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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM___________ TO______________
COMMISSION FILE NUMBER: 0-28972
STEINER LEISURE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF THE BAHAMAS 98-0164731
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
SUITE 104A, SAFFREY SQUARE,
NASSAU, THE BAHAMAS NOT APPLICABLE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (242) 356-0006
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value (U.S.) $.01 per share
Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 17, 1999 was approximately $377,203,608.
As of March 17, 1999, 16,602,980 of the registrant's Common Shares, par
value (U.S.) $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Company's
1999 Annual Meeting of Shareholders, which will be filed on or before April 30,
1999, are incorporated by reference in Part III hereof.
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PART I ....................................................................1
ITEM 1. BUSINESS.........................................................1
General..........................................................1
Cruise Industry Overview.........................................1
Business Strategy................................................2
Growth Strategy..................................................3
Cruise Line Customers............................................3
Shipboard Services...............................................4
Facilities Design................................................5
Hours of Operation...............................................5
Recruiting and Training..........................................6
Products.........................................................6
Marketing and Promotion..........................................6
Cruise Line Agreements...........................................7
Recent Land-Based Activities.....................................7
Competition......................................................7
Regulation.......................................................8
Employees........................................................8
ITEM 2. .......................................................9
ITEM 3. LEGAL PROCEEDINGS................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............9
EXECUTIVE OFFICERS OF THE REGISTRANT...........................................9
PART II ...................................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.........................................................11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...........................................14
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS......................20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................25
PART III ...................................................................26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............26
ITEM 11. EXECUTIVE COMPENSATION..........................................26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................26
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PART IV ...................................................................27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.............................................................27
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PART I
ITEM 1. BUSINESS
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. We strive to create a relaxing and therapeutic environment where
customers can receive body and facial treatments and hair styling comparable in
quality to the finest land-based spas and salons. Steiner Leisure also develops
and markets premium priced, high quality personal care products that are sold
primarily in connection with the services we provide. As of March 1, 1999, we
served 99 cruise ships representing 26 cruise lines, including Carnival, Royal
Caribbean, Princess, Norwegian, Celebrity and Cunard. Our services are provided
under agreements with cruise lines which range in duration from one to six
years.
Steiner Leisure was organized as an international business company
under the laws of The Bahamas in October 1995 as the successor to Steiner Group
Limited, now known as STGR Limited, a family-owned business founded in 1934 in
the United Kingdom ("Steiner Group"). The Company commenced operations in
November 1995 with the contribution to its capital of substantially all of the
cruise-related assets of the maritime division of Steiner Group and the
outstanding common stock of Coiffeur Transocean (Overseas), Inc., a subsidiary
of Steiner Group acquired in June 1994.
Steiner Leisure provides its shipboard services in treatment and
fitness facilities located on cruise ships. On newer ships, our services are
provided in enhanced, large "spa" facilities. Many of these facilities offer
enlarged fitness and treatment areas, generally located in a single passenger
activity area. As of March 1, 1999, 37 of the 99 ships that we served had large
spa facilities. Our services include massage, hydrotherapy (water-based)
treatments, aromatherapy treatments, seaweed wraps, saunas, steam rooms, aerobic
exercise, hair styling, manicures, pedicures and a variety of other specialized
body and facial treatments. Our range of services is designed to capitalize on
the growing consumer trend towards health awareness, personal care and fitness.
Ships with large spas provided us with average weekly revenues of $35,054 in
1997 and $36,373 in 1998, as compared to average weekly revenues of $10,276 in
1997 and $10,607 in 1998 for the other ships we served.
In addition to our shipboard services, we sell a variety of beauty and
hair care products under our "Elemis" and "La Therapie" trademarks. The raw
materials for these products are produced for us by a premier French
manufacturer. We also sell a variety of hair care products under the "Steiner"
name. In total, we offer over 160 different products. These products include
beauty preparations, such as aromatherapy oils, cleansers and creams, other skin
care preparations and accessories and hair care products, such as shampoos,
moisturizers and lotions. Steiner Leisure sells its products primarily on board
the ships that we serve. We also sell products through land-based retail and
wholesale outlets, mail order and our website at www.steinerleisure.com. During
1998, services accounted for approximately 59% of our revenues and products
accounted for approximately 41% of our revenues.
CRUISE INDUSTRY OVERVIEW
The passenger cruise industry has experienced substantial growth over
the past 30 years. The industry has evolved from a trans-ocean carrier service
into a vacation alternative to land-based resorts and sightseeing destinations.
The cruise market is comprised of luxury, premium and volume segments which
appeal to a broad range of passenger tastes and budgets. Steiner Leisure serves
ships in all of these segments. According to Cruise Lines International
Association, a trade association ("CLIA"), the passenger volume of cruises
marketed primarily to North American consumers ("North American Cruises") grew
from approximately 2.2 million in 1985 to approximately 5.4 million in 1998,
representing a compound annual growth rate of approximately 7.1%. As of March 1,
1999, we served 99 ships, approximately 84 of which offered North American
Cruises.
According to a study reported by CLIA in February 1999, passengers
ranked as their top reason for preferring cruising to other vacation types that
cruises "allow you to be pampered." Similarly, in comparing cruise vacations to
other vacations, customers of both ranked cruise vacations higher than resort
vacations in many categories. "Being pampered" achieved the greatest positive
distinction. We believe our services offer a therapeutic and indulgent
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experience to passengers, and provide a memorable highlight of their cruise
vacation. As a result, we believe our operations are an important part of the
cruise ship experience.
In recent years, cruise lines have been building larger ships with
large spas dedicated to the types of health, beauty and fitness services offered
by us. Generally, these large spas offer enlarged fitness and treatment
facilities, are located on higher profile decks and have enriched decor. With
respect to certain ships, we participate in the design of these facilities. As
of March 1, 1999, 37 of the ships that we served offered large spa facilities.
The cruise lines served by us are scheduled to introduce nine new ships into
service in 1999. Steiner Leisure expects to perform services on eight of these
ships, including six that are currently covered by cruise line agreements. Six
of these eight will have large spa facilities.
BUSINESS STRATEGY
Our business strategy is directed at maintaining and enhancing our
position as the leading worldwide provider of spa services and skin and hair
care products on board cruise ships. To do so, we:
RECRUIT AND TRAIN HIGH QUALITY SHIPBOARD PERSONNEL. Steiner Leisure
provides services to our customers on a personal basis. We employ shipboard
staff who are professional, attentive and able to continue our tradition of
catering to the needs of individual customers. We recruit our staff primarily
from the British Isles, the rest of Europe and British Commonwealth countries.
We require prospective employees to be technically skilled and to possess a
willingness to provide outstanding personal service. We train candidates in our
philosophy of customer care. Our training emphasizes the importance of an
individualized and therapeutic experience for our customers. We believe that our
success is largely attributable to our ability to staff our operations with
highly trained personnel who provide outstanding personal service.
UTILIZE EXPERIENCED AND EMPOWERED SHIPBOARD MANAGEMENT. Steiner
Leisure's shipboard operations are supervised by experienced managers who
implement our philosophy of customer care. Our managers are selected from the
best of our shipboard staff and are trained at our facilities in England.
Managers are granted substantial authority to make day-to-day decisions
regarding shipboard operations, including those actions necessary to maximize
shipboard revenues. Our shipboard managers are responsible for efficient
scheduling of personnel, inventory management, supervision of sales and
marketing, maintenance of required shipboard discipline and communication with
our senior management.
DEVELOP AND DELIVER HIGH QUALITY SERVICES AND PRODUCTS. Steiner Leisure
strives to create an engaging and therapeutic environment where customers can
receive body and facial treatments and hair styling comparable in quality to the
finest land-based spas and salons. Many of the techniques and products used by
our personnel have been developed by us. We conduct our own research and respond
to the needs and requests of our customers. We continually update the range of
techniques, services and products we offer to satisfy changing health, beauty
and fitness trends. Through our attentive and highly trained staff and our
premium quality hair and beauty products, Steiner Leisure provides cruise
passengers with what we believe is a richly rewarding experience that is a
memorable highlight of a cruise vacation.
EFFECTIVELY MARKET OUR SERVICES AND PRODUCTS. Steiner Leisure uses a
variety of marketing techniques to bring our services and products to the
attention of cruise passengers. Our personnel individually inform our customers
as to the services and products offered by us and also offer group promotions,
seminars and demonstrations. We provide incentives to our employees to maximize
sales of our services and products and train employees to cross-market services
and products offered by other personnel. Steiner Leisure also promotes
pre-cruise purchases of our shipboard services and spa packages.
MAINTAIN CLOSE RELATIONSHIPS WITH THE CRUISE LINES. Steiner Leisure has
developed strong relationships with the cruise lines as a result of the revenues
we generate for them and the high level of customer satisfaction with our
services. These relationships are important to our future growth and positioned
us to obtain renewals of almost all of our cruise line agreements that have
expired since 1990. During 1997, Holland America Line, with eight ships in
service at March 1, 1999, renewed its agreement with us for an additional six
years. In January 1999, Princess Cruise Lines, with ten ships in service at
March 1, 1999, renewed its agreement with us for an additional three years.
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GROWTH STRATEGY
Steiner Leisure's strategy for continued growth includes the following
principal elements:
EXPAND WITH PRESENT CRUISE LINE CUSTOMERS. We believe that our success
in providing high quality services and products and generating revenues for the
cruise lines will enable us to grow as our cruise line customers introduce new
ships with large spas. From November 1996 to March 1, 1999, we commenced serving
16 new cruise ships brought into service by our cruise line customers. As of
March 1, 1999, the cruise lines served by us were scheduled to introduce nine
new ships into service in 1999. Steiner Leisure expects to perform services on
eight of these ships, including six that are currently covered by cruise line
agreements.
CAPITALIZE ON GROWTH IN SIZE AND QUALITY OF SHIPBOARD FACILITIES. An
increasing number of cruise ships offer large spa facilities. Many of these
facilities include hydrotherapy treatments and enlarged fitness and treatment
areas. Newer facilities are located on higher profile decks, have enriched decor
and offer all of our services and products in a single passenger activity area.
These enhanced facilities foster the cross-marketing of services and products
and enable us to serve a larger number of passengers. We often assist cruise
lines with the planning and design of spa facilities on new ships. We believe
that our participation in the design of facilities has resulted in improved
quality of service and increased revenues to us and the cruise lines. As of
March 1, 1999, 37 of the ships we served had large spa facilities. In 1999, we
believe we will begin serving an additional six ships with large spa facilities.
INCREASE PRODUCT SALES. Sales of our products increased at a compound
annual growth rate of 30.5% from 1994 through 1998. Steiner Leisure's products
are sold primarily to cruise ship passengers. We also sell products at the
luxury spa we operate at the Atlantis Resort on Paradise Island in The Bahamas,
the Elemis Beautiful Skin Centres in Hong Kong, and through third party,
land-based retail and wholesale channels. Our products are also offered through
mail order and our website at www.steinerleisure.com. In 1998, we reformulated
and repackaged our "Elemis" product lines to satisfy our customers' changing
tastes. We believe that there is a significant opportunity to increase our
product sales through third party, land-based channels.
INCREASING SHIPBOARD PRODUCTIVITY. Improved staff productivity on board
ships is a significant factor contributing to our overall growth. The gross
revenue attributable to each shipboard staff member per day that a ship is in
service is expressed as a "gross per day." During 1998, ships with large spa
facilities had an average gross per day of $343 compared to $260 for ships
without large spa facilities. Steiner Leisure's average gross per day has
increased each year, from $213 in 1994 to $310 in 1998. We believe that this
increase is due to the continuous training that we provide to our shipboard
employees including instruction in maximization of sales.
SEEK LAND-BASED OPPORTUNITIES. We believe that there are land-based
opportunities to sell our services and products. In 1999, we began operating the
Atlantis Spa. We sell services and products at that facility similar to those we
sell on cruise ships. In 1998, we licensed rights to operate three Elemis
Beautiful Skin Centres in Hong Kong. These day spas sell our products. We will
consider other land-based opportunities if we believe the circumstances to be
appropriate.
CONSIDER STRATEGIC ACQUISITIONS. Steiner Leisure will consider
strategic acquisitions of land-based or maritime-based businesses that are
compatible with our operations. We do not have any current agreements with
respect to any potential acquisitions.
CRUISE LINE CUSTOMERS
As of March 1, 1999, Steiner Leisure provided its services and products
to 26 cruise lines representing a total of 99 ships, including almost all of the
major cruise lines offering North American Cruises.
