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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
STEINER LEISURE LIMITED
(Exact name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER : 0-28972
COMMONWEALTH OF THE BAHAMAS 98-0164731
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
SUITE 104A, SAFFREY SQUARE
NASSAU, THE BAHAMAS NOT APPLICABLE
(Address of principal executive offices) (Zip Code)
(242) 356-0006
(Registrant's telephone number, including area code)
-----------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by checkmark 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. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
Common Shares, par value (U.S.) $.01 16,535,303 shares as of
per share August 12, 1998
STEINER LEISURE LIMITED
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 ............................................. 3
Condensed Consolidated Statements of Operations for the Three
and Six Months ended June 30, 1997 and June 30, 1998........... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and June 30, 1998................... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds...................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders............ 16
ITEM 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES............................................................. 17
EXHIBIT INDEX.......................................................... 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 1997 1998
------ ------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $12,335,000 $8,996,000
Marketable securities 12,017,000 21,111,000
Accounts receivable 3,980,000 3,735,000
Inventories 4,949,000 5,704,000
Other current assets 958,000 1,827,000
----------- -----------
Total current assets 34,239,000 41,373,000
PROPERTY AND EQUIPMENT, net 2,285,000 3,257,000
INTANGIBLE ASSETS, net - 686,000
OTHER ASSETS 613,000 637,000
----------- -----------
Total assets $37,137,000 $45,953,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,901,000 $ 1,921,000
Accrued expenses 5,941,000 4,654,000
Current portion of capital lease obligations 68,000 61,000
Income taxes payable 685,000 940,000
----------- -----------
Total current liabilities 8,595,000 7,576,000
----------- -----------
CAPITAL LEASE OBLIGATIONS, net of current portion 29,000 1,000
----------- -----------
MINORITY INTEREST - 15,000
SHAREHOLDERS' EQUITY:
Preferred shares, $.01 par value; 10,000,000
shares authorized, none issued and outstanding - -
Common shares, $.01 par value; 20,000,000
shares authorized, and 16,239,000 shares in
1997 and 16,535,269 shares in 1998,
issued and outstanding 162,000 165,000
Additional paid-in capital 10,675,000 12,368,000
Accumulated other comprehensive income 171,000 243,000
Retained earnings 17,505,000 25,585,000
----------- -----------
Total shareholders' equity 28,513,000 38,361,000
----------- -----------
Total liabilities and shareholders' equity $37,137,000 $45,953,000
=========== ===========
The accompanying notes to condensed consolidated financial
statements are an integral part of these balance sheets.
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
REVENUES:
Services $11,805,000 $14,462,000 $23,637,000 $28,197,000
Products 8,275,000 9,873,000 16,103,000 19,073,000
----------- ----------- ----------- -----------
Total revenues 20,080,000 24,335,000 39,740,000 47,270,000
----------- ----------- ----------- -----------
COST OF SALES:
Cost of services 9,354,000 11,161,000 18,633,000 21,824,000
Cost of products 5,556,000 6,674,000 10,964,000 12,923,000
----------- ----------- ----------- -----------
Total cost of sales 14,910,000 17,835,000 29,597,000 34,747,000
----------- ----------- ----------- -----------
Gross profit 5,170,000 6,500,000 10,143,000 12,523,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Administrative 928,000 1,174,000 1,839,000 2,249,000
Salary and payroll taxes 1,078,000 1,234,000 2,159,000 2,462,000
Amortization of intangibles 469,000 - 1,089,000 -
----------- ----------- ----------- -----------
Total operating expenses 2,475,000 2,408,000 5,087,000 4,711,000
----------- ----------- ----------- -----------
Income from operations 2,695,000 4,092,000 5,056,000 7,812,000
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 201,000 424,000 362,000 756,000
Interest expense (4,000) (4,000) (8,000) (7,000)
----------- ----------- ----------- -----------
Total other income (expense) 197,000 420,000 354,000 749,000
----------- ----------- ----------- -----------
Income before provision for
income taxes 2,892,000 4,512,000 5,410,000 8,561,000
PROVISION FOR INCOME TAXES: 250,000 268,000 472,000 481,000
----------- ----------- ----------- -----------
Net income $ 2,642,000 $ 4,244,000 $ 4,938,000 $ 8,080,000
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.16 $ 0.26 $ 0.30 $ 0.49
=========== =========== =========== ===========
Diluted $ 0.16 $ 0.25 $ 0.30 $ 0.47
=========== =========== =========== ===========
