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Commitments and Contingencies
 12 Months Ended
Apr. 30, 2011
Commitments and Contingencies  
Commitments and Contingencies  
NOTE 18: COMMITMENTS AND CONTINGENCIES
We offer guarantees under our POM program to tax clients whereby we will assume the cost of additional tax assessments, up to a cumulative per client limit of $5,500, attributable to tax return preparation error for which we are responsible. We defer all revenues and direct costs associated with these guarantees, recognizing these amounts over the term of the guarantee based on historical and actual payment of claims. The related current asset is included in prepaid expenses and other current assets. The related liability is included in accounts payable, accrued expenses and other current liabilities in the consolidated balance sheets. The related noncurrent asset and liability are included in other assets and other noncurrent liabilities, respectively, in the consolidated balance sheets. A loss on these POM guarantees would be recognized if the sum of expected costs for services exceeded unearned revenue. The changes in the deferred revenue liability for fiscal years 2011 and 2010 are as follows:
                         
(in 000s)        
 
Year Ended April 30,   2011     2010        
 
 
Balance, beginning of the year
  $ 141,542     $ 146,807          
Amounts deferred for new guarantees issued
    77,474       74,889          
Revenue recognized on previous deferrals
    (78,413 )     (80,154 )        
   
Balance, end of the year
  $  140,603     $  141,542          
   

In addition to amounts accrued for our POM guarantee, we had accrued $14.7 million and $14.5 million at April 30, 2011 and 2010, respectively, related to our standard guarantee which is included with our standard tax preparation services.
During fiscal year 2009, we entered into an agreement to purchase $45.8 million in media advertising between July 1, 2009 and June 30, 2013. At April 30, 2011, our remaining obligation totaled $9.5 million. We expect to make payments totaling $6.7 million during fiscal year 2012.
We have various contingent purchase price obligations for acquisitions prior to May 2009. In many cases, contingent payments to be made in connection with these acquisitions are not subject to a stated limit. We estimate the potential payments (undiscounted) for which we have not recorded a liability total $3.8 million as of April 30, 2011. We have recorded liabilities totaling $11.0 million in conjunction with contingent payments related to more recent acquisitions, with the short-term amount recorded in accounts payable, accrued expenses and deposits and the long-term portion included in other noncurrent liabilities. Our estimate is based on current financial conditions. Should actual results differ materially from our assumptions, the potential payments will differ from the above estimate.
We have contractual commitments to fund certain franchises requesting Franchise Equity Lines of Credit (FELCs). Our total obligation under these lines of credit was $85.2 million at April 30, 2011, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $37.7 million.
We are self-insured for certain risks, including, workers' compensation, property and casualty, professional liability and claims related to our POM program. These programs maintain various self-insured retentions. In all but POM, commercial insurance is purchased in excess of the self-insured retentions. We accrue estimated losses for self-insured retentions using actuarial models and assumptions based on historical loss experience. The nature of our business may subject us to error and omissions, casualty and professional liability lawsuits. To the extent that we are subject to claims exceeding our insurance coverage, such suits could have a material effect on our financial position, results of operations or liquidity.
We issued three standby letters of credit to servicers paying claims related to our POM, errors and omissions, and property and casualty insurance policies. These letters of credit are for amounts not to exceed $5.3 million in the aggregate. At April 30, 2011, there were no balances outstanding on these letters of credit.
Our self-insured health benefits plan provides medical benefits to employees electing coverage under the plan. We maintain a reserve for incurred but not reported medical claims and claim development. The reserve is an estimate based on historical experience and other assumptions, some of which are subjective. We adjust our self-insured medical benefits reserve as our loss experience changes due to medical inflation, changes in the number of plan participants and an aging employee base.
During fiscal year 2006, we entered into a transaction with the City of Kansas City, Missouri, to provide us with sales and property tax savings on the furniture, fixtures and equipment for our corporate headquarters facility. Under the transaction, the City purchased equipment by issuing $31.0 million in Industrial Revenue Bonds due in December 2015, and leased the furniture, fixtures and equipment to us for an identical term under a capital lease. The City's bonds were purchased by us. Because the City has assigned the lease to the bond trustee for our benefit as the sole bondholder, we, in effect, control enforcement of the lease against ourselves. As a result of the capital lease treatment, the furniture, fixtures and equipment will remain a component of property, plant and equipment in our consolidated balance sheets. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation. The transaction provides us with property tax exemptions for the leased furniture, fixtures and equipment. As of April 30, 2011, we have purchased $31.0 million in bonds in connection with this arrangement.
Substantially all of the operations of our subsidiaries are conducted in leased premises. Most of the operating leases are for periods ranging from three years to five years, with renewal options and provide for fixed monthly rentals. Future minimum operating lease commitments of our continuing operations at April 30, 2011, are as follows:
                 
