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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, 1999
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)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check [X] 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 16,607,131 shares as of
per share August 11, 1999
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STEINER LEISURE LIMITED
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 .................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Six Months ended
June 30, 1998 and 1999 ............................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 30, 1998 and 1999 ............................................................... 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 4. Submission of Matters to a Vote of Security Holders ...................................... 15
ITEM 6. Exhibits and Reports on Form 8-K ......................................................... 15
SIGNATURES ....................................................................................... 16
EXHIBIT INDEX .................................................................................... 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1999
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,058,000 $ 18,320,000
Marketable securities 21,782,000 17,769,000
Accounts receivable 4,832,000 5,548,000
Inventories 8,002,000 8,318,000
Other current assets 1,142,000 2,115,000
------------ ------------
Total current assets 45,816,000 52,070,000
------------ ------------
PROPERTY AND EQUIPMENT, net 5,840,000 8,109,000
------------ ------------
OTHER ASSETS
Trademarks and product formulations, net 290,000 260,000
License rights, net 740,000 745,000
Other 968,000 1,837,000
------------ ------------
Total other assets 1,998,000 2,842,000
------------ ------------
Total assets $ 53,654,000 $ 63,021,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,641,000 $ 2,672,000
Accrued expenses 6,434,000 6,070,000
Current portion of capital lease obligations 21,000 5,000
Income taxes payable 848,000 1,231,000
------------ ------------
Total current liabilities 9,944,000 9,978,000
------------ ------------
MINORITY INTEREST 19,000 19,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred shares, $.01 par value; 10,000,000 shares authorized,
none issued and outstanding -- --
Common shares, $.01 par value; 100,000,000 shares authorized,
16,603,000 shares issued and outstanding at December 31, 1998 and
16,607,000 shares issued and outstanding at June 30, 1999 166,000 166,000
Additional paid-in capital 12,790,000 12,827,000
Accumulated other comprehensive income 440,000 (291,000)
Retained earnings 35,181,000 45,208,000
Treasury shares, at cost, 313,000 shares at December 31, 1998
and at June 30, 1999 (4,886,000) (4,886,000)
------------ ------------
Total shareholders' equity 43,691,000 53,024,000
------------ ------------
Total liabilities and shareholders' equity $ 53,654,000 $ 63,021,000
============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these balance sheets.
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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
REVENUES:
Services $ 14,462,000 $ 17,169,000 $ 28,197,000 $ 34,188,000
Products 9,873,000 12,764,000 19,073,000 25,099,000
------------ ------------ ------------ ------------
Total revenues 24,335,000 29,933,000 47,270,000 59,287,000
------------ ------------ ------------ ------------
COST OF SALES:
Cost of services 11,161,000 13,244,000 21,824,000 26,400,000
Cost of products 6,674,000 8,912,000 12,923,000 17,411,000
------------ ------------ ------------ ------------
Total cost of sales 17,835,000 22,156,000 34,747,000 43,811,000
------------ ------------ ------------ ------------
Gross profit 6,500,000 7,777,000 12,523,000 15,476,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Administrative 1,174,000 1,426,000 2,249,000 2,864,000
Salary and payroll taxes 1,234,000 1,406,000 2,462,000 2,808,000
------------ ------------ ------------ ------------
Total operating expenses 2,408,000 2,832,000 4,711,000 5,672,000
------------ ------------ ------------ ------------
Income from operations 4,092,000 4,945,000 7,812,000 9,804,000
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 407,000 432,000 733,000 883,000
Gain on sale of marketable securities 17,000 -- 23,000 11,000
Interest expense (4,000) (1,000) (7,000) (3,000)
------------ ------------ ------------ ------------
Total other income (expense) 420,000 431,000 749,000 891,000
------------ ------------ ------------ ------------
Income before provision for income taxes 4,512,000 5,376,000 8,561,000 10,695,000
PROVISION FOR INCOME TAXES: 268,000 359,000 481,000 667,000
------------ ------------ ------------ ------------
Net income $ 4,244,000 $ 5,017,000 $ 8,080,000 $ 10,028,000
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.26 $ 0.31 $ 0.49 $ 0.62
============ ============ ============ ============
Diluted $ 0.25 $ 0.30 $ 0.47 $ 0.60
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
Six Months Ended
June 30,
---------------------------------
1998 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,080,000 $ 10,028,000
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 443,000 1,125,000
Gain on sale of marketable securities (23,000) (11,000)
(Increase) decrease in-
Accounts receivable 270,000 (793,000)
Inventories (727,000) (464,000)
Other current assets (865,000) (168,000)
Other assets (32,000) (1,271,000)
Increase (decrease) in-
Accounts payable 6,000 120,000
Accrued expenses (1,291,000) (476,000)
