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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE PERIOD FROM TO
COMMISSION FILE NUMBER : 0-28972
STEINER LEISURE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF THE BAHAMAS NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUITE 104A, SAFFREY SQUARE,
NASSAU, THE BAHAMAS NOT APPLICABLE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (242) 356-0006
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, PAR VALUE (U.S.) $.01 PER SHARE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AS OF MARCH 26, 1997 WAS APPROXIMATELY $121,059,450.
AS OF MARCH 26, 1997, 7,200,000 OF THE REGISTRANT'S COMMON SHARES, PAR
VALUE (U.S.) $.01 PER SHARE, WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE. PORTIONS OF THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S 1997 ANNUAL MEETING OF
SHAREHOLDERS, WHICH WILL BE FILED ON OR BEFORE APRIL 30, 1997, ARE INCORPORATED
BY REFERENCE IN PART III HEREOF.
TABLE OF CONTENTS
PAGE
PART I.................................................................... 1
ITEM 1. BUSINESS................................................ 1
General................................................. 1
Cruise Industry Overview................................ 1
Business Strategy....................................... 2
Growth Strategy......................................... 3
Cruise Line Customers................................... 4
Shipboard Services...................................... 5
Facilities Design....................................... 6
Hours of Operation...................................... 6
Recruiting and Training.... ........................... 6
Products................................................ 6
Marketing and Promotion................................. 7
Cruise Line Concession Agreements....................... 7
Competition............................................. 8
Regulation.............................................. 8
Employees............................................... 8
ITEM 2. PROPERTIES.............................................. 9
ITEM 3. LEGAL PROCEEDINGS....................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS..... 9
EXECUTIVE OFFICERS OF THE REGISTRANT................................ 9
PART II................................................................... 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................. 11
ITEM 6. SELECTED FINANCIAL DATA................................. 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 23
PART III.................................................................. 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 24
ITEM 11. EXECUTIVE COMPENSATION.................................. 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. .............................. 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 24
PART IV................................................................... 25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................. 25
PART I
ITEM 1. BUSINESS.
GENERAL
Steiner Leisure Limited (including, unless the context otherwise
requires, its subsidiaries and predecessors, "Steiner Leisure" or the "Company")
was organized as an international business company ("IBC") 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 (the"Maritime Division") of Steiner Group and the out-
standing common stock of Coiffeur Transocean (Overseas), Inc. ("CTO"), a
subsidiary of Steiner Group acquired in June 1994. The Company is the leading
provider of spa services and skin and hair care products on board cruise ships
worldwide. The Company 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. In addition, the
Company develops and markets premium priced, high quality personal care products
which are sold primarily in connection with the services the Company provides
and, to a lesser extent, through third party land-based salon and retail
channels. As of March 1, 1997, the Company served 85 cruise ships representing
25 cruise lines including Carnival, Royal Caribbean, Princess, Norwegian,
Celebrity and Cunard, pursuant to agreements with cruise lines ("Cruise Line
Concession Agreements") typically ranging in duration from one to three years.
See "--Cruise Line Concession Agreements."
The Company provides its services solely on cruise ships in treatment
and fitness facilities. On newer ships the Company's services are provided in
enhanced, large spa facilities, many of which offer hydrotherapy (water based)
treatments and enlarged fitness and treatment areas, generally located in a
single passenger activity area. Twenty-Five of the 85 ships served by the
Company as of March 1, 1997 have such spa facilities. The Company's services
include massage, aromatherapy treatments, seaweed wraps, saunas, steam rooms,
aerobic exercise, hair styling, manicures, pedicures and a variety of other
specialized body treatments designed to capitalize on the growing consumer trend
towards health awareness, personal care and fitness. As of March 1, 1997, ships
with large spas were staffed by the Company with an average of approximately 14
employees, as compared to an average of approximately six Company employees on
other ships.
Effective December 1995 and January 1996, respectively, the Company
acquired its two major product lines, "Elemis" and "La Therapie," and Elemis
Limited, which arranges for the production packaging and supply of the Company's
products. These product lines are sourced primarily from a premier French
manufacturer and packaged and shipped by the Company. The Company also sells a
variety of hair care products under the Steiner name that are manufactured by an
unaffiliated entity. The Company offers over 160 different products, including
beauty products such as aromatherapy oils, cleansers, creams and other skin care
products and accessories and hair care products such as shampoos, moisturizers
and lotions. During 1996, services and products accounted for approximately 62%
and 38% of the Company's revenues, respectively.
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. The Company serves ships in
all of these segments. According to Cruise Lines International Association
("CLIA"), an industry trade group, the number of passangers who took cruises
marketed primarily to North American consumers ("North American Cruises")
increased by approximately 4.5% in 1996 over 1995. The number of passangers
taking North American cruises had grown from approximately 2.2 million in
1985 to approximately 4.6 million in 1996, representing a compound annual
growth rate of approximately 7.2%, including a decline from approximately 4.5
million to approximately 4.4 million in 1995, prior to the increase in 1996.
For the reasons discussed below under "Certain Factors That Might
Affect Future Operating Results--Dependence on Cruise Industry," there can be
no assurance, however, that the North American cruise industry will experience
continued growth in the second half of 1996 or at any time in the future, or
that it will not experience
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future decreases in passangers. As of March 1, 1997, the Company served 85 ships
approximately 74 of which the Company believes offer North American Cruises.
According to CLIA, approximately 129 ships offer North American Cruises.
In recent years, cruise lines in general have been building larger
ships with large spas dedicated to the types of health, beauty and fitness
services offered by the Company. Generally, these large spas, many of which
include hydrotherapy treatments, offer enlarged fitness and treatment
facilities, are located on higher profile decks and have enriched decor. With
increasing frequency, the Company has participated in the design of these
facilities. Of the 85 ships served by the Company as of March l, 1997, 25 had
such large spa facilities and the Company believes that five of the six new
ships coming into service during the remainder of 1997 operated by cruise lines
served by the Company will also contain such large spa facilities. There can be
no assurance that the Company will serve any ships not currently subject to an
agreement.
BUSINESS STRATEGY
The Company's business strategy is directed at maintaining and
enhancing its position as the leading provider of spa services and related
products on board cruise ships worldwide. The principal elements of the
Company's business strategy are as follows:
RECRUIT AND TRAIN HIGH QUALITY SHIPBOARD PERSONNEL. The Company provides its
services to customers on a personal basis and employs shipboard staff who are
professional, attentive and able to continue the Company's tradition of catering
to the needs of individual customers. The Company recruits its staff primarily
from European and British Commonwealth countries, and requires prospective
employees to be technically skilled and to possess a willingness to provide
outstanding personal service. The Company trains its candidates in its
philosophy of customer care, emphasizing the objective of assuring that its
customers enjoy an individualized and therapeutic experience. At the same time,
the Company trains and provides incentives to its employees to maximize sales of
the Company's services and products. The Company believes that its success to
date is largely attributable to its ability to staff its operations with highly
qualified personnel.
UTILIZE EXPERIENCED AND EMPOWERED SHIPBOARD MANAGEMENT. The Company's shipboard
operations are supervised by experienced managers who implement the Company's
philosophy of customer care. The Company's managers are selected primarily from
its experienced shipboard staff and are trained at the Company's facilities in
England. These managers are granted substantial authority by senior management
to make the day-to-day decisions regarding shipboard operations including those
actions necessary to maximize revenues. The responsibilities of the Company's
shipboard managers include efficient scheduling of personnel, inventory
management, supervision of sales and marketing, maintenance of the required
shipboard discipline and communication with senior management of the Company.
DEVELOP AND DELIVER HIGH QUALITY SERVICES AND PRODUCTS. The Company strives to
create an engaging and therapeutic environment where customers can receive
body and facial treatments and hair styling comparable in quality to the finest
land-based spas and salons. Many of the techniques and products used by Company
personnel have been developed by the Company based on its own research and in
response to the needs and requests of its customers. The Company continually
updates the range of techniques, services and products it offers to keep pace
with changing health, beauty and fitness trends. Through its attentive and
highly trained staff, and its premium quality hair and beauty products, the
Company provides cruise passengers with what it believes is a richly rewarding
experience that will be a memorable highlight of a cruise vacation.
AGGRESSIVELY MARKET ITS SERVICES AND PRODUCTS. The Company uses a variety of
marketing techniques to bring its services and products to the attention of
cruise passengers. In addition to group promotions, seminars and demonstrations,
Company personnel individually educate their customers as to additional services
and products offered by the Company and cross-market services and products
offered by other Company personnel. Along with shipboard promotions, the Company
promotes and offers the pre-cruise purchase of the Company's shipboard services
by travel groups, including corporate incentive programs, and offers the
pre-cruise purchase of spa packages through travel agents.
MAINTAIN CLOSE RELATIONSHIPS WITH THE CRUISE LINES. The Company believes that
because of its high level of customer satisfaction and the revenues it has
generated for cruise lines, it has developed strong relationships with the
cruise lines served by it that will contribute to the Company's future growth.
The Company believes that its
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performance has enabled it to obtain extensions of almost every Cruise Line
Concession Agreement that has expired since 1990. During 1996, Carnival, Royal
Caribbean and Norwegian, representing an aggregate of 28 ships in service at
March 1, 1997, renewed their Cruise Line Concession Agreements with the Company.
These agreements have an average term of approximately 4.5 years. Since 1990,
agreements with respect to a total of seven ships have not been extended as a
result of cruise lines' decisions to engage another entity or use their own
personnel to provide the services and, with respect to two ships, the cruise
line's discontinuance of the services provided by Company.
GROWTH STRATEGY
The Company's strategy for continued growth includes the following
principal elements:
EXPAND WITH PRESENT CRUISE LINE CUSTOMERS. The Company believes that its success
in providing high quality services and products and generating revenues for the
cruise lines will enable it to grow as the number of ships operated by its
current cruise line customers expands. From 1990 to March 1, 1997, cruise lines
with which the Company had Cruise Line Concession Agreements brought into
service a total of 36 newly constructed ships not covered by then-existing
agreements, all of which were subsequently served by the Company. As of March 1,
1997, cruise lines served by the Company are scheduled to introduce six ships in
service through the end of 1997. The Company expects to perform services on five
of these ships, including three that are subject to agreements with the Company.
In addition, eight of the nine ships scheduled to enter service in 1998 on
behalf of cruise lines that the Company serves are covered by agreements with
the Company. There can be no assurance that the Company will serve any ships not
currently subject to an agreement or that the Company's present cruise line
customers will not retire older, smaller ships.
OBTAIN NEW CRUISE LINE CONCESSION AGREEMENTS. The Company seeks to obtain Cruise
Line Concession Agreements from existing cruise lines with which the Company
currently does not have such agreements, as well as from newly formed cruise
lines. Since 1990, the Company has obtained Cruise Line Concession Agreements
with 10 new cruise line customers.
CAPITALIZE ON GROWTH IN SIZE AND QUALITY OF SHIPBOARD FACILITIES. In response to
passenger demand, an increasing number of cruise ships offer spa facilities many
of which include hydrotherapy treatments, in addition to enlarged fitness and
treatment areas. Newer facilities generally are located on higher profile decks,
have enriched decor and offer all of the Company's services and products in a
single passenger activity area. These enhanced facilities foster the
cross-selling of services and products and enable the Company to serve a larger
number of passengers. With increasing frequency, the Company has participated in
the design of these facilities. The Company believes that its participation has
resulted in the construction of facilities permitting improved quality of
service and increased revenues to the Company and those cruise lines. Of the
ships served by the Company at March 1, 1997, 25 had large spa facilities, as
will, the Company believes, five of the ships coming into service in 1997 for
cruise lines currently served by the Company. There can be no assurance that the
Company's agreements will be extended to cover any ships beyond the three new
ships covered by agreements. As of March 1, 1997, ships with large spas were
staffed by the Company with an average of approximately 14 employees, as
compared to an average of approximately six employees on other Company ships.
