8. 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 an additional five to ten year term 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.

During fiscal year 2005, the Company entered into a lease agreement for a 102,448 square foot building, located in Edina, Minnesota. The original lease term ends in May 2016 and the aggregate amount of lease payments to be made over the remaining lease term are approximately $3.4 million. In fiscal year 2013, the Company began consolidating its corporate headquarters and expects to exit this building during fiscal year 2014.

The Company also has guarantees associated with approximately 20 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 the guarantee of the operating leases to be immaterial to the financial statements.

Sublease income was $29.1, $28.3, and $28.4 million in fiscal years 2013, 2012 and 2011, respectively. Rent expense on premises subleased was $28.7, $27.9, and $27.9 million in fiscal years 2013, 2012 and 2011, 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 ten percent mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4, $0.4, and $0.5 million for fiscal year 2013, 2012 and 2011, respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.

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

	Fiscal Years

	2013		2012		2011
	(Dollars in thousands)
Minimum rent	$	246,787	$	250,487	$	251,417
Percentage rent based on sales		7,566		8,938		9,225
Real estate taxes and other expenses		70,363		72,344		72,417

	$	324,716	$	331,769	$	333,059

As of June 30, 2013, 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)
2014	$	248,458	$	47,958	$	912
2015		197,170		39,751		729
2016		143,330		30,798		554
2017		94,772		20,989		422
2018		53,569		11,304		221
Thereafter		56,431		9,436		125

Total minimum lease payments	$	793,730	$	160,236	$	2,963

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. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleges 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. The derivative action has been stayed by the court pending the decision of the Special Litigation Committee. We do not know when the Special Litigation Committee will complete its work, or what it will decide. 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.

During fiscal year 2013, the Company incurred $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.

During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.