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 March 31, 2015

 

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 x Accelerated filer ¨
       
Non-accelerated filer ¨  (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 229,727,479 ordinary shares outstanding as of April 30, 2015.

 

 

 
 

 

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 16
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 28
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
     
Item 1A. Risk Factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 6. Exhibits 29
   
SIGNATURES 31

 

 
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
March 31,
 
   2015   2014 
Revenue          
Passenger ticket  $670,483   $448,580 
Onboard and other   267,699    215,448 
Total revenue   938,182    664,028 
Cruise operating expense          
Commissions, transportation and other   171,827    116,810 
Onboard and other   58,645    47,924 
Payroll and related   157,629    99,066 
Fuel   87,374    79,040 
Food   41,851    37,683 
Other   106,374    65,387 
Total cruise operating expense   623,700    445,910 
Other operating expense          
Marketing, general and administrative   154,157    83,389 
Depreciation and amortization   99,976    61,640 
Total other operating expense   254,133    145,029 
Operating income   60,349    73,089 
Non-operating income (expense)          
Interest expense, net   (50,989)   (31,172)
Other income (expense)   (30,139)   388 
Total non-operating income (expense)   (81,128)   (30,784)
Net income (loss) before income taxes   (20,779)   42,305 
Income tax benefit (expense)   (677)   9,387 
Net income (loss)   (21,456)   51,692 
Net income attributable to non-controlling interest       425 
Net income (loss) attributable to Norwegian Cruise Line Holdings Ltd.  $(21,456)  $51,267 
Weighted-average shares outstanding          
Basic   224,301,117    205,163,256 
Diluted   224,301,117    211,013,814 
Earnings (loss) per share          
Basic  $(0.10)  $0.25 
Diluted  $(0.10)  $0.24 

 

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 (Loss)

(Unaudited)

(in thousands)

 

   Three Months Ended
March 31,
 
   2015   2014 
Net income (loss)  $(21,456)  $51,692 
           
Other comprehensive loss:          
Shipboard Retirement Plan   119    94 
Cash flow hedges:          
Net unrealized loss   (103,765)   (15,356)
Amount realized and reclassified into earnings   21,886    153 
Total other comprehensive loss   (81,760)   (15,109)
Total comprehensive income (loss)   (103,216)   36,583 
Comprehensive income attributable to non-controlling interest       288 
Total comprehensive income (loss) attributable to Norwegian Cruise Line Holdings Ltd.  $(103,216)  $36,295 

 

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)

 

   March 31,
2015
   December 31,
2014
 
Assets          
Current assets:          
Cash and cash equivalents  $121,422   $84,824 
Accounts receivable, net   30,958    32,432 
Inventories   56,635    56,555 
Prepaid expenses and other assets   115,611    109,924 
Total current assets   324,626    283,735 
Property and equipment, net   8,628,870    8,623,773 
Goodwill and intangible assets   2,365,698    2,383,928 
Other long-term assets   273,543    281,641 
Total assets  $11,592,737   $11,573,077 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Current portion of long-term debt  $579,670   $576,947 
Accounts payable   84,769    101,983 
Accrued expenses and other liabilities   614,629    552,514 
Due to Affiliate   38,081    37,948 
Advance ticket sales   1,056,625    817,207 
Total current liabilities   2,373,774    2,086,599 
Long-term debt   5,379,082    5,607,157 
Due to Affiliate   18,592    18,544 
Other long-term liabilities   341,897    341,964 
Total liabilities   8,113,345    8,054,264 
Commitments and contingencies (Note 9)          
Shareholders’ equity:          
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 232,205,590 shares issued and 229,719,240 shares outstanding at March 31, 2015 and 230,116,780 shares issued and 227,630,430 shares outstanding at December 31, 2014   232    230 
Additional paid-in capital   3,766,137    3,702,344 
Accumulated other comprehensive income (loss)   (324,402)   (242,642)
Retained earnings   119,425    140,881 
Treasury shares (2,486,350 ordinary shares at cost)   (82,000)   (82,000)
Total shareholders’ equity   3,479,392    3,518,813 
Total liabilities and shareholders’ equity  $11,592,737   $11,573,077 

 

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)

 

   Three Months Ended
March 31,
 
   2015   2014 
Cash flows from operating activities          
Net income (loss)  $(21,456)  $51,692 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization expense   104,533    69,708 
Loss (gain) on derivatives   29,027    (75)
Deferred income taxes, net   60    1,027 
Contingent consideration   (9,100)    
Write-off of deferred financing fees   195     
Share-based compensation expense   12,005    1,835 
Changes in operating assets and liabilities:          
Accounts receivable, net   1,474    260 
Inventories   (80)   (4,391)
Prepaid expenses and other assets   (6,044)   (6,476)
Accounts payable   (17,455)   (7,198)
Accrued expenses and other liabilities   (49,493)   3,432 
Advance ticket sales   255,556    118,320 
Net cash provided by operating activities   299,222    228,134 
Cash flows from investing activities          
Additions to property and equipment   (58,563)   (746,310)
Net cash used in investing activities   (58,563)   (746,310)
Cash flows from financing activities          
Repayments of long-term debt   (477,224)   (258,125)
Proceeds from long-term debt   224,033    784,451 
Proceeds from the exercise of share options   51,790    340 
Deferred financing fees and other   (2,660)   (197)
Net cash provided by (used in) financing activities   (204,061)   526,469 
Net increase in cash and cash equivalents   36,598    8,293 
Cash and cash equivalents at beginning of period   84,824    56,467 
Cash and cash equivalents at end of period  $121,422   $64,760 

 

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, 2013  $205   $2,822,864   $(16,690)  $(197,471)  $   $22,358   $2,631,266 
                                    
Share-based compensation       1,835                    1,835 
Transactions with Affiliates, net       (59)                   (59)
Proceeds from the exercise of
share options
       340                    340 
Other comprehensive loss           (14,972)           (137)   (15,109)
Net income               51,267        425    51,692 
Transfers to non-controlling interest       (12,339)               12,339     
Balance, March 31, 2014  $205   $2,812,641   $(31,662)  $(146,204)  $   $34,985   $2,669,965 
                                    
Balance, December 31, 2014  $230   $3,702,344   $(242,642)  $140,881   $(82,000)  $   $3,518,813 
                                    
Share-based compensation       12,005                    12,005 
Proceeds from the exercise of
share options
   2    51,788                    51,790 
Other comprehensive loss           (81,760)               (81,760)
Net loss               (21,456)           (21,456)
Balance, March 31, 2015  $232   $3,766,137   $(324,402)  $119,425   $(82,000)  $   $3,479,392 

 

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” and “us” refer to NCLH (as defined below) and its subsidiaries (including Prestige (as defined below), except for periods prior to the consummation of the Acquisition of Prestige (as defined below)), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, (v) “Prestige” refers to Prestige Cruises International, Inc., a Panamanian corporation, together with its consolidated subsidiaries, (vi) “PCH” refers to Prestige Cruise Holdings, Inc., Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises, Inc. (“Oceania”) and Seven Seas Cruises S. DE R.L. (“Regent”). Oceania also refers to the brand Oceania Cruises and Regent also refers to the brand Regent Seven Seas Cruises, (vii) “Apollo” refers to Apollo Global Management, LLC, its subsidiaries and the affiliated funds it manages 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., Apollo Overseas Partners (Germany) VI, L.P., AAA Guarantor — Co-Invest VII, L.P., AIF VI Euro Holdings, L.P., AIF VII Euro Holdings, L.P., Apollo Alternative Assets, L.P., Apollo Management VI, L.P. and Apollo Management VII, L.P., (viii) “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, (ix) “Genting HK” refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates) and owns NCLH’s ordinary shares indirectly through Star NCLC Holdings Ltd. and (x) “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, “U.K.” are to the United Kingdom 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 its initial public offering (“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 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 nonsubstantive merger from an accounting perspective.

 

As a result of the Corporate Reorganization, NCLC was 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 an amended and restated tax agreement for NCLC. Economic interests in NCLC were 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) represented a 97.3% economic interest in NCLC as of the consummation of the IPO. The remaining 2.7% economic interest in NCLC as of the consummation of the IPO was in the form of Management NCL Corporation Units held by management (or former management).

 

In the fourth quarter of 2014, all Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted shares. NCLH became the sole member and 100% owner of the economic interests in NCLC and the non-controlling interest no longer exists. Accordingly, NCLC is now treated as a disregarded entity for U.S. federal income tax purposes. No new NCLC profits interests or Management NCL Corporation Units will be issued; however, NCLH has granted, and expects to continue to grant to our management team, options to acquire its ordinary shares under its long-term incentive plan.

 

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.

 

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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, 2014, which are included in our most recently filed Annual Report on Form 10-K.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

 

Earnings (Loss) Per Share

 

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

 

   Three Months Ended March 31, 
   2015   2014 
Net income (loss) attributable to Norwegian Cruise Line Holdings Ltd.  $(21,456)  $51,267 
Net income (loss)  $(21,456)  $51,692 
Basic weighted-average shares outstanding   224,301,117    205,163,256 
Dilutive effect of awards       5,850,558 
Diluted weighted-average shares outstanding   224,301,117    211,013,814 
Basic earnings (loss) per share  $(0.10)  $0.25 
Diluted earnings (loss) per share  $(0.10)(1)  $0.24 

 

(1)Due to a net loss, excludes 4,745,812 shares, as including these would be antidilutive.

 

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 $51.9 million and $37.9 million for the three months ended March 31, 2015 and 2014, respectively.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligation and recognition of revenue as the entity satisfies the performance obligations. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In April 2015, the FASB decided to propose a one-year delay in the effective date of the new revenue accounting standard (extending it to 2018). Entities will be allowed to early adopt the guidance as of the original effective date (2017). We are currently evaluating the guidance to determine the potential impact of adopting ASU No. 2014-09 on our results of operations, cash flows and financial position.

 

In April 2015, the FASB issued ASU No. 2015-03 which was issued to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. This guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the impact, if any, of the adoption of this newly issued guidance to our consolidated financial statements.

 

3.The Acquisition of Prestige

 

On November 19, 2014, we completed the Acquisition of Prestige. Consideration for the Acquisition of Prestige includes a cash payment of up to $50 million upon achievement of certain 2015 revenue milestones. The contingent consideration is valued using various projected 2015 revenue scenarios weighted by the likelihood of each scenario occurring. The probability-weighted payout is then discounted at an appropriate discount rate commensurate for the risk of meeting the probabilistic cash flows. As the fair value is measured based upon significant inputs that are unobservable in the market, it was classified as Level 3 in the fair value hierarchy. Level 3 consists of significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available. The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the estimated annual Net Revenue and the probabilities associated with attaining the threshold and target Net Revenue as defined by the Agreement and Plan of Merger. A significant increase in the estimated Net Revenue or an increase in the probability associated with reaching the target would result in a significantly higher fair value measurement, with the maximum fair

 

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value not able to exceed $50 million. The $9.1 million fair value adjustment recognized in the three months ended March 31, 2015 is included in marketing, general and administrative expense.

 

The following table summarizes the change in fair value of the contingent consideration liability (in thousands):

 

   Contingent
Consideration Liability
 
Balance as of December 31, 2014  $43,400 
Fair value adjustment (Level 3)   (9,100)
Balance as of March 31, 2015  $34,300 

 

4.Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) for the three months ended March 31, 2015 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  $(242,642)  $(234,188)  $(8,454)
Current period other comprehensive loss before reclassifications   (103,765)   (103,765)    
Amounts reclassified into earnings   22,005    21,886(1)   119(2)
Accumulated other comprehensive income (loss) at end of period  $(324,402)  $ (316,067)(3)  $(8,335)

 

(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 $95 thousand of income expected to be reclassified into earnings in the next 12 months.

 

Accumulated other comprehensive income (loss) for the three months ended March 31, 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   (15,217)   (15,217)    
Amounts reclassified into earnings   245    152(1)   93(2)
Accumulated other comprehensive income (loss) at end of period  $(31,662)  $(25,597)  $(6,065)

 

(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.

 

5.Related Party Disclosures

 

In March 2015, the Selling Shareholders sold 12,500,000 ordinary shares of NCLH in a Secondary Equity Offering. The Company did not receive any proceeds from this offering. As of March 31, 2015, the relative ownership percentages of NCLH’s ordinary shares were as follows: Genting HK (22.0%), the Apollo Funds (23.8%), the TPG Viking Funds (4.3%), and public shareholders (49.9%).

 

In March 2015, we entered into an agreement with SWB Yankees, LLC related to sponsorship of and advertising with the Scranton/Wilkes-Barre RailRiders, a Minor League Baseball team. Pursuant to the agreement, we will pay an annual fee to SWB Yankees, LLC of $200,000. Mr. David M. Abrams, one of our directors, is the co-managing partner of the Scranton/Wilkes-Barre RailRiders.