CONTINUE TO INCREASE PRODUCT SALES. Sales of the Company's products have
increased at a compound annual growth rate of 37% for the years 1992 through
1996. The Company's products are sold primarily to cruise ship passengers and,
in addition, to land-based customers. The Company believes that there is a
significant opportunity to increase its product sales to third party land-based
salons, retail stores and other retail channels. The Company opened sales
counters at two leading London department stores during 1995 and 1996,
respectively. The Company believes that the acquisitions of the "Elemis" and "La
Therapie" product lines contributed to an improvement in gross profit as a
percentage of sales in 1996.
INCREASING SHIPBOARD PRODUCTIVITY. Improved staff productivity on board ships is
a significant factor contributing to the Company's 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." The Company's average gross per day
has increased each year, from $208 in 1992 to $256 in 1996. During 1996, ships
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with large spa facilities had an average gross per day of $292 while ships
without large spa facilities had average gross per day during 1996 of $224.
There can be no assurance that the gross per day will continue to increase.
GROWTH BY ACQUISITION. The Company has expanded its operations through its
acquisitions of CTO, which provided services to the cruise industry similar to
those provided by the Company, in 1994, the formulations for the "Elemis" and
"La Therapie" product lines, effective December 1995, and Elemis Limited,
effective January 1996. See "--Products." During the next few years the Company
will consider additional acquisitions of land-based or maritime-based businesses
which it deems compatible with its operations and future plans. There can be no
assurance, however, that the Company will be successful in effecting any
acquisition transaction on terms favorable to the Company.
CRUISE LINE CUSTOMERS
As of March 1, 1997, the Company provided its services and products to
25 cruise lines representing a total of 85 ships, including most of the major
cruise lines offering North American Cruises.
The numbers of ships served as of March 1, 1997 under Cruise Line
Concession Agreements with the respective cruise lines are listed below:
NO. OF SHIPS
NO. OF SHIPS COVERED BY
CRUISE LINE COVERED BY AGREEMENT CRUISE LINE AGREEMENT
Airtours(1) (2) 2 Norwegian 7
Blasco 1 Orient 1
Carnival(1) 11 P&O European Ferries(5) 1
Celebrity(3) 6 P&O Cruises(5) 3
Costa(1) 1 Premier(6) 2
Crystal 2 Princess(5) 8
CTC 1 Royal Caribbean 10
Cunard 4 Seabourn(1) 3
Diamond Seven Seas 2 Seawind 1
Dolphin 4 Silversea 2
Fred Olsen(4) 2 Mediterranean 1
Holland America(1) 8 Unicom 1
Louis 1 ------ --
Total 85
(1) Carnival Corporation, the parent company of Carnival Cruise Lines, also
owns Holland America and 50% and approximately 30% of the shares of
Seabourn and Airtours, respectively, and has entered into an agreement to
acquire Costa jointly with Airtours.
(2) One of the ships is served pursuant to an oral agreement with Airtours.
(3) Includes one ship which will cease being operated by Celebrity in
October 1997.
(4) One of the ships is served pursuant to an oral agreement with Fred Olsen.
(5) P&O European Ferries, P&O Cruises and Princess are subsidiaries of The
Peninsular & Oriental Steam Navigation Company.
(6) Includes one ship that will cease being operated by Premier as of April 3,
1997.
In addition to the ships currently served by the Company, the Company's
Cruise Line Concession Agreements covered, as of March 1, 1997, a total of
eleven ships which are expected to come into service through the remainder of
1997 and 1998. The cruise lines for which these ships will enter service and the
expected years of introduction into service are as follows: Carnival (three
ships in 1998); Royal Caribbean (two ships in 1997 and one ship in 1998);
Princess (one ship in 1997 and one ship in 1998); Disney (two ships in 1998);
and Renaissance (one ship in 1998).
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The Company has had no Cruise Line Concession Agreement terminated prior
to its expiration date since 1990, other than as a result of ships being retired
from service or transferred to another cruise line, and the bankruptcy of a
cruise line, and almost all of the Cruise Line Concession Agreements which have
expired have been extended beyond their specified expiration dates. See
"--Cruise Line Concession Agreements."
SHIPBOARD SERVICES
The Company's goal is to provide its customers with a therapeutic and
indulgent experience in an atmosphere of individualized attention. The Company
provides a range of personal services which it believes are comparable to those
offered by the finest land-based resorts. Fees for the Company's services and
products are charged to customers' cabins, with the cruise lines then making
payment to the Company, after deducting a specified percentage of gross revenues
payable to the cruise line pursuant to the applicable Cruise Line Concession
Agreement. The Company believes that the prices it charges for its services and
products are comparable to those charged for similar quality services and
products by land-based establishments.
MASSAGE AND OTHER BODY TREATMENTS
The Company offers massages and a variety of other body treatments to men
and women. Types of body treatments include seaweed and other therapeutic wraps
and aromatherapy treatments. The body treatment techniques include those
developed based on the Company's research of techniques from around the world as
well as those developed in response to the needs and requests of cruise ship
passengers. The number of private treatment rooms for these services ranges,
depending on the size of the ship, from one to twelve and the number of Company
staff available to provide such services also ranges from one to twelve. On
several ships, the Company provides certain specialty treatments including a
body capsule which provides a multi-sensory massage-like treatment in an
individual, self-contained environment. The Company strives to update the
treatments it offers to keep abreast of changing techniques and trends.
BEAUTY AND HAIR
The Company operates a hair styling salon that provides services to
women, men and children as well as facilities for nail and beauty treatments on
each ship it serves. Depending on the size of the ship, the Company's facilities
offer from three to ten hair styling stations as well as stations for manicures,
pedicures and facial treatments, and are staffed by from one to seven Company
employees.
FITNESS FACILITIES
As of March 1, 1997, the Company operated fitness facilities on 44 of
the ships it served. The fitness facilities typically include weightlifting
equipment, cardiovascular equipment (including treadmills, exercise bicycles and
rowing and stair machines) and facilities for fitness classes. In connection
with the fitness facilities, the Company provides from one to three fitness
instructors, depending on ship size, who are available to assist passengers in
using the exercise equipment and conduct aerobic exercise classes. In addition,
the instructors offer special services such as personal nutritional and dietary
advice, body composition analysis and personal training to passengers. Use of
fitness facilities is generally available at no charge to cruise passengers,
except that fees typically are charged for such special services.
SAUNAS AND STEAM ROOMS
The Company operates saunas and steam rooms on most of the ships it
serves. Those facilities generally may be used by passengers at no charge.
SPAS
Since the late 1980's, in response to passenger demand, cruise lines
increasingly have provided enlarged spa facilities which, in general, allow for
all of the Company's services to be offered in a single passenger activity area.
As of March 1, 1997, large spas were found on 25 of the ships served by the
Company. These spas provide enlarged fitness and treatment areas and on most
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ships include hydrotherapy treatments. These facilities are generally
located on higher profile decks and have enriched decor. The Company believes
that the location of its operations in a spa environment enhances the
passengers' enjoyment of the Company's services, encourages increased passenger
interest in those services and facilitates cross-marketing of the Company's
services and products. The Company believes that all of the ships currently
under construction for its largest cruise line customers will include large
spas. The Company employs an average of approximately 14 employees on ships with
large spas, as compared to an average of approximately six employees on other
ships.
FACILITIES DESIGN
In general, the facilities operated by the Company have been designed
by the cruise lines. However, beginning in 1988, several cruise lines began
requesting the Company's assistance in the design of shipboard spas and other
facilities. As of March 1, 1997, the Company had assisted or was assisting in
the design of facilities for a total of 28 ships, including at least 23 of which
have, or upon completion will have, large spas. Of these 28 ships, 16 were in
service at March 1, 1997 and covered by Cruise Line Concession Agreements with
the Company, and the remainder are under construction. The Company believes that
its participation has resulted in the construction of facilities permitting
improved quality of service and increased revenues to the Company and those
cruise lines. The Company believes that its involvement in the design of
shipboard facilities has assisted it in obtaining additional Cruise Line
Concession Agreements, although there can be no assurance that the Company will
be able to obtain agreements for all of the ships with respect to which it has
provided design assistance.
HOURS OF OPERATION
The facilities operated by the Company generally are open each day
during the course of a cruise from 8:00 a.m. to 8:00 p.m.
RECRUITING AND TRAINING
The continued success of the Company is dependent, in part, on its
ability to attract qualified employees. As of March 1, 1997, the Company had 723
employees working on cruise ships. The Company's goal in recruiting and training
new employees is to constantly have available a sufficient number of personnel
trained in the Company's services and philosophy to effectively serve ships in
service and ships anticipated to be in service. Through its wholly-owned
subsidiary, Steiner Training Limited ("Steiner Training"), the Company hires and
trains personnel who perform the Company's shipboard services. Steiner Training
recruits employees, primarily from the United Kingdom and other European and
British Commonwealth countries, through advertisements in trade and other
publications, appearances at beauty, hair and fitness trade shows, meetings with
students at trade schools and recommendations from Company employees. All
shipboard employment candidates are required to have received prior training in
the services they are to perform for the Company and are tested with respect to
such skills prior to being hired. In addition, applicants must possess a
willingness to provide outstanding personal service.
Each candidate must complete a rigorous training program at the
Company's facilities in Stanmore, England. These facilities allow for the
training of up to approximately 60 employees at a time. Typically, the training
course for shipboard personnel is conducted over a period of two to three weeks,
depending on the services to be performed by the employee, and emphasizes the
Company's culture of personalized, attentive passenger care. All employees also
receive supplemental training in their area of specialization, including
instruction in treatments and techniques developed by the Company. Each employee
is educated regarding all of the Company's services and products in order to
cross-market outside of the employee's area of specialty. Steiner Training also
instructs shipboard management candidates. That training covers, among other
things, personnel supervision, customer service and administrative matters,
including interaction with cruise line personnel.
PRODUCTS
The Company sells high quality European manufactured personal care products
for men and women, duty free and tax free in its salons and other shipboard
facilities from on-board inventory. The Company also offers its products through
brochures provided to cruise passengers and to land-based wholesale and retail
customers. The
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beauty products offered include aromatherapy oils as well as cleansers, creams
and other skin care products and cleansing accessories. Hair care products
offered include shampoos, moisturizers and lotions.
Most of the products sold by the Company are from its "Elemis" and "La
Therapie" product lines. As of March l, 1997, the Company sold 127 different
"Elemis" skin and hair care products made primarily from premium quality natural
ingredients. As of that date, the Company also sold a line of 37 premium priced
"La Therapie" skin care products. Almost all of the "Elemis" and "La Therapie"
products are sourced from a premier French manufacturer under an agreement that
expires in 2001.
"Elemis" and "La Therapie" products are used in connection with
services provided by the Company and sold at retail on board ships served by the
Company. In addition, "Elemis" products are sold in a number of countries to
wholesale and retail land-based customers, including third party beauty salons
and retail stores and through other distribution channels directly to consumers.
The Company also sells the products of several entities unaffiliated with the
Company, including private label products manufactured by other companies and
sold by the Company under the Steiner brand name.
Effective December 1995, the Company acquired as a capital contribution
from Nicolas D. Steiner, a senior officer of a predecessor of the Company and
the majority owner of a corporation that was then the sole shareholder of the
Company, certain rights with respect to the formulations for the "Elemis" and
"La Therapie" lines of skin and hair care products. Effective January 1996, the
Company acquired all of the outstanding shares of Elemis Limited, which shares
were owned 95% by Mr. Steiner and 5% by Clive E. Warshaw, the Chairman of the
Board and Chief Executive Officer of the Company. Elemis Limited arranges for
the production, packaging and supplying of the Company's "Elemis" and "La
Therapie" products at facilities in Taunton, England.
MARKETING AND PROMOTION
The Company promotes its services and products to passengers on cruise
ships through on-board demonstrations and seminars, video presentations shown on
in-cabin television, tours of the Company's shipboard facilities and promotional
discounts on lower volume days, such as when the ships are in destination ports.
The Company also distributes illustrated brochures and order forms describing
its services and products to passenger cabins and in the facilities it operates.
In addition, employees cross-market other services and products offered by the
Company to their customers. Along with shipboard promotions, the Company
promotes and offers the pre-cruise purchase of the Company's shipboard services
by travel groups, including corporate incentive programs, and offers the
pre-cruise purchase of spa packages through travel agents. The Company also
benefits from advertising by the cruise lines.
