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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 October 31, 2016
 
 
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 1-06089
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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 November 30, 2016: 207,116,813 shares.
 


Table of Contents

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Form 10-Q for the Period Ended October 31, 2016

Table of Contents

 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three and six months ended October 31, 2016 and 2015
1
 
 
 
 
Consolidated Balance Sheets
 
 
As of October 31, 2016, October 31, 2015 and April 30, 2016
 
 
 
 
Consolidated Statements of Cash Flows
 
 
Six months ended October 31, 2016 and 2015
 
 
 
 
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 October 31,
 
Six months ended October 31,
 
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
Service revenues
 
$
118,940

 
$
113,420

 
$
231,324

 
$
231,854

Royalty, product and other revenues
 
12,392

 
14,995

 
25,193

 
34,279

 
 
131,332

 
128,415

 
256,517

 
266,133

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
Compensation and benefits
 
57,728

 
62,694

 
110,083

 
118,483

Occupancy and equipment
 
99,067

 
95,051

 
193,492

 
184,906

Provision for bad debt
 
(131
)
 
1,182

 
1,286

 
3,187

Depreciation and amortization
 
29,911

 
28,358

 
57,378

 
55,442

Other
 
39,127

 
39,116

 
74,549

 
77,891

 
 
225,702

 
226,401

 
436,788

 
439,909

Selling, general and administrative:
 
 
 
 
 
 
 
 
Marketing and advertising
 
12,001

 
12,965

 
19,562

 
21,496

Compensation and benefits
 
58,293

 
61,593

 
115,815

 
116,262

Depreciation and amortization
 
15,839

 
13,991

 
29,654

 
27,001

Other selling, general and administrative
 
27,519

 
47,298

 
47,444

 
69,280


 
113,652

 
135,847

 
212,475

 
234,039

Total operating expenses
 
339,354

 
362,248

 
649,263

 
673,948

 
 
 
 
 
 
 
 
 
Other income, net
 
2,180

 
10,505

 
5,148

 
10,938

Interest expense on borrowings
 
(22,620
)
 
(14,181
)
 
(44,086
)
 
(22,756
)
Other expenses, net
 
(7
)
 
(210
)
 
(334
)
 
(5,195
)
Loss from continuing operations before income tax benefit
 
(228,469
)
 
(237,719
)
 
(432,018
)
 
(424,828
)
Income tax benefit
 
(85,054
)
 
(95,201
)
 
(167,577
)
 
(185,805
)
Net loss from continuing operations
 
(143,415
)
 
(142,518
)
 
(264,441
)
 
(239,023
)
Net loss from discontinued operations, net of tax benefits of $1,644, $1,420, $3,201 and $3,309
 
(2,805
)
 
(2,489
)
 
(5,452
)
 
(5,643
)
NET LOSS
 
$
(146,220
)
 
$
(145,007
)
 
$
(269,893
)
 
$
(244,666
)
 
 
 
 
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.67
)
 
$
(0.54
)
 
$
(1.21
)
 
$
(0.88
)
Discontinued operations
 
(0.01
)
 
(0.01
)
 
(0.03
)
 
(0.02
)
Consolidated
 
$
(0.68
)
 
$
(0.55
)
 
$
(1.24
)
 
$
(0.90
)
 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.22

 
$
0.20

 
$
0.44

 
$
0.40

 
 
 
 
 
 
 
 
 
COMPREHENSIVE LOSS:
 
 
 
 
 
 
 
 
Net loss
 
$
(146,220
)
 
$
(145,007
)
 
$
(269,893
)
 
$
(244,666
)
Unrealized gains (losses) on securities, net of taxes:
 
 
 
 
 
 
 
 
Unrealized holding losses arising during the
period, net of tax benefits of $ - , $1,384, $6 and $2,259
 

 
(2,150
)
 
(11
)
 
(3,510
)
Reclassification adjustment for gains included in
income, net of taxes of $ - and $3,302, $ - and $3,213
 

 
(5,124
)
 

 
(4,983
)
Change in foreign currency translation adjustments
 
(2,318
)
 
(700
)
 
(5,878
)
 
(9,455
)
Other comprehensive loss
 
(2,318
)
 
(7,974
)
 
(5,889
)
 
(17,948
)
Comprehensive loss
 
$
(148,538
)
 
$
(152,981
)
 
$
(275,782
)
 
$
(262,614
)
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q2 FY2017 Form 10-Q
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Table of Contents

CONSOLIDATED BALANCE SHEETS
 
(unaudited, in 000s, except 
share and per share amounts)
 
As of
 
October 31, 2016

 
October 31, 2015

 
April 30, 2016

 
 


 


 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
232,510

 
$
360,681

 
$
896,801

Cash and cash equivalents - restricted
 
109,538

 
42,781

 
104,110

Receivables, less allowance for doubtful accounts of $56,062, $53,340 and $57,011
 
104,764

 
94,760

 
153,116

Deferred tax assets and income taxes receivable
 

 
145,912

 

Prepaid expenses and other current assets
 
73,555

 
80,764

 
66,574

Mortgage loans held for sale, net of allowance for loan losses of $5,484
 
183,107

 

