H&R BLOCK INC
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
| (Mark One) | ||
|
[
X
]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended January 31, 2010 | ||
|
OR
|
||
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file
number 1-6089
H&R
Block, Inc.
(Exact name of registrant as
specified in its charter)
|
MISSOURI
(State or other jurisdiction of incorporation or organization) |
44-0607856
(I.R.S. Employer Identification No.) |
One
H&R Block Way
Kansas City, Missouri 64105
Kansas City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
Ö
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
Ö
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
|
Large accelerated
filer
Ö
|
Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
No
Ö
The number of shares outstanding of the registrant’s Common
Stock, without par value, at the close of business on
February 28, 2010 was 329,233,821 shares.
Form 10-Q
for the Period Ended January 31, 2010
Table of
Contents
| Page | ||||||||
|
PART I
|
Financial Information
|
|||||||
| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 23 | ||||||||
| 31 | ||||||||
| 31 | ||||||||
| PART II | ||||||||
| 32 | ||||||||
| 35 | ||||||||
| 36 | ||||||||
| 36 | ||||||||
| 37 | ||||||||
| 38 | ||||||||
|
|
||||||||
| EX-10.1 | ||||||||
| EX-10.2 | ||||||||
| EX-10.3 | ||||||||
| EX-10.4 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
Table of Contents
CONDENSED
CONSOLIDATED BALANCE
SHEETS
(amounts
in 000s, except share and per share amounts)
| January 31, 2010 | April 30, 2009 | |||||||
|
|
||||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 1,727,677 | $ | 1,654,663 | ||||
|
Cash and cash equivalents – restricted
|
85,313 | 51,656 | ||||||
|
Receivables, less allowance for doubtful accounts of $86,853 and
$128,541
|
2,566,830 | 512,814 | ||||||
|
Prepaid expenses and other current assets
|
344,922 | 351,947 | ||||||
|
Total current assets
|
4,724,742 | 2,571,080 | ||||||
|
Mortgage loans held for investment, less allowance for loan
losses of $97,269 and $84,073
|
641,157 | 744,899 | ||||||
|
Property and equipment, at cost, less accumulated depreciation
and amortization of $653,866 and $625,075
|
362,170 | 368,289 | ||||||
|
Intangible assets, net
|
371,951 | 385,998 | ||||||
|
Goodwill
|
843,054 | 850,230 | ||||||
|
Other assets
|
467,055 | 439,226 | ||||||
|
Total assets
|
$ | 7,410,129 | $ | 5,359,722 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Liabilities:
|
||||||||
|
Short-term borrowings
|
$ | 1,675,094 | $ | - | ||||
|
Customer banking deposits
|
2,220,501 | 854,888 | ||||||
|
Accounts payable, accrued expenses and other current liabilities
|
756,501 | 705,945 | ||||||
|
Accrued salaries, wages and payroll taxes
|
182,151 | 259,698 | ||||||
|
Accrued income taxes
|
118,079 | 543,967 | ||||||
|
Current portion of long-term debt
|
2,576 | 8,782 | ||||||
|
Current Federal Home Loan Bank borrowings
|
25,000 | 25,000 | ||||||
|
Total current liabilities
|
4,979,902 | 2,398,280 | ||||||
|
Long-term debt
|
1,032,800 | 1,032,122 | ||||||
|
Long-term Federal Home Loan Bank borrowings
|
75,000 | 75,000 | ||||||
|
Other noncurrent liabilities
|
385,960 | 448,461 | ||||||
|
Total liabilities
|
6,473,662 | 3,953,863 | ||||||
|
Commitments and contingencies
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 437,352,210
and 444,176,510
|
4,374 | 4,442 | ||||||
|
Additional paid-in capital
|
826,503 | 836,477 | ||||||
|
Accumulated other comprehensive income (loss)
|
1,086 | (11,639 | ) | |||||
|
Retained earnings
|
2,162,406 | 2,671,437 | ||||||
|
Less treasury shares, at cost
|
(2,057,902 | ) | (2,094,858 | ) | ||||
|
Total stockholders’ equity
|
936,467 | 1,405,859 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 7,410,129 | $ | 5,359,722 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
|
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(Unaudited,
amounts in 000s,
except per share amounts) |
|
|
||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Service revenues
|
$ | 744,327 | $ | 799,687 | $ | 1,287,270 | $ | 1,356,744 | ||||||||
|
Product and other revenues
|
142,179 | 135,155 | 176,422 | 166,582 | ||||||||||||
|
Interest income
|
48,346 | 58,604 | 72,746 | 93,498 | ||||||||||||
| 934,852 | 993,446 | 1,536,438 | 1,616,824 | |||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Cost of revenues
|
645,747 | 684,567 | 1,443,146 | 1,489,652 | ||||||||||||
|
Selling, general and administrative
|
194,661 | 208,814 | 427,563 | 464,054 | ||||||||||||
| 840,408 | 893,381 | 1,870,709 | 1,953,706 | |||||||||||||
|
Operating income (loss)
|
94,444 | 100,065 | (334,271 | ) | (336,882 | ) | ||||||||||
|
Other income (expense), net
|
3,007 | 1,674 | 7,996 | (1,802 | ) | |||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
97,451 | 101,739 | (326,275 | ) | (338,684 | ) | ||||||||||
|
Income taxes (benefit)
|
43,848 | 34,909 | (122,789 | ) | (143,930 | ) | ||||||||||
|
Net income (loss) from continuing operations
|
53,603 | 66,830 | (203,486 | ) | (194,754 | ) | ||||||||||
|
Net loss from discontinued operations
|
(2,968 | ) | (19,467 | ) | (8,100 | ) | (26,476 | ) | ||||||||
|
Net income (loss)
|
$ | 50,635 | $ | 47,363 | $ | (211,586 | ) | $ | (221,230 | ) | ||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 0.16 | $ | 0.20 | $ | (0.61 | ) | $ | (0.59 | ) | ||||||
|
Net loss from discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.02 | ) | (0.08 | ) | ||||||||
|
Net income (loss)
|
$ | 0.15 | $ | 0.14 | $ | (0.63 | ) | $ | (0.67 | ) | ||||||
|
Basic shares
|
332,999 | 337,338 | 334,293 | 331,429 | ||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 0.16 | $ | 0.20 | $ | (0.61 | ) | $ | (0.59 | ) | ||||||
|
Net loss from discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.02 | ) | (0.08 | ) | ||||||||
|
Net income (loss)
|
$ | 0.15 | $ | 0.14 | $ | (0.63 | ) | $ | (0.67 | ) | ||||||
|
Diluted shares
|
334,297 | 338,687 | 334,293 | 331,429 | ||||||||||||
|
Dividends per share
|
$ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.44 | ||||||||
|
Comprehensive income (loss):
|
||||||||||||||||
|
Net income (loss)
|
$ | 50,635 | $ | 47,363 | $ | (211,586 | ) | $ | (221,230 | ) | ||||||
|
Change in unrealized gain on
available-for-sale
securities, net
|
(464 | ) | (1,707 | ) | (882 | ) | (4,271 | ) | ||||||||
|
Change in foreign currency translation adjustments
|
1,484 | (3,671 | ) | 13,607 | (14,829 | ) | ||||||||||
|
Comprehensive income (loss)
|
$ | 51,655 | $ | 41,985 | $ | (198,861 | ) | $ | (240,330 | ) | ||||||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
| Nine Months Ended January 31, | 2010 | 2009 | ||||||
|
|
||||||||
|
Net cash used in operating activities
|
$ | (2,729,047 | ) | $ | (2,423,562 | ) | ||
|
Cash flows from investing activities:
|
||||||||
|
Principal repayments on mortgage loans held for investment, net
|
56,114 | 72,150 | ||||||
|
Purchases of property and equipment, net
|
(63,242 | ) | (73,913 | ) | ||||
|
Payments made for business acquisitions, net of cash acquired
|
(10,828 | ) | (290,868 | ) | ||||
|
Proceeds from sale of businesses, net
|
66,760 | 11,556 | ||||||
|
Net cash provided by investing activities of discontinued
operations
|
- | 255,066 | ||||||
|
Other, net
|
22,370 | 12,283 | ||||||
|
Net cash provided by (used in) investing activities
|
71,174 | (13,726 | ) | |||||
|
Cash flows from financing activities:
|
||||||||
|
Repayments of Federal Home Loan Bank borrowings
|
- | (40,000 | ) | |||||
|
Proceeds from Federal Home Loan Bank borrowings
|
- | 15,000 | ||||||
|
Repayments of short-term borrowings
|
(982,774 | ) | (888,983 | ) | ||||
|
Proceeds from short-term borrowings
|
2,657,436 | 2,550,281 | ||||||
|
Customer banking deposits, net
|
1,365,163 | 1,326,584 | ||||||
|
Dividends paid
|
(151,317 | ) | (147,569 | ) | ||||
|
Repurchase of common stock, including shares surrendered
|
(154,201 | ) | (7,387 | ) | ||||
|
Proceeds from exercise of stock options
|
15,678 | 69,891 | ||||||
|
Proceeds from issuance of common stock, net
|
- | 141,450 | ||||||
|
Net cash provided by financing activities of discontinued
operations
|
- | 4,783 | ||||||
|
Other, net
|
(29,434 | ) | 17,544 | |||||
|
Net cash provided by financing activities
|
2,720,551 | 3,041,594 | ||||||
|
Effects of exchange rates on cash
|
10,336 | - | ||||||
|
Net increase in cash and cash equivalents
|
73,014 | 604,306 | ||||||
|
Cash and cash equivalents at beginning of the period
|
1,654,663 | 664,897 | ||||||
|
Cash and cash equivalents at end of the period
|
$ | 1,727,677 | $ | 1,269,203 | ||||
|
Supplementary cash flow data:
|
||||||||
|
Income taxes paid (refunds received), net
|
$ | 269,774 | $ | (13,006 | ) | |||
|
Interest paid on borrowings
|
61,118 | 70,891 | ||||||
|
Interest paid on deposits
|
8,654 | 11,484 | ||||||
|
Transfers of loans to foreclosed assets
|
12,689 | 62,774 | ||||||
See Notes to
Condensed Consolidated Financial Statements
3
Table of Contents
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | (unaudited) |
| 1. | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated balance sheet as of January 31,
2010, the condensed consolidated statements of operations and
comprehensive income (loss) for the three and nine months ended
January 31, 2010 and 2009, and the condensed consolidated
statements of cash flows for the nine months ended
January 31, 2010 and 2009 have been prepared by the
Company, without audit. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position, results of
operations and cash flows at January 31, 2010 and for all
periods presented have been made.
The accompanying condensed consolidated financial statements
include the accounts of the Company and our wholly-owned
subsidiaries. Intercompany transactions and balances have been
eliminated.
