<PAGE> 1
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 March 31, 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 Identification No.)
incorporation or organization)
SUITE 104A, SAFFREY SQUARE
NASSAU, THE BAHAMAS NOT APPLICABLE
(Address of principal executive offices) (Zip Code)
(242) 356-0006
(Registrant's telephone number, including area code)
--------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check 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 May 11, 1999
<PAGE> 2
STEINER LEISURE LIMITED
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 ......................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 1998 and 1999 .................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 6. Exhibits and Reports on Form 8-K.............................................................. 14
SIGNATURES.............................................................................................. 15
EXHIBIT INDEX........................................................................................... 16
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,058,000 $ 19,600,000
Marketable securities 21,782,000 15,732,000
Accounts receivable 4,832,000 4,779,000
Inventories 8,002,000 8,221,000
Other current assets 1,142,000 2,241,000
------------ ------------
Total current assets 45,816,000 50,573,000
------------ ------------
PROPERTY AND EQUIPMENT, net 5,840,000 7,103,000
------------ ------------
OTHER ASSETS:
Trademarks and product formulations, net 290,000 267,000
License rights, net 740,000 740,000
Other 968,000 804,000
------------ ------------
Total other assets 1,998,000 1,811,000
------------ ------------
Total assets $ 53,654,000 59,487,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,641,000 $ 2,702,000
Accrued expenses 6,434,000 7,413,000
Current portion of capital lease obligations 21,000 13,000
Income taxes payable 848,000 939,000
------------ ------------
Total current liabilities 9,944,000 11,067,000
------------ ------------
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; 20,000,000 shares authorized, 16,603,000 shares
issued and outstanding at December 31, 1998
and 16,607,000 shares issued and outstanding at March 31, 1999 166,000 166,000
Additional paid-in capital 12,790,000 12,827,000
Accumulated other comprehensive income 440,000 102,000
Retained earnings 35,181,000 40,192,000
Treasury shares, at cost, 313,000 shares at December 31, 1998
and at March 31, 1999 (4,886,000) (4,886,000)
------------ ------------
Total shareholders' equity 43,691,000 48,401,000
------------ ------------
Total liabilities and shareholders' equity $ 53,654,000 $ 59,487,000
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
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<PAGE> 4
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
REVENUES:
Services $ 13,735,000 $ 17,019,000
Products 9,200,000 12,335,000
------------ ------------
Total revenues 22,935,000 29,354,000
------------ ------------
COST OF SALES:
Cost of services 10,663,000 13,156,000
Cost of products 6,249,000 8,499,000
------------ ------------
Total cost of sales 16,912,000 21,655,000
------------ ------------
Gross profit 6,023,000 7,699,000
------------ ------------
OPERATING EXPENSES:
Administrative 1,075,000 1,438,000
Salary and payroll taxes 1,228,000 1,402,000
------------ ------------
Total operating expenses 2,303,000 2,840,000
------------ ------------
Income from operations 3,720,000 4,859,000
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 326,000 451,000
Gain on sale of marketable securities 6,000 11,000
Interest expense (3,000) (2,000)
------------ ------------
Total other income (expense) 329,000 460,000
------------ ------------
Income before provision for income taxes 4,049,000 5,319,000
PROVISION FOR INCOME TAXES: 213,000 308,000
------------ ------------
Net income $ 3,836,00 $ 5,011,000
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.24 $ 0.31
============ ============
Diluted $ 0.23 $ 0.30
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
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<PAGE> 5
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,836,000 $ 5,011,000
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 218,000 560,000
Gain on sale of marketable securities (6,000) (11,000)
(Increase) decrease in-
Accounts receivable 733,000 15,000
Inventories (680,000) (299,000)
Other current assets (695,000) (442,000)
Other assets 26,000 (63,000)
Increase (decrease) in-
Accounts payable 672,000 106,000
Accrued expenses (1,953,000) (510,000)
Income taxes payable 213,000 109,000
Minority interest 15,000 --
------------ ------------
Net cash provided by operating activities 2,379,000 4,476,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (4,392,000) (232,000)
Proceeds from maturities of marketable securities 500,000 --
Proceeds from sale of marketable securities 1,599,000 5,488,000
Capital expenditures (130,000) (133,000)
Acquisition of franchise rights (675,000) --
------------ ------------
Net cash (used in) provided by investing activities (3,098,000) 5,123,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (18,000) (8,000)
Net proceeds from stock option exercises 1,144,000 37,000
------------ ------------
Net cash provided by financing activities 1,126,000 29,000
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 44,000 (86,000)
------------ ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 451,000 9,542,000
CASH AND CASH EQUIVALENTS, beginning of period 12,335,000 10,058,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 12,786,000 $ 19,600,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 3,426 $ 3,292
============ ============
Income taxes $ -- $ 51,050
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
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<PAGE> 6
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
months ended March 31, 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. 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 reported as a separate component of shareholders' equity.
(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
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<PAGE> 7
1998, the month of the effective date of the first area development agreement
entered into by EBSC.
(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 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.
