H&R BLOCK INC
10-Ks and 10-Qs
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Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 |
|
| For the fiscal year ended April 30, 2010 | ||
|
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 1-6089
H&R Block,
Inc.
(Exact name of registrant as
specified in its charter)
| MISSOURI | 44-0607856 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
One
H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrant’s telephone
number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|
Common Stock, without par value
|
New York Stock Exchange |
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant is a well-known
seasoned issuer as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
þ
No
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. (Check one):
|
Large accelerated filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
o
No
þ
The aggregate market value of the registrant’s Common Stock
(all voting stock) held by non-affiliates of the registrant,
computed by reference to the price at which the stock was sold
on October 31, 2009, was $6,250,540,705.
Number of shares of the registrant’s Common Stock, without
par value, outstanding on May 31, 2010: 323,306,058.
Documents
incorporated by reference
The definitive proxy statement for the registrant’s Annual
Meeting of Shareholders, to be held September 30, 2010, is
incorporated by reference in Part III to the extent
described therein.
2010
FORM 10-K
AND ANNUAL REPORT
TABLE
OF CONTENTS
Table of Contents
Specified portions of our proxy statement are listed as
“incorporated by reference” in response to certain
items. Our proxy statement will be made available to
shareholders in August 2010, and will also be available on our
website at
www.hrblock.com
.
This report and other documents filed with the Securities and
Exchange Commission (SEC) may contain forward-looking
statements. In addition, our senior management may make
forward-looking statements orally to analysts, investors, the
media and others. Forward-looking statements can be identified
by the fact that they do not relate strictly to historical or
current facts. They often include words such as
“expects,” “anticipates,”
“intends,” “plans,” “believes,”
“seeks,” “estimates,” “will,”
“would,” “should,” “could” or
“may.” Forward-looking statements provide
management’s current expectations or predictions of future
conditions, events or results. They may include projections of
revenues, income, earnings per share, capital expenditures,
dividends, liquidity, capital structure or other financial
items, descriptions of management’s plans or objectives for
future operations, products or services, or descriptions of
assumptions underlying any of the above. They are not guarantees
of future performance. By their nature, forward-looking
statements are subject to risks and uncertainties. These
statements speak only as of the date they are made and
management does not undertake to update them to reflect changes
or events occurring after that date except as required by
federal securities laws.
GENERAL
DEVELOPMENT OF BUSINESS
H&R Block has subsidiaries that provide tax, banking and
business and consulting services. Our Tax Services segment
provides income tax return preparation, electronic filing and
other services and products related to income tax return
preparation to the general public primarily in the United
States, and also in Canada and Australia. This segment also
offers the H&R Block Prepaid Emerald
MasterCard
®
and Emerald Advance lines of credit through H&R Block Bank
(HRB Bank), along with other retail banking services. Our
Business Services segment consists of RSM McGladrey, Inc. (RSM),
a national tax and consulting firm primarily serving mid-sized
businesses. Corporate operations include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
H&R Block, Inc. was organized as a corporation in 1955
under the laws of the State of Missouri. “H&R
Block,” “the Company,” “we,”
“our” and “us” are used interchangeably to
refer to H&R Block, Inc. or to H&R Block, Inc. and its
subsidiaries, as appropriate to the context. A complete list of
our subsidiaries can be found in Exhibit 21.
NEW
DEVELOPMENTS
–
In May 2010 we announced plans to realign field and
support organizations. The realignment included approximately
400 staff reductions and 400 office closures. Associated
severance benefits were recorded primarily during the first
fiscal quarter of 2011 and totaled approximately
$19 million. There were no significant costs incurred in
connection with announced office closures.
During fiscal year 2010, we entered into a new unsecured
committed line of credit (CLOC) agreement to support commercial
paper issuances, general corporate purposes and for working
capital needs. The new facility provides funding up to
$1.7 billion and matures July 31, 2013. This facility
replaced our existing CLOCs, which were set to mature in August
2010. See additional discussion in Item 8, note 10 to
the consolidated financial statements.
RSM and McGladrey & Pullen LLP (M&P), an
independent registered public accounting firm, collaborate to
provide tax and consulting services to clients under an
alternative practice structure (APS). RSM and M&P also
share in certain common overhead costs through an administrative
services agreement. These services are provided by, and
coordinated through, RSM, for which RSM receives a management
fee.
Effective February 3, 2010, RSM and M&P entered into
new agreements related to the operation of the APS. See
additional discussion of the new agreements in Item 8,
note 17.
Effective May 1, 2009, we realigned certain segments of our
business to reflect a new management reporting structure. The
operations of HRB Bank, which was previously reported as the
Consumer Financial Services segment, have now been reclassified,
with activities that support our retail tax network included in
the Tax Services segment, and the net interest margin and gains
and losses relating to our portfolio of mortgage loans held for
investment and related assets included in the corporate segment.
Presentation of prior period results reflects the new segment
reporting structure.
H&R
BLOCK 2010
Form 10K
1
Table of Contents
FINANCIAL
INFORMATION ABOUT INDUSTRY SEGMENTS
See discussion below and in Item 8, note 21 to our
consolidated financial statements.
DESCRIPTION OF
BUSINESS
TAX
SERVICES
GENERAL
–
Our Tax Services segment is primarily engaged in
providing tax return preparation and related services and
products in the U.S. and its territories, Canada and
Australia. Major revenue sources include fees earned for tax
preparation services performed at company-owned retail tax
offices, royalties from franchise retail tax offices, fees for
tax-related services, sales of tax preparation and other
software, online tax preparation fees, participation in refund
anticipation loans (RALs), refund anticipation checks (RACs),
fees from activities related to H&R Block Prepaid Emerald
MasterCard
®
,
and interest and fees from Emerald Advance lines of credit. HRB
Bank also offers traditional banking services including checking
and savings accounts, individual retirement accounts and
certificates of deposit. Segment revenues constituted 76.8% of
our consolidated revenues from continuing operations for fiscal
year 2010, 76.7% for 2009 and 74.9% for 2008.
Retail income tax return preparation and related services are
provided by tax professionals via a system of retail offices
operated directly by us or by franchisees. We also offer our
services through seasonal offices located inside major retailers.
TAX RETURNS
PREPARED
–
We, together with our franchisees, prepared approximately
23.2 million tax returns worldwide during fiscal year 2010,
compared to 23.9 million in 2009 and 24.6 million in
2008. We prepared 20.1 million tax returns in the
U.S. during fiscal year 2010, down from 21.0 million
in 2009 and 21.8 million in 2008. Our U.S. tax returns
prepared, including those prepared by our franchisees and those
prepared and filed at no charge, for the 2010 tax season
constituted 15.6% of an Internal Revenue Service (IRS) estimate
of total individual income tax returns filed during the fiscal
year 2010 tax season. This compares to 15.8% in the 2009 tax
season and 16.2% in the 2008 tax season, excluding tax returns
filed as a result of the Economic Stimulus Act of 2008 (Stimulus
Act). See Item 7 for further discussion of changes in the
number of tax returns prepared.
FRANCHISES
–
We offer franchises as a way to expand our presence in
certain markets. Our franchise arrangements provide us with
certain rights designed to protect our brand. Most of our
franchisees receive use of our software, access to product
offerings and expertise, signs, specialized forms, local
advertising, initial training and supervisory services, and pay
us a percentage, typically approximately 30%, of gross tax
return preparation and related service revenues as a franchise
royalty.
During fiscal years 2010 and 2009 we sold certain offices to
existing franchisees for sales proceeds totaling
$65.7 million and $16.9 million, respectively. The net
gain on these transactions totaled $49.0 million and
$14.9 million in fiscal years 2010 and 2009, respectively.
The extent to which we sell company-owned offices will depend
upon ongoing analysis regarding the optimal mix of offices for
our network, including geographic location, as well as our
ability to identify qualified franchisees.
From time to time, we have also acquired the territories of
existing franchisees and other tax return preparation
businesses, and may continue to do so if future conditions
warrant and satisfactory terms can be negotiated. During fiscal
year 2009, we acquired the assets and franchise rights of our
last major independent franchise operator for an aggregate
purchase price of $279.2 million.
OFFICES
–
A summary of our company-owned and franchise offices is
as follows:
|
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| April 30, | 2010 | 2009 | 2008 | |||||||||
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U.S. OFFICES:
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||||||||||||
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Company-owned offices
|
6,431 | 7,029 | 6,835 | |||||||||
|
Company-owned shared
locations
(1)
|
760 | 1,542 | 1,478 | |||||||||
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||||||||||||
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Total company-owned offices
|
7,191 | 8,571 | 8,313 | |||||||||
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|
Franchise offices
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3,909 | 3,565 | 3,812 | |||||||||
|
Franchise shared
locations
(1)
|
406 | 787 | 913 | |||||||||
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|
||||||||||||
|
Total franchise offices
|
4,315 | 4,352 | 4,725 | |||||||||
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| 11,506 | 12,923 | 13,038 | ||||||||||
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INTERNATIONAL OFFICES:
|
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Canada
|
1,269 | 1,193 | 1,143 | |||||||||
|
Australia
|
374 | 378 | 366 | |||||||||
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||||||||||||
| 1,643 | 1,571 | 1,509 | ||||||||||
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2
H&R
BLOCK 2010 Form 10K
Table of Contents
| (1) | Shared locations include offices located within Sears or other third-party businesses. In 2009 and 2008, these locations also included offices within Wal-Mart stores. |
We sold 267 company-owned offices to franchisees in fiscal
year 2010 and 76 offices in fiscal year 2009. Additionally, we
closed more than 1,700 offices in fiscal year 2010, including
over 1,000 offices in Wal-Mart stores.
The acquisition of our last major independent franchise operator
in fiscal year 2009 included a network of over 600 tax offices,
nearly two-thirds of which converted to company-owned offices
upon the closing of the transaction, as reflected in the table
above.
Offices in shared locations at April 30, 2010 consist
primarily of offices in Sears stores operated as “H&R
Block at Sears.” The Sears license agreement expires in
July 2010. Offices in shared locations at April 30, 2009
and 2008 included offices in Wal-Mart stores. The Wal-Mart
agreement expired in May 2009.
SERVICE AND
PRODUCT
OFFERINGS
–
In addition to our retail offices, we offer a number of
digital tax preparation alternatives. By offering professional
and do-it-yourself tax preparation options through multiple
channels, we seek to serve our clients in the manner they choose
to be served.
We also offer clients a number of options for receiving their
income tax refund, including a check directly from the IRS, an
electronic deposit directly to their bank account, a prepaid
debit card, a RAC or a RAL.
Software
Products.
We
develop and market H&R Block At
Home
tm
income tax preparation software. H&R Block At
Home
tm
offers a simple
step-by-step
tax preparation interview, data imports from money management
software and tax preparation software, calculations, completion
of the appropriate tax forms, error checking and electronic
filing. Our software products may be purchased through
third-party retail stores, direct mail or online.
Online Tax
Preparation.
We
offer a comprehensive range of online tax services, from tax
advice to complete professional and do-it-yourself tax return
preparation and electronic filing, through our website at
www.hrblock.com
. This website allows clients to prepare
their federal and state income tax returns using the H&R
Block At
Home
tm
Online Tax Program, access tax tips, advice and tax-related news
and use calculators for tax planning.
We participate in the Free File Alliance (FFA). This alliance
was created by the tax return preparation industry and the IRS,
and allows qualified filers with adjusted gross incomes less
than $57,000 to prepare and file their federal return online at
no charge. We feel this program provides a valuable public
service and increases our visibility with new clients, while
also providing an opportunity to offer our state return
preparation and other services to these clients.
RALs.
RALs
are offered to our U.S. clients by a designated bank
primarily through a contractual relationship with HSBC Holdings
plc (HSBC). An eligible, electronic filing client may apply for
a RAL at one of our offices. After meeting certain eligibility
criteria, clients are offered the opportunity to apply for a
loan from HSBC in amounts up to $9,999 based on their
anticipated federal income tax refund. We simultaneously
transmit the income tax return information to the IRS and the
lending bank. Within a few days after the filing date, the
client receives a check, direct deposit or prepaid debit card in
the amount of the loan, less the bank’s transaction fee,
our tax return preparation fee and other fees for
client-selected services. Additionally, qualifying electronic
filing clients are eligible to receive their RAL proceeds, less
applicable fees, in approximately one hour after electronic
filing using the Instant Money service. A RAL is repaid
when the IRS directly deposits the participating client’s
federal income tax refund into a designated account at the
lending bank. See related discussion in “Loan
Participations” below.
RACs.
Refund
Anticipation Checks are offered to U.S. clients who would
like to either: (1) receive their refund faster and do not
have a bank account for the IRS to direct deposit their refund;
(2) have their tax preparation fees paid directly out of
their refund; or (3) receive their refund faster but do not
qualify for a RAL under the existing credit criteria. A RAC is
not a loan and is provided through a contractual relationship
with HSBC.
Peace of Mind
(POM)
Guarantee.
The
POM guarantee is offered to U.S. clients, in addition to
our standard guarantee, whereby we (1) represent our
clients if audited by the IRS, and (2) assume the cost,
subject to certain limits, of additional taxes owed by a client
resulting from errors attributable to one of our tax
professionals’ work. The POM program has a per client
cumulative limit of $5,000 in additional taxes assessed with
respect to the federal, state and local tax returns we prepared
for the taxable year covered by the program.
Emerald Advance
Lines of
Credit.
Emerald
Advance lines of credit are offered to clients in tax offices
from late November through early January, currently in an amount
not to exceed $1,000. If the borrower meets certain criteria as
agreed in the loan terms, the line of credit can be increased
and utilized year-round. These lines of credit are offered by
HRB Bank.
H&R Block
Prepaid Emerald
Mastercard
®
.
The
H&R Block Prepaid Emerald
MasterCard
®
allows a client to receive a tax refund from the IRS directly on
a prepaid debit card, or to direct RAL or RAC proceeds to the
card to avoid high-cost check-cashing fees. The card can be used
for everyday purchases, bill payments and ATM withdrawals
anywhere
MasterCard
®
is accepted. Additional funds can be added to the card account
year-round
H&R
BLOCK 2010
Form 10K
3
Table of Contents
through direct deposit or at participating retail locations. The
H&R Block Prepaid Emerald
MasterCard
®
is issued by HRB Bank.
Tax Return
Preparation
Courses.
We
offer income tax return preparation courses to the public, which
teach students how to prepare income tax returns and provide us
with a source of trained tax professionals.
CashBack
Program.
We
offer a refund discount (CashBack) program to our customers in
Canada. In accordance with current Canadian regulations, if a
customer’s tax return indicates the customer is entitled to
a tax refund, we issue a check to the client in the amount of
the refund, less a discount. The client assigns to us the full
amount of the tax refund to be issued by the Canada Revenue
Agency (CRA) and the refund check is then sent by the CRA
directly to us. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the
fee for tax refund discounting. This program is financed by
short-term borrowings. The number of returns discounted under
the CashBack program in fiscal year 2010 was approximately
797,000, compared to 782,000 in 2009 and 749,000 in 2008.
LOAN
PARTICIPATIONS
–
Since July 1996, we have been a party to agreements with
HSBC and its predecessors to participate in RALs provided by a
lending bank to H&R Block tax clients. During fiscal year
2006, we signed new agreements with HSBC in which we obtained
the right to purchase a 49.9% participation interest in all RALs
obtained through our retail offices. We received a signing bonus
from HSBC during fiscal year 2006 in connection with these
agreements, which was recorded as deferred revenue and is earned
over the contract term. These agreements are effective through
June 2011 and we have the right to extend through 2013. Our
purchases of the participation interests are financed through
short-term borrowings and we bear all of the credit risk
associated with our participation interests. Revenue from our
participation is calculated as the rate of participation
multiplied by the fee paid by the borrower to the lending bank.
Our RAL participation revenue was $146.2 million,
$139.8 million and $190.2 million in fiscal years
2010, 2009 and 2008, respectively.
SEASONALITY OF
BUSINESS
–
Because most of our clients file their tax returns during
the period from January through April of each year,
substantially all of our revenues from income tax return
preparation and related services and products are received
during this period. As a result, this segment generally operates
at a loss through the first eight months of the fiscal year.
Peak revenues occur during the applicable tax season, as follows:
|
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||||
|
United States and Canada
Australia |
January – April
July – October |
|||
|
|
||||
HRB Bank’s operating results are subject to seasonal
fluctuations primarily related to the offering of the H&R
Block Prepaid Emerald
MasterCard
®
and Emerald Advance lines of credit, and therefore peak in
January and February and taper off through the remainder of the
tax season.
COMPETITIVE
CONDITIONS
–
The retail tax services business is highly competitive.
There are a substantial number of tax return preparation firms
and accounting firms offering tax return preparation services.
Many tax return preparation firms and many firms not otherwise
in the tax return preparation business are involved in providing
electronic filing and RAL services to the public. Commercial tax
return preparers and electronic filers are highly competitive
with regard to price and service. In terms of the number of
offices and personal tax returns prepared and electronically
filed in offices, online and via our software, we are one of the
largest providers of direct tax return preparation and
electronic filing services in the U.S. We also believe we
operate the largest tax return preparation businesses in Canada
and Australia.
Our digital tax solutions businesses compete with a number of
companies. Intuit, Inc. is the largest supplier of tax
preparation software and online tax preparation services. There
are many smaller competitors in the online market, as well as
free state-sponsored online filing programs. Price and marketing
competition for digital tax preparation services is increasing,
including offers of free tax preparation services.
HRB Bank provides banking services primarily to our tax clients,
both retail and digital, and for many of these clients, HRB Bank
is the only provider of banking services. HRB Bank does not seek
to compete broadly with regional or national retail banks.
GOVERNMENT
REGULATION
–
Federal legislation requires income tax return preparers
to, among other things, set forth their signatures and
identification numbers on all tax returns prepared by them and
retain all tax returns prepared by them for three years. Federal
laws also subject income tax return preparers to
accuracy-related penalties in connection with the preparation of
income tax returns. Preparers may be prohibited from further
acting as income tax return preparers if they continuously and
repeatedly engage in specified misconduct.
The federal government regulates the electronic filing of income
tax returns in part by requiring electronic filers to comply
with all publications and notices of the IRS applicable to
electronic filing. We are required to provide certain electronic
filing information to the taxpayer and comply with advertising
standards for electronic filers. We are also subject to possible
monitoring by the IRS, penalties for improper disclosure or use
of income tax return preparation, other preparer penalties and
suspension from the electronic filing program.
4
H&R
BLOCK 2010 Form 10K
Table of Contents
The Gramm-Leach-Bliley Act and related Federal Trade Commission
(FTC) regulations require income tax preparers to adopt and
disclose consumer privacy policies, and provide consumers a
reasonable opportunity to “opt-out” of having personal
information disclosed to unaffiliated third-parties for
marketing purposes. Some states have adopted or proposed strict
“opt-in” requirements in connection with use or
disclosure of consumer information. In addition, the IRS
generally prohibits the use or disclosure by tax return
preparers of taxpayer information without the prior written
consent of the taxpayer.
Federal statutes and regulations also regulate an electronic
filer’s involvement in RALs. Electronic filers must clearly
explain the RAL is a loan and not a substitute for or a quicker
way of receiving an income tax refund. Federal laws place
restrictions on the fees an electronic filer may charge in
connection with RALs. In addition, some states and localities
have enacted laws and adopted regulations for RAL facilitators
and/or
the
advertising of RALs.
Certain states have regulations and requirements relating to
offering income tax courses. These requirements include
licensing, bonding and certain restrictions on advertising.
The IRS published proposed amendments on March 26, 2010
that, if finalized, would: (1) require all tax return
preparers to use a Preparer Tax Identification Number (PTIN) as
their identifying number on federal tax returns filed after
December 31, 2010; (2) require all tax return
preparers to be authorized to practice before the IRS as a
prerequisite to obtaining or renewing a PTIN; (3) cause all
currently issued PTINs to expire on December 31, 2010
unless properly renewed; (4) allow the IRS to conduct tax
compliance checks on tax return preparers; and (5) define
the individuals who are considered “tax return
preparers” for the PTIN requirement. Additionally, it is
expected that five other proposed regulations will be released
in calendar year 2010. These would propose to:
(1) establish instructions for tax return preparers related
to legislative
e-file
mandate requirements; (2) set the amount of the PTIN user
registration fee; (3) establish a new class of
practitioners who are authorized to practice before the IRS
under Circular 230 called “registered tax return
preparers” and require them to pass a competency
examination as a prerequisite to becoming a registered tax
return preparer, complete annual continuing professional
education requirements, and comply with ethical standards;
(4) set the amount of a sponsor fee for qualified
continuing professional education sponsors; and (5) set the
amount of a competency examination user fee.
As noted above under “Offices,” many of the income tax
return preparation offices operating in the U.S. under the
name “H&R Block” are operated by franchisees. Our
franchising activities are subject to the rules and regulations
of the FTC and various state laws regulating the offer and sale
of franchises. The FTC and various state laws require us to
furnish to prospective franchisees a franchise offering circular
containing prescribed information. A number of states in which
we are currently franchising regulate the sale of franchises and
require registration of the franchise offering circular with
state authorities and the delivery of a franchise offering
circular to prospective franchisees. We are currently operating
under exemptions from registration in several of these states
based on our net worth and experience. Substantive state laws
regulating the franchisor/franchisee relationship presently
exist in a substantial number of states, and bills have been
introduced in Congress from time to time that would provide for
federal regulation of the franchisor/franchisee relationship in
certain respects. The state laws often limit, among other
things, 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. From time to time, we may make appropriate amendments
to our franchise offering circular to comply with our disclosure
obligations under federal and state law.
We also seek to determine the applicability of all government
and self-regulatory organization statutes, ordinances, rules and
regulations in the other countries in which we operate
(collectively, Foreign Laws) and to comply with these Foreign
Laws. In addition, the Canadian government regulates the
refund-discounting program in Canada. These laws have not
materially affected our international operations.
HRB Bank is subject to regulation, supervision and examination
by the Office of Thrift Supervision (OTS), the Federal Reserve
and the Federal Deposit Insurance Corporation (FDIC). All
savings associations are subject to the capital adequacy
guidelines and the regulatory framework for prompt corrective
action. HRB Bank must meet specific capital guidelines involving
quantitative measures of HRB Bank’s assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. HRB Bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
As a savings and loan holding company, H&R Block, Inc. is
also subject to regulation by the OTS.
See Item 7, “Regulatory Environment” and
Item 8, note 19 to the consolidated financial
statements for additional discussion of regulatory requirements.
See discussion in Item 1A, “Risk Factors” for
additional information.
H&R
BLOCK 2010
Form 10K
5
Table of Contents
BUSINESS
SERVICES
GENERAL
–
Our
Business Services segment offers tax and consulting services,
wealth management and capital markets services to middle-market
companies. Segment revenues constituted 22.2% of our
consolidated revenues from continuing operations for fiscal year
2010, 22.0% for fiscal year 2009 and 23.0% for fiscal year
2008.
This segment consists primarily of RSM, which provides tax and
consulting services in 88 cities and 26 states and
offers services in 20 of the 25 top U.S. markets.
From time to time, we have acquired related businesses and may
continue to do so if future conditions warrant and satisfactory
terms can be negotiated.
ALTERNATIVE
PRACTICE STRUCTURE WITH McGLADREY & PULLEN
LLP –
M&P is a limited liability
partnership, owned 100% by certified public accountants (CPAs),
which provides attest services to middle-market clients.
Under state accountancy regulations, a firm cannot provide
attest services unless it is majority-owned and controlled by
licensed CPAs. As such, RSM is unable to provide attest
services. Since 1999, RSM and M&P have operated in what is
known as an “alternative practice structure” (APS).
Through the APS, RSM and M&P are able to offer clients a
full-range of attest and non-attest services in full compliance
with applicable accountancy regulations.
An administrative services agreement between RSM and M&P
obligates RSM to provide M&P with administrative services,
information technology, office space, non-professional staff,
and other infrastructure in exchange for market rate fees from
M&P.
On July 21, 2009, M&P provided 210 days notice of
its intent to terminate the administrative services agreement,
resulting in termination of the APS unless revoked or modified
prior to the expiration of the notice period. As a protective
measure, on September 15, 2009, RSM also provided notice of
its intent to terminate the administrative services agreement.
Effective February 3, 2010, RSM and M&P entered into
new agreements related to the operation of the APS, withdrawing
their prior notices of termination.
Pursuant to a Governance and Operations Agreement effective
February 3, 2010, RSM and M&P agreed to be bound by
the final award of an arbitration panel, dated as of
November 24, 2009, regarding the applicability and
enforceability of certain restrictive covenants between the
parties. In the event the APS were ever terminated, M&P
would generally be prohibited as a result of these restrictive
covenants, from (1) engaging in businesses in which RSM
operates in for 17 months, (2) soliciting any business
with clients or potential clients of RSM or any of its
subsidiaries or affiliates for 29 months, and
(3) soliciting employees of RSM or any of its subsidiaries
or affiliates for 24 months.
Although not required by the Governance and Operations
Agreement, all partners of M&P, with the exception of
M&P’s Managing Partner, are also managing directors
employed by RSM. Approximately 86% of RSM’s managing
directors are also partners in M&P. Certain other personnel
are also employed by both M&P and RSM. M&P partners
receive distributions from M&P in their capacity as
partners, as well as compensation from RSM in their capacity as
managing directors. Distributions to M&P partners are based
on the profitability of M&P and are not capped by this
arrangement. Pursuant to the Governance and Operations
Agreement, effective May 1, 2010, the aggregate
compensation payable to RSM managing directors by RSM in any
given year shall generally equal 67 percent of the combined
profits of M&P and RSM less any amounts paid in their
capacity as M&P partners. RSM followed a similar practice
historically, except that the compensation pool for managing
directors was based on 65 percent of combined profits. In
practice, this means that variability in the amounts paid to RSM
managing directors under these contracts can cause variability
in RSM’s operating results. RSM is not entitled to any
profits or residual interests of M&P, nor is it obligated
to fund losses or capital deficiencies of M&P. Managing
directors of RSM have historically participated in stock-based
compensation plans of H&R Block. Beginning in fiscal 2011,
participation in those plans will cease and be replaced by a
non-qualified retirement plan.
See additional discussion in Item 8, note 17 to the
consolidated financial statements.
SEASONALITY OF
BUSINESS
–
Revenues
for this segment are largely seasonal in nature, with peak
revenues occurring during January through April.
COMPETITIVE
CONDITIONS
–
The
tax and consulting business is highly competitive. The principal
methods of competition are price, service and reputation for
quality. There are a substantial number of accounting firms
offering similar services at the international, national,
regional and local levels. As our focus is on middle-market
businesses, our principal competition is with national and
regional accounting firms.
GOVERNMENT
REGULATION
–
Many
of the same federal and state regulations relating to tax
preparers and the information concerning tax reform and tax
preparer registration discussed previously in Tax Services apply
to the Business Services segment as well. RSM is not, and is not
eligible to be, a licensed public accounting firm and takes
measures to ensure that it does not provide services prohibited
by regulation, such as attest services. RSM, through
6
H&R
BLOCK 2010 Form 10K
Table of Contents
its subsidiaries, provides capital
markets and wealth management services and is subject to state
and federal regulations governing investment advisors and
securities brokers and dealers.
M&P and other accounting firms (collectively, the
“Attest Firms”) operate in an alternative practice
structure with RSM. Auditor independence rules of the SEC, the
Public Company Accounting Oversight Board (PCAOB) and various
states apply to the Attest Firms as public accounting firms. In
applying its auditor independence rules, the SEC views us and
the Attest Firms as a single entity and requires that the SEC
independence rules for the Attest Firms apply to us and requires
us to be independent of any SEC audit client of the Attest
Firms. The SEC regards any financial interest or prohibited
business relationship we have with a client of the Attest Firms
as a financial interest or prohibited business relationship
between the Attest Firms and the client for purposes of applying
its auditor independence rules.
We and the Attest Firms have jointly developed and implemented
policies, procedures and controls designed to ensure the Attest
Firms’ independence as audit firms complying with
applicable SEC regulations and professional responsibilities.
These policies, procedures and controls are designed to monitor
and prevent violations of applicable independence rules and
include, among other things: (1) informing our officers,
directors and other members of senior management concerning
auditor independence matters; (2) procedures for monitoring
securities ownership; (3) communicating with SEC audit
clients regarding the SEC’s interpretation and application
of relevant independence rules and guidelines; and
(4) requiring RSM employees to comply with the Attest
Firms’ independence and relationship policies (including
the Attest Firms’ independence compliance questionnaire
procedures).
See discussion in Item 1A, “Risk Factors” for
additional information.
SERVICE MARKS,
TRADEMARKS AND PATENTS
We have made a practice of selling our services and products
under service marks and trademarks and of obtaining protection
for these by all available means. Our service marks and
trademarks are protected by registration in the U.S. and
other countries where our services and products are marketed. We
consider these service marks and trademarks, in the aggregate,
to be of material importance to our business, particularly our
business segments providing services and products under the
“H&R Block” brand.
We have no registered patents material to our business.
EMPLOYEES
We have approximately 7,700 regular full-time employees as of
April 30, 2010. The highest number of persons we employed
during the fiscal year ended April 30, 2010, including
seasonal employees, was approximately 110,400.
AVAILABILITY OF
REPORTS AND OTHER 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.hrblock.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-0330.
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.
Copies of the following corporate governance documents are
posted on our website:
| § | The Amended and Restated Articles of Incorporation of H&R Block, Inc.; | |
| § | The Amended and Restated Bylaws of H&R Block, Inc.; | |
| § | The H&R Block, Inc. Corporate Governance Guidelines; | |
| § | The H&R Block, Inc. Code of Business Ethics and Conduct; | |
| § | The H&R Block, Inc. Board of Directors Independence Standards; | |
| § | The H&R Block, Inc. Audit Committee Charter; | |
| § | The H&R Block, Inc. Governance and Nominating Committee Charter; and | |
| § | The H&R Block, Inc. Compensation Committee Charter. |
If you would like a printed copy of any of these corporate
governance documents, please send your request to the Office of
the Secretary, H&R Block, Inc., One H&R Block Way,
Kansas City, Missouri 64105.
Information contained on our website does not constitute any
part of this report.
H&R
BLOCK 2010
Form 10K
7
Table of Contents
An investment in our common stock involves risk, including the
risk that the value of an investment may decline or that returns
on that investment may fall below expectations. There are a
number of significant factors which could cause actual
conditions, events or results to differ materially from those
described in forward-looking statements, many of which are
beyond management’s control or its ability to accurately
forecast or predict, or could adversely affect our operating
results and the value of any investment in our stock. Other
factors besides those listed below or discussed in reports filed
with the SEC could adversely affect our results.
Our businesses
may be adversely affected by economic conditions generally,
including the current economic recession and lower employment
levels.
Due in part to poor economic conditions and high unemployment,
U.S. tax returns prepared by us declined 1.0 million
and 0.7 million in fiscal years 2010 and 2009, respectively.
An economic recession as we are currently experiencing, is
frequently characterized by lower employment and declining
consumer and business spending. Poor economic conditions may
negatively affect demand and pricing for our services. Lower
employment levels, especially within client segments we serve,
may result in clients no longer being required to file tax
returns, electing not to file tax returns, or clients seeking
lower cost preparation and filing alternatives. Continued lower
employment levels may negatively impact our ability to increase
tax preparation clients.
In addition, the downturn in the residential housing market and
increase in mortgage defaults has negatively impacted our
operating results and may continue to do so. An economic
recession will likely reduce the ability of our borrowers to
repay mortgage loans, and declining home values could increase
the severity of loss we may incur in the event of default. In
addition to mortgage loans, we also extend secured and unsecured
credit to other customers, including RALs and Emerald Advance
lines of credit to our tax clients. We may incur significant
losses on credit we extend, which in turn could reduce our
profitability.
Our access to
liquidity may be negatively impacted if disruptions in credit
markets occur, if credit rating downgrades occur or if we fail
to meet certain covenants. Funding costs may increase, leading
to reduced earnings.
We need liquidity to meet our off-season working capital
requirements, to service debt obligations including refinancing
of maturing obligations, to purchase RAL participations and for
other related activities. Although we believe we have sufficient
liquidity to meet our current needs, our access to and the cost
of liquidity could be negatively impacted in the event of
credit-rating downgrades or if we fail to meet existing debt
covenants. In addition, events could occur which could increase
our need for liquidity above current levels.
If rating agencies downgrade our credit rating, the cost of debt
would likely increase and capital market access could decrease
or become unavailable. Our CLOC is subject to various covenants,
including a covenant requiring that we maintain minimum net
worth equal to $650.0 million and a requirement that we
reduce the aggregate outstanding principal amount of short-term
debt (as defined) to $200.0 million or less for a minimum
period of thirty consecutive days during the period from March 1
to June 30 of each year. Violation of a covenant could impair
our access to liquidity currently available through the CLOC. If
current sources of liquidity were to become unavailable, we
would need to obtain additional sources of funding, which may
not be possible or may be available under less favorable terms.
The lines of
business in which we operate face 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 earnings to decline.
Negative public opinion can also result from our actual or
alleged conduct in such claims, possibly damaging our reputation
and could cause the market price of our stock to decline. See
Item 3, “Legal Proceedings” for additional
information.
Failure to comply
with laws and regulations that protect our customers’
personal and financial information could result in significant
fines, penalties and damages and could harm our brand and
reputation.
Privacy concerns relating to the disclosure of consumer
financial information have drawn increased attention from
federal and state governments. 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, other regulations require financial service
providers 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
8
H&R
BLOCK 2010 Form 10K
Table of Contents
marketing purposes. Although we have established security
procedures to protect against identity theft, breaches of our
clients’ privacy may occur. To the extent the measures we
have taken prove to be insufficient or inadequate, we may become
subject to litigation or administrative sanctions, which could
result in significant fines, penalties or damages and harm to
our brand and reputation.
In addition, 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. Establishing systems and processes
to achieve compliance with these new requirements may increase
costs
and/or
limit our ability to pursue certain business opportunities.
We are subject to
operational risk and risks associated with our controls and
procedures, which may result in incurring financial and
reputational losses.
There is a risk of loss resulting from inadequate or failed
processes or systems, theft or fraud. These can occur in many
forms including, among others, errors, business interruptions
arising from natural disasters or other events, inadequate
design and development of products and services, inappropriate
behavior of or misconduct by our employees or those contracted
to perform services for us, and vendors that do not perform in
accordance with their contractual agreements. These events could
potentially result in financial losses or other damages. We
utilize internally developed processes, internal and external
information and technological systems to manage our operations.
We are exposed to risk of loss resulting from breaches in the
security or other failures of these processes and systems. Our
ability to recover or replace our major operational systems and
processes could have a significant impact on our core business
operations and increase our risk of loss due to disruptions of
normal operating processes and procedures that may occur while
re-establishing or implementing information and transaction
systems and processes. As our businesses are seasonal, our
systems must be capable of processing high volumes during peak
season. Therefore, service interruptions resulting from system
failures could negatively impact our ability to serve our
customers, which in turn could damage our brand and reputation,
or adversely impact our profitability.
We also face the risk that the design of our controls and
procedures may prove to be inadequate or that our controls and
procedures may be circumvented, thereby causing delays in
detection of errors or inaccuracies in data and information. It
is possible that any lapses in the effective operations of
controls and procedures could materially affect earnings or harm
our reputation. Lapses or deficiencies in internal control over
financial reporting could also be material to us.
TAX
SERVICES
Government
initiatives that simplify tax return preparation could reduce
the need for our services as a third-party tax return preparer.
In addition, changes in government regulations or processes
regarding the preparation and filing of tax returns may increase
our operating costs or reduce our revenues.
Many taxpayers seek assistance from paid tax return preparers
such as us because of the level of complexity involved in the
tax return preparation and filing process. From time to time,
government officials propose measures seeking to simplify the
preparation and filing of tax returns or to provide additional
assistance with respect to preparing and filing such tax
returns. The adoption of any measures that significantly
simplify tax return preparation or otherwise reduce the need for
a third-party tax return preparer could reduce demand for our
services, causing our revenues or results of operations to
decline.
Governmental regulations and processes affect how we provide
services to our clients. Changes in these regulations and
processes may require us to make corresponding changes to our
client service systems and procedures. The degree and timing of
changes in governmental regulations and processes may impair our
ability to serve our clients in an effective and cost-efficient
manner or reduce demand for our services, causing our revenues
or results of operations to decline.
Federal and state
legislators and regulators have increasingly taken an active
role in regulating financial products such as RALs. In addition,
we are dependent on third-party financial institutions to
provide certain of these financial products to our clients and
these institutions could cease or significantly reduce the
offering of such products. These trends or potential
developments could impede our ability to facilitate these
financial products, reduce demand for our services and harm our
business.
Changes in government regulation related to RALs could prohibit
or limit the offering of RALs to our clients or our ability to
purchase participation interests. In addition, third-party
financial institutions currently originating RALs and similar
products could decide to cease or significantly limit such
offerings and related collection practices. Changes in IRS
practices, including limitations on the availability of the IRS
debt indicator, could impair our ability to limit our bad debt
exposure. Changes in any of these, as well as possible
litigation related to financial products offered through our
distribution channels, may cause our revenues or profitability
to decline. See discussion of RAL litigation in Item 3,
“Legal Proceedings.” In addition to the loss of
revenues and income directly attributable to
H&R
BLOCK 2010
Form 10K
9
Table of Contents
the RAL program, the inability to
offer RALs could indirectly result in the loss of significant
retail tax clients and associated tax preparation revenues,
unless we were able to take mitigating actions.
RAL participation and related revenues totaled
$146.2 million for the year ended April 30, 2010,
representing 3.8% of consolidated revenues and contributed
$89.5 million to the Tax Services segment’s pretax
results. We prepared 20.1 million U.S. returns in
fiscal year 2010, and of those clients 16.8% also purchased a
RAL.
Increased
competition for tax preparation clients in our retail offices
and our online and software channels could adversely affect our
current market share and profitability, and could limit our
ability to grow our client base. Offers of free tax preparation
services could adversely affect our revenues and
profitability.