CRUISE LINE CONCESSION AGREEMENTS
Although Cruise Line Concession Agreements vary in certain respects
from cruise line to cruise line, all of the agreements generally give the
Company the right to sell its services and products on board ship, in return for
payment to the cruise lines of specified percentages of the Company's gross
receipts from such sales. Most of the agreements cover all of the then operating
ships of a cruise line. New arrangements must often be negotiated between the
Company and a cruise line as to ships entering service in the future. As of
March 1, 1997, pursuant to Cruise Line Concession Agreements covering a total of
55 ships being served by the Company and seven ships not yet in service, the
Company is obligated to make certain minimum payments to the cruise lines
irrespective of the amount of revenues the Company receives from passengers
under such agreements. Accordingly, the Company could be obligated to pay more
than the amount collected from passengers. As of March 1, 1997, the Company had
guaranteed total minimum payments (excluding payments based on passenger loads
applicable to certain ships served by the Company) of the following approximate
amounts for the indicated years: 1997 - $18.3 million, 1998 - $21.1 million,
1999 - $18.1 million, 2000 - $15.2 million, 2001 - $15.1 million and thereafter
- - $2.5 million
The agreements have specified terms typically ranging from one to
three years, with an average remaining term per ship of approximately two years,
as of March 1, 1997. As of that date, Cruise Line Concession Agreements that
- 7 -
expired within one year covered 25 of the 85 ships served by the Company, which
ships accounted for approximately 17% of the Company's revenues for 1996.
In addition to expiration at specified times, most of the Cruise Line
Concession Agreements provide for termination by the cruise line of the entire
agreement (or, in certain cases, as to a particular vessel) with limited or no
advance notice upon the occurrence of certain specified events, including, among
others, 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 the failure of the Company to receive certain specified passenger
satisfaction ratings. As of March 1, 1997, agreements covering a total of three
ships, eleven ships and one ship permit the cruise lines to terminate the
agreements on six months; 90 days' and 60 days' notice, respectively, for any
reason.
COMPETITION
The Company is the leading provider of hair, beauty, massage and
fitness services, and skin and hair care products on board cruise ships
worldwide. However, the Company competes with passenger activity alternatives on
cruise ships and with providers of services and products similar to those of the
Company seeking agreements with cruise lines. Gambling casinos, bars and a
variety of shops are found on almost all of the ships served by the Company. In
addition, the ships call on ports which provide opportunities for additional
shopping as well as other activities that compete with the Company for passenger
dollars. Cruise ships also typically offer swimming pools and other recreational
facilities and activities, and musical and other entertainment without
additional charge. Furthermore, a number of cruise lines currently perform the
shipboard services performed by the Company with their own personnel, and one or
more additional cruise lines could, in the future, elect to perform such
services themselves. In addition, there currently are several other entities
offering services to the cruise industry similar to those provided by the
Company. However, the Company believes that none of its competitors provides
services to a significant number of ships. Additional entities, including those
with significant resources, also could compete with Company in the future.
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. Enhanced passenger
safety standards adopted as part of the Safety of Life at Sea ("SOLAS")
Convention by the International Maritime Organization are required to be phased
in by 1997 with respect to fire safety and 2010 with respect to vessel
structural requirements. These standards have caused the retirement of certain
cruise ships and otherwise could adversely affect certain of the cruise lines,
including those with which the Company has Cruise Line Concession Agreements.
The Company and its products are subject to regulation by the Federal
Trade Commission (the "FTC") and the Food and Drug Administration ("FDA") in
the United States, as well as various other federal, state and local
regulatory authorities. The Company is also subject to similar regulations under
the laws of the United Kingdom where, in addition to that country's own laws and
regulations, certain European Union laws and regulations also apply. Applicable
regulations relate principally to the ingredients, labeling, packaging and
marketing of the Company's products. The Company believes that it is in
substantial compliance with such regulations, as well as applicable United
States federal, state, local and non-United States rules and regulations
governing the discharge of materials hazardous to the environment.
EMPLOYEES
As of March l, 1997, the Company had a total of 832 employees. Of that
number, 723 worked on cruise ships, 26 were involved in the training of Company
personnel, 32 were involved in the bottling, packaging, warehousing and shipping
of the Company's beauty products and 51 represent management and sales personnel
and support staff. Shipboard employees typically are employed pursuant to
agreements with terms of eight months. Depending on the size of the vessel and
the nature of the facilities on board, the Company has one to three managers on
board each ship it serves. Shipboard employees' compensation consists of salary
plus a commission based on the volume of revenues generated by the employee, or,
in the case of a manager, based on the performance of the team under the
- 8 -
manager's supervision. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.
ITEM 2. PROPERTIES.
The Company's corporate office is located in Nassau, The Bahamas, and
the office of CT Maritime Services, L.C., a Florida subsidiary of the Company
("Maritime Services"), is located in Miami, Florida. The Company also maintains
warehouse and shipping facilities in Fort Lauderdale, Florida. The Company's
training facilities and the administrative office of Elemis Limited are located
in Stanmore, England. The Company also maintains a product bottling, packaging,
warehousing and shipping facility in Taunton, England. All of the
above-described properties are leased, and the Company believes that alternative
sites are readily available on competitive terms in the event that any of the
leases are not renewed.
ITEM 3. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, the Company is
party to various claims and legal proceedings. Currently, there are no such
claims or proceedings which, in the opinion of management, would have a material
adverse effect on the Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1996, prior to the Company's initial
public offering of its common shares, par value (U.S.) $0.01 per share (the
"Common Shares"), the matters described below were submitted to votes of the
Company's shareholders.
On October 8, 1996, the then sole shareholder of the Company, pursuant
to a written action in lieu of a meeting, approved the Company's Non-Employee
Directors' Share Compensation Plan (the "Directors' Plan"), the reservation of
75,000 Common Shares for issuance pursuant to the Plan and certain related
matters. The Directors' Plan, as amended, is described in the definitive Proxy
Statement for the Company's 1997 annual meeting of shareholders, which
registrant intends to file with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this report (the
"Proxy Statement").
On November 10, 1996, pursuant to a written action in lieu of a
meeting, the Company's shareholders approved the Company's 1996 Share Option
and Incentive Plan (the "Incentive Plan"), the reservation of 720,000 Common
Shares for issuance pursuant to the Incentive Plan, the granting of certain
options thereunder and certain related matters. The Incentive Plan and the
grants of options to executive officers of the Company thereunder are described
in the Proxy Statement.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
executive officers of the Company.
NAME AGE POSITION
Clive E. Warshaw 54 Chairman of the Board and Chief
Executive Officer
Leonard I. Fluxman 38 Chief Operating Officer, Chief
Financial Officer and a Director
Michele Steiner Warshaw 51 Executive Vice President and a
Director
Amanda Jane Francis 30 Senior Vice President--Operations
of Steiner Transocean Limited
Sean C. Harrington 30 Managing Director of Elemis Limited
Clive E. Warshaw has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since November 1995. Mr. Warshaw joined
Steiner Group, the Company's predecessor, in 1982 and was involved in both the
land-based operations and Maritime Division of Steiner Group. Mr. Warshaw served
as the senior officer of the Maritime Division of Steiner Group from 1987 until
November 1995. Mr. Warshaw resides in the Bahamas. Mr. Warshaw is the husband of
Michele Steiner Warshaw.
- 9 -
Leonard I. Fluxman has served as Chief Operating Officer, Chief
Financial Officer and a director of the Company since November 1995. Mr. Fluxman
joined the Company in June 1994, in connection with the Company's acquisition of
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 1995.
Mr. Fluxman, a certified public accountant, was employed by Laventhal and
Horwath from 1986 to 1989, during a portion of which period he served as a
manager.
Michele Steiner Warshaw has served as a director of the Company since
November 1995. In March 1997, Ms. Warshaw was appointed Executive Vice President
of the Company. From January 1996 until such appointment, she served as the
Company's Senior Vice President--Development. Ms. Warshaw held a variety of
positions with the Company and Steiner Group since 1967, including assisting in
the design and development of shipboard facilities and services. From 1990 until
November 1995, Ms. Warshaw was involved exclusively in the Maritime Division of
Steiner Group. Ms. Warshaw resides in The Bahamas.
Amanda Jane Francis has served as Senior Vice President--Operations of
Steiner Transocean Limited ("Steiner Transocean"), the Company's principal
subsidiary, since November 1995, and of Steiner Group from June 1994
until November 1995. From 1989 until June 1994, Ms. Francis was the director of
training for Steiner Group. From 1982 until 1989, Ms. Francis held other
land-based and Maritime Division positions with Steiner Group.
Sean C. Harrington has served as Managing Director of Elemis Limited
since January 1996. 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. From 1986 until April 1991, Mr. Harrington served as United
Kingdom Sales Director for M120 Ionithermie Limited, which offers a line of
beauty products and treatments.
Executive officers are appointed annually and serve at the discretion
of the Board of Directors, subject to employment agreements between the Company
and the executive officers.
- 10 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Shares commenced trading on November 13, 1996 on
the Nasdaq National Market ("NNM") under the symbol "STNRF." The high and low
sales prices for the Common Shares as reported by the NNM from November 13,
1996 to December 31, 1996 was $20 1/4 and $13, respectively.
As of March 24, 1997, there were 93 holders of record of the Common
Shares (including nominees holding shares on behalf of beneficial owners).
The Company has not declared or paid any cash dividends on its
Common Shares since its formation and does not presently anticipate paying
any cash dividends on its Common Shares in the foreseeable future. The payment
of future dividends, if any, will be at the discretion of the Company's Board of
Directors after taking into account various factors, including the Company's
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 Bahamian IBCs, such as the
Company and its Bahamian subsidiaries, are not subject to approval by the
Central Bank of The Bahamas. However, the exemption from such approval
requirements expires in 2015. There can be no assurance that the exemption will
continue beyond such date or that the IBC Act will not be amended prior to the
year 2015 to eliminate such exemption.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below are the selected financial data for the five years
ended December 31, 1996. The statement of operations data and balance sheet data
as of and for the four years ended December 31, 1996 have been derived from the
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. The statement of operations and balance sheet data as of and
for the year ended December 31, 1992 have been derived from the unaudited books
and records of the Company. In the opinion of management, such unaudited
financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information set
forth therein. The information contained in this table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994(1) 1995 1996
---- ---- ------- ---- ----
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Services................................. $ 9,556 $11,171 $25,310 $35,764 $43,122
Products................................. 7,513 8,779 14,340 18,648 26,458
------- ------- ------- ------- -------
Total Revenues........................ 17,069 19,950 39,650 54,412 69,580
------- ------- ------- ------- -------
Cost of sales:
Cost of services......................... 9,339 9,633 21,324 29,623 33,446
Cost of products......................... 5,762 6,663 11,867 16,309 18,699
------- ------- ------- ------- -------
Total cost of sales................... 15,101 16,296 33,191 45,932 52,145
------- ------- ------- ------- -------
Gross profit.......................... 1,968 3,654 6,459 8,480 17,435
Operating expenses:
Administrative........................... 359 897 1,874 3,100 3,396
Salary and payroll taxes................. 611 1,122 1,785 1,925 3,973
Amortization of intangibles.............. - - 1,264 2,292 2,477
------- ------- ------- ------- -------
Total operating expenses.............. 970 2,019 4,923 7,317 9,846
------- ------- ------- ------- -------
- 11 -
Income from operations................ 998 1,635 1,536 1,163 7,589
Other income (expense)..................... - (100) (305) (370) (168)
------- ------- ------- ------- -------
Income before provision for income
taxes................................. 998 1,535 1,231 793 7,421
Provision for income taxes
Current.................................. 304 499 940 1,356 1,750
Deferred................................. - - (30) - -
Nonrecurring............................. - - - - 3,200
------- ------- ------- ------- -------
Total provision for income taxes....... 304 499 910 1,356 4,950
------- ------- ------- ------- -------
Net income (loss).......................... $ 694 $ 1,036 $ 321 $ (563) $ 2,471
------- ------- ------- ------- -------
Net income (loss) per share................ $ 0.11 $ 0.16 $ 0.05 $ (0.09) $ 0.38
------- ------- ------- ------- -------
Weighted average shares outstanding........ 6,372 6,372 6,372 6,372 6,470
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital............................ $ 1,457 $ 2,227 $ 2,009 $ 22 $12,595
Total assets............................... 3,328 5,558 16,230 13,320 26,656
Long-term debt............................. 787 2,012 4,775 3,020 -
Shareholders' equity....................... 1,724 2,404 5,150 3,574 16,080
(1) In June 1994, Steiner Group acquired CTO in a transaction accounted for as a purchase. Accordingly, the Company's 1994
Statement of Operations Data includes approximately seven months of operations of CTO.
