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 July 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
August 31, 2010 was 308,513,594 shares.
Form 10-Q
for the Period Ended July 31, 2010
Table of
Contents
| Page | ||||||||
|
PART I
|
Financial Information
|
|||||||
| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 20 | ||||||||
| 24 | ||||||||
| 24 | ||||||||
| PART II |
Other Information
|
|||||||
| 24 | ||||||||
| 27 | ||||||||
| 28 | ||||||||
| 28 | ||||||||
| 29 | ||||||||
|
|
||||||||
| EX-10.1 | ||||||||
| EX-10.2 | ||||||||
| EX-10.3 | ||||||||
| EX-10.4 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
Table of Contents
CONDENSED
CONSOLIDATED BALANCE
SHEETS
(amounts
in 000s, except share and per share amounts)
| July 31, 2010 | April 30, 2010 | |||||||
|
|
||||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 1,098,610 | $ | 1,804,045 | ||||
|
Cash and cash equivalents – restricted
|
37,009 | 34,350 | ||||||
|
Receivables, less allowance for doubtful accounts of $112,374
and $112,475
|
376,929 | 517,986 | ||||||
|
Prepaid expenses and other current assets
|
325,932 | 292,655 | ||||||
|
Total current assets
|
1,838,480 | 2,649,036 | ||||||
|
Mortgage loans held for investment, less allowance for loan
losses of $88,396 and $93,535
|
563,090 | 595,405 | ||||||
|
Property and equipment, at cost, less accumulated depreciation
and amortization of $673,137 and $657,008
|
326,641 | 345,470 | ||||||
|
Intangible assets, net
|
373,556 | 367,432 | ||||||
|
Goodwill
|
875,797 | 840,447 | ||||||
|
Other assets
|
446,600 | 436,528 | ||||||
|
Total assets
|
$ | 4,424,164 | $ | 5,234,318 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Liabilities:
|
||||||||
|
Customer banking deposits
|
$ | 731,413 | $ | 852,555 | ||||
|
Accounts payable, accrued expenses and other current liabilities
|
762,281 | 756,577 | ||||||
|
Accrued salaries, wages and payroll taxes
|
76,918 | 199,496 | ||||||
|
Accrued income taxes
|
315,090 | 459,175 | ||||||
|
Current portion of long-term debt
|
3,577 | 3,688 | ||||||
|
Federal Home Loan Bank borrowings
|
50,000 | 50,000 | ||||||
|
Total current liabilities
|
1,939,279 | 2,321,491 | ||||||
|
Long-term debt
|
1,040,649 | 1,035,144 | ||||||
|
Federal Home Loan Bank borrowings
|
25,000 | 25,000 | ||||||
|
Other noncurrent liabilities
|
394,089 | 412,053 | ||||||
|
Total liabilities
|
3,399,017 | 3,793,688 | ||||||
|
Commitments and contingencies
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 415,890,599
and 431,390,599
|
4,159 | 4,314 | ||||||
|
Additional paid-in capital
|
811,012 | 832,604 | ||||||
|
Accumulated other comprehensive income (loss)
|
(2,648 | ) | 1,678 | |||||
|
Retained earnings
|
2,255,262 | 2,658,586 | ||||||
|
Less treasury shares, at cost
|
(2,042,638 | ) | (2,056,552 | ) | ||||
|
Total stockholders’ equity
|
1,025,147 | 1,440,630 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 4,424,164 | $ | 5,234,318 | ||||
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 July 31, | 2010 | 2009 | ||||||
|
|
||||||||
|
Revenues:
|
||||||||
|
Service revenues
|
$ | 247,419 | $ | 247,985 | ||||
|
Interest income
|
10,302 | 12,287 | ||||||
|
Product and other revenues
|
16,753 | 15,233 | ||||||
| 274,474 | 275,505 | |||||||
|
Operating expenses:
|
||||||||
|
Cost of revenues
|
368,016 | 386,450 | ||||||
|
Selling, general and administrative expenses
|
117,029 | 103,217 | ||||||
| 485,045 | 489,667 | |||||||
|
Operating loss
|
(210,571 | ) | (214,162 | ) | ||||
|
Other income, net
|
3,254 | 3,289 | ||||||
|
Loss from continuing operations before tax benefit
|
(207,317 | ) | (210,873 | ) | ||||
|
Income tax benefit
|
(79,679 | ) | (80,256 | ) | ||||
|
Net loss from continuing operations
|
(127,638 | ) | (130,617 | ) | ||||
|
Net loss from discontinued operations
|
(3,043 | ) | (3,017 | ) | ||||
|
Net loss
|
$ | (130,681 | ) | $ | (133,634 | ) | ||
|
Basic and diluted loss per share:
|
||||||||
|
Net loss from continuing operations
|
$ | (0.40 | ) | $ | (0.39 | ) | ||
|
Net loss from discontinued operations
|
(0.01 | ) | (0.01 | ) | ||||
|
Net loss
|
$ | (0.41 | ) | $ | (0.40 | ) | ||
|
Basic and diluted shares
|
319,690 | 334,533 | ||||||
|
Dividends paid per share
|
$ | 0.15 | $ | 0.15 | ||||
|
Comprehensive income (loss):
|
||||||||
|
Net loss
|
$ | (130,681 | ) | $ | (133,634 | ) | ||
|
Change in unrealized gain on
available-for-sale
securities, net
|
(306 | ) | (747 | ) | ||||
|
Change in foreign currency translation adjustments
|
(4,020 | ) | 9,537 | |||||
|
Comprehensive loss
|
$ | (135,007 | ) | $ | (124,844 | ) | ||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
| Three Months Ended July 31, | 2010 | 2009 | ||||||
|
|
||||||||
|
Net cash used in operating activities
|
$ | (348,251 | ) | $ | (454,577 | ) | ||
|
Cash flows from investing activities:
|
||||||||
|
Principal repayments on mortgage loans held for investment, net
|
17,618 | 19,264 | ||||||
|
Purchases of property and equipment, net
|
(8,634 | ) | (8,760 | ) | ||||
|
Payments made for business acquisitions, net
|
(33,226 | ) | (1,485 | ) | ||||
|
Other, net
|
18,239 | 6,341 | ||||||
|
Net cash provided by (used in) investing activities
|
(6,003 | ) | 15,360 | |||||
|
Cash flows from financing activities:
|
||||||||
|
Customer banking deposits, net
|
(121,401 | ) | (143,199 | ) | ||||
|
Dividends paid
|
(48,692 | ) | (50,287 | ) | ||||
|
Repurchase of common stock, including shares surrendered
|
(164,369 | ) | (3,483 | ) | ||||
|
Proceeds from exercise of stock options
|
1,500 | 6,651 | ||||||
|
Other, net
|
(15,987 | ) | (25,888 | ) | ||||
|
Net cash used in financing activities
|
(348,949 | ) | (216,206 | ) | ||||
|
Effects of exchange rates on cash
|
(2,232 | ) | 7,063 | |||||
|
Net decrease in cash and cash equivalents
|
(705,435 | ) | (648,360 | ) | ||||
|
Cash and cash equivalents at beginning of the period
|
1,804,045 | 1,654,663 | ||||||
|
Cash and cash equivalents at end of the period
|
$ | 1,098,610 | $ | 1,006,303 | ||||
|
Supplementary cash flow data:
|
||||||||
|
Income taxes paid
|
$ | 64,651 | $ | 155,804 | ||||
|
Interest paid on borrowings
|
27,265 | 26,168 | ||||||
|
Interest paid on deposits
|
1,915 | 1,318 | ||||||
|
Transfers of loans to foreclosed assets
|
6,527 | 3,797 | ||||||
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 July 31,
2010, the condensed consolidated statements of operations and
comprehensive income (loss) for the three months ended
July 31, 2010 and 2009, and the condensed consolidated
statements of cash flows for the three months ended
July 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 July 31, 2010 and for all periods presented
have been made.
“H&R Block,” “the Company,”
“we,” “our” and “us” are used
interchangeably to refer to H&R Block, Inc. or to H&R
Block, Inc. and its subsidiaries, as appropriate to the context.
Certain reclassifications have been made to prior year amounts
to conform to the current year presentation. 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, 2010
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2010 or for
the year then ended, are derived from our April 30, 2010
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% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
| 2. | Earnings (Loss) Per Share and Stockholders’ Equity |
Basic and diluted earnings (loss) per share is computed using
the two-class method. The two-class method is an earnings
allocation formula that determines net income per share for each
class of common stock and participating security according to
dividends declared and participation rights in undistributed
earnings. Per share amounts are computed by dividing net income
from continuing operations attributable to common shareholders
by the weighted average shares outstanding during each period.