The retail tax services business is highly competitive. There
are a substantial number of tax return preparation firms and
accounting firms offering tax return preparation services. Many
tax return preparation firms and many firms not otherwise in the
tax return preparation business are involved in providing
electronic filing, RALs and other related services to the
public. Commercial tax return preparers and electronic filers
are highly competitive with regard to price and service. Our
digital tax solutions businesses also compete with in-office tax
preparation services and a number of online and software
companies, primarily on the basis of price and functionality.
Federal and certain state taxing authorities currently offer, or
facilitate the offer of, tax return preparation and electronic
filing options to taxpayers at no charge. In addition, many of
our direct competitors offer certain free online tax preparation
and electronic filing options. We have free offerings as well
and prepared approximately 810,000 federal income tax returns in
fiscal year 2010 and 788,000 in fiscal year 2009 at no charge as
part of the FFA. Government tax authorities and direct
competitors may elect to expand free 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.
See tax returns prepared statistics included in Item 7,
under “Tax Services.”
We are subject to
extensive government regulation, including banking rules and
regulations. If we fail to comply with applicable banking laws,
rules and regulations, we could be subject to disciplinary
actions, damages, penalties or restrictions that could
significantly harm our business.
The OTS can, among other things, censure, fine, issue
cease-and-desist
orders or suspend or expel a bank or any of its officers or
employees with respect to banking activities. Similarly, the
attorneys general of each state could bring legal action on
behalf of the citizens of the various states to ensure
compliance with local laws.
HRB Bank is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital
requirements may trigger actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank. HRB
Bank must meet specific capital guidelines involving
quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory
accounting practices. A bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about the strength of components of its capital,
risk-weightings of assets, off-balance sheet transactions and
other factors. Quantitative measures established by regulation
to ensure capital adequacy require HRB Bank to maintain minimum
amounts and ratios of tangible equity, total risk-based capital
and Tier 1 capital. In addition to these minimum ratio
requirements, HRB Bank is required to continually maintain a
12.0% minimum leverage ratio.
See Item 8, note 19 to the consolidated financial
statements for additional discussion of regulatory capital
requirements and classifications.
Significant
changes have been proposed relating to the regulation of
financial institutions. Although the ultimate impact of pending
proposals is uncertain at this time, increased regulation could
impact operating activities of our bank.
Various legislative proposals have been made regarding changes
in the regulation of financial institutions, including the
Financial Regulatory Reform Plan. Prior proposals included
legislation which would have empowered courts to modify the
terms of mortgage loans including a reduction in the principal
amount to reflect lower underlying property values.
Future changes in regulation could increase compliance
requirements and operating costs of HRB Bank, and could
potentially limit operating activities of the bank. Should
proposals be enacted into law allowing government modification
of mortgage loans, we could report losses on mortgage loans in
excess of current levels. The availability of principal
reductions or other mortgage loan modifications could make
bankruptcy a more attractive option for troubled borrowers,
leading to increased bankruptcy filings and accelerated defaults.
10
H&R
BLOCK 2010 Form 10K
Table of Contents
BUSINESS
SERVICES
The RSM
alternative practice structure involves relationships with
Attest Firms that are subject to regulatory restrictions and
other constraints. Failure to comply with these restrictions, or
operational difficulties involving the Attest Firms, could
damage our brand reputation, lead to reduced earnings and impair
our investment in RSM.
RSM’s relationship with the Attest Firms requires
compliance with applicable regulations regarding the practice of
public accounting and auditor independence rules and
requirements. Many of RSM’s clients are also clients of the
Attest Firms. In addition, the relationship with the Attest
Firms closely links our RSM McGladrey brand with the Attest
Firms. If the Attest Firms were to encounter regulatory or
independence issues pertaining to the alternative practice
structure or if significant litigation arose involving the
Attest Firms or their services, such developments could have an
adverse effect on our brand reputation and our ability to
realize the mutual benefits of our relationship. In addition, a
significant judgment or settlement of a claim against an Attest
Firm could (1) impair the Attest Firm’s, particularly
M&P’s, ability to meet its payment obligations under
various service arrangements with RSM, (2) impair the
profitability of the APS, (3) impact RSM’s ability to
attract and retain clients and quality professionals,
(4) have a significant indirect adverse effect on RSM, as
the Attest Firm partners are also RSM employees and
(5) result in significant management distraction. This in
turn could result in reduced revenue and earnings and, if
sufficiently significant, impairment of our investment in RSM.
RSM receives a
significant portion of its revenues from clients that are also
clients of the Attest Firms. A termination of the alternative
practice structure between RSM and the Attest Firms could result
in a material loss of revenue to RSM and an impairment of our
investment in RSM.
Under the alternative practice structure, RSM and the Attest
Firms market their services and provide services to a
significant number of common clients. RSM also provides
operational and administrative support services to the Attest
Firms, including information technology, office space,
non-professional staff, and other infrastructure in exchange for
market rate fees from M&P. If the RSM/Attest Firms
relationship under the alternative practice structure were to be
terminated, RSM could lose key employees and clients. In
addition, RSM may not be able to recoup its costs associated
with the infrastructure used to provide the operational and
administrative support services to the Attest Firms. This in
turn could result in reduced revenue, increased costs and
reduced earnings and, if sufficiently significant, impairment of
our investment in RSM.
OTHER
Economic
conditions that negatively affect housing prices and the job
market may result in deterioration in credit quality of our loan
portfolio, and such deterioration could have a negative impact
on our business and profitability.
The overall credit quality of mortgage loans held for investment
is impacted by the strength of the U.S. economy and local
economic conditions, including residential housing prices.
Economic trends that negatively affect housing prices and the
job market could result in deterioration in credit quality of
our mortgage loan portfolio and a decline in the value of
associated collateral. Future interest rate resets could also
lead to increased delinquencies in our mortgage loans held for
investment. Recent trends in the residential mortgage loan
market reflect an increase in loan delinquencies and declining
collateral values. As a result of similar trends in our loan
portfolio, we recorded loan loss provisions totaling
$47.8 million and $63.9 million during fiscal years
2010 and 2009, respectively.
Our loan portfolio is concentrated in the states of Florida,
California, New York and Wisconsin, which represented 20%, 16%,
15% and 8%, respectively, of our total mortgage loans held for
investment at April 30, 2010. No other state held more than
5% of our loan balances. If adverse trends in the residential
mortgage loan market continue, particularly in geographic areas
in which we own a greater concentration of mortgage loans, we
could incur additional significant loan loss provisions.
Mortgage loans purchased from Sand Canyon Corporation (SCC)
represent approximately 64% of total loans held for investment
at April 30, 2010. These loans have experienced higher
delinquency rates than other loans in our portfolio, and may
expose us to greater risk of credit loss.
SCC is subject to
potential litigation stemming from discontinued mortgage
operations, which may result in significant financial
losses.
Although SCC terminated its mortgage loan origination activities
and sold its loan servicing business during fiscal year 2008, it
remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities
prior to such termination and sale. The costs involved in
defending against
and/or
resolving these investigations, claims and lawsuits may be
substantial in some instances and the ultimate resulting
liability is difficult to predict. In the current non-prime
mortgage environment, the number and frequency of
investigations,
H&R
BLOCK 2010
Form 10K
11
Table of Contents
claims and lawsuits has increased over historical experience and
is likely to continue at increased levels. In the event of
unfavorable outcomes, the amount SCC may be required to pay in
the discharge of liabilities or settlements could be substantial
and, because SCC’s operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
We are subject to
potential contingent liabilities related to loan repurchase
obligations, which may result in significant financial
losses.
SCC remains exposed to losses relating to mortgage loans it
previously originated. Non-prime mortgage loans originated by
SCC were sold either as whole-loan sales to single third-party
buyers or in the form of a securitization.
SCC entered into indemnification agreements with third-parties
relating to the mortgage loans transferred through such
whole-loan sales or securitizations. In some instances, H&R
Block, Inc. was required to guarantee SCC’s obligations.
Obligations to repurchase loans or indemnify a third-party up to
an agreed upon amount may arise from breaches of various
representations and warranties SCC made under such
indemnification agreements. These representations and warranties
vary based on the nature of the transaction and the buyer’s
requirements but generally pertain to the ownership of the loan,
the property securing the loan and compliance with applicable
laws and SCC underwriting guidelines. These representations and
warranties and corresponding repurchase obligations generally
are not subject to stated limits or a stated term.
SCC records a liability for contingent losses relating to
representation and warranty claims by estimating loan repurchase
volumes and indemnification obligations for both known claims
and projections of expected future claims. To the extent that
future valid claim volumes exceed current estimates, or the
value of mortgage loans and residential home prices decline,
future losses may be greater than these estimates and those
differences may be significant.
None.
Most of our tax offices, except those in shared locations, are
operated under leases throughout the U.S. Our Canadian
executive offices are located in a leased office in Calgary,
Alberta. Our Canadian tax offices are operated under leases
throughout Canada. HRB Bank is headquartered and its single
branch location is located in our corporate headquarters.
RSM’s executive offices are located in leased offices in
Bloomington, Minnesota. Its administrative offices are located
in leased offices in Davenport, Iowa. RSM also leases office
space throughout the U.S.
We own our corporate headquarters, which is located in Kansas
City, Missouri. All current leased and owned facilities are in
good repair and adequate to meet our needs.
The information below should be read in conjunction with the
information included in Item 8, note 18 to our
consolidated financial statements.
RAL
LITIGATION
–
We have been named in multiple lawsuits as defendants in
litigation regarding our refund anticipation loan program in
past years. All of those lawsuits have been settled or otherwise
resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al.
, April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys’ fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. The trial court’s
decertification decision is currently on appeal. We believe we
have meritorious defenses to this case and intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
PEACE OF MIND
LITIGATION
–
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the “POM Cases”), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
12
H&R
BLOCK 2010 Form 10K
Table of Contents
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al.
, Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes (1) statutory fraud by selling
insurance without a license, (2) an unfair trade practice,
by omission and by “cramming” (i.e., charging
customers for the guarantee even though they did not request it
or want it), and (3) a breach of fiduciary duty. The
plaintiffs seek unspecified damages, injunctive relief,
attorneys’ fees and costs. The Madison County court
ultimately certified a class consisting of all persons residing
in 13 states who paid a separate fee for POM from
January 1, 1997 to the date of a final judgment from the
court. We subsequently removed the case to federal court in the
Southern District of Illinois, where it is now pending. In
November 2009, the federal court issued an order effectively
vacating the state court’s class certification ruling and
allowing plaintiffs time to file a renewed motion for class
certification under the federal rules. Plaintiffs filed a new
motion for class certification seeking certification of an
11-state class. Oral argument on plaintiffs’ motion
occurred in April 2010 and the parties are awaiting a ruling. A
trial date has been set for November 2010.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al.
(Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas. This case involves the same
plaintiffs’ attorneys that are involved in the
Marshall
litigation in Illinois and contains allegations similar to
those in the
Marshall
litigation. The plaintiff seeks
actual and treble damages, equitable relief, attorneys’
fees and costs. No class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, however, and there can
be no assurances as to the outcome of these pending actions or
their impact on our consolidated results of operations,
individually or in the aggregate.
EXPRESS IRA
LITIGATION
–
On March 15, 2006, the New York Attorney General
filed a lawsuit in the Supreme Court of the State of New York,
County of New York (Index No. 06/401110) styled
The
People of New York v. H&R Block, Inc. and H&R
Block Financial Advisors, Inc. et al
. The complaint asserts
nationwide jurisdiction and alleges fraudulent business
practices, deceptive acts and practices, common law fraud and
breach of fiduciary duty with respect to the Express IRA product
and seeks equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. To avoid the
cost and inherent risk associated with litigation, we reached an
agreement to settle this case and the civil actions described
below. Details regarding the settlement are below.
Subsequent to the filing of the New York Attorney General
action, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 15, 2006. Except for two cases pending in
state court, all of the civil actions were consolidated by the
panel for Multi-District Litigation into a single action styled
In re H&R Block, Inc. Express IRA Marketing Litigation
(Case
No. 06-1786-MD-RED)
in the United States District Court for the Western District of
Missouri. To avoid the cost and inherent risk associated with
litigation, we reached an agreement to settle these cases and
the New York Attorney General action. The federal court
presiding over the Multi-District Litigation approved the
settlement in a final fairness hearing and dismissed its
underlying actions with prejudice on May 17, 2010.
Stipulations of dismissal were subsequently filed in the two
cases pending in state court. The settlement requires a minimum
payment of $11.4 million and a maximum payment of
$25.4 million. The actual cost of the settlement will
depend on the number of claims submitted by class members, which
are due no later than July 30, 2010. We previously recorded
a liability for our best estimate of the expected loss.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S 2) styled
Jim Hood, Attorney for the State of Mississippi v.
H&R Block, Inc., et al.
The complaint alleges
fraudulent business practices, deceptive acts and practices,
common law fraud and breach of fiduciary duty with respect to
the sale of the Express IRA product in Mississippi and seeks
equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. The
defendants have filed a motion to dismiss. We believe we have
meritorious defenses to the claims in this case, and we intend
to defend this case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated results of
operations.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for any liabilities relating to the Express
IRA litigation through an indemnification agreement.
SECURITIES AND
SHAREHOLDER
LITIGATION
–
On April 6, 2007, a putative class action styled
In re H&R Block Securities Litigation
(Case
No. 06-0236-CV-W-ODS)
was filed against the Company and certain of its officers in the
United States District Court for the Western District of
Missouri. The complaint alleged, among other things, deceptive,
material and misleading financial statements and failure to
prepare financial statements in accordance with generally
accepted accounting principles. The complaint sought unspecified
damages and equitable relief.
H&R
BLOCK 2010
Form 10K
13
Table of Contents
The court dismissed the complaint in February 2008, and the
plaintiffs appealed the dismissal in March 2008. In addition,
plaintiffs in a shareholder derivative action that was
consolidated into the securities litigation filed a separate
appeal in March 2008, contending that the derivative action was
improperly consolidated. The derivative action is
Iron
Workers Local 16 Pension Fund v. H&R Block, et
al.
, in the United States District Court for the Western
District of Missouri, Case
No. 06-cv-00466-ODS
(instituted on June 8, 2006) and was brought against
certain of our directors and officers purportedly on behalf of
the Company. The derivative action alleged breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment. In September 2009, the appellate court affirmed the
dismissal of the securities fraud class action, but reversed the
dismissal of the shareholder derivative action. The plaintiffs
in the shareholder derivative action subsequently agreed to
voluntarily dismiss their complaint; an order dismissing their
complaint was entered on April 19, 2010, thereby ending
this litigation.
RSM McGLADREY
LITIGATION
–
RSM EquiCo, its parent and certain of its subsidiaries
and affiliates, are parties to a class action filed on
July 11, 2006 and styled
Do Right’s Plant Growers,
et al. v. RSM EquiCo, Inc., et al.,
Case No. 06
CC00137, in the California Superior Court, Orange County. The
complaint contains allegations relating to business valuation
services provided by RSM EquiCo, including allegations of fraud,
negligent misrepresentation, breach of contract, breach of
implied covenant of good faith and fair dealing, breach of
fiduciary duty and unfair competition. Plaintiffs seek
unspecified actual and punitive damages, in addition to
pre-judgment interest and attorneys’ fees. On
March 17, 2009, the court granted plaintiffs’ motion
for class certification on all claims. The defendants filed two
requests for interlocutory review of the decision, the last of
which was denied by the Supreme Court of California on
September 30, 2009. A trial date has been set for January
2011.
The certified class consists of RSM EquiCo’s
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale.
The fees paid to RSM EquiCo in connection with these agreements
total approximately $185 million, a number which
substantially exceeds the equity of RSM EquiCo. We intend to
defend this case vigorously. The amount claimed in this action
is substantial and could have a material adverse impact on our
consolidated results of operations. There can be no assurance
regarding the outcome of this matter.
As more fully described in Item 8, note 17, RSM and
M&P operate in an alternative practice structure.
Accordingly, certain claims and lawsuits against M&P could
have an impact on RSM. More specifically, any judgments or
settlements arising from claims and lawsuits against M&P
which exceed its insurance coverage could have a direct adverse
effect on M&P’s operations. Although RSM is not
responsible for the liabilities of M&P, significant
M&P litigation and claims could impair the profitability of
the APS and impair the ability to attract and retain clients and
quality professionals. This could, in turn, have a material
adverse effect on RSM’s operations and impair the value of
our investment in RSM. There is no assurance regarding the
outcome of any claims or litigation involving M&P.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009, where it remains
pending (Case
No. 08-28225).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. We believe we have meritorious
defenses to the claims against RSM and H&R Block in this
case and intend to defend it vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
LITIGATION AND
CLAIMS PERTAINING TO DISCONTINUED MORTGAGE
OPERATIONS
–
Although mortgage loan origination activities were
terminated and the loan servicing business was sold during
fiscal year 2008, SCC remains subject to investigations, claims
and lawsuits pertaining to its loan origination and servicing
activities that occurred prior to such termination and sale.
These investigations, claims and lawsuits include actions by
state attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
predict. In the event of unfavorable outcomes, the amounts SCC
may be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCC’s
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
14
H&R
BLOCK 2010 Form 10K
Table of Contents
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.,
alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. A trial date has been
set for June 2011. We believe the claims in this case are
without merit, and we intend to defend this case vigorously.
There can be no assurances, however, as to its outcome or its
impact on our consolidated results of operations.
OTHER CLAIMS AND
LITIGATION
–
We have been named in several wage and hour class action
lawsuits throughout the country, respectively styled
Alice
Williams v. H&R Block Enterprises LLC
, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008);
Arabella Lemus v. H&R
Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009);
Delana Ugas v. H&R Block
Enterprises LLC, et al.,
Case No. BC417700 (United
States District Court, Central District of California, filed
July 13, 2009);
Joaquin Llano v. H&R Block
Eastern Enterprises, Inc.,
Case
No. 09-CV-22531
(United States District Court, Southern District of Florida,
filed August 27, 2009);
Barbara Petroski v.
H&R Block Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00075
(United States District Court, Western District of
Missouri, filed January 25, 2010);
Lance Hom v.
H&R Block Enterprises LLC, et al.,
Case
No. 10CV0476 H (United States District Court, Southern
District of California, filed March 4, 2010);
Stacy
Oyer v. H&R Block Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00387-WMS
(United States District Court, Western District of New York,
filed May, 10 2010);
Rita Greene v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-21663-FAM
(United States District Court, Southern District of Florida,
filed May 21, 2010); and
Li Dong Ma v. RSM
McGladrey TBS, LLC, et al.,
Case
No. C-08-01729
JF (United States District Court, Northern District of
California, filed February 28, 2008). These cases involve a
variety of legal theories and allegations including, among other
things, failure to compensate employees for all hours worked;
failure to provide employees with meal periods; failure to
provide itemized wage statements; failure to pay wages due upon
termination; failure to compensate for mandatory off-season
training;
and/or
misclassification of non-exempt employees. The plaintiffs seek
actual damages, in addition to statutory penalties, pre-judgment
interest and attorneys’ fees. The Company has moved to
consolidate certain of these cases into a single action because
they allege substantially identical claims. We believe we have
meritorious defenses to the claims in these cases and intend to
defend them vigorously. The amounts claimed in these matters are
substantial in some instances, however, and the ultimate
liability with respect to these matters is difficult to predict.
There can be no assurances as to the outcome of these cases or
their impact on our consolidated results of operations,
individually or in the aggregate.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. Some of
these investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers’ income tax returns, the POM
guarantee program, and other products and services. We believe
we have meritorious defenses to each of these investigations,
claims and lawsuits, and we are defending or intend to defend
them vigorously. The amounts claimed in these matters are
substantial in some instances, however, the ultimate liability
with respect to such matters is difficult to predict. In the
event of an unfavorable outcome, the amounts we may be required
to pay in the discharge of liabilities or settlements could have
a material adverse impact on our consolidated results of
operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
adverse impact on our consolidated results of operations.
H&R
BLOCK 2010
Form 10K
15
Table of Contents
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
H&R Block’s common stock is traded on the New York
Stock Exchange (NYSE) under the symbol HRB. On May 31,
2010, there were 24,000 shareholders of record and the
closing stock price on the NYSE was $16.08 per share.
The quarterly information regarding H&R Block’s common
stock prices and dividends appears in Item 8, note 22
to our consolidated financial statements.
A summary of our securities authorized for issuance under equity
compensation plans as of April 30, 2010 is as follows:
| (in 000s, except per share amounts) | ||||||||||||||
|
|
||||||||||||||
|
Number of
securities
|
Weighted-average
|
Number of securities
remaining
|
||||||||||||
|
to be issued upon
|
exercise price of
|
available for future
issuance under
|
||||||||||||
|
exercise of
options
|
outstanding
options
|
equity compensation
plans (excluding
|
||||||||||||
| warrants and rights | warrants and rights | securities reflected in the first column) | ||||||||||||
|
|
||||||||||||||
|
Equity compensation plans approved by security holders
|
14,866 | $ | 20.60 | 816 | ||||||||||
|
Equity compensation plans not approved by security holders
|
– | – | – | |||||||||||
|
Total
|
14,866 | $ | 20.60 | 816 | ||||||||||
|
|
||||||||||||||
The remaining information called for by this item relating to
“Securities Authorized for Issuance under Equity
Compensation Plans” is reported in Item 8,
note 13 to our consolidated financial statements.
A summary of our purchases of H&R Block common stock during
the fourth quarter of fiscal year 2010 is as follows:
| (in 000s, except per share amounts) | ||||||||||||||||||
|
|
||||||||||||||||||
|
Average
|
Total Number of
Shares
|
Maximum Dollar Value
of
|
||||||||||||||||
|
Total Number of
|
Price Paid
|
Purchased as Part of
Publicly
|
Shares that May be
Purchased
|
|||||||||||||||
| Shares Purchased (1) | per Share | Announced Plans or Programs (2) | Under the Plans or Programs (2) | |||||||||||||||
|
|
||||||||||||||||||
|
February 1 – February 28
|
1 | $ | 22.22 | – | $ | 1,751,530 | ||||||||||||
|
March 1 – March 31
|
5,962 | $ | 16.77 | 5,962 | $ | 1,651,619 | ||||||||||||
|
April 1 – April 30
|
2 | $ | 18.26 | – | $ | 1,651,619 | ||||||||||||
|
|
||||||||||||||||||
| (1) | Of the shares listed above, approximately 2,457 shares were purchased in connection with funding employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on restricted shares. |
| (2) | In June 2008, our Board of Directors rescinded the previous authorizations to repurchase shares of our common stock, and approved an authorization to purchase up to $2.0 billion of our common stock through June 2012. |
16
H&R
BLOCK 2010 Form 10K
Table of Contents
PERFORMANCE
GRAPH
–
The following graph compares the cumulative five-year
total return provided shareholders on H&R Block,
Inc.’s common stock relative to the cumulative total
returns of the S&P 500 index and the S&P Diversified
Commercial & Professional Services index. An
investment of $100, with reinvestment of all dividends, is
assumed to have been made in our common stock and in each of the
indexes on April 30, 2005, and its relative performance is
tracked through April 30, 2010.
| ITEM 6. | SELECTED FINANCIAL DATA |
We derived the selected consolidated financial data presented
below as of and for each of the five years in the period ended
April 30, 2010, from our audited consolidated financial
statements. The data set forth below should be read in
conjunction with Item 7 and our consolidated financial
statements in Item 8.
| (in 000s, except per share amounts) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||
| April 30, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||
|
|
||||||||||||||||||||||
|
Revenues
|
$ | 3,874,332 | $ | 4,083,577 | $ | 4,086,630 | $ | 3,710,362 | $ | 3,286,798 | ||||||||||||
|
Net income from continuing operations
|
488,946 | 513,055 | 445,947 | 369,460 | 310,811 | |||||||||||||||||
|
Net income (loss)
|
479,242 | 485,673 | (308,647 | ) | (433,653 | ) | 490,408 | |||||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||||||||
|
Net income from continuing operations
|
$ | 1.47 | $ | 1.53 | $ | 1.37 | $ | 1.14 | $ | 0.94 | ||||||||||||
|
Net income (loss)
|
1.44 | 1.45 | (0.95 | ) | (1.35 | ) | 1.49 | |||||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||||||||
|
Net income from continuing operations
|
$ | 1.46 | $ | 1.53 | $ | 1.35 | $ | 1.13 | $ | 0.92 | ||||||||||||
|
Net income (loss)
|
1.43 | 1.45 | (0.95 | ) | (1.33 | ) | 1.46 | |||||||||||||||
|
Total assets
|
$ | 5,234,318 | $ | 5,359,722 | $ | 5,623,425 | $ | 7,544,050 | $ | 5,989,135 | ||||||||||||
|
Long-term debt
|
1,035,144 | 1,032,122 | 1,031,784 | 537,134 | 417,262 | |||||||||||||||||
|
Dividends per
share
(1)
|
$ | 0.75 | $ | 0.59 | $ | 0.56 | $ | 0.53 | $ | 0.49 | ||||||||||||
|
|
||||||||||||||||||||||
| (1) | Amounts represent dividends declared. In fiscal year 2010, the dividend payable in July 2010 was declared in April. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our subsidiaries provide tax preparation, retail banking and
various business advisory and consulting services. We are the
only major company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
Effective May 1, 2009, we realigned certain segments of our
business to reflect a new management reporting structure. The
operations of HRB Bank, which was previously reported as the
Consumer Financial Services segment, have now been reclassified,
with activities that support our retail tax network included in
the Tax Services segment, and the net interest margin and gains
and losses relating to our portfolio of mortgage loans held for
investment and related assets included in the corporate segment.
Presentation of prior period results reflects the new segment
reporting structure.
H&R
BLOCK 2010
Form 10K
17
Table of Contents
OVERVIEW
A summary of our fiscal year 2010 results is as follows:
| § | Revenues for the fiscal year were $3.9 billion, down 5.1% from prior year results. | |
| § | Diluted earnings per share from continuing operations decreased 4.6% from the prior year to $1.46. | |
| § | U.S. tax returns prepared by us declined 4.3% from the prior year primarily due to a decline in overall IRS filings and lower employment levels. Lower employment levels disproportionately impacted our key client segments where fourth quarter 2009 unemployment levels ranged from 15-30%, far in excess of national unemployment levels. | |
| § | Revenues in our Tax Services segment decreased 5.0% from the prior year. Pretax income for this segment decreased $59.7 million, or 6.4%, due primarily to the decline in tax returns prepared. | |
| § | Pretax income for the Business Services segment decreased 38.9% from the prior year, due to lower than expected revenues, a $15.0 million goodwill impairment charge, and a $14.5 million increase in expenses related to arbitration proceedings and other litigation. |
|
|
||||||||||||||
| Consolidated Results of Operations Data | (in 000s, except per share amounts) | |||||||||||||
|
|
||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||
|
|
||||||||||||||
|
REVENUES:
|
||||||||||||||
|
Tax Services
|
$ | 2,975,252 | $ | 3,132,077 | $ | 3,060,661 | ||||||||
|
Business Services
|
860,349 | 897,809 | 941,686 | |||||||||||
|
Corporate and eliminations
|
38,731 | 53,691 | 84,283 | |||||||||||
|
|
||||||||||||||
| $ | 3,874,332 | $ | 4,083,577 | $ | 4,086,630 | |||||||||
|
|
||||||||||||||
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
|
||||||||||||||
|
Tax Services
|
$ | 867,362 | $ | 927,048 | $ | 825,721 | ||||||||
|
Business Services
|
58,714 | 96,097 | 88,797 | |||||||||||
|
Corporate and eliminations
|
(141,941 | ) | (183,775 | ) | (179,447 | ) | ||||||||
|
|
||||||||||||||
| 784,135 | 839,370 | 735,071 | ||||||||||||
|
Income taxes
|
295,189 | 326,315 | 289,124 | |||||||||||
|
|
||||||||||||||
|
Net income from continuing operations
|
488,946 | 513,055 | 445,947 | |||||||||||
|
Net loss of discontinued operations
|
(9,704 | ) | (27,382 | ) | (754,594 | ) | ||||||||
|
|
||||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | 485,673 | $ | (308,647 | ) | |||||||
|
|
||||||||||||||
|
BASIC EARNINGS (LOSS) PER SHARE:
|
||||||||||||||
|
Net income from continuing operations
|
$ | 1.47 | $ | 1.53 | $ | 1.37 | ||||||||
|
Net loss of discontinued operations
|
(0.03 | ) | (0.08 | ) | (2.32 | ) | ||||||||
|
|
||||||||||||||
|
Net income (loss)
|
$ | 1.44 | $ | 1.45 | $ | (0.95 | ) | |||||||
|
|
||||||||||||||
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
||||||||||||||
|
Net income from continuing operations
|
$ | 1.46 | $ | 1.53 | $ | 1.35 | ||||||||
|
Net loss of discontinued operations
|
(0.03 | ) | (0.08 | ) | (2.30 | ) | ||||||||
|
|
||||||||||||||
|
Net income (loss)
|
$ | 1.43 | $ | 1.45 | $ | (0.95 | ) | |||||||
|
|
||||||||||||||
|
|
||||||||||||||
18
H&R
BLOCK 2010 Form 10K
Table of Contents
RESULTS OF
OPERATIONS
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses – retail, online and software. This segment
includes our tax operations in the U.S., Canada and Australia.
Additionally, this segment includes the product offerings and
activities of HRB Bank that primarily support the tax network,
our participations in refund anticipation loans, and our
commercial tax businesses, which provide tax preparation
software to CPAs and other tax preparers.
| Tax Services – Operating Statistics | ||||||||||||
|
|
||||||||||||
| (in 000s, except average fee) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
TAX RETURNS PREPARED :
|
||||||||||||
|
United States:
|
||||||||||||
|
Company-owned operations
|
9,182 | 10,231 | 10,530 | |||||||||
|
Franchise operations
|
5,064 | 4,936 | 5,577 | |||||||||
|
|
||||||||||||
|
Total retail operations
|
14,246 | 15,167 | 16,107 | |||||||||
|
|
||||||||||||
|
Software
|
2,193 | 2,309 | 2,378 | |||||||||
|
Online
|
2,893 | 2,775 | 1,911 | |||||||||
|
Free File Alliance
|
810 | 788 | 1,453 | |||||||||
|
|
||||||||||||
|
Total digital tax solutions
|
5,896 | 5,872 | 5,742 | |||||||||
|
|
||||||||||||
|
Total U.S operations
|
20,142 | 21,039 | 21,849 | |||||||||
|
International operations
|
3,019 | 2,864 | 2,725 | |||||||||
|
|
||||||||||||
| 23,161 | 23,903 | 24,574 | ||||||||||
|
|
||||||||||||
|
NET AVERAGE FEE PER U.S. TAX RETURN PREPARED
(1)
:
|
||||||||||||
|
Company-owned operations
|
$ | 197.42 | $ | 196.16 | $ | 183.68 | ||||||
|
Franchise operations
|
174.32 | 169.04 | 157.72 | |||||||||
|
|
||||||||||||
| $ | 189.21 | $ | 187.36 | $ | 174.70 | |||||||
|
|
||||||||||||
| (1) | Calculated as net tax preparation fees divided by retail tax returns prepared. |
|
|
||||||||||||
| Tax Services – Financial Results | (dollars in 000s) | |||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Tax preparation fees
|
$ | 1,991,989 | $ | 2,154,822 | $ | 2,096,236 | ||||||
|
Royalties
|
275,559 | 255,536 | 237,986 | |||||||||
|
Loan participation fees and related revenue
|
146,160 | 139,770 | 190,201 | |||||||||
|
Fees from Emerald Card activities
|
99,822 | 98,031 | 78,385 | |||||||||
|
Interest income on Emerald Advance
|
77,882 | 91,010 | 45,339 | |||||||||
|
Fees from Peace of Mind guarantees
|
79,888 | 78,205 | 80,503 | |||||||||
|
Other
|
303,952 | 314,703 | 332,011 | |||||||||
|
|
||||||||||||
|
Total revenueS
|
2,975,252 | 3,132,077 | 3,060,661 | |||||||||
|
|
||||||||||||
|
Compensation and benefits:
|
||||||||||||
|
Field wages
|
713,792 | 757,835 | 771,598 | |||||||||
|
Other wages
|
111,326 | 117,291 | 137,457 | |||||||||
|
Benefits and other compensation
|
175,904 | 167,005 | 172,728 | |||||||||
|
|
||||||||||||
| 1,001,022 | 1,042,131 | 1,081,783 | ||||||||||
|
Occupancy and equipment
|
410,709 | 412,335 | 409,214 | |||||||||
|
Marketing and advertising
|
233,748 | 226,483 | 179,853 | |||||||||
|
Bad debt
|
104,716 | 112,032 | 129,595 | |||||||||
|
Depreciation and amortization
|
93,424 | 79,543 | 74,916 | |||||||||
|
Supplies
|
49,781 | 52,438 | 63,107 | |||||||||
|
Other
|
263,556 | 294,983 | 296,472 | |||||||||
|
Gains on sale of tax offices
|
(49,066 | ) | (14,916 | ) | – | |||||||
|
|
||||||||||||
|
Total expenses
|
2,107,890 | 2,205,029 | 2,234,940 | |||||||||
|
|
||||||||||||
|
Pretax income
|
$ | 867,362 | $ | 927,048 | $ | 825,721 | ||||||
|
|
||||||||||||
|
Pretax margin
|
29.2% | 29.6% | 27.0% | |||||||||
FISCAL 2010
COMPARED TO FISCAL
2009
–
Tax
Services’ revenues decreased $156.8 million, or 5.0%,
compared to the prior year. Tax preparation fees decreased
$162.8 million, or 7.6%, due to a 10.3% decrease in
U.S. retail tax returns prepared in company-owned offices,
partially offset by a 0.6% increase in the net average fee per
U.S. retail tax return. Adjusting for the effect of
company-owned offices sold to franchisees during fiscal year
2010, the
H&R
BLOCK 2010
Form 10K
19
Table of Contents
decline in tax returns prepared in
company-owned offices was 6.7% from fiscal 2009 to 2010. The
6.7% decrease in U.S. retail tax returns prepared in
company-owned offices is primarily due to the following factors:
| § | Tax returns filed with the IRS declined 1.7%. | |
| § | Lower employment levels disproportionately impacted our key client segments. Fourth quarter 2009 unemployment levels ranged from 15-30%, far in excess of national unemployment levels for key client segments. | |
| § | We closed certain under-performing offices and exited offices serving clients in Wal-Mart locations. We believe that tax returns prepared declined by approximately 1% (net of client retention through other office locations) as a result of these office closures. |
Royalties increased $20.0 million, or 7.8%, due to the
conversion of 267 company-owned offices into franchises,
partially offset by a decline in tax returns prepared in
existing franchise offices.
Interest income on Emerald Advance lines of credit decreased
$13.1 million, or 14.4%. This decline was primarily a
result of lower loan volumes due to these lines of credit only
being offered to prior year tax clients in fiscal year 2010,
while being offered to both prior and new clients in fiscal year
2009.
Other revenue decreased $10.8 million, or 3.4%, primarily
due to a $12.5 million decline in license fees earned from
bank products, mainly RACs, and a decrease in software revenues.
Total expenses decreased $97.1 million, or 4.4%, compared
to the prior year. Total compensation and benefits decreased
$41.1 million, or 3.9%, primarily as a result of lower
commission-based wages due to the decline in the number of tax
returns prepared. Bad debt expense decreased $7.3 million,
or 6.5%, primarily as a result of lower Emerald Advance lines of
credit and RAL volumes, and more restrictive underwriting
criteria. Depreciation and amortization expenses increased
$13.9 million, or 17.5%, primarily as a result of
amortization of intangible assets, related to the November 2008
acquisition of our last major independent franchise operator.
Other expenses decreased $31.4 million, or 10.7%, primarily
as a result of lower legal expenses. During fiscal year 2010 we
recognized gains of $49.1 million on the sale of certain
company-owned offices to franchisees, compared to
$14.9 million in the prior year. We do not expect these
gains to continue at a similar level during fiscal year 2011.
Pretax income for fiscal year 2010 decreased $59.7 million,
or 6.4%, from 2009. As a result of the declines in revenues,
pretax margin for the segment decreased from 29.6% in fiscal
year 2009, to 29.2% in fiscal year 2010.
FISCAL 2009
COMPARED TO FISCAL 2008
– Tax
Services’ revenues increased $71.4 million, or 2.3%,
compared to fiscal year 2008.
Tax preparation fees from our retail offices increased
$58.6 million, or 2.8%, for fiscal year 2009. This increase
is primarily due to an increase of 6.8% in the net average fee
per U.S. tax return prepared in company-owned offices,
offset by a 2.8% decrease in the number of U.S. tax returns
prepared in those offices. Tax return volume was positively
affected by the November 2008 acquisition of our last major
independent franchise operator, which resulted in an increase of
470,000 tax returns prepared in company-owned offices. See
Item 8, note 2 to the consolidated financial
statements for additional information on this acquisition.
Excluding operating results attributable to the acquired
franchise operator, tax returns prepared in company-owned
offices decreased 7.3% from fiscal year 2008 and tax preparation
fees decreased $32.9 million.
Increases in our net average fee were due primarily to increased
tax return complexity. In addition, planned pricing increases of
approximately 1% and lower discounts contributed to an increase
in net average fee. We believe that declines during the year in
tax return volume were attributable to a decline of
approximately 6% in IRS tax filings overall, and difficult
economic conditions which resulted in clients seeking lower-cost
tax preparation alternatives.
Tax returns prepared in our international operations grew 5.1%,
and the related tax preparation revenues increased 8.9% in local
currencies. However, unfavorable exchange rates caused these
revenues in U.S. dollars to decline $9.5 million, or
5.6%, from fiscal year 2008.
Royalty revenue increased $17.6 million, or 7.4%, primarily
due to a 7.2% increase in the net average fee and an increase in
royalty rates at
sub-franchises
of the acquired franchise operator.
