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Form 10-K Liberty Tax, Inc. For: Apr 30

July 1, 2015 5:03 PM EDT

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended April 30, 2015
 
 
 
 
 
or
 
 
 
o
 
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: 001-35588
Liberty Tax, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
27-3561876
(I.R.S. Employer
Identification No.)
 
 
1716 Corporate Landing Parkway,
Virginia Beach, Virginia
(Address of principal executive offices)
 
23454
(Zip Code)
 
Registrant's telephone number, including area code: (757) 493-8855
Securities registered pursuant to Section 12(b) of the Act:
 
Class A Common Stock,
par value $0.01 per share
(Title of Class)
 
The NASDAQ Stock Market LLC
(Name of Exchange on which
registered)
 
Securities to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o    NO ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. YES o    NO ý
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 ý    NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý    NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o


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.
Large accelerated filer o
 
Accelerated filer ý
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o    NO ý
The aggregate market value of the shares of Class A common stock held by non-affiliates of the registrant computed based on the last reported sale price of $37.89 on October 31, 2014 was $268,395,343.
The number of shares of the registrant's Class A common stock outstanding as of June 23, 2015 was 11,920,712.
The number of shares of the registrant's Class B common stock outstanding as of June 23, 2015 was 900,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits and Financial Statement Schedules

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements concerning our business, operations, and financial performance and condition as well as our plans, objectives, and expectations for our business operations and financial performance and condition. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as "aim," "anticipate," "assume," "believe," "could," "due," "estimate," "expect," "goal," "intend," "may," "objective," "plan," "predict," "potential," "positioned," "should," "target," "will," "would," and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and our management's beliefs and assumptions. They are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this annual report may turn out to be inaccurate. Factors that may cause such differences include, but are not limited to, the risks described under "Item 1A—Risk Factors," including:
our inability to sustain growth at our historical pace;
the seasonality of our business;
the continued service of our senior management team and our ability to attract additional talent;
our inability to secure reliable sources of the tax settlement products we make available to our customers;
government regulation and oversight, including the regulation of our tax settlement products such as refund transfers and loan settlement products;
government initiatives that simplify tax return preparation, improve the timing and efficiency of processing tax returns, limit payments to tax preparers, or decrease the number of tax returns filed or the size of the refunds;
government initiatives to pre-populate income tax returns;
the effect of regulation of the products and services that we offer, including changes in laws and regulations;
the possible characterization of refund transfers as a form of loan or extension of credit;
changes in the tax settlement products offered to our customers that make our services less attractive to customers or more costly to us;
our ability to maintain relationships with our tax settlement product service providers;
our ability and the ability of our franchisees to comply with legal and regulatory requirements;
failures by our franchisees and their employees to comply with their contractual obligations to us and with laws and regulations, to the extent these failures affect our reputation or subject us to legal risk;
the ability of our franchisees to open new territories and operate them successfully;
the ability of our franchisees to generate sufficient revenue to repay their indebtedness to us;
our ability to manage Company-owned offices;
our exposure to litigation;
our ability and our franchisees' ability to protect customers' personal information, including from a cyber-security incident;
the impact of identity-theft concerns on customer attitudes toward our services;
our ability to access the credit markets and satisfy our covenants to lenders;
challenges in deploying accurate tax software in a timely way each tax season;
delays in the commencement of the tax season attributable to Congressional action affecting tax matters and the resulting inability of federal and state tax agencies to accept tax returns on a timely basis, or other changes that have the effect of delaying the tax refund cycle;
competition in the tax preparation market;

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the effect of federal and state legislation that affects the demand for paid tax preparation, such as the Affordable Care Act and potential immigration reform;
our reliance on technology systems, including the deployment of our LibPro project, and electronic communications;
our ability to deploy our LibPro software in a timely manner and with all the features our customers require;
the impact of any acquisitions or dispositions, including our ability to integrate acquisitions and capitalize on their anticipated synergies; and
other factors, including the risk factors discussed in this annual report.
Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this annual report. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. A potential investor or other vendor should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission ("SEC") after the date of this annual report.

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PART I
Item 1.    Business.
Company Information
We were incorporated in Delaware in September 2010 as JTH Holding, Inc. In July 2014, our corporate name was changed to Liberty Tax. Inc. in order to better reflect our primary business and to eliminate confusion among stockholders and potential investors seeking information about us. We are the holding company for JTH Tax, Inc. d/b/a Liberty Tax Service, our largest subsidiary, which was incorporated in Delaware in October 1996. As an "emerging growth company" under applicable federal securities laws, we are subject to reduced public company reporting requirements.
References in this report to "years" are to our fiscal years, which end on April 30 unless otherwise noted, and all references to "tax season" refer to the period between January 1 and April 30 of the referenced year. Unless the context requires otherwise, the terms "Liberty Tax," "Liberty Tax Service," "we," "the Company," "us," and "our" refer to Liberty Tax, Inc. and its consolidated subsidiaries. A complete list of our subsidiaries can be found in Exhibit 21.1 to this report.
Financial Information about Segments
The majority of our revenue is earned through our United States operations; however, during our fiscal years 2015, 2014, and 2013, we earned $6.9 million, $6.4 million, and $5.9 million, respectively, from our Canadian operations. Due to the similarity in the nature of products and services, production process, type of customer, distribution methods, future prospects, and regulatory environment, we combine our United States operations and our Canadian operations into one reportable segment.
Our Business
We are one of the leading providers of tax preparation services in the United States and Canada. As measured by both the number of returns prepared and the number of retail offices, we are the second largest national retail preparer of individual tax returns in the United States and the second largest retail preparer of individual tax returns in Canada. Although we operate a limited number of Company-owned offices each tax season, our tax preparation services and related tax settlement products are offered primarily through franchised locations. All of the offices are presently operated under the Liberty Tax Service or SiempreTax+ brands.
Our business involves providing retail federal and state income tax preparation services and related tax settlement products in the United States and Canada. Our focus is on growing the number of Liberty Tax and SiempreTax+ offices, increasing the number of tax returns prepared by those offices, and enhancing profitability by offering services and products that continue to build both brands.
The tax return preparation market is divided into two primary distinct sectors: paid tax preparation and Do It Yourself ("DIY") preparation, which includes traditional "pen and paper" preparation as well as DIY preparation through online and software-based tax products. Although recent years have seen growth in the relative portion of the DIY sector that has been captured by online and software-based tax products, the separate paid tax preparation sector, in which we and our franchisees primarily compete, has also continued to grow. Approximately 59% of e-filed returns during the 2015 tax season were prepared by paid preparers.
The percentage of returns filed through paid tax preparers has remained relatively stable over the past decade, with material year-to-year variations generally in years where government tax rebate programs cause a spike in filings by taxpayers who might otherwise not have filed, or where recessionary conditions, as in 2009, temporarily depress filings. The requirements and complexity of the Affordable Care Act ("ACA"), and the effect of possible future immigration reform, may cause an increase in paid tax preparation in 2016 and future years.
Through our franchisees, we offer tax preparation services and related financial products to our tax customers. The services and products that our franchisees implement are designed to provide streamlined tax preparation services for taxpayers who, for reasons of complexity, convenience, or the need for prompt tax refunds, seek assisted tax preparation services.
In the 2015 tax season, we and our franchisees accounted for 1.9 million tax returns filed through our U.S. retail offices, 0.3 million through our Canadian retail offices, and 0.2 million through our online tax programs.
A typical tax season consists of two primary filing periods: a "first peak" involving filers who file relatively quickly after receiving their Forms W-2, and late-season filers who file during the weeks leading to the usual April 15 federal tax filing deadline. In the 2015 tax season, 66% of returns filed in our retail offices were filed between January 1 and February 28, and an additional 15% were filed between April 1 and April 15. During the 2015 tax season, the IRS opened its electronic filing system

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on January 20, 2015, which was earlier than in the previous two years, when late tax legislation and a government shutdown delayed the beginning of the tax seasons.
We expect to benefit from anticipated industry consolidation as we believe many independent tax preparers will look to exit the industry as they confront increased costs, regulatory requirements and demands to provide tax settlement products. We believe we will be a beneficiary of this consolidation because we are able to more efficiently address changing regulatory requirements due to our scale and also because we have succeeded in providing a fully competitive mix of the kinds of financial products sought by customers. In addition, our reputation in the market should continue to drive new customers to our brands, which will also enhance our position in a consolidating industry. As a result, we believe we will continue to accrete market share by virtue of our attractive platform for preparers and for new franchisees looking to capture customers from exiting independent preparers. We may also consider larger strategic transactions if those opportunities arise.
We believe the ACA presents an opportunity for potential growth in revenue and in number of returns. Because of the complexity of the ACA, we expect that taxpayers will seek assistance and we could see an increase in the number of filers in general and an increase in the number of filers who shift to a paid preparer from DIY. The ACA also requires additional forms and worksheets to be completed, which may produce more revenue. We have provided extensive training and educational materials to our offices and franchisees so that they will be able to guide the taxpayer through all aspects of the ACA. We have also initiated several projects related to the ACA, which we began to implement during fiscal 2015.
We also believe that the growing Hispanic population in the United States presents an opportunity for additional growth to tax providers that are able to successfully target those potential customers with tax and related services that serve the unique needs of the Hispanic community. For that reason, during fiscal 2015 we launched a new franchised tax brand, SiempreTax+, and we and our franchisees operated 57 SiempreTax+ offices during the 2015 tax season. We expect this brand to continue to grow, and we are working with our franchisees to develop additional non-tax service offerings in these offices that will attract customers to the brand. Moreover, we anticipate that any immigration reform, whether enacted through executive action or by Congress, will necessarily have the effect of encouraging a substantial number of undocumented immigrants to prepare and file tax returns, perhaps from multiple years. For that reason, we believe that any immigration reform that is implemented will result in an increase in the number of filers utilizing a paid preparer to guide them through this important governmental interaction.
Our Franchise Model
We rely on a franchise model for our growth. Although our larger primary competitors maintain a mix of franchise locations and Company-owned offices or primarily operate Company-owned offices, we have determined that we can best grow our Company by increasing our franchisee base, and the number of offices operated by our existing franchisees. We have also included in our franchisee model the sale of area developer ("AD") areas. Under this AD model, we make large clusters of territories available to an AD who is responsible for marketing the available franchise territories within the larger AD area in order to help us fill gaps in our franchise system. As described below, when we utilize an AD to assist us in franchise sales, we receive revenue from the sale of the AD area but sacrifice a portion of the franchise fees and the royalty stream from the franchises within the AD area.
We believe that our franchise system is the core of our highly scalable business model. Most of the Liberty Tax and SiempreTax+ offices are operated by franchisees. Because we do not own or operate a significant number of tax offices, we are able to focus on marketing, franchisee coaching and support, financial product development and other initiatives that drive our overall success. In addition, our franchise model allows us to grow our tax system with minimal capital expenditures or fixed cost investments.
Franchise territories. We have divided the United States into approximately 10,000 potential franchise territories. We attempt to draw territory boundaries such that each territory has a target population of approximately 30,000 people. Franchisees are permitted to open more than one office in a territory, and they may also have the opportunity to open a tax preparation kiosk in a retail operation within the territory. We presently have kiosk arrangements with several retailers, including Walmart.
Upon the launch of our new SiempreTax+ brand, we made clear to franchisees who owned existing territories that they would retain the rights to operate both brands within those territories, and that they would be permitted to open offices of both brands, in their existing territories, if they determine that the territory will support both a Liberty Tax office and a SiempreTax+ office. Our franchisees may also be permitted to sell rights to one brand in their territory while retaining rights to the other brand. During fiscal 2015, we also began to sell the rights to our two brands separately in undeveloped territories while we retained the territory boundaries that existed before the launch of our second brand.
As of April 30, 2015, our largest franchisee entity operated 31 tax locations, but a majority of our franchisees operated one or two tax locations. As part of our growth strategy, we anticipate substantially increasing the average number of offices per

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franchisee by encouraging more of our franchisees to acquire and open additional franchise territories. We anticipate that a significant number of our franchisees may elect to remain single-office owners, but that others will be attracted to the opportunity to grow their revenue base and overall profitability by enjoying the economies of scale associated with multi-unit operations. Because we continue to have measurably fewer offices than our two largest competitors, we believe that we have a significant number of additional territories available that will allow us to implement this business model, and we are devoting a substantial amount of our sales efforts to providing opportunities to existing franchisees to acquire additional territories.
Franchise sales process. We engage in an active marketing process, both directly and through our ADs, in order to sell additional franchise territories. Our sales process includes sales to new franchisees, as well as the sale of additional territories to existing franchisees willing to expand into additional territories. For new franchisees, the process includes multiple steps that culminate in a week-long training session that we call Effective Operations Training. A new franchisee may pay the entire franchise fee for the franchisee's first territory at the time of acquisition, but as described below, we often provide financing for territory purchases by both new and existing franchisees. We also utilize advertising in national publications, appearances at conventions and trade shows at which we believe potential franchisees may be present, and various direct marketing techniques, in order to obtain and pursue franchisee leads.
We offer a special franchise purchase program, "rent to own," which was designed to allow existing franchisees to acquire additional territories with minimal risk. In this program, which is designed for the purchase of unsold territories, we allow an existing franchisee that is willing to pursue expansion to operate a territory without an obligation to pay a franchisee fee during the first tax season. If the franchisee operates the territory and elects to purchase the territory, the territory becomes subject to a standard franchise agreement and the payment of the standard franchise fee.
Because of the uncertainty surrounding the availability of tax settlement products, the difficulty that many independent and smaller tax preparers are having accessing sources of these products, and an increasingly cumbersome regulatory climate, we believe that there is an opportunity to convert independent tax preparers, including smaller multi-unit operations, to Liberty Tax franchisees. We are expending significant marketing effort to encourage these conversions, and because these operations involve existing tax operations, generally offer more favorable terms to these prospective franchisees than we make available for undeveloped territories.
Our franchise agreements. Under the terms of our standard franchise agreement, each franchisee receives the right to operate a tax return preparation business under the Liberty Tax Service brand and/or SiempreTax+ brand within a designated geographic area. Similarly, our agreements with ADs permit ADs to market franchise territories within a designated multi-territory area. Franchise agreements have an initial term of five years and are renewable. The agreements impose various performance requirements on franchisees, require franchisees to use our proprietary software and equipment designated by us, and obligate our franchisees to operate in their offices in accordance with standards we establish. These standards include specified in-season and out-of-season opening hours, criteria for the location of franchise offices, requirements related to tax preparers and other office employees, and minimum performance standards. Our agreements also require our franchisees to comply with applicable state and federal legal requirements. Although we do not control and are not responsible for any compliance issues that could be caused by our franchisees or their tax preparers, we provide guidance to our franchisees regarding their compliance obligations, including the provision of standard advertising templates, training materials that include detailed compliance information, and systems that alert them to unusual activity. We also use a variety of means to identify potential compliance issues and to require franchisees to address any concerns.
Each year, as part of our active management of our franchise base, we terminate a number of franchisees, and other franchisees voluntarily relinquish their territories, sometimes in exchange for our forbearance on the remaining indebtedness owed to us in connection with the franchise territory. We generally intend to resell these territories to new or existing franchisees; however, we sometimes close office locations or maintain office locations that we were not able to resell before the subsequent tax season as Company-owned offices. In order to protect our competitive position, we regularly take actions to enforce the non-competition obligations and restrictions regarding customer lists and our trademarks and service marks contained in our franchise agreements.
AD areas. We initiated our AD program in 2001 in order to accelerate the growth of our franchise system. We continue utilizing the AD program to focus on areas with large underdeveloped groups of territories we believe would benefit from the dedicated sales attention that an AD offers. Our fees for AD areas vary based on our assessment of the revenue potential of each AD area, and also depend on the performance of any existing franchisees within the AD area being sold. Our ADs generally receive 50% of both the franchise fee and royalties collected from franchises located in their AD areas and are required to provide marketing and operational support.
Company-owned offices. We intentionally operate relatively few Company-owned offices. During the 2015 tax season we operated 182 Company-owned offices in the U.S. and Canada, 17 of which were seasonal offices. We focus primarily on growing through the opening of new franchise locations, and most of the Company-owned offices we operate in a given tax

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season are offices that have been previously owned by former franchisees who have ceased operations or failed to meet our performance standards. Rather than close offices that we believe have the potential to be successful, we attempt to resell these offices, and when we fail to do so before the beginning of a tax season, we may operate them as Company-owned offices until we can resell them at a later time. For this reason, the number of offices we operate as Company-owned offices changes substantially from season to season. During the fourth quarter of fiscal 2014, we began classifying assets associated with our U.S. Company-owned offices as assets held for sale because it is our intent to sell these offices within one year.
Franchise fees and royalties. New franchisees (and existing franchisees acquiring additional territories) presently have several options for acquiring a new undeveloped territory:
For new franchisees purchasing their first territory, payment of a franchise fee of $40,000, all or a portion of which might be financed by us subject to credit approval. In territories that we believe can support both a Liberty Tax office and a SiempreTax+ office, the franchise fee for one of the franchises is $40,000 and $25,000 for the other franchise, although we have reserved the right to vary this dual-fee structure.
For existing franchisees acquiring additional territories, payment of a franchise fee of $40,000, of which 20% must be paid as a down payment and the balance may be financed by us subject to credit approval. As noted above, in territories that can support offices for both of our brands, we may charge separate franchise fees for the acquisition of the rights to each of the brands.
For existing franchisees willing to expand, use of our "rent to own" option, which requires the same 20% down payment, but allows the franchisees to defer the down payment until they have operated the territory for most of one tax season and elect to keep the territory.
When we resell franchises in existing territories, we generally base the price of the territory on the revenue generated by the tax location in prior years, and in some cases may make the "rent to own" option available to prospective purchasers. The purchasing franchisee is required to pay what we consider to be a customer list purchase price, representing the value attributable to the prior operations in the franchised office.
Our franchise agreement requires franchisees to pay us:
A base royalty equal to 14% of the franchisee's tax preparation revenue, subject to certain specified minimums.
An advertising fee of 5% of the franchisee's tax preparation revenue that we utilize to fund our collective advertising efforts.
Our franchisees generally pay royalties and advertising fees to us during the month following the month in which they accrue. We have the ability to collect from our franchisees through a "fee intercept" mechanism. Our franchisees file returns electronically for their customers utilizing our facilities. Our franchise agreement allows us to obtain repayment of amounts due to us from our franchisees through an electronic fee intercept program before our franchisees receive the net proceeds from tax preparation and other fees they have charged to their customers who have received a tax settlement product. Therefore, we are able to reduce the nonpayment risk associated with amounts outstanding from franchisees by obtaining direct electronic payment in the ordinary course throughout the tax season. Our credit risk associated with amounts outstanding to ADs is also mitigated by our electronic fee intercept program, which enables us to obtain repayments of amounts that would otherwise flow through to ADs as their share of franchise fee and royalty payments, to the extent of an AD's indebtedness to us.
Franchisee loans. We provide a substantial amount of lending to our franchisees and ADs. In addition to allowing franchisees to defer a portion of their franchise fees, which they pay over time, we offer our franchisees working capital loans to fund their operations between tax seasons and expenditures they need to make in order to prepare for the upcoming tax season.
This indebtedness generally takes one of the following forms:
The unpaid portion of franchise and AD fees, which does not represent a cash advance by us to the franchisee or AD, but a loan of the franchise or AD fee, generally payable over four years for territory franchise fees and six years for AD fees.
Amounts due to us in connection with the purchase of a Company-owned office. The notes for these amounts are generally payable over five years following the acquisition.
Annual working capital loans made available to qualified franchisees between May 1 and January 31 each year, which are repayable to us generally by the end of February.

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We utilize our fee intercept mechanism in order to facilitate repayment of these amounts by our franchisees, ensuring that repayment occurs from the stream of revenues our franchisees receive from tax preparation and other services. In addition, when a franchise is held by an entity, rather than an individual principal, we generally require an individual guaranty of the franchisee indebtedness.
LibTax software. Our current proprietary tax software program, "LibTax," was first deployed for the 2007 tax season and offers an interactive question-and-answer format that is easy for our retail office tax preparers to use, facilitating tax preparer training. A substantial number of changes are made each year to tax laws, regulations, and forms that require us to expend substantial resources every year to develop and maintain tax preparation software, at both the federal level and for every state with income tax filing requirements, that will be ready to be deployed in every office before the beginning of the tax season. We use the LibTax software in both our Liberty Tax offices and our SiempreTax+ offices.
Electronic filing. The LibTax software also allows tax customers to have their federal and state income tax returns filed electronically. Electronic filing permits taxpayers to receive tax refunds substantially sooner than when a tax return is filed on paper through the mail. Based on information made available by the IRS, we believe that an electronically-filed return for which a refund is direct deposited into a bank account takes fewer than 21 days after the IRS accepts the return for the refund to be made available to a taxpayer, while a refund associated with a mailed return will take 21 to 28 days after the IRS accepts the return if the refund is to be direct deposited and 6-8 weeks after IRS acceptance if the refund is to be mailed to the taxpayer using a government check. Although our software will permit a customer's return to be printed and filed as a paper return, substantially all of our customers utilize the electronic filing option available through our software.
Franchisee support. We provide substantial support to our franchisees in a variety of ways. Our franchise agreement requires our franchisees to adhere to certain minimum standards, including the use of tax preparation software we provide, the use of computers and other equipment that we select (but that we do not sell to them), training requirements, and other criteria. We make substantial training opportunities available to our franchisees and their prospective employees, and we require each franchisee to send representatives to a week-long Effective Operations Training seminar before they are allowed to operate a franchise location. We also make intermediate and advanced training available to our franchisees, offer "Tax School" classes for franchisees and prospective tax preparers, and provide substantial phone and internet-based support, particularly during the tax season. During the tax season, we maintain a fully-staffed operations center, with extended hours, at our corporate headquarters in Virginia Beach, Virginia. During the peak tax season, we hold daily conference calls in which we share and allow other franchisees to share recommendations and techniques for improving office performance, and in which we emphasize the importance of implementing the marketing plan that we recommend as part of our franchisee training.
Integration of product offerings. The LibTax software makes each of our product offerings available to our customers, including loan-based products and refund transfer products. We believe that this integration of our products into our tax preparation software is essential to attracting customers to the tax preparation services offered in our retail office locations.
Our LibPro tax software project, which we piloted in a small number of offices during the 2015 tax season, will integrate our existing LibTax and online tax offerings so customers will be able to move between the two offerings and access all of our tax products and services through both offerings. Additionally, this product will move us from managing software at individual office PC locations to a browser-based system.
Our Financial Products
We expend considerable effort to ensure that our franchisees are able to offer a complete range of tax settlement products to our customers, and to provide our customers choices in these products. We offer these products because we believe that a substantial portion of our prospective customer base places significant value on the ability to monetize their expected income tax refund more quickly than they would be able to do if they were to file their tax return without utilizing the services of a paid tax preparer. We offer two types of tax settlement products: refund transfer products and refund-based loans.
Refund transfer products. Many of our tax customers seek products that will enable them to obtain access to their tax refunds more quickly than they might otherwise be able to receive those funds. We believe that many of our customers are unbanked, in that they do not have access to a traditional banking account, and therefore, cannot make such an account available to the IRS and other tax authorities for the direct deposit of their tax refunds. Additional customers may have access to a traditional banking account, but for personal reasons, may prefer not to utilize that account for the deposit of their tax refunds. A refund transfer product involves:
a direct deposit of the customer's tax refund into a newly established temporary bank account in the customer's name that we establish with one of our banking partners or other banks that have contracted with one of our subsidiaries, JTH Financial, LLC ("JTH Financial"), or

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delivery to the customer of a paper check or a prepaid card containing the balance of the customer's refund after the payment of tax preparation and other fees.
When the prepaid card option is elected, the card is issued through one of our financial product partners and is branded with the Liberty Tax logo. When we deliver a physical refund check to a customer, we are generally able to print the check in one of our retail tax offices on check stock paper provided by the bank within a matter of hours after the electronic deposit of the customer's refund has been made to the customer's temporary account. We also enter into check-cashing arrangements with a number of retail establishments, including Walmart, which facilitate the ability of our customers to monetize their check even when they do not have traditional banking relationships. Unlike some of our competitors that penalize their customers for receiving their tax refunds on a paper check, we do not assess similar fees against our customers, who are permitted to choose freely among different disbursement options. For this reason, disbursements on prepaid cards represent a smaller percentage of our financial products than for some of our competitors, and we receive less income from this source than those competitors.
We believe the continued availability of refund transfers will enable us to continue to offer an adequate mix of tax settlement products to our customers. Although the number of refund-based loans, described below, obtained by our customers has declined significantly since the 2010 tax season, the number of customers receiving our refund transfer products, which we call our "attachment rate," has varied from 49.7% for the 2015 tax season compared to 51.5% for the 2014 tax season and 48.1% for the 2013 tax season.
Refund-based loans. We partner with a non-bank counter-party to provide a refund-based loan product that is marketed as an Instant Cash Advance ("ICA"). For the last three years we have not earned any significant revenue on this product; however, we feel that the availability of this product is appreciated by a segment of our customer base.
Online Tax Preparation
Although online tax preparation, through our online tax services, represents a small portion of tax returns prepared and associated revenue, we believe there is a substantial market for customers who wish to prepare their own tax returns using moderately priced online tax preparation products, and the continued availability of these products will be a part of our long-term growth, particularly if we are able to successfully integrate our online and retail tax services. At present, because our online tax customers often reside in territories where we have franchisees, the revenue associated with online customers in franchise territories is split with our franchisees on the same basis as our franchisees split with the Company the tax preparation revenues purchased in the retail offices.
Based on the highly competitive pricing environment in the online tax preparation market, as well as the costs of customer acquisition, we determined that the carrying amount of our online software and related acquired customer lists would not be recovered through estimated future cash flows; for this reason, we compared the fair value of the online software and acquired customer lists to their carrying value and recognized a non-cash impairment charge of $8.4 million as of April 30, 2015.
Intellectual Property
We regard our intellectual property as critical to our success and we rely on trademark, copyright, and trade secret laws in the United States to protect our proprietary rights. We pursue the protection of our service mark and trademarks by applying to register key trademarks in the United States. The initial duration of federal trademark registrations is 10 years. Most registrations can be renewed perpetually at 10-year intervals. In addition, we seek to protect our proprietary rights through the use of confidentiality agreements with employees, consultants, vendors, advisors, and others. The primary marks we believe to be of material importance to our business include our Lady Liberty logo and the brands "Liberty Tax," "Liberty Tax Service," "Liberty Income Tax," "Liberty Canada," and "SiempreTax+."
Seasonality
The tax return preparation business is highly seasonal, and we historically generate most of our revenues during the period from January 1 through April 30. For example, in fiscal 2015 and fiscal 2014, we earned 29% and 26% of our revenues during our fiscal third quarter ended January 31 and 90% and 90% of our revenues during the combined fiscal third and fourth quarters of 2015 and 2014, respectively. We generally operate at a loss during the period from May 1 through December 31, during which we incur costs associated with preparing for the upcoming tax season.
Available Financing
By building on steady growth since our founding and using our available financing to fund operations between tax seasons, we have avoided excess leverage while ensuring minimal outstanding indebtedness at the end of each tax season. At April 30, 2015 and 2014, for example, we had no outstanding balance under our revolving credit facility. Our term loan had outstanding balances of $20.5 million and $21.9 million at April 30, 2015 and 2014, respectively.

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Competition
The paid tax preparation market is highly competitive. We compete with tens of thousands of paid tax return preparers, including H&R Block, Jackson Hewitt, regional and local tax return preparation companies, most of which are independent and some of which are franchised, regional and national accounting firms, and financial service institutions that prepare tax returns as part of their businesses. We consider the major factors that will affect our ability to successfully compete in our industry to include the following:
Our ability to continue to grow our franchise base in order to broaden our national reach and brand recognition.
Our ability to offer best of class customer and franchisee service and support.
Consolidation in our industry and our ability to capitalize on such consolidation.
Our ability to continue to offer a competitive range of tax settlement financial products.
The successful deployment of the next stage of our LibPro tax software.
We also face increased competitive challenges from the online and software self preparer market, including the Free File Alliance ("FFA"), a consortium of the IRS and online preparation services that provides free online tax return preparation, and from volunteer and certain state organizations that prepare tax returns at no cost for low-income taxpayers. Our ability to compete in the tax return preparation business depends on our product mix, price for services, customer service, the specific site locations of our offices, local economic conditions, quality of on-site office management, the ability to file tax returns electronically with the IRS, and the availability of tax settlement products to offer to our customers.
We also compete for the sale of tax return preparation franchises with H&R Block, Jackson Hewitt, and other regional franchisors. In addition, we compete with franchisors of other high-margin services outside of the tax preparation industry that attract entrepreneurs seeking to become franchisees. Our ability to continue to sell franchises is dependent on our brand image, the products and services to be provided through the network, the relative costs of financing and start-up costs, our reputation for quality, and our marketing and advertising support. However, we believe that there is no existing smaller competitor in the retail tax preparation market that could challenge our market position on a national scale due to the expense and length of time required to develop the infrastructure, systems and software necessary to create and support a nationwide network of tax preparation offices. As a result, we believe that it would be difficult for an additional national competitor to emerge in our market for the foreseeable future.
Our online tax business also competes with a number of companies. Intuit, Inc., the maker of Turbo Tax, is the largest supplier of tax preparation software for online tax preparation services. H&R Block and Blucora, Inc., the owner of TaxAct, also have substantial online and software-based products.
Although we acquired the customer lists of two other online tax providers before the 2013 and 2014 tax seasons, the substantial advertising resources of our largest online tax competitors places us at a substantial disadvantage in this very competitive segment of the tax preparation market. During fiscal 2015, we recognized a portion of the purchase prices of those previously acquired customer lists as impaired, and we do not have any present plans for further growth of our online business through acquisition, unless a compelling strategic opportunity presents itself.
Regulation
We and our franchisees must comply with laws and regulations relating to our businesses. Regulations and related regulatory matters specific to our businesses are described below.
Federal tax return preparation regulation. Federal law requires tax preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them and retain for three years all tax returns prepared. Federal laws also subject tax preparers to accuracy-related penalties in connection with the preparation of tax returns. Preparers may be enjoined from further acting as tax preparers if they continually or repeatedly engage in specified misconduct. Additionally, all authorized IRS e-file providers must adhere to IRS e-file rules and requirements to continue participation in IRS e-file. Adherence to all rules and regulations is expected of all providers regardless of where published and includes, but is not limited to, those described in IRS Publication 1345, Handbook for Authorized IRS e-file Providers. Various IRS regulations also require tax return preparers to comply with certain due diligence requirements to investigate factual matters in connection with the preparation of tax returns. The IRS conducts audit examinations of authorized IRS e-file providers and tax return preparers, reviewing samples of prepared tax returns to ensure compliance with regulations in connection with tax return preparation activities. From time to time, certain of our franchisees and Company-owned offices are the subject of IRS audits to review their tax return preparation activities.

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We engage in significant efforts to enhance tax compliance by our franchisees and their preparers, including the use of a franchisee alert system that identifies anomalous patterns, compliance audits of selected offices and returns, additional training requirements and actions taken against problematic preparers (including blacklisting to prevent their hiring by other franchisees).
The IRS published final regulations in 2010 that would have imposed mandatory tax return preparer regulations, but federal courts have ruled that the IRS did not have authority to implement those regulations. The IRS has created a voluntary tax preparer certification regime.
State tax return preparation regulation. We are also subject to tax return preparation regulation at the state level. The scope and substance of these regulations vary from state to state, but states also conduct examinations and take enforcement action against tax return preparers. From time to time, certain of our franchisees and Company-owned offices are the subject of state-level audits to review their tax preparation activities. In addition, particularly in the absence of effective IRS regulations imposing mandatory tax return preparer requirements, several states have begun to fill this void by imposing state-level preparer regulatory requirements. We believe our in-house certification program exceeds these regulatory requirements.
Financial privacy regulation. The Gramm-Leach-Bliley Act and related FTC regulations require income tax return preparers to adopt and disclose customer privacy policies and provide customers a reasonable opportunity to opt-out of having personal information disclosed to unaffiliated third parties for marketing purposes. Some states have adopted or proposed stricter opt-in requirements in connection with use or disclosure of consumer information. Federal and state law also requires us and our franchisees to safeguard the privacy and security of our customers' data, including financial information, to prevent the compromise or breach of our security that would result in the unauthorized release of customer data. Breaches of information security that affect us or our franchisees require compliance with customer notification requirements imposed at the state and local level, and in addition, may subject us to regulatory review by the FTC and other federal and state agencies. For example, in connection with a burglary that occurred at a single franchise office in California in early 2015, both we and the affected franchisee have been required to respond to a document request issued by the FTC. Additional restrictions on disclosure are imposed by the IRS, which prohibits the use or disclosure by tax preparers of income tax return information without the prior written consent of the taxpayer. The IRS may continue to consider further regulations concerning disclosures or uses of tax return information.
Financial product regulation. Federal and state statutes and regulations govern the facilitation of refund-based loans and other tax settlement financial products. These laws require us, among other things, to provide specific loan disclosures and advertise loans in a certain manner. In addition, we are subject to federal and state laws that prohibit deceptive claims and require that our marketing practices are fair and not misleading. Federal law also limits the annual percentage rate on loans for active duty service members and their dependents. There are also many states that have statutes regulating, through licensing and other requirements, the activities of brokering loans and offering credit repair services to consumers, as well as local usury laws which could be applicable to our business in certain circumstances. From time to time, we receive inquiries from various state regulators regarding our and our franchisees' facilitation of refund-based loans and other tax settlement products. We have in certain states paid fines, penalties, and other payments as well as agreed to injunctive relief, in connection with resolving these types of inquiries.
Potential regulation of refund transfer products or treatment of refund transfer products as loans or extensions of credit. Our refund transfer products may be subject to additional regulation because of potential regulatory changes as well as litigation asserting that refund transfer products constitute a loan or extension of credit because many customers who receive refund transfer products elect to defer paying their tax preparation fees until their tax refund is received. With respect to possible new regulation, the broad authority of the Consumer Financial Protection Bureau may enable that agency to pursue initiatives that negatively impact our ability to offer tax settlement products by imposing disclosure requirements or other limitations that make the products more difficult to offer or reduce their acceptance by potential customers. See "Item 1A—Risk Factors—Risk Related to Regulation of Our Industry—Legislative and regulatory reforms may have a significant impact on our business, results of operations and financial condition" and "—Federal and state regulators may impose new regulations on non-loan tax settlement products that would make those products more expensive for us to offer or more difficult for our customers to obtain."
We are also subject to pending litigation that asserts that the refund transfer product is a loan or extension of credit, and should therefore be subject to loan-related federal and state disclosure requirements. See "Item 3—Legal Proceedings—ERC class action litigation." We are also subject to an injunction in California that treats our refund transfer product as an extension of credit. If we are subject to an adverse decision in future litigation that affects our offering of refund transfer products in other states, our refund transfer products would be subject to additional regulatory requirements in those states, including federal truth-in-lending disclosure obligations, and possible compliance with statutes and regulations governing refund anticipation loans that have been adopted in numerous states. This additional regulation would not prohibit us from offering refund transfer products but might require us to make interest rate and other disclosures to customers because of the characterization of the

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refund transfer product as a loan or extension of credit that would make it more difficult to market the refund transfer product to potential customers or reduce their acceptance by potential customers, and might adversely affect fees charged related to refund transfer products because of limitations on fees imposed by state refund anticipation loans statutes and regulations. See "Item 1A—Risk Factors—Risks Related to Regulation of Our Industry—Federal and state regulators may impose new regulations on non-loan tax settlement products that would make those products more expensive for us to offer or more difficult for our customers to obtain" and "—We may be unsuccessful in litigation that characterizes refund transfer products as loans, which could subject us to damages and additional regulation, and which could adversely affect our ability to offer tax settlement products and have a material adverse effect on our operations and financial results."
Franchise regulations. Our franchising activities are subject to the rules and regulations of the FTC and various state agencies regulating the offer and sale of franchises. These laws require that we furnish to prospective franchisees a franchise disclosure document describing the requirements for purchasing and operating a Liberty Tax franchise. In a number of states in which we are currently franchising, we are required to be registered to sell franchises. Several states also regulate the franchisor/franchisee relationship particularly with respect to the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise, and the ability of a franchisor to designate sources of supply. Bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects.
Telephone Consumer Protection Act. Maintaining contact with customers is an essential component of the efforts by our franchisees, and by us in Company-owned offices, to retain tax customers from year-to-year. In addition, we utilize a variety of contact methods to solicit new franchisees. The Telephone Consumer Protection Act ("TCPA") imposes substantial restrictions on the manner in which persons may be contacted, by telephone calls or text, on mobile telephones. We are required to comply with these restrictions in the telephone calls and text messages that we send, and we also make available tools intended to assist our franchisees in ensuring that telephone calls they made and text messages they send are compliant with the TCPA. Violations of the TCPA may result in per-call and per-message penalties of $500 to $1,500, and frequently result in class action litigation. The Federal Communications Commission ("FCC"), which is responsible for regulations relating to the TCPA, has been asked to clarify certain aspects of their regulations that have led to a substantial increase in TCPA litigation, but it is not clear that any significant changes to those regulations will be implemented in the foreseeable future.
Tax course regulations. Our tax courses are subject to regulation under proprietary school laws and regulations in many states. Under these regulations, our tax courses may need to be registered and may be subject to other requirements relating to facilities, instructor qualifications, contributions to tuition guaranty funds, bonding, and advertising.
Foreign regulations. We are subject to a variety of other regulations in the Canadian markets, including anti-corruption laws and regulations. Foreign regulations and laws potentially affecting our business are evolving rapidly. We rely on external counsel in Canada to advise us regarding compliance with applicable laws and regulations.
Employees
As of April 30, 2015, we employed 1,026 full-time employees, consisting of 494 employees in our corporate operations, primarily located in Virginia Beach, Virginia and 532 employees at our Company-owned offices. Many of our employees are seasonal and, by contrast, we had 623 corporate employees and 936 employees at our Company-owned offices as of February 28, 2015. As of May 31, 2015, we employed 493 corporate employees and 407 employees at our Company-owned offices. We consider our relationships with our employees to be good.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.libertytax.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference room by calling the SEC at 1-800-SEC-0030. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other information regarding issuers who file electronically with the SEC.
Item 1A.    Risk Factors.
In addition to the other information contained in this annual report, the following risk factors should be considered carefully in evaluating our business. If any of the risks or uncertainties described below were to occur, our business, financial condition, and results of operations may be materially and adversely affected. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.

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Risks Related to Our Business
Because much of our growth has been achieved through rapidly establishing new offices, we may not achieve the same level of growth in revenues and profits in future years.
Historically our growth has been driven by selling franchises and entering into agreements with ADs who have assisted us in expanding our geographic reach. Our future viability, profitability, and growth will depend upon our ability to successfully operate and continue to expand our operations in the United States and Canada. Furthermore, our business has experienced rapid growth in the number of franchisees and office locations in large geographic markets, and our continued growth in those markets may not continue at the same pace. Our ability to continue to grow our business will be subject to a number of risks and uncertainties and will depend in large part on:
adding new customers and retaining existing customers;
innovating new products and services to meet the needs of our customers;
finding new opportunities in our existing and new markets;
remaining competitive in the tax return preparation industry;
our ability to offer directly and to facilitate through others the sale of tax settlement products;
attracting and retaining capable franchisees and ADs;
maintaining a reputation for quality tax preparation services sufficient to attract and retain customers and franchisees;
our success in replacing independent preparers with franchisees;
hiring, training, and retaining skilled managers and seasonal employees; and
expanding and improving the efficiency of our operations and systems.
There can be no assurance that any of our efforts will prove successful or that we will continue to achieve growth in revenues and profits.
The highly seasonal nature of our business presents a number of financial risks and operational challenges which, if we fail to meet, could materially affect our business.
Our business is highly seasonal, with the substantial portion of our revenue earned in the January through April "tax season" in the United States and Canada each year. The concentration of our revenue-generating activity during this relatively short period presents a number of challenges for us and our franchisees, including:
cash and resource management during the first eight months of our fiscal year, when we generally operate at a loss and incur fixed costs and costs of preparing for the upcoming tax season;
compliance with financial covenants under our credit facility, particularly if the timing of our revenue generation deviates from our typical revenue patterns;
the availability of seasonal employees willing to work for our franchisees for little more than the minimum wage, with minimal benefits, for periods of less than a year;
the success of our franchisees in hiring, training, and supervising these employees and dealing with turnover rates;
accurate forecasting of revenues and expenses because we may have little or no time to respond to changes in competitive conditions, markets, pricing, and new product offerings by competitors, which could affect our position during the tax season;
disruptions in one tax season, including any customer dissatisfaction issues, which may not be discovered until the following tax season; and
ensuring optimal uninterrupted operations during peak season.
If we experience significant business disruptions during the tax season or if we or our franchisees are unable to meet the challenges described above, we could experience a loss of business, which could have a material adverse effect on our business, financial condition, and results of operations.