 

Total current assets
 
703,474

 
724,898

 
1,220,601

Mortgage loans held for investment, less allowance for loan losses of $ - , $7,412 and $5,518
 

 
220,671

 
202,385

Property and equipment, at cost, less accumulated depreciation and amortization of $647,689, $563,158 and $601,120
 
293,060

 
298,602

 
293,565

Intangible assets, net
 
433,135

 
466,224

 
433,885

Goodwill
 
477,360

 
442,068

 
470,757

Deferred tax assets and income taxes receivable
 
81,755

 
11,264

 
120,123

Other noncurrent assets
 
93,394

 
114,746

 
105,909

Total assets
 
$
2,082,178

 
$
2,278,473

 
$
2,847,225

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
139,808

 
$
141,070

 
$
259,586

Accrued salaries, wages and payroll taxes
 
40,754

 
37,512

 
161,786

Accrued income taxes and reserves for uncertain tax positions
 
68,832

 
67,732

 
373,754

Current portion of long-term debt
 
903

 
808

 
826

Deferred revenue and other current liabilities
 
184,560

 
319,426

 
243,653

Total current liabilities
 
434,857

 
566,548

 
1,039,605

Long-term debt and line of credit borrowings
 
1,967,206

 
1,490,514

 
1,491,375

Deferred tax liabilities and reserves for uncertain tax positions
 
117,553

 
140,539

 
132,960

Deferred revenue and other noncurrent liabilities
 
120,033

 
108,115

 
160,182

Total liabilities
 
2,639,649

 
2,305,716

 
2,824,122

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued
of 250,578,382, 276,087,566 and 260,218,666
 
2,506

 
2,761

 
2,602

Additional paid-in capital
 
751,229

 
757,816

 
758,230

Accumulated other comprehensive loss
 
(17,122
)
 
(16,208
)
 
(11,233
)
Retained earnings (deficit)
 
(538,242
)
 
3,573

 
40,347

Less treasury shares, at cost, of 39,085,220, 40,138,877 and 39,701,409
 
(755,842
)
 
(775,185
)
 
(766,843
)
Total stockholders' equity (deficiency)
 
(557,471
)
 
(27,243
)
 
23,103

Total liabilities and stockholders' equity
 
$
2,082,178

 
$
2,278,473

 
$
2,847,225

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2
Q2 FY2017 Form 10-Q | H&R Block, Inc.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Six months ended October 31,
 
2016

 
2015

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(269,893
)
 
$
(244,666
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
87,032

 
82,443

Provision for bad debt
 
1,286

 
3,187

Deferred taxes
 
6,489

 
20,282

Stock-based compensation
 
12,472

 
13,876

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Cash and cash equivalents — restricted
 
(5,421
)
 
49,113

Receivables
 
48,653

 
67,373

Prepaid expenses and other current assets
 
(7,386
)
 
(6,173
)
Other noncurrent assets
 
7,713

 
7,518

Accounts payable and accrued expenses
 
(99,378
)
 
(79,918
)
Accrued salaries, wages and payroll taxes
 
(120,672
)
 
(106,504
)
Deferred revenue and other current liabilities
 
(46,531
)
 
(3,188
)
Income tax receivables, accrued income taxes and income tax reserves
 
(282,234
)
 
(334,245
)
Deferred revenue and other noncurrent liabilities
 
(52,548
)
 
(49,669
)
Other, net
 
(5,379
)
 
(22,142
)
Net cash used in operating activities
 
(725,797
)
 
(602,713
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Sales, maturities of and payments received on available-for-sale securities
 
144

 
434,261

Principal payments on mortgage loans, net
 
16,706

 
17,006

Capital expenditures
 
(44,918
)
 
(38,779
)
Payments made for business acquisitions, net of cash acquired
 
(36,151
)
 
(61,846
)
Franchise loans funded
 
(10,171
)
 
(10,281
)
Payments received on franchise loans
 
14,263

 
17,473

Other, net
 
4,336

 
7,246

Net cash provided by (used in) investing activities
 
(55,791
)
 
365,080

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of line of credit borrowings
 
(50,000
)
 

Proceeds from line of credit borrowings
 
525,000

 

Proceeds from issuance of long-term debt
 

 
996,831

Customer banking deposits, net
 

 
(326,705
)
Transfer of HRB Bank deposits
 

 
(419,028
)
Dividends paid
 
(95,971
)
 
(110,338
)
Repurchase of common stock, including shares surrendered
 
(215,511
)
 
(1,517,786
)
Proceeds from exercise of stock options
 
1,630

 
16,875

Other, net
 
(43,734
)
 
(37,820
)
Net cash provided by (used in) financing activities
 
121,414

 
(1,397,971
)
 
 
 
 
 
Effects of exchange rate changes on cash
 
(4,117
)
 
(10,905
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(664,291
)
 
(1,646,509
)
Cash and cash equivalents at beginning of the period
 
896,801

 
2,007,190

Cash and cash equivalents at end of the period
 
$
232,510

 
$
360,681

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
112,339

 
$
132,096

Interest paid on borrowings
 
40,670

 
15,606

Accrued additions to property and equipment
 
12,920

 
4,573

Accrued purchase of common stock
 
7,143

 