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
1997 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,938,000 $ 8,080,000
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 1,434,000 443,000
Share options issued to nonemployees 7,000 -
(Increase) decrease in-
Accounts receivable 127,000 270,000
Inventories 371,000 (727,000)
Other current assets (132,000) (861,000)
Other assets (356,000) (32,000)
Increase (decrease) in-
Accounts payable (555,000) 6,000
Accrued expenses 443,000 (1,291,000)
Income taxes payable (3,156,000) 242,000
Minority interest - 15,000
----------- -----------
Net cash provided by operating activities 3,121,000 6,145,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (6,649,000) (9,082,000)
Advances on construction costs - (1,000,000)
Capital expenditures (401,000) (395,000)
Acquisition of franchise rights - (692,000)
----------- -----------
Net cash used in investing activities (7,050,000) (11,169,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (39,000) (36,000)
Payments on long-term debt (217,000) -
Net proceeds from stock option exercise - 1,696,000
----------- -----------
Net cash (used in) provided by
financing activities (256,000) 1,660,000
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,000) 25,000
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (4,189,000) (3,339,000)
CASH AND CASH EQUIVALENTS, beginning of period 13,625,000 12,335,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 9,436,000 $ 8,996,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 8,000 $ 7,000
=========== ===========
Income taxes $ 3,629,000 $ 474,000
=========== ===========
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION OF INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS:
The unaudited condensed consolidated statements of operations for the three and
six months ended June 30, 1997 and 1998 reflect, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
fairly present the results of operations for the interim periods. The results of
operations for any interim period are not necessarily indicative of results for
the full year.
The year-end balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. The unaudited interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
(2) ORGANIZATION:
Steiner Leisure Limited (including its subsidiaries where the context requires,
the "Company") and subsidiaries provide spa services and skin and hair care
products to passengers on board cruise ships worldwide. The Company,
incorporated in The Bahamas, commenced operations effective November 1995 with
the contributions of substantially all of the assets and certain of the
liabilities of the Maritime Division (the "Maritime Division") of Steiner Group
Limited, now known as STGR Limited ("Steiner Group"), a U.K. company and an
affiliate of the Company, and all of the outstanding common stock of Coiffeur
Transocean (Overseas), Inc. ("CTO"), a Florida corporation and a wholly owned
subsidiary of Steiner Group. The contributions of the net assets of the Maritime
Division and CTO were recorded at historical cost in a manner similar to a
pooling of interests.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) MARKETABLE SECURITIES-
Marketable securities consist of investment grade commercial paper. The Company
accounts for marketable securities in accordance with Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" and, accordingly, all such instruments are classified as
"available for sale" securities which are reported at fair value, with
unrealized gains and losses reported as a separate component of shareholders'
equity.
(B) AMORTIZATION-
Intangible assets were amortized on a straight-line basis over a 3-year period
ended June 1, 1997. This period represented the approximate remaining life of
the acquired intangible assets of CTO, its concession agreements with cruise
lines.
Intangible assets as of June 30, 1998 represent the cost of the intellectual
property acquired by the Company in connection with its investment in EBSC
International Limited, a Bahamian Company ("EBSC"). Amortization of these
intangible assets commenced in April 1998, the month of the effective date of
the first area development agreement entered into by EBSC (see Note 4).
(C) MINORITY INTEREST-
Minority interest represents the minority shareholders' proportional share of
the net assets of EBSC (see Note 4).
(D) INCOME TAXES-
The Company files separate tax returns for its domestic subsidiaries. In
addition, the Company's foreign subsidiaries file income tax returns in their
respective countries of incorporation, where required. The Company follows
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS No. 109 utilizes the liability method and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of enacted tax laws. SFAS No. 109 permits the recognition of
deferred tax assets. Deferred income tax provisions and benefits are based on
the changes to the asset or liability from period to period.
