Note 9 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Text Block]

(9)       COMMITMENTS AND CONTINGENCIES:

(a)       Cruise Line Agreements -

A large portion of our revenues are generated on cruise ships.  We have entered into agreements of varying terms with the cruise lines under which we provide services and products paid for by cruise passengers.  These agreements provide for us to pay the cruise line commissions for use of their shipboard facilities as well as fees for staff shipboard meals and accommodations.  These commissions are based on a percentage of revenue, a minimum annual amount or a combination of both.  Some of the minimum commissions are calculated as a flat dollar amount while others are based upon minimum passenger per diems for passengers actually embarked on each cruise of the respective vessel.  Staff shipboard meals and accommodations are charged by the cruise lines on a per staff per day basis.  We recognize all expenses related to cruise line commissions, minimum guarantees and staff shipboard meals and accommodations, generally, as they are incurred.  For cruises in process at period end, accrual is made to record such expenses in a manner that approximates a pro-rata basis.  In addition, staff-related expenses such as shipboard employee commissions are recognized in the same manner.  Pursuant to agreements that provide for minimum commissions, we guaranteed the following amounts as of December 31, 2012 (in thousands):

Year	Amount
2013	$	94,081
2014		7,800
	$	101,881

The cruise line agreements have specified terms, ranging from one to six years with an average remaining term per ship of approximately two years as of February 13, 2013 (unaudited).  Cruise line agreements that expire within one year covered 44 of the 156 ships served by us as of February 13, 2013 (unaudited).  These 44 ships accounted for approximately 15.0% of our 2012 revenues.  Revenues from passengers of each of the following cruise line companies accounted for more than ten percent of our total revenues in each of the three years ended December 31, 2012: Carnival (including Carnival, Carnival Australia, Costa, Cunard (which we began serving again in October 2010), Holland America, Ibero, P&O, P&O European Ferries (which we ceased serving in January 2010), Princess and Seabourn cruise lines): 25.7%, 29.9%, and 29.3%, and Royal Caribbean (including Royal Caribbean, Celebrity, Pullmantur and Azamara cruise lines): 14.8%, 16.7% and 17.3%.  These companies, combined, accounted for 128 of the 156 ships served by us as of February 13, 2013.  If we cease to serve one of these cruise companies, or a substantial number of ships operated by a cruise company, it could materially adversely affect our results of operations and financial condition.  We have separate agreements for each cruise line, even where they are under common ownership with other cruise lines.

(b)       Operating Leases -

We lease office and warehouse space as well as office equipment and automobiles under operating leases.  We also make certain payments to the owners of the venues where our land-based spas, schools and Ideal Image centers are located. Our land-based spas generally require rent based on a percentage of revenues.  In addition, as part of our rental arrangements for some of our land-based spas and all of our schools and Ideal Image centers, we are required to pay a minimum annual rental regardless of whether such amount would be required to be paid under the percentage rent arrangement.  Substantially all of these arrangements include renewal options ranging from three to five years.  We incurred approximately $31.6 million, $24.6 million and $18.0 million in rental expense under operating leases in 2012, 2011 and 2010, respectively.

Minimum annual commitments under operating leases at December 31, 2012 are as follows (in thousands):

Year	Amount
2013	$	24,445
2014		24,360
2015		21,111
2016		15,263
2017		12,350
Thereafter		28,361
	$	125,890

(c)       Employment and Consulting Agreements -

We have entered into one-year employment agreements, subject to renewal, with certain of our executive officers.  The agreements provide for minimum annual base salaries and annual incentive bonuses based on our attainment of certain targeted earnings levels.  The earnings levels are required to be approved for such purpose by the Compensation Committee of our Board of Directors.  We incurred approximately $4.3 million, $2.9 million and $2.7 million in compensation expense under these employment agreements in 2012, 2011 and 2010, respectively.

Future minimum annual commitments under our employment agreements at December 31, 2012 are as follows (in thousands):

Year	Amount
2013	$	3,838

(d)       Product Supply and Equipment -

We develop and sell a variety of high quality beauty products under our Elemis, La Thérapie, Bliss, Remède, Laboratoire Remède, Mandara Spa, Mandara and Jou brands.  Many of our products are produced for us by premier United States and European manufacturers.  If any of this limited number of manufacturers ceased producing for us, for any reason, these ingredients and other materials for our products, the transition to other manufacturers could result in significant production delays.  Any significant delay or disruption in the supply of our products could adversely impact our results of operations and financial condition.

Ideal Image depends on a single manufacturer as the source of its laser hair removal equipment.  Ideal Image does not have an agreement with this manufacturer which would require the manufacturer to continue providing these devices to Ideal Image.  If Ideal Image were unable to continue to acquire this equipment from this manufacturer, Ideal Image would be required to seek another manufacturer of these devices or a manufacturer of alternative devices and we cannot assure you that the devices we currently use or equivalent devices would be available at prices that are economically beneficial to us or otherwise.  Any lack of availability for more than a brief period of time of the equipment we use to provide our laser hair removal services could adversely impact our results of operations and financial condition.