“H&R Block,” “the Company,”
“we,” “our” and “us” are used
interchangeably to refer to H&R Block, Inc. or to H&R
Block, Inc. and its subsidiaries, as appropriate to the context.
Certain reclassifications have been made to prior year amounts
to conform to the current year presentation. In addition, we
realigned our segments as discussed in note 14, and
accordingly restated segment disclosures for prior periods.
These changes had no effect on our results of operations or
stockholders’ equity as previously reported.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in our April 30, 2009
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2009 or for
the year then ended, are derived from our April 30, 2009
Annual Report to Shareholders on
Form 10-K.
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, reserves for uncertain tax positions and
related matters. We revise 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.
Seasonality of
Business
Our operating revenues are seasonal in nature with peak revenues
occurring in the months of January through April. Therefore,
results for interim periods are not indicative of results to be
expected for the full year.
Concentrations of
Risk
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 51.6% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
4
Table of Contents
| 2. | Alternative Practice Structure with McGladrey & Pullen LLP |
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. RSM also provides M&P, at market rates of
interest, a working capital credit facility and additional term
financing to make acquisitions. Borrowings under the working
capital credit facility are limited to the lower of the value of
their accounts receivable,
work-in-process
and fixed assets or $125 million.
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
professional employees 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.
The administrative services agreement, financing arrangements,
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 condensed 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
5
Table of Contents
amounts included in our condensed consolidated balance sheet,
and our exposure to economic loss, resulting from our interests
in the various agreements with M&P is as follows at
January 31, 2010:
| (in 000s) | ||||||||
| Carrying Amount | Maximum Exposure to Loss | |||||||
|
Revolving credit facility
|
$ | 60,560 | $ | 125,000 | ||||
|
Term loans
|
27,856 | 27,856 | ||||||
|
Compensation arrangements
|
N/A | (1) | ||||||
|
Administrative Services Agreement
|
N/A | 81,500 | (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. M&P’s anticipated share of future lease costs under existing operating leases total $15.2 million, $14.1 million, $12.7 million, $10.8 million and $28.7 million for the fiscal years ended April 30, 2011, 2012, 2013, 2014 and beyond, respectively. RSM could be exposed to loss for these amounts in the event of default by M&P. |
| 3. | Earnings (Loss) Per Share and Stockholders’ Equity |
Basic and diluted earnings (loss) per share is computed using
the two-class method. See note 15 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 dilutive effect of potential common shares is included in
diluted earnings per share except in those periods with a loss
from continuing operations. Diluted earnings per share excludes
the impact of shares of common stock issuable upon the lapse of
certain restrictions or the exercise of options to purchase
9.6 million shares and 16.0 million shares for the
three months ended January 31, 2010 and 2009, respectively,
as the effect would be antidilutive. 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 16.8 million shares and 20.2 million shares
for the nine months ended January 31, 2010 and 2009,
respectively, as the effect would be antidilutive due to the net
loss from continuing operations during each period.
The computations of basic and diluted loss per share from
continuing operations are as follows:
| (in 000s, except per share amounts) | ||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net income (loss) from continuing operations attributable to
shareholders
|
$ | 53,603 | $ | 66,830 | $ | (203,486 | ) | $ | (194,754 | ) | ||||||
|
Amounts allocated to participating securities (nonvested shares)
|
(203 | ) | (219 | ) | (530 | ) | (613 | ) | ||||||||
|
Net income (loss) from continuing operations attributable to
common shareholders
|
$ | 53,400 | $ | 66,611 | $ | (204,016 | ) | $ | (195,367 | ) | ||||||
|
Basic weighted average common shares
|
332,999 | 337,338 | 334,293 | 331,429 | ||||||||||||
|
Potential dilutive shares
|
1,298 | 1,349 | - | - | ||||||||||||
|
Dilutive weighted average common shares
|
334,297 | 338,687 | 334,293 | 331,429 | ||||||||||||
|
Earnings (loss) per share from continuing operations
attributable to common shareholders:
|
||||||||||||||||
|
Basic
|
$ | 0.16 | $ | 0.20 | $ | (0.61 | ) | $ | (0.59 | ) | ||||||
|
Diluted
|
0.16 | 0.20 | (0.61 | ) | (0.59 | ) | ||||||||||
The weighted average shares outstanding for the three and nine
months ended January 31, 2010 totaled 333.0 million
and 334.3 million, respectively, compared to
337.3 million and 331.4 million for the three and nine
months ended January 31, 2009, respectively.
During the three months ended January 31, 2010, we
purchased and immediately retired 6.8 million shares of our
common stock at a cost of $150.0 million. We may continue
to repurchase and retire common
6
Table of Contents
stock or retire shares held in treasury in the future. The cost
of shares retired during the period was allocated to the
components of stockholders’ equity as follows:
| (in 000s) | ||||
|
Common stock
|
$ | 68 | ||
|
Additional paid-in capital
|
4,095 | |||
|
Retained earnings
|
145,839 | |||
| $ | 150,002 | |||
During the nine months ended January 31, 2010 and 2009, we
issued 2.2 million and 5.7 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the nine months ended January 31, 2010, we acquired
0.2 million shares of our common stock at an aggregate cost
of $4.2 million, and during the nine months ended
January 31, 2009, we acquired 0.4 million shares at an
aggregate cost of $7.4 million. Shares acquired during
these periods represented shares swapped or surrendered to us in
connection with the vesting of nonvested shares and the exercise
of stock options.
During the nine months ended January 31, 2010, we granted
4.6 million stock options and 0.9 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$3.27 for management options and $2.70 for options granted to
our seasonal associates. Stock-based compensation expense
totaled $7.2 million and $19.3 million for the three
and nine months ended January 31, 2010, respectively, and
$7.0 million and $20.0 million for the three and nine
months ended January 31, 2009, respectively. At
January 31, 2010, unrecognized compensation cost for
options totaled $14.0 million, and for nonvested shares and
units totaled $19.8 million.
| 4. | Receivables |
Receivables consist of the following:
| (in 000s) | ||||||||||||
| As of | January 31, 2010 | January 31, 2009 | April 30, 2009 | |||||||||
|
Participation in tax client loans
|
$ | 1,109,795 | $ | 1,122,347 | $ | 29,616 | ||||||
|
Emerald Advance lines of credit
|
667,859 | 688,663 | 64,029 | |||||||||
|
Business Services receivables
|
324,085 | 335,893 | 322,636 | |||||||||
|
Receivables for tax preparation and related fees
|
286,732 | 309,379 | 50,400 | |||||||||
|
Royalties from franchisees
|
82,943 | 80,603 | 8,741 | |||||||||
|
Loans to franchisees
|
70,706 | 66,317 | 48,831 | |||||||||
|
Other
|
111,563 | 125,076 | 117,102 | |||||||||
| 2,653,683 | 2,728,278 | 641,355 | ||||||||||
|
Allowance for doubtful accounts
|
(86,853 | ) | (85,327 | ) | (128,541 | ) | ||||||
| $ | 2,566,830 | $ | 2,642,951 | $ | 512,814 | |||||||
| 5. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of
January 31, 2010 and April 30, 2009 is as follows:
| (dollars in 000s) | ||||||||||||||||
| As of | January 31, 2010 | April 30, 2009 | ||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
|
Adjustable-rate loans
|
$ | 449,758 | 61 | % | $ | 534,943 | 65 | % | ||||||||
|
Fixed-rate loans
|
283,040 | 39 | % | 286,894 | 35 | % | ||||||||||
| 732,798 | 100 | % | 821,837 | 100 | % | |||||||||||
|
Unamortized deferred fees and costs
|
5,628 | 7,135 | ||||||||||||||
|
Less: Allowance for loan losses
|
(97,269 | ) | (84,073 | ) | ||||||||||||
| $ | 641,157 | $ | 744,899 | |||||||||||||
7
Table of Contents
Activity in the allowance for loan losses for the nine months
ended January 31, 2010 and 2009 is as follows:
(in
000s)
| Nine Months Ended January 31, | 2010 | 2009 | ||||||||
|
Balance, beginning of the period
|
$ | 84,073 | $ | 45,401 | ||||||
|
Provision
|
36,050 | 51,953 | ||||||||
|
Recoveries
|
38 | 50 | ||||||||
|
Charge-offs
|
(22,892 | ) | (21,789 | ) | ||||||
|
Balance, end of the period
|
$ | 97,269 | $ | 75,615 | ||||||
Our loan loss reserve as a percent of mortgage loans was 13.27%
at January 31, 2010, compared to 10.23% at April 30,
2009.
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).
TDR loans totaled $153.4 million and $160.7 million at
January 31, 2010 and April 30, 2009, respectively. The
principal balance of impaired loans and real estate owned as of
January 31, 2010 and April 30, 2009 is as follows:
(in
000s)
| As of | January 31, 2010 | April 30, 2009 | ||||||||
|
Impaired loans:
|
||||||||||
|
30 – 59 days
|
$ | 894 | $ | - | ||||||
|
60 – 89 days
|
12,210 | 21,415 | ||||||||
|
90+ days, non-accrual
|
162,391 | 121,685 | ||||||||
|
TDR loans, accrual
|
103,894 | 60,044 | ||||||||
|
TDR loans, non-accrual
|
49,538 | 100,697 | ||||||||
| 328,927 | 303,841 | |||||||||
|
Real estate
owned
(1)
|
31,511 | 44,533 | ||||||||
|
Total non-performing assets
|
$ | 360,438 | $ | 348,374 | ||||||
| (1) | Includes loans accounted for as in-substance foreclosures of $16.4 million and $27.4 million at January 31, 2010 and April 30, 2009, respectively. |
Activity related to our real estate owned is as follows:
(in
000s)
| Nine Months Ended January 31, | 2010 | 2009 | ||||||||
|
Balance, beginning of the period
|
$ | 44,533 | $ | 350 | ||||||
|
Additions
|
12,689 | 62,774 | ||||||||
|
Sales
|
(17,528 | ) | (5,506 | ) | ||||||
|
Impairments
|
(8,183 | ) | (5,699 | ) | ||||||
|
Balance, end of the period
|
$ | 31,511 | $ | 51,919 | ||||||
8
Table of Contents
| 6. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the nine months
ended January 31, 2010 consist of the following:
| (in 000s) | ||||||||||||
| Tax Services | Business Services | Total | ||||||||||
|
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
|
9,378 | - | 9,378 | |||||||||
|
Other
|
(530 | ) | (1,024 | ) | (1,554 | ) | ||||||
|
Impairments
|
- | (15,000 | ) | (15,000 | ) | |||||||
|
Balance at January 31, 2010:
|
||||||||||||
|
Goodwill
|
458,627 | 401,615 | 860,242 | |||||||||
|
Accumulated impairment losses
|
(2,188 | ) | (15,000 | ) | (17,188 | ) | ||||||
| $ | 456,439 | $ | 386,615 | $ | 843,054 | |||||||
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur which could,
more likely than not, reduce the fair value of a reporting
unit’s net assets below its carrying value.
