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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, 1999
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)
Registrant's telephone number, including area code: (242) 356-0006
Securities registered pursuant to Section 12(b) of the Act:
None
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<S> <C>
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)
</TABLE>
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 20, 2000 was approximately $244,252,885.
As of March 20, 2000, 16,615,850 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
2000 Annual Meeting of Shareholders, which will be filed on or before April 29,
2000, are incorporated by reference in Part III hereof.
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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, 2000, we
served 106 cruise ships representing 29 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.
We also operate four post-secondary schools in Florida offering degree
and non-degree programs in massage therapy, skin care and related areas and
operate a luxury spa at the Atlantis Resort on Paradise Island in The Bahamas.
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, 2000, 43 of the 106 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 $36,373 in
1998 and $42,249 in 1999, as compared to average weekly revenues of $10,607 in
1998 and $11,296 in 1999 for the other ships we served.
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 products of third parties,
including a variety of hair care products under the "Steiner" name. In total, we
offer over 170 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 third party land-based retail (including at
our Atlantis Spa and our Florida schools) and wholesale outlets, mail order and
our web site at www.steinerleisure.com. During 1999, 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"), passenger volume of cruises marketed
primarily to North American consumers ("North American Cruises") grew from
approximately 2.2 million in 1985 to approximately 5.9 million in 1999,
representing a compound annual growth rate of approximately 7.3%. As of March 1,
2000, approximately 89 of the 106 ships we served offered North American
Cruises.
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According to a study reported by CLIA in February 2000, 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 other
vacations in many categories. "Being pampered" achieved the greatest positive
distinction. We believe our services offer a therapeutic and indulgent
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 we
offer. 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, 2000, 43 of the ships that we served offered large spa facilities.
The cruise lines we serve are scheduled to introduce a total of eight new ships
during the remainder of 2000. Steiner Leisure expects to perform services on
seven of these ships, including five that are currently covered by cruise line
agreements. Six of these seven 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. We have developed many of the techniques and
products used by our personnel. 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 have
positioned us to obtain renewals of almost all of our cruise line agreements
that have expired since 1990. During 1999 and through March 1, 2000, we renewed
our agreements with Carnival (14 ships in service at March 1, 2000) and Holland
America (nine ships in service at March 1,
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2000) (each for six year terms); Royal Caribbean (12 ships in service at March
1, 2000) and Celebrity (five ships in service at March 1, 2000) (each for five
year terms); Fred Olsen (two ships in service at March 1, 2000) (for a three
year term) and Renaissance (five ships in service at March 1, 2000) (for an
additional six months).
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, 2000, we commenced serving
26 new cruise ships brought into service by our cruise line customers. As of
March 1, 2000, the cruise lines served by us were scheduled to introduce eight
new ships into service during the remainder of 2000. Steiner Leisure expects to
perform services on seven of these ships, including five 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, 2000, 43 of the ships we served had large spa facilities. During the
remainder of 2000, 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 29.7% from 1995 through 1999. 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 retail outlets of our Florida schools, 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. We believe that there is a significant opportunity to
increase our product retail sales through third party, land-based channels.
INCREASE 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 1999, ships with large spa
facilities had an average gross per day of $390 compared to $274 for ships
without large spa facilities. Steiner Leisure's average gross per staff per day
has increased each year, from $221 in 1995 to $347 in 1999. We believe that this
increase is due to the continuous training that we provide to our shipboard
employees, including instruction in maximization of sales as well as the
increase in the number of vessels with large spa facilities.
SEEK LAND-BASED OPPORTUNITIES. We believe that there are land-based
opportunities to sell our services and products and to otherwise expand our
operations. In 1999, we began operating the Atlantis Spa. We offer services and
products at that facility similar to those we offer on cruise ships. In 1999, we
began operating four post-secondary schools in Florida offering training in
massage therapy and skin care. We recently entered into an agreement to acquire
a total of five additional massage therapy training schools located in Maryland,
Pennsylvania and Virginia. 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. Other than the five additional schools described
above, we do not have any current agreements with respect to any potential
acquisitions.
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CRUISE LINE CUSTOMERS
As of March 1, 2000, Steiner Leisure provided its services and products
to 29 cruise lines representing a total of 106 ships, including almost all of
the major cruise lines offering North American Cruises.
The numbers of ships served as of March 1, 2000 under cruise line
agreements with the respective cruise lines are listed below:
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NUMBER NUMBER
OF SHIPS OF SHIPS
CRUISE LINE SERVED CRUISE LINE SERVED
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Carnival (l) 14 Orient (3) 1
Celebrity (2) 5 P&O Cruises (4) 3
Costa (l) 5 P&O European Ferries (4) 1
Crown 1 Passat 1
Crystal (3) 2 Premier 6
Cunard (l) 4 Princess (4) 10
Disney 2 Radisson Diamond Seven Seas 2
Festival 1 Renaissance 5
Fred Olsen 2 Royal Caribbean (2) 12
Holland America (l) 9 Saga 1
Louis 1 Seabourn (1) 4
Mediterranean Shipping 1 Silversea (5) 2
MTC 1 Unicom 1
Norwegian (3) 7 Windstar (1) 1
Norwegian Capricorn (3) 1 ---
Total 106
===
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(1) Carnival Corporation, the parent company of Carnival Cruise
Lines, also owns Holland America, Costa and 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. We are operating the Norwegian Sky
without an agreement.
(4) P&O European Ferries, P&O Cruises and Princess are
subsidiaries of The Peninsular & Oriental Steam Navigation
Company.
(5) We will cease to serve ships of Silverseas as of May 10, 2000.
The cruise lines served by us are scheduled to introduce eight new
ships into service during the remainder of 2000. Steiner Leisure expects to
perform services on seven of these ships, including five 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); Celebrity (one ship); Costa (one ship); Holland
America (two ships); Royal Caribbean (one ship); and Renaissance (one ship).
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.
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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
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 thirteen, depending on the size of the ship.
The number of our staff providing these services on a ship ranges from one to
twenty-two. 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.
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 1980s, 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, 2000, large spas
were found on 43 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 2000. 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 1999, our average weekly revenues on ships with
large spas were 3.7 times our average weekly revenues on other ships.
FITNESS FACILITIES. As of March 1, 2000, we operated fitness facilities
on 69 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 46 ships, including some that will be
introduced during the remainder of 2000, 30 which have, or upon completion will
have, large spas. Of these 46 ships, 38 are currently in service, 37 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, we cannot assure you that we
will be able to obtain agreements for all of the ships for which we provide
design assistance.
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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.
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, and other spas that may be
operated by our partner.
Students trained at our Florida schools may be employed by us at the
Atlantis Spa, or any other land-based facilities that we may operate in the
future, as well as on cruise ships we serve.
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 retail outlets of our Florida schools,
the Elemis Beautiful Skin Centres and salons, retail stores and other third
party 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, 2000, Steiner Leisure
sold 148 "Elemis" skin and hair care products made primarily from premium
quality natural ingredients and 27 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 Bridgewater, England. We
recently updated our product manufacturing equipment to expand our production
capacity.
We have begun to train the students attending our Florida schools in
the use of our Elemis products. The three Elemis Beautiful Skin Centres operated
in Hong Kong by a licensee of ours also sell our Elemis product range.
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We also sell the products of third parties, 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 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 and one-half years as of March 1, 2000. As of that date, cruise line
agreements that expire within one year covered 45 of the 106 ships served by us.
These 45 ships accounted for approximately 17.7% of our revenues for 1999.
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 achieve specified passenger service
standards. As of March 1, 2000, agreements for three ships provide for
termination for any reason by the cruise line on six months notice, for six
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, 1999, these payments
are required by cruise line agreements covering a total of 85 ships served by us
and 23 additional ships not yet in service. As of December 31, 1999, Steiner
Leisure had guaranteed total minimum payments (excluding payments based on
passenger loads applicable to certain ships served by us) of approximately:
$21.0 million in 2000, $16.8 million in 2001, $18.7 million in 2002 and $22.0
million in 2003, $23.7 million in 2004 and $26.3 million thereafter.
RECENT LAND-BASED ACTIVITIES
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.
In August 1999, we acquired from Florida College of National Health,
Inc., and began operating four post-secondary schools in Florida offering degree
and non-degree courses in massage therapy, skin care and related areas. As of
March 1, 2000, 768 students attended our schools. We are eligible to participate
in student financial assistance programs administered by the U.S. Department of
Education (the "U.S. DOE") and a majority of our students receive one or more
forms of assistance under those programs. Accordingly, the success of our
schools is dependent to a significant extent on our continued eligibility to
participate in these programs. During 1999, revenues from our Florida schools
represented two percent of our total revenues.
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We believe these schools have the potential to provide us with the
services of skilled and trained staff for our land-based and shipboard
facilities and will assist us in creating new channels for distribution of our
Elemis product range.
In January 2000, we entered into an agreement to acquire a total of
five additional post-secondary massage therapy schools located in Maryland,
Pennsylvania and Virginia for approximately $4.0 million in cash. The closing of
the transaction is subject to the fulfillment of certain conditions, and the
transaction is further subject to a post-closing condition requiring regulatory
approval of the acquisition by the U.S. Department of Education.
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 services and products similar to ours 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, 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. Recently, we learned that Mandara Spas will be replacing us on
the two ships we serve for Silverseas. In addition, Harding Brothers is
currently serving two ships formerly served by us.
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. Our Florida schools compete
with other providers of similar training in Florida and elsewhere in the United
States, including large entities with greater resources than ours.
Our land-based product sales compete with a variety of other brands,
including those of manufacturers with greater resources than ours, and those
with greater name recognition than our products.
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
safety, 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 effect 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 and the
Food and Drug Administration, 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 effect or
increase the cost of advertising, marketing and packaging our products.
Steiner Leisure's land-based operations, including our Atlantis Spa and
the Florida schools, are subject to applicable regulations in the locations
where such operations are conducted. These regulations could adversely effect
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.
The Florida Schools are subject to regulation by the Florida Department
of Education. These schools also are eligible to participate in student
financial assistance programs administered by the U.S. DOE. In order to continue
to be eligible for these programs, these schools must satisfy certain criteria
established by the DOE and our administration of these financial aid programs is
subject to periodic review by regulatory authorities. A failure to satisfy the
DOE criteria could result in a limitation, suspension or termination of our
eligibility to participate in these programs as well as certain financial
penalties. In addition, these programs are subject to political and budgetary
considerations and we cannot assure you that funding for these programs will be
maintained at current levels.
8
<PAGE> 10
EMPLOYEES
As of March 1, 2000, Steiner Leisure had a total of 1,334 employees. Of
that number, 1,030 worked on cruise ships, 60 worked at the Atlantis Spa, 61
were involved in teaching at our Florida schools, 37 were involved in the
recruiting and training of our onboard personnel, 37 were involved in the
bottling, distributing, warehousing and shipping of our beauty products and 109
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. We believe that our relations
with our employees are satisfactory.
Personnel working at the Elemis Beautiful Skin Centres are employees of
the operator of these facilities.
ITEM 2. PROPERTIES
Steiner Leisure's corporate office is located in Nassau, The Bahamas,
and the office of Steiner Management Services LLC (formerly, CT Maritime
Services, L.C.), a Florida subsidiary of Steiner Leisure, is located in Miami,
Florida. We also maintain warehouse and shipping facilities in Fort Lauderdale,
Florida. Our Florida schools are located in Pompano Beach, Miami, Altamonte
Springs and Sarasota. Our training facilities and the administrative offices of
our Elemis Limited subsidiary are located in Stanmore, England. We also maintain
a product production, packaging, warehousing and distribution facility in
Bridgewater, 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.
