10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended July 31, 2015
 
 
OR
¨

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from             to             
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
MISSOURI
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer þ          Accelerated filer ¨         Non-accelerated filer ¨         Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨    No  þ
The number of shares outstanding of the registrant's Common Stock, without par value, at the close of business on August 31, 2015: 276,359,906 shares.
 


Table of Contents

Form 10-Q for the Period Ended July 31, 2015

Table of Contents

 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three months ended July 31, 2015 and 2014
1
 
 
 
 
Consolidated Balance Sheets
 
 
As of July 31, 2015, July 31, 2014 and April 30, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Three months ended July 31, 2015 and 2014
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 


Table of Contents

PART I    FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(unaudited, in 000s, except 
per share amounts)
 
Three months ended July 31,
 
2015

 
2014

 
 
 
 
 
REVENUES:
 
 
 
 
Service revenues
 
$
118,434

 
$
115,473

Royalty, product and other revenues
 
10,906

 
8,814

Interest income
 
8,378

 
9,299

 
 
137,718

 
133,586

OPERATING EXPENSES:
 
 
 
 
Cost of revenues:
 
 
 
 
Compensation and benefits
 
55,789

 
51,855

Occupancy and equipment
 
89,855

 
83,306

Provision for bad debt and loan losses
 
2,005

 
4,364

Depreciation and amortization
 
27,084

 
25,085

Other
 
38,775

 
33,116

 
 
213,508

 
197,726

Selling, general and administrative:
 
 
 
 
Marketing and advertising
 
8,531

 
8,145

Compensation and benefits
 
54,669

 
60,964

Depreciation and amortization
 
13,010

 
8,601

Other selling, general and administrative
 
21,982

 
19,490


 
98,192

 
97,200

Total operating expenses
 
311,700

 
294,926

 
 
 
 
 
Other income
 
433

 
523

Interest expense on borrowings
 
(8,575
)
 
(13,795
)
Other expenses
 
(4,985
)
 
(1,204
)
Loss from continuing operations before income tax benefit
 
(187,109
)
 
(175,816
)
Income tax benefit
 
(90,604
)
 
(66,965
)
Net loss from continuing operations
 
(96,505
)
 
(108,851
)
Net loss from discontinued operations, net of tax benefits of $1,889 and $4,564
 
(3,154
)
 
(7,381
)
NET LOSS
 
$
(99,659
)
 
$
(116,232
)
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
Continuing operations
 
$
(0.35
)
 
$
(0.40
)
Discontinued operations
 
(0.01
)
 
(0.02
)
Consolidated
 
$
(0.36
)
 
$
(0.42
)
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.20

 
$
0.20

 
 
 
 
 
COMPREHENSIVE LOSS:
 
 
 
 
Net loss
 
$
(99,659
)
 
$
(116,232
)
Unrealized gains (losses) on securities, net of taxes:
 
 
 
 
Unrealized holding losses arising during the period
 
(1,360
)
 
(723
)
Reclassification adjustment for gains included in income
 
141

 
574

Change in foreign currency translation adjustments
 
(8,755
)
 
455

Other comprehensive income (loss)
 
(9,974
)
 
306

Comprehensive loss
 
$
(109,633
)
 
$
(115,926
)
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS
 
(unaudited, in 000s, except 
share and per share amounts)
 
As of
 
July 31, 2015

 
July 31, 2014

 
April 30, 2015

 
 


 


 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,299,382

 
$
1,429,489

 
$
2,007,190

Cash and cash equivalents - restricted
 
61,040

 
71,917

 
91,972

Receivables, less allowance for doubtful accounts of $53,771, $51,400 and $54,527
 
103,194

 
122,315

 
167,964

Deferred tax assets and income taxes receivable
 
160,390

 
190,323

 
174,267

Prepaid expenses and other current assets
 
80,993

 
74,343

 
70,283

Investments in available-for-sale securities
 
406,360

 
403,774

 
439,625

Total current assets
 
2,111,359

 
2,292,161

 
2,951,301

Mortgage loans held for investment, less allowance for loan losses of $7,659, $10,561 and $7,886
 
230,130

 
259,732

 
239,338

Property and equipment, at cost less accumulated depreciation and amortization of $538,823, $468,372 and $518,797
 
297,321

 
314,531

 
311,387

Intangible assets, net
 
417,009

 
347,890

 
432,142

Goodwill
 
454,394

 
478,845

 
441,831

Deferred tax assets and income taxes receivable
 
11,377

 
46,953

 
13,461

Other noncurrent assets
 
111,101

 
150,707

 
125,960

Total assets
 
$
3,632,691

 
$
3,890,819

 
$
4,515,420

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Customer banking deposits
 
$
476,732

 
$
482,975

 
$
744,241

Accounts payable and accrued expenses
 
116,855

 
127,912

 
231,322

Accrued salaries, wages and payroll taxes
 
33,447

 
30,996

 
144,744

Accrued income taxes
 
245,541

 
284,038

 
434,684

Current portion of long-term debt
 
799

 
400,705

 
790

Deferred revenue and other current liabilities
 
316,880

 
357,293

 
322,508

Total current liabilities
 
1,190,254

 
1,683,919

 
1,878,289

Long-term debt
 
505,197

 
505,714

 
505,298

Deferred tax liabilities and reserves for uncertain tax positions
 
137,603

 
167,914

 
142,586

Deferred revenue and other noncurrent liabilities
 
130,210

 
136,072

 
156,298

Total liabilities
 
1,963,264

 
2,493,619

 
2,682,471

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110
 
3,166

 
3,166

 
3,166

Additional paid-in capital
 
773,783

 
766,014

 
783,793

Accumulated other comprehensive income (loss)
 
(8,234
)
 
5,483

 
1,740

Retained earnings
 
1,679,234

 
1,418,124

 
1,836,442

Less treasury shares, at cost
 
(778,522
)
 
(795,587
)
 
(792,192
)
Total stockholders' equity
 
1,669,427

 
1,397,200

 
1,832,949

Total liabilities and stockholders' equity
 
$
3,632,691

 
$
3,890,819

 
$
4,515,420

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Three months ended July 31,
 
2015

 
2014

 
 
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
 
$
(378,246
)
 
$
(381,585
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Maturities of and payments received on available-for-sale securities
 
32,103

 
18,484

Principal payments on mortgage loans held for investment, net
 
8,537

 
6,250

Capital expenditures
 
(8,689
)
 
(25,841
)
Payments made for business acquisitions, net of cash acquired
 
(12,271
)
 
(40,533
)
Franchise loans:
 
 
 
 
Loans funded
 
(2,582
)
 
(7,398
)
Payments received
 
11,434

 
18,674

Other, net
 
3,562

 
4,030

Net cash provided by (used in) investing activities
 
32,094

 
(26,334
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Customer banking deposits, net
 
(268,532
)
 
(287,609
)
Dividends paid
 
(55,063
)
 
(54,852
)
Repurchase of common stock, including shares surrendered
 
(17,756
)
 
(9,397
)
Proceeds from exercise of stock options
 
13,015

 
13,368

Other, net
 
(22,413
)
 