RSM EquiCo, Inc. (RSM EquiCo) is a separate reporting unit
within our Business Services segment with goodwill totaling
approximately $29 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 during the three months ended
January 31, 2010, leaving a remaining goodwill balance of
approximately $14 million. The impairment is included in
selling, general and administrative expenses on the condensed
consolidated statements of operations.
Intangible assets consist of the following:
| (in 000s) | ||||||||||||||||||||||||
| As of | January 31, 2010 | April 30, 2009 | ||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
|
Tax Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
$ | 65,544 | $ | (31,199 | ) | $ | 34,345 | $ | 54,655 | $ | (25,267 | ) | $ | 29,388 | ||||||||||
|
Noncompete agreements
|
22,875 | (21,073 | ) | 1,802 | 23,263 | (20,941 | ) | 2,322 | ||||||||||||||||
|
Reacquired franchise rights
|
223,773 | (5,021 | ) | 218,752 | 229,438 | (1,838 | ) | 227,600 | ||||||||||||||||
|
Franchise agreements
|
19,201 | (1,493 | ) | 17,708 | 19,201 | (533 | ) | 18,668 | ||||||||||||||||
|
Purchased technology
|
14,500 | (5,708 | ) | 8,792 | 12,500 | (4,240 | ) | 8,260 | ||||||||||||||||
|
Trade name
|
1,325 | (350 | ) | 975 | 1,025 | (217 | ) | 808 | ||||||||||||||||
|
Business Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
145,177 | (117,890 | ) | 27,287 | 146,040 | (111,017 | ) | 35,023 | ||||||||||||||||
|
Noncompete agreements
|
33,117 | (21,596 | ) | 11,521 | 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 | ||||||||||||||||
| $ | 583,749 | $ | (211,798 | ) | $ | 371,951 | $ | 577,427 | $ | (191,429 | ) | $ | 385,998 | |||||||||||
Amortization of intangible assets for the three and nine months
ended January 31, 2010 was $7.1 million and
$21.4 million, respectively, and $6.8 million and
$20.4 million, for the three and nine months ended
9
Table of Contents
January 31, 2009, respectively. Estimated amortization of
intangible assets for fiscal years 2010 through 2014 is
$30.1 million, $27.9 million, $24.9 million,
$20.5 million and $17.1 million, respectively.
| 7. | Borrowings |
Borrowings consist of the following:
| (in 000s) | ||||||||||||
| As of | January 31, 2010 | January 31, 2009 | April 30, 2009 | |||||||||
|
Short-term borrowings:
|
||||||||||||
|
Commercial paper
|
$ | 792,594 | $ | - | $ | - | ||||||
|
HSBC credit facility
|
882,500 | 690,485 | - | |||||||||
| $ | 1,675,094 | $ | 690,485 | $ | - | |||||||
|
Long-term borrowings:
|
||||||||||||
|
CLOC borrowings, due August 2010
|
$ | - | $ | 970,813 | $ | - | ||||||
|
Senior Notes, 7.875%, due January 2013
|
599,633 | 599,507 | 599,539 | |||||||||
|
Senior Notes, 5.125%, due October 2014
|
398,882 | 398,648 | 398,706 | |||||||||
|
Other
|
36,861 | 42,709 | 42,659 | |||||||||
| 1,035,376 | 2,011,677 | 1,040,904 | ||||||||||
|
Less: Current portion
|
(2,576 | ) | (9,030 | ) | (8,782 | ) | ||||||
| $ | 1,032,800 | $ | 2,002,647 | $ | 1,032,122 | |||||||
At January 31, 2010, we maintained $1.95 billion in
revolving credit facilities to support commercial paper
issuances and general corporate purposes. These unsecured
committed lines of credit (CLOCs) have a maturity date of August
2010 and carry an annual facility fee, based on our credit
ratings, between six and fifteen basis points. We had no
outstanding balance under the CLOCs as of January 31, 2010.
The CLOCs require, among other things, that we maintain a
minimum net worth of $650.0 million on the last day of any
fiscal quarter. At January 31, 2010, we had net worth of
$936.5 million.
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 is 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. At January 31,
2010, there was $882.5 million outstanding under this
facility.
On March 4, 2010, we entered into a new CLOC agreement to
support commercial paper issuances, general corporate purposes,
or for working capital needs. This facility replaced the CLOCs
discussed above. 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”).
H&R Block Bank (HRB Bank) is a member of the Federal Home
Loan Bank (FHLB) of Des Moines, which extends credit to member
banks based on eligible collateral. At January 31, 2010,
HRB Bank had total FHLB advance capacity of $252.0 million.
There was $100.0 million outstanding on this facility,
leaving remaining availability of $152.0 million. Mortgage
loans held for investment of $487.7 million serve as
eligible collateral and are used to determine total capacity.
| 8. | Income Taxes |
We file a consolidated federal income tax return in the United
States and file tax returns in various state and foreign
jurisdictions. Consolidated tax returns for the years 1999
through 2007 are currently under examination by the Internal
Revenue Service. 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
exam.
During the nine months ended January 31, 2010, we accrued
additional gross interest and penalties of $5.6 million
related to our uncertain tax positions. We had gross
unrecognized tax benefits of
10
Table of Contents
$124.8 million and $124.6 million at January 31,
2010 and April 30, 2009, respectively. The gross
unrecognized tax benefits increased $0.2 million in the
current year, due primarily to interest accrual on positions
related to prior years. Except as noted below, we have
classified the liability for unrecognized tax benefits,
including corresponding accrued interest, as long-term at
January 31, 2010, which is included in other noncurrent
liabilities on the condensed consolidated balance sheets.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the total gross amount of reserves
for previously unrecognized tax benefits may decrease by
approximately $18.2 million within twelve months of
January 31, 2010. This portion of our liability for
unrecognized tax benefits has been classified as current and is
included in accounts payable, accrued expenses and other current
liabilities on the condensed consolidated balance sheets.
| 9. | Interest Income and Expense |
The following table shows the components of operating interest
income and expense of our continuing operations:
| (in 000s) | ||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Interest income:
|
||||||||||||||||
|
Mortgage loans
|
$ | 7,567 | $ | 11,131 | $ | 23,535 | $ | 36,494 | ||||||||
|
Emerald Advance lines of credit
|
36,867 | 43,311 | 39,944 | 44,539 | ||||||||||||
|
Other
|
3,912 | 4,162 | 9,267 | 12,465 | ||||||||||||
| $ | 48,346 | $ | 58,604 | $ | 72,746 | $ | 93,498 | |||||||||
|
Interest expense:
|
||||||||||||||||
|
Borrowings
|
$ | 19,617 | $ | 21,623 | $ | 57,088 | $ | 60,849 | ||||||||
|
Deposits
|
3,340 | 3,719 | 7,673 | 11,646 | ||||||||||||
|
FHLB advances
|
509 | 1,326 | 1,526 | 3,981 | ||||||||||||
| $ | 23,466 | $ | 26,668 | $ | 66,287 | $ | 76,476 | |||||||||
| 10. | Fair Value |
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 at January 31, 2010:
| (dollars in 000s) | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
|
Recurring:
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 40,956 | $ | - | $ | 40,956 | $ | - | ||||||||
|
Non-recurring:
|
||||||||||||||||
|
Impaired mortgage loans held for investment
|
244,757 | - | - | 244,757 | ||||||||||||
| $ | 285,713 | $ | - | $ | 40,956 | $ | 244,757 | |||||||||
|
As a percentage of total assets
|
3.9% | -% | 0.6% | 3.3% | ||||||||||||
There were no significant changes to the unobservable inputs
used in determining the fair values of our level 2 and
level 3 financial assets.
The carrying amounts and estimated fair values of our financial
instruments at January 31, 2010 are as follows:
(in
000s)
|
Carrying
|
Estimated
|
|||||||||
| Amount | Fair Value | |||||||||
|
Mortgage loans held for investment
|
$ | 641,157 | $ | 473,633 | ||||||
|
IRAs and other time deposits
|
747,831 | 747,148 | ||||||||
|
Long-term debt
|
1,035,376 | 1,144,323 | ||||||||
11
Table of Contents
| 11. | Regulatory Requirements |
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis with the Office of Thrift Supervision
(OTS). The following table sets forth HRB Bank’s regulatory
capital requirements at December 31, 2009, as calculated in
the most recently filed TFR:
| (dollars in 000s) | ||||||||||||||||||||||||
|
To Be Well
|
||||||||||||||||||||||||
|
Capitalized
|
||||||||||||||||||||||||
|
For Capital
Adequacy
|
Under Prompt
Corrective
|
|||||||||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
Total risk-based capital
ratio
(1)
|
$ | 374,952 | 33.7% | $ | 89,032 | 8.0% | $ | 111,290 | 10.0% | |||||||||||||||
|
Tier 1 risk-based capital
ratio
(2)
|
$ | 360,715 | 32.4% | N/A | N/A | $ | 66,774 | 6.0% | ||||||||||||||||
|
Tier 1 capital ratio
(leverage)
(3)
|
$ | 360,715 | 16.4% | $ | 264,722 | 12.0% | $ | 110,301 | 5.0% | |||||||||||||||
|
Tangible equity
ratio
(4)
|
$ | 360,715 | 16.4% | $ | 33,090 | 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. |
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
the nine months ended January 31, 2010, and
$245.0 million during the fiscal year ended April 30,
2009.
As of January 31, 2010, HRB Bank’s leverage ratio was
13.7%.
| 12. | Commitments and Contingencies |
Changes in deferred revenue balances related to our Peace of
Mind (POM) program, the current portion of which is included in
accounts payable, accrued expenses and other current liabilities
and the long-term portion of which is included in other
noncurrent liabilities in the condensed consolidated balance
sheets, are as follows:
| (in 000s) | ||||||||
| Nine Months Ended January 31, | 2010 | 2009 | ||||||
|
Balance, beginning of period
|
$ | 146,807 | $ | 140,583 | ||||
|
Amounts deferred for new guarantees issued
|
21,139 | 23,480 | ||||||
|
Revenue recognized on previous deferrals
|
(58,122) | (56,375) | ||||||
|
Balance, end of period
|
$ | 109,824 | $ | 107,688 | ||||
The following table summarizes certain of our other contractual
obligations and commitments:
| (in 000s) | ||||||||
| As of | January 31, 2010 | April 30, 2009 | ||||||
|
Franchise Equity Lines of Credit – undrawn commitment
|
$ | 20,629 | $ | 38,055 | ||||
|
Contingent business acquisition obligations
|
25,990 | 24,165 | ||||||
|
Media advertising purchase obligation
|
39,865 | 45,768 | ||||||
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. 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 are 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
12
Table of Contents
such claims are asserted, we believe the fair value of
guarantees and indemnifications relating to our continuing
operations is not material as of January 31, 2010.