9
<PAGE> 11
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 57 Chairman of the Board and Chief Executive Officer
Leonard I. Fluxman 41 President and Chief Operating Officer and a Director
Michele Steiner Warshaw 54 Executive Vice President and a Director
Amanda Jane Francis 33 Senior Vice President-- Operations of Steiner Transocean
Sean C. Harrington 33 Managing Director of Elemis Limited
Carl S. St. Philip, Jr. 33 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 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 Steiner Transocean Limited, our subsidiary that conducts our shipboard
operations, 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.
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 our Dubai and 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. From January 1997
through December 1998, Mr. St. Philip served as Vice President -- Finance of our
Steiner Management Services LLC 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> 12
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 split effected on April 28,
1998).
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ----- ---
<S> <C> <C>
First Quarter .................................... $35.67 $18.17
Second Quarter.................................... 34.25 24.13
Third Quarter..................................... 32.63 15.13
Fourth Quarter.................................... 32.25 14.38
</TABLE>
<TABLE>
<CAPTION>
1999 HIGH LOW
- ---- ----- ---
<S> <C> <C>
First Quarter .................................... $35.38 $22.00
Second Quarter.................................... 35.88 27.13
Third Quarter..................................... 34.75 22.69
Fourth Quarter.................................... 25.63 12.75
</TABLE>
As of March 20, 2000, there were 30 holders of record of our common
shares (including nominees holding shares on behalf of beneficial owners). As of
that date, there were approximately 2,800 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 exchange control approval by the Central Bank of The Bahamas
(the "Central Bank"). However, the exemption from such approval requirements
expires in 2015. We cannot assure you 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 exchange
control approval by the Central Bank.
11
<PAGE> 13
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, 1999. The balance sheet data as of
December 31, 1998 and 1999 and the statement of operations data for the years
ended December 31, 1997, 1998 and 1999 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, 1995, 1996 and 1997, and the statement of
operations data for the years ended December 31, 1995 and 1996, 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,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Services $ 35,764 $ 43,122 $ 50,113 $ 59,741 $ 76,958
Products 18,648 26,458 33,863 41,647 52,825
--------- --------- --------- --------- ---------
Total revenues 54,412 69,580 83,976 101,388 129,783
--------- --------- --------- --------- ---------
Cost of revenues:
Cost of services 29,623 33,446 39,085 46,142 59,037
Cost of products 16,309 18,699 23,110 28,227 36,824
--------- --------- --------- --------- ---------
Total cost of revenues 45,932 52,145 62,195 74,369 95,861
--------- --------- --------- --------- ---------
Gross profit 8,480 17,435 21,781 27,019 33,922
--------- --------- --------- --------- ---------
Operating expenses:
Administrative 3,100 3,396 3,862 4,801 5,946
Salary and payroll taxes 1,925 3,973 4,344 4,979 6,025
Amortization of CTO intangibles 2,292 2,477 1,089 -- --
Amortization of Goodwill -- -- -- -- 192
--------- --------- --------- --------- ---------
Total operating expenses 7,317 9,846 9,295 9,780 12,163
--------- --------- --------- --------- ---------
Income from operations 1,163 7,589 12,486 17,239 21,759
Other income (expense) (370) (168) 908 1,737 1,457
--------- --------- --------- --------- ---------
Income before provision for income
Taxes and minority interest 793 7,421 13,394 18,976 23,216
--------- --------- --------- --------- ---------
Provision for income taxes:
Current 1,356 1,750 1,147 1,296 1,341
Nonrecurring -- 3,200 -- -- --
--------- --------- --------- --------- ---------
Total provision for income taxes 1,356 4,950 1,147 1,296 1,341
--------- --------- --------- --------- ---------
Income before minority interest (563) 2,471 12,247 17,680 21,875
Minority interest
-- -- -- (4) 18
--------- --------- --------- --------- ---------
Net income (loss) $ (563) $ 2,471 $ 12,247 $ 17,676 $ 21,893
========= ========= ========= ========= =========
Earnings (loss) per common share (1)
Basic $ (0.04) $ 0.17 $ 0.76 $ 1.08 $ 1.35
========= ========= ========= ========= =========
Diluted $ (0.04) $ 0.17 $ 0.73 $ 1.04 $ 1.31
========= ========= ========= ========= =========
Basic weighted average shares outstanding 14,337 14,556 16,202 16,401 16,215
Diluted weighted average shares outstanding 14,337 14,684 16,693 16,960 16,720
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 22 $ 12,595 $ 25,644 $ 35,872 $ 35,105
Total assets 13,320 26,656 37,137 53,654 68,674
Long-term debt 3,020 -- -- -- --
Shareholders' equity 3,574 16,080 28,513 43,691 53,997
</TABLE>
- ---------------------
(1) 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. In 1999 we began offering services and products similar to
those we offer on cruise ships at the luxury spa at the Atlantis Resort on
Paradise Island in The Bahamas. Also in 1999, we began offering post-secondary
degree and non-degree programs in massage therapy, skin care and related areas
at four schools in Florida.
Cost of revenues includes:
- cost of services, including an allocable portion of wages paid
to shipboard and land-based spa employees, rent payments to
cruise lines and the Atlantis Resort (which are a percentage
of services revenues or a minimum annual rent or a combination
of both) and other staff-related shipboard expenses as well
as, with respect to our Florida schools, directly attributable
campus costs such as rent and employee wages; and
- cost of products, including an allocable portion of wages paid
to shipboard employees, rent payments to cruise lines and the
owners of the Atlantis Resort (as noted above) and other
staff-related shipboard expenses, as well as costs associated
with development, manufacturing and distribution of products.
Cost of revenues 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 as a percentage of revenues 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, operating expenses included goodwill amortization related to
the acquisition of CTO for the three year period ended June 1997 and the
acquisition of our Florida schools in 1999.
Steiner Leisure and Steiner Transocean, our subsidiary that conducts
our shipboard operations, are Bahamas international companies ("IBCs"). The
Bahamas does not tax Bahamas 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
13
<PAGE> 15
taxation. More than 87.0% of our income for 1999 was not subject to United
States or United Kingdom income tax. Earnings from Steiner Training and Elemis
Limited, our United Kingdom subsidiaries, which accounted for a total of 7.2% of
our pretax income for 1999, will be subject to U.K. tax rates (generally up to
31%). The income from our United States subsidiaries, Steiner Beauty Products,
Inc. (which sells our products in the U.S.), Steiner Management Services, LLC
(which performs administrative services) and FCNH, Inc. (which operates our
Florida schools), 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. To the extent that our income from
non-maritime operations increases more rapidly than any increase in our
maritime-related income, the percentage of our income subject to tax would
increase. Our Bahamas subsidiary which conducts our Atlantis Spa operations is
not an IBC and is subject to tax on its revenues of approximately one percent.
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. The adoption of SOP 98-1 did not
have a material effect on our financial position or results of operations.
In April 1998, the ACSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 establishes standards for the reporting and
disclosure of start-up costs, including organization costs. Steiner Leisure
adopted SOP 98-5 effective January 1, 1999. The adoption of SOP 98-5 did not
have a material effect on our financial position or results of operations.
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.
14
<PAGE> 16
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,
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues:
Services ............................. 59.7% 58.9% 59.3%
Products ............................. 40.3 41.1 40.7
----- ----- -----
Total revenues ................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of services ..................... 46.5 45.5 45.5
Cost of products ..................... 27.5 27.9 28.4
----- ----- -----
Total cost of revenues ........ 74.0 73.4 73.9
----- ----- -----
Gross profit .................. 26.0 26.6 26.1
----- ----- -----
Operating expenses:
Administrative ....................... 4.6 4.7 4.6
Salary and payroll taxes ............. 5.2 4.9 4.6
Amortization of CTO intangibles ...... 1.3 -- --
Amortization Goodwill ................ -- -- .1
----- ----- -----
Total operating expenses ...... 11.1 9.6 9.3
----- ----- -----
Income from operations ........ 14.9 17.0 16.8
Other income ........................... 1.1 1.7 1.1
----- ----- -----
Income before provision for income taxes 16.0 18.7 17.9
----- ----- -----
Provision for income taxes:
Current and deferred ................. 1.4 1.3 1.0
----- ----- -----
Total provision for income taxes ... 1.4 1.3 1.0
----- ----- -----
Net income ............................. 14.6% 17.4% 16.9%
===== ===== =====
</TABLE>
1999 COMPARED TO 1998
REVENUES. Revenues increased approximately 28.0%, or $28.4 million, to
$129.8 million in 1999 from $101.4 million in 1998. Of this increase, $17.2
million was attributable to an increase in services revenues and $11.2 million
was attributable to an increase in products revenues. The increase in revenues
was primarily attributable to an average of five additional spa ships in service
in 1999 compared to 1998 and the commencement of operations at the Atlantis Spa
and our Florida schools in the first and third quarters of 1999, respectively.
We had an average of 938 shipboard staff members in service in 1999 compared to
an average of 842 shipboard staff members in service in 1998. Revenues per staff
per day increased by 11.9% to $347 in 1999 from $310 in 1998.
COST OF SERVICES. Cost of services as a percentage of services revenues
decreased to 76.7% in 1999 from 77.2% in 1998. This decrease was due to an
increase in productivity of onboard staff during 1999, increased revenues on
ships where we are subject to minimum annual rental payments and a decrease in
the rent allocable to services on ships covered by an agreement which was
renewed in 1998 and became effective in the first quarter of 1999.
COST OF PRODUCTS. Cost of products as a percentage of products revenues
increased to 69.7% in 1999 from 67.8% in 1998. This increase was due to an
increase in the rent allocable to products sales on cruise ships covered by an
agreement which was renewed in 1998 and became effective in the first quarter of
1999, and discounts offered on certain Elemis products. This increase was
partially offset by increases in productivity of our shipboard staff.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
decreased to 9.3% in 1999 from 9.6% in 1998. This decrease was primarily
attributable to the increase in revenues from the additional ships in service
during 1999 compared to 1998.
15
<PAGE> 17
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
an overall effective rate of 5.8% in 1999 from an overall effective rate of 6.8%
in 1998 due to a one-time tax charge of $237,000 recorded with respect to Elemis
Limited during the third quarter of 1998 resulting from the sale of the rights
to the "Elemis" name and certain other rights to Cosmetics Limited, a Bahamas
subsidiary of Steiner Leisure.
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.
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 was 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.
16
<PAGE> 18
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth selected statement of operations data on
a quarterly basis for 1998 and 1999 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 effected by seasonality. The quarterly selected statement of
operations data set forth below were derived from the 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.
<TABLE>
<CAPTION>
FISCAL 1998
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................... $ 22,935 $ 24,335 $ 26,943 $ 27,175
Gross profit ............... 6,023 6,500 7,249 7,247
Administrative, salary and
payroll taxes .............. 2,303 2,408 2,471 2,598
Income from operations ..... 3,720 4,092 4,778 4,649
Net income ................. 3,836 4,244 4,713 4,883
Diluted earnings per share . $ 0.23 $ 0.25 $ 0.28 $ 0.29
AS A PERCENTAGE OF REVENUES:
Gross profit ............... 26.3% 26.7% 26.9% 26.7%
Administrative, salary and
payroll taxes .............. 10.0% 9.9% 9.2% 9.6%
Income from operations ..... 16.2% 16.8% 17.7% 17.1%
Net income ................. 16.7% 17.4% 17.5% 18.0%
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................... $ 29,354 $ 29,933 $ 34,407 $ 36,089
Gross profit ............... 7,699 7,777 8,947 9,499
Administrative, salary and
payroll taxes .............. 2,840 2,832 3,099 3,392
Income from operations ..... 4,859 4,945 5,848 6,107
Net income ................. 5,011 5,017 5,874 5,991
Diluted earnings per share . $ 0.30 $ 0.30 $ 0.35 $ 0.37
AS A PERCENTAGE OF REVENUES:
Gross profit ............... 26.2% 26.0% 26.0% 26.3%
Administrative, salary and
payroll taxes .............. 9.7% 9.5% 9.0% 9.4%
Income from operations ..... 16.5% 16.5% 17.0% 16.9%
Net income ................. 17.1% 16.7% 17.1% 16.6%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $23.4 million in 1999, $15.2
million in 1998 and $11.6 million in 1997. Steiner Leisure had working capital
of approximately $35.1 million at December 31, 1999, compared to $35.9 million
at December 31, 1998.