Income taxes payable 242,000 422,000
Minority interest 15,000 --
------------ ------------
Net cash provided by operating activities 6,118,000 8,512,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (17,643,000) (6,820,000)
Proceeds from maturities of marketable securities 1,675,000 3,500,000
Proceeds from sale of marketable securities 6,913,000 6,280,000
Advances on construction costs (1,000,000) --
Capital expenditures (395,000) (3,092,000)
Acquisition of franchise rights (692,000) --
------------ ------------
Net cash used in investing activities (11,142,000) (132,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (36,000) (16,000)
Net proceeds from stock option exercises 1,696,000 37,000
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Net cash provided by financing activities 1,660,000 21,000
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 25,000 (139,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,339,000) 8,262,000
CASH AND CASH EQUIVALENTS, beginning of period 12,335,000 10,058,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 8,996,000 $ 18,320,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 7,000 $ 3,000
============ ============
Income taxes $ 474,000 $ 249,000
============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
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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, 1998 and 1999 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, 1998.
(2) ORGANIZATION:
Steiner Leisure Limited (including its subsidiaries and predecessors, "Steiner
Leisure;" "we," "us" and "our" refer to Steiner Leisure) is the leading
worldwide provider of spa services and skin and hair care products on board
cruise ships. Steiner Leisure, 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 Steiner Leisure, 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.
Commencing in February 1999, we began operating the luxury health spa at the
Atlantis Resort on Paradise Island in The Bahamas (the "Atlantis Spa"). In
connection with our operation of the spa, we pay the resort owner the greater of
a minimum monthly rental and an amount based on our revenues at the spa. The
resort then pays us after deducting rental payments or other amounts due to the
resort from us.
In January 1998, we acquired for $675,000 the intellectual property (the "BSC
Rights") relating to the Beautiful Skin Centres, a group of Hong Kong day spas
("BSC"). We have begun to license the BSC concept at three former BSC facilities
in Hong Kong under the name "Elemis Beautiful Skin Centres." We granted the
right to operate these initial Elemis Beautiful Skin Centres to the entity that
sold us the BSC Rights. That entity owns 15% of EBSC International Limited, a
Bahamas subsidiary of Steiner Leisure that licenses rights to operate Elemis
Beautiful Skin Centres ("EBSC").
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) MARKETABLE SECURITIES-
Marketable securities consist of investment grade commercial paper. We account
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 included in other comprehensive income.
(b) AMORTIZATION-
Other assets include the cost of trademark registrations and product
formulations in connection with our investment in our Elemis Limited subsidiary,
and the intellectual property represented by rights acquired by Steiner Leisure
in connection with its investment in the BSC Rights. Costs relating to such
trademark registrations, product formulations and 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 license 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.
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(c) MINORITY INTEREST-
Minority interest represents the minority shareholders' proportional share of
the net assets of EBSC.
(d) INCOME TAXES-
Steiner Leisure files separate tax returns for its domestic subsidiaries. In
addition, our foreign subsidiaries file income tax returns in their respective
countries of incorporation, where required. Steiner Leisure follows Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
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.
(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 the statements of operations.
(f) EARNINGS PER SHARE-
Basic earnings per share is computed by dividing the net income available to
shareholders by the weighted average number of outstanding common shares. 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. 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,
---------------------------- ----------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
Weighted average shares outstanding used in
calculating basic earnings per share 16,507,000 16,294,000 16,400,000 16,293,000
Dilutive common share equivalents 590,000 526,000 632,000 530,000
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares used in calculating diluted
earnings per share 17,097,000 16,820,000 17,032,000 16,823,000
========== ========== ========== ==========
Options and warrants outstanding which are not
included in the calculation of diluted earnings
per share because their impact is antidilutive 195,000 422,000 195,000 422,000
========== ========== ========== ==========
(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. Steiner Leisure adopted SOP
98-1 prospectively effective January 1, 1999. The adoption of SOP 98-1 did not
have a material effect on our 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. Steiner Leisure adopted SOP 98-5
effective January 1, 1999. The adoption of SOP 98-5 did not have a material
effect on our financial position or results of operations.
