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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 September 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 (I.R.S. Employer
incorporation 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 check 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 shares, as of the latest practicable date.
CLASS OUTSTANDING
Common Shares, par value (U.S.) $.01 16,535,703 shares as of
per share November 11, 1998
STEINER LEISURE LIMITED
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
1997 and September 30, 1998 (Unaudited)...................... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 1997 (Unaudited)
and September 30, 1998 (Unaudited)........................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 (Unaudited) and September
30, 1998 (Unaudited)......................................... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.................... 15
ITEM 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES ........................................................... 16
EXHIBIT INDEX.......................................................... 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 1997 1998
------
----------------- -----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 12,335,000 $ 10,362,000
Marketable securities 12,017,000 25,344,000
Accounts receivable 3,980,000 3,969,000
Inventories 4,949,000 6,666,000
Other current assets 958,000 1,711,000
--------------- ---------------
Total current assets 34,239,000 48,052,000
--------------- ---------------
PROPERTY AND EQUIPMENT, net 2,285,000 3,239,000
--------------- ---------------
OTHER ASSETS:
Trademarks and product formulations, net 190,000 293,000
Franchise rights, net 31,000 729,000
Other 392,000 252,000
--------------- ---------------
Total other assets 613,000 1,274,000
--------------- ---------------
Total assets $ 37,137,000 $ 52,565,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,901,000 $ 2,654,000
Accrued expenses 5,941,000 5,314,000
Current portion of capital lease obligations 68,000 48,000
Income taxes payable 685,000 664,000
--------------- ---------------
Total current liabilities 8,595,000 8,680,000
--------------- ---------------
CAPITAL LEASE OBLIGATIONS, net of current portion 29,000 -
- --------------- ---------------
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 16,536,000 shares in 1998,
issued and outstanding 162,000 165,000
Additional paid-in capital 10,675,000 12,372,000
Accumulated other comprehensive income 171,000 1,035,000
Retained earnings 17,505,000 30,298,000
--------------- ---------------
Total shareholders' equity 28,513,000 43,870,000
--------------- ---------------
Total liabilities and shareholders' equity $ 37,137,000 $ 52,565,000
=============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
3
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1998 1997 1998
-------------- --------------- -------------- --------------
REVENUES:
Services $ 13,307,000 $ 15,658,000 $ 36,944,000 $ 43,855,000
Products 8,826,000 11,285,000 24,929,000 30,358,000
------------- ------------- ------------- -------------
Total revenues 22,133,000 26,943,000 61,873,000 74,213,000
------------- ------------- ------------- -------------
COST OF SALES:
Cost of services 10,342,000 12,079,000 28,975,000 33,903,000
Cost of products 6,045,000 7,615,000 17,009,000 20,538,000
------------- ------------- ------------- -------------
Total cost of sales 16,387,000 19,694,000 45,984,000 54,441,000
------------- ------------- ------------- -------------
Gross profit 5,746,000 7,249,000 15,889,000 19,772,000
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Administrative 989,000 1,198,000 2,828,000 3,438,000
Salary and payroll taxes 1,102,000 1,260,000 3,261,000 3,722,000
Amortization of intangibles - 13,000 1,089,000 22,000
-------------- ------------- ------------- -------------
Total operating expenses 2,091,000 2,471,000 7,178,000 7,182,000
------------- ------------- ------------- -------------
Income from operations 3,655,000 4,778,000 8,711,000 12,590,000
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 246,000 453,000 608,000 1,209,000
Interest expense (4,000) (1,000) (12,000) (8,000)
------------- ------------- ------------- -------------
Total other income (expense) 242,000 452,000 596,000 1,201,000
------------- ------------- ------------- -------------
Income before provision for income taxes 3,897,000 5,230,000 9,307,000 13,791,000
PROVISION FOR INCOME TAXES 419,000 517,000 891,000 998,000
------------- ------------- ------------- -------------
Net income $ 3,478,000 $ 4,713,000 $ 8,416,000 $ 12,793,000
============= ============= ============= =============
EARNINGS PER COMMON SHARE:
Basic $ 0.21 $ 0.29 $ 0.52 $ 0.78
============= ============= ============= =============
Diluted $ 0.21 $ 0.28 $ 0.50 $ 0.75