(e)       Product Liability -

The nature and use of our products and services could give rise to liability, including product liability, if a customer were injured while receiving one of our services (including those performed by students at our schools) or were to suffer adverse reactions following the use of our products.  Adverse reactions could be caused by various factors beyond our control, including hypoallergenic sensitivity and the possibility of malicious tampering with our products.  Guests at our spa facilities also could be injured, among other things, in connection with their use of our fitness equipment, sauna facilities or other facilities.  If any of these events occurred, we could incur substantial litigation expense and be required to make payments in connection with settlements of claims or as a result of judgments against us.

(f)       Governmental Regulation -

We derive a large portion of our massage and beauty school revenue from students participating in the Title IV Programs.  The majority of our students rely on federal student financial assistance received under the Title IV Programs to help pay for the cost of their education.  In order to provide eligible students with access to Title IV Program funds, our schools must be eligible to participate in the Title IV Programs.   Among other things, in order to participate in the Title IV Programs, each school must be accredited by an accrediting agency recognized by the DOE, legally authorized to provide postsecondary educational programs in the state in which it is physically located, and certified by the DOE as part of an eligible institution.  These approvals, accreditations, and certifications must typically be renewed from time to time with the applicable agencies.

Consequently, each of our schools is subject to the extensive requirements of the HEA and the regulations promulgated by the DOE, as well as to the separate requirements of its respective state licensing and accrediting agencies.  These regulatory requirements cover virtually all phases of our operations, including our educational programs, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw from school, acquisitions or openings of additional schools, additions of new educational programs and changes in our corporate structure.  Any failure to comply with the HEA or DOE regulations, state laws or regulations, or accrediting body standards could subject any or all of our schools to loss of eligibility to participate in the Title IV Programs, loss of state licensure or accreditation, monetary liabilities with respect to funds determined to have been improperly disbursed, fines or other sanctions.  Because the DOE periodically revises its regulations and changes its interpretations of existing laws and regulations, we cannot predict with certainty how Title IV Program requirements will be applied in all circumstances or whether each of our schools will be able to comply with all of the requirements in the future.  Because a majority of our students pay their tuition with financial assistance from the Title IV Programs, the continued eligibility to participate in these programs is critical to the success of our schools.  Increased regulation in recent years related to the operations of our schools has required us to increase the amount of funds we spend on compliance-related matters.  Any loss or limitation on the eligibility of our schools to participate in the Title IV Programs could adversely affect our schools' results of operations and financial condition.

An institution participating in the Title IV Programs must comply with certain measures of financial responsibility under DOE regulations.  Among other things, an institution must achieve an acceptable composite score, which is calculated by combining the results of three separate financial ratios.  If an institution's composite score is below the minimum requirement, but above a designated threshold level, such institution may take advantage of an alternative that allows it to continue to participate in the Title IV Programs for up to three years under certain "zone alternative" requirements, including additional monitoring procedures and the heightened cash monitoring or the reimbursement methods of payment (the latter method would require the school to cover the costs of a student's enrollment and then seek reimbursement of such costs from the DOE).  If an institution's composite score falls below this threshold level or is between the minimum for an acceptable composite score and the threshold for more than three consecutive years, the institution will be required to post a letter of credit in favor of the DOE in order to continue to participate in the Title IV Programs and may be subject to zone alternative and other requirements.  The DOE measures the financial responsibility of all of our schools based on the composite score of the schools' parent company, Steiner Education Group, Inc., rather than each school individually.  We expect the DOE to continue to evaluate the financial responsibility of our schools, including our schools acquired from Cortiva, in the same manner.

An institution which fails to satisfy the 90/10 Rule for one fiscal year is placed on provisional certification and may be subject to other sanctions.  If one of our institutions fails to comply with the 90/10 Rule, the institution (including its main campus and all of its additional locations) could lose its eligibility to participate in the Title IV Programs.  Certain HEA-related relief from the 90/10 Rule expired on July 1, 2011.  Since the expiration of such relief, we have experienced adverse effects on our ability to comply with this rule and we expect to experience an increase to such adverse effects on our ability to comply with this rule in the future.  Moreover, if Congress or the DOE were to modify the 90/10 rule by lowering the 90% threshold, counting other federal funds in the same manner as Title IV funds in the 90/10 calculation, or otherwise amending the calculation methodology (each of which has been proposed by some Congressional members in proposed legislation), these or other changes to the 90/10 Rule could adversely affect our ability to the comply with the 90/10 Rule.

The operation of our schools is required to be authorized by applicable agencies of the states in which they are located.  These authorizations vary from state to state but, generally, require schools to meet tests relating to financial matters, administrative capabilities, educational criteria, the rates at which students complete their programs and the rates at which students are placed into employment.

Accreditation by an accrediting agency recognized by the DOE is also required for an institution to participate in the federal student financial aid programs.  Requirements for accreditation vary substantially among the applicable agencies.  Loss of state authorization or accreditation by one or more of our campuses could have a material adverse effect on our student population and revenue.

(g)       Legal Proceedings -

From time to time, in the ordinary course of business, we are a party to various claims and legal proceedings.  Currently, other than as described below, there are no such claims or proceedings which, in the opinion of management, could have a material adverse effect on our results of operations, financial condition and cash flows.

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) 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.  The parties to this action have agreed to settle the matter.  Because of the putative class action nature of the lawsuit, that agreement is subject to approval by the court.  While the court has issued a preliminary approval of the settlement agreement, final court approval has not yet been granted.  Management currently believes that the amount of such liability would not be material to the Company's financial condition, results of operations and cash flows.