 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q2 FY2017 Form 10-Q
3

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated balance sheets as of October 31, 2016 and 2015, the consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2016 and 2015, and the consolidated statements of cash flows for the six months ended October 31, 2016 and 2015 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 October 31, 2016 and 2015 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 United States (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, 2016 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2016 or for the year then ended are derived from our April 30, 2016 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 11 and 12 for additional information on litigation, claims and other loss contingencies related to our discontinued operations.
NEW ACCOUNTING PRONOUNCEMENTS – In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-3, "Interest - Imputation of Interest," (ASU 2015-3) which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance must be applied retrospectively to all periods presented. We adopted this guidance effective May 1, 2016. Prior periods have been retrospectively adjusted to conform to the current period presentation. Debt issuance costs related to our Senior Notes previously reported as other current assets and other noncurrent assets have been reclassified to long-term debt. This guidance did not have a material effect on our consolidated financial statements.
NOTE 2: 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 4.6 million shares for the three and six months ended October 31, 2016, and 5.0 million shares for the three and six months ended October 31, 2015, as the effect would be antidilutive due to the net loss from continuing operations during those periods.

4
Q2 FY2017 Form 10-Q | H&R Block, Inc.

Table of Contents

The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
 
 
Three months ended October 31,
 
Six months ended October 31,
 
 
2016

 
2015

 
2016

 
2015

Net loss from continuing operations attributable to shareholders
 
$
(143,415
)
 
$
(142,518
)
 
$
(264,441
)
 
$
(239,023
)
Amounts allocated to participating securities
 
(143
)
 
(102
)
 
(267
)
 
(204
)
Net loss from continuing operations attributable to common shareholders
 
$
(143,558
)
 
$
(142,620
)
 
$
(264,708
)
 
$
(239,227
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares
 
215,535

 
266,267

 
218,009

 
271,016

Potential dilutive shares
 

 

 

 

Dilutive weighted average common shares
 
215,535

 
266,267

 
218,009

 
271,016

 
 
 
 
 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
Basic
 
$
(0.67
)
 
$
(0.54
)
 
$
(1.21
)
 
$
(0.88
)
Diluted
 
(0.67
)
 
(0.54
)
 
(1.21
)
 
(0.88
)
 
 
 
 
 
 
 
 
 
The weighted average shares outstanding for the three and six months ended October 31, 2016 decreased to 215.5 million and 218.0 million, respectively, from 266.3 million and 271.0 million for the three and six months ended October 31, 2015, respectively, primarily due to share repurchases completed in the prior and current year. During the six months ended October 31, 2016, we purchased and immediately retired 9.6 million shares at an aggregate cost of $217.0 million (average price of $22.51 per share). During the six months ended October 31, 2015, we purchased and immediately retired 40.5 million shares at an aggregate cost of $1.5 billion (average price of $37.00 per share). The cost of shares retired was allocated to the components of stockholders’ equity as follows:
 
 
(in 000s)
 
Six months ended October 31,
 
2016

 
2015

Common stock
 
$
96

 
$
405

Additional paid-in-capital
 
5,784

 
24,325

Retained earnings
 
211,140

 
1,475,270

Total
 
$
217,020

 
$
1,500,000

 
 
 
 
 
STOCK-BASED COMPENSATION – In addition to the shares repurchased as discussed above, during the six months ended October 31, 2016, we acquired 0.2 million shares of our common stock at an aggregate cost of $5.6 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the six months ended October 31, 2015, we acquired 0.6 million shares at an aggregate cost of $17.8 million for similar purposes.
During the six months ended October 31, 2016 and 2015, we issued 0.9 million and 1.8 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the six months ended October 31, 2016, we granted equity awards equivalent to 1.2 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, although the Compensation Committee may in limited circumstances approve grants with a modified vesting schedule. Stock-based compensation expense of our continuing operations totaled $6.9 million and $12.5 million for the three and six months ended October 31, 2016, respectively, and $7.9 million and $13.9 million for the three and six months ended October 31, 2015, respectively. As of October 31, 2016, unrecognized compensation cost for stock options totaled $0.1 million, and for nonvested shares and units totaled $41.2 million.