 

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6.Income Tax Benefit (Expense)

 

NCLH is treated as a corporation for U.S. federal income tax purposes. In 2015, we had an income tax expense of $0.7 million compared to an income tax benefit of $9.4 million for 2014. The benefit for 2014 includes a $6.7 million non-recurring benefit associated with the election of a tax method to calculate deductible interest expense.

 

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.

 

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

 

      Asset   Liability 
  Balance Sheet location  March 31,
2015
   December 31,
2014
   March 31,
2015
   December 31,
2014
 
Fuel swaps designated as hedging instruments                       
   Accrued expenses and other liabilities  $773   $   $97,282   $111,304 
   Other long-term liabilities   223    190    69,874    77,250 
Foreign currency forward contracts designated as hedging instruments                       
   Accrued expenses and other liabilities           107,310    29,498 

 

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Asset

  

Liability

 
  Balance Sheet location  March 31,
2015
   December 31,
2014
   March 31,
2015
   December 31,
2014
 
   Other long-term liabilities   168        19,864    118 
Foreign currency collar not designated as a hedging instrument                       
   Other long-term liabilities           45,697    16,744 
Interest rate swaps designated as hedging instruments                       
   Accrued expenses and other liabilities           6,693    5,736 
   Other long-term liabilities           4,858    3,104 
Interest rate swap not designated as a hedging instrument                       
   Accrued expenses and other liabilities               3,823 

 

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.

 

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 the balance sheets (in thousands):

 

March 31, 2015  Gross Amounts    Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Liabilities  $351,578   $(1,164)  $350,414   $(164,558)  $185,856 

 

December 31, 2014  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Liabilities  $247,577   $(190)  $247,387   $(59,023)  $188,364 

 

Fuel Swaps

 

As of March 31, 2015, we had fuel swaps maturing through December 31, 2018 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 1.2 million metric tons of our projected fuel purchases.

 

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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
March 31,
 
   2015   2014 
Loss recognized in other comprehensive loss – effective portion  $(2,801)  $(9,771)
Loss recognized in other income (expense) – ineffective portion   (6,051)   (416)
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   20,536    (705)

 

Fuel Collars and Options

 

We had fuel collars and fuel options maturing through December 2014, which were used to mitigate the financial impact of volatility in fuel prices of our 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
March 31,

 
   2015   2014 
Loss recognized in other comprehensive loss – effective portion  $   $(324)
Gain recognized in other income (expense) – ineffective portion       108 
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   238    370 

 

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
March 31,
 
   2015   2014 
Gain recognized in other income (expense)  $   $85 

 

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
March 31,
 
   2015   2014 
Loss recognized in other comprehensive loss – effective portion  $   $(1,157)
Loss recognized in other income (expense) – ineffective portion       (241)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   330    279 

 

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Foreign Currency Forward Contracts

 

As of March 31, 2015, we had foreign currency forward contracts which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts and forecasted Dry-dock payments denominated in euros. The notional amount of our foreign currency forward contracts was €888.5 million, or $953.4 million based on the euro/U.S. dollar exchange rate as of March 31, 2015.

 

The effects on the consolidated financial statements of the foreign currency forward contracts which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
March 31,
 
   2015   2014 
Loss recognized in other comprehensive loss – effective portion  $(97,375)  $(1,076)
Loss recognized in other income (expense) – ineffective portion   (15)   (1)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   (64)   (53)

 

Foreign Currency Collar

 

We had a foreign currency collar that matured in January 2014, which was used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts 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
March 31,
 
   2015   2014 
Loss recognized in other comprehensive loss – effective portion  $   $(1,588)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   (91)   (60)

 

As of March 31, 2015, we had a foreign currency collar which is used to mitigate the financial impact of volatility in foreign currency exchange rates related to a ship construction contract. The notional amount of our foreign currency collar was €274.4 million, or $294.5 million based on the euro/U.S. dollar exchange rate as of March 31, 2015.

 

The effect on the consolidated financial statements of the foreign currency collar contract which was not designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
March 31,
 
   2015   2014 
Loss recognized in other income (expense)  $(28,953)  $ 

 

Interest Rate Swaps

 

As of March 31, 2015, 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 $1.2 billion.

 

The effects on the consolidated financial statements of the interest rates swaps which were designated as cash flow hedges were as follows (in thousands):

 

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   Three Months Ended
March 31,
 
   2015   2014 
Loss recognized in other comprehensive loss – effective portion  $(3,589)  $(1,440)
Loss recognized in other income (expense)– ineffective portion   (7)    
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net   937    322 

 

We had an interest rate swap that matured in January 2015, which was used to mitigate our exposure to interest rate movements and to manage our interest expense.

 

The effect on the consolidated financial statements of the interest rate swap which was not designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
March 31,
 
   2015   2014 
Loss recognized in other income (expense)  $(2)  $ 

 

Long-Term Debt

 

As of March 31, 2015 and December 31, 2014, the fair value of our long-term debt, including the current portion, was $6,025.1 million and $6,229.1 million, which was $67.2 million and $45.0 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 three months ended March 31, 2015:

 

   Number of Share Option
Awards
   Weighted-Average Exercise
Price
   Weighted-
Average
Contractual
Term
   Aggregate
Intrinsic Value
 
   Time-Based
Awards
   Performance-
Based Awards
   Time-Based
Awards
   Performance-
Based Awards
   (years)   (in thousands) 
Outstanding as of January 1, 2015   6,079,881    1,457,314   $29.92   $19.00    7.61   $142,831 
Granted   100,000        43.91               
Exercised   (1,692,001)   (304,100)   27.19    19.00           
Forfeited and cancelled   (693,636)   (477,611)   32.28    19.00           
Outstanding as of March 31, 2015   3,794,244    675,603    31.08    19.00    7.75    110,669 

 

The total intrinsic value of options exercised during the three months ended March 31, 2015 was $44.8 million and total cash received by the Company from options exercised was $51.8 million. Share-based compensation expense for the three months ended March 31, 2015 was $12.0 million, which includes $8.2 million related to the acceleration of certain equity awards of the former President and Chief Executive Officer, and was recorded in marketing, general and administrative expense.

 

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Restricted Share Awards

 

The following is a summary of restricted share activity for the three months ended March 31, 2015:

 

   Number of
Time-Based
Awards
  

Weighted-
Average Grant
Date Fair Value 

  

Number of
Performance-
Based Awards 

  

Weighted-
Average Grant
Date Fair Value

 
Non-vested as of January 1, 2015   196,644   $3.43    1,208,608   $3.37 
Granted   4,815    46.70         
Vested   (14,994)   11.16    (56,687)   4.13 
Forfeited or Expired   (70,668)   2.70    (587,870)   2.79 
                     
Non-vested and expected to vest as of March 31, 2015   115,797    4.68    564,051    3.90 

 

Other Employee Matters

 

On January 8, 2015, Kevin M. Sheehan resigned as President and Chief Executive Officer of the Company, together with all of his positions and offices with the Company and its subsidiaries or affiliates, effective immediately. In connection with Mr. Sheehan’s resignation from the Company, Mr. Sheehan and the Company entered into a Separation Agreement and Release (the “Separation Agreement”). The Separation Agreement sets forth the terms of Mr. Sheehan’s resignation from the Company, including, among other things, a general release of claims in favor of the Company and certain non-competition, non-solicitation, confidentiality and cooperation undertakings. The Separation Agreement also provides that Mr. Sheehan will receive (i) all of his accrued and unpaid base salary (and accrued and unpaid vacation time) through January 8, 2015 (the “Effective Date”), (ii) his previously approved bonus payment for fiscal year 2014 of $1,627,500, (iii) a one-time cash separation payment in an amount equal to his base salary and target bonus and (iv) vesting of a portion of his outstanding unvested equity-based awards as of the Effective Date, and all remaining unvested equity-based awards shall immediately terminate, expire and be forfeited as of the Effective Date. This resulted in a total severance expense of $13.4 million of which $8.2 million was due to the acceleration of the equity-based awards which was recorded in marketing, general and administrative expense in January 2015.

 

Effective as of January 8, 2015, Frank J. Del Rio, was appointed President and Chief Executive Officer of the Company.

 

9.Commitments and Contingencies

 

Ship Construction Contracts

 

We have four Breakaway Plus Class Ships on order with Meyer Werft shipyard 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 price of these four ships is approximately €3.1 billion, or $3.3 billion based on the euro/U.S. dollar exchange rate as of March 31, 2015. We have export credit financing in place that provides financing for 80% of their contract prices. We also have a contract with Fincantieri shipyard to build a luxury cruise ship to be named Seven Seas Explorer. The contract price of the ship is approximately €343.0 million, or approximately $368.1 million based on the euro/U.S. dollar exchange rate as of March 31, 2015. We have export credit financing in place that provides financing for 80% of the ship’s contract price. Seven Seas Explorer is expected to be delivered in the summer of 2016.

 

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 the normal course of our business, various 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 potential 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.

 

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10.Restructuring Costs

 

Due to the Acquisition of Prestige, a number of employee positions were consolidated. As of March 31, 2015, we had an accrual balance of $11.1 million for restructuring costs for severance and other employee-related costs. The current period expense of $4.7 million is included in marketing general and administrative expense.

 

The following table summarizes changes in the accrual (in thousands):

 

   Restructuring costs 
Balance as of December 31, 2014  $(7,956)
Amounts paid   1,568 
Additional accrued expense   (4,664)
Balance as of March 31, 2015  $(11,052)

 

11.Supplemental Cash Flow Information

 

For the three months ended March 31, 2015 we had non-cash investing activities in connection with a capital lease of $27.6 million.

 

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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 contained, or incorporated by reference, 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 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 Acquisition of Prestige;
the ability to realize, or delays in realizing, the anticipated benefits of the Acquisition of Prestige;
the 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;
the effect that the Acquisition of Prestige may have on employee relations and on our ability to retain key personnel;
the adverse impact of general economic conditions and related factors, such as fluctuating or increasing levels of unemployment, underemployment and the volatility of fuel prices, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence;
the risks associated with operating internationally, including changes in interest rates and/or foreign currency exchange rates;
changes in fuel prices and/or other cruise operating costs;
our efforts to expand our business into new markets;
our substantial indebtedness, including the ability to raise additional capital to fund our operations, and to generate the necessary amount of cash to service our existing debt;
restrictions in the agreements governing our indebtedness that limit our flexibility in operating our business;
the significant portion of our assets pledged as collateral under our existing debt agreements and the ability of our creditors to accelerate the repayment of our indebtedness;
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 threats thereof and other international events;
the impact of the spread of epidemics and viral outbreaks;
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 services to certain of our ships and certain other services;
the impact of delays in our shipbuilding program and ship repairs, maintenance and refurbishments;
the impact of any future increases in the price of, or major changes or reduction in, commercial airline services;
the impact of seasonal variations in passenger fare rates and occupancy levels at different times of the year;
the effect of adverse incidents involving cruise ships and our ability to obtain adequate insurance coverage;
the impact of any breaches in data security or other disturbances to our information technology and other networks;
our ability to keep pace with developments in technology;
the impact of amendments to our collective bargaining agreements for crew members and other employee relation issues;
the continued availability of attractive port destinations;
the impact of pending or threatened litigation, investigations and enforcement actions;
changes involving the tax and environmental regulatory regimes in which we operate;
the control of our business by our Sponsors; and
other factors set forth under “Risk Factors” in our most recently filed Annual Report on Form 10-K.

 

The above examples are not exhaustive and new risks emerge from time to time. Our 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 made. Except as required by law, 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.

 

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The interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2014, which are included in our most recently filed Annual Report on Form 10-K.

 

Terminology

 

This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Yield, Adjusted Net Revenue, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. Definitions of these non-GAAP financial measures are included below. For further information about our non-GAAP financial measures including detailed adjustments made in calculating our non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measure, we refer you to “Results of Operations” below.

 

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

 

Acquisition of Prestige. In November 2014, pursuant to the Merger Agreement, we acquired Prestige in a cash and stock transaction for total consideration of $3.025 billion, including the assumption of debt. The acquisition consideration is subject to an additional cash payment of up to $50 million upon achievement of certain 2015 revenue milestones.

 

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.

 

Adjusted Net Revenue. Net Revenue adjusted for supplemental adjustments.

 

Adjusted Net Yield. Net Yield 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.

 

Breakaway Class Ships. Norwegian Breakaway and Norwegian Getaway.

 

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.

 

EPS. Earnings per share.

 

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.

 

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.

 

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Management NCL Corporation Units. NCLC’s previously outstanding profits interests issued to management (or former management) of NCLC which were converted into units in NCLC in connection with our corporate reorganization.

