2

(Continued)

3

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.

4

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

5

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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(Continued)

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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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The accompanying unaudited condensed consolidated financial statements include the condensed consolidated balance sheets, statements of income, comprehensive income and cash flows of Steiner Leisure Limited (including its subsidiaries, "Steiner Leisure," the "Company," "we" and "our"). All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC's rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations for the three and nine months ended September 30, 2013 and cash flows for the nine months then ended are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Annual Report"). The December 31, 2012 Condensed Consolidated Balance Sheet included herein was extracted from the December 31, 2012 audited Consolidated Balance Sheet included in the 2012 Annual Report.

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") 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. Significant estimates include the assessment of the realization of accounts receivable, accounts receivable - students, recovery of long-lived assets and goodwill and other intangible assets, determination of deferred income taxes, including valuation allowances, useful lives of definite-lived intangible assets and property and equipment, determination of fair value of assets and liabilities in purchase price allocations, the determination of gift certificate breakage revenue, assumptions related to the determination of stock-based compensation, for Ideal Image Center revenue and related deferred customer acquisition costs, the determination of the average number of treatments provided, and the allocation of arrangement consideration between services and products for treatment packages that include our products.

Steiner Leisure Limited, a worldwide provider and innovator in the fields of beauty, wellness and education, was incorporated in the Bahamas as a Bahamian international business company in 1995. In our facilities on cruise ships, at land-based spas, including at resorts and urban hotels, luxury Elemis® day spas, Bliss® premium urban day spas and at our Ideal Image centers (the "Centers"), we strive to create a relaxing and therapeutic environment where guests can receive beauty and body treatments of the highest quality. Our services include traditional and alternative massage, body and skin treatment options, fitness, acupuncture, medi-spa treatments and laser hair removal. We also develop and market premium quality beauty products which are sold at our facilities, through e-commerce and third party retail outlets and other channels. We also operate 12 post-secondary schools (comprised of a total of 31 campuses) located in Arizona, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, Pennsylvania, Texas, Utah, Virginia and Washington.

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Our significant accounting policies were described in Note 2 to our consolidated financial statements included in our 2012 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the nine months ended September 30, 2013, unless as described below.

We hold variable interests in physician-owned entities that provide medical services to the Centers' guests. These entities were set up for regulatory compliance purposes. We bear the benefits and risks of loss from operating those entities through contractual agreements. Our condensed consolidated financial statements include the operating results of those entities.

Inventories, consisting principally of beauty products, are stated at the lower of cost (first-in, first-out) or market. Manufactured finished goods include the cost of raw material, labor and overhead. Inventories consist of the following (in thousands):

We recognize Centers' sales in relation to laser hair removal treatment packages sold at Company-owned and at physician-owned clinic locations. The packages provide for five initial treatments which occur at up to ten-week intervals and generally allow for up to four additional treatments, as necessary, to obtain the desired results. Centers' sales service revenue is recognized evenly over the average number of treatments provided, and is included in Services Revenues in our consolidated statements of income. Remaining revenue, net of related financing fees, relating to unperformed services is included in deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2013, some of our treatment packages included certain of our products. Treatment packages that are bundled with our products are considered multiple deliverable arrangements and, hence, require us to allocate revenue between services and products using either vendor specific objective evidence, third party evidence of selling price, or the best estimate of selling price. Because both our treatments and products are offered for sale separately, we allocate consideration received for treatment packages based upon their relative stand-alone selling prices. Revenues for the treatment component are deferred and recognized as discussed above. Revenues for the products are recognized when they are delivered. All costs directly related to the operation of both Company-owned and physician-owned center locations, such  as rent of the facilities, maintenance costs of our equipment, depreciation expense related to leaseholds and equipment, payroll costs of sales personnel and service providers and advertising costs are included in Cost of Services and certain of these costs are included in Cost of Products to the extent they relate to the sale of products in our condensed consolidated statements of income. All corporate related payroll and other corporate related expenses are included in Salary and Payroll and Administrative expenses in our condensed consolidated statements of income. 