H&R Block, Inc. | Q2 FY2017 Form 10-Q
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Table of Contents

NOTE 3: RECEIVABLES
Receivables consist of the following:
(in 000s)
 
As of
 
October 31, 2016
 
October 31, 2015
 
April 30, 2016
 
 
Short-term
 
Long-term
 
Short-term
 
Long-term
 
Short-term
 
Long-term
Loans to franchisees
 
$
48,772

 
$
46,998

 
$
55,970

 
$
61,428

 
$
50,000

 
$
46,284

Receivables for tax preparation and related fees
 
37,303

 
5,528

 
37,751

 
6,103

 
52,327

 
5,528

Cash Back® receivables
 
2,630

 

 
901

 

 
37,663

 

Emerald Advance® lines of credit
 
23,495

 

 
19,373

 
246

 
25,092

 
869

Royalties and other receivables from franchisees
 
15,348

 

 
9,851

 

 
9,997

 

Other
 
33,278

 
3,712

 
24,254

 
7,498

 
35,048

 
7,726

 
 
160,826

 
56,238

 
148,100

 
75,275

 
210,127

 
60,407

Allowance for doubtful accounts
 
(56,062
)
 

 
(53,340
)
 

 
(57,011
)
 

 
 
$
104,764

 
$
56,238

 
$
94,760

 
$
75,275

 
$
153,116

 
$
60,407

 
 
 
 
 
 
 
 
 
 
 
 
 
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 October 31, 2016 and 2015 and April 30, 2016, consisted of $31.4 million, $41.1 million and $35.1 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs and $64.4 million, $76.3 million and $61.2 million, respectively, in term loans made primarily to finance the purchase of franchises.
As of October 31, 2016 and 2015 and April 30, 2016, loans with a principal balance of $2.0 million, $1.6 million and $0.3 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 October 31, 2016 and 2015 and April 30, 2016, $29 thousand, $36 thousand and $1.5 million of Cash Back balances were more than 60 days old, respectively.
H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT Beginning in fiscal year 2016, we no longer originate H&R Block Emerald Advance® lines of credit (EAs). These lines of credit are originated by BofI Federal Bank, a federal savings bank (BofI), and we purchase a participation interest in them.
We review the credit quality of our 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 October 31, 2016, by year of origination, are as follows:
(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2016
 
$
8,644

Revolving loans
 
14,851

 
 
$
23,495

 
 
 
As of October 31, 2016 and 2015 and April 30, 2016, $20.8 million, $18.2 million and $21.1 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 receivables for the six months ended October 31, 2016 and 2015 is as follows:
(in 000s)
 
 
 
EAs

 
All Other

 
Total

Balances as of May 1, 2016
 
$
9,007

 
$
48,004

 
$
57,011

Provision
 
451

 
835

 
1,286

Charge-offs
 

 
(2,235
)
 
(2,235
)
Balances as of October 31, 2016
 
$
9,458

 
$
46,604

 
$
56,062

 
 
 
 
 
 
 
Balances as of May 1, 2015
 
$
7,353

 
$
47,174

 
$
54,527

Provision
 
877

 
349

 
1,226

Charge-offs
 

 
(2,413
)
 
(2,413
)
Balances as of October 31, 2015
 
$
8,230

 
$
45,110

 
$
53,340

 
 
 
 
 
 
 
NOTE 4: MORTGAGE LOANS HELD FOR SALE OR INVESTMENT
In September 2016, our Board of Directors approved a plan to sell our portfolio of mortgage loans and we expect to complete the sale of these assets in our third fiscal quarter. As a result, these loans are presented as held for sale as of October 31, 2016, while they are presented as held for investment as of October 31, 2015 and April 30, 2016.
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s)
 
As of
 
October 31, 2016
 
October 31, 2015
 
April 30, 2016
 
 
Amount

 
% of Total

 
Amount

 
% of Total

 
Amount

 
% of Total

Adjustable-rate loans
 
$
97,358

 
52
%
 
$
118,612

 
52
%
 
$
108,251

 
52
%
Fixed-rate loans
 
89,699

 
48
%
 
107,612

 
48
%
 
97,957

 
48
%
 
 
187,057

 
100
%
 
226,224

 
100
%
 
206,208

 
100
%
Unamortized deferred fees and costs
 
1,534

 
 
 
1,859

 
 
 
1,695

 
 
Less: Allowance for loan losses
 
(5,484
)
 
 
 
(7,412
)
 
 
 
(5,518
)
 
 
 
 
$
183,107

 
 
 
$
220,671

 
 
 
$
202,385

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our loan loss allowance as a percent of mortgage loans was 2.9% as of October 31, 2016, compared to 3.3% as of October 31, 2015 and 2.7% as of April 30, 2016.
Activity in the allowance for loan losses for the six months ended October 31, 2016 and 2015 is as follows:
(in 000s)
 
Six months ended October 31,
 
2016

 
2015

Balance at beginning of the period
 
$
5,518

 
$
7,886

Provision
 

 
(28
)
Recoveries
 
742

 
1,050

Charge-offs
 
(776
)
 
(1,496
)
Balance at end of the period
 
$
5,484

 
$
7,412

 
 
 
 
 

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Detail of the aging of the mortgage loans in our portfolio as of October 31, 2016 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
 
$
6,350

 
$
1,714

 
$
38,057

 
$
46,121

 
$
65,412

 
$
111,533

All other
 
1,471

 
428

 
4,620

 
6,519

 
69,005

 
75,524

 
 
$
7,821

 
$
2,142

 
$
42,677

 
$
52,640

 
$
134,417

 
$
187,057

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
We do not accrue interest on loans past due 90 days or more.
NOTE 5: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the six months ended October 31, 2016 and 2015 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of April 30, 2016
 
$
503,054

 
$
(32,297
)
 
$
470,757

Acquisitions
 
7,435

 

 
7,435

Disposals and foreign currency changes, net
 
(832
)
 

 
(832
)
Impairments
 

 

 

Balances as of October 31, 2016
 
$
509,657

 
$
(32,297
)
 
$
477,360

 
 
 
 
 
 
 
Balances as of April 30, 2015
 
$
474,128

 
$
(32,297
)
 
$
441,831

Acquisitions
 
1,852

 

 
1,852

Disposals and foreign currency changes, net
 
(1,615
)
 

 
(1,615
)
Impairments
 

 

 

Balances as of October 31, 2015
 
$
474,365

 
$
(32,297
)
 
$
442,068

 
 
 
 
 
 
 
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 intangible assets are as follows:
(in 000s)
 
 
 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

As of October 31, 2016:
 
 
 
 
 
 
Reacquired franchise rights
 
$
322,916

 
$
(79,484
)
 
$
243,432

Customer relationships
 
211,106

 
(117,539
)
 
93,567

Internally-developed software
 
137,533

 
(104,022
)
 
33,511

Noncompete agreements
 
31,625

 
(26,520
)
 
5,105

Franchise agreements
 
19,201

 
(10,134
)
 
9,067

Purchased technology
 
54,700

 
(28,941
)
 
25,759

Acquired assets pending final allocation (1)
 
22,694

 

 
22,694

 
 
$
799,775

 
$
(366,640
)
 
$
433,135

As of October 31, 2015:
 
 
 
 
 
 
Reacquired franchise rights
 
$
316,142

 
$
(56,731
)
 
$
259,411

Customer relationships
 
182,137

 
(89,340
)
 
92,797

Internally-developed software
 
123,263

 
(88,091
)
 
35,172

Noncompete agreements
 
32,428

 
(24,632
)
 
7,796

Franchise agreements
 
19,201

 
(8,854
)
 
10,347

Purchased technology
 
54,700

 
(22,877
)
 
31,823

Acquired assets pending final allocation (1)
 
28,878

 

 
28,878

 
 
$
756,749

 
$
(290,525
)
 
$
466,224

As of April 30, 2016:
 
 
 
 
 
 
Reacquired franchise rights
 
$
319,354

 
$
(68,284
)
 
$
251,070

Customer relationships
 
206,607

 
(104,072
)
 
102,535

Internally-developed software
 
131,161

 
(95,768
)
 
35,393

Noncompete agreements
 
31,499

 
(25,572
)
 
5,927

Franchise agreements
 
19,201

 
(9,494
)
 
9,707

Purchased technology
 
54,700

 
(25,909
)
 
28,791

Acquired assets pending final allocation (1)
 
462

 

 
462

 
 
$
762,984

 
$
(329,099
)
 
$
433,885

 
 
 
 
 
 
 
(1)    Represents business acquisitions for which final purchase price allocations have not yet been determined.
Amortization of intangible assets for the three and six months ended October 31, 2016 was $20.1 million and $38.0 million, respectively. Amortization of intangible assets for the three and six months ended October 31, 2015 was $17.9 million and $34.5 million, respectively. Estimated amortization of intangible assets for fiscal years 2017, 2018, 2019, 2020 and 2021 is $69.8 million, $65.9 million, $51.5 million, $36.6 million and $24.7 million, respectively.

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NOTE 6: LONG-TERM DEBT
The components of long-term debt are as follows:
 
 
 
 
 
 
(in 000s)

As of
 
October 31, 2016

 
October 31, 2015

 
April 30, 2016

Senior Notes, 4.125%, due October 2020
 
$
650,000

 
$
650,000

 
$
650,000

Senior Notes, 5.500%, due November 2022
 
500,000

 
500,000

 
500,000

Senior Notes, 5.250%, due October 2025
 
350,000

 
350,000

 
350,000

Committed line of credit borrowings
 
475,000

 

 

Capital lease obligation
 
7,024

 
7,835

 
7,435

Debt issuance costs and discounts
 
(13,915
)
 
(16,513
)
 
(15,234
)
 
 
1,968,109

 
1,491,322

 
1,492,201

Less: Current portion
 
(903
)
 
(808
)
 
(826
)
 
 
$
1,967,206

 
$
1,490,514

 
$
1,491,375

 
 
 
 
 
 