- 12 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Steiner Leisure is the leading provider of spa services and skin and
hair care products on board cruise ships worldwide. The Company, through its
predecessors, commenced operations on board cruise ships approximately 35 years
ago. Pursuant to Cruise Line Concession Agreements, the Company sells its
services and products to cruise passengers in return for payments to cruise
lines, which payments are based on a percentage of revenues or a minimum annual
rental or a combination of both.
The Company commenced operations in November 1995 with the contribution
to its capital of substantially all of the assets and certain of the liabilities
of the Maritime Division of Steiner Group and all of the outstanding common
stock of CTO. The Consolidated Financial Statements of the Company in this
report for periods prior to November 1995 have been prepared from the books of
Steiner Group. Allocations for corporate overhead, payroll, facilities,
administration and other overhead were allocated to the Maritime Division using
a proportional cost method of allocation. The Company believes that such
allocations are representative of stand-alone expenses based on the Maritime
Division's operations. See Note l of Notes to Consolidated Financial Statements.
During the fourth quarter of 1996, CTO was liquidated. The liquidation
resulted in the assignment of CTO's cruise line agreements to the Company and
the assumption of CTO's other functions by the Company. The liquidation of CTO
was a taxable transaction for United States federal and state income tax
purposes, and CTO will be treated as if it had sold all of its assets for fair
market value on the date of distribution of those assets to the Company. Based
on the value of the assets of CTO as determined by an independent appraiser, the
Company has determined that CTO's United States federal and state income tax
liability resulting from the liquidation of approximately $3.2 million was
recognized in full in the fourth quarter of 1996, resulting in the Company
recognizing a loss for the quarter. The tax liability was paid out of the net
proceeds to the Company from its underwritten initial public offering of Common
Shares in November, 1996 (the "IPO"). Other than the tax liability, there was no
effect on the Company's consolidated financial statements from such liquidation.
The Company is a Bahamian IBC. The Bahamas does not tax Bahamian IBCs.
The Company believes that income from its maritime operations will be foreign
source income, which will not be subject to United States taxation. More than
75% of the Company's income for 1996 is not subject to United States income tax.
To the extent that the Company's income from non-maritime operations increases
at a rate in excess of any increase in its maritime-related income, the
percentage of the Company's income subject to tax would increase. A United
States subsidiary of the Company provides administrative services to the
maritime operations, and its earnings from such activities will generally be
subject to U.S. federal income tax at regular corporate rates (generally up to
35%) and may be subject to additional state and local income, franchise and
other taxes. Earnings from Steiner Training and Elemis Limited will be subject
to U.K. tax rates (generally up to 33%).
Effective December 1995, Nicolas D. Steiner acquired certain rights
with respect to the formulations for the "Elemis" and "La Therapie" lines of
skin and hair care products sold by the Company. Immediately thereafter, Mr.
Steiner contributed those rights to the capital of the Company. That
contribution was recorded at the historical cost of those rights of $219,000.
The Company acquired all of the shares of Elemis Limited, effective January
1996, from Nicolas D. Steiner and Clive E. Warshaw. The net book value of the
assets acquired was recorded at their historical cost of $543,000 (based on an
exchange rate of approximately 1.53 U.S. dollars to the British pound). The
transaction was not retroactively accounted for in a manner similar to a pooling
of interests due to the immateriality of Elemis Limited's operations compared to
the Company's combined operations. The Company believes that its acquisitions of
Elemis Limited and the "Elemis" and "La Therapie" product lines permit more
effective control of its manufacturing costs, inventory levels and the
development of beauty products because the operations with respect to those
products are under the direct supervision and control of Company officers. The
Company believes that the acquisitions of the "Elemis" and "La Therapie" product
lines contributed to an improvement in gross profit as a percentage of sales in
1996.
Revenues are generated by the Company from the sale of services and
products, primarily to cruise ship passengers. The Company bills its services at
rates which inherently include an immaterial charge for products used in the
- 13 -
rendering of such services. In 1996, sales of the Company's services and
products accounted for approximately 62% and 38% of the Company's revenues,
respectively.
Cost of sales includes (i) cost of service, including wages paid to
shipboard employees, rent payments to cruise lines (which are derived as a
percentage of service revenues or a minimum annual rent or a combination of
both) and other staff-related shipboard expenses and (ii) cost of product,
including wages paid to shipboard employees and rent payments to cruise lines
(which are derived as a percentage of product revenues or a minimum annual rent
or a combination of both). Cost of sales may be affected by, among other things,
sales mix, production levels, changes in prices and discounts, sales volume and
growth rate, purchasing and manufacturing efficiencies, tariffs, duties and
freight and inventory costs. Certain Cruise Line Concession Agreements provide
for increases in the percentage 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. Rental payments may also be
increased under new agreements with cruise lines that replace expiring
agreements. In general, the Company has experienced increases in rental payments
upon entering into new agreements with cruise lines. Cost of products includes
the cost of products sold through the Company's various retail methods of
distribution, including sales in shipboard facilities, through brochures
provided to cruise passengers and to land-based wholesale and retail customers.
To a lesser extent, cost of products also includes the cost of products consumed
in the rendering of services. Such amount would not be a material component of
the cost of services rendered and would not be practicable to separately
identify. Operating expenses include administrative expenses, salary and payroll
taxes and goodwill amortization related to the acquisition of CTO. Such goodwill
is being amortized over the three-year period that commenced in June 1994.
RECENTLY ISSUED ACCOUNTING STANDARDS. Beginning in 1996, the Company
implemented the provisions of Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123") in accounting for
stock-based transactions with nonemployees and, accordingly, records
compensation expense in the consolidated statements of operations for such
transactions. The Company continues to apply the provisions of APB 25 for
transactions with employees, as permitted by SFAS 123.
The Company was required to adopt Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of ("SFAS 121") in 1996. SFAS 121 establishes
accounting standards for recording the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The adoption of SFAS 121 did not have a
material impact on the Company's financial position or the results of its
operations.
- 14 -
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain
selected income statement data expressed as a percentage of revenues:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
Revenues:
Services...................................................... 63.8% 65.7% 62.0%
Products...................................................... 36.2 34.3 38.0
----- ----- -----
Total revenues............................................ 100.0 100.0 100.0
----- ----- -----
Cost of sales:
Cost of services.............................................. 53.8 54.4 48.1
Cost of products.............................................. 29.9 30.0 26.9
----- ----- -----
Total cost of sales....................................... 83.7 84.4 75.0
----- ----- -----
Gross profit.............................................. 16.3 15.6 25.0
Operating expenses:
Administrative................................................ 4.7 5.7 4.9
Salary and payroll taxes...................................... 4.5 3.5 5.7
Amortization of intangibles................................... 3.2 4.2 3.6
----- ----- -----
Total-operating expenses.................................. 12.4 13.4 14.2
----- ----- -----
Income from operations.................................... 3.9 2.2 10.8
Other income (expense)............................................. (.8) (.7) (.2)
----- ----- -----
Income before provision for income taxes........................... 3.1 1.5 10.6
Provision for income taxes:
Non-recurring................................................. - - 4.6
Current and Deferred.......................................... 2.3 2.5 2.5
----- ----- -----
Total provision for income taxes.......................... 2.3 2.5 7.1
----- ----- -----
Net income (loss).................................................. .8% (1.0)% 3.5%
===== ===== =====
1996 COMPARED TO 1995
REVENUES. Revenues increased approximately 27.9%, or $15.2 million, to
$69.6 million in 1996 from $54.4 million in 1995. Of this increase, $7.4 million
was attributable to increases in services provided on cruise ships and $7.8
million was attributable to increases in sales of products. The increase in
revenues for 1996 was primarily attributable to an increase of six in the
average number of spa ships in service, which generated greater aggregate
revenues to the Company than the aggregate revenues generated by the twelve
non-spa ships (on average) which the Company ceased to serve in 1996. The
Company had 695 shipboard staff members in service on average in 1996 and 655
shipboard staff members in service on average in 1995. Revenues per staff per
day increased by 15.8% in 1996 compared to 1995.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 77.6% in 1996 from 82.8% in 1995. This decrease was due to the
reduction in onboard expenses and an increase in revenues on ships where the
Company is subject to minimum annual rental payments.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
decreased to 70.7% in 1996 from 87.5% in 1995. This decrease was a result of
lower costs achieved through the Company's ownership of the "Elemis" and "La
Therapie" product lines (previously supplied to the Company by third parties)
and a decrease in wages allocable to product sales, partially offset by an
increase in rent allocable to product sales on certain cruise ships covered by
agreements which became effective in 1996. As a result of the ownership of the
"Elemis" and "La Therapie" product lines, inventories are now recorded at lower
- 15 -
values, representing manufacturers' cost rather than the cost of obtaining
inventories from third parties.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
increased to 14.2% in 1996 from 13.4% in 1995 primarily as a result of the
addition of salary and payroll taxes after the acquisition of Elemis Limited,
which was not owned by the Company in 1995 and increases in the compensation of
executive officers of the Company.
NON-RECURRING TAX CHARGE. In 1996 the Company had a non-recurring tax
charge of approximately $3.2 million related to the liquidation of CTO, a United
States subsidiary of the Company. The functions of CTO have been assumed by
other subsidiaries of the Company.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
an overall effective rate of 23.6% in 1996 from an overall effective rate of
171.0% in 1995 due to the impact of greater non-tax deductible amortization of
intangibles and interest in the prior period. Without such amortization of
intangibles and interest, the overall effective rate in 1996 would have been
17.2%, compared to 39.9% in 1995.
1995 COMPARED TO 1994
REVENUES. Revenues increased approximately 37.2%, or $14.7 million, to
$54.4 million in 1995 from $39.7 million in 1994. Of such $14.7 million
increase, $12.6 million was attributable to the inclusion in the Company's
financial results of a full year of operations of CTO compared to the inclusion
of seven months of CTO's operations in 1994. Of the $14.7 million increase in
total revenues, $10.4 million was attributable to an increase in services
revenue and $4.3 million was attributable to an increase in products revenue.
Both of these increases resulted from a net increase of 20 cruise ships served
and an increase of 154 staff in service on average in 1995 compared to 1994. In
addition, revenues per staff per day increased 3.8% in 1995.
COST OF SERVICES. Cost of services as a percentage of services revenue
decreased to 82.8% in 1995 from 84.3% in 1994, primarily due to on-board staff
cost controls and reduction of other costs of service which occurred in late
1994 following the consolidation of the CTO operations with those of the
Company. These cost savings were realized during the first full year of combined
operations following the CTO acquisition.
COST OF PRODUCTS. Cost of products as a percentage of products revenue
increased to 87.5% in 1995 from 82.8% in 1994, due primarily to the upgrading of
inventories, including the discontinuance of certain products, on board cruise
ships served by CTO.
OPERATING EXPENSES. Operating expenses as a percentage of revenues
increased to 13.4% in 1995 from 12.4% in 1994, primarily as a result of the
first full year of amortization of intangibles arising from the CTO acquisition
and an increase in administrative expenses as a percentage of sales caused by
higher training costs during the first full year of combined operations
following the CTO acquisition in June 1994.