(9,919
)
Net cash used in financing activities
 
(350,749
)
 
(348,409
)
 
 
 
 
 
Effects of exchange rate changes on cash
 
(10,907
)
 
510

 
 
 
 
 
Net decrease in cash and cash equivalents
 
(707,808
)
 
(755,818
)
Cash and cash equivalents at beginning of the period
 
2,007,190

 
2,185,307

Cash and cash equivalents at end of the period
 
$
1,299,382

 
$
1,429,489

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
75,358

 
$
88,924

Interest paid on borrowings
 
15,381

 
15,415

Interest paid on deposits
 
136

 
201

Transfers of foreclosed loans to other assets
 
624

 
1,818

Accrued additions to property and equipment
 
5,977

 
11,988

 
 
 
 
 
See accompanying notes to consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated balance sheets as of July 31, 2015 and 2014, the consolidated statements of operations and comprehensive loss for the three months ended July 31, 2015 and 2014, and the condensed consolidated statements of cash flows for the three months ended July 31, 2015 and 2014 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows as of July 31, 2015 and 2014 and for all periods presented have been made.
"H&R Block," "the Company," "we," "our" and "us" are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U. S. (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2015 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2015 or for the year then ended are derived from our April 30, 2015 Annual Report to Shareholders on Form 10-K.
MANAGEMENT ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, valuation allowances on deferred tax assets, reserves for uncertain tax positions and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
SEASONALITY OF BUSINESS Our operating revenues are seasonal in nature with peak revenues typically occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See notes 12 and 13 for additional information on litigation, claims and other loss contingencies related to our discontinued operations.
NOTE 2: SUBSEQUENT EVENTS
DIVESTITURE OF H&R BLOCK BANK – In April 2014, our subsidiaries, H&R Block Bank (HRB Bank) and Block Financial LLC, the sole shareholder of HRB Bank (Block Financial), entered into a definitive Purchase and Assumption Agreement with BofI Federal Bank, a federal savings bank (BofI), pursuant to which we agreed to sell certain assets and liabilities, including all of the deposit liabilities of HRB Bank, to BofI (P&A Transaction). On August 4, 2015, HRB Bank, Block Financial and BofI received regulatory approvals for the P&A Transaction. On August 5, 2015, HRB Bank, Block Financial and BofI entered into an Amended and Restated Purchase and Assumption Agreement.
On August 31, 2015, we completed the P&A Transaction and made a one-time cash payment to BofI of approximately $419 million, which is approximately equal to the carrying value of the liabilities (including all deposit liabilities) assumed by BofI. In connection with the closing, we intend to liquidate the available-for-sale (AFS) securities previously held by HRB Bank, which totaled $404 million at July 31, 2015.
On the closing date of the P&A Transaction, HRB Bank converted from a federal savings bank to a national banking association, merged with and into its parent company, Block Financial, surrendered its bank charter and ceased to exist as a bank. As a result, as of August 31, 2015, neither we nor any of our subsidiaries is subject to minimum regulatory capital requirements or to regulation by the Office of the Comptroller of the Currency (OCC). In addition, H&R Block, Inc., H&R Block Group, Inc. and Block Financial (collectively, our Holding Companies) were Savings and Loan Holding Companies (SLHCs) because they controlled HRB Bank. As a result of the P&A Transaction and related actions, our Holding Companies have ceased to be SLHCs and have deregistered as SLHCs under Section 10(b) of the

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Table of Contents

Home Owner's Loan Act. As of August 31, 2015, our Holding Companies are no longer subject to regulatory capital requirements applicable to SLHCs or regulation by the Board of Governors of the Federal Reserve System (Federal Reserve).
Additional information about the closing of the P&A Transaction and the agreements executed at the closing are set forth in Part 1, Item 2 under "Recent Developments."
CAPITAL STRUCTURE – On September 1, 2015, we announced our intent to establish a new capital structure, which includes a new $3.5 billion share repurchase program approved by our Board of Directors, a new unsecured committed line of credit (CLOC) and incremental debt. As a part of this new capital structure, we also announced our intent to take near-term action on the planned capital structure changes, including:
Our plans to launch a "modified Dutch auction" tender offer to purchase up to $1.5 billion of our common stock under our new share repurchase program, at a price per share of not less than $32.25 and not greater than $37.00, which will be contingent upon, among other customary items, the successful closing of a new CLOC, and satisfaction of other customary conditions;
Our intent to replace our existing five-year $1.5 billion CLOC (2012 CLOC) with the new CLOC; and
Our intent to incur additional incremental debt through other debt issuances as a part of the capital structure changes, which will fund stock repurchases under our new share repurchase program, together with available cash, borrowings under the new CLOC and funds from ongoing business operations.
On September 2, 2015, we commenced the tender offer described above to purchase up to $1.5 billion of our common stock, at a price per share of not less than $32.25 and not greater than $37.00.
Additional information about our new capital structure, including our new share repurchase program and related tender offer, is set forth in Part 1, Item 2 under "Recent Developments."
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
LOSS PER SHARE – Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 5.0 million shares for the three months ended July 31, 2015, and 5.5 million shares for the three months ended July 31, 2014, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
Three months ended July 31,
 
2015

 
2014

 
 
 
 
 
Net loss from continuing operations attributable to shareholders
 
$
(96,505
)
 
$
(108,851
)
Amounts allocated to participating securities
 
(102
)
 
(89
)
Net loss from continuing operations attributable to common shareholders
 
$
(96,607
)
 
$
(108,940
)
 
 
 
 
 
Basic weighted average common shares
 
275,765

 
274,575

Potential dilutive shares
 

 

Dilutive weighted average common shares
 
275,765

 
274,575

 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
 
 
 
 
Basic
 
$
(0.35
)
 
$
(0.40
)
Diluted
 
(0.35
)
 
(0.40
)
 
 
 
 
 

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STOCK-BASED COMPENSATION – During the three months ended July 31, 2015, we acquired 0.6 million shares of our common stock at an aggregate cost of $17.8 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the three months ended July 31, 2014, we acquired 0.3 million shares at an aggregate cost of $9.4 million for similar purposes.
During the three months ended July 31, 2015 and 2014, we issued 1.6 million and 1.1 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the three months ended July 31, 2015, we granted equity awards equivalent to 0.9 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Nonvested units generally either vest over a three-year period with one-third vesting each year or cliff vest at the end of a three-year period. Stock-based compensation expense of our continuing operations totaled $6.0 million for the three months ended July 31, 2015, and $7.5 million for the three months ended July 31, 2014. As of July 31, 2015, unrecognized compensation cost for stock options totaled $0.1 million, and for nonvested shares and units totaled $50.2 million.
OTHER COMPREHENSIVE INCOME Components of other comprehensive income include foreign currency translation adjustments and the change in net unrealized gains or losses on AFS marketable securities, and are as follows:
(in 000s)
 
 
 
Foreign Currency
Translation Adjustments

 
Unrealized Gain (Loss)
on AFS Securities

 
Total

Balances as of May 1, 2015
 
$
(6,789
)
 
$
8,529

 
$
1,740

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Gross losses arising during the period
 