In November 1996, the Company liquidated CTO. As a result, CTO's functions were
assumed by the Company and its cruise line agreements were assigned to the
Company. The liquidation of CTO was a taxable transaction for income tax
purposes. CTO was treated as if it had sold all of its assets at fair value on
the date of distribution of these assets to the Company. Based on the value of
the assets of CTO as determined by an independent appraiser, CTO's income tax
liability resulting from the liquidation was approximately $3.2 million. The
entire $3.2 million estimated tax liability was paid during the first quarter of
1997.
(E) TRANSLATION OF FOREIGN CURRENCIES-
Assets and liabilities of foreign subsidiaries are translated at the rate of
exchange in effect at the balance sheet date; income and expenses are translated
at the average rates of exchange prevailing during the year. The related
translation adjustments are reflected in the accumulated other comprehensive
income section of the consolidated balance sheets. Foreign currency gains and
losses resulting from transactions, including intercompany transactions, are
included in results of operations.
(F) EARNINGS PER SHARE-
Basic earnings per share is computed by dividing the net income available to
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per share
except that the denominator includes dilutive common stock equivalents such as
stock options and warrants. The computation of weighted average common and
common equivalent shares used in the calculation of basic and diluted earnings
per share is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
Weighted average shares outstanding
used in calculating basic earnings
per share 16,200,000 16,507,000 16,200,000 16,400,000
Dilutive common share equivalents 411,000 590,000 437,000 632,000
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares used in calculating
diluted earnings per share 16,611,000 17,097,000 16,637,000 17,032,000
========== ========== ========== ==========
Options and warrants outstanding which
are not included in the calculation
of diluted earnings per share
because their impact is antidilutive -- 195,000 -- 195,000
========== ========== ========== ==========
(G) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS-
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 establishes criteria for determining which
costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. SOP 98-1 is effective for
all transactions entered into in fiscal years beginning after December 15, 1998.
Management does not believe that the adoption of SOP 98-1 will have a material
effect on the Company's financial position or results of operations.
In April 1998, the ACSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 establishes standards for the reporting and disclosure of
start-up costs, including organization costs. SOP 98-5 is effective for
financial statements issued after December 15, 1998. Management does not believe
that the adoption of SOP 98-5 will have a material effect on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual and interim financial reports to shareholders. It also
establishes standards for related disclosures about an enterprise's business
segments, products, services, geographic areas, and major customers. SFAS No.
131, which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 requires that a public company report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. SFAS No. 131 is effective as of December 31, 1998.
(4) ACQUISITIONS:
In January 1998, the Company, through EBSC, a Bahamian international business
company ("IBC"), owned 85% by the Company, acquired for $675,000 the
intellectual property (the "BSC Rights") relating to the Beautiful Skin Centres,
a group of Hong Kong day spas ("BSC"). The Company proposes to franchise the BSC
concept, initially in Hong Kong and, possibly, in other locations in Asia, and,
subsequently, elsewhere that the Company deems appropriate under the name
"Elemis Beautiful Skin Centre" or similar names. The initial franchise area
development agreement for the operation of Elemis Beautiful Skin Centres in Hong
Kong is with the seller of the BSC Rights, which owns the remaining 15% of EBSC.
(5) ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31, June 30,
1997 1998
----------- -----------
(Unaudited)
Operative commissions $1,059,000 $ 927,000
Guaranteed minimum rentals 2,235,000 1,219,000
Bonuses 769,000 565,000
Staff shipboard accommodations 227,000 278,000
Other 1,651,000 1,666,000
---------- ----------
$5,941,000 $4,655,000
========== ==========
(6) COMPREHENSIVE INCOME:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and
disclosure of comprehensive income and its components in financial
statements. The components of the Company's comprehensive income are as
follows:
Six Months Ended
June 30,
-------------------------
1997 1998
----------- -----------
Net income $ 4,938,000 $ 8,080,000
Unrealized gain on marketable securities,
net of income taxes - 12,000
Foreign currency translation adjustments,
net of income taxes (50,000) 60,000
----------- -----------
Comprehensive income $ 4,888,000 $ 8,152,000
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Steiner Leisure Limited is the leading provider of spa services and skin
and hair care products on board cruise ships worldwide. The Company, through its
predecessors, commenced operations on board cruise ships approximately 35 years
ago. Pursuant to cruise line concession agreements, the Company sells its
services and products to cruise passengers in return for payments to cruise
lines, which payments are based on a percentage of revenues or a minimum annual
rental or a combination of both. Certain cruise line concession agreements
provide for increases in the percentage of services and products revenues
payable as rent payments and/or, as the case may be, the amount of minimum
annual rental payments over the terms of such agreements. Rental payments may
also be increased under new agreements with cruise lines that replace expiring
agreements. In general, the Company has experienced increases in rental payments
upon entering into new agreements with cruise lines.