============= ============= ============= =============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------------------
1997 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,416,000 $ 12,793,000
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 1,617,000 685,000
Share options issued to nonemployees 7,000 -
(Increase) decrease in-
Accounts receivable 82,000 55,000
Inventories 498,000 (1,647,000)
Other current assets (308,000) (733,000)
Other assets (299,000) 140,000
Increase (decrease) in-
Accounts payable (392,000) 703,000
Accrued expenses 1,458,000 (638,000)
Income taxes payable (3,690,000) (35,000)
Minority interest - 15,000
---------------- ---------------
Net cash provided by operating activities 7,389,000 11,338,000
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (10,371,000) (12,600,000)
Advances on construction costs - (1,218,000)
Capital expenditures (552,000) (384,000)
Acquisition of trademarks, product formulations and franchise rights - (823,000)
---------------- ----------------
Net cash used in investing activities (10,923,000) (15,025,000)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (63,000) (50,000)
Payments on long-term debt (217,000) -
Net proceeds from stock option exercises - 1,700,000
---------------- ---------------
Net cash (used in) provided by financing activities (280,000) 1,650,000
---------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (38,000) 64,000
---------------- ---------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (3,852,000) (1,973,000)
CASH AND CASH EQUIVALENTS, beginning of period 13,625,000 12,335,000
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 9,773,000 $ 10,362,000
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 12,000 $ 8,000
=============== ===============
Income taxes $ 4,579,000 $ 1,039,000
=============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
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
nine months ended September 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.
Other assets as of September 30, 1998 include the cost of trademark
registrations and product formulations in connection with the Company's
investment in Elemis Limited, and the intellectual property represented by
franchise rights acquired by the Company in connection with its investment in
EBSC International Limited, a Bahamian Company ("EBSC"). Costs relating to such
trademark registrations, product formulations and franchise rights are amortized
on the straight-line method over the estimated lives of those respective costs
(ranging from 15 to 30 years). Amortization of the franchise rights acquired in
connection with the EBSC investment commenced in April 1998, the month of the
effective date of the first area development agreement entered into by EBSC (see
Note 4).
6
(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 is 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 share equivalents such as
share 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 Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1997 1998 1997 1998
------------- -------------- ------------ -------------
Weighted average shares outstanding used in
calculating basic earnings per share 16,200,000 16,535,000 16,200,000 16,445,000
Dilutive common share equivalents 474,000 523,000 510,000 596,000
------------ ------------ ----------- -----------
Weighted average common and common
equivalent shares used in calculating
diluted earnings per share 16,674,000 17,058,000 16,710,000 17,041,000
============ ============ =========== ===========
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.
7
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, September 30,
1997 1998
--------------- ---------------
(Unaudited)
Operative commissions $ 1,059,000 $ 1,109,000
Guaranteed minimum rentals 2,235,000 1,578,000
Bonuses 769,000 697,000
Staff shipboard accommodations 227,000 298,000
Other 1,651,000 1,632,000
------------- -------------
$ 5,941,000 $ 5,314,000
============= =============
8
(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:
Nine Months Ended
September 30, 1998
----------------------------------
1997 1998
--------------- --------------
Net income $ 8,416,000 $ 12,793,000
Unrealized gain (loss) on marketable
securities, net of income taxes (1,000) 726,000
Foreign currency translation adjustments,
net of income taxes (142,000) 137,000
-------------- -------------
Comprehensive income $ 8,273,000 $ 13,656,000
============= =============
9
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 37 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 78% of the Company's income for the first nine 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 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 15% of the Company's pre-tax income for the first
nine 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 three-for-two share splits of the Company's common
shares, 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.