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Our future success will depend in part upon the continued services of our senior management, including our CEO, as well as our ability to attract and retain capable middle management.
Failure to maintain the continued services of senior management personnel or to attract and maintain capable middle management could have a material adverse effect on us. If our Chairman and CEO, John Hewitt, or other senior management were to leave the Company, it could be difficult to replace him or her, and our operations and ability to manage day-to-day aspects of our business as well as our ability to continue to grow our business may be materially adversely affected. Our future success will also depend in part upon our ability to attract and retain capable middle management, such as regional directors, consultants for franchised offices, training directors, tax advisors, and computer personnel, having the specific executive skills necessary to assist us and our franchisees. We face competition for personnel from numerous other entities, including competing tax return preparation firms, some of which have significantly greater resources than us.
Because we are not a financial institution, we can only facilitate the sale of financial products through our arrangements with financial institutions and other financial partners and, if these arrangements are terminated for any reason, we may not be able to replace them on acceptable terms or at all.
In the United States, 23% of our revenue during our 2015 fiscal year was directly derived from our facilitation of the sale of financial products provided to our customers by financial institutions and other lenders or providers, and we believe that percentage may grow in future tax seasons. Our tax return preparation business is also, to some extent, dependent on our ability to facilitate the sale of these products, because our customers are often attracted to our business by the expectation that these products will be available. Financial products that monetize future tax refunds are specialized financial products, and if our arrangements with the financial institutions and other partners that provide our tax settlement products were to terminate and we were unable to enter into an alternative relationship on acceptable terms, or at all, our financial results could be materially adversely affected. In addition, any changes in our contractual terms with these financial institutions and other partners that result in a reduction in our fee income, if not offset by customer growth associated with lower fees, could adversely affect our profitability. See "—Risks Related to Regulation of Our Industry—We may be unsuccessful in litigation that characterizes refund transfer products as loans, which could subject us to damages and additional regulation, and which could adversely affect our ability to offer tax settlement products and have a material adverse effect on our operations and financial results."
The loan products made available through non-bank lenders may be limited in scope, are dependent on the availability of financing, may be more expensive, and could subject us to greater risk of loss.
During recent tax seasons, we entered into a relationship with a non-bank lender to offer an ICA product to customers in a limited number of our offices. Because some tax settlement products such as ICAs are offered by third-party lenders that are not subject to federal banking law regulations, the products offered through these lenders may subject us to additional laws and regulation at the state level. These laws and regulations may make the offering of the products more expensive and may increase the cost of these products to our customers. Moreover, ICAs will not be available in all states due to regulatory restrictions. The ability to maintain and expand the program will depend on the availability of financing the lender must secure each year. The impact of this additional layer of regulation and the availability of funding may, therefore, limit our product offerings and adversely affect our profitability. Moreover, because we are continuing to work with the lenders to refine loan underwriting criteria for ICAs, these third parties may experience a higher rate of loss on these loans. We have agreed to repurchase delinquent loans in the ICA program in the past, and if we incur losses as a result of similar obligations in the future, they could adversely affect our results of operations. To the extent ICAs become a more significant product in our portfolio of tax settlement products, our risk of incurring losses due to these or similar repurchase obligations will also increase.
We face significant competition in the tax return preparation business and face a competitive threat from software providers and internet businesses that enable and encourage taxpayers to prepare their own tax returns.
The tax return preparation industry is characterized by intense competition. We compete with H&R Block, which is larger and more widely recognized than us, and with other national and regional tax services and smaller independent tax return preparation services, small franchisors, regional tax return preparation businesses, accounting firms, and financial service institutions that prepare tax returns as part of their business. Additionally, many taxpayers in our target market prepare their own returns. The availability of these alternative options may reduce demand for our products and limit the fees our franchisees can charge, and competitors may develop or offer more attractive or lower cost products and services than ours, which could erode, our consumer base.
We also face increased competitive challenges from the online and software self-preparer market, including the FFA, a consortium of the IRS, online preparation services that provides free online tax return preparation, and assistance from volunteer organizations that prepare tax returns at no cost for low-income taxpayers. In addition, many of our direct competitors offer certain free online tax preparation and electronic filing options, and limited in-office promotions of free or nominal cost tax preparation services. Government tax authorities, volunteer organizations, and direct competitors may elect to expand free

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and reduced cost offerings in the future. Intense price competition, including offers of free service, could result in a loss of market share, lower revenues, or lower margins. Our ability to compete in the tax return preparation business depends on our product offerings, price for services, customer service, the specific site locations of our offices, local economic conditions, quality of on-site office management, the ability to file tax returns electronically with the IRS, and the availability of tax settlement products to our customers.
We rely on our own proprietary tax preparation software, and any difficulties in deploying or utilizing our software each tax season could adversely affect our business.
We have utilized our own tax preparation software, since the 2007 tax season. However, tax changes made by the federal and state governments each year and changes in tax forms require us to make substantial changes to our software before the beginning of each tax season. Although we engage in extensive testing of our software before deploying it in our franchisees' tax preparation offices, any delays in the availability of IRS forms or instructions or problems with the rollout of the new software each season could delay our franchisees' ability to file tax returns at the beginning of the tax season and could adversely affect our business. Moreover, we are in the early stages of deploying our new LibPro software, which is based on a different platform than our previous software, and any implementation issues with that software could adversely affect our business.
Our online tax business will depend in the future on our ability to deploy our own software, and any further delays in deploying fully functional software could adversely affect our business.
Until 2004, we utilized software provided by a third party in order to offer online tax preparation. Our agreement with the third party expired in 2013, and they no longer support that product. We replaced the third-party online software with our LibPro software for the 2014 tax season, but the version we utilized for the 2014 and 2015 tax seasons did not include all available IRS forms or permit state tax filing in all states. We expect to add additional functionality for the 2016 and subsequent tax seasons, but any limitations on functionality could adversely affect both customer retention and our ability to attract new customers.
Our Company-owned offices may not be as successful as our franchised offices.
Historically, almost all Liberty Tax offices have been owned by franchisees, and most of the Company-owned offices we have operated during a tax season have been offices previously operated by former franchisees. For the 2015 tax season, we operated a total of 182 Company-owned offices. Our Company-owned offices tend to be less successful than our typical franchisee-owned offices because they often represent offices transitioned from a less successful franchisee. For this reason, we are not able to obtain the continuity of staffing in Company-owned offices that we expect to experience in our franchisee-owned offices.
Our participation in ventures designed to take advantage of the Affordable Care Act may subject us to additional economic and regulatory risks.
During the 2014 tax season, we participated in limited programs designed to make information about health insurance options and access to health insurance enrollment opportunities available to our tax office customers. We developed additional opportunities to make health insurance information and enrollment available to our customers during the 2015 tax season and will continue to do so in future tax seasons. Some of these ventures have included and will include participation as an owner of new entities offering health insurance and receiving health insurance-related income. We cannot be certain that our participation in these ventures in order to provide additional services to our customers will be profitable, and any losses we incur as a consequence of these opportunities may have an adverse effect on our operating results. Moreover, the health insurance business is a complex regulatory environment, involving state-by-state laws and regulations in addition to federal legal requirements. Any failure by us or by any counterparties in our various health insurance related business arrangements to comply with applicable law and regulations could have an adverse effect on our business, and subject us and our franchisees to legal penalties.
The provision of health insurance and other insurance products to customers by our franchisees and their preparers may subject us and our franchisees to additional claims from customers, as well as increased regulatory risk.
As part of our effort to make information about health insurance options available to tax office customers, we have encouraged our franchisees to make licensed insurance agents available in tax offices. A significant number of our franchisees have become or arranged for the availability of insurance agents, and participated in the writing of health insurance policies for customers. The provision of these insurance services subjects our franchisees to a complex regulatory environment, and to potential claims by customers who may become dissatisfied with the insurance products they obtain. Any failure by our franchisees or their employees to comply with applicable insurance laws and regulations could have an adverse effect on our

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business and subject our franchisees and us to regulatory complaints, and any failure by our franchisees to provide satisfactory insurance services to customers may adversely affect our customer relationships and our business.
Our failure to protect our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.
We regard our intellectual property as critical to the success of our business. Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition, or operating results. The actions we take to protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. There are no assurances that we will be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. In addition, third parties may assert infringement claims against us. Any claims and any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third party's patent or to license alternative technology from another party. Litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.
Our business relies on technology systems and electronic communications, which, if disrupted, could significantly affect our business.
Our ability to file tax returns electronically and to facilitate tax settlement products depends on our ability to electronically communicate with all of our offices, the IRS, state tax agencies, and the financial institutions that provide the tax settlement products. Our electronic communications network is subject to disruptions of various magnitudes and durations. Any severe disruption of our network or electronic communications, especially during the tax season, could impair our ability to complete our customers' tax filings, to provide tax settlement products from financial institutions, or to maintain our operations, which, in turn, could have a material adverse effect on our business, financial condition, and results of operations.
We are dependent on our financing sources and any loss of financing could materially and adversely affect our operating results and our ability to expand our business.
We are dependent upon the continued availability of our credit facility, which consists of a term loan and a revolving loan, in order to fund our seasonal needs and for the further expansion of our business. Were we to default on our financing or otherwise lose access to our sources of credit, our ability to provide financing to our franchisees would be significantly impaired and may result in certain offices closing if our franchisees are not able to secure alternative financing for their working capital needs. In addition, our ability to expand our business would be impaired. We may need to obtain new credit arrangements and other sources of financing to continue to provide financing to our franchisees, to meet future obligations, and to fund our future growth. Our ability to maintain or refinance our debt and fund other obligations depends on our successful financial and operating performance and the availability of funds from credit markets. There is no assurance that when our credit facility matures in 2019, we will be able to renew or refinance our debt or enter into new credit arrangements on terms similar to those of our existing loans.
Our credit facility contains restrictive covenants and other requirements that may limit our business flexibility by imposing operating and financial restrictions on our operations.
Our credit facility is secured by substantially all of our assets, including the assets of our subsidiaries. We are subject to a number of covenants that could potentially restrict how we carry out our business or that require us to meet certain periodic tests in the form of financial covenants. The restrictions we consider to be material to our ongoing business include the following:
We must satisfy a "leverage ratio" test that is based on our outstanding indebtedness at the end of each fiscal quarter.
We must satisfy a "fixed charge coverage ratio" test at the end of each fiscal quarter.
We must reduce the outstanding balance under our revolving loan to zero for a period of at least 45 consecutive days each fiscal year.
Our credit facility also contains customary affirmative and negative covenants, including limitations on indebtedness; limitations on liens and negative pledges; delivery of financial statements and other information requirements; limitations on investments, loans, and acquisitions; limitations on mergers, consolidations, liquidations, and dissolutions; limitations on sales of assets; limitations on certain restricted payments; and limitations on transactions with affiliates; among others. Our credit

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facility also includes change of control provisions that may result in our obligations under that facility accelerating if certain change of control events were to occur, including if John Hewitt, our Chairman and CEO, ceases to control our Company.
A breach of any of these covenants, tests, or mandatory payments could limit our ability to borrow funds under the revolving loan or result in a default under our loans. In addition, these covenants may prevent us from incurring additional indebtedness to expand our operations and execute our business strategy, including making acquisitions. We may also from time to time seek to refinance all or a portion of our debt or incur additional debt in the future. Any such future debt or other contracts could contain covenants more restrictive than those in our existing credit facility. Our ability to comply with the covenants, tests, or mandatory payments in our credit facility may be affected by events beyond our control, including prevailing economic, financial, and industry conditions or our ability to make tax settlement products available to our customers. See "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview of factors affecting our liquidity—Credit facility."
We are dependent on the timing of the tax filing season, and disruptions in the opening of the tax season may have a material adverse effect on our results of operations and liquidity.
Historically, the federal tax filing season has begun in mid-January, and both we and our franchisees have begun to prepare tax returns in early January with the ability to electronically file those returns beginning in mid-January. For both the 2013 and 2014 tax seasons, the IRS postponed the first date on which it generally accepts electronic filings until the end of January, and in 2013, also delayed the availability of a significant number of tax forms. These delays at the beginning of the tax season were also replicated at the state level in 2013, because of the reliance of states on tax forms that are dependent upon or subject to changes in federal tax forms. The change in the start of the 2013 and 2014 tax filing seasons materially affected our revenue during the fiscal quarter ending January 31 of both years, and also required us to engage in additional borrowing to support both our operations and those of our franchisees because of the delay in receipt of revenue associated with tax filings. Substantial delays in the opening of the tax filing season in future years would be likely to have an adverse effect on our revenue and liquidity.
Our floating rate debt financing exposes us to interest rate risk.
We may borrow amounts under our credit facility that bear interest at rates that vary with prevailing market interest rates. Accordingly, if we do not adequately hedge our interest rate risk, a rise in market interest rates will adversely affect our financial results. We expect to draw most heavily on our revolving loan from July through January of each year and then repay substantially all of the borrowings by the end of each tax season. Therefore, a significant rise in interest rates during our off-season could have a disproportionate impact on our financial results during these months.
The lines of business in which we operate involve substantial litigation, and such litigation may damage our reputation or result in material liabilities and losses.
We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation arising in connection with our various business activities. Adverse outcomes related to litigation could result in substantial damages and could cause our net income to decline or may require us to alter our business operations. Negative public opinion can also result from our actual or alleged conduct in such claims, possibly damaging our reputation, which could negatively impact our financial performance and could cause the value of our stock to decline. See "Item 3—Legal Proceedings."
If we fail to protect or fail to comply with laws and regulations related to our customers' personal information, we may face significant fines, penalties, or damages and our brand and reputation may be harmed.
Privacy concerns relating to the disclosure of consumer financial information have drawn increased attention from federal and state governments in the United States. The IRS generally prohibits the use or disclosure by tax return preparers of taxpayers' information without the prior written consent of the taxpayer. In addition, the Gramm-Leach-Bliley Act and other Federal Trade Commission ("FTC") regulations require financial service providers, including tax return preparers, to adopt and disclose consumer privacy policies and provide consumers with a reasonable opportunity to opt out of having personal information disclosed to unaffiliated third parties for advertising purposes. We and our franchisees manage highly sensitive client information in our operations, and although we have established security procedures to protect against identity theft and require our franchisees to do the same, a security incident resulting in breaches of our customers' privacy may occur. If the measures we have taken prove to be insufficient or inadequate or if our franchisees fail to meet their obligations in this area, we and our franchisees may become subject to litigation or administrative sanctions, which could result in significant fines, penalties, or damages and harm to our brand and reputation, which in turn could negatively impact our ability to retain our customers. Moreover, although we have some insurance that may defray the cost, the cost of remediating any breach resulting from a cybersecurity incident or other breach of the privacy of customer information would likely be substantial. Furthermore, we may be required to invest additional resources to protect us against damages caused by these actual or perceived disruptions

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or security breaches in the future. We could also suffer harm to our reputation from a security breach or inappropriate disclosure of customer information. Changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change business practices, including how information is disclosed. These changes could have a material adverse effect on our business, financial condition, and results of operations. Moreover, a significant security breach or disclosure of customer information could so damage our brand and reputation that demand for the services that are provided by us and our franchisees may be reduced.
If our business or the tax industry generally is perceived as a source of identity theft, our reputation may be harmed and our financial performance could be materially adversely affected.
During the 2015 tax season, there was substantial publicity around identity theft problems involving at least one of our competitors, and in May 2015, the IRS announced a significant breach of its data security that resulted in the potential theft of personally identifiable tax information involving more than 100,000 taxpayers. If the use of electronic tax filing becomes perceived by customers as subjecting them to unacceptable identity theft risk, or if we experience a breach of security that subjects a number of our customers to potential identity theft, customers may eschew our services or assisted tax preparation generally, in favor of self-preparation and the avoidance of electronic filing. In such an event, our reputation may be harmed and we may experience a material adverse effect on our business, financial condition and results of operation.
If we or our franchisees fail to comply with the Telephone Consumer Protection Act, we may face significant damages.
The retention of customers by our franchisees, and our ability to attract additional franchisees, depends on the use of telephone calls and text messaging to contact customers and potential franchisees. However, the Telephone Consumer Protection Act (“TCPA”) imposes significant restrictions on the ability to utilize telephone calls and text messages to mobile telephone numbers as a means of communication, when the prior consent of the person being contacted has not been obtained. We are in the process of settling one lawsuit related to the manner in which a contractor for us previously contacted potential franchisees, and we recently became a defendant in another lawsuit in which text messages were allegedly sent by or on behalf of a franchisee without compliance with the TCPA. Violations of the TCPA may be enforced by individual customers through class actions, and statutory penalties for TCPA violations range from $500 to $1,500 per violation. If we fail to ensure that our own telemarketing and telemarketing efforts are TCPA compliant, or if our franchisees fail to do so and we are held responsible for their behavior, we may incur significant damages.
If we and our franchisees are unable to attract and retain qualified employees, our financial performance could be materially adversely affected.
Both we and our franchisees depend on the ability to hire a substantial number of seasonal employees for each tax season. We require seasonal employees in order to staff our franchises and customer call centers and Company-owned offices, and our franchisees require employees to implement marketing programs, to act as tax preparers, and to otherwise staff their offices. The ability of our franchisees and us to meet our labor needs is subject to many external factors, including competition for qualified personnel, unemployment levels in each of the markets in which we have offices, prevailing wage rates, minimum wage laws, and workplace regulation. Our franchisees require a substantial number of employees who are willing to become trained as tax preparers, and who have the ability to engage in temporary, seasonal employment. Moreover, in addition to our seasonal employees, we hire a substantial number of full-time employees who are required to have the technical skills necessary to participate in software development, database management, and other highly technical tasks. If we and our franchisees are not able to hire a sufficient supply of qualified seasonal employees, or if we are not able to secure employees with the technical skills we require for other purposes, our ability to serve our customers in our offices, to deploy our marketing programs, and to maintain the services that our franchisees require may be compromised and have a material adverse effect on our business.
An increase in the minimum wage may adversely affect the operations of our franchisees.
Many of the seasonal employees hired by our franchisees for each tax season receive compensation at or near the minimum wage. If our franchisees experience increases in payroll expenses as a result of government-mandated increases in the minimum wage, such as some of the state and local minimum wage increases recently adopted, their costs of operation may increase at a rate greater than their ability to raise the prices of the services they offer. If this occurs, our franchisees may not be able to maintain seasonal employment at levels that will provide an optimal level of customer service and marketing support, their marketing and advertising programs may be less effective, and their results of operations may be adversely affected, which could, in turn, adversely affect our results of operations.
If credit market volatility affects our financial partners or franchisees, our business and financial performance could be adversely affected.

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In recent years, the credit markets experienced unprecedented volatility and disruption, causing many lenders and institutional investors to cease providing funding to even the most creditworthy borrowers or to other financial institutions. If additional credit market volatility prevents our financial partners from providing tax settlement products to our customers, limits the products offered, or results in us having to incur further financial obligations to support our financial partners, our revenues or profitability could decline. The cost and availability of funds has also adversely impacted our franchisees' ability to grow and operate their businesses, which could cause our revenues or profitability to decline. In addition, future disruptions in the credit markets could adversely affect our ability to sell territories to new or existing franchisees, causing our revenues or profitability to decline.
Because the tax season is relatively short and straddles two quarters, our quarterly results may not be indicative of our performance.
We experience quarterly variations in revenues and operating income as a result of many factors, including the highly seasonal nature of the tax return preparation business, the timing of off-season activities, and the hiring of personnel. Due to the foregoing factors, our quarter-to-quarter results vary significantly. In addition, because our peak period straddles the third and fourth quarters, any delay or acceleration in the number of tax returns processed in January may make our year-to-year quarterly comparisons not as meaningful as year-to-year tax season comparisons. To the extent our quarterly results vary significantly from year to year, our stock value may be subject to significant volatility.
Risks Related to Our Franchise Business
Our success is tied to the growth and operations of our franchises, and their operations could adversely affect our business.
Our financial success depends on our franchisees and the manner in which they operate and develop their offices. We do not exercise direct control over the day-to-day operations of our franchises, and our franchisees may not operate their offices in a manner consistent with our philosophy and standards and may not increase the level of revenues generated compared to prior tax seasons. Our growth and revenues may, therefore, be adversely affected. There can be no assurance that the training programs and quality control procedures we have established will be effective in enabling franchisees to run profitable tax preparation businesses or that we will be able to identify problems or take corrective action quickly enough. In addition, failure by a franchisee to provide service at acceptable levels may result in adverse publicity that can materially adversely affect our reputation and ability to compete in the market in which the franchisee is located.
If our franchisees fail to open offices in new territories or if they are not successful in operating their new offices, our franchise-related revenue and results of operation will be adversely affected.
Each year, we anticipate adding offices to our franchise system but the opening of these offices depends on the purchase of additional territories by our franchisees and on the opening of offices in territories previously purchased and newly purchased. Many factors go into opening a new office, including obtaining a suitable office location, the availability of sufficient start-up capital, and the ability to recruit tax preparers and other personnel to work in new offices. If a significant number of offices that we expect to be open in a tax season fail to open, are delayed, or open in unsuitable locations or with insufficient personnel, the revenue we expect to receive from royalty payments and the repayment of indebtedness to us by our franchisees will be adversely affected. Because we utilize an almost exclusive franchise business model, we do not have the same flexibility to open new offices as our competitors who make greater use of Company-owned offices.
Our operating results may be adversely affected by the default of our franchisees and ADs on loans made by us or third parties.
We extend financing to certain franchisees for initial franchise fees as cash advances for their working capital needs and for other purposes. The financing is in the form of promissory notes payable to us. There can be no assurance that any franchisee will generate revenue sufficient to repay any amounts due nor is there any assurance that any franchisee will be able to repay any amounts due through other means. We also extend financing to ADs from time-to-time for a portion of their area development fees. At April 30, 2015, the aggregate amount due to us, including accrued interest, from franchisees and ADs for financing was $94.0 million, net of unrecognized revenue of $38.6 million, of which we considered $17.0 million to be impaired because the amounts due exceeded the fair value of the underlying franchise. Any failure by the franchisees and ADs to pay these amounts, if the amounts are not recoverable by us through other means, could have a material adverse effect on our financial performance.
Moreover, in some cases, we may be liable for office leases or other contractual obligations that have been assumed by purchasers of Company-owned offices and acquired tax practices. If the franchisees default on third-party obligations for which we continue to have liability, our operating results will be adversely affected.

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We may be held responsible by third parties, regulators, or courts for the action of, or failure to act, by our franchisees and be exposed to possible fines, other liabilities, and bad publicity.
We grant our franchisees a limited license to use our registered service marks and, accordingly, there is risk that one or more of the franchisees may be identified as being controlled by us. Third parties, regulators, or courts may seek to hold us responsible for the actions or failures to act by our franchisees. The extent to which franchisors should be held responsible for the behavior of their franchisees has become a more significant issue in recent years, with some government agencies taking the position that the extent to which a franchise system establishes requirements for franchisees may justify treating the franchisor as if it “controls” the franchisee’s behavior. Thus, the failure of our franchisees to comply with laws and regulations may expose us to liability and damages that may have an adverse effect on our business.
The Liberty Tax brand could be impaired due to actions taken by our franchisees or otherwise.
We believe the Liberty Tax brand is one of our most valuable assets in that it provides us with a competitive advantage, particularly over our competitors that do not have a national presence. Our franchisees operate their businesses under our brand. Because our franchisees are independent third parties with their own financial objectives, actions taken by them, including breaches of their contractual obligations, and negative publicity associated with these actions, could adversely affect our reputation and brand more broadly. Any actions as a result of conduct by our franchisees or otherwise which negatively impacts our reputation and brand may result in fewer customers and lower revenues and profits for us.
Our tax return preparation compliance program may not be successful in detecting all problems in our franchisee network, and franchisee misbehavior and related enforcement action may damage our reputation and adversely affect our business.
Although our tax return preparation compliance program seeks to monitor the activities of our franchisees, it is unlikely to detect every problem. While we have implemented a variety of measures to enhance tax return preparation compliance as well as our monitoring of these activities, there can be no assurance that franchisees and tax preparers will follow these procedures. From time to time, the federal and/or state authorities may take adverse action against franchisees or preparers related to tax compliance issues, seeking injunctions, damages or even criminal sanctions with respect to such behavior. Failure to detect and prevent tax return preparation compliance issues could expose us to the risk of government investigation or litigation, result in bad publicity and reputational harm, and could subject us to remedies and loss of customers that could cause our revenues or profitability to decline.
Disputes with our franchisees may have a material adverse effect on our business.
From time to time, we engage in disputes with some of our franchisees, and some of these disputes result in litigation or arbitration proceedings. Disputes with our franchisees may require us to incur significant legal fees, subject us to damages, and occupy a disproportionate amount of management's time. A material increase in the number of these disputes, or unfavorable outcomes in these disputes, may have a material adverse effect on our business. To the extent we have disputes with our franchisees, our relationships with our franchisees could be negatively impacted, which could hurt our growth prospects or negatively impact our financial performance.
Our operating results depend on the effectiveness of our marketing and advertising programs and franchisee support of these programs.
Our revenues are heavily influenced by brand marketing and advertising. If our marketing and advertising programs are unsuccessful, we may fail to retain existing customers and attract new customers, which could limit the growth of our revenues or profitability or result in a decline in our revenues or profitability. Moreover, because franchisees are required to pay us marketing and advertising fees based on a percentage of their revenues, our marketing fund expenditures are dependent upon sales volumes of our franchisees.
The support of our franchisees is critical for the success of our marketing programs and any new strategic initiatives we seek to undertake. While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we need the active support of our franchisees if the implementation of our marketing programs and strategic initiatives is to be successful. Although certain actions are required of our franchisees under the franchise agreements, there can be no assurance that our franchisees will continue to support our marketing programs and strategic initiatives. The failure of our franchisees to support our marketing programs and strategic initiatives would adversely affect our ability to implement our business strategy and could have a material adverse effect on our business, financial condition, and results of operations.
Our launch of a new franchise brand may be unsuccessful and consume significant management and financial resources.
During fiscal 2015, we launched a new franchise brand, SiempreTax+, designed to enable our franchisees to better serve Hispanic customers and to assist us in building out our franchise network. Although franchisees opened a significant number of SiempreTax+ offices for the 2015 tax season, the launch of a new nationwide brand involves substantial risks and uncertainties,

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and the interest of prospective franchisees and customers in the new brand may not be sufficient to permit us to grow the brand as rapidly as we hope. We expended significant management time and start-up expenses during the first year of this brand, and if the brand is not successful or falls short of anticipated growth, we may be adversely affected by continued expenses and the diversion of management time to this initiative at the expense of our core Liberty Tax brand.
Risks Related to Regulation of Our Industry
Federal and state regulators may impose new regulations on non-loan tax settlement products that would make those products more expensive for us to offer or more difficult for our customers to obtain.
Consumer advocacy organizations and some government officials have asserted that non-loan tax settlement products, such as the refund transfer products we offer, should be treated as loan products or otherwise be more heavily regulated. These groups assert that refund transfer products and similar products are loans because most customers complete the payment for their tax preparation and related fees at the time their refund is disbursed, and therefore, the customer has received an extension of credit because of a purported deferral of the tax preparation fees until the refund is received. We are subject to a judgment in the State of California that treats refund transfer product products that we provide in that state as if they were extensions of credit. In addition, certain litigation discussed below involving us and others in the tax industry include claims that refund transfer products and similar products constitute loans or extensions of credit. If other state or federal courts or agencies successfully require us to treat refund transfer products as if they are loans or extensions of credit, we may be subject to the cost of additional regulation, including disclosure requirements that could reduce the demand for these products by potential customers and may be subject to limitations on our ability to offer these products, which could materially adversely affect our operations. See "Item 3—Legal Proceedings" and "Item 1—Business—Regulation—Potential regulation of refund transfer products or treatment of refund transfer products as loans or extensions of credit."
We may be unsuccessful in litigation that characterizes refund transfer products as loans, which could subject us to damages and additional regulation, and which could adversely affect our ability to offer tax settlement products and have a material adverse effect on our operations and financial results.
We were sued in November 2011 in four states, and additional lawsuits have been filed in five other states since the initial filings. These cases have now been consolidated before a single judge in federal court in the Northern District of Illinois. The consolidated complaint alleges violations of state-specific refund anticipation loan and other consumer statutes alleging that a refund transfer product represents a form of refund anticipation loan because the taxpayer is "loaned" the tax preparation fee, and that a refund transfer product is, therefore, subject to federal truth-in-lending disclosure and state law requirements regulating refund anticipation loans. We are aware that virtually identical lawsuits were filed against three of our competitors. In June 2015, we entered into a settlement agreement in this case in order to minimize the expense of litigation and the risk attendant to the litigation. Although this case is expected to be resolved through the settlement, the underlying issue may be the subject of additional regulation and litigation. We may also become subject to existing state regulations governing refund anticipation loans (in the states that have such regulations) and the costs of additional regulation, including disclosure requirements, and we may be subject to limitations on our ability to offer these products. These additional disclosure requirements could reduce the demand for these products by potential customers, and the possible application of state lending and other refund anticipation loan-related statutes and regulations might adversely affect our fee income to the extent those statutes or regulations impose limitations on fees that we now charge in connection with refund transfer products. If it becomes more difficult for us and our franchisees to offer these products to taxpayers, or if we are subject to damages in future litigation, it could materially and adversely affect our operations and financial results. See "Item 1-Business-Regulation-Potential regulation of refund transfer products or treatment of refund transfer products as loans or extensions of credit."
The failure by us, our franchisees, the financial institutions, and other lenders that provide tax settlement products to our customers through us and our franchisees, to comply with legal and regulatory requirements, including with respect to tax return preparation or tax settlement products, could result in substantial sanctions against us or require changes to our business practices that could harm our profitability and reputation.
Our tax return preparation business, including our franchise operations and facilitation of tax settlement products, are subject to extensive regulation and oversight in the United States by the IRS, the FTC, and by federal and state regulatory and law enforcement agencies and similar entities in Canada. The profitability of our future operations will, therefore, depend in large part on our continued ability to comply with federal and state franchise regulations, and in Canada, on our continued ability to comply with Canadian and provincial franchise regulations. If governmental agencies with jurisdiction over our operations were to conclude that our business practices, the practices of our franchisees, or those of financial institutions and other lenders with which we conduct our business violate applicable laws, we could become subject to sanctions that could have a material adverse effect on our business, financial condition, and results of operations. These sanctions may include, without limitation:

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civil monetary damages and penalties,
criminal penalties, and
injunctions or other restrictions on the manner in which we conduct our business.
In addition, the financial institutions and other providers of tax settlement products to our customers are also subject to significant regulation and oversight by federal and state regulators, including banking regulators. The failure of these providers to comply with the regulatory requirements of federal and state government regulatory bodies, including banking and consumer protection laws, could affect their ability to continue to provide tax settlement products to our customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Our customers' inability to obtain tax settlement products through our tax return preparation offices could cause our revenues or profitability to decline. We also may be required to change business practices, which could alter the way tax settlement products are facilitated and could cause our revenues or profitability to decline.
Federal and state legislators and regulators have increasingly taken an active role in regulating tax settlement products and, because our ability to offer these products in future tax seasons may be limited, demand for our services may be reduced, we may be exposed to additional credit risk, and our business may be harmed.
From time to time, government officials at the federal and state levels introduce and enact legislation and regulations proposing to regulate or prevent the facilitation of refund-based loans and other tax settlement products and take other actions that have the effect of restricting the availability of these products. Certain of the proposed legislation, regulations, and activities could increase costs to us, our franchisees, the financial institutions, and other parties that provide our tax settlement products or could negatively impact or eliminate the ability of financial institutions to provide or facilitate tax settlement products through tax return preparation offices.
The financial institutions that provide or otherwise facilitate tax settlement products are subject to significant regulation and oversight by federal and state regulators, including banking regulators. In December 2011, Republic Bank, the last bank continuing to offer refund anticipation loans in any significant number, reached a settlement with the FDIC that required Republic Bank to cease to offer refund anticipation loans after the 2012 tax season. For this reason, any refund-related loans (such as the ICA) made available to our customers are offered by non-bank lenders.
In August 2010, the IRS announced that, starting in 2011, it would no longer provide tax preparers or refund anticipation loan providers with the Debt Indicator ("DI"), which was used by financial institutions to determine whether to extend credit to a taxpayer in connection with the facilitation of a refund anticipation loan. In eliminating the DI, the IRS no longer discloses to financial institutions or tax preparers if a taxpayer owes the federal government any money that will be deducted from the taxpayer's expected income tax refund. The unavailability of the DI subjects a lender that originates refund-related loans to additional risks because those loans are more difficult for a lender to underwrite.
Even if we continue to develop relationships that allow our customers to obtain refund-related loans through non-bank lenders, the laws and regulations that apply to those lenders and us may make these products more expensive to offer or limit their availability to our customers. The loss of the DI has caused approval rates and loan amounts to be lower than in prior tax seasons, and lenders may issue ICAs and similar products that have a greater probability of not being repaid. We may experience a loss of customers because of this change, and to the extent our arrangements with financial institutions impose any of the risk of customer defaults upon us, our profitability may be reduced. In addition, many states have statutes regulating through licensing and other requirements the activities of brokering loans and providing credit services to consumers as well as payday loan laws and local usury laws. Some state regulators are interpreting these laws in a manner that could adversely affect the manner in which tax settlement products are facilitated, or permitted, or result in fines or penalties to us or our franchisees. Some states are introducing and enacting legislation that would seek to directly apply such laws to the facilitators of refund-based loans. Additional states may interpret these laws in a manner that is adverse to how we currently conduct our business or how we have conducted our business in the past, and we may be required to change business practices or otherwise comply with these statutes and could be subject to fines, penalties, or other payments related to past conduct.
If our financial product service providers become unable or unwilling to enable us to offer refund transfer products, we may be unable to offer tax settlement products to our customers.
Our ability to offer refund transfer products (as well as other tax settlement products that require the creation of a customer bank account) is dependent on the ability and willingness of our financial product service providers to make available to our customers the bank accounts into which their tax refunds are deposited. If any of the federal or state regulatory authorities with the power to regulate these service providers prevents or makes it more difficult for our service providers to make these bank accounts available to our customers or if the service providers determine that they no longer wish to

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participate in these transactions, we may be unable to find alternative service providers that will be willing to provide the required number of bank accounts to our customers. If we are unable to make bank accounts available for refund transfer products, we will not be able to enable our customers to utilize these accounts for the direct deposit of their federal and state tax returns, which would materially affect our ability to offer tax settlement products to those customers.
Legislative and regulatory reforms may have a significant impact on our business, results of operations, and financial condition.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"), which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets, was signed into law. The full impact of the Reform Act is difficult to assess because many provisions require federal agencies to adopt regulations implementing provisions of the Reform Act. In addition, the Reform Act mandates multiple studies, which could result in additional legislative or regulatory action. The Reform Act as well as other legislative and regulatory changes could adversely affect our businesses. There is particular risk associated with the establishment of the Consumer Financial Protection Bureau ("CFPB") with broad authority to implement new consumer protection regulations. For example, the CFPB may pursue initiatives that negatively impact our ability and the ability of others we contract with to offer tax settlement products, may impose regulations on the manner in which tax preparation services are offered, and may take action to invalidate the use of consumer arbitration as a means of resolving customer disputes in connection with tax settlement products and otherwise.
The effect of the Reform Act on our business and operations could be significant, depending upon final implementation of regulations, the initiatives pursued by the CFPB, the actions of our competitors, and the behavior of other marketplace participants. Moreover, the Reform Act expanded the authority of state regulators to enforce and promulgate consumer protection laws and regulations, and this expansion of state authority may result in new and broader consumer protection requirements that might be more comprehensive than those at the federal level. In addition, we may be required to invest significant management time and resources to address the various provisions of the Reform Act and the numerous regulations that are required to be issued under it. The Reform Act and any related federal or state legislation or regulations could have a material adverse effect on our business, results of operations, and financial condition.
Increased regulation of tax return preparers could make it more difficult to find qualified tax preparers and could harm our business.
From time to time, the federal government and various states consider regulations regarding the education, testing, licensing, certification, and registration of tax return preparers. Although the IRS’ effort to implement a new model for tax return preparer regulation has been declared invalid by a federal appeals court, Congressional action authorizing mandatory regulation may be adopted in the future, and various states have begun to fill the void created by the absence of federal tax return preparer regulation by proposing new or enhanced regulatory requirements at the state level. Although we believe that our training for preparers already exceeds the requirements the IRS had proposed and that states have adopted or have proposed, regulation of tax return preparers could impact our ability to find an adequate number of tax return preparers to meet the demands of our customers and impose additional costs on us and our franchisees to train tax return preparers, which could cause our revenues and profitability to decline.
Immigration reform may lead our customers to seek our assistance with matters related to immigration reform and may subject us to additional regulatory risk.
We believe that any material immigration reform, whether implemented by executive action or by Congress, will necessarily involve the use of prior tax returns as a means by which undocumented immigrants may demonstrate their presence in the United States and compliance with federal and state tax laws. We anticipate that any additional customers we might obtain because of this opportunity to prepare additional tax returns may also seek our assistance in their efforts to comply with whatever processes are implemented to enable undocumented immigrants to take advantage of the benefits of any immigration reform initiatives. We and our franchisees may be subject to state restrictions on the unauthorized practice of law, and other federal and state restrictions regarding who may advise individuals with respect to immigration matters, and failure to comply with these regulatory restrictions may subject us and our franchisees to enforcement action and adversely affect our business.
Risks Related to Changes in Tax Laws and Regulations
Because demand for our products is related to the complexity of tax return preparation and the frequency of tax law changes, government initiatives that simplify tax return preparation, reduce the need for a third-party tax return preparer, or lower the number of returns required to be filed may decrease demand for our services and financial products.
Many taxpayers seek assistance from paid tax return preparers such as Liberty Tax Service because of the level of complexity involved in tax return preparation and filing and frequent changes in the tax laws. From time to time politicians and

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government officials propose measures seeking to simplify the preparation and filing of tax returns. The passage of any measures that significantly simplify tax return preparation or reduce the need for third-party tax return preparers may be highly detrimental to our business. In addition, any changes or other initiatives that result in a decrease in the number of tax returns filed or reduce the size of tax refunds could reduce demand for our products and services causing our revenues or profitability to decline.
For example, several members of Congress have proposed legislation that would authorize or require the IRS to allow taxpayers to access web-based tax preparation tools that would include "pre-populated" tax return forms that would presumably include data provided to the IRS from other government agencies, such as the Social Security Administration. If these or similar proposals that involve government encroachment on the tax preparation process are enacted, many tax customers might elect those services rather than paid tax preparation or the use of fee-based tax software or online tax preparation.
Initiatives that improve the timing and efficiency of processing tax returns could reduce the attractiveness of the tax settlement products offered to our customers and demand for our services.
Our performance depends on our ability to offer access to tax settlement products that increase the speed and efficiency by which our customers can receive their refunds. The federal government and various state and local municipalities have, from time to time, announced initiatives designed to modernize their operations and improve the timing and efficiency of processing tax returns. For example, during a prior tax season, the U.S. Department of Treasury introduced a prepaid debit card pilot program designed to facilitate the refund process. If tax authorities are able to significantly increase the speed and efficiency with which they process tax returns, the value and attractiveness of the tax settlement products offered to our customers and demand for our services could be reduced.
Delays in the passage of tax laws and their implementation by the federal or state governments could harm our business.
The enactment of tax legislation occurring late in the calendar year could result in the beginning of tax filing season being delayed or make it difficult for us to make necessary changes on a timely basis to the software used by our franchisees to prepare tax returns. Any such delays could impact our revenues and profitability in any given year.
Proposals to make fundamental changes in the way tax refunds are processed or to impose price limitations on tax preparation, if enacted, could result in substantial losses of customers and other risks.
Some regulators have suggested that it would be appropriate to allow taxpayers to "split" their tax refunds, in a manner that would separate the payment of tax preparation fees from the balance of a customer's refund. In describing these proposals, some advocates have called for a cap on tax preparation fees that would adversely affect the ability of tax preparers to charge market prices for tax services and could reduce income to our franchisees, and therefore, to us. Other proposals have been advanced that would attempt to reduce tax refund fraud by significantly postponing the speed with which refunds are processed, or even postponing the processing of refunds until after the April 15 federal tax filing deadline. Such a change would likely have the effect of devaluing services that allow tax customers in the early portion of the tax season to receive their refunds on a more expedited basis that is available when electronic filing is not used, and could therefore reduce the demand for the services we and our franchisees provide.
There can be no assurance that these proposals will be enacted at all or in their present form but if enacted, our growth and revenues could be adversely affected.
Our participation in government programs designed to speed access to tax refunds may result in customer loss when the IRS fails to perform.
The IRS has responded to the increase in electronic filing by developing programs designed to reduce a taxpayer's wait to receive a tax refund. In the past, we participated in some programs offered by the IRS that did not perform as expected, resulting in significant delays in processing refunds for some of our customers. Although we continue to seek to give our customers quicker access to their refunds, doing so involves the risk of customer dissatisfaction and injury to our reputation in the market if the IRS fails to perform, which is outside our control.
Risks Related to Our Class A Common Stock
We are controlled by our Chairman and Chief Executive Officer, whose interests in our business may be different from those of our stockholders.
John Hewitt, our Chairman and Chief Executive Officer, currently owns all outstanding shares of our Class B common stock. Our Class B common stock has the power to elect, voting as a separate class, the minimum number of directors that constitute a majority of the Board of Directors. As a result, Mr. Hewitt will, for the foreseeable future, have significant influence over our management and affairs, given the Board's authority to appoint or replace our senior management, cause us

26


to issue additional shares of our Class A common stock or repurchase Class A common stock, declare dividends, or take other actions. Upon Mr. Hewitt’s death, pending the effectiveness of a provision of our certificate of incorporation that will become effective only after we have conducted an initial public offering or certain other triggering events occur, Mr. Hewitt’s estate would succeed to these special voting rights. Mr. Hewitt may make decisions regarding our Company and business that are opposed to other stockholders' interests or with which they disagree. Mr. Hewitt's ability to elect a majority of the Board of Directors may also delay or prevent a change of control of us, even if that change of control would benefit our stockholders, which could deprive an investor of the opportunity to receive a premium for your Class A common stock. The power to elect a majority of the directors may adversely affect the value of our Class A common stock due to investors' perception that conflicts of interest may exist or arise. To the extent that the interests of our other stockholders are harmed by the actions of Mr. Hewitt, the price of our Class A common stock may be harmed. For information regarding the ownership of our outstanding stock, please see the section titled "Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
Because we are not required to comply with certain NASDAQ corporate governance requirements, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ.
Because Mr. Hewitt owns all of the outstanding shares of our Class B common stock, and therefore, has the ability to elect a majority of our directors, we have elected to be a "controlled company" for the purposes of the NASDAQ listing requirements. As such, we are exempt from certain corporate governance requirements, including the requirements that our Board of Directors be comprised of a majority of directors who are independent under NASDAQ rules and that we have nominating and compensation committees with members meeting the NASDAQ independence requirements. We currently are voluntarily complying with the NASDAQ's corporate governance standards but may choose not to in the future. If we choose not to comply with certain of the requirements, our Board of Directors may have more directors who do not meet the NASDAQ independence standards than they would if those standards were to apply. We may also elect not to maintain formal nominating/corporate governance and compensation committees or, if we maintain those committees, they may not be comprised of independent directors. In such circumstances, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ, and circumstances may occur in which the interests of Mr. Hewitt could conflict with the interests of our other stockholders.
Our stock price may be volatile, and investors may be unable to resell their shares at or above their acquisition price or at all.
Our stock price could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
actual or anticipated variations in our operating results from quarter to quarter;
actual or anticipated variations in our operating results from the expectations of securities analysts and investors;
actual or anticipated variations in our operating results from our competitors;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
sales of Class A common stock or other securities by us or our stockholders in the future;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
departures of key executives or directors;
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, financing efforts or capital commitments;
delays or other changes in our expansion plans;
involvement in litigation or governmental investigations or enforcement activity;
stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
general market conditions in our industry and the industries of our customers;
general economic and stock market conditions;
regulatory or political developments; and

27


terrorist attacks or natural disasters.
Furthermore, the capital markets experience extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, or international currency fluctuations may negatively impact our stock price. Trading price fluctuations may also make it more difficult for us to use our Class A common stock as a means to make acquisitions or to use options to purchase our Class A common stock to attract and retain employees. If our stock price does not exceed the price at which stockholders acquired their shares, investors may not realize any return on their investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could materially adversely affect our business, results of operations, and financial position.
A significant portion of our outstanding shares of Class A common stock may be sold into the market, which could adversely affect our stock price.
Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time, subject to certain securities law restrictions. Sales of shares of our Class A common stock or the perception in the market that the holders of a large number of shares of Class A common stock intend to sell shares could reduce our stock price. As of June 23, 2015, we have outstanding 11,920,712 shares of Class A common stock and 900,000 shares of Class B common stock, which are convertible into shares of Class A common stock on a one-for-one basis, assuming no exercise of our outstanding options.
At June 23, 2015, we also have approximately 1.6 million shares of our Class A common stock reserved for issuance in connection with options and restricted stock units granted under our 1998 Stock Option Plan and the 2011 Equity and Cash Incentive Plan. These shares may also be freely sold in the public market upon issuance and once vested.
The trading in our Class A Common Stock is limited.
Because of the number of shares of our Class A common stock held by affiliates, the volume of typical trading in our stock on the NASDAQ Stock Market has been limited. This limitation on the liquidity of our stock may impede the ability of our stockholders to sell shares at the time they wish to sell them at a price that they consider reasonable or at all, and could reduce our stock price and impede our ability to acquire other companies using our shares as consideration.
Our stock price and trading volume could decline if securities or industry analysts do not publish research or reports about our business or if they publish misleading or unfavorable research or reports about our business.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. As of the date of this report, only two securities analysts engage in coverage of our Class A common stock, and if few securities or industry analysts commence or maintain such coverage, the trading price and liquidity for our shares could be adversely impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases to cover us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.
We incur increased costs and our management will face increased demands as a result of operating as a company with public equity.
As a company with public equity, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act as well as related rules implemented by the SEC and NASDAQ impose various requirements on companies with public equity. As a public company, we are required to:
prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and NASDAQ rules,
create or expand the roles and duties of our Board of Directors and committees of the Board of Directors,
institute more comprehensive financial reporting and disclosure compliance functions,
supplement our internal accounting and auditing function,
enhance and formalize closing procedures at the end of our accounting periods,

28


enhance our investor relations function,
establish new or enhanced internal policies, including those relating to disclosure controls and procedures, and
involve and retain to a greater degree outside counsel and accountants in the activities listed above.
Our management and other personnel have devoted a substantial amount of time to these compliance matters. Also, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly than would be the case for a private company. For example, these rules and regulations have made it more expensive for us to maintain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as our executive officers.
In addition, as a result of being a public company, we are subject to financial reporting and other requirements including NASDAQ continued listing requirements that are burdensome and costly. Our failure to timely complete our analysis of these reporting requirements could adversely affect investor confidence in our Company and, as a result, the value of our common stock. Further, if we fail to implement these reporting requirements, our ability to report our results of operations on a timely and accurate basis could be impaired. In fact, in connection with restating our previously issued annual and quarterly consolidated financial statements, we recently were delinquent in filing our annual and quarterly reports. Consequently, we received two notices from NASDAQ in connection with the delinquent filings, and we may be subject to NASDAQ delisting procedures if we fail to comply with the NASDAQ continued listing requirements in the future.
We are an "emerging growth company" and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") enacted in April 2012, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"); the same reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that smaller reporting companies are permitted to provide; and exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation, frequency of approval of executive compensation, and of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company may take advantage of the extended transition period provided in the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") for complying with new or revised accounting standards. In other words, an emerging growth company may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. We will remain an "emerging growth company" until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenue of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the sale by us of common equity securities pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a "large accelerated filer," as defined under the Exchange Act.
Although we may desire to continue to pay dividends in the future, our financial condition, debt covenants, or Delaware law may prohibit us from doing so.
Although we initiated the payment of dividends in April 2015 and may continue to pay cash dividends in the future, we have no obligation to do so and the payment of dividends will be at the discretion of our Board of Directors and will depend, among other things, on our earnings, capital requirements, and financial condition as well as our ability to dividend funds from our principal subsidiary under the terms of our credit facility. Our ability to pay dividends will be subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of preferred stock. We cannot assure investors that we will continue to pay dividends at any specific level or at all.
Anti-takeover provisions in our charter documents, Delaware law, and our credit facility could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management, and adversely affect the value of our Class A common stock.

