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. 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,
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.
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:
---------------------
(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.
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.
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.
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.
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.
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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive officers of Steiner Leisure.
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.
PART II
ITEM 5.
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).
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.
ITEM 6.
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.
- ---------------------
(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.
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
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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of revenues:
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.
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.
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.
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.
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
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.
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.
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
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.
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
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
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.
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.
PART IV
ITEM 14.
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.
(c) The following is a list of all exhibits filed as a part of this report:
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, 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, Registration Number 333-5266, and incorporated herein by reference.
(5) Previously filed with Amendment No. 3 to the Company's Registration Statement on Form, 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.
+ Management contract or compensatory plan or agreement.
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.
STEINER LEISURE LIMITED AND SUBSIDIARIES
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.
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes to consolidated financial statements are an integral part of these statements.
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The accompanying notes to consolidated financial statements are an integral part of these statements.
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
The Company acquired the assets and assumed certain liabilities of certain businesses as follows:
The accompanying notes to consolidated financial statements are an integral part of these statements.
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.
(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
(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.
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.
(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:
(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
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:
(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:
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.
(5) ACCRUED EXPENSES:
Accrued expenses consist of the following:
(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:
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:
(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:
Amounts reclassified are as follows:
(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 ============
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:
(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.
(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.
(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:
Additional information regarding options outstanding at December 31, 1999 is as follows:
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:
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.
(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.
-i-