COMMITMENTS AND CONTINGENCIES

Operating Leases:

The Company leases most of its company-owned salons and some of its corporate facilities and distribution centers under operating leases. The original terms of the salon leases range from one to 20 years, with many leases renewable for additional five to ten year terms at the option of the Company. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Rent expense for the Company's international department store salons is based primarily on a percentage of sales.

The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees.

Sublease income was $29.5, $29.1 and $28.3 million in fiscal years 2014, 2013 and 2012, respectively. Rent expense on premises subleased was $29.1, $28.7 and $27.9 million in fiscal years 2014, 2013 and 2012, respectively. Rent expense and related rental income on sublease arrangements with franchisees is netted within the rent expense line item on the Consolidated Statement of Operations. In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net income (loss). However, in limited cases, the Company charges a 10.0% mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4 million for each fiscal year 2014, 2013 and 2012 and was classified in the royalties and fees caption of the Consolidated Statement of Operations.

The Company has a sublease arrangement for a leased building the Company previously occupied. Rent expense of $0.9 million and related sublease income of $0.6 million for this arrangement is netted within the rent expense line on the Consolidated Statement of Operations. The aggregate amount of lease payments to be made over the remaining lease term are approximately $2.5 million.

The Company also guarantees approximately 10 operating leases associated with the Company's former Trade Secret concept. As the Company has not experienced and does not expect any material loss to result from these arrangements, the Company has determined the exposure to the risk of loss on these guarantees to be immaterial to the financial statements.

Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:



	Fiscal Years
	2014		2013		2012
	(Dollars in thousands)
Minimum rent	$	246,687	$	246,787	$	250,487
Percentage rent based on sales	7,164		7,566		8,938
Real estate taxes and other expenses	68,254		70,363		72,344
	$	322,105	$	324,716	$	331,769

As of June 30, 2014, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases with remaining terms of greater than one year are as follows:



Fiscal Year	Corporate leases		Franchisee leases		Guaranteed leases
	(Dollars in thousands)
2015	$	246,000	$	52,663	$	404
2016	193,779		44,600		310
2017	138,255		34,371		195
2018	90,605		24,387		85
2019	49,327		14,197		34
Thereafter	51,392		11,392		14
Total minimum lease payments	$	769,358	$	181,610	$	1,042

The Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations.

Contingencies:

The Company is self-insured for most workers' compensation, employment practice liability and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.

Litigation and Settlements:

The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

In addition, the Company was a nominal defendant, and nine current and former directors and officers of the Company were named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleged that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. The Board of Directors appointed a Special Litigation Committee to investigate the claims and allegations made in the derivative action, and to decide on behalf of the Company whether the claims and allegations should be pursued. In April 2014, the Special Litigation Committee issued a report and concluded the claims and allegations should not be pursued, and in June 2014 the Special Litigation Committee filed a motion requesting the court dismiss the shareholder derivative action.

See Note 9 for discussion regarding certain issues that have resulted from the IRS' audit of fiscal year 2010 and 2011.

During fiscal year 2014 and 2013, the Company incurred $3.3 and $1.2 million of expense in conjunction with the derivative shareholder action. During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.