    (in 000s)        
 
 
2012
  $ 238,167          
2013
    181,044          
2014
    128,063          
2015
    84,138          
2016
    35,942          
2017 and beyond
    67,694          
   
    $  735,048          
   

Rent expense of our continuing operations for fiscal years 2011, 2010 and 2009 totaled $272.1 million, $289.6 million and $308.1 million, respectively.
In the regular course of business, we are subject to routine examinations by federal, state and local taxing authorities. In management's opinion, the disposition of matters raised by such taxing authorities, if any, would not have a material impact on our consolidated financial statements.
We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Other guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the terms of the indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance we will ultimately prevail in the event any such claims are asserted, we believe the fair value of these guarantees and indemnifications is not material as of April 30, 2011.
DISCONTINUED OPERATIONS – SCC, previously known as Option One Mortgage Corporation, ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans.
In connection with the securitization and sale of loans, SCC made certain representations and warranties, including, but not limited to, representations relating to matters such as ownership of the loan, validity of lien securing the loan, and the loan's compliance with SCC's underwriting criteria. Representations and warranties in whole loan sale transactions to institutional investors included a "knowledge qualifier" which limits SCC liability for borrower fraud to those instances where SCC had knowledge of the fraud at the time the loans were sold. In the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan, SCC may be obligated to repurchase a loan or otherwise indemnify certain parties for losses incurred as a result of loan liquidation. Generally, these representations and warranties are not subject to a stated term, but would be subject to statutes of limitation applicable to the contractual provisions.
Claims received by SCC have primarily related to alleged breaches of representations and warranties related to a loan's compliance with the underwriting standards established by SCC at origination, borrower fraud and credit exceptions without sufficient compensating factors. Claims received since May 1, 2008 follows:
                                                                                                         
                                                                            (in millions)  
 
          Fiscal Year 2009                 Fiscal Year 2010                 Fiscal Year 2011              
    Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4     Total  
 
 
Loan Origination Year:
                                                                                                       
2005
  $ 40     $ 21     $ 1     $ –     $ –     $ 15     $ –     $ –     $ 6     $ 1     $ –     $ 1     $ 85  
2006
    89       10       111       7       2       57       4       45       100       15       29       50       519  
2007
    43       10       85       15       4       11       7       –       3       5       4       4       191  
   
Total
  $  172     $  41     $  197     $  22     $  6     $  83     $  11     $  45     $  109     $  21     $  33     $  55     $  795  
   