Loan participation fees and related revenues decreased
$50.4 million, or 26.5%, from fiscal year 2008. This
decrease is primarily due to a 24.6% decline in RAL volume,
mainly as a result of many clients choosing lower cost
alternatives such as RACs rather than a loan. In addition,
stricter credit criteria were required by our third-party loan
originator.
Fees from Emerald Card activities and interest income on Emerald
Advance increased $19.6 million and $45.7 million,
respectively, both primarily as a result of higher volumes.
Other revenues decreased $17.3 million, or 5.2%, primarily
due to a $10.6 million decline in
e-filing
revenues, as a result of the elimination of separate
e-filing
fees related to our tax preparation software and a decline in
software revenues. These declines were partially offset by
$10.7 million in additional license fees earned from bank
products, mainly RACs.
20
H&R
BLOCK 2010 Form 10K
Table of Contents
Total expenses decreased $29.9 million, or 1.3%, compared
with fiscal year 2008, due primarily to lower tax return
volumes, lower bad debt on loan products and planned cost
reduction initiatives. Compensation and benefits decreased
$39.7 million, or 3.7%, from fiscal year 2008 as a result
of a decrease in commission-based wages resulting from a
corresponding decrease in tax returns prepared. Marketing and
advertising increased $46.6 million, or 25.9%, primarily
due to a planned increase in marketing costs. Bad debt expense
decreased $17.6 million, or 13.6%, primarily due to lower
RAL volumes and the impact of loss provisions in fiscal year
2008 which did not repeat in fiscal year 2009. During fiscal
year 2009 we sold certain company-owned offices to franchisees,
recognizing a net gain of $14.9 million.
Pretax income for fiscal year 2009 increased
$101.3 million, or 12.3%, from 2008. As a result of cost
reduction initiatives and the acquisition of our last major
franchise operator, pretax margin for the segment increased from
27.0% in fiscal year 2008, to 29.6% in fiscal year 2009.
BUSINESS
SERVICES
This segment offers tax and consulting services, wealth
management and capital market services to middle-market
companies.
| Business Services – Operating Results | ||||||||||||
|
|
||||||||||||
| (dollars in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Tax services
|
$ | 429,102 | $ | 458,439 | $ | 442,521 | ||||||
|
Business consulting
|
262,590 | 249,346 | 237,113 | |||||||||
|
Accounting services
|
48,987 | 54,217 | 57,399 | |||||||||
|
Capital markets
|
11,855 | 18,220 | 51,144 | |||||||||
|
Leased employee revenue
|
– | 55 | 25,100 | |||||||||
|
Reimbursed expenses
|
22,929 | 19,863 | 18,654 | |||||||||
|
Other
|
84,886 | 97,669 | 109,755 | |||||||||
|
|
||||||||||||
|
Total revenues
|
860,349 | 897,809 | 941,686 | |||||||||
|
|
||||||||||||
|
Compensation and benefits
|
574,901 | 588,866 | 587,972 | |||||||||
|
Occupancy
|
49,154 | 49,070 | 53,946 | |||||||||
|
Depreciation
|
21,122 | 22,626 | 21,400 | |||||||||
|
Marketing and advertising
|
18,960 | 23,803 | 25,623 | |||||||||
|
Amortization of intangible assets
|
11,639 | 13,018 | 14,439 | |||||||||
|
Other
|
125,859 | 104,329 | 149,509 | |||||||||
|
|
||||||||||||
|
Total expenses
|
801,635 | 801,712 | 852,889 | |||||||||
|
|
||||||||||||
|
Pretax income
|
$ | 58,714 | $ | 96,097 | $ | 88,797 | ||||||
|
|
||||||||||||
|
Pretax margin
|
6.8% | 10.7% | 9.4% | |||||||||
|
|
||||||||||||
FISCAL 2010
COMPARED TO FISCAL 2009
– Business
Services’ revenues for fiscal year 2010 decreased
$37.5 million, or 4.2%, from the prior year. Revenues from
core tax, consulting and accounting services decreased
$21.3 million, or 2.8%, from the prior year. Tax and
accounting services revenues decreased $29.3 million and
$5.2 million, respectively, primarily due to decreases in
chargeable hours and pressures on billable rates. Business
consulting revenues increased $13.2 million, or 5.3%, over
the prior year primarily due to a large engagement in our
operational consulting practice.
Continued weak economic conditions in recent years have severely
reduced investment and transaction activity. As a result,
revenues from our capital markets business have been declining
severely, including a decline in revenues of $6.4 million,
or 34.9%, from fiscal year 2009. As noted below, we recorded an
impairment of goodwill associated with this business during
fiscal year 2010.
Other revenue declined $12.8 million, or 13.1%, primarily
due to lower management fee revenues and interest income
received from M&P.
Total expenses were essentially flat compared to the prior year.
Compensation and benefits decreased $14.0 million, or 2.4%,
primarily due to headcount reductions driven by reduced client
demand. Marketing and advertising costs decreased
$4.8 million, or 20.3%, primarily due to fewer sponsorships
and lower advertising costs. Other expenses increased
$21.5 million primarily due to a $15.0 million
impairment of goodwill at RSM EquiCo, Inc. (RSM EquiCo), as
discussed in Item 8, note 8 to the consolidated
financial statements, and increased legal expenses.
Pretax income for the year ended April 30, 2010 of
$58.7 million compares to $96.1 million in the prior
year. Pretax margin for the segment decreased from 10.7% in
fiscal year 2009, to 6.8% in fiscal year 2010, primarily due to
poor results in our capital markets business and a reduction of
revenue in our core businesses.
FISCAL 2009
COMPARED TO FISCAL
2008
–
Business
Services’ revenues for fiscal year 2009 decreased
$43.9 million, or 4.7%, from fiscal year 2008, primarily
due to declines in capital markets, leased employee revenues and
outside contractor services.
H&R
BLOCK 2010
Form 10K
21
Table of Contents
Revenues from core tax, consulting and accounting services
increased $25.0 million, or 3.4%, over fiscal year 2008.
Tax services revenues increased $15.9 million, or 3.6%, due
to increases in net billed rate per hour. Business consulting
revenues increased $12.2 million, or 5.2%, primarily due to
a large one-time financial institutions engagement.
Weak economic conditions in fiscal year 2009 severely reduced
investment and transaction activity. As a result, capital
markets revenues decreased $32.9 million, or 64.4%, from
fiscal year 2008 primarily due to a 57.4% decline in the number
of transactions closed.
Leased employee revenue decreased due to a change in
organizational structure between the businesses we acquired from
American Express Tax and Business Services, Inc. (AmexTBS) and
the Attest Firms that, while not affiliates of our company, also
serve our clients. Employees we previously leased to the Attest
Firms were transferred to the separate attest practices in
fiscal years 2008 and 2007. As a result, we no longer record the
revenues and expenses associated with leasing these employees,
which resulted in a reduction of $25.0 million to fiscal
year 2009 revenues, and a similar reduction in compensation and
benefits.
Other revenue declined $12.0 million, or 11.0%, primarily
due to a decrease in outside contractor services provided to our
clients.
Total expenses decreased $51.2 million, or 6.0%, compared
to fiscal year 2008. Other expenses decreased
$45.2 million, or 30.2%, primarily due to declines in
external consulting fees, allocated corporate and support
department costs and travel and entertainment expenses.
Pretax income for the year ended April 30, 2009 of
$96.1 million compares to $88.8 million in fiscal year
2008. Pretax margin for the segment increased from 9.4% in
fiscal year 2008, to 10.7% in fiscal year 2009.
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
|
|
||||||||||||||||
| Corporate – Operating Results | (in 000s) | |||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Interest income on mortgage loans held for investment
|
$ | 31,877 | $ | 46,396 | $ | 74,895 | ||||||||||
|
Other
|
6,854 | 7,295 | 9,388 | |||||||||||||
|
|
||||||||||||||||
|
Total revenues
|
38,731 | 53,691 | 84,283 | |||||||||||||
|
|
||||||||||||||||
|
Interest expense
|
79,929 | 92,945 | 92,923 | |||||||||||||
|
Provision for loan losses
|
47,750 | 63,897 | 42,004 | |||||||||||||
|
Compensation and benefits
|
53,607 | 48,973 | 115,479 | |||||||||||||
|
Other, net
|
(614 | ) | 31,651 | 13,324 | ||||||||||||
|
|
||||||||||||||||
|
Total expense
|
180,672 | 237,466 | 263,730 | |||||||||||||
|
|
||||||||||||||||
|
Pretax loss
|
$ | (141,941 | ) | $ | (183,775 | ) | $ | (179,447 | ) | |||||||
|
|
||||||||||||||||
FISCAL YEAR 2010
COMPARED TO FISCAL YEAR 2009
Interest income earned on mortgage loans held for investment for
the fiscal year ended April 30, 2010 decreased
$14.5 million, or 31.3%, from the prior year, primarily as
a result of non-performing loans. Interest expense decreased
$13.0 million, or 14.0%, due to lower funding costs related
to our mortgage loan portfolio and lower corporate borrowings.
Our provision for loan losses decreased $16.1 million from
the prior year. See related discussion below under
“Mortgage Loans Held for Investment.”
Other expenses declined $32.3 million primarily due to
gains of $9.0 million on residual interests in the current
year, compared to impairments of $3.1 million recorded in
the prior year. Additionally, we transferred liabilities
relating to previously retained insurance risk to a third-party,
and recorded a gain of $9.5 million in fiscal year 2010.
Income Taxes on
Continuing Operations
Our effective tax rate for continuing operations was 37.6% for
the fiscal year ended April 30, 2010, compared to 38.9% in
the prior year. Our effective tax rates declined from the prior
year due to a reduction in our valuation allowance related to
tax-planning strategies and favorable tax benefits related to
investment gains on our corporate owned life insurance
investments.
Mortgage Loans
Held for Investment
Mortgage loans held for investment at April 30, 2010
totaled $595.4 million. The portfolio includes loans
originated by SCC, and purchased by HRB Bank which constituted
approximately 64% of the total loan portfolio at April 30,
2010. We have experienced higher rates of delinquency and have
greater exposure to loss with respect to this segment of our
loan portfolio. Our remaining loan portfolio totaled
$249.0 million and is more characteristic of a prime loan
portfolio, and we believe subject to a lower loss exposure.
22
H&R
BLOCK 2010 Form 10K
Table of Contents
Detail of our mortgage loans held for investment and the related
allowance, excluding unamortized deferred fees and costs of
$5.3 million and $7.1 million at April 30, 2010
and 2009, respectively, is as follows:
| (dollars in 000s) | |||||||||||||||
|
|
|||||||||||||||
|
Outstanding
|
Loan Loss Allowance |
% 30+ Days
|
|||||||||||||
| Principal Balance | Amount | % of Principal | Past Due | ||||||||||||
|
|
|||||||||||||||
|
As of April 30, 2010:
|
|||||||||||||||
|
Purchased from SCC
|
$ | 434,644 | $ | 82,793 | 19.1% | 37.8% | |||||||||
|
All other
|
249,040 | 10,742 | 4.3% | 8.9% | |||||||||||
|
|
|||||||||||||||
| $ | 683,684 | $ | 93,535 | 13.7% | 27.3% | ||||||||||
|
|
|||||||||||||||
|
|
|||||||||||||||
|
As of April 30, 2009:
|
|||||||||||||||
|
Purchased from SCC
|
$ | 531,233 | $ | 78,067 | 14.7% | 28.7% | |||||||||
|
All other
|
290,604 | 6,006 | 2.1% | 4.4% | |||||||||||
|
|
|||||||||||||||
| $ | 821,837 | $ | 84,073 | 10.2% | 20.2% | ||||||||||
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
|||||||||||||||
We recorded a provision for loan loss of $47.8 million
during fiscal year 2010, compared to $63.9 million in the
prior year. Our allowance for loan losses as a percent of
mortgage loans was 13.7%, or $93.5 million, at
April 30, 2010, compared to 10.2%, or $84.1 million,
at April 30, 2009. This allowance represents our best
estimate of credit losses inherent in the loan portfolio as of
the balance sheet dates.
FISCAL YEAR 2009
COMPARED TO FISCAL YEAR 2008
Interest income earned on mortgage loans held for investment for
the fiscal year ended April 30, 2009 decreased
$28.5 million, or 38.1%, from fiscal year 2008, primarily
as a result of non-performing loans. Our provision for loan
losses increased $21.9 million from fiscal year 2008
primarily due to declines in residential home prices and higher
projected delinquencies.
Compensation and benefits decreased $66.5 million, or
57.6%, primarily due to severance-related costs recorded in
fiscal year 2008, coupled with benefits in fiscal year 2009
resulting from the staff reductions.
Other expenses increased $18.3 million primarily due to an
$11.9 million write-down of REO property during fiscal year
2009.
Income Taxes on
Continuing Operations
Our effective tax rate for continuing operations was 38.9% for
the fiscal year ended April 30, 2009, compared to 39.3% in
fiscal year 2008.
DISCONTINUED
OPERATIONS
Effective November 1, 2008, we sold H&R Block
Financial Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc.
HRBFA and its direct corporate parent are presented as
discontinued operations in the consolidated financial statements
for all periods presented. Our discontinued operations also
include our former mortgage loan origination and servicing
business, as well as three smaller lines of business previously
reported in our Business Services segment.
FISCAL 2010
COMPARED TO FISCAL
2009
–
The
net loss from discontinued operations for fiscal year 2010 was
$9.7 million compared to a net loss of $27.4 million
in the prior year. The decline in losses was due to a loss on
the disposition of HRBFA totaling $12.2 million in fiscal
year 2009 compared with a gain of $6.2 million in fiscal
year 2010 relating to post-disposition purchase price
adjustments.
FISCAL 2009
COMPARED TO FISCAL
2008
–
The
pretax loss of our discontinued operations for fiscal year 2009
was $47.6 million compared to a loss of $1.2 billion
in the prior year. The loss from discontinued operations for
fiscal year 2008 included significant losses from our former
mortgage loan businesses, including losses relating to loan
repurchase obligations of $582.4 million and impairments of
residual interests of $137.8 million. Net of applicable tax
benefits, the loss from discontinued operations for fiscal year
2009 was $27.4 million compared to a loss of
$754.6 million in fiscal year 2008.
Our effective tax rate for discontinued operations was 42.5% and
35.3% for the fiscal years 2009 and 2008, respectively. Our
effective tax rate increased primarily due to a tax benefit
recorded in conjunction with the sale of HRBFA.
CRITICAL
ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to
understanding our financial statements, as they require the use
of significant judgment and estimation in order to measure, at a
specific point in time, matters that are inherently uncertain.
Specific risks for these critical accounting estimates are
described in the following paragraphs. We have reviewed and
discussed each of these estimates with the Audit Committee of
our Board
H&R
BLOCK 2010
Form 10K
23
Table of Contents
of Directors. For all of these estimates, we caution that future
events rarely develop precisely as forecasted and estimates
routinely require adjustment and may require material adjustment.
ALLOWANCE FOR
LOAN LOSSES
– The principal amount of
mortgage loans held for investment totaled $683.7 million
at April 30, 2010. We are exposed to the risk that
borrowers may not repay amounts owed to us when they become
contractually due. We record an allowance representing our
estimate of credit losses inherent in the portfolio of loans
held for investment at the balance sheet date. Determination of
our allowance for loan losses is considered a critical
accounting estimate because loss provisions can be material to
our operating results, projections of loan delinquencies and
related matters are inherently subjective, and actual losses are
impacted by factors outside of our control including economic
conditions, unemployment rates and residential home prices.
We record a loan loss allowance for loans less than 60 days
past due on a pooled basis. The aggregate principal balance of
these loans totaled $372.7 million at April 30, 2010,
and the portion of our allowance for loan losses allocated to
these loans totaled $16.2 million. In estimating our loan
loss allowance for these loans, we stratify the loan portfolio
based on our view of risk associated with various elements of
the pool and assign estimated loss rates based on those risks.
Loss rates are based primarily on historical experience and our
assessment of economic and market conditions. Loss rates
consider both the rate at which loans will become delinquent
(frequency) and the amount of loss that will ultimately be
realized upon occurrence of a liquidation of collateral
(severity). Frequency rates are based primarily on historical
migration analysis of loans to delinquent status. Severity rates
are based primarily on recent broker quotes or appraisals of
collateral. Because of imprecision and uncertainty inherent in
developing estimates of future credit losses, in particular
during periods of rapidly declining collateral values or
increasing delinquency rates, our estimation process includes
development of ranges of possible outcomes. Ranges were
developed by stressing initial estimates of both frequency and
severity rates. Stressing of frequency and severity assumptions
is intended to model deterioration in credit quality that is
difficult to predict during declining economic conditions.
Future deterioration in credit quality may exceed our modeled
assumptions.
Mortgage loans held for investment include loans originated by
our affiliate, SCC, and purchased by HRB Bank. We have greater
exposure to loss with respect to this segment of our loan
portfolio as a result of historically higher delinquency rates.
Therefore, we assign higher frequency rate assumptions to
SCC-originated loans compared with loans originated by other
third-party banks as we consider estimates of future losses. At
April 30, 2010 our weighted-average frequency assumption
was 15% for SCC-originated loans compared to 4% for remaining
loans in the portfolio.
Loans 60 days past due are considered impaired and are
reviewed individually. We record loss estimates typically based
on the value of the underlying collateral. Our specific loan
loss allowance for these impaired loans reflected an average
loss severity of approximately 41% at April 30, 2010. The
aggregate principal balance of impaired loans totaled
$165.9 million at April 30, 2010, and the portion of
our allowance for loan losses allocated to these loans totaled
$68.7 million.
Modified loans that meet the definition of a troubled debt
restructuring (TDR) are also considered impaired and are
reviewed individually. We record impairment equal to the
difference between the principal balance of the loan and the
present value of expected future cash flows discounted at the
loan’s effective interest rate. However, if we assess that
foreclosure of a modified loan is probable, we record impairment
based on the estimated fair value of the underlying collateral.
The aggregate principal balance of TDR loans totaled
$145.0 million at April 30, 2010, and the portion of
our allowance for loan losses allocated to these loans totaled
$8.9 million.
The loan loss allowance as a percent of mortgage loans held for
investment was 13.7% at April 30, 2010, compared to 10.2%
at April 30, 2009. The percentage increased significantly
during the current year primarily as a result of declining
collateral values due to lower residential home prices and
modeled expectations for future loan delinquencies in the
portfolio. The residential mortgage industry has experienced
significant adverse trends for an extended period. If adverse
trends continue for a sustained period or at rates worse than
modeled by us, we may be required to record additional loan loss
provisions, and those losses may be significant.
Determining the allowance for loan losses for loans held for
investment requires us to make estimates of losses that are
highly uncertain and requires a high degree of judgment. If our
underlying assumptions prove to be inaccurate, the allowance for
loan losses could be insufficient to cover actual losses. Our
mortgage loan portfolio is a static pool, as we are no longer
originating or purchasing new mortgage loans, and we believe
that factor, over time, will limit variability in our loss
estimates.
MORTGAGE LOAN
REPURCHASE OBLIGATION
– SCC is
obligated to repurchase loans sold or securitized in the event
of a breach of representations and warranties it made to
purchasers or insurers of such loans, or otherwise indemnify
certain third-parties for losses incurred by them. SCC records a
liability for contingent losses relating to representation and
warranty claims by estimating loan repurchase volumes and
indemnification obligations for both known claims and
projections of expected future claims. Projections of future
claims are
24
H&R
BLOCK 2010 Form 10K
Table of Contents
based on an analysis that includes a combination of reviewing
historical repurchase trends, developing loss expectations on
loans sold or securitized, and predicting the level at which
previously originated loans may be subject to valid claims
regarding representation and warranty breaches.
Based on an analysis as of April 30, 2010, SCC estimated
its liability for loan repurchase and indemnification
obligations pertaining to claims of breach of representation and
warranties to be $188.2 million. Actual losses charged
against this reserve during fiscal year 2010 totaled
$18.4 million. To the extent that valid claim volumes in
the future exceed current estimates, or the value of mortgage
loans and residential home prices decline, future losses may be
greater than our current estimates and those differences may be
significant. See Item 8, note 16 to our consolidated
financial statements.
LITIGATION
– It
is our policy to routinely assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as
ranges of probable losses. A determination of the amount of the
reserves required, if any, for these contingencies is made after
analysis of each known issue and an analysis of historical
experience. Therefore, we have recorded reserves related to
certain legal matters for which we believe it is probable that a
loss will be incurred and the range of such loss can be
estimated. With respect to other matters, we have concluded that
a loss is only reasonably possible or remote, or is not
estimable and, therefore, no liability is recorded.
Assessing the likely outcome of pending litigation, including
the amount of potential loss, if any, is highly subjective. Our
judgments regarding likelihood of loss and our estimates of
probable loss amounts may differ from actual results due to
difficulties in predicting the outcome of jury trials,
arbitration hearings, settlement discussions and related
activity, predicting the outcome of class certification actions
and various other uncertainties. Due to the number of claims
which are periodically asserted against us, and the magnitude of
damages sought in those claims, actual losses in the future may
significantly exceed our current estimates.
VALUATION OF
GOODWILL
– The evaluation of goodwill
for impairment is a critical accounting estimate due both to the
magnitude of our goodwill balances, and the judgment involved in
determining the fair value of our reporting units. Goodwill
balances totaled $840.4 million as of April 30, 2010
and $850.2 million as of April 30, 2009.
We test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently if events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. Our
goodwill impairment analysis is based on a discounted cash flow
approach and market comparables. This analysis, at the reporting
unit level, requires significant management judgment with
respect to revenue and expense forecasts, anticipated changes in
working capital and the selection and application of an
appropriate discount rate. Changes in projections or assumptions
could materially affect our estimate of reporting unit fair
values. The use of different assumptions would increase or
decrease estimated discounted future operating cash flows and
could affect our conclusions regarding the existence or amount
of potential impairment. Finally, strategic changes in our
outlook regarding reporting units or intangible assets may alter
our valuation approach and could result in changes to our
conclusions regarding impairment.
Estimates of fair value for certain of our reporting units
exceed the corresponding carrying value by a significant margin.
In certain instances, however, the excess of estimated fair
value over carrying value is not significant. Future estimates
of fair value may be adversely impacted by declining economic
conditions. In addition, if future operating results of our
reporting units are below our current modeled expectations, fair
value estimates may decline. Any of these factors could result
in future impairments, and those impairments could be
significant.
In assessing potential goodwill impairment of our RSM reporting
unit, we estimate fair value based on an assumption that the
collaboration between RSM and M&P under their alternative
practice structure arrangement will continue. Were M&P to
exit the alternative practice structure, or the collaboration
between these two businesses otherwise cease, we believe our
fair value estimates could be lower than presently assumed. In
addition, adverse business results for M&P could also
negatively impact our fair value estimates for RSM. Goodwill
balances for RSM totaled $374.5 million at April 30,
2010. In fiscal year 2010, the estimated fair value of our RSM
reporting unit exceeded its carrying value by approximately 30%.
We recorded a goodwill impairment of $15.0 million related
to our RSM EquiCo reporting unit within our Business Services
segment in the third quarter of fiscal year 2010, leaving a
remaining goodwill balance of $14.3 million. Operating
results for this reporting unit have been declining and
continued poor results could result in further impairment.
We have a separate reporting unit within our Tax Services
segment with a goodwill balance totaling $28.6 million at
April 30, 2010. Operating activities of the business
consist principally of the development and sale of commercial
tax preparation software. The estimated fair value of this
reporting unit exceeded its carrying value by approximately 8%
at April 30, 2010.
See Item 8, note 8 to our consolidated financial
statements.
INCOME
TAXES
– Income taxes are accounted for
using the asset and liability approach under U.S. GAAP.
H&R
BLOCK 2010
Form 10K
25
Table of Contents
We calculate our current and deferred tax provision for the
fiscal year based on estimates and assumptions that could differ
from the actual results reflected in income tax returns filed
during the applicable calendar year. Adjustments based on filed
returns are recorded in the appropriate periods when identified.
We file a consolidated federal tax return on a calendar year
basis, generally in the second fiscal quarter of the subsequent
year.
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. We have considered taxable income in carry-back
periods, historical and forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we
operate, and tax planning strategies in determining the need for
a valuation allowance against our deferred tax assets.
Determination of a valuation allowance for deferred tax assets
requires that we make judgments about future matters that are
not certain, including projections of future taxable income and
evaluating potential tax-planning strategies. To the extent that
actual results differ from our current assumptions, the
valuation allowance will increase or decrease. In the event we
were to determine we would not be able to realize all or part of
our deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to earnings in the period
in which we make such determination. Likewise, if we later
determine it is more likely than not that the deferred tax
assets would be realized, we would reverse the applicable
portion of the previously provided valuation allowance.
The income tax laws of jurisdictions in which we operate are
complex and subject to different interpretations by the taxpayer
and applicable government taxing authorities. Income tax returns
filed by us are based on our interpretation of these rules. The
amount of income taxes we pay is subject to ongoing audits by
federal, state and foreign tax authorities, which may result in
proposed assessments, including assessments of interest
and/or
penalties. Our estimate for the potential outcome for any
uncertain tax issue is highly subjective and based on our best
judgments. Actual results may differ from our current judgments
due to a variety of factors, including changes in law,
interpretations of law by taxing authorities that differ from
our assessments, changes in the jurisdictions in which we
operate and results of routine tax examinations. We believe we
have adequately provided for any reasonably foreseeable outcome
related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated
tax liabilities in the period the assessments are made or
resolved, or when statutes of limitation on potential
assessments expire. As a result, our effective tax rate may
fluctuate on a quarterly basis.
REVENUE
RECOGNITION
– We have many different
revenue sources, each governed by specific revenue recognition
policies. Our revenue recognition policies can be found in
Item 8, note 1 to our consolidated financial
statements.
OTHER SIGNIFICANT
ACCOUNTING ESTIMATES
– Other
significant accounting estimates, not involving the same level
of judgment or uncertainty as those discussed above are
nevertheless important to an understanding of the financial
statements. These estimates may require judgments on complex
matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among
topics currently under reexamination by accounting standard
setters and regulators. Although specific conclusions reached by
these standard setters may cause a material change in our
accounting estimates, outcomes cannot be predicted with
confidence. See Item 8, note 1 to our consolidated
financial statements, which discusses accounting estimates we
have selected when there are acceptable alternatives and new or
proposed accounting standards that may affect our financial
reporting in the future.
FINANCIAL
CONDITION
CAPITAL RESOURCES
AND LIQUIDITY
– Our sources of capital
include cash from operations, cash from customer deposits,
issuances of common stock and debt. We use capital primarily to
fund working capital, pay dividends, repurchase treasury shares
and acquire businesses. Our operations are highly seasonal and
therefore generally require the use of cash to fund operating
losses during the period May through mid-January.
Given the likely availability of a number of liquidity options
discussed herein, including borrowing capacity under our CLOC,
we believe, that in the absence of any unexpected developments,
our existing sources of capital at April 30, 2010 are
sufficient to meet our operating needs.
These comments should be read in conjunction with the
consolidated balance sheets and consolidated statements of cash
flows included in Item 8.
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Net cash provided by (used in):
|
||||||||||||||||
|
Operating activities
|
$ | 587,469 | $ | 1,024,439 | $ | 258,760 | ||||||||||
|
Investing activities
|
31,353 | 5,560 | 1,147,289 | |||||||||||||
|
Financing activities
|
(481,118 | ) | (40,233 | ) | (1,558,069 | ) | ||||||||||
|
Effect of exchange rates on cash
|
11,678 | – | – | |||||||||||||
|
|
||||||||||||||||
|
Net change in cash and cash equivalents
|
$ | 149,382 | $ | 989,766 | $ | (152,020 | ) | |||||||||
|
|
||||||||||||||||
26
H&R
BLOCK 2010 Form 10K
Table of Contents
CASH FROM
OPERATING ACTIVITIES
– Cash provided
by operations decreased $437.0 million from fiscal year
2009 primarily due to income tax payments of $359.6 million
in the current year, compared to refunds received in the prior
year.
Restricted
Cash.
We hold certain cash balances that are
restricted as to use. Cash and cash equivalents –
restricted totaled $34.4 million at April 30, 2010,
and primarily consisted of cash held by our captive insurance
subsidiary that will be used to pay claims.
CASH FROM
INVESTING ACTIVITIES
– Changes in cash
provided by investing activities primarily relate to the
following:
Mortgage Loans
Held for Investment.
We received net proceeds of
$72.8 million, $91.3 million and $207.6 million
on our mortgage loans held for investment in fiscal years 2010,
2009 and 2008, respectively.
Purchases of
Property and Equipment.
Total cash paid for
property and equipment was $90.5 million,
$97.9 million and $101.6 million for fiscal years
2010, 2009 and 2008, respectively.
Business
Acquisitions.
Total cash paid for acquisitions
was $10.5 million, $293.8 million and
$24.9 million during fiscal years 2010, 2009 and 2008,
respectively. In November 2008, we acquired our last major
independent franchise operator for an aggregate purchase price
of $279.2 million.
Sales of
Businesses.
In fiscal year 2010, we sold 267 tax
offices to franchisees for proceeds of $65.7 million. In
fiscal year 2009, we sold certain tax offices to franchisees for
proceeds of $16.9 million. The majority of these sales were
financed through Franchise Equity Lines of Credit (FELCs). The
increase in the lines of credit is also included in investing
activities.
Discontinued
Operations.
In fiscal year 2009, we sold our
financial advisor business for proceeds of $304.0 million.
In fiscal year 2008, we sold our former mortgage loan
origination and servicing business, as well as three smaller
lines of business previously reported in our Business Services
segment, for cash proceeds of $1.1 billion.
CASH FROM
FINANCING ACTIVITIES
– Changes in cash
used in financing activities primarily relate to the following:
Short-Term
Borrowings.
We had no short-term borrowings
outstanding at April 30, 2010.
Customer Banking
Deposits.
Customer banking deposits provided
$17.5 million in the current year compared to
$64.4 million provided in fiscal year 2009 and
$345.4 million used in fiscal year 2008. These deposits are
held by HRB Bank
Dividends.
We
have consistently paid quarterly dividends. Dividends paid
totaled $200.9 million, $198.7 million and
$183.6 million in fiscal years 2010, 2009 and 2008,
respectively.
Repurchase and
Retirement of Common Stock.
During fiscal year
2010, we purchased and immediately retired 12.8 million
shares of our common stock at a cost of $250.0 million. We
may continue to repurchase and retire common stock or retire
treasury stock in the future.
In June 2008, our Board of Directors rescinded the previous
authorizations to repurchase shares of our common stock and
approved an authorization to purchase up to $2.0 billion of
our common stock through June 2012. There was $1.7 billion
remaining under this authorization at April 30, 2010.
Issuances of
Common Stock.
In October 2008, we sold
8.3 million shares of our common stock, without par value,
at a price of $17.50 per share in a registered direct offering
through subscription agreements with selected institutional
investors. We received net proceeds of $141.4 million,
after deducting placement agent fees and other offering
expenses. The purpose of the equity offering was to ensure we
maintained adequate equity levels, as a condition of our CLOC,
during our off-season. Proceeds were used for general corporate
purposes.
Proceeds from the issuance of common stock in accordance with
our stock-based compensation plans totaled $16.7 million,
$71.6 million, and $23.3 million in fiscal years 2010,
2009 and 2008, respectively.
HRB
BANK
– Block Financial LLC (BFC)
typically makes capital contributions to HRB Bank to help it
meet its capital requirements. BFC made capital contributions to
HRB Bank of $235.0 million during fiscal year 2010 and
$245.0 million during fiscal year 2009.
Historically, capital contributions by BFC have been repaid as a
return of capital by HRB Bank as capital requirements decline. A
return of capital or dividend paid by HRB Bank must be approved
by the Office of Thrift Supervision (OTS). Although the OTS has
approved such payments in the past, there is no assurance that
they will continue to do so in the future, in particular if they
determine that higher capital levels at HRB Bank are necessary
due to non-performing asset levels. In addition, BFC may elect
to maintain higher capital levels at HRB Bank. At April 30,
2010, HRB Bank had cash balances of $701.0 million.
Distribution of those cash balances would be subject to OTS
approval and are therefore not currently available for general
corporate purposes.
HRB Bank received approval from the OTS on May 17, 2010 to
pay a non-cash dividend by June 30, 2010 to BFC of REO.
See additional discussion of regulatory and capital requirements
of HRB Bank in “Regulatory Environment.”
H&R
BLOCK 2010
Form 10K
27
Table of Contents
BORROWINGS
We continually monitor our funding requirements and execute
strategies to manage our overall asset and liability profile.
The following chart provides the debt ratings for BFC as of
April 30, 2010 and 2009:
|
|
||||||||||||
| Short-term | Long-term | Outlook | ||||||||||
|
|
||||||||||||
|
Moody’s
|
P-2 | Baa1 | Stable | |||||||||
|
S&P
|
A-2 | BBB | Positive | |||||||||
|
DBRS
|
R-2 (high | ) | BBB (high | ) | Positive | |||||||
|
|
||||||||||||
On March 4, 2010, we entered into a new CLOC agreement to
support commercial paper issuances, general corporate purposes
or for working capital needs, and terminated the previous CLOCs.
The new facility provides funding up to $1.7 billion and
matures July 31, 2013. The new facility bears interest at
an annual rate of LIBOR plus 1.30% to 2.80% or PRIME plus .30%
to 1.80% (depending on the type of borrowing) and includes an
annual facility fee of .20% to .70% of the committed amounts,
based on our credit ratings. Covenants in the new facility are
substantially similar to those in the previous CLOCs including:
(1) maintenance of a minimum net worth of
$650.0 million on the last day of any fiscal quarter; and
(2) reduction of the aggregate outstanding principal amount
of short-term debt, as defined in the agreement, to
$200.0 million or less for thirty consecutive days during
the period March 1 to June 30 of each year (“Clean- down
requirement”). At April 30, 2010, we were in
compliance with these covenants and had net worth of
$1.4 billion. There was no balance outstanding on this
facility at April 30, 2010.
As of April 30, 2010, we had $250.0 million remaining
under our shelf registration for additional debt issuances.
Effective January 12, 2010, we entered into a
$2.5 billion committed line of credit agreement with HSBC
Bank USA, National Association (HSBC) for the purchase of RAL
participations. This line was available up to its facility limit
through March 30, 2010 and then only up to
$120.0 million thereafter through June 30, 2010. The
line is subject to covenants similar to those in the CLOC, but
secured by the RAL participation interests. All borrowings on
this facility were repaid as of April 30, 2010 and the
facility is now closed.
During fiscal year 2010, borrowing needs in our Canadian
operations were funded by corporate borrowings in the
U.S. To mitigate the foreign currency exchange rate risk,
we used foreign exchange forward contracts. We do not enter into
forward contracts for speculative purposes. In estimating the
fair value of derivative positions, we utilize quoted market
prices, if available, or quotes obtained from external sources.
There were no forward contracts outstanding as of April 30,
2010.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our obligations to make future payments as of
April 30, 2010, is as follows:
| (in 000s) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Less Than
|
||||||||||||||||||||||
| Total | 1 Year | 1 - 3 Years | 4 - 5 Years | After 5 Years | ||||||||||||||||||
|
|
||||||||||||||||||||||
|
Long-term debt (including interest)
|
$ | 1,218,824 | $ | 67,750 | $ | 721,383 | $ | 429,691 | $ | – | ||||||||||||
|
Customer deposits
|
874,218 | 492,313 | 18,558 | 3,106 | 360,241 | |||||||||||||||||
|
FHLB borrowings
|
75,000 | 50,000 | 25,000 | – | – | |||||||||||||||||
|
Retirement plan contribution
|
60,000 | 60,000 | – | – | – | |||||||||||||||||
|
Acquisition payments
|
28,701 | 3,157 | 25,455 | 89 | – | |||||||||||||||||
|
Media advertising purchase obligation
|
26,548 | 13,274 | 13,274 | – | – | |||||||||||||||||
|
Capital lease obligations
|
11,526 | 531 | 1,293 | 1,477 | 8,225 | |||||||||||||||||
|
Operating leases
|
791,206 | 246,061 | 332,119 | 144,278 | 68,748 | |||||||||||||||||
|
|
||||||||||||||||||||||
|
Total contractual cash obligations
|
$ | 3,086,023 | $ | 933,086 | $ | 1,137,082 | $ | 578,641 | $ | 437,214 | ||||||||||||
|
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
The amount of liabilities recorded in connection with
unrecognized tax positions that we reasonably expect to pay
within twelve months is $74.5 million at April 30,
2010 and is included in accrued income taxes on our consolidated
balance sheet. The remaining amount is included in other
noncurrent liabilities on our consolidated balance sheet.
Because the ultimate amount and timing of any future cash
settlements cannot be predicted with reasonable certainty, the
estimated unrecognized tax position liability has been excluded
from the table above. See Item 8, note 14 to the
consolidated financial statements for additional information.
28
H&R
BLOCK 2010 Form 10K
Table of Contents
A summary of our commitments as of April 30, 2010, which
may or may not require future payments, are as follows:
| (in 000s) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Less Than
|
||||||||||||||||||||||
| Total | 1 Year | 1 - 3 Years | 4 - 5 Years | After 5 Years | ||||||||||||||||||
|
|
||||||||||||||||||||||
|
Franchise Equity Lines of Credit
|
$ | 36,806 | $ | 21,819 | $ | 9,242 | $ | 5,745 | $ | – | ||||||||||||
|
Contingent acquisition payments
|
20,697 | 5,365 | 14,391 | 941 | – | |||||||||||||||||
|
Other commercial commitments
|
482 | 482 | – | – | – | |||||||||||||||||
|
|
||||||||||||||||||||||
|
Total commercial commitments
|
$ | 57,985 | $ | 27,666 | $ | 23,633 | $ | 6,686 | $ | – | ||||||||||||
|
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
See discussion of contractual obligations and commitments in
Item 8, within the notes to our consolidated financial
statements.
