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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
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
<PAGE>
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
<PAGE>
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.
<PAGE>
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
(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
=========== ===========
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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)
<PAGE>
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
<PAGE>
EXHIBIT 10.3(B)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is made as
of the 20th day of April, 1998 by and between STEINER LEISURE LIMITED, a Bahamas
international business company (the "Company"), and Michele Steiner Warshaw
("Employee").
WITNESSETH:
WHEREAS, the Company and Employee entered into an Employment
Agreement dated October 21, 1996, as amended by amendment dated March 25, 1997
(the "Employment Agreement"); and
WHEREAS, the Company and Employee desire to amend the Employment
Agreement as provided below.
NOW, THEREFORE, in consideration of the premises and mutual
agreements hereinafter contained, the parties hereto agree as follows:
1. COMPENSATION.
Section 3(a)(i) of the Employment Agreement is hereby amended
so that, as amended, it shall read as follows:
a. SALARY, ETC. Commencing as of January 1, 1998, except as
otherwise expressly provided herein, the Company (or any Affiliate
thereof) shall pay to Employee during the term hereof compensation
as described in this Section 3(a), all of which shall be subject to
such deductions as may be required by applicable law or regulation.
(i) BASE SALARY. A base salary at the rate of (A) One
Hundred Forty Seven Thousand Dollars [(U.S.) $147,000.00] for
calendar year ("Year") 1998 and (B) no less than One Hundred Forty
Seven Thousand Dollars [(U.S.) $147,000.00] for each Year thereafter
during the term of this Agreement, subject to review by the
Compensation Committee of the Board of Directors of the Company,
payable in bi-weekly installments (the "Base Salary").
2. EFFECTIVE DATE. The effective date of the amendments to
the Employment Agreement contained in this Amendment shall be January 1, 1998.
3. NO OTHER AMENDMENT. Except as set forth in this Amendment,
all provisions of the Employment Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the day and year first above written.
STEINER LEISURE LIMITED
/S/ MICHELE STEINER WARSHAW By: /S/ LEONARD I. FLUXMAN
- ----------------------------------- -------------------------------------
Michele Steiner Warshaw Leonard I. Fluxman,
Chief Operating Officer and
Chief Financial Officer
<PAGE>
EXHIBIT 10.5(B)
AMENDMENT TO SERVICE AGREEMENT
This Amendment to Service Agreement (this "Amendment") is made as of the
8th day of July, 1998 by and between ELEMIS LIMITED, a United Kingdom company
(the "Company"), and Sean C. Harrington ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee entered into a Service Agreement dated
September 18, 1996, as amended by amendment dated March 25, 1997 (the "Service
Agreement"); and
WHEREAS, the Company and Employee desire to further amend the Service
Agreement as provided below.
NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto agree as follows:
1. COMPENSATION.
(a) BASE SALARY. Clause 5(a) of the Service Agreement is
hereby amended to delete "(pound)52,500.00" on the third line thereof and
replace it with "(pound)83,602.00."