Discontinued
Operations
Sand Canyon Corporation (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.
At January 31, 2010 and April 30, 2009, our loan
repurchase reserve totaled $198.3 million and
$206.6 million, respectively. This liability is included in
accounts payable, accrued expenses and other current liabilities
on our condensed consolidated balance sheets.
| 13. | 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 $31.6 million and
$27.9 million at January 31, 2010 and April 30,
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 as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, “RAL Cases”). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
“Texas RAL Settlement”) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We have settled all but one of the RAL Cases. The sole remaining
RAL Case is a putative class action entitled
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 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
13
Table of Contents
residing in 13 states who from January 1, 1997 to
final judgment (1) were charged a separate fee for POM by
“H&R Block;” (2) were charged a separate fee
for POM by an “H&R Block” entity not licensed to
sell insurance; or (3) had an unsolicited charge for POM
posted to their bills by “H&R Block.” Persons who
received the POM guarantee through an H&R Block Premium
office were excluded from the class. 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. A hearing on
plaintiffs’ motion is set for April 30, 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 and is pending before the same judge that
presided over the Texas RAL Settlement, involves the same
plaintiffs’ attorneys that are involved in the
Marshall
litigation in Illinois, and contains allegations similar to
those in the
Marshall
case. The plaintiff seeks actual
and treble damages, equitable relief, attorney 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) entitled
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. In July 2007,
the Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than H&R Block Financial
Advisors, Inc. (HRBFA) and the claims of common law fraud. The
intermediate appellate court reversed this ruling in January
2009. To avoid the cost and inherent risk associated with
litigation, we reached an agreement to settle this case and the
civil actions described below, subject to approval by the
federal court presiding over the civil actions. Details
regarding the settlement are described below. We believe we have
meritorious defenses to the claims in this case and, if for any
reason the settlement is not approved, we will continue to
defend this case vigorously. There can be no assurances,
however, as to the outcome of this case or its impact on our
consolidated results of operations.
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) entitled
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 Express IRA product 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.
In addition to the New York and Mississippi Attorney General
actions, 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 have been 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 have reached an agreement to settle these cases
and the New York Attorney General action, subject to approval by
the federal court presiding over the Multi-District Litigation.
The settlement would require a minimum payment of
$11.4 million and a maximum payment of $25.4 million.
The actual cost of the settlement would depend on the number of
claims submitted by class members. The federal court granted
preliminary approval of
14
Table of Contents
the settlement on January 25, 2010 and scheduled a final
fairness hearing on May 17, 2010. We believe we have
meritorious defenses to the claims in these cases and, if for
any reason the settlement is not approved, we will continue to
defend them vigorously. We previously recorded a liability for
our best estimate of the expected loss. There can be no
assurances, however, as to the outcome of these cases or their
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 pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. In September 2009, the
appellate court affirmed the dismissal of the securities fraud
class action, but reversed the dismissal of the shareholder
derivative action. We believe we have meritorious defenses to
the claims in the shareholder derivative action and intend to
defend the action vigorously. There can be no assurances,
however, as to its outcome.
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 entitled
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 all RSM EquiCo 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 2, 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.
15
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 entitled 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 M&P for failure to meet generally accepted
auditing standards and failure to detect fraud in financial
statement audits. The complaint also asserts claims for
vicarious liability and alter ego liability against RSM, and for
equitable restitution against H&R Block. The amount claimed
in this case is substantial. We believe we have meritorious
defenses to the claims 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)
entitled
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. 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.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCC’s obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. Because SCC’s
operating results are included in our consolidated financial
statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of
unfavorable outcomes could have a material adverse impact on our
consolidated results of operations.
Other Claims and
Litigation
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, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these
investigations, claims and lawsuits,
16
Table of Contents
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.
In addition to the aforementioned types of matters, we are 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 effect on our
consolidated financial statements.
| 14. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
| (in 000s) | ||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Revenues:
|
||||||||||||||||
|
Tax Services
|
$ | 747,685 | $ | 796,866 | $ | 944,953 | $ | 983,300 | ||||||||
|
Business Services
|
178,482 | 185,177 | 562,702 | 592,873 | ||||||||||||
|
Corporate
|
8,685 | 11,403 | 28,783 | 40,651 | ||||||||||||
| $ | 934,852 | $ | 993,446 | $ | 1,536,438 | $ | 1,616,824 | |||||||||
|
Pretax income (loss):
|
||||||||||||||||
|
Tax Services
|
$ | 131,189 | $ | 133,473 | $ | (212,973 | ) | $ | (218,309 | ) | ||||||
|
Business Services
|
(11,222 | ) | 10,695 | (9,727 | ) | 23,481 | ||||||||||
|
Corporate
|
(22,516 | ) | (42,429 | ) | (103,575 | ) | (143,856 | ) | ||||||||
|
Income (loss) from continuing operations before income taxes
|
$ | 97,451 | $ | 101,739 | $ | (326,275 | ) | $ | (338,684 | ) | ||||||
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.
These segment changes also resulted in the reclassification of
assets between segments. Identifiable assets by reportable
segment at January 31, 2010 are as follows:
| (in 000s) | ||||
|
Tax Services
|
$ | 5,187,631 | ||
|
Business Services
|
835,074 | |||
|
Corporate
|
1,387,424 | |||
| $ | 7,410,129 | |||
| 15. | Accounting Pronouncements |
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
17
Table of Contents
(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. We are currently evaluating the effect of this
guidance on our consolidated financial statements.
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. We are currently
evaluating the effect of this guidance on our consolidated
financial statements.
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 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. We adopted the provisions of
this guidance as of May 1, 2009. The adoption and
retrospective application of this guidance did not change the
current year or prior period earnings per share amounts for the
fiscal quarter. The adoption of this accounting guidance will
reduce earnings per share as previously reported for fiscal year
2009 by $0.01. See additional discussion in note 3.
| 16. | Condensed Consolidating Financial Statements |
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, our 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.
18
Table of Contents
| Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | - | $ | 83,291 | $ | 851,581 | $ | (20 | ) | $ | 934,852 | |||||||||
|
Cost of revenues
|
- | 86,020 | 559,799 | (72 | ) | 645,747 | ||||||||||||||
|
Selling, general and administrative
|
- | 2,881 | 191,800 | (20 | ) | 194,661 | ||||||||||||||
|
Total expenses
|
- | 88,901 | 751,599 | (92 | ) | 840,408 | ||||||||||||||
|
Operating income (loss)
|
- | (5,610 | ) | 99,982 | 72 | 94,444 | ||||||||||||||
|
Other income (expense), net
|
97,451 | (1,609 | ) | 4,688 | (97,523 | ) | 3,007 | |||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
97,451 | (7,219 | ) | 104,670 | (97,451 | ) | 97,451 | |||||||||||||
|
Income taxes (benefit)
|
43,848 | (2,721 | ) | 46,569 | (43,848 | ) | 43,848 | |||||||||||||
|
Net income (loss) from continuing operations
|
53,603 | (4,498 | ) | 58,101 | (53,603 | ) | 53,603 | |||||||||||||
|
Net loss from discontinued operations
|
(2,968 | ) | (2,968 | ) | - | 2,968 | (2,968 | ) | ||||||||||||
|
Net income (loss)
|
$ | 50,635 | $ | (7,466 | ) | $ | 58,101 | $ | (50,635 | ) | $ | 50,635 | ||||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | - | $ | 85,044 | $ | 908,466 | $ | (64 | ) | $ | 993,446 | |||||||||
|
Cost of revenues
|
- | 79,743 | 604,819 | 5 | 684,567 | |||||||||||||||
|
Selling, general and administrative
|
- | 44,125 | 164,791 | (102 | ) | 208,814 | ||||||||||||||
|
Total expenses
|
- | 123,868 | 769,610 | (97 | ) | 893,381 | ||||||||||||||
|
Operating income (loss)
|
- | (38,824 | ) | 138,856 | 33 | 100,065 | ||||||||||||||
|
Other income (expense), net
|
101,739 | (1,968 | ) | 3,610 | (101,707 | ) | 1,674 | |||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
101,739 | (40,792 | ) | 142,466 | (101,674 | ) | 101,739 | |||||||||||||