In connection with the construction of the Atlantis Spa, we spent $2.5
million in 1999 and $3.1 million in 1998. These $5.6 million in capital
expenditures will be amortized over the fifteen-year term of our arrangement
with the Atlantis Resort. We anticipate that any other land-based spas that we
operate in the future would require expenditures of at least that amount.
In August 1999, Steiner Leisure acquired four post-secondary massage
therapy and skin care schools from Florida College of Natural Health, Inc. for
approximately $7.9 million in cash (including purchase price adjustments) and
$1.0 million in Steiner Leisure common shares. The cash portion of the purchase
price was funded from our working capital. We have entered into an agreement to
acquire a total of five additional post-secondary massage therapy schools
located in Maryland, Pennsylvania and Virginia for approximately $4.0 million in
cash. This amount will be funded from our working capital. The closing of the
transaction is subject to the fulfillment of certain conditions, and the
transaction is further subject to a post-closing condition requiring regulatory
approval of the acquisition by the U.S. Department of Education.
During 1998 and 1999, we purchased a total of 312,750 and 740,000,
respectively, of our common shares in the open market for an aggregate purchase
prices of $4.9 million and $12.2 million, respectively. These purchases were
made pursuant to a share purchase program authorized by our board of directors.
As of March 1, 2000, we have repurchased 1,052,750 of the 1,687,250 shares
authorized under the share repurchase program.
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<PAGE> 19
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, other than with respect to the five schools described above.
INFLATION
Steiner Leisure does not believe that inflation has had a material
adverse effect on revenues or results of operations. However, public demand for
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 effect on the cruise industry upon which we are dependent.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, Steiner Leisure may publish
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The words "may," "will," "intend," "expect," "proposed,"
"anticipate," "believe," "estimate" and similar expressions are intended to
identify such forward-looking statements. Because such statements include risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors set
forth below 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 we
may make.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information set forth, or incorporated by
reference in this report, you should carefully consider the following risk
factors in evaluating Steiner Leisure and its business.
WE DEPEND 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, 2000, of
approximately two and one-half years. As of that date, cruise line agreements
that expire within one year, covered 45 of the 106 ships served by us. These 45
ships accounted for approximately 17.7% of our 1999 revenues. We cannot assure
you that any of these agreements will be renewed after their 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 achieve specified
passenger service standards. As of March 1, 2000, an agreement for three ships
provided for termination for any reason by the cruise line on six months'
notice, for six
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<PAGE> 20
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 DEPEND 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 CLIA, the
passenger volume of cruises marketed primarily to North American consumers
increased from approximately 2.2 million passengers in 1985 to approximately 5.9
million in 1999. However, the cruise industry may not continue to grow or may
decrease in size in the future. A decrease in passenger volume could have a
material adverse effect on our business, results of operations and financial
condition.
The cruise industry is subject to significant risks that could effect
our results of operations. Recently, industry analysts have expressed concern
regarding potential over-capacity of ships operated by the cruise lines. Such
over-capacity could adversely effect the cruise industry.
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
effected demand for cruise vacations. Severe weather conditions, both at sea and
at ports of embarkation, publicized operational difficulties or outbreaks of
disease on cruise ships also could adversely effect the cruise industry. The
cruise industry also relies to a significant extent on airlines to transport
passengers to ports of embarkation. Any strikes or other disruptions of airline
service could adversely effect 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 we serve 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 have a material adverse effect on our business, results of operations and
financial condition.
WE DEPEND ON CERTAIN CRUISE COMPANIES
As a result of the consolidation of the cruise industry, the number of
independent cruise companies has decreased in the past few years. Industry
analysts believe that further consolidation of the cruise industry may occur. As
a result of industry consolidation, a small number of cruise companies, all of
whom currently are our customers, dominate the cruise industry. Revenues from
passengers of each of the following cruise companies accounted for more than ten
percent of our revenues in 1999: Carnival (including Costa, Holland America,
Seabourn, Windstar and Cunard) - 32.0%; Royal Caribbean (including Celebrity)
- -25.2%; and Peninsular and Oriental Steam Navigation Company (including
Princess, P&O and P&O European Ferries) - 12.9%. These companies also accounted
for 68 of the 106 ships served by us as of March 1, 2000. If we cease to serve
one of these cruise companies, or a substantial number of ships operated by a
cruise company, it could materially adversely affect our business, results of
operations and financial condition.
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<PAGE> 21
WE ARE REQUIRED TO MAKE MINIMUM PAYMENTS UNDER OUR AGREEMENTS AND FACE
INCREASING RENTS
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, 1999, these payments are
required by cruise line agreements covering a total of 84 ships served by us and
23 additional ships not yet in service. As of December 31, 1999, Steiner Leisure
had guaranteed total minimum payments (excluding payments based on passenger
loads applicable to certain ships served by us) of approximately: $21.0 million
in 2000, $16.8 million in 2001, $18.7 million in 2002, $22.0 million in 2003,
$23.7 million in 2004 and $26.3 million thereafter. These amounts could increase
under new, or renewed cruise line agreements.
In general, Steiner Leisure has experienced increases in rent payments,
as a percentage of revenues, upon entering into new agreements with cruise
lines.
WE DEPEND ON OUR 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
married. 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 has
taken out key person life insurance policies on them. Our continued success is
also dependent on our ability to recruit and retain personnel qualified to
perform our shipboard and land-based facilities. Shipboard employees typically
are employed pursuant to agreements with terms of eight months; land-based spa
employees' agreements are for terms of one year. 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, results of operations
and financial condition could be materially adversely affected.
WE DEPEND 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 ADVERSE CHANGES IN THE TAXATION OF STEINER LEISURE
Steiner Leisure is a Bahamas international business company ("IBC") that,
directly or indirectly, owns:
- Steiner Transocean Limited, our principal subsidiary and a
Bahamas IBC that conducts our shipboard operations;
- FCNH, Inc., a Florida corporation through which we operate our
Florida schools;
- Steiner Spa Resorts Limited, a Bahamas company, which operates
our Atlantis Spa ("Steiner Spa");
- Steiner Management Services LLC, a Florida limited liability
company that performs administrative services in connection
with our operations in exchange for fees from Steiner
Transocean and other subsidiaries ("Management Services");
- Steiner Beauty Products, Inc., a Florida corporation that
sells skin and hair care products ("Steiner Beauty"); and
- Cosmetics Limited, a Bahamas IBC that owns the rights to, and
distributes our Elemis and La Therapie products.
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<PAGE> 22
Steiner Leisure also owns all, or almost all, of the shares of
additional United States, Bahamas, United Kingdom and other subsidiaries through
which we conduct our business.
Steiner Leisure and its Bahamas IBC subsidiaries are not subject to
Bahamas or other tax, except as set forth below. Steiner Leisure's United States
subsidiaries are subject to U.S. income tax as a consolidated group at regular
corporate rates up to 35%. Steiner Leisure believes that none of its other
income will be effectively connected with our deemed conduct of business in the
United States and, accordingly, that our remaining income will not be subject to
United States federal income tax.
Steiner Transocean is a Bahamas IBC and is not subject to Bahamas tax.
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. We believe that Steiner
Transocean's income 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:
- all of Steiner Transocean's shipboard spa and salon services
being performed outside the United States and its possessions
and their respective territorial waters;
- passage of title and transfer of ownership of all beauty
products sold by Steiner Transocean taking place outside the
United States; and
- 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:
- 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
- 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%.
Steiner Spa is subject to a Bahamas tax of approximately one percent on
its revenues.
Management Services receives payments from Steiner Transocean in return
for certain administrative services it provides to Steiner Transocean. The IRS
may assert that transactions between Management Services and Steiner Transocean
(and between our other direct and indirect subsidiaries) 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 taxable income of Management
Services. This reallocation also could result in the imposition of interest and
penalties. Management Services and Steiner Beauty also may be subject to
additional U.S. state and local income, franchise and other taxes.
Our United Kingdom subsidiaries provide goods and services to Steiner
Transocean and Cosmetics Limited. 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 1999, Steiner Leisure paid tax at an aggregate rate of 5.8% 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
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<PAGE> 23
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 services and products similar to ours 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. Recently, we learned
that Mandara Spas will be replacing us on the two ships we serve for Silver
Seas. In addition, Harding Brothers is currently serving two ships formerly
served by us.
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. Our Florida schools compete
with other providers of similar training in Florida and elsewhere in the United
States, including those with greater resources than ours.
Our land-based product sales compete with a variety of other brands,
including those of manufacturers with greater resources than ours, and those
with greater name recognition than our products, including large entities with
greater resources than ours.
OUR 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, land-based day spas
in Hong Kong. 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.
Our Atlantis Spa operations and 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. Any of these factors could have a
material adverse effect on these operations.
In August 1999, we acquired four post-secondary schools in Florida
offering degree and non-degree programs in massage therapy, skin care and
related areas. In January 2000, we entered into an agreement to acquire a total
of five massage therapy schools in Maryland, Virginia and Pennsylvania. We have
had no prior experience in operations of this type and we cannot assure you that
these or any other acquired businesses will perform as we anticipate. If we are
unable to successfully operate, and integrate into our existing businesses, the
four Florida schools, the five schools proposed to be acquired (if they are so
acquired), and any similar operations that we may acquire in the future, our
business, results of operations and financial condition could be materially
adversely affected.
GOVERNMENT REGULATION COULD ADVERSELY EFFECT US
Steiner Leisure's advertising and product labeling practices in the
United States are subject to regulation by the Federal Trade Commission and the
Food and Drug Administration, 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 materially adversely affect, or
increase the cost of advertising, manufacturing and packaging our products.
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<PAGE> 24
Steiner Leisure's land-based operations, including our Atlantis Spa and
our Florida schools are subject to applicable regulations in the locations where
such operations are conducted. These regulations could adversely effect 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.
The Florida Schools are subject to regulation by the Florida Department
of Education. These schools also are eligible to participate in student
financial assistance programs administered by the U.S. DOE. In order to continue
to be eligible for these programs, these schools must satisfy certain criteria
established by the DOE and our administration of these financial aid programs is
subject to periodic review by regulatory authorities. A failure to satisfy the
DOE criteria could result in a limitation, suspension or termination of our
eligibility to participate in these programs as well as certain financial
penalties. In addition, these programs are subject to political and budgetary
considerations and we cannot assure you that funding for these programs will be
maintained at current levels. Because the majority of the students at our
Florida schools receive financial assistance under these programs, any such
limitation, suspension or termination could have a material adverse effect on
our business, results of operations and financial condition.
PRODUCT LIABILITY AND OTHER POTENTIAL CLAIMS COULD ADVERSELY EFFECT 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 the use of
our products. Adverse reactions could be caused by various factors beyond our
control, including hypoallergenic sensitivity 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.
WE ARE NOT A UNITED STATES COMPANY AND, AS A RESULT, THERE ARE SPECIAL RISKS
Our corporate affairs are governed by our Memorandum of Association and
Articles of Association, which are similar to the articles of incorporation and
bylaws of a United States corporation, and the International Business Companies
Act, 1989 of The Bahamas (the "IBC Act"). There are very few reported judicial
cases under the IBC Act. Accordingly, the rights and remedies of our public
shareholders in the face of actions by our management, directors or shareholders
are less clearly established than would be the case with a company incorporated
in the United Kingdom or a United States jurisdiction.