(8,755
)
 
(2,235
)
 
(10,990
)
Income taxes
 

 
(875
)
 
(875
)
 
 
(8,755
)
 
(1,360
)
 
(10,115
)
Amounts reclassified to net income:
 
 
 
 
 
 
Gross amount reclassified
 

 
230

 
230

Income taxes
 

 
89

 
89

 
 

 
141

 
141

Net other comprehensive loss
 
(8,755
)
 
(1,219
)
 
(9,974
)
Balances as of July 31, 2015
 
$
(15,544
)
 
$
7,310

 
$
(8,234
)
 
 
 
 
 
 
 
Balances as of May 1, 2014
 
$
3,334

 
$
1,843

 
$
5,177

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Gross gains (losses) arising during the period
 
455

 
(1,183
)
 
(728
)
Income taxes
 

 
(460
)
 
(460
)
 
 
455

 
(723
)
 
(268
)
Amounts reclassified to net income:
 
 
 
 
 
 
Gross amount reclassified
 

 
941

 
941

Income taxes
 

 
367

 
367

 
 

 
574

 
574

Net other comprehensive income (loss)
 
455

 
(149
)
 
306

Balances as of July 31, 2014
 
$
3,789

 
$
1,694

 
$
5,483

 
 
 
 
 
 
 
Gross gains and losses reclassified out of accumulated other comprehensive income are included in other income and other expense, respectively, in the consolidated statements of operations and comprehensive loss.

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NOTE 4: RECEIVABLES
Receivables consist of the following:
(in 000s)
 
As of
 
July 31, 2015
 
July 31, 2014
 
April 30, 2015
 
 
Short-term
 
Long-term
 
Short-term
 
Long-term
 
Short-term
 
Long-term
Loans to franchisees
 
$
56,277

 
$
57,792

 
$
62,195

 
$
83,013

 
$
56,603

 
$
64,472

Receivables for tax preparation and related fees
 
39,927

 
6,103

 
38,204

 

 
48,864

 
6,103

Cash Back® receivables
 
2,777

 

 
4,170

 

 
42,680

 

Emerald Advance lines of credit
 
20,321

 
598

 
20,239

 
2,839

 
21,908

 
1,913

Royalties from franchisees
 
4,509

 

 
4,278

 

 
8,206

 

Other
 
33,154

 
7,934

 
44,629

 
15,294

 
44,230

 
8,379

 
 
156,965

 
72,427

 
173,715

 
101,146

 
222,491

 
80,867

Allowance for doubtful accounts
 
(53,771
)
 

 
(51,400
)
 

 
(54,527
)
 

 
 
$
103,194

 
$
72,427

 
$
122,315

 
$
101,146

 
$
167,964

 
$
80,867

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances presented above as short-term are included in receivables, while the long-term portions are included in other noncurrent assets in the consolidated balance sheets.
LOANS TO FRANCHISEES Franchisee loan balances as of July 31, 2015 and 2014 and April 30, 2015, consisted of $75.7 million, $99.7 million and $80.8 million, respectively, in term loans made primarily to finance the purchase of franchises and $38.4 million, $45.5 million and $40.3 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of July 31, 2015 and 2014 and April 30, 2015, loans with a principal balance of $1.5 million, $0.8 million and $0.1 million, respectively, were more than 30 days past due. We had no loans to franchisees on non-accrual status.
CANADIAN CASH BACK® PROGRAM Refunds advanced under the Cash Back program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. Cash Back amounts are generally received within 60 days of filing the client's return. As of July 31, 2015 and 2014 and April 30, 2015, $0.6 million, $1.1 million and $1.3 million of Cash Back balances were more than 60 days old, respectively.
H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT We review the credit quality of our H&R Block Emerald Advance® lines of credit (EA) receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of July 31, 2015, by year of origination, are as follows:
(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2015
 
$
5,348

2014
 
92

2013
 
1,699

Revolving loans
 
13,780

 
 
$
20,919

 
 
 
As of July 31, 2015 and 2014 and April 30, 2015, $17.4 million, $20.0 million and $18.7 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.

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ALLOWANCE FOR DOUBTFUL ACCOUNTS Activity in the allowance for doubtful accounts for our short-term receivables for the three months ended July 31, 2015 and 2014 is as follows:
(in 000s)
 
 
 
EAs

 
All Other

 
Total

Balances as of May 1, 2015
 
$
7,353

 
$
47,174

 
$
54,527

Provision
 

 
713

 
713

Charge-offs
 

 
(1,469
)
 
(1,469
)
Balances as of July 31, 2015
 
$
7,353

 
$
46,418

 
$
53,771

 
 
 
 
 
 
 
Balances as of May 1, 2014
 
$
7,530

 
$
45,048

 
$
52,578

Provision
 

 
2,842

 
2,842

Charge-offs
 

 
(4,020
)
 
(4,020
)
Balances as of July 31, 2014
 
$
7,530

 
$
43,870

 
$
51,400

 
 
 
 
 
 
 
NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s)
 
As of
 
July 31, 2015
 
July 31, 2014
 
April 30, 2015
 
 
Amount

 
% of Total

 
Amount

 
% of Total

 
Amount

 
% of Total

Adjustable-rate loans
 
$
124,752

 
53
%
 
$
144,096

 
54
%
 
$
130,182

 
53
%
Fixed-rate loans
 
111,096

 
47
%
 
123,991

 
46
%
 
115,034

 
47
%
 
 
235,848

 
100
%
 
268,087

 
100
%
 
245,216

 
100
%
Unamortized deferred fees and costs
 
1,941

 
 
 
2,206

 
 
 
2,008

 
 
Less: Allowance for loan losses
 
(7,659
)
 
 
 
(10,561
)
 
 
 
(7,886
)
 
 
 
 
$
230,130

 
 
 
$
259,732

 
 
 
$
239,338

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our loan loss allowance as a percent of mortgage loans was 3.2% as of July 31, 2015, compared to 3.9% as of July 31, 2014 and 3.2% as of April 30, 2015.
Activity in the allowance for loan losses for the three months ended July 31, 2015 and 2014 is as follows:
(in 000s)
 
Three months ended July 31,
 
2015

 
2014

Balance at beginning of the period
 
$
7,886

 
$
11,272

Provision
 
(28
)
 
725

Recoveries
 
365

 
679

Charge-offs
 
(564
)
 
(2,115
)
Balance at end of the period
 
$
7,659

 
$
10,561

 
 
 
 
 
Detail of the aging of the mortgage loans in our portfolio as of July 31, 2015 is as follows:
(in 000s)
 
 
 
Less than 60
Days Past Due

 
60 – 89 Days
Past Due

 
90+ Days
Past Due(1)

 
Total
Past Due

 
Current

 
Total

Purchased from SCC
 
$
8,525

 
$
985

 
$
45,957

 
$
55,467

 
$
83,894

 
$
139,361

All other
 
2,790

 
488

 
6,346

 
9,624

 
86,863

 
96,487

 
 
$
11,315

 
$
1,473

 
$
52,303

 
$
65,091

 
$
170,757

 
$
235,848

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
We do not accrue interest on loans past due 90 days or more.