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(4) ACQUISITION:
In August 1999, Steiner Leisure entered into an agreement to acquire the assets
of Florida College of Natural Health, Inc. ("FCNH") for a purchase price of $7.5
million in cash and $1.0 million in Steiner Leisure common shares to be
delivered at closing. FCNH operates four post secondary schools in Florida
offering degree and non-degree programs in massage therapy and skin care and
related courses. The closing of the transaction is subject to the fulfillment of
certain conditions, and the transaction is further subject to a post-closing
condition requiring certain regulatory approval. The closing is anticipated to
take place during August 1999. The transaction will be accounted for under the
purchase method of accounting.
(5) ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31, June 30,
1998 1999
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(Unaudited)
Operative commissions $1,387,000 $1,535,000
Guaranteed minimum rentals 2,144,000 1,516,000
Bonuses 910,000 518,000
Staff shipboard accommodations 326,000 369,000
Other 1,667,000 2,132,000
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$6,434,000 $6,070,000
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(6) COMPREHENSIVE INCOME:
Steiner Leisure 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 Steiner Leisure's comprehensive income are as follows:
Six Months Ended
June 30,
------------------------------
1998 1999
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Net income $8,080,000 $ 10,028,000
Unrealized gain (loss) on marketable securities,
net of income taxes 12,000 (458,000)
Foreign currency translation adjustments,
net of income taxes 60,000 (273,000)
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Comprehensive income $8,152,000 $ 9,297,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Steiner Leisure Limited is the leading worldwide provider of spa
services and skin and hair care products on board cruise ships. Payments to
cruise lines are based on a percentage of our passenger revenues and, in certain
cases, a minimum annual rental or a combination of both. Steiner Leisure also
sells its services and products through land-based channels, including the
luxury health spa at the Atlantis Resort on Paradise Island in The Bahamas.
Steiner Leisure is a Bahamian IBC. The Bahamas does not tax Bahamian
IBCs. We believe that income from our maritime operations will be foreign source
income that will not be subject to United States, United Kingdom or other
taxation. More than 84% of our income for the first six months of 1999 was not
subject to United States or United Kingdom income tax. To the extent that our
income from non-maritime operations increases more rapidly than any increase in
our maritime-related income, the percentage of our income subject to tax would
increase. The income from our United States subsidiaries, Steiner Beauty
Products, Inc. and CT Maritime Services, L.C. are, and the proposed operations
to be conducted with the FCNH assets will generally be, subject to U.S. federal
income tax at regular corporate rates (generally up to 35%) and may be subject
to additional U.S. federal, state and local taxes. Earnings from Steiner
Training and Elemis Limited, our United Kingdom subsidiaries which accounted for
a total of 8.4% of our pre-tax income for the first six months of 1999, will be
subject to U.K. tax rates (generally up to 31%).