REGULATORY
ENVIRONMENT
HRB Bank is a federal savings bank and H&R Block, Inc. is a
savings and loan holding company. As a result, each is subject
to regulation by the OTS. Federal savings banks are subject to
extensive regulation and examination by the OTS, their primary
federal regulator, as well as the FDIC.
All savings associations are subject to the capital adequacy
guidelines and the regulatory framework for prompt corrective
action. HRB Bank must meet specific capital guidelines involving
quantitative measures of HRB Bank’s assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. HRB Bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
As of March 31, 2010, our most recent Thrift Financial
Report (TFR) filing with the OTS, HRB bank was a “well
capitalized” institution under the prompt corrective action
provisions of the FDIC. See Item 8, note 19 to the
consolidated financial statements for additional discussion of
regulatory capital requirements and classifications.
HRB Bank is an indirect wholly-owned subsidiary of H&R
Block, Inc. and its customer deposits are insured by the FDIC.
If an insured institution fails, claims for administrative
expenses of the receiver and for deposits in U.S. branches
(including claims of the FDIC as subrogee of the failed
institution) have priority over the claims of general unsecured
creditors. In addition, the FDIC has authority to require
H&R Block, Inc. to reimburse it for losses it incurs in
connection with the failure of HRB Bank or with the FDIC’s
provision of assistance to a banking subsidiary that is in
danger of failure.
H&R Block, Inc. is a legal entity separate and distinct
from its subsidiary, HRB Bank. Various federal and state
statutory provisions and regulations limit the amount of
dividends HRB Bank may pay without regulatory approval. The OTS
has authority to prohibit HRB Bank from engaging in unsafe or
unsound practices in conducting their business. The payment of
dividends, depending on the financial condition of the bank,
could be deemed an unsafe or unsound practice. The ability of
HRB Bank to pay dividends in the future is currently, and could
be further, influenced by bank regulatory policies and capital
guidelines.
The U.S., various state, local, provincial and foreign
governments and some self-regulatory organizations have enacted
statutes and ordinances,
and/or
adopted rules and regulations, regulating aspects of our
business. These aspects include, but are not limited to,
commercial income tax return preparers, income tax courses, the
electronic filing of income tax returns, the facilitation of
RALs, loan originations and assistance in loan originations,
mortgage lending, privacy, consumer protection, franchising,
sales methods, banking, accountants and the accounting practice.
We seek to determine the applicability of such statutes,
ordinances, rules and regulations (collectively,
“Laws”) and comply with those Laws.
From time to time in the ordinary course of business, we receive
inquiries from governmental and self-regulatory agencies
regarding the applicability of Laws to our services and
products. In response to past inquiries, we have agreed to
comply with such Laws, convinced the authorities that such Laws
were not applicable or that compliance already exists
and/or
modified our activities in the applicable jurisdiction to avoid
the application of all or certain parts of such Laws. We believe
the past resolution of such inquiries and our ongoing compliance
with Laws has not had a material adverse effect on our
consolidated financial statements. We cannot predict what effect
future Laws, changes in interpretations of existing Laws or the
results of future regulator inquiries with respect to the
applicability of Laws may have on our consolidated financial
statements. See additional discussion of legal matters in
Item 3, “Legal Proceedings” and Item 8,
note 18 to our consolidated financial statements.
FUTURE
LEGISLATION
– In light of current
conditions in the U.S. and global financial markets and the
U.S. and global economy, regulators have increased their
focus on the regulation of the financial services industry.
Proposals that could substantially intensify the regulation of
the financial services industry are expected to be introduced in
the U.S. Congress, in state legislatures and from
applicable regulatory authorities. These proposals may change
banking statutes and regulation and our operating environment in
substantial and unpredictable ways. If enacted, these proposals
could increase or decrease the cost of doing business, limit or
expand permissible
H&R
BLOCK 2010
Form 10K
29
Table of Contents
activities or affect the
competitive balance among banks, savings associations, credit
unions and other financial institutions. We cannot predict
whether any of these proposals will be enacted and, if enacted,
the effect that it, or any impending regulations, would have on
our business, results of operations or financial condition.
STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
This section presents information required by the SEC’s
Industry Guide 3, “Statistical Disclosure by Bank Holding
Companies.” The tables in this section include HRB Bank
information only.
DISTRIBUTION OF
ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
– The
following table presents average balance data and interest
income and expense data for our banking operations, as well as
the related interest yields and rates for fiscal years 2010,
2009 and 2008:
| (dollars in 000s) | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||||||||||
| Balance | Expense | Cost | Balance | Expense | Cost | Balance | Expense | Cost | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Mortgage loans, net
|
$ | 677,115 | $ | 31,877 | 4.12 | % | $ | 839,253 | $ | 46,396 | 5.14 | % | $ | 1,157,360 | $ | 74,895 | 6.40 | % | ||||||||||||||||||
|
Federal funds sold
|
9,471 | 9 | 0.09 | % | 311,138 | 801 | 0.26 | % | 153,332 | 4,981 | 3.25 | % | ||||||||||||||||||||||||
|
Emerald Advance
(1)
|
106,093 | 77,891 | 35.21 | % | 133,252 | 91,019 | 35.31 | % | 68,932 | 45,339 | 32.31 | % | ||||||||||||||||||||||||
|
Available-for-sale
investment securities
|
25,144 | 181 | 0.71 | % | 29,500 | 791 | 2.68 | % | 36,055 | 1,847 | 5.12 | % | ||||||||||||||||||||||||
|
FHLB stock
|
6,703 | 119 | 1.77 | % | 6,557 | 127 | 1.93 | % | 6,876 | 322 | 4.70 | % | ||||||||||||||||||||||||
|
Cash and due from banks
|
747,504 | 1,976 | 0.26 | % | 12,474 | 123 | 0.99 | % | – | – | – | % | ||||||||||||||||||||||||
| 1,572,030 | $ | 112,053 | 7.00 | % | 1,332,174 | $ | 139,257 | 10.45 | % | 1,422,555 | $ | 127,384 | 8.95 | % | ||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Non-interest-earning assets
|
94,499 | 71,759 | 20,313 | |||||||||||||||||||||||||||||||||
|
Total HRB Bank assets
|
$ | 1,666,529 | $ | 1,403,933 | $ | 1,442,868 | ||||||||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Customer deposits
|
$ | 1,019,664 | $ | 10,174 | 1.00 | % | $ | 863,072 | $ | 14,069 | 1.63 | % | $ | 904,836 | $ | 42,878 | 4.74 | % | ||||||||||||||||||
|
FHLB borrowing
|
98,767 | 1,997 | 2.02 | % | 103,885 | 5,113 | 4.92 | % | 117,743 | 6,008 | 5.10 | % | ||||||||||||||||||||||||
| 1,118,431 | $ | 12,171 | 1.09 | % | 966,957 | $ | 19,182 | 1.98 | % | 1,022,579 | $ | 48,886 | 4.78 | % | ||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Non-interest-bearing liabilities
|
267,159 | 230,271 | 210,767 | |||||||||||||||||||||||||||||||||
|
Total liabilities
|
1,385,590 | 1,197,228 | 1,233,346 | |||||||||||||||||||||||||||||||||
|
Total shareholders’ equity
|
280,939 | 206,705 | 209,522 | |||||||||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,666,529 | $ | 1,403,933 | $ | 1,442,868 | ||||||||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Net yield on interest-earning assets
(1)
|
$ | 99,882 | 6.23 | % | $ | 120,075 | 9.06 | % | $ | 78,498 | 5.54 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Includes all interest income related to Emerald Advance activities. Amounts recognized as interest income also include certain fees, which are amortized into interest income over the life of the loan, of $39.2 million, $44.0 million and $23.1 million for fiscal years 2010, 2009 and 2008, respectively. |
The following table presents the rate/volume variance in
interest income and expense for the last two fiscal years:
| (in 000s) | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total Change
|
Change
|
Change
|
Change
|
Total Change
|
Change
|
Change
|
Change
|
|||||||||||||||||||||||||||||
|
in Interest
|
Due to
|
Due to
|
Due to
|
in Interest
|
Due to
|
Due to
|
Due to
|
|||||||||||||||||||||||||||||
| Income/Expense | Rate/Volume | Rate | Volume | Income/Expense | Rate/Volume | Rate | Volume | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||||||
|
Loans,
net
(1)
|
$ | (27,646 | ) | $ | 1,233 | $ | (8,192 | ) | $ | (20,687 | ) | $ | 17,182 | $ | (11,253 | ) | $ | 53,654 | $ | (25,219 | ) | |||||||||||||||
|
Available-for-sale
investment securities
|
(611 | ) | 86 | (580 | ) | (117 | ) | (1,056 | ) | 160 | (881 | ) | (335 | ) | ||||||||||||||||||||||
|
Federal funds sold
|
(792 | ) | 500 | (515 | ) | (777 | ) | (4,180 | ) | (4,720 | ) | (4,586 | ) | 5,126 | ||||||||||||||||||||||
|
FHLB stock
|
(8 | ) | – | (11 | ) | 3 | (196 | ) | 9 | (190 | ) | (15 | ) | |||||||||||||||||||||||
|
Cash & due from banks
|
1,853 | (5,305 | ) | (90 | ) | 7,248 | 123 | 123 | – | – | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| $ | (27,204 | ) | $ | (3,486 | ) | $ | (9,388 | ) | $ | (14,330 | ) | $ | 11,873 | $ | (15,681 | ) | $ | 47,997 | $ | (20,443 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest expense:
|
||||||||||||||||||||||||||||||||||||
|
Customer deposits
|
$ | (3,895 | ) | $ | (573 | ) | $ | (5,457 | ) | $ | 2,135 | $ | (28,809 | ) | $ | 1,298 | $ | (28,128 | ) | $ | (1,979 | ) | ||||||||||||||
|
FHLB borrowings
|
(3,116 | ) | 149 | (3,013 | ) | (252 | ) | (895 | ) | 25 | (213 | ) | (707 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| $ | (7,011 | ) | $ | (424 | ) | $ | (8,470 | ) | $ | 1,883 | $ | (29,704 | ) | $ | 1,323 | $ | (28,341 | ) | $ | (2,686 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Non-accruing loans have been excluded. |
30
H&R
BLOCK 2010 Form 10K
Table of Contents
INVESTMENT
PORTFOLIO
–
The following table presents the cost basis and fair
value of HRB Bank’s investment portfolio at April 30,
2010, 2009 and 2008:
| (in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| April 30, | 2010 | 2009 | 2008 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| Cost Basis | Fair Value | Cost Basis | Fair Value | Cost Basis | Fair Value | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 23,026 | $ | 23,016 | $ | 27,466 | $ | 26,793 | $ | 30,809 | $ | 29,401 | ||||||||||||||||
|
Federal funds sold
|
2,338 | 2,338 | 157,326 | 157,326 | 9,938 | 9,938 | ||||||||||||||||||||||
|
FHLB stock
|
6,033 | 6,033 | 6,730 | 6,730 | 7,536 | 7,536 | ||||||||||||||||||||||
|
Trust preferred security
|
1,854 | 31 | 3,454 | 292 | 3,500 | 2,809 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| $ | 33,251 | $ | 31,418 | $ | 194,976 | $ | 191,141 | $ | 51,783 | $ | 49,684 | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
The following table shows the cost basis, scheduled maturities
and average yields for HRB Bank’s investment portfolio at
April 30, 2010:
|
|
||||||||||||||||||||||||||||||
| (dollars in 000s) | ||||||||||||||||||||||||||||||
| Less Than One Year | After Ten Years | Total | ||||||||||||||||||||||||||||
|
Cost
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
||||||||||||||||||||||||
| Basis | Due | Yield | Due | Yield | Due | Yield | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 23,026 | $ | – | – | % | $ | 23,026 | 0.7 | % | $ | 23,026 | 0.7 | % | ||||||||||||||||
|
Federal funds sold
|
2,338 | 2,338 | 0.1 | % | – | – | % | 2,338 | 0.1 | % | ||||||||||||||||||||
|
FHLB stock
|
6,033 | – | – | % | 6,033 | 1.8 | % | 6,033 | 1.8 | % | ||||||||||||||||||||
|
Trust preferred security
|
1,854 | – | – | % | 1,854 | 1.3 | % | 1,854 | 1.3 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||
| $ | 33,251 | $ | 2,338 | $ | 30,913 | $ | 33,251 | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||
LOAN PORTFOLIO
AND SUMMARY OF LOAN LOSS
EXPERIENCE
–
The following table shows the composition of HRB
Bank’s mortgage loan portfolio as of April 30, 2010,
2009, 2008 and 2007, and information on delinquent loans:
| (in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| April 30, | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Residential real estate mortgages
|
$ | 683,452 | $ | 821,583 | $ | 1,004,283 | $ | 1,350,612 | ||||||||||||
|
Home equity lines of credit
|
232 | 254 | 357 | 280 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| $ | 683,684 | $ | 821,837 | $ | 1,004,640 | $ | 1,350,892 | |||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Loans and TDRs on non-accrual
|
$ | 185,209 | $ | 222,382 | $ | 110,759 | $ | 22,909 | ||||||||||||
|
Loans past due 90 days or more
|
153,703 | 121,685 | 73,600 | 22,909 | ||||||||||||||||
|
Total TDRs
|
144,977 | 160,741 | 37,159 | – | ||||||||||||||||
|
|
||||||||||||||||||||
Of total loans outstanding at April 30, 2010, 60% were
adjustable-rate loans and 40% were fixed-rate loans.
Concentrations of loans to borrowers located in a single state
may result in increased exposure to loss as a result of changes
in real estate values and underlying economic or market
conditions related to a particular geographical location. The
table below presents outstanding loans by state for our
portfolio of mortgage loans held for investment as of
April 30, 2010:
| (dollars in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Loans
|
||||||||||||||||||||
|
Loans
|
Purchased
|
|||||||||||||||||||
|
Purchased
|
from Other
|
Percent
|
Delinquency
|
|||||||||||||||||
| from SCC | Parties | Total | of Total | Rate (30+ Days) | ||||||||||||||||
|
|
||||||||||||||||||||
|
Florida
|
$ | 57,396 | $ | 78,999 | $ | 136,395 | 20 | % | 30.3 | % | ||||||||||
|
California
|
96,830 | 14,546 | 111,376 | 16 | % | 35.3 | % | |||||||||||||
|
New York
|
94,626 | 10,305 | 104,931 | 15 | % | 34.9 | % | |||||||||||||
|
Wisconsin
|
2,214 | 51,947 | 54,161 | 8 | % | 4.3 | % | |||||||||||||
|
All others
|
183,578 | 93,243 | 276,821 | 41 | % | 24.2 | % | |||||||||||||
|
|
|
|
||||||||||||||||||
|
Total
|
$ | 434,644 | $ | 249,040 | $ | 683,684 | 100 | % | 27.3 | % | ||||||||||
|
|
|
|
||||||||||||||||||
|
|
||||||||||||||||||||
H&R
BLOCK 2010
Form 10K
31
Table of Contents
A rollforward of HRB Bank’s allowance for loss on mortgage
loans is as follows:
| (dollars in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | 2007 | ||||||||||||
|
|
||||||||||||||||
|
Balance at beginning of the year
|
$ | 84,073 | $ | 45,401 | $ | 3,448 | $ | – | ||||||||
|
Provision
|
47,750 | 63,897 | 42,004 | 3,622 | ||||||||||||
|
Recoveries
|
88 | 54 | 999 | – | ||||||||||||
|
Charge-offs
|
(38,376 | ) | (25,279 | ) | (1,050 | ) | (174 | ) | ||||||||
|
|
|
|
|
|||||||||||||
|
Balance at end of the year
|
$ | 93,535 | $ | 84,073 | $ | 45,401 | $ | 3,448 | ||||||||
|
|
|
|
||||||||||||||
|
Ratio of net charge-offs to average loans outstanding during the
year
|
4.95% | 2.80% | 0.09% | 0.02% | ||||||||||||
|
|
||||||||||||||||
DEPOSITS
–
The following table shows HRB Bank’s average deposit
balances and the average rate paid on those deposits for fiscal
years 2010, 2009 and 2008:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Money market and savings
|
$ | 400,920 | 0.50 | % | $ | 467,864 | 1.37 | % | $ | 653,126 | 4.92 | % | ||||||||||||
|
Interest-bearing checking accounts
|
13,677 | 0.61 | % | 13,579 | 2.25 | % | 141,328 | 4.31 | % | |||||||||||||||
|
IRAs
|
377,973 | 1.02 | % | 289,814 | 1.27 | % | 101,085 | 4.12 | % | |||||||||||||||
|
Certificates of deposit
|
227,094 | 1.86 | % | 91,815 | 3.98 | % | 9,297 | 5.45 | % | |||||||||||||||
| 1,019,664 | 1.00 | % | 863,072 | 1.63 | % | 904,836 | 4.74 | % | ||||||||||||||||
|
Non-interest-bearing deposits
|
233,717 | 212,607 | 189,325 | |||||||||||||||||||||
| $ | 1,253,381 | $ | 1,075,679 | $ | 1,094,161 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
RATIOS
–
The following table shows certain of HRB Bank’s key
ratios for fiscal years 2010, 2009 and 2008:
|
|
|||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | ||||||||
|
|
|||||||||||
|
Pretax return on assets
|
2.12% | (1.03 | )% | 0.80% | |||||||
|
Net return on equity
|
21.04% | (6.67 | )% | 3.32% | |||||||
|
Equity to assets ratio
|
28.83% | 12.44 | % | 12.80% | |||||||
|
|
|||||||||||
During fiscal year 2009, HRB Bank shared the revenues and
expenses of the H&R Block Prepaid Emerald
MasterCard
®
program with an affiliate, and as a result, transferred revenues
and expenses of $49.4 million and $13.4 million,
respectively, to this affiliate. During fiscal year 2010, the
agreement with the affiliate was terminated and HRB Bank now
retains the revenues and expenses of the program.
SHORT-TERM
BORROWINGS
–
The following table shows HRB Bank’s short-term
borrowings for fiscal years 2010, 2009 and 2008:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance of FHLB advances
|
$ | 50,000 | 1.92% | $ | 25,000 | 1.76% | $ | 25,000 | 2.64% | |||||||||||||||
|
Average balance of FHLB advances
|
98,767 | 2.07% | 103,885 | 4.92% | 13,743 | 5.32% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
The maximum amount of FHLB advances outstanding during fiscal
years 2010, 2009 and 2008 was $100.0 million,
$129.0 million and $179.0 million, respectively.
NEW ACCOUNTING
PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial
statements for a discussion of recently issued accounting
pronouncements.
32
H&R
BLOCK 2010 Form 10K
Table of Contents
INTEREST RATE
RISK
GENERAL
–
We
have a formal investment policy that strives to minimize the
market risk exposure of our cash equivalents and
available-for-sale
(AFS) securities, which are primarily affected by credit quality
and movements in interest rates. These guidelines focus on
managing liquidity and preserving principal and earnings.
Our cash equivalents are primarily held for liquidity purposes
and are comprised of high quality, short-term investments,
including qualified money market funds. Because our cash and
cash equivalents have a relatively short maturity, our
portfolio’s market value is relatively insensitive to
interest rate changes.
As our short-term borrowings are generally seasonal, interest
rate risk typically increases through our third fiscal quarter
and declines to zero by fiscal year-end. While the market value
of short-term borrowings is relatively insensitive to interest
rate changes, interest expense on short-term borrowings will
increase and decrease with changes in the underlying short-term
interest rates.
Our long-term debt at April 30, 2010, consists primarily of
fixed-rate Senior Notes; therefore, a change in interest rates
would have no impact on consolidated pretax earnings. See
Item 8, note 10 to our consolidated financial
statements.
HRB
BANK
–
At
April 30, 2010, approximately 42% of HRB Bank’s total
assets were residential mortgage loans with 40% of these
fixed-rate loans and 60% adjustable-rate loans. These loans are
sensitive to changes in interest rates as well as expected
prepayment levels. As interest rates increase, fixed-rate
residential mortgages tend to exhibit lower prepayments. The
opposite is true in a falling rate environment. When mortgage
loans prepay, mortgage origination costs are written off.
Depending on the timing of the prepayment, the write-offs of
mortgage origination costs may result in lower than anticipated
yields.
At April 30, 2010, HRB Bank’s other investments
consisted primarily of mortgage-backed securities and FHLB
stock. See table below for sensitivity analysis of our
mortgage-backed securities.
HRB Bank’s liabilities consist primarily of transactional
deposit relationships, such as prepaid debit card accounts and
checking accounts. Other liabilities include money market
accounts, certificates of deposit and collateralized borrowings
from the FHLB. Money market accounts re-price as interest rates
change. Certificates of deposit re-price over time depending on
maturities. FHLB advances generally have fixed rates ranging
from one day through multiple years.
Under criteria published by the OTS, HRB Bank’s overall
interest rate risk exposure at March 31, 2010, the most
recent date an evaluation was completed, was characterized as
“minimal.” We actively manage our interest rate risk
positions. As interest rates change, we will adjust our strategy
and mix of assets and liabilities to optimize our position.
EQUITY PRICE
RISK
We have limited exposure to the equity markets. Our primary
exposure is through our deferred compensation plans. Within the
deferred compensation plans, we have mismatches in asset and
liability amounts and investment choices (both fixed-income and
equity). At April 30, 2010 and 2009, the impact of a 10%
market value change in the combined equity assets held by our
deferred compensation plans and other equity investments would
be approximately $9.7 million and $7.3 million,
respectively, assuming no offset for the liabilities.
FOREIGN EXCHANGE
RATE RISK
Our operations in international markets are exposed to movements
in currency exchange rates. The currencies involved are the
Canadian dollar and the Australian dollar. We translate revenues
and expenses related to these operations at the average of
exchange rates in effect during the period. Assets and
liabilities of foreign subsidiaries are translated into
U.S. dollars at exchange rates prevailing at the end of the
year. Translation adjustments are recorded as a separate
component of other comprehensive income in stockholders’
equity. Translation of financial results into U.S. dollars
does not presently materially affect and has not historically
materially affected our consolidated financial results, although
such changes do affect the
year-to-year
comparability of the operating results in U.S. dollars of
our international businesses. We estimate a 10% change in
foreign exchange rates by itself would impact consolidated net
income in fiscal years 2010 and 2009 by approximately
$5.1 million and $3.0 million, respectively, and cash
balances at April 30, 2010 and 2009 by $7.1 million
and $5.4 million, respectively.
During fiscal year 2010, borrowing needs in our Canadian
operations were funded by corporate borrowings in the
U.S. To mitigate the foreign currency exchange rate risk,
we used forward foreign exchange contracts. We do not enter into
forward contracts for speculative purposes. In estimating the
fair value of derivative positions, we utilized quoted market
prices, if available, or quotes obtained from external sources.
When foreign currency financial instruments are outstanding,
exposure to market risk on these instruments results from
fluctuations in
H&R
BLOCK 2010
Form 10K
33
Table of Contents
currency rates during the periods
in which the contracts are outstanding. The counterparties to
our currency exchange contracts consist of major financial
institutions, each of which is rated investment grade. We are
exposed to credit risk to the extent of potential
non-performance by counterparties on financial instruments. Any
potential credit exposure does not exceed the fair value. We
believe the risk of incurring losses due to credit risk is
remote. At April 30, 2010 we had no forward exchange
contracts outstanding.
SENSITIVITY
ANALYSIS
The sensitivities of certain financial instruments to changes in
interest rates as of April 30, 2010 and 2009 are presented
below. The following table represents hypothetical instantaneous
and sustained parallel shifts in interest rates and should not
be relied on as an indicator of future expected results. The
impact of a change in interest rates on other factors, such as
delinquency and prepayment rates, is not included in the
analysis below.
|
|
||||||||||||||||||||||||
| (in 000s) | ||||||||||||||||||||||||
|
Basis Point
Change
|
||||||||||||||||||||||||
|
Carrying Value at
|
|
|||||||||||||||||||||||
| April 30, 2010 | −300 | −200 | −100 | +100 | +200 | +300 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Mortgage loans held for investment
|
$ | 595,405 | $ | 60,251 | $ | 43,363 | $ | 20,780 | $ | (7,906) | $ | (12,525) | $ | (14,664) | ||||||||||
|
Mortgage-backed securities
|
23,016 | 123 | 125 | 134 | (272) | (411) | (510) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Basis Point
Change
|
||||||||||||||||||||||||
|
Carrying Value at
|
|
|||||||||||||||||||||||
| April 30, 2009 | −300 | −200 | −100 | +100 | +200 | +300 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Mortgage loans held for investment
|
$ | 744,899 | $ | 115,319 | $ | 76,202 | $ | 33,253 | $ | (28,847) | $ | (58,293) | $ | (85,922) | ||||||||||
|
Mortgage-backed securities
|
26,793 | 803 | 727 | 398 | (1,188) | (1,675) | (1,906) | |||||||||||||||||
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
DISCUSSION OF
FINANCIAL RESPONSIBILITY
We at H&R Block are guided by our core values of client
focus, teamwork and responsibility. These values govern the
manner in which we serve clients and each other and are embedded
in the execution and delivery of our responsibilities to our
shareholders. H&R Block’s management is responsible
for the integrity and objectivity of the information contained
in this document. Management is responsible for the consistency
of reporting this information and for ensuring that accounting
principles generally accepted in the United States are used. In
discharging this responsibility, management maintains an
extensive program of internal audits and requires the management
teams of our individual subsidiaries to certify their respective
financial information. Our system of internal control over
financial reporting also includes formal policies and
procedures, including a Code of Business Ethics and Conduct
program designed to encourage and assist all employees and
directors in living up to high standards of integrity.
The Audit Committee of the Board of Directors, composed solely
of outside and independent directors, meets periodically with
management, the independent auditors and the chief internal
auditor to review matters relating to our financial statements,
internal audit activities, internal accounting controls and
non-audit services provided by the independent auditors. The
independent auditors and the chief internal auditor have full
access to the Audit Committee and meet, both with and without
management present, to discuss the scope and results of their
audits, including internal control, audit and financial matters.
Deloitte & Touche LLP audited our consolidated
financial statements for fiscal years 2010, 2009 and 2008. Their
audits were conducted in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
34
H&R
BLOCK 2010 Form 10K
Table of Contents
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 12a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in “Internal Control — Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as of April 30, 2010.
Based on our assessment, management concluded that as of
April 30, 2010, the Company’s internal control over
financial reporting was effective based on the criteria set
forth by COSO. The Company’s external auditors,
Deloitte & Touche LLP, an independent registered
public accounting firm, have issued an audit report on the
effectiveness of the Company’s internal control over
financial reporting.
Russell P. Smyth President and Chief Executive Officer |
Jeffrey T. Brown Vice President, Interim Chief Financial Officer and Corporate Controller |
H&R
BLOCK 2010
Form 10K
35
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of
H&R Block, Inc. and subsidiaries (the “Company”)
as of April 30, 2010 and 2009, and the related consolidated
statements of operations and comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three
years in the period ended April 30, 2010. Our audits also
included the financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule 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, such consolidated financial statements present
fairly, in all material respects, the financial position of
H&R Block, Inc. and subsidiaries as of April 30, 2010
and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended
April 30, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 14 to the consolidated financial
statements, the Company adopted an accounting standard for
uncertainty in income taxes on May 1, 2007.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
April 30, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 28, 2010 expressed an
unqualified opinion on the Company’s internal control over
financial reporting.
June 28, 2010
36
H&R
BLOCK 2010 Form 10K
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
H&R Block, Inc.
Kansas City, Missouri
We have audited the internal control over financial reporting of
H&R Block, Inc. and subsidiaries (the “Company”)
as of April 30, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of April 30, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended April 30, 2010 of the
Company and our report dated June 28, 2010 expressed an
unqualified opinion on those financial statements and financial
statement schedule and included an explanatory paragraph
regarding the Company’s adoption of an accounting standard
for uncertainty in income taxes on May 1, 2007.
June 28, 2010
H&R
BLOCK 2010
Form 10K
37
Table of Contents
| AND COMPREHENSIVE INCOME (LOSS) | (in 000s, except per share amounts) |
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
REVENUES:
|
||||||||||||
|
Service revenues
|
$ | 3,231,487 | $ | 3,437,906 | $ | 3,393,906 | ||||||
|
Product and other revenues
|
520,440 | 491,155 | 541,166 | |||||||||
|
Interest income
|
122,405 | 154,516 | 151,558 | |||||||||
|
|
||||||||||||
| 3,874,332 | 4,083,577 | 4,086,630 | ||||||||||
|
|
||||||||||||
|
OPERATING EXPENSES:
|
||||||||||||
|
Cost of revenues
|
2,467,996 | 2,596,218 | 2,588,193 | |||||||||
|
Selling, general and administrative
|
631,499 | 648,490 | 788,898 | |||||||||
|
|
||||||||||||
| 3,099,495 | 3,244,708 | 3,377,091 | ||||||||||
|
|
||||||||||||
|
Operating income
|
774,837 | 838,869 | 709,539 | |||||||||
|
Other income, net
|
9,298 | 501 | 25,532 | |||||||||
|
|
||||||||||||
|
Income from continuing operations before income taxes
|
784,135 | 839,370 | 735,071 | |||||||||
|
Income taxes
|
295,189 | 326,315 | 289,124 | |||||||||
|
|
||||||||||||
|
Net income from continuing operations
|
488,946 | 513,055 | 445,947 | |||||||||
|
Net loss from discontinued operations
|
(9,704 | ) | (27,382 | ) | (754,594 | ) | ||||||
|
|
||||||||||||
|
NET INCOME (LOSS)
|
$ | 479,242 | $ | 485,673 | $ | (308,647 | ) | |||||
|
|
||||||||||||
|
BASIC EARNINGS (LOSS) PER SHARE:
|
||||||||||||
|
Net income from continuing operations
|
$ | 1.47 | $ | 1.53 | $ | 1.37 | ||||||
|
Net loss from discontinued operations
|
(0.03 | ) | (0.08 | ) | (2.32 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 1.44 | $ | 1.45 | $ | (0.95 | ) | |||||
|
|
||||||||||||
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
||||||||||||
|
Net income from continuing operations
|
$ | 1.46 | $ | 1.53 | $ | 1.35 | ||||||
|
Net loss from discontinued operations
|
(0.03 | ) | (0.08 | ) | (2.30 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 1.43 | $ | 1.45 | $ | (0.95 | ) | |||||
|
|
||||||||||||
|
COMPREHENSIVE INCOME (LOSS):
|
||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | 485,673 | $ | (308,647 | ) | |||||
|
Unrealized gains (losses) on securities, net of taxes:
|
||||||||||||
|
Unrealized holding gains (losses) arising during the year,
net of taxes of $188, $(1,736) and $2,683 |
274 | (2,836 | ) | 4,402 | ||||||||
|
Reclassification adjustment for gains included in income,
net of taxes of $811, $762 and $130 |
(1,399 | ) | (1,164 | ) | (205 | ) | ||||||
|
Change in foreign currency translation adjustments
|
14,442 | (10,125 | ) | (391 | ) | |||||||
|
|
||||||||||||
|
Comprehensive income (loss)
|
$ | 492,559 | $ | 471,548 | $ | (304,841 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
See
accompanying notes to consolidated financial statements.
38
H&R
BLOCK 2010 Form 10K
Table of Contents
|
|
(in 000s, except share and per share amounts) |
|
|
||||||||
| April 30, 2010 | April 30, 2009 | |||||||
|
|
||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 1,804,045 | $ | 1,654,663 | ||||
|
Cash and cash equivalents — restricted
|
34,350 | 51,656 | ||||||
|
Receivables, less allowance for doubtful accounts of $112,475
and $128,541
|
517,986 | 512,814 | ||||||
|
Prepaid expenses and other current assets
|
292,655 | 351,947 | ||||||
|
|
||||||||
|
Total current assets
|
2,649,036 | 2,571,080 | ||||||
|
Mortgage loans held for investment, less allowance for loan
losses of $93,535 and $84,073
|
595,405 | 744,899 | ||||||
|
Property and equipment, at cost less accumulated depreciation
and amortization of $657,008 and $625,075
|
345,470 | 368,289 | ||||||
|
Intangible assets, net
|
367,432 | 385,998 | ||||||
|
Goodwill
|
840,447 | 850,230 | ||||||
|
Other assets
|
436,528 | 439,226 | ||||||
|
|
||||||||
|
Total assets
|
$ | 5,234,318 | $ | 5,359,722 | ||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Customer banking deposits
|
$ | 852,555 | $ | 854,888 | ||||
|
Accounts payable, accrued expenses and other current liabilities
|
756,577 | 705,945 | ||||||
|
Accrued salaries, wages and payroll taxes
|
199,496 | 259,698 | ||||||
|
Accrued income taxes
|
459,175 | 543,967 | ||||||
|
Current portion of long-term debt
|
3,688 | 8,782 | ||||||
|
Current Federal Home Loan Bank borrowings
|
50,000 | 25,000 | ||||||
|
|
||||||||
|
Total current liabilities
|
2,321,491 | 2,398,280 | ||||||
|
Long-term debt
|
1,035,144 | 1,032,122 | ||||||
|
Long-term Federal Home Loan Bank borrowings
|
25,000 | 75,000 | ||||||
|
Other noncurrent liabilities
|
412,053 | 448,461 | ||||||
|
|
||||||||
|
Total liabilities
|
3,793,688 | 3,953,863 | ||||||
|
|
||||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 431,390,599
and 444,176,510
|
4,314 | 4,442 | ||||||
|
Convertible preferred stock, no par, stated value $0.01 per
share, 500,000 shares authorized
|
– | – | ||||||
|
Additional paid-in capital
|
832,604 | 836,477 | ||||||
|
Accumulated other comprehensive income (loss)
|
1,678 | (11,639 | ) | |||||
|
Retained earnings
|
2,658,586 | 2,671,437 | ||||||
|
Less treasury shares, at cost
|
(2,056,552 | ) | (2,094,858 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
1,440,630 | 1,405,859 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 5,234,318 | $ | 5,359,722 | ||||
|
|
||||||||
|
|
||||||||
See
accompanying notes to consolidated financial statements.
H&R
BLOCK 2010
Form 10K
39
Table of Contents
|
|
(in 000s) |
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | 485,673 | $ | (308,647 | ) | |||||||||
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||||||||||
|
Depreciation and amortization
|
126,901 | 123,631 | 119,514 | |||||||||||||
|
Provision for bad debts and loan losses
|
161,296 | 181,829 | 174,813 | |||||||||||||
|
Provision for deferred taxes
|
170,566 | 73,213 | (51,695 | ) | ||||||||||||
|
Stock-based compensation
|
29,369 | 26,557 | 40,373 | |||||||||||||
|
Net cash provided by discontinued operations
|
– | 97,578 | 213,045 | |||||||||||||
|
Changes in assets and liabilities, net of acquisitions:
|
||||||||||||||||
|
Cash and cash equivalents — restricted
|
2,497 | (44,625 | ) | (3,168 | ) | |||||||||||
|
Receivables
|
(87,889 | ) | (77,447 | ) | (120,676 | ) | ||||||||||
|
Prepaid expenses and other current assets
|
(2,320 | ) | 84,279 | 6,796 | ||||||||||||
|
Accounts payable, accrued expenses and other current liabilities
|
(305 | ) | (36,024 | ) | 16,215 | |||||||||||
|
Accrued salaries, wages and payroll taxes
|
(59,617 | ) | (106,014 | ) | 65,845 | |||||||||||
|
Accrued income taxes
|
(77,254 | ) | 126,594 | 204,472 | ||||||||||||
|
Other noncurrent liabilities
|
(65,261 | ) | (56,001 | ) | (34,738 | ) | ||||||||||
|
Other, net
|
(89,756 | ) | 145,196 | (63,389 | ) | |||||||||||
|
|
||||||||||||||||
|
Net cash provided by operating activities
|
587,469 | 1,024,439 | 258,760 | |||||||||||||
|
|
||||||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||
|
Purchases of
available-for-sale
securities
|
(5,365 | ) | (5,092 | ) | (11,794 | ) | ||||||||||
|
Sales of and payments received on
available-for-sale
securities
|
15,758 | 15,075 | 18,175 | |||||||||||||
|
Principal payments on mortgage loans held for investment, net
|
72,832 | 91,329 | 207,606 | |||||||||||||
|
Purchases of property and equipment
|
(90,515 | ) | (97,880 | ) | (101,554 | ) | ||||||||||
|
Payments made for business acquisitions, net of cash acquired
|
(10,539 | ) | (293,805 | ) | (24,872 | ) | ||||||||||
|
Net cash provided by investing activities of discontinued
operations
|
– | 255,066 | 1,044,990 | |||||||||||||
|
Other, net
|
49,182 | 40,867 | 14,738 | |||||||||||||
|
|
||||||||||||||||
|
Net cash provided by investing activities
|
31,353 | 5,560 | 1,147,289 | |||||||||||||
|
|
||||||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
|
Repayments of commercial paper
|
(1,406,013 | ) | – | (5,125,279 | ) | |||||||||||
|
Proceeds from issuance of commercial paper
|
1,406,013 | – | 4,133,197 | |||||||||||||
|
Proceeds from issuance of Senior Notes
|
– | – | 599,376 | |||||||||||||
|
Repayments of other borrowings
|
(4,267,773 | ) | (4,762,294 | ) | (9,055,426 | ) | ||||||||||
|
Proceeds from other borrowings
|
4,242,727 | 4,733,294 | 8,505,426 | |||||||||||||
|
Customer banking deposits, net
|
17,539 | 64,357 | (345,391 | ) | ||||||||||||
|
Dividends paid
|
(200,899 | ) | (198,685 | ) | (183,628 | ) | ||||||||||
|
Repurchase of common stock, including shares surrendered
|
(254,250 | ) | (106,189 | ) | (7,280 | ) | ||||||||||
|
Proceeds from issuance of common stock, net
|
– | 141,415 | – | |||||||||||||
|
Proceeds from exercise of stock options
|
16,682 | 71,594 | 23,322 | |||||||||||||
|
Net cash provided by (used in) financing activities of
discontinued operations
|
– | 4,783 | (64,439 | ) | ||||||||||||
|
Other, net
|
(35,144 | ) | 11,492 | (37,947 | ) | |||||||||||
|
|
||||||||||||||||
|
Net cash used in financing activities
|
(481,118 | ) | (40,233 | ) | (1,558,069 | ) | ||||||||||
|
|
||||||||||||||||
|
Effects of exchange rates on cash
|
11,678 | – | – | |||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
149,382 | 989,766 | (152,020 | ) | ||||||||||||
|
Cash and cash equivalents at beginning of the year
|
1,654,663 | 664,897 | 816,917 | |||||||||||||
|
|
||||||||||||||||
|
Cash and cash equivalents at end of the year
|
$ | 1,804,045 | $ | 1,654,663 | $ | 664,897 | ||||||||||
|
|
||||||||||||||||
|
SUPPLEMENTARY CASH FLOW DATA:
|
||||||||||||||||
|
Income taxes paid, net of refunds received of $12,587, $158,862
and $317,849
|
$ | 359,559 | $ | (1,593 | ) | $ | (238,803 | ) | ||||||||
|
Interest paid on borrowings
|
78,305 | 89,541 | 173,181 | |||||||||||||
|
Interest paid on deposits
|
10,156 | 14,004 | 44,501 | |||||||||||||
|
Transfers of loans to foreclosed assets
|
19,341 | 65,171 | – | |||||||||||||
|
|
||||||||||||||||
See
accompanying notes to consolidated financial statements.