|
Income taxes (benefit)
|
34,909 | (16,013 | ) | 50,942 | (34,929 | ) | 34,909 | |||||||||||||
|
Net income (loss) from continuing operations
|
66,830 | (24,779 | ) | 91,524 | (66,745 | ) | 66,830 | |||||||||||||
|
Net loss from discontinued operations
|
(19,467 | ) | (20,113 | ) | - | 20,113 | (19,467 | ) | ||||||||||||
|
Net income (loss)
|
$ | 47,363 | $ | (44,892 | ) | $ | 91,524 | $ | (46,632 | ) | $ | 47,363 | ||||||||
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | - | $ | 127,513 | $ | 1,409,001 | $ | (76 | ) | $ | 1,536,438 | |||||||||
|
Cost of revenues
|
- | 177,441 | 1,265,777 | (72 | ) | 1,443,146 | ||||||||||||||
|
Selling, general and administrative
|
- | 7,836 | 419,803 | (76 | ) | 427,563 | ||||||||||||||
|
Total expenses
|
- | 185,277 | 1,685,580 | (148 | ) | 1,870,709 | ||||||||||||||
|
Operating loss
|
- | (57,764 | ) | (276,579 | ) | 72 | (334,271 | ) | ||||||||||||
|
Other income (expense), net
|
(326,275 | ) | (5,449 | ) | 13,517 | 326,203 | 7,996 | |||||||||||||
|
Loss from continuing operations before tax benefit
|
(326,275 | ) | (63,213 | ) | (263,062 | ) | 326,275 | (326,275 | ) | |||||||||||
|
Income tax benefit
|
(122,789 | ) | (25,707 | ) | (97,082 | ) | 122,789 | (122,789 | ) | |||||||||||
|
Net loss from continuing operations
|
(203,486 | ) | (37,506 | ) | (165,980 | ) | 203,486 | (203,486 | ) | |||||||||||
|
Net loss from discontinued operations
|
(8,100 | ) | (8,100 | ) | - | 8,100 | (8,100 | ) | ||||||||||||
|
Net loss
|
$ | (211,586 | ) | $ | (45,606 | ) | $ | (165,980 | ) | $ | 211,586 | $ | (211,586 | ) | ||||||
19
Table of Contents
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | - | $ | 124,145 | $ | 1,495,472 | $ | (2,793 | ) | $ | 1,616,824 | |||||||||
|
Cost of revenues
|
- | 172,187 | 1,317,475 | (10 | ) | 1,489,652 | ||||||||||||||
|
Selling, general and administrative
|
- | 74,669 | 389,669 | (284 | ) | 464,054 | ||||||||||||||
|
Total expenses
|
- | 246,856 | 1,707,144 | (294 | ) | 1,953,706 | ||||||||||||||
|
Operating loss
|
- | (122,711 | ) | (211,672 | ) | (2,499 | ) | (336,882 | ) | |||||||||||
|
Other income (expense), net
|
(338,684 | ) | (5,858 | ) | 4,024 | 338,716 | (1,802 | ) | ||||||||||||
|
Loss from continuing operations before tax benefit
|
(338,684 | ) | (128,569 | ) | (207,648 | ) | 336,217 | (338,684 | ) | |||||||||||
|
Income tax benefit
|
(143,930 | ) | (50,553 | ) | (92,329 | ) | 142,882 | (143,930 | ) | |||||||||||
|
Net loss from continuing operations
|
(194,754 | ) | (78,016 | ) | (115,319 | ) | 193,335 | (194,754 | ) | |||||||||||
|
Net loss from discontinued operations
|
(26,476 | ) | (28,577 | ) | - | 28,577 | (26,476 | ) | ||||||||||||
|
Net loss
|
$ | (221,230 | ) | $ | (106,593 | ) | $ | (115,319 | ) | $ | 221,912 | $ | (221,230 | ) | ||||||
| Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Cash & cash equivalents
|
$ | - | $ | 1,333,879 | $ | 400,963 | $ | (7,165 | ) | $ | 1,727,677 | |||||||||
|
Cash & cash equivalents – restricted
|
- | 61,893 | 23,420 | - | 85,313 | |||||||||||||||
|
Receivables, net
|
8 | 1,826,437 | 740,385 | - | 2,566,830 | |||||||||||||||
|
Mortgage loans held for investment
|
- | 641,157 | - | - | 641,157 | |||||||||||||||
|
Intangible assets and goodwill, net
|
- | - | 1,215,005 | - | 1,215,005 | |||||||||||||||
|
Other assets
|
2,780,404 | 362,303 | 811,844 | (2,780,404 | ) | 1,174,147 | ||||||||||||||
|
Total assets
|
$ | 2,780,412 | $ | 4,225,669 | $ | 3,191,617 | $ | (2,787,569 | ) | $ | 7,410,129 | |||||||||
|
Short-term borrowings
|
$ | - | $ | 1,675,094 | $ | - | $ | - | $ | 1,675,094 | ||||||||||
|
Customer deposits
|
- | 2,227,666 | - | (7,165 | ) | 2,220,501 | ||||||||||||||
|
Long-term debt
|
- | 998,515 | 34,285 | - | 1,032,800 | |||||||||||||||
|
FHLB borrowings
|
- | 100,000 | - | - | 100,000 | |||||||||||||||
|
Other liabilities
|
65 | 97,990 | 1,347,212 | - | 1,445,267 | |||||||||||||||
|
Net intercompany advances
|
1,843,880 | (981,063 | ) | (862,817 | ) | - | - | |||||||||||||
|
Stockholders’ equity
|
936,467 | 107,467 | 2,672,937 | (2,780,404 | ) | 936,467 | ||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,780,412 | $ | 4,225,669 | $ | 3,191,617 | $ | (2,787,569 | ) | $ | 7,410,129 | |||||||||
|
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
|
- | 744,899 | - | - | 744,899 | |||||||||||||||
|
Intangible assets and goodwill, net
|
- | - | 1,236,228 | - | 1,236,228 | |||||||||||||||
|
Other assets
|
3,289,435 | 308,481 | 850,981 | (3,289,435 | ) | 1,159,462 | ||||||||||||||
|
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 | |||||||||
20
Table of Contents
| Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 11,590 | $ | (1,868,572 | ) | $ | (872,065 | ) | $ | - | $ | (2,729,047 | ) | |||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
- | 56,114 | - | - | 56,114 | |||||||||||||||
|
Purchase property & equipment
|
- | 616 | (63,858 | ) | - | (63,242 | ) | |||||||||||||
|
Payments made for business acquisitions, net of cash acquired
|
- | - | (10,828 | ) | - | (10,828 | ) | |||||||||||||
|
Proceeds from sale of businesses, net
|
- | - | 66,760 | - | 66,760 | |||||||||||||||
|
Net intercompany advances
|
276,743 | - | - | (276,743 | ) | - | ||||||||||||||
|
Other, net
|
- | 23,989 | (1,619 | ) | - | 22,370 | ||||||||||||||
|
Net cash provided by (used in) investing activities
|
276,743 | 80,719 | (9,545 | ) | (276,743 | ) | 71,174 | |||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Repayments of short-term borrowings
|
- | (982,774 | ) | - | - | (982,774 | ) | |||||||||||||
|
Proceeds from short-term borrowings
|
- | 2,657,436 | - | - | 2,657,436 | |||||||||||||||
|
Customer banking deposits
|
- | 1,366,106 | - | (943 | ) | 1,365,163 | ||||||||||||||
|
Dividends paid
|
(151,317 | ) | - | - | - | (151,317 | ) | |||||||||||||
|
Repurchase of common stock
|
(154,201 | ) | - | - | - | (154,201 | ) | |||||||||||||
|
Proceeds from stock options
|
15,678 | - | - | - | 15,678 | |||||||||||||||
|
Net intercompany advances
|
- | (151,334 | ) | (125,409 | ) | 276,743 | - | |||||||||||||
|
Other, net
|
1,507 | (9,052 | ) | (21,889 | ) | - | (29,434 | ) | ||||||||||||
|
Net cash provided by (used in) financing activities
|
(288,333 | ) | 2,880,382 | (147,298 | ) | 275,800 | 2,720,551 | |||||||||||||
|
Effects of exchange rates on cash
|
- | - | 10,336 | - | 10,336 | |||||||||||||||
|
Net increase (decrease) in cash
|
- | 1,092,529 | (1,018,572 | ) | (943 | ) | 73,014 | |||||||||||||
|
Cash – beginning of period
|
- | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||
|
Cash – end of period
|
$ | - | $ | 1,333,879 | $ | 400,963 | $ | (7,165 | ) | $ | 1,727,677 | |||||||||
21
Table of Contents
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash used in operating activities:
|
$ | (3,360 | ) | $ | (1,868,531 | ) | $ | (551,671 | ) | $ | - | $ | (2,423,562 | ) | ||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
- | 72,150 | - | - | 72,150 | |||||||||||||||
|
Purchase property & equipment
|
- | (5,366 | ) | (68,547 | ) | - | (73,913 | ) | ||||||||||||
|
Payments made for business acquisitions, net of cash acquired
|
- | - | (290,868 | ) | - | (290,868 | ) | |||||||||||||
|
Proceeds from sale of businesses, net
|
- | - | 11,556 | - | 11,556 | |||||||||||||||
|
Net intercompany advances
|
(71,691 | ) | - | - | 71,691 | - | ||||||||||||||
|
Investing cash flows of discontinued operations
|
- | 255,066 | - | - | 255,066 | |||||||||||||||
|
Other, net
|
- | 7,483 | 4,800 | - | 12,283 | |||||||||||||||
|
Net cash provided by (used in) investing activities
|
(71,691 | ) | 329,333 | (343,059 | ) | 71,691 | (13,726 | ) | ||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Repayments of short-term borrowings
|
- | (928,983 | ) | - | - | (928,983 | ) | |||||||||||||
|
Proceeds from short-term borrowings
|
- | 2,565,281 | - | - | 2,565,281 | |||||||||||||||
|
Customer banking deposits
|
- | 1,326,275 | - | 309 | 1,326,584 | |||||||||||||||
|
Dividends paid
|
(147,569 | ) | - | - | - | (147,569 | ) | |||||||||||||
|
Acquisition of treasury shares
|
(7,387 | ) | - | - | - | (7,387 | ) | |||||||||||||
|
Proceeds from stock options
|
69,891 | - | - | - | 69,891 | |||||||||||||||
|
Proceeds from issuance of stock
|
141,450 | - | - | - | 141,450 | |||||||||||||||
|
Net intercompany advances
|
- | (448,639 | ) | 520,330 | (71,691 | ) | - | |||||||||||||
|
Financing cash flows of discontinued operations
|
- | 4,783 | - | - | 4,783 | |||||||||||||||
|
Other, net
|
18,666 | - | (1,122 | ) | - | 17,544 | ||||||||||||||
|
Net cash provided by financing activities
|
75,051 | 2,518,717 | 519,208 | (71,382 | ) | 3,041,594 | ||||||||||||||
|
Net increase (decrease) in cash
|
- | 979,519 | (375,522 | ) | 309 | 604,306 | ||||||||||||||
|
Cash – beginning of period
|
- | 34,611 | 630,933 | (647 | ) | 664,897 | ||||||||||||||
|
Cash – end of period
|
$ | - | $ | 1,014,130 | $ | 255,411 | $ | (338 | ) | $ | 1,269,203 | |||||||||
22
Table of Contents
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF
OPERATIONS
H&R Block provides tax services, banking services and
business and consulting services. Our Tax Services segment
provides income tax return preparation services, electronic
filing services and other services and products related to
income tax return preparation to the general public primarily in
the United States, 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), which was previously reported in our Consumer
Financial Services segment. Our Business Services segment
consists of RSM McGladrey, Inc. (RSM), a national accounting,
tax and business consulting firm primarily serving mid-sized
businesses. 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. All periods presented reflect our new segment
reporting structure.
Recent
Events.
RSM and McGladrey & Pullen LLP
(M&P), an independent registered public accounting firm,
collaborate to provide accounting, 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.
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.
See additional discussion of the new agreements in note 2
to the condensed consolidated financial statements.
23
Table of Contents
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses – retail, online and software.