 
Effective May 1, 2016, we adopted the provisions of ASU 2015-3 on a retrospective basis. Accordingly, debt issuance costs related to our Senior Notes are included in long-term debt in the consolidated balance sheets. Amounts for prior periods have been retrospectively adjusted to conform to the current period presentation. See note 1 for additional information.
On September 22, 2016, we entered into a First Amended and Restated Credit and Guarantee Agreement (2016 CLOC), which amended our Credit and Guarantee Agreement (2015 CLOC), extending the scheduled maturity date from September 21, 2020 to September 22, 2021 and decreasing the sublimit for standby letters of credit. Other material terms remain unchanged from our 2015 CLOC. The 2016 CLOC provides for an unsecured senior revolving credit facility in the aggregate principal amount of $2.0 billion, which includes a $200.0 million sublimit for swingline loans and a $50.0 million sublimit for standby letters of credit. We may request increases in the aggregate principal amount of the revolving credit facility of up to $500.0 million, subject to obtaining commitments from lenders therefor and meeting certain other conditions. The 2016 CLOC will mature on September 22, 2021, unless extended pursuant to the terms of the 2016 CLOC, at which time all outstanding amounts thereunder will be due and payable. The 2016 CLOC includes an annual facility fee, which will vary depending our then current credit ratings.
The 2016 CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on April 30, July 31, and October 31 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage (EBITDA-to-interest expense) ratio calculated on a consolidated basis of not less than 2.50 to 1.00 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur certain additional debt, incur liens, merge or consolidate with other companies, sell or dispose of assets (including equity interests), liquidate or dissolve, engage in certain transactions with affiliates or enter into certain restrictive agreements. The 2016 CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the 2016 CLOC may be used for working capital needs or for other general corporate purposes. We were in compliance with these requirements as of October 31, 2016.
We had an outstanding balance of $475.0 million under the 2016 CLOC as of October 31, 2016. Incremental amounts available to borrow under the 2016 CLOC were limited to approximately $948 million as of October 31, 2016, in accordance with the covenant requiring a minimum debt-to-EBITDA ratio of 3.50 to 1.00.

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NOTE 7: FAIR VALUE
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS – The carrying amounts and estimated fair values of our financial instruments are as follows:
(in 000s)
 
As of
 
October 31, 2016
 
October 31, 2015
 
April 30, 2016
 
 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
232,510

 
$
232,510

 
$
360,681

 
$
360,681

 
$
896,801

 
$
896,801

Cash and cash equivalents - restricted
 
109,538

 
109,538

 
42,781

 
42,781

 
104,110

 
104,110

Receivables, net - short-term
 
104,764

 
104,764

 
94,760

 
94,760

 
153,116

 
153,116

Mortgage loans held for sale
 
183,107

 
195,432

 

 

 

 

Mortgage loans held for investment, net
 

 

 
220,671

 
180,437

 
202,385

 
190,503

Receivables, net - long-term
 
56,238

 
56,238

 
75,275

 
75,275

 
60,407

 
60,407

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt and line of credit borrowings
 
1,968,109

 
2,067,234

 
1,491,322

 
1,553,633

 
1,492,201

 
1,566,098

Contingent consideration
 
7,817

 
7,817

 
11,932

 
11,932

 
8,657

 
8,657

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value estimates, methods and assumptions are set forth below. 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 sale - The fair value is based on indicative bids received from prospective buyers and is based on estimated valuations of unpaid principal balances (Level 2). These loans were previously reported as held for investment with the related fair value determined as outlined below (Level 3). In accordance with plans approved by our Board of Directors, these loans are now presented as held for sale.
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).
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 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.
Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2). For outstanding balances on the 2016 CLOC, fair value approximates the carrying amount (Level 1).
Contingent consideration - Fair value approximates the carrying amount (Level 3).
NOTE 8: 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.

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The Company currently does not have a U.S. federal income tax return under examination. Our U.S. federal returns for 2012 and all prior periods have been audited by the IRS and are closed. Our U.S. federal returns for 2013 and after have not been audited and remain open to examination. With respect to state and local jurisdictions and countries outside the United States, we and our subsidiaries are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of the audits is always uncertain, we believe that adequate amounts of tax, interest and penalties have been provided for in the consolidated financial statements for any adjustments that might be incurred due to state, local or foreign audits.
We had gross unrecognized tax benefits of $105.7 million, $96.6 million and $111.5 million as of October 31, 2016 and 2015 and April 30, 2016, respectively. The gross unrecognized tax benefits decreased $5.8 million and increased $10.3 million during the six months ended October 31, 2016 and 2015, respectively. The decrease in unrecognized tax benefits during the six months ending October 31, 2016 is primarily related to audit settlements in various states. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $11.6 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 $7.5 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 other noncurrent liabilities in the consolidated balance sheet.
Consistent with prior years, our pretax loss for the six months ended October 31, 2016 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, we have determined that it is at least 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 $10.8 million was recorded in the six months ended October 31, 2016, compared to a discrete tax benefit of $26.6 million in the same period of the prior year. The discrete tax benefit recorded in the current period resulted primarily from favorable settlements of state audits. The discrete tax benefit recorded in the prior year resulted primarily from a law change enacted in the state of Missouri.
Our effective tax rate for continuing operations, including the effects of discrete income tax items was 38.8% and 43.7% for the six months ended October 31, 2016 and 2015, respectively. Discrete items increased our estimate of the annualized effective tax rate for the six months ended October 31, 2016 and 2015 by 2.5% and 6.3%, 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 discrete tax items combined with the seasonal nature of our business can cause the effective tax rate through our second quarter to be significantly different than the rate for our full fiscal year.