40
H&R
BLOCK 2010 Form 10K
Table of Contents
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts
in 000s, except
per share amounts)
per share amounts)
|
|
||||||||||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
|
Convertible
|
Additional
|
Other
|
||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock |
Paid-in
|
Comprehensive
|
Retained
|
Treasury Stock |
Total
|
||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at May 1, 2007
|
435,891 | $ | 4,359 | – | $ | – | $ | 676,766 | $ | (1,320 | ) | $ | 2,886,440 | (112,672 | ) | $ | (2,151,746 | ) | $ | 1,414,499 | ||||||||||||||||||||
|
Remeasurement of uncertain tax positions upon adoption of new
accounting standard
|
– | – | – | – | – | – | (9,716 | ) | – | – | (9,716 | ) | ||||||||||||||||||||||||||||
|
Net loss
|
– | – | – | – | – | – | (308,647 | ) | – | – | (308,647 | ) | ||||||||||||||||||||||||||||
|
Unrealized translation loss
|
– | – | – | – | – | (391 | ) | – | – | – | (391 | ) | ||||||||||||||||||||||||||||
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
– | – | – | – | – | 4,197 | – | – | – | 4,197 | ||||||||||||||||||||||||||||||
|
Stock-based compensation
|
– | – | – | – | 50,410 | – | – | – | – | 50,410 | ||||||||||||||||||||||||||||||
|
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
|
Option exercises
|
– | – | – | – | (11,090 | ) | – | – | 1,736 | 33,174 | 22,084 | |||||||||||||||||||||||||||||
|
Nonvested shares
|
– | – | – | – | (20,097 | ) | – | – | 963 | 18,387 | (1,710 | ) | ||||||||||||||||||||||||||||
|
ESPP
|
– | – | – | – | (65 | ) | – | – | 413 | 7,872 | 7,807 | |||||||||||||||||||||||||||||
|
Acquisitions
|
– | – | – | – | 35 | – | – | 8 | 158 | 193 | ||||||||||||||||||||||||||||||
|
Acquisition of treasury shares
|
– | – | – | – | – | – | – | (328 | ) | (7,280 | ) | (7,280 | ) | |||||||||||||||||||||||||||
|
Cash dividends paid – $0.56 per share
|
– | – | – | – | – | – | (183,628 | ) | – | – | (183,628 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at April 30, 2008
|
435,891 | 4,359 | – | – | 695,959 | 2,486 | 2,384,449 | (109,880 | ) | (2,099,435 | ) | 987,818 | ||||||||||||||||||||||||||||
|
Net income
|
– | – | – | – | – | – | 485,673 | – | – | 485,673 | ||||||||||||||||||||||||||||||
|
Unrealized translation loss
|
– | – | – | – | – | (10,125 | ) | – | – | – | (10,125 | ) | ||||||||||||||||||||||||||||
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
– | – | – | – | – | (4,000 | ) | – | – | – | (4,000 | ) | ||||||||||||||||||||||||||||
|
Proceeds from common stock Issuance, net of expenses
|
8,286 | 83 | – | – | 141,332 | – | – | – | – | 141,415 | ||||||||||||||||||||||||||||||
|
Stock-based compensation
|
– | – | – | – | 32,600 | – | – | – | – | 32,600 | ||||||||||||||||||||||||||||||
|
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
|
Option exercises
|
– | – | – | – | (12,624 | ) | – | – | 4,481 | 85,624 | 73,000 | |||||||||||||||||||||||||||||
|
Nonvested shares
|
– | – | – | – | (20,392 | ) | – | – | 1,015 | 19,402 | (990 | ) | ||||||||||||||||||||||||||||
|
ESPP
|
– | – | – | – | (423 | ) | – | – | 292 | 5,577 | 5,154 | |||||||||||||||||||||||||||||
|
Acquisitions
|
– | – | – | – | 25 | – | – | 8 | 163 | 188 | ||||||||||||||||||||||||||||||
|
Acquisition of treasury shares
|
– | – | – | – | – | – | – | (5,991 | ) | (106,189 | ) | (106,189 | ) | |||||||||||||||||||||||||||
|
Cash dividends paid – $0.59 per share
|
– | – | – | – | – | – | (198,685 | ) | – | – | (198,685 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at April 30, 2009
|
444,177 | 4,442 | – | – | 836,477 | (11,639 | ) | 2,671,437 | (110,075 | ) | (2,094,858 | ) | 1,405,859 | |||||||||||||||||||||||||||
|
Net income
|
– | – | – | – | – | – | 479,242 | – | – | 479,242 | ||||||||||||||||||||||||||||||
|
Unrealized translation gain
|
– | – | – | – | – | 14,442 | – | – | – | 14,442 | ||||||||||||||||||||||||||||||
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
– | – | – | – | – | (1,125 | ) | – | – | – | (1,125 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation
|
– | – | – | – | 29,369 | – | – | – | – | 29,369 | ||||||||||||||||||||||||||||||
|
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
|
Option exercises
|
– | – | – | – | (10,840 | ) | – | – | 1,293 | 24,616 | 13,776 | |||||||||||||||||||||||||||||
|
Nonvested shares/units
|
– | – | – | – | (13,806 | ) | – | (300 | ) | 677 | 12,879 | (1,227 | ) | |||||||||||||||||||||||||||
|
ESPP
|
– | – | – | – | (924 | ) | – | – | 266 | 5,058 | 4,134 | |||||||||||||||||||||||||||||
|
Acquisition of treasury shares
|
– | – | – | – | – | – | – | (246 | ) | (4,247 | ) | (4,247 | ) | |||||||||||||||||||||||||||
|
Retirement of common shares
|
(12,786 | ) | (128 | ) | – | – | (7,672 | ) | – | (242,203 | ) | – | – | (250,003 | ) | |||||||||||||||||||||||||
|
Cash dividends declared
|
– | – | – | – | – | – | (48,691 | ) | – | – | (48,691 | ) | ||||||||||||||||||||||||||||
|
Cash dividends paid – $0.60 per share
|
– | – | – | – | – | – | (200,899 | ) | – | – | (200,899 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at April 30, 2010
|
431,391 | $ | 4,314 | – | $ | – | $ | 832,604 | $ | 1,678 | $ | 2,658,586 | (108,085 | ) | $ | (2,056,552 | ) | $ | 1,440,630 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
See
accompanying notes to consolidated financial statements.
H&R
BLOCK 2010
Form 10K
41
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NATURE OF
OPERATIONS
–
Our
operating subsidiaries provide a variety of services to the
general public, principally in the United States (U.S.).
Specifically, we offer: tax return preparation; tax and
consulting services to business clients; certain retail banking
services; tax preparation and related software; and refund
anticipation loans (RALs) offered by third-party lending
institutions. Tax preparation services are also provided in
Canada and Australia. Our Tax Services segment comprised 76.8%
of our consolidated revenues from continuing operations for
fiscal year 2010.
PRINCIPLES OF
CONSOLIDATION
–
The
consolidated financial statements include the accounts of the
Company and our wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated.
Some of our subsidiaries operate in regulated industries and
their underlying accounting records reflect the policies and
requirements of these industries.
RECLASSIFICATIONS
–
Certain
reclassifications have been made to prior year amounts to
conform to the current year presentation. We realigned our
segments as discussed in note 21, and accordingly restated
segment disclosures for prior periods. These changes had no
effect on our results of operations or stockholders’ equity
as previously reported.
MANAGEMENT
ESTIMATES
–
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Significant estimates, assumptions and judgments are
applied in the determination of our allowance for loan losses,
potential losses from loan repurchase and indemnity obligations
associated with our discontinued mortgage business, contingent
losses associated with pending litigation, fair value of
reporting units, valuation allowances based on future taxable
income, reserves for uncertain tax positions and related
matters. We seek to change our estimates when facts and
circumstances dictate, however, future events and their effects
cannot be determined with absolute certainty. As such, actual
results could differ materially from those estimates.
CONCENTRATIONS OF
RISK
–
The
overall credit quality of our mortgage loans held for investment
is impacted by the strength of the U.S. economy and local
economies. Our mortgage loans held for investment include
concentrations of loans to borrowers in certain states, which
may result in increased exposure to loss as a result of changes
in real estate values and underlying economic or market
conditions related to a particular geographical location.
Approximately 51% of our mortgage loan portfolio consists of
loans to borrowers located in the states of Florida, California
and New York.
CASH AND CASH
EQUIVALENTS
–
Cash
and cash equivalents include cash on hand, cash due from banks
and federal funds sold. For purposes of the consolidated balance
sheets and consolidated statements of cash flows, all
non-restricted highly liquid instruments purchased with an
original maturity of three months or less are considered to be
cash equivalents. We present cash flow activities utilizing the
indirect method. Book overdrafts included in accounts payable
totaled $35.9 million and $48.0 million at
April 30, 2010 and 2009, respectively.
CASH AND CASH
EQUIVALENTS – RESTRICTED –
Cash and cash equivalents – restricted
consists primarily of cash held by our captive insurance
subsidiary that will be used to pay claims.
RECEIVABLES
–
Receivables
consist primarily of accounts receivable from customers of our
Business Services segment, receivables from tax clients for tax
return preparation, refund anticipation loan participations and
receivables of our franchise financing subsidiary. The allowance
for doubtful accounts requires management’s judgment
regarding collectibility and current economic conditions to
establish an amount considered by management to be adequate to
cover estimated losses as of the balance sheet date.
MARKETABLE
SECURITIES – AVAILABLE-FOR-SALE
–
Marketable
securities we hold are classified as
available-for-sale
(AFS) and are reported at fair value. Unrealized gains and
losses are calculated using the specific identification method
and reported, net of applicable taxes, as a component of
accumulated other comprehensive income. Realized gains and
losses on the sale of these securities are determined using the
specific identification method. These securities are included in
other assets in the consolidated balance sheets.
We monitor our AFS investment portfolio for impairment and
consider many factors in determining whether the impairment is
deemed to be
other-than-temporary.
These factors include, but are not limited to, the length of
time the security has had a market value less than the cost
basis, the severity of loss, our intent to sell, including
regulatory or contractual requirements to sell, recent events
specific to the issuer or industry, external credit ratings and
recent downgrades in such ratings.
42
H&R
BLOCK 2010 Form 10K
Table of Contents
For investments in mortgage-backed securities, amortization of
premiums and accretion of discounts are recognized in interest
income using the interest method, adjusted for anticipated
prepayments where applicable. We update our estimates of
expected cash flows periodically and recognize changes in
calculated effective yields as appropriate.
Our investment in the stock of the Federal Home Loan Bank (FHLB)
is carried at cost, as it is a restricted security, which is
required to be maintained by H&R Block Bank (HRB Bank) for
borrowing availability. The cost of the stock represents its
redemption value, as there is no ready market value.
REAL ESTATE
OWNED
–
Real
estate owned (REO) includes foreclosed properties securing
mortgage loans. Foreclosed assets are adjusted to fair value
less costs to sell upon transfer of the loans to REO.
Subsequently, REO is carried at the lower of carrying value or
fair value less costs to sell. Fair value is generally based on
independent market prices or appraised values of the collateral.
Subsequent holding period losses and losses arising from the
sale of REO are expensed as incurred. REO is included in prepaid
expenses and other current assets in the consolidated balance
sheets.
MORTGAGE LOANS
HELD FOR
INVESTMENT
–
Mortgage
loans held for investment represent loans originated or acquired
with the ability and current intent to hold to maturity. Loans
held for investment are carried at amortized cost adjusted for
charge-offs, net allowance for loan losses, deferred fees or
costs on originated loans and unamortized premiums or discounts
on purchased loans. Loan fees and certain direct loan
origination costs are deferred and the net fee or cost is
recognized in interest income over the lives of the related
loans. Unearned income, premiums and discounts on purchased
loans are amortized or accreted into income over the estimated
life of the loan using methods that approximate the interest
method based on assumptions regarding the loan portfolio,
including prepayments adjusted to reflect actual experience.
We record an allowance representing our estimate of credit
losses inherent in the loan portfolio at the balance sheet date.
Loan recoveries and the provision for credit losses increase the
allowance, while loan charge-offs decrease the allowance. A
current assessment of the value of the loan is made when the
loan is no later than 60 days past due and any loan balance
in excess of the value less costs to sell the property is
charged off.
We evaluate mortgage loans less than 60 days past due on a
pooled basis and record a loan loss allowance for those loans in
the aggregate. We stratify these loans based on our view of risk
associated with various elements of the pool and assign
estimated loss rates based on those risks. Loss rates consider
both the rate at which loans will become delinquent (frequency)
and the amount of loss that will ultimately be realized upon
occurrence of a liquidation of collateral (severity), and are
primarily based on historical experience and our assessment of
economic and market conditions.
Loans are considered impaired when we believe it is probable we
will be unable to collect all principal and interest due
according to the contractual terms of the note, or when the loan
is 60 days past due. Impaired loans are reviewed
individually and a specific loan loss allowance is recorded
based on the fair value of the underlying collateral.
We classify loans as non-accrual when full and timely collection
of interest or principal becomes uncertain, or when they are
90 days past due. Interest previously accrued, but not
collected, is reversed against current interest income when a
loan is placed on non-accrual status. Accretion of deferred fees
is discontinued for non-accrual loans. Payments received on
non-accrual loans are recognized as interest income when the
loan is considered collectible and applied to principal when it
is doubtful that full payment will be collected. Loans are not
placed back on accrual status until collection of principal and
interest is reasonably assured as a result of the borrower
bringing the loan into compliance with the contractual terms of
the loan. Prior to restoring a loan to accrual status,
management considers a borrower’s prospects for continuing
future contractual payments.
From time to time, as part of our loss mitigation process, we
may agree to modify the contractual terms of a borrower’s
loan. We have developed loan modification programs designed to
help borrowers refinance adjustable-rate mortgage loans prior to
rate reset. In cases where we modify a loan and in so doing
grant a concession to a borrower experiencing financial
difficulty, the modification is considered a troubled debt
restructuring (TDR). We may consider the borrower’s payment
status and history, the borrower’s ability to pay upon a
rate reset on an adjustable-rate mortgage, the size of the
payment increase upon a rate reset, the period of time remaining
prior to the rate reset and other relevant factors in
determining whether a borrower is experiencing financial
difficulty. A borrower who is current may be deemed to be
experiencing financial difficulty in instances where the
evidence suggests an inability to pay based on the original
terms of the loan after the interest rate reset and, in the
absence of a modification, may default on the loan. We evaluate
whether the modification represents a concession we would not
otherwise consider, such as a lower interest rate than what a
new borrower of similar credit risk would be offered. A loan
modified in a troubled debt restructuring, including a loan that
was current at the time of modification, is placed on
non-accrual status until we determine future collection of
principal and interest is reasonably assured, which generally
requires the borrower to demonstrate a period of performance
according to
H&R
BLOCK 2010
Form 10K
43
Table of Contents
the restructured terms. TDR loans totaled $145.0 million
and $160.7 million at April 30, 2010 and 2009,
respectively. At the time of the modification, we record
impairment for TDR loans equal to the difference between the
principal balance of the loan and the present value of expected
future cash flows discounted at the loan’s effective
interest rate. However, if we later assess that foreclosure of a
modified loan is probable, we record impairment based on the
estimated fair value of the underlying collateral.
PROPERTY AND
EQUIPMENT
–
Buildings
and equipment are initially recorded at cost and are depreciated
over the estimated useful life of the assets using the
straight-line method. Leasehold improvements are initially
recorded at cost and are amortized over the lesser of the term
of the respective lease or the estimated useful life, using the
straight-line method. Estimated useful lives are 15 to
40 years for buildings, 3 to 5 years for computers and
other equipment and up to 8 years for leasehold
improvements.
We capitalize certain allowable costs associated with software
developed or purchased for internal use. These costs are
typically amortized over 36 months using the straight-line
method.
Substantially all of the operations of our subsidiaries are
conducted in leased premises. For all lease agreements,
including those with escalating rent payments or rent holidays,
we recognize rent expense on a straight-line basis.
INTANGIBLE ASSETS
AND
GOODWILL
–
We
test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently, whenever events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. The
first step of the impairment test is to compare the estimated
fair value of the reporting unit to its carrying value. If the
carrying value is less than fair value, no impairment exists. If
the carrying value is greater than fair value, a second step is
performed to determine the fair value of goodwill and the amount
of impairment loss, if any.
In addition, long-lived assets, including intangible assets with
finite lives, are assessed for impairment whenever events or
circumstances indicate the carrying value may not be fully
recoverable by comparing the carrying value to future
undiscounted cash flows. Impairment is recorded for long-lived
assets determined not to be fully recoverable equal to the
excess of the carrying amount of the asset over its estimated
fair value.
We recorded a $15.0 million goodwill impairment related to
our RSM EquiCo, Inc. (RSM EquiCo) reporting unit within our
Business Services segment in fiscal year 2010 and a
$2.2 million goodwill impairment for a reporting unit
within our Tax Services segment in fiscal year 2009. No material
impairment adjustments to other intangible assets or other
long-lived assets of continuing operations were made during the
three-year period ended April 30, 2010.
The weighted-average life of intangible assets with finite lives
is 27 years. Intangible assets are typically amortized over
the estimated useful life of the assets using the straight-line
method.
COMMERCIAL
PAPER
–
We
resumed issuing commercial paper during fiscal year 2010 to
finance temporary liquidity needs and various financial
activities. There was no commercial paper outstanding at
April 30, 2010.
MORTGAGE LOAN
REPURCHASE
LIABILITY
–
Sand
Canyon Corporation (SCC) is obligated to repurchase loans sold
or securitized in the event of a breach of representations and
warranties it made to purchasers or insurers of such loans, or
otherwise indemnify certain third-parties for losses incurred by
them.
The amount of expected losses depends primarily on the frequency
of valid claims and the severity of loss incurred on loans. To
the extent actual losses related to repurchase and
indemnification activity are different from estimates, the
repurchase reserve may increase or decrease. See note 16
for additional information.
LITIGATION
–
It
is our policy to routinely assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as
ranges of probable losses. A determination of the amount of the
reserves required, if any, for these contingencies is made after
analysis of each known issue and an analysis of historical
experience. We record reserves related to certain legal matters
for which we believe it is probable that a loss will be incurred
and the range of such loss can be estimated. With respect to
other matters, management has concluded that a loss is only
reasonably possible or remote, or not estimable and, therefore,
no liability is recorded. Management discloses the facts
regarding material matters, and potential exposure if
determinable, for losses assessed as reasonably possible to
occur. Costs incurred with defending claims are expensed as
incurred. Any receivable for insurance recoveries is recorded
separately from the corresponding litigation reserve, and only
if recovery is determined to be probable.
INCOME
TAXES
–
We
account for income taxes under the asset and liability method,
which requires us to record deferred income tax assets and
liabilities for future tax consequences attributable to
differences between the financial statement carrying value of
existing assets and liabilities and their respective tax basis.
Deferred taxes are determined separately for each tax-paying
component within each tax jurisdiction based on provisions of
enacted tax law. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Our deferred tax assets
include capital loss and state and foreign tax loss
carry-forwards and are reduced by a
44
H&R
BLOCK 2010 Form 10K
Table of Contents
valuation allowance if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Our current deferred tax assets are
included in prepaid expenses and other current assets in the
consolidated balance sheets. Noncurrent deferred tax assets are
included in other assets on our consolidated balance sheets.
Noncurrent deferred tax liabilities are included in other
noncurrent liabilities on our consolidated balance sheets.
We evaluate the sustainability of each uncertain tax position
based on its technical merits. If we determine it is more likely
than not a tax position will be sustained based on its technical
merits, we record the impact of the position in our consolidated
financial statements at the largest amount that is greater than
fifty percent likely of being realized upon ultimate settlement.
We record no tax benefit for tax positions where we have
concluded it is not more likely than not to be sustained.
Differences between a tax position taken or expected to be taken
in our tax returns and the amount of benefit recognized and
measured in the financial statements result in unrecognized tax
benefits, which are recorded in the balance sheet as either a
liability for unrecognized tax benefits or reductions to
recorded tax assets, as applicable.
We file a consolidated federal tax return on a calendar year
basis and state tax returns on a consolidated or combined basis,
as permitted by authorities. We report interest and penalties as
a component of income tax expense.
TREASURY
SHARES
–
Shares
of common stock repurchased by us are recorded, at cost, as
treasury shares and result in a reduction of stockholders’
equity. We reissue treasury shares as part of our stock-based
compensation programs or for acquisitions. When shares are
reissued, we determine the cost using the average cost method.
Periodically, we may permanently retire shares held in treasury
as determined by our Board of Directors.
REVENUE
RECOGNITION
–
Service
revenues consist primarily of fees for preparation and filing of
tax returns, both in offices and through our online programs,
fees associated with our Peace of Mind (POM) guarantee program
and fees for consulting services. Service revenues are
recognized in the period in which the service is performed as
follows:
| § | Retail and online tax preparation revenues are recorded when a completed return is filed or accepted by the customer. | |
| § | POM revenues are deferred and recognized over the term of the guarantee, based on historical and actual payment of claims. | |
| § | Revenues for services rendered in connection with the Business Services segment include fees based on time and materials, which are recognized as the services are performed and amounts are earned. | |
| § | Revenues associated with our H&R Block Prepaid Emerald MasterCard ® program consist of interchange income from the use of debit cards and fees from the use of ATM networks. Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network, and is based on cardholder purchase volumes. Interchange income is recognized as earned. |
Product and other revenues include royalties from franchisees,
refund anticipation loan (RAL) participation revenues and sales
of software products, and are recognized as follows:
| § | Upon granting of a franchise, franchisees pay a refundable deposit generally in the amount of $2,500, but pay no initial franchise fee. We record the payment as a deposit liability and recognize no revenue in connection with the initial granting of a franchise. Franchise royalties, which are based on contractual percentages of franchise revenues, are recorded in the period in which the franchise provides the service. | |
| § | Loan participation revenue is recognized over the life of the loan. | |
| § | Software revenues consist mainly of tax preparation software and other personal productivity software. Revenue from the sale of software such as H&R Block At Home tm is recognized when the product is sold to the end user, either through retail, online or other channels. Rebates, slotting fees and other incentives paid in connection with these sales are recorded as a reduction of revenue. Revenue from the sale of TaxWorks ® software is deferred and recognized over the period for which upgrades and support are provided to the customer. |
Interest income consists primarily of interest earned on
mortgage loans held for investment and Emerald Advance lines of
credit and is recognized as follows:
| § | Interest income on mortgage loans held for investment includes deferred origination fees and costs and purchase discounts and premiums, which are amortized to income over the life of the loan using the interest method. | |
| § | Interest income on Emerald Advance lines of credit is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or written-off. | |
| § | Loan commitment fees, net of related expenses, are initially deferred and recognized as revenue over the commitment period. |
H&R
BLOCK 2010
Form 10K
45
Table of Contents
Revenue recognition is evaluated separately for each unit in
multiple-deliverable arrangements. Sales tax we collect and
remit to taxing authorities is recorded net in our consolidated
income statements.
ADVERTISING
EXPENSE
–
Advertising
costs are primarily expensed as incurred, or the first time the
advertisement takes place. Total advertising costs of continuing
operations for fiscal years 2010, 2009 and 2008 totaled
$254.8 million, $249.2 million and
$204.8 million, respectively.
EMPLOYEE BENEFIT
PLANS
–
We
have 401(k) defined contribution plans covering all full-time
and seasonal employees following the completion of an
eligibility period. Contributions of our continuing operations
to these plans are discretionary and totaled $24.0 million,
$26.7 million and $27.3 million for fiscal years 2010,
2009 and 2008, respectively.
We have a severance policy covering all regular full-time or
part-time active employees for involuntary separation from the
company. In May 2010 we announced plans to realign field and
support organizations. The realignment included approximately
400 staff reductions. Associated severance benefits were
recorded primarily during the first fiscal quarter of 2011 and
totaled approximately $19 million.
FOREIGN CURRENCY
TRANSLATION
–
Assets
and liabilities of foreign subsidiaries are translated into
U.S. dollars at exchange rates prevailing at the end of the
year. Revenues and expenses of our foreign operations are
translated at the average exchanges rates in effect during the
fiscal year. Translation adjustments are recorded as a separate
component of other comprehensive income in stockholders’
equity.
COMPREHENSIVE
INCOME
–
Our
comprehensive income (loss) is comprised of net income (loss),
foreign currency translation adjustments and the change in net
unrealized gains or losses on AFS marketable securities.
Included in stockholders’ equity at April 30, 2010 and
2009, the net unrealized holding gain on AFS securities was
$0.3 million and $1.5 million, respectively, and the
foreign currency translation adjustment was $1.3 million
and $(13.1) million, respectively.
NEW ACCOUNTING
STANDARDS
–
In
October 2009, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update
2009-13,
“Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements” (ASU
2009-13).
This guidance amends the criteria for separating consideration
in multiple-deliverable arrangements to enable vendors to
account for products or services (deliverables) separately
rather than as a combined unit. This guidance establishes a
selling price hierarchy for determining the selling price of a
deliverable, which is based on: (1) vendor-specific
objective evidence; (2) third-party evidence; or
(3) estimates. This guidance also eliminates the residual
method of allocation and requires that arrangement consideration
be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. In
addition, this guidance significantly expands required
disclosures related to a vendor’s multiple-deliverable
revenue arrangements. This guidance is effective prospectively
for revenue arrangements entered into or materially modified
beginning with our fiscal year 2012. We are currently evaluating
the effect of this guidance on our consolidated financial
statements.
In June 2009, the FASB issued guidance, under Topic
810 – Consolidation. This guidance changes how a
reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
or similar rights should be consolidated. The determination of
whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s
purpose and design and the reporting entity’s ability to
direct the activities of the other entity that most
significantly impact the other entity’s economic
performance. This guidance will require a reporting entity to
provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk
exposure due to that involvement, and will be effective for our
fiscal year 2011. The adoption of this guidance will not have a
material effect on our consolidated financial statements, but
will require additional disclosures in our quarterly and annual
filings.
In June 2009, the FASB issued guidance, under Topic
860 – Transfers and Servicing. This guidance will
require more disclosure about transfers of financial assets,
including securitization transactions, and where entities have
continuing exposure to the risks related to transferred
financial assets. It eliminates the concept of a qualifying
special purpose entity and changes the requirements for
derecognizing financial assets. This guidance will be effective
at the beginning of our fiscal year 2011. The adoption of this
guidance will not have a material effect on our consolidated
financial statements.
STANDARDS
IMPLEMENTED
–
In
December 2007, the FASB issued guidance, under Topic
805 – Business Combinations, requiring an acquiring
entity to recognize all the assets acquired and liabilities
assumed in a transaction, including non-controlling interests,
at the acquisition-date fair value with limited exceptions. This
guidance will require acquisition-related expenses to be
expensed and will generally require contingent consideration to
be recorded as a liability at the time of acquisition. Under
this guidance, subsequent changes to deferred tax valuation
allowances relating to acquired businesses and acquired
liabilities for uncertain tax positions will no longer be
applied to goodwill but will instead be typically recognized as
an adjustment to income
46
H&R
BLOCK 2010 Form 10K
Table of Contents
tax expense. We adopted the
provisions of this guidance as of May 1, 2009. The adoption
did not have a material impact on our consolidated financial
statements.
In June 2008, the FASB issued guidance, under Topic
260 – Earnings Per Share, addressing whether
instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, should
be included in the process of allocating earnings for purposes
of computing earnings per share (EPS). We adopted the provisions
of this guidance as of May 1, 2009. The adoption and
retrospective application of this guidance reduced basic EPS as
previously reported for fiscal year 2009 by $0.01 and increased
diluted EPS by $0.01 for fiscal year 2008. See additional
discussion in note 3.
We periodically acquire the businesses of franchisees and
account for the transaction as a business combination. We also
periodically sell company-owned offices to franchisees and
record a gain if the sale qualifies as a divestiture for
accounting purposes and upon determination that collection of
the sales proceeds is reasonably assured. Gains are reported in
operating income because the transactions are considered a
recurring part of our business, and are included as a reduction
of selling, general and administrative expenses in our
consolidated income statements. During fiscal years 2010 and
2009, we sold certain offices to existing franchisees for cash
proceeds of $65.7 million and $16.9 million,
respectively, and recorded gains on these sales of
$49.0 million and $14.9 million, respectively.
Effective November 3, 2008, we acquired the assets and
franchise rights of our last major independent franchise
operator for an aggregate purchase price of $279.2 million.
Goodwill recognized on this transaction is included in the Tax
Services segment and is deductible for tax purposes.
During fiscal years 2010, 2009 and 2008, we made other
acquisitions, which were accounted for as purchases with cash
payments totaling $10.3 million, $12.6 million and
$21.4 million, respectively. Operating results of the
acquired businesses, which are not material, are included in the
consolidated income statements since the date of acquisition.
During fiscal years 2010, 2009 and 2008 we also paid
$0.2 million, $1.9 million and $3.6 million,
respectively, for contingent payments on prior acquisitions.
Basic and diluted earnings per share is computed using the
two-class method. See note 1 for additional information on
our adoption of the two-class method. The two-class method is an
earnings allocation formula that determines net income per share
for each class of common stock and participating security
according to dividends declared and participation rights in
undistributed earnings. Per share amounts are computed by
dividing net income from continuing operations attributable to
common shareholders by the weighted average shares outstanding
during each period. The computations of basic and diluted
earnings per share from continuing operations are as follows:
| (in 000s, except per share amounts) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Net income from continuing operations attributable to
shareholders
|
$ | 488,946 | $ | 513,055 | $ | 445,947 | ||||||||||
|
Amounts allocated to participating securities (nonvested shares)
|
(1,888 | ) | (2,042 | ) | (2,453 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income from continuing operations attributable to common
shareholders
|
$ | 487,058 | $ | 511,013 | $ | 443,494 | ||||||||||
|
Basic weighted average common shares
|
332,283 | 332,787 | 324,810 | |||||||||||||
|
Potential dilutive shares
|
953 | 1,752 | 2,658 | |||||||||||||
|
|
||||||||||||||||
|
Dilutive weighted average common shares
|
333,236 | 334,539 | 327,468 | |||||||||||||
|
|
||||||||||||||||
|
Earnings per share from continuing operations attributable to
common shareholders:
|
||||||||||||||||
|
Basic
|
$ | 1.47 | $ | 1.53 | $ | 1.37 | ||||||||||
|
Diluted
|
1.46 | 1.53 | 1.35 | |||||||||||||
|
|
||||||||||||||||
Diluted earnings per share excludes the impact of shares of
common stock issuable upon the lapse of certain restrictions or
the exercise of options to purchase 13.7 million,
15.7 million and 18.2 million shares of stock for
fiscal years 2010, 2009 and 2008, respectively, as the effect
would be antidilutive.
H&R
BLOCK 2010
Form 10K
47
Table of Contents
The amortized cost and fair value of securities classified as
available-for-sale
held at April 30, 2010 and 2009 are summarized below:
| (in 000s) | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| As of April 30, | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||||||
| Cost | Gains | Losses (1) | Value | Cost | Gains | Losses (1) | Value | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 23,026 | $ | 39 | $ | (49 | ) | $ | 23,016 | $ | 27,466 | $ | 25 | $ | (698 | ) | $ | 26,793 | ||||||||||||||||||
|
Municipal bonds
|
8,442 | 459 | – | 8,901 | 9,560 | 491 | (4 | ) | 10,047 | |||||||||||||||||||||||||||
|
Trust preferred security
|
1,854 | – | (1,823 | ) | 31 | 3,454 | – | (3,162 | ) | 292 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| $ | 33,322 | $ | 498 | $ | (1,872 | ) | $ | 31,948 | $ | 40,480 | $ | 516 | $ | (3,864 | ) | $ | 37,132 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | At April 30, 2010, investments with a cost of $15.7 million and gross unrealized losses of $1.9 million had been in continuous loss position for more than twelve months. At April 30, 2009, investments with a cost of $30.3 million and gross unrealized losses of $3.9 million had been in continuous loss position for more than twelve months. |
Proceeds from the sales of AFS securities were
$2.1 million, $8.3 million and $13.9 million
during fiscal years 2010, 2009 and 2008, respectively. We
recorded no gross realized gains or losses on those sales during
fiscal year 2010. Gross realized gains on those sales during
fiscal years 2009 and 2008 were $0.7 million and
$0.4 million, respectively; gross realized losses were
$1.3 million and $0.1 million, respectively. During
fiscal years 2010, 2009 and 2008, we recorded
other-than-temporary
impairments of AFS securities totaling $1.6 million,
$1.5 million and $0.4 million, respectively, as a
result of an assessment that it was probable we would not
collect all amounts due or an assessment that we would not be
able to hold the investments until potential recovery of market
value.
Contractual maturities of AFS debt securities at April 30,
2010, occur at varying dates over the next two to 27 years,
and are set forth in the table below.
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Cost Basis | Fair Value | |||||||||||
|
|
||||||||||||
|
Maturing in:
|
||||||||||||
|
Two to five years
|
$ | 4,091 | $ | 4,311 | ||||||||
|
Five to ten years
|
4,351 | 4,590 | ||||||||||
|
Beyond
|
24,880 | 23,047 | ||||||||||
|
|
||||||||||||
| $ | 33,322 | $ | 31,948 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
HRB Bank is required to maintain a restricted investment in FHLB
stock for borrowing availability. The cost of this investment,
$6.0 million, represents its redemption value, as these
investments do not have a ready market.
The composition of our mortgage loan portfolio as of
April 30, 2010 and 2009 is as follows:
| (dollars in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||
|
|
||||||||||||||||||||
| As of April 30, | Amount | % of Total | Amount | % of Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Adjustable-rate loans
|
$ | 411,122 | 60 | % | $ | 534,943 | 65 | % | ||||||||||||
|
Fixed-rate loans
|
272,562 | 40 | % | 286,894 | 35 | % | ||||||||||||||
|
|
||||||||||||||||||||
| 683,684 | 100 | % | 821,837 | 100 | % | |||||||||||||||
|
Unamortized deferred fees and costs
|
5,256 | 7,135 | ||||||||||||||||||
|
Less: Allowance for loan losses
|
(93,535 | ) | (84,073 | ) | ||||||||||||||||
| $ | 595,405 | $ | 744,899 | |||||||||||||||||
|
|
|
|||||||||||||||||||
|
|
||||||||||||||||||||
Activity in the allowance for loan losses for the years ended
April 30, 2010 and 2009 is as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Balance at beginning of the year
|
$ | 84,073 | $ | 45,401 | $ | 3,448 | ||||||||||
|
Provision
|
47,750 | 63,897 | 42,004 | |||||||||||||
|
Recoveries
|
88 | 54 | 999 | |||||||||||||
|
Charge-offs
|
(38,376 | ) | (25,279 | ) | (1,050 | ) | ||||||||||
|
|
||||||||||||||||
|
Balance at end of the year
|
$ | 93,535 | $ | 84,073 | $ | 45,401 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
48
H&R
BLOCK 2010 Form 10K
Table of Contents
Our loan loss reserve as a percent of mortgage loans was 13.7%
at April 30, 2010, compared to 10.2% at April 30,
2009. The loan loss provision as a percent of mortgage loans
increased during the current year as a result of declining
collateral values due to declining residential home prices and
increasing delinquencies occurring in our portfolio.
Mortgage loans held for investment include loans originated by
SCC, which were purchased by HRB Bank. Those loans have
experienced higher rates of delinquency than other loans in our
portfolio and expose us to a higher risk of potential credit
loss. Residential real estate markets have experienced
significant declines in property values and mortgage default
rates have been severe. If adverse market trends continue,
including trends within our portfolio specifically, we may be
required to record additional loan loss provisions, and those
losses may be significant.
