HR Block 2014 Annual Report Download - page 27

H&R Block, Inc. | 2014 Form 10-K 19
for their own or others' advantage. In addition, third-parties may allege we are infringing on their intellectual property,
and we may face intellectual property challenges from other parties. We may not be successful in defending against
any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes and, in that event,
we could lose significant revenues, incur significant license, royalty or technology development expenses, or pay
significant monetary damages.
Failure to maintain sound business relationships with our franchisees may have a material adverse effect on our
business and our consolidated financial position, results of operations and cash flows.
Our financial success depends in significant part on our ability to maintain sound business relationships with our
franchisees. The support of our franchisees is also critical for the success of our marketing programs and any new
strategic initiatives we seek to undertake. Deterioration in our relationships with our franchisees or the failure of our
franchisees to support our marketing programs and strategic initiatives could have a material adverse effect on our
business and our consolidated financial position, results of operations and cash flows.
Our international operations are subject to risks which may harm our business and our consolidated financial
position, results of operations and cash flows.
We have international tax preparation operations, including in Canada, Australia, India, and Brazil, and may consider
expansion opportunities in additional countries in the future. In addition to uncertainty about our ability to generate
revenues from these foreign operations and expand into other international markets, there are risks inherent in doing
business internationally, including: (1) changes in trade regulations; (2) difficulties in managing foreign operations as
a result of distance, language, and cultural differences; (3) profit repatriation restrictions, and fluctuations in foreign
currency exchange rates; (4) geopolitical events, including acts of war and terrorism, and economic and political
instability; (5) compliance with U.S. laws such as the Foreign Corrupt Practices Act and other applicable foreign anti-
corruption laws; (6) compliance with U.S. and international laws and regulations concerning privacy, data protection
and data retention; and (7) risks related to other government regulation or required compliance with local laws. These
risks inherent in our international operations and expansion increase our costs of doing business internationally and
could have a material adverse effect on our business and our consolidated financial position, results of operations
and cash flows.
RISKS RELATING TO DISCONTINUED OPERATIONS
SCC is subject to potential contingent losses related to representation and warranty claims, which may have an
adverse effect on our business and our consolidated financial condition, results of operations and cash flows. SCC
has accrued an estimated liability related to these contingent losses that may not be adequate.
SCC remains exposed to losses relating to mortgage loans it previously originated. Mortgage loans originated by SCC
were sold either as whole loans to single third-party buyers or in the form of residential mortgage-backed securities
(RMBSs).
In connection with the sale of loans or RMBSs, SCC made certain representations and warranties. These
representations and warranties varied based on the nature of the transaction and the buyer's or insurer's requirements,
but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the
loan's compliance with the criteria for inclusion in the transaction, including compliance with SCC's underwriting
standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with
applicable laws. SCC believes it would have an obligation to repurchase a loan only if it breached a representation and
warranty and such breach materially and adversely affects the value of the mortgage loan or certificate holder's interest
in the mortgage loan. SCC also would assert that it has no liability for the failure to repurchase any mortgage loan that
has been liquidated prior to a repurchase demand, although there is limited and conflicting case law on the liquidated
loan defense issue. Such claims together with any settlement arrangements related to these losses are collectively
referred to as "representation and warranty claims."
The statute of limitations for a contractual claim to enforce a representation and warranty obligation is generally
six years or such shorter limitations period that may apply under the law of a state where the economic injury occurred.
SCC believes that the limitations period begins to run from the applicable closing date of the sale of the loans or RMBS,
although there is limited and conflicting case law on this issue. During fiscal years 2014 and 2013, SCC entered into
agreements with certain counterparties to toll the running of any applicable statute of limitations related to potential