10-Q 1 g65300e10-q.txt STEINER LEISURE LIMITED 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 September 30, 2000 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 (I.R.S. Employer of incorporation or organization) Identification No.) SUITE 104A, SAFFREY SQUARE NASSAU, THE BAHAMAS NOT APPLICABLE ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) (242) 356-0006 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check [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 16,628,300 shares as of per share November 10, 2000 ================================================================================ 2 STEINER LEISURE LIMITED INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Unaudited Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 ..................................................................... 3 Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 1999 and 2000................................................... 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 2000........................................................... 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
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STEINER LEISURE LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30, 1999 2000 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 23,893,000 $ 31,652,000 Marketable securities 6,261,000 5,153,000 Accounts receivable 6,924,000 5,154,000 Accounts receivable - students, net 2,503,000 7,141,000 Inventories 7,514,000 9,113,000 Other current assets 2,542,000 2,787,000 ------------ ------------ Total current assets 49,637,000 61,000,000 ------------ ------------ PROPERTY AND EQUIPMENT, net 8,111,000 8,978,000 ------------ ------------ GOODWILL, net 8,571,000 13,492,000 ------------ ------------ OTHER ASSETS: Trademarks and product formulations, net 261,000 218,000 License rights, net 733,000 720,000 Other 1,361,000 1,576,000 ------------ ------------ Total other assets 2,355,000 2,514,000 ------------ ------------ Total assets $ 68,674,000 $ 85,984,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,368,000 $ 3,241,000 Accrued expenses 9,019,000 8,877,000 Current portion of deferred tuition revenue 2,141,000 7,875,000 Current portion of capital lease obligations 2,000 -- Income taxes payable 1,002,000 798,000 ------------ ------------ Total current liabilities 14,532,000 20,791,000 ------------ ------------ LONG TERM DEFERRED TUITION REVENUE 144,000 189,000 ------------ ------------ MINORITY INTEREST 1,000 7,000 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred shares, $.0l par value; 10,000,000 shares authorized, none issued and outstanding -- -- Common shares, $.0l par value; 100,000,000 shares authorized, 16,616,000 shares issued at December 31, 1999 and 16,628,000 shares issued at September 30, 2000, respectively 166,000 166,000 Additional paid-in capital 13,338,000 13,426,000 Accumulated other comprehensive income (65,000) (645,000) Retained earnings 57,074,000 74,583,000 Treasury shares, at cost, 1,017,000 shares in 1999 and 1,382,000 shares in 2000 (16,516,000) (22,533,000) ------------ ------------ Total shareholders' equity 53,997,000 64,997,000 ------------ ------------ Total liabilities and shareholders' equity $ 68,674,000 $ 85,984,000 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. -3- 4 STEINER LEISURE LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 1999 2000 1999 2000 ------------ ------------ ------------ ------------- REVENUES: Services $ 20,599,000 $ 27,395,000 $ 54,787,000 $ 75,641,000 Products 13,808,000 15,137,000 38,907,000 44,321,000 ------------ ------------ ------------ ------------- Total revenues 34,407,000 42,532,000 93,694,000 119,962,000 ------------ ------------ ------------ ------------- COST OF SALES: Cost of services 15,865,000 20,729,000 42,265,000 57,251,000 Cost of products 9,595,000 11,219,000 27,006,000 32,814,000 ------------ ------------ ------------ ------------- Total cost of sales 25,460,000 31,948,000 69,271,000 90,065,000 ------------ ------------ ------------ ------------- Gross profit 8,947,000 10,584,000 24,423,000 29,897,000 ------------ ------------ ------------ ------------- OPERATING EXPENSES: Administrative 1,515,000 2,119,000 4,379,000 6,208,000 Salary and payroll taxes 1,535,000 2,041,000 4,343,000 5,891,000 Goodwill amortization 49,000 203,000 49,000 490,000 ------------ ------------ ------------ ------------- Total operating expenses 3,099,000 4,363,000 8,771,000 12,589,000 ------------ ------------ ------------ ------------- Income from operations 5,848,000 6,221,000 15,652,000 17,308,000 ------------ ------------ ------------ ------------- OTHER INCOME (EXPENSE): Interest income 412,000 403,000 1,294,000 1,185,000 Gain on sale of marketable securities -- -- 11,000 -- Interest expense (2,000) (1,000) (5,000) (2,000) ------------ ------------ ------------ ------------- Total other income (expense) 410,000 402,000 1,300,000 1,183,000 ------------ ------------ ------------ ------------- Income before provision for income taxes and minority interest 6,258,000 6,623,000 16,952,000 18,491,000 PROVISION FOR INCOME TAXES 384,000 342,000 1,051,000 976,000 ------------ ------------ ------------ ------------- Income before minority interest 5,874,000 6,281,000 15,901,000 17,515,000 MINORITY INTEREST -- -- -- (6,000) ------------ ------------ ------------ ------------- Net income $ 5,874,000 $ 6,281,000 $ 15,901,000 $ 17,509,000 ============ ============ ============ ============= EARNINGS PER COMMON SHARE: Basic $ 0.36 $ 0.41 $ 0.98 $ 1.14 ============ ============ ============ ============= Diluted $ 0.35 $ 0.40 $ 0.95 $ 1.10 ============ ============ ============ =============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. -4- 5 STEINER LEISURE LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (UNAUDITED)
Nine Months Ended September 30, ------------------------------- 1999 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,901,000 $ 17,509,000 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 1,890,000 1,776,000 Gain on sale of marketable securities (11,000) -- Minority interest -- 6,000 (Increase) decrease in- Accounts receivable (1,776,000) (624,000) Inventories 17,000 (1,834,000) Other current assets (141,000) (202,000) Other assets (995,000) (322,000) Increase (decrease) in- Accounts payable (1,326,000) 737,000 Accrued expenses 1,525,000) (204,000) Deferred tuition revenue 743,000 2,356,000 Income taxes payable 4,000 (163,000) ------------ ------------ Net cash provided by operating activities 15,831,000 19,035,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (6,820,000) (2,635,000) Proceeds from maturities of marketable securities 3,730,000 2,785,000 Proceeds from sale of marketable securities 6,304,000 995,000 Capital expenditures (3,294,000) (2,075,000) Acquisitions, net of cash acquired (7,759,000) (4,149,000) ------------ ------------ Net cash used in investing activities (7,839,000) (5,079,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations (19,000) (2,000) Payments on long-term debt (14,000) -- Purchases of treasury shares -- (6,017,000) Net proceeds from stock option exercises 106,000 88,000 ------------ ------------ Net cash provided by (used in) financing activities 73,000 (5,931,000) ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (22,000) (266,000) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 8,043,000 7,759,000 CASH AND CASH EQUIVALENTS, beginning of period 10,058,000 23,893,000 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 18,101,000 $ 31,652,000 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 5,000 $ 3,000 ============ ============ Income taxes $ 1,048,000 $ 1,114,000 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. -5- 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 and nine months ended September 30, 1999 and 2000 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, 1999. (2) ORGANIZATION: Steiner Leisure Limited (including its subsidiaries, where the context requires; "Steiner Leisure," "we," "us," "our," and the "Company" refer to Steiner Leisure Limited) provides spa services and skin and hair care products to passengers on board cruise ships worldwide. Commencing in February 1999, the Company began operating the luxury health spa at the Atlantis Resort on Paradise Island in The Bahamas (the "Atlantis Spa"). In connection with the operation of the Atlantis Spa, the Company pays the resort's owner the greater of a minimum monthly rental and an amount based on its revenues at the Atlantis Spa. As the result of an acquisition in August 1999, the Company operates, through a wholly-owned subsidiary, four post-secondary schools in Florida offering degree and non-degree programs in massage therapy and skin care and related areas (the "Florida Schools"). As the result of an acquisition in April 2000, the Company operates, through a wholly-owned subsidiary, a total of five post-secondary massage therapy schools in Maryland, Pennsylvania and Virginia (the "Additional Schools"). On October 19, 2000, Steiner Leisure entered into an agreement to build and operate a luxury spa facility at the Aladdin Resort and Casino in Las Vegas, Nevada. The term of the lease of the facilities will be for 15 years with a five year renewal option if certain sales levels are achieved. (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 Statement of Financial Accounting Standards 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) GOODWILL- Goodwill represents the excess of cost over the fair market value of identifiable net assets acquired. Goodwill