Certain of our directors and executive officers reside outside the
United States. A substantial portion of our assets and the assets of those
persons are located outside the United States. As a result, it may not be
possible to effect service of process within the United States upon such
persons. It also may not be possible to enforce against them or Steiner Leisure
judgments obtained in United States courts based on the civil liability
provisions of the United States federal securities laws. In the opinion of Harry
B. Sands & Company, our Bahamas counsel:
- it is unlikely that Bahamian courts would entertain original
actions against Bahamas companies or their directors or
officers based solely upon United States federal securities
laws;
- judgments predicated upon any civil liability provisions of
the U.S. federal securities laws are not directly enforceable
in The Bahamas; rather, a lawsuit must be brought in The
Bahamas on any such judgment; and
- in general, a judgment obtained after due trial by a court of
competent jurisdiction, which is final and conclusive as to
the issues in contention, is actionable in Bahamian courts and
is impeachable only upon the grounds of (i) fraud, (ii) public
policy and (iii) natural justice.
FAILURE TO OBTAIN YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON US
While we have not experienced any material disruption of our business
due to year 2000 computer problems, 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
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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. This
could materially adversely affect our business, results of operations and
financial condition.
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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
29, 2000, 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 29, 2000 (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, 1998 and 1999
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999
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 1999.
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<PAGE> 29
(c) The following is a list of all exhibits filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Plan of Complete Liquidation and Dissolution of Coiffeur Transocean
(Overseas), Inc.(1)
3.1 Amended and Restated Memorandum of Association of Steiner Leisure
Limited(2)
3.2 Amended and Restated Articles of Association of Steiner Leisure
Limited(3)
4.1 Specimen of common share certificate 4 10.1 Employment Agreement dated
as of October 17, 1996 between Steiner Leisure Limited and Clive E.
Warshaw(4)+
10.1 Employment Agreement dated as of October 17, 1996 between Steiner
Leisure Limited and Clive E. Warshaw(5)+
10.1(a) Amendment No. 1 to Employment Agreement between Steiner Leisure Limited
and Clive E. Warshaw dated as of March 25, 1997(6)+
10.1(b) Second Amendment to Employment Agreement between Steiner Leisure
Limited and Clive E. Warshaw dated as of April 20, 1998(7)+
10.2 Employment Agreement dated as of October 23, 1996 between Steiner
Leisure Limited and Leonard I. Fluxman(1)+
10.2(a) Amendment No. 1 to Employment Agreement between Steiner Leisure Limited
and Leonard I. Fluxman dated as of March 25, 1997(6)+
10.2(b) Second Amendment to Employment Agreement between Steiner Leisure
Limited and Leonard I. Fluxman dated as of December 19, 1997(3)+
10.3 Employment Agreement dated as of October 21, 1996 between Steiner
Leisure Limited and Michele Steiner Warshaw(5)+
10.3(a) Amendment No. 1 to Employment Agreement between Steiner Leisure Limited
and Michele Steiner Warshaw dated as of March 25, 1997(6)+
10.3(b) Second Amendment to Employment Agreement between Steiner Leisure
Limited and Michele Steiner Warshaw dated as of April 20, 1998(7)+
10.4 Employment Agreement dated as of October 17, 1996 between Steiner
Transocean Limited and Amanda Jane Francis(5)+
10.4(a) Amendment No. 1 to Employment Agreement between Steiner Transocean
Limited and Amanda Jane Frances dated as of March 25, 1997(6)+
10.4(b) Second Amendment to Employment Agreement between Steiner Transocean
Limited and Amanda Jane Francis dated as of April 20, 1998(3)
10.5 Service Agreement dated as of September 18, 1996 between Elemis Limited
and Sean C. Harrington(4)+
10.5(a) Amendment No. 1 to Service Agreement between Elemis Limited and Sean C.
Harrington dated as of March 25, 1997(6)+
10.5(b) Second Amendment to Service Agreement between Elemis Limited and Sean
C. Harrington dated as of July 8, 1998(7)+
10.6 Amended and Restated 1996 Share Option and Incentive Plan(+)
10.7 Amended and Restated Non-Employee Directors' Share Option Plan(2)+
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. Steiner(4)
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. Steiner(4)
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. Warshaw(4)
10.11 Product Agreement dated October 31, 1996 among Nicolas D. Steiner,
Elemis Limited, Alban Muller International, Cosmetics Limited and Alban
Muller(1)
</TABLE>
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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. Steiner(1)
10.13 Deferred Compensation Agreement dated as of December 31, 1996 between
Steiner Leisure Limited and Leonard I. Fluxman(6)+
10.14 Split Dollar Insurance Agreement dated as of March 25, 1997 between
Steiner Leisure Limited and Leonard I. Fluxman(6)+
10.15 Form of Option Agreement under Steiner Leisure Limited Amended and
Restated 1996 Share Option and Incentive Plan For Incentive Share
Options(8)*+
10.16 Form of Option Agreement under Steiner Leisure Limited Amended and
Restated 1996 Share Option and Incentive Plan For Non-Qualified Share
Options(8)**+
10.17 Amended Form of Option Agreement under Steiner Leisure Limited Amended
and Restated 1996 Share Option and Incentive Plan for Incentive Share
Options(8)*+
10.18 Form of Option Agreement under Steiner Leisure Limited Amended and
Restated Non-Employee Directors' Share Option Plan(9)***+
10.19 Asset purchase Agreement, dated August 3, 1999 among FCNH, Inc.,
Steiner Leisure Limited, Florida College of Natural Health, Inc. Neal
R. Heller, Elizabeth S. Heller, Daniel Stubbs, II, Arthur Keiser and
Belinda Keiser.(2)
10.20 Employment Agreement dated August 24, 1999 between Steiner Education
Group, Inc. and Neal R. Heller(10)+
21 List of subsidiaries of Steiner Leisure Limited
27 Financial Data Schedule
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Harry B. Sands and Company
- ---------------------
(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 quarterly report on Form 10-Q for the quarter ended
June 30, 1999 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 Number 2 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated
herein by reference.
(5) 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.
(6) Previously filed with annual report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
(7) Previously filed with quarterly report on Form 10-Q for the quarter ended
June 30, 1998 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.
(10) Previously filed with quarterly report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference.
* Executed by United States based officers of the Company in connection with
grants and options under the indicated plan.
** Executed by Non-United States based officers of the Company in connection
with grants of options under the indicated plan.
*** Executed in connection with annual grants of options by non-employee
directors under the indicated plan.
29
<PAGE> 31
+ Management contract or compensatory plan or agreement.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 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 29, 2000.
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 on behalf of the
registrant in the capacities, and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ CLIVE E.WARSHAW Chairman of the Board March 29, 2000
- ------------------- and Chief Executive Officer
Clive E. Warshaw (Principal Executive Officer)
/s/ LEONARD I. FLUXMAN President, Chief Operating Officer and March 29, 2000
- ---------------------- Director
Leonard I. Fluxman
/s/ CARL S. ST. PHILIP, JR Vice President and Chief Financial March 29, 2000
- -------------------------- Officer (Principal Financial and
Carl S. St. Philip, Jr. Accounting Officer)
/s/ MICHELE STEINER WARSHAW Director March 29, 2000
- ---------------------------
Michele Steiner Warshaw
/s/ CHARLES D. FINKELSTEIN Director March 29, 2000
- --------------------------
Charles D. Finkelstein
/s/ JONATHAN D. MARINER Director March 29, 2000
- -----------------------
Jonathan D. Mariner
/s/ STEVEN J. PRESTON Director March 29, 2000
- ---------------------
Steven J. Preston
</TABLE>
31
<PAGE> 33
STEINER LEISURE LIMITED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants......................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............................F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999................................................................F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999...................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999...................................................F-6
Notes to Consolidated Financial Statements..............................................F-8
</TABLE>
F-1
<PAGE> 34
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 Bahamas international business company) and subsidiaries as
of December 31, 1998 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 29, 2000.
F-2
<PAGE> 35
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 10,058,000 $ 23,893,000
Marketable securities .............................................. 21,782,000 6,261,000
Accounts receivable ................................................ 4,832,000 6,924,000
Accounts receivable - students ..................................... -- 2,503,000
Inventories ........................................................ 8,002,000 7,514,000
Other current assets ............................................... 1,142,000 2,542,000
------------ ------------
Total current assets ............................................. 45,816,000 49,637,000
------------ ------------
PROPERTY AND EQUIPMENT, net ........................................ 5,840,000 8,111,000
------------ ------------
GOODWILL, net ...................................................... -- 8,571,000
------------ ------------
OTHER ASSETS:
Trademarks and product formulations, net ........................... 290,000 261,000
License rights, net ................................................ 740,000 733,000
Other .............................................................. 968,000 1,361,000
------------ ------------
Total other assets ............................................... 1,998,000 2,355,000
------------ ------------
Total assets ..................................................... $ 53,654,000 $ 68,674,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 2,641,000 $ 2,368,000
Accrued expenses ................................................... 6,434,000 9,019,000
Current portion of deferred tuition revenue ........................ -- 2,141,000
Current portion of capital lease obligations ....................... 21,000 2,000
Income taxes payable ............................................... 848,000 1,002,000
------------ ------------
Total current liabilities ........................................ 9,944,000 14,532,000
------------ ------------
LONG TERM DEFERRED TUITION REVENUE ................................. -- 144,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
MINORITY INTEREST .................................................. 19,000 1,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred shares, $.0l par value; 10,000,000 shares authorized, none
issued and outstanding ........................................... -- --
Common shares, $.0l par value; 100,000,000 shares authorized,
16,603,000 shares issued at December 31, 1998
and 16,616,000 shares issued at December 31, 1999 ................ 166,000 166,000
Additional paid-in capital ......................................... 12,790,000 13,338,000
Accumulated other comprehensive income ............................. 440,000 (65,000)
Retained earnings .................................................. 35,181,000 57,074,000
DECEMBER 31,
Treasury shares, at cost, 313,000 shares in 1998 and
1,017,000 shares in 1999 ......................................... (4,886,000) (16,516,000)
------------ ------------
Total shareholders' equity ....................................... 43,691,000 53,997,000
------------ ------------
Total liabilities and shareholders' equity ....................... $ 53,654,000 $ 68,674,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE> 36
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Services .................................... $ 50,113,000 $ 59,741,000 $ 76,958,000
Products .................................... 33,863,000 41,647,000 52,825,000
------------- ------------- -------------
Total revenues ............................ 83,976,000 101,388,000 129,783,000
------------- ------------- -------------
COST OF REVENUES:
Cost of services ............................ 39,085,000 46,142,000 59,037,000
Cost of products ............................ 23,110,000 28,227,000 36,824,000
------------- ------------- -------------
Total cost of revenues .................... 62,195,000 74,369,000 95,861,000
------------- ------------- -------------
Gross profit .............................. 21,781,000 27,019,000 33,922,000
------------- ------------- -------------
OPERATING EXPENSES:
Administrative .............................. 3,862,000 4,801,000 5,946,000
Salary and payroll taxes .................... 4,344,000 4,979,000 6,025,000
Amortization of CTO intangibles ............. 1,089,000 -- --
Amortization of goodwill .................... -- -- 192,000
------------- ------------- -------------
Total operating expenses .................. 9,295,000 9,780,000 12,163,000
------------- ------------- -------------
Income from operations .................... 12,486,000 17,239,000 21,759,000
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income ............................. 908,000 1,627,000 1,659,000
Gains (loss) on sale of marketable securities 16,000 118,000 (195,000)
Interest expense ............................ (16,000) (8,000) (7,000)
------------- ------------- -------------
Total other income (expense) .............. 908,000 1,737,000 1,457,000
------------- ------------- -------------
Income before provision for income taxes
and minority interest ................... 13,394,000 18,976,000 23,216,000
PROVISION FOR INCOME TAXES .................. 1,147,000 1,296,000 1,341,000
------------- ------------- -------------
Income before minority interest ........... 12,247,000 17,680,000 21,875,000
MINORITY INTEREST ........................... -- (4,000) 18,000
------------- ------------- -------------