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 (U.S. only) | ||||||||
| Three Months Ended January 31, | 2010 | 2009 | ||||||
|
Tax returns prepared (in 000s):
|
||||||||
|
Company-owned operations
|
2,292 | 2,579 | ||||||
|
Franchise
operations
(1)
|
1,347 | 1,339 | ||||||
|
Total retail operations
|
3,639 | 3,918 | ||||||
|
Software
|
635 | 780 | ||||||
|
Online
|
719 | 643 | ||||||
|
Free File Alliance
|
201 | 178 | ||||||
|
Total digital tax solutions
|
1,555 | 1,601 | ||||||
| 5,194 | 5,519 | |||||||
|
Net average fee per tax return
prepared:
(2)
|
||||||||
|
Company-owned operations
|
$ | 205.06 | $ | 202.07 | ||||
|
Franchise operations
|
181.20 | 171.67 | ||||||
| $ | 196.23 | $ | 191.68 | |||||
|
“Same-office” tax returns prepared (in
000s):
(3)
|
||||||||
|
Company-owned operations
|
2,249 | 2,335 | ||||||
|
Franchise operations
|
1,292 | 1,376 | ||||||
|
Total retail operations
|
3,541 | 3,711 | ||||||
|
Offices:
|
||||||||
|
Company-owned
|
6,431 | 7,029 | ||||||
|
Company-owned shared
locations
(4)
|
760 | 1,542 | ||||||
|
Total company-owned offices
|
7,191 | 8,571 | ||||||
|
Franchise
|
3,909 | 3,565 | ||||||
|
Franchise shared
locations
(4)
|
406 | 787 | ||||||
|
Total franchise offices
|
4,315 | 4,352 | ||||||
| 11,506 | 12,923 | |||||||
| (1) | Fiscal year 2009 returns include approximately 112,000 returns prepared in offices we sold or franchised in fiscal year 2010. Tax returns prepared in these offices are presented within company-owned operations for fiscal year 2009. | |
| (2) | Calculated as net tax preparation fees divided by retail tax returns prepared. | |
| (3) | Same-office returns represent returns prepared at 6,978 company-owned and 3,871 franchise offices open in both fiscal year 2010 and 2009. Prior year numbers have been reclassified between company-owned and franchise operations for offices which were refranchised during either year. | |
| (4) | Shared locations include offices located within Sears and other third-party businesses. In the prior year, these locations also included offices within Wal-Mart stores. |
24
Table of Contents
| Tax Services – Operating Results | (in 000s) | |||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Tax preparation fees
|
$ | 485,277 | $ | 534,389 | $ | 578,207 | $ | 620,728 | ||||||||
|
Royalties
|
75,174 | 72,980 | 84,836 | 81,963 | ||||||||||||
|
Loan participation and related fees
|
38,163 | 36,766 | 38,463 | 36,123 | ||||||||||||
|
Interest income on Emerald Advance
|
36,867 | 43,311 | 39,944 | 44,539 | ||||||||||||
|
Fees from Emerald Card activities
|
21,814 | 23,678 | 42,933 | 42,328 | ||||||||||||
|
Fees from Peace of Mind guarantees
|
11,079 | 10,549 | 58,122 | 56,375 | ||||||||||||
|
Other
|
79,311 | 75,193 | 102,448 | 101,244 | ||||||||||||
|
Total revenues
|
747,685 | 796,866 | 944,953 | 983,300 | ||||||||||||
|
Compensation and benefits:
|
||||||||||||||||
|
Field wages
|
208,466 | 217,927 | 302,783 | 313,831 | ||||||||||||
|
Other wages
|
29,634 | 32,822 | 88,355 | 89,704 | ||||||||||||
|
Benefits and other compensation
|
44,023 | 51,044 | 85,134 | 84,766 | ||||||||||||
| 282,123 | 301,793 | 476,272 | 488,301 | |||||||||||||
|
Occupancy and equipment
|
98,625 | 100,981 | 279,568 | 276,737 | ||||||||||||
|
Marketing and advertising
|
87,670 | 90,083 | 109,770 | 110,023 | ||||||||||||
|
Bad debt
|
56,762 | 62,062 | 59,034 | 63,614 | ||||||||||||
|
Depreciation and amortization
|
23,226 | 20,492 | 67,952 | 57,359 | ||||||||||||
|
Supplies
|
15,409 | 18,729 | 23,255 | 27,657 | ||||||||||||
|
Other
|
64,676 | 69,253 | 155,659 | 177,918 | ||||||||||||
|
Gains on sale of tax offices
|
(11,995 | ) | - | (13,584 | ) | - | ||||||||||
|
Total expenses
|
616,496 | 663,393 | 1,157,926 | 1,201,609 | ||||||||||||
|
Pretax income (loss)
|
$ | 131,189 | $ | 133,473 | $ | (212,973 | ) | $ | (218,309 | ) | ||||||
Three months
ended January 31, 2010 compared to January 31,
2009
Tax Services’ revenues decreased $49.2 million, or
6.2%, for the three months ended January 31, 2010 from the
prior year. Tax preparation fees decreased $49.1 million,
or 9.2%, primarily due to an 11.1% decrease in U.S. retail
tax returns prepared in company-owned offices, partially offset
by a 1.5% increase in the net average fee per U.S. retail
tax return. The decrease in U.S. retail tax returns
prepared in company-owned offices is primarily due to the
following factors:
| • | During fiscal year 2010, we sold more than 270 tax offices to franchisees. Approximately 112,000 tax returns prepared in company-owned offices in fiscal year 2009 were prepared by franchisees in 2010. Adjusting for these returns, the decline in tax returns prepared in company-owned offices was 7.1% from fiscal 2009 to 2010. | |
| • | We believe the decline of 7.1% is primarily due to a decline in returns filed with the IRS as well as a 1-2% shift (through February) from assisted tax preparation to do-it-yourself alternatives. We estimate that IRS filings to date are down approximately 4 to 5 percent through February 28, and believe these declines are principally attributable to difficult economic conditions in the U.S., in particular, the extended duration of high unemployment levels. | |
| • | In addition, during fiscal year 2010, 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. |
The business of our Tax Services segment is highly seasonal and
results for our third quarter represent only a small portion of
the tax season. Third quarter results may not be indicative of
the results we expect for the entire fiscal year. Tax returns
prepared in company-owned and franchise offices through
February 28, 2010 decreased 9.4% from the prior year,
compared with a 7.1% decline through January 31.
Royalties increased $2.2 million, or 3.0%, due to the
conversion of more than 270 company-owned offices into
franchises, partially offset by a decline in tax returns
prepared in existing franchise offices.
Loan participation and related fees increased $1.4 million,
or 3.8%, as lower loan volumes were offset by higher average
loan amounts.
25
Table of Contents
Interest income on Emerald Advance lines of credit decreased
$6.4 million, or 14.9%. 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, and both
prior and new clients in fiscal year 2009.
Total expenses decreased $46.9 million, or 7.1%, for the
three months ended January 31, 2010. Total compensation and
benefits decreased $19.7 million, or 6.5%, primarily as a
result of lower commission-based wages due to the decline in the
number of tax returns prepared. Bad debt expense decreased
$5.3 million, or 8.5%, primarily as a result of lower
Emerald Advance lines of credit and RAL volumes, and more
restrictive underwriting criteria. Other expenses decreased
$4.6 million, or 6.6%, primarily as a result of lower legal
expenses. During the three months ended January 31, 2010 we
recognized gains of $12.0 million on the sale of certain
company-owned offices to franchisees. Gains totaling
$45.4 million were deferred at January 31, 2010 and
are expected to be recognized principally in the fourth quarter
of fiscal year 2010.
The pretax income for the three months ended January 31,
2010 and 2009 was $131.2 million and $133.5 million,
respectively.
Nine months ended
January 31, 2010 compared to January 31,
2009
Tax Services’ revenues decreased $38.3 million, or
3.9%, for the nine months ended January 31, 2010 from the
prior year. Tax preparation fees decreased $42.5 million,
or 6.9%, primarily due to a 9.7% decrease in U.S. retail
tax returns prepared in company-owned offices, offset by a 1.5%
increase in the net average fee per U.S. retail tax return.
Royalties increased $2.9 million, or 3.5%, primarily due to
the conversion of more than 270 company-owned offices into
franchises, partially offset by a decline in tax returns
prepared in existing franchise offices.
Loan participation and related fees increased $2.3 million,
or 6.5%, as lower loan volumes were offset by higher average
loan amounts.
Interest income on Emerald Advance lines of credit decreased
$4.6 million, or 10.3%. This decline was primarily a result
of lower loan volumes due to these lines of credit only being
offered to prior year tax clients.
Total expenses decreased $43.7 million, or 3.6%, for the
nine months ended January 31, 2010. Total compensation and
benefits decreased $12.0 million, or 2.5%, primarily as a
result of lower commission-based wages due to the decline in the
number of tax returns prepared. Bad debt expense decreased
$4.6 million, or 7.2%, primarily as a result of lower
volumes of Emerald Advance and RAL products. Depreciation and
amortization expenses increased $10.6 million, or 18.5%, as
a result of amortization of intangible assets related to the
November 2008 acquisition of our last major independent
franchise operator. Other expenses decreased $22.3 million,
or 12.5% primarily as a result of lower legal expenses. In the
current year, we recognized gains of $13.6 million on the
sale of certain company-owned offices to franchisees.
The pretax loss for the nine months ended January 31, 2010
and 2009 was $213.0 million and $218.3 million,
respectively.
26
Table of Contents
BUSINESS
SERVICES
This segment offers accounting, tax and consulting services to
middle-market companies.
| Business Services – Operating Results | (in 000s) | |||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Tax services
|
$ | 72,979 | $ | 78,267 | $ | 251,272 | $ | 265,137 | ||||||||
|
Business consulting
|
68,887 | 60,366 | 192,032 | 187,123 | ||||||||||||
|
Accounting services
|
11,877 | 13,904 | 35,926 | 40,285 | ||||||||||||
|
Capital markets
|
3,225 | 4,762 | 5,754 | 15,545 | ||||||||||||
|
Reimbursed expenses
|
5,658 | 5,883 | 16,011 | 14,418 | ||||||||||||
|
Other
|
15,856 | 21,995 | 61,707 | 70,365 | ||||||||||||
|
Total revenues
|
178,482 | 185,177 | 562,702 | 592,873 | ||||||||||||
|
Compensation and benefits
|
116,606 | 121,983 | 400,295 | 406,272 | ||||||||||||
|
Occupancy
|
14,678 | 12,456 | 33,601 | 37,590 | ||||||||||||
|
Depreciation
|
5,224 | 5,678 | 16,054 | 16,807 | ||||||||||||
|
Marketing and advertising
|
4,733 | 6,255 | 14,287 | 18,461 | ||||||||||||
|
Amortization of intangible assets
|
2,896 | 3,177 | 8,803 | 9,946 | ||||||||||||
|
Other
|
45,567 | 24,933 | 99,389 | 80,316 | ||||||||||||
|
Total expenses
|
189,704 | 174,482 | 572,429 | 569,392 | ||||||||||||
|
Pretax income (loss)
|
$ | (11,222 | ) | $ | 10,695 | $ | (9,727 | ) | $ | 23,481 | ||||||
Three months
ended January 31, 2010 compared to January 31,
2009
Business Services’ revenues for the three months ended
January 31, 2010 decreased $6.7 million, or 3.6%, from
the prior year. Revenues from tax and accounting services
decreased $5.3 million and $2.0 million, respectively,
from the prior year primarily due to lower rates and fewer
chargeable hours resulting from reduced client demand given the
current economic conditions. Business consulting revenues
increased $8.5 million, or 14.1%, primarily due to a large
engagement in our operational consulting practice.
Total expenses increased $15.2 million, or 8.7%, from the
prior year, primarily due to a $15.0 million impairment of
goodwill at RSM EquiCo, Inc. (RSM EquiCo), as discussed in
note 6 to the condensed consolidated financial statements.
Compensation and benefits decreased $5.4 million, or 4.4%,
primarily due to headcount reductions driven by reduced client
demand. Other expenses increased $20.6 million over the
prior year primarily due to the impairment of goodwill.
