650    261,515    644,401    493,467 
Net income attributable to non-controlling interest   2,200    2,036    4,288    857 
Other (income) expense   (3,242)   626    (3,305)   (1,168)
Non-cash share-based compensation related to the IPO               18,527 
Non-cash compensation   7,008    4,057    14,696    6,782 
Expenses related to Secondary Offerings       1,400    2,075    1,400 
Merger transaction expenses (1)   20,268        20,268     
Other (2)   810    1,400    2,943    3,264 
Adjusted EBITDA  $326,694   $271,034   $685,366   $523,129 

 

(1)Included in the three and nine months ended September 30, 2014 are certain fees (legal, accounting and consulting) and integration costs related to the Merger.
(2)Included in the three months ended September 30, 2014 and 2013 are expenses primarily associated with the tax restructuring. Included in the nine months ended September 30, 2014 and 2013 are expenses primarily associated with the tax restructuring and costs related to the settlement of a 2007 breach of contract claim.

 

Three months ended September 30, 2014 (“2014”) compared to three months ended September 30, 2013 (“2013”)

 

Revenue

 

Total revenue increased 13.7% to $907.0 million in 2014 compared to $797.9 million in 2013. Net Revenue in 2014 increased 16.5% to $694.4 million from $596.1 million in 2013 primarily due to an increase in Capacity Days of 13.1% and a Net Yield increase of 3.0%. The increase in Capacity Days was primarily due to the delivery of Norwegian Getaway in January 2014. The Net Yield improvement was due to higher net ticket and onboard and other revenue. On a Constant Currency basis, Net Yield increased 2.6% in 2014 compared to 2013.

 

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Expense

 

Total cruise operating expense increased 12.1% in 2014 compared to 2013 primarily due to the increase in Capacity Days discussed above. Total other operating expense increased 20.3% in 2014 compared to 2013 primarily due to transaction expenses related to the Merger and an increase in depreciation and amortization expense related to the addition of Norwegian Getaway. On a Capacity Day basis, Net Cruise Cost increased 5.5% (5.1% on a Constant Currency basis) primarily due to the transaction expenses related to the Merger and increases in cruise operating expenses partially offset by decreases in fuel expense. The decrease in fuel expense was primarily the result of a 7.8% decrease in the average fuel price to $641 per metric ton in 2014 from $695 per metric ton in 2013. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.6% (2.2% on a Constant Currency basis) primarily due to an increase in cruise operating expenses due to investments in guest experience enhancement initiatives under the Norwegian NEXT program. 

 

Interest expense, net increased to $32.3 million in 2014 from $26.6 million in 2013 primarily due to higher average debt outstanding and higher interest rates.

 

Income tax benefit (expense) was an expense of $2.5 million in 2014 compared to an expense of $7.9 million in 2013 from our U.S. operations.

 

Nine months ended September 30, 2014 (“2014”) compared to nine months ended September 30, 2013 (“2013”)

 

Revenue

 

Total revenue increased 18.6% to $2.3 billion in 2014 compared to $2.0 billion in 2013. Net Revenue in 2014 increased 21.8% to $1.8 billion from $1.5 billion in 2013 due to an increase in Capacity Days of 18.4% and a Net Yield increase of 2.9%. The increase in Capacity Days was primarily due to the delivery of Norwegian Breakaway in April 2013 and Norwegian Getaway in January 2014. The Net Yield improvement was due to higher net ticket and onboard and other revenue. On a Constant Currency basis, Net Yield increased 2.7% in 2014 compared to 2013.

 

Expense

 

Total cruise operating expense increased 15.2% in 2014 compared to 2013 primarily due to the increase in Capacity Days as discussed above. Total other operating expense increased 14.4% in 2014 compared to 2013 primarily due to an increase in depreciation and amortization expense related to the addition of Norwegian Breakaway and Norwegian Getaway, transaction expenses related to the Merger and certain inaugural and launch-related costs for Norwegian Getaway. On a Capacity Day basis, Net Cruise Cost was unchanged due to decreases in fuel expense and general and administrative expenses primarily offset by transaction expenses related to the Merger. The decrease in fuel expense was primarily the result of a 7.2% decrease in the average fuel price to $636 per metric ton in 2014 from $685 per metric ton in 2013. The decrease in general and administrative expense was primarily due to non-cash expenses included in 2013 which related to share-based compensation recognized upon the realization of the IPO. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day remained relatively unchanged on an as reported and Constant Currency basis.

 

Interest expense, net decreased to $95.3 million in 2014 from $258.0 million in 2013 primarily due to lower interest rates resulting from the benefits from the redemption of higher rate debt and refinancing transactions partially offset by an increase in average debt outstanding. In addition, 2013 included $160.6 million of expenses associated with debt prepayments partially offset by lower interest rates.

 

In 2014 we had an income tax benefit of $3.8 million compared to an expense of $11.2 million in the prior year. The income tax benefit in 2014 primarily related to a change in our corporate entity structure which was completed in 2013. For the year ended December 31, 2013, the tax provision reflected an interest expense deduction based on a method supported by the information available at such time. During the first quarter of 2014, we received additional information which allowed us to elect another acceptable tax method, resulting in a tax benefit of $11.1 million which includes a $5.3 million non-recurring benefit which has been excluded from Adjusted Net Income and Adjusted EPS for the nine months ended September 30, 2014. Income tax expense, net for the nine months ended September 30, 2013 was $11.2 million which consists of a one-time expense of $4.2 million due to a change in U.S. tax status from a partnership to a corporation in connection with the IPO, a benefit of $2.6 million in connection with our prepayments of debt, and a $9.6 million expense from our U.S. operations.

 

Liquidity and Capital Resources

 

General

 

As of September 30, 2014, our liquidity was $651.9 million consisting of $55.9 million in cash and cash equivalents and $596.0 million available under our Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

 

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As of September 30, 2014, we had a working capital deficit of $1,112.4 million. This deficit included $504.1 million of advance ticket sales, which represents the passenger ticket revenue we collect in advance of sailing dates; accordingly, they are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.

 

Sources and Uses of Cash

 

In this section, references to “2014” refer to the nine months ended September 30, 2014 and references to “2013” refer to the nine months ended September 30, 2013. 

 

Net cash provided by operating activities was $700.7 million in 2014 as compared to $398.3 million in 2013. The change in net cash provided by operating activities reflects net income in 2014 of $368.2 million compared to net income in 2013 of $66.5 million, as well as timing differences in cash receipts and payments relating to operating assets and liabilities. The net income in 2013 included fees of $124.2 million related to prepayment of debt.

 

Net cash used in investing activities was $864.8 million in 2014, primarily related to payments for delivery of Norwegian Getaway, as well as payments related to our Breakaway Plus Class Ships and other ship improvements and shoreside projects. Net cash used in investing activities was $835.8 million in 2013, primarily related to the payments for construction and delivery of Norwegian Breakaway and construction of Norwegian Getaway and other ship improvements and shoreside projects.

 

Net cash provided by financing activities was $163.5 million in 2014, primarily due to proceeds from the Breakaway Two Credit Facility and credit facilities related to our Breakaway Plus Class Ships partially offset by repayments of our revolving credit facility and other borrowings. Net cash provided by financing activities was $448.9 million in 2013 primarily due to proceeds from the issuance of our $300.0 million 5% senior notes due 2018 as well as borrowings under certain of our credit facilities. Also included are the proceeds from the issuance of ordinary shares partially offset by repayments of our $450.0 million 11.75% senior secured notes due 2016 and revolving credit facilities. Additionally, we made a payment related to the Norwegian Sky purchase agreement.

 

Future Capital Commitments

 

Future capital commitments consist of contracted commitments, including future expected capital expenditures for business enhancements and ship construction contracts. As of September 30, 2014 anticipated capital expenditures together with amounts for ship construction and related export credit financing were as follows (in thousands, based on the euro/U.S. dollar exchange rate as of September 30, 2014):

 

   Remaining
Quarters
   Full Year 
   2014   2014   2015   2016 
Ship construction  $63,889   $847,785   $924,203   $253,517 
Ship financing   (42,341)   (737,119)   (712,770)   (139,495)
Ship construction net of financing  $21,548   $110,666   $211,433   $114,022 
Business Enhancement Capital Expenditures including ROI Capital Expenditures (1)(2)(3)  $35,000   $98,000   $83,000   $90,000 
Incremental ROI Capital Expenditures for exhaust gas scrubbers  $14,000   $27,000   $27,000   $10,000 

 

(1)Remaining Quarters and Full Year 2014 includes $23 million and $49 million in ROI Capital Expenditures, respectively.
(2)Remaining Quarters and Full Year 2014, 2015 and 2016 exclude amounts for exhaust gas scrubbers.
(3)Remaining Quarters and Full Year 2014 and 2015 include investment for development of our future cruise destination in Belize.

  

We have orders with Meyer Werft for four Breakaway Plus Class Ships for delivery in the fall of 2015, spring of 2017, spring of 2018 and fall of 2019. These ships will be the largest in our fleet, reaching approximately 164,600 Gross Tons and up to 4,200 Berths each and will be similar in design and innovation to our Breakaway Class Ships. The combined contract cost of these four ships is approximately €3.0 billion, or $3.8 billion based on the euro/U.S. dollar exchange rate as of September 30, 2014. We have export credit financing in place that provides financing for 80% of their contract prices.

 

In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

 

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Capitalized interest for the three and nine months ended September 30, 2014 was $5.5 million and $14.7 million, respectively, primarily associated with the construction of the Breakaway Plus Class Ships. Capitalized interest for the three and nine months ended September 30, 2013 was $5.9 million and $19.0 million, respectively, primarily associated with the construction of Norwegian Breakaway and Norwegian Getaway.

 

Off-Balance Sheet Transactions

 

None.

 

Contractual Obligations

 

As of September 30, 2014, our contractual obligations, with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):

  

    Total     Less than
1 year
    1-3 years     3-5 years     More than
5 years
 
Long-term debt (1)   $ 3,463,911     $ 381,565     $ 767,964     $ 1,206,807     $ 1,107,575  
Due to Affiliate (2)     73,906       36,928       36,978              
Operating leases (3)     39,865       6,710       12,826       10,300       10,029  
Ship construction contracts (4)     3,713,384       158,780       1,752,902       991,933       809,769  
Port facilities (5)     252,894       32,701       68,823       55,810       95,560  
Interest (6)     483,931       96,364       170,227       98,659       118,681  
Other (7)     89,815       49,136       30,057       7,599       3,023  
Total   $ 8,117,706     $ 762,184     $ 2,839,777     $ 2,371,108     $ 2,144,637  

 

(1)Net of unamortized original issue discount of $1.2 million. Also includes capital leases.
(2)Primarily related to the purchase of Norwegian Sky.
(3)Primarily for offices, motor vehicles and office equipment.
(4)For four Breakaway Plus Class Ships based on the euro/U.S. dollar exchange rate as of September30, 2014. Export credit financing is in place from a syndicate of banks.
(5)Primarily for our usage of certain port facilities.
(6)Includes fixed and variable rates with LIBOR held constant as of September 30, 2014.
(7)Future commitments for service and maintenance contracts.

 

Other

 

Certain of our service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.

 

As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities. 

 

Funding Sources

 

Our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Our ships and substantially all other property and equipment are pledged as collateral for our debt. We believe we were in compliance with these covenants as of September 30, 2014.

 

We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our existing credit facility and our ability to issue debt securities or raise additional equity, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

General

 

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. The financial impacts of these derivative 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 derivatives with the underlying risk being hedged. We do not hold or issue derivatives for trading or other speculative purposes. Derivative positions are monitored using techniques including market valuations and sensitivity analyses.

 

Interest Rate Risk

 

From time to time, we consider entering into interest rate swap agreements to mitigate our exposure to interest rate movements and to manage our interest expense. As of September 30, 2014, 52% of our debt was fixed and 48% was variable which includes the effects of the interest rate swap. The notional amount of outstanding debt associated with the interest rate swap agreements as of September 30, 2014 was $627.5 million. Based on our September 30, 2014 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $16.6 million excluding the effects of capitalization of interest.

 

Foreign Currency Exchange Rate Risk

 

We use foreign currency derivatives to hedge the exposure to volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. As of September 30, 2014, we had a foreign currency forward contract to hedge the foreign currency exchange rate risk on a portion of the final payments on a ship construction contract. The notional amount of our foreign currency forward contract was €289.0 million, or $365.0 million based on the euro/U.S. dollar exchange rate as of September 30, 2014. The remaining payments not hedged aggregate €2,650.9 million, $3,348.3 million based on the euro/U.S. dollar value of the foreign currency denominated remaining payments. We estimate that a 10% change in the euro as of September 30, 2014 would result in a $334.8 million change in the U.S. dollar value of the foreign currency denominated remaining payments.

 

Fuel Price Risk

 

Our exposure to market risk for changes in fuel prices relates to the forecasted purchases of fuel on our ships. Fuel expense, as a percentage of our total cruise operating expense, was 15.6% and 16.9% for the three months ended September 30, 2014 and 2013 and 16.6% and 18.2% for the nine months ended September 30, 2014 and 2013, respectively. From time to time, we use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices. As of September 30, 2014, we had hedged approximately 91%, 59%, 50% and 10% of its remaining 2014, 2015, 2016 and 2017 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2014 fuel expense by $7.2 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements and fuel collars and options of $5.2 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of September 30, 2014. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014 to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 

In July 2009, a class action complaint was filed against NCL (Bahamas) Ltd. in the United States District Court, Southern District of Florida, on behalf of a purported class of crew members alleging inappropriate deductions of their wages pursuant to the Seaman’s Wage Act and wrongful termination resulting in a loss of retirement benefits. In December 2010, the Court denied the plaintiffs’ Motion for Class Certification. In February 2011, the plaintiffs filed a Motion for Reconsideration as to the Court’s Order on Class Certification which was denied. The Court tried six individual plaintiffs’ claims, and in September 2012 awarded wages aggregating approximately $100,000 to such plaintiffs. In October 2013, the United States Court of Appeals for the Eleventh Circuit affirmed the Court’s rulings as to the denial of Class Certification and the trial verdict. The Plaintiffs filed a petition for a writ of certiorari in the United States Supreme Court seeking review of the appellate court’s decision which was denied in March 2014. We are vigorously defending this action and are not able at this time to estimate the impact of these proceedings.

 

In May 2011, a class action complaint was filed against NCL (Bahamas) Ltd. in the United States District Court, Southern District of Florida, on behalf of a purported class of crew members alleging inappropriate deductions of their wages pursuant to the Seaman’s Wage Act and breach of contract. In July 2012, this action was stayed by the Court pending the outcome of the litigation commenced with the class action complaint filed in July 2009. We are vigorously defending this action and are not able at this time to estimate the impact of these proceedings.

 

In the normal course of our business, various other claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount. Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other reasonably possible contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.

 

Item 1A. Risk Factors

 

We refer you to our 2013 Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. We wish to caution the reader that the risk factors discussed in “ Item 1A. Risk Factors ” in our 2013 Annual Report on Form 10-K, and those described elsewhere in this report or other Securities and Exchange Commission filings, could cause future results to differ materially from those stated in any forward-looking statements.

 

Significant costs have been incurred in connection with the consummation of the Merger and are expected to be incurred in connection with the integration of Prestige into our business, including legal, accounting, financial advisory and other costs.

 

We expect to incur significant costs in connection with integrating the operations, products and personnel of Prestige into our business, in addition to costs related directly to completing the Merger. These costs may include costs for:

 

·employee retention, redeployment, relocation or severance;

 

·integration of information systems;

 

·combination of corporate and administrative functions and marketing teams and processes; and

 

·maintenance and management of the combined company’s fleet.

 

In addition, we expect to incur a number of non-recurring costs associated with combining our operations with those of Prestige, which cannot be estimated accurately at this time. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of our operations with those of Prestige, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. In addition, we expect to incur or assume new indebtedness in connection with the Merger. The debt we incur or assume in connection with the Merger may limit our financial and operating flexibility, and we may incur additional debt, which could increase the risks associated with our substantial indebtedness. Our substantial indebtedness has had, and will continue to have, material consequences for our business, financial condition and results of operations.

 

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We may not realize the anticipated benefits of the Merger.