(b) BONUS. Clause 5(b) of the Service Agreement is
hereby deleted in its entirety and replaced with the following:
(b) Subject to the conditions described below, with respect to each Period
(as defined below) and financial year ("Year") during the term hereof,
Employee shall be entitled to receive additional cash compensation as
described in this Section 5(b) (the "Bonus") based on a budget of the
Company, including budgets for each Period (as defined below) within such
Year, which budgets include estimates of the net income before taxes of
the Company (the "Budgeted NIBT") for each such Period and for such Year
and which budgets shall have been approved by the Compensation Committee
of the Board of Directors (the "Committee") of Steiner Leisure Limited,
the Company's parent company ("SLL"). At the end of the first Period, if
the Company shall have met or exceeded the Budgeted NIBT for such date,
Employee shall be entitled to receive an amount equal to 0.25 times the
Base Salary then in effect for the Year in question; PROVIDED, HOWEVER,
that the amount described in this sentence shall not exceed two and
one-half percent (2.5%) of the budgeted net income before taxes of SLL for
such Period as set forth in the budget for SLL approved by the Committee
(the "SLL Budgeted NIBT"). At the end of the second Period, if the Company
shall have met or exceeded the Budgeted NIBT for such date (cumulatively
for the Year to date, and not solely for the second Period -
"cumulatively" in this sentence), Employee shall be entitled to receive an
amount equal to 0.50 times the Base Salary then in effect for the Year in
question, less the amount paid pursuant to the prior sentence; PROVIDED,
HOWEVER, that the amount described in this sentence shall not exceed two
and one-half percent (2.5%) of the SLL Budgeted NIBT for such Period. At
the end of the third Period, if the Company shall have met or exceeded the
Budgeted NIBT for such date (cumulatively for the Year to date, and not
solely for the third Period - "cumulatively" in this sentence), Employee
shall be entitled to receive an amount equal to 0.75 times the Base Salary
then in effect for the Year in question, less the amounts paid pursuant to
each of the prior two sentences; PROVIDED, HOWEVER, that the amount
described in this sentence shall not exceed two and one-half percent
(2.5%) of the SLL Budgeted NIBT for such Period. Any amount which the
Employee is entitled to receive pursuant to the preceding three sentences
shall be payable one-half within sixty (60) days after the end of the
Period in question and one-half within sixty (60) days after the end of
the Year in question. At the end of the fourth Period, if the Company
shall have met or exceeded the SLL Budgeted NIBT for such date
(cumulatively for the Year to date, and not solely for the fourth Period -
"cumulatively" in this sentence), Employee shall be entitled to receive,
within sixty (60) days after the end of such Period, an amount equal to
the Base Salary then in effect for the Year in question, less the amounts
paid pursuant to the second, third and fourth sentences of this clause
5(b) ; PROVIDED, HOWEVER, that the amount described in this sentence shall
not exceed two and one-half percent (2.5%) of the SLL Budgeted NIBT for
such Period. Notwithstanding the foregoing, however, (i) no excess over
budget, or shortfall under budget of revenues of the Company from sales to
Steiner Transocean Limited or any costs related thereto shall be deemed to
increase or decrease, as the case may be, other budgeted items of revenue
or expense for purposes of determining the Budgeted NIBT and (ii) if the
Company fails to meet the Budgeted NIBT for a Period as a result of
expenses incurred by the Company solely due to modification(s) in the
operating structure of the Company resulting from compliance with
tax-related advice from outside consultants to the Company, the Budgeted
NIBT shall, nonetheless, be deemed to have been met for such Period.
Employee shall only be entitled to receive a Bonus payment with respect to
a Period if he is employed hereunder on the last day of such Period. For
purposes of this Clause 5(b), "Period" shall mean each of the four fiscal
quarters of the Company during each Year hereunder.
2. ANNUAL SALARY REVIEW. Clause 6 of the Service Agreement is
hereby amended by deleting "Board" and replacing it with "Compensation
Committee of the Board of Directors of SLL."
3. EFFECTIVE DATE. The effective date of the amendments to
the Service Agreement contained in this Amendment shall be January 1, 1998.
4. NO OTHER AMENDMENT. Except as set forth in this Amendment,
all provisions of the Service Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the day and year first above written.
ELEMIS LIMITED
/S/ SEAN C. HARRINGTON By: /S/ CLIVE E. WARSHAW
- ------------------------------ -----------------------------------
Sean C. Harrington Clive E. Warshaw,
Chairman of the Board and
Chief Executive Officer of
STEINER LEISURE LIMITED,
Duly authorized to sign
<PAGE>
EXHIBIT 10.7
AMENDED AND RESTATED
STEINER LEISURE LIMITED
NON-EMPLOYEE DIRECTORS' SHARE
OPTION PLAN
JUNE 26, 1998
<PAGE>
STEINER LEISURE LIMITED
NON-EMPLOYEE DIRECTORS' SHARE OPTION PLAN
1. INTRODUCTION.
This plan shall be known as the "Steiner Leisure Limited
Non-Employee Directors' Share Option Plan" (this "Plan"). This Plan sets forth
the terms of grants of options (each, an "Option") to purchase the common shares
(the "Shares") of Steiner Leisure Limited (the "Company") to Non-Employee
Directors (as defined below) of the Company. The purpose of this Plan is to
advance the interests of Company and its shareholders by promoting an identity
of interest between the Company's non-employee directors and its shareholders,
providing non-employee directors with a proprietary stake in the Company's
success and strengthening the Company's ability to attract and retain qualified
non-employee directors by affording such persons an opportunity to share in the
future success of the Company.
2. DEFINITIONS.
(a) ACT means the Securities Act of 1933, as amended.
(b) BOARD means the Board of Directors of the Company.
(c) COMPANY means Steiner Leisure Limited.
(d) DATE OF GRANT means the date as of which an Option is
granted to a Non-Employee Director pursuant to Section 5 of this Plan.
(e) EXCHANGE ACT means the Securities Exchange Act of
1934, as amended.
(f) FAIR MARKET VALUE means, on the date in question, or if
the prices described in clauses (i) and (ii), below, are not available on such
date, on the latest date preceding the date in question on which such prices are
available, (i) the closing sales price per share of the Shares underlying an
Option on the Nasdaq Stock Market ("Nasdaq") or, if the Shares are not then
traded on Nasdaq, on any national securities exchange, or (ii) if the Shares are
not then traded on Nasdaq or such exchange, and are then traded on an
over-the-counter market, the average of the closing bid and asked prices for the
Shares in such over-the-counter market or (iii) if the Shares are then not
listed on Nasdaq or such exchange, or traded in an over-the-counter market, such
value as the Board may determine.
(g) NON-EMPLOYEE DIRECTOR means a member of the Board of
Directors of the Company who is not an employee of the Company or any subsidiary
(as defined under Rule 12b-2 under the Exchange Act) of the Company on a date in
question.
(h) OPTIONS means the options to purchase Shares granted
pursuant to this Plan.
(i) PLAN means this Steiner Leisure Limited Directors'
Share Option Plan.
(j) SHARES means the common shares of the Company, par
value (U.S.) $.01 per share.
3. ADMINISTRATION.
This Plan shall be administered by the Board or a committee of the
Board so designated by the Board to administer this Plan. Where the context so
requires, references to the Board herein shall refer to any such committee.
Subject to the provisions of this Plan, the Board shall be authorized to
interpret this Plan, to establish, amend and rescind any rules and regulations
relating to this Plan and to make all other determinations necessary or
advisable for the administration of this Plan; provided, however, that the Board
shall have no discretion with respect to the selection of directors to receive
Options, the number of Shares to be received upon exercise of Options or the
timing of grants of Options, all of which shall be determined in accordance with
the provisions of this Plan. Notwithstanding the foregoing, the Board may amend
this Plan pursuant to Section 8, below. The determinations of the Board in the
administration of this Plan, as described herein, shall be final and conclusive.
The Chairman of the Board and the Chief Operating Officer of the Company, and
either of them, shall be authorized to implement this Plan in accordance with
its terms and to take such actions of a ministerial nature as shall be necessary
to effectuate the intent and purposes thereof. Except as otherwise provided
herein, the validity, construction and effect of this Plan and any rules and
regulations relating to this Plan shall be determined in accordance with the
laws of the Commonwealth of the Bahamas subject to any applicable requirements
under United States federal or state securities laws.
4. ELIGIBILITY; OPTION AGREEMENT.
Only Non-Employee Directors shall be eligible to receive Options
under this Plan. Options shall be evidenced by written option agreements in such
form as the Board shall approve.
5. GRANTS OF OPTIONS.
Options shall be granted to Non-Employee Directors, subject to the
limitation on the number of Shares that may be issued under this Plan as
described in Section 6, below, as follows:
(a) GRANTS TO INITIAL DIRECTORS. Each of the initial four
Non-Employee Directors (the "Initial Directors") shall be granted, on the
effective date of the appointment or election of such Initial Director (the
"Initial Effective Date") without the need for further action by the Board,
Options to purchase that number of Shares equal to 2,813 multiplied by a
fraction, the numerator of which is the number of days from the Initial
Effective Date until the scheduled date of the then next annual meeting of
Shareholders of the Company ("Annual Meeting") (or, if such date has not yet
been scheduled, a date approximating the date of the next Annual Meeting as
determined in good faith by the Board), and the denominator of which is 365.