The Company is a Bahamian IBC. The Bahamas does not tax Bahamian IBCs. The
Company believes that income from its maritime operations will be foreign source
income, which will not be subject to United States or United Kingdom taxation.
More than 84% of the Company's income for the first six months of 1998 is not
subject to United States or United Kingdom income tax. To the extent that the
Company's income from non-maritime operations increases at a rate in excess of
any increase in its maritime-related income, the percentage of the Company's
income subject to tax would increase. A United States subsidiary of the Company
provides administrative services to the maritime operations, and its earnings
from such activities will generally be subject to U.S. federal income tax at
regular corporate rates (generally up to 35%) and is subject to additional state
taxes and may be subject to local income, franchise and other taxes. Earnings
from Steiner Training Limited and Elemis Limited, United Kingdom subsidiaries of
the Company which accounted for a total of 9% of the Company's pre-tax income
for the first six months of 1998, will be subject to U.K. tax rates (generally
up to 33%).
Effective October 24, 1997 and April 28, 1998, the Board of Directors of
the Company approved 3-for-2 share splits, effected as share dividends,
effective for shareholders of record as of October 13, 1997 and April 14, 1998,
respectively (collectively, the "Share Splits"). All per share data and
references to numbers of common shares and the price thereof presented herein
have been, where appropriate, adjusted to give effect to the Share Splits.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of revenues:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1998 1997 1998
---- ---- ---- ----
Revenues:
Services...................... 58.8% 59.4% 59.5% 59.7%
Products...................... 41.2 40.6 40.5 40.3
----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Cost of services.............. 46.6 45.9 46.9 46.2
Cost of products.............. 27.7 27.4 27.6 27.3
----- ----- ----- -----
Total cost of sales......... 74.3 73.3 74.5 73.5
----- ----- ----- -----
Gross profit 25.7 26.7 25.5 26.5
Operating expenses:
Administrative................ 4.6 4.8 4.6 4.8
Salary and payroll taxes...... 5.4 5.1 5.4 5.2
Amortization of intangibles... 2.3 - 2.8 -
----- ----- ----- -----
Total operating expenses.... 12.3 9.9 12.8 10.0
----- ----- ----- -----
Income from operations...... 13.4 16.8 12.7 16.5
Other income..................... 1.0 1.7 0.9 1.6
----- ----- ----- -----
Income before provision for
income taxes................... 14.4 18.5 13.6 18.1
Provision for income taxes....... 1.2 1.1 1.2 1.0
----- ----- ----- -----
Net income....................... 13.2% 17.4% 12.4% 17.1%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased approximately 21.2%, or $4.2 million, to
$24.3 million in the second quarter of 1998 from $20.1 million in the second
quarter of 1997. Of this increase, $2.7 million was attributable to increases in
services provided on cruise ships and $1.6 million was attributable to increases
in sales of products. The increase in revenues for the second quarter of 1998
compared to the second quarter of 1997 was primarily attributable to an increase
of seven in the average number of ships in service with enhanced large spa
facilities and an increase of two in the average number of non-spa ships in
service over the second quarter of 1997. The Company had 830 shipboard staff
members in service on average in the second quarter of 1998 compared to 742
shipboard staff members in service on average in the second quarter of 1997.