 

The Merger involves the integration of two companies that have previously operated independently. The integration of our operations with those of Prestige is expected to result in financial and operational benefits, including increased revenues and cost savings. There can be no assurance, however, regarding when or the extent to which we will be able to realize these increased revenues, cost savings or other benefits. Integration may also be difficult, unpredictable, and subject to delay because of possible company culture conflicts and different opinions on technical decisions and product roadmaps. We must integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which may be dissimilar. Difficulties associated with integration could have a material adverse effect on our business, financial condition and results of operations.

 

In connection with the Merger, we will assume certain potential liabilities relating to Prestige’s business.

 

In connection with the Merger, we will have assumed certain potential liabilities relating to Prestige’s business. To the extent we have not identified such liabilities or to the extent the indemnifications obtained from the other parties to the Merger Agreement are insufficient to cover known liabilities, these liabilities could have a material adverse effect on our business, financial condition and results of operations.

 

Integrating Prestige’s business into our business may divert our management’s attention away from operations.

 

Successful integration of Prestige’s operations, products and personnel may place a significant burden on our management and other internal resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could harm our business, financial condition and results of operations. 

 

As a result of the Merger, we may not be able to retain key personnel or recruit additional qualified personnel, which could materially adversely affect our business, financial condition and results of operations and require us to incur substantial additional costs to recruit replacement personnel.

 

As a result of the Merger, our current and prospective employees could experience uncertainty about their future roles. This uncertainty may adversely affect our ability to attract and retain high-quality employees. Any failure to attract and retain key personnel could have a material adverse effect on our business, financial condition and results of operations.

 

General guest uncertainty related to the Merger could harm us.

 

Our guests may, in response to the announcement of the consummation of the Merger, delay or defer booking decisions. If our customers delay or defer booking decisions, our revenues could materially decline or any anticipated increases in revenue could be lower than expected.

 

The adverse impact of general economic and related factors such as fluctuating or increasing levels of unemployment, underemployment and fuel prices, declines in the securities and real estate markets, and perceptions of these conditions can decrease the level of disposable income of consumers or consumer confidence. The demand for cruises is affected by international, national and local economic conditions.

 

The demand for cruises is affected by international, national and local economic conditions. Adverse changes in the perceived or actual economic climate in North America or globally, such as higher fuel prices, higher interest rates, stock and real estate market declines and/or volatility, more restrictive credit markets, higher unemployment or underemployment rates, higher taxes, and changes in governmental policies could reduce the level of discretionary income or consumer confidence in the countries from which we source our guests. Consequently, this may negatively affect demand for cruise vacations in these countries, which are a discretionary purchase. Decreases in demand for cruise vacations 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.

 

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. Because some of our expenses are incurred in foreign currencies, we are exposed to exchange rate risks. 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

 

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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. 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. If we are unable to address these risks adequately, our business, financial condition and results of operations could be materially and 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 have implemented safeguards and policies to prevent violations of various anti-corruption laws that prohibit improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business by our employees and agents. However, our existing safeguards and policies and any future improvements may prove to be less than effective and our employees or agents may engage in conduct prohibited by our policies, but for which we nevertheless may be held responsible. If our employees or agents violate our policies, we fail to maintain adequate record-keeping and internal accounting practices to accurately record our transactions or if we fail to implement or maintain other adequate safeguards, we may be subject to regulatory sanctions, or severe criminal or civil sanctions and penalties.

 

Changes in fuel prices and/or other cruise operating costs would increase the cost of our cruise ship operations.

 

Fuel expense, as a percentage of total cruise operating expense, was 15.6% and 16.9% for the three months ended September 30, 2014 and 2013 and 16.6% and 18.2% for the nine months ended September 30, 2014 and 2013, respectively. Future increases in the cost of fuel globally would increase the cost of our cruise ship operations. In addition, we could experience increases in other cruise operating costs, due to market forces and economic or political instability beyond our control. Despite any fuel hedges we are currently a party to, may become a party to as a result of the Merger or may enter into in the future, increases in fuel prices or other cruise operating costs could have a material adverse effect on our business, 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 would result in margin calls under certain fuel hedges to which we are a party or to which we may become a party as a result of the Merger, which could create a short-term liquidity risk. While we anticipate 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 covenants under certain agreements governing our indebtedness.

 

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

 

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 and may undertake such expansion efforts at any time in the future. 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.

 

The impact of volatility and disruptions in the global credit and financial markets may adversely affect our ability to borrow and could increase our counterparty credit risks, including those under our credit facilities, derivatives, contingent obligations, insurance contracts and new ship progress payment guarantees.

 

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 credit facilities, derivatives, contingent obligations, insurance contracts and new ship progress payment guarantees to be unable to perform their obligations or to breach their obligations to us under our contracts with them, which could include failures of financial institutions to fund required borrowings under our loan agreements and to pay us amounts that may become due under our derivative contracts and other agreements. Also, we may 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 their failure to perform their obligations under such instruments, we would likely incur significant costs to replace the counterparty. Any failure to replace any counterparties under these circumstances may result in additional costs to us or an ineffective instrument.

 

Terrorist acts, acts of piracy, armed conflict and threats thereof, and other international events impacting the security of travel could adversely affect the demand for cruises.

 

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 outbreak of 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 travel advisories by national governments, and other geo-political 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 business by reducing our profitability.

 

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

 

The majority of our guests book their cruises through independent travel agents, wholesalers and tour operators. In the event that these distribution channels are adversely impacted by the worldwide economic downturn, or other reason, this could reduce the distribution channels available for us to market and sell our cruises and we could be forced to increase the use of 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

 

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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 certain of our ships in connection with the Merger 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 certain of our ships in connection with the Merger 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.

 

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 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.

 

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 summer months. 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 Dry-docks, which we typically schedule during off-peak demand periods for such ships. Accordingly, seasonality in demand and Dry-dock periods could adversely affect our ability to generate sufficient revenues to cover the expenses we incur during certain

 

Adverse incidents involving cruise ships and our ability to obtain adequate insurance coverage may adversely affect our business, financial condition and results of operations.

 

The operation of cruise ships carries an inherent risk of loss caused by adverse weather conditions, maritime disaster, including, but not limited to, oil spills and other environmental mishaps, fire, mechanical failure, collisions, human error, war, terrorism, piracy, political action, civil unrest and insurrection in various countries and other circumstances or events. Any such event may result in loss of life or property, loss of revenue or increased costs. The operation of cruise ships also involves the risk of other incidents at sea or while in port, including missing guests, inappropriate crew or passenger behavior and onboard crimes, which may bring into question passenger safety, may adversely affect future industry performance and may lead to litigation against us. Although we place passenger safety as the highest priority in the design and operation of our fleet, we have experienced accidents and other incidents involving our cruise ships and there can be no assurance that similar events will not occur in the future. It is possible that we could be forced to cancel a cruise or a series of cruises due to these factors or incur increased port-related and other costs resulting from such adverse events. Any such event involving our cruise ships or other passenger cruise ships may adversely affect guests’ perceptions of safety or result in increased governmental or other regulatory oversight. An adverse judgment or settlement in respect of any of the ongoing claims against us may also lead to negative publicity about us. Anything that damages our reputation (whether or not justified), including adverse publicity about passenger safety, could have an adverse impact on demand, which could lead to price discounting and a reduction in our sales and could adversely affect our business, financial condition and results of operations. If there is a significant accident, mechanical failure or similar problem involving a ship, we may have to place a ship in an extended Dry-dock period for repairs. This could result in material lost revenue and/or expenditures.

 

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There can be no assurance that all risks are fully insured against or that any particular claim will be fully paid. Such losses, to the extent they are not adequately covered by contractual remedies or insurance, could affect our financial results. In addition, we have been and 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 and increased premiums could result in significant expenses to us. 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. Moreover, irrespective of the occurrence of such events, there can still be no assurance that we will be able to obtain adequate insurance coverage at commercially reasonable rates or at all.

 

Breaches in data security or other disturbances to our information technology and other networks could impair our operations and have a material adverse impact on our business, financial condition and results of operations.

 

The integrity and reliability of our information technology systems and other networks are crucial to our business operations. Disruptions to these networks could impair our operations and have an adverse impact on our financial results and 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 of 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 carry limited business interruption insurance for certain of our shoreside operations, subject to limitations, exclusions and deductibles. We have also made significant investments in our information technology systems to optimize booking procedures, enhance the marketing power of our websites and control costs. Any unauthorized use of our information systems to gain access to sensitive information, corrupt data or create general disturbances in our operations systems could impair our ability to conduct business and damage our reputation. If our security measures were breached, we could be exposed to cyber-related risks and malware and access to credit cards and other sensitive data could be at risk. 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.

 

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.

 

Amendments to the collective bargaining agreements for crewmembers of our fleet and other employee relation issues may materially adversely affect our financial results.

 

Currently, we are a party to six collective bargaining agreements. Three of these agreements are in effect through 2014 and negotiations are underway for three new collective bargaining agreements valid from 2015 through 2017. Of the three remaining agreements, two are scheduled to expire in 2018 and one is scheduled to expire in 2020. Upon appropriate notice, these agreements may be reopened at certain 3-yearly intervals, and we received notice from one of the parties to reopen wage/benefit negotiations in 2015. These negotiations will commence in late 2014 with a completion date set for April 1, 2015. Any future amendments to such collective bargaining agreements or inability to satisfactorily renegotiate such agreements may increase our labor costs and have a negative impact on our financial condition. In addition, although our collective bargaining agreements have a no-strike provision, they may not prevent a disruption in work on our ships in the future. Any such disruptions in work could have a material adverse effect on our financial results.

 

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

 

We believe that attractive port destinations are a major reason why guests choose to go on a particular cruise or on a cruise vacation. 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 tour business, financial condition and results of operations.

 

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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On April 29, 2014, NCLH’s Board of Directors authorized, and NCLH announced, a three-year share repurchase program for up to $500.0 million. The share repurchases during the three months ended September 30, 2014 were made under this share repurchase program. NCLH may make repurchases in the open market, in privately negotiated transactions, in accelerated repurchase programs or in structured share repurchase programs, and any repurchases may be made pursuant to Rule 10b5-1 plans. During the nine months ended September 30, 2014, NCLH repurchased approximately 2.5 million ordinary shares under its share repurchase program for $82.0 million, which shares are reflected as treasury shares at cost on the consolidated balance sheet as of September 30, 2014.

 

Share repurchase activity during the three months ended September 30, 2014 was as follows:

 

Period  Total Number of
Shares Purchased
   Average
Price Paid
per Share
   Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Program  
   Approximate
Dollar Value of
Shares that May
Yet be
Purchased
Under the
Program
(in thousands)
 
July 1, 2014 - July 31, 2014   89,056   $31.95    89,056   $418,000 
August 1, 2014 - August 31, 2014      $       $ 
September 1, 2014 - September 30, 2014      $       $ 
Total for the nine months ended September 30, 2014   2,486,350   $32.98    2,486,350      

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

  2.1

Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 4, 2014 (File No. 001-35784).†

 

  10.1* Addendum No. 2, dated July 8, 2014, to Shipbuilding Contract for Hull identified therein, as amended, by and among Meyer Werft GmbH, Seahawk One, Ltd. and NCL Corporation Ltd. +
   
  10.2* Addendum No. 2, dated July 8, 2014, to Shipbuilding Contract for Hull identified therein, as amended, by and among Meyer Werft GmbH, Seahawk Two, Ltd. and NCL Corporation Ltd.+
   
  10.3*

€665.9 million Breakaway Five Credit Agreement, dated July 14, 2014, by and among Seahawk One, Ltd. and various other lenders therein defined and a related guarantee by NCL Corporation Ltd.+

 

  10.4* €665.9 million Breakaway Six Credit Agreement, dated July 14, 2014, by and among Seahawk Two, Ltd. and various other lenders therein defined and a related guarantee by NCL Corporation Ltd.+

 

 

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10.5* Second Amendment to the Amended and Restated United States Tax Agreement for NCL Corporation Ltd. (including Annex A-Form Exchange Agreement for NCL Corporation Ltd.), dated September 29, 2014.
   
31.1* Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

31.2* Certification of the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

32.1** Certifications of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code.

 

101* The following unaudited financial statements from Norwegian Cruise Line Holdings Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), as follows:

   

(i)the Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013;
(ii)the Consolidated Statements of Comprehensive income for the three and nine months ended September 30, 2014 and 2013;
(iii)the Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013;
(iv)the Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013;
(v)the Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and 2013; and
(vi)the Notes to Consolidated Financial Statements, tagged in summary and detail.

 

  * Filed herewith.
  ** Furnished herewith.
  + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
  Norwegian hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit to such agreement to the SEC upon request.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

NORWEGIAN CRUISE LINE HOLDINGS LTD.

(Registrant)

     
  By: /s/ Kevin M. Sheehan
  Name: Kevin M. Sheehan
  Title: President and Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Wendy A. Beck
  Name: Wendy A. Beck
  Title: Executive Vice President and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)

 

Dated: October 31, 2014

 

35

 

 

Exhibit 10.1

 

[*]: THE CONFIDENTIAL PORTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

  

ADDENDUM NO. 2

TO THE SHIPBUILDING CONTRACT

HULL NO. [ * ]

DATED 14 JUNE 2013

 

between

 

MEYER WERFT GMBH, a company organised and existing under the laws of Germany, and having its principal office at Industriegebiet Süd, D-26871 Papenburg, Germany (the "Builder"); and

 

SEAHAWK ONE, LTD., a company incorporated in Bermuda and having its registered office at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda (the "Buyer"); and

 

NCL CORPORATION LTD., a company incorporated in Bermuda having its registered office at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda ("NCLC").

  

Whereas by a Shipbuilding Contract originally dated 14 June 2013 in relation to Hull No. [*] – as amended – to which, by novation made on the date of this Addendum No. 2, the Builder, the Buyer and NCLC are parties – (the "Contract"), the Builder has agreed to design, build, complete and sell to the Buyer a passenger cruise ship and the Buyer has agreed to purchase and accept delivery of the same, all in accordance with the terms and conditions of the Contract.

 

Now, therefore, in consideration of the premises, and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties agree as follows:

  

1.Any and every recital, article and provision whatsoever of the Contract is agreed to be deleted in their entirety and replaced by the following new recitals, articles and provisions.

 

- REMAINDER OF PAGE INTENTIONALLY LEFT BLANK –

 

1
 

  

SHIPBUILDING CONTRACT

 

BETWEEN

 

MEYER WERFT GMBH

 

AND

 

SEAHAWK ONE, LTD.

 

AND

 

NCL CORPORATION LTD.

 

 

 

IN RELATION TO

HULL NO. [*]

 

 

 

2
 

  

ARTICLE 1: SUBJECT MATTER OF CONTRACT 4
   
ARTICLE 2: SUPERVISION 13
   
ARTICLE 3: MODIFICATIONS 18
   
ARTICLE 4: TITLE AND INSURANCES 21
   
ARTICLE 5: PERMISSIBLE DELAYS 25
   
ARTICLE 6: TESTS, LIQUIDATED DAMAGES AND CERTAIN TERMINATION RIGHTS 28
   
ARTICLE 7: DELIVERY AND GUARANTEE 33
   
ARTICLE 8: CONTRACT PRICE AND PAYMENT TERMS 41
   
ARTICLE 9: TERMINATION 45
   
ARTICLE 10: BUILDER'S REPRESENTATIONS, COVENANTS AND INDEMNITIES 50
   
ARTICLE 11: INTELLECTUAL PROPERTY RIGHTS 52
   
ARTICLE 12: TAXES AND CONTRACT EXPENSES 54
   
ARTICLE 13: DISPUTES, JURISDICTION, GOVERNING LAW AND NOTICES 55
   
ARTICLE 14: GENERAL MATTERS 59
   
SCHEDULE 1 65
   
SCHEDULE 2 (A) 70
   
SCHEDULE 2 (B) 73

 

3
 

  

THIS AMENDED AND RESTATED SHIPBUILDING CONTRACT (this "Contract") is made between:

 

(1)MEYER WERFT GMBH, a company organised and existing under the laws of Germany, and having its principal office at Industriegebiet Süd, D-26871 Papenburg, Germany (the "Builder"); and

 

(2)SEAHAWK ONE, LTD., a company incorporated in Bermuda and having its registered office at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda (the "Buyer"); and

 

(3)NCL CORPORATION LTD., a company incorporated in Bermuda having its registered office at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda ("NCLC").

 

NOW IT IS HEREBY AGREED as follows:

 

ARTICLE 1: SUBJECT MATTER OF CONTRACT

 

1AGREEMENT TO BUILD, SELL AND PURCHASE

 

1.1On and subject to the provisions of this Contract, the Plans and the Specification:

 

(i)the Builder shall:

 

(a)design, engineer, build, launch, equip and outfit the passenger cruise ship more particularly described in this Contract, the Plans and the Specification (the “Ship”) at the Shipyard, and

 

(b)provide all components, equipment, gear, fittings, machinery, materials, parts, plant, outfit, spares and supplies which are necessary to achieve the objects and purposes described in Clause 1.1(i) (a) (the "Parts") other than the specified supplies to be provided by the Buyer (the "Buyer's Supplies"),

 

(c)supply all operating and maintenance manuals, drawings, lists, maker’s instructions, plans, records, training materials and other construction documents;

 

(d)provide or procure the provision of all specified training of the Buyer, its employees and other representatives; and

 

(e)complete, finish, sell and deliver the Ship to the Buyer at Bremerhaven, but if this is not reasonably possible the Ship may be delivered at Eemshaven or if this is not reasonably possible at any other North European sea port or alternatively at sea close to a North European sea port (the "Delivery Port") selected by the Builder and approved by the Buyer (such approval not to be unreasonably withheld or delayed), after successful performance and completion of the tests relating to the Ship; and

 

(ii)the Buyer shall purchase and accept delivery of the duly completed Ship at the Delivery Port.

 

1.2The Builder, as a first class shipbuilder with a reputation for excellence and with knowledge of the Buyer's performance and quality requirements and standards shall ensure that all building work shall be carried out in a good and workmanlike manner and in accordance with the highest shipbuilding and marine engineering practices and

 

4
 

  

standards for new passenger cruise ships, and so that (unless specified to the contrary in the Specification) the design, quality, workmanship, Parts, function and performance of systems, and the aesthetic design of the passenger cabins and public areas and other specified areas of the Ship, shall not be lower than the highest of the corresponding standards on the reference ship, as built by the relevant builder and as accepted by the relevant buyer.

 

2DESCRIPTION OF THE SHIP

 

2.1The Ship shall be a luxury passenger cruise ship suitable for continuous year-round worldwide cruising, with the following main dimensions and characteristics:

 

(i)Dimensions

 

Length overall about 325.90 metres
Length between perpendiculars about 300.18 meters
Breadth moulded about 41.40 metres
Depth bulkhead deck about 11.60 metres
Design draft about 8.33 metres

 

(ii)Deadweight

 

The guaranteed deadweight at a design draft of 8.33 metres will be 11,700 metric tons in seawater of 1.025 t/m3 density (and under the conditions further described in section G.2.3 of the Specification). The deadweight is the difference between the loaded displacement and the contractual lightweight. The contractual lightweight is the weight of the Ship clean, empty, equipped ready for sea in accordance with section G.8.3 of the Specification and adjusted by any weight (and related ballast) added or subtracted by reason of any agreements on modification made at any time under Article 3 of this Contract.

 

(iii)Passenger cabins

 

Penthouse Suite 1: 4

Penthouse Suite 2: 4

Courtyard Suite 1: 20

Courtyard Suite 2: 25

Courtyard Suite 2 ADA: 2

Spa Suites: 13

Spa Suite Deluxe: 1

Corner Suite: 8

Junior Suite: 14

Family Deluxe Suite: 3

Family Deluxe Suite ADA: 1

Mini Suite: 284

Mini Suite Spa: 20

Mini Suite ADA: 4

Balcony Cabin: 1,114

Balcony Cabin Spa: 38

Balcony Cabin ADA: 16

 

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Ocean View Cabins Transversal: 32

Ocean View Cabins Longitudinal: 30

Ocean View Cabins Longitudinal Family: 6

Ocean View Cabins ADA: 4

Family Cabin: 38

Family Cabin ADA: 4

Inside Cabin: 392

Inside Cabin ADA: 16

Inside Studio Cabin: 82

 

(iv)Crew cabins

 

Captain class cabins: 4

 

Senior Officer cabins: 5

 

Officer outside cabins: 112

 

Officer inside cabins: 2

 

Senior Crew, single cabins: 71

 

Senior Crew, double cabins: 10

 

Crew single cabins: 42

 

Crew single shared cabins: 716

 

Crew, double cabins A: 147

 

Crew, double cabins B: 222

 

Crew entertainer cabins: 10

 

(v)Life saving equipment

 

Total number of persons on board for the purposes of long international voyages: 6,936.

 

(vi)Machinery

 

Diesel engines3 x 12V 48/60 CR TIER2, each capable of a maximum continuous rating of 14,400 kW at 514 rpm (or equivalent)

 

2 x 14V 48/60 CR TIER2, each capable of a maximum continuous rating of 16,800 kW at 514 rpm (or equivalent)

 

Pod units2 pod units each developing 19,500 kW at approximately 139 rpm

  

6
 

  

(vii)Speed

 

The trial speed of the Ship at a mean moulded draft of 8.33 metres shall be at least 22.4 knots under the conditions specified in Section G.2.5 of the Specification.

 

2.2The details of the dimensions and characteristics referred to in Clause 2.1 above, as well as the definitions and method of measurements and calculations, are as indicated in the Specification and no changes shall be made to such dimensions and characteristics without the Buyer's prior written approval.

 

2.3The hull number of the Ship will be [*] and that number shall in accordance with Clause 1.1 and 1.2 in Article 4 be placed upon the Ship and the Parts during construction.

 

3SPECIFICATION AND PLANS

 

3.1The Specification and the Plans describe in detail building work standards, the features of the building work and the general scope of the building work but, although the contents of the Specification and the Plans are believed by the Builder and the Buyer to be accurate, all dimensions and other details shall be independently verified and checked by the Builder and, if there are any errors or omissions in the Specification or Plans which may adversely affect the safety, seaworthiness or technical performance of the Ship, the Builder shall correct the same, after first notifying the Buyer in writing and obtaining the Buyer's written approval (which is not to be unreasonably withheld or delayed), without any increase in the Contract Price.

 

3.2The Builder shall be solely and directly responsible for all aspects of the design, performance and quality of the building work, and the fact that any calculations, measurements, drawings, plans, test results or any other documents and data relating to the building work shall have been made, prepared or supplied by the Buyer or shown to the Buyer or approved by the Buyer and/or any Regulatory Authority and/or the Classification Society and/or any other specified person(s) or that modifications or alterations shall have been carried out in accordance with the Buyer's requirements shall not in any manner or to any extent relieve the Builder from (or otherwise reduce) any of the Builder's obligations and/or liabilities under this Contract.

 

3.3All Parts shall be new or (with the Supervisor's prior written approval which shall not be unreasonably withheld or delayed) unused, of high quality, and in strict and full accordance and compliance with this Contract, the Plans and the Specification and shall otherwise be in strict and full accordance and compliance with the Builder's usual high standards and practices of construction for similar passenger ships.

 

3.4The Builder shall pay for all Parts promptly on or before delivery of the Ship or in accordance with usual commercial credit terms.

 

3.5The Builder shall furnish: spare parts in accordance with the Specification; and maintenance tools of the kind and in at least the quantities required by the Specification, the Classification Society, and the makers' standards, for items furnished by the Builder. The cost of such spares and tools are included in the Contract Price. The Builder at its own cost and risk shall be responsible for the handling, storing and bringing on board the Ship of all spares and tools. Spares and tools furnished by the Builder shall be properly protected against physical decay, corrosion and mechanical damage and shall be properly listed so that replacements may be readily ordered by the Buyer.

  

4CLASSIFICATION

 

4.1The Builder shall design and build the Ship under the supervision and special survey of Det Norske Veritas (the "Classification Society"), in accordance with the regulations,

 

7
 

  

requirements, resolutions and rules of the Classification Society (the "Class Rules") that are (i) in force as of the Effective Date and (ii) announced as of the Effective Date as intended at any time thereafter to come into force or to be implemented. On delivery the Ship shall achieve the class notations specified in Section G.3.2 of the Specification free of all conditions, notations, qualifications, recommendations, reservations and restrictions.

 

4.2The Classification Society's decision as to compliance or non-compliance of the building work with the Class Rules shall be final and binding on the parties but this provision shall not in any manner or to any extent relieve the Builder from (or otherwise reduce) any of the Builder's obligations to comply with this Contract, the Plans and the Specification in respect of requirements that exceed the Class Rules.

 

4.3The Builder shall also design and build the Ship under the supervision and in accordance with the regulations, requirements, resolutions and rules of the Regulatory Authorities (the "Regulatory Rules") as well as all other specified regulations, requirements, resolutions and rules that, are (i) in force as of the Effective Date and (ii) announced as of the Effective Date as intended at any time thereafter to come into force or to be implemented.

 

4.4The decision of any Regulatory Authority which is to issue specified certificates shall be final and binding on the parties as to compliance or non-compliance of the building work with the relevant Regulatory Rules but this provision shall not in any manner or to any extent relieve the Builder from (or otherwise reduce) any of the Builder's obligations to comply with this Contract, the Plans or the Specification in respect of requirements which exceed the Regulatory Rules.

 

4.5All classification, certification, testing, survey and other fees and charges payable to the Classification Society and other third parties in relation to the building work shall be for the account of the Builder.

 

4.6Although the Classification Society will be appointed and paid for by the Builder, and although the Builder will be exclusively responsible for the correct interpretation and application of the Class Rules:

 

(i)the parties intend that, in performing its role in relation to the building work, the Classification Society shall be acting for, and shall owe identical duties to, both of the parties to this Contract; and

 

(ii)the Builder will ensure that the provisions of this Clause 4.6 are communicated to, and accepted by, the Classification Society prior to its appointment under this Contract.

 

4.7All fees and charges incidental to the registration of the Ship under the flag and laws of the Flag State shall be for the account of the Buyer.

 

4.8In relation to the building work, the Buyer has the right:

 

(i)to inspect all correspondence, minutes of meetings and other documents passing between the Builder and the Classification Society or the Regulatory Authorities and to have copies thereof upon request of the Supervisor or the Buyer; and

 

(ii)to attend all scheduled meetings between the Builder and the Classification Society or the Regulatory Authorities,

 

8
 

  

and the Builder shall provide (or procure that the Classification Society or Regulatory Authorities provide) copies of all documents requested under paragraph (i) above and shall keep the Buyer well informed (in advance) of all of the meetings referred to in paragraph (ii) above. The Builder will promptly inform the Supervisor of any unscheduled meetings between the Builder and the Classification Society or the Regulatory Authorities and, if the Supervisor does not attend any of such meetings, the Builder will give the Supervisor a reasonably detailed account of the matters discussed and decisions taken at the meeting.

 

4.9The Builder and its subcontractors shall comply with all laws, rules and regulations applicable to the building work, and the Builder shall obtain all licenses, permits, certificates and permissions required for the execution and completion of the building work, including those required by the Classification Society and the Regulatory Authorities.

 

4.10The Builder shall be responsible for obtaining the approval of all drawings, calculations and other necessary matters by the Classification Society and the Regulatory Authorities, and shall arrange for all applicable certificates and approvals to be issued.

 

5BUILDER'S RIGHT TO SUBCONTRACT

 

5.1The Builder shall not subcontract the whole of the building work but it may subcontract the performance of certain parts of the building work to reputable and suitably qualified and experienced subcontractors provided that for any major subcontracting the Builder shall obtain the prior written consent of the Buyer (which consent shall not be unreasonably withheld or delayed), it being agreed that "major subcontracting" shall mean any construction or assembly of the Ship's volume sections or installation of the Ship's machinery and other main Parts, or any other major building work, to be done outside the Shipyard unless customarily done outside the builders' yards in connection with the construction of luxury passenger ships within the North/Northwest European shipbuilding industry.

 

5.2The Builder's appointment, contracting, employment or use of any workmen, subcontractors, agents and other representatives (including, without limitation, any such persons appointed or employed or contracted by the Builder with the Buyer's approval) shall not in any manner or to any extent relieve the Builder from (or otherwise reduce) any of the Builder's obligations and/or liabilities under or in connection with this Contract nor diminish the Builder's responsibility adequately to manage and supervise such persons and to ensure that they conduct themselves in an efficient and workmanlike manner and in accordance with the practices and standards referred to in Clause 1.2.

 

5.3The Builder covenants with the Buyer that:

 

(i)it shall ensure that there is not and will not be created by the Builder any direct or indirect contractual or other legal relationship between the Buyer and any subcontractors appointed or otherwise used by the Builder (save for such relationships as may be created by reason of (a) the warranty and guarantee assignments to be made by the Builder under Clause 2.10 of Article 7 and (b) under Clause 4.6 of Article 1);

 

(ii)it shall take reasonable care in the selection, employment, appointment and supervision of all subcontractors, and shall use its best endeavours to procure their employment or appointment on the best possible terms consistent with the Buyer's rights, and the Builder's obligations and liabilities, under this Contract including,

 

9
 

  

without limitation, such matters as (a) the best possible guarantees and warranties reasonably achievable and liberty for the Builder to assign all or any part(s) of such guarantees and warranties to the Buyer, (b) the safety of passengers and crew, (c) good service, (d) reliability of subcontractors, and (e) availability of spares and post-delivery service support;

 

(iii)it shall prevent its subcontractors from exercising any rights (including without limitation, any German Law Encumbrance Rights) to arrest, attach, detain or encumber the Ship, the Parts or any of the Buyer's Supplies;

 

(iv)it shall promptly provide the Buyer with such information and access as it may require from time to time in order to verify the performance of the supply and building work carried out by the Builder's subcontractors;

 

(v)it shall promptly (a) deal with the Buyer's reasonable complaints regarding the terms of engagement or contract of any of its subcontractors, and/or (b) take necessary steps to ensure the proper performance of any such subcontractors, and/or (c) comply with any reasonable requests by the Buyer to terminate any such engagement or contract and appoint a substitute subcontractor; and

 

(vi)it shall be fully, directly and solely responsible (as between the Builder, the Buyer and the other protected parties) for the acts, omissions and defaults of the Builder's subcontractors (including, without limitation, any persons appointed, employed or contracted by the Builder with the approval of the Buyer) and for the acts, omissions and defaults of the respective officers, employees, workmen, agents and other representatives of the Builder and its subcontractors.

 

5.4The Buyer shall have the right to approve the identity of all main subcontractors other than those specified in the List of Suppliers, such approval not to be unreasonably withheld or delayed.

 

5.5All labour costs (including overtime costs) of the Builder and of the workmen, subcontractors, and others used by the Builder shall be for the account of the Builder.

 

6BUYER'S SUPPLIES

 

6.1The Buyer, at its own risk and expense, shall contract for, supply and deliver the Buyer's Supplies to the Shipyard and, in the case of certain materials, to the Builder's facility at the base port for trials in proper condition for installation or incorporation in, or stowage on board, the Ship in precise accordance with a delivery schedule to be agreed between the Buyer and the Builder within one hundred and eighty (180) days after the Effective Date.

 

6.2The Builder shall, at its own risk and expense, receive, check as to agreement with transport documents, insure (in accordance with Clause 2 of Article 4), safely store and keep well protected, and properly inspect, put on board and thereafter install or incorporate in or stow on the Ship, all of the Buyer's Supplies from time to time delivered to the Shipyard, and (whenever so requested by the Supervisor) the Builder shall also assist the Buyer to clear any Buyer's Supplies through German customs and (in relation to the materials which are to be delivered at the base port for trials) through the relevant customs. Upon request by the Builder and subject always to the availability of appropriate representatives of the Buyer at the Shipyard, the Buyer's representatives at the Shipyard will assist the Builder at the Shipyard in the transport, storage and installation of the Buyer's Supplies.