10
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1998 1997 1998
---- ---- ---- ----
Revenues:
Services................................... 60.1% 58.1% 59.7% 59.1%
Products................................... 39.9 41.9 40.3 40.9
------ ------ ------- ------
Total revenues........................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Cost of services........................... 46.7 44.8 46.8 45.7
Cost of products........................... 27.3 28.3 27.5 27.7
------ ------ ------ ------
Total cost of sales...................... 74.0 73.1 74.3 73.4
------ ------ ------ ------
Gross profit 26.0 26.9 25.7 26.6
Operating expenses:
Administrative............................. 4.5 4.5 4.5 4.6
Salary and payroll taxes................... 5.0 4.7 5.3 5.0
Amortization of intangibles................ - - 1.8 -
------- ------- -------- --------
Total operating expenses................. 9.5 9.2 11.6 9.6
------- ------- -------- --------
Income from operations................... 16.5 17.7 14.1 17.0
Other income.................................... 1.1 1.7 0.9 1.6
------- ------- ------- -------
Income before provision for income taxes........ 17.6 19.4 15.0 18.6
Provision for income taxes...................... 1.9 1.9 1.4 1.3
------- ------- ------- -------
Net income...................................... 15.7% 17.5% 13.6% 17.3%
======= ======== ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues increased approximately 21.7%, or $4.8 million, to
$26.9 million in the third quarter of 1998 from $22.1 million in the third
quarter of 1997. Of this increase, $2.3 million was attributable to increases in
services provided on cruise ships and $2.5 million was attributable to increases
in sales of products. The increase in revenues for the third quarter of 1998
compared to the third quarter of 1997 was primarily attributable to an increase
of six in the average number of ships in service with enhanced large spa
facilities, and an increase of one in the average of non-spa ships in service
for the same period as well as an increase in land based sales of the Company's
"Elemis" product line. The Company had 847 shipboard staff members in service on
average in the third quarter of 1998 compared to 778 shipboard staff members in
service on average in the third quarter of 1997. Revenues per staff per day
increased by 11.4% in the third quarter of 1998 compared to the third quarter of
1997.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.1% in the third quarter of 1998 from 77.7% in the third quarter
of 1997. This decrease was due to an increase 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 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 67.5% in the third quarter of 1998 from 68.5% in the third quarter
of 1997. This decrease was due to increases in productivity of onboard staff
during the third quarter of 1998 compared to the third quarter of 1997, 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 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.
11
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.2% in the third quarter of 1998 from 9.5% in the third quarter of
1997 as a result of the increase in aggregate revenues generated from the
additional ships in service with enhanced large spa facilities during the third
quarter of 1998 and an increase in land based product sales as compared to same
period in 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
an overall effective rate of 9.9% for the third quarter of 1998 from an overall
effective rate of 10.8% for the third quarter of 1997 due to an increase in the
proportion of the Company's income generated by subsidiaries located in
non-taxable jurisdictions. This decrease was partially offset by a one time tax
charge of $237,000 recorded by Elemis Limited resulting from the sale of the
rights to the "Elemis" name and certain other rights to Cosmetics Limited, a
Bahaman subsidiary of the Company (the "Elemis Charge").
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES. Revenues increased approximately 19.9%, or $12.3 million, to
$74.2 million for the nine months ended September 30, 1998 from $61.9 million
for the nine months ended September 30, 1997. Of this increase, $6.9 million was
attributable to increases in services provided on cruise ships and $5.4 million
was attributable to increases in sales of products. The increase in revenues for
the first nine months 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 825
shipboard staff members in service on average during the nine months ended
September 30, 1998 compared to 750 shipboard staff members in service on average
during the nine months ended September 30, 1997. Revenues per staff per day
increased by 8.8% during the first nine months of 1998 compared to the
comparable period of 1997.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.3% in the first nine months of 1998 from 78.4% for the first
nine months of 1997. This decrease was due to an increase in productivity of
onboard staff during the first nine months of 1998 compared to the same period
in 1997. 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 67.7% in the first nine months of 1998 from 68.2% for the first
nine months of 1997. This decrease was due to an increase 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 9.6% for the first nine months of 1998 from 11.6% for the first
nine months of 1997 as a result of the increase in aggregate revenues generated
from the additional ships in service with enhanced large spa facilities during
the first nine months of 1998 compared to the comparable period of 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
an overall effective rate of 7.2% for the first nine months of 1998 from an
overall effective rate of 9.6% for the first nine months of 1997 due to an
increase in the proportion of the Company's income generated by subsidiaries
located in non-taxable jurisdictions. This decrease was partially offset by the
Elemis Charge.
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.
12
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, will be used for
working capital purposes and have been invested in cash equivalents and high
grade commercial paper.