Net income .................................. $ 12,247,000 $ 17,676,000 $ 21,893,000
============= ============= =============
EARNINGS PER COMMON SHARE:
Basic ....................................... $ 0.76 $ 1.08 $ 1.35
============= ============= =============
Diluted ..................................... $ 0.73 $ 1.04 $ 1.31
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 37
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
NUMBER ACCUMULATED
OF ADDITIONAL OTHER
COMMON COMMON PAID-IN COMPREHENSIVE
SHARES SHARES CAPITAL INCOME
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
Net income ................................. -- -- -- --
Foreign currency translation adjustment .... -- -- -- (133,000)
Unrealized (loss) on marketable securities . -- -- -- (372,000)
Comprehensive income ....................... -- -- -- --
Issuance of common shares in connection
with exercise of share options ........... 13,000 -- 106,000 --
Issuance of common shares in connection
with acquisition ......................... -- -- 442,000 --
Purchases of treasury shares ............... -- -- -- --
-- -- -- --
---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 ................. 16,616,000 $ 166,000 $ 13,338,000 $ (65,000)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
RETAINED TREASURY
EARNINGS SHARES TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
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
Net income ................................. 21,893,000 -- 21,893,000
Foreign currency translation adjustment .... -- -- (133,000)
Unrealized (loss) on marketable securities . -- -- (372,000)
------------
Comprehensive income ....................... -- -- 21,388,000
Issuance of common shares in connection
with exercise of share options ........... -- -- 106,000
Issuance of common shares in connection
with acquisition ......................... -- 558,000 1,000,000
Purchases of treasury shares ............... --
-- (12,188,000) (12,188,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 ................. $ 57,074,000 $(16,516,000) $ 53,997,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 38
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ............................................ $ 12,247,000 $ 17,676,000 $ 21,983,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ....................... 1,819,000 1,009,000 2,748,000
Gain (loss) on sale of marketable securities ........ (16,000) (118,000) 195,000
Share options issued to non-employees ............... 7,000 -- --
Minority interest ................................... -- 4,000 (18,000)
(Increase) decrease in:
Accounts receivable ................................. (607,000) (843,000) (2,348,000)
Inventories ......................................... 206,000 (3,044,000) 775,000
Other current assets ................................ (148,000) (183,000) (151,000)
Other assets ........................................ (363,000) (572,000) (1,524,000)
Increase (decrease) in:
Accounts payable .................................... (115,000) 735,000 (390,000)
Accrued expenses .................................... 2,217,000 381,000 2,284,000
Income taxes payable ................................ (3,670,000) 159,000 169,000
Deferred tuition revenue ............................ -- -- (335,000)
Minority interest ................................... -- 15,000 --
------------ ------------ ------------
Net cash provided by operating activities ........... 11,577,000 15,219,000 23,388,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of marketable securities .................... (33,804,000) (37,221,000) (7,325,000)
Proceeds from maturities of marketable
securities .......................................... 11,890,000 13,163,000 4,834,000
Proceeds from the sale of marketable securities ....... 9,929,000 14,681,000 16,839,000
Capital expenditures .................................. (800,000) (4,504,000) (3,647,000)
Acquisition of trademarks, product formulations
And franchise rights ................................ -- (765,000) --
Acquisitions, net of cash acquired .................... -- -- (7,866,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities . (12,785,000) (14,646,000) 2,835,000
============ ============ ============
</TABLE>
(Continued)
F-6
<PAGE> 39
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on capital lease obligations ............................. $ (100,000) $ (85,000) $ (19,000)
Payments on long-term debt ........................................ (217,000) -- (109,000)
Purchases of treasury shares ...................................... -- (4,886,000) (12,188,000)
Net proceeds from share option exercises........................... 226,000 2,119,000 106,000
------------ ------------ ------------
Net cash used in financing activities ............................. (91,000) (2,852,000) (12,210,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH ................................................. 9,000 2,000 (178,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................................ (1,290,000) (2,277,000) 13,835,000
CASH AND CASH EQUIVALENTS,
beginning of year................................................ 13,625,000 12,335,000 10,058,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of year ..................................................... $ 12,335,000 $ 10,058,000 $ 23,893,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for
Interest ...................................................... $ 19,000 $ 8,000 $ 7,000
============ ============ ============
Income taxes .................................................. $ 4,692,000 $ 1,137,000 $ 1,212,000
============ ============ ============
</TABLE>
The Company acquired the assets and assumed certain liabilities of
certain businesses as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fair value of assets acquired, net of cash acquired................ $ - $ - $12,055,000
Total liabilities assumed.......................................... - - (3,189,000)
Amounts paid through the issuance of stock, options
and warrants..................................................... - - (1,000,000)
-------------- ------------- ------------
Net cash paid...................................................... $ - $ - $ 7,866,000
============== ============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE> 40
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").
Commencing in February 1999, the Company began operating the luxury
health spa at the Atlantis Resort on Paradise Island in The Bahamas (the
"Atlantis Spa"). In connection with the operation of the spa, the Company pays
the resort's owner the greater of a minimum monthly rental and an amount based
on our revenues at the spa.
On August 24, 1999, the Company acquired the assets of Florida College
of Natural Health, Inc. ("Florida College"). As a result of the acquisition, the
Company currently operates, through FCNH, Inc., a wholly-owned subsidiary, four
post-secondary schools in Florida offering degree and non-degree programs in
massage therapy and skin care and related areas.
(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, 1998 and 1999, cash and cash equivalents include
interest-bearing deposits of $5,113,000 and $19,312,000, 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.
F-8
<PAGE> 41
(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:
DECEMBER, 31
<TABLE>
<CAPTION>
------------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Finished goods ............. $6,205,000 $6,297,000
Raw materials .............. 1,797,000 1,217,000
---------- ----------
$8,002,000 $7,514,000
========== ==========
</TABLE>
(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 or shipped. 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 $121,000 in
1999 and are included in services revenues in the accompanying consolidated
statement of operations.
Tuition revenue at the Florida College is recognized monthly on a
straight-line basis over the term of the course of study. Certain nonrefundable
fees and charges are fully recognized as revenue at the time a student begins
classes. Deferred revenue represents the portion of student tuition recorded in
excess of amounts earned and certain other amounts collected in advance. The
Company is generally required to refund a portion of a student's tuition upon
the student's withdrawal from a program. The amount of tuition, if any, that may
be retained by the Company after payment of any required refund is immediately
recognized as income.
Revenue related to sales of Florida College inventories are recognized
when the related program materials, books and supplies are delivered.
(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 assets
(ranging from 15 to 30 years). The amortization expense related to the trademark
registration and product formulation was approximately $75,000 and $56,000 in
1998 and 1999, respectively.
F-9
<PAGE> 42
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. The amortization expense
related to license rights was approximately $17,000 and $28,000 in 1998 and
1999, respectively.
(h) GOODWILL -
Goodwill represents the excess of cost over the fair market value of
identifiable net assets acquired. Goodwill is amortized on a straight-line basis
over its estimated useful life of 20 years. The Company continually evaluates
intangible assets and other long-lived assets for impairment whenever
circumstances indicate that carrying amounts may not be recoverable. When
factors indicate that the assets acquired in a business purchase combination and
the related goodwill may be impaired, we recognize an impairment loss if the
undiscounted future cash flows expected to be generated by the asset (or
acquired business) are less than the carrying value of the related asset.
Amortization expense related to goodwill was approximately $192,000 in 1999.
(i) 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.
(j) 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-10
<PAGE> 43
(k) 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>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding used in
calculating basic earnings per share ............ 16,202,000 16,401,000 16,215,000
Dilutive common share equivalents ................. 491,000 559,000 505,000
---------- ---------- ----------
Weighted average common and common equivalent
shares used in calculating diluted earnings per
Share ........................................... 16,693,000 16,960,000 16,720,000
========== ========== ==========
Options outstanding which are not included in the
calculation of diluted earnings per share because
their impact is anti-dilutive ................... 369,000 189,000 431,000
========== ========== ==========
</TABLE>
(l) USE OF ESTIMATES -
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect 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.
(m) 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, accounts
receivable and accounts payable are reflected in the accompanying consolidated
financial statements at cost, which approximates fair value.
(n) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
investments and accounts receivable. The Company maintains cash and cash
equivalents with high quality financial institutions. Concentrations of credit
risk with respect to accounts receivable are limited because a large number of
customers comprise the Company's customer base. No single customer represents
greater than 10% of total accounts receivable. The Company controls credit risk
through credit approvals, credit limits, and monitoring procedures.
(o) 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 Opinion
No. 25 "Accounting for Stock Issued to Employees," ("APB No. 25") for
transactions with employees, as permitted by SFAS 123.
(p) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB Statement No. 133." SFAS No. 137 defers for
one year the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and
F-11
<PAGE> 44
Hedging Activities." SFAS No. 133 will now apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000 and requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. The Company will adopt
SFAS No. 133 as required in fiscal year 2001. The Company believes the adoption
of this Statement will not have a material effect on the earnings and financial
position of the Company.
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. The adoption of SOP 98-1 did not 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. The adoption of SOP 98-5 did not have a
material effect on the Company's financial position or results of operations.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIFE DECEMBER 31,
IN YEARS 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures ........................ 5-7 $ 350,000 $ 479,000
Computers and equipment ....................... 3-8 2,829,000 3,756,000
Leasehold improvements ........................ Term of lease 6,340,000 9,011,000
------------ ------------
9,519,000 13,246,000
Less: Accumulated depreciation and amortization (3,679,000) (5,135,000)
------------ ------------
$ 5,840,000 $ 8,111,000
============ ============
</TABLE>
(4) ACQUISITION:
On August 24, 1999, the Company acquired the assets of Florida College
in consideration of approximately $7.9 million (including purchase price
adjustments) in cash and $1,000,000 of the Company's common shares. The
transaction was accounted for under the purchase method of accounting. The
purchase price exceeded the fair market value of net assets acquired resulting
in goodwill of approximately $8.7 million.
Unaudited pro forma consolidated results of operations assuming the
Florida College acquisition had occurred at the beginning of the periods
presented are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Revenue .................. $ 107,114,000 $ 134,490,000
Net income ............... 17,223,000 21,321,000
Basic earnings per share . 1.05 1.31
Diluted earnings per share 1.01 1.27
</TABLE>
The above pro forma consolidated statement of operations are based upon
certain assumptions and estimates which the Company believes are reasonable. The
unaudited pro forma consolidated results of operations may not be indicative of
the operating results that would have been reported had the acquisition been
consummated on January 1, 1998, nor are they necessarily indicative of results
which will be reported in the future.
F-12
<PAGE> 45
(5) ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Operative commissions ............. $1,387,000 $1,638,000
Guaranteed minimum rentals ........ 2,144,000 3,117,000
Bonuses ........................... 910,000 750,000
Staff shipboard accommodations .... 326,000 397,000
Due to former shareholder (Note 11) -- 500,000
Other ............................. 1,667,000 2,617,000
---------- ----------
$6,434,000 $9,019,000
========== ==========
</TABLE>
(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.
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.
In 1999, the shareholders approved an increase in the number of common
shares from 20,000,000 to 100,000,000.
(7) INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Federal................................ $ 447,000 $ 484,000 $ 707,000
U.S. State ................................. 57,000 75,000 85,000
U.K ........................................ 643,000 737,000 549,000
---------- ---------- ----------
............................................ $1,147,000 $1,296,000 $1,341,000
========== ========== ==========
</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,
------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Provision using statutory U.S. federal tax rate $ 4,688,000 $ 6,640,000 $ 8,126,000
Income earned in jurisdictions not subject to
income taxes ................................ (3,990,000) (5,318,000) (6,682,000)
Amortization of intangibles ................... 381,000 -- --
Meals and entertainment ....................... 5,000 -- --
Effect of state income taxes .................. 38,000 50,000 56,000
Other ......................................... 25,000 (76,000) (159,000)
----------- ----------- -----------
$ 1,147,000 $ 1,296,000 $ 1,341,000
=========== =========== ===========
</TABLE>
F-13
<PAGE> 46
(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 (LOSS) ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME
--------- --------- ---------
<S> <C> <C> <C>
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
Current-period activity ..................... (133,000) (372,000) (505,000)
--------- --------- ---------
Balance, December 31, 1999 .................. $ 4,000 $ (69,000) $ (65,000)
========= ========= =========
</TABLE>
Amounts reclassified are as follows:
<TABLE>
<S> <C>
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
---------
Unrealized holding losses arising during 1999 ..................... $(264,000)
Less: reclassification adjustment for losses included in net income 195,000
---------
Unrealized losses on marketable securities ........................ $ (69,000)
=========
</TABLE>
(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 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, 1999, which
include amounts for ships that are not yet in service:
YEAR AMOUNT
- ---------- ------------
2000 ........................................... $ 20,977,000
2001 ........................................... 16,793,000
2002 ........................................... 18,750,000
2003 ........................................... 22,031,000
2004 ........................................... 23,744,000
Thereafter...................................... 26,279,000
------------
$128,574,000
============
F-14
<PAGE> 47
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, 2000, of
approximately two and one-half years as of that date, cruise line agreements
that expire within one year, covered 45 of the 106 ships served by us. These 45
ships accounted for approximately 17.7% of our 1999 revenues. Revenues from
passengers of each of the following cruise companies accounted for more than ten
percent of our revenues in 1999: Carnival (including Costa, Holland America,
Seabourn, Windstar and Cunard) - 32.0%; Royal Caribbean (including Celebrity)
- -25.2%; and Peninsular and Oriental Steam Navigation Company (including
Princess, P&O and P&O European Ferries) - 12.9%. These companies also accounted
for 68 of the 106 ships served by us as of March 1, 2000. If we cease to serve
one of these cruise companies, or a substantial number of ships operated by a
cruise company, it could adversely effect our results of operations.
(b) OPERATING LEASES -
The Company leases office and warehouse space as well as office
equipment and automobiles under operating leases. The Company incurred
approximately $334,000, $403,000 and $691,000 in rental expense under
non-cancelable operating leases in 1997, 1998 and 1999, respectively.
Minimum annual commitments under operating leases at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ----------
<S> <C>
2000........................................................ $1,401,000
2001........................................................ 1,396,000
2002........................................................ 1,394,000
2003........................................................ 1,325,000
2004........................................................ 939,000
Thereafter.................................................. 3,467,000
-----------
$ 9,922,000
===========
</TABLE>
(c) EMPLOYMENT AND CONSULTING AGREEMENTS -
The Company entered into employment agreements, effective as of January
1, 1996 and as amended in 1997 and 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 $1,621,000, $1,865,000 and
$1,448,000 in compensation expense under these employment agreements in 1997,
1998 and 1999, respectively.
Future minimum annual commitments under the Company's employment and
consulting agreements at December 31, 1999 are as follows:
YEAR AMOUNT
- ---- ----------
2000 ................................................... $1,629,000
2001 ................................................... 1,490,000
2002 ................................................... 439,000
2003 ................................................... 355,000
2004 ................................................... 220,000
Thereafter.............................................. 53,000
----------
$4,186,000
==========
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.
F-15
<PAGE> 48
(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. 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.
(e) 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.
(f) GOVERNMENTAL REGULATION
The Company's Florida schools are subject to extensive regulation by
governmental agencies. In particular, these operations are subject to the
requirement of the Higher Education Act ("HEA") and the regulations promulgated
thereunder by the U.S. Department of Education (the "U.S. DOE"). Schools must
satisfy certain criteria in order to participate in various financial assistance
programs under Title IV of the HEA. Any regulatory violation could be the basis
for the initiation of a suspension, limitation or termination of the eligibility
of the Company or any of its schools to participate in such programs.
In November 1997, the DOE published new regulations regarding financial
responsibility that took effect July 1, 1998. The new regulations provide a
transaction year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current regulations, whichever are more
favorable to the Company. Under the new regulations, the DOE will calculate
three financial ratios for an institution, each of which will be scored
separately and which will then be combined to determine the institution's
financial responsibility. If an institution's composite score is below the
minimum requirement for unconditional approval but above a designated threshold
level, such institution may take advantage of an alternative that allows it to
continue to participate in the Title IV Programs for up to three years under
additional monitoring procedures. If an institution's composite score falls
below this threshold level or is between the minimum for unconditional approval
and the threshold for more than three consecutive years, the institution will be
required to post a letter of credit in favor of the DOE.
All of the Company's Florida schools are eligible to receive federal
funding, including loan funds. In order to operate and award degrees, diplomas
and certificates and to participate in the Title IV Programs, a campus must be
licensed or authorized to offer its programs by the Florida Department of
Education. Additionally, each institution must be accredited by an agency
recognized by the U.S. DOE. Management believes all of the Company's Florida
schools met these requirements.
The financial aid and assistance programs, in which most of the
Company's students participate, are subject to political and budgetary
considerations. There is no assurance that such funding will be maintained at
current levels. The Company's administration of these programs is periodically
reviewed by various regulatory agencies. The failure by the Company and its
colleges and schools to comply with applicable, federal, state or accrediting
agency requirements could result in the limitation, suspension or termination of
the ability to participate in Title IV Programs or the loss of the state
licensure or accreditation. The loss of, or a significant reduction in, Title IV
Program funds would have a material adverse effect on the Company's revenues and
cash flows because the colleges' and schools' student enrollment would likely
decline as a result of its students' inability to finance their education
without the availability of Title IV Program funds. Additionally, if alternative
financing was made available to students it would be on longer terms which could
have a material adverse affect on the Company's cash flow.
F-16
<PAGE> 49
(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.
The December 31, 1999 consolidated balance sheet reflects $92,000 due
from former shareholders of Florida College representing purchase price
adjustments and $500,000 due to a former shareholders of Florida College
pursuant to the asset purchase agreement for that acquisition.
(11) SHARE OPTIONS:
The Company has reserved 3,500,000 of its common shares for issuance
under its 1996 Share Option and Incentive Plan (the "Option Plan") and 185,625
of its common shares for issuance under its Non-Employee Directors' Share Option
Plan (the "Directors' Plan", and with the 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 and
its subsidiaries. The terms of each option agreement under the Option Plan are
determined by the Compensation Committee of the Board of Directors and, under
the Directors' Plan, by the Board of Directors. The exercise price of incentive
share options and options issued under the Directors' Plan 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 under the Option Plan is
determined by the Compensation Committee and their terms may not exceed ten
years. The following table presents a summary of share option activity under the
Plans as of December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE PER SHARE
OF SHARES LOW HIGH WEIGHTED
--------- --- ---- --------
<S> <C> <C> <C> <C>
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
Granted 849,824 15.84 30.56 20.26
Exercised (13,126) 5.78 12.42 9.42
---------
Outstanding, December 31, 1999 2,024,761 5.78 34.54 18.67
=========
</TABLE>
F-17
<PAGE> 50
Additional information regarding options outstanding at December 31,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
RANGE OF NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
EXERCISABLE OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
PRICES AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
LOW HIGH 12/31/99 LIFE PRICE 12/31/99 PRICE
- ------ ------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
$ 5.78 $ 5.78 408,737 6.86 $ 5.78 408,737 $ 5.78
8.72 8.72 1,788 7.12 8.72 1,788 8.72
10.56 10.56 123,000 7.22 10.56 61,275 10.56
12.22 12.22 4,626 7.43 12.22 4,626 12.22
12.42 12.42 225 7.58 12.42 -- --
20.58 25.73 324,001 7.93 23.17 162,000 20.58
18.13 18.13 45,000 7.98 18.13 22,500 18.13
34.54 34.54 188,775 8.24 34.54 62,925 34.54
29.92 29.92 9,189 8.49 29.92 9,189 29.92
25.50 25.50 12,625 8.88 25.50 4,218 25.50
25.00 25.00 56,971 8.91 25.00 18,995 25.00
30.56 30.56 233,090 9.20 30.56 -- --
26.47 26.47 30,000 9.65 26.47 -- --
15.84 15.84 586,734 9.83 15.84 -- --
- ------ ------ --------- ------ ------ --------- ------
$ 5.78 $34.54 2,024,761 8.46 $18.67 756,253 $13.03
====== ====== ========= ====== ====== ========= ======
</TABLE>
The SEG options outstanding at December 31, 1999 were not included in
the computation of the Company's earnings per share because the option exercise
price was equal to the fair market price of SEG common stock.
The Company applies APB No. 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,
1998 and 1999 net income and income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income .................................. As reported $ 12,247,000 $ 17,676,000 $ 21,893,000
Pro forma 11,442,000 14,106,000 15,475,000
Diluted earnings per share .................. As reported .73 1.04 1.31
Pro forma .69 .83 .93
</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%, 61.0% and 58.6% for 1997, 1998 and 1999, respectively,
risk-free interest rate of 6.0%, expected dividends of $0 and expected term of 5
years.
Steiner Education Group, Inc. ("SEG"), a wholly owned subsidiary of
Steiner Leisure, has adopted the Steiner Education Group, Inc. 1999 Stock Option
Plan (the "SEG Plan"). The SEG Plan permits the issuance of options to
employees, directors and consultants of SEG and its parent and subsidiary
entities. On September 2, 1999, non-qualified options to purchase a total of
15,000 shares of common stock (representing 15% of the outstanding stock of SEG
on a fully diluted basis) were granted with an exercise price of $98 per share.
Unlike options granted under the Plans, options granted under the SEG Plan are
subject to certain restrictions prior to, among other things, any initial public
offering of SEG's common stock. These options vest over a three year period.
F-18
<PAGE> 51
(12) SUBSEQUENT EVENT:
On January 24, 2000, the Company entered into an agreement to acquire a
total of five additional massage therapy schools located in Maryland,
Pennsylvania and Virginia. The transaction is structured as a purchase of assets
for approximately $4.0 million. The closing of the transaction is subject to the
fulfillment of certain conditions and the transaction is further subject to a
post-closing condition requiring regulatory approval of the acquisition by the
Department of Education.
F-19
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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. PROPERTIES....................................................................................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 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
PART IV ..............................................................................................27
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...............................27
</TABLE>
-i-
<PAGE> 1
EXHIBIT 10.6
STEINER LEISURE LIMITED
AMENDED AND RESTATED
1996 SHARE OPTION AND INCENTIVE PLAN
<PAGE> 2
STEINER LEISURE LIMITED AMENDED AND RESTATED 1996 SHARE OPTION AND INCENTIVE
PLAN
1. PURPOSE.
The purpose of the Steiner Leisure Limited Amended and Restated 1996
Share Option and Incentive Plan (hereinafter referred to as this "Plan") is to
(i) assist Steiner Leisure Limited (the "Company") in attracting and retaining
highly qualified officers, key employees, directors and consultants for the
successful conduct of its business; (ii) provide incentives and rewards for
persons eligible for awards which are directly linked to the financial
performance of the Company in order to motivate such persons to achieve
long-range performance goals; and (iii) allow persons receiving awards to
participate in the growth of the Company.
2. DEFINITIONS.
2.1 "Board" means the Board of Directors of the Company.