 

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6.3In order to facilitate the inspection, installation and incorporation of the Buyer's Supplies by the Builder, the Buyer shall furnish the Builder with all storage instructions, plans, instruction books, test reports and certificates provided to the Buyer by its suppliers and, if so requested by the Builder, the Buyer shall without charge to the Builder cause the relevant suppliers to assist the Builder in the installation and incorporation of such Buyer's Supplies at the Shipyard. If any Buyer's Supplies (including any Buyer's Supplies to be replaced by the Buyer pursuant to this Clause 6) have not been delivered within five (5) working days after the Supervisor's receipt of a notice from the Builder under Clause 6.4(ii), the Builder shall be entitled to proceed with the construction of the Ship without installing or incorporating such Supplies in or on the Ship and the lack of any such installation or incorporation shall not be treated as a Defect in the Ship provided that if, having regard to the nature and/or expected delivery date(s) of the relevant Buyer's Supplies and/or the Builder's programme for the building work, it is reasonable for the Buyer to request the Builder to arrange the building work so that the relevant Supplies can be installed or incorporated in or on the Ship at a later date then, in each such case, the Builder will use its best efforts to accommodate any such reasonable request.

 

6.4The Builder:

 

(i)shall be liable to the Buyer for any damage to or loss of any Buyer's Supplies occurring or arising after their delivery by (or on behalf of) the Buyer under Clause 6.1 unless such damage or loss is caused by the inadequate packing or inherent vice of such Buyer's Supplies; and

 

(ii)shall notify the Supervisor as soon as practicable of any loss of, damage to, or deficiency in the supply or performance of, any of the Buyer's Supplies or any late delivery thereof in accordance with Clause 6.3.

 

6.5Where the Builder is liable to the Buyer (under Clause 6.4) for any damage to or loss of any Buyer's Supplies, the Builder will promptly replace the relevant Supplies with identical items at its risk and expense. If, notwithstanding all reasonable efforts by the Builder, it is not possible to obtain identical items then the Builder will at its risk and expense provide comparable items which are reasonably acceptable to the Buyer. In all other cases where the Builder gives notice to the Buyer under Clause 6.4(ii), the Buyer will promptly replace the relevant Supplies at its risk and expense.

 

6.6Within thirty (30) days after the Ship has been delivered by the Builder and accepted by the Buyer in accordance with the provisions of this Contract, the Buyer will remove from the Shipyard any of the Buyer's Supplies which have not been used in the construction of, or otherwise delivered with, the Ship.

  

7BUILDER'S TALLY OF BUYER'S SUPPLIES

 

7.1The Builder shall make and keep up-to-date records of all Buyer's Supplies from time to time delivered to the Shipyard and/or other premises of the Builder (and/or its subcontractors) and, without prejudice to the generality of the foregoing, the Builder shall ensure that such records are made and kept in the form usually used by the Builder and/or its subcontractors therefore and show:

 

(i)the date of delivery to the Builder (or its subcontractors) of each batch or consignment of Buyer's Supplies;

 

(ii)where and how such Buyer's Supplies are stored;

 

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(iii)when such Buyer's Supplies are incorporated or installed in, or stowed on, the Ship; and

 

(iv)the balance of any unused Buyer's Supplies.

 

7.2The Builder shall provide the Supervisor, on a monthly basis, with a complete set of the records described in Clause 7.1 and all amendments of, or supplements to, such records.

 

(End of Article 1)

 

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ARTICLE 2: SUPERVISION

 

1.SUPERVISOR

 

1.1The Buyer may retain a supervisor (the "Supervisor") and a supervision team at the Shipyard to maintain close contact with the Builder and, on behalf of the Buyer, to supervise the building work, and the Builder will assist the Buyer to obtain any necessary German permissions and authorisations for the Supervisor and his team to carry out their duties.

 

1.2The Supervisor and his team shall at all times be deemed to be the employees of the Buyer and the Builder shall be under no liability whatsoever for personal injuries or other harm to, or death of, the Supervisor or any of his team, or for damage to, or loss or destruction of, their property, unless such injury, harm, death, damage, loss or destruction is caused by the negligence and/or wilful default of the Builder and/or any of the Builder's subcontractors.

 

1.3The Supervisor and his team shall carry out their inspections and supervision in an efficient manner and in such a way as to avoid any increase in the building costs or delays to the building work.

 

1.4All salaries and, subject to Clause 1.5, costs and expenses of the Supervisor and his team shall be for the Buyer's account.

 

1.5The Builder shall provide, free of charge to the Buyer, the Supervisor and the Supervisor's team:

 

(i)adequately equipped, maintained and serviced changing rooms and offices in reasonable numbers (including, without limitation, tables, chairs, filing cabinets, direct call national and international telephones and faxes, word processing workstations with laser printers in each office all in reasonable numbers, and one (1) full time secretary) conveniently located in the Shipyard and in close proximity to the Ship, and

 

(ii)lodgings in Papenburg (or vicinity) and meals at the Shipyard (as far as available),

 

provided that the Builder may charge the Buyer at cost for such lodgings and meals, for the secretary and for the use by the Supervisor and his team of the national and international postage, telephone and fax services provided by the Builder under this Clause 1.5.

 

1.6A written statement confirming the Supervisor's appointment and the scope of his actual authority shall be given by the Buyer to the Builder within thirty (30) days after the Effective Date. Written notice of revocation of appointment of the Supervisor and/or any change in the scope of his actual authority shall be given by the Buyer to the Builder immediately after any such revocation and/or change has been decided upon by the Buyer.

 

1.7The Supervisor and his team shall be deemed to have notice of and shall observe the safety, security and other rules and precautions in force from time to time at the Shipyard and at the premises of the Builder's sub-contractors.

 

2.PLAN APPROVAL

 

2.1Each of the Builder and the Buyer acknowledges and agrees that the construction of the Ship requires co-operation and flexibility on the part of both parties, especially during the design phase. The plan approval arrangements referred to in this Clause 2 shall be limited to such plans, drawings and other documents as are described in section G.4.3 of the Specification. For the avoidance of doubt and notwithstanding anything to the contrary in this Clause 2, it is agreed that for areas, features and spaces of the Ship that are the same

 

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as the corresponding areas, features and spaces of the Builder’s Hull No. [*], the Builder is not obliged to prepare new drawings for Buyer’s review and approval and the Builder may use the drawings approved by the buyer of Builder’s Hull No. [*] in respect of such areas, features and spaces.

 

2.2Notwithstanding the generality of Clause 2.1, the building work shall be carried out in strict accordance with the provisions of this Contract, the Specification and the Plans, and prior to commencement of the building work (and from time to time thereafter as and when the Buyer may request) the Builder will provide the Supervisor with a work schedule containing a critical path treatment of the major and significant elements of the building work, in their proper sequence, which must be completed to ensure delivery of the Ship by the Delivery Date.

 

2.3All plans, drawings and other documents required to be developed and supplied by the Builder to the Buyer for approval shall be delivered by the Builder in their proposed final form in three (3) copies which shall be delivered to the Supervisor (or, if the Supervisor is not at the Shipyard at the relevant time, to the most senior member of the Supervisor's team at the Shipyard unless a specified member of the team has been nominated by the Supervisor for this purpose by notice to the Builder and is available at the Shipyard), and the Builder agrees to use its best endeavours to submit all such plans, drawings and documents in such a manner that the Buyer may reasonably review and approve or comment on the same within the periods provided for in Clauses 2.4 and 2.5.

 

2.4Within five (5) working days after the Supervisor's receipt of the plans, drawings and other documents referred to in Clause 2.3, the Supervisor will notify the Builder in writing whether or not such plans, drawings and other documents are sufficient to enable the Buyer to review them pursuant to this Clause 2; and if any of the plans, drawings or other documents are deficient in any way, the Supervisor must specify the deficiency and give his reasons in such notice.

 

2.5If a plan, drawing or other document is not accepted by the Supervisor as being sufficient for the Buyer's review in accordance with Clause 2.4, the Builder shall promptly alter the relevant plan, drawing or document without charge to the Buyer and resubmit it as altered for approval by the Buyer in accordance with Clauses 2.3 to 2.6. Such approval shall refer only to the alterations.

 

2.6Any plans, drawings and other documents submitted to the Supervisor and accepted by him as being sufficient for the Buyer's review must be returned to the Builder as soon as practicable and, at the latest, within fifteen (15) working days after the Supervisor's receipt of those plans, drawings and other documents which the Supervisor has authority to approve on behalf of the Buyer. If the Buyer needs additional time to review any plans, drawings and other documents, it will request an extension by written notice to the Builder as soon as reasonably practicable after the Supervisor's receipt of the relevant plans, drawings or other documents and the Builder will not unreasonably withhold or delay its request to such an extension.

 

2.7When returning to the Builder plans, drawings and other documents accepted by the Supervisor as being sufficient for the Buyer's review, the Supervisor shall mark them as approved or as rejected by the Buyer provided that all rejections shall specify with reasons all aspects of the rejected plans, drawings or documents which do not, or which provide for building work which does not, conform to the requirements of this Contract, the Plans or the Specification.

 

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2.8If a plan, drawing or other document is approved by or on behalf of the Buyer, the Builder shall proceed with the building work shown therein.

 

2.9If a plan, drawing or other document is rejected (in whole or part) by or on behalf of the Buyer, the Builder shall promptly alter the relevant plan, drawing or document without charge to the Buyer and resubmit it as altered for approval by the Buyer in accordance with Clauses 2.3 to 2.6. Such approval shall refer only to the alterations.

 

2.10If the Builder does not accept (in whole or part) any rejections made by or on behalf of the Buyer, the Builder shall promptly notify the Supervisor in writing and give his reasons in the notice for such non-acceptance. In addition, if the Buyer reasonably requests any clarification or further information from the Builder in connection with the Buyer's review and approval of plans, drawings or other documents, the Builder shall promptly provide the requested clarification or information to the Supervisor.

 

2.11All building work performed by the Builder prior to approval by the Buyer of all plans, drawings or documents relating to such work shall be at the sole risk and expense of the Builder.

 

2.12If the Buyer (or the Supervisor on the Buyer's behalf) fails to return to the Builder, in accordance with Clause 2.6, any plan or drawing or other document and this failure is not remedied within two (2) working days after the Supervisor's receipt of a written notice from the Builder specifying such failure, such plan or drawing or other document shall be deemed to have been automatically approved by the Buyer without any comments.

 

2.13If the Builder discovers any feature in the Plans or the Specification which appears to be inconsistent with the general scheme of the building work or which might (in the reasonable opinion of the Builder) expose the Builder or the Buyer to any product liabilities, the Builder shall promptly notify the Supervisor and submit a proposal to the Supervisor for the Buyer's approval (such approval not to be unreasonably withheld or delayed) for the removal of the inconsistency or risk of product liability at the Builder's cost and in the Builder's time. If the Buyer becomes aware of any feature in the Plans or the Specification which might (in the reasonable opinion of the Buyer) expose the Builder or the Buyer to any product liabilities, the Buyer shall promptly notify the Builder after which the Builder shall promptly submit a proposal to the Supervisor for the Buyer's approval (such approval not to be unreasonably withheld or delayed) for the removal of the inconsistency or risk of product liability at the Builder's cost and in the Builder's time

 

3.WORK APPROVAL

 

3.1Throughout the period during which the Ship is being built the Builder will conduct its usual quality control programme of inspections, testing and supervision by a team of the Builder's staff specially designated for this purpose but the building work and all Parts, as the same may at any time and at any place be completed or be in progress, shall also be subject to inspection by and the approval of the Buyer (acting through the Supervisor and his team) and the Classification Society.

 

3.2The Builder shall at all times during normal working hours give the Supervisor and the Supervisor's team free and ready access to (and a free right to inspect) the Ship and Parts at any place where building work is being done or tests are being carried out or Parts are being processed or stored in connection with the building of the Ship including, without limitation, the Shipyard and other yards, workshops and stores of the Builder, and the premises of the Builder's subcontractors who are doing work in connection with the building of the Ship or processing or storing Parts, and the Builder shall ensure that the provisions

 

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of this Clause 3.2 are inserted into all subcontracts from time to time made by it in connection with the building work.

 

3.3The Buyer shall be entitled (but not obliged) to reject all building work and Parts which do not comply with the requirements of this Contract, the Plans and the Specification unless and to the extent that such non-compliance is the direct result of the Builder seeking to avoid (in a manner approved by the Buyer, such approval not to be unreasonably withheld or delayed) the product liabilities described in Clause 2.13 provided that all rejections shall be made in writing, and shall specify with reasons those aspects of the building work or Parts inspected which do not comply with the requirements of this Contract, the Plans or the Specification.

 

3.4If any building work or Parts shall be duly rejected by the Buyer as not complying with the Contract, the Plans or the Specification, the Builder shall promptly correct or replace such work or Parts at the Builder's cost and in the Builder's time.

 

4.PLANNED PROGRAMME

 

4.1The Ship shall be constructed in accordance with the planned milestones programme attached to the Specification as Appendix 8 defining certain stages of the construction process ("Milestones") which must be completed by the dates therein specified.

 

4.2The Builder shall submit to the Buyer each month, commencing on the date falling three (3) months after the Effective Date, until delivery, the following documentation (the accuracy of which the Builder hereby warrants):

 

(i)a status report on the building work as compared with the planned programme, including the critical path;

 

(ii)a report setting out the actual progress of the building work during the previous month as compared with the planned programme;

 

(iii)a list of modifications (if any) agreed during the previous month, including Contract adjustments, if any, agreed during that month;

 

(iv)a report on the delivery of subcontracted materials during the previous month (the precise nature and form of which report shall be agreed, from time to time, between the Buyer and the Builder).

 

4.3Without prejudice to the Builder's obligations under this Contract, if the construction of the Ship should, for any reason whatsoever, be delayed beyond the time-frame indicated in the planned programme, the Builder shall immediately notify the Buyer. If the delay which has occurred is not a permissible delay, the Builder shall within fourteen (14) working days after provision of such notification provide to the Buyer a written schedule describing the steps (including any appropriate increase in manpower and material resources) the Builder intends to take to recover the time lost. The Builder and the Buyer shall meet at the earliest opportunity to discuss the proposal and the Builder's detailed plans for implementation of the same.

 

5.MINOR ALTERATIONS

 

5.1Subject to Clause 3.2 in Article 1 and to Article 3, approvals and other decisions of the Buyer in relation to the design and performance of the building work shall be final and may not be revised or revoked without the prior written approval of the Builder provided that the Builder shall not withhold its approval for any minor alterations or revisions requested by the Buyer which (in the reasonable opinion of the Builder) would not:

 

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(i)delay or increase the cost of the building work or have a material adverse affect on the Builder's planning or programme for the building work; or

 

(ii)otherwise constitute a material modification of this Contract, the Plans or the Specification; or

 

(iii)require the Builder to jeopardise its contracted building schedule(s) for other ships.

 

6.TECHNICAL DISPUTES

 

6.1If, at any time during the design phase or any other stage of the building work, there is a difference of opinion between the Builder and the Buyer in relation to any technical matter, then either party may give a notice to the other party and if the parties do not resolve the difference of opinion within five (5) working days after the date of service of such a notice, the Builder or the Buyer may require that the difference of opinion be treated as a Dispute of a technical nature to be resolved in accordance with Clause 1 of Article 13.

 

(End of Article 2)

 

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ARTICLE 3: MODIFICATIONS

 

1.MODIFICATIONS

 

1.1This Contract, the Plans and the Specification may be modified from time to time by agreement of the parties. The Builder shall act in good faith and on an open book basis to implement modifications requested by the Buyer, and/or any modifications required to be made under Clause 2 which are occasioned by any changes in the Class Rules or in any of the Regulatory Rules after the Effective Date, subject to the Buyer agreeing to necessary modifications to the Contract Price, the Delivery Date and any other relevant provisions of this Contract. The Builder agrees to act in good faith and on an open book basis to implement any such modifications:

 

(i)at the lowest cost reasonably possible;

 

(ii)within the shortest period of time reasonably possible; and

 

(iii)without any loss in the relative priority of the building work for the Ship compared to other construction work in the Shipyard,

 

provided that nothing in this Clause 1.1 shall require the Builder to jeopardise its contracted building schedule(s) for other ships.

 

1.2Any agreement on a modification ("AOM") of this Contract, the Plans or the Specification shall include:

 

(i)any increase or decrease in the Contract Price;

 

(ii)any change in the Delivery Date, and

 

(iii)any other adjustment to or amendment of any relevant provisions of this Contract, the Plans or the Specification,

 

which is directly, necessarily and reasonably occasioned by such modification.

 

Unless otherwise expressly agreed in writing by the Buyer, for each AOM the increased costs or savings in costs directly, necessarily and reasonably occasioned by the relevant modifications shall be calculated as the sum of:-

 

(i) the net positive or negative change in (a) the Builder's actual design costs (excluding profit and SG&A expenses), (b) the Builder's actual labour costs (excluding profit and SG&A expenses), and (c) the Builder's actual material costs (excluding profit and SG&A expenses); and

 

(ii) a fixed profit margin for the Builder of [*], which margin (a) covers and includes all compensation, financing, guarantee, insurance, profit, remuneration, risk and other factors whatsoever in connection with the relevant AOM, and (b) shall be applied only in the case of a net increase in the costs directly, necessarily and reasonably occasioned by such AOM.

 

For these purposes, the Builder's "SG&A" expenses mean the Builder's combined operating expenses including expenses for contracting, payroll, design, engineering and production, purchasing and sales, and all other administrative and operational expenses.

 

1.3Whenever so requested by the Buyer, the Builder will verify its calculation of any modification costs by providing to the Buyer, on an open book basis, a reasonably detailed explanation of the Builder’s calculations and details of the man-hours and other data used in connection with any of the alterations or changes occasioned by any modification to be made under this

 

18
 

  

Article 3. For all purposes of this Contract, the expression "open book basis" means the provision by or on behalf of the Builder (subject to such provision being reasonably practicable on the part of the Builder, or possible without breach of confidentiality restrictions binding on the Builder) of all such invoices and other supporting information, and of all such calculations, determinations and other data as may be required in order to afford complete transparency to the Buyer in relation to the Builder's calculations. Each agreement on a modification of this Contract, the Plans or the Specification shall be recorded and evidenced by an AOM based on the form set out in Schedule 3 of this Contract each of which, when signed by the duly authorised representatives of the Builder and the Buyer, shall constitute an amendment to this Contract and/or the Plans and/or the Specification. Following the signature of each AOM the Builder shall implement the modifications referred to therein.

 

1.4If there is any Dispute between the parties as to any of the matters referred to in Clause 1.2 then, if the Buyer so requires, the Builder will make the requested modification before the Dispute has been resolved provided the Buyer confirms its willingness to pay the amount found due to the Builder in respect of such modification.

 

1.5Throughout the construction period, the Builder and the Buyer will co-operate and work closely together on an open book basis in order to try to identify and agree on cost savings in the construction of the Ship which shall not diminish the general appearance, safety and operational aspects of the Ship. The agreed cost savings will be recorded as modifications in accordance with the provisions of this Clause 1.

 

1.6In costing all modifications: (i) the Builder will give due credit to the Buyer where implementation of a modification will relieve the Builder from costs or work that it would otherwise have had to incur or carry out in performing its obligations under this Contract, and (ii) the Buyer will be duly debited where implementation of a modification will burden the Builder with costs or work which are in excess of costs and work that the Builder would otherwise have had to incur or carry out in performing its obligations under this Contract.

 

1.7Within the Contract Price for the Ship the implicit unit cost of each grade of passenger cabin is listed in a table attached to the Specification as Appendix 9. Until phase 6-7 of the architectural plan, the Buyer may modify the number of passenger cabins on the Ship on the cost basis and within the following scale parameters:

 

(i)The cost increase referable to each cabin added to the Ship, and the cost saving referable to each cabin removed from the Ship, will be as specified for each grade of cabin in the table referred to above. In addition, (a) due credit will be given to the Buyer where the addition or removal of cabins will relieve the Builder from costs or work that the Builder would otherwise have had to incur or carry out in performing its obligations under this Contract, and (b) the Buyer will be duly debited where the addition or removal of cabins will burden the Builder with costs or work which are in excess of costs and work that the Builder would otherwise have had to incur or carry out in performing its obligations under this Contract.

 

(ii)The additional number of passenger cabins on the Ship will not exceed a total of 25 cabins with a total of 50lower berths.

 

(iii)The increase of the gross tonnage of the Ship as result of cabin modifications will not exceed 300 GT. Apart from this permitted increase in the gross tonnage, the cabin modifications will not change

 

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any of the other main dimensions or main technical characteristics of the Ship as defined in the specifications.

 

2.CLASSIFICATION AND REGULATORY CHANGES

 

2.1If, after the Effective Date, any Class Rules and/or any Regulatory Rules are changed by the Classification Society or any Regulatory Authority, the Builder shall promptly notify the Buyer in writing of the relevant change(s) and of the necessary modifications to be made to this Contract, the Plans and the Specification.

 

2.2If, following its receipt of a notice under Clause 2.1, the Buyer reasonably considers that the operation of the Ship in its intended service would permit of a dispensation or waiver, the Builder will at the request of the Buyer apply for a dispensation from, or waiver of compliance with, the relevant change(s).

 

2.3If the Buyer does not require the Builder to apply for a dispensation or waiver (or it has not been possible to obtain a dispensation or waiver) within a period of fifteen (15) days after the Buyer's receipt of a notice under Clause 2.1 (or such longer period of time as the parties may agree to be reasonable in the light of all the circumstances then prevailing), the parties shall make an agreement to modify this Contract in accordance with Clause 1 and thereafter the Builder shall make the relevant change(s) in the design or building of the Ship.

 

3.SUBSTITUTION OF PARTS

 

3.1If (notwithstanding all reasonable efforts on the part of the Builder and provided that orders for the same were placed in good time by the Builder) any Parts are not available at the time required for their installation or incorporation in the Ship, the Builder may (with the prior written approval of the Buyer) use suitable substitute Parts which are at least equal to the standard and quality of the Parts which were not available and which are capable of meeting all of the requirements of:

 

(i)this Contract, the Plans and the Specification; and

 

(ii)the Classification Society and the Regulatory Authorities.

 

3.2Where a proposed substitution of Parts is approved by the Buyer, the Builder shall:

 

(i)bear all additional costs and expenses whatsoever in relation to such substitution; and

 

(ii)credit the Buyer with any cost savings occasioned by such substitution.

 

(End of Article 3)

 

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ARTICLE 4: TITLE AND INSURANCES

 

1.TITLE, RISK AND ENCUMBRANCES

 

1.1Title to the Ship and all Parts (but not Buyer's Supplies, title to which will at all times be and remain with the Buyer) shall pass to the Buyer upon the Ship's delivery to, and acceptance by, the Buyer in accordance with Clause 1 in Article 7 and until such delivery and acceptance shall have occurred all risks connected with the building work - including, without limitation, all risks in relation to the Ship, all Parts and all Buyer's Supplies from the time when they are taken into the custody of the Builder or any of its subcontractors - shall lie exclusively with the Builder.

 

1.2Immediately upon:

 

(i)the receipt by the Builder (or any of its subcontractors) of any Buyer's Supplies; and

 

(ii)the delivery to, or fabrication by, the Builder (or any of its subcontractors) of all other Parts,

 

the Builder shall mark (or cause its relevant subcontractors to mark) the same and the Ship (as it is from time to time built) with Hull number [*].

 

1.3The Builder shall have no authority to create (and waives all rights to create) any encumbrances whatsoever over any of the Buyer's Supplies, nor shall it permit any encumbrances of any kind (other than permitted encumbrances) to be imposed on or asserted against any of the Buyer's Supplies.

 

1.4At any time when a payment is due to the Builder under this Contract, and at all other reasonable times, the Buyer may require the Builder to provide a written statement satisfactory to the Buyer showing what, if any, encumbrances of any kind (other than permitted encumbrances) have been or are liable to be imposed on or asserted against any of the Buyer's Supplies.

 

1.5If any encumbrance of any kind (other than any permitted encumbrance) is imposed on or asserted against any of the Buyer's Supplies, the Builder shall promptly notify the Buyer and shall, not later than ten (10) days thereafter, secure the discharge or release of such encumbrance provided that if the Builder desires to contest any such encumbrance and such discharge or release is not available under law during such contest (including, without limitation, through the filing of a bond or other security), the Builder shall immediately take such steps as in the opinion of the Buyer shall prevent such encumbrance from delaying or otherwise adversely affecting the building work and shall indemnify fully, hold harmless and defend the Buyer and all other protected parties from and against all Losses which any of them may sustain or incur as a result of the imposition of any such encumbrance.

 

1.6Notwithstanding the provisions of Clause 1.5, the Buyer may secure the removal of any such encumbrance in which event the Builder shall reimburse the Buyer in full for its costs (including legal fees) of securing such discharge or release by deducting such sum from any payments due or to become due to the Builder under this Contract save that if any such cost is in excess of the amount of any such reimbursement by deductions, the Builder shall pay the amount of such excess to the Buyer promptly upon demand.

 

1.7Notwithstanding the provisions of Clause 1.5, the Buyer, without securing the discharge or release of any such encumbrance, may nevertheless withhold from any payments due or to become due to the Builder, unless and until such encumbrance is discharged or released

 

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by the Builder, a sum equal to the amount reasonably determined by the Buyer to be required to secure the discharge or release of such encumbrance (which amount shall include the estimated amount of all expenses which might be incurred in connection therewith, including legal fees).

 

1.8Prior to the installation of any of the Buyer's Supplies:

 

(i)the Builder may require the Buyer to state in writing whether any permitted encumbrances have been imposed on or asserted against the relevant Buyer's Supplies and to discharge any such permitted encumbrances prior to the installation of such Buyer's Supplies, and if the Buyer fails to discharge any such permitted encumbrances, the Builder may withhold the installation of the relevant Buyer's Supplies in which case any resulting delays will be the Buyer's responsibility; and

 

(ii)the Buyer may require the Builder to confirm in writing that the representations made by it in Article 10, Clause 1.2(ii) remain in all respects true and accurate and to procure that the Builder's financiers confirm in writing to the Buyer that they have no grounds for making (nor any expectation of acquiring grounds for making) any claims against the Builder or the Ship, and if the Builder or its financiers fails to deliver any such statement, the Buyer may require the Builder to withhold the installation of the relevant Buyer's Supplies in which case any resulting delays will be the Builder's responsibility.

 

2.INSURANCES

 

2.1During the currency of this Contract and until her delivery to the Buyer the Ship, all Parts, and all Buyers' Supplies (up to a maximum aggregate value of [*]) taken into the custody of the Builder (or any of its subcontractors) and whether or not built into or installed on or in the Ship, shall be at the exclusive risk of the Builder which shall at its own expense keep the same insured on policy terms, and with first class brokers and underwriters approved by the Buyer and its financiers in respect of and against all usual marine and builder's risks, including protection and indemnity risks, tests risks and war risks. All premiums and deductibles shall be for the sole account of the Builder. Neither the brokers nor the underwriters shall have any rights of recourse against the Ship or any of the protected parties, or any rights to make any deduction, set-off or other withholding from or against any sum payable to the Buyer or its assignees in connection with the Insurances.

 

2.2The amount of the insurances (the "Insurances") to be arranged by the Builder under this Article shall be not less than the Contract Price.

 

2.3All Insurances shall be taken out by the Builder naming the Builder as the assured party and the Buyer as the co-insured party for their respective interests. The Insurances shall contain loss payable provisions reasonably acceptable to the Buyer and its financiers.

 

2.4All Insurances shall provide that there shall be no recourse against the Ship, any of the protected parties or Buyer's assignees for the payment of any premiums or commissions and that no cancellation of the Insurances, for any reason whatsoever, shall become effective unless and until fourteen (14) days - or seven (7) days, in the case of war cover - prior written notice has been given by the relevant brokers or insurers to the Buyer.

 

2.5The Builder shall supply the Buyer prior to the commencement of construction of the Ship with a cover note and all related documents specifying the terms of the Insurances and security (which shall be as usual for the London insurance market) for the Ship.

 

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2.6If at any time there is:

 

(i)any lapse in the insurance coverage which the Builder is required to arrange under this Clause 2, the Buyer may effect replacement coverage at the Builder's expense; or

 

(ii)any failure by the Builder to pay any premiums due in respect of the Insurances, the Buyer may pay the same and recover the relevant payment(s) from the Builder.

 

3.LOSS OR DAMAGE

 

3.1In the event of any partial loss of the Ship before delivery:

 

(i)the loss shall be made good by the Builder as soon as reasonably possible, the Delivery Date shall be extended in accordance with Clause 1 in Article 5 (provided that the cause of the partial loss is excused under that Clause) and the partial loss proceeds referable to the Ship and/or Parts (other than Buyer's Supplies) subject to the partial loss shall be applied by the Builder in making good the partial loss to the approval of the Buyer, the Classification Society and the Regulatory Authorities; and

 

(ii)the partial loss proceeds referable to any Buyer's Supplies subject to the partial loss shall be paid to the Buyer.

 

3.2In the event of the total loss of the Ship before delivery, either the Builder or the Buyer shall be entitled to terminate this Contract by written notice to the other, such notice to be delivered within thirty (30) days after the date (the "Determination Date") on which it is determined that the Ship has become a total loss pursuant to Clause 3.6 below.

 

3.3If, following the total loss of the Ship, neither party terminates this Contract pursuant to Clause 3.2, the Builder shall proceed with the building of the Ship in accordance with this Contract and the Delivery Date shall be extended in accordance with Clause 1 in Article 5 provided that the cause of the total loss is excused under that Clause.

 

3.4If there is a total loss of the Ship before delivery, then:

 

(i)if either party elects to terminate this Contract pursuant to Clause 3.2, the Builder shall within ninety (90) days from (and including) the Determination Date pay to the Buyer an amount equal to the sum of:

 

(a)all payments previously made by the Buyer to the Builder under this Contract together with interest thereof at the relevant rate calculated from the date on which the Builder received each such payment to the date on which the reimbursement is received by the Buyer, and

 

(b)the Buyer's Supply Costs in respect of any Buyer's Supplies which are subject to the total loss or which cannot be removed in sound condition from the Ship, the Shipyard or other place(s) where they are stored and returned to the Buyer,

 

and in addition the Builder will return to the Buyer, free from all encumbrances (other than permitted encumbrances) all Buyer's Supplies which have not been lost or damaged and which can be removed in sound condition from the Ship, the Shipyard and other place(s) where they are stored; or

 

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(ii)if neither party terminates this Contract pursuant to Clause 3.2, the Builder shall within ninety (90) days from (and including) the Determination Date pay to the Buyer the Buyer's Supply Costs in respect of any Buyer's Supplies which are subject to the total loss.

 

3.5To the extent that any amounts are paid by the Builder to the Buyer under Clause 3.4 and the Buyer also receives any proceeds of the Insurances in respect of the same loss, the Buyer will account to the Builder for the relevant excess amount. To the extent that any of the amounts referred to in Clause 3.4 are received by the Buyer out of the proceeds of the Insurances, the Builder's liability under Clause 3.4 shall be limited to payment of the remainder of the amounts referred to in Clause 3.4.

 

3.6A total loss shall be deemed to have occurred:

 

(i)if it consists of an actual loss, at noon Papenburg time on the actual date of loss; or

 

(ii)if it consists of a constructive or compromised or arranged or agreed total loss, at noon Papenburg time on the date on which notice of abandonment of the Ship is given to her insurers or (if her insurers do not admit the claim for a total loss) at the time on the date at which a total loss is subsequently adjudged to have occurred by a competent court or arbitration tribunal or liability in respect thereof as a total loss is admitted by underwriters.

 

(End of Article 4)

 

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ARTICLE 5: PERMISSIBLE DELAYS

 

1.EXTENSION OF TIME FOR BUILDING WORK

 

1.1If the Builder gives notice as provided in Clauses 2.1, 2.2 and 2.3 the Builder shall be entitled to an extension of the Delivery Date but only if:

 

(i)there is a specific cause of delay which the Builder can prove will solely and directly delay delivery of the Ship beyond the Delivery Date and which cause is delaying or will delay building work which is in the critical path of delivery of the Ship for more than one working day;

 

(ii)such cause of delay is one of the excusable causes set out in Clause 1.3;

 

(iii)the Builder proves that it has used and is continuing to use all reasonable efforts to avoid, prevent, minimise and overcome the actual delay in delivery of the Ship including, without limitation, by the performance of other or additional building work provided that such other or additional building work does not jeopardise the Builder's contracted obligations for the construction of other ships; and

 

(iv)but for such cause of delay the Ship would have been delivered on time,

 

provided that the length of any such extension shall be the number of days by which the Builder can prove that the Delivery Date for the Ship actually will be delayed solely and directly by each such cause of delay.