During the first nine months of 1998, cash flow from operating
activities was $11.3 million, compared to $7.4 million (reflecting, among other
things, the $3.2 million CTO Tax Payment) for the first nine months of 1997. At
September 30, 1998, the Company had working capital of approximately $39.4
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 September 30, 1998, the Company has expended $1.2 million
as a deposit on construction costs, of which $1.0 million 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 ("Y2K"). This could
result in system failures or miscalculations leading to disruptions in business
activities and operations (the "Y2K Issue"). The Company's computer systems
consist of its general ledger system, which tracks the Company's accounting and
financial information and is responsible for generating the Company's financial
reports (the "GLS"), and its onboard payroll and personnel tracking system (the
"OPPTS"), which provides human resource support for the Company's maritime
operations. The GLS currently is able to process two-digit year-date codes,
including years commencing with the year 2000 ("Y2K Compliant"). The Company is
currently in the process of updating the OPPTS, not only to assure that it is
Y2K Compliant, but also to enhance the capacity of that system in order to
accommodate future growth of the Company and to add features to assist the
Company in efficiently administering its onboard payroll and personnel
management functions. The Company anticipates that the OPPTS system will be
fully updated by May of 1999.
13
Part of the Company's plan to identify risk areas with regard to the
Y2K Issue and mitigate those risks includes assessing the Y2K compliance of its
major cruise line customers and its major suppliers. With respect to its major
cruise line customers, the Company has sent surveys to determine third party Y2K
preparedness. A number of those surveyed have refused to respond for liability
reasons, while others have failed to respond without providing any reason
therefor. Of the 25 major customers surveyed, five have responded and all five
expect to be Y2K Complaint before January 1, 2000. In the absence of adequate
responses or other Y2K disclosure from the remaining customers surveyed, the
Company is attempting to make its own assessment as to their Y2K readiness. In
the event that any of the Company's major cruise line customers do not
successfully achieve Y2K compliance in a timely manner, the Company's business
or operations could be adversely affected as a result of sales on one or more
cruise ships being limited or precluded. The magnitude of that effect cannot be
described or quantified at this time because of variables such as the type and
importance of customers which have not responded, the unknown level and duration
of noncompliance by such customers (and their customers and suppliers), the
possible effect on the Company's operations, and the Company's ability to
respond to such non-compliance.
While the Company has not yet begun to determine the Y2K status of any
of its major suppliers of products or services, it plans to do so in the near
future. Currently, the most reasonably likely sources of risk to the Company
with respect to such suppliers include the disruption of transportation channels
relevant to the Company's onboard operations, including transportation vendors
(airlines and freight forwarders) as a result of a general failure of support
systems and necessary infrastructure; the disruption of travel agencies needed
to provide staff transportation to various cruise ships; and the inability of
the Company to obtain the products it sells to its customers
As a result, the Company will consider contingency plans that assume
some estimated level of non-compliance by, or disruption to, customers and
suppliers. The Company plans to have contingency plans developed by mid-1999 for
major customers and suppliers it determines may be at high risk of
non-compliance or disruption. Such contingency plans are themselves subject to
uncertainties, and there can be no assurance that the Company can reasonably
estimate the level, impact or duration of Y2K non-compliance by its customers or
suppliers, or that the Company's contingency plans will be sufficient to
mitigate such risks.
Costs related to the Company's actions to become Y2K Compliant are
funded through cash from operating activities. The Company estimates that total
costs related to becoming Y2K Compliant will be approximately $150,000, and
approximately $100,000 of that amount will be capitalized. Through the date
hereof, the Company has expended approximately $25,000 in connection with the
Y2K Issue. The Company presently believes that the costs related to updating or
replacing existing computer systems in order to become Y2K Compliant are not
expected to have a material impact on the Company's future financial condition,
liquidity or results of operations. However, in view of the uncertainties
relating to the Y2K Compliant status of the Company's customers and suppliers,
there can be no assurance that the cost to the Company of dealing with the Y2K
Issue will not be significantly in excess of the foregoing amounts or that the
Y2K Issue will not materially adversely affect the Company's future operations.
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; product
liability or other claims against the Company by customers of the Company's
products or services; and failure of significant customers and suppliers of the
Company to become Y2K Compliant. 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.
14
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 September 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 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.
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 September 30, 1998.
15
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: November 16, 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)
16
EXHIBIT INDEX
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Exhibit No. Description
- - ----------- -----------
27 Financial Data Schedule