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NOTE 9: OTHER INCOME AND OTHER EXPENSES
The following table shows the components of other income and other expenses:
(in 000s)
 
 
 
Three months ended October 31,
 
Six months ended October 31,
 
 
2016

 
2015

 
2016

 
2015

Other income, net:
 
 
 
 
 
 
 
 
Mortgage loans and real estate owned, net
 
$
1,508

 
$
34

 
$
3,045

 
$
34

Interest and gains on AFS securities
 
52

 
8,768

 
83

 
8,768

Other
 
620

 
1,703

 
2,020

 
2,136

 
 
$
2,180

 
$
10,505

 
$
5,148

 
$
10,938

Other expenses, net:
 
 
 
 
 
 
 
 
Foreign currency losses
 
$
(6
)
 
$
(23
)
 
$
(27
)
 
$
(4,622
)
Other
 
(1
)
 
(187
)
 
(307
)
 
(573
)
 
 
$
(7
)
 
$
(210
)
 
$
(334
)
 
$
(5,195
)
 
 
 
 
 
 
 
 
 
In connection with our deregistration as a savings and loan holding company (SLHC), we no longer present interest income on mortgage loans and various other investments as revenues. Effective September 1, 2015, these amounts are prospectively reported in other income on the consolidated statements of operations and comprehensive loss.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Changes in deferred revenue balances related to our Peace of Mind® Extended Service Plan (POM) for both company-owned and franchise offices, which is included in deferred revenue and other liabilities in the consolidated balance sheets, are as follows:
(in 000s)
 
Six months ended October 31,
 
2016

 
2015

Balance, beginning of the period
 
$
204,342

 
$
189,779

Amounts deferred for new extended service plans issued
 
2,561

 
2,608

Revenue recognized on previous deferrals
 
(58,921
)
 
(54,943
)
Balance, end of the period
 
$
147,982

 
$
137,444

 
 
 
 
 
We accrued $5.0 million, $6.8 million and $7.0 million as of October 31, 2016 and 2015 and April 30, 2016, respectively, related to estimated losses under the standard guarantee, which is included with assisted 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.
We have accrued estimated contingent consideration totaling $7.8 million, $11.9 million and $8.7 million as of October 31, 2016 and 2015 and April 30, 2016, respectively, related to acquisitions, with amounts 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 $56.4 million at October 31, 2016, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $25.0 million.
On October 25, 2016, we entered into a Refund Advance Program Agreement and certain ancillary agreements with certain third parties, pursuant to which they will originate and fund Refund Advance loans, and provide technology, software, and underwriting support services related to such loans. The Refund Advance loans will be offered to eligible assisted U.S. tax preparation clients, based on client eligibility as determined by the loan originator. We will pay loan origination fees based on volume and customer type. The loan origination fees are intended to cover expected loan

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losses and payments to capital providers, among other items. In addition, we have provided limited guarantees up to $73 million in the aggregate, subject to specified thresholds, which would cover certain incremental loan losses. We expect that only an immaterial amount of the guarantees will be called upon under anticipated loss scenarios.
NOTE 11: 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 certain 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 October 31, 2016. 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 business and our consolidated financial position, results of operations and cash flows. As of October 31, 2016 and 2015 and April 30, 2016, our total accrued liabilities were $2.3 million, $6.2 million and $2.3 million, respectively, for matters 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 October 31, 2016, 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.

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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 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 our 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 has been, remains, and may in the future be subject to litigation, claims, including indemnification and contribution 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, underwriters, and securitization trustees, 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 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. Representatives of a holder of certificates in the trust have requested a pre-motion conference for a proposed motion to intervene to add H&R Block, Inc. to the lawsuit to assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing and agency law. We believe we have meritorious defenses to the extent the court allows any such claims to be asserted. 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). 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

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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. On September 30, 2016, the court granted a motion allowing plaintiff to file a second amended complaint to include breach of contract claims with respect to 649 additional loans in the trust and to allow such claims with respect to other loans in the trust proven to be in material breach of SCC’s representations and warranties. SCC filed a motion for reconsideration and a motion for leave to appeal the ruling, both of which remain pending. On October 6, 2016, plaintiff filed its second amended complaint. SCC filed a motion to dismiss, which also remains pending. Representatives of a holder of certificates in the trust have requested a pre-motion conference for a proposed motion to intervene to add H&R Block, Inc. to the lawsuit to assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing and agency law. We believe we have meritorious defenses to the extent the court allows any such claims to be asserted. A portion of the accrual for representation and warranty claims, as discussed in note 12, is related to some of the loans included in the original complaint in this case. We have not concluded that a loss related to this lawsuit is probable, nor have we accrued a liability related to this lawsuit.
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. A portion of the accrual for representation and warranty claims, as discussed in note 12, is related to loans in this case. We have not concluded that a loss related to this lawsuit is probable, nor have we accrued a liability related to this lawsuit.
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. SCC has received notices of claims for indemnification relating to lawsuits to which underwriters or depositors are party. Based on information currently available to SCC, it believes that the 22 lawsuits in which notice of a claim has been made involve 39 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 Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al., filed in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) and settled as to SCC in August 2015), 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.
Securitization trustees also are, or have been, involved in lawsuits related to securitization transactions in which SCC participated. Plaintiffs in these lawsuits allege, among other things, that originators, depositors, servicers or other parties breached their representations and warranties or otherwise failed to fulfill their obligations, including that securitization trustees breached their contractual obligations, breached their fiduciary duties, or violated statutory requirements by failing to properly protect the certificate holders’ interests. SCC may receive notices for indemnification with respect to existing or new lawsuits or settlements of such lawsuits in its capacity as originator, depositor, or servicer. We have not concluded that a loss related to any indemnification claims by securitization trustees is probable, nor have we accrued a liability for such claims.