(b) ANNUAL GRANTS. On the date of each Annual Meeting during
the term of this Plan (an Annual Meeting Date") each individual elected or
re-elected as a Non-Employee Director at such meeting or continuing as a
Non-Employee Director shall be granted, without the need for further action by
the Board, an Option to purchase 2,813 Shares. In addition, any Non-Employee
Director who serves as Chairman of each of the Audit Committee and Compensation
Committee of the Board shall be granted on each Annual Meeting Date an option to
purchase an additional 750 Shares.
(c) OTHER GRANTS. Any new Non-Employee Director who is
appointed by the Board to fill a vacancy on the Board, or who is otherwise
appointed or elected to the Board otherwise than at an Annual Meeting shall be
granted, on the effective date of such appointment or election (the "Effective
Date"), without the need for further action by the Board, an Option to purchase
that number of Shares equal to 2,813 multiplied by a fraction, the numerator of
which is the number of days from the Effective Date until the scheduled date of
the then next Annual meeting (or, if such date has not yet been scheduled, the
anniversary date of the then immediately preceding Annual Meeting or, in the
absence of such date, a date approximating the date of the next Annual Meeting
as determined in good faith by the Board), and the denominator of which is 365.
(d) EXERCISE PRICE. The exercise price of each Option
shall be the Fair Market Value of the Shares on the Date of Grant.
(e) DURATION OF OPTIONS. Except as otherwise provided herein,
the latest date on which an Option may be exercised (the "Final Exercise Date")
shall be the date which is ten years from the Date of Grant.
(f) EXERCISE OF OPTIONS. Except as otherwise provided herein,
an Option shall become exercisable one year after the Date of Grant. An Option
may be exercised by giving written notice to the Secretary of the Company
specifying the number of Shares to be purchased, accompanied by the full
purchase price for the Shares to be purchased. An Option may not be exercised
for a fraction of a Share.
(g) PAYMENT FOR SHARES. Shares purchased pursuant to the
exercise of an Option granted under this Plan shall be paid for as follows: (i)
in cash or by certified check, bank draft or money order payable to the order of
the Company, (ii) through the delivery of Shares having a Fair Market Value on
the last business day preceding the date of exercise equal to the purchase
price, provided that, in the case of Shares acquired directly from the Company,
such Shares have been held for at least six months, or (iii) by a combination of
cash and Shares, as provided in clauses (i) and (ii), above.
(h) WITHHOLDING TAXES. Prior to issuance of the Shares upon
exercise of an Option, the Option holder shall pay or make adequate provision
for any applicable United States federal or state, or other tax withholding
obligations of the Company. Where approved by the Board in its sole discretion,
the Option holder may provide for the payment of withholding taxes upon exercise
of the Option by requesting that the Company retain Shares with a Fair Market
Value equal to the amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Option holder by deducting
the Shares retained from the Shares with respect to which the Option was
exercised. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by Option holders to have Shares withheld for this
purpose shall be made in writing in form acceptable to the Board.
(i) DELIVERY OF SHARE CERTIFICATES. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the certificate evidencing the
Shares underlying an Option, an Option holder shall not have any rights as a
shareholder of the Company. A certificate for the number of Shares purchased
pursuant to the exercise of an Option shall be issued as soon as practicable
after exercise of the Option. However, the Company shall not be obligated to
deliver a certificate evidencing Shares issuable under an Option (i) until, in
the opinion of the Company's counsel, all applicable Bahamas and United States
federal and state laws and regulations have been complied with and any
applicable taxes have been paid, (ii) if the Shares are at the time traded on
Nasdaq or any national securities exchange, until the Shares represented by the
certificate to be delivered have been listed or are authorized to be listed on
Nasdaq or such exchange, and (iii) until all other legal matters in connection
with the issuance and delivery of such certificate have been approved by the
Company's counsel. If the sale of Shares has not been registered under the Act,
the Company may require, as a condition to exercise of the Option, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of the Act and may require that the certificate
evidencing such Shares bear an appropriate legend restricting transfer. The
inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell such Shares.
(j) ASSIGNMENT OR TRANSFER. Except as set forth in this Section 5(j),
no Option may be transferred other than by will or by the laws of descent and
distribution, and during a Non-Employee Director's lifetime an Option may be
exercised only by the Non-Employee Director to whom it was granted. An Option
may be transferred to a (i) Non-Employee Director's spouse, children or
grandchildren (referred to herein as "Family Members"), (ii) a trust or trusts
for the exclusive benefit of Family Members or (iii) a partnership in which
Family Members are the only partners. Any transfer pursuant to this Section 5
(j) shall be subject to the following: (i) there shall be no consideration for
such transfer, (ii) there may be no subsequent transfers without the approval of
the Board and (iii) all transfers shall be made so that no liability under
Section 16(b) of the Exchange Act arises as a result of such transfer. Following
any transfer, an Option shall continue to be subject to the same terms and
conditions as were applicable to the Non-Employee Director immediately prior to
transfer, with the transferee being deemed to be the Non-Employee Director for
such purposes, except that the events of death and termination of service
described in Sections 5(k) and 5(l), below, shall continue to apply with respect
to the Non-Employee Director.
(k) DEATH. Upon the death of a Non-Employee Director, all Options
held by such Non-Employee Director that are not then exercisable shall
immediately become exercisable. All Options held by such Non-Employee Director
immediately prior to death may be exercised by his or her executor or
administrator, or by the person or persons to whom the Option is transferred by
will or the applicable laws of descent and distribution, at any time within the
three years following the date of death (but not later than the Final Exercise
Date); provided, however, that the Company shall be under no obligation to
deliver a certificate representing Shares that may be issued pursuant to such
exercise until the Company is satisfied as to the authority of the person or
persons exercising the Option.
(l) OTHER TERMINATION OF STATUS OF NON-EMPLOYEE DIRECTOR. If a
Non-Employee Director ceases to be a member of the Board for any reason other
than death, all Options held by such Non-Employee Director that are not then
exercisable shall terminate three years following the date they first become
exercisable. Options that are exercisable on the date of such termination shall
continue to be exercisable for a period of three years following the date of
termination (or until the Final Exercise Date, if earlier). Notwithstanding the
foregoing, all Options held by a Non-Employee Director shall terminate
immediately upon the termination of such Non-Employee Director's membership on
the Board if such termination was based on the misconduct of such Non-Employee
Director. After completion of the aforesaid three-year periods, such Options
shall terminate to the extent not previously exercised, expired or terminated.
(m) CHANGE IN CONTROL. In the event of a Change in Control (as
defined below) of the Company, any Options outstanding as of the date of such
Change in Control is determined to have occurred that are not yet exercisable on
such date shall become fully exercisable. For purposes of this Section 5(m) a
"Change in Control" means the happening of any of the following:
i. any transaction as a result of which a change in
control of the Company would be required to be
reported in response to Item 1(a) of the Current
Report on Form 8-K as in effect on the date hereof,
pursuant to Sections 13 or 15(d) of the Exchange Act,
whether or not the Company is then subject to such
reporting requirement, otherwise than through an
arrangement or arrangements consummated with the
prior approval of the Board;
ii. any "person" or "group" within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act (a)
becomes the "beneficial owner," as defined in Rule
13d-3 under the Exchange Act, of more than 20% of the
then outstanding voting securities of the Company,
otherwise than through a transaction or transactions
arranged by, or consummated with the prior approval
of, the Board or (b) acquires by proxy or otherwise
the right to vote for the election of directors, for
any merger or consolidation of the Company or for any
other matter or question, more than 20% of the then
outstanding voting securities of the Company,
otherwise than through an arrangement or arrangements
consummated with the prior approval of the Board;
iii. during any period of 24 consecutive months (not
including any period prior to the adoption of this
Plan), Present Directors and/or New Directors cease
for any reason to constitute a majority of the
Board. For purposes of the preceding sentence,
"Present Directors" shall mean individuals who, at
the beginning of such consecutive 24 month period,
were members of the Board and "New Directors" shall
mean any director whose election by the Board or
whose nomination for election by the Company's
shareholders was approved by a vote of at least
two-thirds of the Directors then still in office who
were Present Directors or New Directors; or
iv. any "person" or "group" within the meaning of Sections
13(d) and 14(d)(2) of the Exchange Act that is the
"beneficial owner" as defined in Rule 13d-3 under the
Exchange Act of 20% or more of the then outstanding
voting securities of the Company commences soliciting
proxies.