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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,
------------------- -------------------
1998 1999 1998 1999
----- ----- ----- -----
Revenues:
Services................................. 59.4% 57.4% 59.7% 57.7%
Products................................. 40.6 42.6 40.3 42.3
----- ----- ----- -----
Total revenues ....................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Cost of services......................... 45.9 44.2 46.2 44.5
Cost of products......................... 27.4 29.8 27.3 29.4
----- ----- ----- -----
Total cost of sales................... 73.3 74.0 73.5 73.9
----- ----- ----- -----
Gross profit 26.7 26.0 26.5 26.1
Operating expenses:
Administrative........................... 4.8 4.8 4.8 4.8
Salary and payroll taxes................. 5.1 4.7 5.2 4.7
----- ----- ----- -----
Total operating expenses.............. 9.9 9.5 10.0 9.5
----- ----- ----- -----
Income from operations................ 16.8 16.5 16.5 16.6
Other income................................ 1.7 1.4 1.6 1.5
----- ----- ----- -----
Income before provision for income taxes.... 18.5 17.9 18.1 18.1
Provision for income taxes.................. 1.1 1.2 1.0 1.1
----- ----- ----- -----
Net income.................................. 17.4% 16.7% 17.1% 17.0%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased approximately 23.0%, or $5.6 million, to
$29.9 million in the second quarter of 1999 from $24.3 million in the second
quarter of 1998. Of this increase, $2.7 million was attributable to increases in
services provided on cruise ships and the commencement of services at the
Atlantis Spa during the first quarter of 1999 and $2.9 million was attributable
to increases in sales of products. The increase in revenues for the second
quarter of 1999 compared to the second quarter of 1998 was primarily
attributable to an increase of three in the average number of ships in service
with enhanced large spa facilities. The Company had 881 shipboard staff members
in service on average in the second quarter of 1999 compared to 830 shipboard
staff members in service on average in the second quarter of 1998. Revenues per
staff per day increased by 15.2% in the second quarter of 1999 compared to the
second quarter of 1998.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.1% in the second quarter of 1999 from 77.2% in the second
quarter of 1998. This decrease was due to increases in productivity of onboard
staff during the second quarter of 1999 compared to the second quarter of 1998,
increased revenues on ships where we are subject to minimum annual rental
payments and a decrease in rent allocable to services on cruise ships covered by
an agreement which was renewed in 1998 and became effective in the first quarter
of 1999.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
increased to 69.8% in the second quarter of 1999 from 67.6% in the second
quarter of 1998. This increase was due to increases in rent allocable to
products sales on cruise ships covered by an agreement which was renewed in 1998
and became effective in the first quarter of 1999, and discounts offered on
"Elemis" products, other than the recently formulated product lines. This
increase was partially offset by increases in productivity of onboard staff.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.5% in the second quarter of 1999 from 9.9% in the second quarter
of 1998 as a result of the increase in aggregate revenues generated from the
additional ships in service with enhanced large spa facilities during the second
quarter of 1999 compared to the comparable period in 1998.
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PROVISION FOR INCOME TAXES. The provision for income taxes increased to
an overall effective rate of 6.7% for the second quarter of 1999 from an overall
effective rate of 5.9% for the second quarter of 1998 primarily due to an
increase in the income earned in jurisdictions that tax our income increasing at
a greater rate than the income earned in jurisdictions that do not tax our
income.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased approximately 25.4%, or $12.0 million, to
$59.3 million for the six months ended June 30, 1999 from $47.3 million for the
six months ended June 30, 1998. Of this increase, $6.0 million was attributable
to increases in services provided on cruise ships and the commencement of
services at the Atlantis Spa during the first quarter of 1999 and $6.0 million
was attributable to increases in sales of products. The increase in revenues for
the first half of 1999 compared to the same period in the prior year 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 four in the
average of non-spa ships in service for the same period. The Company had 885
shipboard staff members in service on average during the six months ended June
30, 1999 compared to 814 shipboard staff members in service on average during
the six months ended June 30, 1998. Revenues per staff per day increased by
14.2% in the first half of 1999 compared to the comparable period of 1998.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.2% in the first six months of 1999 from 77.4% for the first six
months of 1998. This decrease was due to an increase in productivity of onboard
staff during the first half of 1999 compared to the same period in prior year,
increased revenues on ships where we are subject to minimum annual rental
payments, and a decrease in rent allocable to services on cruise ships covered
by an agreement which was renewed in 1998 and became effective in the first
quarter of 1999.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
increased to 69.4% in the first six months of 1999 from 67.8% for the first six
months of 1998. This increase was primarily due to increases in rent allocable
to products sales on cruise ships covered by an agreement which was renewed in
1998 and became effective in the first quarter of 1999, and discounts offered on
"Elemis" products, other than the recently formulated product lines. This
increase was partially offset by increases in productivity of onboard staff.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.6% for the first six months of 1999 from 10.0% for the first six
months of 1998 as a result of the increase in aggregate revenues generated from
the additional ships in service with enhanced large spa facilities during the
first six months of 1999 compared to the comparable period in 1998.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
an overall effective rate of 6.2% for the first six months of 1999 from an
overall effective rate of 5.6% for the first six months of 1998 due to an
increase in the income earned in jurisdictions that tax our income increasing at
a greater rate than the income earned in jurisdictions that do not tax our
income.