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NOTE 6: INVESTMENTS
The amortized cost and fair value of securities classified as AFS are summarized below:
(in 000s)
 
 
 
Amortized
Cost

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
Fair Value

As of July 31, 2015:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
392,285

 
$
11,936

 
$

 
$
404,221

Municipal bonds
 
3,025

 
80

 

 
3,105

U.S. treasury bills
 
100

 

 

 
100

 
 
$
395,410

 
$
12,016

 
$

 
$
407,426

As of July 31, 2014:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
401,092

 
$
2,582

 
$

 
$
403,674

Municipal bonds
 
4,106

 
183

 

 
4,289

U.S. treasury bills
 
100

 

 

 
100

 
 
$
405,298

 
$
2,765

 
$

 
$
408,063

As of April 30, 2015:
 
 
Mortgage-backed securities
 
$
421,035

 
$
13,889

 
$

 
$
434,924

Municipal bonds
 
4,062

 
109

 
(24
)
 
4,147

Common stock
 
2,491

 
47

 

 
2,538

U.S. treasury bills
 
100

 

 

 
100

 
 
$
427,688

 
$
14,045

 
$
(24
)
 
$
441,709

 
 
 
 
 
 
 
 
 
Substantially all AFS debt securities held as of July 31, 2015 mature after five years.
NOTE 7: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill of our Tax Services segment for the three months ended July 31, 2015 and 2014 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of April 30, 2015
 
$
474,128

 
$
(32,297
)
 
$
441,831

Acquisitions
 
14,030

 

 
14,030

Disposals and foreign currency changes, net
 
(1,467
)
 

 
(1,467
)
Impairments
 

 

 

Balances as of July 31, 2015
 
$
486,691

 
$
(32,297
)
 
$
454,394

 
 
 
 
 
 
 
Balances as of April 30, 2014
 
$
468,414

 
$
(32,297
)
 
$
436,117

Acquisitions
 
42,274

 

 
42,274

Disposals and foreign currency changes, net
 
454

 

 
454

Impairments
 

 

 

Balances as of July 31, 2014
 
$
511,142

 
$
(32,297
)
 
$
478,845

 
 
 
 
 
 
 
The increase in goodwill resulted from acquired franchisee and competitor businesses during the period. We expect the purchase price allocation to be finalized during fiscal year 2016.
We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

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Components of the intangible assets of our Tax Services segment are as follows:
(in 000s)
 
 
 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

As of July 31, 2015:
 
 
 
 
 
 
Reacquired franchise rights
 
$
294,918

 
$
(51,233
)
 
$
243,685

Customer relationships
 
169,998

 
(83,471
)
 
86,527

Internally-developed software
 
120,522

 
(84,215
)
 
36,307

Noncompete agreements
 
30,576

 
(24,091
)
 
6,485

Franchise agreements
 
19,201

 
(8,534
)
 
10,667

Purchased technology
 
54,700

 
(21,362
)
 
33,338

 
 
$
689,915

 
$
(272,906
)
 
$
417,009

As of July 31, 2014:
 
 
 
 
 
 
Reacquired franchise rights
 
$
233,749

 
$
(29,152
)
 
$
204,597

Customer relationships
 
123,130

 
(62,514
)
 
60,616

Internally-developed software
 
104,580

 
(75,243
)
 
29,337

Noncompete agreements
 
24,697

 
(22,408
)
 
2,289

Franchise agreements
 
19,201

 
(7,254
)
 
11,947

Purchased technology
 
54,974

 
(15,870
)
 
39,104

 
 
$
560,331

 
$
(212,441
)
 
$
347,890

As of April 30, 2015:
 
 
 
 
 
 
Reacquired franchise rights
 
$
294,647

 
$
(46,180
)
 
$
248,467

Customer relationships
 
170,851

 
(78,157
)
 
92,694

Internally-developed software
 
118,865

 
(80,689
)
 
38,176

Noncompete agreements
 
30,630

 
(23,666
)
 
6,964

Franchise agreements
 
19,201

 
(8,214
)
 
10,987

Purchased technology
 
54,700

 
(19,846
)
 
34,854

 
 
$
688,894

 
$
(256,752
)
 
$
432,142

 
 
 
 
 
 
 
Amortization of intangible assets for the three months ended July 31, 2015 was $16.6 million. Amortization of intangible assets for the three months ended July 31, 2014 was $11.2 million. Estimated amortization of intangible assets for fiscal years 2016, 2017, 2018, 2019 and 2020 is $64.1 million, $55.7 million, $48.6 million, $36.9 million and $26.2 million, respectively.

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NOTE 8: FAIR VALUE
FAIR VALUE MEASUREMENT Assets measured on a recurring basis are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Our investments in AFS securities are carried at fair value on a recurring basis with gains and losses reported as a component of other comprehensive income, except for losses assessed to be other than temporary. Our AFS securities include certain agency and agency-sponsored mortgage-backed securities and municipal bonds. Quoted market prices are not available for these securities, as they are not actively traded and have fewer observable transactions. As a result, we use third-party pricing services to determine fair value and classify the securities as Level 2. The third-party pricing services' models are based on market data and utilize available trade, bid and other market information for similar securities. Quarterly, we compare the prices obtained from our third-party pricing services to other available independent pricing information to validate the reasonableness of the valuations provided. In addition, we also perform analytics to assess the reasonableness of the fair value received from the third-party pricing service based on changes in the portfolio and changes in market conditions. We evaluate whether adjustments to third-party pricing is necessary and historically, we have not made adjustments to prices obtained from our third-party pricing services.
There were no transfers of AFS securities between hierarchy levels during the three months ended July 31, 2015 and 2014. See note 6 for details of our AFS securities that were remeasured at fair value on a recurring basis during the three months ended July 31, 2015 and 2014 and the unrealized gains or losses on those remeasurements.
The following table presents the assets that were remeasured at fair value on a non-recurring basis during the three months ended July 31, 2015 and 2014 and the losses on those remeasurements:
(dollars in 000s)
 
 
 
Total

 
Level 1

 
Level 2

 
Level 3

 
Losses

As of July 31, 2015:
 
 
 
 
 
 
 
 
 
 
Impaired mortgage loans held for investment
 
$
57,951

 
$

 
$

 
$
57,951

 
$
(88
)
As a percentage of total assets
 
1.6
%
 
%
 
%
 
1.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
As of July 31, 2014:
 
 
 
 
 
 
 
 
 
 
Impaired mortgage loans held for investment
 
$
59,635

 
$

 
$

 
$
59,635

 
$
(842
)
As a percentage of total assets
 
1.5
%
 
%
 
%
 
1.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. Impaired and TDR loans are required to be remeasured at least annually, based on HRB Bank's loan policy. These loans are classified as Level 3.
We have established various controls and procedures to ensure that the unobservable inputs used in the fair value measurement of these instruments are appropriate. Appraisals are obtained from certified appraisers and reviewed internally by HRB Bank's asset management group. The inputs and assumptions used in our discounted cash flow model for TDRs are reviewed and approved by HRB Bank management each time the balances are remeasured. Significant changes in fair value from the previous measurement are presented to HRB Bank management for approval. There were no changes to the unobservable inputs used in determining the fair values of our Level 3 financial assets.