OTHER INCOME (EXPENSE). Other expense increased by $65,000 primarily as
a result of interest expense being amortized for a full year on the debt assumed
in the acquisition of CTO in June 1994.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
an overall effective rate of 171% in 1995 from an overall effective rate of
73.9% in 1994 due to the impact of greater non-tax deductible amortization of
intangibles and interest in 1995 compared to 1994. Without such amortization of
intangibles and interest, the overall effective rate in 1995 would have been
39.9% compared to 35.6% in 1994.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the statement of operations data for the
four quarters of 1995 and 1996 and the percentage of revenues represented by the
line items presented. Although certain cruise lines have experienced moderate
seasonality, the Company believes that the introduction of cruise ships into
service throughout a year has mitigated the effect of seasonality on the
Company's results of operations. In addition, decreased passenger loads during
slower months for the cruise industry has not had a significant impact on the
Company's revenues.
- 16 -
However, due to the Company's dependence on the cruise industry, the Company's
revenues may in the future be affected by seasonality. The quarterly statement
of operations data set forth below were derived from Unaudited Consolidated
Financial Statements of the Company which, in the opinion of management of the
Company, contain all adjustments (consisting only of normal recurring
adjustments) necessary for the fair presentation of those statements.
FISCAL 1995
-----------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $12,980 $13,497 $13,784 $14,151
Gross profit...................................... 2,232 2,176 2,402 1,670
Administrative, salary and payroll taxes.......... 1,229 1,402 1,215 1,179
Amortization of intangibles....................... 573 573 573 573
Operating income (loss)........................... 430 201 614 (82)
Net income (loss)................................. (17) (162) 69 (453)
Net income (loss) per share....................... $ 0.00 $ (0.03) $ 0.01 $ (0.07)
Weighted Average Shares Outstanding............... 6,372 6,372 6,372 6,372
FISCAL 1996
-----------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $16,492 $16,769 $18,130 $18,189
Gross profit ..................................... 3,894 4,113 4,755 4,673
Administrative, salary and payroll taxes ......... 1,542 1,590 1,922 2,315
Amortization of intangibles ...................... 619 619 620 619
Operating income (loss) .......................... 1,733 1,904 2,213 1,739
Net income (loss) ................................ 1,183 1,334 1,719 (1,765)
Net income (loss) per share ...................... $0.19 $ 0.21 $0.27 $ (0.26)
Weighted Average Shares Outstanding .............. 6,372 6,372 6,372 6,782
LIQUIDITY AND CAPITAL RESOURCES
The business of the Company historically has been operated with cash
generated from operations, and borrowed funds have been utilized only for
acquisitions and limited capital expenditures.
In November 1996, the Company issued 828,000 of its Common Shares
pursuant to its IPO (which also included shares of a selling shareholder), which
generated net proceeds of approximately $9.7 million to the Company.
Approximately $3.4 million of the net proceeds were used to repay the remaining
outstanding indebtedness assumed by the Company in connection with the
contribution to the capital of the Company of the assets of the Maritime
Division and the common stock of CTO. Approximately $3.2 million were used to
pay the United States federal and state income tax liability incurred in
connection with the liquidation of CTO. The remaining net proceeds, in the
- 17 -
approximate amount of $3.1 million, will be used for working capital purposes
and have been invested in cash equivalents.
The Company experienced an increase in inventories of approximately
$2.6 million in 1996 from 1995 as a result of the Company's acquisition of the
"Elemis" and "La Therapie" product lines. During 1994, 1995 and 1996, cash flows
from operating activities were $1.7 million, $3.5 million and $9.0 million,
respectively. At December 31, 1995 and 1996, the Company had working capital
of approximately $22,000 and $12.6 million, respectively.
In 1994, in connection with the acquisition of CTO, $1.7 million was
transferred to the Maritime Division from the non-maritime operations of Steiner
Group and Steiner Group incurred debt of approximately $4.0 million from a
financing company. That debt, which bore interest at an imputed rate of 7.5% per
annum, was payable in equal monthly installments and was secured by cruise
business - related assets. The Company assumed the outstanding balance of such
debt, as well as certain other debt of Steiner Group, aggregating approximately
$5.7 million, in connection with the contribution to its capital of the Maritime
Division and the common stock of CTO in November 1995. The remaining unpaid
balance of that debt, aggregating approximately $3.4 million, was repaid from
the net proceeds to the Company from the IPO.
In 1995, cash in the amount of $1.1 million was transferred by the
Maritime Division to the non-maritime operations of Steiner Group to support
these operations. See Consolidated Statements of Cash Flows.
The Company believes that cash generated from operations, together with
the net proceeds received from the IPO, will be sufficient to satisfy its cash
requirements through at least the next twelve months. If the Company were to
engage in any significant acquisition, it may require additional financing from
a third party. The Company currently does not have any agreement with respect to
an acquisition.
INFLATION
The Company does not believe that inflation has had a material adverse
effect on revenues or results of operations. However, public demand for leisure
activities, including cruises, is influenced by general economic conditions,
including inflation. Periods of economic recession or high inflation,
particularly in North America where a number of cruise passengers reside, could
have a material adverse effect on the cruise industry upon which the Company is
dependent.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, the Company 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. 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."
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to other information in this report, the following
are important factors that should be considered in evaluating the Company and
its business.
- 18 -
DEPENDENCE ON CRUISE LINE CONCESSION AGREEMENTS
The Company's revenues are generated primarily on cruise ships pursuant
to Cruise Line Concession Agreements under which the Company provides services
and products paid for by cruise passengers. The Cruise Line Concession
Agreements have specified terms, typically ranging from one to three years, with
an average remaining term per ship as of March 1, 1997 of approximately two
years. As of that date, Cruise Line Concession Agreements that expire within one
year covered 25 of the 85 ships served by the Company, which ships accounted for
approximately 17% of the Company's 1996 revenues. There can be no assurance that
any such agreement will be continued after its expiration date or that any
renewal will be on similar terms. In addition, the Cruise Line Concession
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
the failure of the Company to receive specified passenger service rankings. As
of March 1, 1997, agreements covering a total of three ships, eleven ships and
one ship permit the cruise lines to terminate the agreements on six months', 90
days' and 60 days' notice, respectively, for any reason. There can be no
assurance that any of the Cruise Line Concession Agreements will not be
terminated prior to its specified termination date.
DEPENDENCE ON CRUISE INDUSTRY
The Company's revenues are generated principally from cruise ship
passengers. Therefore, the ability of the cruise industry to attract passengers
is critical to the financial condition of the Company. According to CLIA, North
American Cruises experienced an increase in passenger volume from approximately
2.2 million passengers in 1985 to approximately 4.5 million in 1993. However,
passenger volume declined to approximately 4.4 million in 1995. While, according
to CLIA, passenger volume increased to approximately 4.6 million in 1996, there
can be no assurance as to the future growth of the cruise industry. The cruise
industry is subject to significant risks as described below.
EXTRAORDINARY EVENTS. The cruise lines operate in waters and call on
ports throughout the world, including geographic regions that from time to time
experience political and civil unrest and armed hostilities. Historically, such
events have adversely affected demand for cruise vacations. Furthermore, the
activities of the cruise industry may be adversely affected by severe weather
conditions, both at sea and at ports of embarkation. Publicized operational
difficulties on cruise ships also could adversely affect the cruise industry.
REGULATION. The cruise industry is subject to significant United States
and international regulation relating to, among other things, financial
responsibility, environmental matters and passenger safety. With respect to the
latter, enhanced passenger safety standards adopted as part of the SOLAS
Convention by the International Maritime Organization are required to be phased
in by 1997 with respect to fire safety and 2010 with respect to vessel
structural requirements. These standards have caused the retirement of certain
cruise ships and otherwise could adversely affect certain of the cruise lines,
including those with which the Company has Cruise Line Concession Agreements.
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.
LOSSES AND CONSOLIDATION OF CRUISE LINES. Certain cruise lines with
which the Company has Cruise Line Concession Agreements have experienced
decreases in earnings or losses in recent years. In October 1995, Regency
Cruises, which operated five ships, ceased operations. At the time of such
cessation, the Company had an agreement to provide services on board all of
those ships. In addition, the cruise industry generally has experienced
consolidation during the past few years and, according to cruise industry
analysts, further consolidation is anticipated. Continued consolidation would
result in the Company's dependence on agreements with a smaller number of cruise
lines. Under such circumstances, terminations of even a few Cruise Line
Concession Agreements could have a material adverse effect on the Company.
- 19 -
COMPETITION AND ECONOMIC CONDITIONS. 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. Periods of
general economic recession, particularly in North America where a substantial
number of cruise passengers reside, could have a material adverse effect on the
cruise industry.
MINIMUM PAYMENTS UNDER CRUISE LINE CONCESSION AGREEMENTS
As of March 1, 1997, pursuant to Cruise Line Concession Agreements
covering a total of 55 ships being served by the Company and seven additional
ships not yet in service, the Company is obligated to make certain minimum
payments to the cruise lines irrespective of the amount of revenues the Company
receives from passengers. Accordingly, the Company could be obligated to pay
more than the amount collected from passengers. As of March 1, 1997, the Company
had guaranteed total minimum payments (excluding payments based on passenger
loads applicable to certain ships served by the Company) of the following
approximate amounts for the indicated years: 1997 - $18.3 million, 1998 - $21.1
million, 1999 - $18.1 million, 2000 - $15.2 million, 2001 - $15.1 million and
thereafter - $2.5 million.
DEPENDENCE ON CERTAIN CRUISE LINES
The Company's revenues are dependent to a significant extent on a
limited number of cruise lines. Revenues from passengers of each of the
following cruise lines accounted for more than five percent of the Company's
revenues in 1996: Carnival (including its subsidiaries, Holland America,
Seabourn and Airtours)--33%; Royal Caribbean--18%; P&O (including Princess, P&O,
and P&O European Ferries--13%); Norwegian--9% and Celebrity--6%. Those lines
also accounted for 59 of the 85 ships served by the Company as of March 1, 1997.
The loss of any of these cruise line customers could have a material adverse
effect on the Company's revenues.
DEPENDENCE ON QUALIFIED SHIPBOARD EMPLOYEES
The Company's success is dependent on its ability to recruit and retain
personnel qualified to perform the Company's shipboard services. Shipboard
employees typically are employed pursuant to agreements with terms of eight
months. There can be no assurance that the Company will be able to continue to
attract a sufficient number of applicants possessing the requisite skills
necessary to the Company's business.
DEPENDENCE ON SINGLE PRODUCT MANUFACTURER
Almost all of the Company's proprietary beauty products are produced by
a single manufacturer pursuant to an agreement terminating in 2001. In the event
such manufacturer ceased producing the Company's products, the Company believes
that suitable alternative manufacturers could be obtained, although the
transition to other manufacturers could result in significant production delays.
Any significant delay or disruption in the supply of the Company's products
could have a material adverse effect on the Company's product sales.
TAXATION OF THE COMPANY
The Company is a Bahamian IBC that, directly or indirectly, owns all of
the shares of (i) Steiner Transocean, a Bahamian IBC that operates the Company's
shipboard business; (ii) Cosmetics, a Bahamian IBC that owns the rights to the
Company's "Elemis" and "La Therapie" product lines; (iii) Maritime Services,
a Florida limited liability company that performs administrative services in
connection with the Company's maritime operations;(iv) Steiner Beauty Products,
Inc., a Florida corporation that sells skin and hair care products ("Steiner
Beauty"); (v) Steiner Training, a United Kingdom company that provides training
to the Company's shipboard personnel; and (vi) Elemis Limited, a United Kingdom
company that arranges for the production, purchasing and supplying of the
Company's "Elemis" and "La Therapie" products. Maritime Services will not be
subject to United States federal income tax, but the Company, as a result of its
ownership of interests in Maritime Services, will be subject to such tax (at
- 20 -
regular corporate rates which are generally up to 35%) with respect to the net
income of Maritime Services. In addition, the Company could be subject to the
federal branch profits tax of 30% on certain annual decreases in the United
States net equity of the Company as a result of its ownership of Maritime
Services. The income of Steiner Beauty generally will be subject to United
States federal income tax at regular corporate rates. Maritime Services and
Steiner Beauty may be subject to additional state and local income, franchise
and other taxes. Among other things, Maritime Services, pursuant to an agreement
with Steiner Transocean, receives payments from Steiner Transocean in return for
certain administrative services it provides to Steiner Transocean. The United
States Internal Revenue Service (the "Service") may assert that transactions
between Maritime Services and Steiner Transocean and between other direct and
indirect subsidiaries of the Company do not contain arm's length terms and that
income or deductions should therefore be reallocated among the subsidiaries in a
manner that increases the taxable income of Maritime Services. Any increase in
the taxable income of Maritime Services may result in the imposition of interest
and penalties.