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The numbers of ships served as of March 1, 1999 under cruise line
agreements with the respective cruise lines are listed below:
<TABLE>
<CAPTION>
NO. OF SHIPS NO. OF SHIPS
COVERED BY COVERED BY
CRUISE LINE AGREEMENT CRUISE LINE AGREEMENT
<S> <C> <C> <C>
Carnival (l).................... 13 P&O Cruises (5)........................ 3
Celebrity (2)................... 5 P&O European Ferries (5)............... 1
Costa (l)....................... 5 Passat................................. 1
Crystal......................... 2 Premier................................ 6
Cunard (l)...................... 5 Princess (5)........................... 10
Disney.......................... 1 Radisson Diamond Seven Seas............ 2
Fred Olsen...................... 2 Renaissance............................ 2
Holland America (l)............. 8 Royal Caribbean........................ 12
Louis........................... 2 Saga (6)............................... 1
MTC............................. 1 Seabourn (1)........................... 3
Norwegian (3)................... 8 Silversea.............................. 2
Norwegian Capricorn (3) (4)..... 1 Unicom................................. 1
Orient (3)..................... 1 WINDSTAR (1)........................... 1
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Total.................................. 99
</TABLE>
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(1) Carnival Corporation, the parent company of Carnival Cruise
Lines, also owns Holland America, Costa, Windstar and a majority
interest in Cunard and Seabourn.
(2) Celebrity is owned by Royal Caribbean.
(3) Norwegian is a partner in the entity that owns Norwegian
Capricorn and owns Orient.
(4) We are serving this ship pending execution of the applicable
agreement.
(5) P&O European Ferries, P&O Cruises and Princess are subsidiaries
of The Peninsular & Oriental Steam Navigation Company.
(6) This agreement will expire on April 30, 1999. Steiner Leisure is
currently negotiating a renewal of the agreement.
As of March 1, 1999, the cruise lines served by us were scheduled to
introduce nine new ships into service in 1999. Steiner Leisure expects to
perform services on eight of these ships, including six that are currently
covered by cruise line agreements. Six of these eight will have large spa
facilities. The cruise lines for which these ships will enter service are as
follows: Carnival (one ship); Holland America (one ship); Norwegian (one ship);
Royal Caribbean (one ship); Princess (one ship); Disney (one ship); and
Renaissance (two ships).
Since November 1996, none of our cruise line agreements has been
terminated prior to its expiration date. Historically, almost all of our cruise
line agreements that have expired have been renewed beyond their specified
expiration dates. The total number of ships we serve is affected by cruise lines
removing from service older ships as new ships are introduced.
SHIPBOARD SERVICES
Our goal is to provide our customers with a therapeutic and indulgent
experience in an atmosphere of individualized attention. Steiner Leisure
provides a range of personal services that we believe is comparable to those
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offered by the finest land-based spas and salons. We believe that the prices we
charge are comparable to those charged for similar quality services and products
by land-based establishments.
MASSAGE AND OTHER BODY TREATMENTS. We offer massages and a variety of
other body treatments to women and men. Types of body treatments include seaweed
and other therapeutic wraps and aromatherapy treatments. The body treatment
techniques include those developed by us in response to the needs and requests
of cruise ship passengers. The number of private treatment rooms available for
these services ranges from one to twelve, depending on the size of the ship. The
number of our staff providing these services on a ship also ranges from one to
twelve. On several ships, Steiner Leisure provides certain specialty treatments
including a body capsule that provides a multi-sensory massage-like treatment in
an individual, self-contained environment. We regularly introduce new treatments
and products.
BEAUTY AND HAIR. On each ship we serve we operate a hair styling salon
that provides services to women, men and children and facilities for nail and
beauty treatments. Depending on the size of the ship, Steiner Leisure's
facilities offer from two to ten hair styling stations as well as stations for
facial treatments, manicures and pedicures. We staff each ship with one to seven
employees performing hair, nail and beauty services.
SPAS. Since the late 1980's, cruise lines increasingly have provided
enlarged spa facilities which, in general, allow all of our services to be
offered in a single passenger activity area. As of March 1, 1999, large spas
were found on 37 of the ships that we served. We expect to serve an additional
six ships with large spa facilities that are anticipated to begin service later
in 1999. These spas provide enlarged fitness and treatment areas and on most
ships include hydrotherapy treatments. These facilities are generally located on
higher profile decks and have enriched decor. We believe that the location of
our operations in a spa environment enhances enjoyment of our services by
passengers, encourages increased passenger interest in our services and
facilitates cross-marketing of our services and products. We believe that most
of the ships currently under construction for our largest cruise line customers
will include large spas. In 1998, our average weekly revenues on ships with
large spas were 3.4 times our average weekly revenues on other ships.
FITNESS FACILITIES. As of March 1, 1999, we operated fitness facilities
on 61 of the ships we serve. Fitness facilities typically include weightlifting
equipment, cardiovascular equipment (including treadmills, exercise bicycles and
rowing and stair machines) and facilities for fitness classes. Steiner Leisure
provides from one to three fitness instructors, depending on ship size. These
instructors are available to provide special services to passengers, such as
personal nutritional and dietary advice, body composition analysis and personal
training. Use of fitness facilities is generally available at no charge to
cruise passengers, except for fees that are typically charged for special
services.
SAUNAS AND STEAM ROOMS. We operate saunas and steam rooms on most of
the ships we serve. These facilities generally may be used by passengers at no
charge.
FACILITIES DESIGN
In general, facilities we operate have been designed by the cruise
lines. However, several cruise lines have requested our assistance in the design
of shipboard spas and other facilities. We have assisted or are assisting in the
design of facilities for a total of 39 ships, including 26 which have, or upon
completion will have, large spas. Of these 39 ships, 30 are currently in
service, 29 of which we serve, and the remainder are under construction. We
believe that our participation has resulted in the construction of facilities
permitting improved quality of service and increased revenues to us and the
cruise lines. We believe that our involvement in the design of shipboard
facilities has enabled us to obtain additional cruise line agreements. However,
there can be no assurance that we will be able to obtain agreements for all of
the ships for which we provide design assistance.
HOURS OF OPERATION
The facilities operated by Steiner Leisure generally are open each day
during the course of a cruise from 8:00 a.m. to 8:00 p.m., except when a ship is
in the territorial waters of a jurisdiction that would tax our sales or income.
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RECRUITING AND TRAINING
Our continued success is dependent, in part, on our ability to attract
qualified employees. Steiner Leisure's goal in recruiting and training new
employees is to constantly have available a sufficient number of skilled
personnel trained in our customer service philosophy. We hire and train
personnel who perform our shipboard services and the services at our Atlantis
Spa. Steiner Leisure recruits employees primarily from the British Isles, the
rest of Europe and British Commonwealth countries. Recruitment techniques
include advertisements in trade and other publications, appearances at beauty,
hair and fitness trade shows, meetings with students at trade schools and
recommendations from our employees. All shipboard employment candidates are
required to have received prior training in the services they are to perform for
us and are tested with respect to their skills prior to being hired. Applicants
must possess a willingness to provide outstanding personal service.
Each candidate must complete a rigorous training program at our
facilities in Stanmore, England. We can train up to approximately 60 employees
at a time. The training course for service personnel is typically conducted over
a period of two to three weeks, depending on the services to be performed by the
employee. The training course emphasizes our culture of personalized, attentive
customer care. All employees also receive supplemental training in their area of
specialization, including instruction in treatments and techniques developed by
us. Each employee is educated with respect to all of our services and products
to enable them to cross-market our services and products. We also train
shipboard management candidates. This training covers, among other things,
maximization of shipboard revenues, personnel supervision, customer service and
administrative matters, including interaction with cruise line personnel.
In November 1998, we expanded our training activities by opening a
beauty training school in Dubai, United Arab Emirates. This school is operated
through a joint venture with a local firm. The school teaches our beauty
treatment techniques and methods. It also provides vocational training to enable
students to qualify for beauty and hair care-related professional licenses. Our
joint venture partner in the school operates a large day spa in Dubai which uses
and sells our Elemis products. A primary reason for our involvement in this
school is to provide trained staff for this spa.
PRODUCTS
Steiner Leisure sells high quality personal care products for men and
women. The products sold on ships are duty free and tax free. We also offer our
products through our Atlantis Spa, the Elemis Beautiful Skin Centres and third
party salons, retail stores and other land-based retail and wholesale outlets.
We also sell products through mail order and our website at
www.steinerleisure.com. The beauty products offered include aromatherapy oils as
well as cleansers, creams and other skin care products and cleaning accessories.
Hair care products offered include shampoos, moisturizers and lotions. Most of
the products sold by us are from our "Elemis" and "La Therapie" product lines.
As of March 1, 1999, Steiner Leisure sold 108 "Elemis" skin and hair care
products made primarily from premium quality natural ingredients and 24 premium
quality "La Therapie" skin care products. Almost all of the raw materials for
"Elemis" and "La Therapie" products are sourced from a premier French
manufacturer under an agreement that expires in 2001. Production, packaging and
distribution of our "Elemis" and "La Therapie" products are conducted at our
facilities in Taunton, England.
We recently reformulated and repackaged our "Elemis" product lines.
This is part of our continuing efforts to increase the brand awareness of our
products and to keep abreast of product trends and our customers' tastes. We are
currently updating our product manufacturing equipment to expand our production
capacity.
We also sell the products of several entities unaffiliated with Steiner
Leisure, including 18 private label products manufactured by other companies and
sold by us under the "Steiner" brand name.
MARKETING AND PROMOTION
We promote our services and products to cruise passengers through
on-board demonstrations and seminars, video presentations shown on in-cabin
television, tours of our shipboard facilities and promotional discounts on lower
volume days, such as when a ship is in a destination port. We also distribute
illustrated brochures and order forms
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describing our services and products to passenger cabins and in the facilities
we operate. In addition, employees cross-market other services and products
offered by us to their customers. Steiner Leisure promotes pre-cruise purchases
of our shipboard services and spa packages. We also benefit from advertising by
the cruise lines, and, increasingly, cruise lines are featuring their spa
facilities and our services as part of their advertising campaigns.
CRUISE LINE AGREEMENTS
Our cruise line agreements give us the right to offer our services and
products on board ships. Services and products sold to passengers are billed to
them by the cruise lines. The cruise lines retain a specified percentage of our
gross receipts from such sales before remitting the remainder to us. Under the
cruise line agreements, we are required to pay for the meals and accommodations
of our employees. Most of the agreements cover all of the then operating ships
of a cruise line. New arrangements must often be negotiated between us and a
cruise line as ships enter service. The agreements have specified terms ranging
from one to six years, with an average remaining term per ship of approximately
two years as of March 1, 1999. As of that date, cruise line agreements that
expire within one year, including the agreement with Royal Caribbean, covered 40
of the 99 ships served by us. These 40 ships accounted for approximately 36.1%
of our revenues for 1998.
The cruise line agreements provide for termination by the cruise lines
with limited or no advance notice under certain circumstances, including, among
other things, the withdrawal of a vessel from the cruise trade, the sale or
lease of a vessel or our failure to receive specified passenger service
rankings. As of March 1, 1999, agreements for three ships provide for
termination for any reason by the cruise line on six months' notice, for eight
ships on 90 days' notice and for one ship on 60 days' notice.
Steiner Leisure is obligated to make minimum payments to certain cruise
lines (as well as in connection with the Atlantis Spa) regardless of the amount
of revenues we receive from customers. As of December 31, 1998, these payments
are required by cruise line agreements covering a total of 67 ships served by us
and three additional ships not yet in service, as well as in connection with the
Atlantis Spa. As of December 31, 1998, Steiner Leisure had guaranteed total
minimum payments (excluding payments based on passenger loads applicable to
certain ships served by us) of approximately: $20.7 million in 1999, $16.9
million in 2000, $14.4 million in 2001 and $2.9 million in 2002.
RECENT LAND-BASED ACTIVITIES
Commencing in February 1999, we began operating the luxury health spa
at the Atlantis Resort on Paradise Island in The Bahamas. The Atlantis Resort
has over 2,300 guestrooms. Our spa is a 25,000 square foot facility at which we
offer services and products similar to those offered to our shipboard customers.
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. Fees
for our services and products at the Atlantis Spa are charged to customers'
rooms. The resort then pays us after deducting rental payments or other amounts
due to the resort from us. We are currently operating the Atlantis Spa pursuant
to agreed to terms pending the signing of a definitive agreement.
In January 1998, Steiner Leisure acquired the intellectual property
rights (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 (the "Hong Kong Operator").
This entity owns 15% of our subsidiary that licenses rights to operate Elemis
Beautiful Skin Centres. The three Elemis Beautiful Skin Centres offer a variety
of high quality skin care treatments, similar to those offered to our shipboard
customers. They also sell our Elemis products. Under our agreement with the Hong
Kong Operator, we receive a percentage of the revenues generated by the Centres.
We will consider licensing rights to additional Elemis Beautiful Skin Centres
outside of Hong Kong if we believe the circumstances to be appropriate.
COMPETITION
Steiner Leisure is the leading worldwide provider of hair, beauty,
massage and fitness services, and skin and hair care products on board cruise
ships. However, we compete with passenger activity alternates on cruise ships
and with competing providers of similar services and products to ours seeking
agreements with cruise lines. Gambling
7
<PAGE>
casinos, bars and a variety of shops are found on almost all of the ships served
by us. In addition, the ships call on ports which provide opportunities for
additional shopping as well as other activities that compete with us for
passenger dollars. Cruise ships also typically offer swimming pools and other
recreational facilities and activities, as well as musical and other
entertainment, all without additional charge to the passengers. A number of
cruise lines currently perform the shipboard services performed by us with their
own personnel, and one or more additional cruise lines could elect to perform
these services themselves. There currently are several other entities offering
services to the cruise industry similar to those provided by us. Additional
entities, including those with significant resources, also could compete with us
in the future.