We also receive royalties from Ideal Image franchisees. These royalties from franchised Ideal Image Center operations are recognized in the period earned and are recorded in Services Revenues in our condensed consolidated statements of income. There are no related direct costs associated with these royalties. 

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A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. The majority of our income is generated outside of the United States. We believe a large percentage of our shipboard services income is foreign-source income, not effectively connected to a business we conduct in the United States and, therefore, not subject to United States income taxation.

For currency exchange rate purposes, assets and liabilities of our foreign subsidiaries are translated at the rate of exchange in effect at the balance sheet date. Equity and other items are translated at historical rates and income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected in the Accumulated Other Comprehensive Loss caption of our Condensed Consolidated Balance Sheets. Foreign currency gains and losses resulting from transactions, including intercompany transactions, are included in the results of operations. The transaction gains (losses) included in the Administrative expenses caption of our Condensed Consolidated Statements of Income were approximately $1.1 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively, and approximately ($0.4 million) and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The transaction gains (losses) in the Cost of Products caption of our Condensed Consolidated Statements of Income were approximately ($1.1 million) and ($0.5 million) for the three months ended September 30, 2013 and 2012, respectively, and approximately ($0.3 million) and ($1.1 million) for the nine months ended September 30, 2013 and 2012, respectively.

Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common share equivalents such as share options and restricted share units. Reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):

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The Company issued approximately 7,000 of its common shares upon the exercise of share options during the three months ended September 30, 2013 and issued approximately 30,000 and 16,000 of its common shares upon exercise of share options during the nine months ended September 30, 2013 and 2012, respectively.

The Company granted approximately 30,000 and 11,000 restricted share units during the nine months ended September 30, 2013 and 2012, respectively. No other stock-based compensation was granted during the nine months ended September 30, 2013 and 2012, respectively.

In January 2013, we adopted authoritative guidance issued in 2012 regarding the periodic impairment testing of indefinite-lived intangible assets.  The new guidance allows an entity to assess qualitative factors to determine if it is more-likely-than-not that indefinite-lived intangible assets might be impaired and, based on this assessment, to determine whether it is necessary to perform the quantitative impairment tests.  The adoption of this guidance did not have an impact on our consolidated financial statements.

In March 2013, we adopted authoritative guidance regarding the presentation of amounts reclassified from accumulated other comprehensive income (loss) to net income.  The new guidance requires an entity to present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income (loss) based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest expense).  We elected to present this information in a single note. See Note 7. Changes in Accumulated Other Comprehensive Loss for our disclosures required under this guidance.

In March 2013, amended guidance was issued regarding the release of cumulative translation adjustments into net income.  The new guidance provides clarification of when to release the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity.  This guidance will be effective for our interim and annual reporting periods beginning after December 15, 2013.  The adoption of this newly issued guidance is not expected to have a material impact on our consolidated financial statements, but will have an impact on the accounting for future sales of investments or changes in control of foreign entities.

US GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy.  The three levels of inputs used to measure fair value are as follows:

• Level 1 - Quoted prices in active markets for identical assets and liabilities.

• Level 2 - Observable inputs other than quoted prices included in Level 1. This includes dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

In accordance with US GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis and nonrecurring basis. We have no assets or liabilities that are adjusted to fair value on a recurring basis. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2013, or 2012.

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Cash and cash equivalents is reflected in the accompanying Condensed Consolidated Financial Statements at cost, which approximated fair value estimated using Level 1 inputs as they are maintained with high-quality financial institutions and having original maturities of three months or less. The fair value of our term loan, which is the same as the carrying value, was estimated using Level 2 inputs based on quoted prices for those or similar instruments. The fair value of the term loan was determined using applicable interest rates as of September 30, 2013 and December 31, 2012 and approximate the carrying value of such debt.

A significant portion of our revenues are generated from our cruise ship spa operations. Certain cruise lines, and, as a result, Steiner Leisure, have experienced varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, generally the third quarter and holiday periods result in the highest revenue yields for us. Our product sales are strongest in the third and fourth quarters as a result of the December holiday shopping period.