SEASONALITY
Although certain cruise lines have experienced moderate seasonality, we
believe that the introduction of cruise ships into service throughout a year has
mitigated the effect of seasonality on our results of operations. In addition,
decreased passenger loads during slower months for the cruise industry has not
had a significant impact on our revenues. However, due to our dependence on the
cruise industry, revenues may in the future be affected by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
Steiner Leisure's business is operated with cash generated from
operations.
Cash flow from operating activities during the first six months of 1999
was $8.5 million compared to $6.1 million in the first six months of 1998. This
increase is primarily due to the increase in our net income. In connection with
the construction of the Atlantis Spa, we spent $2.5 million this year through
July 1999 and $3.1 million in 1998. These $5.6 million of capital expenditures
will be amortized over the fifteen-year term of our arrangement with the owner
of the Atlantis Resort. Steiner Leisure had working capital of approximately
$42.1 million at June 30, 1999 compared to $35.9 million at December 31, 1998.
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In August 1999, Steiner Leisure entered into an agreement to purchase
the assets of FCNH for $7.5 million dollars in cash and $1.0 million in Steiner
Leisure common shares. The closing of this transaction is anticipated to take
place during August 1999. The cash portion of the purchase price is being funded
from our working capital.
We believe that cash generated from operations is sufficient to satisfy
the cash required to operate our business. Any significant acquisition may
require outside financing.
INFLATION
Steiner Leisure 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
we are dependent.
YEAR 2000 COMPLIANCE
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000s" from dates in the "1900s." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
We have developed a plan to assess the overall impact to Steiner
Leisure with respect to the Year 2000 issue. Part of our plan is to identify
areas of risk and to develop means to mitigate these risks. This includes
assessing the Year 2000 compliance of our cruise line customers and our major
third party suppliers.
In order for us to make an assessment of the Year 2000 risks that may
have a material adverse effect on our results of operations, we have conducted a
survey of our cruise line customers and major third party suppliers of services
and products. With respect to our cruise line customers, as of August 10, 1999,
a number of those surveyed have refused to respond for liability reasons, while
others have failed to respond without providing any reason therefor. The 16
cruise lines that responded expect to be Year 2000 compliant before January 1,
2000. We are actively pursuing responses from the remaining 11 cruise lines that
have not responded.
With respect to our major third party suppliers, as of August 10, 1999,
we obtained 30 responses or statements published through the Internet indicating
that they expect to be Year 2000 compliant prior to January 1, 2000. We are
actively pursuing responses for the remaining 23 major third party suppliers
that have not responded. In the absence of adequate responses, or other formal
communications from either our cruise line customers or our major third party
suppliers, we are attempting to make our own assessment as to their readiness.
We believe that our biggest risks related to the Year 2000 issue are
associated with potential concerns with cruise line customers and major third
party suppliers. The most reasonably likely source of Year 2000 risk with
respect to our cruise line customers would be the disruption of transportation
channels that deliver passengers to cruise ships. The disruption of
transportation channels could also impede our ability to deliver our products to
intended points of sale or the ability of our staff to report to the ships to
which they are assigned.
We do not believe that there are contingency plans that we can effect
that can mitigate the risk of cruise line passengers being unable to reach
cruise ships as a result of any transportation disruption. We are in the process
of developing a contingency plan that would allow us to have available product
inventories sufficient for distribution to our intended points of sale in the
event a transportation disruption impairs our ability to obtain delivery of our
products. In addition, we intend to develop a schedule of deployment of our
shipboard staff to minimize the effect of any transportation disruption that
could occur around January 1, 2000. These contingency plans are subject to
uncertainties. We cannot guarantee that any estimate of the level, impact or
duration of Year 2000 non-compliance by our customers or suppliers will be
accurate, or that our contingency plans will be sufficient to mitigate these
risks.
In the event that any of our cruise line customers or major third party
suppliers do not successfully achieve Year 2000 compliance for their own
operations in a timely manner, our business or operations could be adversely
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affected. The magnitude of any adverse effect cannot be quantified at this time
because of variables such as the type and importance of cruise line customers or
major third party suppliers that have not responded, the unknown level and
duration of noncompliance by these customers and suppliers (and their customers
and suppliers), the possible effect on our operations and our ability to respond
to any non-compliance.