Information related to our non-performing assets as of
April 30, 2010 and 2009 is as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Impaired loans:
|
||||||||||||
|
30 – 59 days
|
$ | 330 | $ | – | ||||||||
|
60 – 89 days
|
11,851 | 21,415 | ||||||||||
|
90+ days, non-accrual
|
153,703 | 121,685 | ||||||||||
|
TDR loans, accrual
|
113,471 | 60,044 | ||||||||||
|
TDR loans, non-accrual
|
31,506 | 100,697 | ||||||||||
|
|
||||||||||||
| 310,861 | 303,841 | |||||||||||
|
Real estate
owned
(1)
|
29,252 | 44,533 | ||||||||||
|
|
||||||||||||
|
Total non-performing assets
|
$ | 340,113 | $ | 348,374 | ||||||||
|
|
||||||||||||
|
Average impaired loans
|
$ | 307,351 | $ | 216,391 | ||||||||
|
Interest income on impaired loans
|
$ | 8,548 | $ | 5,964 | ||||||||
|
Interest income on impaired loans recognized on a cash basis on
non-accrual status
|
$ | 7,452 | $ | 4,927 | ||||||||
|
Portion of total allowance for loan losses allocated to impaired
loans and TDR loans:
|
||||||||||||
|
Based on collateral value method
|
$ | 68,696 | $ | 55,134 | ||||||||
|
Based on discounted cash flow method
|
8,915 | 10,139 | ||||||||||
|
|
||||||||||||
| $ | 77,611 | $ | 65,273 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
| (1) | Includes loans accounted for as in-substance foreclosures of $12.5 million and $27.4 million at April 30, 2010 and 2009, respectively. |
As of April 30, 2010 and 2009, accrued interest receivable
on mortgage loans held for investment totaled $2.6 million
and $3.5 million, respectively. At April 30, 2010, HRB
Bank had interest-only mortgage loans in its investment
portfolio totaling $4.7 million.
Activity related to our real estate owned is as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Balance, beginning of the period
|
$ | 44,533 | $ | 350 | ||||||||
|
Additions
|
19,341 | 65,171 | ||||||||||
|
Sales
|
(24,308 | ) | (9,072 | ) | ||||||||
|
Impairments
|
(10,314 | ) | (11,916 | ) | ||||||||
|
|
||||||||||||
|
Balance, end of the period
|
$ | 29,252 | $ | 44,533 | ||||||||
|
|
||||||||||||
We use the following valuation methodologies for assets and
liabilities measured at fair value and the general
classification of these instruments pursuant to the fair value
hierarchy.
| § | Available-for-sale securities – Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or other pricing models. Available-for-sale securities that we classify as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities. | |
| § | Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment are generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. These loans are classified as Level 3. |
H&R
BLOCK 2010
Form 10K
49
Table of Contents
The following methods were used to determine the fair values of
our other financial instruments:
| § | Cash equivalents, accounts receivable, demand deposits, accounts payable, accrued liabilities and the current portion of long-term debt – The carrying values reported in the balance sheet for these items approximate fair market value due to the relative short-term nature of the respective instruments. | |
| § | Mortgage loans held for investment – The fair value of mortgage loans held for investment is generally determined using a pricing model based on current market information obtained from origination data, and bids received from time to time. The fair value of certain impaired loans held for investment is primarily based on the appraised value of the underlying collateral less estimated selling costs. | |
| § | IRAs and other time deposits – The fair value is calculated based on the discounted value of contractual cash flows. | |
| § | Long-term debt – The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market rates on our Senior Notes. |
The following table presents for each hierarchy level the
financial assets that are measured at fair value on both a
recurring and non-recurring basis:
| (dollars in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||
|
|
||||||||||||||||||||
|
As of April 30, 2010:
|
||||||||||||||||||||
|
Recurring:
|
||||||||||||||||||||
|
Available-for-sale
securities
|
$ | 31,948 | $ | – | $ | 31,948 | $ | – | ||||||||||||
|
Non-recurring:
|
||||||||||||||||||||
|
Impaired mortgage loans held for investment
|
249,549 | – | – | 249,549 | ||||||||||||||||
|
|
||||||||||||||||||||
| $ | 281,497 | $ | – | $ | 31,948 | $ | 249,549 | |||||||||||||
|
|
||||||||||||||||||||
|
As a percentage of total assets
|
5.4 | % | – | % | 0.6 | % | 4.8 | % | ||||||||||||
|
As of April 30, 2009:
|
||||||||||||||||||||
|
Recurring:
|
||||||||||||||||||||
|
Available-for-sale
securities
|
$ | 43,863 | $ | – | $ | 43,863 | $ | – | ||||||||||||
|
Non-recurring:
|
||||||||||||||||||||
|
Impaired mortgage loans held for investment
|
238,568 | – | – | 238,568 | ||||||||||||||||
|
|
||||||||||||||||||||
| $ | 282,431 | $ | – | $ | 43,863 | $ | 238,568 | |||||||||||||
|
|
||||||||||||||||||||
|
As a percentage of total assets
|
5.3 | % | – | % | 0.8 | % | 4.5 | % | ||||||||||||
|
|
||||||||||||||||||||
Available-for-sale
securities are included in other assets on our consolidated
balance sheets. Losses included in earnings are reported in
results from operations.
The carrying amounts and estimated fair values of our financial
instruments at April 30, 2010 are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
|
Carrying
|
Estimated
|
|||||||||||
| Amount | Fair Value | |||||||||||
|
|
||||||||||||
|
Mortgage loans held for investment
|
$ | 595,405 | $ | 356,389 | ||||||||
|
IRAs and other time deposits
|
442,252 | 441,910 | ||||||||||
|
Long-term debt
|
1,038,832 | 1,132,577 | ||||||||||
|
FHLB advances
|
75,000 | 75,084 | ||||||||||
| NOTE 7: | PROPERTY AND EQUIPMENT |
The components of property and equipment are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Land and other non-depreciable assets
|
$ | 2,482 | $ | 5,353 | ||||||||
|
Buildings
|
161,460 | 171,785 | ||||||||||
|
Computers and other equipment
|
488,160 | 469,066 | ||||||||||
|
Capitalized software
|
147,104 | 153,771 | ||||||||||
|
Leasehold improvements
|
199,370 | 187,180 | ||||||||||
|
Construction in process
|
3,902 | 6,209 | ||||||||||
|
|
||||||||||||
| 1,002,478 | 993,364 | |||||||||||
|
Less: Accumulated depreciation and amortization
|
(657,008 | ) | (625,075 | ) | ||||||||
|
|
||||||||||||
| $ | 345,470 | $ | 368,289 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
During fiscal year 2010, we received $10.3 million for tax
incentives from certain government agencies related to our
corporate headquarters building, which was recorded as a
reduction of original cost.
50
H&R
BLOCK 2010 Form 10K
Table of Contents
Property and equipment included above and subject to capital
lease arrangements included the following:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Property and equipment under capital lease
|
$ | 47,844 | $ | 47,913 | ||||||||
|
Less accumulated amortization
|
(31,418 | ) | (25,368 | ) | ||||||||
|
|
||||||||||||
| $ | 16,426 | $ | 22,545 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
Depreciation and amortization expense of continuing operations
for fiscal years 2010, 2009 and 2008 was $96.9 million,
$96.6 million and $90.1 million, respectively.
Included in depreciation and amortization expense of continuing
operations is amortization of capitalized software of
$21.8 million, $23.4 million and $19.9 million,
respectively.
| NOTE 8: | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill by segment for the
years ended April 30, 2010 and 2009 are as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Tax Services | Business Services | Total | ||||||||||||||
|
|
||||||||||||||||
|
Balance at May 1, 2008:
|
||||||||||||||||
|
Goodwill
|
$ | 431,981 | $ | 399,333 | $ | 831,314 | ||||||||||
|
Accumulated impairment losses
|
– | – | – | |||||||||||||
|
|
||||||||||||||||
| 431,981 | 399,333 | 831,314 | ||||||||||||||
|
|
||||||||||||||||
|
Changes:
|
||||||||||||||||
|
Acquisitions
|
22,692 | 3,306 | 25,998 | |||||||||||||
|
Disposals and foreign currency changes
|
(4,894 | ) | – | (4,894 | ) | |||||||||||
|
Impairments
|
(2,188 | ) | – | (2,188 | ) | |||||||||||
|
|
||||||||||||||||
|
Balance at April 30, 2009:
|
||||||||||||||||
|
Goodwill
|
449,779 | 402,639 | 852,418 | |||||||||||||
|
Accumulated impairment losses
|
(2,188 | ) | – | (2,188 | ) | |||||||||||
|
|
||||||||||||||||
| 447,591 | 402,639 | 850,230 | ||||||||||||||
|
|
||||||||||||||||
|
Changes:
|
||||||||||||||||
|
Acquisitions
|
5,136 | 1,112 | 6,248 | |||||||||||||
|
Disposals and foreign currency changes
|
(1,031 | ) | – | (1,031 | ) | |||||||||||
|
Impairments
|
– | (15,000 | ) | (15,000 | ) | |||||||||||
|
|
||||||||||||||||
|
Balance at April 30, 2010:
|
||||||||||||||||
|
Goodwill
|
453,884 | 403,751 | 857,635 | |||||||||||||
|
Accumulated impairment losses
|
(2,188 | ) | (15,000 | ) | (17,188 | ) | ||||||||||
|
|
||||||||||||||||
| $ | 451,696 | $ | 388,751 | $ | 840,447 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Goodwill and other indefinite-life intangible assets were tested
for impairment in the fourth quarter of fiscal year 2010.
RSM EquiCo is a separate reporting unit within our Business
Services segment with goodwill totaling $29.3 million. RSM
EquiCo assists clients with capital markets transactions and has
experienced declining revenues and profitability in the current
economic environment. Accordingly, we evaluated RSM
EquiCo’s goodwill for impairment at January 31, 2010.
The measurement of impairment of goodwill consists of two steps.
In the first step, we compared the fair value of RSM EquiCo,
determined using discounted cash flows, to its carrying value.
As the results of the first test indicated that the fair value
of RSM EquiCo was less than its carrying value, we then
performed the second step, which was to determine the implied
fair value of RSM EquiCo’s goodwill, and to compare that to
its carrying value. The second step included hypothetically
valuing all of the tangible and intangible assets of RSM EquiCo.
As a result, we recorded an impairment of the reporting
unit’s goodwill of $15.0 million, leaving a remaining
goodwill balance of $14.3 million. The impairment is
included in selling, general and administrative expenses on the
consolidated statements of operations.
We have a separate reporting unit within our Tax Services
segment with a goodwill balance totaling $28.6 million at
April 30, 2010. Operating activities of the business
consist principally of the development and sale of commercial
tax preparation software. The estimated fair value of this
reporting unit exceeded its carrying value by approximately 8%
at April 30, 2010. If revenues or pretax results of this
reporting unit fall below our expectations, we may be required
to consider impairment of the carrying value of its goodwill.
We recorded a $2.2 million goodwill impairment in our Tax
Services segment in fiscal year 2009, which was a result of the
closure of a previously acquired business.
H&R
BLOCK 2010
Form 10K
51
Table of Contents
The components of intangible assets are as follows:
| (in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| As of April 30, | 2010 | 2009 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Tax Services:
|
||||||||||||||||||||||||||||
|
Customer relationships
|
$ | 67,705 | $ | (33,096 | ) | $ | 34,609 | $ | 54,655 | $ | (25,267 | ) | $ | 29,388 | ||||||||||||||
|
Noncompete agreements
|
23,062 | (21,278 | ) | 1,784 | 23,263 | (20,941 | ) | 2,322 | ||||||||||||||||||||
|
Reacquired franchise rights
|
223,773 | (6,096 | ) | 217,677 | 229,438 | (1,838 | ) | 227,600 | ||||||||||||||||||||
|
Franchise agreements
|
19,201 | (1,813 | ) | 17,388 | 19,201 | (533 | ) | 18,668 | ||||||||||||||||||||
|
Purchased technology
|
14,500 | (6,266 | ) | 8,234 | 12,500 | (4,240 | ) | 8,260 | ||||||||||||||||||||
|
Trade name
|
1,325 | (400 | ) | 925 | 1,025 | (217 | ) | 808 | ||||||||||||||||||||
|
Business Services:
|
||||||||||||||||||||||||||||
|
Customer relationships
|
145,149 | (120,037 | ) | 25,112 | 146,040 | (111,017 | ) | 35,023 | ||||||||||||||||||||
|
Noncompete agreements
|
33,052 | (22,118 | ) | 10,934 | 33,068 | (19,908 | ) | 13,160 | ||||||||||||||||||||
|
Trade name – amortizing
|
2,600 | (2,600 | ) | – | 2,600 | (2,600 | ) | – | ||||||||||||||||||||
|
Trade name –
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total intangible assets
|
$ | 586,004 | $ | (218,572 | ) | $ | 367,432 | $ | 577,427 | $ | (191,429 | ) | $ | 385,998 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Amortization of intangible assets of continuing operations for
the years ended April 30, 2010, 2009 and 2008 was
$30.0 million, $24.9 million and $23.7 million,
respectively. Estimated amortization of intangible assets for
fiscal years 2011, 2012, 2013, 2014 and 2015 is
$28.4 million, $25.4 million, $21.0 million,
$17.5 million and $12.3 million, respectively.
| NOTE 9: | CUSTOMER BANKING DEPOSITS |
The components of customer banking deposits at April 30,
2010 and 2009 are as follows:
| (in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| April 30, | 2010 | 2009 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Outstanding
|
Interest
|
Outstanding
|
Interest
|
|||||||||||||||||
| Balance | Expense | Balance | Expense | |||||||||||||||||
|
|
||||||||||||||||||||
|
Money-market deposits
|
$ | 195,220 | $ | 1,871 | $ | 144,617 | $ | 6,148 | ||||||||||||
|
Savings deposits
|
12,460 | 128 | 16,943 | 270 | ||||||||||||||||
|
Checking deposits:
|
||||||||||||||||||||
|
Interest-bearing
|
24,190 | 83 | 1,728 | 306 | ||||||||||||||||
|
Non-interest-bearing
|
200,096 | – | 196,221 | – | ||||||||||||||||
|
|
||||||||||||||||||||
| 224,286 | 83 | 197,949 | 306 | |||||||||||||||||
|
|
||||||||||||||||||||
|
IRAs and other time deposits:
|
||||||||||||||||||||
|
Due in one year
|
60,348 | 83,164 | ||||||||||||||||||
|
Due in two years
|
12,479 | 7,207 | ||||||||||||||||||
|
Due in three years
|
6,079 | 10,442 | ||||||||||||||||||
|
Due in four years
|
3,105 | 5,670 | ||||||||||||||||||
|
Due in five years
|
1 | 3,028 | ||||||||||||||||||
|
IRAs
|
360,240 | 385,868 | ||||||||||||||||||
|
|
||||||||||||||||||||
| 442,252 | 8,092 | 495,379 | 7,345 | |||||||||||||||||
|
|
||||||||||||||||||||
| $ | 874,218 | $ | 10,174 | $ | 854,888 | $ | 14,069 | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
52
H&R
BLOCK 2010 Form 10K
Table of Contents
At April 30, 2010, customer banking deposits totaling
$21.7 million have a maturity of greater than one year and
are included in other noncurrent liabilities on our consolidated
balance sheet.
Accrued but unpaid interest on deposits totaled
$0.2 million at April 30, 2010 and 2009.
Time deposit accounts totaling $9.0 million were in excess
of Federal Deposit Insurance Corporation (FDIC) insured limits
at April 30, 2010, and mature as follows:
| (in 000s) | ||||
|
|
||||
|
Three months or less
|
$ | 509 | ||
|
Three to six months
|
1,140 | |||
|
Six to twelve months
|
5,275 | |||
|
Over twelve months
|
2,087 | |||
|
|
||||
| $ | 9,011 | |||
|
|
||||
The components of long-term debt are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Senior Notes, 7.875%, due January 2013
|
$ | 599,664 | $ | 599,539 | ||||||||
|
Senior Notes, 5.125%, due October 2014
|
398,941 | 398,706 | ||||||||||
|
Acquisition obligations, due from May 2010 to May 2015
|
28,701 | 30,658 | ||||||||||
|
Capital lease obligations
|
11,526 | 12,001 | ||||||||||
|
|
||||||||||||
| 1,038,832 | 1,040,904 | |||||||||||
|
Less: Current portion
|
(3,688 | ) | (8,782 | ) | ||||||||
|
|
||||||||||||
| $ | 1,035,144 | $ | 1,032,122 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
On March 4, 2010, we entered into a new committed line of
credit (CLOC) agreement to support commercial paper issuances,
general corporate purposes or for working capital needs, and
terminated the previous CLOCs. The new facility provides funding
up to $1.7 billion and matures July 31, 2013. The new
facility bears interest at an annual rate of LIBOR plus 1.30% to
2.80% or PRIME plus .30% to 1.80% (depending on the type of
borrowing) and includes an annual facility fee of .20% to .70%
of the committed amounts, based on our credit ratings. Covenants
in the new facility are substantially similar to those in the
previous CLOCs including: (1) maintenance of a minimum net
worth of $650.0 million on the last day of any fiscal
quarter; and (2) reduction of the aggregate outstanding
principal amount of short-term debt, as defined in the
agreement, to $200.0 million or less for thirty consecutive
days during the period March 1 to June 30 of each year
(“Clean-down requirement”). At April 30, 2010, we
were in compliance with these covenants and had net worth of
$1.4 billion. We had no balance outstanding under the CLOCs
at April 30, 2010 or 2009.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay a
$500.0 million facility, with the remaining proceeds used
for working capital and general corporate purposes.
On October 26, 2004, we issued $400.0 million of
5.125% Senior Notes under our shelf registration. The
Senior Notes are due October 30, 2014 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay
$250.0 million in
6
3
/
4
% Senior
Notes that were due in November 2004. The remaining proceeds
were used for working capital, capital expenditures, repayment
of other debt and other general corporate purposes.
As of April 30, 2010, we had $250.0 million remaining
under our shelf registration for additional debt issuances.
We have obligations related to various acquisitions of
$28.7 million and $30.7 million at April 30, 2010
and 2009, respectively, which are due from May 2010 to May 2015.
We have a capitalized lease obligation of $11.5 million at
April 30, 2010, that is collateralized by land and
buildings. The obligation is due in 11 years.
Effective January 12, 2010, we entered into a
$2.5 billion committed line of credit agreement with HSBC
Bank USA, National Association (HSBC) for the purchase of RAL
participations. This line was available up to its facility limit
through March 30, 2010 and then only up to
$120.0 million thereafter through June 30, 2010. The
line is subject to covenants similar to those in the CLOC, but
secured by RAL participation interests. All borrowings on this
facility were repaid as of April 30, 2010 and the facility
is now closed.
The aggregate payments required to retire long-term debt are
$3.7 million, $26.0 million, $0.7 million,
$600.4 million, $399.8 million and $8.2 million
in fiscal years 2011, 2012, 2013, 2014, 2015 and beyond,
respectively.
H&R
BLOCK 2010
Form 10K
53
Table of Contents
HRB Bank is a member of the FHLB of Des Moines, which extends
credit to member banks based on eligible collateral. At
April 30, 2010, HRB Bank had FHLB advance capacity of
$266.4 million. At April 30, 2010, we had
$75.0 million outstanding on this facility, leaving
remaining availability of $191.4 million. Mortgage loans
held for investment of $461.1 million serve as eligible
collateral and are used to determine total capacity. The
maturities and related interest rates related to this borrowing
are as follows:
| (dollars in 000s) | ||||||||
|
|
||||||||
| Amount Due | Interest Rate | |||||||
|
|
||||||||
|
Fiscal year:
|
||||||||
|
2011
|
$ | 50,000 | 1.92% | |||||
|
2012
|
25,000 | 2.36% | ||||||
|
|
||||||||
| $ | 75,000 | |||||||
|
|
||||||||
We have deferred compensation plans that permit certain
employees to defer portions of their compensation and accrue
income on the deferred amounts. Included in other noncurrent
liabilities is $135.5 million and $112.6 million at
April 30, 2010 and 2009, respectively, reflecting our
obligation under these plans. We may purchase whole-life
insurance contracts on certain employee participants to recover
distributions made or to be made under the plans. The cash
surrender value of the policies and other assets held by the
Deferred Compensation Trust is recorded in other noncurrent
assets and totaled $112.4 million and $104.0 million
at April 30, 2010 and 2009, respectively. These assets are
restricted, as they are only available to fund the related
liability.
During fiscal year 2010, we purchased and immediately retired
12.8 million shares of our common stock at a cost of
$250.0 million. We may continue to repurchase and retire
common stock or retire shares held in treasury in the future.
On October 27, 2008, we sold 8.3 million shares of our
common stock, without par value, at a price of $17.50 per share
in a registered direct offering through subscription agreements
with selected institutional investors. We received net proceeds
of $141.4 million, after deducting placement agent fees and
other offering expenses. Proceeds were used for general
corporate purposes.
We are authorized to issue 6.0 million shares of Preferred
Stock without par value. At April 30, 2010, we had
5.6 million shares of authorized but unissued Preferred
Stock. Of the unissued shares, 0.6 million shares have been
designated as Participating Preferred Stock.
On March 8, 1995, our Board of Directors authorized the
issuance of a series of 0.5 million shares of non-voting
Preferred Stock designated as Convertible Preferred Stock
without par value. At April 30, 2010, we had
0.5 million shares of authorized but unissued Convertible
Preferred Stock. The holders of the Convertible Preferred Stock
are not entitled to receive dividends paid in cash, property or
securities and, in the event of any dissolution, liquidation or
wind-up
of
the Company, will share ratably with the holders of Common Stock
then outstanding in the assets of the Company after any
distribution or payments are made to the holders of
Participating Preferred stock or the holders of any other class
or series of stock of the Company with preference over the
Common Stock.
We utilize the fair value method to account for stock-based
awards. Stock-based compensation expense of $29.4 million,
$32.6 million and $50.4 million was recorded in fiscal
years 2010, 2009 and 2008, respectively, net of related tax
benefits of $10.5 million, $12.2 million and
$17.3 million, respectively. Stock-based compensation
expense of our continuing operations totaled $29.3 million,
$26.6 million and $40.4 million in fiscal years 2010,
2009 and 2008, respectively.
Accounting standards require excess tax benefits from
stock-based compensation to be included as a financing activity
in the statements of cash flows. As a result, we classified
$1.6 million, $8.6 million and $3.2 million as
cash inflows from financing activities for fiscal years 2010,
2009 and 2008, respectively. We realized tax benefits of
$6.6 million, $20.2 million and $12.6 million in
fiscal years 2010, 2009 and 2008, respectively.
We have four stock-based compensation plans which have been
approved by our shareholders. As of April 30, 2010, we had
0.8 million shares reserved for future awards under
stock-based compensation plans. We issue shares from our
treasury stock to satisfy the exercise or release of stock-based
awards. We believe we have adequate treasury stock to issue for
the exercise or release of stock-based awards.
Our 2003 Long-Term Executive Compensation Plan provides for
awards of options (both incentive and nonqualified), nonvested
shares, performance nonvested share units and other stock-based
awards to
54
H&R
BLOCK 2010 Form 10K
Table of Contents
employees. These awards entitle the
holder to shares or the right to purchase shares of common stock
as the award vests, typically over a three-year period with
one-third vesting each year. Nonvested shares receive dividends
during the vesting period and performance nonvested share units
receive cumulative dividends at the end of the vesting period.
We measure the fair value of options on the grant date or
modification date using the Black-Scholes option valuation
model. We measure the fair value of nonvested shares and
performance nonvested share units based on the closing price of
our common stock on the grant date. Generally, we expense the
grant-date fair value, net of estimated forfeitures, over the
vesting period on a straight-line basis. Awards granted to
employees who are of retirement age or reach retirement age at
least one year after the grant date, but prior to the end of the
service period of the awards, are expensed over the shorter of
the two periods. Options are generally granted at a price equal
to the fair market value of our common stock on the grant date
and have a contractual term of ten years.
Our 1999 Stock Option Plan for Seasonal Employees, which
provided for awards of nonqualified options to certain
employees, was terminated effective December 31, 2009,
except for outstanding awards thereunder. These awards were
granted to seasonal employees in our Tax Services segment and
entitled the holder to the right to purchase shares of common
stock as the award vests, typically over a two-year period. We
measure the fair value of options on the grant date using the
Black-Scholes option valuation model. We expense the grant-date
fair value, net of estimated forfeitures, over the seasonal
service period. Options were granted at a price equal to the
fair market value of our common stock on the grant date, are
exercisable during September through November in each of the two
years following the calendar year of the grant, and have a
contractual term of 29 months.
Our 1989 Stock Option Plan for Outside Directors, which provided
for awards of nonqualified options to outside directors, was
terminated effective June 11, 2008, except for outstanding
awards thereunder. The plan was replaced by the 2008 Deferred
Stock Unit Plan for Outside Directors. The number of deferred
stock units credited to an outside director’s account
pursuant to an award is determined by dividing the dollar amount
of the award by the average current market value per share of
common stock for the ten consecutive trading dates ending on the
date the deferred stock units are granted to the outside
directors. Each deferred stock unit granted is vested upon award
and the settlement of shares occurs six months after separation
of service from the Board of Directors. The vested shares
receive dividends prior to settlement, which are reinvested and
settled in shares at the time of settlement.
Our 2000 Employee Stock Purchase Plan (ESPP) provides employees
the option to purchase shares of our common stock through
payroll deductions. The purchase price of the stock is 90% of
the lower of either the fair market value of our common stock on
the first trading day within the Option Period or on the last
trading day of the Option Period. The Option Periods are
six-month periods beginning on January 1 and July 1 each year.
We measure the fair value of options on the grant date utilizing
the Black-Scholes option valuation model. The fair value of the
option includes the value of the 10% discount and the look-back
feature. We expense the grant-date fair value over the six-month
vesting period.
A summary of options for the year ended April 30, 2010, is
as follows:
| (in 000s, except per share amounts) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Weighted-Average
|
||||||||||||||||||||
|
Weighted-Average
|
Remaining
|
Aggregate
|
||||||||||||||||||
| Shares | Exercise Price | Contractual Term | Intrinsic Value | |||||||||||||||||
|
|
||||||||||||||||||||
|
Outstanding, beginning of the year
|
16,401 | $ | 21.85 | |||||||||||||||||
|
Granted
|
4,634 | 17.37 | ||||||||||||||||||
|
Exercised
|
(1,293 | ) | 14.44 | |||||||||||||||||
|
Forfeited or expired
|
(4,660 | ) | 23.51 | |||||||||||||||||
|
|
||||||||||||||||||||
|
Outstanding, end of the year
|
15,082 | $ | 20.58 | 4 years | $ | 9,324 | ||||||||||||||
|
|
||||||||||||||||||||
|
Exercisable, end of the year
|
8,973 | $ | 21.60 | 3 years | $ | 4,647 | ||||||||||||||
|
Exercisable and expected to vest
|
14,866 | 20.60 | 4 years | 9,205 | ||||||||||||||||
|
|
||||||||||||||||||||
The total intrinsic value of options exercised during fiscal
years 2010, 2009 and 2008 was $5.4 milllion, $33.0 million
and $12.9 million, respectively. As of April 30, 2010,
we had $7.5 million of total unrecognized compensation cost
related to these options. The cost is expected to be recognized
over a weighted-average period of two years.
We utilize the Black-Scholes option valuation model to value our
options on the grant date. We typically estimate the expected
volatility using our historical stock price data, unless
historical volatility is not representative of expected
volatility. We also use historical exercise and forfeiture
behaviors to estimate the options expected term and our
forfeiture rate. The dividend yield is calculated based on the
current dividend and the market price of our common stock on the
grant date. The risk-free interest rate is based on the U.S.
Treasury zero-coupon yield curve
H&R
BLOCK 2010
Form 10K
55
Table of Contents
in effect on the grant date. Both
expected volatility and the risk-free interest rate are based on
a period that approximates the expected term.
The following assumptions were used to value options during the
periods:
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Options – management and director:
|
||||||||||||||||
|
Expected volatility
|
27.11% - 27.27% | 23.41% - 25.20% | 21.92% - 25.74% | |||||||||||||
|
Expected term
|
5 years | 4 years | 4-7 years | |||||||||||||
|
Dividend yield
|
3.24% - 3.55% | 2.35% - 3.04% | 2.36% - 3.12% | |||||||||||||
|
Risk-free interest rate
|
2.38% - 2.75% | 2.54% - 3.26% | 2.35% - 5.01% | |||||||||||||
|
Weighted-average fair value
|
$ | 3.27 | $ | 3.80 | $ | 4.44 | ||||||||||
|
Options – seasonal:
|
||||||||||||||||
|
Expected volatility
|
33.81% | 25.35% | 20.75% | |||||||||||||
|
Expected term
|
2 years | 2 years | 2 years | |||||||||||||
|
Dividend yield
|
3.48% | 2.80% | 2.44% | |||||||||||||
|
Risk-free interest rate
|
0.85% | 2.54% | 4.81% | |||||||||||||
|
Weighted-average fair value
|
$ | 2.70 | $ | 2.83 | $ | 3.07 | ||||||||||
|
ESPP options:
|
||||||||||||||||
|
Expected volatility
|
23.68% - 43.20% | 29.13% - 43.82% | 29.96% - 31.10% | |||||||||||||
|
Expected term
|
0.5 years | 0.5 years | 0.5 years | |||||||||||||
|
Dividend yield
|
2.65% - 3.46% | 2.67% - 2.78% | 2.46% - 3.06% | |||||||||||||
|
Risk-free interest rate
|
0.20% - 0.33% | 0.27% - 2.13% | 3.32% - 4.98% | |||||||||||||
|
Weighted-average fair value
|
$ | 3.66 | $ | 4.38 | $ | 3.87 | ||||||||||
|
|
||||||||||||||||
A summary of nonvested shares and performance nonvested share
units for the year ended April 30, 2010, is as follows:
| (shares in 000s) | ||||||||||||
|
|
||||||||||||
|
Weighted-Average
|
||||||||||||
|
Grant Date
|
||||||||||||
| Shares | Fair Value | |||||||||||
|
|
||||||||||||
|
Outstanding, beginning of the year
|
1,457 | $ | 22.73 | |||||||||
|
Granted
|
953 | 17.04 | ||||||||||
|
Released
|
(677 | ) | 22.94 | |||||||||
|
Forfeited
|
(114 | ) | 20.52 | |||||||||
|
|
||||||||||||
|
Outstanding, end of the year
|
1,619 | $ | 19.55 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
The total fair value of shares vesting during fiscal years 2010,
2009 and 2008 was $15.5 million, $21.1 million and
$21.4 million, respectively. Upon the grant of nonvested
shares and performance nonvested share units, unearned
compensation cost is recorded as an offset to additional paid-in
capital and is amortized as compensation expense over the
vesting period. As of April 30, 2010, we had
$16.4 million of total unrecognized compensation cost
related to these shares. This cost is expected to be recognized
over a weighted-average period of two years.
The components of income from continuing operations upon which
domestic and foreign income taxes have been provided are as
follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Domestic
|
$ | 745,912 | $ | 815,614 | $ | 700,162 | ||||||||||
|
Foreign
|
38,223 | 23,756 | 34,909 | |||||||||||||
|
|
||||||||||||||||
| $ | 784,135 | $ | 839,370 | $ | 735,071 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
56
H&R
BLOCK 2010 Form 10K
Table of Contents
The components of income tax expense (benefit) for continuing
operations are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 92,992 | $ | 243,085 | $ | 196,676 | ||||||
|
State
|
23,625 | 38,418 | 54,096 | |||||||||
|
Foreign
|
16,052 | 1,393 | 16,901 | |||||||||
|
|
||||||||||||
| 132,669 | 282,896 | 267,673 | ||||||||||
|
|
||||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
128,900 | 36,739 | 48,788 | |||||||||
|
State
|
33,448 | 6,582 | (27,471 | ) | ||||||||
|
Foreign
|
172 | 98 | 134 | |||||||||
|
|
||||||||||||
| 162,520 | 43,419 | 21,451 | ||||||||||
|
|
||||||||||||
|
Total income taxes for continuing operations
|
$ | 295,189 | $ | 326,315 | $ | 289,124 | ||||||
|
|
||||||||||||
|
|
||||||||||||
The reconciliation between the income tax provision and the
amount computed by applying the statutory federal tax rate of
35% to income taxes of continuing operations is as follows:
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
U.S. statutory tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||||||
|
Change in tax rate resulting from:
|
||||||||||||||||
|
State income taxes, net of federal income tax benefit
|
3.8 | % | 4.2 | % | 5.0 | % | ||||||||||
|
Permanent differences
|
(0.5 | )% | 1.6 | % | 0.7 | % | ||||||||||
|
Uncertain tax position liabilities
|
0.9 | % | 0.5 | % | 2.9 | % | ||||||||||
|
Net decrease in valuation allowance
|
(1.0 | )% | (1.2 | )% | (3.7 | )% | ||||||||||
|
Other
|
(0.6 | )% | (1.2 | )% | (0.6 | )% | ||||||||||
|
|
||||||||||||||||
|
Effective tax rate
|
37.6 | % | 38.9 | % | 39.3 | % | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
The significant components of deferred tax assets and
liabilities of continuing operations are reflected in the
following table:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Gross deferred tax assets:
|
||||||||||||
|
Accrued expenses
|
$ | 17,554 | $ | 49,239 | ||||||||
|
Allowance for credit losses and related reserves
|
164,783 | 179,508 | ||||||||||
|
Net operating loss carryovers
|
200 | 5,495 | ||||||||||
|
Other
|
237 | 2,119 | ||||||||||
|
Valuation allowance
|
(1,745 | ) | (4,773 | ) | ||||||||
|
|
||||||||||||
|
Current
|
181,029 | 231,588 | ||||||||||
|
|
||||||||||||
|
Deferred and stock-based compensation
|
71,970 | 65,493 | ||||||||||
|
Property and equipment
|
9,071 | 5,743 | ||||||||||
|
Deferred revenue
|
25,595 | 39,489 | ||||||||||
|
Net operating loss carryovers
|
26,292 | 27,315 | ||||||||||
|
Accrued expenses
|
31,892 | 42,291 | ||||||||||
|
Capital loss carryover
|
144,507 | 145,572 | ||||||||||
|
Other
|
15,991 | 6,480 | ||||||||||
|
Valuation allowance
|
(151,838 | ) | (160,642 | ) | ||||||||
|
|
||||||||||||
|
Noncurrent
|
173,480 | 171,741 | ||||||||||
|
|
||||||||||||
| 354,509 | 403,329 | |||||||||||
|
Gross deferred tax liabilities:
|
||||||||||||
|
Prepaid expenses
|
(6,337 | ) | (5,607 | ) | ||||||||
|
|
||||||||||||
|
Current
|
(6,337 | ) | (5,607 | ) | ||||||||
|
|
||||||||||||
|
Basis difference in mortgage-related investment
|
(81,118 | ) | 18,288 | |||||||||
|
Intangibles
|
(124,918 | ) | (105,366 | ) | ||||||||
|
|
||||||||||||
|
Noncurrent
|
(206,036 | ) | (87,078 | ) | ||||||||
|
|
||||||||||||
|
Net deferred tax assets
|
$ | 142,136 | $ | 310,644 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
H&R
BLOCK 2010
Form 10K
57
Table of Contents
The loss from discontinued operations for fiscal years 2010,
2009 and 2008 of $9.7 million, $27.4 million and
$754.6 million, respectively are net of tax benefits of
$8.0 million, $20.3 million and $411.1 million,
respectively. Our effective tax rate for discontinued operations
was 45.1%, 42.5% and 35.3% for fiscal years 2010, 2009 and 2008,
respectively.
As of April 30, 2010, we have recorded a deferred tax asset
of $142.1 million, representing the tax effects of the
difference between the tax and book basis in the stock of our
brokerage business sold to Ameriprise in November 2008. For tax
purposes, we incurred a capital loss upon disposition of that
business, which generally can only be utilized to the extent we
realize capital gains within five years subsequent to the date
of the loss. We do not currently expect to be able to realize a
tax benefit for substantially all of this loss and, therefore,
recorded a valuation allowance of $122.6 million. We have
capital loss carryover of approximately $362 million which
will expire if not used to offset future capital gains before
December 31, 2013.
Our current tax expense has been reduced and our deferred tax
expense increased by offsetting amounts due to the tax effects
of a tax accounting change impacting the timing of taxable
income from certain mortgage related assets. Because of this
treatment we have recorded a noncurrent deferred tax liability
of $81.1 million and a long term receivable of the same
amount as a result of this change.
Certain of our subsidiaries file stand-alone returns in various
states and foreign jurisdictions, and others join in filing
consolidated or combined returns in such jurisdictions. At
April 30, 2010, we had net operating losses (NOLs) in
various states and foreign jurisdictions. The amount of state
NOLs vary by taxing jurisdiction. We recorded deferred tax
assets of $26.5 million for the tax effects of such losses
and a valuation allowance of $19.8 million for the portion
of such losses that, more likely than not, will not be realized.
If not used, the NOLs will expire in varying amounts during
fiscal years 2011 through 2030.
We intend to indefinitely reinvest foreign earnings, therefore,
a provision has not been made for income taxes that might be
payable upon remittance of such earnings. Determination of the
amount of unrecognized deferred tax liability on unremitted
foreign earnings is not practicable.
As a result of the initial adoption of accounting guidance
effective fiscal year 2008, we recognized an additional reserve
for uncertain tax positions of $9.7 million and a
corresponding decrease to retained earnings.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits for fiscal years 2010 and 2009 is as
follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Balance, beginning of the year
|
$ | 124,605 | $ | 137,608 | $ | 133,263 | ||||||||||
|
Additions based on tax positions related to prior years
|
12,957 | 14,541 | 26,283 | |||||||||||||
|
Reductions based on tax positions related to prior years
|
(2,427 | ) | (6,096 | ) | (16,500 | ) | ||||||||||
|
Additions based on tax positions related to the current year
|
3,314 | 4,110 | 17,736 | |||||||||||||
|
Reductions related to settlements with tax authorities
|
(8,545 | ) | (18,189 | ) | (18,633 | ) | ||||||||||
|
Expiration of statute of limitations
|
(1,061 | ) | (5,007 | ) | (5,692 | ) | ||||||||||
|
Foreign currency translation
|
924 | (2,362 | ) | 1,151 | ||||||||||||
|
|
||||||||||||||||
|
Balance, end of the year
|
$ | 129,767 | $ | 124,605 | $ | 137,608 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Of the $129.8 million, $124.6 million and
$137.6 million ending gross unrecognized tax benefit
balance, as of April 30, 2010, 2009 and 2008, respectively,
$106.8 million, $107.0 million and
$119.6 million, respectively, if recognized, would impact
the effective rate. This difference results from adjusting the
gross balances for such items as federal, state and foreign
deferred items, interest and deductible taxes. We believe it is
reasonably possible that the balance of unrecognized tax
benefits could decrease by approximately $74.5 million
within the next twelve months due to anticipated settlements of
audit issues and expiring statutes of limitations. This amount
is included in accrued income taxes in our consolidated balance
sheet. The remaining amount is classified as long-term and is
included in other noncurrent liabilities in the consolidated
balance sheet.