 

Merger Agreement. Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige, NCLH, Portland Merger Sub, Inc. and Apollo Management, L.P., as amended, for the Acquisition of Prestige.

 

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.

 

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.

 

Secondary Equity Offering(s). Secondary public offering(s) of NCLH’s ordinary shares in March 2015, March 2014, December 2013 and August 2013.

 

Selling Shareholders. The TPG Viking Funds and Genting HK.

 

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, Adjusted Net Revenue, Net Yield, Adjusted Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, 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 a measure comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.

 

In addition, Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain charges and are used to supplement GAAP net income and EPS. 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. The charges excluded in the presentation of Adjusted Net Income and Adjusted EPS may 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 product offering, 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 guests 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, photo services as well as certain Charter revenue. 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.

 

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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 charges, certain port expenses, the costs associated with shore excursions and hotel accommodations included as part of the overall cruise purchase price.

 

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 and costs for a third party that provides crew and other services for certain of our ships.

 

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

 

Food consists of food costs for passengers and crew on certain of our ships.

 

Other consists of repairs and maintenance (including Dry-dock costs), ship insurance, Charter costs 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, 2014 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, 2014.

 

Quarterly Overview

 

For the first quarter of 2015, on a GAAP basis, net loss and diluted loss per share were $(21.5) million and $(0.10), respectively. We reported Adjusted Net Income of $62.6 million and Adjusted EPS of $0.27, which primarily excludes $13.5 million of expenses related to non-cash compensation, $10.4 million of expenses related to severance expenses, $21.2 million of a deferred revenue adjustment, $18.1 million related to the amortization of intangible assets, $9.1 million of contingent consideration adjustment and $29.0 million related to a derivative fair value adjustment.

 

In March 2015, the Selling Shareholders sold 12,500,000 ordinary shares of NCLH in a Secondary Equity Offering. We did not receive any proceeds from this offering.

 

Three months ended March 31, 2015 (“2015”) compared to the three months ended March 31, 2014 (“2014”)

 

Total revenue increased 41.3% to $938.2 million in 2015 compared to $664.0 million in 2014. Net Revenue in 2015 increased 41.7% to $707.7 million from $499.3 million in 2014 due to an increase in Capacity Days of 22.8% and Net Yield of 15.4%.The increase in Capacity Days was primarily due to the Acquisition of Prestige and the operation of Norwegian Getaway for the full quarter.

 

Operating income was $60.3 million in 2015 compared to $73.1 million in 2014 and Adjusted EBITDA (we refer you to our “Results of Operations” below for a calculation of Adjusted EBITDA) improved 41.6% for the same period.

 

 

Results of Operations

 

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

 

   Three Months Ended
March 31,
 
   2015   2014 
         
Revenue          
Passenger ticket   71.5%   67.6%
Onboard and other   28.5%   32.4%
Total revenue   100.0%   100.0%
           
Cruise operating expense          
Commissions, transportation and other   18.3%   17.6%
Onboard and other   6.3%   7.2%
Payroll and related   16.8%   14.9%

 

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   Three Months Ended
March 31,
 
   2015   2014 
Fuel   9.3%   11.9%
Food   4.5%   5.8%
Other   11.3%   9.8%
Total cruise operating expense   66.5%   67.2%
           
Other operating expense          
Marketing, general and administrative   16.4%   12.5%
Depreciation and amortization   10.7%   9.3%
Total other operating expense   27.1%   21.8%
Operating income   6.4%   11.0%
           
Non-operating income (expense)          
Interest expense, net   (5.4)%   (4.7)%
Other income (expense)   (3.2)%   0.1%
Total non-operating income (expense)   (8.6)%   (4.6)%
           
Net income (loss) before income taxes   (2.2)%   6.4%
Income tax benefit (expense)   (0.1)%   1.4%
Net income (loss)   (2.3)%   7.8%
Net income attributable to non-controlling interest       0.1%
Net income (loss) attributable to Norwegian Cruise Line Holdings Ltd.   (2.3)%   7.7%

 

The following table sets forth selected statistical information:

 

   Three Months Ended
March 31,
 
   2015   2014 
Passengers carried   513,526    455,163 
Passenger Cruise Days   3,768,115    3,075,402 
Capacity Days   3,556,468    2,895,984 
Occupancy Percentage   106.0%   106.2%

  

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

 

   Three Months Ended
March 31,
 
   2015   2015
Constant
Currency
   2014 
Passenger ticket revenue  $670,483   $678,693   $448,580 
Onboard and other revenue   267,699    267,699    215,448 
Total revenue   938,182    946,392    664,028 
Less:               
Commissions, transportation and other expense   171,827    173,789    116,810 
Onboard and other expense   58,645    58,645    47,924 
Net Revenue   707,710    713,958    499,294 
Non-GAAP Adjustment:               
Deferred revenue (1)   21,194    21,194     
Adjusted Net Revenue  $728,904   $735,152   $499,294 
Capacity Days   3,556,468    3,556,468    2,895,984 

 

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   Three Months Ended
March 31,
 
   2015   2015
Constant
Currency
   2014 
Gross Yield  $263.80   $266.10   $229.29 
Net Yield  $198.99   $200.75   $172.41 
Adjusted Net Yield  $204.95   $206.71   $172.41 

 

(1)Reflects deferred revenue fair value adjustments totaling $21.2 million related to the Acquisition of Prestige that were made pursuant to business combination accounting rules.

 

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):

 

   Three Months Ended
March 31,
 
   2015   2015
Constant
Currency
   2014 
Total cruise operating expense  $623,700   $626,300   $445,910 
Marketing, general and administrative expense   154,157    155,314    83,389 
Gross Cruise Cost   777,857    781,614    529,299 
Less:               
Commissions, transportation and other expense   171,827    173,789    116,810 
Onboard and other expense   58,645    58,645    47,924 
Net Cruise Cost   547,385    549,180    364,565 
Less: Fuel expense   87,374    87,374    79,040 
Net Cruise Cost Excluding Fuel   460,011    461,806    285,525 
Less Non-GAAP Adjustments:               
Non-cash deferred compensation (1)   1,453    1,453    839 
Non-cash share-based compensation (2)   12,005    12,005    1,835 
Secondary Equity Offering expenses (3)           1,877 
Severance payments and other fees (4)   10,387    10,387     
NCL Management Units exchange expenses (5)   624    624     
Acquisition expenses (6)   400    400     
Contingent consideration adjustment (7)   (9,100)   (9,100)    
Adjusted Net Cruise Cost Excluding Fuel  $444,242   $446,037   $280,974 
Capacity Days   3,556,468    3,556,468    2,895,984 
Gross Cruise Cost per Capacity Day  $218.72   $219.77   $182.77 
Net Cruise Cost per Capacity Day  $153.91   $154.42   $125.89 
Net Cruise Cost Excluding Fuel per Capacity Day  $129.34   $129.85   $98.59 
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day  $124.91   $125.42   $97.02 

 

(1)Non-cash share-based compensation expenses related to the crew pension plan, which are included in payroll and related expense.

(2)Non-cash share-based compensation expenses related to equity grants, which are included in marketing, general and administrative expense.

(3)Expenses related to a Secondary Equity Offering, which are included in marketing, general and administrative expense.

(4)Severance payments and other expenses related to restructuring costs and other severance arrangements included in marketing, general and administrative expense.

(5)Expenses related to the exchange of Management NCL Corporation Units for ordinary shares included in marketing, general and administrative expense.

(6)Expenses related to the Acquisition of Prestige included in marketing, general and administrative expense.

 

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(7)Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.

  

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

 

  

Three Months Ended

March 31,

 
   2015   2014 
Net income (loss) attributable to Norwegian Cruise Line Holdings Ltd.  $(21,456)  $51,267 
Net income attributable to non-controlling interest       425 
Net income (loss)   (21,456)   51,692 
Non-GAAP Adjustments:          
Non-cash deferred compensation (1)   1,453    839 
Non-cash share-based compensation (2)   12,005    1,835 
Secondary Equity Offering expenses (3)       1,877 
Tax benefit (4)       (6,685)
Severance payments and other fees (5)   10,387     
NCL Management Units exchange expenses (6)   624     
Acquisition expenses (7)   400     
Deferred revenue (8)   21,194     
Amortization of intangible assets (9)   18,146     
Contingent consideration adjustment (10)   (9,100)    
Derivative adjustment (11)   28,953     
Adjusted Net Income  $62,606   $49,558 
Diluted weighted–average shares outstanding – Net income (loss)   224,301,117(12)   211,013,814 
Diluted weighted–average shares outstanding – Adjusted Net Income   229,046,929    211,013,814 
Diluted earnings (loss) per share  $(0.10)  $0.24 
Adjusted EPS  $0.27   $0.23 

 

(1)Non-cash share-based compensation expenses related to the crew pension plan, which are included in payroll and related expense.

(2)Non-cash share-based compensation expenses related to equity grants, which are included in marketing, general and administrative expense.

(3)Expenses related to a Secondary Equity Offering, which are included in marketing, general and administrative expense.

(4)Tax benefit of $6.7 million from a change in estimate of tax provision associated with a change in our corporate entity structure included in income tax benefit (expense).

(5)Severance payments and other expenses related to restructuring costs and other severance arrangements included in marketing, general and administrative expense.

(6)Expenses related to the exchange of Management NCL Corporation Units for ordinary shares included in marketing, general and administrative expense.

(7)Expenses related to the Acquisition of Prestige included in marketing, general and administrative expense.

(8)Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue.

(9)Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.

(10)Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.

(11)Derivative fair value adjustment for a foreign exchange collar which does not receive hedge accounting treatment.

(12)Due to a net loss, excludes 4,745,812 shares, as including these would be antidilutive.

 

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

 

  

Three Months Ended

March 31,

 
   2015   2014 
Net income (loss) attributable to Norwegian Cruise Line Holdings Ltd.  $(21,456)  $51,267 
Interest expense, net   50,989    31,172 
Income tax expense (benefit)   677    (9,387)
Depreciation and amortization expense   99,976    61,640 
EBITDA   130,186    134,692 
Net income attributable to non-controlling interest       425 
Other (income) expense   30,139    (388)
Non-GAAP Adjustments:          
Non-cash deferred compensation (1)   1,453    839 
Non-cash share-based compensation (2)   12,005    1,835 
Secondary Equity Offering expenses (3)       1,877 
Severance payments and other fees (4)   10,387     
NCL Management Units exchange expenses (5)   624     
Acquisition expenses (6)   400     
Deferred revenue (7)   21,194     
Contingent consideration adjustment (8)   (9,100)    
Adjusted EBITDA  $197,288   $139,280 

 

(1)Non-cash share-based compensation expenses related to the crew pension plan, which are included in payroll and related expense.

(2)Non-cash share-based compensation expenses related to equity grants, which are included in marketing, general and administrative expense.

(3)Expenses related to a Secondary Equity Offering, which are included in marketing, general and administrative expense.

(4)Severance payments and other expenses related to restructuring costs and other severance arrangements included in marketing, general and administrative expense.

(5)Expenses related to the exchange of Management NCL Corporation Units for ordinary shares included in marketing, general and administrative expense.

(6)Expenses related to the Acquisition of Prestige included in marketing, general and administrative expense.

(7)Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue.

(8)Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.

 

Three months ended March 31, 2015 (“2015”) compared to three months ended March 31, 2014 (“2014”)

 

Revenue

 

Total revenue increased 41.3% to $938.2 million in 2015 compared to $664.0 million in 2014. Net Revenue in 2015 increased 41.7% to $707.7 million from $499.3 million in 2014 due to an increase in Capacity Days of 22.8% and Net Yield of 15.4%.The increase in Capacity Days was primarily due to the Acquisition of Prestige and the operation of Norwegian Getaway for the full quarter. The increase in Net Yield was due to an increase in passenger ticket pricing and higher onboard and other revenue. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $21.2 million related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 16.4% and 19.9%, respectively, in 2015 compared to 2014.

 

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Expense

 

Total cruise operating expense increased 39.9% in 2015 compared to 2014 primarily due to the increase in Capacity Days as discussed above. Total other operating expense increased 75.2% in 2015 compared to 2014 primarily due to an increase in marketing general and administrative expenses primarily related to the Acquisition of Prestige including certain restructuring and severance costs, the adjustment for the contingent consideration related to the Acquisition of Prestige as well as amortization expense related to the intangible assets and depreciation related to the Prestige ships. On a Capacity Day basis, Net Cruise Cost increased 22.3% (22.7% on a Constant Currency basis) due to an increase in marketing general and administrative expenses as discussed above and certain crew related expenses partially offset by the decrease in fuel expense which was primarily the result of a 18.2% decrease in the average fuel price to $526 per metric ton in 2015 from $643 per metric ton in 2014. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 28.7% (29.3% on a Constant Currency basis) primarily due to the increase in expenses discussed above.