2.2 "Change in Control" A Change in Control of the Company shall be
deemed to occur if any of the following circumstances have occurred after the
closing of initial public offering of the Shares:
(i) any transaction as a result of which a change in control of
the Company would be required to be reported in response to Item 1(a) of the
Current Report on Form 8-K as in effect on the date hereof, pursuant to Sections
13 or 15(d) of the Exchange Act, whether or not the Company is then subject to
such reporting requirement, otherwise than through an arrangement or
arrangements consummated with the prior approval of the Board;
(ii) any "person" or "group" within the meaning of Sections 13(d)
and 14(d)(2) of the Exchange Act (a) becomes the "beneficial owner," as defined
in Rule 13d-3 under the Exchange Act, of more than 20% of the then outstanding
voting securities of the Company, otherwise than through a transaction or
transactions arranged by, or consummated with the prior approval of, the Board
or (b) acquires by proxy or otherwise the right to vote for the election of
directors, for any merger or consolidation of the Company or for any other
matter or question, more than 20% of the then outstanding voting securities of
the Company, otherwise than through an arrangement or arrangements consummated
with the prior approval of the Board;
(iii) during any period of 24 consecutive months (not including
any period prior to the adoption of this Plan), Present Directors and/or New
1
<PAGE> 3
Directors cease for any reason to constitute a majority of the Board. For
purposes of the preceding sentence, "Present Directors" shall mean individuals
who, at the beginning of such consecutive 24 month period, were members of the
Board and "New Directors" shall mean any director whose election by the Board or
whose nomination for election by the Company's shareholders was approved by a
vote of at least two-thirds of the Directors then still in office who were
Present Directors or New Directors;
(iv) any "person" or "group" within the meaning of Sections 13(d)
and 14(d)(2) of the Exchange Act that is the "beneficial owner" as defined in
Rule 13d-3 under the Exchange Act of 20% or more of the then outstanding voting
securities of the Company commences soliciting proxies; and
(v) with respect to a particular Employee, there occurs a "change
in control," as such term is defined under any employment agreement or service
agreement between the Company or any direct or indirect subsidiary thereof and
such Employee, entered into before or after the date of adoption of this Plan (a
"Change in Control Agreement"), which provides for, upon such change in control,
the acceleration of the vesting of share options or otherwise affects awards
that may be made under this Plan; provided, however, that this Section 2.2.(v)
applies only with respect to the award or awards accelerated, or otherwise
affected by such change in control under such Change in Control Agreement.
2
<PAGE> 4
2.3 "Code" means the United States Internal Revenue Code of 1986, as
currently in effect or hereafter amended.
2.4 "Committee" means the committee appointed to administer this Plan
in accordance with Section 4 of this Plan.
2.5 "Disability" means "permanent and total disability" as defined in
Section 22(e)(3) of the Code.
2.6 "Employee" means any employee of the Company or any direct or
indirect subsidiary of the Company (a "Subsidiary"), including officers of the
Company and any Subsidiary, as well as such officers who are also directors of
the Company.
2.7 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.8 "Exercise Payment" means a payment described in Section 8 upon the
exercise of a Share Option.
2.9 "Fair Market Value," unless otherwise required by any applicable
provision of the Code or any regulations issued thereunder, means, as of any
date, the mean of the high and low prices reported per Share on the applicable
date (i) as quoted on the Nasdaq National Market or the Nasdaq Small Cap Market
(each, a "Nasdaq Market") or (ii) if not traded on a Nasdaq Market, as reported
by any principal national securities exchange in the United States on which it
is then traded (or if the Shares have not been quoted or reported, as the case
may be, on such date, on the first day prior thereto on which the Shares were
quoted or reported, as the case may be), except that in the case of a Share
Appreciation Right that is exercised for cash during the first three (3) days of
the ten (10) day period set forth in Section 7.4 of this Plan, "Fair Market
Value" means the highest daily closing price per Share as reported on such
Nasdaq Market or exchange during such ten (10) day period. Notwithstanding the
foregoing, if a Share Appreciation Right is exercised during the sixty (60) day
period commencing on the date of a Change in Control, the Fair Market Value for
purposes of determining the Share Appreciation shall be the highest of (i) the
Fair Market Value per Share, as determined under the preceding sentence; (ii)
the highest Fair Market Value per Share during the ninety (90) day period ending
on the date of exercise of the SAR; (iii) the highest price per Share shown on
Schedule 13D or an amendment thereto filed pursuant to Section 13(d) of the
Exchange Act by any person holding 20% of the combined voting power of the
Company's then outstanding voting securities; or (iv) the highest price paid or
to be paid per Share pursuant to a tender or exchange offer as determined by the
Committee. If the Shares are not reported or quoted on a Nasdaq Market or a
national securities exchange, its Fair Market Value shall be as determined in
good faith by the Committee.
2.10 "Incentive Share Option" or "ISO" means any Share Option granted
to an Employee pursuant to this Plan which is designated as such by the
Committee and which complies with Section 422 of the Code or any successor
provision.
2.11 "Non-qualified Share Option" means any Share Option granted to a
Participant pursuant to this Plan which is not an ISO.
2.12 "Option Price" means the purchase price of one Share upon exercise
of a Share Option.
2.13 "Performance Award" means an award described in Section 10 of this
Plan.
3
<PAGE> 5
2.14 "Retirement" means retirement from employment by the Company or
any Subsidiary by a Participant who has attained the normal retirement age under
any applicable retirement plan (which is qualified under Section 401(a) of the
Code) of the Company in which such Participant participates.
2.15 "Restricted Shares" means Shares subject to restrictions on the
transfer of such Shares, conditions of forfeitability of such Shares or any
other limitations or restrictions as determined by the Committee.
2.16 "Settlement Date" means, (i) with respect to any Share
Appreciation Rights that have been exercised, the date or dates upon which cash
payment is to be made to the Participant, or in the case of Share Appreciation
Rights that are to be settled in Shares, the date or dates upon which such
Shares are to be delivered to the Participant; (ii) with respect to Performance
Awards, the date or dates upon which Shares are to be delivered to the
Participant; (iii) with respect to Exercise Payments, the date or dates upon
which payment thereof is to be made; and (iv) with respect to grants of Shares,
including Restricted Shares, the date or dates upon which such Shares are to be
delivered to the Participant, in each case determined in accordance with the
terms of the grant (including any award agreement) under which any such award
was made.
2.17 "Share" or "Shares" means the common shares of the Company.
2.18 "Share Appreciation" means the excess of the Fair Market Value per
Share over the Option Price of the related Share, as determined by the
Committee.
2.19 "Share Appreciation Right" or "SAR" means an award that entitles a
Participant to receive an amount described in Section 7.2.
2.20 "Share Option" or "Option" means an award that entitles a
Participant to purchase one Share for each Option granted.
3. PARTICIPATION.
The participants in this Plan ("Participants") shall be those persons
who are selected to participate in this Plan by the Committee and who are (i)
Employees serving in managerial, administrative or professional positions, (ii)
directors of the Company or (iii) consultants to the Company or any Subsidiary.
4. ADMINISTRATION.
This Plan shall be administered and interpreted by a committee of two
or more members of the Board appointed by the Board. Members of the Committee
shall be "Non-Employee Directors" as that term is defined for purposes of Rule
16b-3(b)(3)(i) under the Exchange Act. All decisions and acts of the Committee
shall be final and binding upon all Participants. The Committee shall: (i)
determine the number and types of awards to be made under this Plan; (ii) set
the Option Price, the number of Options to be awarded and the number of Shares
to be awarded out of the total number of Shares available for award; (iii)
establish any applicable administrative regulations to further the purpose of
this Plan; (iv) approve forms of award agreements between a Participant and the
Company; and (v) take any other action desirable or necessary to interpret,
construe or implement the provisions of this Plan. Prior to the appointment of
the Committee by the Board, or if the Committee shall not be in existence at any
time during the term of this Plan, this Plan shall be administered and
interpreted by the Board and, in such case, all references to the Committee
herein shall be deemed to refer to the Board.
4
<PAGE> 6
5. AWARDS.
5.1 FORM OF AWARDS. Awards under this Plan may be in any of the
following forms (or a combination thereof): (i) Share Options; (ii) Share
Appreciation Rights; (iii) Exercise Payment rights; (iv) grants of Shares,
including Restricted Shares; or (v) Performance Awards. The Committee may
require that any or all awards under this Plan be made pursuant to an award
agreement between the Participant and the Company. Such award agreements shall
be in such form as the Committee may approve from time to time. The Committee
may accelerate awards and waive conditions and restrictions on any awards to the
extent it may deem appropriate.
5.2 MAXIMUM AMOUNT OF SHARES AVAILABLE. The total number of Shares
(including Restricted Shares, if any) granted, or covered by Options granted,
under this Plan during the term of this Plan shall not exceed 3,500,000. Solely
for the purpose of computing the total number of Shares optioned or granted
under this Plan, there shall not be counted any Shares which have been forfeited
and any Shares covered by Options which, prior to such computation, have
terminated in accordance with their terms or have been canceled by the
Participant or the Company.
5.3 ADJUSTMENT IN THE EVENT OF RECAPITALIZATION, ETC. In the event of
any change in the outstanding Shares of the Company by reason of any share
split, share dividend, recapitalization, merger, consolidation, combination or
exchange of shares or other similar corporate change or in the event of any
special distribution to the shareholders, the Committee shall make such
equitable adjustments in the number of Shares and prices per Share applicable to
Options then outstanding and in the number of Shares which are available
thereafter for Option awards or other awards, both under this Plan as a whole
and with respect to individuals, as the Committee determines are necessary and
appropriate. Any such adjustment shall be conclusive and binding for all
purposes of this Plan.
6. SHARE OPTIONS.
6.1 GRANT OF AWARD. The Company may award Options to purchase Shares,
including Restricted Shares (hereinafter referred to as "Share Option Awards")
to such Participants as the Committee authorizes and under such terms as the
Committee establishes. The Committee shall determine with respect to each Share
Option Award, and designate in the grant whether a Participant is to receive an
ISO or a Non-Qualified Share Option.
6.2 OPTION PRICE. The Option Price per Share subject to a Share Option
Award shall be specified in the grant, but, to the extent any Share Option is an
Incentive Share Option, the Option Price in no event shall be less than the Fair
Market Value per Share on the date of grant. Notwithstanding the foregoing, if
the Participant to whom an ISO is granted owns, at the time of the grant, more
than ten percent (10%) of the combined voting power of the Company, the Option
Price per Share subject to such grant shall be not less than one hundred ten
percent (110%) of the Fair Market Value.
6.3 TERMS OF OPTION. A Share Option that is an ISO shall not be
transferable by the Participant other than as permitted under Section 422 of the
Code or any successor provision, and, during the Participant's lifetime, shall
be exercisable only by the Participant. Non-Qualified Share Options may be
subject to such restrictions on transferability and exercise as may be provided
for by the Committee in the terms of the grant thereof. A Share Option shall be
of no more than ten (10) years' duration, except that an ISO granted to a
Participant who, at the time of the grant, owns Shares representing more than
ten percent (10%) of the combined voting power of the Company shall by its terms
be of no more than five (5) years' duration. A Share Option by its terms shall
vest in a Participant to whom it is granted and be exercisable only after the
earliest of: (i) such period of time as the Committee shall determine and
specify in the grant, but, with respect to Employees, in no event less than one
(1) year following the date of grant of such award; (ii) the Participant's
death; or (iii) a Change in Control.
5
<PAGE> 7
6.4 EXERCISE OF OPTION. A Non-Qualified Share Option is only
exercisable by a Participant who is an Employee while such Participant is in
active employment with the Company or a Subsidiary or within thirty (30) days
after termination of such employment, except (i) during the three-year period
after a Participant's death, Disability or Retirement; (ii) during a three-year
period commencing on the date of a Participant's termination of employment by
the Company or a Subsidiary other than for cause; (iii) during a three-year
period commencing on the date of termination, by the Participant or the Company
or a Subsidiary, of employment after a Change in Control unless such termination
of employment is by the Company or a Subsidiary for cause; or (iv) if the
Committee decides that it is in the best interest of the Company to permit other
exceptions. A Non-Qualified Share Option may not be exercised pursuant to this
paragraph after the expiration date of the Share Option.
An ISO is only exercisable by a Participant while the Participant is in
active employment with the Company or a Subsidiary or within thirty (30) days
after termination of such employment, except (i) during a one-year period after
a Participant's death, where the Option is exercised by the estate of the
Participant or by any person who acquired such Option by bequest or inheritance;
(ii) during a three-month period commencing on the date of the Participant's
termination of employment other than due to death, a Disability or by the
Company or a Subsidiary other than for cause; or (iii) during a one-year period
commencing on the Participant's termination of employment on account of
Disability. An ISO may not be exercised pursuant to this paragraph after the
expiration date of the Share Option.
An Option may be exercised with respect to part or all of the Shares
subject to the Option by giving written notice to the Company of the exercise of
the Option. The Option Price for the Shares for which an Option is exercised
shall be paid on or within ten (10) business days after the date of exercise in
cash (by certified or bank cashier's check), in whole Shares owned by the
Participant prior to exercising the Option, in a combination of cash and such
Shares or on such other terms and conditions as the Committee may approve. The
value of any Share delivered in payment of the Option Price shall be its Fair
Market Value on the date the Option is exercised.
6.5 LIMITATION APPLICABLE TO ISOS. The aggregate Fair Market Value,
determined as of the date the related Share Option is granted, of all Shares
with respect to which ISOs are exercisable for the first time by a Participant
in any one calendar year, under this Plan or any other share option plan
maintained by the Company, shall not exceed $100,000.
7. SHARE APPRECIATION RIGHTS.
7.1 GENERAL. The Committee may, in its discretion, grant SARs to
Participants who have received a Share Option Award. The SARs may relate to such
number of Shares, not exceeding the number of Shares that the Participant may
acquire upon exercise of a related Share Option, as the Committee determines in
its discretion. Upon exercise of a Share Option by a Participant, the SAR
relating to the Share covered by such exercise shall terminate. Upon termination
or expiration of a Share Option, any unexercised SAR related to that Option
shall also terminate. Upon exercise of SARs, such rights and the related Share
Options, to the extent of an equal number of Shares shall be surrendered to the
Committee, and such SARs and the related Share Options shall terminate.
7.2 AWARD. Upon a Participant's exercise of some or all of the
Participant's SARs, the Participant shall receive an amount equal to the value
of the Share Appreciation for the number of SARs exercised, payable in cash,
Shares, Restricted Shares, or a combination thereof, at the discretion of the
Committee.
6
<PAGE> 8
7.3 FORM OF SETTLEMENT. The Committee shall have the discretion to
determine the form in which payment of an SAR will be made, or to permit an
election by the Participant to receive cash in full or partial settlement of the
SAR. Unless otherwise specified in the grant of the SAR, if a Participant
exercises an SAR during the sixty (60) day period commencing on the date of a
Change in Control, the form of payment of such SAR shall be cash, provided that
such SAR was granted at least six (6) months prior to the date of exercise, and
shall be Shares if such SAR was granted six (6) months or less prior to the date
of the exercise. Settlement for exercised SARs may be deferred by the Committee
in its discretion to such date and under such terms and conditions as the
Committee may determine.
7.4 RESTRICTIONS ON CASH EXERCISE. Except in the case of an SAR that
was granted at least six (6) months prior to exercise and is exercised for cash
during the sixty (60) day period commencing on the date of the Change in
Control, any election by a Participant to receive cash in full or partial
settlement of the SAR, as well as any exercise by a Participant of the
Participant's SAR for such cash, shall be made only during the period beginning
on the third business day following the date of release of the quarterly or
annual summary statements of sales and earnings and ending on the twelfth
business day following such date.
7.5 RESTRICTIONS. An SAR is only vested, exercisable and transferable
during the period when the Share Option to which it is related is also vested,
exercisable and transferable, respectively. If the Participant is a person
subject to Section 16 of the Exchange Act, the SAR may not be exercised within
six (6) months after the grant of the related Share Option, unless otherwise
permitted by law.
8. EXERCISE PAYMENTS.
The Committee may grant to Participants holding Share Options the right
to receive payments in connection with the exercise of a Participant's Share
Options ("Exercise Payments") relating to such number of Shares covered by such
Share Options, and subject to such restrictions and pursuant to such other terms
as the Committee may determine. Exercise Payments shall be in an amount
determined by the Committee in its discretion, which amount shall not be greater
than 60% of the excess of the Fair Market Value (as of the date of exercise)
over the Option Price of the Shares acquired upon the exercise of the Option. At
the discretion of the Committee, the Exercise Payment may be made in cash,
Shares, including Restricted Shares, or a combination thereof.
9. GRANTS OF SHARES.
9.1 AWARDS. The Committee may grant, either alone or in addition to
other awards granted under this Plan, Shares (including Restricted Shares) to
such Participants as the Committee authorizes and under such terms (including
the payment of a purchase price) as the Committee establishes. The Committee, in
its discretion, may also make a cash payment to a Participant granted Shares or
Restricted Shares under this Plan to allow such Participant to satisfy tax
obligations arising out of receipt of such Shares or Restricted Shares.
9.2 RESTRICTED SHARE TERMS. Awards of Restricted Shares shall be
subject to such terms and conditions as are established by the Committee. Such
terms and conditions may include, but are not limited to, the requirement of
continued service with the Company, achievement of specified business objectives
and other measurements of individual or business unit performance, the manner in
which such Restricted Shares are held, the extent to which the holder of such
Restricted Shares has rights of a shareholder and the circumstances under which
such Restricted Shares shall be forfeited. The Participant shall not be
permitted to sell, assign, transfer, pledge or otherwise encumber Shares
7
<PAGE> 9
received pursuant to this Section 9 prior to the date on which any applicable
restriction established by the Committee lapses. The Participant shall have,
with respect to Restricted Shares, all of the rights of a shareholder of the
Company, including the right to vote the Restricted Shares and the right to
receive any dividends, unless the Committee shall otherwise provide in the grant
of such Restricted Shares. Restricted Shares may not be sold or transferred by
the Participant until any restrictions that have been established by the
Committee have lapsed. Upon the termination of employment of a Participant who
is an Employee during the period any restrictions are in effect, all Restricted
Shares shall be forfeited without compensation to the Participant unless
otherwise provided in the grant of such Restricted Shares.
10. PERFORMANCE AWARDS.
The Committee may grant, either alone or in addition to other awards
granted under this Plan, awards of Shares based on the attainment, over a
specified period, of individual performance targets or other parameters to such
Participants as the Committee authorizes and under such terms as the Committee
establishes. Performance Awards shall entitle the Participant to receive an
award if the measures of performance established by the Committee, are met. The
Committee, shall determine the times at which Performance Awards are to be made
and all conditions of such awards. The Participant shall not be permitted to
sell, assign, transfer, pledge or otherwise encumber Shares received pursuant to
this Section 10 prior to the date on which any applicable restriction or
performance period established by the Committee lapses. Performance Awards may
be paid in Shares, Restricted Shares or other securities of the Company, cash or
any other form of property that the Committee shall determine. Unless otherwise
provided in the Performance Award, a Participant who is an Employee must be an
Employee at the end of the performance period in order to receive a Performance
Award, unless the Participant dies, has reached Retirement or incurs a
Disability or under such other circumstances as the Committee may determine.
11. GENERAL PROVISIONS.
11.1 Any assignment or transfer of any awards granted under this Plan
may be effected only if such assignment or transfer does not violate the terms
of the award.
11.2 Nothing contained herein shall require the Company to segregate
any monies from its general funds, or to create any trusts, or to make any
special deposits for any immediate or deferred amounts payable to any
Participant for any year.
11.3 Participation in this Plan shall not affect the Company's right to
discharge a Participant or constitute an agreement of employment between a
Participant and the Company.
11.4 This Plan shall be interpreted in accordance with, and the
enforcement of this Plan shall be governed by, the laws of The Bahamas, subject
to any applicable United States federal or state securities laws.
11.5 The headings preceding the text of the sections of this Plan have
been inserted solely for convenience of reference and do not affect the meaning
or interpretation of this Plan.
12. AMENDMENT, SUSPENSION OR TERMINATION.
12.1 GENERAL RULE. Except as otherwise required under applicable rules
of a Nasdaq Market or a securities exchange or other market where the securities
of the Company are traded or applicable law, the Board may suspend, terminate or
amend this Plan, including, but not limited to, such amendments as may be
necessary or desirable resulting from changes in the United States federal
income tax laws and other applicable laws, without the approval of the Company's
shareholders or Participants; provided, however, that no such action shall
adversely affect any awards previously granted to a Participant without the
Participant's consent.
8
<PAGE> 10
12.2 COMPLIANCE WITH RULE 16B-3. With respect to any person subject to
Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with the requirements of Rule 16b-3 under the Exchange Act, as applicable
during the term of this Plan. To the extent that any provision of this Plan or
action of the Committee or its delegates fail to so comply, it shall be deemed
null and void.
13. EFFECTIVE DATE AND DURATION OF PLAN.
This Plan shall be effective on August 15, 1996. No award shall be
granted under this Plan subsequent to August 15, 2006.
14. TAX WITHHOLDING.
The Company shall have the right to (i) make deductions from any
settlement of an award, including delivery or vesting of Shares, or require that
Shares or cash, or both, be withheld from any award, in each case in an amount
sufficient to satisfy withholding of any foreign, federal, state or local taxes
required by law or (ii) take such other action as may be necessary or
appropriate to satisfy any such withholding obligations. The Committee may
determine the manner in which such tax withholding shall be satisfied, and may
permit Shares (rounded up to the next whole number) to be used to satisfy
required tax withholding based on the Fair Market Value of such Shares as of the
Settlement Date of the applicable award.
9
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF STEINER LEISURE LIMITED
OWNED BY STEINER LEISURE LIMITED
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
An extra section break has been inserted above this paragraph. Do not
delete this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
<PAGE> 2
EXHIBIT 21
SUBSIDIARIES OF STEINER LEISURE LIMITED
OWNED BY STEINER LEISURE LIMITED
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
Cosmetics Limited The Bahamas
Elemis Limited United Kingdom
Steiner Spa Resorts Limited The Bahamas
Steiner Training Limited United Kingdom
Steiner Transocean Limited The Bahamas
Steiner U.S. Holdings, Inc. Florida
Spa Resources Limited The Bahamas
OWNED BY STEINER U.S. HOLDINGS, INC.
Steiner Education Group, Inc. Florida
Steiner Beauty Products, Inc. Florida
Steiner Management Services LLC(1) Florida
OWNED BY STEINER EDUCATION GROUP, INC.
FCNH, Inc. Florida
OWNED BY COSMETICS LIMITED
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
EBSC 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
- ------------------
(1). Formerly known as CT Maritime Services, L.C.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report dated February 29, 2000, included in this Form 10-K,
into Steiner Leisure Limited's previously filed Form S-8 Registration Statements
(File No.'s 333-39927 and 333-52343). It should be noted that we have not
audited any financial statements of the Company subsequent to December 31, 1999
or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Miami, Florida
March 30, 2000.
<PAGE> 1
EXHIBIT 23.2
Harry B. Sands & Co.
P.O. Box N-624
Nassau, Bahamas
29 March 2000
Steiner Leisure Limited
Suite 104A,
Saffrey Square,
Nassau, The Bahamas
Dear Sirs:
RE: Form Annual Report on Form 10-K
We hereby consent to the incorporation of the use of our name in the
Annual Report on Form 10-K of Steiner Leisure Limited for the year ended
December 31, 1999 under the caption "Risk Factors -- We are not a United States
Company and, as a Result, there are Special Risks" into Steiner Leisure
Limited's previously filed Form S-8 Registration Statements (File nos. 333-39927
and 333-52343).
Yours faithfully,
HARRY B. SANDS & COMPANY
/s/ ARTHUR SELIGMAN
---------------------------
Arthur Seligman
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 23,893,000
<SECURITIES> 6,261,000
<RECEIVABLES> 9,883,000
<ALLOWANCES> 456,000
<INVENTORY> 7,514,000
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<DEPRECIATION> 5,135,000
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0
0
<COMMON> 166,000
<OTHER-SE> 53,831,000
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<CGS> 36,824,000
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<EPS-BASIC> 1.35
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</TABLE>