Interest and penalties, if any, accrued on the unrecognized tax
benefits are reflected in income tax expense. The amount of
gross interest and penalties accrued on uncertain tax positions
during fiscal years 2010, 2009 and 2008 totaled
$4.1 million, $15.4 million and $18.6 million,
respectively. The total gross interest and penalties accrued as
of April 30, 2010, 2009 and 2008 totaled
$39.7 million, $42.4 million and $47.5 million,
respectively.
We file a consolidated federal income tax return in the
U.S. and file tax returns in various state and foreign
jurisdictions. The consolidated tax returns for the years 2006
and 2007 are currently under examination by the IRS. The
consolidated tax returns for the years 1999 — 2005 are
at the appellate level. Tax years prior to 1999 are closed by
statute. Historically, tax returns in various foreign and state
jurisdictions are examined and settled upon completion of the
examination.
58
H&R
BLOCK 2010 Form 10K
Table of Contents
| NOTE 15: | INTEREST INCOME AND INTEREST EXPENSE |
The following table shows the components of interest income and
expense of our continuing operations. Interest expense is
included in cost of other revenues on our consolidated
statements of operations.
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Interest income:
|
||||||||||||||||
|
Mortgage loans, net
|
$ | 31,877 | $ | 46,396 | $ | 74,895 | ||||||||||
|
Emerald Advance lines of credit
|
77,891 | 91,019 | 45,339 | |||||||||||||
|
Investment securities
|
2,318 | 4,896 | 12,143 | |||||||||||||
|
Other
|
10,319 | 12,205 | 19,181 | |||||||||||||
|
|
||||||||||||||||
| $ | 122,405 | $ | 154,516 | $ | 151,558 | |||||||||||
|
|
||||||||||||||||
|
Interest expense:
|
||||||||||||||||
|
Borrowings
|
$ | 78,398 | $ | 83,193 | $ | 56,482 | ||||||||||
|
Deposits
|
10,174 | 14,069 | 42,878 | |||||||||||||
|
FHLB advances
|
1,997 | 5,113 | 6,008 | |||||||||||||
|
|
||||||||||||||||
| $ | 90,569 | $ | 102,375 | $ | 105,368 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
| NOTE 16: | COMMITMENTS AND CONTINGENCIES |
We offer guarantees under our POM program to tax clients whereby
we will assume the cost of additional tax assessments, up to a
cumulative per client limit of $5,000, attributable to tax
return preparation error for which we are responsible. We defer
all revenues and direct costs associated with these guarantees,
recognizing these amounts over the term of the guarantee based
on historical and actual payment of claims. The related current
asset is included in prepaid expenses and other current assets.
The related liability is included in accounts payable, accrued
expenses and other current liabilities in the consolidated
balance sheets. The related noncurrent asset and liability are
included in other assets and other noncurrent liabilities,
respectively, in the consolidated balance sheets. A loss on
these POM guarantees would be recognized if the sum of expected
costs for services exceeded unearned revenue. The changes in the
deferred revenue liability for fiscal years 2010 and 2009 are as
follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | ||||||||||
|
|
||||||||||||
|
Balance, beginning of the year
|
$ | 146,807 | $ | 140,583 | ||||||||
|
Amounts deferred for new guarantees issued
|
74,889 | 84,429 | ||||||||||
|
Revenue recognized on previous deferrals
|
(80,154 | ) | (78,205 | ) | ||||||||
|
|
||||||||||||
|
Balance, end of the year
|
$ | 141,542 | $ | 146,807 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
During fiscal year 2009, we entered into an agreement to
purchase $45.8 million in media advertising between
July 1, 2009 and June 30, 2013. At April 30,
2010, our remaining obligation totaled $26.5 million. We
expect to make payments totaling $13.3 million during
fiscal years 2011 and 2012.
We have various contingent purchase price obligations in
connection with prior acquisitions. In many cases, contingent
payments to be made in connection with these acquisitions are
not subject to a stated limit. We estimate the potential
payments (undiscounted) total $20.7 million as of
April 30, 2010. Our estimate is based on current financial
conditions. Should actual results differ materially from our
assumptions, the potential payments will differ from the above
estimate.
We have contractual commitments to fund certain franchises
requesting Franchise Equity Lines of Credit (FELCs). Our total
obligation under these lines of credit was $82.4 million at
April 30, 2010, and net of amounts drawn and outstanding,
our remaining commitment to fund totaled $36.8 million.
We are self-insured for certain risks, including, workers’
compensation, property and casualty, professional liability and
claims related to our POM program. These programs maintain
various self-insured retentions. In all but POM, commercial
insurance is purchased in excess of the self-insured retentions.
We accrue estimated losses for self-insured retentions using
actuarial models and assumptions based on historical loss
experience. The nature of our business may subject us to error
and omissions, casualty and professional liability lawsuits. To
the extent that we are subject to claims exceeding our insurance
coverage, such suits could have a material adverse effect on our
financial position, results of operations or liquidity.
We issued three standby letters of credit to servicers paying
claims related to our POM, errors and omissions, and property
and casualty insurance policies. These letters of credit are for
amounts not to exceed $6.7 million in the aggregate. At
April 30, 2010, there were no balances outstanding on these
letters of credit.
H&R
BLOCK 2010
Form 10K
59
Table of Contents
Our self-insured health benefits plan provides medical benefits
to employees electing coverage under the plan. We maintain a
reserve for incurred but not reported medical claims and claim
development. The reserve is an estimate based on historical
experience and other assumptions, some of which are subjective.
We adjust our self-insured medical benefits reserve as our loss
experience changes due to medical inflation, changes in the
number of plan participants and an aging employee base.
During fiscal year 2006, we entered into a transaction with the
City of Kansas City, Missouri, to provide us with sales and
property tax savings on the furniture, fixtures and equipment
for our corporate headquarters facility. Under the transaction,
the City purchased equipment by issuing $31.0 million in
Industrial Revenue Bonds due in December 2015, and leased the
furniture, fixtures and equipment to us for an identical term
under a capital lease. The City’s bonds were purchased by
us. Because the City has assigned the lease to the bond trustee
for our benefit as the sole bondholder, we, in effect, control
enforcement of the lease against ourselves. As a result of the
capital lease treatment, the furniture, fixtures and equipment
will remain a component of property, plant and equipment in our
consolidated balance sheets. As a result of the legal right of
offset, the capital lease obligation and the corresponding bond
investments have been eliminated in consolidation. The
transaction provides us with property tax exemptions for the
leased furniture, fixtures and equipment. As of April 30,
2010, we have purchased $31.0 million in bonds in
connection with this arrangement.
Substantially all of the operations of our subsidiaries are
conducted in leased premises. Most of the operating leases are
for periods ranging from three years to five years, with renewal
options and provide for fixed monthly rentals. Future minimum
operating lease commitments of our continuing operations at
April 30, 2010, are as follows:
| (in 000s) | ||||||||
|
|
||||||||
|
2011
|
$ | 246,061 | ||||||
|
2012
|
196,343 | |||||||
|
2013
|
135,776 | |||||||
|
2014
|
87,138 | |||||||
|
2015
|
57,140 | |||||||
|
2016 and beyond
|
68,748 | |||||||
|
|
||||||||
| $ | 791,206 | |||||||
|
|
||||||||
|
|
||||||||
Rent expense of our continuing operations for fiscal years 2010,
2009 and 2008 totaled $289.6 million, $308.1 million
and $299.6 million, respectively.
In the regular course of business, we are subject to routine
examinations by federal, state and local taxing authorities. In
management’s opinion, the disposition of matters raised by
such taxing authorities, if any, would not have a material
adverse impact on our consolidated financial statements.
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. Other guarantees and indemnifications of the Company
and its subsidiaries include obligations to protect
counterparties from losses arising from the following:
(1) tax, legal and other risks related to the purchase or
disposition of businesses; (2) penalties and interest
assessed by federal and state taxing authorities in connection
with tax returns prepared for clients; (3) indemnification
of our directors and officers; and (4) third-party claims
relating to various arrangements in the normal course of
business. Typically, there is no stated maximum payment related
to these indemnifications, and the terms of the indemnities may
vary and in many cases is limited only by the applicable statute
of limitations. The likelihood of any claims being asserted
against us and the ultimate liability related to any such
claims, if any, is difficult to predict. While we cannot provide
assurance we will ultimately prevail in the event any such
claims are asserted, we believe the fair value of these
guarantees and indemnifications is not material as of
April 30, 2010.
DISCONTINUED
OPERATIONS
– SCC maintains recourse with
respect to loans previously sold or securitized under
indemnification of loss provisions relating to breach of
representations and warranties made to purchasers or insurers.
As a result, SCC may be required to repurchase loans or
otherwise indemnify third-parties for losses. These
representations and warranties and corresponding repurchase
obligations generally are not subject to stated limits or a
stated term and, therefore, may continue. SCC has established a
liability related to potential losses under these
indemnifications and monitors the adequacy of the repurchase
liability on an ongoing basis. To the extent that future claim
volumes differ from current estimates, or the value of mortgage
loans and residential home prices change, future losses may be
different than these estimates and those differences may be
significant.
At April 30, 2010 and 2009, our loan repurchase liability
totaled $188.2 million and $206.6 million,
respectively. This liability is included in accounts payable,
accrued expenses and other current liabilities on our
consolidated balance sheets. Actual losses charged against this
reserve during fiscal year 2010 totaled $18.4 million.
60
H&R
BLOCK 2010 Form 10K
Table of Contents
McGladrey & Pullen LLP (M&P) is a limited
liability partnership, owned 100% by certified public
accountants (CPAs), which provides attest services to middle
market clients.
Under state accountancy regulations, a firm cannot provide
attest services unless it is majority owned and controlled by
licensed CPAs. As such, RSM McGladrey, Inc. (RSM) is unable to
provide attest services. Since 1999, RSM and M&P have
operated in what is known as an “alternative practice
structure” (APS). Through the APS, RSM and M&P are
able to offer clients a full-range of attest and non-attest
services in full compliance with applicable accountancy
regulations.
An administrative services agreement between RSM and M&P
obligates RSM to provide M&P with administrative services,
information technology, office space, non-professional staff,
and other infrastructure in exchange for market rate fees from
M&P. During fiscal year 2010, we received
$22.6 million in management fee revenues from M&P.
On July 21, 2009, M&P provided 210 days notice of
its intent to terminate the administrative services agreement,
resulting in termination of the APS unless revoked or modified
prior to the expiration of the notice period. As a protective
measure, on September 15, 2009, RSM also provided notice of
its intent to terminate the administrative services agreement.
Effective February 3, 2010, RSM and M&P entered into
new agreements, withdrawing their prior notices of termination.
Pursuant to a Governance and Operations Agreement effective
February 3, 2010, RSM and M&P agreed to be bound by a
final award of an arbitration panel, dated as of
November 24, 2009, regarding the applicability and
enforceability of certain restrictive covenants between the
parties. In the event the APS were ever terminated, M&P
would generally be prohibited as a result of these restrictive
covenants, from (1) engaging in businesses in which RSM
operates in for 17 months, (2) soliciting any business
with clients or potential clients of RSM or any of its
subsidiaries or affiliates for 29 months, and
(3) soliciting employees of RSM or any of its subsidiaries
or affiliates for 24 months.
Although not required by the Governance and Operations
Agreement, all partners of M&P, with the exception of
M&P’s Managing Partner, are also managing directors
employed by RSM. Approximately 86% of RSM’s managing
directors are also partners in M&P. Certain other personnel
are also employed by both M&P and RSM. M&P partners
receive distributions from M&P in their capacity as
partners, as well as compensation from RSM in their capacity as
managing directors. Distributions to M&P partners are based
on the profitability of M&P and are not capped by this
arrangement. Pursuant to the Governance and Operations
Agreement, effective May 1, 2010, the aggregate
compensation payable to RSM managing directors by RSM in any
given year shall generally equal 67 percent of the combined
profits of M&P and RSM less any amounts paid in their
capacity as M&P partners. RSM followed a similar practice
historically, except that the compensation pool for managing
directors was based on 65 percent of combined profits. In
practice, this means that variability in the amounts paid to RSM
managing directors under these contracts can cause variability
in RSM’s operating results. RSM is not entitled to any
profits or residual interests of M&P, nor is it obligated
to fund losses or capital deficiencies of M&P. Managing
directors of RSM have historically participated in stock-based
compensation plans of H&R Block. Beginning in fiscal 2011,
participation in those plans will cease and be replaced by a
non-qualified retirement plan. RSM is required to pay
$60.0 million during fiscal year 2011 to fund contributions
to the retirement plan through 2015.
The administrative services agreement and compensation
arrangements described above all represent variable interests of
RSM in M&P. Our determination of primary beneficiary of
M&P was based on an assessment of which party was most
closely associated with M&P. We have concluded that RSM is
not the primary beneficiary of M&P and, therefore, the
financial results of M&P have not been included in the
accompanying consolidated financial statements. RSM does not
have an equity interest in M&P, nor does it have the power
to direct any activities of M&P.
The carrying amounts included in our consolidated balance sheet,
and our exposure to economic loss, resulting from our interests
in the various agreements with M&P is as follows at
April 30, 2010:
| (in 000s) | ||||||||
|
|
||||||||
| Carrying Amount | Maximum Exposure to Loss | |||||||
|
|
||||||||
|
Compensation arrangements
|
N/A | (1) | ||||||
|
Administrative Services Agreement
|
N/A | $ | 94,200 | (2) | ||||
|
|
||||||||
| (1) | As described above, operating results of RSM are exposed to variability caused by compensation arrangements. |
| (2) | Under this agreement, M&P shares costs with RSM for office space under RSM’s operating leases. RSM could be exposed to loss in the event of default by M&P. |
H&R
BLOCK 2010
Form 10K
61
Table of Contents
| NOTE 18: | LITIGATION AND RELATED CONTINGENCIES |
We are party to investigations, legal claims and lawsuits
arising out of our business operations. As required, we accrue
our best estimate of loss contingencies when we believe a loss
is probable and we can reasonably estimate the amount of any
such loss. Amounts accrued, including obligations under
indemnifications, totaled $35.5 million and
$27.9 million at April 30, 2010 and 2009,
respectively. Litigation is inherently unpredictable and it is
difficult to predict the outcome of particular matters with
reasonable certainty and, therefore, the actual amount of any
loss may prove to be larger or smaller than the amounts
reflected in our consolidated financial statements.
RAL
LITIGATION
– We have been named in multiple
lawsuits as defendants in litigation regarding our refund
anticipation loan program in past years. All of those lawsuits
have been settled or otherwise resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al.
, April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys’ fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. The trial court’s
decertification decision is currently on appeal. We believe we
have meritorious defenses to this case and intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
PEACE OF MIND
LITIGATION
– We are defendants in lawsuits
regarding our Peace of Mind program (collectively, the “POM
Cases”), under which our applicable tax return preparation
subsidiary assumes liability for additional tax assessments
attributable to tax return preparation error. The POM Cases are
described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al.
, Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes (1) statutory fraud by selling
insurance without a license, (2) an unfair trade practice,
by omission and by “cramming” (i.e., charging
customers for the guarantee even though they did not request it
or want it), and (3) a breach of fiduciary duty. The
plaintiffs seek unspecified damages, injunctive relief,
attorneys’ fees and costs. The Madison County court
ultimately certified a class consisting of all persons residing
in 13 states who paid a separate fee for POM from
January 1, 1997 to the date of a final judgment from the
court. We subsequently removed the case to federal court in the
Southern District of Illinois, where it is now pending. In
November 2009, the federal court issued an order effectively
vacating the state court’s class certification ruling and
allowing plaintiffs time to file a renewed motion for class
certification under the federal rules. Plaintiffs filed a new
motion for class certification seeking certification of an
11-state class. Oral argument on plaintiffs’ motion
occurred in April 2010 and the parties are awaiting a ruling. A
trial date has been set for November 2010.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al.
(Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas. This case involves the same
plaintiffs’ attorneys that are involved in the
Marshall
litigation in Illinois and contains allegations similar to
those in the
Marshall
litigation. The plaintiff seeks
actual and treble damages, equitable relief, attorneys’
fees and costs. No class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, however, and there can
be no assurances as to the outcome of these pending actions or
their impact on our consolidated results of operations,
individually or in the aggregate.
EXPRESS IRA
LITIGATION
– On March 15, 2006, the New
York Attorney General filed a lawsuit in the Supreme Court of
the State of New York, County of New York (Index
No. 06/401110) styled
The People of New York v.
H&R Block, Inc. and H&R Block Financial Advisors, Inc.
et al
. The complaint asserts nationwide jurisdiction and
alleges fraudulent business practices, deceptive acts and
practices, common law fraud and breach of fiduciary duty with
respect to the Express IRA product and seeks equitable relief,
disgorgement of profits, damages and restitution, civil
penalties and punitive damages. To avoid the cost and inherent
risk associated with litigation, we reached an agreement to
settle this case and the civil actions described below. Details
regarding the settlement are below.
Subsequent to the filing of the New York Attorney General
action, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 15, 2006. Except for two cases pending in
state court, all of the civil actions were consolidated by the
panel for Multi-District Litigation into
62
H&R
BLOCK 2010 Form 10K
Table of Contents
a single action styled
In re H&R Block, Inc. Express IRA
Marketing Litigation
(Case
No. 06-1786-MD-RED)
in the United States District Court for the Western District of
Missouri. To avoid the cost and inherent risk associated with
litigation, we reached an agreement to settle these cases and
the New York Attorney General action. The federal court
presiding over the Multi-District Litigation approved the
settlement in a final fairness hearing and dismissed its
underlying actions with prejudice on May 17, 2010.
Stipulations of dismissal were subsequently filed in the two
cases pending in state court. The settlement requires a minimum
payment of $11.4 million and a maximum payment of
$25.4 million. The actual cost of the settlement will
depend on the number of claims submitted by class members, which
are due no later than July 30, 2010. We previously recorded
a liability for our best estimate of the expected loss.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S 2) styled
Jim Hood, Attorney for the State of Mississippi v.
H&R Block, Inc., et al.
The complaint alleges
fraudulent business practices, deceptive acts and practices,
common law fraud and breach of fiduciary duty with respect to
the sale of the Express IRA product in Mississippi and seeks
equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. The
defendants have filed a motion to dismiss. We believe we have
meritorious defenses to the claims in this case, and we intend
to defend this case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated results of
operations.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for any liabilities relating to the Express
IRA litigation through an indemnification agreement.
SECURITIES AND
SHAREHOLDER LITIGATION
– On April 6, 2007,
a putative class action styled
In re H&R Block
Securities Litigation
(Case
No. 06-0236-CV-W-ODS)
was filed against the Company and certain of its officers in the
United States District Court for the Western District of
Missouri. The complaint alleged, among other things, deceptive,
material and misleading financial statements and failure to
prepare financial statements in accordance with generally
accepted accounting principles. The complaint sought unspecified
damages and equitable relief. The court dismissed the complaint
in February 2008, and the plaintiffs appealed the dismissal in
March 2008. In addition, plaintiffs in a shareholder derivative
action that was consolidated into the securities litigation
filed a separate appeal in March 2008, contending that the
derivative action was improperly consolidated. The derivative
action is
Iron Workers Local 16 Pension Fund v. H&R
Block, et al.
, in the United States District Court for the
Western District of Missouri, Case
No. 06-cv-00466-ODS
(instituted on June 8, 2006) and was brought against
certain of our directors and officers purportedly on behalf of
the Company. The derivative action alleged breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment. In September 2009, the appellate court affirmed the
dismissal of the securities fraud class action, but reversed the
dismissal of the shareholder derivative action. The plaintiffs
in the shareholder derivative action subsequently agreed to
voluntarily dismiss their complaint; an order dismissing their
complaint was entered on April 19, 2010, thereby ending
this litigation.
RSM McGLADREY
LITIGATION
– RSM EquiCo, its parent and certain
of its subsidiaries and affiliates, are parties to a class
action filed on July 11, 2006 and styled
Do Right’s
Plant Growers, et al. v. RSM EquiCo, Inc., et al.,
Case
No. 06 CC00137, in the California Superior Court, Orange
County. The complaint contains allegations relating to business
valuation services provided by RSM EquiCo, including allegations
of fraud, negligent misrepresentation, breach of contract,
breach of implied covenant of good faith and fair dealing,
breach of fiduciary duty and unfair competition. Plaintiffs seek
unspecified actual and punitive damages, in addition to
pre-judgment interest and attorneys’ fees. On
March 17, 2009, the court granted plaintiffs’ motion
for class certification on all claims. The defendants filed two
requests for interlocutory review of the decision, the last of
which was denied by the Supreme Court of California on
September 30, 2009. A trial date has been set for January
2011.
The certified class consists of RSM EquiCo’s
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale.
The fees paid to RSM EquiCo in connection with these agreements
total approximately $185 million, a number which
substantially exceeds the equity of RSM EquiCo. We intend to
defend this case vigorously. The amount claimed in this action
is substantial and could have a material adverse impact on our
consolidated results of operations. There can be no assurance
regarding the outcome of this matter.
As more fully described in note 17, RSM and M&P
operate in an alternative practice structure. Accordingly,
certain claims and lawsuits against M&P could have an
impact on RSM. More specifically, any judgments or settlements
arising from claims and lawsuits against M&P which exceed
its insurance coverage could have a direct adverse effect on
M&P’s operations. Although RSM is not responsible for
the liabilities of M&P, significant M&P litigation and
claims could impair the profitability of the APS and impair the
ability to attract and retain clients and quality professionals.
This could, in turn, have a material adverse effect on
RSM’s operations and impair the value of our investment in
RSM. There is no assurance regarding the outcome of any claims
or litigation involving M&P.
H&R
BLOCK 2010
Form 10K
63
Table of Contents
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009, where it remains
pending (Case
No. 08-28225).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. We believe we have meritorious
defenses to the claims against RSM and H&R Block in this
case and intend to defend it vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
LITIGATION AND
CLAIMS PERTAINING TO DISCONTINUED MORTGAGE
OPERATIONS
– Although mortgage loan origination
activities were terminated and the loan servicing business was
sold during fiscal year 2008, SCC remains subject to
investigations, claims and lawsuits pertaining to its loan
origination and servicing activities that occurred prior to such
termination and sale. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, municipalities, individual plaintiffs, and cases in
which plaintiffs seek to represent a class of others alleged to
be similarly situated. Among other things, these investigations,
claims and lawsuits allege discriminatory or unfair and
deceptive loan origination and servicing practices, public
nuisance, fraud, and violations of the Truth in Lending Act,
Equal Credit Opportunity Act and the Fair Housing Act. In the
current non-prime mortgage environment, the number of these
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. The amounts claimed in these investigations, claims and
lawsuits are substantial in some instances, and the ultimate
resulting liability is difficult to predict. In the event of
unfavorable outcomes, the amounts SCC may be required to pay in
the discharge of liabilities or settlements could be substantial
and, because SCC’s operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.,
alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. A trial date has been
set for June 2011. We believe the claims in this case are
without merit, and we intend to defend this case vigorously.
There can be no assurances, however, as to its outcome or its
impact on our consolidated results of operations.
OTHER CLAIMS AND
LITIGATION
– We have been named in several wage
and hour class action lawsuits throughout the country,
respectively styled
Alice Williams v. H&R Block
Enterprises LLC
, Case No.RG08366506 (Superior Court of
California, County of Alameda, filed January 17, 2008);
Arabella Lemus v. H&R Block Enterprises LLC, et
al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009);
Delana Ugas v. H&R Block
Enterprises LLC, et al.,
Case No. BC417700 (United
States District Court, Central District of California, filed
July 13, 2009);
Joaquin Llano v. H&R Block
Eastern Enterprises, Inc.,
Case
No. 09-CV-22531
(United States District Court, Southern District of Florida,
filed August 27, 2009);
Barbara Petroski v.
H&R Block Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010);
Lance Hom v. H&R
Block Enterprises LLC, et al.,
Case No. 10CV0476 H
(United States District Court, Southern District of California,
filed March 4, 2010);
Stacy Oyer v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00387-WMS
(United States District Court, Western District of New York,
filed May, 10 2010);
Rita Greene v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-21663-FAM
(United States District Court, Southern District of Florida,
filed May 21, 2010); and
Li Dong Ma v. RSM
McGladrey TBS, LLC, et al.,
Case
No. C-08-01729
JF (United States District Court, Northern District of
California, filed February 28, 2008). These cases involve a
variety of legal theories and allegations including, among other
things, failure to compensate employees for all hours worked;
failure to provide employees with meal periods; failure to
provide itemized wage statements; failure to pay wages due upon
termination; failure to compensate for mandatory off-season
training;
and/or
misclassification of non-exempt employees. The plaintiffs seek
actual damages, in addition to statutory penalties, pre-judgment
interest and attorneys’ fees. The Company has moved to
consolidate certain of these cases into a single action because
they allege substantially identical claims. We believe we have
meritorious defenses to the claims in these cases and intend to
defend them vigorously. The amounts claimed in these matters are
substantial in some instances, however, and the ultimate
liability with respect to these matters is difficult to predict.
There can be no assurances
64
H&R
BLOCK 2010 Form 10K
Table of Contents
as to the outcome of these cases or
their impact on our consolidated results of operations,
individually or in the aggregate.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. Some of
these investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers’ income tax returns, the POM
guarantee program, and other products and services. We believe
we have meritorious defenses to each of these investigations,
claims and lawsuits, and we are defending or intend to defend
them vigorously. The amounts claimed in these matters are
substantial in some instances, however, the ultimate liability
with respect to such matters is difficult to predict. In the
event of an unfavorable outcome, the amounts we may be required
to pay in the discharge of liabilities or settlements could have
a material adverse impact on our consolidated results of
operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
adverse impact on our consolidated results of operations.
| NOTE 19: | REGULATORY REQUIREMENTS |
HRB Bank and the Company are subject to various regulatory
requirements, including capital guidelines for HRB Bank,
administered by federal banking agencies. Failure to meet
minimum capital requirements can trigger certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank and
our consolidated financial statements. All savings associations
are subject to the capital adequacy guidelines and the
regulatory framework for prompt corrective action. HRB Bank must
meet specific capital guidelines that involve quantitative
measures of HRB Bank’s assets, liabilities and certain
off-balance sheet items, as calculated under regulatory
accounting practices. HRB Bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis.
Quantitative measures established by regulation to ensure
capital adequacy require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and
Tier 1 capital, as set forth in the table below. In
addition to these minimum ratio requirements, HRB Bank is
required to continually maintain a 12.0% minimum leverage ratio.
As of April 30, 2010, HRB Bank’s leverage ratio was
28.8%.
As of March 31, 2010, our most recent TFR filing with the
Office of Thrift Supervision (OTS), HRB Bank was a “well
capitalized” institution under the prompt corrective action
provisions of the FDIC. The five capital categories are:
(1) “well capitalized” (total risk-based capital
ratio of 10%, Tier 1 Risk-based capital ratio of 6% and
leverage ratio of 5%); (2) “adequately
capitalized;” (3) “undercapitalized;”
(4) “significantly undercapitalized;” and
(5) “critically undercapitalized.” There are no
conditions or events since March 31, 2010 that management
believes have changed HRB Bank’s category.
The following table sets forth HRB Bank’s regulatory
capital requirements at March 31, 2010, as calculated in
the most recently filed TFR:
| (dollars in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
To Be Well
Capitalized
|
||||||||||||||||||||||||||||
|
For Capital
Adequacy
|
Prompt Corrective
|
|||||||||||||||||||||||||||
| Actual | Under Purposes | Action Provisions | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total risk-based capital ratio
(1)
|
$ | 420,401 | 75.7% | $ | 44,436 | 8.0% | $ | 55,545 | 10.0% | |||||||||||||||||||
|
Tier 1 risk-based capital ratio
(2)
|
$ | 413,074 | 74.4% | N/A | N/A | $ | 33,327 | 6.0% | ||||||||||||||||||||
|
Tier 1 capital ratio (leverage)
(3)
|
$ | 413,074 | 24.9% | $ | 199,272 | 12.0% | $ | 83,030 | 5.0% | |||||||||||||||||||
|
Tangible equity ratio
(4)
|
$ | 413,074 | 24.9% | $ | 24,909 | 1.5% | N/A | N/A | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| (1) | Total risk-based capital divided by risk-weighted assets. |
| (2) | Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets. |
| (3) | Tier 1 (core) capital divided by adjusted total assets. |
| (4) | Tangible capital divided by tangible assets. |
H&R
BLOCK 2010
Form 10K
65
Table of Contents
Block Financial LLC (BFC) typically makes capital contributions
to HRB Bank to help it meet its capital requirements. BFC made
capital contributions to HRB Bank of $235.0 million during
fiscal year 2010, and $245.0 million during fiscal year
2009.
| NOTE 20: | DISCONTINUED OPERATIONS |
Discontinued operations for the year ended April 30, 2010,
consist primarily of the continued wind-down of our mortgage
operations. Fiscal year 2009 and 2008 include the results of
operations of H&R Block Financial Advisors, Inc. (HRBFA)
and its direct corporate parent, as well as our mortgage
operations and three smaller lines of business related to our
Business Services segment.
The financial results of discontinued operations are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Net revenue
|
$ | 372 | $ | 129,863 | $ | (105,964 | ) | |||||
|
|
||||||||||||
|
Pretax loss from operations
|
$ | (23,872 | ) | $ | (37,015 | ) | $ | (1,120,216 | ) | |||
|
Gain (loss) on sale and estimated impairments
|
6,194 | (10,626 | ) | (45,510 | ) | |||||||
|
|
||||||||||||
|
Pretax loss
|
(17,678 | ) | (47,641 | ) | (1,165,726 | ) | ||||||
|
Income tax benefit
|
(7,974 | ) | (20,259 | ) | (411,132 | ) | ||||||
|
|
||||||||||||
|
Net loss from discontinued operations
|
$ | (9,704 | ) | $ | (27,382 | ) | $ | (754,594 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
| NOTE 21: | SEGMENT INFORMATION |
Management has determined the reportable segments identified
below according to types of services offered and the manner in
which operational decisions are made. Operating results of our
reportable segments are all seasonal. Effective May 1,
2009, we realigned certain segments of our business to reflect a
new management reporting structure. The operations of HRB Bank,
which was previously reported as the Consumer Financial Services
segment, have now been reclassified, with activities that
support our retail tax network included in the Tax Services
segment, and the net interest margin and gains and losses
relating to our portfolio of mortgage loans held for investment
and related assets included in corporate. Presentation of prior
period results reflects the new segment reporting structure.
TAX
SERVICES
– Our Tax Services segment is
primarily engaged in providing tax return preparation and
related services and products in the U.S. and its
territories, Canada and Australia. Major revenue sources include
fees earned for tax preparation services performed at
company-owned retail tax offices, royalties from franchise
retail tax offices, fees for tax-related services, sales of tax
preparation and other software, online tax preparation fees,
participation in RALs, fees from activities related to H&R
Block Prepaid Emerald
MasterCard
®
,
and interest and fees from Emerald Advance lines of credit. HRB
Bank also offers traditional banking services including checking
and savings accounts, individual retirement accounts and
certificates of deposit.
Our international operations contributed $190.9 million,
$160.7 million and $170.2 million in revenues for
fiscal years 2010, 2009 and 2008, respectively, and
$46.7 million, $31.6 million and $32.1 million of
pretax income, respectively.
BUSINESS
SERVICES
– This segment offers tax and
consulting services, wealth management, and capital markets
services to middle-market companies in offices located
throughout the U.S.
CORPORATE
–
This segment’s operations include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
IDENTIFIABLE
ASSETS
– Identifiable assets are those
assets, including goodwill and intangible assets, associated
with each reportable segment. The remaining assets are
classified as Corporate assets, which consist primarily of cash
and marketable securities. The carrying value of assets held
outside the U.S. totaled $166.8 million,
$126.8 million and $124.8 million at April 30,
2010, 2009 and 2008, respectively.
66
H&R
BLOCK 2010 Form 10K
Table of Contents
Information concerning the Company’s operations by
reportable segment is as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2010 | 2009 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
REVENUES :
|
||||||||||||||||
|
Tax Services
|
$ | 2,975,252 | $ | 3,132,077 | $ | 3,060,661 | ||||||||||
|
Business Services
|
860,349 | 897,809 | 941,686 | |||||||||||||
|
Corporate
|
38,731 | 53,691 | 84,283 | |||||||||||||
|
|
||||||||||||||||
| $ | 3,874,332 | $ | 4,083,577 | $ | 4,086,630 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES :
|
||||||||||||||||
|
Tax Services
|
$ | 867,362 | $ | 927,048 | $ | 825,721 | ||||||||||
|
Business Services
|
58,714 | 96,097 | 88,797 | |||||||||||||
|
Corporate
|
(141,941 | ) | (183,775 | ) | (179,447 | ) | ||||||||||
|
|
||||||||||||||||
| $ | 784,135 | $ | 839,370 | $ | 735,071 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
DEPRECIATION AND AMORTIZATION :
|
||||||||||||||||
|
Tax Services
|
$ | 88,523 | $ | 79,415 | $ | 77,207 | ||||||||||
|
Business Services
|
33,064 | 36,748 | 36,523 | |||||||||||||
|
Corporate
|
5,314 | 7,468 | 5,784 | |||||||||||||
|
|
||||||||||||||||
| $ | 126,901 | $ | 123,631 | $ | 119,514 | |||||||||||
|
|
||||||||||||||||
|
CAPITAL EXPENDITURES :
|
||||||||||||||||
|
Tax Services
|
$ | 78,108 | $ | 76,305 | $ | 59,474 | ||||||||||
|
Business Services
|
12,318 | 21,185 | 32,918 | |||||||||||||
|
Corporate
|
89 | 390 | 9,162 | |||||||||||||
|
|
||||||||||||||||
| $ | 90,515 | $ | 97,880 | $ | 101,554 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
IDENTIFIABLE ASSETS :
|
||||||||||||||||
|
Tax Services
|
$ | 2,279,161 | $ | 2,117,475 | $ | 1,303,749 | ||||||||||
|
Business Services
|
806,688 | 897,250 | 920,945 | |||||||||||||
|
Corporate
|
2,148,469 | 2,344,997 | 2,411,139 | |||||||||||||
|
Assets of discontinued operations
|
– | – | 987,592 | |||||||||||||
|
|
||||||||||||||||
| $ | 5,234,318 | $ | 5,359,722 | $ | 5,623,425 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
H&R
BLOCK 2010
Form 10K
67
Table of Contents
| NOTE 22: | QUARTERLY FINANCIAL DATA (UNAUDITED) |
| (in 000s, except per share amounts) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Fiscal Year 2010 | Apr 30, 2010 | Jan 31, 2010 | Oct 31, 2009 | Jul 31, 2009 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
$ | 3,874,332 | $ | 2,337,894 | $ | 934,852 | $ | 326,081 | $ | 275,505 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
$ | 784,135 | $ | 1,110,410 | $ | 97,451 | $ | (212,853 | ) | $ | (210,873 | ) | ||||||||||||
|
Income taxes (benefit)
|
295,189 | 417,978 | 43,848 | (86,381 | ) | (80,256 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
488,946 | 692,432 | 53,603 | (126,472 | ) | (130,617 | ) | |||||||||||||||||
|
Net loss from discontinued operations
|
(9,704 | ) | (1,604 | ) | (2,968 | ) | (2,115 | ) | (3,017 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | 690,828 | $ | 50,635 | $ | (128,587 | ) | $ | (133,634 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.47 | $ | 2.11 | $ | 0.16 | $ | (0.38 | ) | $ | (0.39 | ) | ||||||||||||
|
Net loss from discontinued operations
|
(0.03 | ) | – | (0.01 | ) | – | (0.01 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.44 | $ | 2.11 | $ | 0.15 | $ | (0.38 | ) | $ | (0.40 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.46 | $ | 2.11 | $ | 0.16 | $ | (0.38 | ) | $ | (0.39 | ) | ||||||||||||
|
Net loss from discontinued operations
|
(0.03 | ) | (0.01 | ) | (0.01 | ) | – | (0.01 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
1.43 | $ | 2.10 | $ | 0.15 | $ | (0.38 | ) | $ | (0.40 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Fiscal Year 2009 | Apr 30, 2009 | Jan 31, 2009 | Oct 31, 2008 | Jul 31, 2008 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
$ | 4,083,577 | $ | 2,466,753 | $ | 993,446 | $ | 351,469 | $ | 271,909 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
$ | 839,370 | $ | 1,178,054 | $ | 101,739 | $ | (227,453 | ) | $ | (212,970 | ) | ||||||||||||
|
Income taxes (benefit)
|
326,315 | 470,245 | 34,909 | (94,292 | ) | (84,547 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
513,055 | 707,809 | 66,830 | (133,161 | ) | (128,423 | ) | |||||||||||||||||
|
Net loss from discontinued operations
|
(27,382 | ) | (906 | ) | (19,467 | ) | (2,713 | ) | (4,296 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 485,673 | $ | 706,903 | $ | 47,363 | $ | (135,874 | ) | $ | (132,719 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.53 | $ | 2.09 | $ | 0.20 | $ | (0.40 | ) | $ | (0.39 | ) | ||||||||||||
|
Net loss from discontinued operations
|
(0.08 | ) | – | (0.06 | ) | (0.01 | ) | (0.02 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.45 | $ | 2.09 | $ | 0.14 | $ | (0.41 | ) | $ | (0.41 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.53 | $ | 2.08 | $ | 0.20 | $ | (0.40 | ) | $ | (0.39 | ) | ||||||||||||
|
Net loss from discontinued operations
|
(0.08 | ) | – | (0.06 | ) | (0.01 | ) | (0.02 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.45 | $ | 2.08 | $ | 0.14 | $ | (0.41 | ) | $ | (0.41 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
The accumulation of four quarters in fiscal years 2010 and 2009
for earnings per share may not equal the related per share
amounts for the years ended April 30, 2010 and 2009 due to
the timing of the exercise of stock options and
68
H&R
BLOCK 2010 Form 10K
Table of Contents
lapse of certain restrictions on
nonvested shares and the antidilutive effect of stock options
and nonvested shares in the first two quarters for those years,
as well as the retirement of treasury shares for fiscal year
2010.
|
|
||||||||||||||||||||||||
| Fiscal Year | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fiscal Year 2010:
|
||||||||||||||||||||||||
|
Dividends paid per share
|
$ | 0.60 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||||||||
|
Stock price range:
|
||||||||||||||||||||||||
|
High
|
$ | 23.23 | $ | 21.84 | $ | 23.23 | $ | 20.00 | $ | 17.85 | ||||||||||||||
|
Low
|
13.73 | 15.90 | 18.10 | 16.41 | 13.73 | |||||||||||||||||||
|
Fiscal Year 2009:
|
||||||||||||||||||||||||
|
Dividends paid per share
|
$ | 0.59 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.14 | ||||||||||||||
|
Stock price range:
|
||||||||||||||||||||||||
|
High
|
$ | 27.97 | $ | 22.98 | $ | 23.27 | $ | 27.97 | $ | 24.65 | ||||||||||||||
|
Low
|
14.69 | 14.69 | 15.37 | 15.00 | 20.40 | |||||||||||||||||||
BFC is an indirect, wholly-owned consolidated subsidiary of the
Company. BFC is the Issuer and the Company is the Guarantor of
the Senior Notes issued on January 11, 2008 and
October 26, 2004, the CLOCs and other indebtedness issued
from time to time. These condensed consolidating financial
statements have been prepared using the equity method of
accounting. Earnings of subsidiaries are, therefore, reflected
in the Company’s investment in subsidiaries account. The
elimination entries eliminate investments in subsidiaries,
related stockholders’ equity and other intercompany
balances and transactions.