 

Interest expense, net increased to $51.0 million in 2015 from $31.2 million in 2014 primarily due to an increase in average debt outstanding in connection with the Acquisition of Prestige. Other income (expense) was $(30.1) million in 2015 primarily related to the derivative fair value adjustment for a foreign exchange collar which does not receive hedge accounting treatment.

 

In 2015 we had an income tax expense of $0.7 million. In 2014 we had an income tax benefit of $9.4 million. During the fourth quarter of 2013, we completed the implementation of a global tax platform, which had a favorable impact on the amount of income subject to U.S. corporate tax. This favorable impact continued through calendar year 2014. In addition, during the first quarter of 2014, we received information which allowed us to elect a tax method to calculate deductible interest expense resulting in a tax benefit of $11.1 million including a $6.7 million non-recurring benefit that has been excluded from Adjusted Net Income and Adjusted EPS for the three months ended March 31, 2014.

 

Liquidity and Capital Resources

 

General

 

As of March 31, 2015, our liquidity was $685.4 million consisting of $121.4 million in cash and cash equivalents and $564.0 million available under our Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

 

As of March 31, 2015, we had a working capital deficit of $2.0 billion. This deficit included $1.1 billion of advance ticket sales, which represents the passenger ticket revenue we collect in advance of sailing dates, and accordingly, 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 “2015” refer to the three months ended March 31, 2015 and references to “2014” refer to the three months ended March 31, 2014.

 

Net cash provided by operating activities was $299.2 million in 2015 as compared to $228.1 million in 2014. The change in net cash provided by operating activities reflects a net loss in 2015 of $21.5 million compared to net income in 2014 of $51.7 million. The net cash provided by operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities.

 

Net cash used in investing activities was $58.6 million in 2015, primarily related to payments for our Breakaway Plus Class Ships and ship improvements and shoreside projects. Net cash used in investing activities was $746.3 million in 2014, primarily related to the payments for delivery of Norwegian Getaway and other ship improvements and shoreside projects.

 

Net cash used in financing activities was $204.1 million in 2015, primarily due to repayments of our Revolving Loan Facility and other loan facilities. Net cash provided by financing activities was $526.5 million in 2014, primarily due to proceeds from the Breakaway Two Credit Facility.

 

Future Capital Commitments

 

Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations. As of March 31, 2015, anticipated capital expenditures were $1.1 billion for the remainder of 2015, and $0.9 billion and $1.0 billion for each of the years ending December 31, 2016 and 2017, respectively, of which we have export credit financing in place for the expenditures related to ship construction contracts of $0.7 billion for the remainder of 2015, $0.5 billion for 2016 and $0.6 billion for 2017.

 

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We have four Breakaway Plus Class Ships on order with Meyer Werft shipyard 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 price of these four ships is approximately €3.1 billion, or $3.3 billion based on the euro/U.S. dollar exchange rate as of March 31, 2015. We have export credit financing in place that provides financing for 80% of their contract prices. We also have a contract with Fincantieri shipyard to build a luxury cruise ship to be named Seven Seas Explorer. The contract price of the ship is approximately €343.0 million, or approximately $368.1 million based on the euro/U.S. dollar exchange rate as of March 31, 2015. We have export credit financing in place that provides financing for 80% of the ship’s contract price. Seven Seas Explorer is expected to be delivered in the summer of 2016.

 

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.

 

Capitalized interest for the three months ended March 31, 2015 was $7.7 million primarily associated with the construction of our Breakaway Plus Class Ships and for the three months ended March 31, 2014 was $5.1 million associated with the construction of Norwegian Getaway.

 

Off-Balance Sheet Transactions

 

None.

 

Contractual Obligations

 

As of March 31, 2015, 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)  $5,958,752   $579,670   $1,082,832   $2,569,940   $1,726,310 
Due to Affiliate (2)   56,673    38,081    18,592         
Operating leases (3)   142,969    10,990    22,490    23,030    86,459 
Ship construction contracts (4)   3,661,547    905,009    1,263,493    1,493,045     
Port facilities (5)   206,374    31,780    56,191    41,490    76,913 
Interest (6)   813,714    173,060    307,355    193,342    139,957 
Other (7)   82,941    47,463    29,099    5,637    742 
Total  $10,922,970   $1,786,053   $2,780,052   $4,326,484   $2,030,381 

  

(1)Net of unamortized original issue discount of $1.0 million and includes premiums aggregating $0.8 million. Also includes capital leases.
(2)Primarily related to the purchase of Norwegian Sky.
(3)Primarily for offices, motor vehicles and office equipment.

 

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(4)For our newbuild ships based on the euro/U.S. dollar exchange rate as of March 31, 2015. 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 March 31, 2015.
(7)Future commitments for service, maintenance and other Business Enhancement Capital Expenditure contracts.

 

The table above does not include $11.2 million of unrecognized tax benefits.

 

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 March 31, 2015.

 

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.

 

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

 

As of March 31, 2015, we had interest rate swap agreements to mitigate our exposure to interest rate movements and to manage our interest expense. As of March 31, 2015, 54% of our debt was fixed and 46% was variable, which includes the effects of the interest rate swaps. The notional amount of outstanding debt associated with the interest rate swap agreements as of March 31, 2015 was $1.2 billion. Based on our March 31, 2015 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $27.5 million excluding the effects of capitalization of interest.

 

Foreign Currency Exchange Rate Risk

 

As of March 31, 2015, we had foreign currency derivatives to hedge the exposure to volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. These derivatives hedge the foreign currency exchange rate risk on a portion of the final payments on our ship construction contracts. The payments not hedged aggregate €2.1 billion, or $2.2 billion based on the euro/U.S. dollar exchange rate as of March 31, 2015. We estimate that a 10% change in the euro as of March 31, 2015 would result in a $224.6 million change in the U.S. dollar value of the foreign currency denominated remaining payments.

 

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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 14.0% and 17.7% for the three months ended March 31, 2015 and 2014, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of March 31, 2015, we had hedged approximately 74%, 53%, 37% and 11% of our 2015, 2016, 2017 and 2018 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2015 fuel expense by $19.4 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements of $11.8 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 March 31, 2015. 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 March 31, 2015 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.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2015 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 the normal course of our business, various 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 potential 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 2014 Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. There have been no material changes to those risk factors. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2014 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.

 

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

 

Share Repurchase Program

 

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. 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. There was no share repurchase activity during the three months ended March 31, 2015 and as of March 31, 2015 $418.0 million remained available for repurchases of our outstanding ordinary shares under the share repurchase program.

 

Item 6. Exhibits

 

2.1Agreement 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))

 

2.2Amendment No. 1 to the Agreement and Plan of Merger, dated as of October 6, 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 October 8, 2014 (File No. 001-35784))

 

10.1Directors’ Compensation Policy (incorporated herein by reference to Exhibit 10.108 to Norwegian Cruise Line Holdings Ltd.’s Form 10-K filed on February 27, 2015 (File No. 001-35784))

 

10.2Separation Agreement and Release among Norwegian Cruise Line Holdings Ltd., NCL (Bahamas) Ltd. and Kevin M. Sheehan, entered into as of January 8, 2015 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on January 9, 2015 (File No. 001-35784))#

 

10.3*Amendment No. 8, dated January 28, 2015, to Office Lease Agreement, dated December 1, 2006, as amended, by and between SPUS7 Miami ACC, LP and NCL (Bahamas) Ltd.+

 

10.4*Addendum No. 4, dated January 30, 2015, to Shipbuilding Contract for Hull identified therein, as amended, by and among Meyer Werft GMBH & Co. KG, the Buyer and NCL Corporation Ltd.+

 

10.5Employment Agreement by and between NCL (Bahamas) Ltd. and Andrew Stuart, entered into on March 4, 2015 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on March 4, 2015 (File No. 001-35784))#

 

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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 are from Norwegian Cruise Line Holdings Ltd.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in Extensible Business Reporting Language (XBRL), as follows:
(i)the Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014;

 

(ii)the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014;

 

(iii)the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014;

 

(iv)the Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014;

 

(v)the Consolidated Statements of Changes in Shareholder’s Equity for the three months ended March 31, 2015 and 2014; and

 

(vi)the Notes to the 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 Securities and Exchange Commission.
#Management contract or compensatory plan.

 

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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/ FRANK J. DEL RIO 
  Name: Frank J. Del Rio
  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: May 8, 2015

 

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Exhibit 10.3

 

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

 

EIGHTH AMENDMENT TO LEASE

 

(Norwegian Cruise Line – Airport Corporate Center)

 

THIS EIGHTH AMENDMENT TO LEASE (“Amendment”) is dated effective and for identification purposes as of January 28, 2015 (the “Effective Date”), and is made by and between SPUS7 MIAMI ACC, LP, a Delaware limited partnership (“Landlord”), and NCL (BAHAMAS) LTD., a Bermuda company, d/b/a Norwegian Cruise Line (“Tenant”).

 

RECITALS:

 

WHEREAS, Landlord’s predecessor-in-interest (Hines REIT Airport Corporate Center LLC) and Tenant entered into that certain Lease Agreement dated December 1, 2006 (“Original Lease”), as amended by that certain First Amendment to Lease dated December 1, 2006, Second Amendment to Lease dated March 20, 2007, Third Amendment to Lease dated July 31, 2007, letter agreement dated August 1, 2007, Fourth Amendment to Lease dated December 10, 2007, Fifth Amendment to Lease dated February 2, 2010, Sixth Amendment dated April 1, 2012, and Seventh Amendment dated June 29, 2012 (collectively, the “Lease”), pertaining to the premises currently comprised of a total of approximately 205,798 rentable square feet of space (of which 125,806 rentable square feet of space are located in 7665 Corporate Center Drive, Miami, Florida (“Building 11”), and 72,925 rentable square feet of space are located in 7650 Corporate Center Drive, Miami, Florida (“Building 10”) (collectively, the “Original Office Premises”) and 7,067 rentable square feet are located in 7245 Corporate Center Drive, Miami, Florida (“Building 3”) (“the Warehouse Premises”). The Original Office Premises and the Warehouse Premises are collectively referred to herein as the “Total Premises”; and

 

WHEREAS, Landlord and Tenant desire to enter into this Amendment to expand the Total Premises, extend the Lease Term, and provide for certain other matters as more fully set forth herein;

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree that the Lease shall be amended in accordance with the terms and conditions set forth below.

 

1.          Definitions. The capitalized terms used herein shall have the same definitions as set forth in the Lease, unless otherwise defined herein.

 

2.          Remeasurement. Landlord remeasured the Project and the Original Office Premises, and the parties agree that effective on the Extension Commencement Date, as defined below, the Rentable Area of the Project shall be deemed to contain 1,050,761 rentable square feet of space, and the Original Office Premises shall be deemed to contain approximately 206,078 rentable square feet of space. Except as set forth in Section 5(c) below, the measurements contained herein shall be the final agreement of the parties. Notwithstanding the foregoing, the parties acknowledge that there shall be no charges or other rental adjustments applicable to the period prior to the Extension Commencement Date as a result of the foregoing remeasurement.

 

3.          Extension. The parties hereby acknowledge and agree that the Lease Term for the Total

 

 
 

 

 

Premises expires on January 31, 2023. However, Landlord and Tenant desire to extend the Lease Term for the Original Office Premises only, on the terms and conditions set forth herein. Accordingly, subject to the terms and conditions set forth in this Amendment, the Lease Term for the Original Office Premises is hereby extended for an additional period of sixty (60) months (“Extension Term”), commencing on February 1, 2023 (“Extension Commencement Date”), and expiring on January 31, 2028 (“Extension Expiration Date”). The parties hereby acknowledge and agree that the Extension Term does not constitute a “Renewal Term” as such term is defined in Section 10.2 of the Lease. Accordingly, Tenant shall have two (2) options to renew the Lease Term beyond the Extension Term pursuant to Section 10.2 of the Lease. Except as otherwise specifically stated herein, Tenant hereby accepts the Leased Premises (as hereinafter defined) in its present “as-is” condition.

 

4.          Base Rental for the Original Office Premises. During the Extension Term, Tenant shall pay to Landlord Base Rental for the Original Office Premises in full and without offset or demand except as otherwise set forth in the Lease, provided that such Base Rental shall be payable in monthly installments as follows:

 

Dates   Rate/RSF/yr.     Monthly Installment
02/01/23 – 01/31/24   $ [*]   $ [*]
02/01/24 – 01/31/25   $ [*]   $ [*]
02/01/25 – 01/31/26   $ [*]   $ [*]
02/01/26 – 01/31/27   $ [*]   $ [*]
02/01/27 – 01/31/28   $ [*]   $ [*]

 

Except as otherwise set forth herein, Base Rental shall be payable pursuant to Article 2 of the Original Lease. During the Extension Term, Tenant shall continue to pay any and all Rental, including, without limitation, Tenant's Percentage Share of Tenant’s Additional Rent and other amounts due and payable under the Lease.