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The following table presents the quantitative information about our Level 3 fair value measurements, which utilize significant unobservable internally-developed inputs:
(in 000s)
 
 
Fair Value as of July 31, 2015

 
Valuation
Technique
 
Unobservable Input
 
Range
(Weighted Average)
Impaired mortgage loans held for investment – non TDRs
 
$
68,368

 
Collateral-
based
 
Cost to list/sell
Time to sell (months)
Collateral depreciation
Loss severity
 
0% – 171%(10%)
12 (12)
(128%) – 100%(32%)
0% – 100%(61%)
Impaired mortgage loans held for investment – TDRs
 
$
29,925

 
Discounted
cash flow
 
Aged default performance
Loss severity
 
23% – 36%(29%)
0% – 23%(7%)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS – The carrying amounts and estimated fair values of our financial instruments are as follows:
(in 000s)
 
As of
 
July 31, 2015
 
July 31, 2014
 
April 30, 2015
 
 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,299,382

 
$
1,299,382

 
$
1,429,489

 
$
1,429,489

 
$
2,007,190

 
$
2,007,190

Cash and cash equivalents - restricted
 
61,040

 
61,040

 
71,917

 
71,917

 
91,972

 
91,972

Receivables, net - short-term
 
103,194

 
103,194

 
122,315

 
122,315

 
167,964

 
167,964

Mortgage loans held for investment, net
 
230,130

 
184,277

 
259,732

 
193,920

 
239,338

 
190,196

Investments in AFS securities
 
407,426

 
407,426

 
408,063

 
408,063

 
441,709

 
441,709

Receivables, net - long-term
 
72,427

 
72,427

 
101,146

 
101,146

 
80,867

 
80,867

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Customer banking deposits
 
477,145

 
473,720

 
483,477

 
480,729

 
744,699

 
737,261

Long-term debt
 
505,996

 
552,431

 
906,419

 
965,650

 
506,088

 
556,769

Contingent consideration payments
 
10,650

 
10,650

 
9,168

 
9,168

 
10,667

 
10,667

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value estimates, methods and assumptions are set forth below. The fair value was not estimated for assets and liabilities that are not considered financial instruments.
Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).
Receivables, net - short-term - For short-term balances the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1).
Mortgage loans held for investment, net - The fair value of mortgage loans held for investment is estimated using a third-party pricing service. The fair value is determined using the present value of expected future cash flows at the asset level, assuming future prepayments and using discount factors determined by prices obtained for residential loans with similar characteristics in the secondary market, as discounted for illiquid assets. Quarterly, we perform analytics to assess the reasonableness of the fair value received from the third-party pricing service based on changes in the portfolio and changes in market conditions. We evaluate whether adjustments to third-party pricing is necessary and historically, we have not made adjustments to prices obtained from our third-party pricing service (Level 3).
Investments in AFS securities - For mortgage-backed securities, we use a third-party pricing service to determine fair value. The service's pricing model is based on market data and utilizes available trade, bid and other market information for similar securities (Level 2). The fair value of our investment in common stock is determined based on quoted market prices (Level 1).
Receivables, net - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to variable interest rates, low historical delinquency rates and franchise

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territories serving as collateral (Level 1). Long-term EA receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates.
Customer banking deposits - The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, checking, money market and savings accounts, is equal to the amount payable on demand (Level 1). The fair value of IRAs and other time deposits is estimated by discounting the future cash flows using the rates currently offered by HRB Bank for products with similar remaining maturities (Level 3).
Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2).
Contingent consideration payments - Fair value approximates the carrying amount (Level 3).
NOTE 9: INCOME TAXES
We file a consolidated federal income tax return in the United States (U.S.) with the Internal Revenue Service (IRS) and file tax returns in various state and foreign jurisdictions. Tax returns are typically examined and settled upon completion of the examination, with tax controversies settled either at the exam level or through the appeals process. The Company currently does not have a U.S. federal return under examination; however, our calendar 2013 federal return and federal returns for all periods after this date remain open to examination. Additionally, the Company is either currently under examination or open to examination in all U.S. states that impose a corporate income tax.
We had gross unrecognized tax benefits of $76.5 million, $128.1 million and $86.3 million as of July 31, 2015 and 2014 and April 30, 2015, respectively. The gross unrecognized tax benefits decreased $9.8 million and increased $16.6 million during the three months ended July 31, 2015 and 2014, respectively. The decrease in unrecognized tax benefits during the three months ending July 31, 2015 is primarily related to a law change enacted in the state of Missouri which allowed the Company to release prior year income tax reserves. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $15 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various state matters currently under exam. The portion of unrecognized benefits expected to be cash settled within the next twelve months amounts to $8.7 million and is included in accrued income taxes on our consolidated balance sheet. The remaining liability for uncertain tax positions is classified as long-term and is included in deferred tax liabilities and reserves for uncertain tax positions on the consolidated balance sheet.
Consistent with prior years, our pretax loss for the three months ended July 31, 2015 is expected to be offset by income in the fourth quarter due to the established pattern of seasonality in our primary business operations. As such, management has determined that it is more-likely-than-not that realization of tax benefits recorded in our financial statements will occur within our fiscal year. The amount of tax benefit recorded reflects management's estimate of the annual effective tax rate applied to the year-to-date loss from continuing operations. Certain discrete tax adjustments are also reflected in income tax expense for the periods presented.
A discrete income tax benefit of $20.6 million was recorded in the three months ended July 31, 2015, compared to a discrete tax benefit of less than $100 thousand in the same period of the prior year. The discrete tax benefit recorded in the current period resulted primarily from a law change enacted in the state of Missouri which provides us the ability to reduce tax expense related to income from our two prior fiscal years that will be included on timely filed state tax returns for calendar years 2014 and 2015.
Excluding discrete items, management's estimate of the annualized effective tax rate for the three months ended July 31, 2015 and 2014 was 37.4% and 38.1%, respectively. Our effective tax rate for continuing operations, including the effects of discrete income tax items was 48.4% and 38.1% for the three months ended July 31, 2015 and 2014, respectively. Due to the loss in both periods, a discrete tax benefit in either period increases the tax rate while an item of discrete tax expense decreases the tax rate. The impact of the discrete tax items combined with the seasonal nature of our business can cause the effective tax rate through our first quarter to be significantly different than the rate for our full fiscal year.