is amortized on a straight-line basis over its estimated useful life of 20 years. The Company continually evaluates intangible assets and other long-lived assets for impairment whenever circumstances indicate that carrying amounts may not be recoverable. When factors indicate that the assets acquired in a business purchase combination and the related goodwill may be impaired, we recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset (or acquired business) are less than the carrying value of the related asset. (c) 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 -6- 7 Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 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 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. (d) 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 condensed consolidated statements of operations. (e) EARNINGS PER SHARE- Basic earnings per share is computed by dividing the net income available to shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common share equivalents such as share options. The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 1999 2000 1999 2000 ------------ -------------- ------------ -------------- Weighted average shares outstanding used in calculating basic earnings per share 16,312,000 15,264,000 16,299,000 15,404,000 Dilutive common share equivalents 502,000 520,000 521,000 475,000 ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares used in calculating diluted earnings per share 16,814,000 15,784,000 16,820,000 15,879,000 =========== =========== =========== =========== Options and warrants outstanding which are not included in the calculation of diluted earnings per share because their impact is antidilutive 431,000 744,000 431,000 906,000 =========== =========== =========== ===========
(f) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. We will adopt SAB 101 as required in the fourth quarter of 2000. Management does not expect the adoption of SAB 101 to have a material impact on the Company's consolidated results of operations and financial position. In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133." SFAS No. 137 defers for one year the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138, will now apply to all fiscal quarters of all fiscal years beginning after June 15, 2000 and requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The Company will adopt SFAS No. 133 as required in fiscal year 2001. The Company believes the adoption of this Statement will not have a material effect on the earnings and financial position of the Company. (4) ACQUISITIONS: In August 1999, the Company acquired the assets that now constitute the Florida Schools in consideration of approximately $7.9 million (including purchase price adjustments) in cash and $1,000,000 of the Company's common shares. The transaction was accounted for under the purchase method of accounting. The purchase price exceeded the fair market value of net assets acquired resulting in goodwill of approximately $8.7 million. -7- 8 In April 2000, the Company acquired the assets that now constitute the Additional Schools in consideration of approximately $4.1 million (including purchase price adjustments) in cash. The transaction was accounted for under the purchase method of accounting. The purchase price exceeded the fair market value of net assets acquired resulting in goodwill of approximately $5.3 million. Unaudited pro forma consolidated results of operations assuming the Florida Schools and the Additional Schools acquisitions had occurred at the beginning of the periods presented are as follows: NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 2000 ------------ ------------- Revenue $ 101,680,000 $ 121,390,000 Net income 15,406,000 17,622,000 Basic earnings per share 0.94 1.14 Diluted earnings per share 0.91 1.11 The above pro forma consolidated statement of operations are based upon certain assumptions and estimates which the Company believes are reasonable. The unaudited pro forma consolidated results of operations may not be indicative of the operating results that would have been reported had the acquisitions been consummated on January 1, 1999, nor are they necessarily indicative of results which will be reported in the future. (5) ACCRUED EXPENSES: Accrued expenses consist of the following: December 31, September 30, 1999 2000 ------------- --------------- (Unaudited) Operative commissions $ 1,638,000 $ 1,871,000 Guaranteed minimum rentals 3,117,000 2,981,000 Bonuses 750,000 689,000 Staff shipboard accommodations 397,000 443,000 Earnout 500,000 -- Other 2,617,000 2,893,000 ------------ ----------- Total $ 9,019,000 $ 8,877,000 =========== =========== (6) COMPREHENSIVE INCOME: Steiner Leisure adopted SFAS No. 130, "Reporting Comprehensive Income," effective