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 $30.9, $29.5 and $29.1 million in fiscal years 2015, 2014 and 2013, respectively. Rent expense on premises subleased was $30.5, $29.1 and $28.7 million in fiscal years 2015, 2014 and 2013, 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 (loss) income. 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 2015, 2014 and 2013 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. The aggregate amount of lease payments to be made over the remaining lease term are approximately $7.1 million.

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



	Fiscal Years
	2015		2014(1)		2013(1)
	(Dollars in thousands)
Minimum rent	$	236,137	$	246,844	$	247,258
Percentage rent based on sales	8,238		7,164		7,566
Real estate taxes and other expenses	64,750		68,254		70,363
	$	309,125	$	322,262	$	325,187

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(1)	Fiscal years 2014 and 2013 have been revised. See Note 1 to the Consolidated Financial Statements.

As of June 30, 2015, 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
	(Dollars in thousands)
2016	$	235,404	$	58,789
2017	184,069		49,575
2018	131,968		39,132
2019	88,495		28,747
2020	50,403		16,132
Thereafter	39,159		15,065
Total minimum lease payments	$	729,498	$	207,440

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 September 2014 the case was dismissed by court order. In a collateral proceeding, the plaintiff filed a motion for an award of fees in November 2014. The Company has opposed the motion and this collateral proceeding is pending. During fiscal years 2015, 2014 and 2013, the Company incurred $0.7, $3.3 and $1.2 million of expense in conjunction with the derivative shareholder action. During fiscal year 2015, the Company received insurance reimbursement of $1.0 million for legal fees previously paid in conjunction with the derivative shareholder action.

See Note 9 for discussion regarding certain issues that have resulted from the IRS' audit of fiscal year 2010 and 2011. In addition, the Company is currently under payroll tax examination by the IRS for calendar years 2012 and 2013. Final resolution of these issues is not expected to have a material impact on the Company’s financial position.