 

5.            Expansion.

 

(a)          Expansion Premises. The term “Expansion Premises” is hereby defined to be and to mean, subject to Section 5(c) hereof, the entirety of the second (2nd) and third (3rd) floors of 7300 Corporate Center Drive, Miami, Florida (“Building 8”), and Suite 301 in Building 10, consisting of approximately 70,296 total rentable square feet of space (which is the final agreement of the parties and not subject to adjustment), as outlined on Exhibit A, attached hereto and incorporated herein by this reference. The Expansion Premises shall be delivered in the following manner:

 

Space  RSF   Estimated Delivery Date
        
2nd Floor of Building 8 (except Suite 203):   28,904   May 1, 2015 (or 5 days after the current tenant vacates)
         
Suite 203 of Building 8:   2,019   August 1, 2015 (or 5 days after the current tenant vacates)
         
3rd Floor of Building 8 (except for Suites 301, 302, 305, 311, 312):   13,367   May 1, 2015 (or 5 days after the current tenant vacates)

 

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Suite 302 of Building 8:   1,777   December 31, 2015 (or 5 days after the current tenant vacates)
         
Suite 305 of Building 8:   2,028   December 31, 2015 (or 5 days after the current tenant vacates)
         
Suites 301, 311 and 312 of Building 8:   17,767   December 31, 2015 (or 5 days after the current tenant vacates)
         
Suite 301 of Building 10:   4,434   May 1, 2015

 

Promptly following delivery of any portion of the Expansion Premises, the parties shall execute and deliver to one another a Confirmation of Lease Terms confirming such date substantially in the form attached hereto as Exhibit C, each being an “Actual Delivery Date”.

 

(b)          Notwithstanding the Estimated Delivery Dates set forth above, Landlord shall use commercially reasonable efforts to cause all third party tenants currently occupying any portion of the Expansion Premises to relocate (or such third party leases to be terminated) prior to May 1, 2015. Landlord represents and warrants that, except with respect to Suites 301, 311 and 312 totaling 17,767 rentable square feet (the "Encumbered Expansion Premises"), no third party tenants currently leasing any portion of the Expansion Premises have any rights to renew or otherwise extend such leases beyond the Estimated Delivery Dates set forth above.

 

(c)          If the third party tenant (or its successors or assigns) currently occupying the Encumbered Expansion Premises exercises its renewal option on the Encumbered Expansion Premises and Landlord is therefore unable to deliver the Encumbered Expansion Premises by the Estimated Delivery Date therefor, Landlord agrees that alternate space within Building 8 (the "Alternate Space") shall be substituted for the Encumbered Expansion Premises and shall satisfy all of the following conditions:

 

(i):        the total rentable square footage of the Alternate Space shall be on the same floor of Building 8 and in no more than two (2) non-contiguous portions of such floor; and

 

(ii)         the total portion of the Expansion Premises within Building 8 shall not be less than 65,300 rentable square feet, nor greater than 68,000 rentable square feet; and

 

(iii)        the Alternate Space shall be delivered to Tenant on or prior to May 1, 2015; and

 

(iv)       the Expansion Premises shall be adjusted to reflect the rentable square footage of the Alternate Space; and

 

(v)          Base Rental, Tenant's Percentage Share of Additional Rent, the Per Square Foot Allowance Amount (as defined in Exhibit B) and all other amounts set forth in the Lease, as hereby amended, which are a function of the rentable square footage of the Expansion Premises shall be adjusted accordingly. Upon final determination of the location

 

3
 

 

of the Alternate Space, the parties shall execute an amendment to the Lease pursuant to which the location of the Expansion Premises in Building 8 as set forth on Exhibit A shall be revised to reflect the Alternate Space (and shall incorporate any other conforming changes to the Lease agreed to by the parties).

 

(vi)        Landlord shall promptly notify Tenant, in writing, upon Landlord's receipt of written notice from the third party tenant of the exercise of the renewal option on the Encumbered Expansion Premises.

 

(d)          Expansion Commencement Date. The term “Expansion Commencement Date” with respect to each portion of the Expansion Premises shall mean the date which is four (4) months after Landlord delivers possession of each portion of the Expansion Premises to Tenant. Effective as of each applicable Expansion Commencement Date, the defined term “Leased Premises” under the Lease shall include the Original Office Premises and the applicable portion of the Expansion Premises. Additionally, effective as of the first Actual Delivery Date of any Expansion Premises within Building 8, the defined term “Buildings” under the Lease shall include Building 8.

 

(e)          Expansion Term. The term “Expansion Term” is hereby defined to be and to mean that period of time commencing on the applicable Expansion Commencement Date and expiring on the Extension Expiration Date.

 

(f)          Acceptance. Effective on each applicable Expansion Commencement Date, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, on the terms and conditions set forth in the Lease and herein, that portion of the Expansion Premises. Tenant shall accept the Expansion Premises in its present “as is” condition as of the Effective Date of this Amendment. Tenant shall install the work set forth in the Work Letter, attached hereto as Exhibit B and incorporated herein by this reference.

 

(g)          Notwithstanding anything herein to the contrary, if, in order for Tenant to receive a building permit for Tenant Improvements (as defined in Exhibit B) or a certificate of occupancy or completion for the Tenant Improvements, any portion of the existing building systems located outside of and serving any portion of the Expansion Premises or any portion of the existing common areas located on any floors containing any portion of the Expansion Premises are required by applicable governmental authority, to be made compliant with the currently applicable building code or fire code or applicable requirements of the Americans with Disabilities Act (“ADA”), then Landlord agrees that it is Landlord’s responsibility, at its cost, to perform the necessary work to make said portion of the existing building systems and/or existing common areas compliant; however, Tenant acknowledges and agrees that Landlord is only responsible for the building systems up to the point of common connection for the floor on which the applicable portion of the Expansion Premises are located and under no circumstances shall Landlord be required to upgrade restrooms on either the second or third floors of Building 8 to meet ADA requirements.

 

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6.          Base Rental for Expansion Premises. During the Expansion Term, Tenant shall pay to Landlord Base Rental for the Expansion Premises, which shall be payable in monthly installments as follows:

 

EXPANSION PREMISES

 

Dates   Annual Rate/RSF     Monthly Installment  
Expansion Commencement Date - Month 12*   $ [*]     $ [*] **
Month 13 – Month 24   $ [*]     $ [*]  
Month 25 – Month 36   $ [*]     $ [*]  
Month 37 – Month 48   $ [*]     $ [*]  
Month 49 – Month 60   $ [*]     $ [*]  
Month 61 – Month 72   $ [*]     $ [*]  
Month 73 – Month 84   $ [*]     $ [*]  
Month 85 – Month 96   $ [*]     $ [*]  
Month 97 – Month 108   $ [*]     $ [*]  
Month 109 – Month 120   $ [*]     $ [*]  
Month 121 – Extension Expiration Date   (01/31/28)***   $ [*]     $ [*]  

 

* Notwithstanding the foregoing, Tenant shall receive twelve (12) full calendar months of abated Base Rental for each portion of the Expansion Premises commencing on the applicable Expansion Commencement Date. If any applicable Expansion Commencement Date is other than the first day of a calendar month, then the first and last months of the applicable abatement period shall be prorated. Such abatement shall apply solely to payment of the monthly installments of Base Rental and shall not be applicable to any other charges, expenses or costs payable by Tenant under the Lease or this Amendment, including, without limitation, Tenant’s obligation to pay Additional Rent and its utilities. In the event that Tenant defaults under the terms and conditions of the Lease or this Amendment beyond any applicable notice and cure period resulting in the loss of Tenant’s right to possess the Premises, Landlord shall have a claim for the unamortized portion of all conditionally abated rental (without limitation and in addition to any and all other rights and remedies available to Landlord provided herein or at law and in equity).

 

**The total monthly installment will fluctuate based on the Actual Delivery Date of each portion of the Expansion Premises.

 

***If the Extension Expiration Date is after Month 132, the Annual Rate/RSF shall continue to increase by [*] per year; provided, however, in no event shall the Extension Expiration Date for any portion of the Original Office Premises or the Expansion Premises be later than January 31, 2028.

 

Except as otherwise expressly set forth herein, Base Rental shall be payable pursuant to the terms and conditions of Article 2 of the Original Lease. Tenant shall be solely liable for any and all tax on rental.

 

7.          Tenant's Percentage Share.   Beginning on the Expansion Commencement Date of each applicable portion of the Expansion Premises, Tenant's Percentage Share, as defined in Section 2.3(c) of the Original Lease, shall be increased based upon an amount determined by (a) the fraction, the numerator of which is the total number of Rentable Square Feet then leased by Tenant in Building 8, and the denominator of which is the greater of (i) ninety-five percent (95%) of the total Rentable Square Feet in Building 8; or (ii) the total Rentable Square feet in Building 8 actually leased or occupied by tenants; and (b) the fraction, the numerator of which is the total number of Rentable Square Feet then leased by Tenant in Building 10, and the

 

5
 

 

 

denominator of which is the greater of (i) ninety-five percent (95%) of the total Rentable Square Feet in Building 10; or (ii) the total Rentable Square feet in Building 10 actually leased or occupied by tenants. For avoidance of doubt, Tenant's Percentage Share shall be determined separately for each Building.

 

8.          Tenant's Parking Spaces for Building 8 and Building 10. Commencing as of the applicable Expansion Commencement Dates, Tenant shall receive four (4) parking spaces per 1,000 rentable square feet of space Tenant leases in Building 8 with twenty percent (20%) of such spaces being located in the covered portion of the parking garage adjacent to Building 8. However, since Tenant’s use requires five (5) parking spaces per 1,000 rentable square feet of space in Building 8, the difference shall be supplied by Landlord to Tenant at a location within the Project to be determined by Landlord; provided, however, Landlord shall have the right to relocate any of such additional parking spaces upon not less than thirty (30) days prior written notice to Tenant, and in no event shall there be any relocation of any or all of such additional spaces more than two (2) times per year. In no event shall Tenant be charged any rent or other fees for Parking Permits with respect to the parking garage adjacent to Building 8; provided, however, Tenant will pay the Building standard charge for any additional or replacement access cards requested by Tenant for such garage. Commencing on the Expansion Commencement Date for Suite 301 of Building 10, Tenant shall also receive an additional eighteen (18) Parking Permits for the Building 10 parking garage, at no additional cost to Tenant.

 

9.          Signs. In addition to the signage rights set forth in Section 3.3(b) (i) and (ii) of the Original Lease which shall also be applicable to Building 8, commencing on the Effective Date, Tenant shall have the non-exclusive right to install and maintain in a first class manner one (1) exterior sign at the top of one (1) side of Building 8 (the “Building 8 Façade Sign”) as well as one (1) panel on both sides of the existing monument sign (the “Building 8 Monument Sign”). All costs associated with the fabrication, installation, maintenance, removal and replacement of the Building 8 Façade Sign and the Building 8 Monument Sign shall be the sole responsibility of Tenant. Tenant shall maintain such signage in good condition and repair. Tenant shall remove such signage and repair any damage caused thereby, at its sole cost and expense, upon the expiration or sooner termination of the Lease. The color, content, size and other specifications of any such signage shall be in accordance with the terms and conditions of the Lease, and shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. Further, Tenant shall ensure that all signage complies with any and all applicable local zoning codes and building regulations. Tenant's Building 8 Façade Sign right set forth herein shall expire and shall thereafter be void (and Tenant shall promptly remove such sign and restore the Building to the condition that existed before installation) if at any time following the latest applicable Expansion Commencement Date, Tenant does not occupy at least 65,300 rentable square feet in Building 8. In no event shall Landlord grant any signage rights for signs on the exterior sides or on top of Building 8 showing the name of a cruise line in direct competition with Tenant and identified on Exhibit D.

 

Landlord shall be responsible for the costs associated with the installation of Building 8 standard directory signage in Building 8’s main lobby. Tenant shall be responsible for the costs of Tenant’s suite entry signage; however, the cost for such suite entry signage may be deducted from Tenant’s Total Allowance.

 

10.         Generator and UPS System. Prior to the first Actual Delivery Date for any portion of the Expansion Premises located in Building 8, Landlord, at its sole cost and expense, shall upgrade the existing 1,125 KVA stand-by generator associated with Building 8 (the “Building 8 Generator”) in such a manner which will provide back-up electrical power to the Expansion Premises located in Building 8 on a

 

6
 

 

 

24 hour per day, 7 days per week basis. Tenant shall thereafter, at its sole cost and expense, have the right to connect to the Building 8 Generator to provide such back-up electrical power to the Expansion Premises in Building 8. All terms and conditions set forth in Section 9.6 of the Original Lease shall be applicable to the Building 8 Generator.

 

In addition, Tenant shall have the right, at Tenant’s sole cost and expense, to install a UPS system using funds from Tenant’s Allowance.

 

11.         Building 10 One-Time Right of Offer.

 

(a)          Offer Space. If, at any time during the Lease Term, after the expiration of one hundred eighty (180) days following the first applicable Expansion Commencement Date, any space in Building 10 becomes “available for lease”, Landlord shall give Tenant written notice (“Building 10 Offer Space Notice”) of such event. Such notice shall identify the location, configuration and size of the space (“Building 10 Offer Space”), as well as the applicable business terms under which Landlord is willing to lease such space (such as duration, commencement date, concessions, base rent, and additional rent). Within ten (10) business days after the date the Building 10 Offer Space Notice is given to Tenant, the time of giving of such notice to be of the essence of this Section, Tenant shall give Landlord written notice (“Building 10 Offer Acceptance Notice”) of its election to lease the entire Building 10 Offer Space. Space shall not be considered “available for lease” if it is leased by another tenant or is subject to an expansion option or prior right held by another tenant, or if the existing tenant of such space desires to renew or extend its lease.

 

(b)          Amendment. After receipt of any such Building 10 Offer Acceptance Notice, Landlord and Tenant shall enter into an amendment to the Lease acceptable to Landlord and Tenant to amend the Lease pursuant to the terms and conditions of the Building 10 Offer Space Notice. Except as set forth in the Building 10 Offer Space Notice, the terms and conditions of the Lease as they apply to the Premises shall govern Tenant’s lease of the Building 10 Offer Space.

 

(c)          Failure to Exercise. In the event that Tenant fails to exercise its right as aforesaid within ten (10) business days of the date the Building 10 Offer Space Notice is given to Tenant or, in the event Tenant shall have exercised its right and Tenant shall not have executed an amendment of the Lease as aforesaid within ten (10) business days from the date the Tenant is given such an Amendment, Tenant shall, be deemed to have waived its right under this Section unless Landlord desires to lease such Building 10 Offer Space at a Net Effective Rental Rate (hereinafter defined) less than ninety-five percent (95%) of the Net Effective Rental Rate offered to Tenant in the related Building 10 Offer Space Notice. If Landlord desires to lease such space at a Net Effective Rental Rate less than ninety-five percent (95%) of the Net Effective Rental Rate offered to Tenant, then such space shall again be offered to Tenant by a new Building 10 Offer Space Notice hereunder on such lower terms. As used herein, the term “Net Effective Rental Rate” shall mean the net rental rate payable to Landlord under a lease net of all tenant inducements (e.g., tenant improvement allowances, rental abatements, moving allowances), with the cost of such tenant inducements, together with interest thereon at a rate of ten percent (10%) per annum, amortized over the term of such Lease.

 

(d)          Subordination. Tenant’s right of offer granted hereunder shall be subordinate to any and all existing rights or interests conferred to other tenants for all or any portion of the Building 10

 

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Offer Space, as contained in any lease, or otherwise, in effect on the date of execution of this Amendment including, without limitation options or rights regarding renewal, extension or expansion.

 

(e)          Not Transferable. Tenant acknowledges and agrees that any right of offer granted herein shall be deemed personal to Tenant and if Tenant subleases, assigns or otherwise transfers any interests under the Lease prior to the exercise of any right of offer granted under this Section, such right shall lapse and be of no further force or effect, except for a transfer to an Affiliate or Successor (as such terms are defined in the Original Lease).

 

(f)          No Default. Tenant shall be deemed to have waived its rights under this Section in the event that Tenant is in default under the Lease beyond any applicable notice and grace period as of the date of either the Building 10 Offer Space Notice or Building 10 Offer Acceptance Notice.

 

12.         Building 8 Right of Offer.

 

(a)          Offer Space. If, at any time during the Lease Term, after the expiration of one hundred eighty (180) days following the first applicable Expansion Commencement Date, any space that is located on the first (1st) or fourth (4th) floors of Building 8, becomes “available for lease”, Landlord shall give Tenant written notice (“Building 8 Offer Space Notice”) of such event. Such notice shall identify the location, configuration and size of the space (“Building 8 Offer Space”), as well as the applicable business terms under which Landlord is willing to lease such space (such as duration, commencement date, concessions, base rent, and additional rent). Within ten (10) business days after the date the Building 8 Offer Space Notice is given to Tenant, the time of giving of such notice to be of the essence of this Section, Tenant shall give Landlord written notice (“Building 8 Offer Acceptance Notice”) of its election to lease the entire Building 8 Offer Space. Space shall not be considered “available for lease” if it is leased by another tenant or is subject to an expansion option or prior right held by another tenant, or if the existing tenant of such space desires to renew or extend its lease.

 

(b)          Amendment. After receipt of any such Building 8 Offer Acceptance Notice, Landlord and Tenant shall enter into an amendment to the Lease acceptable to Landlord and Tenant to amend the Lease pursuant to the terms and conditions of the Building 8 Offer Space Notice. Except as set forth in the Building 8 Offer Space Notice, the terms and conditions of the Lease as they apply to the Leased Premises, shall govern Tenant’s lease of the Building 8 Offer Space. Notwithstanding the foregoing to the contrary, the Base Rental amount for the Building 8 Offer Space shall be as set forth in the Lease, as hereby amended, and any allowance for the Building 8 Offer Space shall be pro-rated for the remainder of the Lease Term.

 

(c)          Failure to Exercise. In the event that Tenant fails to exercise its right as aforesaid within ten (10) business days of the date the Building 8 Offer Space Notice is given to Tenant or, in the event Tenant shall have exercised its right and Tenant shall not have executed an amendment of the Lease as aforesaid within ten (10) business days from the date the Tenant is given such an Amendment, Tenant shall be deemed to have waived its right under this Section for a period of one hundred eighty (180) days beginning on the expiration of the applicable ten (10) business day period. Except for such waiver, Tenant’s rights under this Section are continuous and, therefore, if the lease in favor of a third party of the Building 8 Offer Space expires or otherwise terminates, and Landlord desires to accept an Offer to lease such Building 8 Offer Space after the expiration of the above-referenced one hundred eighty (180) day period, Landlord shall again give Tenant notice of its right to lease such Offer Space.

 

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(d)          Subordination. Tenant’s right of offer granted hereunder shall be subordinate to any and all existing rights or interests conferred to other tenants for all or any portion of the Building 8 Offer Space, as contained in any lease, or otherwise, in effect on the date of execution of this Amendment including, without limitation options or rights regarding renewal, extension or expansion.

 

(e)          Not Transferable. Tenant acknowledges and agrees that any right of offer granted herein shall be deemed personal to Tenant and if Tenant subleases, assigns or otherwise transfers any interests under the Lease prior to the exercise of any right of offer granted under this Section, such right shall lapse and be of no further force or effect, except for a transfer to an Affiliate or Successor (as such terms are defined in the Original Lease).

 

(f)          No Default. Tenant shall be deemed to have waived its rights under this Section in the event that Tenant is in default under the Lease beyond any applicable notice and grace period as of the date of either the Building 8 Offer Space Notice or Building 8 Offer Acceptance Notice.

 

13.         Brokers. Tenant hereby represents and warrants to Landlord that Tenant has not dealt with any real estate brokers or leasing agents, except Flagler Brokerage and Management Services, LLC, in association with Travers Realty Corporation, d/b/a Travers Cresa, who represent Tenant, and Landlord hereby represents and warrants to Tenant that CBRE, Inc., is the sole real estate broker or leasing agent representing Landlord (collectively the “Brokers”). Landlord and Tenant hereby agree to indemnify and to hold each other harmless against any loss, expense, or liability with respect to any claims for commissions or brokerage fees arising from or out of any breach of the foregoing representation and warranty. Landlord shall pay all brokerage commissions due to the Brokers pursuant to a separate agreement.

 

14.         Energy and Environmental Initiatives. Tenant shall cooperate with Landlord in any programs in which Landlord may elect to participate relating to the Building’s (i) energy efficiency, management, and conservation; (ii) water conservation and management; (iii) environmental standards and efficiency; (iv) recycling and reduction programs; and/or (v) safety, which participation may include, without limitation, the Leadership in Energy and Environmental Design (LEED) program and related Green Building Rating System promoted by the U.S. Green Building Council, as well as the Energy Star program promoted by the U.S. Environmental Protection Agency and the U.S. Department of Energy. To the extent that compliance with this Section is not required by law, Tenant shall not be required to incur any material costs for complying with this Section; provided, however, costs may be included in Operating Expenses to the extent allowable under Exhibit F of the Original Lease.

 

15.         Satellite Dish. In addition to the four (4) satellite dishes, antennae and other communication equipment on the roofs of the Buildings, Tenant shall have the right to install one (1) satellite dish, antenna and other communication equipment on the roof of Building 8 in accordance with the terms of Section 1.4 of the Lease.

 

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16.         Notices.   Landlord's notice address under the Lease is hereby amended to be as follows:

 

CBRE, Inc.

7300 Corporate Center Drive, Suite 100

Miami, Florida 33126

Attn: General Manager

 

With a copy of all notices going to:      SPUS7 Miami ACC, LP,

c/o CBRE Global Investors

515 South Flower Street, Suite 3100

Los Angeles, CA 90071

Attn: Director of Asset Management

 

17.         Miscellaneous. With the exception of those matters set forth in this Amendment, Tenant's leasing of the Leased Premises (including the Expansion Premises set forth herein) shall be subject to all terms, covenants and conditions of the Lease. In the event of any express conflict or inconsistency between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall control and govern. Except as expressly modified by this Amendment, all other terms and conditions of the Lease are hereby ratified and affirmed. This Amendment may be executed in any number of counterparts, and delivery of any counterpart to the other party may occur by electronic or facsimile transmission; each such counterpart shall be deemed an original instrument, but all such counterparts together shall constitute one agreement. An executed Amendment containing the signatures (whether original, faxed or electronic) of all the parties, in any number of counterparts, is binding on the parties. The “Effective Date” of this Amendment will be the date on which the last party shall have executed and delivered a fully executed Amendment to the other party. The parties acknowledge that the Lease is a valid and enforceable agreement and that neither party has any demands, claims (matured or unmatured), losses, rights of set off or deduction asserted or assertable against the other party in any manner relating to the Lease, or arising in connection with the Leased Premises or the Project.

 

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, the foregoing Amendment to Lease is dated effective as of the date and year first written above.

 

WITNESS:    
    LANDLORD:
       
      SPUS7 MIAMI ACC, LP,
      a Delaware limited partnership
By: /s/ Signature Illegible    
Name: Illegible   By: /s/ Claudia Walraven
      Name: Claudia Walraven
By: /s/ Signature Illegible   Title: Assistant Vice President
Name: Illegible   Date:  
         
By: /s/ Signature Illegible      
Name: Illegible   By: /s/ Phillip G. Hench
      Name: Phillip G. Hench
By: /s/ Signature Illegible   Title: Vice President
Name: Illegible   Date:  
       
WITNESS:   TENANT:
       
      NCL (BAHAMAS) LTD.,
      a Bermuda company, d/b/a Norwegian Cruise Line
By: /s/ Lincoln M. Vidal    
Name: Lincoln M. Vidal      
      By: /s/ Wendy Beck
      Name: Wendy Beck
By: /s/ Daniel S. Farkas   Title: Executive Vice President & Chief Financial Officer
Name: Daniel S. Farkas   Date: January 27, 2015

 

CONSENT OF GUARANTOR

 

The undersigned Guarantor under the original Guaranty of Lease dated November 27, 2006 (the “Guaranty”), does hereby consent to the foregoing Amendment. Guarantor acknowledges and agrees that the Guaranty is in full force and effect and shall continue to apply to the Lease, as amended by this Amendment.