The dilutive effect of potential common shares is included in
diluted earnings per share except in those periods with a
4
Table of Contents
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 14.7 million shares and 19.4 million shares
for the three months ended July 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 July 31, | 2010 | 2009 | ||||||
|
Net loss from continuing operations attributable to shareholders
|
$ | (127,638 | ) | $ | (130,617 | ) | ||
|
Amounts allocated to participating securities (nonvested shares)
|
(20 | ) | (367 | ) | ||||
|
Net loss from continuing operations attributable to common
shareholders
|
$ | (127,658 | ) | $ | (130,984 | ) | ||
|
Basic weighted average common shares
|
319,690 | 334,533 | ||||||
|
Potential dilutive shares
|
- | - | ||||||
|
Dilutive weighted average common shares
|
319,690 | 334,533 | ||||||
|
Earnings (loss) per share from continuing operations:
|
||||||||
|
Basic
|
$ | (0.40 | ) | $ | (0.39 | ) | ||
|
Diluted
|
(0.40 | ) | (0.39 | ) | ||||
The weighted average shares outstanding for the three months
ended July 31, 2010 decreased to 319.7 million from
334.5 million for the three months ended July 31,
2009. During the three months ended July 31, 2010, we
purchased and immediately retired 15.5 million shares of
our common stock at a cost of $235.7 million. Cash payments
of $161.0 million were made during the quarter for the
share purchases with settlement of the remaining
$74.7 million occurring in August. We may continue to
repurchase and retire common 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
|
$ | 155 | ||
|
Additional paid-in capital
|
9,300 | |||
|
Retained earnings
|
226,220 | |||
| $ | 235,675 | |||
During the three months ended July 31, 2010 and 2009, we
issued 0.9 million and 1.4 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the three months ended July 31, 2010, we acquired
0.2 million shares of our common stock at an aggregate cost
of $3.4 million, and during the three months ended
July 31, 2009, we acquired 0.2 million shares at an
aggregate cost of $3.5 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.
At July 31, 2010 and April 30, 2010, we had accrued
but unpaid dividends totaling $46.5 million and
$48.7 million, respectively. These amounts are included in
accounts payable, accrued expenses and other current liabilities
on the condensed consolidated balance sheets.
During the three months ended July 31, 2010, we granted
1.0 million stock options and 4,521 nonvested shares and
units in accordance with our stock-based compensation plans. The
weighted average fair value of options granted was $2.51 for
management options. Stock-based compensation expense of our
continuing operations totaled $3.4 million and
$7.3 million for the three months ended July 31, 2010
and 2009, respectively. At July 31, 2010, unrecognized
compensation cost for options totaled $11.3 million, and
for nonvested shares and units totaled $5.1 million.
5
Table of Contents
| 3. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of
July 31, 2010 and April 30, 2010 is as follows:
| (dollars in 000s) | ||||||||||||||||
| July 31, 2010 | April 30, 2010 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
|
Adjustable-rate loans
|
$ | 382,986 | 59 | % | $ | 411,122 | 60 | % | ||||||||
|
Fixed-rate loans
|
263,745 | 41 | % | 272,562 | 40 | % | ||||||||||
| 646,731 | 100 | % | 683,684 | 100 | % | |||||||||||
|
Unamortized deferred fees and costs
|
4,755 | 5,256 | ||||||||||||||
|
Less: Allowance for loan losses
|
(88,396 | ) | (93,535 | ) | ||||||||||||
| $ | 563,090 | $ | 595,405 | |||||||||||||
Activity in the allowance for loan losses for the three months
ended July 31, 2010 and 2009 is as follows:
(in
000s)
| Three Months Ended July 31, | 2010 | 2009 | ||||||||
|
Balance, beginning of the period
|
$ | 93,535 | $ | 84,073 | ||||||
|
Provision
|
8,000 | 13,600 | ||||||||
|
Recoveries
|
33 | 28 | ||||||||
|
Charge-offs
|
(13,172 | ) | (6,010 | ) | ||||||
|
Balance, end of the period
|
$ | 88,396 | $ | 91,691 | ||||||
Our loan loss reserve as a percent of mortgage loans was 13.7%
at July 31, 2010 and April 30, 2010.
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 $133.3 million and $145.0 million at
July 31, 2010 and April 30, 2010, respectively. The
principal balance of non-performing assets as of July 31,
2010 and April 30, 2010 is as follows:
(in
000s)
| July 31, 2010 | April 30, 2010 | |||||||||
|
Impaired loans:
|
||||||||||
|
30 – 59 days
|
$ | 1,251 | $ | 330 | ||||||
|
60 – 89 days
|
11,205 | 11,851 | ||||||||
|
90+ days, non-accrual
|
148,056 | 153,703 | ||||||||
|
TDR loans, accrual
|
115,805 | 113,471 | ||||||||
|
TDR loans, non-accrual
|
17,469 | 31,506 | ||||||||
| 293,786 | 310,861 | |||||||||
|
Real estate
owned
(1)
|
26,309 | 29,252 | ||||||||
|
Total non-performing assets
|
$ | 320,095 | $ | 340,113 | ||||||
| (1) | Includes loans accounted for as in-substance foreclosures of $11.6 million and $12.5 million at July 31, 2010 and April 30, 2010, respectively. |
Activity related to our real estate owned is as follows:
(in
000s)
| Three Months Ended July 31, | 2010 | 2009 | ||||||||
|
Balance, beginning of the period
|
$ | 29,252 | $ | 44,533 | ||||||
|
Additions
|
6,527 | 3,797 | ||||||||
|
Sales
|
(8,827 | ) | (4,348 | ) | ||||||
|
Writedowns
|
(643 | ) | (1,241 | ) | ||||||
|
Balance, end of the period
|
$ | 26,309 | $ | 42,741 | ||||||
6
Table of Contents
| 4. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the three months
ended July 31, 2010 consist of the following:
| (in 000s) | ||||||||||||
| Tax Services | Business Services | Total | ||||||||||
|
Balance at April 30, 2010:
|
||||||||||||
|
Goodwill
|
$ | 453,884 | $ | 403,751 | $ | 857,635 | ||||||
|
Accumulated impairment losses
|
(2,188 | ) | (15,000 | ) | (17,188 | ) | ||||||
| 451,696 | 388,751 | 840,447 | ||||||||||
|
Changes:
|
||||||||||||
|
Acquisitions
|
4,925 | 30,903 | 35,828 | |||||||||
|
Other
|
(478 | ) | - | (478 | ) | |||||||
|
Impairments
|
- | - | - | |||||||||
|
Balance at July 31, 2010:
|
||||||||||||
|
Goodwill
|
458,331 | 434,654 | 892,985 | |||||||||
|
Accumulated impairment losses
|
(2,188 | ) | (15,000 | ) | (17,188 | ) | ||||||
| $ | 456,143 | $ | 419,654 | $ | 875,797 | |||||||
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.
Effective July 20, 2010, our Business Services segment
acquired certain assets and liabilities of a Boston-based
accounting firm for an aggregate purchase price of
$40.5 million, subject to adjustments. We made cash
payments of $29.8 million at closing. Amounts recorded for
intangible assets and goodwill as of July 31, 2010 are
preliminary.
Intangible assets consist of the following:
| (in 000s) | ||||||||||||||||||||||||
| July 31, 2010 | April 30, 2010 | |||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
|
Tax Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
$ | 68,474 | $ | (34,987 | ) | $ | 33,487 | $ | 67,705 | $ | (33,096 | ) | $ | 34,609 | ||||||||||
|
Noncompete agreements
|
23,200 | (21,479 | ) | 1,721 | 23,062 | (21,278 | ) | 1,784 | ||||||||||||||||
|
Reacquired franchise rights
|
223,773 | (7,172 | ) | 216,601 | 223,773 | (6,096 | ) | 217,677 | ||||||||||||||||
|
Franchise agreements
|
19,201 | (2,133 | ) | 17,068 | 19,201 | (1,813 | ) | 17,388 | ||||||||||||||||
|
Purchased technology
|
14,500 | (6,823 | ) | 7,677 | 14,500 | (6,266 | ) | 8,234 | ||||||||||||||||
|
Trade name
|
1,325 | (450 | ) | 875 | 1,325 | (400 | ) | 925 | ||||||||||||||||
|
Business Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
153,439 | (122,310 | ) | 31,129 | 145,149 | (120,037 | ) | 25,112 | ||||||||||||||||
|
Noncompete agreements
|
36,909 | (22,680 | ) | 14,229 | 33,052 | (22,118 | ) | 10,934 | ||||||||||||||||
|
Trade name – amortizing
|
2,600 | (2,600 | ) | - | 2,600 | (2,600 | ) | - | ||||||||||||||||
|
Trade name –
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||
|
Total intangible assets
|
$ | 599,058 | $ | 225,502 | $ | 373,556 | $ | 586,004 | $ | (218,572 | ) | $ | 367,432 | |||||||||||
Amortization of intangible assets for the three months ended
July 31, 2010 and 2009 was $6.9 million. Estimated
amortization of intangible assets for fiscal years 2011 through
2015 is $28.6 million, $25.5 million,
$21.1 million, $17.6 million and $12.4 million,
respectively.
| 5. | Income Taxes |
We file a consolidated federal income tax return in the United
States and file tax returns in various state and foreign
jurisdictions. The U.S. Federal consolidated tax returns for the
years 1999 through 2007 are currently under examination by the
Internal Revenue Service, with the 1999 – 2005 returns
currently at the appellate level. Tax years prior to 1999 are
closed by statute. Historically, tax returns in various foreign
and state jurisdictions are examined and settled upon completion
of the exam.
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During the three months ended July 31, 2010, we accrued
additional gross interest and penalties of $1.5 million
related to our uncertain tax positions. We had gross
unrecognized tax benefits of $130.4 million and
$129.8 million at July 31, 2010 and April 30,
2010, respectively. The gross unrecognized tax benefits
increased $0.6 million in the current year, due to accruals
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
July 31, 2010, which is included in other noncurrent
liabilities on the condensed consolidated balance sheet.