29


Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. We have two classes of common stock, one of which is entitled to elect a majority of our Board of Directors and is controlled by our Chairman and CEO as described above. Our second amended and restated certificate of incorporation and bylaws will also include provisions that:
authorize our Board of Directors to issue, without further action by the stockholders, up to approximately 3.0 million shares of undesignated preferred stock;
specify that special meetings of our stockholders can be called only by our Board of Directors, the Chair of our Board of Directors, or holders of at least 20% of the shares that will be entitled to vote on the matters presented at such special meeting;
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; and
do not provide for cumulative voting in the election of directors.
In addition, our credit facility contains covenants that may impede, discourage, or prevent a takeover of us. For instance, upon a change of control, we would default on our credit facility. As a result, a potential takeover may not occur unless sufficient funds are available to repay our outstanding debt.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. Any provision of our amended and restated certificate of incorporation and bylaws or our debt documents that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect our stock value if they are viewed as discouraging takeover attempts in the future.
Item 1B.    Unresolved Staff Comments.
None.

Item 2.    Properties.
We own our corporate headquarters, located in five buildings, totaling approximately 106 thousand square feet. Our principal executive office is located at 1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454. We also own additional properties in Ohio, New York, Tennessee, and Virginia which are used as Company-owned offices or leased to franchisees. The remainder of our Company-owned offices are operated under leases. We believe that our offices are in good repair and sufficient to meet our present and anticipated future needs.
Item 3.    Legal Proceedings.
In the ordinary course of operations, we may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows, or results of operations except as provided below.
ERC class action litigation. We were sued in November 2011 in federal courts in Arkansas, California, Florida, and Illinois, and additional lawsuits were filed in federal courts in January 2012 in Maryland and North Carolina, in February 2012 in Wisconsin, and in May 2012 in New York and Minnesota. In April 2012, a motion to consolidate all of the then-pending cases before a single judge in federal court in the Northern District of Illinois was granted, and in June 2012, the plaintiffs filed a new complaint in the consolidated action. The consolidated complaint alleges that our refund transfer products formerly called electronic refund checks ("ERC") represent a form of refund anticipation loan ("RAL") because the taxpayer is "loaned" the tax preparation fee, and that the refund transfer product is, therefore, subject to federal truth-in-lending disclosure and state law requirements regulating RALs. The plaintiffs also allege disclosure violations related to the ERC fees paid by RAL customers. The plaintiffs, therefore, claim violations of state-specific RAL and other consumer statutes. The lawsuit purports to be a class action, and the plaintiffs allege potential damages in excess of $5.0 million. We appealed to the United States Court of Appeals for the Seventh Circuit a ruling that certain of the plaintiffs’ claims were not subject to arbitration. Following mediation, the parties entered into a settlement agreement in June 2015 pursuant to which we will establish a settlement fund of $5.3 million, inclusive of settlement administration costs and plaintiffs’ counsel fees. The parties are in the process of arranging for the remand of the case to the trial court, which must approve the settlement. We have preserved potential claims against a financial product partner that was responsible for the design of a portion of our ERC programs in the years at issue in the cases. We have also accrued the proposed settlement amount.

30


TCPA class action litigation. We were sued in September 2013 in federal court in Illinois in connection with alleged violations of the Telephone Consumer Protection Act. Plaintiff alleges that we inappropriately made auto dialed telephone calls to cellular telephones, seeks the certification of a nationwide class action, and claims statutory damages of $500-$1,500 per violation. We tendered the defense of this litigation to a third party entity that had contracted with us to solicit potential franchisees, and that third party entity acknowledged its defense and indemnification obligations to us. However, because the third party did not have the financial resources to satisfy its defense and indemnity obligations, we concluded that we could not rely upon the fulfillment of those obligations. In September 2014, the Company and the plaintiffs reached a tentative settlement of this litigation pursuant to which we will establish a settlement fund of $3.0 million, inclusive of settlement administration costs and plaintiffs’ counsel fees. This settlement has received the preliminary approval of the court, but remains subject to other conditions typical in a class action. We have accrued the proposed settlement amount.
We are also party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the preparation of customers' income tax returns, the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on our consolidated results of operations or financial position.
Item 4.    Mine Safety Disclosures.
Not applicable.

31


PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market and Stock Information
Our Class A common stock has been listed on The NASDAQ Global Market under the symbol "TAX" since July 2, 2012. We traded on the over-the-counter bulletin board from June 14, 2012 until that date. Prior to that time, there was no public market for our Class A common stock. The following table sets forth for the periods indicated the high and low sale prices of our Class A common stock on The NASDAQ Global Market.
 
 
2015
 
2014
 
 
 
Sales Price
 
Sales Price
 
 
 
High
 
Low
 
High
 
Low
 
First Quarter
 
$
35.20

 
$
26.19

 
$
19.42

 
$
15.90

 
Second Quarter
 
39.19

 
31.31

 
20.99

 
16.28

 
Third Quarter
 
39.60

 
31.64

 
26.78

 
18.93

 
Fourth Quarter
 
37.03

 
25.69

 
28.00

 
23.88

 
As of April 30, 2015, our stockholders' equity consisted of the following: 11,905,156 shares of Class A common stock, 900,000 shares of Class B common stock, and 10 shares of special voting preferred stock. We treat as common stock equivalents exchangeable shares that may be exchanged for 1,000,000 shares of Class A common stock. As of April 30, 2015, options to acquire 1,343,559 shares of Class A common stock were outstanding, 958,143 of which were immediately exercisable.
Holders of Record
As of June 23, 2015, we had approximately 180 registered record holders of our Class A common stock and one holder of our Class B common stock. The reported closing price of our Class A common stock on June 23, 2015 was $24.50. Wells Fargo Shareowner Services is the transfer agent and registrar for our Class A common stock. We have no established public trading market for our Class B common stock.
Dividends
Until our dividend paid in April 2015, we had never declared or paid a cash dividend on our common stock. Although we have now announced a $0.16 per share quarterly cash dividend and may continue to pay cash dividends in the future, the payment of dividends will be at the discretion of our Board of Directors and will depend, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends will also be subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will continue to pay dividends at any specific level or at all.

32


Share Repurchases
Our Board of Directors has approved $10.0 million of authorizations for share repurchases. These authorizations have no specific expiration date and cash proceeds from stock option exercises increase the amount of the authorizations. Shares repurchased from option exercises that are net-share settled by us and shares repurchased in privately negotiated transactions are not considered share repurchases under these authorizations. During the three months ended April 30, 2015, we repurchased shares from option exercises that were net-share settled by us as follows (in thousands, except for share and per share amounts):
Period
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plan
 
Remaining Maximum
Value
of Shares
that may
be Purchased
Under
the Plan
February 1 through February 28, 2015
 

 
$

 

 
$
4,669

March 1 through March 31, 2015
 
12,817

 
29.26

 

 
5,217

April 1 through April 30, 2015
 
768

 
29.30

 

 
6,201

   Total
 
13,585

 
29.26

 

 
 
_______________________________________________________________________________
(1) During the three months ended April 30, 2015, all of the shares repurchased were associated with the exercise of stock options.

During fiscal 2015, we repurchased 1,284,246 shares of our Class A common stock as shown in the table below:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
First quarter
 
881,172

 
$
25.67

Second quarter
 
328,589

 
33.72

Third quarter
 
60,900

 
36.31

Fourth quarter
 
13,585

 
29.26

Total
 
1,284,246

 
28.27


On June 3, 2014, we repurchased 800,000 shares of our Class A common stock at $25.00 per share in a privately negotiated transaction with an affiliate.

33


Stock Performance Graph
The graph below compares the cumulative total return provided stockholders on the Company's Class A common stock relative to the cumulative total returns of the Russell 2000 index and the S&P Diversified Commercial & Professional Services index. Returns assume an initial investment of $100 at the market close on June 14, 2012, which was the first day our stock was traded on the over-the-counter bulletin board, and then for the periods ending April 30, 2013, 2014, and 2015. Dividends, if any, are assumed to have been reinvested.


34


Item 6.    Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 below and our Consolidated Financial Statements and related notes included in Item 15. We derived the consolidated statements of income data for the years ended April 30, 2015, 2014, and 2013 and the consolidated balance sheet data as of April 30, 2015 and 2014 from our audited consolidated financial statements included in Item 8. The consolidated statements of income data for the years ended April 30, 2012 and 2011 and the consolidated balance sheet data as of April 30, 2012 and 2011 are derived from our restated unaudited consolidated financial statements not included in this annual report. Our historical results are not necessarily indicative of the results that may be expected in the future.
 
 
Fiscal Years Ended and as of April 30,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(amounts in thousands, except per share, franchisees, offices, per franchisee amounts, fee per tax return, and per office amounts)
Consolidated Statements of Income Data:
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
Franchise fees
 
$
6,246

 
$
7,844

 
$
8,721

 
$
7,996

 
$
8,780

AD fees
 
6,901

 
6,680

 
7,699

 
6,702

 
6,335

Royalties and advertising fees
 
80,469

 
78,426

 
73,129

 
70,016

 
66,182

Financial Products
 
37,058

 
34,512

 
30,345

 
22,903

 
16,507

Tax preparation fees, net of discounts
 
13,877

 
14,295

 
10,148

 
7,026

 
4,789

Other revenue
 
17,621

 
17,939

 
17,571

 
16,582

 
15,343

Total revenue
 
162,172

 
159,696

 
147,613

 
131,225

 
117,936

Total operating expenses
 
(146,780
)
 
(124,875
)
 
(116,777
)
 
(103,245
)
 
(91,245
)
Income from operations
 
15,392

 
34,821

 
30,836

 
27,980

 
26,691

Foreign currency translation gain (loss)
 
(2
)
 
(13
)
 

 
4

 
75

Gain on sale of available-for-sale securities
 

 
2,183

 

 

 

Interest expense
 
(1,889
)
 
(1,355
)
 
(2,039
)
 
(1,854
)
 
(1,954
)
Income before income taxes
 
13,501

 
35,636

 
28,797

 
26,130

 
24,812

Income tax expense
 
(4,811
)
 
(13,654
)
 
(11,170
)
 
(9,747
)
 
(10,142
)
Net income
 
$
8,690

 
$
21,982

 
$
17,627

 
$
16,383

 
$
14,670

Earnings per share of Class A common stock and Class B common stock
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.63

 
$
1.57

 
$
1.26

 
$
1.17

 
$
0.85

Diluted
 
$
0.61

 
$
1.51

 
$
1.25

 
$
1.16

 
$
0.83

Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Amounts due from franchisees and ADs less unrecognized revenue, net of allowances
 
$
86,680

 
$
81,480

 
$
85,658

 
$
76,493

 
$
68,196

Property, equipment, and software, net
 
36,232

 
38,343

 
33,037

 
23,948

 
18,228

Total assets
 
184,146

 
198,763

 
169,530

 
152,196

 
116,093

Long-term debt, including current installments
 
25,397

 
28,488

 
27,683

 
28,985

 
4,458

Total stockholders' equity
 
98,862

 
110,185

 
81,836

 
67,065

 
52,018



35


 
 
Fiscal Years Ended and as of April 30,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(amounts in thousands, except per share, franchisees, offices, per franchisee amounts, fee per tax return, and per office amounts)
Other Financial and Operational Data:
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA(1)
 
$
42,787

 
$
44,734

 
$
40,424

 
$
35,331

 
$
32,205

 
 
 
 
 
 
 
 
 
 
 
Number of U.S. offices(2)
 
4,069

 
4,175

 
4,262

 
3,920

 
3,590

Number of Canadian offices(2)
 
259

 
263

 
258

 
263

 
255

Number of offices(2)
 
4,328

 
4,438

 
4,520

 
4,183

 
3,845

 
 
 
 
 
 
 
 
 
 
 
Number of U.S. franchisees
 
1,907

 
1,959

 
2,073

 
1,959

 
1,810

Number of Canadian franchisees
 
125

 
145

 
138

 
139

 
131

Number of franchisees
 
2,032

 
2,104

 
2,211

 
2,098

 
1,941

 
 
 
 
 
 
 
 
 
 
 
Average number of offices per U.S. franchisee(2)(3)
 
2.07

 
2.04

 
1.94

 
1.96

 
1.96

Average number of offices per Canadian franchisee(2)(3)
 
1.62

 
1.57

 
1.67

 
1.76

 
1.84

Average number of offices per franchisee(2)(3)
 
2.04

 
2.01

 
1.93

 
1.95

 
1.95

 
 
 
 
 
 
 
 
 
 
 
Number of tax returns processed in U.S. offices
 
1,907

 
1,890

 
1,805

 
1,790

 
1,658

Number of tax returns processed in Canadian offices
 
340

 
311

 
311

 
285

 
288

Number of tax returns filed online(4)
 
167

 
187

 
159

 
109

 
98

Number of tax returns processed
 
2,414

 
2,388

 
2,275

 
2,184

 
2,044

 
 
 
 
 
 
 
 
 
 
 
Systemwide revenue from U.S. offices(5)
 
$
413,200

 
$
397,300

 
$
358,000

 
$
337,000

 
$
317,000

Systemwide revenue from Canadian offices (CN$)(5)
 
26,400

 
23,900

 
23,200

 
22,100

 
21,600

Systemwide revenue from Canadian offices (US$)(5)
 
21,761

 
21,789

 
22,819

 
22,298

 
21,895

 
 
 
 
 
 
 
 
 
 
 
Systemwide revenue per U.S. office(5)(6)
 
$
101,548

 
$
95,162

 
$
83,998

 
$
85,969

 
$
88,301

Systemwide revenue per Canadian office (CN$)(5)(6)
 
101,931

 
90,875

 
89,922

 
84,030

 
84,706

Systemwide revenue per Canadian office (US$)(5)(6)
 
84,021

 
82,848

 
88,446

 
84,783

 
85,863

 
 
 
 
 
 
 
 
 
 
 
Net average fee per U.S. tax return processed(6)
 
$
217

 
$
210

 
$
198

 
$
188

 
$
191

Net average fee per Canadian tax return processed (CN$)(6)
 
78

 
77

 
75

 
78

 
75

Net average fee per Canadian tax return processed (US$)(6)
 
64

 
70

 
73

 
78

 
76


______________________________________________________________________________
(1) We define Adjusted EBITDA as net income plus provision for income taxes, interest expense, certain other adjustments, depreciation, amortization, and impairment charges. Please see "Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(2) We measure our number of offices per fiscal year based on franchised and Company-owned offices open at any point during the tax season.
(3) The calculation of the average number of offices per franchisee excludes Company-owned offices.
(4) Previously reported online return counts for fiscal years prior to 2015 have been restated to reflect accepted e-files only. No changes were made to previously reported returns for office counts.
(5) Our systemwide revenue represents the total tax preparation revenue generated by our franchised and Company-owned offices. It does not represent our revenue because our franchise royalties are derived from the operations of our franchisees. Because we maintain an infrastructure to support systemwide operations, we consider growth in systemwide revenue to be an important measurement.
(6) Systemwide revenue per office and the net average fee per tax return prepared reflect amounts for our franchised and Company-owned offices.
Adjusted EBITDA
To provide additional information regarding our financial results, we have disclosed in the table above and within this annual report Adjusted EBITDA. Adjusted EBITDA represents net income, before income taxes, interest expense, depreciation

36


and amortization, and certain other items specified below. We have provided a reconciliation below of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this annual report because we seek to manage our business to achieve higher levels of Adjusted EBITDA and to improve the level of Adjusted EBITDA as a percentage of revenue. In addition, it is a key basis upon which we assess the performance of our operations and management. We also use Adjusted EBITDA for business planning and the evaluation of acquisition opportunities. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons. We believe the presentation of Adjusted EBITDA enhances an overall understanding of the financial performance of and prospects for our business. Adjusted EBITDA is not a recognized financial measure under GAAP and may not be comparable to similarly titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income, operating income (loss), or any other performance measures derived in accordance with GAAP.
The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated.
 
 
Fiscal Years Ended April 30,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(dollars in thousands)
Reconciliation of Adjusted EBITDA to Net Income:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
8,690

 
$
21,982

 
$
17,627

 
$
16,383

 
$
14,670

Interest expense
 
1,889

 
1,355

 
2,039

 
1,854

 
1,954

Income tax expense
 
4,811

 
13,654

 
11,170

 
9,747

 
10,142

Depreciation, amortization, and impairment charges
 
9,900

 
9,277

 
6,538

 
5,999

 
5,439

Impairment of online software and acquired customer lists
 
8,392

 

 

 

 

Net gain on available-for-sale securities
 

 
(2,183
)
 

 

 

Costs associated with postponed IPO
 

 

 

 
1,348

 

Executive severance
 
1,488

 
614

 

 

 

Restatement costs
 

 
907

 

 

 

Restructuring charge
 

 

 
425

 

 

Tentative settlements of class action litigation cases, net of estimated recoveries
 
7,617

 

 

 

 

Stock-based compensation expense (income) related to liability classified awards
 

 
(872
)
 
2,625

 

 

Adjusted EBITDA
 
$
42,787

 
$
44,734

 
$
40,424

 
$
35,331

 
$
32,205


37


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are one of the leading providers of tax preparation services in the United States and Canada. As measured by both the number of returns prepared and the number of retail offices, we are the second largest retail preparer of individual tax returns in the United States and the second largest retail preparer of individual tax returns in Canada. Our tax preparation services and related tax settlement products are offered primarily through franchised locations, although we operate a limited number of Company-owned offices each tax season. All of the offices are operated under the Liberty Tax Service and SiempreTax+ brands.
From 2001 through 2015, we grew our number of tax offices from 508 to 4,328. See Note 1 of the Notes to our Consolidated Financial Statements for detail of the U.S. office activity and the number of Canadian and Company-owned offices for the years ended April 30, 2015, 2014, and 2013.
Approximately 58% of our revenue for fiscal year 2015 was derived from franchise fees, AD fees, royalties, and advertising fees, and for this reason, continued growth in and seasoning of our franchise locations is viewed by management as the key to our future performance.
Our revenue primarily consists of the following components:
Franchise Fees: Our standard franchise fee per territory is $40,000, and we offer our franchisees flexible structures and financing options for franchise fees. Franchise fee revenue is recognized when our obligations to prepare the franchisee for operation are substantially complete and as cash is received.
AD Fees: Our fees for AD areas vary based on our assessment of the revenue potential of each AD area, and also depend on the performance of any existing franchisees within the AD area being sold. Our ADs generally receive 50% of franchise fees, royalties, and a portion of the interest income derived from territories located in their area. AD fees received are recognized as revenue on a straight-line basis over the initial contract term of each AD agreement, which has historically been ten years, with the cumulative amount of revenue recognized not to exceed the amount of cash received.
Royalties: Our franchise agreements require franchisees to pay us a base royalty typically equal to 14% of the franchisee's tax preparation revenue, subject to certain specified minimums.
Advertising Fees: Our franchise agreements require all franchisees to pay us an advertising fee of 5% of the franchisee's tax preparation revenue, which we use primarily to fund collective advertising efforts.
Financial Products: We offer two types of tax settlement financial products: refund transfer products, which involve providing a means by which a customer may receive his or her refund more quickly and conveniently, and refund-based loans. We earn fees from the sale of these financial products.
Interest Income: We earn interest income from our franchisees and ADs related to both indebtedness for the unpaid portions of their franchise fees and AD territory fees, and for other loans we extend to our franchisees related to the operation of their territories. For franchise fees and AD loans upon which the underlying revenue has not been recognized, we recognize the interest income only to the extent of actual payment.
Tax Preparation Fees: We earn tax preparation fees, net of discounts, directly from both the operation of Company-owned offices and providing tax preparation services through our online tax return products.
For purposes of this section and throughout this annual report, all references to "fiscal 2015," "fiscal 2014," and "fiscal 2013" refer to our fiscal years ended April 30, 2015, 2014, and 2013, respectively. For purposes of this section and throughout this annual report, all references to "year" or "years" are the respective fiscal year or years ended April 30 unless otherwise noted in this annual report, and all references to "tax season" refer to the period between January 1 and April 30 of the referenced year.

38


 
 
Fiscal Years Ended and as of April 30,
 
 
2015
 
2014
 
2013
 
 
(amounts in thousands, except franchisees, per office amounts, and net average fees)
Results of Operations:
 
 
 
 
 
 
Total revenue
 
$
162,172

 
$
159,696

 
$
147,613

Income from operations
 
$
15,392

 
$
34,821

 
$
30,836

Net income
 
$
8,690

 
$
21,982

 
$
17,627

Other Financial and Operational Data:
 
 
 
 
 
 
Number of U.S. offices
 
4,069

 
4,175

 
4,262

Number of Canadian offices
 
259

 
263

 
258

Number of offices
 
4,328

 
4,438

 
4,520

 
 
 
 
 
 
 
Number of U.S. franchisees
 
1,907

 
1,959

 
2,073

Number of Canadian franchisees
 
125

 
145

 
138

Number of franchisees
 
2,032

 
2,104

 
2,211

 
 
 
 
 
 
 
Number of tax returns processed in U.S. offices
 
1,907

 
1,890

 
1,805

Number of tax returns processed in Canadian offices
 
340

 
311

 
311

Number of tax returns filed online (1)
 
167

 
187

 
159

Number of tax returns processed
 
2,414

 
2,388

 
2,275

 
 
 
 
 
 
 
Systemwide revenue from U.S. offices
 
$
413,200

 
$
397,300

 
$
358,000

Systemwide revenue from Canadian offices (CN$)
 
26,400

 
23,900

 
23,200

Systemwide revenue from Canadian offices (US$)
 
21,761

 
21,789

 
22,819

 
 
 
 
 
 
 
Number of U.S. refund transfer products funded
 
949

 
973

 
868

 
 
 
 
 
 
 
Net average fee per tax return filed in U.S. offices (1)
 
$
217

 
$
210

 
$
198

Net average fee per tax return filed in Canadian offices (CN$)(1)
 
78

 
77

 
75

Net average fee per tax return filed in Canadian offices (US$)(1)
 
64

 
70

 
73

______________________________________________________________________________
(1) Previously reported online return counts for fiscal years prior to 2015 have been restated to reflect accepted e-files only. No changes were made to previously reported returns for office counts.
(2) Systemwide revenue per office and the net average fee per tax return prepared reflect amounts for our franchised and Company-owned offices.
(3) Our systemwide revenue represents the total tax preparation revenue generated by our franchised and Company-owned offices. It does not represent
our revenue because our franchise royalties are derived from the operations of our franchisees. Because we maintain an infrastructure to support
systemwide operations, we consider growth in systemwide revenue to be an important measurement.
In evaluating our performance, management focuses on several metrics that we believe are key to our continued success:
Net growth in permanent office locations. The change in permanent office locations from year to year is a function of the opening of new offices, offset by locations that our franchisees or we close. Opening new permanent offices can be accomplished by the sale of new territories or the opening of permanent offices in previously sold territories. During the 2015 tax season, we stressed the importance of franchisees opening permanent locations in new territories. In fiscal 2015, on a net basis, our franchisees opened 101 permanent new offices in the U.S., compared to closing 153 permanent offices in fiscal 2014. Prior to the 2015 tax season, Walmart substantially changed the way in which it charged rent to our franchisees for Walmart kiosk locations. As a result, our franchisees operated fewer such offices during the 2015 tax season and we have deemphasized seasonal offices such as kiosks as part of our growth plans.

39


We utilize our AD program to focus on areas with large underdeveloped groups of territories we believe would benefit from the dedicated sales attention that an AD brings to our franchise sales process. Although we intend to grow our franchise network through the sale of new AD areas, opportunities often arise to acquire underperforming AD areas or AD areas in mature markets at favorable terms, offering us better future profitability from the associated franchise locations.
Continued growth of SiempreTax+ brand. During fiscal 2015, we launched our second brand, SiempreTax+. Given the demographic trends in the United States, the growing consumer purchasing power of the Hispanic community, and the prospect of immigration reform, whether through Congressional legislation or executive action, we believe serving the Hispanic community through a separate brand that engages with customers in their preferred language and provides ancillary services unique to their needs presents a significant office growth opportunity. For this reason, although we had a successful launch of this brand in fiscal 2015, our ability to grow this brand further should substantially contribute to our future ability to meet our growth goals.
Growth in the number of returns prepared. We strive to provide our franchisees with the resources and training needed to grow their own revenue. One of the principal factors in that growth is growth in the number of returns prepared. We and our franchisees prepared a total of approximately 1.9 million returns in our U.S. offices in fiscal 2015, which was an increase of 0.9% from fiscal 2014. Our new retail offices typically experience their most rapid growth during the first five years as they develop customer loyalty, operational experience and a referral base within their community. The seasoning of our U.S. offices shown in the following table highlights the relatively young age of our offices, with 1,789 offices of 4,069 operated during tax season 2015 having been operated for five or fewer years, including the 2015 tax season.
 
 
Tax Season 2015 Office Age in Years
 
 
1
 
2
 
3
 
4
 
5
 
6+
 
Total
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Franchised permanent
 
388

 
232

 
257

 
339

 
272

 
2,158

 
3,646

  Franchised seasonal
 
115

 
77

 
33

 
2

 
2

 
26

 
255

  Total U.S. franchised offices
 
503

 
309

 
290

 
341

 
274

 
2,184

 
3,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Company-owned permanent
 
9

 
1

 
5

 
9

 
5

 
89

 
118

  Company-owned seasonal
 
3

 
2

 

 

 

 
2

 
7

  Total U.S. Company-owned offices
 
12

 
3

 
5

 
9

 
5

 
91

 
125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Processing centers
 
17

 
8

 
3

 
8

 
2

 
5

 
43

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total U.S. offices
 
532

 
320

 
298

 
358

 
281

 
2,280

 
4,069

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canada:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Franchised permanent
 
1

 
11

 
8

 
11

 
12

 
130

 
173

  Franchised seasonal
 
3

 
1

 
1

 
1

 
1

 
22

 
29

  Total Canadian franchised offices
 
4

 
12

 
9

 
12

 
13

 
152

 
202

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Company-owned permanent
 
2

 

 

 

 
1

 
44

 
47

  Company-owned seasonal
 
4

 
1

 

 

 
1

 
4

 
10

  Total Canadian Company-owned offices
 
6

 
1

 

 

 
2

 
48

 
57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Canadian offices
 
10

 
13

 
9

 
12

 
15

 
200

 
259

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total offices
 
542

 
333

 
307

 
370

 
296

 
2,480

 
4,328

Growth in systemwide revenue. Systemwide revenue, a non-GAAP financial measure, includes sales by both Company-owned and franchised offices. We believe systemwide revenue data is useful in assessing consumer

40


demand for our services and products, the overall success of the Liberty Tax brand and, ultimately, the performance of the Company. Our royalty revenue is computed as a percentage of sales made by our franchised offices, less certain deductions. Accordingly, sales by our franchisees have a direct effect on the Company's royalty revenue and profitability. In addition, our systemwide revenue reflects the size of the Liberty Tax system, and because the size of our franchise system drives our management and infrastructure needs, systemwide revenue data helps us assess those needs in comparison to other companies in our industry and other franchise operators.
Our systemwide revenue in the U.S. grew by 4.0% from fiscal 2014 to 2015 and 11.0% from fiscal 2013 to fiscal 2014. This increase in both years was the result of the continued seasoning of our offices. We experienced a 3.1% increase in average net fee per return filed in the U.S. from $210 in fiscal 2014 to $217 in fiscal 2015 as well as a 0.9% increase in number of tax returns filed in the U.S. processed from 1,890,000 in fiscal 2014 to 1,907,000 in fiscal 2015.
Number of Company-owned offices. For the 2015 and 2014 tax seasons, respectively, we operated a total of 182 and 216 Company-owned offices. Our Company-owned offices, including Walmart kiosks, tend to be less successful than franchised offices. For this reason, we continue to seek to minimize the number of Company-owned offices we operate each tax season. To the extent we succeed in this effort, we would expect tax preparation fees to decrease, but royalties and advertising fees to be favorably affected.
Growth in the number of tax settlement products obtained by U.S. customers. The total percentage of our U.S. customers obtaining a refund transfer product decreased to 49.7% during fiscal 2015 compared to 51.5% during fiscal 2014. During fiscal 2015, the share of refund transfer products funded through JTH Financial was 73.4% of the total refund transfer products utilized by our customers, compared to 48.0% in fiscal 2014. As we have demonstrated our ability to offer products through JTH Financial, we have been successful in obtaining more favorable terms from outside vendors. Each year we analyze available tax settlement product solutions to balance risk and maximize profit per product.
However, having grown the share of products funded through JTH Financial to more than 73% of our total financial products last year, we recognize that the prospects for continued growth through shifting away from externally-originated products may be limited, and that future growth of financial products revenue will largely depend on increasing the attachment rate, increasing the number of customers served and possible future fee increases.
Results of Operations
Fiscal year 2015 compared to fiscal year 2014
Revenues. The table below sets forth the components and changes in our revenue for the years ended April 30, 2015 and 2014.
 
 
Fiscal Years Ended April 30,
 
 
 
 
 
 
Change
 
 
2015
 
2014
 
$
 
%
 
 
(dollars in thousands)
Franchise fees
 
$
6,246

 
$
7,844

 
$
(1,598
)
 
(20
)%
AD fees
 
6,901

 
6,680

 
221

 
3
 %
Royalties and advertising fees
 
80,469

 
78,426

 
2,043

 
3
 %
Financial products
 
37,058

 
34,512

 
2,546

 
7
 %
Interest income
 
14,707

 
14,231

 
476

 
3
 %
Tax preparation fees, net of discounts
 
13,877

 
14,295

 
(418
)
 
(3
)%
Other
 
2,914

 
3,708

 
(794
)
 
(21
)%
   Total revenue
 
$
162,172

 
$
159,696

 
$
2,476

 
2
 %
Our total revenue increased by $2.5 million, or 1.6%, in fiscal 2015 over fiscal 2014. This increase was primarily due to the following:
A $2.5 million increase in financial products, due to our decision to originate a larger portion of financial products through our in-house financial subsidiary, JTH Financial. In fiscal 2015 we processed 73% of our

41


financial products in-house, versus 48% in fiscal 2014. We receive more revenue on financial products that are originated in-house than we do on those originated by third parties. This increase in revenue was partially offset by a lower attachment rate. Our attachment rate was 49.7% of funded returns in fiscal 2015 compared to 51.5% in fiscal 2014, partially because a lower percentage of customers received refunds this year.
A $2.0 million, or 2.6% increase in royalties and advertising fees driven by a 3.1% increase in the average net fee and a 0.9% increase in the number of returns filed by our franchised offices. This was partially offset by a decline in Canadian royalties because 20 previously franchised Canadian locations were operated as Company-owned offices.
These increases in revenue were partially offset by:
A $1.6 million decrease in franchise fees primarily attributable to receiving lower cash payments on notes from our franchisees in fiscal 2015. Franchise fee revenue is recognized when our obligations to prepare the franchisee for operations are substantially complete and as cash is received. We believe the reason we received less cash payments was largely due to franchisees borrowing more during the offseason to fund their preparations for the Affordable Care Act, which impacted their ability to make franchise note payments.
A $0.8 million decrease in other revenue due to lower gains on the sale of assets to franchisees. The largest portion of the gains on the sale of assets to franchisees are deferred and recognized as cash is received on notes. Because our franchisees incurred higher operating expenses during tax season, this impacted their ability to make these note payments. Since we received lower note payments on these notes in fiscal 2015 than we did in fiscal 2014, the deferred gains recognized were less.
A $0.4 million decrease in tax preparation fees primarily driven by a $1.3 million decrease in online revenue caused by increased competition in the online market. This was partially offset by a $0.9 million increase in Canadian tax preparation revenue because we operated a larger number of Company-owned offices in Canada, which would have resulted in a larger offset but for a negative impact of the exchange rate of $0.3 million.
Operating expenses. The following table details the amounts and changes in our operating expenses in and from fiscal 2015 and fiscal 2014.
 
 
Fiscal Years Ended April 30,
 
 
 
 
 
 
Change
 
 
2015
 
2014
 
$
 
%
 
 
(dollars in thousands)
Employee compensation and benefits
 
$
41,079

 
$
38,399

 
$
2,680

 
7
%
Selling, general, and administrative
 
40,604

 
34,756

 
5,848

 
17
%
AD expense
 
28,497

 
27,319

 
1,178

 
4
%
Advertising
 
18,308

 
15,124

 
3,184

 
21
%
Depreciation, amortization, and impairment charges
 
9,900

 
9,277

 
623

 
7
%
Impairment of online software and acquired customer lists
 
8,392

 

 
8,392

 
NA

Total operating expenses
 
$
146,780

 
$
124,875

 
$
21,905

 
18
%
Our total operating expenses increased by $21.9 million, or 18%, in fiscal 2015 compared to fiscal 2014. The largest components of this increase were as follows:
A $2.7 million increase in employee compensation and benefit expenses during fiscal 2015 over fiscal 2014 caused primarily by the following:
A $2.1 million increase in salary and related expenses to support growth initiatives.
A $0.9 million increase in executive severance costs.
A $0.9 million reduction in stock compensation expense in fiscal 2014 related to a change from liability classified awards to equity classified awards that did not recur in fiscal 2015.
These increases were partially offset by a $1.2 million decrease in bonus expense because, due to the Company's performance, we did not pay employee bonuses for fiscal 2015.

42


A $5.8 million increase in selling, general, and administrative expenses during fiscal 2015 over fiscal 2014, caused primarily by the following:
An increase of $7.6 million related to the tentative settlements of our class action litigation cases, net of estimated recoveries.
An increase of $1.4 million in expenses related to our investment in SiempreTax+ and our ACA initiatives.
An increase of $1.1 million in bank fees due to our decision to originate a larger portion of financial products through our in-house financial subsidiary.
The increases were partially offset by the following:
A $2.9 million reduction in bad debt expense due to fewer franchisee terminations occurring in fiscal 2015 compared to fiscal 2014.
A reduction of $0.9 million in restatement costs that occurred in fiscal 2014, but not in fiscal 2015.
A reduction in professional fees of $0.9 million for advertising-related expenses that occurred in fiscal 2014, but not in fiscal 2015.
A $3.2 million increase in advertising expense caused primarily by the following:
A $1.0 million in spending on advertising above the amount required to utilize the advertising fund established by franchisee advertising fees.
A $1.0 million increase related to launching the SiempreTax+ brand and advertising designed to attract new franchisees.
A $0.9 million increase in expenses that were spent in professional fees in fiscal 2014 but that were spent in advertising in fiscal 2015.
An increase of $0.6 million in depreciation and amortization consisting of a $2.1 million depreciation expense related to placing a portion of LibPro software program into service, offset by a decrease in amortization expense on Company-owned offices, which is now recorded as assets held for sale and no longer amortized.
An $8.4 million impairment charge related to our online software and acquired customer lists. The online market is increasingly competitive due to aggressive pricing actions and increased advertising by significantly larger competitors. These factors have adversely affected our ability to recover the carrying value of our online software and acquired customer lists. The impairment charge was measured by the amount in which the carrying value exceeded the estimated fair value of the online software and acquired customer lists. See Note 5 of the Notes to our Consolidated Financial Statements for a description of the impairment related to the Company's online software and acquired online customer lists.
Income Taxes. The following table sets forth certain information regarding our income taxes for the fiscal years ended April 30, 2015 and 2014.
 
 
Fiscal Years Ended April 30,
 
 
 
 
 
 
Change
 
 
2015
 
2014
 
$
 
%
 
 
(dollars in thousands)
Income before income taxes
 
$
13,501

 
$
35,636

 
$
(22,135
)
 
(62
)%
Income tax expense
 
4,811

 
13,654

 
(8,843
)
 
(65
)%
Effective tax rate
 
35.6
%
 
38.3
%
 
 
 
 

The decrease in our income tax rate from fiscal 2014 to fiscal 2015 relates primarily to higher tax deductions for stock option expense coupled with the decline in income before income taxes.
Net income. Our net income decreased by 60% in fiscal 2015 over fiscal 2014, primarily as a result of higher operating expenses associated with our growth initiatives, an $8.4 million impairment charge related to our online software and acquired customer lists, and $7.6 million in tentative settlements of our class action litigation cases, net of estimated recoveries.

43


Fiscal year 2014 compared to fiscal year 2013
Revenues. The table below sets forth the components and changes in our revenue for the years ended April 30, 2014 and 2013.
 
 
Fiscal Years Ended April 30,
 
 
 
 
 
 
Change
 
 
2014
 
2013
 
$
 
%
 
 
(dollars in thousands)
Franchise fees
 
$
7,844

 
$
8,721

 
$
(877
)
 
(10
)%
AD fees
 
6,680

 
7,699

 
(1,019
)
 
(13
)%
Royalties and advertising fees
 
78,426

 
73,129

 
5,297

 
7
 %
Financial products
 
34,512

 
30,345

 
4,167

 
14
 %
Interest income
 
14,231

 
13,848

 
383

 
3
 %
Tax preparation fees, net of discounts
 
14,295

 
10,148

 
4,147

 
41
 %
Other
 
3,708

 
3,723

 
(15
)
 
 %
Total revenue
 
$
159,696

 
$
147,613

 
$
12,083

 
8
 %
Our total revenue increased by $12.1 million, or 8%, in fiscal 2014 over fiscal 2013. This increase was primarily due to the following:
The $5.3 million increase in royalties and advertising fees driven by both a 5.9% increase in the average net fee per U.S. tax return filed and a 4.7% increase in the number of U.S. returns filed by our franchised offices.
The $4.2 million increase in financial products, reflecting the favorable terms we were able to negotiate with third party financial product vendors. Our attachment rate was 51.5% of funded returns in fiscal 2014 compared to 48.1% in fiscal 2013, which had an impact on the increase.
The $4.1 million increase in tax preparation fees, net of discounts, during fiscal 2014 over fiscal 2013 due to an increase in the number of returns filed though our Company-owned offices as well as an increase in the number of online returns filed. The acquisition of certain assets of an online tax preparation software provider in the third quarter of fiscal 2014 favorably impacted the number of online returns filed.
These increases in revenue were partially offset by:
A $1.0 million decrease from fiscal 2013 to fiscal 2014 in AD fees. This decrease resulted primarily from the repurchase of several areas during fiscal 2014 and a decrease in cash received from the remaining ADs.
A $0.9 million decrease in franchise fees primarily attributable to a decrease in the number of franchise sales because we were unable to sell franchises for a portion of the second quarter of fiscal 2014. However, our fourth quarter franchise sales were up for fiscal 2014 over fourth quarter fiscal 2013 due to a large number of existing franchisee expansions during our spring selling season.
Operating expenses. The following table details the amounts and changes in our operating expenses in and from fiscal 2014 and fiscal 2013.
 
 
Fiscal Years Ended April 30,
 
 
 
 
 
 
Change
 
 
2014
 
2013
 
$
 
%
 
 
(dollars in thousands)
Employee compensation and benefits
 
$
38,399

 
$
37,998

 
$
401

 
1
 %
Selling, general, and administrative expenses
 
34,756

 
31,212

 
3,544

 
11
 %
AD expense
 
27,319

 
25,736

 
1,583

 
6
 %
Advertising expense
 
15,124

 
15,293

 
(169
)
 
(1
)%
Depreciation, amortization, and impairment charges
 
9,277

 
6,538

 
2,739

 
42
 %
Total operating expenses
 
$
124,875

 
$
116,777

 
$
8,098

 
7
 %
Our total operating expenses increased by $8.1 million, or 7%, in fiscal 2014 compared to fiscal 2013. The largest components of this increase were as follows:

44


A $3.5 million increase in selling, general, and administrative expenses during fiscal 2014 over fiscal 2013 caused primarily by the following:
Non-recurring expenses of $0.9 million related to the restatement of our prior period financial statements incurred during fiscal 2014.
A $0.9 million increase in professional fees during fiscal 2014 over fiscal 2013 caused predominantly by increases in costs related to our marketing initiatives in fiscal 2014.
A $1.6 million increase in bad debt expense during fiscal 2014 over fiscal 2013 due to the increase in terminations during fiscal 2014.
A $2.7 million increase in depreciation, amortization, and impairment charges because we put a portion of our LibPro tax software into service during the third quarter of fiscal 2014 and incurred $1.3 million in depreciation expense. Also, we expensed $0.7 million more amortization during fiscal 2014 over fiscal 2013 related to the purchase of certain assets of online tax preparation software providers. Impairment charges increased by $0.6 million predominantly due to the reclassification of Company-owned offices to assets held for sale in the fourth quarter of fiscal 2014.
A $1.6 million increase in AD expense during fiscal 2014 over fiscal 2013 primarily related to an increase in royalty revenue generated by franchisees in AD areas.
Although total employee compensation and benefits only increased by $0.4 million during fiscal 2014 compared to fiscal 2013, stock-based compensation, a component of employee compensation and benefits, included $2.6 million in expense related to the classification of certain stock options as liability instruments in fiscal 2013 and a subsequent reclassification of those awards as equity instruments in fiscal 2014, resulting in a credit of $0.9 million. The remaining increase in employee compensation and benefits was primarily caused by the $3.3 million increase in salaries because of the increase in corporate employees required to run a growing and publicly traded company.
Income Taxes. The following table sets forth certain information regarding our income taxes for the fiscal years ended April 30, 2014 and 2013.
 
 
Fiscal Years Ended April 30,
 
 
 
 
 
 
Change
 
 
2014
 
2013
 
$
 
%
 
 
(dollars in thousands)
Income before income taxes
 
$
35,636

 
$
28,797

 
$
6,839

 
24
%
Income tax expense
 
13,654

 
11,170

 
2,484

 
22
%
Effective tax rate
 
38.3
%
 
38.8
%
 
 
 
 

The increase in our income tax expense from fiscal 2013 to fiscal 2014 relates not only to an increase in income, but also to an increase in our effective tax rate due to a decrease in allowable tax credits and an increase in our state tax rate.
Net income. Our net income increased by 25% in fiscal 2014 over fiscal 2013, reflecting an increase in operating income of 13%. Also, during fiscal 2014 we sold available-for-sale securities for a realized gain of $2.2 million, which is recorded in other income.
Liquidity and Capital Resources
Overview of factors affecting our liquidity
Seasonality of cash flow. Our tax return preparation business is seasonal, and most of our revenues and cash flow are generated during the period from late January through April 30. Following each tax season, from May 1 through late January of the following year, we rely significantly on excess operating cash flow from the previous season, from cash payments made by franchisees and ADs who purchase new territories and areas prior to the next tax season, and on the use of our credit facility to fund our operating expenses and invest in the future growth of our business. Our business has historically generated a strong operating cash flow from operations on an annual basis. We devote a significant portion of our cash resources during the off season to finance the working capital needs of our franchisees. We have also incurred significant expenditures in the development of our LibPro tax software and anticipate spending approximately $4.8 million related to this project during fiscal 2016.