 

NCL CORPORATION LTD.,  
a Bermuda company  
   
By: /s/ Daniel S. Farkas  
Name: Daniel S. Farkas  
Title: Senior Vice President & General Counsel  

 

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EXHIBIT A

 

EXPANSION PREMISES

 

 

 

1
 

 

 

 

2
 

 

EXHIBIT B

 

WORK LETTER

 

This is the Work Letter referred to in and specifically made a part of the Amendment to which this Exhibit B is annexed, covering the entire Leased Premises, including the Expansion Premises, as more particularly described in the Amendment. Landlord and Tenant agree as follows:

 

1.            Defined Terms. The following defined terms shall have the meaning set forth below and, unless provided to the contrary herein, the remaining defined terms shall have the meaning set forth in the Lease, as amended:

 

Landlord's Representative:   Suzanne Russo of CBRE, Inc.  Landlord has designated Landlord's Representative as its sole representative with respect to the matters set forth in this Work Letter, who shall have full authority and responsibility to act on behalf of Landlord as required in this Work Letter.  Landlord shall not change Landlord's Representative except upon prior written notice to Tenant. Tenant acknowledges that neither Tenant's architect nor any contractor engaged by Tenant is Landlord's agent and neither entity has authority to enter into agreements on Landlord's behalf or otherwise bind Landlord.
     
Tenant's Representative:   George Chesney of Norwegian Cruise Line, or such other person as may be designated in writing by Tenant. Tenant has designated Tenant's Representative as its representative with respect to the matters set forth in this Work Letter, who shall have full authority and responsibility to act on behalf of Tenant as required in this Work Letter.  Tenant shall not change Tenant's Representative except upon prior written notice to Landlord.
     
Allowance:   [*] per rentable square foot of the Expansion Premises (the "Per Square foot Allowance Amount") plus a fixed amount of [*] (the "Fixed Allowance").  Up to [*] of the Allowance may be used towards Tenant’s soft costs (including, but not limited to, furniture fixtures, equipment and Base Rental) and a maximum of [*] of the amount set forth above for soft costs may be used towards the existing rental obligation of Tenant (or its affiliate) at Westside Plaza II.  All of the Allowance must be used on or before the later of: (i) November 30, 2016; or (ii) twelve (12) months following the latest Actual Delivery Date.  
     
Additional Allowance:   An additional [*] which Additional Allowance may only be used within the first year of the Extension Term.  Up to [*] of the Additional Allowance may be used towards Tenant’s soft costs (including, but not limited to, furniture fixtures, equipment and Base Rental and a maximum of [*] of the amount set forth above for soft costs can be used towards the existing rental obligation of Tenant (or its affiliate) at Westside Plaza II).  The Allowance and the Additional Allowance are collectively referred to herein as the “Total Allowance”.

 

 
 

 

Construction Management Fee:   $50,000.00
     
General Contractor:   City Construction Group (which is hereby approved by Landlord), or such other general contractor approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed.

 

2.          Landlord’s Work. Subject to Section 5(g) of the Amendment, Tenant accepts the Expansion Premises in its current “AS IS” condition and acknowledges that Landlord shall have no obligation to do any work in or on the Expansion Premises to render it ready for Tenant's use or occupancy.

 

3.          Tenant Improvements. The “Tenant Improvements” shall mean the interior walls, partitions, doors, door hardware, wall coverings, wall base, counters, lighting fixtures, electrical and telephone wiring, cabling for computers, electrical outlets, ceilings, floor and window coverings, that portion of the HVAC system located within any portion of the Expansion Premises, that portion of the fire sprinklers system located within any portion of the Leased Premises (including the Expansion Premises), and other items of general applicability that Tenant desires to be installed in the interior of the Expansion Premises. Tenant shall promptly commence and diligently prosecute to full completion Tenant Improvements in accordance with the Drawings (defined below). The parties agree that no demolition work or other Tenant Improvements shall be commenced within the Expansion Premises until such time as Tenant has provided to Landlord copies of the building permits required to be obtained from all applicable governmental authorities. All materials, work, installations, equipment and decorations of any nature whatsoever brought on or installed in the Expansion Premises before the applicable Expansion Commencement Date or during the Expansion Term shall be at Tenant's risk, and neither Landlord nor any party acting on Landlord's behalf shall be responsible for any damage thereto or loss or destruction thereof due to any reason or cause whatsoever, excluding by reason of Landlord's negligence or willful or criminal misconduct. Notwithstanding anything set forth in this Amendment to the contrary, Tenant shall have the right, in its sole discretion, to apply all or any portion of the Total Allowance to performing Alterations (as defined in and pursuant to Section 5(e) of the Original Lease) to the Original Office Premises.

 

4.          Drawings. Tenant shall engage and pay for the services of a licensed architect to prepare a space layout, drawings and specifications for all Tenant Improvements (the “Drawings”), which architect shall be subject to Landlord's approval, not to be unreasonably withheld, conditioned or delayed (the “Architect”). Tenant shall devote such time in consultation with the Architect as shall be necessary to enable the Architect to develop complete and detailed architectural, mechanical and engineering drawings and specifications, as necessary, for the construction of Tenant Improvements, showing thereon all Tenant Improvements. Tenant hereby acknowledges and agrees that it is Tenant's sole and exclusive responsibility to cause the Premises and the Drawings to comply with all applicable laws, including the Americans with Disabilities Act and other ordinances, orders, rules, regulations and requirements of all governmental authorities having jurisdiction thereof.

 

5.          Landlord's Approval.  On or before the applicable Time Limit set forth below, Tenant shall submit to Landlord an electronic PDF copy, electronic CAD copy and hard copy of the complete and final Drawings for Tenant Improvements. The Drawings shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. If Landlord should disapprove such Drawings, Landlord shall specify to Tenant, in writing, the reasons for its disapproval and Tenant shall cause the same to be revised to meet the Landlord and Tenant's mutual reasonable satisfaction and shall

 

2
 

 

resubmit the same to Landlord, as so revised, on or before the applicable Time Limit set forth below.

 

6.            Changes. Tenant may request reasonable changes in the Drawings; provided, however, that (a) no change shall be made to the Drawings without Landlord's Representative's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed; (b) no such request shall effect any structural change in the Building or otherwise render any portion of the Expansion Premises or the building within which such portion is situated in violation of applicable laws; (c) Tenant shall pay any additional costs required to implement such change, including, without limitation, architecture and other consultant fees, and increases in construction costs; and (d) such requests shall constitute an agreement by Tenant to any delay in completion caused by Landlord's reviewing, and processing such change. If Tenant requests or causes any change, addition or deletion to the Premises to be necessary after approval of the Drawings, a request for the change shall be submitted to Landlord's Representative, accompanied by revised plans prepared by the Architect, all at Tenant's sole expense.

 

7.            Tenant's Contractors.  It is understood and agreed by the parties that, as hereinafter set forth, Tenant has elected to retain a general contractor and arrange for the construction and installation of Tenant Improvements itself in a good and workmanlike manner by contractors and subcontractors”. On or before the applicable Time Limit set forth below, Tenant shall submit to Landlord the names of the general contractor, electrical, ventilation, plumbing and heating subcontractors (hereinafter “Major Subcontractors”), as applicable, for Landlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed. If Landlord shall reject any Major Subcontractor, Landlord shall advise Tenant, in writing, of the reason(s) and Tenant shall choose another Major Subcontractor. Along with Tenant's notice of its Major Subcontractors, Tenant shall notify Landlord of its estimate of the total costs for Tenant Improvements.

 

8.            Tenant's Construction of Tenant Improvements.

 

(a)          Payment; Liens. Tenant shall promptly pay any and all costs and expenses in connection with or arising out of the performance of Tenant Improvements and shall furnish to Landlord evidence of such payment upon request. In the event any lien is filed against the building within which any Tenant Improvements are performed by Tenant as set forth herein, or against Tenant's leasehold interest therein, the provisions of Article 5(g) of the Original Lease shall apply.

 

(b)          Indemnity. Tenant shall indemnify, defend (with counsel reasonably satisfactory to Landlord and Tenant) and hold Landlord harmless from and against any and all suits, claims, actions, loss, cost or expense (including claims for workers' compensation, attorneys' fees and costs) based on personal injury, property damage or contract claims (including, but not limited to claims for breach of warranty) arising from Tenant Improvements. Tenant shall repair or replace (or, at Landlord's election, reimburse Landlord for the commercially reasonable cost of repairing or replacing) any portion of the building within which any Tenant Improvements are performed by Tenant as set forth herein, or item of Landlord's equipment or any of Landlord's real or personal property damaged, lost or destroyed by Tenant's contractors during construction of Tenant Improvements.

 

(c)          Contractors. The Major Subcontractors employed by Tenant and any subcontractors thereof shall be (i) duly licensed in the state in which the Premises are located, and (ii) except as otherwise approved herein, subject to Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed. On or before ten (10) business days prior to the

 

3
 

 

commencement of any construction activity in the applicable portion of the Expansion Premises or any portion of the Original Office Premises, Tenant and Tenant's contractors shall obtain and provide Landlord with certificates evidencing Workers' Compensation, public liability and property damage insurance in amounts and forms and with companies reasonably satisfactory to Landlord. If Landlord should disapprove such insurance, Landlord shall specify to Tenant the reasons for its disapproval within five (5) business days after delivery of such certificates. Tenant's agreement with its contractors shall require such contractors to provide daily clean up of the construction area to the extent such clean up is necessitated by the construction of Tenant Improvements, and to take reasonable steps to minimize interference with other tenants' use and occupancy of the Building. Nothing contained herein shall make or constitute Tenant as the agent of Landlord. Tenant and Tenant's contractors shall comply with any other reasonable rules, regulations or requirements that Landlord may impose. Notwithstanding anything to the contrary, Tenant’s contractors shall not be charged for the use of parking, utilities, elevators use or security costs. To the extent reasonably required by Tenant during construction of Tenant Improvements, Landlord shall use commercially reasonable efforts to provide Tenant with space for a storage container, the exact location and size of which shall be subject to Landlord’s reasonable approval and discretion. Tenant shall be responsible to ensure that the storage container satisfies all applicable laws. The storage container may only be used for temporarily storing building materials or equipment which will be incorporated into the Expansion Premises. All of the foregoing shall be maintained by Tenant in a neat and orderly manner and shall not affect other tenants in the Project. Tenant shall be solely responsible for all costs in connection with the foregoing and the same shall only be in place for a reasonable period of time as necessary to facilitate the Tenant Improvements.

 

(d)          Use of Common Areas. During the construction period and installation of fixtures period, Tenant shall be allowed to use, at no cost to Tenant, a freight elevator for the purpose of hoisting materials, equipment and personnel to the Premises. Also during the construction period, Tenant shall ensure that the Building and all common areas and the Expansion Premises are kept in a clean and safe condition at all times. Further, all construction activities shall be conducted so as to use reasonable efforts to minimize interference with the use and occupancy of the Building by the tenants thereof. Such entry shall be deemed to be under all the terms, covenants, provisions and conditions of the Lease, as amended.

 

(e)          Coordination. All work performed by Tenant shall be coordinated with Landlord’s Representative. Tenant shall use commercially reasonable efforts to timely notify and invite Landlord’s Representative to construction meetings (with contractors, engineers, architects and others), and supply all documentation reasonably requested by Landlord’s Representative.

 

(f)          Assumption of Risk. All materials, work, installations, equipment and decorations of any nature whatsoever brought on or installed in the Premises pursuant to the provisions of this Work Letter before the commencement of the Term or throughout the Term shall be at Tenant's risk, and neither Landlord nor any party acting on Landlord's behalf shall be responsible for any damage thereto or loss or destruction thereof due to any reason or cause whatsoever, excluding by reason of Landlord or such other party's gross negligence or willful or criminal misconduct.

 

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9.          Time Limits. The following maximum time limits and periods shall be allowed for the indicated matters:

 

Action   Time Limit
     
Tenant submits Drawings to Landlord for review and approval.   On or before 60 days after the date of mutual execution of this Amendment.
     
Landlord notifies Tenant and the Architect of its approval of the Drawings with any required changes in detail.   On or before 10 business days after the date of Landlord's receipt of the Drawings.
     
Tenant notifies Landlord of its selection of major subcontractors.   On or before 60 days after the date of mutual execution of this Amendment.
     
Landlord approves/disapproves Tenant's major subcontractors.   On or before 7 business days after the date of Landlord's receipt of the list of major subcontractors.
     
If applicable, Landlord and Tenant mutually approve the final revised list of major subcontractors.   On or before 3 business days after the date of Landlord's receipt of a revised list of major subcontractors.
     
If applicable, Landlord and Tenant mutually approve the final revised Drawings.   On or before 5 business days after the date of Landlord's receipt of revised Drawings.
     
Tenant submits Drawings for building permit, if applicable.   On or after the date Tenant and Landlord mutually approve the final, revised Drawings.
     
Tenant allowed access to the applicable portion of the Expansion Premises to commence Construction of Tenant Improvements   After providing copies of the building permit(s) and the contractors meeting all of Landlord’s insurance requirements.