January 1, 1998. SFAS No. 130 establishes standards for reporting and disclosure of comprehensive income and its components in financial statements. The components of Steiner Leisure's comprehensive income are as follows:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- ----------------------------------- 1999 2000 1999 2000 -------------- -------------- --------------- ---------------- Net income $ 5,874,000 $ 6,281,000 $ 15,901,000 $ 17,509,000 Unrealized gain (loss) on marketable securities, net of income taxes 435,000 25,000 (23,000) 37,000 Foreign currency translation adjustments, net of income taxes (201,000) (231,000) (474,000) (616,000) ------------- ------------- ------------- ------------- Comprehensive income $ 6,108,000 $ 6,075,000 $ 15,404,000 $ 16,930,000 ============= ============= ============= =============
-8- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL 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. 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. In general, Steiner Leisure has experienced increases in rent payments as a percentage of revenue upon entering into new agreements with cruise lines. Steiner Leisure also sells its services and products through land-based channels, including a luxury spa at the Atlantis Resort on Paradise Island in The Bahamas ("Atlantis Spa") and has entered into an agreement to build and operate a luxury spa facility at the Aladdin Resort and Casino in Las Vegas, Nevada. Steiner Leisure also operates nine post secondary schools in the United States offering degree and non-degree programs in massage therapy and related courses. Steiner Leisure, Steiner Transocean Limited, our subsidiary that conducts our shipboard operations, and Cosmetics Limited, our subsidiary that owns the rights to, and distributes our Elemis and La Therapie products, are Bahamian international business companies ("IBCs"). 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. Approximately 86% of our income for the first nine months of 2000 was not subject to United States or United Kingdom income tax. The income from our United States subsidiaries, including those that perform administrative services for us, operate our massage therapy schools and sell our products in the United States, are 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 9% of our pre-tax income for the first nine months of 2000, will be subject to U.K. tax rates (generally up to 31%). Our Bahamas subsidiary that conducts our Atlantis Spa operations is not an IBC and is subject to tax on its revenues of approximately one percent. To the extent that our income from non-maritime operations in jurisdictions that impose income taxes increases more rapidly than any increase in our maritime-related income, the percentage of our income subject to tax would increase. On October 31, 2000, Steiner Leisure was advised by Norwegian Cruise Line that our agreement to serve Norwegian's vessels would not be renewed after its expiration on December 31, 2000. -9- 10 RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of revenues:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 2000 1999 2000 ------ ------ ------ ------ Revenues: Services 59.9% 64.4% 58.5% 63.0% Products 40.1 35.6 41.5 37.0 ------ ------ ------ ------ Total revenues 100.0 100.0 100.0 100.0 ------ ------ ------ ------ Cost of sales: Cost of services 46.1 48.7 45.1 47.7 Cost of products 27.9 26.4 28.8 27.4 ------ ------ ------ ------ Total cost of sales 74.0 75.1 73.9 75.1 ------ ------ ------ ------ Gross profit 26.0 24.9 26.1 24.9 Operating expenses: Administrative 4.4 5.0 4.7 5.2 Salary and payroll taxes 4.5 4.8 4.6 4.9 Amortization of goodwill 0.1 0.5 0.1 0.4 ------ ------ ------ ------ Total operating expenses 9.0 10.3 9.4 10.5 ------ ------ ------ ------ Income from operations 17.0 14.6 16.7 14.4 Other income 1.2 0.9 1.4 1.0 ------ ------ ------ ------ Income before provision for income taxes and minority interest 18.2 15.5 18.1 15.4 Provision for income taxes 1.1 0.8 1.1 0.8 ------ ------ ------ ------ Income before minority interest 17.1 14.7 17.0 14.6 Minority interest -- -- -- -- ------ ------ ------ ------ Net income 17.1% 14.7% 17.0% 14.6% ====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES. Revenues increased approximately 24.0%, or $8.1 million, to $42.5 million in the third quarter of 2000 from $34.4 million in the third quarter of 1999. Of this increase, $6.8 million was attributable to an increase in services revenues and $1.3 million was attributable to an increase in products revenues. The increase in revenues was primarily attributable to an average of seven additional spa ships in service in the third quarter of 2000 compared to the third quarter of 1999, the commencement of operations at our Florida Schools on August 25, 