The pretax loss for the three months ended January 31, 2010
was $11.2 million compared to income of $10.7 million
in the prior year.
Nine months ended
January 31, 2010 compared to January 31,
2009
Business Services’ revenues for the nine months ended
January 31, 2010 decreased $30.2 million, or 5.1%,
from the prior year. Revenues from tax and accounting services
decreased $13.9 million and $4.4 million,
respectively, from the prior year primarily due to lower
chargeable hours resulting from reduced client demand given the
current economic conditions. Business consulting revenues
increased $4.9 million, or 2.6%, primarily due to higher
chargeable hours compared to the prior year.
Capital markets revenues decreased $9.8 million, or 63.0%,
primarily due to a 47.6% decline in the number of transactions
closed in the current year due to the continued weak economic
conditions.
Total expenses increased $3.0 million, or 0.5%, from the
prior year, as a $15.0 million impairment of goodwill was
partially offset by operating cost reductions. Compensation and
benefits decreased $6.0 million, or 1.5%, primarily due to
headcount reductions driven by reduced client demand. Marketing
and advertising decreased $4.2 million, or 22.6%, primarily
due to fewer sponsorships and lower advertising costs. Other
expenses increased $19.1 million over the prior year
primarily due to the impairment of goodwill.
The pretax loss for the nine months ended January 31, 2010
was $9.7 million compared to income of $23.5 million
in the prior year.
27
Table of Contents
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) | |||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Interest income on mortgage loans held for investment
|
$ | 7,567 | $ | 11,131 | $ | 23,535 | $ | 36,494 | ||||||||
|
Other
|
1,118 | 272 | 5,248 | 4,157 | ||||||||||||
|
Total revenues
|
8,685 | 11,403 | 28,783 | 40,651 | ||||||||||||
|
Interest expense
|
19,762 | 24,431 | 58,636 | 70,805 | ||||||||||||
|
Provision for loan losses
|
9,050 | 13,870 | 36,050 | 51,953 | ||||||||||||
|
Compensation and benefits
|
11,805 | 16,665 | 38,592 | 41,856 | ||||||||||||
|
Other, net
|
(9,416 | ) | (1,134 | ) | (920 | ) | 19,893 | |||||||||
|
Total expenses
|
31,201 | 53,832 | 132,358 | 184,507 | ||||||||||||
|
Pretax loss
|
$ | (22,516 | ) | $ | (42,429 | ) | $ | (103,575 | ) | $ | (143,856 | ) | ||||
Three months
ended January 31, 2010 compared to January 31,
2009
Interest income earned on mortgage loans held for investment for
the three months ended January 31, 2010 decreased
$3.6 million, or 32.0%, from the prior year, primarily as a
result of non-performing loans, declining loan balances and
lower interest rates on modified loans. Interest expense
declined $4.7 million, or 19.1% due to lower funding costs
related to our mortgage loan portfolio and lower corporate
borrowings. Our provision for loan losses decreased
$4.8 million from the prior year as a result of declining
rates of new delinquencies in our static loan portfolio,
partially offset by higher loss severity. See related discussion
below under “Mortgage Loans Held for Investment.”
During the quarter we transferred liabilities relating to
previously retained insurance risk to a third-party, and
recorded a gain totaling $9.5 million, which is reported
above as a reduction of other expenses, net.
Nine months ended
January 31, 2010 compared to January 31,
2009
Interest income earned on mortgage loans held for investment for
the nine months ended January 31, 2010 declined
$13.0 million, or 35.5%, from the prior year, primarily as
a result of non-performing loans and declining loan balances and
lower interest rates on modified loans. Interest expense
declined $12.2 million, or 17.2%, due to lower corporate
borrowings and lower funding costs related to our mortgage loan
portfolio. Our provision for loan losses decreased
$15.9 million from the prior year. See related discussion
below under “Mortgage Loans Held for Investment.”
Other expenses, net declined $20.8 million primarily due to
impairments of residual interests totaling $4.0 million
recorded in the prior year, compared with gains of
$6.4 million in the current year and a gain of
$9.9 million recorded on the transfer of insurance
liabilities to a third-party.
Income
Taxes
Our effective tax rate for continuing operations was 45.0% and
34.3% for the three months ended January 31, 2010 and 2009,
respectively. The increase in the quarterly rate was primarily
due to an increase in income tax reserves and adjustments to the
annual estimated tax rate.
Our effective tax rate for continuing operations was 37.6% and
42.5% for the nine months ended January 31, 2010 and 2009,
respectively. The decline from the prior year was primarily due
to discrete tax reserves in fiscal year 2009, and a decrease in
non-deductible losses from investments in company-owned life
insurance assets. We expect our effective tax rate for full
fiscal year 2010 to be approximately 39%.
28
Table of Contents
Mortgage Loans
Held for Investment
Mortgage loans held for investment include loans originated by
our affiliate, Sand Canyon Corporation (SCC), and purchased by
HRB Bank totaling $465.4 million, or 63.5% of the total
loan portfolio at January 31, 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 $267.4 million and is
characteristic of a prime loan portfolio, and we believe subject
to a lower loss exposure.
Detail of our mortgage loans held for investment and the related
allowance at January 31, 2010 and April 30, 2009 is as
follows:
| (dollars in 000s) | ||||||||||||||||
|
Outstanding
|
Loan Loss Allowance |
% 30+ Days
|
||||||||||||||
| Principal Balance | Amount | % of Principal | Past Due | |||||||||||||
|
As of January 31, 2010:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 465,426 | $ | 87,216 | 18.74 | % | 37.04 | % | ||||||||
|
All other
|
267,372 | 10,053 | 3.76 | % | 9.01 | % | ||||||||||
| $ | 732,798 | $ | 97,269 | 13.27 | % | 27.06 | % | |||||||||
|
As of April 30, 2009:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 531,233 | $ | 78,067 | 14.70 | % | 28.74 | % | ||||||||
|
All other
|
290,604 | 6,006 | 2.07 | % | 4.44 | % | ||||||||||
| $ | 821,837 | $ | 84,073 | 10.23 | % | 20.23 | % | |||||||||
We recorded provisions for loan losses of $9.1 million and
$36.1 million during the three and nine months ended
January 31, 2010, respectively, compared to
$13.9 million and $52.0 million during the three and
nine months ended January 31, 2009, respectively. Our
allowance for loan losses as a percent of mortgage loans was
13.27%, or $97.3 million, at January 31, 2010,
compared to 10.23%, 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.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets and condensed consolidated
statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES
AND LIQUIDITY
– Our sources of capital
include cash from operations, issuances of common stock and
debt. We use capital primarily to fund working capital, pay
dividends, repurchase 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
commercial paper program, unsecured committed lines of credit
(CLOCs) and seasonal CLOC used to purchase RAL participations,
we believe, that in the absence of any unexpected developments,
our existing sources of capital at January 31, 2010 are
sufficient to meet our operating needs.
CASH FROM
OPERATING ACTIVITIES
– Cash used in
operations totaled $2.7 billion for the nine months ended
January 31, 2010, compared with $2.4 billion for the
same period last year. The increase was primarily due to
increases in income tax payments made during the current year.
CASH FROM
INVESTING ACTIVITIES
– Cash provided by
investing activities totaled $71.2 million for the nine
months ended January 31, 2010, compared to a use of
$13.7 million for the same period last year, primarily as a
result of lower payments for business acquisitions, partially
offset by a decline in proceeds from the sale of businesses in
the current year. In the prior year, we received cash proceeds
of $304.0 million from the sale of H&R Block Financial
Advisors, Inc. (HRBFA).
Mortgage Loans
Held for Investment.
We received net payments of
$56.1 million and $72.2 million on our mortgage loans
held for investment for the first nine months of fiscal years
2010 and 2009, respectively. Cash payments declined primarily
due to non-performing loans and continued run-off of our
portfolio.
Purchases of
Property and Equipment.
Total cash paid for property
and equipment was $63.2 million and $73.9 million for
the first nine months of fiscal years 2010 and 2009,
respectively.
29
Table of Contents
Business
Acquisitions.
Total cash paid for acquisitions was
$10.8 million and $290.9 million for the first nine
months of fiscal years 2010 and 2009, 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 the first nine months of fiscal year
2010, we sold more than 270 tax offices to franchisees for cash
proceeds of $66.3 million. In fiscal year 2009, we sold
certain tax offices to franchisees for cash proceeds of
$9.6 million and sold our financial advisor business for
proceeds of $304.0 million.
CASH FROM
FINANCING ACTIVITIES
– Cash provided by
financing activities totaled $2.7 billion for the first
nine months of fiscal year 2010, compared to $3.0 billion
for the same period last year.
Short-Term
Borrowings.
We had commercial paper borrowings of
$792.6 million outstanding at January 31, 2010. In the
same period last year, we borrowed a net $970.8 million on
our CLOCs to fund our off-season working capital needs. We also
had other short-term borrowings of $882.5 million and
$690.5 million outstanding as of January 31, 2010 and
2009, respectively, to fund our participation interests in RALs.
See additional discussion under “Borrowings” below.
Customer Banking
Deposits.
Customer banking deposits provided cash of
$1.4 billion for the nine months ended January 31,
2010 compared to $1.3 billion in same period last year. We
utilize cash provided by deposit balances as a funding source
for our Emerald Advance lines of credit during the tax season.
Dividends.
We have consistently paid quarterly dividends. Dividends paid
totaled $151.3 million and $147.6 million for the nine
months ended January 31, 2010 and 2009, respectively.
Issuances of
Common Stock.
Proceeds from the issuance of common
stock resulting from stock compensation plans totaled
$15.7 million and $69.9 million for the nine months
ended January 31, 2010 and 2009, respectively. This decline
is due to a reduction in stock option exercises and the related
tax benefits.
In the prior year, 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
$141.5 million.
Repurchase and
Retirement of Common Stock.
During the three months
ended January 31, 2010, we purchased and immediately
retired 6.8 million shares of our common stock at a cost of
$150.0 million. We may continue to repurchase and retire
common stock or retire treasury stock in the future.
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 the nine months ended
January 31, 2010. Capital contributions totaling
$245.0 million were made by BFC during the fiscal year
ended April 30, 2009.
Historically, capital contributions by BFC have been repaid as a
return of capital by HRB Bank as capital requirements decline.
During the fiscal year ended April 30, 2009, HRB Bank
returned capital of $235.0 million. 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.
BORROWINGS
At January 31, 2010, we maintained $1.95 billion in
revolving credit facilities to support commercial paper
issuances and general corporate purposes. The CLOCs have a
maturity date of August 2010 and carry an annual facility fee,
based on our credit ratings, between six and fifteen basis
points. We had no outstanding balance under the CLOCs as of
January 31, 2010. The CLOCs require, among other things,
that we maintain a minimum net worth of $650.0 million on
the last day of any fiscal quarter. At January 31, 2010, we
had net worth of $936.5 million.