Revenues per staff per day increased by 8.2% in the second quarter of 1998
compared to the second quarter of 1997.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.2% in the second quarter of 1998 from 79.2% in the second
quarter of 1997. This decrease was due to increases in productivity of onboard
staff during the second quarter of 1998 compared to the second quarter of 1997
and increased revenues on ships where the Company is subject to minimum annual
rental payments. This decrease was partially offset by increases in rent
allocable to services on cruise ships covered by an agreement which was renewed
in 1997 and became effective in the first quarter of 1998.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
increased to 67.6% in the second quarter of 1998 from 67.1% in the second
quarter of 1997. This increase was due to increases in rent allocable to
products sales on cruise ships covered by an agreement which was renewed in 1997
and became effective in the first quarter of 1998, partially offset by increases
in productivity of onboard staff during the second quarter of 1998 compared to
the second quarter of 1997, as well as increased revenues on ships where the
Company is subject to minimum annual rental payments.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.9% in the second quarter of 1998 from 12.3% in the second quarter
of 1997 as a result of the decrease in goodwill amortization as a result of the
related intangible assets becoming fully amortized during the second quarter of
1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to an
overall effective rate of 5.9% for the second quarter of 1998 from an overall
effective rate of 8.6% for the second quarter of 1997 is primarily due to an
increase in the proportion of the Company's income generated by subsidiaries
located in non-taxable jurisdictions. Without the amortization of intangibles,
the overall effective rate for the three months ended June 30, 1998 would have
been 5.9% compared to 7.4% for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased approximately 18.9%, or $7.6 million, to
$47.3 million for the six months ended June 30, 1998 from $39.7 million for the
six months ended June 30, 1997. Of this increase, $4.6 million was attributable
to increases in services provided on cruise ships and $3.0 million was
attributable to increases in sales of products. The increase in revenues for the
first half of 1998 compared to the same period in the prior year was primarily
attributable to an increase of seven in the average number of ships in service
with enhanced large spa facilities, and an increase of two in the average of
non-spa ships in service for the same period. The Company had 814 shipboard
staff members in service on average during the six months ended June 30, 1998
compared to 736 shipboard staff members in service on average during the six
months ended June 30, 1997. Revenues per staff per day increased by 7.5% in the
first half of 1998 compared to the comparable period of 1997.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.4% in the first six months of 1998 from 78.8% for the first six
months of 1997. This decrease was due to an increase in productivity of onboard
staff during the first half of 1998 compared to the same period in prior year.
This decrease was partially offset by increases in rent allocable to services on
cruise ships covered by an agreement which was renewed in 1997 and became
effective in the first quarter of 1998.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
decreased to 67.8% in the first six months of 1998 from 68.1% for the first six
months of 1997. This decrease was primarily due to increases in productivity of
onboard staff, a product price increase implemented in the first quarter of
1998, as well as increased revenues on ships where the Company is subject to
minimum annual rental payments. This decrease was partially offset by an
increase in rent allocable to products sales on cruise ships covered by an
agreement which was renewed in 1997 and became effective in the first quarter of
1998.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 10.0% for the first six months of 1998 from 12.8% for the first six
months of 1997 as a result of the decrease in goodwill amortization as a result
of the related intangible assets becoming fully amortized during the second
quarter of 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to an
overall effective rate of 5.6% for the first six months of 1998 from an overall
effective rate of 8.7% for the first six months of 1997 due to an increase in
the proportion of the Company's income generated by subsidiaries located in
non-taxable jurisdictions. Without the amortization of intangibles and interest,
the overall effective rate for the six months ended June 30, 1998 would have
been 5.6% compared to 7.3% for the six months ended June 30, 1997.
SEASONALITY
Although certain cruise lines have experienced moderate seasonality, the
Company believes that the introduction of cruise ships into service throughout a
year has mitigated the effect of seasonality on the Company's results of
operations. In addition, decreased passenger loads during slower months for the
cruise industry has not had a significant impact on the Company's revenues.
However, due to the Company's dependence on the cruise industry, the Company's
revenues may in the future be affected by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
The business of the Company historically has been operated with cash
generated from operations, and borrowed funds have been utilized only for
acquisitions and limited capital expenditures.