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NOTE 10: INTEREST INCOME AND INTEREST EXPENSE
The following table shows the components of interest income and expense:
(in 000s)
 
Three months ended July 31,
 
2015

 
2014

Interest income:
 
 
 
 
Mortgage loans, net
 
$
2,812

 
$
2,978

Loans to franchisees
 
1,654

 
2,071

AFS securities
 
2,058

 
2,270

Other
 
1,854

 
1,980

 
 
$
8,378

 
$
9,299

Interest expense:
 
 
 
 
Borrowings
 
$
8,575

 
$
13,795

Deposits
 
136

 
145

 
 
$
8,711

 
$
13,940

 
 
 
 
 
The presentation of interest expense from borrowings in the amount of $13.8 million for the three months ended July 31, 2014, has been restated to correct errors in presentation. We reclassified such interest expense from cost of revenues to a separate caption in the consolidated statements of operations and comprehensive loss.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Changes in deferred revenue balances related to our Peace of Mind® Extended Service Plan (POM), which is included in deferred revenue and other liabilities in the consolidated balance sheets, are as follows:
(in 000s)
 
Three months ended July 31,
 
2015

 
2014

Balance, beginning of the period
 
$
158,169

 
$
145,237

Amounts deferred for new extended service plans issued
 
920

 
873

Revenue recognized on previous deferrals
 
(27,703
)
 
(24,253
)
Balance, end of the period
 
$
131,386

 
$
121,857

 
 
 
 
 
We accrued $7.6 million, $10.6 million and $8.4 million as of July 31, 2015 and 2014 and April 30, 2015, respectively, related to estimated losses under our standard guarantee, which is included with our standard in-office tax preparation services. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets. For POM in franchise offices, we deferred revenue of $0.1 million, and recognized revenue of $3.4 million during the three months ended July 31, 2015. At July 31, 2015, our deferred revenue related to POM in franchise offices totaled $28.3 million.
We have accrued estimated contingent consideration payments totaling $10.7 million, $9.2 million and $10.7 million as of July 31, 2015 and 2014 and April 30, 2015, respectively, related to acquisitions, with the short-term amount recorded in deferred revenue and other liabilities. Estimates of contingent payments are typically based on expected financial performance of the acquired business and economic conditions at the time of acquisition. Should actual results differ from our assumptions, future payments made will differ from the above estimate and any differences will be recorded in results from continuing operations.
We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total obligation under these lines of credit was $77.4 million at July 31, 2015, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $38.8 million.
We maintain compensating balances with certain financial institutions that are creditors in our 2012 CLOC, which are not legally restricted as to withdrawal. We had compensating balances totaling $225.0 million as of July 31, 2015. These balances may fluctuate significantly over the course of any fiscal year.

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NOTE 12: LITIGATION AND RELATED CONTINGENCIES
We are a defendant in numerous litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the lawsuits to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or a claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement of numerous claims over an extended period of time.
The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
In addition to litigation matters, we are also subject to claims and other loss contingencies arising out of our business activities, including as described below.
We accrue liabilities for litigation, claims and other loss contingencies and any related settlements (each referred to, individually, as a "matter" and, collectively, as "matters") when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been accrued for a number of the matters noted below. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range.
For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that such matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated as of July 31, 2015. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material adverse effect on our consolidated financial position, results of operations and cash flows. As of July 31, 2015 and 2014 and April 30, 2015, we accrued liabilities of $9.3 million, $23.7 million and $8.9 million, respectively, for such litigation addressed in this note.
For some matters where a liability has not been accrued, we are able to estimate a reasonably possible loss or range of loss. This estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not reasonably possible are not included within this estimated range. Therefore, this estimated range of reasonably possible loss represents what we believe to be an estimate of reasonably possible loss only for certain matters meeting these criteria. It does not represent our maximum loss exposure. For those matters, and for matters where a liability has been accrued, as of July 31, 2015, we believe the aggregate range of reasonably possible losses in excess of amounts accrued is not material.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the reasonably possible loss or range of loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by courts on motions or appeals, analysis by experts, or the status of any settlement negotiations.
On a quarterly and annual basis, we review relevant information with respect to litigation and other loss contingencies and update our accruals, disclosures and estimates of reasonably possible loss or range of loss based on such reviews. Costs incurred with defending matters are expensed as incurred. Any receivable for insurance

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recoveries is recorded separately from the corresponding liability, and only if recovery is determined to be probable and reasonably estimable.
We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously, but there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our business and consolidated financial position, results of operations and cash flows.
LITIGATION, CLAIMS, INCLUDING INDEMNIFICATION CLAIMS, OR OTHER LOSS CONTINGENCIES PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC or the Company have been, remain, or may in the future be subject to litigation, claims, including indemnification claims, and other loss contingencies pertaining to SCC's mortgage business activities that occurred prior to such termination and sale. These contingencies, claims and lawsuits include actions by regulators, third parties seeking indemnification, including depositors and underwriters, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others alleged to be similarly situated. Among other things, these contingencies, claims and lawsuits allege or may allege discriminatory or unfair and deceptive loan origination and servicing (including debt collection, foreclosure and eviction) practices, other common law torts, rights to indemnification and contribution, breach of contract, violations of securities laws and a variety of federal statutes, including the Truth in Lending Act (TILA), Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Home Ownership & Equity Protection Act (HOEPA), as well as similar state statutes. Given the impact of the financial crisis on the non-prime mortgage environment, the aggregate volume of these matters is substantial although it is difficult to predict either the likelihood of new matters being initiated or the outcome of existing matters. In many of these matters, including certain of the lawsuits and claims described below, it is not possible to estimate a reasonably possible loss or range of loss due to, among other things, the inherent uncertainties involved in these matters, some of which are beyond the Company's control, and the indeterminate damages sought in some of these matters.
On October 15, 2010, the Federal Home Loan Bank of Chicago (FHLB-Chicago) filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al. against multiple defendants, including various SCC-related entities, H&R Block, Inc. and other entities, arising out of FHLB-Chicago's purchase of residential mortgage-backed securities (RMBSs). The plaintiff seeks rescission and damages under state securities law and for common law negligent misrepresentation in connection with its purchase of two securities collateralized by loans originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50 million, of which approximately $32 million remains outstanding. The plaintiff agreed to voluntarily dismiss H&R Block, Inc. from the suit. The remaining defendants, including SCC, filed motions to dismiss, which the court denied. The defendants moved for leave to appeal and the circuit court denied the motion. On August 31, 2015, the parties reached an agreement to settle the claims for an amount fully covered by prior accruals.
On May 31, 2012, a lawsuit was filed by Homeward Residential, Inc. (Homeward) in the Supreme Court of the State of New York, County of New York, against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 12-cv-5067). The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract, anticipatory breach, indemnity and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to SCC and to loans sold to the trust. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and as to the loans' compliance with its underwriting standards and the value of underlying real estate. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase, anticipatory breach, indemnity, and declaratory judgment. The case is proceeding on the remaining claims. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
On September 28, 2012, a second lawsuit was filed by Homeward in the United States District Court for the Southern District of New York against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 12-cv-7319).