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 gross amount of reserves for
previously unrecognized tax benefits may decrease by
approximately $75.5 million within twelve months of
July 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.
| 6. | Interest Income and Expense |
The following table shows the components of interest income and
expense of our continuing operations:
(in
000s)
| Three Months Ended July 31, | 2010 | 2009 | ||||||||
|
Interest income:
|
||||||||||
|
Mortgage loans, net
|
$ | 6,323 | $ | 7,896 | ||||||
|
Other
|
3,979 | 4,391 | ||||||||
| $ | 10,302 | $ | 12,287 | |||||||
|
Interest expense:
|
||||||||||
|
Borrowings
|
$ | 20,643 | $ | 18,957 | ||||||
|
Deposits
|
1,923 | 2,049 | ||||||||
|
FHLB advances
|
396 | 509 | ||||||||
| $ | 22,962 | $ | 21,515 | |||||||
| 7. | Fair Value |
We use the following valuation methodologies for assets and
liabilities measured at fair value and the general
classification of these instruments pursuant to the fair value
hierarchy.
| • | Available-for-sale securities – Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or other pricing models. Available-for-sale securities that we classify as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities. | |
| • | Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment are generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. These loans are classified as Level 3. |
The following methods were used to determine the fair values of
our other financial instruments:
| • | Cash equivalents, accounts receivable, demand deposits, accounts payable, accrued liabilities and the current portion of long-term debt – The carrying values reported in the balance sheet for these items approximate fair market value due to the relative short-term nature of the respective instruments. | |
| • | Mortgage loans held for investment – The fair value of mortgage loans held for investment is generally determined using a pricing model based on current market information obtained from origination data, and bids received from time to time. The fair value of certain impaired loans held for investment is primarily based on the appraised value of the underlying collateral less estimated selling costs. |
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| • | IRAs and other time deposits – The fair value is calculated based on the discounted value of contractual cash flows. | |
| • | Long-term debt – The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market rates on our Senior Notes. |
The following table presents for each hierarchy level the
financial assets that are measured at fair value on both a
recurring and non-recurring basis at July 31, 2010 and
April 30, 2010:
| (dollars in 000s) | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
|
As of July 31, 2010:
|
||||||||||||||||
|
Recurring:
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 30,913 | $ | - | $ | 30,913 | $ | - | ||||||||
|
Non-recurring:
|
||||||||||||||||
|
Impaired mortgage loans held for investment
|
237,272 | - | - | 237,272 | ||||||||||||
| $ | 268,185 | $ | - | $ | 30,913 | $ | 237,272 | |||||||||
|
As a percentage of total assets
|
6.1% | -% | 0.7% | 5.4% | ||||||||||||
|
As of April 30, 2010:
|
||||||||||||||||
|
Recurring:
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 31,948 | $ | - | $ | 31,948 | $ | - | ||||||||
|
Non-recurring:
|
||||||||||||||||
|
Impaired mortgage loans held for investment
|
249,549 | - | - | 249,549 | ||||||||||||
| $ | 281,497 | $ | - | $ | 31,948 | $ | 249,549 | |||||||||
|
As a percentage of total assets
|
5.4% | -% | 0.6% | 4.8% | ||||||||||||
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 July 31, 2010 are as follows:
(in
000s)
|
Carrying
|
Estimated
|
|||||||||
| Amount | Fair Value | |||||||||
|
Mortgage loans held for investment
|
$ | 563,090 | $ | 334,011 | ||||||
|
IRAs and other time deposits
|
435,635 | 436,228 | ||||||||
|
Long-term debt
|
1,044,226 | 1,137,881 | ||||||||
|
FHLB advances
|
75,000 | 75,149 | ||||||||
| 8. | Regulatory Requirements |
H&R Block Bank (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
June 30, 2010, as calculated in the most recently filed TFR:
| (dollars in 000s) | ||||||||||||||||||||||||
|
To Be Well
Capitalized
|
||||||||||||||||||||||||
|
Under Prompt
|
||||||||||||||||||||||||
|
For Capital
Adequacy
|
Corrective
|
|||||||||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
Total risk-based capital
ratio
(1)
|
$ | 387,993 | 77.4% | $ | 40,101 | 8.0% | $ | 50,127 | 10.0% | |||||||||||||||
|
Tier 1 risk-based capital
ratio
(2)
|
$ | 381,315 | 76.1% | N/A | N/A | $ | 30,076 | 6.0% | ||||||||||||||||
|
Tier 1 capital ratio
(leverage)
(3)
|
$ | 381,315 | 29.7% | $ | 154,031 | 12.0% | $ | 64,179 | 5.0% | |||||||||||||||
|
Tangible equity
ratio
(4)
|
$ | 381,315 | 29.7% | $ | 19,254 | 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. |
As of July 31, 2010, HRB Bank’s leverage ratio was
30.1%.
9
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| 9. | Variable Interests |
In June 2009, the FASB issued revised authoritative guidance
associated with the consolidation of variable interest entities
(VIEs). The revised guidance replaced the previous
quantitative-based assessment for determining whether an
enterprise is the primary beneficiary of a VIE and focuses
primarily on a qualitative assessment. This assessment requires
identifying the enterprise that has (1) the power to direct
the activities of the VIE that can most significantly impact the
entity’s performance; and (2) the obligation to absorb
losses and the right to receive benefits from the VIE that could
potentially be significant to such entity. The revised guidance
also requires that the enterprise continually reassess whether
it is the primary beneficiary of a VIE rather than conducting a
reassessment only upon the occurrence of specific events.
We implemented this guidance on May 1, 2010 and evaluated
our financial interests to determine if we had interests in VIEs
and if we are the primary beneficiary of the VIE.
The following is a description of our financial interests in
VIEs which we consider significant or where we are the sponsor.
For these VIEs we have determined that we are not the primary
beneficiary and, therefore have not consolidated the VIEs. Prior
to implementation of this new guidance we did not consolidate
these entities.
| • | McGladrey & Pullen LLP – The administrative services agreement with McGladrey & Pullen, LLP (M&P) and compensation arrangements between RSM McGladrey (RSM) and their managing directors represent a variable interest in M&P. These agreements are described more fully in our 2010 Annual Report to Shareholders on Form 10-K. |
We have concluded that RSM is not the primary beneficiary of
M&P and, therefore, we have not consolidated M&P. RSM
does not have an equity interest in M&P, nor does it have
the power to direct any activities of M&P and does not
receive any of its income. We have no assets or liabilities
included in our condensed consolidated balance sheets related to
our variable interests. We believe RSM’s maximum exposure
to economic loss, resulting from various agreements with
M&P, relates primarily to shared office space from
operating leases under the administrative services agreement
equal to approximately $103.3 million, and variability in
our operating results due to the compensation agreements with
RSM managing directors. We do not provide any support that is
not contractually required.
| • | Securitization Trusts – Sand Canyon Corporation (SCC) holds an interest in and is the sponsor (issuer) of 56 REMIC Trusts and 14 NIM Trusts (collectively, “Trusts”) related to previously originated mortgage loans that were securitized. These Trusts are variable interest entities. The REMIC Trusts hold static pools of sub-prime residential mortgage loans. The NIM Trusts hold beneficial interests in certain REMIC Trusts. The Trusts were designed to collect and pass through to the beneficial interest holders the cash flows of the underlying mortgage loans. The REMIC Trusts were financed with bonds and equity. The NIM Trusts were financed with notes and equity. All bonds and notes are held by third-party investors. |
Our identification of the primary beneficiary of the Trusts was
based on a determination that the servicer of the underlying
mortgage loans has the power to direct the most significant
activities of the Trusts because the servicer handles all of the
loss mitigation activities for the mortgage loans.
SCC is not the servicer of the mortgage loans underlying the
REMIC Trusts. Therefore, SCC is not the primary beneficiary of
the REMIC Trusts because it does not have the power to direct
the most significant activities of the REMIC Trusts, which is
the servicing of the underlying mortgage loans.
SCC does have the exclusive right to appoint a servicer when
certain conditions have been met for specific loans related to
two of the NIM Trusts. As of July 31, 2010, those
conditions have been met for a minority portion of the loans
underlying those Trusts. As this right pertains only to a
minority of the loans, we have concluded that SCC does not have
the power to direct the most significant activities of these two
NIM Trusts, as the servicer has the power to direct significant
activities over the majority of the mortgage loans. In the
remaining NIM Trusts, SCC has a shared right to appoint a
servicer under certain conditions. For these NIM Trusts, we have
concluded that SCC is not the primary beneficiary because the
power to direct the most significant activities, which is the
servicing of the underlying mortgage loans, is shared with other
unrelated parties.
10
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At July 31, 2010, we had no significant assets or
liabilities included in our condensed consolidated balance
sheets related to our variable interests in the Trusts. We have
a reserve, as discussed in note 10, and a deferred tax
asset recorded in our condensed consolidated balance sheets
related to the securitization trusts. We have no remaining
exposure to economic loss arising from impairment of our
beneficial interest in the Trusts. If we receive cash flows in
the future as a holder of beneficial interests we would record
gains as other income in our income statement. As of
June 30, 2010 mortgage loans underlying the REMIC and NIM
Trusts had an unpaid principal balance of approximately
$11.3 billion. We have no liquidity arrangements,
guarantees or other commitments for the Trusts and have not
provided any support that was not contractually required.
| 10. | 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) | ||||||||
| Three Months Ended July 31, | 2010 | 2009 | ||||||
|
Balance, beginning of period
|
$ | 141,542 | $ | 146,807 | ||||
|
Amounts deferred for new guarantees issued
|
654 | 583 | ||||||
|
Revenue recognized on previous deferrals
|
(28,547) | (27,913) | ||||||
|
Balance, end of period
|
$ | 113,649 | $ | 119,477 | ||||
The following table summarizes certain of our other contractual
obligations and commitments:
| (in 000s) | ||||||||
| As of | July 31, 2010 | April 30, 2010 | ||||||
|
Franchise Equity Lines of Credit – undrawn commitment
|
$ | 36,422 | $ | 36,806 | ||||
|
Contingent business acquisition obligations
|
21,908 | 20,697 | ||||||
|
Media advertising purchase obligation
|
26,548 | 26,548 | ||||||
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 such claims are
asserted, we believe the fair value of guarantees and
indemnifications relating to our continuing operations is not
material as of July 31, 2010.