Costs related to our actions to become Year 2000 compliant are funded
through cash from operating activities. We estimate that total costs related to
becoming Year 2000 compliant will be approximately $150,000, and approximately
$100,000 of this amount will be capitalized. Through June 30, 1999, we have
expended approximately $120,000 in connection with the Year 2000 issue. We
believe that the costs related to updating or replacing existing computer
systems in order to become Year 2000 compliant will not be material. We believe
that our systems will be Year 2000 compliant by the end of September 1999.
However, in view of the uncertainties relating to the Year 2000 compliant status
of our customers and suppliers, we cannot guarantee that our cost of dealing
with the Year 2000 issue will be consistent with the foregoing estimates or that
the Year 2000 issue will not materially adversely affect Steiner Leisure's
future operations.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, Steiner Leisure 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. The words "may," "will," "intend," "expect," "proposed,"
"anticipate," "believe," "estimate" and similar expressions are intended to
identify such forward-looking statements. Because such statements include 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: our
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; our dependence on the cruise industry and our being subject to
the risks of that industry; our obligation to make certain minimum payments to
certain cruise lines irrespective of the revenues received by us from
passengers; our dependence on a limited number of cruise companies and on a
single product manufacturer; our dependence for success on our ability to
recruit and retain qualified personnel; changes in the non-U.S. tax status of
our principal subsidiary; changing competitive conditions; changes in laws and
government regulations applicable to us and the cruise industry; our limited
experience in franchise, school and other land-based operations; product
liability or other claims against us by customers of our products or services;
and our failure, or the failure of a cruise line customer or supplier, to
correct a material Year 2000 problem. The risks to which we are subject are more
fully described under "Certain Factors That May Affect Future Operating Results"
in our Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
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 18, 1999. At the Annual Meeting, the
following matters were considered and voted upon:
Leonard I. Fluxman, Michele Steiner Warshaw and Steven J.
Preston 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, Charles D.
Finkelstein and Jonathan D. Mariner. The votes cast with respect to the
election of Messrs. Fluxman and Preston, and Ms. Warshaw were as
follows: 14,847,187 shares were voted for each of the nominees and
6,822 shares were withheld from the votes for each of the nominees.
A proposal to amend Steiner Leisure's Amended and Restated
Memorandum of Association to increase the number of common shares from
20,000,000 to 100,000,000 was approved based on the following vote:
10,042,110 votes "for", 4,210,833 votes "against" and 13,344
abstentions.
A proposal to amend Steiner Leisure's Amended and Restated
1996 Share Option and Incentive Plan to increase the number of common
shares available for grant thereunder from 1,620,000 to 3,500,000 was
approved based on the following vote: 9,011,198 votes "for", 4,559,768
"against" and 23,721 abstentions.
A proposal to ratify the appointment of Arthur Andersen LLP as
independent auditors for the Company for the fiscal year ended December
31, 1999 was approved based on the following vote: 14,846,794 votes
"for", 2,025 votes "against" and 5,190 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Amended and Restated Memorandum of Association of Steiner
Leisure Limited
10.7 Amended and Restated Non-Employee Directors' Share Option Plan
10.19 Asset Purchase Agreement, dated August 3, 1999 among FCNH,
Inc., Steiner Leisure Limited, Florida College of Natural
Health Inc., The Natural Health Shoppe, Inc., Neal R. Heller,
Elizabeth S. Heller, Daniel Stubbs II, Arthur Keiser and
Belinda Keiser
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, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1999
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
President and Chief Operating Officer
/s/ Carl S. St. Philip, Jr.
-------------------------------------------------
Carl S. St. Philip, Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Amended and Restated Memorandum of Association of Steiner
Leisure Limited
10.7 Amended and Restated Non-Employee Directors' Share Option Plan
10.19 Asset Purchase Agreement, dated August 3, 1999 among FCNH,
Inc., Steiner Leisure Limited, Florida College of Natural
Health Inc., The Natural Health Shoppe, Inc., Neal R. Heller,
Elizabeth S. Heller, Daniel Stubbs II, Arthur Keiser and
Belinda Keiser.
27 Financial Data Schedule
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