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The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-3 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 96 loans sold to the trust. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase and for indemnification of its costs associated with the litigation. The case is proceeding on the remaining claims. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
On April 5, 2013, a third lawsuit was filed by Homeward in the United States District Court for the Southern District of New York against SCC. The suit, styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 13-cv-2107), was filed as a related matter to the September 2012 Homeward suit mentioned above. In this April 2013 lawsuit, the plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2007-4 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 159 loans sold to the trust. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase and for indemnification of its costs associated with the litigation. The case is proceeding on the remaining claims. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
Underwriters and depositors are, or have been, involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege or alleged a variety of claims, including violations of federal and state securities laws and common law fraud, based on alleged materially inaccurate or misleading disclosures. Based on information currently available to SCC, it believes that the 20 lawsuits in which notice of a claim has been made involve 38 securitization transactions with original investments of approximately $14 billion (of which the outstanding principal amount is approximately $4 billion). Because SCC has not been a party to these lawsuits (with the exception of the Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation case discussed in this note) and has not had control of this litigation or any settlements thereof, SCC does not have precise information about the amount of damages or other remedies being asserted, the defenses to the claims in such lawsuits or the terms of any settlements of such lawsuits. SCC therefore cannot reasonably estimate the amount of potential losses or associated fees and expenses that may be incurred in connection with such lawsuits, which may be material. Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification from underwriters or depositors with respect to existing or new lawsuits or settlements of such lawsuits. Certain of the notices received included, and future notices may include, a reservation of rights, which are referred to as "reserved contribution rights," that encompasses a right of contribution which may become operative if indemnification is unavailable or insufficient to cover all of the losses and expenses involved. We have not concluded that a loss related to any of these indemnification claims or reserved contribution rights is probable, nor have we accrued a liability related to any of these claims or rights.
LITIGATION, CLAIMS OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS
Compliance Fee Litigation. On April 16, 2012, a putative class action lawsuit was filed against us in the Circuit Court of Jackson County, Missouri styled Manuel H. Lopez III v. H&R Block, Inc., et al. (Case # 1216CV12290) concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. The plaintiff seeks to represent all Missouri citizens who were charged the compliance fee, and asserts claims of violation of the Missouri Merchandising Practices Act, money had and received, and unjust enrichment. We filed a motion to compel arbitration of the 2011 claims. The court denied the motion. We filed an appeal. On May 6, 2014, the Missouri Court of Appeals, Western District, reversed the ruling of the trial court and remanded the case for further consideration of the motion. On March 12, 2015, the trial court denied the motion on remand. We filed an appeal, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
On April 19, 2012, a putative class action lawsuit was filed against us in the United States District Court for the Western District of Missouri styled Ronald Perras v. H&R Block, Inc., et al. (Case No. 4:12-cv-00450-DGK) concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. The plaintiff seeks to represent all persons nationwide (excluding citizens of Missouri) who were charged the compliance fee, and asserts claims of

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violation of various state consumer laws, money had and received, and unjust enrichment. In November 2013, the court compelled arbitration of the 2011 claims and stayed all proceedings with respect to those claims. In June 2014, the court denied class certification of the remaining 2012 claims. Plaintiff filed an appeal with the Eighth Circuit Court of Appeals, which was denied on June 18, 2015. The Eighth Circuit denied plaintiff's subsequent petition for rehearing on August 7, 2015. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
Form 8863 Litigation. A series of putative class action lawsuits were filed against us in various federal courts and one state court beginning on March 13, 2013. Taken together, the plaintiffs in these lawsuits purport to represent certain clients nationwide who filed Form 8863 during tax season 2013 through an H&R Block office or using H&R Block At Home® online tax services or desktop tax preparation software, and allege breach of contract, negligence and violation of state consumer laws in connection with transmission of the form. The plaintiffs seek damages, pre-judgment interest, attorneys' fees and costs. In August 2013, the plaintiff in the state court action voluntarily dismissed her case without prejudice. The Judicial Panel on Multidistrict Litigation subsequently granted our petition to consolidate the remaining federal lawsuits for coordinated pretrial proceedings in the United States District Court for the Western District of Missouri in a proceeding styled IN RE: H&R BLOCK IRS FORM 8863 LITIGATION (MDL No. 2474/Case No. 4:13-MD-02474-FJG). On July 11, 2014, the MDL court granted our motion to compel arbitration for those named plaintiffs who agreed to arbitrate their claims. Plaintiffs filed a consolidated class action complaint in October 2014. We filed a motion to strike the class allegations relating to those clients who agreed to arbitration, which the court granted on January 7, 2015. The cases remain stayed with respect to the individual plaintiffs who agreed to arbitration. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and reasonably estimable.
LITIGATION, CLAIMS AND OTHER LOSS CONTINGENCIES PERTAINING TO OTHER DISCONTINUED OPERATIONS
Express IRA Litigation. On January 2, 2008, the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) filed a lawsuit regarding our former Express IRA product that is styled Jim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc., et al. The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.
OTHER – We are from time to time a party to litigation, claims and other loss contingencies not discussed herein arising out of our business operations. These matters may include actions by state attorneys general, other state regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others similarly situated.
While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay to discharge or settle these other matters will not have a material adverse impact on our business or our consolidated financial position, results of operations and cash flows.
We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously. The amounts claimed in the matters are substantial, however, and there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our consolidated financial position, results of operations and cash flows.
NOTE 13: LOSS CONTINGENCIES ARISING FROM REPRESENTATIONS AND WARRANTIES OF OUR DISCONTINUED MORTGAGE OPERATIONS
SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations.

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Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers, who generally securitized such loans, or in the form of RMBSs. In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. Claims under these representations and warranties together with any settlement arrangements related to these losses are collectively referred to as "representation and warranty claims." 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. Representations and warranties related to borrower fraud in whole loan sale transactions to institutional investors, which were generally securitized by such investors and represented approximately 68% of the disposal of loans originated in calendar years 2005, 2006 and 2007, included a "knowledge qualifier" limiting SCC's liability to those instances where SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale transactions effectively did not include a knowledge qualifier as to borrower fraud. 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 conflicting case law on the liquidated loan defense issue as described below.
Representation and warranty 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 and borrower fraud for loans originated in calendar years 2006 and 2007. SCC has received claims representing an original principal amount of $2.6 billion since May 1, 2008, of which $1.9 billion were received prior to fiscal year 2013.
SETTLEMENT ACTIONS SCC has entered into tolling agreements with counterparties that have made a significant portion of previously denied representation and warranty claims. These tolling agreements toll the running of any applicable statute of limitations related to potential lawsuits regarding representation and warranty claims and other claims against SCC.
Beginning in the fourth quarter of fiscal year 2013 and continuing through the first quarter of fiscal year 2016, SCC has been engaged in discussions with these counterparties regarding the bulk settlement of previously denied and potential future claims. Based on settlement discussions with these counterparties, SCC believes a bulk settlement approach, rather than the loan-by-loan resolution process, will be needed to resolve all of the representation and warranty and other claims that are the subject of these discussions. On December 5, 2014, SCC entered into a settlement agreement to resolve certain of these claims. The amount paid under the settlement agreement was fully covered by prior accruals. In the event that the ongoing efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result.
SCC will continue to vigorously contest any request for repurchase when it has concluded that a valid basis for repurchase does not exist. SCC's decision whether to engage in bulk settlement discussions is based on factors that vary by counterparty or type of counterparty and include the considerations used by SCC in determining its loss estimate, described below under "Liability for Estimated Contingent Losses."
LIABILITY FOR ESTIMATED CONTINGENT LOSSES SCC accrues a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. Development of loss estimates is subject to a high degree of management judgment and estimates may vary significantly period to period. SCC's loss estimate as of July 31, 2015, is based on the best information currently available, significant management judgment, and a number of factors that are subject to change, including developments in case law and the factors mentioned below. These factors include the terms of prior bulk settlements, the terms expected to result from ongoing bulk settlement discussions, and an assessment of, among other things, historical claim results, threatened claims, terms and provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to provide a comprehensive settlement, bulk settlement methodologies used and publicly disclosed by other market participants, the potential pro-rata realization of the claims as compared to all claims and other relevant facts and circumstances when developing its estimate of probable loss. SCC believes that the most significant of these factors are the terms expected to result from ongoing bulk settlement discussions, which have been primarily influenced by the bulk settlement methodologies used and publicly disclosed by other market participants and the

