Serious concerns about the future well-being of Premier Cruises are being raised by the financial community in the wake of the cruise line's significantly worse-than-expected financial results - losses of $18.3 million in the fourth quarter of 1997, $29 million for fiscal year 1997 overall, and $21.3 million for the first quarter of 1998 alone.

Just four months after Premier's $160 million bond offering, which served to refinance the company's debt and secure a $15 million credit facility through lender SE Banken (SEB), Premier's liquidity was down to $5.6 million of cash, with $5 million left in the SEE facility. Already, the company found itself seeking an additional $20 million in new equity. 

The current situation compelled a swift rearrangement both of Premier's board and its executive ranks. At the same time, it caused a downgrading of Premier's senior notes, with Moody's Investors Service cutting Premier's rating from 83 to Caa2 (a rating given to bonds "of poor quality" in "clear danger of default").

The value of Premier's bonds has plunged significantly since their opening at 97.07 of par, by a factor of almost 30 percent. At press time, the bonds were being offered for just 76 percent of par, with a price of 72 bid, according to market sources.

Management Shuffle

The mid-May management transition included the replacement of President and CEO Larry Magnan with the past president of Color Line, Jon Erik Nygaard; the replacement of CFO Einar Gruner-Hegge by Daniel Huwel; the replacement of board chairman Isaac Kier by board director Henrik Von Platen; and the overall cutting down of the board to a three-member team: Von Platen, Premier founder Kristian Stensby, and Norwegian Vidar Lyhus - the man who holds the controlling interest in Premier's stock.

There are two markedly different stories behind this management shuffling. The public relations line is that Magnan left for "personal reasons" and the management transition is indicative of "stage two of Premier's growth... the first phase involved consolidation - that's over; for the second phase the board decided to bring in executives with more experience in internal operations."

But bondholders listening in on a May 26 conference call heard nothing of "personal reasons" or natural shifts between company stages. During the call, the new chairman Von Platen explained, "Four weeks ago, we became aware of significant negative variations in the fourth quarter of 1997 and first quarter of 1998. We spoke to our shareholders and decided to move very forcibly to mitigate developments. The first thing we looked at was the existing management, and we decided we had to remove the CEO and acting CFO."

Nygaard maintained that the "classic ship" idea behind Premier was sound, but the execution of that idea during the past several months has been "bad -­ that's the only word that can be used."

He said past management had been "totally lacking in focus" and that they had "totally underestimated" the task of merging systems of the various lines into the new Premier. He further noted, "There is a fine line between 'classic' vessels and 'old' vessels - that is the challenge for this company."

Financial Results

New CFO Huwel then outlined specific figures versus projections. For fourth-quarter 1997: net revenues: $37.6 million (projected: 41.1 million); total EBITDA: -7.4 million (projected $1.1 million); net income loss: $18.3 million (projected $8.4 million).

For fiscal year 1997: net revenues: $172.4 million, ship operating expenses: $116.6 million; shoreside expenditures: $52.4 million; EBITDA: $3.3 million; depreciation: $14.4 million; other net: $7.4 million; interest expenses: $10.6 million; for a net income loss of $29 million.

For first-quarter 1998: net revenues: $51.4 million (projected $57.8 million); ship operating expenses: $35.5 million ($35.3 projected); shoreside expenses: $15.2 million ($13.9 million projected); $5.4 million in depreciation; $9.6 million other net; $7 million interest expenses; for a net loss of $21.3 million ($10 million worse than projected). In cash flow there was a net loss of $21.4 million, for net cash flow of $5 .6 million.

For first-quarter 1998, operating profits and occupancies by ship: for Ocean Breeze, no operating profit on net revenues of $5.5 million, occupancy not provided; Seabreeze, operating profit of $2.9 million on net revenues of $8.3 million, occupancy I 02 percent; Island Breeze, operating profit of $700,000 on net revenues of $5.8 million, occupancy not provided; Oceanic, $7 .5 million operating profit on $15 .3 million in revenues, 121 percent occupancy ("Thank God for the Oceanic," remarked Nygaard); Seawind Crown, $2.8 million in operating profit on $6.7 million in revenues, 74 percent occupancy; and Rembrandt, $2 million operating profit on $9.8 million in revenues, 90.9 percent occupancy; making for an overall operating profit of $15.9 million (versus $22.5 million projected) and overall occupancy of 90 percent (versus 91.6 percent projected).

Of the various shortfalls versus projections in the past two quarters, Nygaard stressed that at least the new management was aware of exactly what the problems were, and how to fix them. Nygaard and Huwel ran down a laundry list of problems which were behind the recent losses: first, there was a misunderstanding with crew who found out there was no tipping on the Rembrandt's Brazil cruises, causing them to quit.

The replacement crew cost for Premier: $300,000.

Other items included a canceled European charter of the Rembrandt (cost: $700,000); an accounting mistake ($600,000); a systems problem which caused Premier to lose track of its own air costs (more than $2 million); the bankruptcy of Air Aruba, which carried Seawind Crown passengers ($2.4 million); and a boiler problem on the Seawind Crown necessitating 40 cabins be filled with repairman not passengers.

Expenses on the near horizon include a $1 million replacement job involving the Rembrandt's boiler system in the next four or five months, a $3 million drydocking of the Seabreeze in September; and the first semi-annual bond payment, for $8.8 million, due Sept. 15.

Fixing Premier

Nygaard proposed the following strategies to get Premier back on track:

Cost Reductions. "I have introduced a management freeze of all expenses," he said. "We have freezed hiring. We have sent out to every manager new targets to reduce costs by 20 percent for the rest of the year. We have described how many 'heads' we think should be allowed to work in the company." In shoreside expenses, Nygaard is targeting a $5 million reduction for the remainder of the year, yet he noted, "Cost reduction is extremely important, but that is the easiest part."

• Revenue Enhancement. Each gift shop, bar, etc. on board each ship will now have a target for revenue, explained Nygaard. On the ticket side, said Nygaard, "We market classic ships but we sell them too cheap." He speculates on the possibility of increasing prices. And he also believes that Premier could save $750,000 during the rest of the year by tweaking itineraries, spending slightly less time in port, renegotiating costs, perhaps skipping one harbor, etc. Major itinerary changes will not come until 1999, although Nygaard has decided to change the mix aboard this winter's Island Breeze season in the Canaries - formerly it was to be filled 50 percent by Americans, now it will be 100 percent Europeans.

Management of information systems. "We are totally loaded with information, but with a total lack of systemized management of this information," said Nygaard.

In conclusion, said Nygaard, "Five months of this year are gone, but we are 100 percent dedicated to making the utmost of the last seven. There are a lot of challenges," he said, noting that in the past few months Premier has made "tons of mistakes."