 

1.2The Builder shall at all times have the burden of proving each of the matters required to be established by this Clause 1 and in the event that it is not possible for it to prove whether, or to what extent, any delay in delivery is directly and solely attributable to a cause which is excused by the provisions of this Clause 1, the Builder shall not be entitled to any extension of the Delivery Date.

 

1.3The Builder shall be entitled to an extension of the Delivery Date, as provided in Clause 1.1, for any delay caused:

 

(i)by the Buyer (other than such delays, if any, as are caused by the Buyer in the proper and timely exercise of any of its rights or obligations under this Contract);

 

(ii)by legislation or other formal action by or on behalf of the German government (or any agency or other authority of such government) prohibiting or otherwise preventing the Builder from proceeding with the building work;

 

(iii)by war or warlike events or terrorist attacks or riots or the imposition of embargoes where any of the foregoing involves any of the Builder's subcontractors outside Germany who supply important parts (such as engines, major castings or major forgings);

 

(iv)by extraordinary weather conditions not included in normal planning;

 

(v)by such strikes, lockouts and other labour disturbances of the Builder or those of its subcontractors who supply important parts (such as engines, major castings or major forgings) as are beyond the Builder's control;

 

(vi)by such accidents, explosions, fires, disruptions of power supplies and other similar occurrences as are beyond the Builder's control;

 

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(vii)by the late delivery or non-delivery to the Builder of any Parts or the late performance or non-performance of the Builder's subcontractors provided that the late delivery or non-delivery or the late performance or non-performance resulted from causes which would entitle the Builder to an extension of the Delivery Date under this Clause 1 and provided that the Builder proves that it has exercised due diligence (a) in contracting for such Parts and with such subcontractors, (b) in the performance of any acts required of it with respect to such Parts or subcontractors, (c) in monitoring the acts and circumstances of such subcontractors, and (d) in expediting deliveries or performance under the Builder's purchase or subcontracts or procuring equivalent substitute performance in the event of the late delivery of such Parts or the under-performance in such purchase or subcontracts; or

 

(viii)by unfavourable weather conditions if commencement of the sea trials tests is postponed or such tests are discontinued pursuant to Clause 1.4 in Article 6 by reason of such conditions and the number of days thereafter during which such tests cannot be undertaken exceed three (3) in total, then any further days during which the weather conditions remain unfavourable may be claimed (subject to the other provisions of this Clause 1) as a permissible delay.

 

1.4Notwithstanding anything to the contrary in this Clause 1, the Builder shall not be entitled to any extension of the Delivery Date for:

 

(i)any delay resulting from a cause of delay which has itself been caused or contributed to by any error, neglect, omission or other default of the Builder or any of its subcontractors;

 

(ii)any delay resulting from a cause of delay in existence as of the Effective Date; or

 

(iii)any delay resulting from a cause of delay, which was or reasonably should have been foreseen or anticipated by the Builder by reason of facts which were, or after reasonable enquiry should have become, known to the Builder as of the Effective Date; or

 

(iv)any delay resulting from a cause of delay which reasonably could have been avoided by the Builder;

 

(v)any delay resulting from the late delivery or non-delivery or the late performance or non-performance or other default of a subcontractor, if such delay results from a cause of delay in effect published and announced as of the date of the award of the relevant purchase contract or subcontract;

 

(vi)any delay resulting from any Dispute or legal proceeding under this Contract, provided that in the case of any building work under Dispute which would otherwise be commenced prior to the resolution thereof the Builder shall not be required to proceed therewith (and a corresponding extension of the Delivery Date shall be allowed) if, after written request by the Builder, the Buyer fails to confirm forthwith its willingness to pay the amount found due in respect of such work; or

 

(vii)any delay in moving the Ship from the Shipyard to the open sea due to extraordinary weather conditions not included in normal planning.

 

2.DELAY NOTICES

 

2.1The Builder shall give written notice to the Buyer of a cause of delay pursuant to Clause 1.3 as soon as practicable and no later than five (5) days after the date on which the Builder

 

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first has knowledge of such cause of delay and in such notice the Builder shall describe the cause of the delay, the date of commencement (or first occurrence) of the cause, its expected duration and its expected effect on the Builder's ability to carry on with the building work.

 

2.2The Builder will provide the Buyer with regular written status reports (at such reasonable intervals as the Buyer may request) with respect to any delay in respect of which the Builder has given notice pursuant to Clause 2.1 and as to the steps being taken (and planned) by the Builder to minimise and overcome any actual delay in delivery of the Ship.

 

2.3Within five (5) days after any cause of delay set forth in Clause 1.3 has ceased to exist, the Builder shall notify the Buyer of such cessation and give the Buyer a written statement of the actual or estimated delay in the completion of the building work resulting from such cause together with such detailed documentation as is then available to it justifying such extension, and any such detailed documentation thereafter becoming available to the Builder shall be promptly be given to the Buyer.

 

2.4On the basis of the notices, reports, statements and information given to the Buyer by the Builder relating to any actual or estimated delay in delivery (and such further information and documentation as the Buyer may reasonably request), the Buyer and the Builder shall confer and attempt to agree upon the number of days by which the Delivery Date shall be extended provided that if the Buyer and the Builder cannot so agree within thirty (30) days after the completion of any such conference, the extension of the Delivery Date (if any) shall be determined as a Dispute pursuant to the provisions of Article 13.

 

2.5The extension of the Delivery Date provided for in this Article shall be the only remedy for delay to which the Builder shall be entitled and, by way of illustration but not limitation, the Builder shall not be entitled to damages or any adjustment in the Contract Price.

 

(End of Article 5)

 

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ARTICLE 6: TESTS, LIQUIDATED DAMAGES AND CERTAIN TERMINATION RIGHTS

 

1.TESTS

 

1.1At its sole and direct risk and expense, the Builder shall subject the Ship and specified Parts to the tests in order to ascertain whether the Ship and such Parts have been completed in full accordance with this Contract, the Plans and Specification.

 

1.2The Buyer shall be entitled to have the Supervisor and his team present at all tests and the Builder shall give the Supervisor:

 

(i)two (2) days prior written notice of all tests (except sea trials tests) (a) designated for such notice by the Buyer after its receipt from the Builder of an agreed schedule of tests and (b) scheduled to take place on week-ends or other non-working days; and

 

(ii)twenty four (24) hours prior written notice of all other tests (except sea trials tests).

 

1.3The Builder shall give the Supervisor fifteen (15) days' estimated, and seven (7) days' definite, prior written notice of the time and the place for the sea trials tests provided that only one (1) day's prior written notice need be given to the Supervisor with respect to retrials at sea conducted within three (3) days after completion of a previous sea trial at or upon which the need for such retrial was determined.

 

1.4If the weather conditions on the date specified for the sea trials tests are (in the reasonable opinion of the Builder) so unfavourable that they would prevent the Builder from carrying out such tests then the same shall take place on the first available day thereafter that weather conditions permit. If, during the sea trials tests sudden and unexpected changes in the weather occur which, in the reasonable opinion of the Builder, are such as to prevent the continuation of such tests then the Builder shall have the option of continuing such tests or of postponing them until the next following favourable day unless the Buyer shall (in its option) agree to accept the Ship on the basis of the tests made.

 

1.5The failure of the Supervisor to be present at any test, after due notice, shall (unless such failure is due an event or combination of events outside the Supervisor's control) be deemed to be a waiver of the Supervisor's right to be present at the relevant test and the Buyer shall be obliged to accept the results of such test on the basis of acceptance by the Builder and the Classification Society.

 

1.6All tests conducted without notice to the Supervisor shall be reconducted by the Builder on due notice to the Supervisor at the sole risk and expense of the Builder.

 

1.7If a Defect is discovered during any test the Builder shall, after correcting such Defect, be required to make such further tests as may be necessary in extent and number to demonstrate and confirm the complete correction thereof provided that additional sea trials tests will not be required if the correction of any such Defect can be verified in shop or dock tests, and the sole and direct risk and expense of all such further or additional tests shall be borne by the Builder.

 

1.8The term "Defect" means:

 

(i)any defect in the Ship or in any Part installed or incorporated in, stowed on or otherwise delivered with the Ship (including work relating to the installation of Buyer's Supplies installed by the Builder or its subcontractors) which is due to incomplete or defective materials, workmanship, construction or design or any

 

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failure to comply with the relevant recommendations of any subcontractors or other parties,

 

(ii)any inherent vice, breakdown, incompleteness, omission or other deficiency of the Ship or any Part,

 

(iii)any failure of the Ship or any Part or any aspect of the building work to comply with any of the requirements of this Contract, the Specification or the Plans, or the requirements of any of the subcontractors used in connection with this Contract, or

 

(iv)the existence of any condition, notation, qualification, recommendation, reservation or restriction in relation to any certificate issued by the Classification Society or any Regulatory Authority,

 

provided that the term "Defect" shall not include any fault in any of the Buyer's Supplies which were properly received, handled, installed or incorporated in, stowed on or otherwise delivered with, the Ship by the Builder in accordance with the requirements of this Contract, the Specification and the Plans.

 

1.9After all tests have been satisfactorily performed and completed, the Builder shall:

 

(i)take the Ship to the sea port referred to in Article 1, Clause 1.1(i)(e) and open up such machinery as (a) the Classification Society and/or the Regulatory Authorities may require and/or (b) the Buyer may reasonably require, for post-tests inspection and examination;

 

(ii)correct any Defects then appearing in such machinery; and

 

(iii)close, connect, retry and retest the machinery, as appropriate, and then make the Ship ready for service, and

 

thereafter the Buyer may require a final post-tests examination and inspection at which the Builder shall demonstrate and confirm to the Buyer the complete correction of any and all Defects in such machinery.

 

1.10Not later than two (2) weeks before the anticipated Delivery Date, the Builder and the Buyer shall prepare and agree a final punch list of items which the Buyer considers defective from the perspective of first class shipping and/or shipbuilding practice and, subject always to Article 7 Clauses 1.5 and 1.6, the Builder shall be obliged to rectify such items before delivery.

 

1.11No later than twelve (12) months before the anticipated Delivery Date, the Builder and the Buyer shall in good faith discuss and agree upon the parameters (which including timelines and numbers of persons) and bases by reference to which the Buyer may send additional representatives and crew members to the Shipyard and the Builder's facility at the Delivery Port in order to attend tests and for familiarisation, training and other usual pre-delivery purposes.

 

2.LIQUIDATED DAMAGES

 

2.1The Builder agrees that certain Defects and certain delays in the delivery of the Ship shall result in the reduction of the Contract Price by way of the liquidated damages provided for in this Clause 2.

 

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2.2The guaranteed trial speed ("GTS") of the Ship at a mean moulded draft of [*] shall be [*] and shall be demonstrated by the Builder during the sea trials tests under the conditions described in section G.2.5 of the Specification. If at any time the Builder anticipates that, or if the sea trials tests demonstrate that, there will be a deficiency in the GTS the Builder shall promptly develop and provide the Buyer with a proposal to remedy the deficiency at the Builder's cost.

 

2.3If the Builder fails to remedy any deficiency in the GTS before delivery, the Builder shall have no liability to the Buyer if the actual speed of the Ship as determined during the final sea trials tests is up to [*] below GTS but commencing with a deficiency of more than [*] in actual speed below the GTS the Contract Price shall be reduced by way of liquidated damages as follows: (i) for [*], a total sum of [*]; (ii) for [*], a total sum of [*], with fractions of a knot being calculated in proportion provided that if the Defect in the actual speed of the Ship is more than [*] below the GTS, then the Buyer may, at its option, either accept the Ship at a reduction in the Contract Price for such Defect of [*] or reject the Ship and terminate this Contract pursuant to Clause 2 in Article 9.

 

2.4The guaranteed fuel consumption ("GFC") of each of the diesel engines of the Ship at [*] power of MCR without attached pumps shall be [*] plus a [*] margin and a calorific value of fuel oil of [*] in ISO conditions and shall be demonstrated by the Builder in tests conducted at the engine manufacturers' test bed.

 

2.5If the Builder fails to remedy any deficiency in the fuel consumption of the Ship's diesel engines before delivery the Contract Price shall be reduced by way of liquidated damages by the sum of [*] for each [*] increase in fuel consumption above GFC up to a maximum of [*] over the GFC with fractions of every [*] being calculated in proportion provided that if the fuel consumption is more than [*] above the GFC, the Buyer may, at its option, either accept the Ship at a reduction in the Contract Price for such Defect of [*] or reject the relevant engine(s) (without prejudice to its other rights with respect to the Ship).

 

2.6The guaranteed deadweight capacity of the Ship shall be [*] under the conditions defined in sections G.2.3 and G.2.4 of the Specification and shall be demonstrated by the Builder in the specified deadweight capacity test.

 

2.7If the Builder fails to remedy any deficiency in the Ship's deadweight capacity before delivery, the Builder shall have no liability to the Buyer if the actual deadweight capacity of the Ship as determined in accordance with the Specification is less than [*] below the guaranteed deadweight capacity but the Contract Price for the Ship shall be reduced by way of liquidated damages by the sum of [*] for each full metric ton of such deficiency being more than [*] up to a maximum deficiency of [*] at a draft of not more than [*] even keel with fractions of each metric ton being calculated in proportion provided that if the actual deadweight deficiency at a mean moulded draft of not more than [*] even keel is more than [*], the Buyer may, at its option, either accept the Ship at a reduction in the Contract Price of [*] for such Defect or reject the Ship and terminate this Contract pursuant to Clause 2 in Article 9.

 

2.8The guaranteed cabin capacity of the Ship shall be as defined in sections G.2.2.1 and G.2.2.2 of the Specification and no change shall be made to such cabin capacity without the Buyer's prior written consent. If the number of completed and fully habitable cabins of any of the passenger or crew grades referred to in Clause 2.1 (iii) and (iv) of Article 1 is lower than the number of cabins specified for any such grade, subject to the following provisos the Buyer will accept the Ship with a to be agreed reduction in the Contract Price for the Ship calculated on a fair and reasonable basis so as to compensate the Buyer for its estimated loss directly and naturally resulting, in the ordinary course of events, from the relevant cabin

 

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deficiency provided that (i) if the shortfall in the number of completed and fully habitable cabins (irrespective of the grades of cabins involved) exceeds 10 cabins, or (ii) if the parties are unable to agree upon a reduction in the Contract Price the Buyer may reject the Ship and terminate this Contract pursuant to Clause 2 in Article 9. For the purposes of this Clause 2.8 sound and vibration effects shall be excluded when evaluating whether or not a cabin is fully habitable, such effects being regulated by Clauses 2.9 to 2.12 of this Article.

 

2.9The Builder will carry out its works so that at the time of delivery of the Ship under this Contract, and after taking into account the maximum allowed deviations and tolerances referred to in section G.5.2 of the Specification, the Ship shall fulfil the same requirements in relation to noise levels, sound insulation, impact sound insulation and vibration levels (the "S&V Requirements") as are defined by the Classification Society for its notations CRN (1) and CRN (2), as far as applicable pursuant to the Specification.

 

2.10If the S&V Requirements are not fulfilled in any of the passenger or crew cabins or in any other of the spaces referred to in section G.5.2 of the Specification then, before delivery of the Ship, the Builder shall take all such remedial steps and carry out all such further tests and measurements as shall be reasonably required to demonstrate the complete and permanent correction of the relevant deficiencies.

 

2.11If, after the steps taken by the Builder pursuant to Clause 2.10, the S&V Requirements are not fulfilled in any of the passenger or crew cabins or in any other of the spaces referred to in section G.5.2 of the Specification then, subject always to the Buyer's rights under Clause 2.12, at delivery of the Ship the Builder shall be liable to compensate the Buyer for such deficiencies through an agreed reduction in the Contract Price.

 

2.12If, after the steps taken by the Builder pursuant to Clause 2.10, the S&V Requirements are not fulfilled in: (a) any of the top grades of passenger cabins (meaning penthouse suites, courtyard suites and corner suites); or (b) in [*] of the other passenger cabins, irrespective of the grade(s); or (c) in [*] of spaces referred to in section G.5.2 of the Specification, then the Buyer may, at its option, either accept the Ship at an agreed reduction in the Contract Price or the Buyer may reject the Ship and terminate this Contract pursuant to Clause 2 in Article 9.