Although Steiner Transocean is a Bahamian IBC and maintains an office
in The Bahamas, Steiner Transocean may be deemed by the Service to have a fixed
place of business in the United States as a result of its relationship with
Maritime Services. A foreign corporation generally is subject to United States
federal corporate income tax at a rate generally up to 35% on its United
States-source income and on its foreign-source income that is effectively
connected to a fixed place of business it maintains in the United States. The
Company believes that Steiner Transocean's income will be foreign-source income,
none of which will be effectively connected to a fixed place of business in the
United States. The Company's belief is based on (i) all of Steiner Transocean's
shipboard spa and salon services being performed outside the United States and
its possessions and their respective territorial waters; (ii) passage of title
and transfer of beneficial ownership of all beauty products sold by Steiner
Transocean taking place outside the United States; and (iii) the activities
performed on behalf of Steiner Transocean in the United States not constituting
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 activities described in (i) or (ii) were deemed to
occur in the United States, its possessions or their respective territorial
waters, or if the activities performed on behalf of Steiner Transocean in the
United States were deemed to constitute such a material factor. In that event,
Steiner Transocean would be subject to tax at a rate of up to 35% on such
income, rather than having no tax liability on such income under Bahamian law.
CTO was liquidated for United States federal and state income tax
purposes during the fourth quarter of 1996 and, accordingly, will be treated as
if it sold all its assets for fair market value on the date those assets are
distributed to the Company. Based on the value of CTO's assets, as determined by
an unrelated party, the Company calculated CTO's tax liability resulting from
its liquidation at approximately $3.2 million. However, if the Service were to
successfully ascribe a higher value to CTO's assets, the tax liability resulting
from CTO's liquidation could be increased correspondingly.
COMPETITION
The Company competes with passenger activity alternatives on cruise
ships and with providers of services and products similar to those of the
Company seeking agreements with cruise lines. Gambling casinos, bars and a
variety of shops are found on almost all of the ships served by the Company. In
addition, the ships call on ports which provide opportunities for additional
shopping as well as other activities that compete with the Company for passenger
dollars. Cruise ships also typically offer swimming pools and other recreational
facilities and activities, and musical and other entertainment without
additional charge. Furthermore, a number of cruise lines currently perform the
shipboard services performed by the Company with their own personnel, and one or
more additional cruise lines could, in the future, elect to perform such
services themselves or discontinue offering such services. In addition, the
Company believes that there currently are several other entities offering
services to the cruise industry similar to those provided by the Company.
However, the Company believes that no single competitor provides services to a
significant number of ships. Additional entities, including those with
significant resources, also could compete with the Company in the future.
- 21 -
REGULATION
The Company's advertising and product labeling practices in the United
States are subject to regulation by the FTC and FDA, as well as various other
federal, state and local regulatory authorities. The contents of the Company's
products are also subject to regulation in the United States. The Company
(including its packaging activities) is also subject to similar regulation under
the laws of the United Kingdom where, in addition to that country's own
laws and regulations, certain European Union laws and regulations also apply.
Compliance with federal, state and local laws and regulations and non-United
States requirements, including laws and regulations pertaining to the protection
of the environment, has not had a material adverse effect on the Company.
However, federal, state and local regulations in the United States and
non-United States jurisdictions, including increasing European Union regulation,
that are designed to protect consumers or the environment, have had and can be
expected to have, an influence on product claims, manufacturing, contents and
packaging.
POTENTIAL CLAIMS
The nature and use of the Company's products and services could give
rise to claims, including product liability, if one or more of the Company's
customers were to be injured in connection with the Company's services or suffer
adverse reactions following use of its products. Such adverse reactions could be
caused by various factors, many of which are beyond the Company's control,
including hypoallergenic sensitivity and the possibility of malicious tampering
with the Company's products. In the event of any such occurrence, the Company
could incur substantial litigation expense, receive adverse publicity and suffer
a loss of sales. The Company believes that it has insurance sufficient to cover
foreseeable liabilities in connection with its products and services.
- 22 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated Financial Statements and the Notes thereto,
together with the report thereon of Arthur Andersen LLP dated February 21, 1997,
are filed as part of this report, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 23 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors of the Company and compliance
with respect to Section 16(a) of the Securities Exchange Act of 1934 may be
found under the captions "Proposal 1--Election of Directors" and "Security
Ownership of Management and Certain Beneficial Owners" in the Proxy Statement.
Such information is incorporated herein by reference. Information with respect
to executive officers may be found under the caption "Executive Officers of the
Registrant" herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information in the Proxy Statement set forth under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of
Management and Certain Beneficial Owners" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the captions "Executive Compensation"
and "Certain Transactions" in the Proxy Statement is incorporated herein by
reference.
- 24 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following report and Consolidated Financial Statements are
filed as part of this report beginning on page F-1, pursuant
to Item 8.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1995
and 1996
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996
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 1996.
- 25 -
(c) The following is a list of all exhibits filed as a part of the
report:
EXHIBIT
NUMBER DESCRIPTION
2.1 Plan of Complete Liquidation and Dissolution of Coiffeur
Transocean (Overseas), Inc.*
3.1 Amended and Restated Memorandum of Association of Steiner
Leisure Limited**
3.2 Amended and Restated Articles of Association of Steiner Leisure
Limited
4.1 Specimen of Common Share certificate**
10.1 Employment Agreement dated as of October 17, 1996 between Steiner
Leisure Limited and Clive E. Warshaw***+
10.1(a) Amendment No. 1 to Employment Agreement between Steiner Leisure
Limited and Clive E. Warshaw dated as of March 25, 1997.+
10.2 Employment Agreement dated as of October 23, 1996 between Steiner
Leisure Limited and Leonard I. Fluxman*+
10.2(a) Amendment No. 1 to Employment Agreement between Steiner Leisure
Limited and Leonard I. Fluxman dated as of March 25, 1997.+
10.3 Employment Agreement dated as of October 21, 1996 between Steiner
Leisure Limited and Michele Steiner Warshaw***+
10.3(a) Amendment No. 1 to Employment Agreement between Steiner Leisure
Limited and Michele Steiner Warshaw dated as of March 25, 1997+
10.4 Employment Agreement dated as of October 17, 1996 between Steiner
Transocean Limited and Amanda Jane Francis***+
10.4(a) Amendment No. 1 to Employment Agreement between Steiner Transocean
Limited and Amanda Jane Frances dated as of March 25, 1997.+
10.5 Service Agreement dated as of September 18, 1996 between Elemis
Limited and Sean C. Harrington**+
10.5(a) Amendment No. 1 to Service Agreement between Elemis Limited and
Sean C. Harrington dated as of March 25, 1997+
10.6 Amended and Restated 1996 Share Option and Incentive Plan+
10.7 Amended and Restated Non-Employee Directors' Share Option Plan
(formerly, "Non-Employee Directors' Share Compensation Plan)+
10.8 Agreement dated May 29, 1996 for the sale and purchase of the
share capital of Elemis Limited among Nicolas D. Steiner,
Clive E. Warshaw, Steiner Leisure Limited and Linda D. Steiner**
10.9 Loan Note dated May 29, 1996 in connection with purchase of the
share capital of Elemis Limited issued by Steiner Leisure
Limited to Nicolas D. Steiner**
10.10 Loan Note dated May 29, 1996 in connection with purchase of the
share capital of Elemis Limited issued by Steiner Leisure Limited
to Clive E. Warshaw**
10.11 Deferred Compensation Agreement dated as of December 31, 1996
between Steiner Leisure Limited and Leonard I. Fluxman+
10.12 Split Dollar Insurance Agreement dated as of March 25, 1997
between Steiner Leisure Limited and Leonard I. Fluxman+
21.1 List of subsidiaries of Steiner Leisure Limited*
27 Financial Data Schedule
- ----------------------------------
*Previously filed with Amendment Number 4 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated herein by
reference.
- 26 -
**Previously filed with Amendment Number 2 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated herein by
reference.
***Previously filed with Amendment Number 3 to the Company's Registration
Statement on Form F-1, Registration Number 333-5266, and incorporated herein by
reference.
+ Management contract or compensatory plan or arrangement.
- 27 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 27, 1997.
STEINER LEISURE LIMITED
By:/S/ CLIVE E. WARSHAW
----------------------------
Clive E. Warshaw
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 27, 1997.
SIGNATURE TITLE(S)
/S/ CLIVE E. WARSHAW Chairman of the Board
- ------------------------------ and Chief Executive Officer
Clive E. Warshaw (Principal Executive Officer)
/S/ LEONARD I. FLUXMAN
- ----------------------------- Director and Chief Operating
Leonard I. Fluxman Officer and Chief Financial
Officer (Principal Financial
and Accounting Officer)
/S/ MICHELE STEINER WARSHAW
- ----------------------------- Director
Michele Steiner Warshaw
/S/ CHARLES D. FINKELSTEIN
- ----------------------------- Director
Charles D. Finkelstein
/S/ JONATHAN M. MARINER
- ----------------------------- Director
Jonathan M. Mariner
/S/ GRAHAM M. WALLACE
- ------------------------------ Director
Graham M. Wallace
- 28 -
STEINER LEISURE LIMITED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-5
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Steiner Leisure Limited and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Steiner Leisure
Limited (a Bahamian international business company) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Steiner Leisure Limited and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 21, 1997.