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 is 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. At January 31,
2010, there was $882.5 million outstanding under this
facility.
On March 4, 2010, we entered into a new CLOC agreement to
support commercial paper issuances, general corporate purposes,
or for working capital needs. This facility replaced the CLOCs
discussed above. The new facility provides funding up to
$1.7 billion and matures July 31, 2013. The new
facility bears interest at an
30
Table of Contents
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”).
There have been no other material changes in our borrowings or
debt ratings from those reported at April 30, 2009 in our
Annual Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual
obligations and commercial commitments from those reported at
April 30, 2009 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
There have been no material changes in our regulatory
environment from those reported at April 30, 2009 in our
Annual Report on
Form 10-K.
FORWARD-LOOKING
INFORMATION
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 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.
There have been no material changes in our market risks from
those reported at April 30, 2009 in our Annual Report on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. 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 that our
disclosure controls and procedures were effective as of the end
of the period covered by this Quarterly Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
31
Table of Contents
The information below should be read in conjunction with the
information included in note 13 to our condensed
consolidated financial statements.
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, “RAL Cases”). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
“Texas RAL Settlement”) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We have settled all but one of the RAL Cases. The sole remaining
RAL Case is a putative class action entitled
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 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 from January 1, 1997 to final
judgment (1) were charged a separate fee for POM by
“H&R Block;” (2) were charged a separate fee
for POM by an “H&R Block” entity not licensed to
sell insurance; or (3) had an unsolicited charge for POM
posted to their bills by “H&R Block.” Persons who
received the POM guarantee through an H&R Block Premium
office were excluded from the class. 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. A hearing on
plaintiffs’ motion is set for April 30, 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
32
Table of Contents
District Court of Kleberg County, Texas and is pending before
the same judge that presided over the Texas RAL Settlement,
involves the same plaintiffs’ attorneys that are involved
in the
Marshall
litigation in Illinois, and contains
allegations similar to those in the
Marshall
case. The
plaintiff seeks actual and treble damages, equitable relief,
attorney 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) entitled
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. In July 2007,
the Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than H&R Block Financial
Advisors, Inc. (HRBFA) and the claims of common law fraud. The
intermediate appellate court reversed this ruling in January
2009. To avoid the cost and inherent risk associated with
litigation, we reached an agreement to settle this case and the
civil actions described below, subject to approval by the
federal court presiding over the civil actions. Details
regarding the settlement are described below. We believe we have
meritorious defenses to the claims in this case and, if for any
reason the settlement is not approved, we will continue to
defend this case vigorously. There can be no assurances,
however, as to the outcome of this case or its impact on our
consolidated results of operations.
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) entitled
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 Express IRA product 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.
In addition to the New York and Mississippi Attorney General
actions, 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 have been 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 have reached an agreement to settle these cases
and the New York Attorney General action, subject to approval by
the federal court presiding over the Multi-District Litigation.
The settlement would require a minimum payment of
$11.4 million and a maximum payment of $25.4 million.
The actual cost of the settlement would depend on the number of
claims submitted by class members. The federal court granted
preliminary approval of the settlement on January 25, 2010
and scheduled a final fairness hearing on May 17, 2010. We
believe we have meritorious defenses to the claims in these
cases and, if for any reason the settlement is not approved, we
will continue to defend them vigorously. We previously recorded
a liability for our best estimate of the expected loss. There
can be no assurances, however, as to the outcome of these cases
or their 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
33
Table of Contents
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 pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. In September 2009, the
appellate court affirmed the dismissal of the securities fraud
class action, but reversed the dismissal of the shareholder
derivative action. We believe we have meritorious defenses to
the claims in the shareholder derivative action and intend to
defend the action vigorously. There can be no assurances,
however, as to its outcome.
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 entitled
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 all RSM EquiCo 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 2 to the condensed
consolidated financial statements, 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 entitled 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 M&P for failure to meet generally accepted
auditing standards and failure to detect fraud in financial
statement audits. The complaint also asserts claims for
vicarious liability and alter ego liability against RSM, and for
equitable restitution against H&R Block. The amount claimed
in this case is substantial. We believe we have meritorious
defenses to the claims 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
34
Table of Contents
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)
entitled
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. 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.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCC’s obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. Because SCC’s
operating results are included in our consolidated financial
statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of
unfavorable outcomes could have a material adverse impact on our
consolidated results of operations.
Other Claims and
Litigation
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, wage and hour claims and investment products.
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.
In addition to the aforementioned types of matters, we are 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 effect on our
consolidated financial statements.
There have been no material changes in our risk factors from
those reported at April 30, 2009 in our Annual Report on
Form 10-K.
35
Table of Contents
ISSUER PURCHASES
OF EQUITY SECURITIES
A summary of our purchases of H&R Block common stock during
the third quarter of fiscal year 2010 is as follows:
| (in 000s, except per share amounts) | ||||||||||||
|
Total Number of
Shares
|
Maximum $ Value
|
|||||||||||
|
Total
|
Average
|
Purchased as Part
of
|
of Shares that
May
|
|||||||||
|
Number of Shares
|
Price Paid
|
Publicly
Announced
|
Be Purchased
Under
|
|||||||||
| Purchased (1) | per Share | Plans or Programs (2) | the Plans or Programs (2) | |||||||||
|
November 1 – November 30
|
17 | $ | 18.53 | - | $ | 1,901,419 | ||||||
|
December 1 – December 31
|
3,887 | $ | 21.81 | 3,887 | $ | 1,816,707 | ||||||
|
January 1 – January 31
|
2,942 | $ | 22.21 | 2,937 | $ | 1,751,530 | ||||||
| (1) | We purchased 21,366 shares in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares. | |
| (2) | In June 2008, our Board of Directors rescinded 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. |
On March 4, 2010, BFC, a wholly owned subsidiary of
H&R Block, Inc. (the “Company”), entered into a
new $1.7 billion Credit and Guarantee Agreement (the
“2010 Credit Facility”), among BFC, as Borrower, the
Company, as Guarantor, various lenders, and Bank of America,
N.A., as Administrative Agent.
The 2010 Credit Facility will expire on July 31, 2013, at
which time all outstanding amounts thereunder will be due and
payable. Funds available under the 2010 Credit Facility may be
used for paying at maturity commercial paper issued by BFC from
time to time, for general corporate purposes, or for working
capital needs. The 2010 Credit Facility bears interest at an
annual rate of LIBOR plus 1.30% to 2.8% or PRIME plus .30% to
1.8% (depending on the type of borrowing) and includes an annual
facility fee of .20% to .70% of the committed amounts. Actual
rates within these ranges will be based on the Company’s
then current credit ratings.
The 2010 Credit Facility is subject to various conditions,
triggers, events or occurrences that could result in earlier
termination and contains representations, warranties, covenants
and events of default customary for financings of this type,
including, without limitation (1) a covenant requiring the
Company to maintain a consolidated net worth of at least
$650.0 million at the last day of any fiscal quarter,
(2) a covenant requiring the Company to reduce the
aggregate outstanding principal amount of Short-Term Debt to
$200.0 million or less for thirty consecutive days during
the period from March 1 to June 30 of each year, and
(3) covenants restricting the Company’s and BFC’s
ability to incur additional debt, incur liens, merge or
consolidate with other companies, sell or dispose of their
respective assets (including equity interests), liquidate or
dissolve, make investments, loans, advances, guarantees and
acquisitions, and engage in certain transactions with affiliates.
If an event of default by the Company or BFC under the 2010
Credit Agreement occurs and is continuing, the Administrative
Agent (1) may, with the consent of the requisite lenders,
or (2) shall, at the request of the requisite lenders,
terminate the 2010 Credit Facility and declare the loans then
outstanding, together with any accrued interest thereon and all
fees and other obligations of the Company and BFC thereunder, to
be immediately due and payable.
In connection with the entering into of the 2010 Credit Facility
described above, on March 4, 2010, BFC terminated
(1) the Five-Year Credit and Guarantee Agreement, dated as
of August 10, 2005, among BFC, as Borrower, the Company, as
Guarantor, various lenders and JPMorgan Chase Bank, N.A., as
Administrative Agent and (2) the Amended and Restated
Five-Year Credit and Guarantee Agreement, dated as of
August 10, 2005, among BFC, as Borrower, the Company, as
Guarantor, various lenders and JPMorgan Chase Bank, N.A., as
Administrative Agent (collectively, the “2005 Credit
Facilities”). The 2005 Credit Facilities were due to expire
on August 9, 2010 and provided BFC with an aggregate
borrowing amount of $1.95 billion. The terms of 2005 Credit
Facilities were substantially similar to the terms of the 2010
Credit Facility.
36
Table of Contents
From time to time in the ordinary course of their respective
businesses, certain of the lenders under the 2005 Credit
Facilities and the 2010 Credit Facility, as well as certain of
their respective affiliates, have performed, and may in the
future perform, for the Company and its subsidiaries, various
commercial banking, investment banking, underwriting, transfer
agent and other financial advisory services, for which in each
case they have received, and will receive, customary fees and
expenses. In addition, HSBC Bank USA, National Association
(HSBC), a lender under the 2005 Credit Facilities, and certain
of its affiliates, are parties to various agreements with the
Company or its subsidiaries pursuant to which (1) HSBC
provides funding for BFC’s purchases of participation
interests in RALs under the HSBC RAL Participation Credit
Facility, as more fully described in the Company’s Current
Report on
Form 8-K
dated January 12, 2010, (2) HSBC and its affiliates
originate RALs and issue refund anticipation checks on a
nationwide basis to eligible clients of H&R Block
company-owned and franchise office locations, (3) BFC may
purchase participation interests in RALs originated by certain
HSBC affiliates, and (4) certain HSBC affiliates service
certain RALs in which BFC purchases participation interests.
| 10 | .1 | Second Amended and Restated HSBC Refund Anticipation Loan Participation Agreement dated as of January 12, 2010, by and among Block Financial LLC, HSBC Bank USA, National Association, HSBC Trust Company (Delaware) and HSBC Taxpayer Financial Services Inc.* | ||
| 10 | .2 | Credit and Guarantee Agreement dated as of January 12, 2010, among Block Financial LLC, H&R Block, Inc. and HSBC Bank USA, National Association. | ||
| 10 | .3 | 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. | ||
| 10 | .4 | 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. | ||
| 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 furnished 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 furnished 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 | ||
| * | Confidential information has been omitted from this exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2. |
37
Table of Contents
Pursuant to the requirements 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
March 8,
2010
Becky
S. Shulman
Senior
Vice President and
Chief
Financial Officer
March 8,
2010
Jeffrey
T. Brown
Vice
President and
Corporate
Controller
March 8,
2010
38
TABLE OF CONTENTS
Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 5. Other InformationprintItem 6. Exhibitsprint