(n) RULE 16B-3. Options granted hereunder are required to comply with
the applicable provisions of Rule 16b-3 under the Exchange Act and the award
thereof shall contain such additional conditions or restrictions as may be
required thereunder to qualify to the maximum extent for the exemption from
Section 16(b) of the Exchange Act available pursuant to Rule 16b-3.
6. SHARES AUTHORIZED.
(a) Subject to adjustment as provided below, the aggregate
number of Shares that may be issued pursuant to Options granted under this Plan
is 185,625. Such Shares may be authorized, but unissued Shares, or may be Shares
reacquired by the Company and held in treasury. If any Option granted under this
Plan terminates without being exercised in full, the number of Shares as to
which such Option was not exercised shall be available for future grants within
the limits set forth in this Section 6(a).
(b) Subject to any required action by the shareholders of the
Company in the event of any reorganization, recapitalization, share split, share
dividend, combination of shares, issuance of rights or any other change in the
capital or corporate structure of the Company, the number of Shares covered by
each outstanding Option and the number of Shares available for issuance under
this Plan, but as to which Options have not been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the exercise price per Share under outstanding Options, shall be adjusted
equitably to reflect the occurrence of such event; provided, however, that no
adjustments shall be made except as shall be necessary to preserve, rather than
enlarge or reduce the value of awards under this Plan. Any such adjustment shall
be made by the Board.
7. EFFECT AND DISCONTINUANCE.
Neither adoption of this Plan nor the grant of Options to a
Non-Employee Director hereunder shall confer upon any person any right to
continued status as a director of the Company or affect in any way the right of
the Company to terminate a director at any time. The Board may at any time
discontinue granting Options under this Plan.
8. EFFECTIVE DATE; TERMINATION AND AMENDMENT OF PLAN.
(a) The effective date of this Plan shall be the date of its
adoption by the Board of Directors and shareholders of the Company as indicated
on the cover page of this Plan. The final award under this Plan shall be made on
the date of the Annual Meeting in 2006, but the pertinent terms of this Plan
shall continue thereafter while previously awarded Options remain outstanding.
(b) The Board may terminate or amend this Plan as it shall
deem advisable or to conform to any change in any law or regulation applicable
thereto; provided, however, that the Board may not make any amendment that would
reduce any award previously made under this Plan.
9. GENERAL PROVISIONS.
(a) Nothing in this Plan is intended to be a
substitute for, or shall preclude or limit the establishment or continuation of,
any other plan, practice or arrangement for the payment of compensation or
benefits to Non-Employee Directors that the Company now has or may hereafter put
into effect.
(b) Options awarded hereunder and Shares underlying such
Options shall be held by the Non-Employee Director for such period of time
required so as to avoid liability under Section 16(b) of the Exchange Act.
(c) Headings are given to sections of this Plan solely as a
convenience to facilitate reference and are not intended to affect the meaning
of any provision hereof. The references herein to any statute, regulation or
other provision of law shall be construed to refer to any amendment or successor
to such provisions.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AT, AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,996,000
<SECURITIES> 21,111,000
<RECEIVABLES> 3,997,000
<ALLOWANCES> 262,000
<INVENTORY> 5,704,000
<CURRENT-ASSETS> 41,373,000
<PP&E> 6,456,000
<DEPRECIATION> 3,199,000
<TOTAL-ASSETS> 45,953,000
<CURRENT-LIABILITIES> 7,576,000
<BONDS> 0
0
0
<COMMON> 165,000
<OTHER-SE> 38,196,000
<TOTAL-LIABILITY-AND-EQUITY> 45,953,000
<SALES> 19,073,000
<TOTAL-REVENUES> 47,270,000
<CGS> 12,923,000
<TOTAL-COSTS> 39,458,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,000
<INTEREST-EXPENSE> 7,000
<INCOME-PRETAX> 8,561,000
<INCOME-TAX> 481,000
<INCOME-CONTINUING> 8,080,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,080,000
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
</TABLE>