From time to time, in the ordinary course of business, we are a party to various claims and legal proceedings. There have been no material changes with respect to legal proceedings previously reported in our annual report on Form 10-K for the year ended December 31, 2012, except as follows:

As previously reported, in April 2011, a complaint was filed in California Superior Court, Los Angeles Central Division, against Bliss World LLC and related entities (Yvette Ferrari v. Bliss World LLC, et al), seeking damages on behalf of an employee of Bliss claiming violations of various California requirements relating to the payment of wages. The action was presented as a class action. In July 2013, the parties to this action settled the matter for an amount that was not material to the Company's financial condition, results of operations or cash flows.

On June 21, 2013, we entered into an amendment to our credit facility. As a result, among other things, our restrictive payment limits were increased, certain of our financial covenants were modified, we received improved pricing on our interest rate and the maturity date of the term loan was extended from November 1, 2016 to June 21, 2018. In connection with entering into the amendment, we incurred $0.4 million of lender and third-party costs.

On February 27, 2013, the Board of Directors (the "Board") of Steiner Leisure approved a new share repurchase plan under which up to $100.0 million of Steiner Leisure common shares can be purchased. In connection with the new repurchase authorization, the repurchase plan approved by the Board in February 2008 was terminated. During the nine months ended September 30, 2013 and 2012, respectively, we purchased approximately 61,000 and 723,000 shares, with a value of approximately $2.9 million and $33.2 million, respectively. Of those shares purchased, 12,000 and 21,000 shares for the nine months ended September 30, 2013 and 2012, respectively, were surrendered by our employees in connection with the vesting of restricted share units and used by us to satisfy payment of our minimum federal income tax withholding obligations in connection with these vestings. These share purchases were outside of our repurchase plan.

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The following table presents the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2013 (in thousands):

All amounts are after tax. Amounts in parenthesis indicate debits.

We operate in four reportable segments: (1) Spa Operations, which sells spa services and beauty products onboard cruise ships, on land at hotels and at day spas; (2) Products, which sells a variety of high quality beauty products to third parties through channels other than those above; (3) Schools, which offers programs in massage therapy and skin care; and (4) Laser Hair Removal, which sells laser hair removal services and certain of our products. Amounts included in "Other" include various corporate items such as unallocated overhead and intercompany transactions.

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Included in Spa Operations, Products, Laser Hair Removal and Schools is goodwill of $51.0 million, $23.7 million, $195.1 million and $58.4 million, respectively, as of September 30, 2013 and December 31, 2012.

Products segment revenues excluding intercompany transactions was $35.8 million and $30.9 million for the three months ended September 30, 2013 and 2012, respectively, and $99.3 million and $89.8 million for the nine months ended September 30, 2013 and 2012, respectively.

Set forth below is information relating to countries in which we have material operations. We are not able to identify the country of origin for the customers to which revenues from our cruise ship operations relate. Geographic information is as follows (in thousands):

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Overview

Steiner Leisure Limited is a worldwide provider and innovator in the fields of health, wellness and education.  We operate our business through four reportable segments: Spa Operations, Products, Schools and Laser Hair Removal.

Through our Spa Operations segment, we offer massages and a variety of other body treatments, as well as a broad variety of beauty treatments to women, men and teenagers on cruise ships and at land-based spas. We conduct our activities pursuant to agreements with cruise lines and owners of our land-based venues that, generally, give us the exclusive right to offer these types of services at those venues. The cruise lines and land-based venue owners, generally, receive compensation based on a percentage of our revenues at these respective locations and, in certain cases, a minimum annual rental or combination of both.

Through our Products segment, we develop and sell a variety of high quality beauty products under our Elemis, La Thérapie™, Bliss, Remède® and Laboratoire Remède® brands, and also sell products of third parties, both under our packaging and labeling and otherwise. The ingredients for these products are produced for us by several suppliers, including premier European manufacturers. We sell our products at our shipboard and land-based spas pursuant to the same agreements under which we provide spa services at those locations, as well as through third party outlets and our catalogs and websites.