F-1
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31,
---------------------------------------
1995 1996
CURRENT ASSETS: ------------- --------------
Cash and cash equivalents
Accounts receivable $ 1,397,000 $ 13,625,000
Inventories 2,362,000 3,413,000
Other current assets 2,603,000 5,232,000
344,000 810,000
Total current assets ----------- ------------
6,706,000 23,080,000
PROPERTY AND EQUIPMENT, net
2,258,000 2,211,000
DUE FROM RELATED PARTIES
402,000 -
INTANGIBLE ASSETS, net
3,571,000 1,111,000
OTHER ASSETS
383,000 254,000
Total assets ----------- ------------
$13,320,000 $ 26,656,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses $ 1,211,000 $ 2,041,000
Current portion of capital 2,182,000 3,732,000
lease obligations
Current maturities of long-term debt 59,000 106,000
Due to related parties 2,091,000 217,000
Income taxes payable 891,000 -
250,000 4,389,000
Total current liabilities ----------- ------------
6,684,000 10,485,000
CAPITAL LEASE OBLIGATIONS, net of current ----------- ------------
portion
42,000 91,000
LONG-TERM DEBT, net of current portion ----------- ------------
3,020,000 -
COMMITMENTS (Note 9) ----------- ------------
SHAREHOLDERS' EQUITY:
Preferred shares, $.01 par value;
10,000,000 shares authorized,
none issued and outstanding
Common shares, $.01 par value; - -
20,000,000 shares authorized,
6,372,000 shares in 1995 and
7,200,000 shares in 1996 issued
and outstanding
Subscription receivable 63,720 72,000
Additional paid-in capital (100) -
Foreign currency translation adjustment 723,380 10,532,000
Retained earnings/divisional equity - 218,000
2,787,000 5,258,000
Total shareholders' equity ----------- ------------
3,574,000 16,080,000
Total liabilities and ----------- ------------
shareholders' equity
$13,320,000 $ 26,656,000
=========== ============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-2
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
-------------- -------------- -------------
REVENUES:
Services $ 25,310,000 $ 35,764,000 $ 43,122,000
Products 14,340,000 18,648,000 26,458,000
------------ ------------ ------------
Total revenues 39,650,000 54,412,000 69,580,000
------------ ------------ ------------
COST OF SALES:
Cost of services 21,324,000 29,623,000 33,446,000
Cost of products 11,867,000 16,309,000 18,699,000
------------ ------------ ------------
Total cost of sales 33,191,000 45,932,000 52,145,000
------------ ------------ ------------
Gross profit 6,459,000 8,480,000 17,435,000
------------ ------------ ------------
OPERATING EXPENSES:
Administrative 1,874,000 3,100,000 3,396,000
Salary and payroll taxes 1,785,000 1,925,000 3,973,000
Amortization of intangibles 1,264,000 2,292,000 2,477,000
------------ ----------- ------------
Total operating expenses 4,923,000 7,317,000 9,846,000
------------ ----------- ------------
Income from operations 1,536,000 1,163,000 7,589,000
------------ ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 27,000 43,000 137,000
Interest expense (332,000) (413,000) (305,000)
------------- ----------- ------------
Total other income
(expense) (305,000) (370,000) (168,000)
------------- ----------- ------------
Income before provision for
income taxes 1,231,000 793,000 7,421,000
PROVISION FOR INCOME TAXES:
Current 940,000 1,356,000 1,750,000
Deferred (30,000) - -
Nonrecurring - - 3,200,000
------------- ----------- ------------
Total provision for
income taxes 910,000 1,356,000 4,950,000
------------- ----------- ------------
Net income (loss) $ 321,000 $ (563,000) $ 2,471,000
============= =========== ============
NET INCOME (LOSS) PER SHARE $ 0.05 $ (0.09) $ 0.38
============= =========== ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,372,000 6,372,000 6,470,000
============= =========== ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-3
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Foreign Retained
Additional Currency Earnings/
Common Common Paid-In Subscription Translation Divisional
Shares Shares Capital Receivable Adjustment Equity Total
---------- ------------ ------------ --------------- -------------- ------------ ------------
BALANCE, December 31, 1993 6,372,000 $ 63,720 $ (63,620) $ (100) $ (32,000) $ 2,436,000 $ 2,404,000
Net income - - - - - 321,000 321,000
Contribution from Steiner Group
Limited - - 568,000 - - - 568,000
Divisional transfers - - - - - 1,719,000 1,719,000
Foreign currency translation
adjustment - - - - 138,000 - 138,000
--------- -------- ----------- --------- ---------- ----------- -----------
BALANCE, December 31, 1994 6,372,000 63,720 504,380 (100) 106,000 4,476,000 5,150,000
Net loss - - - - - (563,000) (563,000)
Contribution from shareholder - - 219,000 - - - 219,000
Divisional transfers - - - - - (1,126,000) (1,126,000)
Foreign currency translation
adjustment - - - - (106,000) - (106,000)
--------- ------- ----------- -------- --------- --------- -----------
BALANCE, December 31, 1995 6,372,000 63,720 723,380 (100) - 2,787,000 3,574,000
Net income - - - - - 2,471,000 2,471,000
Collection of subscription
receivable - - (100) 100 - - -
Net proceeds from sale of common
shares 828,000 8,280 9,695,720 - - - 9,704,000
Share options issued to
nonemployee - - 113,000 - - - 113,000
Foreign currency translation
adjustment - - - - 218,000 - 218,000
--------- -------- ----------- --------- --------- ---------- -----------
BALANCE, December 31, 1996 7,200,000 $ 72,000 $10,532,000 $ - $ 218,000 $5,258,000 $16,080,000
========= ======== =========== ========= ========= ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996
------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 321,000 $ (563,000) $ 2,471,000
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and amortization 1,680,000 2,776,000 3,075,000
Accretion of debt discount 210,000 304,000 177,000
Deferred tax benefit (30,000) - -
Share options issued to nonemployee - - 113,000
(Increase) decrease in-
Accounts receivable (1,187,000) 1,011,000 434,000
Inventories (351,000) 258,000 (1,874,000)
Other current assets (121,000) 221,000 (508,000)
Other assets (89,000) (48,000) 166,000
Increase (decrease) in- 791,000 (694,000) 317,000
Accounts payable
Accrued expenses 428,000 14,000 792,000
Income taxes payable - 250,000 3,835,000
----------- ----------- ------------
Net cash provided by operating
activities 1,652,000 3,529,000 8,998,000
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (223,000) (320,000) (215,000)
Acquisitions, net of cash acquired (5,458,000) - 105,000
Advances to related parties - (402,000) (2,973,000)
Collection of advances to related
parties - - 3,164,000
------------ ----------- ------------
Net cash (used in) provided by
investing activities (5,681,000) (722,000) 81,000
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (34,000) (70,000) (115,000)
Borrowings on long-term debt 4,302,000 - -
Payments on long-term debt (832,000) (2,263,000) (5,679,000)
Advances from related parties 156,000 891,000 -
Payments on advances from related
parties - (156,000) (894,000)
Transfers (to) from nonmaritime
operations 1,719,000 (1,126,000) -
Net proceeds from sale of common
shares - - 9,704,000
------------ ----------- ------------
Net cash provided by (used in)
financing activities 5,311,000 (2,724,000) 3,016,000
------------ ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 138,000 (106,000) 133,000
F-5
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,420,000 (23,000) 12,228,000
CASH AND CASH EQUIVALENTS, beginning
of period - 1,420,000 1,397,000
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period $ 1,420,000 $ 1,397,000 $ 13,625,000
============ =========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 139,000 118,000 $ 178,000
============ =========== ============
Income taxes $ 823,000 $ 1,101,000 $ 1,080,000
============ =========== ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS (See Notes 1 and 10)
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Steiner Leisure Limited ("SLL") and subsidiaries provide spa services and skin
and hair care products to passengers on board cruise ships worldwide. SLL,
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 division of a U.K.
company and an affiliate of SLL, 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 net assets of the
Maritime Division and CTO were recorded at historical cost in a manner similar
to a pooling of interests. Accordingly, the consolidated financial statements
include the operations of the Maritime Division for all periods presented and of
CTO for the period since the June 1, 1994 acquisition. See below.
When used herein, unless the context otherwise requires, "Company" refers to
SLL, its subsidiaries and its predecessor businesses conducted through the
Maritime Division and CTO.
Effective June 1, 1994, Steiner Group purchased all outstanding stock of
CTO for total consideration of $8,500,000 in a transaction accounted for as a
purchase as follows:
Purchase price $ 8,400,000
Cost of acquisition 100,000
-------------
8,500,000
Fair value of net assets acquired 1,997,000
-------------
Intangible assets $ 6,503,000
=============
A portion of the purchase price was financed through a $4,050,000 noninterest
bearing note and a noninterest bearing loan from the former shareholder of CTO
in the amount of $1,802,000. The difference between the present value of the
note and its face value of $568,000 was considered a contribution from Steiner
Group to the Company. The difference between the present value of the
seller note and its face value is reflected as a reduction of the purchase
price. Interest was imputed using the Company's weighted average borrowing rate
of 7.5% (see Note 6).
Additionally, if the gross profits of CTO exceeded $4,246,000 for the years
ended December 31, 1994 and 1995, the excess, up to a maximum amount of
$300,000, would be paid to CTO's former shareholder. As of December 31, 1996,
the maximum amount owed relating to 1994 and 1995 was paid. In connection with
the acquisition, the Company entered into a consulting agreement with the former
shareholder (see Note 9(c)). The former shareholder did not exercise control
over the day-to-day operations of CTO and "earn-out" payments were required
regardless of the former shareholder's continued association with CTO.
Accordingly, such payments have been reflected as an increase in the purchase
price.
The intangible assets generated from this acquisition primarily relate to CTO's
concession agreements with the cruise lines and the usefulness of the business
as a going concern as determined by independent appraisal. The concession
agreements did not provide for a right of renewal by CTO. The average remaining
life of these assets was approximately three years. As a result, intangible
assets are being amortized over a period of three years, the life of the
underlying assets.
F-7
On an unaudited pro forma basis, had the acquisition of CTO occurred as of the
beginning of the period presented, the Company's results of operations would
have been as follows (in thousands):
1994
-------------------------------
REVENUES NET INCOME
---------- ------------
Historical results $ 39,650 $ 321
CTO, prior to the June 1, 1994 acquisition 10,046 354
Pro forma adjustments - 113
--------- ------
Pro forma $ 49,696 $ 788
========= ======
Pro forma adjustments represent the impact of amortization, interest expense,
taxes and the elimination of duplicate administrative fees and intercompany
management fees.
For periods prior to October 31, 1995, the accompanying consolidated financial
statements have been prepared from the books and records of Steiner Group.
Accordingly, the consolidated statements of operations include allocations of
expenses which are material in amount. Such expenses include allocations for
corporate overhead, payroll, facilities, administration and other overhead which
were allocated to the Maritime Division using a proportional cost method of
allocation. This method considers the direct amounts of revenue and costs and
allocates non-direct costs to the division based on the proportion of divisional
direct costs and revenues to total cost and revenues. This method is used when
specific identification of expenses is not practicable. Management believes that
such allocations are representative of stand-alone expenses based on the
Maritime Division's operations. The divisional equity of the Maritime Division
reflects transfers of cash to and from the non-Maritime Division operations of
Steiner Group. These amounts are considered capital contributions or
distributions as they are non-interest bearing and were repaid or collected, as
the case may be, upon transfer of the net assets to SLL.
The tax provision for each period prior to October 31, 1995 reflects taxes which
would have been applicable to the divisional income if the Maritime Division
were a stand alone entity, at an estimated foreign tax rate of 33%. In the
opinion of management, the results of operations and cash flows of the Company
are properly reflected in the accompanying consolidated financial statements.
(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.
(B) CASH AND CASH EQUIVALENTS-
For purposes of the consolidated statements of cash flows, 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, 1995 and 1996,
cash and cash equivalents include interest-bearing deposits of $1,397,000 and
$11,862,000, respectively.
F-8
(C) 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,
--------------------------------------
1995 1996
------------- --------------
Finished goods $ 2,603,000 $ 3,997,000
Raw materials - 1,235,000
----------- ------------
$ 2,603,000 $ 5,232,000
=========== ============
(D) PROPERTY AND EQUIPMENT-
Property and equipment are recorded at cost. Depreciation is provided over
estimated useful lives of the respective assets on a straight-line basis.
Leasehold improvements are amortized on a straight-line basis over periods not
exceeding the respective terms of the leases.
(E) REVENUE RECOGNITION-
The Company recognizes revenues earned as services are provided and as retail
products are sold.
(F) AMORTIZATION-
Intangible assets are being amortized on a straight-line basis over 3 years,
representing the approximate remaining life of the acquired intangible assets of
CTO, its concession agreements. Subsequent to an acquisition, the Company
continually evaluates whether later events and circumstances have occurred that
indicate the remaining net book value may warrant revision or may not be
recoverable. When factors indicate that the net book value should be evaluated
for possible impairment, the Company uses an estimate of the related business's
undiscounted operating income over the remaining life of the cost in excess of
net assets of acquired businesses, in measuring whether such cost is
recoverable. At December 31, 1995 and 1996, accumulated amortization was
$3,556,000 and $6,016,000, respectively.
In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121") was issued. SFAS 121 establishes accounting standards for
recording the impairment of long-lived assets, certain identifiable intangibles
and goodwill. The Company adopted the provisions of SFAS 121 for the year ended
December 31, 1996, as required, which did not have an impact on its results of
operations and financial position.
(G) INCOME TAXES-
The Company files separate tax returns for its domestic 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 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.
F-9
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 for income tax
purposes. 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, the Company has
determined that CTO's income tax liability resulting from the liquidation is
approximately $3.2 million. This amount has been reflected as a nonrecurring
component of the provision for income taxes in the Company's consolidated
financial statements. Prior to the CTO liquidation, the Company filed a
consolidated tax return for its domestic subsidiaries.
(H) 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 translation adjustment
section of the consolidated balance sheets. Foreign currency gains and losses
resulting from transactions, including intercompany transactions are included in
results of operations.
(I) NET INCOME (LOSS) PER SHARE-
Net income (loss) per common share and common share equivalents have been
computed by dividing net income (loss) by the weighted average number of common
shares and dilutive common share equivalents outstanding, after applying the
treasury stock method. During 1994 and 1995, there were no common share
equivalents. Primary and fully diluted net income (loss) per share are the same
for all periods presented.