(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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Weighted average shares outstanding used in
calculating basic earnings per share 16,291,000 16,291,000
Dilutive common share equivalents 476,000 536,000
------------- -------------
Weighted average common and common equivalent
shares used in calculating diluted earnings per share 16,767,000 16,827,000
============= =============
Options outstanding which are not included in the
calculation of diluted earnings per share because
their impact is antidilutive -- 189,000
============= =============
</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. 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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<PAGE> 8
(4) ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Operative commissions $1,387,000 $1,385,000
Guaranteed minimum rentals 2,144,000 1,106,000
Bonuses 910,000 340,000
Staff shipboard accommodations 326,000 339,000
Accrued construction costs -- 1,500,000
Other 1,667,000 2,743,000
---------- ----------
$6,434,000 $7,413,000
========== ==========
</TABLE>
(5) 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net income $ 3,836,000 $ 5,011,000
Unrealized gain (loss) on marketable securities,
net of income taxes 3,000 (199,000)
Foreign currency translation adjustments,
net of income taxes 59,000 (139,000)
----------- -----------
Comprehensive income $ 3,898,000 $ 4,673,000
=========== ===========
</TABLE>
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<PAGE> 9
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 85% of our income for the first three 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. 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 7.6% of our pre-tax income for the first three months of 1999, will
be subject to U.K. tax rates (generally up to 31%).
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<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain
selected income statement data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
----- -----
<S> <C> <C>
Revenues:
Services 59.9% 58.0%
Products 40.1 42.0
----- -----
Total revenues 100.0 100.0
----- -----
Cost of sales:
Cost of services 46.5 44.8
Cost of products 27.2 29.0
----- -----
Total cost of sales 73.7 73.8
----- -----
Gross profit 26.3 26.2
Operating expenses:
Administrative 4.7 4.9
Salary and payroll taxes 5.4 4.8
Amortization of intangibles -- --
----- -----
Total operating expenses 10.1 9.7
----- -----
Income from operations 16.2 16.5
Other income 1.4 1.6
----- -----
Income before provision for income taxes 17.6 18.1
Provision for income taxes 0.9 1.0
----- -----
Net income 16.7% 17.1%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues increased approximately 28.0%, or $6.4 million, to
$29.3 million in the first quarter of 1999 from $22.9 million in the first
quarter of 1998. Of this increase, $3.3 million was attributable to an increase
in services revenues and $3.1 million was attributable to an increase in
products revenues. The increase in revenues was primarily attributable to an
average of six additional spa ships in service in the first quarter of 1999
compared to the first quarter of 1998. We had an average of 890 shipboard staff
members in service in the first quarter of 1999 compared to an average of 798
shipboard staff members in service in the first quarter of 1998. Revenues per
staff per day increased by 13.2% to $342 in the first quarter of 1999 from $302
in the first quarter of 1998.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.3% in the first quarter of 1999 from 77.6% in the first quarter
of 1998. This decrease was due to increases in productivity of onboard staff
during the first quarter of 1999 compared to the first quarter of 1998,
increased revenues on ships where we are subject to minimum annual rental
payments, and decreases in rent allocable to services on cruise ships covered by
an agreement which was renewed after the first quarter of 1998 and became
effective the first quarter of 1999.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
increased to 68.9% in the first quarter of 1999 from 67.9% in the first 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 after the first
quarter of 1998 and became effective the first quarter of 1999 and discounts
offered to passengers on "Elemis" products, other than the recently reformulated
product lines.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.7% in the first quarter of 1999 from 10.1% in the first quarter
of 1998 as a result of the increase in aggregate revenues generated from the
additional ships in services with enhanced large spa facilities during the first
three months of 1999 compared to the comparable period in 1998.
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<PAGE> 11
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
an overall effective rate of 5.8% for the first quarter of 1999 from an overall
effective rate of 5.3% for the first quarter of 1998 primarily due to an
increase in the income earned in jurisdictions that tax our income increasing at
a greater rate than income 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 three months of
1999 was $4.5 million compared to $2.4 million in the first three 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 $3.0 million in
1998. Subsequent to March 31, 1999, we have spent $500,000, and anticipate
spending an additional approximately $1.0 million in 1999 to reimburse the owner
of the Atlantis Resort for additional construction costs for the Atlantis Spa.
Included in property and equipment and accrued expenses in our consolidated
balance sheets at March 31, 1999 are such $1.5 million in construction costs
reimbursement. That amount had no effect on our cash flow for the first quarter
of 1999. These approximately $4.5 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 $39.5
million at March 31, 1999 compared to $35.9 million at December 31, 1998.
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. We currently do not have an agreement with respect to
an acquisition.
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.
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<PAGE> 12
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 May 12, 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 10 cruise lines that
have not responded.
With respect to our major third party suppliers, as of May 12, 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
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 March 31, 1999, we have
expended approximately $63,000 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. 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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<PAGE> 13
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, 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
the Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed with the Securities and Exchange Commission.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed below have been filed as part of this Quarterly
Report on Form 10-Q.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Steiner Leisure during the quarter
ended March 31, 1999.
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 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
-------------------------------------------------
Carl S. St. Philip
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-15-
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule (for SEC use only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AT, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,600,000
<SECURITIES> 15,732,000
<RECEIVABLES> 4,522,000
<ALLOWANCES> 257,000
<INVENTORY> 8,221,000
<CURRENT-ASSETS> 50,573,000
<PP&E> 11,051,000
<DEPRECIATION> 3,948,000
<TOTAL-ASSETS> 59,487,000
<CURRENT-LIABILITIES> 11,067,000
<BONDS> 0
0
0
<COMMON> 166,000
<OTHER-SE> 48,235,000
<TOTAL-LIABILITY-AND-EQUITY> 59,487,000
<SALES> 12,355,000
<TOTAL-REVENUES> 29,354,000
<CGS> 8,499,000
<TOTAL-COSTS> 24,495,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> 5,319,000
<INCOME-TAX> 308,000
<INCOME-CONTINUING> 5,011,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,011,000
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
</TABLE>