 

Except as may be otherwise specifically provided for herein, in all instances where either Tenant's or Landlord's approval is required, if no written notice of disapproval is given within the applicable Time Limit, at the end of such period the applicable party shall be deemed to have given its approval and the next succeeding time period shall commence. Any delay in any of the foregoing dates (including any “re-do”, continuation or abatement of any item due to Tenant's or Landlord's disapproval thereof) shall automatically delay all subsequent deadlines by a like amount of time.

 

10.         Total Allowance.  Landlord shall contribute to the costs and expenses of all costs for the planning and design of Tenant Improvements, including all permits, licenses and construction fees and constructing Tenant Work in an amount not to exceed the Total Allowance. If the final costs for Tenant Improvements

 

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exceed Total Allowance, Tenant shall be responsible for such excess costs. If the total cost of performing Tenant Improvements is less than the Total Allowance, portions of the Allowance and the Additional Allowance may be used towards Tenant's soft costs and existing lease obligations at Westside Plaza II in accordance with Section 1 of this Work Letter. Landlord shall pay the Total Allowance to Tenant consistent with the terms and conditions of this Section. After Tenant Improvements are complete (as provided under Section 11 hereof), Tenant may submit to Landlord a request in writing (the “Final Draw Request”) for the Total Allowance which request shall include: (a) “as-built“ drawings showing all of Tenant Improvements, (b) a detailed breakdown of Tenant's final and total construction costs, together with receipted invoices showing payment thereof, (c) a certified, written statement from the Architect that all of Tenant Improvements has been completed in accordance with the Drawings, (d) all required AIA forms, supporting final lien waivers, and releases executed by the Architect, General Contractor, the Major Subcontractors and all subcontractors and suppliers in connection with Tenant Improvements, (e) a copy of a certificate of occupancy or amended certificate of occupancy required with respect to the Expansion Premises, if applicable, together with all licenses, certificates, permits and other government authorizations necessary in connection with Tenant Improvements and the operation of Tenant's business from the Expansion Premises, and (f) proof reasonably satisfactory to Landlord that Tenant has complied with all of the conditions set forth in this Work Letter and has satisfactorily completed Tenant Improvements”. Upon Landlord's receipt and approval of the Final Draw Request, Landlord shall pay the balance of the Total Allowance less the Construction Management Fee. Payment by Landlord shall be made within thirty (30) days, unless Landlord notifies Tenant, in writing, of its rejection (and the reasons therefor) of any or all of the Final Draw Request. To the extent Landlord does not so reject any portion of said Final Draw Request, Landlord shall timely pay the Final Draw Request. Notwithstanding the foregoing to the contrary, but subject to Section 1 of this Work Letter, Landlord will pay the amount of the Total Allowance to Tenant in progress payments (not more often than monthly) after the applicable Actual Delivery Dates. Such progress payments will be made not later than 30 days after receipt by Landlord from Tenant of copies of Tenant’s invoices from its Architect or General Contractor together with a certificate from Tenant indicating that the work to which such invoices relate has been substantially completed and/or the materials to which such invoices relate have been installed in, or delivered to, the applicable portion of the Expansion Premises or the Original Office Premises. Such progress payments will be made payable to Tenant and will be for the undisputed amount of the submitted invoices, less a 10% retainage (which shall not be released until such time as Landlord has received the Final Draw Request). As a condition precedent to Landlord’s issuing any such progress payment subsequent to the first such progress payment, Tenant will deliver to Landlord an original lien waiver from its general contractor waiving any claim for a mechanic’s or materialman’s lien with respect to the labor and materials reflected in the invoices submitted for the immediately preceding progress payment.

 

11.         Substantial Completion. Tenant Improvements shall be deemed substantially complete when all work called for by the Drawings has been finished and the applicable portion of the Expansion Premises or the Original Office Premises is ready to be used and occupied by Tenant, even though minor items may remain to be installed, finished or corrected (“Substantial Completion Date” or the “Date of Substantial Completion”). Tenant shall cause the contractors to diligently complete any items of work not completed when the applicable portion of the Expansion Premises or the Original Office Premises are substantially complete. Substantial completion shall have occurred notwithstanding punch list items. Promptly after the Substantial Completion Date for any portion of the Expansion Premises, the parties will execute an instrument in the form attached hereto as Exhibit C, setting forth the applicable Expansion Commencement Date, so that said date is certain and such instrument, when executed, is hereby made a part of this Amendment and incorporated herein by reference.

 

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12.         No Representations or Warranties. Notwithstanding anything to the contrary contained in the Lease, as amended, or herein, Landlord's participation in the preparation of the Drawings, the cost estimates for Tenant and the construction of Tenant Improvements shall not constitute any representation or warranty, express or implied, that (i) the Drawings are in conformity with applicable governmental codes, regulations or rules or (ii) Tenant Improvements, if built in accordance with the Drawings, will be suitable for Tenant's intended purpose. Landlord's obligations shall be to review the Drawings; and any additional cost or expense required for the modification thereof to more adequately meet Tenant's use, whether during or after construction thereof, shall be borne entirely by Tenant.

 

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EXHIBIT C

 

CONFIRMATION OF TERMS AND DATES

 

Re:Eighth Amendment to Lease (the “Amendment”) dated December 31, 2014, between SPUS7 MIAMI ACC, LP, a Delaware limited partnership (“Landlord”), and NCL (BAHAMAS) LTD., a Bermuda company, d/b/a Norwegian Cruise Line (“Tenant”) for the premises located at 7300 Corporate Center Drive, Miami, Florida and 7650 Corporate Center Drive, Miami, Florida (“Expansion Premises”)

 

The undersigned, as Tenant, hereby confirms as of this _____ day of _________, 20____, the following:

 

1.           The Actual Delivery Date of each of the following portions of the Expansion Premises is as follows:

 

Space   RSF   Actual Delivery Date
2nd Floor of Building 8, except Suite 203   _______   ______________, 2015
Suite 203 of Building 8   _______   ______________, 2015
3rd Floor of Building 8 (except for Suites 301,        
302, 305, 311, 312)   _______   ______________, 2015
Suite 302 of Building 8   _______   ______________, 2015
Suite 305 of Building 8   _______   ______________, 2015
Suites 301, 311 and 312 of Building 8        
or Alternate Space   _______   ______________, 2015
Suite 301 of Building 10   _______   ______________, 2015

 

2.          The Expiration Date is January 31, 2028.

 

3.          The schedule of Base Rental is:

 

Dates   Ann. Rate/RSF   Monthly Installment  
           
__/__/__ - __/__/__   $____________     $________________*  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  

 

 
 

 

__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  
__/__/__ - __/__/__   $____________   $________________  

 

*Subject to the 12-full calendar month base rental abatement set forth in the Amendment.

 

4.          Tenant has the right to use ____ parking spaces associated with the Expansion Premises. Of which, _____ are located in the covered portion of the parking garage adjacent to Building 8, _____ are uncovered parking spaces in the parking lot associated with Building 8 and ____ are located at ____________________________________.

 

5.          All alterations and improvements required to be performed by Landlord pursuant to the terms of the Amendment to prepare the Expansion Premises for Tenant's initial occupancy have been satisfactorily completed. There are no offsets or credits against Rent or other amounts owed by Tenant to Landlord, except: ____________________________________________________. As of the Effective Date, Landlord has fulfilled all of its obligations under the Lease, as amended. The Lease, as amended, is in full force and effect and has not been modified, altered, or amended. There are no defaults by Landlord.

 

  TENANT:
  NCL (BAHAMAS) LTD.,
  a Bermuda company, d/b/a Norwegian Cruise Line
   
   
  By:  
  Name:  
  Title:  

 

2
 

 

EXHIBIT D

 

1.Carnival Cruise Lines;
2.Royal Caribbean International;
3.MSC Cruises;
4.Viking Cruises;
5.Virgin Cruises or any cruise line owned or operated by the Virgin Group;
6.Disney Cruise Line; and
7.Any parent, affiliates, subsidiaries, successors, or brands of any of those listed in items 1-6 above.

 

 

 

Exhibit 10.4

 

[*]: 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. 4

TO THE SHIPBUILDING CONTRACT

HULL NO. [*]

DATED [*]

 

 

between

 

 

MEYER WERFT GMBH & CO. KG, 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

 

[*], 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 dated [*] in relation to Hull No. [*] - as amended - made between the Builder, the Buyer and NCLC (the “Contract”), the Builder agreed to design, build, complete and sell to the Buyer a passenger cruise ship and the Buyer agreed to purchase and accept delivery of the same, all in accordance with the terms and conditions of the Contract.

 

Whereas, the parties have agreed upon the modification of Hull No. [*] to a ship which shall be operated [*]. Furthermore the parties have agreed that this modification shall be conducted and documented - in addition to the Addendum No. 3 to the Contract - by way of an agreement on modification (the “[*] AOM”).

 

Whereas, by way of an agreement dated 22 May 2014 (the “Agreement”) the parties have agreed upon certain terms and conditions regarding the aforementioned [*] AOM. These terms and conditions shall herewith partially be amended as the parties have agreed upon a different technical solution than previously envisaged within the Agreement.

 

 

1. Article 1 Clause 2 “Description of the Ship” shall be amended as follows:

 

a.Dimensions

 

Length overall: about [*] metres

Length between perpendiculars: about [*] metres

 

 

 
 

 

b.Deadweight

 

The guaranteed deadweight at a design draft of [*] metres will be [*] 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.

 

c.Life saving equipment

 

Total number of persons on board for the purposes of long international voyages: [*].

 

2.Article 6, Clause 2.6

 

The 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.

 

3.Article 6, Clause 2.7

 

If 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.

 

4.For the avoidance of doubt, the Buyer and NCLC herewith agree that the AoM 01 to AoM 03, AoM 05-13, AoM 15-18, AoM 20-22, AoM 24-25, AoM 27, AoM 29, CR&E 30-33, CR&E 35-38, CR&E 40 in each case mentioned in Clause G.l.l of the Specification are currently only part of the Specification in technical respects but not in commercial respects. Hence Article 3 of the Contract finds nevertheless application for these items so that for these items the total sum shall be paid with the delivery installment (i.e. balance of the Contract Price) due and payable under and in accordance with the Contract. AoM 10, 21 and 22 will be considered in the cost complexity of architects phase 4 and 5 (cf. Appendix 7 of the Specification) and removals / reductions of complexity will be reasonably credited by the Builder to the Buyer with the delivery installment (i.e. balance of the Contract Price).

 

5.This Addendum No. 4 will be treated as having been signed by the parties hereto at the time and on the date when each party has signed and initialled a complete, legible and identical counterpart of this Addendum No. 4 and exchanged the same by e-mail or fax with the other parties. Thereafter for record purposes only three identical original counterparts of this Addendum No. 4 shall be signed and initialled by each of the parties after which one original counterpart will be retained by the Builder, one will be retained by the Buyer and the other will be retained by NCLC.

 

2
 

 

 

6.Words and expressions defined in the Contract shall have the same meanings when used herein.

 

7.Except as set forth in this Addendum No. 4, the Contract shall remain unchanged and this Addendum No. 4 shall be treated as an integral part of the Contract.

 

 

IN WITNESS WHEREOF, the Builder, the Buyer and NCLC have duly executed this Addendum No. 4.

 

 

 

/s/ Bernard Meyer

 

For and on behalf of Meyer Werft GmbH & Co. KG

30 January 2015

 

 

 

/s/ Wendy Beck

 

For and on behalf of [*]

28 January 2015

 

 

 

/s/ Wendy Beck

 

For and on behalf of NCL Corporation Ltd.

28 January 2015

 

 

3

  

Exhibit 31.1

CERTIFICATION

 

I, Frank J. Del Rio, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Norwegian Cruise Line Holdings Ltd.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

  /s/ Frank J. Del Rio
Dated: May 8, 2015 Name: Frank J. Del Rio
  Title: President and Chief Executive Officer

 

 

 

Exhibit 31.2

CERTIFICATION

 

I, Wendy A. Beck, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Norwegian Cruise Line Holdings Ltd.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

  /s/ Wendy A. Beck
Dated: May 8, 2015 Name: Wendy A. Beck
  Title:  Executive Vice President and Chief Financial Officer

 

 

 

Exhibit 32.1

 

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL

OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of Frank J. Del Rio, the President and Chief Executive Officer, and Wendy A. Beck, the Executive Vice President and Chief Financial Officer, of Norwegian Cruise Line Holdings Ltd. (the "Company"), does hereby certify, that, to such officer’s knowledge:

 

The Quarterly Report on Form 10-Q of the Company, for the quarter ended March 31, 2015 (the “Form 10-Q”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 8, 2015 

       
  By: /s/ Frank J. Del Rio
  Name: Frank J. Del Rio
  Title:    President and Chief Executive Officer
     
  By: /s/ Wendy A. Beck
  Name: Wendy A. Beck
  Title:    Executive Vice President and Chief Financial Officer