Discontinued
Operations
Sand Canyon Corporation (SCC) completed its exit from the loan
origination and loan servicing business effective April 30,
2008. At that time, the outstanding unpaid principal balance of
loans originated and transferred totaled $50.4 billion,
including loans previously transferred through private-label
securitization transactions of $17.2 billion and whole loan
sales of $33.2 billion of which 1% were with government
sponsored enterprises (FNMA and FHLMC). The outstanding unpaid
principal balance at June 30, 2010, (as reported by the
servicer of those loans) totaled $33.2 billion, a decline
of 34% from April 30, 2008. Outstanding loan principal at
June 30, 2010 included $11.3 billion relating to loan
securitizations and $21.9 billion relating to whole loan
sales.
SCC made certain representations and warranties with respect to
the transfer of such loans. In the event that there is a
material adverse effect on the purchaser’s, investor’s
or insurer’s interest in a loan which resulted from a valid
breach of a representation and warranty, SCC may be obligated to
repurchase the loan or otherwise indemnify those parties for
losses incurred as a result of loan liquidation. SCC records a
11
Table of Contents
reserve for contingent losses relating to representation and
warranty claims by estimating loan repurchase volumes and
indemnification obligations based on both known claims and
projections of future claims. Projections of future claims are
based on an analysis that includes a combination of reviewing
historical repurchase trends, recent repurchase activity, actual
defaults and loss expectations, inquiries from various third
parties and the probability that a future claim will be a valid
breach of a representation and warranty.
At July 31, 2010, SCC had recorded a reserve for loan
repurchase and indemnification obligations pertaining to claims
of breach of representations and warranties of
$188.1 million. This reserve represents our estimate of
probable loss for both asserted and unasserted claims, which in
the case of a repurchase of loans, would be net of the estimated
value of collateral upon liquidation. Based on recent
liquidations, loss severity rates have approximated 60%.
The gross principal balance of claims asserted by third parties
for alleged breach of representations and warranties for the
27-month
period from May 1, 2008 through July 31, 2010 totaled
approximately $686 million. SCC has completed its review of
claims totaling approximately $550 million and rejected the
claim, or settled the claim through repurchase of loans or
payment of loss. Net losses incurred on claim settlements during
this period totaled approximately $55 million. Claims
totaling $136 million (gross principal amount) remain under
review by SCC at July 31, 2010.
Net losses on settled claims since April 30, 2008 have been
within initial loss estimates. As such, these settlements have
been recorded as a reduction to our initial reserve and no
provisions for additional loss have been recorded subsequent to
April 30, 2008. To the extent that valid claim volumes in
the future exceed current estimates, or residential home values
decline, our actual losses may be greater than our current
estimates and those differences may be significant.
| 11. | 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 $24.0 million and
$35.5 million at July 31, 2010 and April 30,
2010, respectively. Litigation is inherently unpredictable and
it is difficult to predict the outcome of particular matters
with reasonable certainty and, therefore, the actual amount of
any loss may prove to be larger or smaller than the amounts
reflected in our consolidated financial statements.
RAL Litigation
We have been named in multiple lawsuits as defendants in
litigation regarding our refund anticipation loan program in
past years. All of those lawsuits have been settled or otherwise
resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al.
, April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys’ fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. The trial court’s
decertification decision is currently on appeal. We believe we
have meritorious defenses to this case and intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the “POM Cases”), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al.
, Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes (1) statutory fraud by selling
insurance without a license, (2) an unfair trade practice,
by
12
Table of Contents
omission and by “cramming” (i.e., charging customers
for the guarantee even though they did not request it or want
it), and (3) a breach of fiduciary duty. The plaintiffs
seek unspecified damages, injunctive relief, attorneys’
fees and costs. The Madison County court ultimately certified a
class consisting of all persons residing in 13 states who
paid a separate fee for POM from January 1, 1997 to the
date of a final judgment from the court. We subsequently removed
the case to federal court in the Southern District of Illinois,
where it is now pending. In November 2009, the federal court
issued an order vacating the state court’s class
certification ruling and allowing plaintiffs time to file a
renewed motion for class certification under the federal rules.
Plaintiffs filed a new motion for class certification seeking
certification of an 11-state class. Oral argument on
plaintiffs’ motion occurred in April 2010 and the parties
are awaiting a ruling. A trial date has been set for November
2010.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al.
(Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas. This case involves the same
plaintiffs’ attorneys that are involved in the
Marshall
litigation in Illinois and contains allegations similar to
those in the
Marshall
litigation. The plaintiff seeks
actual and treble damages, equitable relief, attorneys’
fees and costs. No class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, however, and there can
be no assurances as to the outcome of these pending actions or
their impact on our consolidated results of operations,
individually or in the aggregate.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) styled
The People of New
York v. H&R Block, Inc. and H&R Block Financial
Advisors, Inc
.,
et al.
asserting claims against the
Express IRA product. Thereafter, a number of civil actions were
filed against HRBFA and us concerning the product. Except for
two cases pending in state court, all of the civil actions were
consolidated by the panel for Multi-District Litigation into a
single action styled
In re H&R Block, Inc. Express IRA
Marketing Litigation
(Case
No. 06-1786-MD-RED)
in the United States District Court for the Western District of
Missouri. To avoid the cost and inherent risk associated with
litigation, we reached an agreement to settle these cases. The
settlement became final in May 2010. We previously recorded a
sufficient liability for the loss associated with the settlement.
One other lawsuit relating to the Express IRA product remains
pending. This lawsuit was filed on January 2, 2008 by the
Mississippi Attorney General in the Chancery Court of Hinds
County, Mississippi First Judicial District (Case No. G
2008 6 S 2) and is styled
Jim Hood, Attorney for the
State of Mississippi v. H&R Block, Inc., et al.
The complaint alleges fraudulent business practices,
deceptive acts and practices, common law fraud and breach of
fiduciary duty with respect to the sale of the product in
Mississippi and seeks equitable relief, disgorgement of profits,
damages and restitution, civil penalties and punitive damages.
The defendants have filed a motion to dismiss. We believe we
have meritorious defenses to the claims in this case, and we
intend to defend this case vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for any liabilities relating to the Express
IRA litigation through an indemnification agreement.
RSM McGladrey
Litigation
RSM EquiCo, its parent and certain of its subsidiaries and
affiliates, are parties to a class action filed on July 11,
2006 and styled
Do Right’s Plant Growers, et al. v.
RSM EquiCo, Inc., et al.,
Case No. 06 CC00137, in the
California Superior Court, Orange County. The complaint contains
allegations relating to business valuation services provided by
RSM EquiCo, including allegations of fraud, negligent
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, breach of fiduciary
duty and unfair competition. Plaintiffs seek unspecified actual
and punitive damages, in addition to pre-judgment interest and
attorneys’ fees. On March 17, 2009, the court granted
plaintiffs’ motion for class certification on all claims.
The defendants filed two requests for interlocutory review of
the decision, the last of which was denied by the Supreme Court
of California on September 30, 2009. A trial date has been
set for January 2011.
13
Table of Contents
The certified class consists of RSM EquiCo’s
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale.
The fees paid to RSM EquiCo in connection with these agreements
total approximately $185 million, a number which
substantially exceeds the equity of RSM EquiCo. We intend to
defend this case vigorously. The amount claimed in this action
is substantial and could have a material adverse impact on our
consolidated results of operations. There can be no assurance
regarding the outcome of this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009, where it remains
pending (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. We believe we have meritorious
defenses to the claims against RSM and H&R Block in this
case and intend to defend it vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
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
that 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.
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 and federal regulators,
municipalities, individual plaintiffs, and cases in which
plaintiffs seek to represent a class of others alleged to be
similarly situated. Among other things, these investigations,
claims and lawsuits allege discriminatory or unfair and
deceptive loan origination and servicing practices, public
nuisance, fraud, and violations of the Truth in Lending Act,
Equal Credit Opportunity Act and the Fair Housing Act. In the
current non-prime mortgage environment, the number of these
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. The amounts claimed in these investigations, claims and
lawsuits are substantial in some instances, and the ultimate
resulting liability is difficult to predict. In the event of
unfavorable outcomes, the amounts SCC may be required to pay in
the discharge of liabilities or settlements could be substantial
and, because SCC’s operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.,
alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. A trial date has been
set for June 2011. We believe the claims in this case are
without merit, and we intend to defend this case vigorously.
There can be no assurances, however, as to its outcome or its
impact on our consolidated results of operations.
14
Table of Contents
Other Claims and
Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, respectively styled
Alice
Williams v. H&R Block Enterprises LLC
, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008);
Arabella Lemus v. H&R
Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009);
Delana Ugas v. H&R Block
Enterprises LLC, et al.,
Case No. BC417700 (United
States District Court, Central District of California, filed
July 13, 2009);
Barbara Petroski v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010);
Lance Hom v. H&R
Block Enterprises LLC, et al.,
Case No. 10CV0476 H
(United States District Court, Southern District of California,
filed March 4, 2010);
Stacy Oyer v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00387-WMS
(United States District Court, Western District of New York,
filed May 10, 2010); and
Li Dong Ma v. RSM
McGladrey TBS, LLC, et al.,
Case
No. C-08-01729
JF (United States District Court, Northern District of
California, filed February 28, 2008). These cases involve a
variety of legal theories and allegations including, among other
things, failure to compensate employees for all hours worked;
failure to provide employees with meal periods; failure to
provide itemized wage statements; failure to pay wages due upon
termination; failure to compensate for mandatory off-season
training;
and/or
misclassification of non-exempt employees. The plaintiffs seek
actual damages, in addition to statutory penalties, pre-judgment
interest and attorneys’ fees. We believe we have
meritorious defenses to the claims in these cases and intend to
defend them vigorously. The amounts claimed in these matters are
substantial in some instances, however, and the ultimate
liability with respect to these matters is difficult to predict.
There can be no assurances as to the outcome of these cases or
their impact on our consolidated results of operations,
individually or in the aggregate.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. Some of
these investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers’ income tax returns, the POM
guarantee program, and other products and services. We believe
we have meritorious defenses to each of these investigations,
claims and lawsuits, and we are defending or intend to defend
them vigorously. The amounts claimed in these matters are
substantial in some instances, however, the ultimate liability
with respect to such matters is difficult to predict. In the
event of an unfavorable outcome, the amounts we may be required
to pay in the discharge of liabilities or settlements could have
a material adverse impact on our consolidated results of
operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
adverse impact on our consolidated results of operations.
15
Table of Contents
| 12. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
| (in 000s) | ||||||||
| Three Months Ended July 31, | 2010 | 2009 | ||||||
|
Revenues:
|
||||||||
|
Tax Services
|
$ | 91,645 | $ | 87,963 | ||||
|
Business Services
|
174,710 | 177,618 | ||||||
|
Corporate
|
8,119 | 9,924 | ||||||
| $ | 274,474 | $ | 275,505 | |||||
|
Pretax income (loss):
|
||||||||
|
Tax Services
|
$ | (174,624) | $ | (171,974) | ||||
|
Business Services
|
(433) | 1,321 | ||||||
|
Corporate
|
(32,260) | (40,220) | ||||||
|
Loss from continuing operations before tax benefit
|
$ | (207,317) | $ | (210,873) | ||||
| 13. | Accounting Pronouncements |
In July 2010 the Financial Accounting Standard Board (FASB)
issued Accounting Standards Update
2010-20,
Disclosures About Credit Quality of Financing Receivables and
Allowance for Credit Losses. This guidance would require
enhanced disclosures about the allowance for credit losses and
the credit quality of financing receivables and would apply to
financing receivables held by all creditors. This guidance is
effective beginning with the first interim or annual reporting
period ending after December 15, 2010. Early application is
encouraged. We are currently evaluating the effect of this
guidance on our financial statement disclosures.
In October 2009, the FASB issued Accounting Standards Update
2009-13,
“Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements” (ASU
2009-13).
This guidance amends the criteria for separating consideration
in multiple-deliverable arrangements to enable vendors to
account for products or services (deliverables) separately
rather than as a combined unit. This guidance establishes a
selling price hierarchy for determining the selling price of a
deliverable, which is based on: (1) vendor-specific
objective evidence; (2) third-party evidence; or
(3) estimates. This guidance also eliminates the residual
method of allocation and requires that arrangement consideration
be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. In
addition, this guidance significantly expands required
disclosures related to a vendor’s multiple-deliverable
revenue arrangements. This guidance is effective prospectively
for revenue arrangements entered into or materially modified
beginning with our fiscal year 2012. We are currently evaluating
the effect of this guidance on our consolidated financial
statements.
In June 2009, the FASB issued guidance, under Topic
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. We adopted this guidance as of
May 1, 2010 and it did not have a material effect on our
consolidated financial statements.
| 14. | Condensed Consolidating Financial Statements |
Block Financial LLC (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 unsecured
committed lines of credit (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.
16
Table of Contents
| Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| July 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | - | $ | 21,000 | $ | 253,474 | $ | - | $ | 274,474 | ||||||||||
|
Cost of revenues
|
- | 39,028 | 328,988 | - | 368,016 | |||||||||||||||
|
Selling, general and administrative
|
- | 2,090 | 114,939 | - | 117,029 | |||||||||||||||
|
Total expenses
|
- | 41,118 | 443,927 | - | 485,045 | |||||||||||||||
|
Operating income (loss)
|
- | (20,118 | ) | (190,453 | ) | - | (210,571 | ) | ||||||||||||
|
Other income (expense), net
|
(207,317 | ) | 382 | 2,872 | 207,317 | 3,254 | ||||||||||||||
|
Loss from continuing operations before tax benefit
|
(207,317 | ) | (19,736 | ) | (187,581 | ) | 207,317 | (207,317 | ) | |||||||||||
|
Income taxes (benefit)
|
(79,679 | ) | (7,841 | ) | (71,838 | ) | 79,679 | (79,679 | ) | |||||||||||
|
Net loss from continuing operations
|
(127,638 | ) | (11,895 | ) | (115,743 | ) | 127,638 | (127,638 | ) | |||||||||||
|
Net loss from discontinued operations
|
(3,043 | ) | (3,004 | ) | (39 | ) | 3,043 | (3,043 | ) | |||||||||||
|
Net loss
|
$ | (130,681 | ) | $ | (14,899 | ) | $ | (115,782 | ) | $ | 130,681 | $ | (130,681 | ) | ||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| July 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | - | $ | 23,196 | $ | 252,365 | $ | (56 | ) | $ | 275,505 | |||||||||
|
Cost of revenues
|
- | 45,560 | 340,890 | - | 386,450 | |||||||||||||||
|
Selling, general and administrative
|
- | 2,498 | 100,775 | (56 | ) | 103,217 | ||||||||||||||
|
Total expenses
|
- | 48,058 | 441,665 | (56 | ) | 489,667 | ||||||||||||||
|
Operating income (loss)
|
- | (24,862 | ) | (189,300 | ) | - | (214,162 | ) | ||||||||||||
|
Other income (expense), net
|
(210,873 | ) | (1,233 | ) | 4,522 | 210,873 | 3,289 | |||||||||||||
|
Loss from continuing operations before tax benefit
|
(210,873 | ) | (26,095 | ) | (184,778 | ) | 210,873 | (210,873 | ) | |||||||||||
|
Income taxes (benefit)
|
(80,256 | ) | (10,692 | ) | (69,564 | ) | 80,256 | (80,256 | ) | |||||||||||
|
Net loss from continuing operations
|
(130,617 | ) | (15,403 | ) | (115,214 | ) | 130,617 | (130,617 | ) | |||||||||||
|
Net loss from discontinued operations
|
(3,017 | ) | (3,017 | ) | - | 3,017 | (3,017 | ) | ||||||||||||
|
Net loss
|
$ | (133,634 | ) | $ | (18,420 | ) | $ | (115,214 | ) | $ | 133,634 | $ | (133,634 | ) | ||||||
| Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||
| July 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Cash & cash equivalents
|
$ | - | $ | 604,527 | $ | 494,429 | $ | (346 | ) | $ | 1,098,610 | |||||||||
|
Cash & cash equivalents – restricted
|
- | 324 | 36,685 | - | 37,009 | |||||||||||||||
|
Receivables, net
|
- | 96,867 | 280,062 | - | 376,929 | |||||||||||||||
|
Mortgage loans held for investment
|
- | 563,090 | - | - | 563,090 | |||||||||||||||
|
Intangible assets and goodwill, net
|
- | - | 1,249,353 | - | 1,249,353 | |||||||||||||||
|
Investments in subsidiaries
|
2,874,038 | - | 209 | (2,874,038 | ) | 209 | ||||||||||||||
|
Other assets
|
14,552 | 348,407 | 736,005 | - | 1,098,964 | |||||||||||||||
|
Total assets
|
$ | 2,888,590 | $ | 1,613,215 | $ | 2,796,743 | $ | (2,874,384 | ) | $ | 4,424,164 | |||||||||
|
Customer deposits
|
$ | - | $ | 731,759 | $ | - | $ | (346 | ) | $ | 731,413 | |||||||||
|
Long-term debt
|
- | 998,695 | 45,531 | - | 1,044,226 | |||||||||||||||
|
FHLB borrowings
|
- | 75,000 | - | - | 75,000 | |||||||||||||||
|
Other liabilities
|
121,145 | 125,317 | 1,301,916 | - | 1,548,378 | |||||||||||||||
|
Net intercompany advances
|
1,742,298 | (396,112 | ) | (1,346,186 | ) | - | - | |||||||||||||
|
Stockholders’ equity
|
1,025,147 | 78,556 | 2,795,482 | (2,874,038 | ) | 1,025,147 | ||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,888,590 | $ | 1,613,215 | $ | 2,796,743 | $ | (2,874,384 | ) | $ | 4,424,164 | |||||||||
17
Table of Contents
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||
| April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Cash & cash equivalents
|
$ | - | $ | 702,021 | $ | 1,102,135 | $ | (111 | ) | $ | 1,804,045 | |||||||||
|
Cash & cash equivalents – restricted
|
- | 6,160 | 28,190 | - | 34,350 | |||||||||||||||
|
Receivables, net
|
57 | 105,192 | 412,737 | - | 517,986 | |||||||||||||||
|
Mortgage loans held for investment, net
|
- | 595,405 | - | - | 595,405 | |||||||||||||||
|
Intangible assets and goodwill, net
|
- | - | 1,207,879 | - | 1,207,879 | |||||||||||||||
|
Investments in subsidiaries
|
3,276,597 | - | 231 | (3,276,597 | ) | 231 | ||||||||||||||
|
Other assets
|
19,014 | 332,782 | 722,626 | - | 1,074,422 | |||||||||||||||
|
Total assets
|
$ | 3,295,668 | $ | 1,741,560 | $ | 3,473,798 | $ | (3,276,708 | ) | $ | 5,234,318 | |||||||||
|
Customer deposits
|
$ | - | $ | 852,666 | $ | - | $ | (111 | ) | $ | 852,555 | |||||||||
|
Long-term debt
|
- | 998,605 | 36,539 | - | 1,035,144 | |||||||||||||||
|
FHLB borrowings
|
- | 75,000 | - | - | 75,000 | |||||||||||||||
|
Other liabilities
|
48,775 | 153,154 | 1,629,060 | - | 1,830,989 | |||||||||||||||
|
Net intercompany advances
|
1,806,263 | (431,696 | ) | (1,374,567 | ) | - | - | |||||||||||||
|
Stockholders’ equity
|
1,440,630 | 93,831 | 3,182,766 | (3,276,597 | ) | 1,440,630 | ||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 3,295,668 | $ | 1,741,560 | $ | 3,473,798 | $ | (3,276,708 | ) | $ | 5,234,318 | |||||||||
| Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| July 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash used in operating activities:
|
$ | 22,849 | $ | (43,301 | ) | $ | (327,799 | ) | $ | - | $ | (348,251 | ) | |||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
- | 17,618 | - | - | 17,618 | |||||||||||||||
|
Purchase property & equipment
|
- | - | (8,634 | ) | - | (8,634 | ) | |||||||||||||
|
Payments made for business acquisitions, net
|
- | - | (33,226 | ) | - | (33,226 | ) | |||||||||||||
|
Net intercompany advances
|
188,324 | - | - | (188,324 | ) | - | ||||||||||||||
|
Other, net
|
- | 13,672 | 4,567 | - | 18,239 | |||||||||||||||
|
Net cash provided by (used in) investing activities
|
188,324 | 31,290 | (37,293 | ) | (188,324 | ) | (6,003 | ) | ||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Customer banking deposits
|
- | (121,166 | ) | - | (235 | ) | (121,401 | ) | ||||||||||||
|
Dividends paid
|
(48,692 | ) | - | - | - | (48,692 | ) | |||||||||||||
|
Repurchase of common stock
|
(164,369 | ) | - | - | - | (164,369 | ) | |||||||||||||
|
Proceeds from exercise of stock options
|
1,500 | - | - | - | 1,500 | |||||||||||||||
|
Net intercompany advances
|
- | 35,507 | (223,831 | ) | 188,324 | - | ||||||||||||||
|
Other, net
|
388 | 176 | (16,551 | ) | - | (15,987 | ) | |||||||||||||
|
Net cash used in financing activities
|
(211,173 | ) | (85,483 | ) | (240,382 | ) | 188,089 | (348,949 | ) | |||||||||||
|
Effects of exchange rates on cash
|
- | - | (2,232 | ) | - | (2,232 | ) | |||||||||||||
|
Net decrease in cash
|
- | (97,494 | ) | (607,706 | ) | (235 | ) | (705,435 | ) | |||||||||||
|
Cash – beginning of period
|
- | 702,021 | 1,102,135 | (111 | ) | 1,804,045 | ||||||||||||||
|
Cash – end of period
|
$ | - | $ | 604,527 | $ | 494,429 | $ | (346 | ) | $ | 1,098,610 | |||||||||
18
Table of Contents
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| July 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash used in operating activities:
|
$ | 868 | $ | (4,881 | ) | $ | (450,564 | ) | $ | - | $ | (454,577 | ) | |||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
- | 19,264 | - | - | 19,264 | |||||||||||||||
|
Purchase property & equipment
|
- | - | (8,760 | ) | - | (8,760 | ) | |||||||||||||
|
Net intercompany advances
|
45,536 | - | - | (45,536 | ) | - | ||||||||||||||
|
Other, net
|
- | 6,803 | (1,947 | ) | - | 4,856 | ||||||||||||||
|
Net cash provided by (used in) investing activities
|
45,536 | 26,067 | (10,707 | ) | (45,536 | ) | 15,360 | |||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Customer banking deposits
|
- | (148,861 | ) | - | 5,662 | (143,199 | ) | |||||||||||||
|
Dividends paid
|
(50,287 | ) | - | - | - | (50,287 | ) | |||||||||||||
|
Repurchase of common stock
|
(3,483 | ) | - | - | - | (3,483 | ) | |||||||||||||
|
Proceeds from exercise of stock options
|
6,651 | - | - | - | 6,651 | |||||||||||||||
|
Net intercompany advances
|
- | 18,058 | (63,594 | ) | 45,536 | - | ||||||||||||||
|
Other, net
|
715 | (8,838 | ) | (17,765 | ) | - | (25,888 | ) | ||||||||||||
|
Net cash provided by financing activities
|
(46,404 | ) | (139,641 | ) | (81,359 | ) | 51,198 | (216,206 | ) | |||||||||||
|
Effects of exchange rates on cash
|
- | - | 7,063 | - | 7,063 | |||||||||||||||
|
Net decrease in cash
|
- | (118,455 | ) | (535,567 | ) | 5,662 | (648,360 | ) | ||||||||||||
|
Cash – beginning of period
|
- | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||
|
Cash – end of period
|
$ | - | $ | 122,895 | $ | 883,968 | $ | (560 | ) | $ | 1,006,303 | |||||||||
19
Table of Contents
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF
OPERATIONS
Our subsidiaries provide tax preparation, retail banking and
various business advisory and consulting services. We are the
only major company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses – retail, online and software. This segment
includes our tax operations in the U.S., Canada and Australia.
Additionally, this segment includes the product offerings and
activities of HRB Bank that primarily support the tax network,
our participations in refund anticipation loans, and our
commercial tax businesses, which provide tax preparation
software to CPAs and other tax preparers.
| Tax Services – Operating Results | (in 000s) | |||||||
| Three Months Ended July 31, | 2010 | 2009 | ||||||
|
Tax preparation fees
|
$ | 34,545 | $ | 33,625 | ||||
|
Fees from Peace of Mind guarantees
|
28,547 | 27,913 | ||||||
|
Fees from Emerald Card activities
|
10,575 | 11,691 | ||||||
|
Royalties
|
5,605 | 3,607 | ||||||
|
Other
|
12,373 | 11,127 | ||||||
|
Total revenues
|
91,645 | 87,963 | ||||||
|
Compensation and benefits:
|
||||||||
|
Field wages
|
39,249 | 39,379 | ||||||
|
Corporate wages
|
28,486 | 29,880 | ||||||
|
Benefits and other compensation
|
34,304 | 21,316 | ||||||
| 102,039 | 90,575 | |||||||
|
Occupancy and equipment
|
82,624 | 87,920 | ||||||
|
Depreciation and amortization
|
22,395 | 22,316 | ||||||
|
Marketing and advertising
|
8,413 | 6,839 | ||||||
|
Other
|
50,798 | 52,287 | ||||||
|
Total expenses
|
266,269 | 259,937 | ||||||
|
Pretax loss
|
$ | (174,624 | ) | $ | (171,974 | ) | ||
Three months
ended July 31, 2010 compared to July 31,
2009
Tax Services’ revenues increased $3.7 million, or
4.2%, for the three months ended July 31, 2010 compared to
the prior year, primarily due to higher royalties earned as a
result of the conversion of company-owned offices to franchises
in the prior year.
Total expenses increased $6.3 million, or 2.4%, for the
three months ended July 31, 2010. Benefits and other
compensation increased $13.0 million, or 60.9%, primarily
as a result of severance costs and related payroll taxes in the
current year. Occupancy and equipment expenses decreased
$5.3 million, or 6.0%, primarily due to the closure of
certain offices during the current quarter.
The pretax loss for the three months ended July 31, 2010
and 2009 was $174.6 million and $172.0 million,
respectively.
In August 2010, the Internal Revenue Service (IRS) announced
that, as of the beginning of the upcoming tax season, it would
no longer furnish the debt indicator (DI), to tax preparers or
financial institutions. As a result, RAL volumes are expected to
decline in fiscal year 2011, and alternate products may have
lower margins resulting in reduced profitability. We estimate
that the impact of the discontinuation of the DI will reduce our
pretax profitability by approximately $25 million or $0.05
per share. Our estimate is based on a number of assumptions and
actual results could differ.
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BUSINESS
SERVICES
This segment consists of RSM McGladrey, Inc. (RSM), a national
firm offering tax and consulting services, wealth management and
capital market services to middle-market companies.
| Business Services – Operating Results | (in 000s) | |||||||
| Three Months Ended July 31, | 2010 | 2009 | ||||||
|
Tax services
|
$ | 81,331 | $ | 82,669 | ||||
|
Business consulting
|
61,678 | 61,921 | ||||||
|
Accounting services
|
10,842 | 11,529 | ||||||
|
Capital markets
|
2,390 | 1,517 | ||||||
|
Reimbursed expenses
|
6,331 | 4,149 | ||||||
|
Other
|
12,138 | 15,833 | ||||||
|
Total revenues
|
174,710 | 177,618 | ||||||
|
Compensation and benefits
|
127,113 | 134,380 | ||||||
|
Occupancy
|
11,930 | 9,252 | ||||||
|
Amortization of intangible assets
|
2,836 | 2,965 | ||||||
|
Other
|
33,264 | 29,700 | ||||||
|
Total expenses
|
175,143 | 176,297 | ||||||
|
Pretax income (loss)
|
$ | (433 | ) | $ | 1,321 | |||
Three months
ended July 31, 2010 compared to July 31,
2009
Business Services’ revenues for the three months ended
July 31, 2010 decreased $2.9 million, or 1.6% from the
prior year.
Total expenses decreased $1.2 million, or 0.7%, from the
prior year. Compensation and benefits decreased
$7.3 million, or 5.4%, primarily due to decreases in
managing director compensation.
The pretax loss for the three months ended July 31, 2010
was $0.4 million compared to income of $1.3 million in
the prior year.
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 July 31, | 2010 | 2009 | ||||||
|
Interest income:
|
||||||||
|
Mortgage loans held for investment, net
|
$ | 6,323 | $ | 7,896 | ||||
|
Other investments
|
471 | 824 | ||||||
| 6,794 | 8,720 | |||||||
|
Other
|
1,325 | 1,204 | ||||||
|
Total revenues
|
8,119 | 9,924 | ||||||
|
Interest expense
|
20,788 | 19,658 | ||||||
|
Provision for loan losses
|
8,000 | 13,600 | ||||||
|
Compensation and benefits
|
12,385 | 13,301 | ||||||
|
Other
|
(794 | ) | 3,585 | |||||
|
Total expenses
|
40,379 | 50,144 | ||||||
|
Pretax loss
|
$ | (32,260 | ) | $ | (40,220 | ) | ||
Three months
ended July 31, 2010 compared to July 31,
2009
Interest income earned on mortgage loans held for investment
decreased $1.6 million from the prior year, primarily as a
result of declining rates and non-performing loans. Other
expenses declined $4.4 million primarily due to expense
reductions and higher cash receipts on residual interests in
securitizations.
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Income
Taxes
Our effective tax rate for continuing operations was 38.4% and
38.1% for the three months ended July 31, 2010 and 2009,
respectively. Our effective tax rate increased from the prior
year due to non-taxable gains from investments in company-owned
life insurance assets recorded in the first fiscal quarter of
last year. This increase was partially offset by a decrease to
the state effective tax rate. We expect our effective tax rate
for full fiscal year 2011 to be approximately 39%.
Mortgage Loans
Held for Investment
Mortgage loans held for investment at July 31, 2010 totaled
$563.1 million. The portfolio includes loans originated by
Sand Canyon Corporation (SCC) and purchased by HRB Bank which
constitutes approximately 63% of the total loan portfolio at
July 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 $239.9 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, excluding unamortized deferred fees and costs of
$4.8 million and $5.3 million at July 31, 2010
and April 30, 2010, respectively, is as follows:
| (dollars in 000s) | ||||||||||||||||
|
Outstanding
|
Loan Loss Allowance |
% 30+ Days
|
||||||||||||||
| Principal Balance | Amount | % of Principal | Past Due | |||||||||||||
|
As of July 31, 2010:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 406,881 | $ | 77,618 | 19.1 | % | 37.3 | % | ||||||||
|
All other
|
239,850 | 10,778 | 4.5 | % | 10.0 | % | ||||||||||
| $ | 646,731 | $ | 88,396 | 13.7 | % | 27.2 | % | |||||||||
|
As of April 30, 2010:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 434,644 | $ | 82,793 | 19.1 | % | 37.8 | % | ||||||||
|
All other
|
249,040 | 10,742 | 4.3 | % | 8.9 | % | ||||||||||
| $ | 683,684 | $ | 93,535 | 13.7 | % | 27.3 | % | |||||||||
We recorded provisions for loan losses of $8.0 million and
$13.6 million during the three months ended July 31,
2010 and 2009, respectively. Our allowance for loan losses as a
percent of mortgage loans was 13.7%, or $88.4 million, at
July 31, 2010, compared to 13.7%, or $93.5 million, at
April 30, 2010. 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, cash from customer deposits,
issuances of common stock and debt. We use capital primarily to
fund working capital, pay dividends, repurchase shares of common
stock 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
unsecured committed lines of credit (CLOCs), we believe, that in
the absence of any unexpected developments, our existing sources
of capital at July 31, 2010 are sufficient to meet our
operating needs.
CASH FROM
OPERATING ACTIVITIES
– Cash used by
operations totaled $348.3 million for the first three
months of fiscal year 2011, compared with $454.6 million
for the same period last year. The decrease was primarily due to
lower income tax payments made during the current quarter
compared to the prior year.
CASH FROM
INVESTING ACTIVITIES
– Cash used in
investing activities totaled $6.0 million for the first
three months of fiscal year 2011, compared to $15.4 million
provided in the same period last year.
Mortgage Loans
Held for Investment.
We received net payments of
$17.6 million and $19.3 million on our mortgage loans
held for investment for the first three months of fiscal years
2011 and 2010, respectively. Cash payments declined due
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 $8.6 million and $8.8 million for
the first three months of fiscal years 2011 and 2010,
respectively.
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Business
Acquisitions.
Total cash paid for acquisitions was
$33.2 million and $1.5 million during the three months
ended July 31, 2010 and 2009, respectively. In July 2010
our Business Services segment acquired a Boston-based accounting
firm for $29.8 million in cash, subject to adjustments.
Sales of
Businesses.
During the first quarter of fiscal year
2011, we sold 127 tax offices to franchisees for proceeds of
$26.4 million. During fiscal year 2010, we sold 267 tax
offices to franchisees for proceeds of $65.7 million. The
majority of these sales were financed through Franchise Equity
Lines of Credit (FELCs). Sales proceeds and cash payments under
the lines of credit are both included in investing activities.
CASH FROM
FINANCING ACTIVITIES
– Cash used in
financing activities totaled $348.9 million for the first
three months of fiscal year 2011, compared to
$216.2 million for the same period last year.
Customer Banking
Deposits.
Customer banking deposits declined
$121.4 million for the three months ended July 31,
2010 compared to $143.2 million in the prior year, due to
seasonal fluctuations in prepaid debit card deposits.
Dividends.
We have consistently paid quarterly dividends. Dividends paid
totaled $48.7 million and $50.3 million for the three
months ended July 31, 2010 and 2009, respectively.
Repurchase and
Retirement of Common Stock.
During the three months
ended July 31, 2010, we purchased and immediately retired
15.5 million shares of our common stock at a cost of
$235.7 million. Cash payments of $161.0 million were
made during the quarter for the share repurchases with the
settlement of the remaining $74.7 million occurring in
August. We may continue to repurchase and retire common stock or
retire treasury stock in the future.
Issuances of
Common Stock.
Proceeds from the issuance of common
stock totaled $1.5 million and $6.7 million for the
three months ended July 31, 2010 and 2009, respectively.
This decline is due to a reduction in stock option exercises and
the related tax benefits.
BORROWINGS
The following chart provides the debt ratings for BFC as of
July 31, 2010:
| Short-term | Long-term | Outlook | ||||||||||
|
Moody’s
|
P-2 | Baa1 | Negative | |||||||||
|
S&P
|
A-2 | BBB | Positive (1 | ) | ||||||||
|
DBRS
|
R-2(high | ) | BBB(high | ) | Positive (1 | ) | ||||||
| (1) | In August 2010, the outlook was changed to “Stable.” |
During the quarter ended July 31, 2010 Moody’s revised
their outlook from stable to negative, and in August, initiated
a
90-day
review period to consider a possible ratings downgrade.
There have been no other material changes in our borrowings or
debt ratings from those reported at April 30, 2010 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, 2010 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, 2010 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
23
Table of Contents
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.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from
those reported at April 30, 2010 in our Annual Report on
Form 10-K.
ITEM 4. CONTROLS
AND PROCEDURES
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, we 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.
RAL Litigation
We have been named in multiple lawsuits as defendants in
litigation regarding our refund anticipation loan program in
past years. All of those lawsuits have been settled or otherwise
resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al.
, April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys’ fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. The trial court’s
decertification decision is currently on appeal. We believe we
have meritorious defenses to this case and intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the “POM Cases”), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al.
, Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes (1) statutory fraud by selling
insurance without a license, (2) an unfair trade practice,
by omission and by “cramming” (i.e., charging
customers for the guarantee even though they did not request it
or want it), and (3) a breach of fiduciary duty. The
plaintiffs seek unspecified damages, injunctive relief,
attorneys’ fees and costs. The Madison County court
ultimately certified a class consisting of all persons residing
in 13 states who
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Table of Contents
paid a separate fee for POM from January 1, 1997 to the
date of a final judgment from the court. We subsequently removed
the case to federal court in the Southern District of Illinois,
where it is now pending. In November 2009, the federal court
issued an order vacating the state court’s class
certification ruling and allowing plaintiffs time to file a
renewed motion for class certification under the federal rules.
Plaintiffs filed a new motion for class certification seeking
certification of an 11-state class. Oral argument on
plaintiffs’ motion occurred in April 2010 and the parties
are awaiting a ruling. A trial date has been set for November
2010.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al.
(Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas. This case involves the same
plaintiffs’ attorneys that are involved in the
Marshall
litigation in Illinois and contains allegations similar to
those in the
Marshall
litigation. The plaintiff seeks
actual and treble damages, equitable relief, attorneys’
fees and costs. No class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, however, and there can
be no assurances as to the outcome of these pending actions or
their impact on our consolidated results of operations,
individually or in the aggregate.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) styled
The People of New
York v. H&R Block, Inc. and H&R Block Financial
Advisors, Inc
.,
et al.
asserting claims against the
Express IRA product. Thereafter, a number of civil actions were
filed against HRBFA and us concerning the product. Except for
two cases pending in state court, all of the civil actions were
consolidated by the panel for Multi-District Litigation into a
single action styled
In re H&R Block, Inc. Express IRA
Marketing Litigation
(Case
No. 06-1786-MD-RED)
in the United States District Court for the Western
District of Missouri. To avoid the cost and inherent risk
associated with litigation, we reached an agreement to settle
these cases. The settlement became final in May 2010. We
previously recorded a sufficient liability for the loss
associated with the settlement.
One other lawsuit relating to the Express IRA product remains
pending. This lawsuit was filed on January 2, 2008 by the
Mississippi Attorney General in the Chancery Court of Hinds
County, Mississippi First Judicial District (Case No. G
2008 6 S 2) and is styled
Jim Hood, Attorney for the
State of Mississippi v. H&R Block, Inc., et al.
The complaint alleges fraudulent business practices,
deceptive acts and practices, common law fraud and breach of
fiduciary duty with respect to the sale of the product in
Mississippi and seeks equitable relief, disgorgement of profits,
damages and restitution, civil penalties and punitive damages.
The defendants have filed a motion to dismiss. We believe we
have meritorious defenses to the claims in this case, and we
intend to defend this case vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for any liabilities relating to the Express
IRA litigation through an indemnification agreement.
RSM McGladrey
Litigation
RSM EquiCo, its parent and certain of its subsidiaries and
affiliates, are parties to a class action filed on July 11,
2006 and styled
Do Right’s Plant Growers, et al. v.
RSM EquiCo, Inc., et al.,
Case No. 06 CC00137, in the
California Superior Court, Orange County. The complaint contains
allegations relating to business valuation services provided by
RSM EquiCo, including allegations of fraud, negligent
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, breach of fiduciary
duty and unfair competition. Plaintiffs seek unspecified actual
and punitive damages, in addition to pre-judgment interest and
attorneys’ fees. On March 17, 2009, the court granted
plaintiffs’ motion for class certification on all claims.
The defendants filed two requests for interlocutory review of
the decision, the last of which was denied by the Supreme Court
of California on September 30, 2009. A trial date has been
set for January 2011.
The certified class consists of RSM EquiCo’s
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale.
The fees paid to RSM EquiCo in connection with these agreements
total approximately $185 million, a number which
substantially exceeds the equity of RSM EquiCo. We intend to
defend this case vigorously. The amount claimed in this action
is substantial and could have a
25
Table of Contents
material adverse impact on our consolidated results of
operations. There can be no assurance regarding the outcome of
this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009, where it remains
pending (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. We believe we have meritorious
defenses to the claims against RSM and H&R Block in this
case and intend to defend it vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
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
that 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 alternative practice structure 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.
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 and federal regulators,
municipalities, individual plaintiffs, and cases in which
plaintiffs seek to represent a class of others alleged to be
similarly situated. Among other things, these investigations,
claims and lawsuits allege discriminatory or unfair and
deceptive loan origination and servicing practices, public
nuisance, fraud, and violations of the Truth in Lending Act,
Equal Credit Opportunity Act and the Fair Housing Act. In the
current non-prime mortgage environment, the number of these
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. The amounts claimed in these investigations, claims and
lawsuits are substantial in some instances, and the ultimate
resulting liability is difficult to predict. In the event of
unfavorable outcomes, the amounts SCC may be required to pay in
the discharge of liabilities or settlements could be substantial
and, because SCC’s operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.,
alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. A trial date has been
set for June 2011. We believe the claims in this case are
without merit, and we intend to defend this case vigorously.
There can be no assurances, however, as to its outcome or its
impact on our consolidated results of operations.
Other Claims and
Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, respectively styled
Alice
Williams v. H&R Block Enterprises LLC
, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008);
Arabella Lemus v. H&R
Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009);
Delana Ugas v. H&R Block
Enterprises LLC, et al.,
Case No. BC417700 (United
States District Court, Central District of California, filed
July 13, 2009);
Barbara Petroski v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
26
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No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010);
Lance Hom v. H&R
Block Enterprises LLC, et al.,
Case No. 10CV0476 H
(United States District Court, Southern District of California,
filed March 4, 2010);
Stacy Oyer v. H&R Block
Eastern Enterprises, Inc., et al.,
Case
No. 10-CV-00387-WMS
(United States District Court, Western District of New York,
filed May 10, 2010); and
Li Dong Ma v. RSM
McGladrey TBS, LLC, et al.,
Case
No. C-08-01729
JF (United States District Court, Northern District of
California, filed February 28, 2008). These cases involve a
variety of legal theories and allegations including, among other
things, failure to compensate employees for all hours worked;
failure to provide employees with meal periods; failure to
provide itemized wage statements; failure to pay wages due upon
termination; failure to compensate for mandatory off-season
training;
and/or
misclassification of non-exempt employees. The plaintiffs seek
actual damages, in addition to statutory penalties, pre-judgment
interest and attorneys’ fees. We believe we have
meritorious defenses to the claims in these cases and intend to
defend them vigorously. The amounts claimed in these matters are
substantial in some instances, however, and the ultimate
liability with respect to these matters is difficult to predict.
There can be no assurances as to the outcome of these cases or
their impact on our consolidated results of operations,
individually or in the aggregate.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. Some of
these investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers’ income tax returns, the POM
guarantee program, and other products and services. We believe
we have meritorious defenses to each of these investigations,
claims and lawsuits, and we are defending or intend to defend
them vigorously. The amounts claimed in these matters are
substantial in some instances, however, the ultimate liability
with respect to such matters is difficult to predict. In the
event of an unfavorable outcome, the amounts we may be required
to pay in the discharge of liabilities or settlements could have
a material adverse impact on our consolidated results of
operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
adverse impact on our consolidated results of operations.
ITEM 1A. RISK
FACTORS
THE ELIMINATION
OF THE IRS DEBT INDICATOR MAY INCREASE THE RISK OF DEFAULT ON
RALS AND MAY REDUCE OUR PROFITABILITY.
In August 2010, the Internal Revenue Service (IRS) announced
that, as of the beginning of the upcoming tax season, it would
no longer furnish the debt indicator (DI), to tax preparers or
financial institutions. The DI is an underwriting tool that
lenders use when considering whether to loan money to taxpayers
who apply for a refund anticipation loan (RAL), which is short
term loan, secured by the taxpayer’s federal tax refund. As
a result of the IRS decision, approval rates and loan amounts
will likely be lower, and lenders may issue RALs that have a
greater probability of not being repaid. Our participation
interests in any RALs issued without the DI used in the credit
assessment of the client may have a higher risk of default,
which could increase our bad debt expense and reduce our
profitability. During the fiscal year ended April 30, 2010,
our revenues from RAL participations (including RALs which were
based on underwriting standards that included use of the
DI) totaled $146.2 million. RAL volumes are expected
to decline in fiscal year 2011, and alternate products may have
lower margins resulting in reduced profitability. We estimate
that the impact of the discontinuation of the DI will reduce our
pretax profitability by approximately $25 million or $0.05
per share. Our estimate is based on a number of assumptions and
actual results could differ.
There have been no other material changes in our risk factors
from those reported at April 30, 2010 in our Annual Report
on
Form 10-K.
27
Table of Contents
A summary of our purchases of H&R Block common stock during
the first quarter of fiscal year 2011 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 | |||||||||
|
May 1 – May 31
|
2 | $ | 18.32 | - | $ | 1,651,619 | ||||||
|
June 1 – June 30
|
79 | $ | 16.39 | - | $ | 1,651,619 | ||||||
|
July 1 – July 31
|
15,633 | $ | 15.21 | 15,500 | $ | 1,416,177 | ||||||
| (1) | We purchased 214,233 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. |
ITEM
6. EXHIBITS
| 10 | .1 | H&R Block, Inc. 2003 Long-Term Executive Compensation Plan (amended and restated effective July 27, 2010).* | ||
| 10 | .2 | H&R Block, Inc. Executive Severance Plan (amended and restated effective July 27, 2010).* | ||
| 10 | .3 | H&R Block, Inc. Severance Plan (amended and restated effective July 27, 2010).* | ||
| 10 | .4 | H&R Block, Inc. Deferred Compensation Plan for Executives (amended and restated effective July 27, 2010).* | ||
| 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. | ||
| * | Indicates management contracts, compensatory plans or arrangements. |
28
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.
Alan
M. Bennett
President
and Chief Executive Officer
September 3,
2010
Jeffrey
T. Brown
Vice
President, Interim Chief Financial
Officer
and Corporate Controller
September 3,
2010
29
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 6. Exhibitsprint