Our Atlantis Spa and the Elemis Beautiful Skin Centres compete with a
variety of other operators of land-based day spas and beauty salons, including
those with greater resources than Steiner Leisure.
REGULATION
The cruise industry is subject to significant United States and
international regulation relating to, among other things, financial
responsibility, environmental matters and passenger safety. With respect to the
latter, enhanced passenger safety standards adopted as part of the Safety of
Life at Sea Convention by the International Maritime Organization had been
phased in and additional standards are required to be phased in by 2010 with
respect to vessel structural requirements. These standards have caused the
retirement of certain cruise ships and otherwise could adversely affect certain
of the cruise lines, including those with which we have cruise line agreements.
From time to time, various other regulatory and legislative changes have been or
may in the future be proposed or enacted that could have an adverse effect on
the cruise industry.
Steiner Leisure's advertising and product labeling practices in the
United States are subject to regulation by the Federal Trade Commission (the
"FTC") and the Food and Drug Administration (the "FDA"), as well as various
other federal, state and local regulatory authorities. The contents of our
products that are sold in the United States are subject to regulation in the
United States. We are subject to similar regulations under the laws of the
United Kingdom and certain European Union laws. Federal, state and local
regulations in the United States and non-United States jurisdictions, including
increasing regulation by the European Union designed to protect consumers or the
environment could adversely affect or increase the cost of advertising,
marketing and packaging our products.
Steiner Leisure's land-based operations, including our Atlantis Spa and
the Elemis Beautiful Skin Centres, are subject to applicable regulations in the
locations where such operations are conducted. These regulations could adversely
affect our ability to sell or could increase the cost of our services and
products. Among other things, local immigration laws could impede our ability to
obtain work permits needed for Steiner Leisure-trained employees at our
land-based facilities.
EMPLOYEES
As of March 1, 1999, Steiner Leisure had a total of 1,033 employees. Of
that number, 884 worked on cruise ships, 29 worked at the Atlantis Spa, 31 were
involved in the training of our personnel, 30 were involved in the bottling,
distributing, warehousing and shipping of our beauty products and 59 represented
management and sales personnel and support staff. Shipboard employees typically
are employed under agreements with terms of eight months. Depending on the size
of the vessel and the nature of the facilities on board, Steiner Leisure has one
to three managers on board each ship we serve. Shipboard employees' compensation
consists of salary plus a commission based on the volume of revenues generated
by the employee. A manager's compensation is based on the performance of the
team under the manager's supervision. None of our employees is covered by a
collective bargaining agreement.
Steiner Leisure believes that our relations with our employees are satisfactory.
Personnel working at the Elemis Beautiful Skin Centres are employees of
the Hong Kong Operator.
8
<PAGE>
ITEM 2. PROPERTIES
Steiner Leisure's corporate office is located in Nassau, The Bahamas,
and the office of CT Maritime Services, L.C., a Florida subsidiary of Steiner
Leisure ("Maritime Services"), is located in Miami, Florida. Steiner Leisure
also maintains warehouse and shipping facilities in Fort Lauderdale, Florida.
Our training facilities and the administrative offices of our Elemis Limited
subsidiary are located in Stanmore, England. Steiner Leisure also maintains a
product production, packaging, warehousing and distribution facility in Tauton,
England. All of the above-described properties are leased, and Steiner Leisure
believes that alternative sites are readily available on competitive terms in
the event that any of the leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, in the ordinary course of business, Steiner Leisure
is party to various claims and legal proceedings. Currently, there are no such
claims or proceedings which, in the opinion of management, would have a material
adverse effect on the Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
executive officers of Steiner Leisure.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Clive E. Warshaw 56 Chairman of the Board and Chief Executive Officer
Leonard I. Fluxman 40 President and Chief Operating Officer and a Director
Michele Steiner Warshaw 53 Executive Vice President and a Director
Amanda Jane Francis 32 Senior Vice President-- Operations of Steiner Transocean
Sean C. Harrington 32 Managing Director of Elemis Limited
Carl S. St. Philip, Jr. 32 Vice President and Chief Financial Officer
</TABLE>
Clive E. Warshaw has served as our Chairman of the Board and Chief
Executive Officer since November 1995. Mr. Warshaw joined Steiner Group Limited
(now known as STGR Limited), our predecessor ("Steiner Group"), in 1982. Mr.
Warshaw resides in The Bahamas. Mr. Warshaw is the husband of Michele Steiner
Warshaw.
Leonard I. Fluxman has served as our President and Chief Operating
Officer since January 1999, and as a director since November 1995. From November
1995 through December 1998, he served as Chief Operating Officer and Chief
Financial Officer of Steiner Leisure. Mr. Fluxman joined us in June 1994, in
connection with our acquisition of Coiffeur Transocean (Overseas), Inc. ("CTO").
Mr. Fluxman served as CTO's Vice President -- Finance from January 1990 until
June 1994, and as its Chief Operating Officer from June 1994 until November
1996.
Michele Steiner Warshaw has served as a director of Steiner Leisure
since November 1995 and served as our Senior Vice President -- Development from
January 1996 until March 1997, when she was named Executive Vice President. Ms.
Warshaw held a variety of positions with Steiner Group from 1967 until November
1995, including assisting in the design and development of shipboard facilities
and services. Ms. Warshaw resides in The Bahamas. Ms. Warshaw is the wife of
Clive E. Warshaw.
Amanda Jane Francis has served as Senior Vice President -- Operations
of our Steiner Transocean subsidiary since November 1995, and of Steiner Group
from June 1994 until November 1995. From 1989 until June 1994, Ms. Francis was
the Director of Training for Steiner Group. From 1982 until 1989, Ms. Francis
held other land-based and shipboard positions with Steiner Group.
9
<PAGE>
Sean C. Harrington has served as Managing Director of our Elemis
Limited subsidiary since January 1996. Mr. Harrington also oversees our United
Kingdom operations and the Elemis Beautiful Skin Centre operations. From July
1993 through December 1995, he served as Sales Director, and from May 1991 until
July 1993, as United Kingdom Sales Manager of Elemis Limited.
Carl S. St. Philip, Jr. has served as Vice President and Chief
Financial Officer of Steiner Leisure since January 1999. From July 1997 through
December 1998, he served as our Vice President -- Finance. Since January 1997,
Mr. St. Philip has served as Vice President -- Finance of our CT Maritime
Services, L.C. subsidiary. Mr. St. Philip joined us in June 1994 when we
acquired CTO. Mr. St. Philip served as Assistant Controller of CTO from June
1991 until June 1993, and as CTO's Controller from June 1993 until December
1996, when CTO was liquidated. Mr. St. Philip, a certified public accountant,
was employed by Laventhol and Horwath from 1989 to 1991.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON SHARES AND RELATED MATTERS
Our common shares are traded on the Nasdaq Stock Market under the
symbol "STNR." The following table sets forth for the periods indicated the high
and low sales prices per share of our common shares as reported by the Nasdaq
Stock Market (as adjusted for our 3-for-2 share splits effected on each of
October 24, 1997 and April 28, 1998 (the "Share Splits")).
1997 HIGH LOW
---- ------ ------
First Quarter .................................... $11.72 $ 7.78
Second Quarter.................................... 13.06 10.44
Third Quarter..................................... 16.56 12.00
Fourth Quarter.................................... 21.83 15.42
1998 HIGH LOW
---- ------ ------
First Quarter .................................... $35.67 $18.17
Second Quarter.................................... 34.25 24.13
Third Quarter..................................... 32.63 15.13
Fourth Quarter.................................... 32.25 14.38
As of March 17, 1999 there were 19 holders of record of our Common
Shares (including nominees holding shares on behalf of beneficial owners). As of
that date, there were approximately 2,200 beneficial owners of the common
shares.
Steiner Leisure has not paid dividends on its Common Shares and does
not intend to pay cash dividends in the foreseeable future. The payment of
future dividends, if any, will be at the discretion of our Board of Directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs as well as other factors
that the Board of Directors may deem relevant.
Dividends and other distributions from Bahamas international business
companies ("IBCs"), such as Steiner Leisure and its Bahamas IBC subsidiaries,
are not subject to approval by the Central Bank of The Bahamas (the "Central
Bank"). However, the exemption from such approval requirements expires in 2015.
There can be no assurance that the exemption will continue beyond such date or
that Bahamas law will not be amended prior to the year 2015 to eliminate such
exemption. Our subsidiary that operates the Atlantis Spa is a Bahamas domestic
company. Dividends from that subsidiary are subject to approval by the Central
Bank.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
On November 12, 1996, Steiner Leisure's Registration Statement on form
F-1 under the Securities Act of 1933, as amended, File No. 333-5266, with
respect to the initial public offering of its common shares at a price of $5.78
per share (the "Offering") was declared effective by the Securities and Exchange
Commission. The Offering 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 Steiner Leisure 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 Steiner Leisure from the Offering, after
deducting total expenses in the amount of $1,060,000 were $9,704,000. The
Offering terminated, and all of the securities registered in connection
therewith were sold. The managing underwriters of the Offering were Furman Selz
LLC and Raymond James & Associates, Inc. The number of shares and the offering
price per share described above are adjusted to reflect the Share Splits.
In connection with the Offering, Steiner Leisure incurred the following
estimated expenses for the indicated purposes:
11
<PAGE>
Underwriting discounts and commissions.................. $ 753,480
Expenses paid to or for underwriters.................... $ 2,265
Other expenses.......................................... $ 304,255
The net proceeds to Steiner Leisure from the Offering have been
applied, through December 31, 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
Construction of plant, building and facilities.......... $1,000,000
Purchase of Steiner Leisure common shares in the open
market.................................................. $2,043,207
The use of proceeds of the Offering 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, represents 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.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below are the selected financial data for each of the years
in the five-year period ended December 31, 1998. The balance sheet data as of
December 31, 1997 and 1998, and the statement of operations data for the years
ended December 31, 1996, 1997 and 1998 have been derived from our financial
statements which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The balance
sheet data as of December 31, 1994, 1995 and 1996, and the statement of
operations data for the years ended December 31, 1994 and 1995, are derived from
our financial statements which have been audited by Arthur Andersen LLP. These
financial statements are not included herein. The information contained in this
table should be read in conjunction with our Consolidated Financial Statements
and the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994(1) 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Services........................................ $25,310 $35,764 $43,122 $50,113 $59,741
Products........................................ 14,340 18,648 26,458 33,863 41,647
------- ------- ------- ------- -------
Total revenues............................ 39,650 54,412 69,580 83,976 101,388
------- ------- ------- ------- -------
Cost of sales:.....................................
Cost of services................................ 21,324 29,623 33,446 39,085 46,142
Cost of products................................ 11,867 16,309 18,699 23,110 28,227
------- ------- ------- ------- -------
Total cost of sales....................... 33,191 45,932 52,145 62,195 74,369
------- ------- ------- ------- -------
Gross profit.............................. 6,459 8,480 17,435 21,781 27,019
------- ------- ------- ------- -------
Operating expenses:
Administrative................................ 1,874 3,100 3,396 3,862 4,801
Salary and payroll taxes...................... 1,785 1,925 3,973 4,344 4,979
Amortization of CTO intangibles............... 1,264 2,292 2,477 1,089 --
------- ------- ------- ------- -------
Total operating expenses.................. 4,923 7,317 9,846 9,295 9,780
------- ------- ------- ------- -------
Income from operations.................... 1,536 1,163 7,589 12,486 17,239
Other income (expense)............................. (305) (370) (168) 908 1,737
------- ------- ------- ------- -------
Income before provision for income
taxes and minority interest............... 1,231 793 7,421 13,394 18,976
------- ------- ------- ------- -------
Provision for income taxes:
Current......................................... 940 1,356 1,750 1,147 1,296
Deferred........................................ (30) -- -- -- --
Nonrecurring.................................... -- -- 3,200 -- --
------- ------- ------- ------- -------
Total provision for income taxes.......... 910 1,356 4,950 1,147 1,296
------- ------- ------- ------- -------
Income before minority interest.................... 321 (563) 2,471 12,247 17,680
Minority interest.................................. -- -- -- -- (4)
------- -------- ------- ------- -------
Net income (loss).................................. $ 321 $ (563) $ 2,471 $12,247 $17,676
======= ========= ======= ======= =======
Earnings (loss) per common share (2)...............