(J) USE OF ESTIMATES IN THE PREPARATION
OF CONSOLIDATED FINANCIAL STATEMENTS-
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS-
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of the fair
value of certain financial instruments. Cash and cash equivalents, other current
assets, other assets, accrued expenses and debt are reflected in the
accompanying consolidated financial statements at cost, which approximates fair
value. All long-term debt balances bear interest, or, if noninterest bearing,
have been discounted to approximate fair value.
(L) STOCK-BASED COMPENSATION-
Beginning in 1996, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") in accounting for stock-based transactions with nonemployees and,
accordingly, records compensation expense in the consolidated statements of
operations for such transactions. The Company continues to apply the provisions
of APB 25 for transactions with employees, as permitted by SFAS 123.
F-10
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
------------------------------------
Useful Life
in Years 1995 1996
------------- -------------- --------------
Furniture and fixtures 5-7 $ 92,000 $ 255,000
Computers and equipment 3-8 764,000 1,169,000
Leasehold improvements 3-5 2,791,000 2,883,000
------------ -------------
3,647,000 4,307,000
Less: Accumulated depreciation
and amortization (1,389,000) (2,096,000)
------------ -------------
$ 2,258,000 $ 2,211,000
============ =============
(4) ACCRUED EXPENSES:
Accrued expenses consist of the following:
DECEMBER 31,
------------------------------------
1995 1996
-------------- --------------
Operative commissions $ 685,000 $ 963,000
Guaranteed minimum rentals 604,000 1,333,000
CTO earnout 300,000 -
Bonuses 212,000 440,000
Staff shipboard accommodations 104,000 163,000
Other 277,000 833,000
------------- -------------
$ 2,182,000 $ 3,732,000
============= =============
(5) CAPITAL LEASE OBLIGATIONS:
Assets under capital leases include office equipment and onboard massage and
exercise equipment. The future minimum lease payments under capital leases and
the present value of the net minimum lease payments as of December 31, 1996 are
as follows:
YEAR AMOUNT
--------------------------------------------- ---------------
1997 $ 115,000
1998 79,000
1999 29,000
2000 3,000
-------------
Total minimum lease payments 226,000
Less: amount representing interest (29,000)
-------------
Present value of minimum lease payments 197,000
Less: Current portion of lease obligations (106,000)
-------------
$ 91,000
=============
F-11
(6) LONG-TERM DEBT:
Long-term debt consists of the following as of:
DECEMBER 31,
---------------------------
1995 1996
----------- ----------
Loan payable to the former shareholder of
CTO, original principal amount of
$1,802,000 net of unamortized discount
of $56,000 at December 31, 1995,
interest imputed at 7.5%, due in
twelve quarterly installments of $150,000,
beginning on August 31, 1994 $ 845,000 $ -
Note payable to a financing company,
original principal of $4,050,000 net of
unamortized discount of $199,000 at December
31, 1995, interest imputed at 7.5%, due in
thirty-six monthly installments of $113,000
beginning on January 7, 1995, secured by
certain assets of the Company 2,500,000 -
Note payable to a financing company, original
principal of $1,900,000, variable rate
based on the Eurodollar Rate plus 1%,
due in annual installments of $238,000,
due on April 19, 2001, secured by certain
assets of the Company 1,425,000 -
Loans payable to current and former
shareholders, non-interest bearing,
due in ten monthly installments beginning
on August 1, 1996, unsecured - 217,000
Other 341,000 -
----------- ------------
5,111,000 217,000
Less: Current maturities of long-term debt (2,091,000) (217,000)
----------- ------------
$ 3,020,000 $ -
=========== ============
The Company repaid the loan payable to the former shareholder of CTO, the notes
payable to a financing company and other long-term debt, including accrued
interest, with proceeds from the initial public offering discussed in Note 7.
(7) SHAREHOLDERS' EQUITY:
In November 1996, the Company completed an initial public offering of 5,097,240
of its common shares of which 828,000 shares were sold by the Company and
4,269,240 shares were sold by a shareholder of the Company. The offering price
was $13 per share and the proceeds to the Company, net of the underwriters'
discount and other direct costs, were approximately $9,704,000. The Company used
approximately $3,400,000 of the net proceeds to retire long-term debt. In
connection with the offering, the Company authorized an increase in the amount
of common shares to 20,000,000 and changed the par value to $.01 per share.
The Company also authorized 10,000,000 preferred shares with a par value of $.01
per share.
F-12
In connection with the initial public offering, the Board of Directors of the
Company approved a 63,720-for-1 stock split of its common shares effective
coincident with the date of the initial public offering. Such split has been
retroactively reflected in the accompanying consolidated financial statements
for all periods presented.
(8) INCOME TAXES:
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996
------------- --------------- -------------
Federal $ 503,000 $ 1,131,000 $ 3,816,000
State 30,000 72,000 332,000
Foreign 377,000 153,000 802,000
----------- ------------- -----------
$ 910,000 $ 1,356,000 $ 4,950,000
=========== ============= ===========
A reconciliation of the difference between the expected provision for income
taxes using the federal tax rate and the Company's actual provision is as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
----------- ------------- -------------
Provision using statutory federal tax rate $ 419,000 $ 270,000 $ 2,597,000
(Income) loss earned in jurisdictions
not subject to income taxes - 203,000 (1,600,000)
Amortization of intangibles 430,000 779,000 753,000
Nonrecurring provision related to the
liquidation of CTO (See Note 2(g)) - - 3,200,000
Meals and entertainment 4,000 4,000 3,000
Effect of state income taxes 20,000 48,000 46,000
Effect of foreign taxes 37,000 11,000 (49,000)
Other - 41,000 -
--------- ----------- -----------
$ 910,000 $ 1,356,000 $ 4,950,000
========= =========== ===========
(9) COMMITMENTS:
(A) CRUISE LINE CONCESSION AGREEMENTS-
The Company has entered into agreements with various cruise line companies of
varying terms. These agreements provide for the Company to pay the cruise lines
rent for use of their shipboard facilities as well as for staff shipboard
accommodations. Rental amounts are based on a percentage of revenue, a minimum
annual rental or a combination of both. Some of the minimum annual rentals are
calculated as a flat dollar amount on an annual basis while others are based
upon minimum passenger per diems for passengers actually embarked on each cruise
of the respective vessel. Staff shipboard 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
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
F-13
that provide for minimum annual rentals, the Company has guaranteed the
following amounts as of December 31, 1996:
Year Amount
----------- --------------
1997 $ 17,920,000
1998 21,104,000
1999 18,057,000
2000 15,237,000
2001 15,148,000
Thereafter 2,494,000
-------------
$ 89,960,000
=============
(B) OPERATING LEASES-
The Company leases office and warehouse space as well as office equipment and
automobiles under operating leases. The Company incurred approximately $108,000,
$127,000 and $367,000 in rental expense under noncancelable operating leases in
the years ended December 31, 1994, 1995 and 1996, respectively.
Minimum annual commitments under operating leases at December 31, 1996 are as
follows:
Year Amount
-------- --------------
1997 $ 337,000
1998 260,000
1999 244,000
2000 197,000
2001 179,000
-------------
$ 1,217,000
=============
(C) EMPLOYMENT AND CONSULTING AGREEMENTS-
The Company entered into employment agreements, effective as of January 1, 1996,
with its executive officers. The agreements provide for annual base salaries and
annual incentive bonuses based on the Company's attainment of certain earnings
levels or sales levels or at the discretion of the Board of Directors of the
Company, as the case may be.
Future minimum annual commitments under these employment agreements at December
31, 1996 are as follows:
Year Amount
-------- -------------
1997 $ 863,000
1998 863,000
1999 863,000
2000 863,000
2001 740,000
-----------
$ 4,192,000
===========
F-14
The Company has a consulting agreement with the former shareholder of CTO. Under
the terms of the consulting agreement, the consultant must devote a minimum
number of hours per week to the advancement of the Company. The agreement
provides for annual payments of $150,000 for a period of three years, commencing
June 3, 1994. The obligation with respect to the final annual payment of
$150,000 has been assumed by Steiner Group.
(D) PRODUCT SUPPLY AGREEMENT-
Effective December 1995, the Company entered into a five year agreement with its
principal products supplier, pursuant to which the Company will purchase its
requirements for its products. Such agreement provides for no specific minimum
commitments. See Note 10.
(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 intangibles 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. Subsequent to the acquisition, the Company continuously
evaluates the realizability of rights acquired to determine if impairment in the
assets' carrying value has occurred due to changes in the Company's plans
regarding sale of the products or decreases in the sales value of the underlying
products. When such impairment has occurred, appropriate write-downs are made to
state the rights at their estimated net realizable value.
Prior to December 31, 1995, the Company incurred obligations to an affiliated
entity for (i) agent processing, which involves the hiring and training of
on-board employees and (ii) certain management services. Included in
Administrative Expenses is $131,000 and $765,000 for agent processing and
management services in the years ended December 31, 1994 and 1995, respectively.
Due to/from related parties consists of the following at December 31, 1995:
AMOUNT
-----------
Elemis Limited $ 459,000
Steiner Group Limited 400,000
Other 32,000
-----------
Total due to related parties $ 891,000
===========
EJ Contracts Limited $ 153,000
Shareholders 249,000
-----------
Total due from related parties $ 402,000
===========
Due to related parties represents amounts owed to affiliates for products
purchased and agent processing. Such amounts are reflected as a current
liability as amounts are owed within a ninety-day period. In the opinion of
management, the terms of purchases from related parties are equivalent to terms
available for the purchase of products from unrelated parties. Related party
purchases were $1,234,136 and $2,300,450 for the years ended December 31, 1994
and 1995, respectively. Effective January 1, 1996, the Company purchased Elemis
Limited ("Elemis") from which products were previously purchased. See below.
F-15
Due from related parties represents advances to shareholders and affiliates. The
amounts are unsecured, noninterest bearing and have no specified repayment term
and as a result have been reflected as long-term assets. As of December 31,
1996, there were no amounts due from related parties.
Effective January 1, 1996, the Company purchased from Nicolas D. Steiner and
Clive E. Warshaw (the principal beneficial owners of the Company prior to the
initial public offering - see Note 7) 100% of the outstanding shares of Elemis.
The purchase price was funded through a note in the amount of $543,000 and
represented the net book value of the net assets acquired. As such, the
transaction was recorded at historical cost. The transaction was not accounted
for retroactively in a manner similar to a pooling of interests due to the
immateriality of Elemis's operations to the total operations of the Company.
(11) SHARE OPTIONS:
The Company has reserved 720,000 of its common shares for issuance under
its 1996 Share Option and Incentive Plan (the "Plan"). Under the Plan, incentive
share options are available to employees and nonqualified share options may be
granted to consultants, directors or employees of the Company. The terms of each
option agreement are determined by the Compensation Committee of the Board of
Directors. The exercise price of incentive share options may not be less than
fair market value at the date of grant and their terms may not exceed ten years.
The exercise price of nonqualified share options is determined by the
Compensation Committee of the Board of Directors and their terms may not exceed
ten years. A summary of share option activity through December 31, 1996 is as
follows:
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Options outstanding, December 31, 1995 - $ -
Granted 341,054 13.00
Exercised - -
Canceled - -
------- ------
Options outstanding, December 31, 1996 341,054 $13.00
======= ======
Outstanding options exercisable, December 31, 1996 25,000 $13.00
======= ======
The Company applies APB Opinion 25 and related interpretations in accounting for
options granted to employees. Accordingly, no compensation cost has been
recognized related to such grants. Had compensation cost for the Company's stock
been based on fair value at the grant dates for awards under the Plan consistent
with the methodologies of SFAS 123, the Company's 1996 net income and income per
share would have been reduced to the pro forma amounts indicated below:
Net income As reported $ 2,471,000
Pro forma $ 2,407,000
Income per share As reported $ 0.38
Pro forma $ 0.37
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
25.0%, risk-free interest rate of 6.0%, expected dividends of $0 and expected
terms of 5 years.
F-16
In 1996, the Company recorded expense of $113,000 related to 25,000 share
options granted to a nonemployee of the Company. In determining the expense to
be recorded, the Company applied the Black-Scholes model using the same
assumptions described above.
F-17