 

2.13All reductions in the Contract Price provided for under any of Clauses 2.3, 2.5, 2.7, 2.8, 2.11 and/or 2.12 shall be determined on delivery of the Ship and made by means of set-off and deduction from the payments to be made by the Buyer on delivery of the Ship.

 

2.14The Builder: (i) acknowledges that the Buyer intends to arrange for the Ship's maiden cruise with fare paying passengers to be held on the Ship's relocation voyage from the Delivery Port; (ii) acknowledges that it is imperative for the Ship to be ready at the time, and in the condition, provided for in this Contract so as to enable the Buyer to fulfil its commitments in relation to the Ship's maiden cruise; (iii) agrees to do all it can to assist the Buyer to fulfil its commitments in relation to the Ship's maiden cruise; and (iv) acknowledges that if delivery of the Ship is not made on the Delivery Date, the Buyer will suffer loss and damage (including reputational damage) in amounts which are extremely difficult to quantify in advance and agrees that the per day sums set out in Clause 2.15 represent a genuine and reasonable pre-estimate of the Buyer's loss and damage for each day of delay in delivery of the Ship beyond the Delivery Date.

 

2.15If delivery of the Ship is delayed beyond the Delivery Date, then subject to a grace period which will expire at midnight in Papenburg on the [*], the Builder shall pay liquidated damages for each calendar day (or pro-rata for each part of a calendar day) of delay in delivery, calculated as follows: for the first [*] of delay, counting from midnight Papenburg

 

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on the [*], the liquidated damages for delay shall be calculated at the rate of [*] per day; and thereafter, until delivery of the Ship is actually made or this Contract is terminated, the liquidated damages for delay shall be calculated at the rate of [*] per day.

 

2.16If the delay in delivery of the Ship continues for [*] then, in such event, the Buyer may at any time thereafter terminate this Contract pursuant to Clause 2 in Article 9.

 

2.17If the delay in delivery of the Ship continues for [*], and provided the Buyer has not by then elected to terminate this Contract, the Builder may (by written notice) require the Buyer to make an election in which case the Buyer shall - within [*] after its receipt of the Builder's notice - notify the Builder in writing of its intention either to terminate this Contract or to consent to the acceptance of the Ship at an agreed future date on the basis that the Buyer shall remain entitled to all liquidated damages which would otherwise have been payable or allowable by the Builder; it being further understood that, if the Ship is not delivered by such agreed future date, the Buyer shall have the same right of termination upon the same terms and conditions as set out above. If the Buyer fails to make an election as specified above within the relevant [*] period, the Buyer shall be deemed to have consented to the Ship being delivered at the future date proposed by the Builder.

 

2.18Payment of the liquidated damages referred to in Clause 2.15 shall be made by the Builder to the Buyer as follows:

 

(i)the Builder's first payment shall be made on the earlier of (a) the [*] after delivery of the Ship has been delayed beyond the Delivery Date and (b) the date on which actual delivery of the Ship is made; and

 

(ii)thereafter the payments shall be made every [*] commencing on the [*] after the end of the [*] period mentioned in Clause 2.18 (i),

 

and continuing on the last day of each succeeding [*] period thereafter until the day on which delivery of the Ship is actually made or this Contract is terminated at which time the Builder shall pay the entire remaining amount due under Clause 2.15.

 

2.19The parties acknowledge and agree that:

 

(i)the Contract Price reductions and payments provided for in this Clause 2 are cumulative; and

 

(ii)subject always to the guarantee provisions in Article 7 Clause 2 and to the termination provisions in Article 9 Clause 2, the Contract Price reductions and payments provided for in this Clause 2 shall be the only compensation recoverable by the Buyer in respect of the Defects and the delay in delivery to which they relate and, in particular, the Builder shall not be liable for any consequential losses resulting from such Defects or such delay in delivery.

  

(End of Article 6)

 

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ARTICLE 7: DELIVERY AND GUARANTEE

 

1.DELIVERY AND ACCEPTANCE

 

1.1The date on which the Ship shall be ready for delivery is [*] (the "Delivery Date"). The Ship shall not be delivered before the Delivery Date without the express written approval of the Buyer. When:

 

(i)the Builder has completed the building work in conformity with this Contract, the Plans and the Specification;

 

(ii)all tests have been performed and completed in a manner satisfactory to the Buyer;

 

(iii)the Ship has been freed from all Defects (apart from Defects which qualify as minor and insignificant Defects, as defined in Clause 1.6, and Defects for which there will be a reduction in the Contract Price in accordance with Article 6 Clause 2); and

 

(iv)the Ship (a) has been cleaned and prepared (in accordance with the Builder's usual practices and to their usual standards for ships of this type) to take on a full complement of passengers, officers, crew and staff, and (b) is in all other respects ready to commence operations as a luxury cruise ship,

 

the Builder shall tender the Ship for delivery to the Buyer safely afloat alongside a safe and accessible quay at the Delivery Port where there must be sufficient water for the Ship always to remain afloat and from where there must be direct, free, unimpeded, safe and lawful access to international waters provided that the Builder shall have given to the Buyer not less than (a) 365 (three hundred and sixty five) days, 180 (one hundred and eighty) days, ninety (90) days prior written notice of the date on which the Builder in its good faith assessment expects to tender the Ship for delivery to the Buyer in accordance with this Contract, and (b) 15 (fifteen) days definite prior written notice of the date on which the Builder will tender the Ship for delivery to the Buyer in accordance with this Contract.

 

1.2The Builder shall deliver the Ship to the Buyer free and clear of all encumbrances whatsoever.

 

1.3On delivery of the Ship the Builder shall also deliver the following documents (together, the "Delivery Documents"):

 

(i)a protocol of delivery and acceptance in a mutually agreed form confirming delivery of the Ship to, and acceptance and taking possession of the Ship by, the Buyer pursuant to this Contract, executed in duplicate by the Builder and stating the date and (local) time of such delivery and acceptance;

 

(ii)a declaration of warranty by the Builder in a mutually agreed form confirming that the Ship is delivered to the Buyer free and clear of all encumbrances whatsoever (including, without limitation, all liabilities of the Builder to the Refund Guarantors, the Builder's financiers and its subcontractors, and all liabilities arising from the construction of the Ship or the operation of the Ship for the purposes of the tests or otherwise before delivery) and that the Ship is absolutely free of all burdens in the nature of imposts, taxes or other charges imposed by the national, provincial, local or port authorities of the country where the Ship was built and (if different) the country in which the Ship is delivered to the Buyer, executed in triplicate and notarised and legalised in accordance with the Buyer's instructions;

 

(iii)a detailed inventory showing the machinery and equipment installed on the Ship and the spares, stores and other consumable items delivered with the Ship;

 

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(iv)the makers' certificates, subcontractors' instruction books, and all of the Classification Society, trading and other certificates (each free of conditions, qualifications, recommendations, reservations and restrictions) required to be supplied upon delivery of the Ship pursuant to this Contract and the Specification;

 

(v)a protocol showing the results of the tests;

 

(vi)a non-registration or deletion certificate issued by the District Court of Emden, Germany;

 

(vii)a commercial invoice for the Ship and all other amounts payable by the Buyer on delivery;

 

(viii)a builder's certificate and a bill of sale, each in a form acceptable to the Buyer, each executed in quadruplicate and notarised and legalised in accordance with the Buyer's instructions, and such other written instruments (each notarised and legalised in accordance with the Buyer's instructions) as may be necessary or desirable, in the reasonable opinion of the Buyer, to confirm that full and clean title in the Ship has been vested in the Buyer;

 

(ix)a full set of the specified construction documents (each in three (3) white prints, one of each of which will be on board the Ship at delivery);

 

(x)one CD-ROM of the principal delivery drawings and plans relating to the Ship approved by the Classification Society;

 

(xi)such further certificates and/or other documents as may be necessary or desirable, in the reasonable opinion of the Buyer, in connection with the Buyer's ownership, registration and/or financing of the Ship;

 

(xii)such documents as may be necessary or desirable, in the reasonable opinion of the Buyer, to prove the authority of the Builder's representatives below senior management to sign the documents to be executed on behalf of the Builder in connection with delivery of the Ship.

 

1.4If, at the time when the Builder tenders delivery of the Ship to the Buyer, the Ship is complete (meaning that she has been designed, engineered, built, launched, equipped, outfitted, finished and tested in accordance with this Contract and the Specification), and if such tender is accompanied by a tender of delivery of a complete and proper set of the Delivery Documents, the Ship and the Delivery Documents (including any interim documents if the requirements of minor and insignificant defects are met and provided that the Builder has used its best efforts to obtain final documents before delivery) shall thereupon be accepted by the Buyer but if, at such time, the Ship and/or the Delivery Documents are not complete, the Buyer shall be entitled to refuse acceptance of the same by delivering to the Builder, within two (2) working days from (and including) the date of such tender, a written notice describing those aspects of the Ship and/or the Delivery Documents which are not complete. Any final documents not delivered to the Buyer at delivery of the Ship shall be delivered as soon as practicable thereafter and in any event within a period that is reasonably acceptable to the Buyer.

 

1.5Notwithstanding any provision to the contrary in this Clause 1, if the Ship is complete but for minor and insignificant Defects, the Buyer shall accept delivery subject to:

 

(i)an agreed reduction in the Contract Price; or

 

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(ii)in the Buyer's option, the Builder undertaking to correct - at the Builder's entire risk and expense, without any interruption to the Ship's service to its passengers, and in accordance with a remedial plan and timetable acceptable to the Buyer (acting reasonably) – the minor and insignificant Defects described in a list which shall be prepared by the Buyer and agreed with the Builder at or before delivery.

 

1.6The expression "minor and insignificant Defects" means those Defects which in and of themselves until they have been remedied, and which in the course and process of being remedied:

 

(i)do not and will not adversely affect the seaworthiness of the Ship; or

 

(ii)do not and will not prevent the unrestricted use of the Ship in its intended service and purpose; or

 

(iii)do not and will not (a) prevent the use of any of the Ship's cabins and public areas, or (b) in any other way adversely affect the comfort and safety of the Ship's passengers; or

 

(iv)do not and will not affect the safety of the Ship's crew members or their ability to carry out their duties in a safe working environment and with appropriate accommodation; or

 

(v)do not and will not adversely affect the operational efficiency of the Ship; or

 

(vi)do not and will not involve any condition, qualification, recommendation, reservation or restriction in relation to any certificate issued (or to be issued) by the Classification Society or any Regulatory Authority or any other specified person which in the opinion of the Buyer (acting in good faith) is or could be material in a commercial or technical sense.

 

1.7Acceptance of the Ship by the Buyer shall be accomplished by:

 

(i)the delivery to the Builder of a counterpart of the protocol of delivery and acceptance duly executed by the Buyer; and

 

(ii)payment by the Buyer to the Builder of that part of the Contract Price which the Buyer is required to pay upon delivery of the Ship pursuant to Clause 2.1(v) in Article 8.

 

1.8The Buyer may (but shall not be obliged to) identify in the list described in Clause 1.5(ii) any Defects which are known by the Buyer to exist in the Ship at the time that the Ship is accepted, and all such Defects (whether or not identified or otherwise noted), shall thereafter be deemed to be, and shall be treated as, Defects arising and reported during the Guarantee Period.

 

1.9The Buyer shall be afforded five (5) days free of any wharfage or any other charge, and up to three (3) further days at the usual wharfage fee charged by the relevant port authority, within which to remove the Ship from her point of delivery.

 

1.10Lubricating oil left in storage tanks, and diesel and fuel oil remaining on board, at delivery of the Ship shall be inventoried by the Builder and the Buyer shall pay for them at the Builder's actual cost price provided that the Builder shall remove all waste-oil and sludge from the Ship at the Builder's risk and expense prior to delivery.

 

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1.11In every instance in which a right or obligation or the computation of any period of time under this Contract is in any manner or to any extent dependent upon delivery of the Ship, delivery shall not be deemed to have occurred unless and until the Ship and the related Delivery Documents have been accepted by the Buyer under this Clause 1.

 

1.12Acceptance of the Ship and the related Delivery Documents by the Buyer under this Clause 1:

 

(i)shall signify that the Buyer has taken possession and the risk of loss of the Ship and the related Delivery Documents as of the time and date set out in the protocol of delivery and acceptance and that the Builder may terminate the Insurances; and

 

(ii)shall not be deemed to constitute a waiver of or otherwise prejudice any of the Buyer's rights under Clause 2 with respect to any Defect, whether known or unknown, and whether or not noted in any document delivered in connection with delivery and acceptance of the Ship, which may exist in the Ship at the time it is accepted by the Buyer, and any such Defect may be reported to, and shall be corrected at the sole and direct risk and expense of, the Builder as provided in Clause 2.

 

2.GUARANTEE

 

2.1Subject to the provisions of this Clause 2, the Builder guarantees:

 

(i)the Ship's main engines and certain components of the azipod system (namely: the pod, the converter, trafo and main switchboard parts) against all Defects for the period of seven hundred and thirty (730) days; and

 

(ii)the Ship and all other Parts against all Defects for the period of three hundred and sixty five (365) days,

 

(subject to any extension thereof as provided for in this Clause 2) from the date of the Ship's actual delivery to the Buyer under Article 7 (the "Guarantee Period").

 

2.2In calculating the length of the Guarantee Period there shall be excluded any day(s) during which the Ship is prevented from entering or is taken out of service solely on account of any Defect in the Ship or in any Part for which the Builder is responsible under this Clause 2.

 

2.3Where any Defect in the Ship or any Part (including the main engines or azipod system as defined in subclause 2.1(i) above) is corrected during or after the Guarantee Period, the Builder's guarantee under this Clause 2 shall apply to such correction for the longer of three hundred and sixty five (365) days from the date on which the correction was completed and the end of the relevant period specified in subclause 2.1(i) and 2.1(ii) above so that the Guarantee Period for the items referred to in subclause 2.1(i) shall not exceed one thousand and ninety five (1095) days and the Guaranteed Period for the items referred to in subclause 2.1(ii) shall not exceed seven hundred and thirty (730) days.

 

2.4If any corrective works made or agreed to be made during or after the Guarantee Period (or any extension thereof under Clause 2.3) indicate any recurring Defect, the Builder shall:

 

(i)investigate the same on the basis of a potential design Defect; and

 

(ii)ascertain the source of such recurring Defect and notify the Buyer thereof; and

 

(iii)correct such recurring Defect, and the source thereof, in order to avoid a continuation or repetition of such recurring Defect.

 

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2.5The Builder shall not be responsible for the correction of any Defect if it is due to:

 

(i)perils of the sea, accident (but excluding any accident caused by any Defect), negligence (but excluding negligence on the part of the Builder), or improper maintenance or handling (including, without limitation, overloading) of the Ship or any Parts; or

 

(ii)use of fuels or lubricants not recommended by the relevant manufacturer; or

 

(iii)ordinary wear and tear; or

 

(iv)any fault in (or caused by) any Buyer's Supplies which were properly (a) received, (b) handled, (c) installed or incorporated in, (d) stowed on, or (e) otherwise delivered with the Ship by the Builder in accordance with all of the requirements of this Contract, the Plans and the Specification.

 

2.6The Buyer shall give written notice to the Builder as soon as possible and in any event within fourteen (14) days after the discovery of any Defect for which a claim is made under this Clause 2 and, a copy of each such notice shall also be given to the guarantee engineer, who shall acknowledge receipt by his signature thereof. The Buyer's notice shall give full details (so far as possible) as to the nature of the Defect and the extent of any damage caused thereby.

 

2.7Within thirty (30) days after the end of the Guarantee Period, the Buyer (in consultation with the guarantee engineer) will draw up, and send to the Builder, a list identifying every Defect for which a claim is to be made under this Clause 2 provided that this Clause 2.7 will not preclude the Buyer from giving notice to the Builder of, and making claims in respect of, any Defect which is covered by the Builder's guarantee under Clause 2.3.

 

2.8Each Defect will be corrected by the Builder as soon as reasonably practicable (and shall be scheduled so as to minimise disruption to the Ship's service and the availability of cabins, public rooms and areas, and other passenger facilities) or, at the Buyer's option, under the instruction or supervision of the Builder at a suitably qualified shipyard or workshop selected by the Buyer and approved by the Builder (such approval not to be unreasonably withheld or delayed), and in each case the Builder shall bear and pay:

 

(i)the cost of all equipment, parts and materials required to correct the Defect (including, without limitation, the cost of delivering the same to the selected shipyard or workshop by airfreight if the Buyer reasonably so requires, and the cost of returning any defective equipment, parts and materials);

 

(ii)the cost of all labour required to correct the Defect including, without limitation, the expenses of independent contractors in travelling to the Ship;

 

(iii)the cost of any necessary underwater inspection of the Ship by divers; and

 

(iv)where the Ship is drydocked solely on account of the need to investigate or correct any Defect in the Ship's external underwater parts at any time before the Ship's first scheduled drydocking after delivery, the fuel costs of taking the Ship from her berth to the nearest available dry-dock and vice versa, the drydocking costs and the costs of correcting any such Defect.

 

For the avoidance of doubt, in view of the intended area of the Ship's operation during the Guarantee Period, the Builder will not be entitled to require the Ship to be returned to any of the Builder's facilities for the correction of any Defects.

 

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2.9Where the Buyer discovers any Defect which (in the reasonable opinion of the Buyer) requires correction on an urgent basis, the Buyer will (acting in good faith) give such notice to the Builder as is practicable in the circumstances then prevailing (the intention being that the Builder shall have a reasonable opportunity to obtain necessary remedial instructions from the relevant sub-contractor(s) and to relay such instructions to the Buyer) and thereafter the necessary corrective works may be carried out by the Ship's crew or, if practicable having regard to the degree of urgency, by the nearest suitably qualified shipyard or workshop selected by the Buyer, and in each such case the Builder shall reimburse the Buyer for the costs described in Clause 2.8(i), (ii), (iii) and (iv) above.

 

2.10At the Buyer's request from time to time within the period commencing on delivery of the Ship and ending with final completion of all corrective works to be made by the Builder under this Clause 2, the Builder will:

 

(i)assign to the Buyer, to the fullest extent possible and without any charge to the Buyer, that part of every warranty or guarantee made or given by any sub-contractor with respect to any design, workmanship or Part which extends beyond the Guarantee Period or which is otherwise more favourable to the Buyer than the guarantee of the Builder under this Clause 2; or

 

(ii)if it is not possible fully and effectively to assign the relevant part of any such warranty or guarantee, hold and enforce the relevant warranty and guarantee as trustee and agent for the Buyer and promptly account to the Buyer for all monies received in or pursuant to the holding or enforcement of any such warranty or guarantee.

 

2.11The Builder shall, at its sole risk and expense (except for the cost of suitable accommodation and food on board the Ship which shall be supplied free of charge by the Buyer), employ and place a suitably qualified and experienced English-speaking guarantee engineer acceptable to the Buyer on board the Ship for the first three hundred and sixty (365 days) from delivery and thereafter as necessary until the Builder has corrected every Defect to which this Clause 2 applies. If the Builder should so request at delivery, the Buyer will also make one double cabin available for a second guarantee engineer and/or fitters for up to three (3) months after delivery. In addition, if during the Guarantee Period referred to in Clause 2.1(i), there are any Defects relating to the engines or the azipod system the Builder shall arrange (on the same basis as is set out above) for a guarantee engineer to attend on board the Ship as and when required by the Buyer.

 

2.12If:

 

(i)any Defect in the Ship's external underwater parts is discovered during the Guarantee Period or the period of thirty (30) days referred to in Clause 2.7; or

 

(ii)any Defect in the Ship's external underwater parts is discovered during the Ship's first scheduled drydocking after delivery (which is to commence not later than thirty six (36) months after delivery provided that if the Ship is not drydocked within twenty four (24) months after delivery, the Buyer and the Builder will jointly make an in-water inspection of the Ship's underwater parts within twenty four (24) months after delivery) and either the Builder accepts that the Defect arose during the Guarantee Period or the Builder is unable to prove that the Defect arose after the end of the Guarantee Period,

 

the Builder shall be responsible for such Defect and the correction thereof in accordance with this Clause 2 provided that the Buyer shall bear and pay for the haul day and any

 

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drydocking costs incurred in the ordinary course of the Ship's normal drydocking maintenance and the Builder, in addition to the costs of all necessary corrective works, shall bear and pay for such additional drydocking day(s) as may be required to correct such Defect.

 

2.13Without prejudice to the Builder’s obligations and liabilities under the other provisions of this Clause 2, the Builder shall not be responsible for any loss or damage caused by any Defect except:

 

(i)that, in addition to the other guarantee obligations specified in this Clause 2, the Builder shall be obliged to correct (or, as provided for in the preceding paragraphs of this Clause 2, pay for the correction of) any equipment or part of the Ship that is damaged as a direct result of any Defect covered by the Builder's guarantee under this Clause 2;

 

(ii)for any loss or damage directly caused by the Builder's correction of any Defect;

 

(iii)for any loss or damage directly caused by the wrongful refusal or failure of the Builder or its subcontractors to correct (or authorise the correction) of any Defect, and

 

(iv)for any increase in premium or any loss of rebate incurred by the Buyer as a result of any claims being made on the Buyer’s insurance policies for the Ship in respect of any loss or damage referred to in this Clause 2.13

 

provided always that the Builder’s maximum liability in respect of any claim made against it by the Buyer under this Clause 2.13 shall not exceed the sum of €1,153,582 (one million one hundred fifty three thousand five hundred eighty two euros) per Defect.

 

2.14The Builder further guarantees the Ship against any latent Defects which the Buyer can demonstrate existed at the time of the Ship's delivery to the Buyer but which were not apparent during the Guarantee Period. If the Buyer discovers any latent Defects after the expiry of the Guarantee Period, the Guarantee Period shall be deemed to be extended in respect of such Defects and the Builder shall be obliged to correct (or pay for the correction of) such Defects in accordance with the foregoing provisions of this Clause 2 provided always that:

 

(i)the Buyer shall give written notice to the Builder as soon as possible (and in any event within fourteen (14) days) after the discovery of any latent Defect for which a claim is made under this Clause 2.14, and such notice shall give full details (so far as possible) of the nature of the latent Defect and the extent of any damage cause thereby;

 

(ii)the Buyer shall have the burden of establishing that the Defect is a latent Defect within the meaning set out above, failing which the Builder shall have no liability in respect thereof;

 

(iii)the Builder shall be under no obligation in respect of any latent Defect unless written notice thereof has been received by the Builder by midday (Papenburg time) on the day falling thirty six (36) months from the date of the Ship's actual delivery to the Buyer; and

 

(iv)the provisions of this sub Clause relating to latent Defects do not apply to paintings or coatings.

 

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2.15Subject to the other express provisions of this Contract, the Builder shall not be responsible for any loss of profit or other consequential losses suffered by the Buyer.

 

(End of Article 7)

 

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ARTICLE 8: CONTRACT PRICE AND PAYMENT TERMS

 

1.CONTRACT PRICE

 

1.1The Contract Price for the Ship:

 

(i)shall be €801,220,000 (eight hundred one million two hundred twenty thousand euros);

 

(ii)is a fixed price and may be adjusted only in strict accordance with, and subject to, the express provisions of this Contract;

 

(iii)includes a lump sum allowance (the “Buyer’s Allowance”) in the amount of [*] in respect of (a) Buyer's Supplies from time to time purchased by or at the direction of the Buyer and (b) other costs from time to time expended by or at the direction of the Buyer in connection with construction of the Ship, which amount shall be paid by the Builder to the Buyer in accordance with Clause 2.8 below; and

 

(iv)the Contract Price includes a provision for cost savings in the amount of [*] (the "Target Saving") to be agreed upon between the Builder and the Buyer by July 23, 2014. Any such agreed cost savings are to be handled as an AOM. If and to the extent that the Builder and a Buyer are not able to agree on cost savings in the amount of the Target Saving by such date, the Contract Price shall be increased (but without application of any contractual or other profit margin for the Builder) by the difference between the amount of the cost savings agreed between the parties and the amount of the Target Saving.

 

1.2For the avoidance of doubt, the Contract Price includes:

 

(i)the cost of the Ship, completed in accordance with the requirements of this Contract;

 

(ii)the cost of all building work and the cost of all tests and trials of the Ship to be performed by, or on behalf of, the Builder;

 

(iii)the cost of procuring the classification notation for the Ship, and of obtaining all certificates and other documents which are required to be delivered pursuant to this Contract; and

 

(iv)all other costs and expenses of the Builder as provided for herein or otherwise incurred by the Builder unless expressly provided for in this Contract as being for the Buyer's account.

 

1.3No commission of any kind whatsoever is or will be payable (whether directly or indirectly) by or to any person in relation to or in connection with this Contract or any of the business transactions described in or contemplated by this Contract.

 

2.PAYMENTS

 

2.1Payment of the Contract Price shall be made to the Builder as follows:

 

(i)[*], within [*] after the Effective Date;

 

(ii)[*], on the date falling [*] before the Delivery Date;

 

(iii)[*], on the date falling [*] before the Delivery Date;

 

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(iv)[*], on the date falling [*] before the Delivery Date or (if later) the date expressly agreed in writing by the parties, or determined by an Expert appointed under Article 13 Clause 1.2, to be the date on which the Ship is expected to be ready for delivery in accordance with this Contract; and

 

(v)the balance of the Contract Price, on delivery of the Ship and the Delivery Documents to, and their acceptance by, the Buyer in accordance with the provisions of this Contract.

 

2.2The Builder shall by not less than fourteen (14) days advance written notice advise the Buyer of the date upon which each of the payments referred to sub-clauses 2.1(ii) to (iv) shall become due and payable and, in addition, the notice given in relation to sub-clause 2.1(v) will show (in reasonable detail and on an open-book basis) the Builder's calculation of the balance of the Contract Price payable on delivery of the Ship and, in particular, the amounts of any reductions in or additions to the Contract Price occasioned by the terms and conditions of this Contract.

 

2.3The Buyer's obligations to make the payments referred to in sub-clauses 2.1(i) to (iv) shall, in the case of each such payment, be subject to and conditional upon the Buyer's receipt of:

 

(i)the Builder's invoice for the relevant payment;

 

(ii)an irrevocable guarantee for the relevant payment in the form of two refund guarantees, the first to be in respect of the amount of the relevant instalment minus the relevant amount of the Buyer’s Allowance under Clause 2.8 (the “Refund Guarantee”), and the second to be in respect of the relevant amount of the Buyer’s Allowance (the “Buyer’s Allowance Refund Guarantee), each to be issued in favour of the Buyer by a refund guarantor ("Refund Guarantor") which qualifies as an Acceptable Issuer securing the refund to the Buyer of the relevant payment together with interest thereon at the relevant rate calculated from the date of the Builder's receipt of such payment to the date of the Buyer's receipt of the refund, and each such guarantee to be in the terms of the draft set out in Schedule 2 (A) or (as applicable) Schedule 2 (B) or in such other terms as the Buyer, acting reasonably, may approve; and

 

(iii)a list of authorized signatures or equivalent evidence of the authority of the person(s) signing the guarantee on behalf of the Relevant Refund Guarantor.

 

The Buyer's obligation to make the payment referred to in sub-clause 2.1 (v) shall be subject to and conditional upon the Buyer's receipt of the Builder's invoice for the relevant payment and the Builder's performance of the other delivery-related obligations provided for in this Contract.

 

2.4The other payments from time to time due under this Contract shall be made as follows:

 

(i)payment or credits for any modification(s) pursuant to Article 3 and/or any other amount(s) accruing prior to delivery (but for which no specific date is stipulated in this Contract) shall be made simultaneously with delivery of the Ship, and the amount(s) thereof shall be shown in the invoice to be issued and delivered by the Builder in respect of the Contract Price payment referred to in Clause 2.1(v);

 

(ii)any amount for which a specific payment date is stipulated in this Contract shall be paid on such date; and

 

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(iii)for any amount accruing after delivery in respect of a defect, payment shall be made as follows:

 

(a)if the parties agree that the defect in question is a Defect, not later than fifteen (15) days after the Builder's receipt of an invoice for the Defect remedied pursuant to Clause 2 in Article 7; or

 

(c)if there is a Dispute as to whether the defect is a Defect on the date on which it is finally determined or adjudged to be a Defect under Article 13, together with interest thereon at the relevant rate calculated from the date of the Builder's receipt of an invoice for the Defect remedied pursuant to Clause 2 in Article 7 up to and including the date of the Buyer's receipt of the relevant amount.

 

2.5Every amount from time to time due under this Contract but unpaid for longer than seven (7) days from (and excluding) the due date shall bear interest at the relevant rate from the due date up to and including the date of receipt by the party to which the amount is owed.

 

2.6All amounts payable to the Builder under this Contract shall be paid directly to the Builder's Account, and payment shall be fulfilled upon irrevocable credit to such account. The Builder and the Buyer shall consult with each other about the mode of payment with a view to reducing the amount of any applicable bank transfer charges.

 

2.7All payments made by the Buyer to the Builder before delivery and acceptance of the Ship shall be in the nature of advances to the Builder. Payments made by the Buyer shall not be construed as a waiver of the Buyer's rights subsequently to object to any of such payments or the underlying invoices issued by the Builder.

 

2.8The Buyer’s Allowance shall be accounted for and paid by the Builder as follows:

 

(i)Upon its receipt of the first instalment of the Contract Price the Builder shall immediately pay to the Buyer the sum of [*]. Upon the Buyer’s receipt of this payment, the Buyer shall return the Buyer's Allowance Refund Guarantee to the Builder.

 

(ii)Upon its receipt of the second instalment of the Contract Price the Builder shall immediately pay to the Buyer the sum of [*]. Upon the Buyer’s receipt of this payment, the Buyer shall return the Buyer's Allowance Refund Guarantee to the Builder.

 

(iii)Upon its receipt of the third instalment of the Contract Price the Builder shall immediately pay to the Buyer the sum of [*]. Upon the Buyer’s receipt of this payment, the Buyer shall return the Buyer's Allowance Refund Guarantee to the Builder.

 

(iv)Upon its receipt of the fourth instalment of the Contract Price the Builder shall immediately pay to the buyer the sum of [*]. Upon the Buyer’s receipt of this payment, the Buyer shall return the Buyer's Allowance Refund Guarantee to the Builder.

 

(v)For each of the payments referred to in paragraphs (i) to (iv) above, the Buyer shall provide the Builder with a corresponding invoice. In each case, the invoice shall not require any specific explanation of paid or planned expenditures.

 

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(vi)At delivery of the Ship the Builder shall apply the balance of the Buyer’s Allowance, in the amount of [*], in or towards payment of any sums due to the Builder at delivery in respect of agreed modification costs.

 

(vii)At delivery of the Ship the Buyer shall provide the Builder with a written statement (in such form as the Builder may reasonably request) signed by two directors or other authorized officers of the Buyer and describing the categories of items ordered by or on behalf of the Buyer, and the other expenditures made or to be made in respect of orders placed by or on behalf of the Buyer, the total value of each such category and the aggregate total value of such orders in respect of which the Buyer’s Allowance has been applied during the construction period or is to be applied using the amounts referred to in paragraphs (i) to (iv) above and any remainder amount referred to in paragraph (viii) below.

 

(viii)If any part of the Buyer’s Allowance remains after the application referred to in paragraph (vi) above, at delivery of the Ship the relevant remainder amount shall, upon the Builder’s receipt of the instalment of the Contract Price due at delivery, be paid by the Builder to the Buyer by way of a refund of the unutilized portion of the Buyer’s Allowance, and the Buyer shall provide the Builder with a corresponding invoice for such payment.

 

2.9All fees, costs and other charges whatsoever arising in connection with:

 

(i)each guarantee issued under Clause 2.3 (including, without limitation, fees and other costs or charges payable to the relevant bank(s) and/or insurance company(ies) in respect of the issuance and maintenance thereof) shall be borne and paid by the Builder; and

 

(ii)any payment made under this Contract shall be borne and paid by the paying party provided that any fees, costs or other charges levied by the receiving party's bank(s) (including correspondent banks, whether in Germany or elsewhere) shall be borne and paid by that party.

 

2.10The euro is the currency of account and payment for each and every sum at any time due from either party to the other under or in connection with this Contract.

 

(End of Article 8)

 

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ARTICLE 9: TERMINATION

 

1.TERMINATION BY BUILDER

 

1.1Each of the following events shall be a "Builder Termination Event" for the purpose