1999, and the commencement of operations at our Additional Schools in April 2000. We had an average of 1,097 shipboard staff members in service in the third quarter of 2000 compared to an average of 988 shipboard staff members in service in the third quarter of 1999. Revenues per shipboard staff per day increased by 4.3% to $365 in the entire third quarter of 2000 from $350 in the third quarter of 1999. COST OF SERVICES. Cost of services as a percentage of services revenue decreased to 75.7% in the third quarter of 2000 from 77.0% in the third quarter of 1999. This decrease was due to increases in productivity of shipboard staff during the third quarter of 2000 compared to the third quarter of 1999, a decrease in the rent allocable to services revenues on cruise ships covered by agreements which were renewed after the third quarter of 1999 and became effective during the third quarter of 2000, and the effect of the lower cost of services as a percentage of services revenues at our Florida Schools (which were owned by us for a portion of the third quarter of 1999) and Additional Schools (which were not owned by us during the third quarter of 1999). COST OF PRODUCTS. Cost of products as a percentage of products revenue increased to 74.1% in the third quarter of 2000 from 69.5% in the third quarter of 1999. This increase was due to increases in rent allocable to products sales on cruise ships covered by agreements which were renewed after the third quarter of 1999 and became effective during the third quarter of 2000. OPERATING EXPENSES. Operating expenses as a percentage of revenues increased to 10.3% in the third quarter of 2000 from 9.0% in the third quarter of 1999 as a result of the operating expenses and goodwill amortization at our Florida Schools (which were owned by us for a portion of the third quarter of 1999) and Additional Schools (which were not owned by us during the entire third quarter of 1999). -10- 11 PROVISION FOR INCOME TAXES. The provision for income taxes decreased to an overall effective rate of 5.2% for the third quarter of 2000 from an overall effective rate of 6.1% for the third quarter of 1999 primarily due to the income earned in jurisdictions that do not tax our income being greater than our income earned in jurisdictions that tax our income. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES. Revenues increased approximately 28.0%, or $26.3 million, to $120.0 million for the nine months ended September 30, 2000 from $93.7 million for the nine months ended September 30, 1999. Of this increase, $20.9 million was attributable to increases in services provided on cruise ships and $5.4 million was attributable to increases in sales of products. The increase in revenues for the first nine months of 2000 compared to the same period in the prior year was primarily attributable to an average of seven additional spa ships in service, the increase in revenues at the Atlantis Spa, the commencement of operations at our Florida Schools on August 25, 1999, and the commencement of operations at our Additional Schools in April 2000. The Company had 1,063 shipboard staff members in service on average during the nine months ended September 30, 2000 compared to 920 shipboard staff members in service on average during the nine months ended September 30, 1999. Revenues per staff per day increased by 3.2% in the first nine months of 2000 compared to the comparable period of 1999. COST OF SERVICES. Cost of services as a percentage of services revenue decreased to 75.7% in the first nine months of 2000 from 77.1% for the first nine months of 1999. This decrease was due to an increase in productivity of onboard staff during the first nine months of 2000 compared to the same period in prior year, a decrease in the rent allocable to services revenues on cruise ships covered by agreements which were renewed after the first quarter of 1999 and became effective during the first quarter of 2000, and the effect of the lower cost of services as a percentage of services revenues at our Florida Schools (which were owned by us during a portion of 1999) and Additional Schools (which were not owned by us during all of 1999). COST OF PRODUCTS. Cost of products as a percentage of products revenue increased to 74.0% in the first nine months of 2000 from 69.4% for the first nine months of 1999. This increase was primarily due to increases in rent allocable to products sales on cruise ships covered by agreements which were renewed after the first quarter of 1999 and became effective during the first quarter of 2000. OPERATING EXPENSES. Operating expenses as a percentage of revenues increased to 10.5% for the first nine months of 2000 from 9.4% for the first nine months of 1999 as a result of the operating expenses and goodwill amortization at