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Credit facility. In October 2014, the Company amended its credit facility. The amended credit facility consists of a $21.2 million term loan and a revolving credit facility that currently allows borrowing of up to $203.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly, at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company's leverage ratio. At April 30, 2015 and 2014, the interest rate was 1.8% and 1.78%, respectively, and the average interest rate paid during the fiscal year ended April 30, 2015 was 1.79%. A commitment fee that varies from 0.25% to 0.50% depending on the Company's leverage ratio on the unused portion of the credit facility is paid monthly. The indebtedness is collateralized by substantially all the assets of the Company and both loans mature on April 30, 2019 (except as to the commitments of one lender under the revolving credit facility, which mature on September 30, 2017).
Under our credit facility, we are subject to a number of covenants that could potentially restrict how we carry out our business, or that require us to meet certain periodic tests in the form of financial covenants. The restrictions we consider to be material to our ongoing business include the following:
We must satisfy a "leverage ratio" test that is based on our outstanding indebtedness at the end of each fiscal quarter.
We must satisfy a "fixed charge coverage ratio" test at the end of each fiscal quarter.
We must reduce the outstanding balance under our revolving loan to zero for a period of at least 45 consecutive days each fiscal year.
In addition, were we to experience certain types of changes in control affecting Mr. Hewitt's continuing control of us, or certain changes to the composition of our Board of Directors, we might become subject to an event of default under our credit facility, which could result in the acceleration of our obligations under that facility.
Our credit facility also contains customary affirmative and negative covenants, including limitations on indebtedness, limitations on liens and negative pledges, limitations on investments, loans and acquisitions, limitations on mergers, consolidations, liquidations and dissolutions, limitations on sales of assets, limitations on certain restricted payments and limitations on transactions with affiliates, among others.
Franchisee lending and potential exposure to credit loss. A substantial portion of our cash flow during the year is utilized to provide funding to our franchisees and ADs. At April 30, 2015, our total balance of loans to franchisees for working capital and equipment loans, representing cash we had advanced to the franchisees, was $16.5 million. In addition, at that date, our franchisees and ADs together owed us an additional $77.5 million, less unrecognized revenue of $38.6 million, for amounts representing the unpaid purchase price for franchise territories, or areas comprising clusters of territories, and other amounts owed to us for royalties and other amounts for which our franchisees and ADs had outstanding payment obligations.
Our actual exposure to potential credit loss associated with franchisee loans is less than the aggregate amount of those loans because a significant portion of those loans are to franchisees located within AD areas, where our AD is ultimately entitled to a substantial portion of the franchise fee and royalty revenues represented by some of these loans. For this reason, the amount of indebtedness of franchisees to us is effectively offset in part by our related payable obligation to ADs in respect of franchise fees and royalties. As of April 30, 2015, the total indebtedness of franchisees to us where the franchisee is located in an AD area was $53.3 million but $24.3 million of that total indebtedness represents amounts ultimately payable to ADs as their share of franchise fees and royalties.
Our franchisees make electronic return filings for their customers utilizing our facilities. Our franchise agreements allow us to obtain repayment of amounts due to us from our franchisees through an electronic fee intercept program before our franchisees receive the net proceeds from tax preparation and other fees they have charged to their customers on tax returns associated with tax settlement products. Therefore, we are able to minimize the nonpayment risk associated with amounts outstanding from franchisees by obtaining direct electronic payment in the ordinary course throughout the tax season. Our credit risk associated with amounts outstanding to ADs is also mitigated by our electronic fee intercept program, which enables us to obtain repayments of amounts that would otherwise flow through to ADs as their share of franchise fee and royalty payments, to the extent of an AD's indebtedness to us.
The unpaid amounts owed to us from our franchisees and ADs are collateralized by the underlying franchise or area and, when the franchise or area owner is an entity, are generally guaranteed by the owners of the respective entity. Accordingly, to the extent a franchisee or AD does not satisfy its payment obligations to us, we may repossess the underlying franchise or area in order to resell it in the future. At April 30, 2015, we had an investment in impaired accounts and notes receivable and related interest receivable of approximately $17.0 million. We consider accounts and

46


notes receivable to be impaired if the amounts due exceed the fair value of the underlying franchise and estimate an allowance for doubtful accounts based on that excess. Amounts due include the recorded value of the accounts and notes receivable reduced by the allowance for uncollected interest, amounts due to ADs for their portion of franchisee receivables, any related unrecognized revenue and amounts owed to the franchisee or AD by us. In establishing the fair value of the underlying franchise, we consider net fees of open territories and the number of unopened territories. At April 30, 2015, our allowance for doubtful accounts for impaired accounts and notes receivable was $6.6 million. There were no significant concentrations of credit risk with any individual franchisee or AD as of April 30, 2015, and we believe that our allowance for doubtful accounts as of April 30, 2015 is adequate for our existing loss exposure. We closely monitor the performance of our franchisees and ADs, and will adjust our allowances as appropriate if we determine that the existing allowances are inadequate to cover estimated losses.
Dividends. Until our dividend paid in April 2015, we had never declared or paid a cash dividend on our common stock. Although we have now announced a $0.16 per share quarterly cash dividend and may continue to pay cash dividends in the future, the payment of dividends will be at the discretion of our Board of Directors and will depend, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends will also be subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will continue to pay dividends at any specific level or at all. See "Item 5—Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Sources and uses of cash
Operating activities
In fiscal 2015, our cash provided from operating activities declined $19.0 million from the cash provided in fiscal 2014. This reduction was driven by:
A $4.8 million reduction in income taxes payable, resulting from excess tax benefits recognized during the year for stock option exercises. There is a corresponding increase in cash flows from financing activities as a result of such excess tax benefits. These excess tax benefits will reduce the amount of income taxes we would otherwise owe and pay in cash in fiscal 2016.
A $4.1 million increase in cash tax payments in fiscal 2015 compared to fiscal 2014.
Higher operating expenses associated with investments we made to drive growth, including SiempreTax+ and our ACA initiatives.
Lower collections from franchisees partially offset by delayed payments of certain expenses typically paid by year end.
In fiscal 2014, we generated $15.0 million more cash from operating activities than in fiscal 2013. This increase was largely due to higher net income as well as increased cash payments from our franchisees driven by earlier IRS funding.
Investing activities
In fiscal 2015, we utilized $6.6 million more for investing activities compared to fiscal 2014. The items that contributed to this increase included $5.2 million in proceeds from the sale of available-for-sale securities received in fiscal 2014 that did not recur in fiscal 2015, and a $2.3 million increase in cash paid in fiscal 2015 for the purchase of property, equipment and software, primarily land and two buildings in Virginia Beach, Virginia. These decreases were partially offset by an increase of $0.8 million in cash received in fiscal 2015 from the sales of Company-owned stores and AD rights. Although we issued $17.4 million more in operating loans to franchisees in fiscal 2015, that amount was partially offset by $17.1 million in higher payments received.
In fiscal 2014, we utilized $9.6 million less cash for investing activities compared to fiscal 2013. Some of the items that contributed to the decrease in cash usage were the sale of securities in fiscal 2014 generating proceeds of $5.2 million compared to the purchase of securities in 2013 for $3.0 million; a net decrease of $2.5 million in the amount of operating loans issued to franchisees, net of payments received from franchisees, in fiscal 2014 compared to fiscal 2013; and a $2.8 million reduction in the purchase of property and equipment in fiscal 2014 compared to fiscal 2013 primarily due to the purchase of a building in fiscal 2013. These decreases in cash usage for investing activities were partially offset by a $2.7 million increase in cash paid to purchase AD rights, Company-owned offices, and acquired customer lists and a decrease of $1.2 million in cash received from the sale of Company-owned offices and AD rights in fiscal 2014 compared to fiscal 2013.

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Financing activities
In fiscal 2015, we used $26.3 million more cash from financing activities compared to fiscal 2014 because:
We utilized $23.0 million more for common stock repurchases, of which $20.0 million was expended in a privately negotiated transaction with an affiliate.
We used $2.2 million to pay a dividend in fiscal 2015.
We collected $ 2.0 million less in proceeds from the exercise of stock options.
We paid $3.4 million more related to our long-term debt in fiscal 2015 compared to 2014.
This use of cash was offset by a $4.8 million benefit related to the excess tax benefit of stock option exercises. Excess tax benefits result when the intrinsic value of exercised stock-based awards exceeds the amount previously recognized as compensation expense.
In fiscal 2014, we utilized $3.4 million less cash for financing activities compared to fiscal 2013. This decrease in usage was predominantly caused by a $10.2 million increase in the proceeds received from the exercise of stock options net of repurchases of common stock of $6.6 million in fiscal 2014 over fiscal 2013.
Future cash needs and capital requirements
Operating cash flow needs. We believe that our seven year credit facility entered into on April 30, 2012 will be sufficient to support our cash flow needs for the foreseeable future.
The maximum balance of our revolving credit facility during fiscal 2015 was $133.8 million on January 29, 2015. By April 2, 2015, we paid the entire balance of our revolving credit facility. At April 30, 2015, using the leverage ratio applicable under our loan covenants at the end of each fiscal year, our maximum unused borrowing capacity was $108.4 million.
Our credit facility also contains a requirement that we reduce the balance of our revolving loan to zero for a period of at least 45 consecutive days each fiscal year. However, because our term loan will remain outstanding during that 45 day period, and given our historic cash flow experience at the beginning and end of each fiscal year, we do not anticipate that the unavailability of our revolving loan during that 45 day period each fiscal year will adversely affect our cash flow. As of June 14, 2015, we had maintained a zero balance on our revolver for the required 45 days and thus have already met the requirement for fiscal 2016.
Several factors could affect our cash flow in future periods, including the following:
The extent to which we extend additional operating financing to our franchisees and ADs, beyond the levels of prior periods.
The extent and timing of remaining expenditures related to our LibPro tax software.
The cash flow effect of stock option exercises.
The extent to which we engage in stock repurchases.
Our ability to generate fee and other income related to tax settlement products in light of regulatory pressures on us and our business partners.
The extent to which we repurchase AD areas, which will involve the use of cash in the short-term, but improve cash receipts in future periods from what would have been the AD's share of royalties and franchise fees.
The extent, if any, to which our Board of Directors elects to continue to declare dividends on our common stock.
Effect of our credit facility covenants on our future performance. Our credit facility, which matures on April 30, 2019, imposes several restrictive covenants, including a covenant that requires us to maintain a "leverage ratio" of not more than 4.5:1 at the end of each fiscal quarter ending January 31 and a ratio of not more than 3:1 at the end of each other fiscal quarter. The higher permitted leverage ratio at the end of the January 31 quarter reflects the fact that as of that date, we have typically extended significant credit to our franchisees for working capital and other needs that is not reflected in revenue that we receive from our franchisees until the period beginning in February each year. At January 31, 2015 and April 30, 2015, we had a leverage ratio of 3.04:1 and 0.57:1, respectively.

48


Our leverage ratio at April 30, 2015 reflected the fact that we had no balance outstanding on our revolving credit facility at that date and a $20.5 million balance under our term loan. The leverage ratio is measured only at the end of each fiscal quarter, and so there may be times at which we exceed the quarter-end leverage ratio during the quarter, which we are permitted to do provided that our leverage ratio is within the allowable ratio at quarter-end.
We continue to be obligated under our credit facility to satisfy a fixed charge coverage ratio test which requires that ratio to be not less than 1.50:1 at the end of every fiscal quarter. At January 31, 2015 and April 30, 2015, our fixed charge coverage ratios were 3.00:1 and 2.84:1, respectively.
We were in compliance with the ratio tests described in this section as of April 30, 2015. We expect to be able to manage our cash flow and our operating activities in such a manner that we will continue to be able to satisfy our obligations under the credit facility for the remainder of the term of that facility.
As noted above, although we are subject under our credit facility to a requirement that we reduce the balance of our revolving loan to zero for a period of at least 45 consecutive days each fiscal year, we do not believe that requirement will affect our cash flow or future performance.
Seasonality of Operations
Given the seasonal nature of the tax return preparation business, we have historically generated and expect to continue to generate most of our revenues during the period from January 1 through April 30. For example, in fiscal 2015 and fiscal 2014, we earned 29% and 26% of our revenues during our fiscal third quarter ended January 31 and 90% and 90% of our revenues during the combined fiscal third and fourth quarters of 2015 and 2014, respectively. We historically operate at a loss through the first eight months of each fiscal year, during which we incur costs associated with preparing for the upcoming tax season.
Off Balance Sheet Arrangements
From time to time, we have been party to interest rate swap agreements. These swaps effectively changed the variable-rate of our credit facility into a fixed rate credit facility. Under the swaps, we received a variable interest rate based on the one month LIBOR and paid a fixed interest rate. Our most recent interest rate swap agreements expired in March 2013, and none were outstanding at April 30, 2015 or 2014. We may enter into interest rate swap agreements in the future if we determine that it is appropriate to hedge our interest rate risk.
We also enter into forward contracts to eliminate exposure related to foreign currency fluctuations in connection with the short-term advances we make to our Canadian subsidiary in order to fund personal income tax refund discounting for our Canadian operations. At April 30, 2015 and 2014, there were no forward contracts outstanding, but we expect to enter into forward contracts in the future during the Canadian tax season.
Commitments and Contingencies
The following table sets forth certain of our contractual obligations as of April 30, 2015.
 
 
Contractual Obligations
 
 
Total
 
Less than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More than 5 Years
 
 
(dollars in thousands)
Long-term debt obligations(1)
 
$
27,074

 
$
4,370

 
$
7,460

 
$
15,244

 
$

Capital lease obligations
 
38

 
33

 
5

 

 

Operating lease obligations(2)
 
5,586

 
2,819

 
2,378

 
349

 
40

Purchase obligations(3)
 
10,424

 
6,525

 
3,899

 

 

   Total contractual obligations
 
$
43,122

 
$
13,747

 
$
13,742

 
$
15,593

 
$
40

_______________________________________________________________________________
(1) Amounts include mandatory principal payments on long-term debt as well as estimated interest of $469, $877, $369, and $0 for less than 1 year, 1-3 years, 3-5 years, and more than 5 years, respectively. Interest calculated for future periods was based on the interest rate at April 30, 2015. The actual interest rate will vary based on LIBOR and our leverage ratio.
(2) We sublease most of the office spaces represented by this line item and anticipate sublease receipts from franchisees of $1,323, $970, $170, and $0 for less than 1 year, 1-3 years, 3-5 years, and more than 5 years, respectively.
(3) Amounts are primarily for advertising expense and for software licenses, maintenance, and development.
Critical Accounting Policies

49


Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The following critical accounting policies may affect reported results.
Revenue Recognition. We recognize franchise fees when our obligations to prepare the franchise for operation have been substantially completed and cash has been received.
AD rights have historically been granted for a term of ten years. We recently changed the term of new and renewal AD contracts to six years. AD fees are recognized as revenue on a straight-line basis over the initial contract term of each AD agreement with the cumulative amount of revenue recognized not to exceed the amount of cash received. Amounts due to ADs for their services under an area development agreement are expensed as the related franchise fees and royalty revenues are recognized.
Royalties and advertising fees are recognized as franchise territories generate sales.
Tax return preparation fees and financial products revenue are recognized as revenue in the period the related tax return is filed for the customer. Discounts for promotional programs are recorded at the time the return is filed and are recorded as reductions to revenues.
Interest income is recognized when cash is received for notes associated with franchise fees, AD fees, and customer lists. For all other notes, interest income is recognized when earned, and is recorded net of an allowance.
Gains on sales of Company-owned offices are recognized when the purchase price is paid. Losses on sales of Company-owned offices are recognized immediately.
Long-Lived Assets. We review our long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure recoverability by comparison of the carrying value of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. We recognize and measure potential impairment at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge equal to the amount by which the carrying value of the asset exceeds the fair value of the asset. We determine fair value through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals. If assets are to be disposed of, we separately present these assets in the balance sheet and report them at the lower of the carrying amount or fair value less selling costs, and no longer depreciate them. When we have assets classified as held for sale, we present them separately in the appropriate asset sections of the balance sheet.
Allowance for Doubtful Accounts. Our allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in our existing accounts receivable and notes receivable. Because the repayment of accounts receivable and notes receivable are dependent on the performance of the underlying franchises, at the end of each reporting period we estimate the amount of the allowance for uncollectible accounts based on a comparison of amounts due to the estimated fair value of the underlying franchise.
Stock Compensation Expense. For equity classified employee stock-based compensation, we record costs of our employee stock-based compensation based on the grant-date fair value of awards using the Black-Scholes-Merton option pricing model. For liability classified awards we record costs based on the fair value at the reporting date. We recognize compensation costs for an award that has a graded vesting schedule on a straight-line basis over the service period for the entire length of the stock option award.
Potential effect of JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We are an "emerging growth company" and under the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (i.e., not publicly traded) companies. We are electing the ability to delay the adoption of new or revised accounting standards, and as a result, we may not elect to comply with new or revised accounting standards on the relevant dates on which adoption of those standards is required for non-emerging growth companies.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in

50


accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 of the Notes to our Consolidated Financial Statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From Assumptions
Allowance for doubtful accounts
 
 
 
 
We establish our allowance for doubtful accounts for our trade accounts receivable and notes receivable based on a comparison of the amount due to the estimated fair value of the underlying franchise. In establishing the fair value of the underlying franchise, management considers net fees of open offices and the number of unopened offices.
 
Our calculation of the allowance requires management to make assumptions regarding the fair value of the franchise to which the account relates.
 
A 10% decrease in the fair value of franchise territories at April 30, 2015 would have increased our allowance for doubtful accounts by approximately $1.2 million at that date.
Long-lived assets
 
 
 
 
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset.
 
Our calculation of impairment, if any, requires management to make assumptions regarding the fair value of the long-lived asset.
 
We have not made any material changes in the accounting methodology we use to assess impairment loss during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. For AD rights, a 10% decrease in the estimated future cash flows would not result in any incremental loss. For assets acquired from franchisees, a 10% decrease in the fair value would result in an impairment loss of less than $0.1 million. For assets held for sale, a 10% decrease in the fair value would increase our impairment by approximately $0.2 million.
Recently Issued Accounting Standards
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). This update changes the criteria for reporting discontinued operations for all public and nonpublic entities as well as requiring new disclosures about discontinued operations and disposals of components of an entity that do not qualify for discontinued

51


operations reporting. Public business entities should apply the amendments in this update prospectively to all disposals of components of an entity and all business or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on May 1, 2017, although the FASB could delay the effective date to May 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of the new guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.
Foreign exchange risk
We are subject to inherent risks attributed to operating in more than one country. Most of our revenues, expenses, and borrowings are denominated in U.S. dollars. Our operations in Canada, including the advances we make to our Canadian subsidiary, are denominated in Canadian dollars, and are, therefore, subject to foreign currency fluctuations. For fiscal 2015, a 5% change in the exchange rate of the Canadian dollar relative to the U.S. dollar would have had less than a $0.1 million impact on our net income and a $0.6 million impact on our total assets at April 30, 2015. We use, and may continue to use in the future, derivative financial instruments, such as forward contracts, to manage foreign currency exchange rate risks. See "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Off Balance Sheet Arrangements."
Interest rate risk
We are subject to interest rate risk in connection with our credit facility, which provides for borrowings of up to a total of $203.8 million and bears interest at variable rates. Assuming our revolving loan is fully drawn and including the full balance of our term loan, each eighth of a percentage point change in interest rates would result in a $0.3 million change in annual interest expense on our credit facility. From time to time, we have entered into hedging instruments involving the exchange of floating for fixed rate interest payments to reduce interest rate volatility. See " Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Off Balance Sheet Arrangements."
Item 8.    Financial Statements and Supplementary Data.
Our financial statements are annexed to this report beginning on page F-1.
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.    Controls and Procedures.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, including, without limitation, that such information is accumulated and communicated to Company management, including the Company’s principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls

52


and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 30, 2015. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of April 30, 2015, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that material information is recorded, processed, summarized, and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992). Based on this assessment, management believes that, as of April 30, 2015, the Company’s internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
During the quarter ended April 30, 2015, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.    Other Information.
None.

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PART III
Item 10.    Directors, Executive Officers, and Corporate Governance.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders.
Item 11.    Executive Compensation.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders.
Item 12.    Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders.
Item 13.    Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders.
Item 14.    Principal Accounting Fees and Services.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders.

54


PART IV
Item 15.    Exhibits and Financial Statement Schedules.
(a)
Financial Statements.
The following financial statements of the Company are included in Item 8 of this Annual Report on Form 10-K:
Audited Financial Statements for the Years Ended April 30, 2015, 2014, and 2013
 
Page
Report of Independent Registered Public Accounting Firm
 
F-1
Consolidated Balance Sheets as of April 30, 2015 and 2014
 
F-2
Consolidated Statements of Income for the Years Ended April 30, 2015, 2014, and 2013
 
F-3
Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2015, 2014, and 2013
 
F-4
Consolidated Statement of Stockholders' Equity for the Year Ended April 30, 2015
 
F-5
Consolidated Statement of Stockholders' Equity for the Year Ended April 30, 2014
 
F-6
Consolidated Statement of Stockholders' Equity for the Year Ended April 30, 2013
 
F-7
Consolidated Statements of Cash Flows for the Years Ended April 30, 2015, 2014, and 2013
 
F-8
Notes to Consolidated Financial Statements
 
F-10

55


(b)
Exhibits.
Exhibit
Number
 
Exhibit Description
3.1

 
Amended and Restated Certificate of Incorporation of JTH Holding, Inc. (incorporated by reference to Exhibit 3.1 to Form S-1, File No. 333-176655 filed on September 2, 2011).
3.2

 
Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed on July 15, 2014).
3.3

 
Second Amended and Restated Bylaws of Liberty Tax, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K, File No. 001-35588 filed on July 15, 2014).
4.1

 
Share Exchange Agreement among DataTax Business Services Limited, Liberty Tax Holding Corporation, Liberty Tax Service Inc. and JTH Tax, Inc. dated as of October 16, 2001 (incorporated by reference to Exhibit 4.3 to Form S-1, File No. 333-176655 filed on September 2, 2011).
4.2

 
Support Agreement between JTH Tax, Inc. and Liberty Tax Holding Corporation dated as of October 16, 2001(incorporated by reference to Exhibit 4.4 to Form S-1, File No. 333-176655 filed on September 2, 2011).
4.3

 
Specimen Common Stock Certificate of Liberty Tax, Inc. (Incorporated by reference to Exhibit 4.6 to Form 8-K, File No. 001-35588 filed on September 3, 2014).
4.4

 
Form of Indenture with respect to Senior Debt Securities (incorporated by reference to Exhibit 4.2 to Form S-3, File No. 333-199579 filed on October 23, 2014).
4.5

 
Form of Indenture with respect to Subordinated Debt Securities (incorporated by reference to Exhibit 4.4 to Form S-3, File No. 333-199579 filed on October 23, 2014).
10.1

 
JTH Holding, Inc. 2011 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Form S-1, File No. 333-176655 filed on February 3, 2012).
10.2

 
JTH Tax, Inc. Stock Option Plan dated as of May 1, 1998 (incorporated by reference to Exhibit 10.2 to Form S-1, File No. 333-176655 filed on September 2, 2011).
10.3

 
Form of Stock Option Agreement under Stock Option Plan (incorporated by reference to Exhibit 10.3 to Form S-1, File No. 333-176655 filed on September 2, 2011).
10.4

 
Form of Incentive Stock Option Agreement for Employees via JTH Holding, Inc. 2011 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.7 to Amendment No. 5 to Form S-1, File No. 333-176655 filed on October 15, 2012).
10.5

 
Form of Restricted Stock Unit Agreement for Employees via JTH Holding, Inc. 2011 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.5 to Form 10-K, File No. 001-35588 filed on October 1, 2013).
10.6

 
Revolving Credit and Term Loan Agreement dated as of April 30, 2012 among JTH Holding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012).
10.7

 
Security Agreement among JTH Holding, Inc. and certain of its subsidiaries and SunTrust Bank dated as of April 30, 2012 (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012).
10.8

 
Pledge Agreement among JTH Holding, Inc. and certain of its subsidiaries and SunTrust Bank dated as of April 30, 2012 (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012).
10.9

 
Subsidiary Guaranty Agreement among certain subsidiaries of JTH Holding, Inc. and SunTrust Bank dated April 30, 2012 (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012).
10.10

 
Waiver and Amendment to Revolving Credit and Term Loan Agreement dated as of December 19, 2012 among JTH Holding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on December 26, 2012).
10.11

 
Supplement and Joinder Agreement dated as of December 28, 2012 among JTH Holding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on December 28, 2012).
10.12

 
Waiver to Revolving Credit and Term Loan Agreement with SunTrust Bank as Administrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on March 12, 2013).
10.13

 
Standstill Agreement between JTH Holding, Inc., SunTrust Bank and certain of JTH Holding, Inc.'s subsidiaries dated as of August 5, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on August 6, 2013).

56


Exhibit
Number
 
Exhibit Description
10.14

 
Waiver to Revolving Credit and Term Loan Agreement with SunTrust Bank as Administrative Agent dated as of August 29, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on August 29, 2013).
10.15

 
Supplement and Joinder Agreement dated October 3, 2014 (incorporated by reference to Exhibit 10.1 to
Form 8-K, File No. 001-35588 filed on October 6, 2014).
10.16

 
Second Amendment to Revolving Credit and Term Loan Agreement dated October 3, 2014 (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 001-35588 filed on October 6, 2014).
10.17

 
Form of Franchise Agreement for United States Franchisees (filed herewith).
10.18

 
Form of Area Developer Agreement for United States Area Developers (filed herewith).
10.19

 
Amended and Restated Employment Agreement for John T. Hewitt dated June 12, 2015 (incorporated by reference to Exhibit 10.1 of Form 8-K, File No. 001-35588 filed on June 12, 2015).
10.20

 
Amended and Restated Employment Agreement for James J. Wheaton dated June 1, 2012 (incorporated by reference to Exhibit 10.4 of Form 8-K, File No. 000-54660 filed on June 14, 2012).
10.21

 
Employment Agreement for Kathleen Donovan dated February 1, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on January 24, 2014).
10.22

 
Employment Agreement for Richard G. Artese dated May 1, 2014 (incorporated by reference to Exhibit 10.4 to Form 10-K, File No. 001-35588 filed on June 26, 2014).
10.23

 
Employment Agreement for Mark F. Baumgartner dated June 1, 2012 (incorporated by reference to Exhibit 10.2 of Form 8-K, File No. 000-54660 filed on June 14, 2012).
10.24

 
Employment Agreement for Robert J. Lougen, Jr. dated October 10, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on October 14, 2014).
21.1

 
Subsidiaries of Liberty Tax, Inc. (filed herewith).
23.1

 
Consent of KPMG LLP (filed herewith).
31.1

 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
31.2

 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
32.1

 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).
32.2

 
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).


57


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
LIBERTY TAX, INC.
(Registrant)
Dated: July 1, 2015
 
By:
 
/s/ JOHN T. HEWITT
 
 
 
John T. Hewitt
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Dated: July 1, 2015
 
By:
 
/s/ KATHLEEN E. DONOVAN
 
 
 
Kathleen E. Donovan
Chief Financial Officer
(Principal Financial Officer)
Dated: July 1, 2015
 
By:
 
/s/ THOMAS S. DANIELS
 
 
 
Thomas S. Daniels
Chief Accounting Officer
(Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned whose signature appears below constitutes and appoints John T. Hewitt and Kathleen E. Donovan, his true and lawful attorneys-in-fact, with full power of substitution and resubstitution for him and on his behalf, and in his name, place, and stead, in any and all capacities to execute and sign any and all amendments or post-effective amendments to this Annual Report on Form 10-K and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: July 1, 2015
 
By:
 
/s/ JOHN T. HEWITT
 
 
 
John T. Hewitt
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Dated: July 1, 2015
 
By:
 
/s/ KATHLEEN E. DONOVAN
 
 
 
Kathleen E. Donovan
Chief Financial Officer
(Principal Financial Officer)
Dated: July 1, 2015
 
By:
 
 /s/ THOMAS S. DANIELS
 
 
 
Thomas S. Daniels
Chief Accounting Officer
(Principal Accounting Officer)
Dated: July 1, 2015
 
By:
 
/s/ GORDON D'ANGELO
 
 
 
Gordon D'Angelo
Director
Dated: July 1, 2015
 
By:
 
/s/ JOHN R. GAREL
 
 
 
John R. Garel
Director
Dated: July 1, 2015
 
By:
 
/s/ STEVEN IBBOTSON
 
 
 
Steven Ibbotson
Director

58


Dated: July 1, 2015
 
By:
 
/s/ ROSS LONGFIELD
 
 
 
Ross Longfield
Director
Dated: July 1, 2015
 
By:
 
/s/ ELLEN MCDOWELL
 
 
 
Ellen McDowell
Director
Dated: July 1, 2015
 
By:
 
/s/ GEORGE T. ROBSON
 
 
 
George T. Robson
Director

59


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of April 30, 2015 and 2014 and for the years ended April 30, 2015, 2014, and 2013
(With Report of Independent Registered Public Accounting Firm Thereon)

60


Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
Liberty Tax, Inc.:
We have audited the accompanying consolidated balance sheets of Liberty Tax, Inc. and subsidiaries (the Company) as of April 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three‑year period ended April 30, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Liberty Tax, Inc. and subsidiaries as of April 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended April 30, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
Norfolk, Virginia
July 1, 2015


F-1


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2015 and 2014
(In thousands, except share data)
 
 
2015
 
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
21,387

 
$
46,080

Receivables:
 
 
 
 
Accounts receivable
 
46,121

 
43,122

Notes receivable - current
 
24,465

 
27,715

Interest receivable, net of uncollectible amounts
 
1,033

 
415

Allowance for doubtful accounts - current
 
(5,692
)
 
(5,596
)
Total current receivables, net
 
65,927

 
65,656

Assets held for sale
 
5,160

 
4,413

Deferred income tax asset
 
6,921

 
4,058

Other current assets
 
6,470

 
5,325

Total current assets
 
105,865

 
125,532

Property, equipment, and software, net
 
36,232

 
38,343

Notes receivable - non-current
 
22,416

 
17,078

Allowance for doubtful accounts - non-current
 
(1,663
)
 
(1,254
)
Total non-current notes receivables, net
 
20,753

 
15,824

Goodwill
 
3,377

 
2,997

Other intangible assets, net
 
14,672

 
14,295

Other assets
 
3,247

 
1,772

Total assets
 
$
184,146

 
$
198,763

Liabilities and Stockholders' Equity
 
 
 
 
Current liabilities:
 
 
 
 
Current installments of long-term debt
 
$
3,934

 
$
6,797

Accounts payable and accrued expenses
 
17,321

 
15,023

Due to Area Developers (ADs)
 
24,340

 
18,236

Income taxes payable
 
2,147

 
9,676

Deferred revenue - current
 
6,076

 
6,051

Total current liabilities
 
53,818

 
55,783

Long-term debt, excluding current installments
 
21,463

 
21,691

Deferred revenue - non-current
 
7,640

 
8,059

Deferred income tax liability
 
2,363

 
3,045

Total liabilities
 
85,284

 
88,578

Commitments and contingencies
 
 
 
 
Stockholders' equity:
 
 
 
 
Special voting preferred stock, $0.01 par value per share, 10 shares authorized, issued, and outstanding
 

 

Class A common stock, $0.01 par value per share, 21,200,000 shares authorized, 11,905,156 and 12,409,208 shares issued and outstanding at April 30, 2015 and 2014, respectively
 
119

 
124

Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 900,000 shares issued and outstanding
 
9

 
9

Exchangeable shares, $0.01 par value, 1,000,000 shares issued and outstanding
 
10

 
10

Additional paid-in capital
 
4,082

 
9,402

Accumulated other comprehensive income (loss), net of taxes
 
(697
)
 
66

Retained earnings
 
95,339

 
100,574

Total stockholders' equity
 
98,862

 
110,185

Total liabilities and stockholders' equity
 
$
184,146

 
$
198,763


See accompanying notes to consolidated financial statements.

F-2


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended April 30, 2015, 2014, and 2013
(In thousands, except per share data)
 
 
2015
 
2014
 
2013
Revenues:
 
 
 
 
 
 
Franchise fees
 
$
6,246

 
$
7,844

 
$
8,721

AD fees
 
6,901

 
6,680

 
7,699

Royalties and advertising fees
 
80,469

 
78,426

 
73,129

Financial products
 
37,058

 
34,512

 
30,345

Interest income
 
14,707

 
14,231

 
13,848

Tax preparation fees, net of discounts
 
13,877

 
14,295

 
10,148

Other revenue
 
2,914

 
3,708

 
3,723

Total revenues
 
162,172

 
159,696

 
147,613

Operating expenses:
 
 
 
 
 
 
Employee compensation and benefits
 
41,079

 
38,399

 
37,998

Selling, general, and administrative expenses
 
40,604

 
34,756

 
31,212

AD expense
 
28,497

 
27,319

 
25,736

Advertising expense
 
18,308

 
15,124

 
15,293

Depreciation, amortization, and impairment charges
 
9,900

 
9,277

 
6,538

Impairment of online software and acquired customer lists
 
8,392

 

 

Total operating expenses
 
146,780

 
124,875

 
116,777

Income from operations
 
15,392

 
34,821

 
30,836

Other income (expense):
 
 

 
 

 
 

Foreign currency transaction loss
 
(2
)
 
(13
)
 

Gain on sale of available-for-sale securities
 

 
2,183

 

Interest expense
 
(1,889
)
 
(1,355
)
 
(2,039
)
Income before income taxes
 
13,501

 
35,636

 
28,797

Income tax expense
 
4,811

 
13,654

 
11,170

Net income
 
8,690

 
21,982

 
17,627

Less: Net income attributable to participating securities
 
(633
)
 
(1,571
)
 
(1,525
)
Net income attributable to Class A and Class B common stockholders
 
$
8,057

 
$
20,411

 
$
16,102

 
 
 
 
 
 
 
Net income per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
Basic
 
$
0.63

 
$
1.57

 
$
1.26

Diluted
 
0.61

 
1.51

 
1.25

 
 
 
 
 
 
 
Weighted-average shares used to compute net income per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
Basic
 
12,738,887

 
12,990,522

 
12,783,214

Diluted
 
14,294,773

 
14,536,971

 
14,072,358


See accompanying notes to consolidated financial statements.

F-3


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended April 30, 2015, 2014, and 2013
(In thousands)
 
2015
 
2014
 
2013
Net income
$
8,690

 
$
21,982

 
$
17,627

Interest rate swap agreements, net of taxes of $-, $-, and $268, respectively

 

 
438

Unrealized gain on available-for-sale securities, net of taxes of $-, $608, and $237, respectively

 
975

 
387

Reclassified gain on sale of available-for-sale securities included in income, net of taxes of $-, $821, and $-, respectively

 
(1,362
)
 

Foreign currency translation adjustment
(763
)
 
(741
)
 
(307
)
Comprehensive income
$
7,927

 
$
20,854

 
$
18,145


See accompanying notes to consolidated financial statements.

F-4


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended April 30, 2015
(In thousands)
 
 
Class A
 
Class B
 
Class A
 
Special voting preferred stock
 
 
Common stock
 
Common stock
 
Preferred stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Balance at May 1, 2014
 
12,409

 
$
124

 
900

 
$
9

 

 
$

 

 
$

Exercise of stock options
 
762

 
8

 

 

 

 

 

 

Shares issued
 
3

 

 

 

 

 

 

 

Repurchase of common stock
 
(1,284
)
 
(13
)
 

 

 

 

 

 

Vesting of restricted stock
 
15

 

 

 

 

 

 

 

Balance at April 30, 2015
 
11,905

 
$
119

 
900

 
$
9

 

 
$

 

 
$

 
 
 
Exchangeable shares
 
Additional paid-in capital
 
Accumulated other comprehensive
income (loss), net
 
Retained earnings
 
 
 
 
Shares
 
Amount
 
Total
Balance at May 1, 2014
 
1,000

 
$
10

 
$
9,402

 
$
66

 
$
100,574

 
$
110,185

Exercise of stock options
 

 

 
11,975

 

 

 
11,983

Repurchase of common stock
 

 

 
(24,575
)
 

 
(11,720
)
 
(36,308
)
Stock-based compensation expense
 

 

 
2,477

 

 

 
2,477

Conversion of stock-based compensation awards from liability to equity classification
 

 

 

 

 

 

Tax benefit of stock option exercises
 

 

 
4,803

 

 

 
4,803

Net income
 

 

 

 

 
8,690

 
8,690

Cash dividends ($0.16 per share)
 

 

 

 

 
(2,205
)
 
(2,205
)
Foreign currency translation adjustment
 

 

 

 
(763
)
 

 
(763
)
Unrealized gain on available-for-sale securities, net of taxes
 

 

 

 

 

 

Balance at April 30, 2015
 
1,000

 
$
10

 
$
4,082

 
$
(697
)
 
$
95,339

 
$
98,862


See accompanying notes to consolidated financial statements.

F-5


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended April 30, 2014
(In thousands)
 
 
Class A
 
Class B
 
Class A
 
Special voting preferred stock
 
 
Common stock
 
Common stock
 
Preferred stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Balance at May 1, 2013
 
11,975

 
$
120

 
900

 
$
9

 

 
$

 

 
$

Exercise of stock options
 
956

 
9

 

 

 

 

 

 

Shares issued
 
1

 

 

 

 

 

 

 

Repurchase of common stock
 
(538
)
 
(5
)
 

 

 

 

 

 

Vesting of restricted stock
 
15

 

 

 

 

 

 

 

Balance at April 30, 2014
 
12,409

 
$
124

 
900

 
$
9

 

 
$

 

 
$



 
 
Exchangeable shares
 
Additional paid-in capital
 
Accumulated other comprehensive income, net
 
Retained earnings
 
 
 
 
Shares
 
Amount
 
 
Total
Balance at May 1, 2013
 
1,000

 
$
10

 
$
1,911

 
$
1,194

 
$
78,592

 
$
81,836

Exercise of stock options
 

 

 
13,970

 

 

 
13,979

Repurchase of common stock
 

 

 
(13,074
)
 

 

 
(13,079
)
Stock-based compensation expense
 

 

 
2,074

 

 

 
2,074

Conversion of stock-based compensation awards from liability to equity classification
 

 

 
4,238

 

 

 
4,238

Tax benefit of stock option exercises
 

 

 
283

 

 

 
283

Net income
 

 

 

 

 
21,982

 
21,982

Foreign currency translation adjustment
 

 

 

 
(741
)
 

 
(741
)
Unrealized gain on available-for-sale securities, net of taxes
 

 

 

 
(387
)
 

 
(387
)
Balance at April 30, 2014
 
1,000

 
$
10

 
$
9,402

 
$
66

 
$
100,574

 
$
110,185


See accompanying notes to consolidated financial statements.

F-6


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended April 30, 2013
(In thousands)
 
 
Class A
 
Class B
 
Class A
 
Special voting preferred stock
 
 
Common stock
 
Common stock
 
Preferred stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Balance at May 1, 2012
 
10,344

 
$
103

 
900

 
$
9

 
170

 
$
2,129

 

 
$

Exercise of stock options
 
350

 
4

 

 

 

 

 

 

Repurchase of common stock
 
(422
)
 
(4
)
 

 

 

 

 

 

Conversion of preferred stock to common stock
 
1,703

 
$
17

 

 
$

 
(170
)
 
(2,129
)
 

 

Balance at April 30, 2013
 
11,975

 
$
120

 
900

 
$
9

 

 
$

 

 
$

 
 
Exchangeable shares
 
Additional paid-in capital
 
Accumulated other comprehensive income, net
 
Retained earnings
 
 
 
 
Shares
 
Amount
 
 
Total
Balance at May 1, 2012
 
1,000

 
$
10

 
$
3,173

 
$
676

 
$
60,965

 
$
67,065

Exercise of stock options
 

 

 
3,797

 

 

 
3,801

Repurchase of common stock
 

 

 
(6,452
)
 

 

 
(6,456
)
Conversion of preferred stock to common stock
 

 

 
2,112

 

 

 

Stock-based compensation expense
 

 

 
1,496

 

 

 
1,496

Conversion of stock-based compensation awards from equity to liability classification
 

 

 
(2,486
)
 

 

 
(2,486
)
Tax benefit of stock option exercises
 

 

 
271

 

 

 
271

Net income
 

 

 

 

 
17,627

 
17,627

Interest rate swap agreements, net of taxes
 

 

 

 
438

 

 
438

Foreign currency translation adjustment
 

 

 

 
(307
)
 

 
(307
)
Unrealized gain on available-for-sale securities, net of taxes
 

 

 

 
387

 

 
387

Balance at April 30, 2013
 
1,000

 
$
10

 
$
1,911

 
$
1,194

 
$
78,592

 
$
81,836


See accompanying notes to consolidated financial statements.

F-7

LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2015, 2014, and 2013
(In thousands)

 
 
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
8,690

 
$
21,982

 
$
17,627

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Provision for doubtful accounts
 
5,726

 
8,692

 
7,098

Depreciation and amortization
 
8,499

 
7,836

 
5,750

Impairment of goodwill and other assets
 
9,793

 
1,441

 
788

Amortization of deferred financing costs
 
547

 
334

 
301

Loss on sale of property, equipment, and software
 
246

 
75

 

Stock-based compensation expense related to equity classified awards
 
2,477

 
2,074

 
1,496

Stock-based compensation expense (income) related to liability classified awards
 

 
(872
)
 
2,625

Gain on bargain purchases and sales of Company-owned offices
 
(414
)
 
(1,143
)
 
(777
)
Gain on sale of available-for-sale securities
 

 
(2,183
)
 

Equity in loss of affiliate
 
160

 
214

 
193

Deferred tax expense
 
(3,545
)
 
2,605

 
4,119

Changes in:
 
 

 
 

 
 

Accounts, notes, and interest receivable and deferred revenue
 
(8,869
)
 
(7,708
)
 
(13,857
)
Prepaid expenses and other assets
 
(2,911
)
 
(573
)
 
210

Accounts payable and accrued expenses
 
2,685

 
2,643

 
(1,837
)
Due to ADs
 
8,924

 
4,284

 
5,213

Income taxes
 
(7,491
)
 
3,781

 
(508
)
Net cash provided by operating activities
 
24,517

 
43,482

 
28,441

Cash flows from investing activities:
 
 
 
 
 
 
Issuance of operating loans to franchisees
 
(93,365
)
 
(76,013
)
 
(75,605
)
Payments received on operating loans to franchisees
 
88,776

 
71,722

 
68,782

Purchases of Company-owned offices, AD rights, and acquired customer lists
 
(8,246
)
 
(8,706
)
 
(5,980
)
Proceeds from sale of Company-owned offices and AD rights
 
3,687

 
2,879

 
4,072

Purchase of available-for-sale securities
 

 

 
(2,980
)
Proceeds from sale of available-for-sale securities
 

 
5,163

 

Purchases of property, equipment, and software
 
(11,463
)
 
(9,149
)
 
(11,928
)
Proceeds from sale of property, equipment, and software
 

 
59

 

Net cash used in investing activities
 
(20,611
)
 
(14,045
)
 
(23,639
)
Cash flows from financing activities:
 
 

 
 

 
 

Proceeds from the exercise of stock options
 
11,983

 
13,979

 
3,801

Repurchase of common stock
 
(36,308
)
 
(13,079
)
 
(6,456
)
Dividends paid
 
(2,205
)
 

 

Repayment of other long-term debt
 
(5,850
)
 
(3,398
)
 
(2,953
)
Borrowings under revolving credit facility
 
154,633

 
137,391

 
121,216

Repayments under revolving credit facility
 
(154,633
)
 
(137,391
)
 
(121,216
)
Payment for debt issue costs
 
(917
)
 

 
(289
)
Tax benefit of stock option exercises
 
4,803

 
283

 
271

Net cash used in financing activities
 
(28,494
)
 
(2,215
)
 
(5,626
)
Effect of exchange rate changes on cash, net
 
(105
)
 
(155
)
 
(11
)
Net increase (decrease) in cash and cash equivalents
 
(24,693
)
 
27,067

 
(835
)
Cash and cash equivalents at beginning of year
 
46,080

 
19,013

 
19,848

Cash and cash equivalents at end of year
 
$
21,387

 
$
46,080

 
$
19,013


See accompanying notes to consolidated financial statements.

F-8


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended April 30, 2015, 2014, and 2013
(In thousands)
 
 
2015
 
2014
 
2013
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
Cash paid for interest, net of capitalized interest of $200, $378, and $406
 
$
1,467

 
$
1,179

 
$
1,872

Cash paid for taxes, net of refunds
 
11,160

 
7,022

 
7,328

Accrued capitalized software costs included in accounts payable
 
168

 
149

 
733

Transfer from goodwill and other intangible assets to assets held for sale
 
5,160

 
4,413

 

Conversion of stock-based compensation awards from equity to liability classification
 

 

 
2,486

Conversion of stock-based compensation awards from liability to equity classification
 

 
4,238

 

During the years ended April 30, 2015, 2014, and 2013, the Company acquired certain assets from franchisees, ADs, and third parties as follows:
 
 
 
 
 
 
Fair value of assets purchased
 
$
18,310

 
$
18,740

 
$
11,124

Receivables applied, net of amounts due ADs and related deferred revenue
 
(6,931
)
 
(5,336
)
 
(3,079
)
Bargain purchase gains
 
(367
)
 
(487
)
 
(410
)
Notes and accounts payable issued
 
(2,766
)
 
(4,211
)
 
(1,655
)
Cash paid to franchisees, ADs, and third parties
 
$
8,246

 
$
8,706

 
$
5,980

During the years ended April 30, 2015, 2014, and 2013, the Company sold certain assets to franchisees and ADs as follows:
 
 
 
 
 
 
Book value of assets sold
 
$
11,469

 
$
8,135

 
$
6,517

Loss on sale - loss recognized
 
(298
)
 
(160
)
 
(417
)
Gain on sale - revenue deferred
 
2,000

 
1,872

 
2,846

Notes received
 
(9,484
)
 
(6,968
)
 
(4,874
)
Cash received from franchisees and ADs
 
$
3,687

 
$
2,879

 
$
4,072


See accompanying notes to consolidated financial statements.