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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 additional appeal. On March 8, 2016, the appellate court affirmed the decision of the trial court. We filed an application for transfer of the appeal in the Supreme Court of Missouri, which was denied. We subsequently filed a petition for writ of certiorari with the United States Supreme Court, 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 originally sought to represent all persons nationwide (excluding citizens of Missouri) who were charged the compliance fee, and asserted claims of 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. The plaintiff filed an appeal with the Eighth Circuit Court of Appeals, which was denied on June 18, 2015. In January 2016, the plaintiff filed an amended complaint asserting claims of violation of Missouri and California state consumer laws, money had and received, and unjust enrichment, along with a motion to certify a class of all persons (excluding citizens of Missouri) who were charged the compliance fee in the state of California. We subsequently filed a motion for summary judgment on all claims. On April 29, 2016, the court granted our motion for summary judgment on all claims and denied the plaintiff's motion for class certification as moot. The plaintiff filed an appeal with the Eighth Circuit Court of Appeals, 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.
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. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
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 through an indemnification agreement.
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 and 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

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substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
NOTE 12: 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.
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 residential mortgage-backed securities (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.
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. While tolling agreements remain in effect, they toll the running of any applicable statute of limitations related to potential lawsuits regarding representation and warranty claims and other claims against SCC.
SCC has engaged in discussions with counterparties since fiscal year 2013 regarding the bulk settlement of previously denied and potential future representation and warranty and other claims against SCC. Based on settlement discussions with counterparties, SCC believes a bulk settlement approach, rather than the loan-by-loan resolution process, will be needed to resolve all of the claims that are the subject of these discussions. SCC has utilized that approach to resolve certain of these claims. On July 13, 2016, SCC entered into a settlement agreement with an additional counterparty to resolve certain additional claims. The amount paid under this 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 October 31, 2016 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

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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 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)
 
Six months ended October 31,
 
2016

 
2015

Balance, beginning of the period
 
$
65,265

 
$
149,765

Provisions
 
235

 
4,000

Payments
 
(40,000
)
 

Balance, end of the period
 
$
25,500

 
$
153,765

 
 
 
 
 
On June 11, 2015, the New York Court of Appeals, New York's highest court, held 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. 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, have sought, and may in the future seek, to distinguish certain aspects of the ACE decision, pursue alternate legal theories of recovery, or assert claims against other contractual parties such as securitization trustees. For example, a recent ruling by a New York intermediate appellate court allowed a counterparty to pursue litigation on additional loans in the same trust even though only some of the loans complied with the condition precedent of timely pre-suit notice and opportunity to cure or repurchase. The trial court in the second Homeward lawsuit against SCC, discussed above in Note 11, followed that ruling and permitted the plaintiff to amend its complaint to include breach of contract claims with respect to 649 additional loans in the trust and to allow such claims with respect to other loans in the trust proven to be in material breach of SCC’s representations and warranties. The trial court held that claims with respect to the additional loans sufficiently relate back to the timely-asserted claims and therefore are not barred by the statute of limitations. SCC is seeking reconsideration of, and leave to appeal, that ruling. The impact on SCC from alternative legal theories seeking to avoid or distinguish the ACE decision, or judicial limitations on the ACE decision, is unclear. 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.
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 estimable 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 11, losses may also be incurred with respect to various indemnification claims or reserved contribution rights by underwriters, depositors, and securitization trustees in securitization transactions in which SCC participated. 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

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above totaling $25.5 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.
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, other potential claimants, 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 against or seek payment directly from the Company even if SCC's assets exceed its liabilities. SCC's principal assets, as of October 31, 2016, total approximately $346 million and consist primarily of an intercompany note receivable. 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 13: 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, our 2016 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.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
(in 000s)

Three months ended October 31, 2016
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Total revenues
 
$

 
$
10,934

 
$
120,423

 
$
(25
)
 
$
131,332

Cost of revenues
 

 
5,666

 
220,061

 
(25
)
 
225,702

Selling, general and administrative
 

 
1,732

 
111,920

 

 
113,652

Total operating expenses
 

 
7,398

 
331,981

 
(25
)
 
339,354

Other income, net
 

 
2,256

 
1,639

 
(1,715
)
 
2,180

Interest expense on external borrowings
 

 
(22,248
)
 
(372
)
 

 
(22,620
)
Other expenses, net
 
(148,773
)
 
(1,049
)
 
(14,833
)
 
164,648

 
(7
)
Loss from continuing operations before tax benefit
 
(148,773
)
 
(17,505
)
 
(225,124
)
 
162,933

 
(228,469
)
Income tax benefit
 
(2,553
)
 
(5,962
)