our Florida Schools (which were owned by us during a portion of 1999) and Additional Schools (which were not owned by us during the first nine months of 1999). PROVISION FOR INCOME TAXES. The provision for income taxes decreased to an overall effective rate of 5.3% for the first nine months of 2000 from an overall effective rate of 6.2% for the first nine months of 1999 primarily due to the income earned in jurisdictions that do not tax our income being greater than our income earned in jurisdictions that 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 significan 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 Cash flow from operating activities during the first nine months of 2000 was $19.0 million compared to $15.8 million in the first nine months of 1999. This increase is primarily due to the increase in our net income. Steiner Leisure had working capital of approximately $40.2 million at September 30, 2000 compared to $35.1 million at December 31, 1999. On October 19, 2000, Steiner Leisure entered into an agreement to build and operate a luxury spa facility at the Aladdin Resort and Casino in Las Vegas, Nevada. The term of the lease of the facilities will be for 15 years with a five -11- 12 year renewal option if certain sales levels are achieved. We estimate that the build-out will cost approximately $13.5 million and the spa will open in September 2001. The build-out will be funded from our working capital. In April 2000, Steiner Leisure acquired the assets of a total of five post-secondary massage therapy schools located in Maryland, Pennsylvania and Virginia. The purchase price of approximately $4.1 million in cash was funded from our working capital. Through November 5, 2000, we purchased a total of 365,000 of our common shares in 2000 in the open market for an aggregate purchase price of approximately $6.0 million. The cash used to make such purchases was funded from our working capital. These purchases were made pursuant to a share purchase program authorized by our Board of Directors. 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. -12- 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. Such forward looking statements include, among others, statements regarding: o our proposed activities pursuant to agreements with cruise lines or land-based operators; o our future land-based activities; o scheduled introductions of new ships by cruise lines; o our ability to generate sufficient cash flow from operations; and o the extent of the taxability of our income. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to 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: o negotiations with cruise lines resulting in agreements which may not be as beneficial to us as anticipated or non-renewals of agreements; o 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; o our dependence on the cruise industry and our being subject to the risks of that industry; o our obligation to make minimum payments to certain cruise lines and the Atlantis Resort irrespective of the revenues received by us from customers and increase in rent payments accompanying new cruise line agreements; o our dependence on a limited number of cruise companies and on a single product manufacturer; o our dependence for success on our ability to recruit and retain qualified personnel; o changes in the taxation of our Bahamas subsidiaries; o changing competitive conditions, including increased competition from providers of shipboard spa services; o changes in laws and government regulations applicable to us and the cruise industry; o our limited experience in land-based operations including with respect to the integration of acquired businesses; o uncertainties beyond our control that could effect our ability to timely and cost-effectively construct land-based spa facilities; o product liability or other claims against us by customers of our products or services; and o our failure, or the failure of a cruise line customer or supplier, to correct a material Year 2000 problem. We assume no duty to update these forward-looking statements. The risks to which we are subject are more fully described under "Certain Factors That May Affect Future Operating Results" in Steiner Leisure's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the Securities and Exchange Commission. -13- 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. 10.7 Amended and Restated Non-Employee Directors' Share Option Plan 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 September 30, 2000. -14- 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 13, 2000 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- 16 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 10.7 Amended and Restated Non-Employee Directors' Share Option Plan 27 Financial Data Schedule -16-