Through our Schools segment, we own and operate 12 post-secondary schools (comprised of a total of 31 campuses) located in Arizona, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, Pennsylvania, Texas, Utah, Virginia and Washington.  These schools offer programs in massage therapy and, in some cases, beauty and skin care, and train and qualify spa professionals for health and beauty positions. Among other things, in conjunction with skin care programs, we train the students at our schools in the use of our Elemis, Bliss and La Thérapie products. We offer full-time programs as well as part-time programs for students who work or who otherwise desire to take classes outside traditional education hours. Revenues from our massage and beauty schools, which consist almost entirely of student tuition payments, are derived to a significant extent from the proceeds of loans issued under the Title IV Programs, authorized by Title IV of the Higher Education Act of 1965 (the "HEA") and administered by the U.S. Department of Education (the "DOE"). We must comply with a number of regulatory requirements in order to maintain the eligibility of our students and prospective students for loans under these programs. New Rules of the DOE, effective July 1, 2011, increased our regulatory compliance obligations, have adversely affected our Schools segment's enrollments and continue to adversely affect our enrollment and our results of operations.

Through our Laser Hair Removal segment, we offer a non-invasive procedure for the removal of unwanted facial and body hair in a clinical setting. Ideal Image is a leader in the growing consumer healthcare category of laser hair removal. Ideal Image is subject to regulation in the states in which its facilities are located, related to, among other things, corporate entities such as Ideal Image "practicing medicine" and to the provision of the laser hair removal services.

We are continuing to expand our Laser Hair Removal segment. We anticipate opening a number of Centers in each of calendar years 2013, 2014 and 2015. These Centers will either be company-owned or physician-owned, depending on the jurisdiction in which the respective Center will be opened. In connection with the opening of each new Center, we incur expenses, among other things, for leasehold improvements, marketing and training of new personnel. Accordingly, even new Centers that are successful do not become cash flow positive until several months after opening.

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Even after a new Center becomes cash flow positive, however, under applicable  US GAAP rules,  it takes an additional period of time for the positive cash flow (assuming the Center is successful) to be reflected in the operating income of the segment with respect to that Center. This is primarily because the services for which payments are received are not fully performed for a period of several months and revenue cannot be recognized until the related treatment is performed. Accordingly, operating income of the Laser Hair Removal segment trails behind the related cash flow of the segment. This applies to both new Centers and existing Centers. As more new Centers are opened, and, therefore, each new Center becomes a smaller portion of the segment as a whole, the trailing of operating income behind the related cash flows will decline because established Centers typically have a regular base of customers and receive new customers at a more regular rate than newly opened Centers and, therefore, have a stronger revenue base than new Centers.

A significant portion of our revenues are generated from our cruise ship operations. Accordingly, our success and our growth are dependent to a significant extent on the success and growth of the travel and leisure industry in general, and on the cruise industry in particular. Our hotel land-based spas are dependent on the hospitality industry for their success. These industries are subject to significant risks, described in our Annual Report on Form 10-K for the year ended December 31, 2012, that could affect our results of operations.

The success of the cruise and hospitality industries, as well as our business, is impacted by economic conditions. The economic slowdown experienced in recent years in the United States and other world economies have created a challenging environment for the cruise and hospitality industries and our business, including our retail beauty products sales. While economic conditions have shown some improvement, a number of European countries continue to experience adverse economic conditions related to unpaid debt obligations of certain of those countries. The impact on consumers of periodic increases in fuel costs have added to the continuation of this economic turmoil.

As a consequence of these economic conditions, our results of operations and financial condition for 2011, 2012 and the first nine months of 2013 were adversely affected. A worsening of the more severe aspects of the economic slowdown or continuing increases in fuel prices could have a material adverse effect on our services and product sales.