F-9


LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Liberty Tax, Inc. (the "Company"), a Delaware corporation, is a holding company engaged through its subsidiaries as a franchisor and, to a lesser degree, an operator of a system of income tax preparation offices located in the United States and Canada. The Company's principal operations are conducted through JTH Tax, Inc. (d/b/a Liberty Tax Service), the Company's largest subsidiary. Through this system of income tax preparation offices, the Company also facilitates refund-based tax settlement financial products, such as refund transfer products and personal income tax refund discounting. The Company also offers online tax preparation services. Effective July 15, 2014, the Company changed its name from JTH Holding, Inc. to Liberty Tax, Inc.
The Company provides a substantial amount of lending to its franchisees and area developers ("ADs"). The Company allows franchisees and ADs to defer a portion of the franchise fee and AD fee, which are paid over time. The Company also offers its franchisees working capital loans to fund their operations between tax seasons.
Basis of Presentation
The consolidated financial statements include the accounts of Liberty Tax, Inc. and its wholly-owned subsidiaries. Assets and liabilities of the Company's Canadian operations have been translated into U.S. dollars using the exchange rate in effect at the end of the year. Revenues and expenses have been translated using the average exchange rates in effect each month of the year. Foreign exchange transaction gains and losses are recognized when incurred. The Company consolidates any entities in which it has a controlling interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation an entity in which the Company has certain interest where a controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity ("VIE"), is required to be consolidated by its primary beneficiary. The Company does not possess any ownership interests in franchisee entities; however, the Company may provide financial support to franchisee entities. Because the Company's franchise arrangements provide franchisee entities the power to direct the activities that most significantly impact their economic performance, the Company does not consider itself the primary beneficiary of any such entity that might be a VIE. Based on the results of management's analysis of potential VIEs, the Company has not consolidated any franchisee entities. The Company's maximum exposure to loss resulting from involvement with potential VIEs is attributable to accounts and notes receivables and future lease payments due from franchisees. When the Company does not have a controlling interest in an entity but exerts significant influence over the entity, the Company applies the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
The audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with GAAP have been recorded.

F-10

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Office Count
The following table shows the U.S. office activity, the number of processing centers and Canadian offices, and a breakdown of Company-owned and franchised offices for the 2015, 2014, and 2013 tax seasons.
 
 
Tax Season
 
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
U.S. Office Locations:
 
 
 
 
 
 
Permanent Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
3,663

 
3,816

 
3,730

Offices opened
 
397

 
289

 
405

Offices closed
 
(296
)
 
(442
)
 
(319
)
Operated during the current tax season
 
3,764

 
3,663

 
3,816

Seasonal Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
486

 
427

 
176

Offices opened
 
118

 
334

 
344

Offices closed
 
(342
)
 
(275
)
 
(93
)
Operated during the current tax season
 
262

 
486

 
427

 
 
 
 
 
 
 
Processing Centers
 
43

 
26

 
19

Total U.S. Office Locations
 
4,069

 
4,175

 
4,262

 
 
 
 
 
 
 
Canada Office Locations
 
259

 
263

 
258

 
 
 
 
 
 
 
Total Office Locations
 
4,328

 
4,438

 
4,520

 
 
 
 
 
 
 
Additional Office Information:
 
 
 
 
 
 
U.S. franchised offices
 
3,944

 
3,995

 
4,028

U.S. Company-owned offices
 
125

 
180

 
234

  Total U.S. offices
 
4,069

 
4,175

 
4,262

Canadian franchised offices
 
202

 
227

 
231

Canadian Company-owned offices
 
57

 
36

 
27

  Total Canadian offices
 
259

 
263

 
258

Total office locations
 
4,328

 
4,438

 
4,520

The Company's new brand, SiempreTax+, operated 57 offices during the 2015 tax season. These offices consist of second offices opened by current franchisees in territories they already owned, conversions of existing Liberty Tax offices, and offices opened in new territories.
Territory Sales
During fiscal 2015, the Company sold 212 new territories, compared to 225 during fiscal 2014, and 376 during fiscal 2013. The 2013 number of new territories includes 137 territories purchased under the now discontinued "zero franchise fee" program. The 2013 number net of these zero franchise fee purchases was 239. New territories include territories sold to new franchisees and additional territories sold to existing franchisees.
Significant Accounting Policies
Cash and Cash Equivalents - The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are maintained in bank deposit accounts, which at times may

F-11

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents balances.
Accounts Receivable - Accounts receivable are recorded at the invoiced amount less an allowance for doubtful accounts and accrue finance charges at 12% annually if unpaid after 30 days. Account balances are charged off against the allowance after all possible means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its accounts receivable.
Notes Receivable - Notes receivable are recorded less unrecognized revenue, net of an allowance for doubtful accounts. Unrecognized revenue relates to the financed portion of franchise fees and AD fees and, in the case of sales of Company-owned offices, the financed portion of gains related to such sales in each case where revenue has not yet been recognized. Interest income is accrued on the unpaid principal balance. The Company provides an allowance against accrued interest on a delinquent note when a scheduled payment becomes 90 days past due. Notes are written off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote.
Concentrations of credit risk - Financial instruments that could potentially subject the Company to concentrations of credit risk consist of accounts and notes receivable with its franchisees. The Company manages such risk by evaluating the financial position and value of the franchisees as well as obtaining the personal guarantee of the individual franchisees. At April 30, 2015 and 2014, there were no significant concentrations of credit risk associated with any individual franchisee or group of franchisees.
Allowance for Doubtful Accounts - The allowance for doubtful accounts includes the Company's best estimate of the amount of probable credit losses in the Company's existing accounts and notes receivable. Because the repayment of accounts and notes receivable is dependent on the performance of the underlying franchises, management estimates the amount of the allowance for doubtful accounts based on a comparison of amounts due to the estimated fair value of the underlying franchises. Management believes the allowance is adequate to cover the Company's credit loss exposure. If the carrying amount exceeds the fair value, the receivable is considered impaired.
Available-for-sale Securities - During fiscal 2013, the Company purchased corporate equity securities that were subsequently sold during fiscal 2014. Prior to sale, this investment was classified as available-for-sale and an unrealized gain was recognized, net of tax, in accumulated other comprehensive income in the stockholders' equity section of the balance sheet. Cash flows for the purchase and sale of this investment were classified as investing activities.
Assets Held for Sale - Assets held for sale consist of Company-owned offices that the Company intends to sell to a new or existing franchisee within one year. Assets held for sale are recorded at the lower of the carrying value or the estimated sales price, less costs to sell, and are evaluated for impairment at least annually.
Property, Equipment, and Software - Property, equipment, and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years for computer equipment, three to seven years for software, five to seven years for furniture and fixtures, and twenty to thirty years for buildings. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the assets. Certain allowable costs of software developed or obtained for internal use are capitalized and typically amortized over the estimated useful life of the software.
Goodwill - Goodwill represents the excess of costs over fair value of assets of businesses acquired. The reporting unit for the acquisition of assets from various franchisees is considered to be the franchise territory, and these assets are operated as Company-owned offices. Goodwill is not amortized, but instead tested for impairment at least annually. Goodwill is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it with its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. Fair value of the reporting unit for Company-owned offices is determined using the net fees of the offices in the franchise territory. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

F-12

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Deferred Revenue - Deferred revenue represents the amount of cash received for AD fees in excess of the revenue recognized.
Revenue Recognition - The Company earns revenue from the sales of franchises and granting of AD rights. Additionally, the Company earns revenue from royalties and advertising fees and other products. Typically, franchise rights are granted to franchisees for a term of five years with an option to renew at no additional cost. In exchange for franchise fees and royalties and advertising fees, the Company is obligated by its franchise agreements to provide training, an operations manual, site selection guidance, tax preparation software, operational assistance, tax and technical support, the ability to perform electronic filing, and marketing and advertising. Franchise fee revenue for the sales of individual territories is recognized when the obligations of the Company to prepare the franchisee for operation are substantially complete and cash has been received.
AD rights have historically been granted for a term of ten years. The Company recently changed the term of new and renewal AD contracts to six years. AD fees are recognized as revenue on a straight-line basis over the initial contract term of each AD agreement with the cumulative amount of revenue recognized not to exceed the amount of cash received. Amounts due to ADs for their services under an AD agreement are expensed as the related franchise fees and royalty revenues are recognized.
Royalties and advertising fees are recognized as franchise territories generate sales. Tax return preparation fees and financial products revenue are recognized as revenue in the period the related tax return is filed for the customer. Discounts for promotional programs are recorded at the time the return is filed and are recorded as reductions to revenues.
Interest income is recognized when cash is received for notes associated with franchise fees or AD fees. For all other notes and accounts receivable, interest income is recognized when earned, and is recorded net of an allowance.
Gains on sales of Company-owned offices are recognized when the purchase price is paid. Losses on sales of Company-owned offices are recognized immediately.
Derivative Instruments and Hedging Activities - The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.
The Company only enters into a derivative contract when it intends to designate the contract as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk; the derivative expires or is sold, terminated, or exercised; the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring; or management determines to remove the designation of the cash flow hedge.
In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is no longer probable that a forecasted transaction will occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.
At April 30, 2015, 2014, and 2013 the Company did not have any outstanding derivative instruments or hedging activities.

F-13

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Deferred Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities, which are shown on our consolidated balance sheets, are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has elected to classify interest charged on a tax settlement in interest expense, and accrued penalties, if any, in selling, general, and administrative expenses.
Intangible Assets and Other Long-Lived Assets - Amortization on intangible assets is calculated using the straight-line method over the estimated useful lives of the assets, generally from two to ten years. Long-lived assets, such as property, equipment, and software, and other purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. Recognition and measurement of a potential impairment is performed for these assets at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. Assets to be disposed of are no longer depreciated or amortized. These assets are classified as held-for-sale and are presented separately in the appropriate section of the consolidated balance sheets at the lower of their carrying amount or fair value less estimated cost to sell.
Comprehensive Income - Comprehensive income consists of net income, foreign currency translation adjustments, interest rate swap agreements, net of taxes, and the unrealized gain on equity securities available for sale, net of taxes, and is presented in the accompanying consolidated statements of stockholders' equity and comprehensive income.
Advertising Expenses - Advertising costs are expensed in the period incurred.
Stock-Based Compensation - The Company records the cost of its employee stock-based compensation as compensation expense in its consolidated statements of income based on the grant-date fair value of awards using the Black-Scholes-Merton option pricing model. For liability classified awards the Company records costs based on the fair value at the reporting date. The Company recognizes compensation costs for an award that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. The Company reflects the excess tax benefits related to stock option exercises as additional paid-in capital on its consolidated balance sheets and as financing cash flows on its consolidated statements of cash flows.
Compensation costs related to restricted stock units are based on the grant-date fair value and are amortized to compensation expense over the vesting period.
Use of Estimates
Management has made a number of estimates and assumptions related to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates.
Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). This update changes the criteria for reporting discontinued operations for all public and nonpublic entities as well as requiring new disclosures about discontinued operations and disposals of components of an entity that do not qualify for discontinued operations reporting. Public business entities should apply the amendments in this update prospectively to all disposals of components of an entity and all business or nonprofit activities that, on acquisition, are classified as held-for-sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to

F-14

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for annual periods beginning on or after December 15, 2016, and interim periods therein. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The adoption of the new guidance is not expected to have a material impact on the Company's consolidated financial statements.
Segment Reporting
Management has identified two operating segments, U.S. operations and Canadian operations. Although there are two operating segments, each segment is engaged in providing tax return preparation and related services and products. These two operating segments, which have similar gross margin and sales trends, have been aggregated into a single reporting segment because both segments are similar in the nature of services offered, production process, type of customer, the distribution methods, and the regulatory environment in which they operate. Canadian operations contributed $6.9 million, $6.4 million, and $5.9 million in revenues for the years ended April 30, 2015, 2014, and 2013, respectively.
(2) Accounts and Notes Receivable
The Company provides financing to franchisees and ADs for the purchase of franchises, areas and Company-owned offices, and operating loans for working capital and equipment needs. The franchise-related notes generally are payable over five years and the operating loans generally are due within one year. Most notes bear interest at 12%.
Notes and interest receivable, net of unrecognized revenue, as of April 30, 2015 and 2014 are presented in the consolidated balance sheets as follows:
 
 
2015
 
2014
 
 
(In thousands)
Notes receivable - current
 
$
24,465

 
$
27,715

Notes receivable - non-current
 
22,416

 
17,078

Interest receivable, net of uncollectible amounts
 
1,033

 
415

Total notes and interest receivable, net
 
$
47,914

 
$
45,208

Most of the notes receivable are due from the Company's franchisees and ADs and are collateralized by the underlying franchise and, when the franchise or AD is an entity, are guaranteed by the owners of the respective entity. The debtors' ability to repay the notes is dependent upon both the performance of the tax preparation industry as a whole and the individual franchisees' or ADs' areas.
The table above does not include unrecognized revenue. Unrecognized revenue relates to the financed portion of franchise fees and AD fees and, in the case of sales of Company-owned offices, the financed portion of gains related to these sales in each case where revenue has not yet been recognized. For franchise fees and gains related to the sale of Company-owned offices, revenue is recorded as note payments are received by the Company. Payments on AD fee notes receivable generate a corresponding increase in deferred revenue, which is amortized into revenue over the life of the AD contract, historically ten years. In fiscal 2015 the Company changed the term of new and renewal AD contracts to six years from ten years and the revenue for these contracts will be recognized over that period, subject to the receipt of cash. Unrecognized revenue was $38.6 million and $39.7 million at April 30, 2015 and 2014, respectively.
Accounts and notes receivable include royalties billed and franchise fees that relate to territories operated by franchisees located in AD territories and a portion of those accounts and notes are payable to the AD. The Company has recorded amounts payable to ADs for their share of these receivables of $24.3 million and $18.2 million at April 30, 2015 and 2014, respectively.
Allowance for Doubtful Accounts

F-15

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Management believes the recorded allowance is adequate based upon its consideration of the estimated value of the franchises and AD areas supporting the receivables. Any adverse change in the tax preparation industry or the individual franchisees' or ADs' areas could affect the Company's estimate of the allowance.
Activity in the allowance for doubtful accounts for the years ended April 30, 2015, 2014, and 2013 was as follows.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
Balance at beginning of year
 
$
6,850

 
$
6,684

 
$
5,290

Provision for doubtful accounts
 
5,726

 
8,692

 
7,098

Write-offs
 
(5,122
)
 
(8,460
)
 
(5,655
)
Foreign currency adjustment
 
(99
)
 
(66
)
 
(49
)
Balance at end of year
 
$
7,355

 
$
6,850

 
$
6,684

Management considers specific accounts and notes receivable to be impaired if the net amounts due exceed the fair value of the underlying franchise at the time of the annual valuation and estimates an allowance for doubtful accounts based on that excess. While not specifically identifiable as of the balance sheet date, the Company's experience also indicates that a portion of other accounts and notes receivable are also impaired, because management does not expect to collect all principal and interest due under the current contractual terms. Net amounts due include contractually obligated accounts and notes receivable plus accrued interest, net of unrecognized revenue, reduced by the allowance for uncollected interest, amounts due ADs, related deferred revenue, and amounts owed to the franchisee by the Company. In establishing the fair value of the underlying franchise, management considers recent sales between franchisees, net fees of open offices earned during the most recently completed tax season, and the number of unopened offices.

F-16

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The allowance for doubtful accounts at April 30, 2015 and 2014 was allocated as follows.
 
 
2015
 
2014
 
 
(In thousands)
Impaired:
 
 
 
 
Accounts receivable
 
$
7,634

 
$
5,351

Notes and interest receivable, net of unrecognized revenue
 
10,921

 
8,527

Less amounts due to ADs and franchisees
 
(1,535
)
 
(1,166
)
Amounts receivable less amounts due to ADs and franchisees
 
$
17,020

 
$
12,712

 
 
 
 
 
Allowance for doubtful accounts for impaired accounts and notes receivable
 
$
6,594

 
$
6,131

 
 
 
 
 
Non-impaired:
 
 
 
 
Accounts receivable
 
$
38,487

 
$
37,771

Notes and interest receivable, net of unrecognized revenue
 
36,993

 
36,681

Less amounts due to ADs and franchisees
 
(25,150
)
 
(17,818
)
Amounts receivable less amounts due to ADs and franchisees
 
$
50,330

 
$
56,634

 
 
 
 
 
Allowance for doubtful accounts for non-impaired accounts and notes receivable
 
$
761

 
$
719

 
 
 
 
 
Total:
 
 
 
 
Accounts receivable
 
$
46,121

 
$
43,122

Notes and interest receivable, net of unrecognized revenue
 
47,914

 
45,208

Less amounts due to ADs and franchisees
 
(26,685
)
 
(18,984
)
Amounts receivable less amounts due to ADs and franchisees
 
$
67,350

 
$
69,346

 
 
 
 
 
Total allowance for doubtful accounts
 
$
7,355

 
$
6,850

The Company's average investment in impaired notes receivable during the fiscal years ended April 30, 2015, 2014, and 2013 was $7.9 million, $8.5 million, and $8.1 million, respectively. Interest income recognized related to performing impaired notes was $0.7 million, $0.9 million, and $0.8 million for the fiscal years ended April 30, 2015, 2014, and 2013, respectively.

F-17

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Analysis of Past Due Receivables
The breakdown of accounts and notes receivable past due at April 30, 2015 and 2014 was as follows.
 
 
2015
 
 
Past due
 
Allowance for uncollectible interest
 
Current
 
Total receivables
 
 
(In thousands)
Accounts receivable
 
$
22,115

 
$
(938
)
 
$
24,944

 
$
46,121

Notes and interest receivable, net
 
10,492

 
(1,165
)
 
38,587

 
47,914

Total accounts, notes, and interest receivable, net
 
$
32,607

 
$
(2,103
)
 
$
63,531

 
$
94,035

 
 
2014
 
 
Past due
 
Allowance for uncollectible interest
 
Current
 
Total receivables
 
 
(In thousands)
Accounts receivable
 
$
19,672

 
$
(1,926
)
 
$
25,376

 
$
43,122

Notes and interest receivable, net
 
11,880

 
(1,063
)
 
34,391

 
45,208

Total accounts, notes, and interest receivable, net
 
$
31,552

 
$
(2,989
)
 
$
59,767

 
$
88,330

Accounts receivable are considered to be past due if unpaid 30 days after billing and notes receivable are considered past due if unpaid 90 days after due date, at which time the notes are put on nonaccrual status. The Company's investment in notes receivable on nonaccrual status at April 30, 2015 and 2014 was $9.3 million and $10.8 million, respectively. Payments received on notes in nonaccrual status are applied to interest income first until the note is current and then to the principal note balance. Nonaccrual notes that are paid current are moved back into accrual status during the next annual review.

(3) Investments
During the year ended April 30, 2013, the Company purchased corporate equity securities for $3.0 million as a strategic investment in a business partner. The Company classified this investment as available for sale. These securities were sold during fiscal year ended April 30, 2014 for a realized gain of $2.2 million, which was reclassified out of accumulated other comprehensive income and recorded as other income in the consolidated statements of income. No sales of available-for-sale securities occurred and, therefore, no gross realized gains or losses were recorded for the fiscal year ended April 30, 2013. The unrealized gain, net of tax, on the available-for-sale securities at April 30, 2013 was $0.4 million. We periodically review our investment portfolios to determine whether any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The Company did not record any other-than-temporary impairments of available-for-sale securities during fiscal years 2014 or 2013.
(4) Property, Equipment, and Software, Net
Property, equipment, and software at April 30, 2015 and 2014 was as follows:
 
 
2015
 
2014
 
 
(In thousands)
Land and land improvements
 
$
2,259

 
$
2,253

Buildings and building improvements
 
8,481

 
7,419

Leasehold improvements
 
143

 
200

Furniture, fixtures, and equipment
 
6,013

 
6,746

Software
 
37,894

 
44,036

Construction in progress
 
393

 

Property, equipment, and software, gross
 
55,183

 
60,654

Less accumulated depreciation and amortization
 
18,951

 
22,311

Property, equipment, and software, net
 
$
36,232

 
$
38,343


F-18

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Total depreciation and amortization expense on property, equipment, and software was $5.5 million, $3.8 million, and $3.1 million for the years ended April 30, 2015, 2014, and 2013, respectively.
The software included above includes both internally developed software and purchased software. Included in software are $12.9 million and $6.7 million of assets that had not been placed into service at April 30, 2015 and 2014, respectively. See Note 5 for a description of the impairment related to the Company's online software and acquired online customer lists.
The Company is obligated under various operating leases for office space that expire at various dates. At April 30, 2015, future minimum lease payments under noncancelable operating leases with initial or remaining lease terms in excess of one year, together with amounts due from franchisees under subleases, were as follows:
 
 
Lease payments
 
Sublease receipts
 
 
(In thousands)
Year ending April 30:
 
 
 
 
2016
 
$
2,819

 
$
1,323

2017
 
1,613

 
720

2018
 
765

 
250

2019
 
259

 
139

2020
 
90

 
31

Thereafter
 
40

 

Total minimum lease payments
 
$
5,586

 
$
2,463

Total rent expense for operating leases, net of subleases, was $3.2 million, $3.4 million, and $3.2 million for the years ended April 30, 2015, 2014, and 2013, respectively.
(5) Goodwill and Intangible Assets
At the end of the fourth quarter of fiscal 2014, assets associated with tax offices acquired from U.S. franchisees were transferred out of goodwill and intangible assets and classified as assets held for sale.
Changes in the carrying amount of goodwill for the years ended April 30, 2015 and 2014 were as follows:
 
 
2015
 
2014
 
 
(In thousands)
Balance at beginning of year
 
$
2,997

 
$
5,685

Acquisitions of assets from franchisees
 
1,107

 
4,855

Disposals and foreign currency changes, net
 
(465
)
 
(3,769
)
Impairments
 
(262
)
 
(874
)
Reclassified to assets held for sale
 

 
(2,900
)
Balance at end of year
 
$
3,377

 
$
2,997

The Company performed its annual impairment review of goodwill and recorded impairment of $0.3 million and $0.6 million for the years ended April 30, 2015 and 2014, respectively.
As of April 30, 2015, the Company reviewed for impairment the assets related to its online tax preparation business as a result of changes in the pricing environment in the online tax preparation market, a significant decline in the number of returns prepared online and a decline in the related revenues experienced in fiscal 2015. The Company believed that these changes indicated that the carrying amount of assets related to its online tax preparation business may not be recoverable. Accordingly, the undiscounted future cash flows generated by its online software and acquired online customer lists were estimated and the Company concluded that the carrying value of those assets was not recoverable. An impairment loss of $8.4 million was recorded equal to the excess of the carrying amount of those assets over their fair value. The fair value of those assets was determined using a discounted cash flow model.

F-19

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The impairment loss was allocated as follows at April 30, 2015:
 
 
April 30, 2015
 
 
(In thousands)
Software
 
$
6,882

Acquired customer lists
 
1,510

Impairment of online software and acquired customer lists
 
$
8,392

Components of amortizable intangible assets as of April 30, 2015 and 2014 were as follows:
 
 
April 30, 2015
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Customer lists acquired from unrelated third parties
 
4 years
 
$
1,027

 
$

 
$
1,027

Assets acquired from franchisees:
 
 
 
 
 
 
 


Customer lists
 
4 years
 
759

 
(441
)
 
318

Reacquired rights
 
2 years
 
559

 
(473
)
 
86

AD rights
 
10 years
 
17,345

 
(4,104
)
 
13,241

Total intangible assets
 
 
 
$
19,690

 
$
(5,018
)
 
$
14,672

 
 
April 30, 2014
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Customer lists acquired from unrelated third parties
 
6 years
 
$
4,816

 
$
(995
)
 
$
3,821

Assets acquired from franchisees:
 
 
 
 
 
 
 


Customer lists
 
4 years
 
551

 
(387
)
 
164

Reacquired rights
 
2 years
 
481

 
(338
)
 
143

AD rights
 
10 years
 
13,641

 
(3,474
)
 
10,167

Total intangible assets
 
 
 
$
19,489

 
$
(5,194
)
 
$
14,295

During fiscal 2014, the Company purchased certain assets of an online tax preparation software provider for $3.2 million and allocated the purchase price to identifiable intangible assets.
For the years ended April 30, 2015, 2014, and 2013 the Company recorded as intangible assets $1.7 million, $9.0 million, and $6.3 million, respectively, from acquisitions of various franchises. During fiscal 2014 and 2013, both U.S. and Canadian franchise acquisitions were recorded an intangible assets; however, during fiscal 2015, the majority of U.S. franchise acquisitions were recorded as assets held for sale, while Canadian franchise acquisitions continued to be recorded as intangible assets. These acquisitions were accounted for as business combinations.
The purchase price of assets acquired from franchisees and recorded as customer lists, reacquired rights, and goodwill during fiscal 2015, 2014, and 2013 was allocated as follows.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
Customer lists
 
$
435

 
$
2,372

 
$
1,631

Reacquired rights
 
284

 
1,806

 
1,216

Goodwill
 
975

 
4,855

 
3,449

Purchase price of assets acquired from franchisees, not held for sale
 
$
1,694

 
$
9,033

 
$
6,296


F-20

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The Company expects that assets associated with Company-owned offices will be sold before the end of their estimated useful life. During the years ended April 30, 2015, 2014, and 2013, impairment analyses were performed for amortizable intangible assets. Write-downs of assets acquired from franchisees relate to Company-owned offices that were subsequently closed and impairment of the fair value of existing Company-owned offices based on the impairment analysis. As a result, the carrying values of assets acquired from franchisees were reduced by $0.5 million for the fiscal year ended April 30, 2015, $0.9 million for 2014, and $0.8 million for 2013. These amounts were expensed to impairment charges on the consolidated statements of income. The Company estimated the fair value of assets associated with Company-owned offices based on various models, including data and input from a third-party.
For the years ended April 30, 2015, 2014, and 2013, amortization expense was $3.6 million, $4.1 million, and $2.7 million, respectively. Annual amortization expense for the next five years is estimated to be as follows (in thousands):
Year ending April 30:
 
2016
$
2,358

2017
2,120

2018
2,005

2019
1,833

2020
1,481

Total estimated amortization expense
$
9,797

(6) Assets Held for Sale
At the end of the fourth quarter of fiscal 2014, the Company reclassified certain assets associated with Company-owned offices from goodwill, other intangible assets, and property, equipment, and software to assets held for sale. An impairment charge of $0.5 million was recorded upon classification of these assets as held for sale and expensed to depreciation, amortization, and impairment charges on the consolidated statements of income.
The amounts reclassified from each category were as follows (in thousands):
Customer lists
$
1,259

Reacquired rights
624

Goodwill
2,900

Property, equipment, and software
130

Total assets transferred to assets held for sale
4,913

Impairment charge on assets held for sale
(500
)
Total assets held for sale at April 30, 2014
$
4,413

During fiscal 2015, the Company acquired $8.7 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $4.4 million and goodwill of $4.3 million prior to being recorded as assets held for sale. The acquired businesses are operated as Company-owned offices until a buyer is located and a new franchise agreement is entered into.
Changes in the carrying amounts of assets held for sale for the fiscal years ended April 30, 2015 and 2014 were as follows:
 
 
2015
 
2014
 
 
(In thousands)
Balance at beginning of year
 
$
4,413

 
$

Reacquired
 
8,517

 
4,913

Dispositions
 
(7,014
)
 

Impairment
 
(756
)
 
(500
)
Balance at end of year
 
$
5,160

 
$
4,413



F-21


(7) Debt
In October 2014, the Company amended its credit facility. The amended credit facility consists of a $21.2 million term loan and a revolving credit facility that currently allows borrowing of up to $203.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly, at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company's leverage ratio. At April 30, 2015 and 2014, the interest rate was 1.8% and 1.78%, respectively, and the average interest rate paid during the fiscal year ended April 30, 2015 was 1.79%. A commitment fee is paid monthly that varies from 0.25% to 0.50% depending on the Company's leverage ratio on the unused portion of the credit facility. The indebtedness is collateralized by substantially all the assets of the Company and both loans mature on April 30, 2019 (except as to the commitments of one lender under the revolving credit facility, which mature on September 30, 2017).
The credit facility contains certain financial covenants that the Company must meet, including leverage and fixed-charge coverage ratios as well as minimum net worth requirements. In addition, the Company must reduce the outstanding balance under its revolving loan to zero for a period of at least 45 consecutive days each fiscal year. The Company's borrowing availability on the credit facility at April 30, 2015 was $108.4 million. At April 30, 2015 and 2014, the Company had no outstanding borrowings under its revolving credit facility. The Company was in compliance with the financial covenants of its credit facility at April 30, 2015.
The credit facility also contains certain events of default that may cause the bank syndicate to terminate the credit facility and declare amounts owed to become immediately payable if they occur. At April 30, 2015, the Company has not incurred an event of default.
Debt at April 30, 2015 and 2014 was as follows:
 
 
2015
 
2014
 
 
(In thousands)
Term loan payable in quarterly principal installments of 1.875%, 2.5%, 2.5%, and 3.125% of the original amount borrowed for the years ending April 30, 2016, 2017, 2018 and 2019, respectively; at that time a balloon payment of $14,875 is payable.
 
$
20,453

 
$
21,875

Mortgage note payable to a bank in monthly installments of $16 including interest at 6.06% through September 2016; at that time a balloon payment of $2,213 is payable; subject to a prepayment penalty; collateralized by land and building.
 
2,279

 
2,326

Amounts due to former ADs at zero percent interest; due May 2015 through August 2015.
 
2,626

 
4,211

Other debt
 
39

 
76

Total long-term debt
 
25,397

 
28,488

Less current installments
 
3,934

 
6,797

Total long-term debt, less current installments
 
$
21,463

 
$
21,691

Aggregate maturities of long-term debt at April 30, 2015 are as follows (in thousands):
Year ending April 30:
 
 
2016
 
$
3,934

2017
 
4,463

2018
 
2,125

2019
 
14,875

Total long-term debt
 
$
25,397

(8) Derivative Instruments and Hedging Activities
From time to time, the Company uses interest-rate-related derivative financial instruments to manage its exposure related to changes in interest rates on its variable-rate line of credit and forward contracts to manage its exposure to foreign currency fluctuation related to short-term advances made to its Canadian subsidiary. The Company does not speculate using derivative instruments nor does it enter into derivative instruments for any purpose other than cash flow hedging.

F-22

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company money, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty money, and therefore, the Company is not exposed to the counterparty's credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest rates is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rates that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company's outstanding or forecasted debt obligations and forecasted revenues as well as the Company's offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates and foreign currency rates on the Company's future cash flows.
It is the policy of the Company to enter into forward contracts at the time short-term advances are made to its Canadian subsidiary.
Interest rate swap agreements. On July 1, 2009, the Company entered into interest rate swap agreements with a financial institution to manage fluctuations in cash flows resulting from changes in the one-month LIBOR interest rate on its line of credit. These swaps effectively changed the variable-rate line of credit into a fixed-rate line of credit. For the notional amounts, the Company received a variable interest rate based on the one-month LIBOR and paid a fixed interest rate of 2.49% to 2.52%, depending on the agreement. The notional amounts of the interest rate swaps varied from $10.0 million to $70.0 million per month, in relation to the Company's forecasted seasonal borrowings. These interest rate swaps were designated as cash flow hedges. During the year ended April 30, 2013, $0.1 million of income was recognized in the consolidated statements of income due to the ineffectiveness of these interest rate swaps. These interest rate swaps expired in March 2013.
Forward contracts related to foreign currency exchange rates. In connection with short-term advances made to its Canadian subsidiary related to personal income tax refund discounting, the Company enters into forward contracts to eliminate the exposure related to foreign currency fluctuations. Under the terms of the forward currency contracts, the exchange rate for repayments is fixed at the time advance is made and the advances are repaid prior to April 30 of each year. These forward contracts are designated as cash flow hedges. At April 30, 2015 and 2014, there were no remaining forward contracts outstanding. During the years ended April 30, 2015, 2014, and 2013, these foreign currency hedges were effective and, therefore, no amounts were recognized in the consolidated statements of income.
At April 30, 2015, there were no deferred gains on derivative instruments accumulated in other comprehensive income.
(9) Stockholders' Equity
Preferred Stock and Exchangeable Shares
The Company has 190,000 shares of authorized Class A preferred stock with a par value of $0.01, of which none were issued and outstanding at April 30, 2015 and 2014.
The Company also has 10 shares of special voting preferred stock authorized, issued and outstanding with a par value of $0.01 and no liquidation value. Each share of special voting preferred stock entitles the holder to vote as if it represents 100,000 shares of Class A common stock. In conjunction with the special voting preferred stock, there are 1,000,000 exchangeable shares that are exchangeable at any time into Class A common stock of the Company. The special voting preferred stock will be canceled at the time the holder exchanges the exchangeable shares.
Common Stock
The Company is authorized to issue 21,200,000 shares of Class A common stock, par value $0.01 per share, and 1,000,000 shares of Class B common stock, par value $0.01 per share. Class A common stock and Class B common stock entitle the holders to the same rights and privileges and are identical in all respects as to all matters, except the holders of

F-23

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Class B common stock are entitled to elect one more director than the number of directors elected by holders of all other classes of stock combined. Additionally, a holder of Class B common stock may, at the holder's option, elect to convert the Class B common stock into an equal number of fully paid and non-assessable shares of Class A common stock.
Accumulated Other Comprehensive Income (loss)
The components of accumulated other comprehensive income (loss) at April 30, 2015 and 2014 are as follows.
 
 
2015
 
2014
 
 
(In thousands)
Foreign currency adjustment
 
$
(697
)
 
$
66

Total accumulated other comprehensive income (loss)
 
$
(697
)
 
$
66

Net Income per Share
Net income per share of Class A and Class B common stock is computed using the two-class method. Basic net income per share is computed by allocating undistributed earnings to common shares and participating securities (Class A preferred stock and exchangeable shares) and using the weighted-average number of common shares outstanding during the period. Undistributed losses are not allocated to participating securities because they do not meet the required criteria for such allocation.
Diluted net income per share is computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in dilutive earnings per share by application of the treasury stock method. Additionally, the computation of diluted net income per share of Class A common stock assumes the conversion of Class B common stock and exchangeable shares, if dilutive, while the diluted net income per share of Class B common stock does not assume conversion of those shares.
The rights, including liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, with the exception of the election of directors. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year had been distributed. Participating securities have dividend rights that are identical to Class A and Class B common stock.

F-24

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The computation of basic and diluted net income per share for the years ended April 30, 2015, 2014, and 2013 is as follows.
 
 
2015
 
 
Class A common stock
 
Class B common stock
 
 
(In thousands, except for share and per share amounts)
Basic net income per share:
 
 
 
 
Numerator:
 
 
 
 
Allocation of undistributed earnings
 
$
8,076

 
$
614

Amounts allocated to participating securities:
 
 
 
 
Exchangeable shares
 
(588
)
 
(45
)
Net income attributable to common stockholders
 
$
7,488

 
$
569

Denominator:
 
 
 
 
Weighted-average common shares outstanding
 
11,838,887

 
900,000

Basic net income per share
 
$
0.63

 
$
0.63

 
 
 
 
 
Diluted net income per share:
 
 
 
 
Numerator:
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
7,488

 
$
569

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
Class B common stock to Class A common stock
 
569

 

Exchangeable shares to Class A common stock
 
633

 

Net income attributable to stockholders
 
$
8,690

 
$
569

Denominator:
 
 
 
 
Number of shares used in basic computation
 
11,838,887

 
900,000

Weighted-average effect of dilutive securities:
 
 
 
 
Class B common stock to Class A common stock
 
900,000

 

Exchangeable shares to Class A common stock
 
1,000,000

 

Employee stock options and restricted stock units
 
555,886

 
36,415

Weighted-average diluted shares outstanding
 
14,294,773

 
936,415

Diluted net income per share
 
$
0.61

 
$
0.61


F-25

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

 
 
2014
 
 
Class A common stock
 
Class B common stock
 
 
(In thousands, except for share and per share amounts)
Basic net income per share:
 
 
 
 
Numerator:
 
 
 
 
Allocation of undistributed earnings
 
$
20,459

 
$
1,523

Amounts allocated to participating securities:
 
 
 
 
Exchangeable shares
 
(1,462
)
 
(109
)
Net income attributable to common stockholders
 
$
18,997

 
$
1,414

Denominator:
 
 
 
 
Weighted-average common shares outstanding
 
12,090,522

 
900,000

Basic net income per share
 
$
1.57

 
$
1.57

 
 
 
 
 
Diluted net income per share:
 
 
 
 
Numerator:
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
18,997

 
$
1,414

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
Class B common stock to Class A common stock
 
1,414

 

Exchangeable shares to Class A common stock
 
1,571

 

Net income attributable to stockholders
 
$
21,982

 
$
1,414

Denominator:
 
 
 
 
Number of shares used in basic computation
 
12,090,522

 
900,000

Weighted-average effect of dilutive securities:
 
 
 
 
Class B common stock to Class A common stock
 
900,000

 

Exchangeable shares to Class A common stock
 
1,000,000

 

Employee stock options and restricted stock units
 
546,449

 
35,153

Weighted-average diluted shares outstanding
 
14,536,971

 
935,153

Diluted net income per share
 
$
1.51

 
$
1.51


F-26

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

 
 
2013
 
 
Class A common stock
 
Class B common stock
 
 
(In thousands, except for share and per share amounts)
Basic net income per share:
 
 
 
 
Numerator:
 
 
 
 
Allocation of undistributed earnings
 
$
16,386

 
$
1,241

Amounts allocated to participating securities:
 
 
 
 
Class A preferred stock
 
(247
)
 
(18
)
Exchangeable shares
 
(1,171
)
 
(89
)
Net income attributable to common stockholders
 
$
14,968

 
$
1,134

Denominator:
 
 
 
 
Weighted-average common shares outstanding
 
11,883,214

 
900,000

Basic net income per share
 
$
1.26

 
$
1.26

 
 
 
 
 
Diluted net income per share:
 
 
 
 
Numerator:
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
14,968

 
$
1,134

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
Class B common stock to Class A common stock
 
1,134

 

Class A preferred stock to Class A common stock
 
265

 

Exchangeable shares to Class A common stock
 
1,260

 

Net income attributable to stockholders
 
$
17,627

 
$
1,134

Denominator:
 
 
 
 
Number of shares used in basic computation
 
11,883,214

 
900,000

Weighted-average effect of dilutive securities:
 
 
 
 
Class B common stock to Class A common stock
 
900,000

 

Class A preferred stock to Class A common stock
 
210,560

 

Exchangeable shares to Class A common stock
 
1,000,000

 

Employee stock options and restricted stock units
 
78,584

 
5,054

Weighted-average diluted shares outstanding
 
14,072,358

 
905,054

Diluted net income per share
 
$
1.25

 
$
1.25

Diluted net income per share excludes the impact of shares of potential common stock from the exercise of options and vesting of restricted stock units to purchase 210,416, 483,397 and 2,402,183 shares for the years ended April 30, 2015, 2014, and 2013, respectively, because the effect would be anti-dilutive.
(10) Stock Compensation Plan
Stock Options
In August 2011, the Board of Directors approved the JTH Holding, Inc. 2011 Equity and Cash Incentive Plan. Employees and outside directors are eligible to receive awards and a total of 2,500,000 shares of Class A common stock were authorized for grant under the plan. At April 30, 2015, 1,458,756 shares of Class A common stock remained available for grant.

F-27

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The following table summarizes the information for options granted in the years ended April 30, 2015, 2014, and 2013.
 
 
2015
 
2014
 
2013
Weighted-average fair value of options granted
 
$9.59
 
$6.87
 
$1.80
Dividend yield
 
0.0% - 2.2%
 
—%
 
—%
Expected volatility
 
31.1% - 31.7%
 
34.1% - 37.0%
 
13.0% - 14.9%
Expected terms
 
5 years
 
4 - 5 years
 
4 - 6 years
Risk-free interest rates
 
1.6% - 1.9%
 
0.8% - 1.6%
 
0.6% - 1.0%
The Company does not have enough public trading history to calculate volatility for the term of the granted options, therefore, it used a 50/50 weighted-average volatility, equally weighing our public trading history and that of other public companies in the tax preparation industry.
The grants made prior to June 2012 were made prior to our becoming a public company; therefore, we considered appropriate accounting literature regarding the valuation of privately-held company equity securities and determined that the values established in private transactions provided a reasonable basis for establishing the fair value for stock compensation expense purposes. On this basis, we did not obtain any third party valuation or utilize other valuation methods. Any grants made after we became a public company were valued using the closing market price of the preceding business day.
Stock option activity during the years ended April 30, 2015, 2014, and 2013 was as follows:
 
 
Number of options
 
Weighted average exercise price
Outstanding at April 30, 2012
 
2,729,013

 
$
14.21

Granted
 
332,035

 
15.00

Exercised
 
(349,500
)
 
10.88

Canceled
 
(176,865
)
 
13.65

Outstanding at April 30, 2013
 
2,534,683

 
14.81

Granted
 
628,374

 
20.42

Exercised
 
(955,592
)
 
14.63

Canceled
 
(267,059
)
 
15.03

Outstanding at April 30, 2014
 
1,940,406

 
16.68

Granted
 
170,416

 
32.87

Exercised
 
(761,913
)
 
15.73

Canceled
 
(5,350
)
 
15.00

Outstanding at April 30, 2015
 
1,343,559

 
$
19.28

Intrinsic value is defined as the fair value of the stock less the cost to exercise. The total intrinsic value of options exercised was $13.3 million, $9.4 million, and $1.7 million during the years ended April 30, 2015, 2014, and 2013, respectively. The total intrinsic value of stock options outstanding at April 30, 2015 was $12.2 million. Outstanding options have vesting terms that range from six months to six years from the date of grant and expire from four to five years after the vesting date.

F-28

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Nonvested stock options (options that had not vested in the period reported) activity during the years ended April 30, 2015, 2014, and 2013 was as follows:
 
 
Nonvested options
 
Weighted average exercise price
Outstanding at April 30, 2012
 
452,500

 
$
15.00

Granted
 
332,035

 
15.00

Vested
 
(596,935
)
 
15.00

Canceled
 
(55,100
)
 
15.00

Outstanding at April 30, 2013
 
132,500

 
15.00

Granted
 
628,374

 
20.42

Vested
 
(275,874
)
 
16.93

Outstanding at April 30, 2014
 
485,000

 
20.92

Granted
 
170,416

 
32.87

Vested
 
(270,000
)
 
18.99

Outstanding at April 30, 2015
 
385,416

 
$
27.56

At April 30, 2015, unrecognized compensation cost related to nonvested stock options was $2.8 million. These costs are expected to be expensed through fiscal 2021.
The following table summarizes information about stock options outstanding and exercisable at April 30, 2015.
 
 
Options outstanding
 
Options exercisable
Range of Exercise Prices
 
Number of options outstanding
 
Weighted average exercise price
 
Weighted average remaining contractual life (in years)
 
Number of options exercisable
 
Weighted average exercise price
$
10.50

 
12,500

 
$
10.50

 
1.0
 
12,500

 
$
10.50

15.00

 
705,047

 
15.00

 
2.2
 
705,047

 
15.00

16.38 - 19.75

 
280,596

 
17.88

 
4.5
 
205,596

 
17.81

26.18 - 29.48

 
205,000

 
26.66

 
6.6
 
35,000

 
26.18

33.38 - 33.79

 
140,416

 
33.60

 
6.5
 

 

 
 
1,343,559

 
$
19.28

 
 
 
958,143

 
$
15.95

During the fiscal year ended April 30, 2013, the settlement of certain stock option transactions caused a change in the classification of related outstanding stock options to a liability instrument from an equity instrument, which resulted in an increase in stock compensation expense of $2.6 million. At April 30, 2013, the value of the liability for the 997,824 options that changed classifications from an equity to a liability instrument was $5.1 million. On June 11, 2013, the Company's board of directors voted to prohibit those types of transactions; therefore, the Company reclassified the stock options back to equity instruments, resulting in a reduction to stock compensation expense of $0.9 million. The liability was removed and the remainder was reclassified to additional paid-in-capital.
Restricted Stock Units
The Company has awarded restricted stock units to its non-employee directors and certain employees. Restricted stock units are valued at the closing stock price the day preceding the grant date. Compensation costs associated with these restricted shares are amortized on a straight-line basis over the vesting period and recognized as an increase in additional paid-in capital. At April 30, 2015, unrecognized compensation cost related to restricted stock units was $0.6 million. These costs are expected to be recognized through fiscal 2022.

F-29

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Restricted stock activity during the years ended April 30, 2015 and 2014 was as follows. The Company did not issue restricted stock units prior to fiscal year 2013.
 
 
Number of RSUs
 
Weighted Average Fair Value at Grant Date
Balance at April 30, 2012
 

 
$

Granted
 
15,971

 
13.50

Balance at April 30, 2013
 
15,971

 
13.50

Granted
 
23,565

 
16.86

Vested
 
(14,598
)
 
13.36

Canceled
 
(3,493
)
 
16.07

Balance at April 30, 2014
 
21,445

 
16.87

Granted
 
25,691

 
33.38

Vested
 
(14,746
)
 
16.38

Canceled
 
(3,461
)
 
26.47

Balance at April 30, 2015
 
28,929

 
$
30.63

(11) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities subject to fair value measurements are classified according to a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Valuation methodologies for the fair value hierarchy are as follows.
Level 1—Quoted prices for identical assets and liabilities in active markets.
Level 2—Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
Level 3—Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities for which fair value is the primary basis of accounting. Other assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustment in certain circumstances, such as when there is evidence of impairment.

F-30

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The following tables present, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis at April 30, 2015 and 2014.
 
 
 
 
April 30, 2015 Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Recurring assets:
 
 
 
 
 
 
 
 
Cash equivalents
 
$
16,975

 
$
16,975

 
$

 
$

Total recurring assets
 
16,975

 
16,975

 

 

Nonrecurring assets:
 
 
 
 
 
 
 
 
Impaired accounts and notes receivable
 
11,961

 

 

 
11,961

Impaired online software
 
1,253

 

 

 
1,253

Impaired acquired online customer lists
 
1,027

 

 

 
1,027

Impaired goodwill
 
224

 

 

 
224

Impaired reacquired rights
 
79

 

 

 
79

Impaired customer lists
 
126

 

 

 
126

Assets held for sale
 
5,160

 

 

 
5,160

Total nonrecurring assets
 
19,830

 

 

 
19,830

Total recurring and nonrecurring assets
 
$
36,805

 
$
16,975

 
$

 
$
19,830

 
 
 
 
April 30, 2014 Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Recurring assets:
 
 
 
 
 
 
 
 
Cash equivalents
 
$
42,918

 
$
42,918

 
$

 
$

Total recurring assets
 
42,918

 
42,918

 

 

Nonrecurring assets:
 
 
 
 
 
 
 
 
Impaired accounts and notes receivable
 
7,747

 

 

 
7,747

Impaired goodwill
 
86

 

 

 
86

Impaired reacquired rights
 
42

 

 

 
42

Impaired customer lists
 
52

 

 

 
52

Assets held for sale
 
4,413

 

 

 
4,413

Total nonrecurring assets
 
12,340

 

 

 
12,340

Total recurring and nonrecurring assets
 
$
55,258

 
$
42,918

 
$

 
$
12,340

The Company's policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1 or 2 recurring fair value measurements for the years ended April 30, 2015 and 2014.
The following methods and assumptions are used to estimate the fair value of our financial instruments.
Cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments. Cash equivalent financial instruments consist of money market accounts.
Impaired accounts and notes receivable: Accounts and notes receivable are considered to be impaired if the net amounts due exceed the fair value of the underlying franchise or if management considers it probable that all principal and interest will not be collected when contractually due. In establishing the estimated fair value of the underlying franchise, consideration is given to recent sales between franchisees, the net fees of open offices, and the number of unopened offices.

F-31

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Impaired goodwill, reacquired rights, and customer lists: Goodwill, reacquired rights, and customer lists associated with a Company-owned office are considered to be impaired if the net carrying amount exceeds the fair value of the underlying office. In establishing the fair value of the underlying office, consideration is given to the related net fees.
Assets held for sale: Assets held for sale are recorded at the lower of the carrying value or the sales price, less costs to sell, which approximates fair value. The sales price is calculated as a percentage of the prior year's net fees.
Impaired online software and acquired online customer lists: The online software and acquired online customer lists are considered to be impaired if the net carrying amount of these assets exceeds the fair value of these assets. The fair value of these assets was determined using a discounted cash flow model.
Other Fair Value Measurements
Accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments not recorded at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument. No readily available market exists for a significant portion of the Company's financial instruments. Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by the Company in estimating the fair value of these financial instruments.
Receivables other than notes, other current assets, accounts payable and accrued expenses, and due to ADs: The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).
Notes receivable: The carrying amount approximates fair value because the interest rate charged by the Company on these notes approximates rates currently offered by local lending institutions for loans of similar terms to individuals/entities with comparable credit risk (Level 3).
Long-term debt: The carrying amount approximates fair value because the interest rate paid has a variable component (Level 2).
(12) Employee 401(k) Plan
The Company sponsors a defined-contribution 401(k) profit sharing plan. Under the plan, employees who are 18 years of age and have completed 90 days of service are eligible to make voluntary contributions to the plan. The Company matches 50% of each employee's contribution up to 3% of the employee's salary. Total compensation expense related to these contributions was $0.5 million, $0.5 million, and $0.4 million for the years ended April 30, 2015, 2014, and 2013, respectively.
(13) Income Taxes
The Company computes its expense or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.
Congress extended the federal research and development (“R&D”) credit through December 31, 2014; this included a reinstatement of the R&D credit retroactive to January 1, 2014. During the three months ended January 31, 2015, we recorded a discrete tax benefit of approximately $0.2 million for the retroactive effect. Due to the expiration of the credit on December 31, 2014, we reduced the projected tax benefit of the fiscal 2015 credit by $0.1 million, which represents a third of our fiscal year projected credit. Should the credit again be extended retroactively, we will record the benefit in the quarter of enactment.
Interest incurred from income taxes is recognized as incurred and recorded as income tax expense on the consolidated statements of income. Penalties are recognized as incurred and recorded as nondeductible penalties expense and included in general and administrative expense on the consolidated statements of income.

F-32

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

Total income taxes were calculated for the years ended April 30, 2015, 2014, and 2013 as follows.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
Income tax expense
 
$
4,811

 
$
13,654

 
$
11,170

Tax benefit of stock option exercises
 
(4,803
)
 
(283
)
 
(271
)
Interest rate swap agreements
 

 

 
257

Unrealized appreciation on available-for-sale securities
 

 
(252
)
 
252

Total income taxes
 
$
8

 
$
13,119

 
$
11,408

Components of income tax expense for the years ended April 30, 2015, 2014, and 2013 were as follows.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
Current:
 
 
 
 
 
 
Federal
 
$
5,973

 
$
8,632

 
$
5,368

State
 
2,157

 
2,036

 
1,254

Foreign
 
226

 
381

 
429

Current tax expense
 
8,356

 
11,049

 
7,051

Deferred:
 
 
 
 
 
 
Federal
 
(2,629
)
 
2,192

 
3,365

State
 
(950
)
 
517

 
787

Foreign
 
34

 
(104
)
 
(33
)
Deferred tax expense (benefit)
 
(3,545
)
 
2,605

 
4,119

Total income tax expense
 
$
4,811

 
$
13,654

 
$
11,170

For the years ended April 30, 2015, 2014, and 2013, income before taxes consisted of the following.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
U.S. operations
 
$
12,459

 
$
34,746

 
$
27,434

Foreign operations
 
1,042

 
890

 
1,363

Income before income taxes
 
$
13,501

 
$
35,636

 
$
28,797

Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income from continuing operations as a result of the following for the years ended April 30, 2015, 2014, and 2013.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
Computed "expected" income tax expense
 
$
4,725

 
$
12,473

 
$
10,079

Increase (decrease) in income taxes resulting from:
 
 
 
 
 
 
State income taxes, net of federal benefit
 
1,034

 
1,819

 
1,455

Nondeductible expenses
 
308

 
143

 
171

Tax credits
 
(251
)
 
(555
)
 
(545
)
Domestic production deduction
 
(466
)
 
(40
)
 
(155
)
Stock compensation expense
 
(378
)
 
78

 
255

Other
 
(161
)
 
(264
)
 
(90
)
Total income tax expense
 
$
4,811

 
$
13,654

 
$
11,170


F-33

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The tax effect of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of deferred tax assets and liabilities at April 30, 2015 and 2014 are as follows:
 
 
2015
 
2014
 
 
(In thousands)
Deferred tax assets:
 
 
 
 
Unexercised nonqualified stock options
 
$
1,954

 
$
2,259

Allowance for doubtful accounts
 
3,124

 
3,733

Deferred revenue
 
4,096

 
3,914

Other
 
3,209

 
80

Total deferred tax assets
 
12,383

 
9,986

Deferred tax liabilities:
 
 
 
 
Property, equipment, software, and other intangible assets
 
7,247

 
8,426

Prepaid expenses
 
578

 
547

Total deferred tax liabilities
 
7,825

 
8,973

Net deferred tax asset
 
$
4,558

 
$
1,013

In assessing the realizability of the gross deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the benefits of these deductible differences will be realized.
The Company has adopted the accounting and disclosure requirements for uncertain tax positions, which require a two-step approach to evaluate tax positions. This approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine the amounts to be recognized in the financial statements. The Company has determined no reserves for uncertain tax positions were required at April 30, 2015 or 2014.
Foreign subsidiary net earnings that were considered permanently reinvested were $0.8 million, $0.6 million, and $1.0 million for the fiscal years ended April 30, 2015, 2014, and 2013, respectively. Because these foreign subsidiary net earnings are considered permanently reinvested, the amount of deferred tax liability that would need to be provided if these earnings were not reinvested is not reasonably determinable.
At April 30, 2015, the tax years that remain subject to examination by the Internal Revenue Service and other major taxing jurisdictions relate to the fiscal years ended April 30, 2014, 2013, and 2012.
(14) Related-Party Transactions
The Company considers directors and their affiliated companies as well as executive officers and their immediate family to be related parties. For the years ended April 30, 2015, 2014, and 2013, the Company repurchased common stock from related parties as follows.
 
 
2015
 
2014
 
2013
 
 
(In thousands)
Common stock:
 
 
 
 
 
 
Shares repurchased
 
1,007

 
316

 
191

Amount
 
$
26,954

 
$
7,449

 
$
3,010

The Company has entered into a multi-year contract to purchase a license for the use of Canadian tax software at a price of $0.7 million from a company in which it has an investment accounted for under the equity method. One of the members of the Company's Board of Directors is affiliated with the company providing this service.

F-34

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

The Company is party to an agreement to purchase the right to distribute cloud and mobile accounting solutions to its franchisees. Payment of $0.3 million was made for this service during fiscal 2015.
(15) Commitments and Contingencies
In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the Company's business, financial condition, cash flows, or results of operations except as provided below.
ERC class action litigation. The Company was sued in November 2011 in federal courts in Arkansas, California, Florida, and Illinois, and additional lawsuits were filed in federal courts in January 2012 in Maryland and North Carolina, in February 2012 in Wisconsin, and in May 2012 in New York and Minnesota. In April 2012, a motion to consolidate all of the then-pending cases before a single judge in federal court in the Northern District of Illinois was granted, and in June 2012, the plaintiffs filed a new complaint in the consolidated action. The consolidated complaint alleges that the Company's refund transfer products formerly called electronic refund checks ("ERC") represent a form of refund anticipation loan ("RAL") because the taxpayer is "loaned" the tax preparation fee, and that the refund transfer product is, therefore, subject to federal truth-in-lending disclosure and state law requirements regulating RALs. The plaintiffs also allege disclosure violations related to the ERC fees paid by RAL customers. The plaintiffs, therefore, claim violations of state-specific RAL and other consumer statutes. The lawsuit purports to be a class action, and the plaintiffs allege potential damages in excess of $5.0 million. The Company appealed to the United States Court of Appeals for the Seventh Circuit a ruling that certain of the plaintiffs’ claims were not subject to arbitration. Following mediation, the parties entered into a settlement agreement in June 2015 pursuant to which the Company will establish a settlement fund of $5.3 million, inclusive of settlement administration costs and plaintiffs’ counsel fees. The parties are in the process of arranging for the remand of the case to the trial court, which must approve the settlement. The Company has preserved potential claims against a financial product partner that was responsible for the design of a portion of our ERC programs in the years at issue in the cases. The Company has also accrued the proposed settlement amount.
TCPA class action litigation. The Company was sued in September 2013 in federal court in Illinois in connection with alleged violations of the Telephone Consumer Protection Act. Plaintiff alleges that the Company inappropriately made auto dialed telephone calls to cellular telephones, seeks the certification of a nationwide class action, and claims statutory damages of $500-$1,500 per violation. The Company tendered the defense of this litigation to a third party entity that had contracted with the Company to solicit potential franchisees, and that third party entity acknowledged its defense and indemnification obligations to the Company. However, because the third party did not have the financial resources to satisfy its defense and indemnity obligations, the Company concluded that it could not rely upon the fulfillment of those obligations. In September 2014, the Company and the plaintiffs reached a tentative settlement of this litigation pursuant to which the Company will establish a settlement fund of $3.0 million, inclusive of settlement administration costs and plaintiffs’ counsel fees. This settlement has received the preliminary approval of the court, but remains subject to other conditions typical in a class action. The Company has accrued the proposed settlement amount.
The Company is also party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the preparation of customers' income tax returns, the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, the Company believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations or financial position.

F-35

LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2015 and 2014

(16) Quarterly Financial Data (Unaudited)
 
 
Three Months Ended
 
 
April 30, 2015
 
January 31, 2015
 
October 31, 2014
 
July 31, 2014
 
 
(In thousands, except per share amounts)
Revenue
 
$
98,919

 
$
47,680

 
$
7,734

 
$
7,839

Impairment of online software and acquired customer lists
 
8,392

 

 

 

Tentative settlements of class action litigation cases, net of estimated recoveries
 
1,421

 
4,066

 
2,130

 

Net income (loss)
 
$
26,743

 
$
1,919

 
$
(11,328
)
 
$
(8,644
)
Weighted-average basic shares outstanding
 
12,728,341

 
12,679,286

 
12,680,306

 
12,867,273

Weighted-average dilutive shares outstanding
 
14,155,818

 
14,227,163

 
12,680,306

 
12,867,273

Net income (loss) per share of Class A and Class B common stock:
 
 
 
 
 
 
 
 
Basic
 
$
1.95

 
$
0.14

 
$
(0.89
)
 
$
(0.67
)
Diluted
 
$
1.89

 
$
0.13

 
$
(0.89
)
 
$
(0.67
)
 
 
Three Months Ended
 
 
April 30, 2014
 
January 31, 2014
 
October 31, 2013
 
July 31, 2013
 
 
(In thousands, except per share amounts)
Revenue
 
$
103,574

 
$
40,740

 
$
7,317

 
$
8,065

Gain on sale of available-for-sale securities
 

 
1,995

 
188

 

Net income (loss)
 
$
32,331

 
$
4,056

 
$
(8,478
)
 
$
(5,927
)
Weighted-average basic shares outstanding
 
13,154,238

 
12,991,857

 
12,926,060

 
12,895,286

Weighted-average dilutive shares outstanding
 
14,853,416

 
14,654,666

 
12,926,060

 
12,895,286

Net income (loss) per share of Class A and Class B common stock:
 
 
 
 
 
 
 
 
Basic
 
$
2.28

 
$
0.29

 
$
(0.66
)
 
$
(0.46
)
Diluted
 
$
2.18

 
$
0.28

 
$
(0.66
)
 
$
(0.46
)
Because most of the Company's customers file their tax returns during the period from January through April of each year, most of the Company's revenues are earned during this period. As a result, the Company generally operates at a loss through the first eight months of the fiscal year.
(17) Subsequent Events
On June 17, 2015, the Company's Board of Directors approved a cash dividend of $0.16 per share payable on July 22, 2015 to holders of record of common stock and common stock equivalents on July 15, 2015.

F-36








FRANCHISE AGREEMENT















EXHIBIT B

Liberty Franchise Agreement 7-14


TABLE OF CONTENTS
Section
Page
 
 
1. GRANT OF FRANCHISE
1
2. TERM, RENEWAL AND BUYBACK
1
3. TERRITORY
2
4. FEES AND PAYMENTS
2
5. OBLIGATIONS OF FRANCHISOR
5
6. OBLIGATIONS OF FRANCHISEE
7
7. REPORTS AND REVIEW
10
8. TERMINATION
11
9. POST-TERMINATION OBLIGATIONS
13
10. ADDITIONAL IN-TERM AND POST-TERM COVENANTS
14
11. OPTION TO PURCHASE ASSETS
15
12. CONFIDENTIAL INFORMATION
15
13. INDEPENDENT CONTRACTOR
16
14. DEATH OR INCAPACITY
17
15. ASSIGNABILITY AND FIRST RIGHT OF REFUSAL
17
16. NON-WAIVER OF BREACH
19
17. GOVERNING LAW
19
18. MODIFICATION
20
19. RELEASE OF PRIOR CLAIMS
20
20. NOTICES
20
21. FULL UNDERSTANDING
20
22. ACKNOWLEDGMENTS
21
23. SEVERABILITY
21
24. COUNTERPARTS AND ELECTRONIC SIGNATURE
21
25. HEADINGS
21
26. GUARANTY
21
 
 
Signature Page
23
Schedule A – Territory
A-1
Schedules B-1 to B-6 – Special Stipulations
B-1-B-6


Liberty Franchise Agreement 7-14    i



1. GRANT OF FRANCHISE

Liberty Tax Service (“Liberty,” “Liberty Tax”) has developed a system for the operation of tax return preparation offices. The Liberty system utilizes special marketing techniques and operating procedures to facilitate the provision of tax return preparation and related services.

You, meaning the franchisee and all signators identified on the signature page to this franchise agreement (“Agreement” or “Franchise Agreement”), in your personal capacity, have applied for a franchise that utilizes Liberty’s system and Liberty’s trade names, service marks, and trademarks (collectively, the “Marks”) (“Franchised Business” or “Franchise”). Subject to the terms of this Agreement, Liberty grants to you a Liberty Tax Service franchise. This Agreement will allow you to operate a tax return preparation business using Liberty’s system and Liberty’s Marks within the territory described on Schedule A (“Territory”). This agreement shall only grant you a Liberty franchise and grants no rights to you associated with any other brand or concept owned and/or operated by SiempreTax LLC formerly Hispanic Tax, LLC (“SiempreTax”), Liberty Tax, Inc. (formerly JTH Holding, Inc.), Liberty’s partners, affiliates or parent company (“Affiliated Companies”). You agree to abide by the terms of this Agreement.

You recognize and agree that the nature of the tax return preparation business is such that complete uniformity is not always practical or desirable and that Liberty, in Liberty’s sole discretion, may vary the terms of this Agreement and the standards of operation of the Franchised Business to accommodate the peculiarities of a particular situation and/or territory. You have no recourse against Liberty if other franchisees are granted allowances that you are not granted.

2. TERM, RENEWAL AND BUYBACK

a.    Term. This Agreement will be effective for a five-year term beginning on the effective date specified on the signature page of this Agreement (“Effective Date”).

b.    Renewal. You may renew for another five-year term by signing Liberty’s then current franchise agreement if you have met the Target Volume specified in Section 6(f) of this Agreement and are otherwise in compliance with this Agreement. You may continue to renew future franchise agreements in this manner if you are in compliance with all agreements between you and Liberty. You must execute a general release of all claims that you might have against Liberty to renew and Liberty’s then current Franchise Agreement which may contain materially different terms. Liberty may not raise royalties or advertising fees that you pay to Liberty upon any future renewal, or impose a renewal fee. Further, Liberty may not change the boundaries of your Territory, the level and type of territorial exclusivity or the territorial rights you have. Other terms and conditions may vary. If you wish to renew, you must notify Liberty in writing at least 180 days before the expiration of this Agreement.

c.    Buyback. Between May 1 and August 31 of any year, Liberty has the right to purchase your Franchised Business for the greater of $150,000 or 200% of Gross Receipts of the Territory for the previous twelve months, or such shorter time as an office in the Territory may have been in operation. You understand that this is a premium price above fair value and does not vest any rights in you. The term “Gross Receipts” as used in this Agreement means all revenue from all services and products offered by the Franchised Business (including, but not limited to, revenue from individual, corporate, estate and partnership tax returns), excluding only customer discounts, any transmitter, software or electronic filing fee, and sales tax, but not service fees for credit card transactions.

3. TERRITORY

a. Territory Generally. Your Territory is described in Schedule A of this Agreement (“Territory”).

b. General Rights & Restrictions. You may operate as many tax return preparation offices in the Territory as you determine to be appropriate. You may not operate outside your Territory. Liberty may grant franchises for areas outside your Territory or operate company offices in such areas. Except as described below, Liberty may not establish franchised or company owned outlets offering income tax preparation services using the Marks at a physical location in your Territory. Additionally, Liberty may not offer income tax preparation services through other channels of distribution at a physical location in your Territory except as described herein. Liberty, Liberty’s parent company, partners, affiliates and SiempreTax may establish franchised or company owned outlets in your Territory that operate income tax preparation services under different trademarks and may operate or franchise a different line of business. Liberty may distribute Liberty tax return preparation products and services by means other than retail or storefront locations in your Territory, including the sale of gift cards for this service. No other franchisee using the Marks may operate a tax return preparation office in your Territory. Liberty may advertise in your Territory. You may not advertise in areas outside your Territory or in media that extends outside your Territory, without Liberty’s expressed written approval.
    
c. Misplaced Offices. If you locate an office outside your Territory, even if Liberty approved such site location, you agree upon discovery of this fact to promptly abandon the office and refrain from any further targeted solicitation (e.g. direct mail, telephone calls, etc.) of customers residing in the territory containing the misplaced office. If Liberty learns that Liberty or another franchisee has erroneously located an office in your Territory, you agree to accept the abandonment of the office and, in the case of a misplaced office operated by another franchisee, the discontinuation of further targeted solicitation of customers located in your Territory, in full satisfaction of any claim against Liberty, Liberty’s past and present employees, and Liberty’s past and present franchisees, in relation to the misplaced office. Liberty has a reasonable time to correct any such error after Liberty learns of it. No person or entity is a third-party beneficiary of this Section.

d. National and Regional Retail Business Outlets. Liberty may negotiate agreements with national or regional retail businesses. If there is an outlet of such a national or regional business in your Territory that is subject to such an agreement, you may choose to operate a tax return preparation service office in that outlet by communicating that decision to Liberty by December 1 before a given Tax Season, or such earlier date provided by Liberty in order to meet the requirements of that business. If you choose not to operate in an outlet that exists in your Territory, Liberty may operate in that outlet in your Territory and all associated revenue and expenses shall belong to Liberty. Additionally, Liberty will retain the right to service the customers associated with that outlet in the future. The term “Tax Season” means the time period of January 2 – April 30.

4. FEES AND PAYMENTS

a. Initial and Resale Franchise Fee. The initial franchise fee and resale franchise fees are $40,000. The resale franchise fee applies to a territory that has been previously sold. If a territory includes existing operations, the total cost will vary depending upon the Gross Receipts of the Territory and other pertinent market and economic factors.

b.    Down Payment and Approval. You must submit a minimum of 20% of the initial or resale franchise fee as a deposit after you have held the Liberty Franchise Disclosure Document for at least fourteen (14) calendar days and prior to attending Effective Operations Training (“EOT”). Liberty will refund this deposit to you upon your request at any time before you attend EOT. If you receive financing, you will be required to submit a deposit of up to $25,000 prior to closing for your operational expenses (“Operational Supply Deposit”). We will refund to you the initial or resale franchise fee (including deposits) if we do not approve your application or if you do not pass EOT in accordance with our passing standards, provided that you return to us all materials that we distributed to you during training. After closing, Liberty will hold and make available for return to you any Operational Supply Deposit that you were required to submit, upon your written request to Liberty with substantiation as to the expenses to be paid by you with the Operational Supply Deposit. We do not pay interest on the Operational Supply Deposit. The initial and resale franchise fee is fully earned and nonrefundable when both parties execute this Agreement.

c. Reverse Royalty. If Liberty receives tax preparation fees from individuals located in your Territory through the use of Liberty’s online tax preparation services while you have a Liberty Tax Service office open in that Territory, Liberty agrees to use commercially reasonable means to track and identify those revenues and pay or credit to you 14% of those tax preparation fees within sixty (60) days after the end of each Tax Season in its sole discretion.

d.    Royalties. You must pay a royalty to Liberty in the amount of 14% of Gross Receipts subject to the following minimums (“Minimum Royalties”):

i)
Year One. For the period ending April 30 following the Effective Date of this Agreement, if you operated or were required to have operated an office in the Territory for any part of Tax Season ending in that April, the minimum royalty is $5,000 per Territory.

ii)
Year Two. For the period beginning May 1 following the Effective Date of this Agreement through the following April 30, the minimum royalty is $8,000 per Territory.

iii)
Year Three and Beyond. Thereafter, the minimum royalty is $11,000 per Territory for each successive period beginning May 1 through the following April 30.

iv)
Developed Territory. For a territory that contains or that had in the most recent Tax Season prior to the Effective Date of this Agreement, an existing company, franchisee or other Liberty tax preparation office (“Developed Territory”), you must pay royalties as set forth above depending upon how long any office has been operated in the Territory. For example, if it is your first year operating in a territory but an office has been operated in the Territory by Liberty or another franchisee through one Tax Season, then the Territory would be subject to Year Two royalties for the year that you first operate in the Territory. An office includes, but is not limited to, locations such as kiosks or temporary locations where tax return preparation services are provided.

e. Area Developers. If you are in or become part of an area covered by an Area Developer, Liberty may pay to the Area Developer a portion of the initial franchisee fee and royalties that you pay to Liberty.

f.    Advertising Fee. You must pay an advertising fee of 5% of the Gross Receipts each month.

g.    Payment Period. You must pay the royalty owed by the 5th of each month based on Gross Receipts for the preceding month, and any balance owed to achieve Minimum Royalty on May 5 for each fiscal year ending April 30. You must pay advertising fees by the 5th of each month based on Gross Receipts for the preceding month. Liberty reserves the right to modify this payment schedule in Liberty’s Operations Manual.

h.    Interest. You must pay interest of 12% (compounded daily) per year, or the maximum permitted by law if less, on any amounts owed to Liberty that are more than fifteen (15) days past due.

i.    Transfer Fee. If you transfer your Franchised Business, or a majority ownership interest in it, you must pay Liberty a transfer fee of $5,000 at the time of transfer. This fee is subject to increase or decrease in future franchise agreements by the amount of change in the Consumer Price Index – All Urban Consumers, published by the U.S. Department of Labor, or a reasonably similar successor index, from the index as of the Effective Date.

j.    Customer Refunds, Penalty and Interest, Send a Friend. If you do not resolve a customer service complaint or pay penalty and interest on an erroneous return prepared in your office, or misdeliver a customer check, or fail to pay a Send a Friend or E-Send a Friend referral, and the customer contacts Liberty, and Liberty believes there is a reasonable basis for the claim, Liberty may issue a refund of fees paid by the customer, pay to the customer the penalty and interest or amount of misdelivered check, or pay the Send a Friend referral, and bill you. You agree to pay the charges. Your obligation to pay penalty and interest for tax return preparation errors made during the operation of the Franchised Business continues after the expiration, termination or transfer of this Agreement and/or sale of the Franchised Business.

k.    Automatic Payment Transfer. All of the tax preparation, transmitter, software, and electronic filing fees, and any rebates that you receive from Financial Products or customers who purchase Financial Products, shall initially be paid to Liberty. The term “Financial Products” as used in this Agreement means refund-based loan programs and/or a means for customers to obtain a refund using electronic deposit services that Liberty, or a company associated with Liberty, may offer to you. Liberty will remit any remaining balance to you from the above described fees and rebates after deducting monies you owe to Liberty, and/or SiempreTax if applicable, and deducting monies to hold for application to upcoming amounts due to Liberty and/or SiempreTax.

l.    Sales or Gross Receipts Tax. If required by the state or locality where your Territory is located, the initial franchise fee, royalties, and advertising fees will be subject to sales or gross receipts tax. You must pay these taxes to Liberty at the same time and in the same manner as you pay the royalties and fees to Liberty.

m.    Transmitter, Software, or Electronic Filing Fee. Liberty reserves the right to impose a fee charged to you or your customers related to transmission of Financial Products, the provision of software, or the electronic filing of tax returns and, if charged to customers, may rebate a portion of the fee to you. Liberty may vary the dollar amount of the fee and may change its name. Any such fee is not included in your Gross Receipts.

n. Call Center. If you elect to use Liberty’s call center to handle customer appointments, customer follow up, tax school calls, or other calls, you must pay to Liberty a fee for each such call pursuant to Liberty’s schedule of call center charges. This schedule is subject to future modification by Liberty.

o. Cash in a Flash Financing Set up Fee. If you elect to apply for cash in a flash financing through Liberty, you must pay to Liberty any set up fee that Liberty imposes pursuant to Liberty’s schedule of fees. This schedule is subject to future modification by Liberty.

p.    Assessment Related to Understatement of Revenues. Pursuant to the rights and obligations specified in Section 7 of this Agreement, if Liberty determines that you are underreporting Gross Receipts, you must pay to Liberty additional royalties on the undisclosed amount. If the excess determined following a review is more than two percent (2%) of the Gross Receipts for the period in question, you must also pay the costs of the review. Additionally, if a review results from your failure to maintain and/or provide records as required in Section 7, you must pay the costs of the review, regardless of the result. The costs of any review pursuant to the terms of this Agreement shall be determined by Liberty. Liberty’s acceptance of payments of royalties or Gross Receipts reports shall be without prejudice and shall in no case constitute a waiver of Liberty’s rights to claim any delinquent royalties, or to require a review of your books of accounts and records, as provided for herein.



Liberty Franchise Agreement 7-14    1


5. OBLIGATIONS OF FRANCHISOR

a. Training. Liberty provides for new franchisees a required five (5) day or longer EOT and a required one (1) day Hands on Training (“HOT”) taught by an existing franchisee at their Liberty Tax office. Liberty does not charge for EOT or HOT but you are responsible for all expenses you incur as a result of training, such as travel, lodging and meals.

b. Operations Manual. Liberty will loan you a copy of Liberty’s Operations Manual (“Manual”) to offer guidance in the operation of your Franchised Business.

c. Site Selection. Liberty provides guidance and advice to you regarding the selection of the location of your office(s). You may not sign a lease or locate an office until Liberty approves the location of your office. Liberty’s approval of the location of a site is not a guarantee of success in that location or a warranty or assurance as to any aspect of the office or its location.

d. Advertising and Marketing. Liberty raises fees related to marketing through the advertising fees paid under Liberty’s franchise agreements. Liberty will contribute advertising fees from company offices. Liberty disburses advertising fees to develop, produce, distribute and/or conduct advertising programs, marketing programs, public relations, and marketing research. Liberty spends advertising fees on a national, regional or local basis for television, electronic, radio and print advertising as Liberty determines to be appropriate. Liberty may produce advertising in-house and/or through an advertising agency. Liberty pays all costs of such activities, including a share of corporate overhead related to advertising and marketing, with advertising fees. You may also use your own advertising material provided that Liberty first approves it for compliance.

e. Software. Liberty provides tax return preparation software.

f. Tax and Technical Support. Liberty provides reasonable telephone and/or internet support for your questions regarding federal and state individual income tax return preparation, electronic filing, and the use of software specified by Liberty. However, Liberty will not provide support on any equipment that does not meet Liberty’s then current specifications or issues related to the operating system of a computer.

g. Electronic Filing. Liberty provides the ability to file individual federal and certain individual state tax returns electronically, if such method of filing is reasonably available from the respective taxing authority. You must have a valid Electronic Filing Identification Number (“EFIN”).

h. Financial Products. If reasonably available and feasible (in Liberty’s sole determination), Liberty will offer you the ability to participate in Financial Products. If offered, your participation in Financial Products programs is subject to mutual agreement between you, Liberty and the Financial Products provider.

i. Operational Support. Liberty advises you in the budgeting for and operation of your Franchised Business.



Liberty Franchise Agreement 7-14    2


j. Advanced and Update Training and Conference Calls. Liberty provides and may require your attendance at advanced training for experienced franchisees. Liberty also provides and requires attendance by all franchisees at update training. Liberty may offer advanced and update training at various sites that Liberty selects across the country, or Liberty may offer such training through the internet or electronically. The agenda for advanced training varies, but often will focus on improving business management skills in order to increase profitability. Liberty does not charge for advanced or update training, but you are responsible for all expenses that you incur as a result of attending training, such as travel, lodging and meals. Liberty may also require that you attend a reasonable number of toll free conference calls to learn the latest operational and marketing tips. Such calls may either be attended live or through online replay.

k. Supply Source. Liberty will offer for sale or locate a source for purchasing supplies, forms and equipment that may be necessary to conduct the Franchised Business, as reasonably determined by Liberty.

l. Leasing. Liberty may make arrangements to refer you to a company that offers leasing of furniture, fixtures, signs, equipment, and possibly provides loans for franchise fees and working capital. These leasing or loan programs will be financed and administered by a third party. Liberty cannot guarantee that you will be offered leasing or loans, as the third party company will make individual determinations.

m. Financing through Liberty. Liberty may, in Liberty’s sole discretion, provide financing for a portion of the initial franchise fee or other costs associated with the Franchised Business. The terms of such financing are subject to change. You must be in compliance with this Agreement to qualify for any such financing and may be required to obtain certain certifications including, but not limited to, Affordable Care Act certification. Further, if Liberty provides financing to you, you agree to submit monthly financial information to Liberty including, but not limited to, an income statement, balance sheet, and supporting documents. You agree to provide any requested document at the time and in the format required by Liberty.

n. Group Discounts. Liberty may provide you with the opportunity to participate in group purchasing programs that offer group discounts. The discounts and terms for these opportunities will vary.

o. Area Developers. In those areas where Liberty presently or in the future uses an Area Developer, Liberty reserves the right to delegate some portion of the responsibility for certain duties to the Area Developer including, but not limited to, site selection assistance, limited marketing assistance, and operating assistance. Area Developers do not have any authority to approve advertising or marketing material of any kind.

6. OBLIGATIONS OF FRANCHISEE

a.    Training. You must attend and successfully complete Liberty’s EOT and HOT before you may operate a Liberty office. Liberty may allow or require a general manager to attend on your behalf.

b.    Use of Liberty Marks.

(i) Liberty allows you to use Liberty’s Marks. Liberty allows you to use Liberty’s Marks to hold out your Liberty Tax Service business to the public. You agree to exclusively use Liberty’s Marks as Liberty develops them for this purpose only.

(ii) You must obtain prior advertising approval. You must either use pre-approved advertising templates that Liberty or Liberty’s approved vendors provide, or you must obtain Liberty’s prior written consent before using the Marks in any way and before using any marketing or promotional material, including internet advertising.

(iii) No private website allowed. You may not have a website for your Franchised Business without Liberty’s prior written approval.

(iv) Marketing to National Companies. You must obtain written permission from Liberty before marketing on the premises (building and parking lot) of any national company. National companies include, by way of example, Wal-Mart, K-mart, and Sears.

(v) No use of “Liberty” within a company name. You may not use the word “JTH” “Dona Libertad” “Liberty,” “Libtax”, “Siempre”, “SiempreTax” or the name, or any portion of the name of our Affiliated Companies, as any part of the name of a corporation, LLC or other entity except as may be agreed between you and such company in a separate franchise agreement for that company. However, “Liberty Tax Service” followed by your entity number shall be your “doing business as” name for an entity that owns this Franchise, sometimes also called your “assumed name,” “trading as” name, or “fictitious name.”

(vi) No confusingly similar marks. You agree not to use any marks which could be confused with Liberty’s Marks.

(vii) Liberty may update or change Liberty’s Marks. Liberty may replace, modify or add to the Marks. If Liberty replaces, modifies or creates additional marks, you agree to update or replace your signs, supplies, etc., to reflect the new marks in the time frame Liberty provides and at your own expense. Liberty will not change exterior signage requirements more than once every four (4) years unless legally required.

c.    Signs. You must display an exterior lighted sign at each of your offices. Liberty must approve all signs before you order or display them.

d.    Starting Date. In a territory that did not have an existing company, franchisee or other Liberty tax preparation office in the most recent Tax Season (“Undeveloped Territory”), you agree to begin operation and be open for business no later than January 8 following the Effective Date of this Agreement and agree to be open for business no later than January 2 for each year thereafter. For a Developed Territory, you agree to begin operations and be open for business no later than January 2 following the Effective Date of this Agreement and for every year thereafter.

e.    Operating Hours. You agree to exercise your best efforts to promote the Franchised Business and agree, at a minimum, to be open for business during the hours specified in the Operations Manual.

f.    Target Volume. You must use your best efforts to promote the Franchised Business. Beginning in your fifth (5th) Tax Season and continuing in each Tax Season thereafter, you must prepare at least 1000 federal income tax returns in your Territory (“Target Volume”).

g.    Software. You must use the software that Liberty provides. You may not use, install or allow to be installed any other federal or state personal income tax return preparation or electronic filing software on any computers used in the Franchised Business, without Liberty’s prior written consent.
 
h.    Telephone Number and Email Account. You must obtain and maintain a Liberty Tax Service telephone number to be used solely to transact the Franchised Business. You may purchase a white and yellow page listing through our approved vendor and may be required to purchase a yellow page advertisement and/or contribute to a group listing or advertisement per Liberty’s recommendations. You also must provide and maintain an email account sufficient for communications between you and Liberty.

i.Equipment. You must obtain and use a computer system that meets Liberty’s current specifications and any modifications to these specifications. All work stations must be purchased from Liberty’s approved vendor including, but not limited to, tax return preparation and processing computers. Liberty may update the specifications. When the specifications are updated, you must update or upgrade the computer system, at your sole cost. Specifications will not be updated during a Tax Season except upon an emergency, as reasonably determined by Liberty.     

j.    Insurance. During the term of this Agreement, you must procure and maintain an insurance policy or policies with at least the following coverage or such other coverage as may be specified in the Operations Manual: (i) comprehensive general liability of $1 million per office and (ii) worker’s compensation as required by your state law. You must name Liberty as an additional insured on these policies.

k.    Electronic Filing. If Liberty provides or recommends a source for electronically filing tax returns, you are required to offer electronic filing and to use this source exclusively for all electronic filing.

l.    Financial Products. In the event that Liberty negotiates an agreement with a third party Provider to allow you to offer Financial Products, you are required to exclusively use such Providers as Liberty designates and to offer Financial Products to your customers.

m.    Operations Manual. You acknowledge the importance of consistency of quality, service and operation among all Liberty Tax franchised offices and, therefore, agree to operate the Franchised Business in conformity with all standards to be maintained, techniques and operating procedures that Liberty may prescribe in Liberty’s manuals or otherwise in writing, and to refrain from deviating therefrom without Liberty’s prior written consent. Liberty will loan you a copy of the Manual and provide you with other relevant manuals. Liberty may modify the Manual or any other manual, in order to adjust for competitive changes, technological advancements, legal requirements and attempts to improve in the marketplace. You agree to operate the Franchised Business according to the manuals and any modifications including, but not limited to, the Manual, as may be updated or supplemented by memoranda, bulletin, email or other similar mechanism that together with the Manual, contain the mandatory and suggested procedures and specifications that are prescribed for the Franchised Business.

n.    Participation. You agree that the services of the Franchised Business will be provided under your direct supervision and control and/or under the direct supervision and control of a full-time general manager who has been approved by, and not later disapproved by Liberty. Liberty will not approve a general manager prior to their successful completion of EOT.

o.    Return Check. You must prepare each income tax return accurately and in accordance with federal, state and local laws. You must check each return thoroughly.

p.    Tax School. If you complete EOT before September 1 of the year of the Effective Date of this Agreement, and during every year after your first Tax Season regardless of EOT, you must conduct an intensive 6 to 10 week tax course in the period of September through December in accordance with the specifications in the Manual. Additionally, you must conduct a one-week tax course during every January, including the January of your first (1st) Tax Season, in accordance with the specifications in the Manual.

q.    Employee Training. You shall conduct and require each of your employees to attend an employee policy and procedure training course as specified by Liberty. You are solely responsible for hiring, firing, compensating, paying applicable payroll taxes and day to day supervision and control over your employees.

r. Customer Service. You shall employ and train sufficient personnel to accommodate all customers without undue delay. You shall provide all services and abide by all customer service policies described in the Manual, including, but not limited to, the money back guarantee. You must operate in a manner that protects Liberty’s goodwill, reputation and Marks.

s.    Office Condition. You shall maintain offices that are neat and professional in appearance. Further, you may not offer products or services through your Liberty offices other than the franchise services authorized here (i.e., tax preparation, electronic filing, and Financial Products, all processed and reported through Liberty’s systems) without Liberty’s prior written approval.

t.    Supplies and Furniture. You agree that in order to establish a standard and consistent delivery of Liberty Tax services, certain items must be used in the operation of the Franchised Business. You must use the items required in the Manual (e.g. client envelopes and folders, interview worksheets, interior signs sets). You are responsible for the cost of all items needed to conduct the Franchised Business including, but not limited to, supplies, furniture, equipment, leasing and real estate costs.

u.    Laws and Regulations. You agree to comply with all federal, state and local laws, regulations, ordinances and the like. You will abide by all legal requirements and be solely responsible for securing any necessary permits, certificates, licenses and consents to operate your business.

v. Audits. If the IRS or any governmental agency audits or investigates your Liberty Tax operations, or otherwise requires that you provide documents to the IRS related to the Franchised Business, you agree to notify Liberty promptly upon receiving notice of the audit, investigation or request for documents. You agree to promptly provide Liberty with the findings of any audit or investigation.

w. EFIN. You must obtain by January 2 of your first Tax Season and maintain throughout the entire term of this Agreement, an EFIN from the IRS. You agree to comply with all of the requirements of IRS Publication 3112 or any applicable successor publication relevant to EFINs. You hereby authorize the IRS and any state tax authority to disclose to Liberty the reasons for any EFIN denial or suspension and to provide Liberty with copies of all EFIN application materials, suspension and denial notices.

x.    Site Selection and Leases.    As described in Section 5(c), Liberty provides guidance to you regarding the selection of the location of your office and all office locations must be approved by Liberty prior to your execution of a lease for that site. You are required to attempt to ensure that any lease entered into for an approved location contains a provision that the lessor consents to an assignment of the lease to Liberty with the right to sublease at Liberty’s option. You agree to provide Liberty with a copy of the lease for each approved location within seven (7) days of execution.


7. REPORTS AND REVIEW

a.    Gross Receipt Report. You must send Liberty a Gross Receipt report in the manner and form and at the times Liberty specifies. Presently, you must report your Gross Receipts on the fifth (5th) of the month for Gross Receipts received during the prior month.
    
b.    Profit and Loss. By May 30 of each year, you must send Liberty an unaudited profit and loss statement of the Franchised Business, in the manner and form Liberty specifies, for the twelve (12) month period ending April 30.

c.    Review. You agree to permit Liberty and/or Liberty’s agents the right to enter your Liberty Tax offices during normal business hours, without prior notice, and inspect your operations and inspect and copy all of your paper and electronic business records related to the Franchised Business and any other operations taking place at your Franchised Business. This includes, but is not limited to, the right to inspect and copy all tax returns and bank statements that may be indicative of revenues from the Franchised Business. Liberty also has the right to require that you implement a plan to resolve issues that Liberty discovers. You agree to comply with any such plan imposed.

d.    Mail Reviews. If Liberty requests a copy of your customer receipts (paper and/or electronic) or any other business records, including, but not limited to customer taxpayer records related to the Franchised Business, you must send Liberty these records at your expense within five (5) days of receiving Liberty’s request.

e.    Electronic Review. Liberty may cause programs to run on your computer systems that may send information to Liberty. Liberty agrees that the use of such programs will not unreasonably interfere with your operation of the Franchised Business and you agree to allow such programs to run without interference by you. You hereby grant Liberty the right to access the computer systems in your office and authorize Liberty to obtain any and all information related to the Franchised Business. You acknowledge that Liberty will use information obtained from your computer system to make business decisions.

f.    Costs of Review. Depending on the circumstances, you may be responsible for the costs of a review as more fully set forth in Section 4(p).

g. Background Information. During the term of this Agreement, you authorize Liberty to obtain background information related to your employment, credit and financial history, as well as your criminal and driving records.
    
8. TERMINATION

a.    Nonrenewal. You may terminate this Agreement by not renewing; that is by not notifying Liberty in writing of your desire to renew at least one hundred eighty (180) days prior to the expiration of this Agreement. If you terminate pursuant to this Section, you must still comply with all of the post-termination provisions of this Agreement.

b.    Termination Without Notice and Opportunity to Cure. Liberty may terminate this Agreement without notice and the opportunity to cure for any of the following reasons:

(i)    If you become insolvent, are unable to pay debts as they come due or take any steps to seek protection from creditors, or if a receiver (permanent or temporary) is appointed by a creditor or a court of competent authority, or if you make a general assignment for the benefit of creditors;

(ii)    If a final judgment of record against you or your Franchised Business remains unsatisfied for thirty (30) days or longer;

(iii)    If we determine that you, or someone acting under your supervision and control, has committed a material violation of any law, ordinance, rule or regulation of a governmental agency or department reasonably associated with the operation of the Franchised Business;

(iv)    If you abandon the Franchised Business or discontinue the active operation of the Franchised Business for three (3) business days during any Tax Season or seven (7) business days otherwise, except where active operation was not reasonably possible;

(v)    If you fail to open for business in the Territory by January 2 or January 8 of any year, as specified pursuant to Section 6(d);

(vi)    If you operate any offices or advertise outside the Territory without Liberty’s permission;

(vii)    If you fail to meet the Target Volume specified in Section 6(f) above in the Territory during your fifth Tax Season or in any Tax Season thereafter;

(viii)    If you fail to use the software, electronic filing services or Financial Products Liberty provides or recommends;

(ix)    If you do not obtain an EFIN from the IRS for each office in the Territory by January 2 of your first Tax Season or if any such EFINs are suspended for any reason at any time thereafter;

(x)    If you include a materially false representation or omission of fact in your Confidential Franchise Application to Liberty or if you under-report Gross Receipts, falsify financial data, make a false submission with regard to any required reports or otherwise commit an act of fraud with respect to your acquisition or operation of the Franchised Business or your rights or obligations under this Agreement;

(xi)    If you commit three (3) or more breaches of this Agreement, the Operations Manual, or any other agreement (including promissory notes) with Liberty, in any twelve (12) month period regardless of whether such breaches were cured after notice; or

(xii)    If you fail to timely execute all documents necessary for renewal.

c.    Termination with Notice and Opportunity to Cure. No fewer than seven (7) days after Liberty has sent you notice of your opportunity to cure, Liberty may terminate this Agreement if:

(i)
You violate any term or condition of this Agreement, the Operations Manual, or any other agreement with Liberty or Liberty’s Affiliated Companies;

(ii)
Any amount owing to Liberty or Liberty’s Affiliated Companies, whether related to the Territory or not, is more than thirty (30) days past due;

(iii)
You fail to comply with IRS standards applicable to e-file providers as stated in IRS Publication 1345 or another or successor IRS publication applicable to e-file providers; or

(iv)
You are more than sixty (60) days in default of any loan, lease or sublease agreement with a third party, affecting the Franchised Business.

9. POST-TERMINATION OBLIGATIONS

Upon expiration, termination, transfer or nonrenewal of this Agreement for any reason by any party, including a sale of the Franchised Business, you must immediately:

a.
Sell to Liberty (if Liberty elects pursuant to Section 11) any or all equipment, signs, trade fixtures, and furnishings used in the Franchised Business, or if Liberty does not so elect, remove all Marks or other distinguishing indicia from all of your offices and other premises; and

b.
Stop identifying yourself as a Liberty Tax franchisee, never hold out as a former Liberty Tax franchisee and forever cease the use of any of the Marks or any other marks that may be confused with the Marks; and

c.
Stop using all literature and forms received from Liberty and other items bearing the Marks; and

d.
Pay to Liberty all amounts owing to Liberty, whether related to the Territory or not; and

e.
Transfer to Liberty all telephone numbers, listings and advertisements used in relation to the Franchised Business and deliver to Liberty copies of such documents of transfer; and

f.
Assign to Liberty (if Liberty elects), and upon lessor’s consent, any interest that you have in any lease, sublease or any other agreement related to the Franchised Business; and

g.
Deliver to Liberty any original and all copies, including electronic copies and media, of lists and other sources of information containing the names, addresses, e-mail addresses, or phone numbers of customers of the Franchised Business; and

h.
Deliver to Liberty any original and all copies, including electronic copies and media, containing customer tax returns, files, and records; and

i.
Deliver to Liberty the copy of the Manual and any updates which Liberty loaned to you; and

j.
Cancel all fictitious name listings which you have filed that utilize any of the Marks; and

k.
Adhere to all applicable provisions contained herein including, but not limited to, the post-term covenants not to compete and not to solicit.

10. ADDITIONAL IN-TERM AND POST-TERM COVENANTS
    
a.    In-Term Covenant Not to Compete. During the term of this Agreement, you agree not to directly or indirectly, for a fee or charge, in the United States or Canada, prepare or electronically file income tax returns, or offer Financial Products, except in your capacity as a Liberty Tax Service franchisee using the Liberty Tax Service system to offer such products and services.

b.    Post-Term Covenant Not to Compete. For a period of two (2) years following the termination, expiration, transfer or other disposition of the Franchised Business, or your removal as a Signator to this Agreement, you agree not to directly or indirectly, for a fee or charge, prepare or electronically file income tax returns, or offer Financial Products, within the Territory or within twenty-five (25) miles of the boundaries of the Territory.
    
c.    Liquidated Monetary Damages. If you fail to comply with either of the above covenants not to compete, you agree to pay Liberty, as partial liquidated monetary damages, royalties and advertising fees as set forth in Section 4 of this Agreement against the greater of: (1) the total Gross Receipts during your last fiscal year (May 1- April 30) of operation for each Territory in which you are in breach; or (2) the total revenue you received in breach of a covenant not to compete. The greater of these two dollar figures shall be multiplied by two (2) to give consideration to lost, repeat, and referral business to Liberty. You acknowledge that any breach of the covenants not to compete causes damage to the integrity of Liberty’s franchised system, loss of franchisee and customer goodwill and irreparable harm. You specifically acknowledge that the full measure of these damages is greater than that specified herein.

d. Covenant Not to Solicit. For a period of two (2) years following the termination, expiration, transfer or other disposition of the Franchised Business, or your removal as a Signator to this Agreement, you agree that you will not, within the Territory or within twenty-five (25) miles of the boundaries of the Territory, directly or indirectly solicit any person or entity served by any of your prior Liberty offices within the last twelve (12) months that were a Liberty franchisee, for the purpose of offering such person or entity, for a fee or charge, income tax preparation, electronic filing of tax returns, or Financial Products. You further agree for a period of two (2) years following the termination, expiration, transfer or other disposition of the Franchised Business, or your removal as a Signator to this Agreement, not to employ or solicit for employment without Liberty’s prior written consent any of Liberty’s employees or those of any other of Liberty’s franchisees, or induce any such employee to leave his or her employ.

e. Covenant Not to Lease. You agree that during the term of this Agreement, you will not lease, sub-lease, assign or guaranty a lease in the Territory to or for a person or entity who will offer income tax preparation at such an office. You also agree that upon the termination or expiration of this Agreement, if Liberty or a duly authorized Liberty franchisee desires to use any of your former Liberty office locations in the Territory, you will use reasonable good faith efforts to help Liberty secure possession of the office locations through a lease assignment or otherwise. Otherwise, you agree to use reasonable, good faith efforts to ensure that, for a twenty-four (24) month period after non-renewal or termination of this Agreement, no person or entity will offer income tax preparation at the properties where your former Liberty offices were located. Good faith efforts include a duty not to sub-lease or assign the leases of your office location to a person or entity who will offer income tax preparation at such office locations.

f. No Harmful Acts. You agree not to disparage Liberty or its current and former employees or directors. During the term of this Agreement, you also agree not to do any act that is, in Liberty’s determination, harmful, prejudicial or injurious to Liberty.
    
g.    Section 10 Conditions Required for Grant of Franchise. You hereby acknowledge that the qualifications to be a Liberty franchisee are special, unique and extraordinary, and that Liberty would not enter into this Agreement without the inclusion of the conditions set forth in Section 10.
 
h. Waivers. You acknowledge and agree that the provisions of Section 10 are reasonable, valid and not contrary to the public interest. You waive all defenses to the strict enforcement of Section 10. You further agree that Liberty is entitled to a temporary restraining order, preliminary and/or permanent injunction for any breach of duties under any of the non-monetary obligations of Sections 9 and 10. You hereby waive any requirement that Liberty post a bond related to any temporary restraining order or injunctions requested as a result of an alleged violation of Sections 9 and 10.

i.    Survival. The covenants contained in Section 10 shall survive any termination or expiration of this Agreement.

j. Severability. If any covenant or provision within Section 10 is determined to be void or unenforceable, in whole or in part, it shall be deemed severed and removed from this Agreement and shall not affect or impair the validity of any other covenant or provision of this Agreement. Further, these obligations are considered independent of any other provision in this Agreement, and the existence of any claim or cause of action by either party to this Agreement against the other, whether based upon this Agreement or otherwise, shall not constitute a defense to the enforcement of these obligations.

11. OPTION TO PURCHASE ASSETS

Upon termination or expiration of this Agreement, you hereby grant Liberty or its assignee the option to purchase from you some or all of the assets (including, but not limited to, supplies, equipment, signs, furnishings and fixtures) of the Franchised Business. Liberty may exercise this option by transmitting notice to you within thirty (30) days from the effective date of expiration or termination. If Liberty elects to exercise this option, the purchase price for the assets of the Franchised Business, will be the “adjusted book value” as described below. Liberty will have the right to set off and reduce the purchase price by any and all amounts owed by you to Liberty or any of Liberty’s affiliates. The “adjusted book value” is the book value of the assets of the Franchised Business as listed on the balance sheet in the financial statements of the Franchised Business as of the date of the termination or expiration. There shall be no allocation for goodwill or any similar adjustment in the adjusted book value.

12. CONFIDENTIAL INFORMATION

a.    Disclosure.    Liberty possesses confidential information including, but not limited to, methods of operation, service and other methods, techniques, formats, specifications, procedures, information, systems, knowledge of and experience in operating and franchising offices, customer information and marketing information (“Confidential Information”). Liberty may disclose some or all of the Confidential Information to you and your representatives while you operate the Franchised Business. During the term of this Agreement and following the expiration or termination of this Agreement, you covenant not to directly or indirectly communicate, divulge, or use any Confidential Information for your personal benefit or the benefit of any other person or legal entity except as specifically provided by the terms of this Agreement or permitted by Liberty in writing prior to disclosure. Upon the transfer, expiration, termination or nonrenewal of this Agreement, you agree that you will never use or disclose, and will not permit any of your representatives to use or disclose, Liberty’s Confidential Information in any manner whatsoever, including, without limitation, in the design, development or operation of any business substantially similar to the Franchised Business. This provision shall not apply to information that: (i) at the time of disclosure is readily available to the public; (ii) after disclosure becomes readily available to the trade or public other than through breach of this Agreement; (iii) is subsequently lawfully and in good faith obtained by you from an independent third party without breach of this Agreement; (iv) was in your possession prior to the date of our disclosure to you; or (v) is disclosed to others in accordance with the terms of a prior written authorization between you and Liberty. The protections granted in this Section shall be in addition to all other protections for Confidential Information provided by law or equity.

b.    Interest. You will acquire no interest in Liberty’s Confidential Information, but are provided the right to use Confidential Information disclosed to you for the purposes of developing and operating the Franchised Business pursuant to this Agreement. You acknowledge that it would be an unfair method of competition to use or duplicate any Confidential Information other than in connection with the operation of the Franchised Business. No part of the Liberty Tax franchise system nor any document or exhibit forming any part thereof shall be distributed, utilized or reproduced in any form or by any means, without Liberty’s prior written consent.

c.    Use.    You agree that you will: (i) refrain from using Confidential Information for any purpose other than the operation of the Franchised Business pursuant to this Agreement; (ii) maintain absolute confidentiality of Confidential Information during and after the term of this Agreement; (iii) not make unauthorized copies of any portion of Confidential Information; and (iv) adopt and implement all reasonable procedures, including, but not limited to, those required by Liberty, to prevent unauthorized use of or disclosure of Confidential Information, including, but not limited to, restrictions on disclosure to your employees and the use of nondisclosure and non-competition clauses in employment agreements with employees that have access to Confidential Information.

13. INDEPENDENT CONTRACTOR

You and Liberty are independent contractors to each other. Neither you nor Liberty are an agent, fiduciary, partner, employee, or a participant in a joint venture and neither you nor Liberty have the authority to hold out as such to third parties. You do not have any authority to bind or obligate Liberty. Liberty is not and will not be liable for any act, omission, debt, or other obligation of yours.

You are responsible for all claims, demands, losses, damages and/or contractual liability to third parties which may arise at any time related to your operation of the Franchised Business. You agree to defend, indemnify and hold Liberty and its employees harmless from all claims, demands, losses, damages, and/or contractual liability to third parties.

14. DEATH OR INCAPACITY

a.    Assistance and Reimbursement. In the event of the death or incapacity of Franchisee, Liberty is entitled, but not required, to render assistance to maintain smooth and continued operation of the Franchised Business. Liberty shall be entitled to reimbursement from Franchisee or Franchisee's estate for reasonable expenditures incurred.

b. Time Requirements. Pursuant to this Section, death or incapacity shall not be grounds for termination of this Agreement unless:

i)
Franchisee or his/her legal representative fails for a period of one hundred eighty (180) days after such death or incapacity to commence action to assign this Agreement according to controlling state law regarding the affairs of a deceased or incapacitated person and the terms of this Agreement; or

ii)
Such assignment is not completed within one (1) year after death or incapacity.

c. Termination. Liberty shall have the right to terminate this Agreement if one of the conditions listed in 14(b) are not satisfied within the time frame provided. Nothing in this Section shall be construed to limit the provisions of Section 8 regarding termination. Further, the terms and conditions of Section 15 apply to a transfer upon death or incapacity.

15. ASSIGNABILITY AND FIRST RIGHT OF REFUSAL

a.    Assignability Generally. Liberty may assign this Agreement to an assignee who agrees to remain bound by its terms. Liberty does not permit a sub-license of the Franchise. Your interest under this Agreement or your ownership in the Franchise may be transferred or assigned only if you comply with the provisions in this Section. No interest may be transferred unless you are in full compliance with this Agreement and current in all monies owed to Liberty. Pursuant to Liberty’s request, any transfer of an ownership interest in this Agreement must be joined by all signatories to this Agreement, except in the case of death or legal disability.

b. First Right of Refusal. If you have received and desire to accept a signed, bona fide offer to purchase or otherwise transfer the Franchise or any interest in the Franchise, Liberty shall have the option ("Right of First Refusal") to purchase the Franchise or interest. You shall offer the Right of First Refusal by providing written notice to Liberty and including a copy of the signed offer to purchase that you received (collectively “Notice”). Liberty shall have the right to purchase the Franchise or interest in the Franchise for the price and upon the terms set out in the Notice; however, Liberty may substitute cash for any non-cash form of payment proposed and Liberty shall have sixty (60) days after the exercise of Liberty’s Right of First Refusal to close the purchase. Liberty will notify you in writing within fifteen (15) days of receipt of the Notice if it plans to exercise the Right of First Refusal. Upon the transmission of notice by Liberty that it plans to exercise the Right of First Refusal, there shall immediately arise between Liberty and Franchisee, or its owners, a binding contract of purchase and sale at the price and terms contained in the Notice previously provided by you.

c. Transfer to Controlled Entity. A transfer to a "Controlled Entity" shall not trigger the Right of First Refusal. A "Controlled Entity" is an entity in which Franchisee is the beneficial owner of 100% of each class of voting ownership interest. At the time of the desired transfer of interest to a Controlled Entity, you must notify Liberty in writing of the name of the Controlled Entity and the name and address of each officer, director, shareholder, member, partner, or similar person and their respective ownership interest. Each such person of the Controlled Entity shall sign the amendment and release forms and/or franchise agreement as required by Liberty at the time of transfer. Currently, Liberty does not charge a transfer fee for this type of transaction. Upon transfer, a new EFIN must be obtained pursuant to Section 6(w) herein.

d. Transfer of Interest Within Franchisee. A transfer of interest within a Franchisee that is an entity shall not trigger the Right of First Refusal provided that only the percentage ownership is changing and not the identity of the owners. At the time of the desired transfer of interest within an entity, you must notify Liberty in writing of the name and address of each officer, director, shareholder, member, partner or similar person and their respective ownership interest prior to and following the proposed transfer. Each such person of the Controlled Entity shall sign the amendment and release forms and/or franchise agreement as required by Liberty at the time of transfer. Further, if the transfer of interest results in a majority ownership change, you must pay to Liberty the transfer fee required at the time of transfer.

e. Right of First Refusal Not Exercised By Liberty. If Liberty does not exercise the Right of First Refusal, you may transfer the Franchise or ownership interest therein according to the terms set forth in the Notice, provided that you satisfy the conditions of Sections 15(f) below and complete the sale within ninety (90) days from the date that Liberty received Notice from you. If you do not conclude the proposed sale transaction within this ninety (90) day period, Liberty’s Right of First Refusal shall continue in full force and effect.

f. Additional Requirements and Restrictions Regarding Transfers.

i)
The proposed transferee(s) must complete Liberty’s franchise application and pass Liberty’s application screening in place at the time of transfer;

ii)
The proposed transferee(s) must sign the Liberty amendment forms and/or the then current franchise agreement and must personally assume and be bound by all of the terms, covenants and conditions therein;

iii)
The proposed transferee(s) must attend and successfully complete EOT and HOT;

iv)
You shall sign the transfer and release forms required by Liberty at the time of transfer and pay the transfer fee described in Section 4(i) of this Agreement; and

v)
Except as to approved transfers within the Liberty system as described in this Section, you may not give, transfer or sell all or substantially all of the assets of your Franchised Business during the term of this Agreement, or for a two (2) year period after its expiration or termination, to a person or entity who might be reasonably expected to use any such assets to offer income tax preparation in the Territory or within ten (10) miles of the boundaries of the Territory.

g.    Writing Required. No amendment, change, or modification of this Agreement and no waiver of any right under this Agreement will be effective unless in a written document that is signed by an authorized representative of Liberty.

16. NON-WAIVER OF BREACH
    
The failure of either party hereto to enforce any of the terms or conditions of this Agreement shall not be deemed a waiver of such terms or conditions or of either party's rights thereafter to enforce each and every term and condition of this Agreement.

17. GOVERNING LAW

a.    Virginia Law. This Agreement is effective upon its acceptance in Virginia by Liberty’s authorized officer. Virginia law governs all claims that in any way relate to or arise out of this Agreement or any of the dealings of the parties hereto. However, the Virginia Retail Franchising Act does not apply to any claims by or on your behalf if the Territory shown on Schedule A is outside of Virginia.

b.    Jurisdiction and Venue. In any suit brought by Liberty that in any way relates to or arises out of this Agreement or any of the dealings of the parties hereto, you consent to venue and personal jurisdiction in the state and federal court of the city or county of Liberty’s National Office (presently Virginia Beach, Virginia state courts and the United States District Court in Norfolk, Virginia). In any suit brought against Liberty, including Liberty’s present or former employees or agents, that in any way relates to or arises out of this Agreement or any of the dealings of the parties hereto, venue shall be proper only in the federal court district and division located nearest Liberty’s National Office (presently the U.S. District Court in Norfolk, Virginia), or if neither federal subject matter nor diversity jurisdiction exists, in the city or county state court where Liberty’s National Office is located (presently the City of Virginia Beach, Virginia).

c.    Jury Waiver. In any trial between any of the parties hereto, including present or former employees or agents of Liberty, that in any way relates to or arises out of this Agreement or any of the dealings of the parties hereto, you and Liberty agree to waive the rights to a jury trial and instead have such action tried by a judge.

d.    Class Action Waiver. You agree that any claim you may have against Liberty, including Liberty’s past or present employees or agents, shall be brought individually and you shall not join such claim with claims of any other person or entity or bring, join or participate in a class action against Liberty.

e.    No Punitive Damages. In any lawsuit, dispute or claim between or against any of the parties hereto, including present or former agents or employees of Liberty’s, that in any way relates to or arises out of this Agreement or any of the dealings of the parties hereto, you and Liberty agree to waive the rights, if any, to seek or recover punitive damages.

f. Area Developers. If your Territory is or becomes located in an Area Developer area, you agree not to bring any claim, including a lawsuit, against the Area Developer, or its owners, employees or independent contractors, except as to a claim unrelated to the Liberty franchise, such as an automobile accident. Area Developers are a third party beneficiary of this clause. Further, you agree that if you breach this clause, you will pay to Liberty and/or the Area Developer all attorney fees and other costs that Liberty and the Area Developer incur to defend the Area Developer in such an action, regardless of who prevails.

g. Survival. Any provisions of this Agreement that by their nature extend beyond the expiration or termination of this Agreement, shall survive termination or expiration of this Agreement and be fully binding and enforceable as though termination or expiration had not occurred.

18. MODIFICATION

No modifications to this Agreement will have any effect unless such modification is in writing and signed by you and by Liberty’s authorized officer. However, Liberty may modify the provisions of the Operations Manual without your consent.

19. RELEASE OF PRIOR CLAIMS

By executing this Agreement, the undersigned entity, if any, and individuals, on behalf of yourselves and your heirs, legal representatives, successors and assigns, and each assignee of this Agreement, hereby forever release and discharge Liberty, its past and present employees, agents, area developers, officers and directors, including Liberty's parent, subsidiary and affiliated corporations, their respective past and present employees, agents, officers and directors, from any and all claims relating to or arising out of any franchise agreement between the parties executed prior to the date of this Agreement, and all other claims relating to any dealings between any of the parties. However, this release does not apply to Liberty’s renewal obligations the same or similar to those in Section 2(b) above, as contained in any prior or other franchise agreement.

20. NOTICES

You shall give any notice or request hereunder by mail or courier, postage fully prepaid, delivered personally to Liberty’s CEO at Liberty’s National Office, presently 1716 Corporate Landing Parkway, Virginia Beach, Virginia, 23454, Telephone: (757) 493-8855. Liberty may also give any such notice to you in the same manner at the address indicated below the Franchisee’s signature on this Agreement, or such other more current address as Liberty may have for you. Liberty may also give notice to you by e-mail.

21. FULL UNDERSTANDING

This Agreement is the entire agreement between you and Liberty. This Agreement supersedes all other prior oral and written agreements and understandings between you and Liberty with respect to the subject matter herein. Nothing in this or in any related agreement, however, is intended to disclaim the representations Liberty made in the Franchise Disclosure Document Liberty furnished to you.


22. ACKNOWLEDGMENTS

You acknowledge that you have read Liberty’s franchise disclosure document and this Agreement and that you are familiar with their contents. You acknowledge that you have independently investigated the business offered hereunder and base your decision to purchase solely on such investigation. Except as may be stated in Item 19 of Liberty’s Franchise Disclosure Document, you acknowledge that no person is authorized to make and no person has made any representations to you as to the actual, projected or potential sales, volumes, revenues, profits or success of any Liberty Tax franchise. You further acknowledge and agree that you are not a third party beneficiary to any agreement between Liberty and any other franchisee.

23. SEVERABILITY

If any covenant or provision within this Agreement is determined to be void or unenforceable, in whole or in part, it shall be deemed severed and removed from this Agreement and shall not effect or impair the validity of any other covenant or provision of this Agreement and no covenant or provision of this Agreement shall be deemed to be dependent upon any other unless specifically expressed herein.

24. COUNTERPARTS AND ELECTRONIC SIGNATURE
        
This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or in electronic (e.g. “pdf”) format shall be effective as delivery of a manually executed counterpart of this Franchise Agreement. The words “execution,” “signed,” “signature,” and words of similar import in the Franchise Agreement shall be deemed to include electronic or digital signatures or the keeping of records in electronic form, each of which shall be of the same effect, validity and enforceability as manually executed signatures or a paper-based recordkeeping system, as the case may be, to the extent and as provided for under applicable law, including the Electronic Signatures in Global and National Commerce Act of 2000 (15 USC § 7001 et seq.) or any other similar state or federal laws.

25. HEADINGS

The headings of the various sections of this Agreement have been inserted for reference only and shall not be deemed to have any legal effect or meaning.



Liberty Franchise Agreement 7-14    3


26. GUARANTY

The Franchisee named at the top of the following page agrees to abide by the terms of this Agreement. The signature of an individual or individuals constitutes their personal agreement to such terms. The signature of an individual or individuals on behalf of an entity constitutes the entity’s agreement to such terms.

In addition, the Franchisee signatures of all individuals on this Agreement, in any capacity, also constitute their personal joint and several agreement to perform all the obligations in and relating to this Agreement, including, but not limited to, the obligations stated in Section 17 above concerning governing law, including but not limited to, the application of Virginia law, the jurisdiction and venue clause, the jury waiver, the class action waiver, and the limitation to compensatory damages only, the obligation to make payments specified herein, pay any other promissory notes and other debts due to Liberty, and pay for products later ordered from Liberty. All Signators waive any right to presentment, demand or notice of non-performance and the right to require Liberty to proceed against the other Signators.





Liberty Franchise Agreement 7-14    4


Franchisee:__________________________________________    Entity Number:______________

SIGNATORS:

By:                                By:                        
(Signature)                            (Signature)

                                                        
(Printed Name)                        (Printed Name)

Title:                                Title:                        

Address:                            Address:                    

                                                        

Ownership Percentage:_____%             Ownership Percentage:_____%


By:                                By:                        
(Signature)                        (Signature)

                                                        
(Printed Name)                        (Printed Name)

Title:                                Title:                        

Address:                            Address:                    

                                                        


Ownership Percentage:_____%            Ownership Percentage:_____%


                    JTH TAX, INC. d/b/a
LIBERTY TAX SERVICE

By:__________________________
                            
Printed Name: _________________

Title: ________________________

Effective Date:_________________


Liberty Franchise Agreement 7-14    5


SCHEDULE "A" TO THE FRANCHISE AGREEMENT
        
Territory

The Franchise Territory* is as follows:
































*Note:
When a Territory description includes a road, avenue, street, parkway, highway, route or similar roadway, the Territory includes the U.S. Postal addresses assigned to either side of the roadway. When a Territory description excludes a road, avenue, street, parkway, highway, route or similar roadway, the Territory excludes the U.S. Postal addresses assigned to either side of such roadway. If a map of the Territory is attached, the map approximates the Territory, but the above legal description controls as to the Territory's precise boundaries.

A-1
Liberty Franchise Agreement 7-14


SCHEDULE “B-1” TO THE FRANCHISE AGREEMENT

Special Stipulation- Grandfathered Client Exclusion     Entity:_________

To the extent of any conflict between the following and the provisions of the Franchise Agreement, the following Special Stipulation shall control:

You elect to pay Liberty a one-time fee of $5.00 per tax preparation client currently served by your tax preparation practice and thereby exclude from Gross Receipts the income received from such clients for tax preparation only. You shall furnish to Liberty at the time of the closing of this transaction a list in a form satisfactory to Liberty of the names and social security numbers of these pre-existing clients.

These grandfathered clients will be counted for purposes of determining Target Volume.

It is further understood that the In-Term and Post-Term Covenants Not to Compete found in Sections 10(a) and 10(b) of this Agreement shall not apply to tax preparation work for clients covered by this stipulation.

This Special Stipulation, the accompanying one-time fee and list of pre-existing clients, as referenced above, must be fully and completely provided at the time of the closing of this transaction and will not be accepted thereafter.

This Special Stipulation may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts shall constitute one and the same instrument.

Except to the extent modified above, the terms of the Franchise Agreement remain in full force and effect.







FRANCHISEE:                     JTH TAX, INC. d/b/a
LIBERTY TAX SERVICE

By:__________________________            By:__________________________
                            
Printed Name: _________________
By: _________________________
Title: ________________________

Effective Date:_________________

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Liberty Franchise Agreement 7-14



SCHEDULE “B-2” TO THE FRANCHISE AGREEMENT
 
Special Stipulation- Multiple Territories        Entity:_________

To the extent of any conflict between the following and the provisions of the Franchise Agreement, the Special Stipulation shall control:

1. Opening Schedule.     You are acquiring multiple Territories from Liberty and you and we have agreed that you shall open tax preparation offices in these Territories pursuant to the following schedule:

Number of Territories in Which
Calendar Year Tax Season         to Initially Open an Office        
2015
2016
2017
        
You agree that for Liberty’s consideration in allowing the schedule set forth above, Liberty may keep as non-refundable any and all security deposits and franchise fees you may have paid to Liberty at any time. If you and Liberty do not subsequently agree which territories will open in each of the years specified above, and you subsequently are in breach of this Agreement or another franchise agreement as to duties related to the set up and opening of the territory or territories in question, Liberty may issue a notice to cure and/or terminate any of the territory(ies) up to the amount of territories that were to open that year. For example, if you are to open one (1) territory in a given year out of three (3) territories that you purchase, and you and Liberty do not subsequently agree as to which of the three (3) territories shall open in that year, and you fail to open any office in a timely fashion for that year, Liberty may terminate any one (1) of your franchise agreements of Liberty’s choosing. If you and Liberty subsequently agree which territories will open in a given year, and you breach your duties to set up and open that or those territory(ies), Liberty may serve a notice to cure and/or terminate your franchise agreement as to the unopened territory(ies) only. Liberty may allow changes to this opening schedule, but is under no duty to do so. Liberty requires a change fee of $3,500 per change. If any of your territory(ies) are terminated or otherwise sold during the years listed above under Calendar Year Tax Season, that decrease in the number of territories shall reduce your obligation to open an office by the last Calendar Year Tax Season listed unless otherwise approved by Liberty.

2. Royalties and Advertising Fees. You shall pay royalties and advertising fees according to the schedule in the applicable Franchise Agreement. However, the age of each of your territories will be deemed to commence from the first (1st) Tax Season during which you have agreed to initially open an office in that territory pursuant to this Stipulation (unless you open an office sooner, then that date will control). For example, for a Territory in which you are to first open an office for the second (2nd) Tax Season following the Effective Date of this Agreement, such Tax Season will be deemed the first year of that Territory for purposes of royalties and advertising fees. This provision shall not apply to purchases of developed/active/operating territories.


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Liberty Franchise Agreement 7-14


3. Target Volume. The age of each of your territories for the purposes of achieving the required Target Volume set forth in the related franchise agreement shall be calculated in the same manner as set forth in Section 2 of this Stipulation.

4. Counterparts. This Special Stipulation may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts shall constitute one and the same instrument.

Except to the extent modified above, the terms of the Franchise Agreement remain in full force and effect.


FRANCHISEE:                     JTH TAX, INC. d/b/a
LIBERTY TAX SERVICE

By:__________________________            By:__________________________
                            
Printed Name: _________________
By: _________________________
Title: ________________________

Effective Date:_________________


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Liberty Franchise Agreement 7-14



SCHEDULE “B-3” TO THE FRANCHISE AGREEMENT


Special Stipulation – Rent to Own        Entity: _____

To the extent of any conflict between the following and the provisions of the Franchise Agreement, the following Special Stipulation shall control:

1.
You agree to operate the territory (“Rental Territory”) described below for the tax season January 2, 2015 - April 15, 2015 (“2015 Calendar Year Tax Season”). This Rental Territory shall be deemed part of your existing franchise agreement and not a new franchise. If you own multiple territories, Liberty will deem and select which franchise agreement this Special Stipulation will relate to unless it is clearly specified otherwise. Except as modified by this Special Stipulation, the rights, duties and obligations in your existing franchise agreement relates shall control as to the Rental Territory. You specifically agree that Section 10 of your Franchise Agreement will apply to the Rental Territory, regardless of whether you purchase the Rental Territory.

Rental Territory: ____________________________________

2.
You shall be obligated to pay all royalties and other amounts due and payable to Liberty with respect to the Rental Territory and the 2015 Calendar Year Tax Season as provided below:

a.    You must pay a royalty of 14% of Gross Receipts per Territory for the period ending April 30th following the Effective Date of this Franchise Agreement (“Year One”).

b. You must pay an advertising fee of 5% of Gross Receipts each month.

c.
You must pay the royalty owed by the 5th of each month based on Gross Receipts for the preceding month, and any balance owed to achieve Minimum Royalty on May 5 for each fiscal year ending April 30. You must pay advertising fees by the 5th of each month based on Gross Receipts for the preceding month.

3. a.
If you decide not to purchase the Rental Territory, you must notify your Area     Developer in writing of your election not to purchase the Rental Territory no later than March 1, 2015.

b.    If you decide to purchase the Rental Territory, you shall notify your Area Developer of your election on or before March 1, 2015 so that Liberty may send to you a then current Franchise Disclosure Document (“FDD”) and a separate franchise agreement for the Rental Territory. You must hold the FDD at least fourteen (14) calendar days and then remit a 20% down payment ($8,000) of the $40,000 franchise fee applicable to the Rental Territory to Liberty no later than March 31, 2015. Liberty will allow you to finance the remaining 80% ($32,000) of the purchase price of the Rental Territory over a four (4) year period ending February 28, 2019 by your delivery to Liberty of a promissory note in a form containing Liberty’s standard terms and conditions. You will be entitled to make interest-only payments on this promissory note no later than February 28

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Liberty Franchise Agreement 7-14


in each of 2016, 2017, and 2018, with a final payment of accrued interest and all remaining principal due to Liberty Tax Service no later than February 28, 2019. If this Rental Territory is not purchased by April 30, 2015, the offer to sell the Rental Territory is rescinded and you shall have no further rights to the Territory.

c.    If you elect not to purchase the Rental Territory, you will continue to perform all of your obligations with respect to offices opened within the Rental Territory throughout the 2015 Calendar Year Tax Season, and will deliver to Liberty’s national office all customer files and contact information for the Rental Territory no later than April 30, 2015. In addition, all further revenue associated with the Rental Territory, along with the future right to service the customers of the territory, belong to Liberty or Liberty’s designee.

d.    If you purchase the Rental Territory, for the purposes of Section 4(d) of the new franchise agreement you enter into for the Territory, the 2015 Calendar Year Tax Season will constitute “Year One,” the 2016 Calendar Year Tax Season will be deemed “Year Two,” etc.

4.    This Special Stipulation may be executed in any number of counterparts, each of which when     so executed and delivered shall be deemed an original, but such counterparts shall constitute     one and the same instrument.

Except to the extent modified above, the terms of the Franchise Agreement remain in full force and effect.

FRANCHISEE:                     JTH TAX, INC. d/b/a
LIBERTY TAX SERVICE

By:__________________________            By:__________________________
                            
Printed Name: _________________
By: _________________________
Title: ________________________

Effective Date:_________________





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Liberty Franchise Agreement 7-14


SCHEDULE “B-4” TO THE FRANCHISE AGREEMENT

Special Stipulation – Walmart Rent to Own    Entity: ________

To the extent of any conflict between the following and the provisions of the Franchise Agreement, this Special Stipulation shall control:

1.
You agree to operate the territory (“Rental Territory”) described below for the tax season January 2, 2015 - April 15, 2015 (“2015 Calendar Year Tax Season”). This Rental Territory shall be deemed part of your existing franchise agreement and not a new franchise. If you own multiple territories and it is not made clear as to which one this Special Stipulation relates, this shall relate to any such franchise agreement as Liberty deems and selects, absent mutual agreement between you and Liberty otherwise. Except as modified by this Special Stipulation, the rights, duties and obligations in your existing franchise agreement to which this relates shall control as to the Rental Territory. You specifically agree that section 10 of your franchise agreement will apply to the Rental Territory, regardless of whether you purchase the Rental Territory.

Rental Territory: ____________________________________

2.
You shall be obligated to pay all royalties and other amounts due and payable to Liberty with respect to the Rental Territory and the 2015 Calendar Year Tax Season as provided below:

a.    You must pay a royalty of 14% of Gross Receipts subject to a minimum royalty of $5,000 per Rental Territory for the period ending April 30th following the Effective Date of this Agreement (“Year One”). During Year One, if you operate an office in a Walmart in the Rental Territory pursuant to the Walmart Kiosk Stipulation and Agreement (“Walmart Office”) throughout the 2015 Calendar Year Tax Season, the Walmart Office shall not be subject to a minimum royalty. All other royalties under this agreement or future agreements shall remain due and owing, including but not limited to, the $5,000 minimum royalty applicable to a non-Walmart Office within the Rental Territory.

b. You must pay an advertising fee of 5% of Gross Receipts each month.

c.    You must pay the royalty owed by the 5th of each month based on Gross Receipts for the preceding month. You must pay advertising fees by the 5th of each month based on Gross Receipts for the preceding month.
    
3.
a. If you determine not to purchase the Rental Territory, you must notify your Area Developer in writing of your election not to purchase the Rental Territory no later than March 1, 2015.

b.    If you desire to purchase the Rental Territory, you shall notify your Area Developer of your election on or before March 1, 2015 that so Liberty may send to you a then current Franchise Disclosure Document (“FDD”) and a separate franchise agreement for the Rental Territory. You must hold the FDD at least fourteen (14) calendar days and then remit a 20% down payment ($8,000) of the $40,000 franchise fee applicable to the Rental Territory to Liberty no later than

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Liberty Franchise Agreement 7-14


March 31, 2015. Liberty will allow you to finance the remaining 80% ($32,000) of the purchase price of the Rental Territory over a four (4) year period ending February 28, 2019 by your delivery to Liberty of a promissory note in a form containing Liberty’s standard terms and conditions. You will be entitled to make interest-only payments on this promissory note no later than February 28 in each of 2016, 2017, and 2018, with a final payment of accrued interest and all remaining principal due to Liberty Tax Service no later than February 28, 2019. If this Rental Territory is not purchased by April 30, 2015, the offer to sell the Rental Territory is rescinded and you shall have no further rights to the Territory.

c.    If you elect not to purchase the Rental Territory, you will continue to perform all of your obligations with respect to offices opened within the Rental Territory throughout the 2015 Calendar Year Tax Season, and will deliver to Liberty’s national office all customer files and contact information for the Rental Territory no later than April 30, 2015. In addition, all further revenue associated with the Rental Territory, along with the future right to service the customers of the territory, belong to Liberty or Liberty’s designee.

d.    If you purchase the Rental Territory, for the purpose of paragraph 4(d) of the new franchise agreement you enter into to purchase the Rental Territory, the 2015 Calendar Year Tax Season will constitute “Year One,” the 2016 Calendar Year Tax Season will be deemed “Year Two,” the 2017 Calendar Year Tax Season will be deemed “Year Three.” Further, if you purchase the Rental Territory and if you continue to operate a Walmart office within the Rental Territory purchased, pursuant to the Walmart Kiosk Stipulation and Agreement, the Walmart Office shall not be subject to a minimum royalty during Year Two and Year Three. Minimum royalties shall apply to the Walmart Office beyond Year Three and all other royalties under this agreement or future agreements remain due and owing, including but not limited to, the $5,000 minimum royalty applicable to a non-Walmart Office within the Rental Territory.

4.
This Special Stipulation may be executed in any number of counterparts, each of which     
when so executed and delivered shall be deemed an original, but such counterparts shall     
constitute one and the same instrument.

Except to the extent modified above, the terms of the Agreement remain in full force and effect.

FRANCHISEE:                     JTH TAX, INC. d/b/a LIBERTY TAX SERVICE

By:__________________________            By:__________________________
                            
Printed Name: _________________
By: _________________________
Title: ________________________

Effective Date:_________________




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Liberty Franchise Agreement 7-14


SCHEDULE “B-5” TO THE FRANCHISE AGREEMENT
Special Stipulation - Buy One Get One through November 30, 2014

To the extent of any conflict between the following and the provisions of the Franchise Agreement, these Special Stipulations shall control:

1. Contemporaneous Purchase in Same Territorial Area. You have opted to contemporaneously purchase a SiempreTax franchise and a Liberty Tax Service (“Liberty”) franchise for the same territorial area as described in Schedule A of each applicable Franchise Agreement (“Territorial Area”) via a bundle, which will be offered until November 30, 2014. As described in the SiempreTax Franchise Agreement, applicable Special Stipulations, Disclosure Document and pursuant to this Special Stipulation, the initial franchise fee for SiempreTax will be $0. You will also be required to pay the Liberty Tax Service initial franchise fee and deposits outlined in the Liberty FDD and Franchise Agreement prior to closing. You must submit 20% of the Liberty initial franchise fee prior to attending EOT. If you do not pass SiempreTax and Liberty EOT in accordance with our normal standards, Liberty will refund this amount to you. You must submit the remainder of the franchise fees and any applicable deposits prior to closing. In addition to the Liberty Franchise Agreement and required documents, you will be required to sign the SiempreTax Franchise Agreement and required documents.

2. Opening. As described below, your obligation to open either a SiempreTax or Liberty office or both offices will be based on the Hispanic percentage of the population of the Territorial Area as determined by Liberty and SiempreTax, based on data provided from the last United States Census as adjusted by available post census data or information (“Hispanic Population”).

a) Twenty Five Percent or Less. For each year during the Term that the Hispanic Population is less than or equal to Twenty Five Percent (25%) as of January 2, you will not be required to open a SiempreTax office in the Territorial Area. If you do not open a SiempreTax office in the Territorial Area pursuant to this provision, SiempreTax royalties will not apply.

b) Greater than Twenty Five Percent to Seventy Five Percent or Less. For each year during the Term that the Hispanic Population is greater than Twenty Five Percent (25%) and less than or equal to Seventy Five Percent (75%) as of January 2, you will be required to open both offices pursuant to the SiempreTax and Liberty Franchise Agreements.

c) Greater than Seventy Five Percent. For each year during the Term that the Hispanic Population is greater than Seventy Five Percent (75%) as of January 2, you will not be required to open a Liberty office in the Territorial Area. If you do not open a Liberty office in the Territorial Area pursuant to this provision, Liberty royalties will not apply.

3. Royalties. Standard royalty percentages as described in the Franchise Agreement shall apply for any office that is operated. The following is added at the end of Section 4(d) of the Franchise Agreement:


“(v) The aggregate of royalties paid under your Liberty and SiempreTax franchise agreements shall be used to calculate whether the minimum royalty has been met.”

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Liberty Franchise Agreement 7-14


        
4. In Term Non-Compete. Section 10(a) of the Franchise Agreement shall not apply to your operation of the contemporaneously purchased SiempreTax franchise in the Territorial Area.

5. Counterparts. This Special Stipulation may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts shall constitute one and the same instrument.

Except to the extent modified above, the terms of the Agreement remain in full force and effect.

FRANCHISEE:                     JTH TAX, INC. d/b/a LIBERTY TAX SERVICE

By:__________________________            By:__________________________
                            
Printed Name: _________________
By: _________________________
Title: ________________________

Effective Date:_________________













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Liberty Franchise Agreement 7-14


SCHEDULE “B-6” TO THE FRANCHISE AGREEMENT

Special Stipulation – Liberty Tax Service/SiempreTax Bundle after November 30, 2014        
Entity:_________

To the extent of any conflict between the following and the provisions of the Franchise Agreement, these Special Stipulations shall control:

1. Contemporaneous Purchase in Same Territorial Area. You have opted to contemporaneously purchase a SiempreTax franchise and a Liberty Tax Service franchise for the same territorial area as described in Schedule A of each applicable Franchise Agreement (“Territorial Area”) via a bundle that will be offered after November 30, 2014. As described in the SiempreTax Franchise Agreement, applicable Special Stipulations, Disclosure Document and pursuant to this Special Stipulation, the initial franchise fee for SiempreTax will be $25,000. You will also be required to pay the Liberty Tax Service initial franchise fee and deposits outlined in the Liberty FDD and Franchise Agreement prior to closing. You must submit 20% of the Liberty and SiempreTax initial franchise fees prior to attending EOT. If you do not pass SiempreTax and Liberty EOT in accordance with the normal standards, these amounts will be refunded to you. You must submit the remainder of the franchise fees and any applicable deposits prior to closing. In addition to the Liberty Franchise Agreement and required documents, you will be required to sign the SiempreTax Franchise Agreement and required documents.

2. Opening. As described below, your obligation to open either a SiempreTax or Liberty office or both offices will be based on the Hispanic percentage of the population of the Territorial Area as determined by Liberty and SiempreTax, based on data provided from the last United States Census as adjusted by available post census data or information (“Hispanic Population”).

a) Twenty Five Percent or Less. For each year during the Term that the Hispanic Population is less than or equal to Twenty Five Percent (25%) as of January 2, you will not be required to open a SiempreTax office in the Territory. If you do not open a SiempreTax office in the Territorial Area pursuant to this provision, SiempreTax royalties will not apply.

b) Greater than Twenty Five Percent to Seventy Five Percent or Less. For each year during the Term that the Hispanic Population is greater than Twenty Five Percent (25%) and less than or equal to Seventy Five Percent (75%) as of January 2, you will be required to open both offices pursuant to the SiempreTax and Liberty Franchise Agreements.

c) Greater than Seventy Five Percent. For each year during the Term that the Hispanic Population is greater than Seventy Five Percent (75%) as of January 2, you will not be required to open a Liberty office in the Territory. If you do not open a Liberty office in the Territorial Area pursuant to this provision, Liberty royalties will not apply.

3. Royalties. Standard royalty percentages as described in the Franchise Agreement shall apply for any office that is operated. The following is added at the end of Section 4(d) of the Franchise Agreement:



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Liberty Franchise Agreement 7/14


“(v) The aggregate of royalties paid under your Liberty and SiempreTax franchise agreements shall be used to calculate whether the minimum royalty has been met.”

4. In Term Non-Compete. Section 10(a) of the Franchise Agreement shall not apply to your operation of the contemporaneously purchased SiempreTax franchise in the Territorial Area.

5. Counterparts. This Special Stipulation may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts shall constitute one and the same instrument.

Except to the extent modified above, the terms of the Agreement remain in full force and effect.

FRANCHISEE:                     JTH TAX, INC. d/b/a LIBERTY TAX SERVICE

By:__________________________            By:__________________________
                            
Printed Name: _________________
By: _________________________
Title: ________________________

Effective Date:__________________



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AREA DEVELOPER AGREEMENT













EXHIBIT B



Area Developer Agreement 7/14


TABLE OF CONTENTS

1.
SERVICES
3

2.
EXCLUSIVITY
5

3.
FEES AND COMMISSIONS
6

4.
MINIMUM AREA DEVELOPER PERFORMANCE
8

5.
FRANCHISOR — FRANCHISEE RELATIONSHIP
8

6.
NON-COMPETE AND NO SOLICITATION
9

7.
TERM AND TERMINATION
10

8.
MISCELLANEOUS
11

9.
DEATH OR INCAPACITY
15

10.
CONFIDENTIAL INFORMATION
16

11.
COUNTERPARTS AND ELECTRONIC SIGNATURE
17

12.
HEADINGS
17

13.
AGREEMENT
17

 
 
 
Schedule A
19

Schedule B
20



Area Developer Agreement 7/14
2


AREA DEVELOPER
AGREEMENT

WHEREAS, JTH Tax, Inc. d/b/a Liberty Tax Service (“Liberty”) franchises a system for the operation of tax return preparation offices (the “Franchise”); and

WHEREAS, area developer (“Area Developer”) desires to find, solicit and recruit candidates willing to become Franchise owners (“Franchisees”) and desires to provide continuing services (the “Services”) on Liberty’s behalf to Franchisees; and

WHEREAS, Liberty wishes to receive the Services and compensate Area Developer.

NOW, THEREFORE, for value received, Liberty and Area Developer hereby agree as follows:

1.    SERVICES

1.1    Area Developer Services.

(a)    Candidate Development. Area Developer will use best efforts to find, solicit, and recruit candidates interested in operating a Franchise within the Territory (as described in Section 2). Upon Area Developer’s determination that a candidate may have the characteristics of a potential Franchisee (a “Candidate”), Area Developer will identify such Candidate in writing to Liberty for Liberty’s consideration.

(b)    Franchise Award. All Candidates must successfully pass Liberty’s Effective Operations Training (“EOT”) and Hands On Training (“HOT”) to be awarded a Franchise.

(c)    Limitation of Services. Area Developer may only offer those services or products through the Area Developer business as authorized by Liberty in this Agreement or the area developer operations manual (“Area Developer Operations Manual” or “Manual”), unless Liberty provides prior written approval.

1.2    Area Developer Support Services and Obligations.

(a)    Operational Support. Area Developer will be responsible for coaching the Liberty system as described in the Area Developer Operations Manual and will provide Franchisees with timely local support, day-to-day operational help, marketing advice and feedback. Area Developer will host quarterly designated marketing area (DMA) meetings in person or through electronic means. Through these DMA meetings and as required by Liberty, Area Developer will disseminate information, collaborate with Franchisees, discuss advertising and address other issues that may arise or later be specified by Liberty. Area Developer does not have any authority to approve or disapprove Franchisee marketing or advertising. Area Developer agrees to address reasonable company-owned store issues that may arise or be specified by Liberty. “Company-owned” refers to a store owned and operated by Liberty or an entity under the control of Liberty or any of its employees.



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(b)    Customer Service. Area Developer shall use best efforts to ensure that all Franchisees provide all appropriate services as outlined in the Franchisee Operations Manual and the Area Developer Operations Manual, abide by customer service policies issued by Liberty and timely respond to customer complaints and issues. Area Developer must operate in a manner that protects the goodwill, reputation of Liberty and the service marks and trademarks of Liberty (collectively “Marks).

(c)    Site Selection.     Area Developer shall provide site selection assistance in accordance with the Area Developer Operations Manual including, but not limited to, utilization of a company that we designate providing retail business intelligence solutions, and current Electronic Return Originator (“ERO”) data. Final site selection must be approved by Liberty.

(d)    Budgets, Profit and Loss Statements and Action Plans. Area Developer shall review and approve Franchisee budgets, profit and loss statements, action plans and the Marketing Plan Generator for submission to corporate for final approval in accordance with the deadlines provided by Liberty.

(e)    Agreement Facilitation. Area Developers shall review and facilitate Franchisee applications to Liberty for financing, transfers, fee releases, sales, terminations and the like, subject to final approval by Liberty.

(f)    Required Attendance. Area Developer, or Area Developer’s approved representative, shall attend area developer training and EOT within six months of closing. Additionally, Area Developer will attend all meetings that may be required by Liberty.
 
(g)    Manual. Area Developer shall provide all assistance and support described in the Area Developer Operations Manual, the Operations Manual provided to Liberty Franchisees and Area Developers and all updates to these Manuals.

(h)    Contract Enforcement. Upon termination or expiration of the franchise agreement between Liberty and any Franchisee (a “Former Franchisee”), Area Developer will assist Liberty in enforcing the post termination obligations set forth in its franchise agreement with that Former Franchisee (“Post Termination Obligations”), but Area Developer will have no duty to initiate court or other legal proceeding. These obligations include ensuring that all Liberty signs are removed from the Former Franchisee’s offices or other premises, receiving or acquiring all telephone numbers, listings and advertisements used in relation to the Former Franchisee’s business, receiving or acquiring all copies of lists and other sources of information containing the names of customers of the Former Franchisee, obtaining all Former Franchisee’s customer tax returns, files, records and all copies thereof and obtaining all copies of the Former Franchisee’s Operations Manual, including any updates, and performing other reasonable duties as may be assigned by Liberty to assist in the transition or closure of an office.

1.3    Liberty Obligations.

(a)    Area Developer Operations Manual. Liberty will provide an Area Developer Operations Manual and various updates to the Manual to provide requirements of operation and offer guidance in performing Area Developer services.



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(b)    Initial and Advanced Training. Liberty will provide reasonable training to Area Developer, at Area Developer’s expense, in order to ensure that Area Developer has the ability to provide the services to Liberty described in Sections 1.1 and 1.2. At present, Liberty provides a three to four day initial Area Developer training course, which Area Developer and any manager working for Area Developer must attend and successfully complete within six months of closing. Liberty also requires Area Developer to attend EOT within six months of closing. Liberty may also provide and require Area Developer’s attendance at advanced or other trainings that may be offered at select locations or Liberty may offer such training on the web or electronically. Although Liberty does not charge attendance at training, Area Developer must pay the cost incurred with traveling to training, and other incidental expenses such as food, lodging, and transportation incurred in attending any training that Liberty provides.

(c)    Disclosure Document. Liberty will provide or make available to Area Developer its latest Franchise Disclosure Document to use as part of Area Developer’s Development Services.

1.4    Joint Duties. Liberty and Area Developer will be responsible for the enforcement of all agreements (“Franchise Documents”) executed in the awarding of a franchise to a Candidate and the monitoring of individual Franchisee performance and adherence to Liberty’s Franchise system. However, Area Developer will not assert any legal claim by way of a lawsuit or otherwise, against a Franchisee without the written permission of Liberty.

1.5     Personal Involvement. Area Developer must render the Area Developer and support services hereunder personally, unless Area Developer submits to Liberty a general manager who attends and successfully completes our initial Area Developer training course and who is not later disapproved by Liberty.

1.6    Reports. Area Developer agrees to file with Liberty, at such times and in such forms as Liberty may specify, reports detailing Area Developer’s activities, sales and other information that may be requested.

1.7    Reviews. Liberty reserves the right to review Area Developer’s business operations, in person, by mail, or electronically. Liberty may inspect Area Developer’s operations and obtain paper and electronic business records related to the business and any other operations taking place through Area Developer’s business. Area Developer must send Liberty any business records requested within five (5) business days of receiving Liberty’s request for records and shall be responsible for any costs related to this transmission. Liberty has the right to require that Area Developer implement a plan to resolve any issues that Liberty discovers.

2.    EXCLUSIVITY

2.1    Exclusivity. Except as otherwise permitted in this Agreement, Liberty will not appoint or authorize any other person to provide commissioned or paid Area Developer services to Liberty in the territory defined in Schedule A (“Territory”). This grant of the Territory in no way prevents or restricts Liberty from itself recruiting, soliciting or seeking new Franchisees in the Territory (including through the Internet or other means of general electronic communication) or from using unpaid referrals from other sources or as detailed in Section 2.2 in the obtaining of potential Franchisees. As indicated on Schedule A, the Territory has been divided into sub-territories


Area Developer Agreement 7/14
5


(“Franchise Territories”) as defined by Liberty, which will be made available to prospective Franchisees.

2.2    Non-Area Developer-Proposed Franchisees. If Liberty is referred, contacted by or comes into communication with any prospective Franchisee in the Territory not previously identified by Area Developer, Liberty may evaluate, recruit and award such prospective Franchisee a Franchise. Each such individual will be deemed a Franchisee for the purposes of this Agreement.

3.    FEES AND COMMISSIONS

3.1    Initial Fee. Area Developer will pay Liberty $ _______ upon execution of this Agreement, which shall be deemed fully earned by Liberty upon payment.

3.2    Initial Franchise Fee. Liberty will pay Area Developer, as detailed under Section 3.10, an amount equal to ____% of the initial franchise fee and interest on promissory notes, if and only to the extent that such interest is on franchise fees or royalties (except on interest already due and owing before the date of this Agreement), paid to Liberty by a Franchisee during the Term, pursuant to the terms in the franchise agreement between Franchisee and Liberty (“Franchise Fees” and “Royalties”), for the first time that a territory is purchased by a franchisee, except Franchise Fees already due and owing before the Effective Date of this Agreement. Liberty will also pay to Area Developer the same percentage of any change fees for modifying the opening schedule of a multi-territory stipulation which a Franchisee pays to Liberty during the Term, except change fees already due and owing before the Effective Date of this Agreement.

3.3    Franchise Royalties. Except as provided under Section 4.1, Liberty will pay Area Developer, as detailed under Section 3.10, an amount equal to ____% of all ongoing Royalties received by Liberty, if any, from a Franchisee during the Term except Royalties already due and owing before the Effective Date of this Agreement.

Liberty will also pay to Area Developer this same royalty percentage on company-owned stores in Area Developer’s Territory if a Franchisee store becomes company-owned after the Effective Date of this Agreement. The royalty percentage payable to Area Developer shall be calculated as if the store were still a Franchisee store.

3.4    Demand for Payment. Except as authorized herein, or except upon the prior written consent of Liberty, Area Developer will not demand any payment due from a Liberty Franchisee or other person or entity to Liberty.

3.5    Fee for Franchisee Prospects. Liberty may provide to Area Developer leads of prospective Franchisees within the Territory. If Liberty provides any such leads to Area Developer, Liberty will set fees based upon the cost and the difficulty of acquiring the leads and Area Developer agrees to pay these fees.

3.6    Fee for Internal Sales.  If Liberty’s own franchise development staff handles the selling process with a prospective Franchisee within the Territory covered by this Agreement for the sale of an undeveloped territory (meaning one that does not contain an existing Liberty Tax Service office), Area Developer shall pay Liberty 15% of the Franchise Fee (provided that in the case of a prospective Franchisee under a special stipulation agreement whereby no Franchisee Fee


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is paid, this amount shall be deemed to be payable under section 3.5 and be $6,000 or such other amount as is established pursuant to Section 3.5).  Liberty may deduct this from amounts Liberty otherwise owes to Area Developer.

3.7    Advertising and Selling Material. Liberty may charge and Area Developer agrees to pay a reasonable charge for preparing, procuring, printing, and/or sending advertising materials and Disclosure Documents to Area Developer.

3.8    Terminal Services. Liberty may charge and Area Developer agrees to pay a reasonable charge for providing computer access to information within the Liberty system and for computer access to a sales lead and contact information management system.

3.9    Use of Franchise Broker. Liberty may use the services of franchise brokers to identify Candidates who are potentially interested in becoming Franchisees (“Franchise Broker”). To participate in this opportunity, Area Developer agrees to pay a proportionate share of the Broker’s fee for any broker-generated Candidate who becomes a Franchisee in Area Developer’s Territory. Area Developer’s share of Broker’s fee shall be based on the proportion of initial Franchise Fee and Royalties that Area Developer receives under Sections 3.2 and 3.3. For example, if a Broker charges Liberty $13,000 for a Candidate who becomes a Franchisee, and Area Developer receives 35% of the initial Franchise Fee and Royalty under Sections 3.2 and 3.3 above, then Area Developer’s share of the initial Franchise Fee would be reduced by 35% of $13,000 which amounts to $4,550.

3.10    Payment. In any month that Liberty receives Franchise Fees, Royalties, or interest on promissory notes (if such interest is on Franchise Fees or Royalties and are not already due and owing before the date of this agreement) from Franchisees in Area Developer’s Territory, Liberty will pay Area Developer its share of Royalties, Franchise Fees and interest not later than the last day of the next calendar month. In no case will Liberty advance funds to Area Developer, or be liable for payment on accounts receivables or unpaid Franchise Fees, Royalties or interest. Area Developer will be entitled to its share of Royalties only with respect to Royalties actually collected, and Liberty will be entitled to take credits against previous Royalty payments to Area Developer to the extent that any Royalty payments from a Franchisee are subject to a subsequent refund, offset or other credit. Each payment of Area Developer’s share of Royalties, Franchise Fees, and interest will be accompanied by information in sufficient detail to allow Area Developer to determine the basis on which Area Developer’s share of the Royalties, Franchise Fees and interest was calculated.

3.11    Late Fees. Payments for charges Liberty bills to Area Developer are due within 30 days of billing and will be subject to an 12% per annum late fee, or the maximum allowed by law if less.

3.12    Fee Amounts. From time to time, Liberty will set and publish the fee amounts under Sections 3.5 and 3.7-3.8.

3.13    Expenses. Except as provided herein, each party will bear the expenses incurred by it in the performance of this Agreement.
    
3.14    Referral Fees. Liberty may offer referral fees to individuals that refer new Franchisees to Liberty. These referral fees do not apply to Area Developer for Candidates that become Franchisees in Area Developer’s Territory.


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4.    MINIMUM AREA DEVELOPER PERFORMANCE

4.1    Minimum Requirements. Area Developer will provide Liberty with a minimum number of Candidates each year that open Franchise Territories with an active Liberty office in operation, as described and set forth in Schedule B (the “Minimum Requirements”). For this purpose, a year will include each fiscal year of Liberty (including any partial year) ending on April 30. If Area Developer does not meet the Minimum Requirements, Liberty may, upon notification to Area Developer within ninety (90) days of the end of the year wherein the requirements were not met, delete from the Territory up to the number of Franchise Territories by which Area Developer failed to meet the Minimum Requirements for that year. Liberty’s notice will designate which unsold Franchise Territories it desires to delete from the Territory, and Liberty shall have the sole discretion in making this determination. The specified Franchise Territories will be deemed deleted from the Territory as of the date that Liberty sends notice to Area Developer. Area Developer will thereafter not be entitled to any share of Franchise Fees and Royalties paid with respect to Franchisees appointed within those Franchise Territories (“Liberty Franchisees”) and Liberty Franchisees will not be deemed Franchisees for the purposes of this Agreement. This deletion is Liberty’s sole remedy for failure to meet Minimum Requirements.

Liberty’s notice will be accompanied by a credit to amounts owed by Area Developer to Liberty or a payment to Area Developer, as Liberty selects. Such credit or payment shall equal the amount of the Initial Fee that is calculated by multiplication of the Initial Fee with a fraction the numerator of which is the total population of the deleted Territories and the denominator of which is the total population of the Franchise Territories (Initial Fee x (Total Population of Deleted Territories/Total Population of Franchised Territories)). For this calculation, Liberty may choose to use either the population figures that existed at the time of entering into this Agreement or more current data available to Liberty.

5.    FRANCHISOR — FRANCHISEE RELATIONSHIP

5.1    Disclosure. Area Developer will comply with all federal and state franchise disclosure laws applicable to the solicitation of Franchisees, including providing the Disclosure Document, prepared by Liberty, to all Candidates within the time frame provided by law. In most jurisdictions, this disclosure is currently required fourteen (14) calendar days before the signing of a binding agreement between the Candidate and Liberty or making any payment by the Candidate to Liberty. Area Developer will ensure that any disclosure made in any form complies with the applicable franchise disclosure laws. Area Developer will be responsible for providing Liberty’s most current Disclosure Document, but will not be responsible for improper disclosure due to inadequacies or errors in Liberty’s most current Disclosure Document.

5.2    Financial Performance Representations. Except as may be expressly stated in Item 19 of Liberty’s most current unit Franchise Disclosure Document in effect in Area Developer’s Territory, Area Developer will not make any representation, either orally, in writing, electronically, or otherwise, to any prospective Candidate concerning actual or potential earnings, sales, income or profits of any Franchise. However, Area Developer may disclose financial performance of an existing franchise for sale to a Candidate interested in such unit as may be permitted by law.



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5.3    Improper Representations. Area Developer will make no representations to any Candidate that conflicts with Liberty’s current franchise agreement or Disclosure Document or make any promises, guarantees, or warranties to any party not authorized in writing by Liberty.

5.4    No Unauthorized Commitments. Area Developer acknowledges that it has no authority to bind Liberty with respect to any matter, and agrees that it will not enter into any agreements or understandings with any Candidates other than as authorized in writing by Liberty.

5.5    Indemnity. Area Developer will indemnify, defend and hold Liberty and its affiliates, officers, directors, members, partners, employees, agents, contractors, advisors and representatives (the “Indemnified Parties”) harmless from and against any claim, suit or proceeding brought against any of the Indemnified Parties resulting from, relating to or arising out of a claim that Area Developer failed to make proper disclosures under Section 5.1, made any improper earnings claim as detailed in Section 5.2, made any improper representations under Section 5.3, or entered into any unauthorized agreements under Section 5.4.

Liberty will indemnify, defend and hold Area Developer and its affiliates, officers, directors, members, partners, employees, agents, contractors, advisors and representatives (the “Area Developer Indemnified Parties”) harmless from and against any claim, suit, or proceeding brought against any of the Area Developer Indemnified Parties resulting from, relating to or arising out of a claim that Liberty failed to make proper disclosure under Section 5.1, made any improper earnings claim as detailed in Section 5.2, made any improper representations under Section 5.3, or entered into any unauthorized agreements under Section 5.4.

6.    NON-COMPETE AND NO SOLICITATION

6.1    Non-Compete.

(a)    In-Term. Area Developer will not, during the Term of this Agreement, in the United States or Canada, directly or indirectly (i) recruit, search for, or solicit Franchisees or prospective Franchisees to engage in income tax return preparation, electronic filing of tax returns, or the provision of refund anticipation loans, except as to seeking Liberty Tax Service Franchisees pursuant to the terms of this Agreement, or (ii) aid or facilitate another person or entity (except Liberty Tax Service Franchisees) in the provision of paid income tax preparation offered to the public through retail outlets.

(b)    Post-Term. Area Developer will not, for a period of two years after expiration or termination of this Agreement, in the Territory defined in Schedule A regardless of any reduction due to application of Section 4.1 (the “Original Territory”), or within twenty-five (25) miles of the boundaries of the Original Territory, directly or indirectly recruit, search for, or solicit Franchisees or prospective Franchisees to engage in income tax return preparation, electronic filing of tax returns, or the provision of refund anticipation loans.

6.2    No Solicitation.

(a)    In-Term. Except with the permission of Liberty, Area Developer will not, during the term of this Agreement, in the United States or in Canada, directly or indirectly solicit for employment in a management or supervisory capacity, any management or supervisory personnel


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employed by Liberty, any management or supervisory personnel employed by a Liberty Tax Service Franchisee, or any Liberty Tax Service Franchisee, or in the case of a Franchisee which is an entity, the owners of such entity.

(b)    Post-Term. Except with the permission of Liberty, Area Developer will not, for a period of two years after expiration, termination or transfer of this Agreement, in the Original Territory and within twenty-five (25) miles of the boundaries of the Original Territory, directly or indirectly solicit to own, operate, manage or supervise an income tax preparation office or income tax preparation franchise, any management or supervisory personnel employed by Liberty, any management or supervisory personnel employed by a Liberty Tax Service Franchisee, or any Liberty Tax Service Franchisee, or in the case of a Franchisee which is an entity, the owners of such entity, or any other entity beneficially owned by such owner or entity.

6.3    Severability. If any covenant or provision with Section 6.1 or 6.2 is determined to be void or unenforceable, in whole or in part, it shall be deemed severed and removed from this Agreement and shall not affect or impair the validity of any other covenant or provision. Further, these obligations are considered independent of any other provision in this Agreement, and the existence of any claim or cause of action by either party to this Agreement against the other, whether based upon this Agreement or otherwise, shall not constitute a defense to the enforcement of these obligations.

7.    TERM AND TERMINATION

7.1    Term. This Agreement will commence upon its Effective Date and will last for a term of six (6) years (the “Term”).

7.2    Renewal. Upon the completion of the Term of this Agreement, provided Area Developer is in compliance with the terms and conditions in this Agreement, Liberty will provide Area Developer with the right to enter into a new agreement with Liberty for the provision of services similar to those in this Agreement. If Area Developer wishes to renew this Agreement, Area Developer must notify Liberty in writing at least one hundred and eighty (180) days before the expiration of this Agreement. There will be no fee for the renewal, but Area Developer must execute a general release of all claims it may have against Liberty. Area Developer may also renew future Area Developer Agreements, if Area Developer is in compliance with the terms and conditions in such agreements, meets the other conditions therein for renewal, and renews by signing Liberty’s then current Area Developer Agreement. The fees and percentages described in Sections 3.2 and 3.3 above will not be reduced upon any renewal nor will the Territory be reduced, except as may be reduced due to failure to meet Minimum Requirements, as described in Section 4.1 above.
    
7.3    Termination.
    
(a)    Termination by Area Developer. Area Developer may terminate this Agreement at any time through written notice of termination to Liberty. Area Developer’s termination of this Agreement will be effective upon Liberty’s receipt of Area Developer’s termination notice.
    
(b)    Termination by Liberty Without Opportunity to Cure. Liberty may terminate this Agreement effective upon the date of Liberty’s sending written notice of termination to Area Developer, and without the opportunity for Area Developer to cure, for any of the following reasons:


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(i)
Area Developer commits a violation of any law, ordinance, rule or regulation of a government or governmental agency or department and such conduct constitutes a material violation of any franchise law, antitrust law or securities law, fraud or a similar wrong, unfair or deceptive practices, or a comparable violation of applicable law, or the Area Developer is convicted of a felony; or

(ii)
Area Developer violates any of Sections 5.1, 5.2, 5.3 or 5.4 of this Agreement; or

(iii)    Area Developer makes a misstatement of material fact on a Biographical
Information Form, which is required in order to enter into this Area Developer Agreement, or the Sales Agent Disclosure Form Update, or fails to disclose a material fact that is requested in any such form, or refuses to fill out or completely fill out such form or tender supporting documentation upon reasonable request. The present versions of these Forms are appended to the accompanying Disclosure Document as Exhibits D-2 and D-3.

(c)    Termination by Liberty After Opportunity to Cure. Liberty may terminate this Agreement if Area Developer fails to perform any obligation under this Agreement or any other Agreement between the parties (“Breach”) and such failure has continued for thirty (30) days after Liberty sent written notice of such Breach to Area Developer. In the case of past due monies owed by Area Developer to Liberty under this Agreement or for any other debt to Liberty, Liberty may terminate this Agreement fourteen (14) days after Liberty sends written notice of delinquency to Area Developer. If Area Developer fails to provide notification of Area Developer’s desire to renew within the time and manner provided for in Section 7.2 of this Agreement, Liberty may terminate this Agreement fourteen (14) days after Liberty sends written notice to cure.

7.4    No Refund of Initial Fee. Liberty will have no obligation to return or refund any fee to Area Developer upon termination of this Agreement.

7.5    Survival of Obligations. The Parties’ obligations that by their nature may require performance after the termination or expiration of this Agreement, including, but not necessarily limited to, Sections 3.11, 5.5, 6, 7.4, 7.5, and 8-11, will survive the termination or expiration of this Agreement. Upon the termination or expiration of this Agreement, sale of this Agreement or sale or other transfer of Area Developer's business operated under this Agreement, Liberty will have no further obligation to pay Area Developer any share of Franchise Fees, Royalties or interest received by Liberty subsequent to the date of termination or expiration.

8.    MISCELLANEOUS

8.1    Relationship. Notwithstanding anything herein to the contrary, this Agreement does not create a partnership, company, joint venture, or any other entity or similar legal relationship between the parties, and no party has a fiduciary duty or other special duty or relationship with respect to the other party. The parties acknowledge that Area Developer’s relationship with Liberty hereunder is that of an independent contractor.



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8.2    Intellectual Property Ownership. Liberty owns the Franchise system, its trademarks and all other intellectual property associated with the Franchise system. To the extent Area Developer has or later obtains any intellectual property, other property rights or interests in the Franchise system by operation of law or otherwise, Area Developer hereby disclaims such rights or interests and will promptly assign and transfer such entire interest exclusively to Liberty. Area Developer will not undertake to obtain, in lieu of Liberty, copyright, trademark, service mark, trade secret, patent rights or other intellectual property right with respect to the Franchise system. Area Developer will have the right to use Liberty’s Marks during the Term for the sole purpose of advertising the availability of Franchises within the Territory, but Area Developer must obtain Liberty’s prior written consent to such use, which consent may be withheld in Liberty’s sole discretion.

8.3    Trade and Domain Names. Area Developer will not use the word “JTH” “Dona Libertad” “Liberty,” “Libtax”, “Siempre, “SiempreTax” or the name, or any portion of the name of our affiliate companies, as any part of the name of a corporation, LLC or other entity (except as may be agreed between Area Developer and our affiliate company in a separate franchise agreement for that company). Further, unless Area Developer first receives Liberty’s express written permission, Area Developer will not obtain or use any domain name (Internet address) in connection with the provision of services under this Agreement or to facilitate any efforts to find, solicit and recruit Candidates.

8.4        Assignment. Liberty may assign this Agreement to an assignee who agrees to remain bound by its terms. Liberty does not permit a sub-license of the Agreement. Area Developer’s interest under this Agreement may be transferred or assigned only if Area Developer complies with the provisions in this Section. No interest may be transferred unless Area Developer is in full compliance with this Agreement and current in all monies owed to Liberty. Upon Liberty’s request, any transfer of an ownership interest in this Agreement must be joined by all signatories to this Agreement, except in the case of death or legal disability.

(a)        Liberty’s Right of First Refusal. If Area Developer has received and desires to accept a signed, bona fide offer to purchase or otherwise transfer the Area Developer Agreement or any interest in it, Liberty shall have the option (the "Right of First Refusal") to purchase such interest as hereinafter provided. Within fourteen (14) days of receipt of the offer, Area Developer shall offer the Right of First Refusal to Liberty by providing written notice to Liberty which shall include a copy of the signed offer to purchase that Area Developer received (“Notice”). Liberty shall have the right to purchase the Area Developer Agreement or interest in the Area Developer Agreement for the price and upon the terms set out in the Notice, except that Liberty may substitute cash for any non-cash form of payment proposed and Liberty shall have sixty (60) days after the exercise of our Right of First Refusal to close the said purchase. Liberty will notify Area Developer in writing within fifteen (15) days of its receipt of the Notice if it plans to exercise the Right of First Refusal. Upon the transmission of notice by Liberty, there shall immediately arise between Liberty and Area Developer, or its owners, a binding contract of purchase and sale at the price and terms contained in the Notice previously provided by Area Developer.

(b)        Transfer to Controlled Entity. A transfer to a "Controlled Entity" shall not trigger the Right of First Refusal. A "Controlled Entity" is an entity in which Area Developer is the beneficial owner of 100% of each class of voting ownership interest. At the time of the desired transfer of interest to a Controlled Entity, Area Developer must notify Liberty in writing of the name of the


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Controlled Entity and the name and address of each officer, director, shareholder, member, partner, or similar person and their respective ownership interest. Each such person of the Controlled Entity shall sign the amendment and release forms and/or Area Developer Agreement as required by Liberty at the time of transfer. Currently, Liberty does not charge a transfer fee for this type of transaction.

(c)     Transfer of Interest Within Area Developer. A transfer of interest within an Area Developer which is an entity shall not trigger the Right of First Refusal provided that only the percentage ownership, rather than the identity of the owners, is changing. At the time of the desired transfer of interest within an entity, Area Developer must notify Liberty in writing of the name and address of each officer, director, shareholder, member, partner or similar person and their respective ownership interest prior to and following the proposed transfer. Each such person of the Controlled Entity shall sign the amendment and release forms and/or Area Developer Agreement as required by Liberty at the time of transfer. Currently, Liberty does not charge a transfer fee for this type of transaction.

(d)     Right of First Refusal Not Exercised By Liberty. If Liberty does not exercise the Right of First Refusal, Area Developer may transfer the Area Developer Agreement or ownership interest therein according to the terms set forth in the Notice, provided that Area Developer satisfies the conditions in Section 8.4(e) and completes the sale within ninety (90) days from the date that Liberty received Notice from Area Developer. If Area Developer does not conclude the proposed sale transaction within this 90-day period, the Liberty’s Right of First Refusal shall continue in full force and effect.

(e)     Additional Requirements and Obligations for Transfer.

i)
The proposed transferee(s) must complete Liberty’s Area Developer application and pass Liberty’s application screening in place at the time of transfer.

ii)
The proposed transferee(s) must sign the Liberty amendment forms and/or the then current Area Developer Agreement and must personally assume and be bound by all of the terms, covenants and conditions therein.

iii)
The proposed transferee(s) must attend and successfully complete Area Developer Training.

iv)
Area Developer shall sign Liberty’s transfer and release forms required by Liberty at the time of transfer and pay to Liberty a transfer fee of $10,000.00.

8.5    Publicity. Except as required by law, Area Developer may not make any press release or other public announcement involving the subject matter of this Agreement without the written agreement of Liberty as to the form of such press release or public announcement.

8.6    Operations Manual, Specifications, and Equipment. Liberty may issue specifications to guide Area Developer in the provision of Services hereunder. Liberty has an Area Developer Operations Manual that Area Developer agrees to follow. Liberty may issue computer and equipment requirements. At present, Area Developer is required to have business cards, a telephone and telephone line, printer, fax service and computer connected via internet to Liberty’s computer network. Liberty also requires Area Developer to use an appropriate sales lead and contact


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information database or software to keep track of Area Developer’s contacts with prospective Franchisees and may issue recommendations or requirements in this regard. Liberty may change Liberty’s Area Developer Operations Manual and modify Liberty’s specifications in order to maintain competitiveness, adjust for legal, technological, and economic changes, and to improve in the marketplace. Area Developer agrees to be bound by all future changes.

8.7    Maintenance of Liberty Goodwill. Area Developer agrees not to disparage Liberty or its current and former employees or directors. During the term of this Agreement, Area Developer also agrees not to do any act harmful, prejudicial, or injurious to Liberty.
    
8.8        Governing Law.

(a)        Virginia Law. This Agreement is effective upon its acceptance in Virginia by our authorized officer. Virginia law governs all claims that in any way relate to or arise out of this Agreement or any of the dealings of the parties hereto. However, the Virginia Retail Franchising Act does not apply to any claims by or on Area Developer’s behalf if the Territory shown on Schedule A below is located outside of Virginia.

(b)        Jurisdiction and Venue. In any suit brought by Liberty, which in any way relates to or arises out of this Agreement, or any of the dealings of the parties hereto, Area Developer consents to venue and personal jurisdiction in the state and federal court of the city or county of Liberty’s National Office, presently Virginia Beach state courts and the United States District Court in Norfolk, Virginia. In any suit brought against Liberty, including Liberty’s present and former employees and agents, which in any way relates to or arises out of this Agreement, or any of the dealings of the parties hereto, venue shall be proper only in the federal court located nearest Liberty’s National Office (presently the U.S. District Court in Norfolk, Virginia), or if neither federal subject matter or diversity jurisdiction exists, in the city or county state court located where Liberty’s National Office is (presently the City of Virginia Beach, Virginia).

(c)        Jury Waiver. In any trial between any of the parties hereto, including present and former employees and agents of Liberty, which in any way relates to or arises out of this Agreement, or any of the dealings of the parties hereto, Area Developer and Liberty agree to waive our rights to a jury trial and instead have such action tried by a judge.

(d)        Class Action Waiver. Area Developer agrees that any claim Area Developer may have against Liberty, including Liberty’s past and present employees and agents, shall be brought individually and Area Developer shall not join such claim with claims of any other person or entity or bring, join or participate in a class action against Liberty.

(e)        No Punitive Damages. In any lawsuit, dispute or claim between or against any of the parties hereto, including present and former agents and employees of Liberty, Area Developer and Liberty agree to waive our rights, if any, to seek or recover punitive damages.

8.9    Severability. If any one or more of the provisions in this Agreement or any application of such provision is held to be invalid, illegal or unenforceable in any respect by a competent tribunal, the validity, legality and enforceability of the remaining provisions in this Agreement and all other applications of the remaining provisions will not in any way be affected or impaired by such invalidity, illegality or unenforceability. Further, the obligations within Section


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6 above are considered independent of any other provision in this agreement, and the existence of any claim or cause of action by either party to this agreement against the other, whether based upon this agreement or otherwise, shall not constitute a defense to the enforcement of these obligations.

8.10    Notices. Any notice, authorization, consent or other communication required or permitted under this Agreement must be made in writing and shall be given by mail or courier, postage fully prepaid, or delivered personally, to Liberty’s CEO, at Liberty’s National Office, presently 1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454, Telephone: (757) 493-8855. Any such notice may also be given to Area Developer in the same manner at the address indicated below the Area Developer’s signature on this Agreement or such other more current address as Liberty may have on file for Area Developer. Liberty may also give notice to Area Developer by e-mail.

8.11    Burdens and Benefits. This Agreement will be binding upon and will inure to the benefit of the parties, their successors and assigns, as permitted hereunder.

8.12    Entire Agreement. This Agreement, including the Schedules, is the entire agreement between Area Developer and Liberty with respect to the subject matter contained herein. This Agreement supersedes all other prior oral and written agreements and understandings between Area Developer and Liberty with respect to the subject matter herein. However, nothing in this or any related agreement is intended to disclaim the representations Liberty made in the franchise disclosure document Liberty furnished to Area Developer.

8.13    Amendment and Waiver. No amendment, change, or modification of this Agreement and no waiver of any right under this Agreement will be effective unless in a written document that is signed by an authorized representative of each party. No failure to exercise and no delay in exercising any right under this Agreement will operate as a waiver.

8.14    Financing. If Liberty provides financing, Area Developer must submit annual financial information to Liberty including, but not limited to, income statements, balance sheets, and supporting documents. Area Developer agrees to submit the required information at the time and in the format specified by Liberty.

9.    DEATH OR INCAPACITY

9.1        Assistance and Reimbursement. In the event of the death or incapacity of Area Developer, Liberty is entitled, but not required, to render assistance to maintain smooth and continued provision of Services. Liberty shall be entitled to reimbursement from Area Developer or Area Developer's estate for reasonable expenditures incurred.

9.2        Required Time Frames. Pursuant to this Section, death or incapacity shall not be grounds for termination of this Agreement unless either:
    
(a)    Area Developer or his/her legal representative fails for a period of 180 days after such death or incapacity to commence action to assign this Agreement according to controlling state law regarding the affairs of a deceased or incapacitated person and the terms of this Agreement; or,

(b)    Such assignment is not completed within one year after death or incapacity.


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9.3        Termination for Death or Incapacity. Liberty shall have the right to terminate this Agreement if one of the conditions in Section 9.2 is not satisfied within the time frame provided. Nothing in this Section shall be construed to limit the provisions of Section 7 regarding termination. Further, the terms and conditions of Section 8.4 above apply to a transfer upon death or incapacity, in the same manner as such terms and conditions apply to any other transfer to a non-Affiliate.

10.     CONFIDENTIAL INFORMATION

    10.1    Disclosure. Liberty possesses confidential information including, but not limited to, methods of operation, service and other methods, techniques, formats, specifications, procedures, information, system, customer information, marketing information, trade secrets, intellectual property, knowledge of and experience in operating and franchising offices, operating as an Area Developer (“Confidential Information”). Liberty may disclose some or all of the Confidential Information (oral, written, electronic, or otherwise) to Area Developer and Area Developer’s representatives. During the term of this Agreement and following the expiration or termination of this Agreement, Area Developer covenants not to directly or indirectly communicate, divulge, or use Confidential Information for its benefit or the benefit of any other person or legal entity except as specifically provided by the terms of this Agreement or permitted by Liberty in writing. Upon the expiration, termination or nonrenewal of this Agreement, Area Developer agrees that it will never use or disclose, and will not permit any of its representatives to use or disclose, our Confidential Information in any manner whatsoever, including, without limitation, in the design, development or operation of any business which provides services substantially similar to those stated herein. This provision shall not apply to information that: (a) at the time of disclosure is readily available to the public; (b) after disclosure becomes readily available to the trade or public other than through breach of this Agreement; (c) is subsequently lawfully and in good faith obtained by Area Developer from an independent third party without breach of this Agreement; (d) was in Area Developer’s possession prior to the date of Liberty’s disclosure to Area Developer; or (e) is disclosed to others in accordance with the terms of a prior written authorization between Area Developer and Liberty. The protections granted in this Section shall be in addition to all other protections for Confidential Information provided by law or equity.

10.2    Interest. Area Developer will acquire no interest in Liberty’s Confidential Information but is provided the right to use the Confidential Information disclosed for the purposes of developing and operating pursuant to this Agreement. Area Developer acknowledges that it would be an unfair method of competition to use or duplicate any Confidential Information other than in connection with the operation under this Agreement. No part of the Liberty franchise system nor any document or exhibit forming any part thereof shall be distributed, utilized or reproduced in any form or by any means, without our prior written consent.

    10.3    Use In Term.    Area Developer agrees that it will (a) refrain from using the Confidential Information for any purpose other than the operation pursuant to this Agreement; (b) maintain absolute confidentiality of Confidential Information during and after the term of this Agreement; (c) not make unauthorized copies of any portion of Confidential Information; and (d) adopt and implement all reasonable procedures, including but not limited to, those required by Liberty, to prevent unauthorized use of or disclosure of Confidential Information, including but not limited to, restrictions on disclosure to employees of Area Developer and the use of nondisclosure


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and non-competition clauses in employment agreements with employees that have access to Confidential Information.

10.4    Use Following Term. Upon termination of this Agreement, Area Developer will return to Liberty all Confidential Information embodied in tangible form, and will destroy, unless otherwise agreed, all other sources which contain or reflect any such Confidential Information. Notwithstanding the foregoing, Area Developer may retain Confidential Information solely for insurance, warranty, claims and archival purposes, but the information retained will remain subject at all times to the confidentiality restrictions of this Agreement.

11. COUNTERPARTS AND ELECTRONIC SIGNATURE

This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but such counterparts shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or in electronic (e.g. “pdf”) format shall be effective as delivery of a manually executed counterpart of this Agreement. The words “execution,” “signed,” “signature,” and words of similar import in the Agreement shall be deemed to include electronic or digital signatures or the keeping of records in electronic form, each of which shall be of the same effect, validity and enforceability as manually executed signatures or a paper-based recordkeeping system, as the case may be, to the extent and as provided for under applicable law, including the Electronic Signatures in Global and National Commerce Act of 2000 (15 USC § 7001 et seq.) or any other similar state or federal laws.

12.     HEADINGS
        
The headings of the various sections of this Agreement have been inserted for reference only and shall not be deemed to be a part of this Agreement.
    
13.    AGREEMENT

The Area Developer named at the top of the following page agrees to abide by the terms of this Agreement. The signature of an individual or individuals constitutes their personal agreement to such terms. The signature of an individual or individuals on behalf of an entity constitutes the entity’s agreement to such terms.

In addition, the Area Developer signatures of all individuals to this Agreement in, any capacity, also constitute their personal joint and several agreement to perform all the obligations in and relating to this Agreement, including, but not limited to, the obligations stated in Section 8.8 above concerning governing law, including, but not limited to, the application of Virginia law, the jurisdiction and venue clause, the jury waiver, the class action waiver, and the limitation to compensatory damages only, the obligation to make payments specified herein, pay any other promissory notes and other debts due to Liberty, and pay for products later ordered from Liberty. All signators on the following page waive any right to presentment, demand or notice of non-performance and the right to require Liberty to proceed against the other signators.


Area Developer Agreement 7/14
17



Area Developer:______________________________________    Entity Number:______________


SIGNATORS:

By:                                By:                        
(Signature)                            (Signature)

                                                        
(Printed Name)                        (Printed Name)

Title:                                Title:                        

Address:                            Address:                    

                                                        


Ownership Percentage:_____%                 Ownership Percentage:____%



By:                                By:                        
(Signature)                            (Signature)

                                                        
(Printed Name)                        (Printed Name)

Title:                                Title:                        

Address:                            Address:                    

                                                        


Ownership Percentage:_____%                 Ownership Percentage:____%

JTH TAX, INC. d/b/a            LIBERTY TAX SERVICE


By:                        

Printed Name:                    
                            
Title:                         

Effective Date:                


Area Developer Agreement 7/14
18


Schedule A

TERRITORY


The counties of :


which shall be divided by JTH Tax, Inc. into ______ Franchise Territories.


Area Developer Agreement 7/14
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Schedule B

MINIMUM REQUIREMENTS


At closing there are _______ JTH Tax, Inc. d/b/a Liberty Tax Service (“Liberty”) franchise territories with an active Liberty office currently within Area Developer’s Territory, and operating pursuant to franchise agreements by and between Liberty and each Franchisee that is a party to a franchise agreement (“existing active territories”). Area Developer agrees to maintain the number of existing active territories and agrees to identify and secure additional candidates/Franchisees such that the following cumulative minimum development obligations are met during the term of the Area Developer Agreement:


Development
Period
Ending

 
Cumulative Number of Liberty Tax Service
Effective Franchise Agreements
in Operation with an Active Liberty Office

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Area Developer Agreement 7/14
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Exhibit 21.1

SUBSIDIARIES OF JTH HOLDING, INC.
JTH Tax, Inc.
 
Delaware
 
 
 
JTH Financial, LLC
 
Virginia
 
 
 
Wefile, Inc.
 
Virginia
 
 
 
LTS Software, Inc.
 
Virginia
 
 
 
LTS Properties, LLC
 
Virginia
 
 
 
Liberty Tax Holding Corp.
 
Ontario, Canada
 
 
 
Liberty Tax Service Inc.
 
Manitoba, Canada
 
 
 
Employee Plus, Inc.
 
Virginia
 
 
 
JTH Tax Office Properties, LLC
 
Virginia
 
 
 
JTH New Ventures, LLC
 
Virginia
 
 
 
Hispanic Tax, LLC
 
Virginia
 
 
 
ACA Healthquest, LLC
 
Virginia
 
 
 
Unified Partners, LLC
 
Virginia
 
 
 
JTH Properties 1632, LLC
 
Virginia
 
 
 
SiempreTax LLC
 
Virginia
 
 
 
JTH Court Plaza, LLC
 
Virginia






Consent of Independent Registered Public Accounting Firm
The Board of Directors
Liberty Tax, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333 -199579) on Form S-3 and (No. 333-182585) on Form S-8 of Liberty Tax, Inc. (formerly JTH Holding, Inc.) of our report dated July 1, 2015, with respect to the consolidated balance sheets of Liberty Tax, Inc. and subsidiaries as of April 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended April 30, 2015, which report appears in the April 30, 2015 annual report on Form 10-K of Liberty Tax, Inc.
/s/ KPMG LLP
Norfolk, Virginia
July 1, 2015



Exhibit 31.1

I, John T. Hewitt, certify that:
 
1.                   I have reviewed this annual report on Form 10-K of Liberty Tax, Inc..;
 
2.                   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)              Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)              All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: July 1, 2015
By:
/s/ John T. Hewitt
 
 
John T. Hewitt
 
 
Chief Executive Officer and Chairman of the Board
 
 
(Principal Executive Officer)





Exhibit 31.2

I, Kathleen E. Donovan, certify that:
 
1.                          I have reviewed this annual report on Form 10-K of Liberty Tax, Inc.;
 
2.                          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)                       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)                       Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)                        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)                       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                            The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)                       All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)                       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: July 1, 2015
By:
/s/ Kathleen E. Donovan
 
 
Kathleen E. Donovan
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)





Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of JTH Holding, Inc. (the “Company”) on Form 10-K for the fiscal year ended April 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Hewitt, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: July 1, 2015
By:
/s/ John T. Hewitt
 
 
John T. Hewitt
 
 
Chief Executive Officer and Chairman of the Board (Principal Executive Officer)





Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Liberty Tax, Inc. (the “Company”) on Form 10-K for the fiscal year ended April 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kathleen E. Donovan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: July 1, 2015
By:
/s/ Kathleen E. Donovan
 
 
Kathleen E. Donovan
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)





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