In November 1996, the Company issued 1,863,000 of its common shares
pursuant to the initial public offering of its common shares (the "IPO") (which
also included shares of a selling shareholder), which generated net proceeds of
approximately $9.7 million to the Company. Approximately $3.4 million of the net
proceeds were used to repay the remaining outstanding indebtedness assumed by
the Company in connection with the contribution to the capital of the Company of
the assets of the Maritime Division and the common stock of CTO. During the
first quarter of 1997, approximately $3.2 million of such proceeds were used to
pay the estimated United States federal and state income tax liability incurred
in connection with the liquidation of CTO (the "CTO Tax Payment"). The remaining
net proceeds, in the approximate amount of $3.1 million, are available to be
used for working capital purposes and have been invested in cash equivalents and
high grade commercial paper.
During the first six months of 1998, cash flow from operating activities
was $6.1 million, compared to $3.1 million (reflecting, among other things, the
$3.2 million CTO Tax Payment) for the first six months of 1997. At June 30,
1998, the Company had working capital of approximately $33.8 million compared to
$25.6 million at December 31, 1997.
The Company has agreed to commit a total of $3.0 million to design and
operate a luxury spa facility at the Atlantis resort complex of Sun
International Hotels Limited on Paradise Island in Nassau, The Bahamas. The
above agreement is subject to the terms of a definitive agreement to be executed
by the parties. As of June 30, 1998, the Company has expended $1.0 million as a
deposit on construction costs, which amount represents a portion of the proceeds
from the IPO. The remaining balance of the $3.0 million is anticipated to be
expended during the third and fourth quarters of 1998.
The Company believes that cash generated from operations, together with
the net proceeds received from the IPO, will be sufficient to satisfy its cash
requirements through at least the next twelve months. If the Company were to
engage in any significant acquisition, it may require additional financing from
a third party. The Company currently does not have any agreement with respect to
an acquisition.
INFLATION
The Company does not believe that inflation has had a material adverse
effect on revenues or results of operations. However, public demand for leisure
activities, including cruises, is influenced by general economic conditions,
including inflation. Periods of economic recession or high inflation,
particularly in North America where a number of cruise passengers reside, could
have a material adverse effect on the cruise industry, upon which the Company is
dependent.
YEAR 2000 COMPLIANCE
Certain computer software programs are unable to process two-digit
year-date codes (for example "00") after December 31, 1999. The Company is
currently in the process of updating its computer systems to accommodate the
"year 2000" dating changes necessary to permit correct recording of year dates
for 2000 and later years and believes it will be "year 2000" compliant prior to
the year 2000. The Company does not anticipate that the costs related to
updating or replacing existing computer systems in order to become "year 2000"
compliant will have a material impact on the Company's future results of
operations. The Company is, however, dependent for the recording of its revenues
from operations on the computer systems of its cruise line customers. While the
Company has requested information from such customers with respect to their
"year 2000" compliance status, the Company has not yet received responses
sufficient for it to make a determination as to the overall "year 2000"
compliance status of its cruise line customers. In the event that any of the
Company's significant cruise line customers does not successfully achieve "year
2000" compliance in a timely manner, the Company's business or operations could
be adversely affected.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, the Company may publish
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, the following: the Company's dependence on
cruise line concession agreements of specified terms and that are terminable by
cruise lines with limited or no advance notice under certain circumstances; the
Company's dependence on the cruise industry and its being subject to the risks
of that industry; the Company's obligation to make certain minimum payments to
certain cruise lines irrespective of the revenues received by the Company from
passengers; the Company's dependence on a limited number of cruise lines and on
a single product manufacturer; the Company's dependence for its success on its
ability to recruit and retain qualified personnel; changes in the non-U.S. tax
status of the Company's principal subsidiary; changing competitive conditions;
changes in laws and government regulations applicable to the Company and the
cruise industry; the Company's limited experience in franchise, and other
land-based operations; adverse political and economic developments in the
countries where the Company's land-based operations are conducted; and product
liability or other claims against the Company by customers of the Company's
products or services. The risks to which the Company is subject are more fully
described under "Certain Factors That May Affect Future Operating Results" in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, filed with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 12, 1996, the Company's Registration Statement on Form
F-1 under the Securities Act of 1933, as amended, File No. 333-5266, with
respect to the IPO of its common shares at a price of $5.778 per share was
declared effective by the Securities and Exchange Commission. The IPO
commenced on November 13, 1996. A total of 1,863,000 common shares
(aggregate offering price of $10,764,000) were registered and sold on
behalf of the Company and a total of 9,605,790 common shares (aggregate
offering price of $55,500,120) were registered and sold on behalf of a
selling shareholder. The net proceeds to the Company from the IPO, after
deducting total expenses in the amount of $1,060,000, were approximately
$9,704,000. The IPO terminated, and all of the securities registered in
connection therewith were sold. The managing underwriters of the IPO were
Furman Selz LLC and Raymond James & Associates, Inc.
In connection with the IPO, the Company incurred the following
estimated expenses for the indicated purposes:
Underwriting discounts and
Commissions $ 753,480
Expenses paid to or for
Underwriters $ 2,265
Other expenses $ 304,255
The net proceeds to the Company from the IPO have been applied,
through June 30, 1998, in the following amounts toward the indicated
purposes:
Repayment of indebtedness $3,429,661
Payment of federal and state
estimated tax liability $3,231,132
Temporary investment (commercial
paper, AA+ and AAA rated,
through a commercial bank) $2,043,207
Construction of plant, building and
facilities $1,000,000
The use of proceeds of the IPO described above does not represent a
material change in the use of proceeds described in the prospectus which
formed a part of the Registration Statement.
None of the payments described above, other than those with respect
to repayment of indebtedness, represent direct or indirect payment to
directors, officers, general partners of the issuer or their associates;
persons owning ten percent or more of any class of equity securities of
the issuer; or affiliates of the issuer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company (the "Annual
Meeting") was held on June 26, 1998. At the Annual Meeting, Charles D.
Finkelstein and Jonathan D. Mariner were elected as directors based on
the results of the vote indicated below, and the terms of office of the
following directors continued after the Annual Meeting: Clive E.
Warshaw, Leonard I. Fluxman, Steven J. Preston and Michele Steiner
Warshaw. The votes cast with respect to the election of Messrs.
Finkelstein and Mariner were as follows: 13,570,199 shares were voted
for Mr. Finkelstein and 13,569,749 were voted for Mr. Mariner, and
3,968 and 4,418 shares were withheld from such votes, respectively.
In addition, at the Annual Meeting, a proposal to ratify the
appointment of Arthur Andersen LLP as independent auditors for the Company
for the fiscal year ended December 31, 1998 was submitted to the
shareholders with the following results: 13,558,199 shares were voted in
favor of that proposal, 5,048 shares were voted against that proposal and
10,950 shares abstained from such vote.
The aforesaid numbers of shares have been adjusted to reflect a
3-for-2 split of the Company's common shares effective April 28, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed below have been filed as part of this Quarterly Report
on Form 10-Q.
10.3(b) Second Amendment to Employment Agreement between Steiner
Leisure Limited and Michele Steiner Warshaw dated as of April
20, 1998.1
10.5(b) Second Amendment to Service Agreement between Elemis
Limited and Sean C. Harrington dated as of July 8, 1998. 1
10.7 Amended and Restated Non-Employee Directors' Share Option
Plan. 1
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1998.
- --------
1 Management contract or compensatory plan or agreement.
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.
Dated: August 13, 1998
STEINER LEISURE LIMITED
-----------------------------------
(Registrant)
/S/ CLIVE E. WARSHAW
-----------------------------------
Clive E. Warshaw
Chairman of the Board and Chief
Executive Officer
/S/ LEONARD I. FLUXMAN
-----------------------------------
Leonard I. Fluxman
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.3(b) Second Amendment to Employment
Agreement between Steiner
Leisure Limited and Michele
Steiner Warshaw dated as of
April 20, 1998
10.5(b) Second Amendment to Service
Agreement between Elemis Limited
and Sean C. Harrington dated as
of July 8, 1998
10.7 Amended and Restated Non-Employee
Directors' Share Option Plan
27 Financial Data Schedule