The cruise industry also is subject to risks specific to that industry. Among other things, the highly publicized January 2012 accident involving the Costa Concordia adversely affected cruise ship bookings in 2012 and the highly publicized February 2013 Carnival Triumph fire and other recent mishaps involving cruise vessels have adversely affected cruise ship bookings in 2013. This has adversely affected us because cruise lines are discounting fairs in order to attract passengers, which has resulted in an increased number of passengers who are less likely to spend in our spas.

Other factors also can adversely affect our financial results. The U.S. Dollar has been weak in recent years against the U.K. Pound Sterling and the Euro. This weakness affected our results of operations because we pay for the administration of recruitment and training of our shipboard personnel and the ingredients and manufacturing of many of our products in U.K. Pounds Sterling and Euros, respectively.

Key Performance Indicators

Spa Operations. A measure of performance we have used in connection with our periodic financial disclosure relating to our cruise line operations is that of revenue per staff per day. In using that measure, we have differentiated between our revenue per staff per day on ships with large spas and other ships we serve. Our revenue per staff per day has been affected by the continuing requirement that we place additional non-revenue producing staff on ships with large spas to help maintain a high quality guest experience. We also utilize, as a measure of performance for our cruise line operations, our average revenue per week. We use these measures of performance because they assist us in determining the productivity of our staff, which we believe is a critical element of our operations. With respect to our land-based spas, we measure our performance primarily through average weekly revenue over applicable periods of time.

Schools. With respect to our massage and beauty schools, we measure performance primarily by revenues.

Products. With respect to sales of our products, other than on cruise ships and at our land-based spas, we measure performance by revenues.

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Laser Hair Removal. With respect to our laser hair removal Centers, we measure performance primarily through average weekly revenue and number of new locations.

We seek to grow our business by attempting to obtain contracts for new cruise ships brought into service by our existing cruise line customers and for existing and new ships of other cruise lines, seeking new venues for our land-based spas, developing new products and services, seeking additional channels for the distribution of our retail products and seeking to increase the student enrollments at our post-secondary massage and beauty schools, including through the opening of new school campuses, and by opening new Ideal Image centers. We also consider growth, among other things, through appropriate strategic transactions, including acquisitions and joint ventures.

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances.

Our critical accounting policies are included in our 2012 Annual Report. We believe that there have been no significant changes during the nine months ended September 30, 2013 to the critical accounting policies disclosed in our 2012 Annual Report, except as described below.

We recognize Centers' sales in relation to laser hair removal treatment packages sold at Company-owned and at physician-owned clinic locations. The packages provide for five initial treatments which occur at up to ten-week intervals and generally allow for up to four additional treatments, as necessary, to obtain the desired results. Centers' sales service revenue is recognized evenly over the average number of treatments provided, and is included in Services Revenues in our consolidated statements of income. Remaining revenue, net of related financing fees, relating to unperformed services is included in deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2013, some of our treatment packages included certain of our products. Treatment packages that are bundled with our products are considered multiple deliverable arrangements and, hence, require us to allocate revenue between services and products using either vendor specific objective evidence, third party evidence of selling price, or the best estimate of selling price. Because both our treatments and products are offered for sale separately, we allocate consideration received for treatment packages based upon their relative stand-alone selling prices. Revenues for the treatment component are deferred and recognized as discussed above. Revenues for the products are recognized when they are delivered. All costs directly related to the operation of both Company-owned and physician-owned center locations, such as rent of the facilities, maintenance costs of our equipment, depreciation expense related to leaseholds and equipment, payroll costs of sales personnel and service providers and advertising costs are included in Cost of Services and certain of these costs are in Cost of Products to the extent they relate to the sale of products in our consolidated statements of income. All corporate related payroll and other corporate related expenses are included in Salary and Payroll and Administrative expenses in our consolidated statements of income. 

We also receive royalties from Ideal Image franchisees. These royalties from franchised Ideal Image Center operations are recognized in the period earned and are recorded in Services Revenues in our consolidated statements of income. There are no related direct costs associated with these royalties. 

Refer to Note 3(h) to the Condensed Consolidated Financial Statements in this report for a discussion of recent accounting pronouncements.

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The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of revenues: