8. COMMITMENTS AND CONTINGENCIES

Information Systems and Warehouse Outsourcing Contract

We have an outsourcing contract with HP Enterprise Services (HP) to provide information technology system support and product warehousing and distribution services. During late fiscal 2011, we entered into an agreement with HP to modify the minimum required warehouse charges. Under the terms of this agreement, we moved our primary warehouse to an HP distribution facility in Des Moines, Iowa and HP agreed to list the vacated warehouse space in Salt Lake City, Utah for lease. As the warehouse space in Salt Lake City is leased, HP will proportionally reduce our minimum warehouse charge. If the warehouse becomes more than 75 percent leased, the warehouse minimum is contractually reduced to approximately $0.2 million per year from approximately $2.9 million per year. At August 31, 2012, the Salt Lake City warehouse was approximately 70 percent leased to unrelated parties and our warehouse minimum charge has been reduced accordingly. FC Organizational Products is contractually obligated to pay us a portion of our minimum fixed warehouse charges. The table below has been adjusted to reflect current warehouse minimum payments as well as amounts that we will bill to FC Organizational Products, although we are still responsible for the gross minimum fixed charges. If the current tenants are unable to continue in the warehouse, our required minimum payments may return to higher levels in future periods. The warehouse and distribution fixed charge contains an annual escalation clause based upon changes in the Employment Cost Index.

The following schedule summarizes our estimated minimum information systems support and fixed warehouse and distribution charges, without the effect of estimated escalation charges, to HP for services over the remaining life of the outsourcing contract, and the amounts receivable from FC Organizational Products (in thousands):



		Estimated		Receivable
		Gross		from FC		Estimated Net
YEAR ENDING		Minimum and		Organizational		Minimum and
AUGUST 31,		Fixed Charges		Products		Fixed Charges
2013	$	2,232	$	(61)	$	2,171
2014		2,232		(61)		2,171
2015		2,232		(61)		2,171
2016		1,382		(51)		1,331
Thereafter		-		-		-
	$	8,078	$	(234)	$	7,844

Our actual payments to HP include a variable charge for certain warehousing and distribution activities and may fluctuate in future periods based upon actual sales and activity levels.

During fiscal years 2012, 2011, and 2010, we expensed $5.0 million, $6.6 million, and $6.2 million for services provided under the terms of the HP outsourcing contract. The total amount expensed each year under the HP contract includes freight charges, which are billed to the Company based upon activity. Freight charges included in our total HP costs totaled $1.8 million, $1.6 million, and $1.5 million during the years ended August 31, 2012, 2011, and 2010.

The outsourcing contracts contain early termination provisions that we may exercise under certain conditions. However, in order to exercise the early termination provisions, we would have to pay specified penalties to HP depending upon the circumstances of the contract termination.

Purchase Commitments

During the normal course of business, we issue purchase orders to various external vendors for products and services. At August 31, 2012, we had open purchase commitments totaling $4.2 million for products and services to be delivered primarily in fiscal 2013. Other purchase commitments for materials, supplies, and other items incidental to the ordinary conduct of business were immaterial, both individually and in aggregate, to the Company’s operations at August 31, 2012.

Legal Matters and Loss Contingencies

On April 20, 2010, Moore Wallace North America, Inc. doing business as TOPS filed a complaint against FC Organizational Products, LLC (FCOP) in the Circuit Court of Cook County, Illinois, for breach of contract. The complaint also named us as a defendant and alleged that we should be liable for FCOP’s debts under the doctrine of alter ego or fraudulent transfer. On December 23, 2011, Moore Wallace North America, Inc., FCOP, and the Company entered into a settlement agreement and mutual release. Under the terms of this agreement, FCOP paid Moore Wallace North America, Inc. a specified sum to settle the complaint and reimbursed us for legal fees incurred in defense of the allegations.

During fiscal 2012, a former software vendor performed a license review and claimed that we were under licensed for certain software products in prior years. After reviewing the claims from the vendor, we determined that the amounts claimed were not consistent with our previously existing software licensing agreement. We are actively disputing these claims and believe that a settlement is reasonably possible. However, at August 31, 2012 we believe that the amount of such settlement would be immaterial to our consolidated financial statements.

We are also the subject of certain other legal actions, which we consider routine to our business activities. At August 31, 2012, we believe that, after consultation with legal counsel, any potential liability to us under these other actions will not materially affect our financial position, liquidity, or results of operations.

FC Organizational Products Store Leases

According to the terms of the agreements associated with the sale of our CSBU assets that closed in the fourth quarter of fiscal 2008, we assigned the benefits and obligations relating to the leases of most of our retail stores to FC Organizational Products. However, we remain secondarily liable to fulfill the obligations contained in the lease agreements, including making lease payments, if FCOP is unable to fulfill its obligations pursuant to the terms of the lease agreements. At August 31, 2012, the retail store minimum lease payments for which we remain secondarily liable totaled $0.3 million. Any default by FCOP in its lease payment obligations could provide us with certain remedies against FCOP. If FCOP is unable to satisfy the obligations contained in the lease agreements and we are unable to obtain adequate remedies, our results of operations and cash flows may be adversely affected.