Basic .......................................... $ 0.02 $ (0.04) $ 0.17 $ 0.76 $ 1.08
======= ========= ======= ======= =======
Diluted......................................... $ 0.02 $ (0.04) $ 0.17 $ 0.73 $ 1.04
======= ========= ======= ======= =======
Basic weighted average shares outstanding....... 14,337 14,337 14,556 16,202 16,401
Diluted weighted average shares outstanding..... 14,337 14,337 14,684 16,693 16,960
13
<PAGE>
BALANCE SHEET DATA:
Working capital.................................... $ 2,009 $ 22 $12,595 $25,644 $35,872
Total assets....................................... 16,230 13,320 26,656 37,137 53,654
Long-term debt..................................... 4,775 3,020 -- -- --
Shareholders' equity............................... 5,150 3,574 16,080 28,513 43,691
</TABLE>
- ---------------------
(1) In June 1994, Steiner Group acquired Coiffeur Transocean (Overseas),
Inc. ("CTO") in a transaction accounted for as a purchase. Accordingly,
our 1994 Statement of Operations Data includes approximately seven
months of operations of CTO.
(2) We effected a 3-for-2 split of our common shares on each of October 24,
1997 and April 28, 1998. The share and per share data above reflect
these share splits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Steiner Leisure is the leading worldwide provider of spa services and
skin and hair care products on board cruise ships. We sell our services and
products to cruise passengers. 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. We also sell our services and products through
land-based channels.
Cost of sales includes:
o cost of services, including an allocable portion of wages paid to
shipboard employees, rent payments to cruise lines (which are a
percentage of services revenues or a minimum annual rent or a
combination of both) and other staff-related shipboard expenses;
and
o cost of products, including an allocable portion of wages paid to
shipboard employees, rent payments to cruise lines (as noted
above) and other staff-related shipboard expenses, as well as
costs associated with development, manufacturing and distribution
of products.
Cost of sales may be affected by, among other things, sales mix,
production levels, changes in supplier prices and discounts, purchasing and
manufacturing efficiencies, tariffs, duties, freight and inventory costs.
Certain cruise line agreements provide for increases in the percentages 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. Rent payments may also be increased under new agreements with cruise
lines that replace expiring agreements. In general, Steiner Leisure has
experienced increases in rent payments upon entering into new agreements with
cruise lines.
Cost of products includes the cost of products sold through our various
methods of distribution. To a lesser extent, cost of products also includes the
cost of products consumed in rendering services. This amount would not be a
material component of the cost of services rendered and would not be practicable
to identify separately.
Operating expenses include administrative expenses, salary and payroll
taxes. In addition, for the three year period ended June 1997, operating
expenses included goodwill amortization related to the acquisition of CTO.
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 83.7% of our income for 1998 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-
14
<PAGE>
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 10.0% of
our pretax income for 1998, will be subject to U.K. tax rates (generally up to
31%).
RECENTLY ISSUED ACCOUNTING STANDARDS
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. Management does not believe that
the adoption of SOP 98-1 will 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. Management does not believe that the
adoption of SOP 98-5 will have a material effect on our 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. Steiner Leisure adopted SFAS No. 131 effective December 31, 1998.
Management operates Steiner Leisure's business as a single segment. As a result,
no additional disclosure was required.
15
<PAGE>
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>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
---- ---- ----
Revenues:
<S> <C> <C> <C>
Services................................................................... 62.0% 59.7% 58.9%
Products................................................................... 38.0 40.3 41.1
----- ----- -----
Total revenues...................................................... 100.0 100.0 100.0
----- ----- -----
Cost of sales:
Cost of services........................................................... 48.1 46.5 45.5
Cost of products........................................................... 26.9 27.5 27.9
----- ----- -----
Total cost of sales................................................. 75.0 74.0 73.4
----- ----- -----
Gross profit........................................................ 25.0 26.0 26.6
----- ----- -----
Operating expenses:
Administrative............................................................. 4.9 4.6 4.7
Salary and payroll taxes................................................... 5.7 5.2 4.9
Amortization of CTO intangibles............................................ 3.6 1.3 --
----- ----- -----
Total operating expenses............................................ 14.2 11.1 9.6
----- ----- -----
Income from operations.............................................. 10.8 14.9 17.0
Other income (expense)....................................................... (0.2) 1.1 1.7
----- ----- -----
Income before provision for income taxes..................................... 10.6 16.0 18.7
----- ----- -----
Provision for income taxes:
Non-recurring.............................................................. 4.6 -- --
Current and deferred....................................................... 2.5 1.4 1.3
----- ----- -----
Total provision for income taxes......................................... 7.1 1.4 1.3
----- ----- -----
Net income................................................................... 3.5% 14.6% 17.4%
====== ====== ======
</TABLE>
1998 COMPARED TO 1997
REVENUES. Revenues increased approximately 20.7%, or $17.4 million, to
$101.4 million in 1998 from $84.0 million in 1997. Of this increase, $9.6
million was attributable to an increase in services revenues and $7.8 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
and three additional non-spa ships in service in 1998 compared to 1997. We had
an average of 842 shipboard staff members in service in 1998 compared to an
average of 756 shipboard staff members in service in 1997. Revenues per staff
per day increased by 8.4% to $310 in 1998 from $286 in 1997.
COST OF SERVICES. Cost of services as a percentage of services revenues
decreased to 77.2% in 1998 from 78.0% in 1997. This decrease was due to an
increase in productivity of onboard staff during 1998. This decrease was
partially offset by increases in rent allocable to services on cruise ships
covered by an agreement that was renewed in December 1997.
COST OF PRODUCTS. Cost of products as a percentage of products revenues
decreased to 67.8% in 1998 from 68.2% in 1997. This decrease was due to an
increase in productivity of onboard staff that was partially offset by an
increase in rent allocable to product sales on cruise ships covered by an
agreement that was renewed in December 1997. In addition, product sales to
land-based customers, which have a greater margin than product sales on board
ships, increased at a greater rate than sales on board ships.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.6% in 1998 from 11.1% in 1997. This decrease was primarily
attributable to completion in June 1997 of the amortization of intangible assets
relating to the acquisition of CTO. There was no amortization of intangible
assets in 1998.
16
<PAGE>
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
an overall effective rate of 6.8% in 1998 from an overall effective rate of 8.6%
in 1997 due to the impact of non-tax deductible amortization of intangibles in
1997. Without such amortization of intangibles, the overall effective rate in
1998 would have been 6.8%, compared to 7.9% in 1997. The decrease in the overall
effective rate is also partially attributable to income earned in jurisdictions
that do not tax our income increasing at a greater rate than income in
jurisdictions that tax our income.
1997 COMPARED TO 1996
REVENUES. Revenues increased approximately 20.7%, or $14.4 million, to
$84.0 million in 1997 from $69.6 million in 1996. Of this increase, $7.0 million
was attributable to an increase in services revenues and $7.4 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
1997. These six spa ships generated greater aggregate revenues to us than the
aggregate revenues generated by the average of seven non-spa ships that were in
service in 1996, but were not in service in 1997. Steiner Leisure had an average
of 756 shipboard staff members in service in 1997 compared to an average of 695
shipboard staff members in service in 1996. Revenues per staff per day increased
11.7% to $286 in 1997 from $256 in 1996.
COST OF SERVICES. Cost of services as a percentage of services revenues
increased to 78.0% in 1997 from 77.6% in 1996. This increase was due to an
increase in rent allocable to services on cruise ships covered by an agreement
renewal effective in the first quarter of 1997. This increase was partially
offset by increases in productivity of onboard staff during 1997.
COST OF PRODUCTS. Cost of products as a percentage of products revenues
decreased to 68.2% in 1997 from 70.7% in 1996. This decrease was primarily due
to lower product costs realized during 1997 compared to 1996. This was the
result of our acquisition of the "Elemis" and "La Therapie" product lines
(previously supplied to Steiner Leisure by third parties) in March 1996. Lower
product costs were partially offset by an increase in rent allocable to products
sales on cruise ships covered by an agreement renewal effective in the first
quarter of 1997.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 11.1% in 1997 from 14.2% in 1996 as a result of 1996 including a
full year of amortization of intangibles in connection with the acquisition of
CTO while 1997 included only five months of this amortization. Additionally,
operating expenses as a percentage of revenues decreased because of the increase
in revenues generated from the additional spa ships in service during 1997.
These ships generated greater aggregate revenues to us than the aggregate
revenues generated from non-spa ships in service during 1996 that were not in
service during 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
an overall effective rate of 8.6% in 1997 from an overall effective rate of
23.6% (not giving effect to the non-recurring tax charge of approximately $3.2
million related to the liquidation of CTO) in 1996. This was due to the impact
of greater non-tax deductible amortization of intangibles and interest expense
in 1996 and certain tax benefits realized from the liquidation of CTO, which
took place during the fourth quarter of 1996. Without such amortization of
intangibles and interest expense, the overall effective rate in 1997 would have
been 6.3% compared to 17.2% in 1996.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth selected statement of operations data on
a quarterly basis for 1997 and 1998 and the percentage of revenues represented
by the line items presented. 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, Steiner Leisure's revenues may in
the future be affected by seasonality. The quarterly selected statement of
operations data set forth below were derived from Unaudited Consolidated
Financial Statements of Steiner Leisure which, in the opinion of our management,
contain all adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of those statements.
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<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
----------------------------------------- ----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $19,660 $20,080 $22,133 $22,103 $22,935 $24,335 $26,943 $27,175
Gross profit................. 4,973 5,170 5,746 5,892 6,023 6,500 7,249 7,247
Administrative, salary and
payroll taxes................ 1,991 2,006 2,091 2,118 2,303 2,408 2,471 2,598
Income from operations....... 2,361 2,695 3,655 3,775 3,720 4,092 4,778 4,649
Net income................... 2,296 2,642 3,478 3,831 3,836 4,244 4,713 4,883
Diluted earnings per share... $ 0.14 $ 0.16 $ 0.21 $ 0.23 $ 0.23 $ 0.25 $ 0.28 $ 0.29
AS A PERCENTAGE OF REVENUES:
Gross profit................. 25.3% 25.7% 26.0% 26.7% 26.3% 26.7% 26.9% 26.7%
Administrative, salary and
payroll taxes................ 10.1% 10.0% 9.4% 9.6% 10.0% 9.9% 9.2% 9.6%
Income from operations....... 12.0% 13.4% 16.5% 17.1% 16.2% 16.8% 17.7% 17.1%
Net income................... 11.7% 13.2% 15.7% 17.3% 16.7% 17.4% 17.5% 18.0%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Our business is operated with cash generated from operations. In
November 1996, Steiner Leisure received net proceeds of approximately $9.7
million in connection with an initial public offering of its common shares.
Cash flow from operating activities was $15.2 million in 1998, $11.6
million in 1997 and $9.0 million in 1996. These increases generally reflected
increases in net income as affected by income taxes payable in 1996 with respect
to the liquidation of CTO that were paid in 1997 and by an increase in
inventories in 1998. Steiner Leisure had working capital of approximately $35.9
million at December 31, 1998 compared to $25.6 million at December 31, 1997.
In connection with the construction of the Atlantis Spa, we spent $3.0
million in 1998. We anticipate spending approximately $1.5 million in 1999 to
reimburse the owner of the Atlantis Resort for additional construction costs for
the Atlantis Spa. These approximately $4.5 million of capital expenditures would
be amortized over the proposed ten-year term of our arrangement with the owner
of the Atlantis Resort.
During the fourth quarter of 1998, we purchased a total of 312,750 of
our common shares in the open market for an aggregate purchase price of $4.9
million. 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 any 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.
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
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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 March 19, 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 nine
cruise lines that responded expect to be Year 2000 compliant before January 1,
2000. We are actively pursuing responses from the remaining 17 cruise lines that
have not responded.
With respect to our major third party suppliers, as of March 19, 1999,
we obtained nine 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 44 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 the Company's 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 December 31, 1998, we have
expended approximately $34,000 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.
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 l933, as amended, and Section 21E of the Securities Exchange Act of l934,
as amended. The words "may," "will," "intend," "expect," "proposed,"
"anticipate," "believe," "estimate" and
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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 factors set forth under "Certain Factors That May Affect
Future Operating Results." We cannot promise that our expectations in such
forward-looking statements will be correct. We do not undertake to update any
forward-looking statements that may be made by us.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information set forth, or incorporated by
reference, in this prospectus, you should carefully consider the following risk
factors relating to Steiner Leisure before purchasing our common shares.
WE ARE DEPENDENT ON OUR AGREEMENTS WITH CRUISE LINES
Our revenues are generated primarily on cruise ships. Under our
agreements with cruise lines, we provide services and products paid for by
cruise passengers. The cruise line agreements have specific terms, ranging from
one to six years, with an average remaining term per ship as of March 1, 1999,
of approximately two years. As of that date, cruise line agreements that expire
within one year, including the agreement with Royal Caribbean, covered 40 of the
99 ships served by us. These 40 ships accounted for approximately 36.1% of our
1998 revenues. We cannot assure you that any of these agreements will be renewed
after its expiration date or that any renewal will be on similar terms. These
agreements provide for termination by the cruise lines with limited or no
advance notice under certain circumstances, including, among other things,
failure of a cruise line to meet a specified passenger occupancy rate, the
withdrawal of a vessel from the cruise trade, the sale or lease of a vessel or
our failure to receive specified passenger service rankings. As of March 1,
1999, agreements for three ships provided for termination for any reason by
cruise lines on six months' notice, for eight ships on 90 days' notice and for
one ship on 60 days' notice. Our cruise line agreements may, therefore, be
terminated prior to their specified termination dates.