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anticipated pro-rata realization of the claims of particular counterparties as compared to the anticipated realization if all claims and litigation were resolved together with payment of SCC's related administration and legal expense. Changes in any one of the factors mentioned above could significantly impact the estimate.
The liability is included in deferred revenue and other current liabilities on the consolidated balance sheets. A rollforward of SCC's accrued liability for these loss contingencies is as follows:
(in 000s)
 
Three months ended July 31,
 
2015

 
2014

Balance, beginning of the period
 
$
149,765

 
$
183,765

Provisions
 

 
10,000

Payments
 

 

Balance, end of the period
 
$
149,765

 
$
193,765

 
 
 
 
 
On June 11, 2015, the New York Court of Appeals, New York's highest appellate court, upheld the New York intermediate appellate court in ACE Securities Corp. v. DB Structured Products, Inc., that the six-year statute of limitations under New York law starts to run at the time the representations and warranties are made, not the date when the repurchase demand was denied. This decision applies to claims and lawsuits brought against SCC where New York law governs. New York law governs many, though not all, of the RMBS transactions into which SCC entered. However this decision would not affect representation and warranty claims and lawsuits SCC has received or may receive, for example, where the statute of limitations has been tolled by agreement or a suit was timely filed. It is possible that in response to the statute of limitations rulings in the ACE case and similar rulings in other state and federal courts, parties seeking to pursue representation and warranty claims or lawsuits with respect to trusts where the statute of limitations for representation and warranty claims against the originator has run, may pursue alternate legal theories of recovery or assert claims against other contractual parties. SCC has not accrued liabilities for claims not subject to a tolling arrangement or not asserted prior to the expiration of the applicable statute of limitations. The impact on SCC, if any, from alternative legal theories or assertions is unclear. 
SCC is taking the legal position, where appropriate, for both contractual representation and warranty claims and similar claims in litigation, that a valid representation and warranty claim cannot be made with respect to a mortgage loan that has been liquidated. There is conflicting case law on this issue. These decisions are from lower courts, are inconsistent in their analysis and receptivity to this defense, and may be subject to appeal. It is anticipated that the liquidated mortgage loan defense will be the subject of future judicial decisions. In the event the liquidated loan defense is further clarified by the courts or other developments occur, the liquidated loan defense may be a factor in the future in SCC's estimated accrual for representation and warranty claims where such defense may be applicable.
SCC believes it is reasonably possible that future losses related to representation and warranty claims may vary from amounts accrued for these exposures. SCC currently believes the aggregate range of reasonably possible losses in excess of amounts accrued is not material. This estimated range is based on the best information currently available, significant management judgment and a number of factors that are subject to change, including developments in case law and the factors mentioned above. The actual loss that may be incurred could differ materially from our accrual or the estimate of reasonably possible losses.
As described more fully in note 12, losses may also be incurred with respect to various indemnification claims or reserved contribution rights by underwriters and depositors in securitization transactions in which SCC participated. Losses from these indemnification claims or reserved contribution rights are frequently not subject to a stated term or limit. We have not concluded that a loss related to any of these indemnification claims or reserved contribution rights is probable, have not accrued a liability for these claims or rights and are not able to estimate a reasonably possible loss or range of loss for these claims or rights. Accordingly, neither the accrued liability described above totaling $149.8 million, nor the estimated range of reasonably possible losses in excess of the amount accrued described above, includes any possible losses which may arise from these indemnification claims or reserved contribution rights. There can be no assurances as to the outcome or impact of these indemnification claims or reserved contribution rights. In the event of unfavorable outcomes on these claims or rights, the amount required to discharge or settle them could be substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations and cash flows.

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If the amount that SCC is ultimately required to pay with respect to claims and litigation related to its past sales and securitizations of mortgage loans, together with payment of SCC's related administration and legal expense, exceeds SCC's net assets, the creditors of SCC, or a bankruptcy trustee if SCC were to file or be forced into bankruptcy, may attempt to assert claims against us for payment of SCC's obligations. Claimants may also attempt to assert claims or seek payment directly from the Company even if SCC's assets exceed its liabilities. SCC's principal assets, as of July 31, 2015, total approximately $480 million and consist primarily of an intercompany note receivable and a deferred tax asset. We believe our legal position is strong on any potential corporate veil-piercing arguments; however, if this position is challenged and not upheld, it could have a material adverse effect on our business and our consolidated financial position, results of operations and cash flows.
NOTE 14: SEGMENT INFORMATION
Results of our continuing operations by reportable segment are as follows:
(in 000s)
 
Three months ended July 31,
 
2015

 
2014

REVENUES :
 
 
 
 
Tax preparation fees:
 
 
 
 
U.S. assisted
 
$
27,285

 
$
25,489

International
 
35,718

 
41,456

U.S. digital
 
3,179

 
2,932

 
 
66,182

 
69,877

Royalties
 
9,695

 
7,642

Revenues from Refund Transfers
 
3,415

 
3,419

Revenues from Emerald Card®
 
15,689

 
14,045

Revenues from Peace of Mind® Extended Service Plan
 
27,703

 
24,253

Interest and fee income on Emerald Advance
 
314

 
607

Other
 
9,576

 
9,237

Total Tax Services
 
132,574

 
129,080

Corporate and eliminations
 
5,144

 
4,506

 
 
$
137,718

 
$
133,586

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES :
 
 
 
 
Tax Services
 
$
(169,438
)
 
$
(150,560
)
Corporate and eliminations
 
(17,671
)
 
(25,256
)
 
 
$
(187,109
)
 
$
(175,816
)
 
 


 


NOTE 15: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Block Financial is a 100% owned subsidiary of the Company. Block Financial is the Issuer and the Company is the full and unconditional Guarantor of the Senior Notes issued on October 25, 2012, our 2012 CLOC, and other indebtedness issued from time to time. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company's investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders' equity and other intercompany balances and transactions.
As discussed in note 10, the presentation of interest expense on borrowings for the three months ended July 31, 2014 has been restated to correct errors in presentation. We reclassified such interest expense from cost of revenues to a separate caption.

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
(in 000s)

Three months ended July 31, 2015
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Total revenues
 
$

 
$
24,767

 
$
113,044

 
$
(93
)
 
$
137,718

Cost of revenues
 

 
11,755

 
201,846

 
(93
)