Note:  The table above excludes amounts related to an indemnity agreement dated April 2008, which is discussed below.
For claims received, reviewed and determined to be valid, SCC has complied with its obligations by either repurchasing the mortgage loans or REO properties, providing for the reimbursement of losses in connection with liquidated REO properties, or reaching other settlements. SCC has denied approximately 84% of all claims received, excluding resolution reached under other settlements. Counterparties could reassert claims that SCC has denied. Of claims determined to be valid, approximately 22% resulted in loan repurchases, and 78% resulted in indemnification or settlement payments. Losses on loan repurchase, indemnification and settlement payments totaled approximately $117 million for the period May 1, 2008 through April 30, 2011. Loss severity rates on repurchases and indemnification have approximated 57% and SCC has not observed any material trends related to average losses. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the consolidated balance sheets. The net balance of all mortgage loans held for sale by SCC was $12.3 million at April 30, 2011.
SCC generally has 60 to 120 days to respond to representation and warranty claims and performs a loan-by-loan review of all repurchase claims during this time. SCC has completed its review of all claims, with the exception of claims totaling approximately $79 million, which remained subject to review as of April 30, 2011. Of the claims still subject to review, approximately $25 million are from private-label securitizations, and $53 million are from monoline insurers, with the remainder from government sponsored entities. Approximately $30 million of claims under review represent requests by the counterparty for additional information related to denied claims, or are a reassertion of previously denied claims.
All claims asserted against SCC since May 1, 2008 relate to loans originated during calendar years 2005 through 2007, of which, approximately 89% relate to loans originated in calendar years 2006 and 2007. During calendar year 2005 through 2007, SCC originated approximately $84 billion in loans, of which less than 1% were sold to government sponsored entities. SCC is not subject to loss on loans that have been paid in full, repurchased, or were sold without recourse.
The majority of claims asserted since May 1, 2008, which have been determined by SCC to represent a valid breach of its representations and warranties, relate to loans that became delinquent within the first two years following the origination of the mortgage loan. SCC believes the longer a loan performs prior to an event of default, the less likely the default will be related to a breach of a representation and warranty. The balance of loans originated in 2005, 2006 and 2007 which defaulted in the first two years is $4.0 billion, $6.3 billion and $2.9 billion, respectively, at April 30, 2011.
SCC has recorded a liability for estimated contingent losses related to representation and warranty claims as of April 30, 2011, of $126.3 million, which represents SCC's best estimate of the probable loss that may occur. During the current year, payments totaling $49.8 million were made under an indemnity agreement dated April 2008 with a specific counterparty in exchange for a full and complete release of such party's ability to assert representation and warranty claims. The indemnity agreement was given as part of obtaining the counterparty's consent to SCC's sale of its mortgage servicing business in 2008. We have no remaining payment obligations under this indemnity agreement.
The recorded liability represents SCC's estimate of losses from future claims where assertion of a claim and a related contingent loss are both deemed probable. Because the rate at which future claims may be deemed valid and actual loss severity rates may differ significantly from historical experience, SCC is not able to estimate reasonably possible loss outcomes in excess of its current accrual. A 1% increase in both assumed validity rates and loss severities would result in losses beyond SCC's accrual of approximately $16 million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on the representations and warranties liability. In reality, changes in one assumption may result in changes in other assumptions, which may or may not counteract the sensitivity.
While SCC uses the best information available to it in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating probable losses are inherently difficult to estimate and require considerable management judgment. Although net losses on settled claims since May 1, 2008 have been within initial loss estimates, to the extent that the volume of asserted claims, the level of valid claims, the counterparties asserting claims, the nature of claims, or the value of residential home prices differ in the future from current estimates, future losses may be greater than the current estimates and those differences may be significant.
A rollforward of our liability for losses on repurchases for fiscal years 2011, 2010 and 2009 is as follows:
 
                         
                (in 000s)  
 
Year Ended April 30,   2011     2010     2009  
 
 
Balance as of May 1:
                       
Amount related to repurchase and indemnifications
  $ 138,415     $ 156,659     $ 193,066  
Amount related to indemnity agreement dated April 2008
    49,785       49,936       50,000  
   
                         
      188,200       206,595       243,066  
   
                         
Changes:
                       
Provisions
    –         –         –    
Losses on repurchase and indemnifications
    (12,155 )     (18,244 )     (36,407 )
Payments under indemnity agreement dated April 2008
    (49,785 )     (151 )     (64 )
   
                         
Balance as of April 30:
                       
Amount related to repurchase and indemnifications
    126,260       138,415       156,659  
Amount related to indemnity agreement dated April 2008
    –         49,785       49,936  
   
                         
    $  126,260     $  188,200     $  206,595  
   

There have been no provisions for additional losses included in the income statement since April 30, 2008.