WE ARE DEPENDENT ON THE CRUISE INDUSTRY
Our revenues are generated principally from cruise ship passengers.
Therefore, the ability of the cruise industry to attract passengers is critical
to our results of operations and financial condition. According to Cruise Lines
International Association, a trade association, the passenger volume of cruises
marketed primarily to North American consumers increased from approximately 2.2
million passengers in 1985 to approximately 5.4 million in 1998. The cruise
industry may not continue to grow or may decrease in size in the future. A
decrease in passenger volume could adversely affect us.
The cruise industry is subject to significant risks that could affect
our results of operations. The cruise lines operate in waters and call on ports
throughout the world, including geographic regions that from time to time
experience political and civil unrest and armed hostilities. Historically, such
events have adversely affected demand for cruise vacations. The cruise industry
may be adversely affected by severe weather conditions, both at sea and at ports
of embarkation. Publicized operational difficulties or outbreaks of disease on
cruise ships also could adversely affect the cruise industry. The cruise
industry is dependent to a significant extent on airlines to transport
passengers to ports of embarkation. Any strikes or other disruptions of airline
service could adversely affect the ability of cruise passengers to reach their
ports of embarkation.
Cruise lines compete for consumer disposable leisure time dollars with
other vacation alternatives such as land-based resort hotels and sightseeing
vacations. In addition, public demand for vacation activities is influenced by
general economic conditions. A majority of cruise passengers served by us reside
in North America. Periods of general economic recession, particularly in North
America, could have a material adverse effect on the cruise industry and could
also materially adversely affect us.
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WE ARE DEPENDENT ON CERTAIN CRUISE COMPANIES
The number of independent cruise companies has decreased in the past
few years as a result of the consolidation of the cruise industry. Industry
analysts believe that further consolidation of the cruise industry may occur.
Our revenues are dependent to a significant extent on a limited number of cruise
companies. Revenues from passengers of each of the following cruise companies
accounted for more than ten percent of our revenues in 1998: Carnival (including
Costa, Holland America, Seabourn, Windstar and Cunard) - 34.7%; Royal Caribbean
(including Celebrity) - 30.1%; and Peninsular and Oriental Steam Navigation
Company (including Princess, P&O and P&O European Ferries) - 12.9%. These
companies also accounted for 66 of the 99 ships served by us as of March 1,
1999. If we cease to serve one of these cruise companies, or a substantial
number of ships operated by a cruise company, it could adversely affect our
results of operations. As a result of industry consolidation, a small number of
cruise companies, all of whom currently are our customers, dominate the cruise
industry. If any of these large cruise companies discontinues its relationship
with us or incurs economic problems, our results of operations could be
adversely affected.
WE ARE REQUIRED TO MAKE MINIMUM PAYMENTS UNDER OUR AGREEMENTS
Steiner Leisure is obligated to make minimum payments to certain cruise
lines, as well as in connection with the Atlantis Spa, regardless of the amount
of revenues we receive from customers. Accordingly, we could be obligated to pay
more than the amount collected from customers or might not receive revenues
sufficient to cover our costs. As of December 31, 1998, these minimum payments
are required by cruise line agreements covering a total of 67 ships served by us
and three additional ships not yet in service, as well as in connection with the
Atlantis Spa. As of December 31, 1998, we had guaranteed total minimum payments
(excluding payments based on passenger loads applicable to certain ships served
by us) of approximately: $20.7 million in 1999, $16.9 million in 2000, $14.4
million in 2001, $2.9 million in 2002.
WE ARE DEPENDENT ON KEY OFFICERS AND QUALIFIED SHIPBOARD EMPLOYEES
Our continued success depends to a significant extent on our senior
officers, including Clive E. Warshaw, Chairman of the Board and Chief Executive
Officer, Leonard I. Fluxman, President and Chief Operating Officer, and Michele
Steiner Warshaw, Executive Vice President. Mr. Warshaw and Ms. Warshaw are
husband and wife. The loss of services of any of these persons or other key
management personnel could have a material adverse effect on our business.
Steiner Leisure has employment agreements with Mr. Warshaw, Mr. Fluxman and Ms.
Warshaw, and key person life insurance policies on their lives. Our continued
success is also dependent on our ability to recruit and retain personnel
qualified to perform our shipboard services. Shipboard employees typically are
employed pursuant to agreements with terms of eight months. We cannot guarantee
that we will be able to continue to attract a sufficient number of applicants
possessing the requisite skills necessary for our business. If we are unable to
attract a sufficient number of qualified applicants, our business could be
materially adversely affected.
WE ARE DEPENDENT ON A SINGLE PRODUCT MANUFACTURER
Almost all of the ingredients and other materials for our "Elemis" and
"La Therapie" beauty products are produced by a single manufacturer pursuant to
an agreement terminating in 2001. If this manufacturer ceased producing these
ingredients and other materials for our products, the transition to other
manufacturers could result in significant production delays. Any significant
delay or disruption in the supply of our products could have a material adverse
effect on our product sales.
POSSIBLE CHANGES IN THE TAXATION OF STEINER LEISURE
Steiner Leisure is a Bahamian international business company ("IBC")
that, directly or indirectly, owns:
o CT Maritime Services, L.C., a Florida limited liability company that
performs administrative services in connection with our maritime
operations ("Maritime Services");
o Steiner Beauty Products, Inc., a Florida corporation that sells skin
and hair care products ("Steiner Beauty"); and
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o Steiner Transocean Limited, a Bahamian IBC that operates our
shipboard business ("Steiner Transocean").
Steiner Leisure also owns all, or almost all, of the shares of additional
Bahamas, United Kingdom and other subsidiaries through which we conduct our
business.
Steiner Leisure is not subject to Bahamian tax. For United States
federal tax purposes Steiner Leisure will be considered engaged in business in
the United States by virtue of its 98% membership interest in Maritime Services.
As a result Steiner Leisure will be subject to United States federal income tax
at regular corporate rates of up to 35% on its share of the United States-source
income and certain foreign-source income, if any, of Maritime Services. Steiner
Leisure may also be subject to a 30% branch profits tax on any portion of that
income that is not considered reinvested in the United States. Steiner Leisure
believes that none of our remaining income will be effectively connected with
our deemed conduct of business in the United States through Maritime Services
and, accordingly, that our remaining income will not be subject to United States
federal tax.
Steiner Beauty generally will be subject to United States federal
income tax at regular corporate rates of up to 35% on all its worldwide income,
including its share of the income of Maritime Services in which it owns a one
percent membership interest.
Steiner Transocean is a Bahamian IBC and maintains an office in The
Bahamas. Steiner Transocean is not subject to Bahamian tax. For United States
federal tax purposes Steiner Transocean will be considered engaged in business
in the United States as a result of its membership interest in Maritime
Services. As discussed above, a foreign corporation generally is subject to
United States federal corporate income tax at a rate of up to 35% on its United
States-source income and on certain of its foreign-source income that is
effectively connected to a business it conducts in the United States. In
addition, a foreign corporation conducting business in the United States may be
subject to a 30% branch profits tax on income from that business that is not
considered reinvested in the United States. Steiner Transocean may be subject to
both federal corporate income tax and the branch profits tax on its share of the
income of Maritime Services in which it owns a one percent membership interest.
We believe that Steiner Transocean's income from its remaining activities will
be foreign-source income, none of which will be effectively connected to a
business it conducts in the United States. This belief is based on:
o all of Steiner Transocean's shipboard spa and salon
services being performed outside the United States
and its possessions and their respective territorial
waters;
o passage of title and transfer of ownership of all
beauty products sold by Steiner Transocean taking
place outside the United States; and
o the activities performed on behalf of Steiner
Transocean in the United States not being a material
factor in generating income for Steiner Transocean.
However, a portion of Steiner Transocean's income could be subject to
United States federal income tax:
o to the extent the first two activities described
above were considered by the United States Internal
Revenue Service (the "IRS") to occur in the United
States, its possessions or territorial waters; or
o if the activities performed on behalf of Steiner
Transocean in the United States were considered to be
a material factor in generating Steiner Transocean's
income.
In that event, Steiner Transocean would be subject to U.S. federal income tax at
a rate of up to 35% and, possibly, branch profits tax at a rate of 30% on such
income.
Maritime Services will not itself be subject to United States federal
income tax. Instead, its income will flow through and be taxed to its members,
Steiner Leisure, Steiner Beauty and Steiner Transocean, as discussed above.
Maritime Services and Steiner Beauty may be subject to additional U.S.
state and local income, franchise and other taxes. Maritime Services receives
payments from Steiner Transocean in return for certain administrative services
it provides to Steiner Transocean. The IRS may assert that transactions between
Maritime Services and Steiner Transocean and between our other direct and
indirect subsidiaries do not contain arm's length terms. In that event,
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income or deductions could be reallocated among the subsidiaries in a manner
that could increase the taxable income of Maritime Services. This reallocation
also could result in the imposition of interest and penalties.
Our United Kingdom subsidiaries provide goods and services to Steiner
Transocean. The United Kingdom Inland Revenue authorities may assert that these
transactions do not contain arms' length terms. In that event, income or
deductions could be reallocated among the subsidiaries in a manner that could
increase the U.K. tax on us. This reallocation also could result in the
imposition of interest and penalties.
In 1998, Steiner Leisure paid tax at an aggregate rate of 6.8% on its
income. We cannot assure that future income will be taxed at this rate.
Coiffeur Transocean (Overseas), Inc. ("CTO"), our former subsidiary,
was liquidated for United States federal and state income tax purposes during
the fourth quarter of 1996. As a result, CTO was treated as if it sold all of
its assets for fair market value on the date of that liquidation. Based on the
value of CTO's assets, determined by an unrelated party, we calculated CTO's
U.S. tax liability resulting from its liquidation at approximately $3.2 million.
This amount was paid in January 1997. However, if the IRS were successfully to
ascribe a higher value to CTO's assets, the tax liability resulting from CTO's
liquidation could be increased.
WE FACE COMPETITION ON SHIPS AND ON LAND
We compete with passenger activity alternatives on cruise ships and
with competing providers of similar services and products seeking agreements
with cruise lines. Gambling casinos, bars and a variety of shops are found on
almost all of the ships served by us. In addition, ships dock in ports which
provide opportunities for additional shopping as well as other activities that
compete with us for passenger attention and dollars. Cruise ships also typically
offer swimming pools and other recreational facilities and activities, as well
as musical and other entertainment, all without additional charge to the
passengers. A number of cruise lines currently perform the shipboard services
performed by us with their own personnel, and one or more additional cruise
lines could elect to perform these services themselves. There currently are
several other entities offering services to the cruise industry similar to those
provided by us. Additional entities, including those with significant resources,
also could compete with us in the future.
Our Atlantis Spa and the Elemis Beautiful Skin Centres compete with a
variety of other operators of land-based day spas and beauty salons, including
those with greater resources than Steiner Leisure.
GOVERNMENT REGULATION COULD ADVERSELY AFFECT US
Steiner Leisure's advertising and product labeling practices in the
United States are subject to regulation by the FTC and the FDA, as well as
various other federal, state and local regulatory authorities. The contents of
our products that are sold in the United States are subject to regulation in the
United States. We are subject to similar regulation under the laws of the United
Kingdom and certain European Union laws. Federal, state and local regulations in
the United States and non-United States jurisdictions, including increasing
regulation by the European Union, designed to protect consumers or the
environment, could adversely affect or increase the cost of advertising,
manufacturing and packaging our products.
Steiner Leisure's land-based operations, including our Atlantis Spa and
the Elemis Beautiful Skin Centres, are subject to applicable regulations in the
locations where such operations are conducted. These regulations could adversely
affect our ability to sell or could increase the cost of our services and
products. Among other things, local immigration laws could impede our ability to
obtain work permits needed for the Steiner Leisure-trained employees at our
land-based facilities.
PRODUCT LIABILITY AND OTHER POTENTIAL CLAIMS COULD ADVERSELY AFFECT US
The nature and use of Steiner Leisure's products and services could
give rise to product liability or other claims if a customer were injured while
receiving one of our services or suffered adverse reactions following use of our
products. Adverse reactions could be caused by various factors beyond our
control, including hypoallergenic sensitivity
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and the possibility of malicious tampering with our products. If any of these
events occurred, we could incur substantial litigation expense, receive adverse
publicity and suffer a loss of sales.
OUR NEW LAND-BASED OPERATIONS FACE VARIOUS RISKS
In February 1999, we began operating a spa facility at the Atlantis
Resort on Paradise Island in The Bahamas. During 1998 we licensed rights to a
third party to operate three Elemis Beautiful Skin Centres. These are land-based
day spas in Hong Kong. We may, in the future, grant rights to operate such spas
at other locations. Before these operations, we had no experience in land-based
spa operations or the operation of a licensed business. In order to successfully
conduct company-operated land-based businesses such as our Atlantis Spa, we will
be dependent on our ability to hire and retain the services of qualified
personnel. We are currently operating the Atlantis Spa pursuant to agreed-to
terms pending the signing of a definitive agreement. The future success of the
Elemis Beautiful Skin Centres is also dependent on our ability to obtain area
development and license agreements with parties who can successfully operate
these facilities. To date, no agreements have been reached with any parties
outside of Hong Kong. We are not certain that any other license agreements will
be entered into in the future.