CONDENSED
CONSOLIDATING INCOME STATEMENTS
(in
000s)
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total revenues
|
$ | – | $ | 271,704 | $ | 3,602,721 | $ | (93 | ) | $ | 3,874,332 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cost of revenues
|
– | 257,245 | 2,210,868 | (117 | ) | 2,467,996 | ||||||||||||||||||
|
Selling, general and administrative
|
– | 36,946 | 594,646 | (93 | ) | 631,499 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total expenses
|
– | 294,191 | 2,805,514 | (210 | ) | 3,099,495 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
– | (22,487 | ) | 797,207 | 117 | 774,837 | ||||||||||||||||||
|
Other income, net
|
784,135 | 5,644 | 3,771 | (784,252 | ) | 9,298 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
784,135 | (16,843 | ) | 800,978 | (784,135 | ) | 784,135 | |||||||||||||||||
|
Income taxes (benefit)
|
295,189 | (6,368 | ) | 301,557 | (295,189 | ) | 295,189 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
488,946 | (10,475 | ) | 499,421 | (488,946 | ) | 488,946 | |||||||||||||||||
|
Net loss from discontinued operations
|
(9,704 | ) | (5,276 | ) | (4,428 | ) | 9,704 | (9,704 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | (15,751 | ) | $ | 494,993 | $ | (479,242 | ) | $ | 479,242 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
H&R
BLOCK 2010
Form 10K
69
Table of Contents
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total revenues
|
$ | – | $ | 251,758 | $ | 3,834,880 | $ | (3,061 | ) | $ | 4,083,577 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cost of revenues
|
– | 278,789 | 2,317,439 | (10 | ) | 2,596,218 | ||||||||||||||||||
|
Selling, general and administrative
|
– | 66,230 | 582,812 | (552 | ) | 648,490 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total expenses
|
– | 345,019 | 2,900,251 | (562 | ) | 3,244,708 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
– | (93,261 | ) | 934,629 | (2,499 | ) | 838,869 | |||||||||||||||||
|
Other income (expense), net
|
839,370 | (5,992 | ) | 6,461 | (839,338 | ) | 501 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
839,370 | (99,253 | ) | 941,090 | (841,837 | ) | 839,370 | |||||||||||||||||
|
Income taxes (benefit)
|
326,315 | (40,386 | ) | 367,660 | (327,274 | ) | 326,315 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
513,055 | (58,867 | ) | 573,430 | (514,563 | ) | 513,055 | |||||||||||||||||
|
Net loss from discontinued operations
|
(27,382 | ) | (29,176 | ) | – | 29,176 | (27,382 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 485,673 | $ | (88,043 | ) | $ | 573,430 | $ | (485,387 | ) | $ | 485,673 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total revenues
|
$ | – | $ | 338,688 | $ | 3,755,118 | $ | (7,176 | ) | $ | 4,086,630 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cost of revenues
|
– | 231,025 | 2,357,577 | (409 | ) | 2,588,193 | ||||||||||||||||||
|
Selling, general and administrative
|
– | 148,218 | 639,986 | 694 | 788,898 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total expenses
|
– | 379,243 | 2,997,563 | 285 | 3,377,091 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
– | (40,555 | ) | 757,555 | (7,461 | ) | 709,539 | |||||||||||||||||
|
Other income, net
|
735,071 | – | 25,532 | (735,071 | ) | 25,532 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
735,071 | (40,555 | ) | 783,087 | (742,532 | ) | 735,071 | |||||||||||||||||
|
Income taxes (benefit)
|
289,124 | (10,351 | ) | 302,873 | (292,522 | ) | 289,124 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
445,947 | (30,204 | ) | 480,214 | (450,010 | ) | 445,947 | |||||||||||||||||
|
Net loss from discontinued operations
|
(754,594 | ) | (752,386 | ) | (6,288 | ) | 758,674 | (754,594 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | (308,647 | ) | $ | (782,590 | ) | $ | 473,926 | $ | 308,664 | $ | (308,647 | ) | |||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING BALANCE SHEETS
(in
000s)
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 702,021 | $ | 1,102,135 | $ | (111 | ) | $ | 1,804,045 | |||||||||||||
|
Cash & cash equivalents — restricted
|
– | 6,160 | 28,190 | – | 34,350 | |||||||||||||||||||
|
Receivables, net
|
57 | 105,192 | 412,737 | – | 517,986 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 595,405 | – | – | 595,405 | |||||||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,207,879 | – | 1,207,879 | |||||||||||||||||||
|
Investments in subsidiaries
|
3,276,597 | – | 231 | (3,276,597 | ) | 231 | ||||||||||||||||||
|
Other assets
|
19,014 | 332,782 | 722,626 | – | 1,074,422 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 3,295,668 | $ | 1,741,560 | $ | 3,473,798 | $ | (3,276,708 | ) | $ | 5,234,318 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Customer deposits
|
$ | – | $ | 852,666 | $ | – | $ | (111 | ) | $ | 852,555 | |||||||||||||
|
Long-term debt
|
– | 998,605 | 36,539 | – | 1,035,144 | |||||||||||||||||||
|
FHLB borrowings
|
– | 75,000 | – | – | 75,000 | |||||||||||||||||||
|
Other liabilities
|
48,775 | 153,154 | 1,629,060 | – | 1,830,989 | |||||||||||||||||||
|
Net intercompany advances
|
1,806,263 | (431,696 | ) | (1,374,567 | ) | – | – | |||||||||||||||||
|
Stockholders’ equity
|
1,440,630 | 93,831 | 3,182,766 | (3,276,597 | ) | 1,440,630 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 3,295,668 | $ | 1,741,560 | $ | 3,473,798 | $ | (3,276,708 | ) | $ | 5,234,318 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
70
H&R
BLOCK 2010 Form 10K
Table of Contents
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| April 30, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 241,350 | $ | 1,419,535 | $ | (6,222 | ) | $ | 1,654,663 | |||||||||||||
|
Cash & cash equivalents — restricted
|
– | 4,303 | 47,353 | – | 51,656 | |||||||||||||||||||
|
Receivables, net
|
38 | 114,442 | 398,334 | – | 512,814 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 744,899 | – | – | 744,899 | |||||||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,236,228 | – | 1,236,228 | |||||||||||||||||||
|
Investments in subsidiaries
|
3,289,435 | – | 194 | (3,289,435 | ) | 194 | ||||||||||||||||||
|
Other assets
|
– | 308,481 | 850,787 | – | 1,159,268 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 3,289,473 | $ | 1,413,475 | $ | 3,952,431 | $ | (3,295,657 | ) | $ | 5,359,722 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Customer deposits
|
$ | – | $ | 861,110 | $ | – | $ | (6,222 | ) | $ | 854,888 | |||||||||||||
|
Long-term debt
|
– | 998,245 | 33,877 | – | 1,032,122 | |||||||||||||||||||
|
FHLB borrowings
|
– | 100,000 | – | – | 100,000 | |||||||||||||||||||
|
Other liabilities
|
2 | 130,362 | 1,836,477 | 12 | 1,966,853 | |||||||||||||||||||
|
Net intercompany advances
|
1,883,612 | (827,453 | ) | (1,056,147 | ) | (12 | ) | – | ||||||||||||||||
|
Stockholders’ equity
|
1,405,859 | 151,211 | 3,138,224 | (3,289,435 | ) | 1,405,859 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 3,289,473 | $ | 1,413,475 | $ | 3,952,431 | $ | (3,295,657 | ) | $ | 5,359,722 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in
000s)
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by operating activities:
|
$ | 21,252 | $ | 16,698 | $ | 549,519 | $ | – | $ | 587,469 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing:
|
||||||||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 72,832 | – | – | 72,832 | |||||||||||||||||||
|
Purchases of property & equipment
|
– | – | (90,515 | ) | – | (90,515 | ) | |||||||||||||||||
|
Payments for business acquisitions
|
– | – | (10,539 | ) | – | (10,539 | ) | |||||||||||||||||
|
Net intercompany advances
|
415,591 | – | – | (415,591 | ) | – | ||||||||||||||||||
|
Other, net
|
– | 38,813 | 20,762 | – | 59,575 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
415,591 | 111,645 | (80,292 | ) | (415,591 | ) | 31,353 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||||||
|
Repayments of commercial paper
|
– | (1,406,013 | ) | – | – | (1,406,013 | ) | |||||||||||||||||
|
Proceeds from commercial paper
|
– | 1,406,013 | – | – | 1,406,013 | |||||||||||||||||||
|
Repayments of other borrowings
|
– | (4,267,727 | ) | (46 | ) | – | (4,267,773 | ) | ||||||||||||||||
|
Proceeds from other borrowings
|
– | 4,242,727 | – | – | 4,242,727 | |||||||||||||||||||
|
Customer banking deposits, net
|
– | 11,428 | – | 6,111 | 17,539 | |||||||||||||||||||
|
Dividends paid
|
(200,899 | ) | – | – | – | (200,899 | ) | |||||||||||||||||
|
Repurchase of common stock
|
(254,250 | ) | – | – | – | (254,250 | ) | |||||||||||||||||
|
Proceeds from stock options
|
16,682 | – | – | – | 16,682 | |||||||||||||||||||
|
Net intercompany advances
|
– | 354,617 | (770,208 | ) | 415,591 | – | ||||||||||||||||||
|
Other, net
|
1,624 | (8,717 | ) | (28,051 | ) | – | (35,144 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities
|
(436,843 | ) | 332,328 | (798,305 | ) | 421,702 | (481,118 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Effects of exchange rates on cash
|
– | – | 11,678 | – | 11,678 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net increase (decrease) in cash
|
– | 460,671 | (317,400 | ) | 6,111 | 149,382 | ||||||||||||||||||
|
Cash – beginning of the year
|
– | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash – end of the year
|
$ | – | $ | 702,021 | $ | 1,102,135 | $ | (111 | ) | $ | 1,804,045 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
H&R
BLOCK 2010
Form 10K
71
Table of Contents
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 3,835 | $ | (13,225 | ) | $ | 1,033,829 | $ | – | $ | 1,024,439 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing:
|
||||||||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 91,329 | – | – | 91,329 | |||||||||||||||||||
|
Purchases of property & equipment
|
– | (43 | ) | (97,837 | ) | – | (97,880 | ) | ||||||||||||||||
|
Payments for business acquisitions
|
– | – | (293,805 | ) | – | (293,805 | ) | |||||||||||||||||
|
Net intercompany advances
|
73,820 | – | – | (73,820 | ) | – | ||||||||||||||||||
|
Investing cash flows of discontinued operations
|
– | 255,066 | – | – | 255,066 | |||||||||||||||||||
|
Other, net
|
– | 17,598 | 33,252 | – | 50,850 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
73,820 | 363,950 | (358,390 | ) | (73,820 | ) | 5,560 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||||||
|
Repayments of short-term borrowings
|
– | (4,762,294 | ) | – | – | (4,762,294 | ) | |||||||||||||||||
|
Proceeds from short-term borrowings
|
– | 4,733,294 | – | – | 4,733,294 | |||||||||||||||||||
|
Customer banking deposits, net
|
– | 69,932 | – | (5,575 | ) | 64,357 | ||||||||||||||||||
|
Dividends paid
|
(198,685 | ) | – | – | – | (198,685 | ) | |||||||||||||||||
|
Acquisition of treasury shares
|
(106,189 | ) | – | – | – | (106,189 | ) | |||||||||||||||||
|
Proceeds from issuance of common stock
|
141,415 | – | – | – | 141,415 | |||||||||||||||||||
|
Proceeds from stock options
|
71,594 | – | – | – | 71,594 | |||||||||||||||||||
|
Net intercompany advances
|
– | (199,032 | ) | 125,212 | 73,820 | – | ||||||||||||||||||
|
Financing cash flows of discontinued operations
|
– | 4,783 | – | – | 4,783 | |||||||||||||||||||
|
Other, net
|
14,210 | 9,331 | (12,049 | ) | – | 11,492 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities
|
(77,655 | ) | (143,986 | ) | 113,163 | 68,245 | (40,233 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net increase in cash
|
– | 206,739 | 788,602 | (5,575 | ) | 989,766 | ||||||||||||||||||
|
Cash – beginning of the year
|
– | 34,611 | 630,933 | (647 | ) | 664,897 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash – end of the year
|
$ | – | $ | 241,350 | $ | 1,419,535 | $ | (6,222 | ) | $ | 1,654,663 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 47,521 | $ | (686,591 | ) | $ | 897,830 | $ | – | $ | 258,760 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing:
|
||||||||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 207,606 | – | – | 207,606 | |||||||||||||||||||
|
Purchases of property & equipment
|
– | (17 | ) | (101,537 | ) | – | (101,554 | ) | ||||||||||||||||
|
Payments for business acquisitions
|
– | – | (24,872 | ) | – | (24,872 | ) | |||||||||||||||||
|
Net intercompany advances
|
112,027 | – | – | (112,027 | ) | – | ||||||||||||||||||
|
Investing cash flows of discontinued operations
|
– | 1,041,260 | 3,730 | – | 1,044,990 | |||||||||||||||||||
|
Other, net
|
– | 13,410 | 7,709 | – | 21,119 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
112,027 | 1,262,259 | (114,970 | ) | (112,027 | ) | 1,147,289 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||||||
|
Repayments of commercial paper
|
– | (5,125,279 | ) | – | – | (5,125,279 | ) | |||||||||||||||||
|
Proceeds from commercial paper
|
– | 4,133,197 | – | – | 4,133,197 | |||||||||||||||||||
|
Proceeds from issuance of Senior Notes
|
– | 599,376 | – | – | 599,376 | |||||||||||||||||||
|
Repayments of other borrowings
|
– | (9,055,426 | ) | – | – | (9,055,426 | ) | |||||||||||||||||
|
Proceeds from other borrowings
|
– | 8,505,426 | – | – | 8,505,426 | |||||||||||||||||||
|
Customer banking deposits, net
|
– | (344,744 | ) | – | (647 | ) | (345,391 | ) | ||||||||||||||||
|
Dividends paid
|
(183,628 | ) | – | – | – | (183,628 | ) | |||||||||||||||||
|
Acquisition of treasury shares
|
(7,280 | ) | – | – | – | (7,280 | ) | |||||||||||||||||
|
Proceeds from stock options
|
23,322 | – | – | – | 23,322 | |||||||||||||||||||
|
Net intercompany advances
|
– | 753,873 | (865,900 | ) | 112,027 | – | ||||||||||||||||||
|
Financing cash flows of discontinued operations
|
– | (63,249 | ) | (1,190 | ) | – | (64,439 | ) | ||||||||||||||||
|
Other, net
|
8,038 | (4,428 | ) | (41,557 | ) | – | (37,947 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash used in financing activities
|
(159,548 | ) | (601,254 | ) | (908,647 | ) | 111,380 | (1,558,069 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net decrease in cash
|
– | (25,586 | ) | (125,787 | ) | (647 | ) | (152,020 | ) | |||||||||||||||
|
Cash – beginning of the year
|
– | 60,197 | 756,720 | – | 816,917 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash – end of the year
|
$ | – | $ | 34,611 | $ | 630,933 | $ | (647 | ) | $ | 664,897 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
72
H&R
BLOCK 2010 Form 10K
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There were no disagreements or reportable events requiring
disclosure pursuant to Item 304(b) of
Regulation S-K.
| ITEM 9A. | CONTROLS AND PROCEDURES |
(a) EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
– We
have established disclosure controls and procedures (Disclosure
Controls) to ensure that information required to be disclosed in
the Company’s reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the
U.S. Securities and Exchange Commission’s rules and
forms. Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. Our Disclosure Controls were designed to
provide reasonable assurance that the controls and procedures
would meet their objectives. Our management, including the Chief
Executive Officer and Chief Financial Officer, does not expect
that our Disclosure Controls will prevent all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
designed control objectives and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusions of two or more people or by management
override of the control. Because of the inherent limitations in
a cost-effective, maturing control system, misstatements due to
error or fraud may occur and not be detected.
As of the end of the period covered by this
Form 10-K,
we evaluated the effectiveness of the design and operations of
our Disclosure Controls. The controls evaluation was done under
the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded our Disclosure
Controls were effective as of the end of the period covered by
this Annual Report on
Form 10-K.
(b) MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
– Management is responsible for
establishing and maintaining adequate internal control over
financial reporting for the Company, as such term is defined in
Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as of April 30, 2010.
Based on our assessment, management concluded that, as of
April 30, 2010, the Company’s internal control over
financial reporting was effective based on the criteria set
forth by COSO.
The Company’s external auditors who audited the
consolidated financial statements included in Item 8,
Deloitte & Touche LLP, an independent registered
public accounting firm, have issued an audit report on the
effectiveness of the Company’s internal control over
financial reporting. This report appears near the beginning of
Item 8.
(c) CHANGES
IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
– During the quarter ended
April 30, 2010, 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.
H&R
BLOCK 2010
Form 10K
73
Table of Contents
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following information appearing in our definitive proxy
statement, to be filed no later than 120 days after
April 30, 2010, is incorporated herein by reference:
| § | Information appearing under the heading “Election of Directors,” | |
| § | Information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance,” | |
| § | Information appearing under the heading “Board of Directors’ Meetings and Committees” regarding identification of the Audit Committee and Audit Committee financial experts. |
We have adopted a code of business ethics and conduct that
applies to our directors, officers and employees, including our
chief executive officer, chief financial officer, principal
accounting officer and persons performing similar functions. A
copy of the code of business ethics and conduct is available on
our website at
www.hrblock.com
. We intend to provide
information on our website regarding amendments to or waivers
from the code of business ethics and conduct.
Information about our executive officers as of May 15,
2010, is as follows:
|
|
||||
| Name, age | Current position | Business experience since May 1, 2005 | ||
|
|
||||
|
Russell P. Smyth
,
age 53 |
President and Chief Executive Officer | President and Chief Executive Officer since August 2008; Consultant, equity owner and active board member for several private equity firms and served on the boards of several privately held companies from January 2005 to July 2008; President – McDonald’s Europe from January 2003 to January 2005. | ||
|
|
||||
|
Jeffrey T. Brown
,
age 51 |
Vice President, Interim Chief Financial Officer and Corporate Controller | Interim Chief Financial Officer since May 1, 2010; Vice President and Corporate Controller since March 2008; Assistant Vice President and Assistant Controller from August 2005 until March 2008; Director of Corporate Accounting, from September 2002 to August 2005. | ||
|
|
||||
|
C.E. Andrews
,
age 58 |
President and Chief Operating Officer, RSM McGladrey, Inc. | President and Chief Operating Officer, RSM McGladrey since June 2009; President of SLM Corporation (Sallie Mae) from May 2007 until September 2008; Chief Financial Officer of Sallie Mae from 2006 until 2007; Executive Vice President of Accounting and Risk of Sallie Mae from 2003 until 2005. | ||
|
|
||||
|
Robert J. Turtledove
,
age 50 |
Senior Vice President and Chief Marketing Officer | Senior Vice President and Chief Marketing Officer since August 2009; Chief Marketing Officer of TheLadders.com from June 2007 until June 2009; Chief Concept Officer of Metromedia Restaurant Group from January 2003 until February 2007. | ||
|
|
||||
|
Brian J. Woram
,
age 49 |
Senior Vice President and Chief Legal Officer | Senior Vice President and Chief Legal Officer since September 2009; Senior Vice President, Chief Legal Officer and Chief Compliance Officer of Centex Corporation from 2005 until September 2009. | ||
|
|
||||
| ITEM 11. | EXECUTIVE COMPENSATION |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2010, in the
sections entitled “Director Compensation” and
“Executive Compensation” and is incorporated herein by
reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2010, in the
section titled “Equity Compensation Plans” and in the
section titled “Information Regarding Security
Holders” and is incorporated herein by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2010, in the
section titled “Employee Agreements,
Change-of-Control
and Other Arrangements” and is incorporated herein by
reference.
74
H&R
BLOCK 2010 Form 10K
Table of Contents
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2010, in the
section titled “Audit Fees” and is incorporated herein
by reference.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this Report:
| 1. | The following financial statements appearing in Item 8: “Consolidated Statements of Operations and Comprehensive Income (Loss),” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows” and “Consolidated Statements of Stockholders’ Equity.” | |
| 2. | “Financial Statement Schedule II – Valuation and Qualifying Accounts” with the related Reports of Independent Registered Public Accounting Firms. These will be filed with the SEC but will not be included in the printed version of the Annual Report to Shareholders. | |
| 3. | Exhibits – The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference. |
H&R
BLOCK 2010
Form 10K
75
Table of Contents
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.
| H&R BLOCK, INC. | ||
|
|
||
| Russell P. Smyth | ||
|
President and Chief Executive Officer
June 28, 2010 |
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
date indicated on June 28, 2010.
|
|
|
|
||
| Russell P. Smyth | Robert A. Gerard | Tom D. Seip | ||
| President, Chief Executive Officer | Director | Director | ||
|
and Director
(principal executive officer) |
||||
|
|
|
||
|
Richard C. Breeden
|
Jeffrey T. Brown | L. Edward Shaw, Jr. | ||
|
Director, Chairman of the Board
|
Vice President, Interim Chief | Director | ||
|
Financial Officer and Corporate Controller
(principal financial officer and principal accounting officer) |
||||
|
|
|
||
|
Thomas M. Bloch
|
Len J. Lauer | Christianna Wood | ||
|
Director
|
Director | Director | ||
|
|
|||
|
Alan M. Bennett
|
David B. Lewis | |||
|
Director
|
Director |
76
H&R
BLOCK 2010 Form 10K
Table of Contents
The following
exhibits are numbered in accordance with the Exhibit Table
of Item 601 of
Regulation S-K:
| 3 | .1 | Amended and Restated Articles of Incorporation of H&R Block, Inc., filed as Exhibit 3.1 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 3 | .2 | Amended and Restated Bylaws of H&R Block, Inc., as amended through May 5, 2009, filed as Exhibit 3.1 to the Company’s current report on Form 8-K dated May 5, 2009, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .1 | Indenture dated as of October 20, 1997, among H&R Block, Inc., Block Financial Corporation and Bankers Trust Company, as Trustee, filed as Exhibit 4(a) to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 1997, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .2 | First Supplemental Indenture, dated as of April 18, 2000, among H&R Block, Inc., Block Financial Corporation, Bankers Trust Company and the Bank of New York, filed as Exhibit 4(a) to the Company’s current report on Form 8-K dated April 13, 2000, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .3 | Officer’s Certificate, dated October 26, 2004, in respect of 5.125% Notes due 2014 of Block Financial Corporation, filed as Exhibit 4.1 to the Company’s current report on Form 8-K dated October 21, 2004, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .4 | Officer’s Certificate, dated January 11, 2008, in respect of 7.875% Notes due 2013 of Block Financial LLC, filed as Exhibit 4.1 to the Company’s current report on Form 8-K dated January 8, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .5 | Form of 5.125% Note due 2014 of Block Financial Corporation, filed as Exhibit 4.2 to the Company’s current report on Form 8-K dated October 21, 2004, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .6 | Form of 7.875% Note due 2013 of Block Financial LLC, filed as Exhibit 4.2 to the Company’s current report on Form 8-K dated January 8, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .7 | Form of Certificate of Designation, Preferences and Rights of Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(e) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1995, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .8 | Form of Certificate of Amendment of Certificate of Designation, Preferences and Rights of Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(j) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1998, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .9 | Form of Certificate of Designation, Preferences and Rights of Delayed Convertible Preferred Stock of H&R Block, Inc., filed as Exhibit 4(f) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1995, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .1* | The Company’s 2003 Long-Term Executive Compensation Plan, as amended and restated as of September 24, 2009. | ||
| 10 | .2* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Restricted Shares. | ||
| 10 | .3* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Stock Options. | ||
| 10 | .4* | H&R Block Deferred Compensation Plan for Executives (amended and restated effective December 31, 2008), filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2009, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .5* | Amendment No. 1 to the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated, effective as of March 12, 2003, filed as Exhibit 10.5 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .6* | The H&R Block Executive Performance Plan (as amended), filed as Exhibit 10.6 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2006, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .7* | The H&R Block, Inc. 2000 Employee Stock Purchase Plan, as amended August 1, 2001, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .8* | The H&R Block, Inc. Executive Survivor Plan (as Amended and Restated) filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2000, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .9* | First Amendment to the H&R Block, Inc. Executive Survivor Plan (as Amended and Restated), filed as Exhibit 10.9 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2002, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .10* | Second Amendment to the H&R Block, Inc. Executive Survivor Plan (as Amended and Restated), effective as of March 12, 2003, filed as Exhibit 10.12 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .11* | H&R Block Severance Plan, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .12* | H&R Block Inc. Executive Severance Plan, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2009, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .13* | Employment Agreement dated July 19, 2008 between H&R Block Management LLC and Russell P. Smyth, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2008, file number 1-6089, is incorporated herein by reference. |
H&R
BLOCK 2010
Form 10K
77
Table of Contents
| 10 | .14* | Employment Agreement dated December 3, 2007 between HRB Management, Inc. and Alan M. Bennett, filed as Exhibit 10.5 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .15* | Employment Agreement dated as of June 28, 2004 between H&R Block Services, Inc. and Timothy C. Gokey, filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the quarter ended July 31, 2004, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .16* | Separation and Release Agreement dated July 28, 2009 between HRB Tax Group, Inc. and Timothy C. Gokey, filed as Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended July 31, 2009, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .17* | Separation and Release Agreement dated May 4, 2010, between H&R Block Management, LLC and Becky S. Shulman. | ||
| 10 | .18* | Form of Indemnification Agreement for directors, filed as Exhibit 10.1 to the Company’s current report on Form 8-K dated December 14, 2005, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .19* | 2008 Deferred Stock Unit Plan for Outside Directors, as amended and restated as of September 24, 2009. | ||
| 10 | .20 | HSBC Retail Settlement Products Distribution Agreement dated as of September 23, 2005, among HSBC Bank USA, National Association, HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., Household Tax Masters Acquisition Corporation, H&R Block Services, Inc., H&R Block Tax Services, Inc., H&R Block Enterprises, Inc., H&R Block Eastern Enterprises, Inc., H&R Block Digital Tax Solutions, LLC, H&R Block Associates, L.P., HRB Royalty, Inc., HSBC Finance Corporation and H&R Block, Inc., filed as Exhibit 10.14 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .21 | HSBC Digital Settlement Products Distribution Agreement dated as of September 23, 2005, among HSBC Bank USA, National Association, HSBC Taxpayer Financial Services Inc., H&R Block Digital Tax Solutions, LLC, and H&R Block Services, Inc., filed as Exhibit 10.15 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .22 | HSBC Program Appendix of Defined Terms and Rules of Construction, filed as Exhibit 10.18 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .23 | Joinder and First Amendment to Program Contracts dated as of November 10, 2006, among HSBC Bank USA, National Association, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., Household Tax Masters Acquisition Corporation, H&R Block Services, Inc., H&R Block Tax Services, Inc., H&R Block Enterprises, Inc., H&R Block Eastern Enterprises, Inc., H&R Block Digital Solutions, LLC,, H&R Block and Associates, L.P., HRB Royalty, Inc., HSBC Finance Corporation, H&R Block, Inc. and Block Financial Corporation, filed as Exhibit 10.25 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .24 | Second Amendment to Program Contracts dated as of November 13, 2006, among HSBC Bank USA, National Association, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services, Inc., Beneficial Franchise Company Inc., H&R Block Services, Inc., H&R Block Tax Service, Inc., H&R Block Enterprises, Inc., H&R Block Eastern Enterprises, Inc., H&R Block Digital Solutions,, LLC, H&R Block and Associates, L.P., HRB Royalty, Inc., HSBC Finance Corporation, and H&R Block, Inc., filed as Exhibit 10.26 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .25 | Third Amendment to Program Contracts dated as of December 5, 2008, by and among HSBC Bank USA, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., HRB Tax Group, Inc., H&R Block Tax Services LLC, H&R Block Enterprises LLC, H&R Block Eastern enterprises, Inc., HRB Digital LLC, Block Financial LLC, HRB Innovations, Inc., HSBC Finance Corporation, and H&R Block, Inc., filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2009, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .26 | Second Amended and Restated HSBC Refund Anticipation Loan Participation Agreement dated as of January 12, 2010 among Block Financial LLC, HSBC Bank USA, National Association, HSBC Trust Company (Delaware), National Association, and HSBC Taxpayer Financial Services Inc., filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2010, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .27 | First Amended and Restated HSBC Settlements Products Servicing Agreement dated as of November 13, 2006 among Block Financial Corporation, HSBC Bank USA, National Association, HSBC Trust Company (Delaware), National Association, and HSBC Taxpayer Financial Services, Inc., filed as Exhibit 10.28 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .28 | Amended and Restated Five-Year Credit and Guarantee Agreement dated as of August 10, 2005 among Block Financial Corporation, H&R Block, Inc., the lenders party thereto, Bank of America, N.A., HSBC Bank USA, National Association, Royal Bank of Scotland PLC, JPMorgan Chase Bank, N.A., and J.P. Morgan Securities Inc., filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .29 | First Amendment dated as of November 28, 2006 to Amended and Restated Five-Year Credit and Guarantee Agreement among Block Financial Corporation, H&R Block, Inc., JP Morgan Chase Bank and various financial institutions, filed as Exhibit 10.31 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .30 | Second Amendment dated as of November 19, 2007, to the Amended and Restated Five-Year Credit and Guarantee Agreement dated as of August 10, 2005, filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2008, file number 1-6089, is incorporated herein by reference. |
78
H&R
BLOCK 2010 Form 10K
Table of Contents
| 10 | .31 | Consent dated January 4, 2010, concerning the Amended and Restated Five-Year Credit and Guarantee Agreement dated as of August 10, 2005. as amended, by and among Block Financial LLC, H&R Block, Inc., the Lenders as parties thereto, and JPMorgan Chase Bank, N.A., approving the Aurora Bank Commitment Termination, filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the quarter ended January 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .32 | Five-Year Credit and Guarantee Agreement dated as of August 10, 2005 among Block Financial Corporation, H&R Block, Inc., the lenders party thereto, Bank of America, N.A., HSBC Bank USA, National Association, The Royal Bank of Scotland PLC, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities, Inc., filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .33 | First Amendment dated as of November 28, 2006 to Five-Year Credit and Guarantee Agreement among Block Financial Corporation, H&R Block, Inc., JP Morgan Chase Bank and various financial institutions, filed as Exhibit 10.30 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated by reference. | ||
| 10 | .34 | Second Amendment dated as of November 19, 2007, to the Five-Year Credit and Guarantee Agreement dated as of August 10, 2005, filed as Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .35 | Consent dated January 4, 2010, concerning the Five-Year Credit and Guarantee Agreement dated as of August 10, 2005. as amended, by and among Block Financial LLC, H&R Block, Inc., the Lenders as parties thereto, and JPMorgan Chase Bank, N.A., approving the Aurora Bank Commitment Termination, filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended January 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .36 | Credit and Guarantee Agreement dated as of March 4, 2010, among Block Financial LLC, H&R Block, Inc., each lender from time to time party thereto, and Bank of America, N.A. | ||
| 10 | .37 | License Agreement effective August 1, 2007 between H&R Block Services, Inc. and Sears, Roebuck and Co., filed as Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended July 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .38 | Advances, Pledge and Security Agreement dated April 17, 2006, between H&R Block Bank and the Federal Home Loan Bank of Des Moines, filed as Exhibit 10.11 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .39 | Administrative Services Agreement dated January 30, 2006, by and among RSM McGladrey, Inc. and McGladrey & Pullen, LLP, filed as Exhibit 10.35 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2009, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .40 | Amendment Number One, dated June 1, 2008, to the Administrative Services Agreement dated January 30, 2006, by and among RSM McGladrey, Inc. and McGladrey & Pullen, LLP, filed as Exhibit 10.36 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2009, file number 1-6089, is incorporated herein by reference | ||
| 10 | .41 | Operations Agreement, dated as of August 2, 1999, by and among McGladrey & Pullen, LLP, MP Active Partners Trust, Mark W. Scally, Thomas G. Rotherham, RSM McGladrey, Inc., HRB Business Services, Inc., and H&R Block, Inc., filed as Exhibit 10.37 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2009, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .42 | Amended and Restated Administrative Services Agreement dated as of February 3, 2010 among RSM McGladrey, Inc., H&R Block, Inc. and McGladrey & Pullen, LLP. | ||
| 10 | .43 | Governance and Operations Agreement dated as of February 3, 2010 among RSM McGladrey, Inc., H&R Block, Inc. and McGladrey & Pullen LLP. | ||
| 12 | Computation of Ratio of Earnings to Fixed Charges for the five years ended April 30, 2010. | |||
| 21 | Subsidiaries of the Company. | |||
| 23 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | |||
| 31 | .1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101 | .INS | XBRL Instance Document | ||
| 101 | .SCH | XBRL Taxonomy Extension Schema | ||
| 101 | .CAL | XBRL Extension Calculation Linkbase | ||
| 101 | .LAB | XBRL Taxonomy Extension Label Linkbase | ||
| 101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase |
| * | Indicates management contracts, compensatory plans or arrangements. | |
| ** | Confidential Information has been omitted from this exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2. |
H&R
BLOCK 2010
Form 10K
79
Table of Contents
H&R BLOCK, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2010, 2009 AND 2008
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2010, 2009 AND 2008
| Additions | ||||||||||||||||
| Balance at | Charged to | |||||||||||||||
| Beginning of | Costs and | Balance at End of | ||||||||||||||
| Description | Period | Expenses | Deductions (1) | Period | ||||||||||||
|
Allowance for Doubtful Accounts — deducted from accounts receivable in the balance sheet
|
||||||||||||||||
|
|
||||||||||||||||
|
2010
|
$ | 128,541,000 | $ | 111,754,000 | $ | 127,820,000 | $ | 112,475,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2009
|
$ | 120,155,000 | $ | 181,829,000 | $ | 173,443,000 | $ | 128,541,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2008
|
$ | 95,161,000 | $ | 174,813,000 | $ | 149,819,000 | $ | 120,155,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liability related to Mortgage Services restructuring charge
|
||||||||||||||||
|
|
||||||||||||||||
|
2010
|
$ | 7,533,000 | $ | — | $ | 5,764,000 | $ | 1,769,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2009
|
$ | 27,920,000 | $ | — | $ | 20,387,000 | $ | 7,533,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2008
|
$ | 14,607,000 | $ | 76,388,000 | $ | 63,075,000 | $ | 27,920,000 | ||||||||
|
|
||||||||||||||||
| (1) | Deductions from the Allowance for Doubtful Accounts reflect recoveries and charge-offs. | |
| Deductions from the restructuring charge liability represent payments made. |
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1: Summary Of Significant Accounting PoliciesNote 2: Business Combinations and DisposalsNote 3: Earnings Per ShareNote 4: Marketable Securities Available-for-saleNote 5: Mortgage Loans Held For Investment and Related AssetsNote 6: Assets and Liabilities Measured At Fair ValueNote 7: Property and EquipmentNote 8: Goodwill and Intangible AssetsNote 9: Customer Banking DepositsNote 10: Long-term DebtNote 11: Other Noncurrent Assets and LiabilitiesNote 12: Stockholders EquityNote 13: Stock-based CompensationNote 14: Income TaxesNote 15: Interest Income and Interest ExpenseNote 16: Commitments and ContingenciesNote 17: Alternative Practice Structure with Mcgladrey & Pullen LlpNote 18: Litigation and Related ContingenciesNote 19: Regulatory RequirementsNote 20: Discontinued OperationsNote 21: Segment InformationNote 22: Quarterly Financial Data (unaudited)Note 23: Condensed Consolidating Financial StatementsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules