H&R BLOCK INC - Quarter Report: 2008 October (Form 10-Q)
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 October 31, 2008 | ||
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 LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013708014303/c48095c4809501.gif)
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
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrants 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 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 registrants Common
Stock, without par value, at the close of business on
November 30, 2008 was 338,944,762 shares.
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013708014303/c48095c4809502.gif)
Form 10-Q
for the Period Ended October 31, 2008
Table of
Contents
Page | ||||||||
PART I
|
Financial Information
|
|||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
24 | ||||||||
35 | ||||||||
35 | ||||||||
PART II | ||||||||
36 | ||||||||
39 | ||||||||
40 | ||||||||
40 | ||||||||
41 | ||||||||
42 | ||||||||
EX-3.1 | ||||||||
EX-3.2 | ||||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013708014303/c48095c4809502.gif)
CONDENSED
CONSOLIDATED BALANCE
SHEETS (amounts
in 000s, except share and per share amounts)
October 31, 2008 | April 30, 2008 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 693,626 | $ | 664,897 | ||||
Cash and cash equivalents restricted
|
814 | 7,031 | ||||||
Receivables, less allowance for doubtful accounts of $118,198
and $120,155
|
537,751 | 534,229 | ||||||
Prepaid expenses and other current assets
|
387,675 | 420,738 | ||||||
Assets of discontinued operations, held for sale
|
1,039,683 | 987,592 | ||||||
Total current assets
|
2,659,549 | 2,614,487 | ||||||
Mortgage loans held for investment, less allowance
for loan losses of $63,652 and $45,401 |
811,732 | 966,301 | ||||||
Property and equipment, at cost, less accumulated depreciation
and amortization of $626,896 and $620,460
|
377,687 | 363,664 | ||||||
Intangible assets, net
|
136,542 | 147,368 | ||||||
Goodwill
|
832,294 | 831,314 | ||||||
Other assets
|
606,943 | 700,291 | ||||||
Total assets
|
$ | 5,424,747 | $ | 5,623,425 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities:
|
||||||||
Customer banking deposits
|
$ | 748,469 | $ | 785,624 | ||||
Accounts payable, accrued expenses and other current liabilities
|
636,050 | 739,887 | ||||||
Accrued salaries, wages and payroll taxes
|
100,027 | 365,712 | ||||||
Accrued income taxes
|
100,857 | 439,380 | ||||||
Current portion of long-term debt
|
6,257 | 7,286 | ||||||
Federal Home Loan Bank borrowings
|
104,000 | 129,000 | ||||||
Liabilities of discontinued operations, held for sale
|
745,419 | 644,446 | ||||||
Total current liabilities
|
2,441,079 | 3,111,335 | ||||||
Long-term debt
|
1,727,510 | 1,031,784 | ||||||
Other noncurrent liabilities
|
423,496 | 492,488 | ||||||
Total liabilities
|
4,592,085 | 4,635,607 | ||||||
Commitments and contingencies
|
||||||||
Stockholders equity:
|
||||||||
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 444,176,510 and 435,890,796 |
4,442 | 4,359 | ||||||
Additional paid-in capital
|
837,912 | 695,959 | ||||||
Accumulated other comprehensive income (loss)
|
(11,236 | ) | 2,486 | |||||
Retained earnings
|
2,019,301 | 2,384,449 | ||||||
Less treasury shares, at cost
|
(2,017,757 | ) | (2,099,435 | ) | ||||
Total stockholders equity
|
832,662 | 987,818 | ||||||
Total liabilities and stockholders equity
|
$ | 5,424,747 | $ | 5,623,425 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013708014303/c48095c4809502.gif)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(unaudited,
amounts in 000s, except per share amounts) |
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues:
|
||||||||||||||||
Service revenues
|
$ | 316,337 | $ | 305,401 | $ | 557,057 | $ | 557,674 | ||||||||
Other revenues:
|
||||||||||||||||
Interest income
|
17,047 | 26,745 | 34,894 | 54,248 | ||||||||||||
Product and other revenues
|
18,085 | 24,546 | 31,427 | 38,788 | ||||||||||||
351,469 | 356,692 | 623,378 | 650,710 | |||||||||||||
Operating expenses:
|
||||||||||||||||
Cost of services
|
376,153 | 379,863 | 699,908 | 712,073 | ||||||||||||
Cost of other revenues
|
62,612 | 57,229 | 105,177 | 98,695 | ||||||||||||
Selling, general and administrative
|
138,036 | 151,278 | 255,240 | 267,083 | ||||||||||||
576,801 | 588,370 | 1,060,325 | 1,077,851 | |||||||||||||
Operating loss
|
(225,332 | ) | (231,678 | ) | (436,947 | ) | (427,141 | ) | ||||||||
Other income (expense), net
|
(2,121 | ) | 9,855 | (3,476 | ) | 17,819 | ||||||||||
Loss from continuing operations before tax benefit
|
(227,453 | ) | (221,823 | ) | (440,423 | ) | (409,322 | ) | ||||||||
Income tax benefit
|
(94,292 | ) | (86,890 | ) | (178,839 | ) | (162,219 | ) | ||||||||
Net loss from continuing operations
|
(133,161 | ) | (134,933 | ) | (261,584 | ) | (247,103 | ) | ||||||||
Net loss from discontinued operations
|
(2,713 | ) | (367,338 | ) | (7,009 | ) | (557,748 | ) | ||||||||
Net loss
|
$ | (135,874 | ) | $ | (502,271 | ) | $ | (268,593 | ) | $ | (804,851 | ) | ||||
Basic and diluted loss per share:
|
||||||||||||||||
Net loss from continuing operations
|
$ | (0.40 | ) | $ | (0.42 | ) | $ | (0.80 | ) | $ | (0.76 | ) | ||||
Net loss from discontinued operations
|
(0.01 | ) | (1.13 | ) | (0.02 | ) | (1.72 | ) | ||||||||
Net loss
|
$ | (0.41 | ) | $ | (1.55 | ) | $ | (0.82 | ) | $ | (2.48 | ) | ||||
Basic and diluted shares
|
329,810 | 324,694 | 328,475 | 324,279 | ||||||||||||
Dividends per share
|
$ | 0.15 | $ | 0.14 | $ | 0.29 | $ | 0.28 | ||||||||
Comprehensive income (loss):
|
||||||||||||||||
Net loss
|
$ | (135,874 | ) | $ | (502,271 | ) | $ | (268,593 | ) | $ | (804,851 | ) | ||||
Change in unrealized gain on available-for-sale securities, net
|
(597 | ) | 1,626 | (2,564 | ) | 1,163 | ||||||||||
Change in foreign currency translation adjustments
|
(11,472 | ) | (3,023 | ) | (11,158 | ) | 1,288 | |||||||||
Comprehensive loss
|
$ | (147,943 | ) | $ | (503,668 | ) | $ | (282,315 | ) | $ | (802,400 | ) | ||||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013708014303/c48095c4809502.gif)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
Six Months Ended October 31, | 2008 | 2007 | ||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (268,593 | ) | $ | (804,851 | ) | ||
Adjustments to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation and amortization
|
59,314 | 54,229 | ||||||
Stock-based compensation
|
13,505 | 15,500 | ||||||
Operating cash flows of discontinued operations
|
94,624 | 294,685 | ||||||
Other, net of business acquisitions
|
(564,781 | ) | (498,981 | ) | ||||
Net cash used in operating activities
|
(665,931 | ) | (939,418 | ) | ||||
Cash flows from investing activities:
|
||||||||
Principal repayments on mortgage loans held for investment, net
|
54,501 | 76,889 | ||||||
Purchases of property and equipment, net
|
(58,586 | ) | (46,200 | ) | ||||
Payments made for business acquisitions, net of cash acquired
|
(4,709 | ) | (21,037 | ) | ||||
Net cash provided by (used in) investing activities of
discontinued operations
|
(48,917 | ) | 8,214 | |||||
Other, net
|
8,910 | 4,865 | ||||||
Net cash provided by (used in) investing activities
|
(48,801 | ) | 22,731 | |||||
Cash flows from financing activities:
|
||||||||
Repayments of commercial paper
|
- | (5,125,279 | ) | |||||
Proceeds from issuance of commercial paper
|
- | 4,133,197 | ||||||
Repayments of other short-term borrowings
|
(100,000 | ) | (1,005,000 | ) | ||||
Proceeds from other short-term borrowings
|
768,625 | 2,555,000 | ||||||
Customer deposits, net
|
(40,595 | ) | (243,030 | ) | ||||
Dividends paid
|
(96,555 | ) | (90,495 | ) | ||||
Acquisition of treasury shares
|
(4,467 | ) | (5,672 | ) | ||||
Proceeds from exercise of stock options
|
61,699 | 13,434 | ||||||
Proceeds from issuance of common stock, net
|
141,558 | - | ||||||
Net cash provided by financing activities of discontinued
operations
|
4,783 | 191,546 | ||||||
Other, net
|
8,413 | (39,230 | ) | |||||
Net cash provided by financing activities
|
743,461 | 384,471 | ||||||
Net increase (decrease) in cash and cash equivalents
|
28,729 | (532,216 | ) | |||||
Cash and cash equivalents at beginning of the period
|
664,897 | 816,917 | ||||||
Cash and cash equivalents at end of the period
|
$ | 693,626 | $ | 284,701 | ||||
Supplementary cash flow data:
|
||||||||
Income taxes paid, net of refunds received of $19,641 and $71,724
|
$ | 99,910 | $ | (52,360 | ) | |||
Interest paid on borrowings
|
38,713 | 73,998 | ||||||
Interest paid on deposits
|
10,441 | 28,039 |
See Notes to
Condensed Consolidated Financial Statements
3
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013708014303/c48095c4809502.gif)
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |
(unaudited,
amounts in 000s, except per share amounts) |
Accumulated |
||||||||||||||||||||||||||||||||||||||||
Convertible |
Additional |
Other |
||||||||||||||||||||||||||||||||||||||
Common Stock | Preferred Stock |
Paid-in |
Comprehensive |
Retained |
Treasury Stock |
Total |
||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
Balances at April 30, 2007
|
435,891 | $ | 4,359 | - | $ | - | $ | 676,766 | $ | (1,320 | ) | $ | 2,886,440 | (112,672 | ) | $ | (2,151,746 | ) | $ | 1,414,499 | ||||||||||||||||||||
Remeasurement of uncertain tax positions upon adoption of
FIN 48
|
- | - | - | - | - | - | (9,716 | ) | - | - | (9,716 | ) | ||||||||||||||||||||||||||||
Net loss
|
- | - | - | - | - | - | (804,851 | ) | - | - | (804,851 | ) | ||||||||||||||||||||||||||||
Unrealized translation gain
|
- | - | - | - | - | 1,288 | - | - | - | 1,288 | ||||||||||||||||||||||||||||||
Change in net unrealized gain on available-for-sale securities
|
- | - | - | - | - | 1,163 | - | - | - | 1,163 | ||||||||||||||||||||||||||||||
Stock-based compensation
|
- | - | - | - | 20,750 | - | - | - | - | 20,750 | ||||||||||||||||||||||||||||||
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
Option exercises
|
- | - | - | - | (5,105 | ) | - | - | 940 | 17,944 | 12,839 | |||||||||||||||||||||||||||||
Nonvested shares
|
- | - | - | - | (14,439 | ) | - | - | 742 | 14,167 | (272 | ) | ||||||||||||||||||||||||||||
ESPP
|
- | - | - | - | 400 | - | - | 218 | 4,161 | 4,561 | ||||||||||||||||||||||||||||||
Acquisitions
|
- | - | - | - | 35 | - | - | 8 | 151 | 186 | ||||||||||||||||||||||||||||||
Acquisition of treasury shares
|
- | - | - | - | - | - | - | (245 | ) | (5,672 | ) | (5,672 | ) | |||||||||||||||||||||||||||
Cash dividends paid $0.28 per share
|
- | - | - | - | - | - | (90,495 | ) | - | - | (90,495 | ) | ||||||||||||||||||||||||||||
Balances at October 31, 2007
|
435,891 | $ | 4,359 | - | $ | - | $ | 678,407 | $ | 1,131 | $ | 1,981,378 | (111,009 | ) | $ | (2,120,995 | ) | $ | 544,280 | |||||||||||||||||||||
Balances at April 30, 2008
|
435,891 | $ | 4,359 | - | $ | - | $ | 695,959 | $ | 2,486 | $ | 2,384,449 | (109,880 | ) | $ | (2,099,435 | ) | $ | 987,818 | |||||||||||||||||||||
Net loss
|
- | - | - | - | - | - | (268,593 | ) | - | - | (268,593 | ) | ||||||||||||||||||||||||||||
Unrealized translation loss
|
- | - | - | - | - | (11,158 | ) | - | - | - | (11,158 | ) | ||||||||||||||||||||||||||||
Change in net unrealized gain (loss) on available-for-sale
securities
|
- | - | - | - | - | (2,564 | ) | - | - | - | (2,564 | ) | ||||||||||||||||||||||||||||
Proceeds from common stock issuance, net of expenses
|
8,286 | 83 | - | - | 141,475 | - | - | - | - | 141,558 | ||||||||||||||||||||||||||||||
Stock-based compensation
|
- | - | - | - | 15,060 | - | - | - | - | 15,060 | ||||||||||||||||||||||||||||||
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
Option exercises
|
- | - | - | - | (3,351 | ) | - | - | 3,768 | 72,010 | 68,659 | |||||||||||||||||||||||||||||
Nonvested shares
|
- | - | - | - | (10,803 | ) | - | - | 539 | 10,304 | (499 | ) | ||||||||||||||||||||||||||||
ESPP
|
- | - | - | - | (453 | ) | - | - | 192 | 3,668 | 3,215 | |||||||||||||||||||||||||||||
Acquisitions
|
- | - | - | - | 25 | - | - | 9 | 163 | 188 | ||||||||||||||||||||||||||||||
Acquisition of treasury shares
|
- | - | - | - | - | - | - | (205 | ) | (4,467 | ) | (4,467 | ) | |||||||||||||||||||||||||||
Cash dividends paid $0.29 per share
|
- | - | - | - | - | - | (96,555 | ) | - | - | (96,555 | ) | ||||||||||||||||||||||||||||
Balances at October 31, 2008
|
444,177 | $ | 4,442 | - | $ | - | $ | 837,912 | $ | (11,236 | ) | $ | 2,019,301 | (105,577 | ) | $ | (2,017,757 | ) | $ | 832,662 | ||||||||||||||||||||
See Notes to
Condensed Consolidated Financial Statements
4
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 October 31,
2008, the condensed consolidated statements of operations and
comprehensive income (loss) for the three and six months ended
October 31, 2008 and 2007, the condensed consolidated
statements of cash flows for the six months ended
October 31, 2008 and 2007, and the condensed consolidated
statements of stockholders equity for the six months ended
October 31, 2008 and 2007 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, cash flows and changes in stockholders equity
at October 31, 2008 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
reclassifications had no effect on our results of operations or
stockholders equity as previously reported. On
August 12, 2008, we announced the signing of a definitive
agreement to sell H&R Block Financial Advisors, Inc.
(HRBFA) to Ameriprise Financial, Inc. (Ameriprise). At
October 31, 2008, we met the criteria requiring us to
present the results of operations of HRBFA and its direct
corporate parent as discontinued operations, and the related
assets and liabilities as held for sale in the condensed
consolidated financial statements. All periods presented have
been reclassified to reflect our discontinued operations. See
additional discussion in note 15.
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, 2008
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2008 or for
the year then ended, are derived from our April 30, 2008
Annual Report to Shareholders on
Form 10-K.
Management Estimates
The preparation of financial statements in conformity with
U.S. 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. Actual results could differ 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
Cash deposits in bank accounts in excess of insured or
guaranteed limits are exposed to loss in the event of
nonperformance by the financial institution. We had cash
deposits in excess of these limits of $344.4 million at
October 31, 2008. In previous periods, we did not hold
large cash balances in financial institutions, and instead
invested in money market funds. We have not historically
experienced any losses on bank deposits.
Our mortgage loans held for investment include concentrations of
loans to borrowers in a single state, 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 49% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California or New York.
5
Table of Contents
2. | Earnings (Loss) Per Share and Stockholders Equity |
Basic and diluted loss per share is computed using the weighted
average shares outstanding during each period. The dilutive
effect of potential common shares is included in diluted
earnings per share except in those periods with a loss from
continuing operations. Diluted earnings per share excludes the
impact of shares of common stock issuable upon the lapse of
certain restrictions or the exercise of options to purchase
23.7 million shares for the three and six months ended
October 31, 2008, and 30.2 million shares and
30.7 million shares for the three and six months ended
October 31, 2007, respectively, as the effect would be
antidilutive due to the net loss from continuing operations
during each period.
The weighted average shares outstanding for the three and six
months ended October 31, 2008 increased to
329.8 million and 328.5 million, respectively, from
324.7 million and 324.3 million for the three and six
months ended October 31, 2007, respectively, primarily due
to the issuance of shares of our common stock in October 2008.
On October 27, 2008, we sold 8.3 million shares of our
common stock, without par value, at a price of $17.50 per share
in a registered direct offering through subscription agreements
with selected institutional investors. We received net proceeds
of $141.6 million, after deducting placement agent fees and
other offering expenses.
During the six months ended October 31, 2008 and 2007, we
issued 4.5 million and 1.9 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the six months ended October 31, 2008, we acquired
0.2 million shares of our common stock, which represent
shares swapped or surrendered to us in connection with the
vesting of nonvested shares and the exercise of stock options,
at an aggregate cost of $4.5 million. During the six months
ended October 31, 2007, we acquired 0.2 million shares
of our common stock, which represent shares swapped or
surrendered to us in connection with the vesting of nonvested
shares and the exercise of stock options, at an aggregate cost
of $5.7 million.
During the six months ended October 31, 2008, we granted
5.1 million stock options and 1.0 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$3.80 for manager options and $2.83 for options granted to our
seasonal associates. At October 31, 2008, the total
unrecognized compensation cost for options and nonvested shares
and units was $15.6 million and $27.1 million,
respectively.
3. | Mortgage Loans Held for Investment |
The composition of our mortgage loan portfolio as of
October 31, 2008 and April 30, 2008 is as follows:
(dollars in 000s) | ||||||||||||||||
October 31, 2008 | April 30, 2008 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Adjustable-rate loans
|
$ | 584,967 | 67 | % | $ | 715,919 | 71 | % | ||||||||
Fixed-rate loans
|
284,084 | 33 | % | 288,721 | 29 | % | ||||||||||
869,051 | 100 | % | 1,004,640 | 100 | % | |||||||||||
Unamortized deferred fees and costs
|
6,333 | 7,062 | ||||||||||||||
Less: Allowance for loan losses
|
(63,652 | ) | (45,401 | ) | ||||||||||||
$ | 811,732 | $ | 966,301 | |||||||||||||
Activity in the allowance for mortgage loan losses for the six
months ended October 31, 2008 and 2007 is as follows:
(in
000s)
Six Months Ended October 31, | 2008 | 2007 | ||||||||
Balance at beginning of the period
|
$ | 45,401 | $ | 3,448 | ||||||
Provision
|
38,083 | 11,926 | ||||||||
Recoveries
|
3 | 998 | ||||||||
Charge-offs
|
(19,835 | ) | (880 | ) | ||||||
Balance at end of the period
|
$ | 63,652 | $ | 15,492 | ||||||
The loan loss provision increased significantly during the
current period as a result of declining collateral values due to
a decline in residential home prices, and increasing
delinquencies occurring in our
6
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portfolio. Our loan loss reserve as a percent of mortgage loans
was 7.27% at October 31, 2008, compared to 4.49% at
April 30, 2008.
Loans 60 days past due are considered impaired. Impaired
loans at October 31, 2008 and April 30, 2008 totaled
$150.8 million and $128.9 million, respectively.
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 $110.9 million and $37.2 million at
October 31, 2008 and April 30, 2008, respectively.
4. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill of continuing
operations for the six months ended October 31, 2008
consist of the following:
(in
000s)
April 30, 2008 | Additions | Impairment | Other | October 31, 2008 | ||||||||||||||||
Tax Services
|
$ | 431,981 | $ | 4,907 | $ | (2,188 | ) | $ | (2,998 | ) | $ | 431,702 | ||||||||
Business Services
|
399,333 | 1,779 | - | (520 | ) | 400,592 | ||||||||||||||
Total
|
$ | 831,314 | $ | 6,686 | $ | (2,188 | ) | $ | (3,518 | ) | $ | 832,294 | ||||||||
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur indicating it
is more likely than not the fair value of a reporting
units net assets has been reduced below its carrying
value. During the three months ended October 31, 2008, we
recorded a $2.2 million impairment in our Tax Services
segment relating to the goodwill of a small digital business
acquired in fiscal year 2005. No other events indicating
possible impairment of goodwill were identified.
Intangible assets of continuing operations consist of the
following:
(in 000s) | ||||||||||||||||||||||||
October 31, 2008 | April 30, 2008 | |||||||||||||||||||||||
Gross |
Gross |
|||||||||||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Tax Services:
|
||||||||||||||||||||||||
Customer relationships
|
$ | 44,026 | $ | (22,289 | ) | $ | 21,737 | $ | 46,479 | $ | (22,007 | ) | $ | 24,472 | ||||||||||
Noncompete agreements
|
22,367 | (20,226 | ) | 2,141 | 22,966 | (19,981 | ) | 2,985 | ||||||||||||||||
Purchased technology
|
12,500 | (3,262 | ) | 9,238 | 12,500 | (2,283 | ) | 10,217 | ||||||||||||||||
Trade name
|
1,025 | (167 | ) | 858 | 1,025 | (117 | ) | 908 | ||||||||||||||||
Business Services:
|
||||||||||||||||||||||||
Customer relationships
|
144,032 | (105,895 | ) | 38,137 | 143,402 | (100,346 | ) | 43,056 | ||||||||||||||||
Noncompete agreements
|
32,442 | (18,780 | ) | 13,662 | 32,303 | (17,589 | ) | 14,714 | ||||||||||||||||
Trade name amortizing
|
2,600 | (2,600 | ) | - | 3,290 | (3,043 | ) | 247 | ||||||||||||||||
Trade name
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||
$ | 314,629 | $ | (178,087 | ) | $ | 136,542 | $ | 317,602 | $ | (170,234 | ) | $ | 147,368 | |||||||||||
Amortization of intangible assets of continuing operations for
the three and six months ended October 31, 2008 was
$8.0 million and $13.6 million, respectively, and
$5.8 million and $12.2 million for the three and six
months ended October 31, 2007, respectively. Estimated
amortization of intangible assets for fiscal years 2009 through
2013 is $22.6 million, $20.1 million,
$18.3 million, $15.5 million and $11.6 million,
respectively.
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5. | Borrowings |
Long-term debt consists of the following:
(in
000s)
October 31, 2008 | April 30, 2008 | |||||||||
CLOC borrowings, due August 2010
|
$ | 693,625 | $ | - | ||||||
Senior Notes, 7.875%, due January 2013
|
599,476 | 599,414 | ||||||||
Senior Notes, 5.125%, due October 2014
|
398,589 | 398,471 | ||||||||
Other
|
42,077 | 41,185 | ||||||||
1,733,767 | 1,039,070 | |||||||||
Less: Current portion
|
(6,257 | ) | (7,286 | ) | ||||||
$ | 1,727,510 | $ | 1,031,784 | |||||||
At October 31, 2008, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These unsecured committed
lines of credit (CLOCs), and outstanding borrowings thereunder,
have a maturity date of August 2010 and an annual facility fee
in a range of six to fifteen basis points per annum, based on
our credit ratings. We had $693.6 million outstanding as of
October 31, 2008 to support working capital requirements
primarily arising from off-season operating losses, to pay
dividends and acquire businesses. These borrowings are included
in long-term debt on our condensed consolidated balance sheet
due to their contractual maturity date. The CLOCs, among other
things, require we maintain at least $650.0 million of net
worth on the last day of any fiscal quarter. We had net worth of
$832.7 million at October 31, 2008.
Lehman Brothers Bank, FSB (Lehman) is a participating lender in
our $2.0 billion CLOCs, with a $50.0 million credit
commitment. In September 2008, Lehmans parent company
declared bankruptcy. Since then, Lehman has not honored any
funding requests under these facilities, thereby effectively
reducing our available liquidity under our CLOCs to
$1.95 billion. We do not expect this change to have a
material impact on our liquidity or consolidated financial
statements.
H&R Block Bank (HRB Bank) is a member of the Federal Home
Loan Bank (FHLB) of Des Moines, which extends credit to member
banks based on eligible collateral. At October 31, 2008,
HRB Bank had total FHLB advance capacity of $265.3 million.
There was $104.0 million outstanding on this facility,
leaving remaining availability of $161.3 million. Mortgage
loans held for investment of $770.8 million serve as
eligible collateral and are used to determine total capacity.
6. | Income Taxes |
We file a consolidated federal income tax return in the United
States and file tax returns in various state and foreign
jurisdictions. Consolidated tax returns for the years 1999
through 2005 are currently under examination by the Internal
Revenue Service (IRS). Tax years prior to 1999 are closed by
statute. Historically, tax returns in various foreign and state
jurisdictions are examined and settled upon completion of the
exam.
During the three and six months ended October 31, 2008, we
accrued an additional $1.1 million and $4.1 million,
respectively, of interest and penalties related to our uncertain
tax positions. We had unrecognized tax benefits of
$125.8 million and $137.6 million at October 31,
2008 and April 30, 2008, respectively. The unrecognized tax
benefits decreased $11.8 million in the current year, due
primarily to settlement payments of $9.3 million. We have
classified the liability for unrecognized tax benefits,
including corresponding accrued interest, as long-term at
October 31, 2008, which is included in other noncurrent
liabilities on the condensed consolidated balance sheet. Amounts
that we expect to pay, or for which statutes expire, within the
next twelve months have been included in accounts payable,
accrued expenses and other current 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 total amount of previously
unrecognized tax benefits may decrease by approximately $4 to
$5 million within twelve months of October 31, 2008.
8
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7. | Interest Income and Expense |
The following table shows the components of interest income and
expense of our continuing operations. Operating interest expense
is included in cost of other revenues, and interest expense on
acquisition debt is included in other income (expense), net on
our condensed consolidated statements of operations.
(in
000s)
Three Months Ended
|
Six Months Ended |
|||||||||||||||
October 31, | October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Interest income:
|
||||||||||||||||
Mortgage loans, net
|
$ | 12,098 | $ | 20,451 | $ | 25,363 | $ | 42,942 | ||||||||
Other
|
4,949 | 6,294 | 9,531 | 11,306 | ||||||||||||
$ | 17,047 | $ | 26,745 | $ | 34,894 | $ | 54,248 | |||||||||
Operating interest expense:
|
||||||||||||||||
Borrowings
|
$ | 21,054 | $ | 10,362 | $ | 39,226 | $ | 20,660 | ||||||||
Deposits
|
3,884 | 12,221 | 7,927 | 26,464 | ||||||||||||
FHLB advances
|
1,327 | 1,470 | 2,655 | 3,360 | ||||||||||||
26,265 | 24,053 | 49,808 | 50,484 | |||||||||||||
Interest expense acquisition debt
|
416 | 652 | 829 | 1,247 | ||||||||||||
Total interest expense
|
$ | 26,681 | $ | 24,705 | $ | 50,637 | $ | 51,731 | ||||||||
8. | Fair Value |
On May 1, 2008, we adopted Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosure requirements for fair value measurements. We
elected to defer the application of SFAS 157 for
nonfinancial assets and nonfinancial liabilities until fiscal
year 2010, as provided for by FASB Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
The adoption of SFAS 157 did not have an impact on our
consolidated results of operations or financial position.
Fair Value Hierarchy
SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value into three
broad levels, considering the relative reliability of the
inputs, as follows:
n | Level 1 Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. | |
n | Level 2 Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market. | |
n | Level 3 Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. |
Estimation of Fair
Value
The following is a description of the valuation methodologies
used for assets and liabilities measured at fair value and the
general classification of these instruments pursuant to the fair
value hierarchy.
n | 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. |
9
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n | Mortgage loans held for sale The fair values of loans held for sale are generally based on observable market prices of securities that have loan collateral or interests in loans that are similar to the held-for-sale loans, or whole loan sale prices if formally committed. These loans are classified as Level 2. | |
n | Residual interests in securitizations Determination of the fair value of residual interests in securitizations requires the use of unobservable inputs. We value these securities using a discounted cash flow approach that incorporates expectations of prepayment speeds and expectations of delinquencies and losses. Risk-adjusted discount rates are based on quotes from third party sources. These assets are classified as Level 3. |
Assets and
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents for each hierarchy level the
financial assets of our continuing operations that are measured
at fair value on a recurring basis at October 31, 2008:
(dollars
in 000s)
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Available-for-sale securities
|
$ | 47,199 | $ | 2,732 | $ | 44,467 | $ | - | ||||||||
Mortgage loans held for sale
|
24,121 | - | 24,121 | - | ||||||||||||
Residual interests in securitizations
|
9,487 | - | - | 9,487 | ||||||||||||
$ | 80,807 | $ | 2,732 | $ | 68,588 | $ | 9,487 | |||||||||
As a percentage of total assets
|
1.5% | 0.1% | 1.3% | 0.2% | ||||||||||||
The following table presents changes in Level 3 financial
assets measured at fair value on a recurring basis:
(in
000s)
Three Months
Ended |
Six Months Ended |
|||||||||
October 31, 2008 | October 31, 2008 | |||||||||
Fair value, beginning of period
|
$ | 8,466 | $ | 16,678 | ||||||
Losses:
|
||||||||||
Included in earnings
|
(269 | ) | (5,222 | ) | ||||||
Included in other comprehensive income (loss)
|
2,004 | (316 | ) | |||||||
Cash received
|
(714 | ) | (1,653 | ) | ||||||
Fair value, end of period
|
$ | 9,487 | $ | 9,487 | ||||||
Mortgage loans held for sale are included in prepaid expenses
and other current assets, and available-for-sale securities and
residual interests in securitizations are included in other
assets on our condensed consolidated balance sheets.
Fair Value Option
We adopted Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159) on
May 1, 2008. SFAS 159 permits an instrument by
instrument irrevocable election to account for selected
financial assets and financial liabilities at fair value. We did
not elect to apply the fair value option to any eligible
financial assets or financial liabilities on May 1, 2008 or
during the six months ended October 31, 2008. Subsequent to
the initial adoption, we may elect to account for selected
financial assets and financial liabilities at fair value. Such
an election could be made at the time an eligible financial
asset, financial liability or firm commitment is recognized or
when certain specified reconsideration events occur.
9. | Regulatory Requirements |
HRB Bank and the Company are subject to various regulatory
requirements, including capital guidelines for HRB Bank,
administered by federal banking agencies. Failure to meet
minimum capital requirements can trigger certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank and
our consolidated financial statements. All savings associations
are subject to the capital adequacy guidelines and the
regulatory framework for prompt corrective action. HRB Bank must
meet specific capital guidelines that involve quantitative
measures of HRB Banks assets, liabilities and certain
off-balance sheet items, as calculated under regulatory
accounting practices. HRB Banks capital amounts and
classification are also subject to
10
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qualitative judgments by the regulators about components, risk
weightings and other factors. HRB Bank files its regulatory
Thrift Financial Report (TFR) on a calendar quarter basis.
Quantitative measures established by regulation to ensure
capital adequacy require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and
Tier 1 capital, as set forth in the table below. In
addition to these minimum ratio requirements, HRB Bank is
required to continually maintain a 12.0% minimum leverage ratio
as a condition of its charter-approval order through fiscal year
2009. This condition was extended through fiscal year 2012 as a
result of a Supervisory Directive issued on May 29, 2007.
As of October 31, 2008, HRB Banks leverage ratio was
15.5%.
As of September 30, 2008, our most recent TFR filing with
the Office of Thrift Supervision (OTS), HRB Bank was a
well capitalized institution under the prompt
corrective action provisions of the Federal Deposit Insurance
Corporation (FDIC). The five capital categories are:
(1) well capitalized (total risk-based capital
ratio of 10%, Tier 1 Risk-based capital ratio of 6% and
leverage ratio of 5%); (2) adequately
capitalized (3) undercapitalized
(4) significantly undercapitalized and
(5) critically undercapitalized. There are no
conditions or events since September 30, 2008 that
management believes have changed HRB Banks category.
The following table sets forth HRB Banks regulatory
capital requirements at September 30, 2008, as calculated
in the most recently filed TFR:
(dollars in 000s) | ||||||||||||||||||||||||
To Be Well |
||||||||||||||||||||||||
Capitalized |
||||||||||||||||||||||||
For Capital Adequacy
|
Under Prompt |
|||||||||||||||||||||||
Actual | Purposes | Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total risk-based capital
ratio(1)
|
$ | 195,362 | 33.1% | $ | 47,187 | 8.0% | $ | 58,983 | 10.0% | |||||||||||||||
Tier 1 risk-based capital
ratio(2)
|
$ | 188,066 | 31.9% | n/a | n/a | $ | 35,390 | 6.0% | ||||||||||||||||
Tier 1 capital ratio
(leverage)(3)
|
$ | 188,066 | 17.7% | $ | 127,580 | 12.0% | $ | 53,158 | 5.0% | |||||||||||||||
Tangible equity
ratio(4)
|
$ | 188,066 | 17.7% | $ | 15,947 | 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. |
10. | Commitments and Contingencies |
Changes in the deferred revenue liability 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) | ||||||||||
Six Months Ended October 31, | 2008 | 2007 | ||||||||
Balance, beginning of period
|
$ | 140,583 | $ | 142,173 | ||||||
Amounts deferred for new guarantees issued
|
1,148 | 1,067 | ||||||||
Revenue recognized on previous deferrals
|
(45,826 | ) | (46,388 | ) | ||||||
Balance, end of period
|
$ | 95,905 | $ | 96,852 | ||||||
The following table summarizes certain of our other contractual
obligations and commitments:
(in 000s) | ||||||||||
As of | October 31, 2008 | April 30, 2008 | ||||||||
Commitment to fund Franchise Equity Lines of Credit
|
$ | 81,533 | $ | 79,134 | ||||||
Contingent business acquisition obligations
|
25,962 | 24,288 | ||||||||
Media advertising purchase obligation
|
64,811 | 19,043 | ||||||||
11
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We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. Other guarantees and indemnifications of the Company
and its subsidiaries include obligations to protect
counterparties from losses arising from the following:
(1) tax, legal and other risks related to the purchase or
disposition of businesses; (2) penalties and interest
assessed by federal and state taxing authorities in connection
with tax returns prepared for clients; (3) indemnification
of our directors and officers; and (4) third-party claims
relating to various arrangements in the normal course of
business. Typically, there is no stated maximum payment related
to these indemnifications, and the terms of the indemnities may
vary and in many cases 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 these
guarantees and indemnifications is not material as of
October 31, 2008.
Mortgage Loan
Repurchase Liability
Sand Canyon Corporation (SCC), formerly Option One Mortgage
Corporation, maintains recourse with respect to loans previously
sold or securitized under indemnification of loss provisions
relating to breach of representations and warranties made to
purchasers or insurers. As a result, SCC may be required to
repurchase loans or otherwise indemnify third-parties for
losses. These representations and warranties and corresponding
repurchase obligations generally are not subject to stated
limits or a stated term and, therefore, may continue for the
foreseeable future. SCC has established a liability related to
potential losses under these indemnifications and monitors the
adequacy of the repurchase liability on an ongoing basis. To the
extent that future claim volumes differ from current estimates,
or the value of mortgage loans and residential home prices
change, future losses may be different than these estimates and
those differences may be significant.
The following table summarizes SCCs loan repurchase
activity:
(in 000s) | ||||||||||||||
Six Months Ended |
Year Ended |
|||||||||||||
October 31, 2008 | October 31, 2007 | April 30, 2008 | ||||||||||||
Loan repurchase liability at end of period
|
$ | 224,679 | $ | 85,894 | $ | 243,066 | ||||||||
Loans repurchased and indemnification payments during the period
|
22,009 | 381,442 | 515,370 | |||||||||||
Repurchase reserves added during the period
|
- | 329,966 | 582,373 | |||||||||||
Restructuring Charge
During fiscal year 2006, our mortgage business initiated a
restructuring plan to reduce costs. Restructuring activities
continued into fiscal years 2007 and 2008, including our
previously announced closure of all mortgage origination
activities and sale of servicing operations. Changes in our
restructuring charge liability during the six months ended
October 31, 2008 are as follows:
(in 000s) | ||||||||||||||||
Accrual Balance as
of |
Cash |
Other |
Accrual Balance as
of |
|||||||||||||
April 30, 2008 | Payments | Adjustments | October 31, 2008 | |||||||||||||
Employee severance costs
|
$ | 4,807 | $ | (4,223 | ) | $ | 760 | $ | 1,344 | |||||||
Contract termination costs
|
23,113 | (8,016 | ) | 1,508 | 16,605 | |||||||||||
$ | 27,920 | $ | (12,239 | ) | $ | 2,268 | $ | 17,949 | ||||||||
The remaining liability related to this restructuring charge is
included in accounts payable, accrued expenses and other current
liabilities and accrued salaries, wages and payroll taxes on our
consolidated balance sheet and primarily relates to lease
obligations for vacant space resulting from branch office
closings and employee severance costs, respectively.
Contract termination costs include estimates regarding the
length of time required to sublease vacant space and expected
recovery rates. Actual results could vary from these estimates.
12
Table of Contents
11. | Litigation and Related Contingencies |
We are party to investigations, legal claims and lawsuits
arising out of our business operations. We accrue our best
estimate of the probable loss upon resolution of investigations,
legal claims and lawsuits, which totaled $12.7 million and
$11.5 million at October 31, 2008 and April 30,
2008, respectively. With respect to most of the matters
described below, we have concluded that a loss is not probable
and therefore no liability has been recorded.
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We believe we have meritorious defenses to the remaining RAL
Cases and we intend to defend them vigorously. There can be no
assurances, however, as to the outcome of the pending RAL Cases
individually or in the aggregate or regarding the impact of the
RAL Cases on our financial statements. We are unable to
determine an estimate of the possible loss or range of loss, if
any, in light of the current status of the pending RAL Cases.
There were no significant developments regarding the RAL Cases
during the three months ended October 31, 2008.
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 class action case originally filed in the Circuit
Court of Madison County, Illinois on January 18, 2002, in
which class certification was granted on August 27, 2003.
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. In August 2003,
the court certified the plaintiff classes consisting of all
persons who from January 1, 1997 to final judgment
(1) were charged a separate fee for POM by H&R
Block or a defendant H&R Block class member;
(2) reside in certain class states and were charged a
separate fee for POM by H&R Block or a
defendant H&R Block class member not licensed to sell
insurance; or (3) had an unsolicited charge for POM posted
to their bills by H&R Block or a defendant
H&R Block class member. Persons who received the POM
guarantee through an H&R Block Premium office and persons
who reside in Alabama and Texas were excluded from the plaintiff
class. The court also certified a defendant class consisting of
any entity with names that include H&R Block or
HRB, or are otherwise affiliated or associated with
H&R Block Tax Services, Inc., and that sold or sells the
POM product. On August 5, 2008, the court decertified the
defendant class and reduced the geographic scope of the
plaintiff classes from 48 states to 13 states. On
August 19, 2008, we removed the case from state court in
Madison County, Illinois to the U.S. District Court for the
Southern District of Illinois. The plaintiffs motion to
remand the case back to state court is pending.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is pending
before the same judge that presided over the Texas RAL
Settlement, involves the
13
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same plaintiffs attorneys that are involved in the
Marshall litigation in Illinois, and contains allegations
similar to those in the Marshall case. No class has been
certified in this case.
We believe the claims in the POM Cases are without merit, 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 individually or in
the aggregate. We are unable to determine an estimate of the
possible loss or range of loss, if any, in light of the early
stages of the POM Cases.
Electronic Filing
Litigation
We are a defendant in a class action filed on August 30,
2002 and entitled Erin M. McNulty and Brian J. Erzar v.
H&R Block, Inc., et al., Case
No. 02-CIV-4654
in the Court of Common Pleas of Lackawanna County, Pennsylvania,
in which the plaintiffs allege that the defendants deceptively
portray electronic filing fees as a necessary and required
component of standard tax preparation services and do not inform
tax preparation clients that they may (1) file tax returns
free of charge by mailing the returns, (2) electronically
file tax returns from personal computers either free of charge
or at significantly lower fees and (3) be eligible to
electronically file tax returns free of charge via telephone.
The plaintiffs seek unspecified damages and disgorgement of all
electronic filing, tax preparation and related fees collected
during the applicable class period. An agreement to settle this
case for an amount not to exceed $2.5 million was approved
by the court on September 22, 2008, and the impact of the
settlement is included in our consolidated results of operations
for the six months ended October 31, 2008.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) entitled The People of
New York v. H&R Block, Inc. and H&R Block
Financial Advisors, Inc. et al. The complaint alleged
fraudulent business practices, deceptive acts and practices,
common law fraud and breach of fiduciary duty with respect to
the Express IRA product and sought equitable relief,
disgorgement of profits, damages and restitution, civil
penalties and punitive damages. On July 12, 2007, the
Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than HRBFA and the claims of
common law fraud. Both the New York Attorney General and HRBFA
have appealed the adverse portions of the trial courts
ruling. We believe the claims in this case are without merit,
and we intend to defend this case vigorously, but there are no
assurances as to its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe the claims in this case are
without merit, and we intend to defend this case vigorously, but
there are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 17, 2006. Except for two cases pending in
state court, all of the civil actions have been consolidated by
the panel for Multi-District Litigation into a single action
styled In re H&R Block, Inc. Express IRA Marketing
Litigation in the United States District Court for the
Western District of Missouri. Although we sold HRBFA effective
November 1, 2008, we remain responsible for the Express IRA
litigation through an indemnification agreement with Ameriprise.
The amounts claimed in these cases are substantial. We believe
the claims in these cases are without merit, and we intend to
defend these cases vigorously, but there are no assurances as to
their outcome.
We are unable to determine an estimate of the possible loss or
range of loss, if any, of the Express IRA litigation at this
time.
Securities Litigation
On April 6, 2007, a putative class action styled In re
H&R Block Securities Litigation was filed against the
Company and certain of its officers in the United States
District Court for the Western District of Missouri. The
complaint alleged, among other things, deceptive, material and
misleading financial
14
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statements, failure to prepare financial statements in
accordance with generally accepted accounting principles and
concealment of the potential for lawsuits stemming from the
allegedly fraudulent nature of the Companys operations.
The complaint sought unspecified damages and equitable relief.
On October 5, 2007, the court dismissed the complaint and
granted the plaintiffs leave to re-file the portion of the
complaint pertaining to the Companys financial statements.
On November 19, 2007, the plaintiffs re-filed the
complaint, alleging, among other things, deceptive, material and
misleading financial statements and failure to prepare financial
statements in accordance with generally accepted accounting
principles. The court dismissed the re-filed complaint on
February 19, 2008. On March 11, 2008, the plaintiffs
appealed the dismissal. In addition, plaintiffs in a shareholder
derivative action that was consolidated into the securities
litigation filed a separate appeal on March 18, 2008,
contending that the derivative action was improperly
consolidated. The derivative action is Iron Workers Local 16
Pension Fund v. H&R Block, et al., in the United
States District Court for the Western District of Missouri, Case
No. 06-
cv-00466-ODS (instituted on June 8, 2006) and was
brought against certain of our directors and officers
purportedly on behalf of the Company. The derivative action
alleges breach of fiduciary duty, abuse of control, gross
mismanagement, waste, and unjust enrichment pertaining to
(1) our restatement of financial results in fiscal year
2006 due to errors in determining our state effective income tax
rate and (2) certain of our products and business
activities. We believe the claims in these cases are without
merit and intend to defend this litigation vigorously. We
currently do not believe that we will incur a material loss with
respect to this litigation.
RSM McGladrey
Litigation
RSM McGladrey Business Services, Inc. and certain of its
subsidiaries are parties to a putative class action filed on
July 11, 2006 and entitled Do Rights 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 regarding business
valuation services provided by RSM EquiCo, Inc., including
fraud, negligent misrepresentation, breach of contract, breach
of implied covenant of good faith and fair dealing, breach of
fiduciary duty and unfair competition and seeks unspecified
damages, restitution and equitable relief. We intend to defend
this case vigorously. The amount claimed in this action is
substantial and there can be no assurance regarding the outcome
and resolution of this matter. It is reasonably possible that we
could incur losses with respect to this litigation, although an
estimate of such losses cannot be made in light of the early
stage of the litigation.
RSM McGladrey, Inc. (RSM) has a relationship with certain public
accounting firms (collectively, the Attest Firms)
pursuant to which (1) some RSM employees are also partners
or employees of the Attest Firms, (2) many clients of the
Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The
Attest Firms are parties to claims and lawsuits (collectively,
Attest Firm Claims). Judgments or settlements
arising from Attest Firm Claims, which exceed the Attest
Firms insurance coverage, could have a direct adverse
effect on Attest Firm operations, and could impair RSMs
ability to attract and retain clients and quality professionals.
Accordingly, although RSM may not have a direct liability for
significant Attest Firm Claims, such Attest Firm Claims could
have a material adverse effect on RSMs operations and
impair the value of our investment in RSM. There is no assurance
regarding the outcome of the Attest Firm Claims.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
15
Table of Contents
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 SCCs
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
entitled Commonwealth of Massachusetts v. H&R
Block, Inc., et al., alleging unfair, deceptive and
discriminatory origination and servicing of mortgage loans and
seeking equitable relief, disgorgement of profits, restitution
and statutory penalties. On November 10, 2008, the court
granted a preliminary injunction limiting the ability of the
owner of SCCs former loan servicing business to initiate
or advance foreclosure actions against certain loans originated
by SCC or its subsidiaries without (i) advance notice to
the Massachusetts Attorney General and (ii) if the Attorney
General objects to foreclosure, approval by the court. The
preliminary injunction generally applies to loans meeting all of
the following four characteristics: (1) adjustable rate
mortgages with an introductory period of three years or less,
(2) the borrower has a debt-to-income ratio generally
exceeding 50 percent, (3) an introductory interest
rate at least 2 percent lower than the fully indexed rate
(unless the debt-to-income ratio is 55% or greater) and
(4) loan-to-value ratio of 97 percent or certain
prepayment penalties. We have appealed this preliminary
injunction. We believe the claims in this case are without
merit, and we intend to defend this case vigorously, but there
are no assurances as to its outcome. We are unable to determine
an estimate of the possible loss or range of loss, if any, in
light of the early stages of this litigation.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, 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 or settlement of these claims could be substantial
and, because SCCs operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these
investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these claims,
and we are defending or intend to defend them vigorously. The
amounts claimed in these claims and lawsuits are substantial in
some instances, however the ultimate liability with respect to
such litigation and claims 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 be material.
In addition to the aforementioned types of cases, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning
investment products, the preparation of customers income
tax returns, the fees charged customers for various products and
services, losses incurred by customers with respect to their
investment accounts, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
adverse effect on our consolidated operating results, financial
position or cash flows.
16
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12. | Segment Information |
Information concerning our continuing operations by reportable
operating segment is as follows:
(in 000s) | ||||||||||||||||
Three Months
Ended |
Six Months Ended |
|||||||||||||||
October 31, | October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues:
|
||||||||||||||||
Tax Services
|
$ | 99,104 | $ | 90,804 | $ | 174,369 | $ | 160,667 | ||||||||
Business Services
|
233,045 | 239,048 | 407,696 | 431,871 | ||||||||||||
Consumer Financial Services
|
16,835 | 23,122 | 35,785 | 50,303 | ||||||||||||
Corporate
|
2,485 | 3,718 | 5,528 | 7,869 | ||||||||||||
$ | 351,469 | $ | 356,692 | $ | 623,378 | $ | 650,710 | |||||||||
Pretax income (loss):
|
||||||||||||||||
Tax Services
|
$ | (184,565 | ) | $ | (199,149 | ) | $ | (348,488 | ) | $ | (371,438 | ) | ||||
Business Services
|
13,081 | 11,781 | 12,786 | 9,875 | ||||||||||||
Consumer Financial Services
|
(18,629 | ) | (4,409 | ) | (32,746 | ) | 433 | |||||||||
Corporate
|
(37,340 | ) | (30,046 | ) | (71,975 | ) | (48,192 | ) | ||||||||
Loss from continuing operations before tax benefit
|
$ | (227,453 | ) | $ | (221,823 | ) | $ | (440,423 | ) | $ | (409,322 | ) | ||||
At October 31, 2008, we met the criteria requiring us to
present the financial results of HRBFA as discontinued
operations. Accordingly, all periods presented above for our
Consumer Financial Services segment have been revised to exclude
results for discontinued businesses.
13. | Accounting Pronouncements |
In June 2008, FASB Staff Position on
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP 03-6-1)
was issued.
FSP 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, should be included in the process of allocating
earnings for purposes of computing earnings per share. This
guidance is effective for financial statements issued for fiscal
years and interim periods beginning after December 15,
2008. Early application is not permitted. The provisions of
FSP 03-6-1
are effective for our fiscal fourth quarter of 2009. We are
currently evaluating what effect
FSP 03-6-1
will have on our consolidated financial statements.
In December 2007, Statement of Financial Accounting Standards
No. 141(R), Business Combinations,
(SFAS 141R), and Statement of Financial Accounting
Standards No. 160, Non-Controlling Interests in
Consolidated Financial Statements An Amendment of
ARB No. 51 (SFAS 160) were issued. These
standards will require an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction,
including non-controlling interests, at the acquisition-date
fair value with limited exceptions. SFAS 141R will further
require acquisition-related expenses to be expensed separately
from the acquisition, and also requires restructuring costs that
the acquirer expected but was not obligated to incur, be
expensed separately from the acquisition. Under SFAS 141R,
subsequent changes to deferred tax valuation allowances relating
to acquired businesses and acquired liabilities for uncertain
tax positions will no longer be applied to goodwill but will
instead be typically recognized as an adjustment to income tax
expense. The provisions of these standards are effective as of
the beginning of our fiscal year 2010. We are currently
evaluating what effect the adoption of SFAS 141R and
SFAS 160 will have on our consolidated financial statements.
As discussed in note 8, we adopted SFAS 157 and
SFAS 159 as of May 1, 2008.
14. | Subsequent Events |
Effective November 1, 2008, we sold HRB Financial
Corporation, including our securities brokerage business
formerly conducted through HRBFA, to Ameriprise. We received
cash proceeds of approximately $312 million, plus repayment
of net intercompany liabilities of approximately
$46 million, subject to post-closing adjustments. We expect
to record a gain of less than $10 million as a result of
this transaction, which will be reported in our results for the
quarter ending January 31, 2009. The transaction
17
Table of Contents
resulted in a capital loss for income tax purposes and, with the
exception of benefits of approximately $8 million recorded
during the quarter ended October 31, 2008, is not currently
expected to result in a tax benefit.
On November 3, 2008, we acquired our last major independent
franchise operator for approximately $278 million in cash.
This franchise includes a network of over 600 tax offices,
nearly two-thirds of which converted to company-owned offices
upon the closing of the transaction. The remaining offices are
currently operated by sub-franchisees and, as a result, will
become our direct franchises. We have not yet completed our
purchase accounting and related valuation analysis related to
this acquisition.
15. | Discontinued Operations |
At October 31, 2008, we met the criteria requiring us to
present the results of operations of HRBFA and its direct
corporate parent as discontinued operations, and the related
assets and liabilities as held for sale in the condensed
consolidated financial statements. All periods presented reflect
our discontinued operations.
Major classes of assets and liabilities of HRBFA and its direct
corporate parent reported as held for sale in the accompanying
condensed consolidated balance sheets are as follows:
(in 000s) | ||||||||||
October 31, 2008 | April 30, 2008 | |||||||||
Cash and cash equivalents
|
$ | 117,888 | $ | 61,948 | ||||||
Cash and cash equivalents restricted
|
312,000 | 212,000 | ||||||||
Receivables from customers, brokers, dealers and clearing
organizations
|
303,540 | 438,899 | ||||||||
Prepaid expenses and other assets
|
132,301 | 100,791 | ||||||||
Goodwill
|
173,954 | 173,954 | ||||||||
Total assets
|
$ | 1,039,683 | $ | 987,592 | ||||||
Accounts payable to customers, brokers and dealers
|
$ | 614,336 | $ | 559,658 | ||||||
Accounts payable, accrued expenses and deposits
|
45,187 | 42,393 | ||||||||
Other liabilities
|
85,896 | 42,395 | ||||||||
Total liabilities
|
$ | 745,419 | $ | 644,446 | ||||||
At October 31, 2008, HRBFA had $49.3 million invested
in the Reserve Primary Fund (Reserve Fund), a money market fund.
The Reserve Fund currently is in orderly liquidation under the
supervision of the Securities and Exchange Commission (SEC) and
its net asset value has fallen below its stated value of $1.00
per share. The Reserve Fund is not publishing current net asset
values. Based on published guidance from the U.S. Commodity
Futures Trading Commission, we have valued our investment as of
October 31, 2008 at a net asset value of $0.92 per share
and, accordingly, recorded a pretax impairment charge of
$5.1 million in the quarter. Our investment balance, net of
reserves, is included in prepaid expenses and other assets in
the table above. The remaining investment was sold in
conjunction with the sale of HRBFA, as discussed in
note 14, and our purchase price in connection with the sale
is subject to a post-closing adjustment based on final
redemption payments. In December 2008, HRBFA received a
redemption payment of $28.1 million, reducing its remaining
investment balance to $16.0 million, net of impairment.
Overhead costs which would have previously been allocated to
discontinued businesses totaled $2.6 million and
$4.6 million for the three and six months ended
October 31, 2008, respectively, and $3.9 million and
$7.6 million for the three and six months ended
October 31, 2007, respectively. These amounts are included
in continuing operations.
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Table of Contents
The financial results of discontinued operations are as follows:
(in 000s) | ||||||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||
Net revenue
|
$ | 61,867 | $ | (125,941 | ) | $ | 129,596 | $ | (162,140 | ) | ||||||||
Pretax loss
|
$ | (21,786 | ) | $ | (553,082 | ) | $ | (27,389 | ) | $ | (884,560 | ) | ||||||
Income tax benefit
|
(19,073 | ) | (185,744 | ) | (20,380 | ) | (326,812 | ) | ||||||||||
Net loss from discontinued operations
|
$ | (2,713 | ) | $ | (367,338 | ) | $ | (7,009 | ) | $ | (557,748 | ) | ||||||
During fiscal year 2008, we exited the mortgage business
operated through a subsidiary and sold the related loan
servicing business. Our discontinued operations include pretax
losses related to our mortgage business of $5.7 million and
$9.7 million for the three and six months ended
October 31, 2008, respectively, compared to
$550.0 million and $880.9 million, respectively, in
the prior year.
16. | 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 CLOCs, the
$500.0 million credit facility entered into in April 2007
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 Companys investment in
subsidiaries account. The elimination entries eliminate
investments in subsidiaries, related stockholders equity
and other intercompany balances and transactions.
Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 18,326 | $ | 334,434 | $ | (1,291 | ) | $ | 351,469 | |||||||||
Cost of services
|
- | 933 | 375,208 | 12 | 376,153 | |||||||||||||||
Cost of other revenues
|
- | 45,811 | 16,832 | (31 | ) | 62,612 | ||||||||||||||
Selling, general and administrative
|
- | 17,493 | 120,639 | (96 | ) | 138,036 | ||||||||||||||
Total expenses
|
- | 64,237 | 512,679 | (115 | ) | 576,801 | ||||||||||||||
Operating loss
|
- | (45,911 | ) | (178,245 | ) | (1,176 | ) | (225,332 | ) | |||||||||||
Other income (expense), net
|
(227,453 | ) | 460 | (2,581 | ) | 227,453 | (2,121 | ) | ||||||||||||
Loss from continuing operations before tax benefit
|
(227,453 | ) | (45,451 | ) | (180,826 | ) | 226,277 | (227,453 | ) | |||||||||||
Income tax benefit
|
(94,292 | ) | (18,001 | ) | (75,736 | ) | 93,737 | (94,292 | ) | |||||||||||
Net loss from continuing operations
|
(133,161 | ) | (27,450 | ) | (105,090 | ) | 132,540 | (133,161 | ) | |||||||||||
Net loss from discontinued operations
|
(2,713 | ) | (3,285 | ) | - | 3,285 | (2,713 | ) | ||||||||||||
Net loss
|
$ | (135,874 | ) | $ | (30,735 | ) | $ | (105,090 | ) | $ | 135,825 | $ | (135,874 | ) | ||||||
19
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Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2007 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 25,619 | $ | 332,596 | $ | (1,523 | ) | $ | 356,692 | |||||||||
Cost of services
|
- | 4,286 | 375,665 | (88 | ) | 379,863 | ||||||||||||||
Cost of other revenues
|
- | 48,062 | 9,167 | - | 57,229 | |||||||||||||||
Selling, general and administrative
|
- | 18,428 | 132,833 | 17 | 151,278 | |||||||||||||||
Total expenses
|
- | 70,776 | 517,665 | (71 | ) | 588,370 | ||||||||||||||
Operating loss
|
- | (45,157 | ) | (185,069 | ) | (1,452 | ) | (231,678 | ) | |||||||||||
Other income, net
|
(221,823 | ) | (16 | ) | 9,871 | 221,823 | 9,855 | |||||||||||||
Loss from continuing operations before tax benefit
|
(221,823 | ) | (45,173 | ) | (175,198 | ) | 220,371 | (221,823 | ) | |||||||||||
Income tax benefit
|
(86,890 | ) | (16,684 | ) | (69,472 | ) | 86,156 | (86,890 | ) | |||||||||||
Net loss from continuing operations
|
(134,933 | ) | (28,489 | ) | (105,726 | ) | 134,215 | (134,933 | ) | |||||||||||
Net loss from discontinued operations
|
(367,338 | ) | (365,856 | ) | (667 | ) | 366,523 | (367,338 | ) | |||||||||||
Net loss
|
$ | (502,271 | ) | $ | (394,345 | ) | $ | (106,393 | ) | $ | 500,738 | $ | (502,271 | ) | ||||||
Six
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 39,101 | $ | 587,006 | $ | (2,729 | ) | $ | 623,378 | |||||||||
Cost of services
|
- | 7,271 | 692,621 | 16 | 699,908 | |||||||||||||||
Cost of other revenues
|
- | 85,173 | 20,035 | (31 | ) | 105,177 | ||||||||||||||
Selling, general and administrative
|
- | 30,544 | 224,878 | (182 | ) | 255,240 | ||||||||||||||
Total expenses
|
- | 122,988 | 937,534 | (197 | ) | 1,060,325 | ||||||||||||||
Operating loss
|
- | (83,887 | ) | (350,528 | ) | (2,532 | ) | (436,947 | ) | |||||||||||
Other income (expense), net
|
(440,423 | ) | (3,890 | ) | 414 | 440,423 | (3,476 | ) | ||||||||||||
Loss from continuing operations before tax benefit
|
(440,423 | ) | (87,777 | ) | (350,114 | ) | 437,891 | (440,423 | ) | |||||||||||
Income tax benefit
|
(178,839 | ) | (34,540 | ) | (143,271 | ) | 177,811 | (178,839 | ) | |||||||||||
Net loss from continuing operations
|
(261,584 | ) | (53,237 | ) | (206,843 | ) | 260,080 | (261,584 | ) | |||||||||||
Net loss from discontinued operations
|
(7,009 | ) | (8,464 | ) | - | 8,464 | (7,009 | ) | ||||||||||||
Net loss
|
$ | (268,593 | ) | $ | (61,701 | ) | $ | (206,843 | ) | $ | 268,544 | $ | (268,593 | ) | ||||||
Six
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2007 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 127,528 | $ | 526,951 | $ | (3,769 | ) | $ | 650,710 | |||||||||
Cost of services
|
- | 14,910 | 697,218 | (55 | ) | 712,073 | ||||||||||||||
Cost of other revenues
|
- | 83,636 | 15,059 | - | 98,695 | |||||||||||||||
Selling, general and administrative
|
- | 33,803 | 233,368 | (88 | ) | 267,083 | ||||||||||||||
Total expenses
|
- | 132,349 | 945,645 | (143 | ) | 1,077,851 | ||||||||||||||
Operating loss
|
- | (4,821 | ) | (418,694 | ) | (3,626 | ) | (427,141 | ) | |||||||||||
Other income, net
|
(409,322 | ) | (21 | ) | 17,840 | 409,322 | 17,819 | |||||||||||||
Loss from continuing operations before tax benefit
|
(409,322 | ) | (4,842 | ) | (400,854 | ) | 405,696 | (409,322 | ) | |||||||||||
Income tax benefit
|
(162,219 | ) | (2,795 | ) | (157,697 | ) | 160,492 | (162,219 | ) | |||||||||||
Net loss from continuing operations
|
(247,103 | ) | (2,047 | ) | (243,157 | ) | 245,204 | (247,103 | ) | |||||||||||
Net loss from discontinued operations
|
(557,748 | ) | (554,603 | ) | (3,590 | ) | 558,193 | (557,748 | ) | |||||||||||
Net loss
|
$ | (804,851 | ) | $ | (556,650 | ) | $ | (246,747 | ) | $ | 803,397 | $ | (804,851 | ) | ||||||
20
Table of Contents
Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
October 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 233,600 | $ | 597,473 | $ | (137,447 | ) | $ | 693,626 | |||||||||
Cash & cash equivalents restricted
|
- | 167 | 647 | - | 814 | |||||||||||||||
Receivables, net
|
50 | 159,116 | 378,585 | - | 537,751 | |||||||||||||||
Mortgage loans held for investment
|
- | 811,732 | - | - | 811,732 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 968,836 | - | 968,836 | |||||||||||||||
Investments in subsidiaries
|
3,842,440 | - | 269 | (3,842,440 | ) | 269 | ||||||||||||||
Assets of discontinued operations
|
- | 1,039,683 | - | - | 1,039,683 | |||||||||||||||
Other assets
|
- | 371,507 | 1,000,529 | - | 1,372,036 | |||||||||||||||
Total assets
|
$ | 3,842,490 | $ | 2,615,805 | $ | 2,946,339 | $ | (3,979,887 | ) | $ | 5,424,747 | |||||||||
Customer deposits
|
$ | - | $ | 885,916 | $ | - | $ | (137,447 | ) | $ | 748,469 | |||||||||
Long-term debt
|
- | 1,691,690 | 42,077 | - | 1,733,767 | |||||||||||||||
FHLB borrowings
|
- | 104,000 | - | - | 104,000 | |||||||||||||||
Liabilities of discontinued operations
|
- | 745,419 | - | - | 745,419 | |||||||||||||||
Other liabilities
|
386 | 177,705 | 1,082,299 | 40 | 1,260,430 | |||||||||||||||
Net intercompany advances
|
3,009,442 | (1,165,977 | ) | (1,843,425 | ) | (40 | ) | - | ||||||||||||
Stockholders equity
|
832,662 | 177,052 | 3,665,388 | (3,842,440 | ) | 832,662 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 3,842,490 | $ | 2,615,805 | $ | 2,946,339 | $ | (3,979,887 | ) | $ | 5,424,747 | |||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
April 30, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 34,611 | $ | 630,933 | $ | (647 | ) | $ | 664,897 | |||||||||
Cash & cash equivalents restricted
|
- | 6,214 | 817 | - | 7,031 | |||||||||||||||
Receivables, net
|
139 | 122,756 | 411,334 | - | 534,229 | |||||||||||||||
Mortgage loans held for investment
|
- | 966,301 | - | - | 966,301 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 978,682 | - | 978,682 | |||||||||||||||
Investments in subsidiaries
|
4,131,345 | - | 322 | (4,131,345 | ) | 322 | ||||||||||||||
Assets of discontinued operations
|
- | 987,592 | - | - | 987,592 | |||||||||||||||
Other assets
|
- | 514,463 | 969,896 | 12 | 1,484,371 | |||||||||||||||
Total assets
|
$ | 4,131,484 | $ | 2,631,937 | $ | 2,991,984 | $ | (4,131,980 | ) | $ | 5,623,425 | |||||||||
Customer deposits
|
$ | - | $ | 786,271 | $ | - | $ | (647 | ) | $ | 785,624 | |||||||||
Long-term debt
|
- | 997,885 | 41,185 | - | 1,039,070 | |||||||||||||||
FHLB borrowings
|
- | 129,000 | - | - | 129,000 | |||||||||||||||
Liabilities of discontinued operations
|
- | 644,446 | - | - | 644,446 | |||||||||||||||
Other liabilities
|
2 | 466,236 | 1,571,178 | 51 | 2,037,467 | |||||||||||||||
Net intercompany advances
|
3,143,664 | (632,522 | ) | (2,511,103 | ) | (39 | ) | - | ||||||||||||
Stockholders equity
|
987,818 | 240,621 | 3,890,724 | (4,131,345 | ) | 987,818 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 4,131,484 | $ | 2,631,937 | $ | 2,991,984 | $ | (4,131,980 | ) | $ | 5,623,425 | |||||||||
21
Table of Contents
Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
Six
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash used in operating activities:
|
$ | (6,752 | ) | $ | (40,397 | ) | $ | (618,782 | ) | $ | - | $ | (665,931 | ) | ||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 54,501 | - | - | 54,501 | |||||||||||||||
Purchase property & equipment
|
- | (6,822 | ) | (51,764 | ) | - | (58,586 | ) | ||||||||||||
Payments for business acquisitions
|
- | - | (4,709 | ) | - | (4,709 | ) | |||||||||||||
Net intercompany advances
|
(112,550 | ) | - | - | 112,550 | - | ||||||||||||||
Investing cash flows of discontinued operations
|
- | (48,917 | ) | - | - | (48,917 | ) | |||||||||||||
Other, net
|
- | 4,407 | 4,503 | - | 8,910 | |||||||||||||||
Net cash provided by (used in) investing activities
|
(112,550 | ) | 3,169 | (51,970 | ) | 112,550 | (48,801 | ) | ||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Repayments of short-term borrowings
|
- | (100,000 | ) | - | - | (100,000 | ) | |||||||||||||
Proceeds from short-term borrowings
|
- | 768,625 | - | - | 768,625 | |||||||||||||||
Customer deposits
|
- | 96,205 | - | (136,800 | ) | (40,595 | ) | |||||||||||||
Dividends paid
|
(96,555 | ) | - | - | - | (96,555 | ) | |||||||||||||
Acquisition of treasury shares
|
(4,467 | ) | - | - | - | (4,467 | ) | |||||||||||||
Proceeds from stock options
|
61,699 | - | - | - | 61,699 | |||||||||||||||
Proceeds from issuance of stock
|
141,558 | - | - | - | 141,558 | |||||||||||||||
Net intercompany advances
|
- | (533,396 | ) | 645,946 | (112,550 | ) | - | |||||||||||||
Financing cash flows of discontinued operations
|
- | 4,783 | - | - | 4,783 | |||||||||||||||
Other, net
|
17,067 | - | (8,654 | ) | - | 8,413 | ||||||||||||||
Net cash provided by financing activities
|
119,302 | 236,217 | 637,292 | (249,350 | ) | 743,461 | ||||||||||||||
Net increase (decrease) in cash
|
- | 198,989 | (33,460 | ) | (136,800 | ) | 28,729 | |||||||||||||
Cash beginning of period
|
- | 34,611 | 630,933 | (647 | ) | 664,897 | ||||||||||||||
Cash end of period
|
$ | - | $ | 233,600 | $ | 597,473 | $ | (137,447 | ) | $ | 693,626 | |||||||||
22
Table of Contents
Six
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2007 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash provided by (used in) operating activities:
|
$ | 19,051 | $ | (272,796 | ) | $ | (685,673 | ) | $ | - | $ | (939,418 | ) | |||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 76,889 | - | - | 76,889 | |||||||||||||||
Purchase property & equipment
|
- | (5,087 | ) | (41,113 | ) | - | (46,200 | ) | ||||||||||||
Payments for business acquisitions
|
- | - | (21,037 | ) | - | (21,037 | ) | |||||||||||||
Net intercompany advances
|
58,196 | - | - | (58,196 | ) | - | ||||||||||||||
Investing cash flows of discontinued operations
|
- | 4,541 | 3,673 | - | 8,214 | |||||||||||||||
Other, net
|
- | 4,951 | (86 | ) | - | 4,865 | ||||||||||||||
Net cash provided by (used in) investing activities
|
58,196 | 81,294 | (58,563 | ) | (58,196 | ) | 22,731 | |||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Repayments of commercial paper
|
- | (5,125,279 | ) | - | - | (5,125,279 | ) | |||||||||||||
Proceeds from commercial paper
|
- | 4,133,197 | - | - | 4,133,197 | |||||||||||||||
Repayments of other borrowings
|
- | (1,005,000 | ) | - | - | (1,005,000 | ) | |||||||||||||
Proceeds from other borrowings
|
- | 2,555,000 | - | - | 2,555,000 | |||||||||||||||
Customer deposits
|
- | (243,030 | ) | - | - | (243,030 | ) | |||||||||||||
Dividends paid
|
(90,495 | ) | - | - | - | (90,495 | ) | |||||||||||||
Acquisition of treasury shares
|
(5,672 | ) | - | - | - | (5,672 | ) | |||||||||||||
Proceeds from issuance of common stock
|
13,434 | - | - | - | 13,434 | |||||||||||||||
Net intercompany advances
|
- | (382,897 | ) | 324,701 | 58,196 | - | ||||||||||||||
Financing cash flows of discontinued operations
|
- | 191,546 | - | - | 191,546 | |||||||||||||||
Other, net
|
5,486 | 18,532 | (63,248 | ) | - | (39,230 | ) | |||||||||||||
Net cash provided by (used in) financing activities
|
(77,247 | ) | 142,069 | 261,453 | 58,196 | 384,471 | ||||||||||||||
Net decrease in cash
|
- | (49,433 | ) | (482,783 | ) | - | (532,216 | ) | ||||||||||||
Cash beginning of period
|
- | 60,197 | 756,720 | - | 816,917 | |||||||||||||||
Cash end of period
|
$ | - | $ | 10,764 | $ | 273,937 | $ | - | $ | 284,701 | ||||||||||
23
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF
OPERATIONS
H&R Block provides tax services, banking services and
business and consulting services. Our Tax Services segment
provides income tax return preparation services, electronic
filing services and other services and products related to
income tax return preparation to the general public primarily in
the United States, Canada and Australia. Our Business Services
segment consists of RSM McGladrey, Inc. (RSM), a national
accounting, tax and business consulting firm primarily serving
mid-sized businesses. Our Consumer Financial Services segment
offers retail banking through H&R Block Bank (HRB Bank).
On August 12, 2008, we announced the signing of a
definitive agreement to sell H&R Block Financial Advisors,
Inc. (HRBFA) to Ameriprise Financial, Inc. (Ameriprise), and
completed the disposition of this business effective
November 1, 2008. At October 31, 2008, we met the
criteria requiring us to present the results of operations of
HRBFA and its direct corporate parent as discontinued
operations, and the related assets and liabilities as held for
sale in the condensed consolidated financial statements. All
periods presented have been reclassified to reflect our
discontinued operations. See additional discussion in
note 15 to our condensed consolidated financial statements.
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses retail, online and software.
Additionally, this segment includes commercial tax businesses,
which provide tax preparation software to CPAs and other tax
preparers.
Tax Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Service revenues:
|
||||||||||||||||
Tax preparation fees
|
$ | 56,907 | $ | 49,463 | $ | 86,339 | $ | 74,387 | ||||||||
Other services
|
32,501 | 31,578 | 71,284 | 68,927 | ||||||||||||
89,408 | 81,041 | 157,623 | 143,314 | |||||||||||||
Royalties
|
5,299 | 4,919 | 8,983 | 7,761 | ||||||||||||
Other
|
4,397 | 4,844 | 7,763 | 9,592 | ||||||||||||
Total revenues
|
99,104 | 90,804 | 174,369 | 160,667 | ||||||||||||
Cost of services:
|
||||||||||||||||
Compensation and benefits
|
63,684 | 61,473 | 107,881 | 107,613 | ||||||||||||
Occupancy
|
80,937 | 80,108 | 160,287 | 155,068 | ||||||||||||
Depreciation
|
8,186 | 8,450 | 16,205 | 16,610 | ||||||||||||
Other
|
45,398 | 46,302 | 93,075 | 101,467 | ||||||||||||
198,205 | 196,333 | 377,448 | 380,758 | |||||||||||||
Cost of other revenues, selling, general and administrative
|
85,464 | 93,620 | 145,409 | 151,347 | ||||||||||||
Total expenses
|
283,669 | 289,953 | 522,857 | 532,105 | ||||||||||||
Pretax loss
|
$ | (184,565 | ) | $ | (199,149 | ) | $ | (348,488 | ) | $ | (371,438 | ) | ||||
Three months
ended October 31, 2008 compared to October 31,
2007
Tax Services revenues increased $8.3 million, or
9.1%, for the three months ended October 31, 2008 compared
to the prior year. Tax preparation fees increased
$7.4 million, or 15.0% primarily due to an increase of
12.4% in our U.S. retail clients served in company-owned
offices and favorable results in Australia. Approximately half
of the increase in U.S. retail clients served was due to
Economic Stimulus Act filers. Favorable results in Australia
were primarily due to an increase in clients served and changes
in foreign currency exchange rates.
Total expenses decreased $6.3 million, or 2.2%, for the
three months ended October 31, 2008. Cost of other
revenues, selling, general and administrative expenses decreased
$8.2 million, or 8.7%, primarily as a result of
24
Table of Contents
an $11.3 million reduction in bad debt expense on refund
anticipation loans (RALs) compared to the prior year. This
decline was due to prior year changes initiated by the Internal
Revenue Services (IRS) taxpayer fraud detection system and
penalty collection practices, which resulted in a larger number
of refund claims denied during the prior year. This decrease was
partially offset by other cost increases.
The pretax loss for the three months ended October 31, 2008
was $184.6 million, compared to a loss of
$199.1 million in the prior year.
Six months ended
October 31, 2008 compared to October 31,
2007
Tax Services revenues increased $13.7 million, or
8.5%, for the six months ended October 31, 2008 compared to
the prior year. Tax preparation fees increased
$12.0 million, or 16.1% primarily due to an increase of
13.3% in our U.S. retail clients served in company-owned
offices and favorable results in Australia. Approximately half
of the increase in U.S. retail clients served was due to
Economic Stimulus Act filers.
Total expenses decreased $9.2 million, or 1.7%, for the six
months ended October 31, 2008. Cost of services decreased
$3.3 million, or 0.9%, from the prior year, as lower
supplies expenses were partially offset by higher occupancy
expenses. Other cost of services decreased $8.4 million, or
8.3%, primarily as a result of a $6.0 million decrease in
supplies expenses as our tax training schools move to more
computer-based training. Occupancy expenses increased
$5.2 million, or 3.4%, primarily as a result of higher rent
expenses due to a 1.6% increase in company-owned offices under
lease and a 2.3% increase in the average rent.
Cost of other revenues, selling, general and administrative
expenses decreased $5.9 million, or 3.9%, primarily as a
result of an $11.3 million reduction in RAL bad debt
expense compared to the prior year, partially offset by other
cost increases.
The pretax loss for the six months ended October 31, 2008
was $348.5 million, compared to a loss of
$371.4 million in the prior year.
BUSINESS
SERVICES
This segment offers accounting, tax and consulting services to
middle-market companies.
Business Services Operating Statistics | ||||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Accounting, tax and consulting:
|
||||||||||||||||
Chargeable hours
|
1,192,307 | 1,273,112 | 2,155,851 | 2,312,302 | ||||||||||||
Chargeable hours per person
|
319 | 325 | 603 | 599 | ||||||||||||
Net billed rate per hour
|
$ | 150 | $ | 147 | $ | 146 | $ | 146 | ||||||||
Average margin per person
|
$ | 24,981 | $ | 29,824 | $ | 43,588 | $ | 49,049 | ||||||||
25
Table of Contents
Business Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Tax services
|
$ | 110,569 | $ | 104,654 | $ | 186,870 | $ | 179,826 | ||||||||
Business consulting
|
73,121 | 63,803 | 126,757 | 116,092 | ||||||||||||
Accounting services
|
13,421 | 14,760 | 26,381 | 29,685 | ||||||||||||
Capital markets
|
4,965 | 13,213 | 10,783 | 23,947 | ||||||||||||
Leased employee revenue
|
32 | 10,125 | 50 | 21,496 | ||||||||||||
Reimbursed expenses
|
4,330 | 4,719 | 8,535 | 10,567 | ||||||||||||
Other
|
26,607 | 27,774 | 48,320 | 50,258 | ||||||||||||
Total revenues
|
233,045 | 239,048 | 407,696 | 431,871 | ||||||||||||
Cost of revenues:
|
||||||||||||||||
Compensation and benefits
|
138,103 | 142,640 | 242,042 | 257,295 | ||||||||||||
Occupancy
|
20,934 | 17,814 | 39,594 | 35,676 | ||||||||||||
Other
|
15,155 | 24,909 | 30,321 | 43,557 | ||||||||||||
174,192 | 185,363 | 311,957 | 336,528 | |||||||||||||
Amortization of intangible assets
|
3,350 | 3,574 | 6,769 | 7,200 | ||||||||||||
Selling, general and administrative
|
42,422 | 38,330 | 76,184 | 78,268 | ||||||||||||
Total expenses
|
219,964 | 227,267 | 394,910 | 421,996 | ||||||||||||
Pretax income
|
$ | 13,081 | $ | 11,781 | $ | 12,786 | $ | 9,875 | ||||||||
Three months
ended October 31, 2008 compared to October 31,
2007
Business Services revenues for the three months ended
October 31, 2008 declined $6.0 million, or 2.5% from
the prior year.
Tax revenues increased $5.9 million due to increases in net
billed rate per hour and productivity. Business consulting
revenues increased $9.3 million primarily due to a large
one time financial institutions engagement. Capital markets
revenues decreased $8.2 million, primarily due to a fewer
number of transactions closed in the current year as well as a
21.9% decrease in revenue per transaction.
Leased employee revenue decreased $10.1 million primarily
due to a change in organizational structure between the
businesses we acquired from American Express Tax and Business
Services, Inc. (AmexTBS) and the attest firms that, while not
affiliates of our company, also serve our clients. Employees we
previously leased to the attest firms were transferred to the
separate attest practices in the prior fiscal year. As a result,
we no longer record the revenues and expenses associated with
leasing these employees.
Total expenses decreased $7.3 million, or 3.2%, from the
prior year. Compensation and benefits and other cost of revenues
decreased primarily due to the change in organizational
structure with AmexTBS as discussed above. Selling, general and
administrative expenses increased $4.1 million primarily
due to higher legal fees and insurance expenses.
Pretax income for the three months ended October 31, 2008
was $13.1 million compared to $11.8 million in the
prior year.
Six months ended
October 31, 2008 compared to October 31,
2007
Business Services revenues for the six months ended
October 31, 2008 declined $24.2 million, or 5.6% from
the prior year.
Tax revenues increased $7.0 million due to increases in net
billed rate per hour and productivity. Business consulting
revenues increased $10.7 million primarily due to a large
one time financial institutions engagement. Capital markets
revenues decreased $13.2 million, primarily due to a fewer
number of transactions closed in the current year as well as a
36.0% decrease in revenue per transaction.
Leased employee revenue decreased $21.4 million primarily
due to a change in organizational structure between the
businesses we acquired from AmexTBS, as discussed above.
Total expenses decreased $27.1 million, or 6.4%, from the
prior year. Compensation and benefits and other cost of revenues
decreased primarily due to the change in organizational
structure with AmexTBS as discussed above. Selling, general and
administrative expenses decreased $2.1 million primarily as
a result of our cost reduction program.
26
Table of Contents
Pretax income for the six months ended October 31, 2008 was
$12.8 million compared to $9.9 million in the prior
year.
CONSUMER
FINANCIAL SERVICES
This segment is engaged in providing retail banking offerings to
Tax Services clients through HRB Bank. HRB Bank offers
traditional banking services including prepaid debit card
accounts, checking and savings accounts, individual retirement
accounts and certificates of deposit. This segment previously
included HRBFA, which has been presented as a discontinued
operation in the accompanying condensed consolidated financial
statements.
Consumer Financial Services Operating Statistics | (dollars in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Efficiency
ratio (1)
|
61% | 38% | 76% | 38% | ||||||||||||
Annualized net interest
margin (2)
|
3.27% | 2.48% | 3.42% | 2.30% | ||||||||||||
Annualized pretax return on average
assets (3)
|
(7.05)% | (1.38)% | (6.15)% | 0.06% | ||||||||||||
Total assets
|
$ | 1,179,467 | $ | 1,179,453 | $ | 1,179,467 | $ | 1,179,453 | ||||||||
Mortgage loans held for investment:
|
||||||||||||||||
Loan loss reserve as a % of mortgage loans
|
7.27% | 1.40% | 7.27% | 1.40% | ||||||||||||
Delinquency rate
|
11.65% | 1.96% | 11.65% | 1.96% | ||||||||||||
(1) | Defined as non-interest expense divided by revenue net of interest expense. See Reconciliation of Non-GAAP Financial Information at the end of Part I, Item 2. | |
(2) | Defined as annualized net interest revenue divided by average bank earning assets. See Reconciliation of Non-GAAP Financial Information at the end of Part I, Item 2. | |
(3) | Defined as annualized pretax banking income divided by average bank assets. See Reconciliation of Non-GAAP Financial Information at the end of Part I, Item 2. |
Consumer Financial Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Interest income:
|
||||||||||||||||
Mortgage loans
|
$ | 12,098 | $ | 20,451 | $ | 25,363 | $ | 42,942 | ||||||||
Other
|
1,008 | 887 | 2,274 | 2,032 | ||||||||||||
13,106 | 21,338 | 27,637 | 44,974 | |||||||||||||
Interest expense:
|
||||||||||||||||
Deposits
|
3,884 | 12,221 | 7,927 | 26,464 | ||||||||||||
FHLB advances
|
1,327 | 1,470 | 2,655 | 3,360 | ||||||||||||
5,211 | 13,691 | 10,582 | 29,824 | |||||||||||||
Net interest income
|
7,895 | 7,647 | 17,055 | 15,150 | ||||||||||||
Provision for loan loss reserves
|
(23,092 | ) | (9,842 | ) | (38,083 | ) | (11,926 | ) | ||||||||
Other
|
3,729 | 1,784 | 8,148 | 5,330 | ||||||||||||
Total
revenues (1)
|
(11,468 | ) | (411 | ) | (12,880 | ) | 8,554 | |||||||||
Non-interest expenses
|
7,161 | 3,998 | 19,866 | 8,121 | ||||||||||||
Pretax income (loss)
|
$ | (18,629 | ) | $ | (4,409 | ) | $ | (32,746 | ) | $ | 433 | |||||
(1) | Total revenues, less provision for loan loss reserves on mortgage loans held for investment and interest expense. |
Three months
ended October 31, 2008 compared to October 31,
2007
Consumer Financial Services revenues, net of interest
expense and provision for loan loss reserves, for the three
months ended October 31, 2008 decreased $11.1 million
over the prior year.
27
Table of Contents
Net interest income was essentially flat compared to the prior
year. Interest expense and interest income are both declining
due to lower interest rates and lower average balances in the
corresponding liability or asset. Interest income is also
declining due to an increase in non-accrual loans from
$2.8 million at October 31, 2007 to
$150.8 million at October 31, 2008. The following
table summarizes the key drivers of net interest income:
(dollars in 000s) | ||||||||||||||||
Average Balance | Average Rate Earned (Paid) | |||||||||||||||
Three Months Ended October 31, | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Loans
|
$ | 905,161 | $ | 1,194,567 | 5 | .56% | 6 | .85% | ||||||||
Investments
|
114,726 | 65,318 | 1 | .81% | 5 | .41% | ||||||||||
Deposits
|
775,925 | 964,809 | (1 | .99)% | (5 | .03)% | ||||||||||
Our non-performing assets consist of the following:
(in 000s) | ||||||
October 31, |
April 30, |
|||||
Balance at | 2008 | 2008 | ||||
Impaired loans
|
$ | 150,802 | $ | 128,941 | ||
Real estate
owned(1)
|
53,203 | 350 | ||||
Total non-performing assets
|
$ | 204,005 | $ | 129,291 | ||
(1) | Includes loans accounted for as in-substance foreclosures of $39.7 million at October 31, 2008. |
Detail of our mortgage loans held for investment and the related
allowance at October 31, 2008 and April 30, 2008 is as
follows:
(dollars in 000s) | ||||||||||||||||
Outstanding |
Loan Loss |
% 30-Days |
||||||||||||||
Principal Balance | Allowance | Past Due | Average FICO | |||||||||||||
As of October 31, 2008:
|
||||||||||||||||
Purchased from former affiliates:
|
||||||||||||||||
Option One
|
$ | 562,403 | $ | 60,408 | 16.72 | % | 655 | |||||||||
H&R Block Mortgage
|
48,455 | 806 | 4.62 | % | 690 | |||||||||||
610,858 | 61,214 | 15.76 | % | 658 | ||||||||||||
Purchased from third-parties
|
258,193 | 2,438 | 1.70 | % | 726 | |||||||||||
$ | 869,051 | $ | 63,652 | 11.65 | % | 678 | ||||||||||
As of April 30, 2008:
|
||||||||||||||||
Purchased from former affiliates:
|
||||||||||||||||
Option One
|
$ | 683,889 | $ | 43,769 | 17.53 | % | 664 | |||||||||
H&R Block Mortgage
|
50,769 | 411 | 3.00 | % | 696 | |||||||||||
734,658 | 44,180 | 16.30 | % | 666 | ||||||||||||
Purchased from third-parties
|
269,982 | 1,221 | 1.90 | % | 726 | |||||||||||
$ | 1,004,640 | $ | 45,401 | 11.71 | % | 682 | ||||||||||
Mortgage loans held for investment include loans originated by
our former mortgage loan affiliates, Option One and H&R
Block Mortgage (HRBMC), and purchased by HRB Bank totaling
$610.9 million, or approximately 70% of the total loan
portfolio at October 31, 2008. Loans originated by and
purchased from Option One have characteristics which are
representative of Alt-A loans loans to customers who
have credit ratings above sub-prime, but may not conform to
government-sponsored standards. As such, we have experienced
higher rates of delinquency and have greater exposure to loss
with respect to this segment of our loan portfolio. Cumulative
losses on our original loan portfolio purchased from Option One,
including losses on loans now classified as other real estate,
totaled approximately 13% at October 31, 2008. Our
remaining loan portfolio, which was purchased from HRBMC and
third-parties totaled $48.3 million and
$258.2 million, respectively, and is characteristic of a
prime loan portfolio and we believe subject to a lower loss
exposure.
We recorded a provision for loan losses on our mortgage loans
held for investment of $23.1 million during the current
quarter, compared to $9.8 million in the prior year. Our
loan loss provision increased primarily as a result of abrupt
and steep declines in residential home prices, particularly in
certain states where we have a higher concentration of loans.
Our allowance for loan losses as a percent of mortgage loans was
7.27%, or
28
Table of Contents
$63.7 million, at October 31, 2008, compared to 4.49%,
or $45.4 million, at April 30, 2008. This allowance
represents our best estimate of credit losses inherent in the
loan portfolio as of the balance sheet dates.
In estimating our loan loss allowance, we stratify the loan
portfolio based on our view of risk associated with various
elements of the pool and assign estimated loss rates based on
those risks. Loss rates are based primarily on historical
experience and our assessment of economic and market conditions.
Loss rates consider both the rate at which loans will become
delinquent (frequency) and the amount of loss that will
ultimately be realized upon occurrence of a liquidation of
collateral (severity). At October 31, 2008 and
April 30, 2008 our weighted average frequency assumption
was approximately 15% and 14%, respectively, and included a
frequency assumption of 21% relating to the Option One segment
of our portfolio. Our weighted average severity assumption
increased to 37.5% at October 31, 2008 from 22% at
April 30, 2008, due to declining collateral values during
the current year.
Residential real estate markets are experiencing significant
declines in property values and mortgage default rates are
increasing. If adverse market trends continue, including trends
within our portfolio specifically, we may be required to record
additional loan loss provisions, and those losses may be
significant.
Non-interest expenses increased $3.2 million, or 79.2%,
from the prior year, primarily due to increased allocations of
corporate shared services.
The pretax loss for the three months ended October 31, 2008
was $18.6 million compared to prior year loss of
$4.4 million.
Six months ended
October 31, 2008 compared to October 31,
2007
Consumer Financial Services revenues, net of interest
expense and provision for loan loss reserves, for the six months
ended October 31, 2008 decreased $21.4 million over
the prior year.
Net interest income increased $1.9 million from the prior
year as a $17.6 million decline in interest income on
mortgage loans held for investment was offset by an
$18.5 million decline in interest expense on deposits. The
following table summarizes the key drivers of net interest
income:
(dollars in 000s) | ||||||||||||||||
Average Balance | Average Rate Earned (Paid) | |||||||||||||||
Six Months Ended October 31, | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Loans
|
$ | 943,209 | $ | 1,266,719 | 5.38% | 6.78% | ||||||||||
Investments
|
96,941 | 75,249 | 2.14% | 5.38% | ||||||||||||
Deposits
|
706,102 | 1,034,852 | (2.23)% | (5.07)% | ||||||||||||
We recorded a provision for loan losses on our mortgage loans
held for investment of $38.1 million during the current
year, compared to $11.9 million in the prior year. Our loan
loss provision increased primarily as a result of declining
residential home prices, as well as increasing delinquencies
occurring in our portfolio.
Non-interest expenses increased $11.7 million, or 144.6%,
from the prior year, primarily due to an impairment charge of
$5.9 million recorded on our real estate owned and
increased allocations of corporate shared services.
The pretax loss for the six months ended October 31, 2008
was $32.7 million compared to prior year income of
$0.4 million.
Mortgage Loans
Held for Investment and Related Assets
State
Concentrations
Concentrations of loans to borrowers located in a single state
may result in increased exposure to loss as a result of changes
in real estate values and underlying economic or market
conditions related to a particular
29
Table of Contents
geographical location. The table below presents outstanding
loans by certain state concentrations for our mortgage loans
held for investment portfolio:
(dollars in 000s) | ||||||||||||||||||||
Loans Purchased |
Loans Purchased |
Percent |
Delinquency |
|||||||||||||||||
From Affiliates | From Third-Parties | Total | of Total | Rate | ||||||||||||||||
Florida
|
$ | 70,899 | $ | 95,746 | $ | 166,645 | 19 | % | 12.17 | % | ||||||||||
California
|
132,695 | 14,857 | 147,552 | 17 | % | 19.12 | % | |||||||||||||
New York
|
106,536 | 8,584 | 115,120 | 13 | % | 12.38 | % | |||||||||||||
Wisconsin
|
2,253 | 76,282 | 78,535 | 9 | % | 1.84 | % | |||||||||||||
All others
|
298,475 | 62,724 | 361,199 | 42 | % | 10.24 | % | |||||||||||||
Total
|
$ | 610,858 | $ | 258,193 | $ | 869,051 | 100 | % | 11.65 | % | ||||||||||
Real Estate
Owned
Amounts classified as real estate owned as of October 31,
2008 and April 30, 2008 totaled $53.2 million and
$0.3 million, respectively. The table below presents
activity related to our real estate owned:
(in 000s) | ||||
Six Months Ended October 31, | 2008 | |||
Balance, beginning of the period
|
$ | 350 | ||
Additions
|
62,578 | |||
Sales
|
(3,787 | ) | ||
Writedowns
|
(5,938 | ) | ||
Balance, end of the period
|
$ | 53,203 | ||
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Three months
ended October 31, 2008 compared to October 31,
2007
The pretax loss recorded in our corporate operations for the
three months ended October 31, 2008 was $37.3 million
compared to $30.0 million in the prior year. The increased
loss is primarily due to $9.9 million in incremental
interest expense, which resulted from our corporate operations
absorbing current year financing costs for all long-term debt,
and a $7.6 million decline in investment income. In the
prior year, financing costs were primarily related to borrowings
incurred to cover losses of our mortgage business, and related
interest costs were therefore reported in discontinued
operations. These unfavorable changes were partially offset by
benefits resulting from the cost reduction program implemented
earlier this year.
Our effective tax rate for continuing operations was 41.5% and
39.2% for the three months ended October 31, 2008 and 2007,
respectively. Our effective tax rate increased primarily due to
changes in our estimated state tax rate and non-deductible
losses from investments in company-owned life insurance assets.
Six months ended
October 31, 2008 compared to October 31,
2007
The pretax loss recorded in our corporate operations for the six
months ended October 31, 2008 was $72.0 million
compared to $48.2 million in the prior year. The increased
loss is primarily due to $17.3 million in incremental
interest expense resulting from our corporate operations
absorbing current year financing costs for all long-term debt.
We also experienced a $13.8 million decline in investment
income due to lower cash balances and recorded $5.2 million
in net impairments of residual interests in securitizations in
the current year. These unfavorable changes were partially
offset by benefits resulting from the cost reduction program
implemented earlier this year.
Our effective tax rate for continuing operations was 40.6% and
39.6% for the six months ended October 31, 2008 and 2007,
respectively. Our effective tax rate increased primarily due to
changes in our estimated state tax rate.
DISCONTINUED
OPERATIONS
On August 12, 2008, we announced the signing of a
definitive agreement to sell HRBFA to Ameriprise. The
disposition of this business was completed effective
November 1, 2008. At October 31, 2008, we met the
30
Table of Contents
criteria requiring us to present the results of operations of
HRBFA and its direct corporate parent as discontinued
operations, and the related assets and liabilities as held for
sale in the condensed consolidated financial statements. All
periods presented have been reclassified to reflect our
discontinued operations. See additional discussion in
note 15 to our condensed consolidated financial statements.
Discontinued operations also includes the wind-down of our
mortgage loan origination business and the sale of our mortgage
loan servicing business in the prior year. Also included in the
prior year are the results of three smaller lines of business
previously reported in our Business Services segment.
Three months
ended October 31, 2008 compared to October 31,
2007
The pretax loss of our discontinued operations for the three
months ended October 31, 2008 was $21.8 million
compared to a loss of $553.1 million in the prior year. The
loss from discontinued operations for the prior year period
included significant losses from our former mortgage loan
businesses, including impairments of residual interests of
$61.7 million, losses relating to loan repurchase
obligations of $172.7 million and losses on the sale of
mortgage loans totaling $58.3 million.
During the quarter, we recorded a deferred tax asset totaling
$165 million, representing the difference between the tax
and book basis in the stock of our brokerage business sold to
Ameriprise in November. For tax purposes, we incurred a capital
loss upon disposition of that business, which generally can only
be utilized to the extent we realize capital gains within five
years subsequent to the date of the loss. We dont
currently expect to be able to realize a tax benefit for
substantially all of this loss and, therefore, recorded a
valuation allowance of $155 million, resulting in a net tax
benefit during the quarter of approximately $10 million.
Our effective tax rate for discontinued operations was 87.5% and
33.6% for the three months ended October 31, 2008 and 2007,
respectively. Our effective tax rate increased primarily due to
the aforementioned tax benefit.
Six months ended
October 31, 2008 compared to October 31,
2007
The pretax loss of our discontinued operations for the six
months ended October 31, 2008 was $27.4 million
compared to a loss of $884.6 million in the prior year. The
loss from discontinued operations for the prior year period
included significant losses from our former mortgage loans
businesses, including impairments of residual interests of
$111.3 million, losses relating to loan repurchase
obligations of $330.0 million, and losses on the sale of
mortgage loans totaling $115.7 million.
Our effective tax rate for discontinued operations was 74.4% and
36.9% for the six months ended October 31, 2008 and 2007,
respectively. As discussed above, our effective tax rate
increased primarily due to tax benefits in connection with the
disposition of HRBFA.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets, condensed consolidated statements
of cash flows and condensed consolidated statements of
stockholders equity found on pages 1, 3 and 4,
respectively.
CAPITAL
RESOURCES & LIQUIDITY BY SEGMENT
Our sources of capital include cash from operations, issuances
of common stock and debt. We use capital primarily to fund
working capital, pay dividends, repurchase treasury shares and
acquire businesses. Our operations are highly seasonal and
therefore generally require the use of cash to fund operating
losses during the period May through December.
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 October 31, 2008 are sufficient to meet our
operating needs.
Cash From
Operations. Cash used in operating activities for the
first six months of fiscal year 2009 totaled
$665.9 million, compared with $939.4 million for the
same period last year. The change was due primarily to lower
losses and reduced working capital requirements of our
discontinued businesses.
Debt.
We borrow under our CLOCs to support working capital
requirements primarily arising from off-season operating losses
in our Tax Services and Business Services segments, pay
dividends, repurchase treasury shares and acquire businesses. We
had $693.6 million outstanding under our CLOCs at
October 31, 2008. See additional discussion in
Borrowings.
31
Table of Contents
Issuance of
Common Stock. On October 27, 2008, we sold
8.3 million shares of our common stock, without par value,
at a price of $17.50 per share in a registered direct offering
through subscription agreements with selected institutional
investors. We received net proceeds of $141.6 million,
after deducting placement agent fees and other offering
expenses. The purpose of the equity offering was to ensure we
maintained adequate equity levels, as a condition of our CLOCs,
during our off-season. Proceeds were used for general corporate
purposes.
Proceeds from the issuance of common stock in accordance with
our stock-based compensation plans totaled $71.4 million
and $17.2 million for the six months ended October 31,
2008 and 2007, respectively.
Dividends.
Dividends paid totaled $96.6 million and $90.5 million
for the six months ended October 31, 2008 and 2007,
respectively.
Share
Repurchases. In June 2008, our Board of Directors
rescinded the previous authorizations to repurchase shares of
our common stock, and approved an authorization to purchase up
to $2.0 billion of our common stock over the next four
years. We did not repurchase shares during the six months ended
October 31, 2008, and do not expect to repurchase shares
prior to our fourth quarter.
Segment Cash
Flows. A condensed consolidating statement of cash
flows by segment for the six months ended October 31, 2008
is as follows:
(in 000s) | ||||||||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Tax |
Business |
Financial |
Discontinued |
Consolidated |
||||||||||||||||||||
Services | Services | Services | Corporate | Operations | H&R Block | |||||||||||||||||||
Cash provided by (used in):
|
||||||||||||||||||||||||
Operations
|
$ | (387,709 | ) | $ | (58,728 | ) | $ | 31,911 | $ | (339,020 | ) | $ | 87,615 | $ | (665,931 | ) | ||||||||
Investing
|
(17,303 | ) | (16,451 | ) | 57,799 | (23,929 | ) | (48,917 | ) | (48,801 | ) | |||||||||||||
Financing
|
(12,244 | ) | 2,214 | 70,804 | 677,904 | 4,783 | 743,461 | |||||||||||||||||
Net intercompany
|
405,767 | 58,502 | 60,364 | (481,152 | ) | (43,481 | ) | - | ||||||||||||||||
Tax
Services. Tax Services has historically been our
largest provider of annual operating cash flows. The seasonal
nature of Tax Services generally results in a large positive
operating cash flow in our fourth quarter. Tax Services used
$387.7 million in its current six-month operations to cover
off-season costs and working capital requirements. This segment
used $17.3 million in investing activities primarily
related to capital expenditures, and used $12.2 million in
financing activities related to uncashed checks.
Business
Services. Business Services funding requirements are
largely related to receivables for completed work and work
in process. We provide funding sufficient to cover their
working capital needs. This segment used $58.7 million in
operating cash flows during the first six months of the year to
cover off-season costs and working capital requirements.
Business Services used $16.5 million in investing
activities primarily related to capital expenditures.
Consumer
Financial Services. In the first six months of fiscal
year 2009, Consumer Financial Services provided
$57.8 million in investing activities primarily from
principal payments received on mortgage loans held for
investment and provided $70.8 million in financing
activities due to changes in deposits held for affiliates,
partially offset by the repayment of $25.0 million in
Federal Home Loan Bank (FHLB) advances.
HRB Bank is a member of the FHLB of Des Moines, which extends
credit to member banks based on eligible collateral. At
October 31, 2008, HRB Bank had total FHLB advance capacity
of $265.3 million. There was $104.0 million
outstanding on this facility, leaving remaining availability of
$161.3 million. Mortgage loans held for investment of
$770.8 million serve as eligible collateral and are used to
determine total capacity.
32
Table of Contents
BORROWINGS
The following chart provides the debt ratings for Block
Financial LLC (BFC) as of October 31, 2008 and
April 30, 2008:
October 31, 2008 | April 30, 2008 | |||||||||||||||||||||||
Short-term | Long-term | Outlook | Short-term | Long-term | Outlook | |||||||||||||||||||
Fitch
|
F2 | BBB | Stable | F3 | BBB | Negative | ||||||||||||||||||
Moodys(1)
|
P2 | Baa1 | Negative | P2 | Baa1 | Negative | ||||||||||||||||||
S&P
|
A2 | BBB | Positive | A3 | BBB- | Negative | ||||||||||||||||||
DBRS(2)
|
R-2(high | ) | BBB (high | ) | Stable | R-2 (high | ) | BBB (high | ) | Negative | ||||||||||||||
(1) | Outlook of Stable effective November 11, 2008. | |
(2) | Outlook of Positive effective November 3, 2008. |
At October 31, 2008, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These unsecured committed
lines of credit (CLOCs), and outstanding borrowings thereunder,
have a maturity date of August 2010 and an annual facility fee
in a range of six to fifteen basis points per annum, based on
our credit ratings. We had $693.6 million outstanding as of
October 31, 2008 to support working capital requirements
primarily arising from off-season operating losses, to pay
dividends and acquire businesses. These borrowings are included
in long-term debt on our condensed consolidated balance sheet
due to their contractual maturity date. The CLOCs, among other
things, require we maintain at least $650.0 million of net
worth on the last day of any fiscal quarter. We had net worth of
$832.7 million at October 31, 2008.
Lehman Brothers Bank, FSB (Lehman) is a participating lender in
our $2.0 billion CLOCs, with a $50.0 million credit
commitment. In September 2008, Lehmans parent company
declared bankruptcy. Since then, Lehman has not honored any
funding requests under these facilities, thereby effectively
reducing our available liquidity under our CLOCs to
$1.95 billion. We do not expect this change to have a
material impact on our liquidity or consolidated financial
statements.
Other than the changes outlined above, there have been no
material changes in our borrowings from those reported at
April 30, 2008 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, 2008 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
Effective October 27, 2008, the Financial Industry
Regulatory Authority approved our request to sell HRBFA to
Ameriprise, and that disposition was completed effective
November 1, 2008.
There have been no other material changes in our regulatory
environment from those reported at April 30, 2008 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
managements 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 managements plans or objectives for
future operations, products or services, or descriptions of
assumptions underlying any of the above. They are not guarantees
of future performance. By their nature, forward-looking
statements are subject to risks and uncertainties. These
statements speak only as of the date made and management does
not undertake to update them to reflect changes or events
occurring after that date except as required by federal
securities laws.
33
Table of Contents
RECONCILIATION OF
NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally
accepted accounting principles (GAAP). However, we believe
certain non-GAAP performance measures and ratios used in
managing the business may provide additional meaningful
comparisons between current year results and prior periods.
Reconciliations to GAAP financial measures are provided below.
These non-GAAP financial measures should be viewed in addition
to, not as an alternative for, our reported GAAP results.
Banking Ratios | (dollars in 000s) |
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Efficiency Ratio:
|
||||||||||||
Total Consumer Financial Services expenses
|
$ | 35,464 | $ | 27,531 | $ | 68,531 | $ | 49,870 | ||||
Less: Interest and provisions for loan losses
|
28,213 | 23,860 | 48,459 | 42,075 | ||||||||
Non-interest expenses
|
$ | 7,251 | $ | 3,671 | $ | 20,072 | $ | 7,795 | ||||
Total Consumer Financial Services revenues
|
$ | 16,835 | $ | 23,122 | $ | 35,785 | $ | 50,303 | ||||
Less: Interest expense and other expenses
|
4,924 | 13,485 | 9,229 | 29,617 | ||||||||
Banking revenue net of interest expense
|
$ | 11,911 | $ | 9,637 | $ | 26,556 | $ | 20,686 | ||||
61% | 38% | 76% | 38% | |||||||||
Net Interest Margin (annualized):
|
||||||||||||
Net banking interest revenue
|
$ | 7,895 | $ | 7,647 | $ | 17,055 | $ | 15,150 | ||||
Net banking interest revenue (annualized)
|
$ | 31,580 | $ | 31,026 | $ | 34,110 | $ | 30,773 | ||||
Divided by average bank earning assets
|
$ | 965,421 | $ | 1,252,467 | $ | 996,188 | $ | 1,335,726 | ||||
3.27% | 2.48% | 3.42% | 2.30% | |||||||||
Return on Average Assets (annualized):
|
||||||||||||
Pretax banking income
|
$ | (18,629) | $ | (4,409) | $ | (32,746) | $ | 433 | ||||
Pretax banking income (annualized)
|
$ | (74,516) | $ | (17,636) | $ | (65,492) | $ | 866 | ||||
Divided by average bank assets
|
$ | 1,057,372 | $ | 1,274,284 | $ | 1,064,259 | $ | 1,358,212 | ||||
(7.05%) | (1.38%) | (6.15%) | 0.06% |
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There have been no material changes in our market risks from
those reported at April 30, 2008 in our Annual Report on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. The controls evaluation
was done under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer. Based on this evaluation, 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.
35
Table of Contents
The information below should be read in conjunction with the
information included in note 11 to our condensed
consolidated financial statements.
RAL Litigation
We have been named as a defendant in numerous
lawsuits throughout the country regarding our refund
anticipation loan programs (collectively, RAL
Cases). The RAL Cases have involved a variety of legal
theories asserted by plaintiffs. These theories include
allegations that, among other things: disclosures in the RAL
applications were inadequate, misleading and untimely; the RAL
interest rates were usurious and unconscionable; we did not
disclose that we would receive part of the finance charges paid
by the customer for such loans; untrue, misleading or deceptive
statements in marketing RALs; breach of state laws on credit
service organizations; breach of contract, unjust enrichment,
unfair and deceptive acts or practices; violations of the
federal Racketeer Influenced and Corrupt Organizations Act;
violations of the federal Fair Debt Collection Practices Act and
unfair competition regarding debt collection activities; and
that we owe, and breached, a fiduciary duty to our customers in
connection with the RAL program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We believe we have meritorious defenses to the remaining RAL
Cases and we intend to defend them vigorously. There can be no
assurances, however, as to the outcome of the pending RAL Cases
individually or in the aggregate or regarding the impact of the
RAL Cases on our financial statements. We are unable to
determine an estimate of the possible loss or range of loss, if
any, in light of the current status of the pending RAL Cases.
There were no significant developments regarding the RAL Cases
during the three months ended October 31, 2008.
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 class action case originally filed in the Circuit
Court of Madison County, Illinois on January 18, 2002, in
which class certification was granted on August 27, 2003.
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. In August 2003,
the court certified the plaintiff classes consisting of all
persons who from January 1, 1997 to final judgment
(1) were charged a separate fee for POM by H&R
Block or a defendant H&R Block class member;
(2) reside in certain class states and were charged a
separate fee for POM by H&R Block or a
defendant H&R Block class member not licensed to sell
insurance; or (3) had an unsolicited charge for POM posted
to their bills by H&R Block or a defendant
H&R Block class member. Persons who received the POM
guarantee through an H&R Block Premium office and persons
who reside in Alabama and Texas were excluded from the plaintiff
class. The court also certified a defendant class consisting of
any entity with names that include H&R Block or
HRB, or are otherwise affiliated or associated with
H&R Block Tax Services, Inc., and that sold or sells the
POM product. On August 5, 2008, the court decertified the
defendant class and reduced the geographic scope of the
plaintiff classes from 48 states to 13 states. On
August 19, 2008, we removed the case from state court in
Madison County, Illinois to the U.S. District Court for the
Southern District of Illinois. The plaintiffs motion to
remand the case back to state court is pending.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is pending
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains allegations similar to those in the Marshall case. No
class has been certified in this case.
We believe the claims in the POM Cases are without merit, 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
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Table of Contents
of these pending actions individually or in the aggregate. We
are unable to determine an estimate of the possible loss or
range of loss, if any, in light of the early stages of the POM
Cases.
Electronic Filing
Litigation We are a defendant in a class action filed
on August 30, 2002 and entitled Erin M. McNulty and
Brian J. Erzar v. H&R Block, Inc., et al., Case
No. 02-CIV-4654
in the Court of Common Pleas of Lackawanna County, Pennsylvania,
in which the plaintiffs allege that the defendants deceptively
portray electronic filing fees as a necessary and required
component of standard tax preparation services and do not inform
tax preparation clients that they may (1) file tax returns
free of charge by mailing the returns, (2) electronically
file tax returns from personal computers either free of charge
or at significantly lower fees and (3) be eligible to
electronically file tax returns free of charge via telephone.
The plaintiffs seek unspecified damages and disgorgement of all
electronic filing, tax preparation and related fees collected
during the applicable class period. An agreement to settle this
case for an amount not to exceed $2.5 million was approved
by the court on September 22, 2008, and the impact of the
settlement is included in our consolidated results of operations
for the six months ended October 31, 2008.
Express IRA
Litigation On March 15, 2006, the New York
Attorney General filed a lawsuit in the Supreme Court of the
State of New York, County of New York (Index No. 06/401110)
entitled The People of New York v. H&R Block, Inc.
and H&R Block Financial Advisors, Inc. et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. On July 12, 2007, the
Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than HRBFA and the claims of
common law fraud. Both the New York Attorney General and HRBFA
have appealed the adverse portions of the trial courts
ruling. We believe the claims in this case are without merit,
and we intend to defend this case vigorously, but there are no
assurances as to its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe the claims in this case are
without merit, and we intend to defend this case vigorously, but
there are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 17, 2006. Except for two cases pending in
state court, all of the civil actions have been consolidated by
the panel for Multi-District Litigation into a single action
styled In re H&R Block, Inc. Express IRA Marketing
Litigation in the United States District Court for the
Western District of Missouri. Although we sold HRBFA effective
November 1, 2008, we remain responsible for the Express IRA
litigation through an indemnification agreement with Ameriprise.
The amounts claimed in these cases are substantial. We believe
the claims in these cases are without merit, and we intend to
defend these cases vigorously, but there are no assurances as to
their outcome.
We are unable to determine an estimate of the possible loss or
range of loss, if any, of the Express IRA litigation at this
time.
Securities
Litigation On April 6, 2007, a putative class
action styled In re H&R Block Securities Litigation
was filed against the Company and certain of its officers in
the United States District Court for the Western District of
Missouri. The complaint alleged, among other things, deceptive,
material and misleading financial statements, failure to prepare
financial statements in accordance with generally accepted
accounting principles and concealment of the potential for
lawsuits stemming from the allegedly fraudulent nature of the
Companys operations. The complaint sought unspecified
damages and equitable relief. On October 5, 2007, the court
dismissed the complaint and granted the plaintiffs leave to
re-file the portion of the complaint pertaining to the
Companys financial statements. On November 19, 2007,
the plaintiffs re-filed the complaint, alleging, among other
things, deceptive, material and misleading financial statements
and failure to prepare financial statements in accordance with
generally accepted accounting principles. The court dismissed
the re-filed complaint on February 19, 2008. On
March 11, 2008, the plaintiffs appealed the dismissal. In
addition, plaintiffs in a shareholder derivative action that was
consolidated into the securities litigation filed a separate
appeal on March 18, 2008, contending that the derivative
action was improperly consolidated. The derivative
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Table of Contents
action is Iron Workers Local 16 Pension Fund v. H&R
Block, et al., in the United States District Court for the
Western District of Missouri, Case
No. 06-cv-00466-ODS
(instituted on June 8, 2006) and was brought against
certain of our directors and officers purportedly on behalf of
the Company. The derivative action alleges breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. We believe the claims in these
cases are without merit and intend to defend this litigation
vigorously. We currently do not believe that we will incur a
material loss with respect to this litigation.
RSM McGladrey
Litigation RSM McGladrey Business Services, Inc. and
certain of its subsidiaries are parties to a putative class
action filed on July 11, 2006 and entitled Do
Rights 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
regarding business valuation services provided by RSM EquiCo,
Inc., including fraud, negligent misrepresentation, breach of
contract, breach of implied covenant of good faith and fair
dealing, breach of fiduciary duty and unfair competition and
seeks unspecified damages, restitution and equitable relief. We
intend to defend this case vigorously. The amount claimed in
this action is substantial and there can be no assurance
regarding the outcome and resolution of this matter. It is
reasonably possible that we could incur losses with respect to
this litigation, although an estimate of such losses cannot be
made in light of the early stage of the litigation.
RSM McGladrey, Inc. (RSM) has a relationship with certain public
accounting firms (collectively, the Attest Firms)
pursuant to which (1) some RSM employees are also partners
or employees of the Attest Firms, (2) many clients of the
Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The
Attest Firms are parties to claims and lawsuits (collectively,
Attest Firm Claims). Judgments or settlements
arising from Attest Firm Claims, which exceed the Attest
Firms insurance coverage, could have a direct adverse
effect on Attest Firm operations, and could impair RSMs
ability to attract and retain clients and quality professionals.
Accordingly, although RSM may not have a direct liability for
significant Attest Firm Claims, such Attest Firm Claims could
have a material adverse effect on RSMs operations and
impair the value of our investment in RSM. There is no assurance
regarding the outcome of the Attest Firm Claims.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were
terminated and the loan servicing business was sold during
fiscal year 2008, SCC remains subject to investigations, claims
and lawsuits pertaining to its loan origination and servicing
activities that occurred prior to such termination and sale.
These investigations, claims and lawsuits include actions by
state attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
predict. In the event of unfavorable outcomes, the amounts SCC
may be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCCs
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
entitled Commonwealth of Massachusetts v. H&R
Block, Inc., et al., alleging unfair, deceptive and
discriminatory origination and servicing of mortgage loans and
seeking equitable relief, disgorgement of profits, restitution
and statutory penalties. On November 10, 2008, the court
granted a preliminary injunction limiting the ability of the
owner of SCCs former loan servicing business to initiate
or advance foreclosure actions against certain loans originated
by SCC or its subsidiaries without (i) advance notice to
the Massachusetts Attorney General and (ii) if the Attorney
General objects to foreclosure, approval by the court. The
preliminary injunction generally applies to loans meeting all of
the following four characteristics: (1) adjustable rate
mortgages with an introductory period of three years or less,
(2) the borrower has a debt-to-income ratio generally
exceeding 50 percent, (3) an introductory interest
rate at least 2 percent
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lower than the fully indexed rate (unless the debt-to-income
ratio is 55% or greater) and (4) loan-to-value ratio of
97 percent or certain prepayment penalties. We have
appealed this preliminary injunction. We believe the claims in
this case are without merit, and we intend to defend this case
vigorously, but there are no assurances as to its outcome. We
are unable to determine an estimate of the possible loss or
range of loss, if any, in light of the early stages of this
litigation.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, 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 or settlement of these claims could be substantial
and, because SCCs operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
Other Claims and
Litigation We are from time to time party to
investigations, claims and lawsuits not discussed herein arising
out of our business operations. These investigations, claims and
lawsuits include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. Some of
these investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these claims,
and we are defending or intend to defend them vigorously. The
amounts claimed in these claims and lawsuits are substantial in
some instances, however the ultimate liability with respect to
such litigation and claims 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 be material.
In addition to the aforementioned types of cases, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning
investment products, the preparation of customers income
tax returns, the fees charged customers for various products and
services, losses incurred by customers with respect to their
investment accounts, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
adverse effect on our consolidated operating results, financial
position or cash flows.
Our businesses
may be adversely affected by conditions in the global financial
markets and economic conditions generally.
Our business may be materially affected by conditions in the
global financial markets and economic conditions generally, and
these conditions may change suddenly and dramatically. For
example, the capital and credit markets have been experiencing
extreme volatility and disruption, which have reached
unprecedented levels in recent months. Difficulties in the
mortgage and broader credit markets in the United States and
elsewhere resulted in a relatively sudden and substantial
decrease in the availability of credit and a corresponding
increase in funding costs. These conditions have persisted
during 2008 and we cannot predict how long these conditions will
exist or how our business or financial statements may be
affected. Limitations on the availability of credit, such as has
occurred recently, may affect our ability to borrow in excess of
our current commitments on a secured or unsecured basis, which
may adversely affect our liquidity and results of operations.
This could increase our cost of funding, which could reduce our
profitability.
In addition, the recent downturn in the residential housing
market and increase in mortgage defaults has, and may continue,
to negatively impact our operating results. An economic
recession will likely reduce the ability of our borrowers to
repay mortgage loans, and declining home values would increase
the severity of loss we may incur in the event of default. In
addition to mortgage loans, we also extend secured and unsecured
credit to other customers, including refund anticipation loans
and Emerald Advance lines of credit to our tax preparation
customers. We may incur significant losses on credit we extend,
which in turn could reduce our profitability.
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Other than the item discussed above, there have been no material
changes in our risk factors from those reported at
April 30, 2008 in our Annual Report on
Form 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
A summary of our purchases of H&R Block common stock during
the second quarter of fiscal year 2009 is as follows:
(in 000s, except per share amounts) | ||||||||||||
Total Number of
Shares |
Maximum $ Value |
|||||||||||
Total |
Average |
Purchased as Part
of |
of Shares that
May |
|||||||||
Number of Shares |
Price Paid |
Publicly
Announced |
Be Purchased
Under |
|||||||||
Purchased(1) | per Share | Plans or Programs(2) | the Plans or Programs(2) | |||||||||
August 1 August 31
|
10 | $ | 24.56 | - | $ | 2,000,000 | ||||||
September 1 September 30
|
3 | $ | 25.36 | - | $ | 2,000,000 | ||||||
October 1 October 31
|
1 | $ | 19.88 | - | $ | 2,000,000 | ||||||
(1) | We purchased 14,365 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 over the next four years. |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Our annual meeting of shareholders was held on September 4,
2008, at which time our directors were elected to serve until
the 2009 annual meeting, and the proposals set forth below were
submitted to a vote of shareholders. The number of votes cast
for, against or withheld, the number of abstentions, and the
number of no votes, if applicable, for each proposal was as
follows:
Approval of an Amendment to the Companys Restated Articles
of Incorporation to Require an Independent Chairman of the Board
of Directors
Votes For
|
277,970,181 | ||
Votes Against
|
4,090,530 | ||
Abstain
|
2,848,593 | ||
Approval of an Amendment to the Companys Restated Articles
of Incorporation to Decrease the Permissable Number of Directors
Votes For
|
280,473,181 | ||
Votes Against
|
1,520,092 | ||
Abstain
|
2,916,602 | ||
Approval of an Amendment to the Companys Restated Articles
of Incorporation to Impose Director Term Limits
Votes For
|
198,950,440 | ||
Votes Against
|
82,001,691 | ||
Abstain
|
3,957,744 | ||
Approval of an Amendment to the Companys Restated Articles
of Incorporation to Limit Voting Rights of Preferred Stock
Votes For
|
255,392,828 | ||
Votes Against
|
1,628,675 | ||
Abstain
|
2,966,718 | ||
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Table of Contents
Approval of an Advisory Proposal on the Companys Executive
Pay-for-Performance Compensation Policies and Procedures
Votes For
|
255,215,990 | ||
Votes Against
|
2,683,216 | ||
Abstain
|
27,010,669 | ||
Approval of the 2008 Deferred Stock Unit Plan for Outside
Directors to replace the 1989 Stock Option Plan for Outside
Directors
Votes For
|
232,444,901 | ||
Votes Against
|
24,457,615 | ||
Abstain
|
3,085,705 | ||
Ratification of the Appointment of Deloitte & Touche
LLP as our Independent Accountants for the Fiscal Year Ended
April 30, 2009
Votes For
|
281,260,703 | ||
Votes Against
|
783,550 | ||
Abstain
|
2,865,622 | ||
ITEM 6. | EXHIBITS |
3 | .1 | Amended and Restated Articles of Incorporation of H&R Block, Inc., as amended as of October 15, 2008. | ||
3 | .2 | Amended and Restated Bylaws of H&R Block, Inc., as amended through October 15, 2008. | ||
10 | .1 | H&R Block Severance Plan, as amended through September 4, 2008. | ||
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. |
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SIGNATURES
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.
/s/ Russell
P. Smyth
|
Russell
P. Smyth
President and Chief
Executive Officer
December 8, 2008
/s/ Becky
S.
Shulman
Becky
S. Shulman
Senior Vice
President, Treasurer and
Chief Financial
Officer
December 8, 2008
/s/ Jeffrey
T. Brown
Jeffrey
T. Brown
Vice President and
Corporate Controller
December 8, 2008
42