Our Atlantis Spa operations and, for the foreseeable future, all of the
Elemis Beautiful Skin Centre operations will be undertaken outside of the United
States. These operations are subject to certain risks, including adverse
developments in the foreign political and economic environment, varying
governmental regulations, foreign currency fluctuations, potential difficulties
in supervising foreign operations and potential adverse tax consequences.
Recently a number of countries in Asia, where the initial Elemis Beautiful Skin
Centres are located, have experienced economic difficulties and social unrest.
Any of these factors could have a material adverse effect on these operations.
FAILURE TO OBTAIN YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON US
Our failure, or the failure of a cruise line customer or supplier of
ours, to correct a material Year 2000 problem could result in an interruption
in, or a failure of, certain of our normal business activities or operations. 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 of services or products. 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 have developed a compliance program to assess the overall impact to
Steiner Leisure of the Year 2000 issue and are in the process of developing
contingency plans that will attempt to mitigate certain of our Year 2000 risks.
We believe that our costs relating to implementation of our Year 2000 program
will not be material. However, if our Year 2000 compliance program or
contingency plans are ineffective or if the actual costs of implementing our
Year 2000 compliance program or contingency plans significantly exceed our
estimates, our business and results of operation could be materially adversely
affected.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Steiner Leisure's Consolidated Financial Statements and the Notes
thereto, together with the report thereon of Arthur Andersen LLP dated February
23, l999, are filed as part of this report, beginning on page F-l.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors of Steiner Leisure and compliance
with respect to Section 16(a) of the Securities Exchange Act of 1934, as
amended, under the captions "Proposal 1 - Election of Directors" and "Security
Ownership of Management and Certain Beneficial Owners" in the definitive proxy
statement of Steiner Leisure to be filed no later than April 30, 1999 (the
"Proxy Statement") is incorporated by reference herein. Information with respect
to executive officers may be found under the caption "Executive Officers of the
Registrant" herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Security Ownership of
Management and Certain Beneficial Owners" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the captions "Executive Compensation"
and "Certain Transactions" in the Proxy Statement is incorporated herein by
reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following report and Consolidated Financial Statements
are filed as part of this report beginning on page F-l,
pursuant to Item 8.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998
Notes to Consolidated financial Statements
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they
are either not required, not applicable or the information
is otherwise included.
(3) Exhibit Listing
See list of the exhibits at 14(c), below.
(b) Reports on form 8-K
No reports on form 8-K were filed during the fourth quarter
of fiscal year l998.
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(c) The following is a list of all exhibits filed as a part of this report:
EXHIBIT
NUMBER DESCRIPTION
2.1 Plan of Complete Liquidation and Dissolution of Coiffeur
Transocean (Overseas), Inc.1
3.l Amended and Restated Memorandum of Association of Steiner Leisure
Limited2
3.2 Amended and Restated Articles of Association of Steiner Leisure
Limited3
4.1 Specimen of Common Share certificate2
10.1 Employment Agreement dated as of October 17, 1996 between Steiner
Leisure Limited and Clive E. Warshaw4+
10.1(a) Amendment No. 1 to Employment Agreement between Steiner Leisure
Limited and Clive E. Warshaw dated as of March 25, 19975+
10.1(b) Second Amendment to Employment Agreement between Steiner Leisure
Limited and Clive E. Warshaw dated as of April 20, 19986+
10.2 Employment Agreement dated as of October 23, 1996 between Steiner
Leisure Limited and Leonard I. Fluxman1+
10.2(a) Amendment No. 1 to Employment Agreement between Steiner Leisure
Limited and Leonard I. Fluxman dated as of March 25, 19975+
10.2(b) Second Amendment to Employment Agreement between Steiner Leisure
Limited and Leonard I. Fluxman dated as of December 19, 19973+
10.3 Employment Agreement dated as of October 21, l996 between Steiner
Leisure Limited and Michele Steiner Warshaw4+
10.3(a) Amendment No. 1 to Employment Agreement between Steiner Leisure
Limited and Michele Steiner Warshaw dated as of March 25, 19975+
10.3(b) Second Amendment to Employment Agreement between Steiner Leisure
Limited and Michele Steiner Warshaw dated as of April 20, 19986+
10.4 Employment Agreement dated as of October 17, 1996 between Steiner
Transocean Limited and Amanda Jane Francis4+
10.4(a) Amendment No. 1 to Employment Agreement between Steiner Transocean
Limited and Amanda Jane Frances dated as of March 25, 19975+
10.4(b) Second Amendment to Employment Agreement between Steiner
Transocean Limited and Amanda Jane Francis dated as of April
20, 19983
10.5 Service Agreement dated as of September 18, 1996 between Elemis
Limited and Sean C. Harrington2+
10.5(a) Amendment No. 1 to Service Agreement between Elemis Limited and
Sean C. Harrington dated as of March 25, 19975+
10.5(b) Second Amendment to Service Agreement between Elemis Limited and
Sean C. Harrington dated as of July 8, 19986+
10.6 Amended and Restated 1996 Share Option and Incentive Plan7+
10.7 Amended and Restated Non-Employee Directors' Share Option Plan6+
10.8 Agreement dated May 29, 1996 for the sale and purchase of the
share capital of Elemis Limited among Nicolas D. Steiner,
Clive E. Warshaw, Steiner Leisure Limited and Linda D. Steiner2
10.9 Loan Note dated May 29, 1996 in connection with purchase of the
share capital of Elemis Limited issued by Steiner Leisure Limited
to Nicolas D. Steiner2
10.10 Loan Note dated May 29, 1996 in connection with purchase of the
share capital of Elemis Limited issued by Steiner Leisure Limited
to Clive E. Warshaw2
10.11 Product Agreement dated October 31, 1996 among Nicolas D. Steiner,
Elemis Limited, Alban Muller International, Cosmetics Limited and
Alban Muller1
28
<PAGE>
10.12 Capital Contribution Agreement dated October 31, 1996 among Squire
Trading Company Limited, Steiner Leisure Limited, Steiner
Transocean Limited, Cosmetics Limited, STGR Limited and Nicolas D.
Steiner1
10.13 Deferred Compensation Agreement dated as of December 31, 1996
between Steiner Leisure Limited and Leonard I. Fluxman5+
10.14 Split Dollar Insurance Agreement dated as of March 25, 1997
between Steiner Leisure Limited and Leonard I. Fluxman5+
10.15 Form of Option Agreement under Steiner Leisure Limited Amended and
Restated 1996 Share Option and Incentive Plan For Incentive Share
Options8*+
10.16 Form of Option Agreement under Steiner Leisure Limited Amended and
Restated 1996 Share Option and Incentive Plan For Non-Qualified
Share Options8**+
10.17 Amended Form of Option Agreement under Steiner Leisure Limited
Amended and Restated 1996 Share Option and Incentive Plan for
Incentive Share Options8***+
10.18 Form of Option Agreement Under Steiner Leisure Limited Amended and
Restated Non-Employee Directors' Share Option Plan9****+
21 List of subsidiaries of Steiner Leisure Limited
27 Financial Data Schedule
23.1 Consent of Independent Certified Public Accountants
- ---------------------
1 Previously filed with Amendment Number 4 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated
herein by reference.
2 Previously filed with Amendment Number 2 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated
herein by reference.
3 Previously filed with quarterly report on Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference.
4 Previously filed with Amendment No. 3 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated
herein by reference.
5 Previously filed with annual report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
6 Previously filed with quarterly report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference.
7 Previously filed with the Company's Registration Statement on Form S-8,
Registration Number 333-39927, and incorporated herein by reference.
8 Previously filed with quarterly report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference.
9 Previously filed with annual report on Form 10-K for the year ended
December 31, 1997.
* Executed by Leonard Fluxman and Amanda Francis in connection with grants of
options under the indicated plan in November 1996.
** Executed by Clive E. Warshaw, Michele Steiner Warshaw and Sean Harrington
in connection with grants and options under the indicated plan in November
l996.
*** Executed by Leonard Fluxman in connection with grants of options under the
indicated plan in December 1997.
**** Executed in connection with annual grants of options by non-employee
directors under the indicated plan.
+ Management contract or compensatory plan or agreement.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or 15(d) of the Securities
Exchange Act of l934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 22, 1999.
STEINER LEISURE LIMITED
By: /S/ CLIVE E. WARSHAW
-------------------------
Clive E. Warshaw
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities,
and on the dated indicated.
SIGNATURE TITLE(S) DATE
/S/ CLIVE E. WARSHAW Chairman of the Board
- --------------------------- and Chief Executive Officer
Clive E. Warshaw (Principal Executive Officer) March 22, 1999
/S/ LEONARD I. FLUXMAN President, Chief Operating
- --------------------------- Officer and Director March 22, 1999
Leonard I. Fluxman
/S/ CARL S. ST. PHILIP, JR. Vice President and Chief
- --------------------------- Financial Officer (Principal)
Carl S. St. Philip, Jr. Financial and Accounting
Officer) March 22, 1999
/S/ MICHELE STEINER WARSHAW Director March 22, 1999
- ---------------------------
Michele Steiner Warshaw
/S/ CHARLES D. FINKELSTEIN Director March 22, 1999
- ---------------------------
Charles D. Finkelstein
/S/ JONATHAN D. MARINER Director March 22, 1999
- ---------------------------
Jonathan D. Mariner
/S/ STEVEN J. PRESTON Director March 22, 1999
- ---------------------------
Steven J. Preston
30
<PAGE>
STEINER LEISURE LIMITED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants...........................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.................F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998..........................................................F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997 and 1998.............................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.............................................F-6
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Steiner Leisure Limited and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Steiner
Leisure Limited (a Bahamian international business company) and subsidiaries as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Steiner Leisure
Limited and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 23, 1999.
F-2
<PAGE>
<TABLE>
<CAPTION>
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------------
1997 1998
------------ -----------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents............................................. $12,335,000 $10,058,000
Marketable securities................................................. 12,017,000 21,782,000
Accounts receivable................................................... 3,980,000 4,832,000
Inventories........................................................... 4,949,000 8,002,000
Other current assets.................................................. 958,000 1,142,000
----------- -----------
Total current assets................................................ 34,239,000 45,816,000
----------- -----------
PROPERTY AND EQUIPMENT, net 2,285,000 5,840,000
----------- -----------
OTHER ASSETS:
Trademarks and product formulations, net.............................. 190,000 290,000
License rights, net................................................... 31,000 740,000
Other................................................................. 392,000 968,000
----------- -----------
Total other assets.................................................. 613,000 1,998,000
----------- -----------
Total assets........................................................ $37,137,000 $53,654,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................... $ 1,901,000 $ 2,641,000
Accrued expenses...................................................... 5,941,000 6,434,000
Current portion of capital lease obligations.......................... 68,000 21,000
Income taxes payable.................................................. 685,000 848,000
----------- -----------
Total current liabilities........................................... 8,595,000 9,944,000
----------- -----------
CAPITAL LEASE OBLIGATIONS, net of current portion 29,000 -
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
MINORITY INTEREST..................................................... - 19,000
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred shares, $.0l par value; 10,000,000 shares authorized, none
issued and outstanding.............................................. - -
Common shares, $.0l par value; 20,000,000 shares authorized,
16,239,000 shares issued and outstanding at December 31, 1997
and 16,603,000 shares issued at December 31, 1998................... 162,000 166,000
Additional paid-in capital............................................ 10,675,000 12,790,000
Accumulated other comprehensive income................................ 171,000 440,000
Retained earnings 17,505,000 35,181,000
Treasury shares, at cost, 313,000 shares in 1998...................... - (4,886,000)
----------- -----------
Total shareholders' equity.......................................... 28,513,000 43,691,000
----------- -----------
Total liabilities and shareholders' equity.......................... $37,137,000 $53,654,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE>
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
------------ ----------- -------------
REVENUES:
<S> <C> <C> <C>
Services.............................................. $43,122,000 $50,113,000 $ 59,741,000
Products.............................................. 26,458,000 33,863,000 41,647,000
----------- ----------- ------------
Total revenues...................................... 69,580,000 83,976,000 101,388,000
----------- ----------- ------------
COST OF SALES:
Cost of services...................................... 33,446,000 39,085,000 46,142,000
Cost of products...................................... 18,699,000 23,110,000 28,227,000
----------- ----------- ------------
Total cost of sales................................. 52,145,000 62,195,000 74,369,000
----------- ----------- ------------
Gross profit........................................ 17,435,000 21,781,000 27,019,000
----------- ----------- ------------
OPERATING EXPENSES:
Administrative........................................ 3,396,000 3,862,000 4,801,000
Salary and payroll taxes.............................. 3,973,000 4,344,000 4,979,000
Amortization of CTO intangibles....................... 2,477,000 1,089,000 -
----------- ----------- ------------
Total operating expenses............................ 9,846,000 9,295,000 9,780,000
----------- ----------- ------------
Income from operations.............................. 7,589,000 12,486,000 17,239,000
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income....................................... 137,000 908,000 1,627,000
Gains on sale of marketable securities................ - 16,000 118,000
Interest expense...................................... (305,000) (16,000) (8,000)
----------- ----------- ------------
Total other income (expense)........................ (168,000) 908,000 1,737,000
----------- ----------- ------------
Income before provision for income taxes
and minority interest............................. 7,421,000 13,394,000 18,976,000
----------- ----------- ------------
PROVISION FOR INCOME TAXES:
Current............................................... 1,750,000 1,147,000 1,296,000
Deferred.............................................. - - -
Nonrecurring.......................................... 3,200,000 - -
----------- ----------- ------------
Total provision for income taxes.................... 4,950,000 1,147,000 1,296,000
----------- ----------- ------------
Income before minority interest..................... 2,471,000 12,247,000 17,680,000
MINORITY INTEREST..................................... - - (4,000)
------------ ----------- ------------
Net income............................................ $ 2,471,000 $12,247,000 $ 17,676,000
=========== =========== ============
EARNINGS PER COMMON SHARE:
Basic................................................. $ 0.17 $ 0.76 $ 1.08
=========== =========== ============
Diluted............................................... $ 0.17 $ 0.73 $ 1.04
=========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NUMBER ACCUMULATED
OF ADDITIONAL OTHER
COMMON COMMON PAID-IN SUBSCRIPTION COMPREHENSIVE
SHARES SHARES CAPITAL RECEIVABLE INCOME
---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.................. 14,337,000 $143,000 $ 644,100 $ (100) $ -
Net income.................................. - - - - -
Foreign currency translation adjustment..... - - - - 218,000
Comprehensive income........................ - - - - -
Collection of subscription receivable....... - - (100) 100 -
Net proceeds from sale of common shares..... 1,863,000 19,000 9,685,000 - -
Share options issued to non-employees....... - - 113,000 - -
---------- -------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996.................. 16,200,000 162,000 10,442,000 - 218,000
Net income.................................. - - - - -
Foreign currency translation adjustment..... - - - - (80,000)
Unrealized gain on marketable securities.... - - - - 33,000
Comprehensive income........................ - - - - -
Issuance of common shares in connection
with exercise of share options............ 39,000 - 226,000 - -
Share options issued to non-employees....... - - 7,000 - -
---------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997.................. 16,239,000 162,000 10,675,000 171,000
Net income.................................. - - - - -
Foreign currency translation adjustment..... - - - - (1,000)
Unrealized gain on marketable securities.... - - - - 270,000
Comprehensive income........................ - - - - -
Issuance of common shares in connection
with exercise of share options............ 364,000 4,000 2,115,000 - -
Purchases of treasury shares................ - - - - -
---------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998.................. 16,603,000 $166,000 $12,790,000 $ - $ 440,000
========== ========= =========== ============ ============
RETAINED TREASURY
EARNINGS SHARES TOTAL
----------- ----------- ----------
BALANCE, DECEMBER 31, 1995.................. $ 2,787,000 $ - $ 3,574,000
Net income.................................. 2,471,000 - 2,471,000
Foreign currency translation adjustment..... - - 218,000
-----------
Comprehensive income........................ - - 2,689,000
Collection of subscription receivable....... - - -
Net proceeds from sale of common shares..... - - 9,704,000
Share options issued to non-employees....... - - 113,000
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996.................. 5,258,000 - 16,080,000
Net income.................................. 12,247,000 - 12,247,000
Foreign currency translation adjustment..... - - (80,000)
Unrealized gain on marketable securities.... - - 33,000
----------- ----------- -----------
Comprehensive income........................ - - 12,200,000
Issuance of common shares in connection
with exercise of share options............ - - 226,000
Share options issued to non-employees....... - - 7,000
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997.................. 17,505,000 - 28,513,000
Net income.................................. 17,676,000 - 17,676,000
Foreign currency translation adjustment..... - - (1,000)
Unrealized gain on marketable securities.... - - 270,000
----------- ----------- -----------
Comprehensive income........................ - - 17,945,000
Issuance of common shares in connection
with exercise of share options............ - - 2,119,000
Purchases of treasury shares................ - (4,886,000) (4,886,000)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.................. $35,181,000 $(4,886,000) $43,691,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
------------ ------------ -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net income............................................. $ 2,471,000 $12,247,000 $17,676,000
Adjustments to reconcile net income to net cash........
provided by operating activities.....................
Depreciation and amortization........................ 3,075,000 1,819,000 1,009,000
Accretion of debt discount........................... 177,000 - -
Gain on sale of marketable securities................ - (16,000) (118,000)
Share options issued to nonemployees................. 113,000 7,000 -
Minority interest.................................... - - 4,000
(Increase) decrease in
Accounts receivable............................... 434,000 (607,000) (843,000)
Inventories....................................... (1,874,000) 206,000 (3,044,000)
Other current assets.............................. (508,000) (148,000) (183,000)
Other assets...................................... 166,000 (363,000) (572,000)
Increase (decrease) in
Accounts payable.................................. 317,000 (115,000) 735,000
Accrued expenses.................................. 792,000 2,217,000 381,000
Minority interest................................. - - 15,000
Income taxes payable.............................. 3,835,000 (3,670,000) 159,000
------------ ----------- ------------
Net cash provided by operating activities.............. 8,998,000 11,577,000 15,219,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of marketable securities..................... - (33,804,000) (37,221,000)
Proceeds from maturities of marketable
securities........................................... - 11,890,000 13,163,000
Proceeds from the sale of marketable securities........ - 9,929,000 14,681,000
Capital expenditures................................... (215,000) (800,000) (4,504,000)
Acquisition of trademarks, product formulations
and franchise rights................................. - - (765,000)
Acquisitions, net of cash acquired..................... 105,000 - -
Advances to related parties............................ (2,973,000) - -
Collection of advances to related parties.............. 3,164,000 - -
------------ ------------ ------------
Net cash (used in) provided by investing
activities........................................... 81,000 (12,785,000) (14,646,000)
------------- ------------ ------------
(Continued)
F-6
<PAGE>
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on capital lease obligations........................... $ (115,000) $ (100,000) $ (85,000)
Payments on long-term debt...................................... (5,679,000) (217,000) -
Payments on advances from related parties....................... (894,000) - -
Purchases of treasury shares.................................... - - (4,886,000)
Net proceeds from sale of common shares......................... 9,704,000 - -
Net proceeds from share option exercises........................ - 226,000 2,119,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................................... 3,016,000 (91,000) (2,852,000)
----------- ---------- -----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH............................................... 133,000 9,000 2,000
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.......................................... 12,228,000 (1,290,000) (2,277,000)
CASH AND CASH EQUIVALENTS,......................................
beginning of period........................................... 1,397,000 13,625,000 12,335,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period........................................................ $13,625,000 $12,335,000 $10,058,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for
Interest.................................................... $ 178,000 $ 19,000 $ 8,000
=========== =========== ===========
Income taxes................................................ $ 1,080,000 $ 4,692,000 $ 1,137,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE>
STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Steiner Leisure Limited (including its subsidiaries where the context
requires, the "Company") provides 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.
In January 1998, 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 has begun to license the BSC concept at
three former BSC facilities in Hong Kong under the name "Elemis Beautiful Skin
Centres." The Company granted the right to operate these initial Elemis
Beautiful Skin Centres to the entity that sold the Company the BSC Rights. That
entity owns 15% of EBSC International Limited, a Bahamas subsidiary of the
Company that licenses rights to operate Elemis Beautiful Skin Centres ("EBSC").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. Minority interest
represents the minority shareholder's proportional share of the net assets of
EBSC.
(B) CASH AND CASH EQUIVALENTS -
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash equivalents.
At December 31, 1997 and 1998, cash and cash equivalents include
interest-bearing deposits of $11,530,000 and $5,113,000, respectively.
(C) MARKETABLE SECURITIES -
Marketable securities consist of investment grade commercial paper. The
Company accounts for marketable securities in accordance with Statement of
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.
(D) INVENTORIES -
Inventories, consisting principally of beauty products, are stated at
the lower of cost (first-in, first-out) or market. Inventories consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------- ----------
<S> <C> <C>
Finished goods............................................................ $3,805,000 $6,205,000
Raw materials............................................................. 1,144,000 1,797,000
---------- ----------
$4,949,000 $8,002,000
========== ==========
</TABLE>
F-8
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(E) PROPERTY AND EQUIPMENT -
Property and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the respective assets on a straight-line
basis. Leasehold improvements are amortized on a straight-line basis over the
shorter of the terms of the respective leases and the estimated useful lives of
the respective assets.
(F) REVENUE RECOGNITION -
The Company recognizes revenues earned as services are provided and as
products are sold. License revenues consist of license fees, which are typically
collected upon execution of an area development and/or franchise agreement, and
license royalties, based upon gross sales. License fees are initially recorded
as deferred franchise fee income and are recognized in earnings when licensed
locations are opened. License revenues were $106,000 in 1998 and are included in
services revenues in the accompanying consolidated statements of operations.
(G) AMORTIZATION -
The acquired intangible assets of CTO were amortized on a straight-line
basis over a three-year period that ended on June 1, 1997. This period
represented the approximate remaining life of CTO's cruise line agreements.
Other assets include the cost of trademark registrations and product
formulations in connection with the Company's investment in Elemis Limited, and
the intellectual property represented by rights acquired by the Company in
connection with its investment in the BSC Rights. Costs relating to such
trademark registrations, product formulations and rights are amortized on the
straight-line method over the estimated lives of those respective costs (ranging
from 15 to 30 years). Amortization of the license rights acquired in connection
with the EBSC investment commenced in April 1998, the month of the effective
date of the first area development agreement entered into by EBSC.
(H) INCOME TAXES -
The Company files separate tax returns for its U.S. 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 No. 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. 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 U.S. income tax liability
resulting from the liquidation was approximately $3.2 million. This amount has
been reflected as a nonrecurring component of the provision for income taxes in
the Company's 1996 consolidated statement of operations. The entire $3.2 million
estimated tax liability was paid during the first quarter of 1997.
(I) 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-9
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(J) 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 for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding used in
calculating basic earnings per share........................... 14,556,000 16,202,000 16,401,000
Dilutive common share equivalents................................ 128,000 491,000 559,000
---------- ---------- ----------
Weighted average common and common equivalent....................
shares used in calculating diluted earnings per
share.......................................................... 14,684,000 16,693,000 16,960,000
========== ========== ==========
Options outstanding which are not included in the
calculation of diluted earnings per share because
their impact is antidilutive................................... - 369,000 189,000
========== ========== ==========
</TABLE>
(K) USE OF ESTIMATES -
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS -
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of the
fair value of certain financial instruments. Cash and cash equivalents, other
current assets, other assets, accrued expenses and accounts payable are
reflected in the accompanying consolidated financial statements at cost, which
approximates fair value.
(M) STOCK-BASED COMPENSATION -
The Company follows the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in
accounting for stock-based transactions with nonemployees and, accordingly,
records compensation expense in the consolidated statements of operations for
such transactions. The Company continues to apply the provisions of APB 25 for
transactions with employees, as permitted by SFAS 123.
(N) 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. The Company adopted SOP 98-1
prospectively effective January 1, 1999. 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. The Company adopted
SOP 98-5 effective January 1, 1999. 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.
F-10
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company adopted SFAS No. 131 effective December 31, 1998. Management
operates the business of the Company as a single segment. As a result, no
additional disclosure was required.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE ------------------------------
IN YEARS 1997 1998
----------- ------------- ------------
<S> <C> <C> <C>
Furniture and fixtures..................................... 5-7 $ 307,000 $ 350,000
Computers and equipment.................................... 3-8 1,635,000 2,829,000
Leasehold improvements..................................... 3-5 3,119,000 6,340,000
------------ ------------
5,061,000 9,519,000
Less: Accumulated depreciation and amortization (2,776,000) (3,679,000)
------------ ------------
$ 2,285,000 $ 5,840,000
=========== ===========
</TABLE>
(4) ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
---------- ----------
<S> <C> <C>
Operative commissions........................................................... $1,059,000 $1,387,000
Guaranteed minimum rentals...................................................... 2,235,000 2,144,000
Bonuses......................................................................... 769,000 910,000
Staff shipboard accommodations.................................................. 227,000 326,000
Other........................................................................... 1,651,000 1,667,000
---------- ----------
$5,941,000 $6,434,000
========== ==========
</TABLE>
(5) CAPITAL LEASE OBLIGATIONS:
Assets under capital leases include office equipment and onboard
massage and exercise equipment. The future minimum lease payments under capital
leases and the present value of the net minimum lease payments become due in
1999.
(6) SHAREHOLDERS' EQUITY:
In November 1996, the Company completed an initial public offering of
11,468,790 of its common shares of which 1,863,000 shares were sold by the
Company and 9,605,790 shares were sold by a shareholder of the Company. The
offering price was $5.778 per share and the proceeds to the Company, net of the
underwriters' discount and other direct costs, were approximately $9,704,000.
F-11
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective October 24, 1997 and April 28, 1998, the Board of Directors
of the Company approved three-for-two share splits of the Company's common
shares, effected as share dividends, effective for shareholders of record as of
October 13, 1997 and April 14, 1998, respectively. These share splits have been
retroactively reflected in the accompanying consolidated financial statements
for all periods presented.
(7) INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Federal............................................ $3,816,000 $ 447,000 $ 484,000
U.S. State.............................................. 332,000 57,000 75,000
U.K..................................................... 802,000 643,000 737,000
---------- ---------- ----------
$4,950,000 $1,147,000 $1,296,000
========== ========== ==========
</TABLE>
A reconciliation of the difference between the expected provision for
income taxes using the U.S. federal tax rate and the Company's actual provision
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Provision using statutory U.S. federal tax rate........... $2,597,000 $4,688,000 $6,640,000
Income earned in jurisdictions not subject to
income taxes............................................ (1,600,000) (3,990,000) (5,318,000)
Amortization of intangibles............................... 753,000 381,000 -
Nonrecurring provision related to the
liquidation of CTO...................................... 3,200,000 - -
Meals and entertainment................................... 3,000 5,000 -
Effect of state income taxes.............................. 46,000 38,000 50,000
Other..................................................... (49,000) 25,000 (76,000)
---------- ---------- ----------
$4,950,000 $1,147,000 $1,296,000
========== ========== ==========
</TABLE>
F-12
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) 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:
<TABLE>
<CAPTION>
FOREIGN UNREALIZED ACCUMULATED
CURRENCY GAINS ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME
----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.............................. $218,000 $ - $218,000
Current-period activity................................. (80,000) 33,000 (47,000)
-------- -------- --------
Balance, December 31, 1997.............................. 138,000 33,000 171,000
Current-period activity................................. (1,000) 270,000 269,000
-------- -------- --------
Balance, December 31, 1998.............................. $137,000 $303,000 $440,000
======== ======== ========
Amounts reclassified are as follows:
Unrealized holding gains arising during 1997.................................................. $ 49,000
Less: reclassification adjustment for gains included in net income............................ (16,000)
--------
Unrealized gains on marketable securities..................................................... $ 33,000
========
Unrealized holding gains arising during 1998.................................................. $421,000
Less: reclassification adjustment for gains included in net income............................ (118,000)
--------
Unrealized gains on marketable securities..................................................... $303,000
========
</TABLE>
<PAGE>
(9) COMMITMENTS AND CONTINGENCIES:
(A) CRUISE LINE AGREEMENTS -
The Company has entered into agreements of varying terms with the
cruise lines. These agreements provide for the Company to pay the cruise lines
rent for use of their shipboard facilities as well as for staff shipboard meals
and accommodations. Rental amounts are based on a percentage of revenue, a
minimum annual rental or a combination of both. Some of the minimum annual
rentals are calculated as a flat dollar amount on an annual basis while others
are based upon minimum passenger per diems for passengers actually embarked on
each cruise of the respective vessel. Staff shipboard meals and accommodations
are charged by the cruise lines on a per staff per day basis. The Company
recognizes all expenses related to cruise line rents, minimum guarantees and
staff shipboard meals and accommodations, generally at the completion of a
cruise, as they are incurred. For cruises in process at period end, accrual is
made to record such expenses in a manner that approximates a pro-rata basis. In
addition, staff-related expenses such as shipboard employee commissions are
recognized in the same manner. Pursuant to agreements that provide for minimum
annual rentals, the Company has guaranteed the following amounts as of December
31, 1998:
YEAR AMOUNT
- ---- -----------
1999......................................................... $20,682,000
2000......................................................... 16,937,000
2001......................................................... 14,388,000
2002......................................................... 2,894,000
2003......................................................... 400,000
Thereafter................................................... 2,050,000
-----------
$57,351,000
===========
F-13
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(B) OPERATING LEASES -
The Company leases office and warehouse space as well as office
equipment and automobiles under operating leases. The Company incurred
approximately $367,000, $334,000 and $403,000 in rental expense under
noncancelable operating leases in 1996, 1997 and 1998, respectively.
Minimum annual commitments under operating leases at December 31, 1998
are as follows:
YEAR AMOUNT
- ---- -----------
1999......................................................... $ 324,000
2000......................................................... 214,000
2001......................................................... 164,000
2002......................................................... 134,000
2003......................................................... 76,000
Thereafter................................................... 271,000
-----------
$ 1,183,000
===========
(C) EMPLOYMENT AND CONSULTING AGREEMENTS -
The Company entered into employment agreements, effective as of January
1, 1996 and as amended in December 1997 and March 1998, with its executive
officers. The agreements provide for minimum annual base salaries and annual
incentive bonuses in amounts up to the base salaries based on the Company's
attainment of certain targeted earnings levels. The earnings levels are required
to be approved for such purpose by the Compensation Committee of the Board of
Directors of the Company. The Company incurred approximately $1,514,000,
$1,621,000 and $1,865,000 in compensation expense under these employment
agreements in 1996, 1997 and 1998, respectively.
Future minimum annual commitments under the Company's employment and
consulting agreements at December 31, 1998 are as follows:
YEAR AMOUNT
- ---- -----------
1999......................................................... $ 1,210,000
2000......................................................... 1,110,000
2001......................................................... 965,000
2002......................................................... 30,000
2003......................................................... 30,000
Thereafter................................................... 83,000
-----------
$ 3,428,000
===========
The Company had a consulting agreement with the former shareholder of
CTO which provided for annual payments of $150,000 for a period of three years,
commencing June 3, 1994. The 1997 obligation with respect to the final annual
payment of $150,000 was paid by Steiner Group.
(D) PRODUCT SUPPLY AGREEMENT -
The Company has an agreement, which extends to 2001, with its principal
supplier of raw materials for its products pursuant to which the Company will
purchase its raw materials requirements. Such agreement provides for no specific
minimum commitments.
(E) CONSTRUCTION COMMITMENT -
The Company has committed to spend approximately $1.5 million in 1999
in connection with the construction of the spa at the Atlantis Resort.
F-14
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) PRODUCT LIABILITY -
The nature and use of the Company's products and services could give
rise to product liability or other claims if a customer were injured while
receiving one of the Company's services or suffered adverse reactions following
the use of its products. Adverse reactions could be caused by various factors
beyond the Company's control, including hypoallergenic sensitivity and the
possibility of malicious tampering with its products. If any of these events
occurred, the Company could incur substantial litigation expense, receive
adverse publicity and suffer a loss of sales.
(10) RELATED PARTY TRANSACTIONS:
Effective December 1995, the Company's principal shareholder
contributed certain rights with respect to formulations for lines of products
sold by the Company. The rights were purchased from an unrelated third party by
that shareholder. The formulations were used exclusively in the manufacture of
the Company's products. The contribution of these product formulation rights was
recorded at their historical cost of $219,000, the negotiated purchase price of
said product formulation rights between the unrelated parties. These other
assets are being amortized over a period of 15 years, the estimated life of the
underlying assets, representing the estimated period over which the related
products will be sold by the Company.
Notes Payable to Related Parties were non-interest bearing and were
repaid during 1997.
(11) SHARE OPTIONS:
The Company has reserved 1,620,000 of its common shares for issuance
under its 1996 Share Option and Incentive Plan and 185,625 of its common shares
for issuance under its Non-Employee Directors' Share Option Plan (the "Plans").
Under the Plans, incentive share options are available to employees and
nonqualified share options may be granted to consultants, directors or employees
of the Company. The terms of each option agreement are determined by the
Compensation Committee of the Board of Directors. The exercise price of
incentive share options may not be less than fair market value at the date of
grant and their terms may not exceed ten years. The exercise price of
nonqualified share options is determined by the Compensation Committee of the
Board of Directors and their terms may not exceed ten years. The following table
presents a summary of share option activity as of December 31:
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
NUMBER -------------------------------
OF SHARES LOW HIGH WEIGHTED
--------- --- ---- --------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 767,373 5.78 5.78 5.78
----------
Granted 569,257 8.72 25.73 18.34
Exercised (39,227) 5.78 5.78 5.78
Canceled (750) 10.56 10.56 10.56
-----------
Outstanding, December 31, 1997 1,296,653 5.78 25.73 11.29
-----------
Granted 274,040 25.00 34.54 31.99
Exercised (374,650) 5.78 10.61 6.54
Canceled (7,980) 10.56 34.54 30.03
-----------
Outstanding, December 31, 1998 1,188,063 5.78 34.54 17.44
===========
</TABLE>
F-15
<PAGE>
STEINER LEISURE LIMITD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional information regarding options outstanding at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------------
RANGE OF
EXERCISABLE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
PRICES OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
------------------- AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
LOW HIGH 12/31/98 LIFE PRICE 12/31/98 PRICE
------ ------ ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 5.78 $ 5.78 412,956 7.86 $5.78 175,953 $ 5.78
8.72 8.72 2,682 8.12 8.72 2,682 8.72
10.56 10.56 126,750 8.22 10.56 3,450 10.56
12.22 12.22 8,439 8.43 12.22 8,439 12.22
12.42 12.42 675 8.58 12.42 75 12.42
20.58 25.73 324,001 8.93 23.17 81,000 20.58
18.13 18.13 45,000 8.98 18.13 11,250 18.13
34.54 34.54 188,775 9.24 34.54 - -
29.92 29.92 9,189 9.49 29.92 - -
25.50 25.50 12,625 9.88 25.50 - -
25.00 25.00 56,971 9.91 25.00 - -
----- ------ -------- ----- ------ ------- ------
$5.78 $34.54 1,188,063 8.59 $17.44 282,849 $10.79
===== ====== ========= ===== ====== ======= ======
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for options granted to employees. Accordingly, no compensation cost
has been recognized related to such grants. Had compensation cost for the
Company's shares been based on fair value at the grant dates for awards under
the Plans consistent with the methodologies of SFAS 123, the Company's 1997 net
income and income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net income.................................................. As reported $12,247,000 $17,676,000
Pro forma $11,442,000 $14,106,000
Diluted earnings per share.................................. As reported $ .73 $ 1.04
Pro forma $ .69 $ .83
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions: expected
volatility of 37.8% and 61.0% for 1997 and 1998, respectively, risk-free
interest rate of 6.0%, expected dividends of $0 and expected term of 5 years.
In 1996, the Company recorded expense of $113,000 related to 37,500
share options granted to a nonemployee of the Company. In determining the
expense to be recorded, the Company applied the Black-Scholes model using the
following assumptions: expected volatility of 25%, risk-free interest rate of
6%, expected dividends of $0 and expected term of 5 years.
F-16
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF STEINER LEISURE LIMITED
OWNED BY STEINER LEISURE LIMITED
--------------------------------
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
- ----------------------------------- ------------------
CT Maritime Services, L.C. Florida
Cosmetics Limited The Bahamas
EBSC International Limited The Bahamas
Elemis Limited United Kingdom
Steiner Beauty Products, Inc. Florida
Steiner Spa Resorts Limited The Bahamas
Steiner Training Limited United Kingdom
Steiner Transocean Limited The Bahamas
OWNED BY COSMETICS LIMITED
-------------------------
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
- ----------------------------------- ------------------
Spa Resources Limited The Bahamas
OWNED BY ELEMIS LIMITED
-----------------------
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
- ----------------------------------- ------------------
EJ Contracts Limited United Kingdom
Emma Steiner Limited United Kingdom
OWNED BY STEINER TRAINING LIMITED
---------------------------------
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
- ----------------------------------- ------------------
Steiner Group Limited United Kingdom
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into Steiner Leisure
Limited's previously filed Form S-8 Registration Statement (File No. 333-39927),
Form S-8 Registration Statement (File No. 333-52343) and Form S-3 Registration
Statement (File No. 333-73363).
ARTHUR ANDERSEN LLP
Miami, Florida
March 22, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,058,000
<SECURITIES> 21,782,000
<RECEIVABLES> 5,245,000
<ALLOWANCES> 413,000
<INVENTORY> 8,002,000
<CURRENT-ASSETS> 45,816,000
<PP&E> 9,519,000
<DEPRECIATION> 3,679,000
<TOTAL-ASSETS> 53,654,000
<CURRENT-LIABILITIES> 9,944,000
<BONDS> 0
0
0
<COMMON> 166,000
<OTHER-SE> 43,525,000
<TOTAL-LIABILITY-AND-EQUITY> 53,654,000
<SALES> 41,647,000
<TOTAL-REVENUES> 101,388,000
<CGS> 28,227,000
<TOTAL-COSTS> 84,149,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> 18,976,000
<INCOME-TAX> 1,296,000
<INCOME-CONTINUING> 17,676,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,676,000
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.04
</TABLE>
