H&R BLOCK INC - Quarter Report: 2009 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, 2009 | ||
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/0000012659/000095012309069608/c54990c5499000.gif)
H&R
Block, Inc.
(Exact name of registrant as
specified in its charter)
MISSOURI | 44-0607856 | |
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One
H&R Block Way
Kansas
City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes Ö No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one) :
Large accelerated
filer Ö
|
Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes No Ö
The number of shares outstanding of the registrants Common
Stock, without par value, at the close of business on
November 30, 2009 was 335,541,241 shares.
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499004.gif)
Form 10-Q
for the Period Ended October 31, 2009
Table of
Contents
Page | ||||||||
PART I
|
Financial Information
|
|||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
21 | ||||||||
27 | ||||||||
27 | ||||||||
PART II | ||||||||
27 | ||||||||
31 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
34 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499005.gif)
CONDENSED
CONSOLIDATED BALANCE
SHEETS (amounts
in 000s, except share and per share amounts)
October 31, 2009 | April 30, 2009 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 1,432,243 | $ | 1,654,663 | ||||
Cash and cash equivalents restricted
|
46,072 | 51,656 | ||||||
Receivables, less allowance for doubtful accounts
of $131,438 and $128,541 |
461,485 | 512,814 | ||||||
Prepaid expenses and other current assets
|
361,186 | 351,947 | ||||||
Total current assets
|
2,300,986 | 2,571,080 | ||||||
Mortgage loans held for investment, less allowance for
loan losses of $95,993 and $84,073 |
671,049 | 744,899 | ||||||
Property and equipment, at cost, less accumulated depreciation
and amortization of $640,595 and $625,075
|
351,288 | 368,289 | ||||||
Intangible assets, net
|
378,112 | 385,998 | ||||||
Goodwill
|
856,880 | 850,230 | ||||||
Other assets
|
409,044 | 439,226 | ||||||
Total assets
|
$ | 4,967,359 | $ | 5,359,722 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY
|
||||||||
Liabilities:
|
||||||||
Customer banking deposits
|
$ | 1,493,726 | $ | 854,888 | ||||
Accounts payable, accrued expenses and other current liabilities
|
608,149 | 705,945 | ||||||
Accrued salaries, wages and payroll taxes
|
83,321 | 259,698 | ||||||
Accrued income taxes
|
169,004 | 543,967 | ||||||
Current portion of long-term debt
|
3,667 | 8,782 | ||||||
Federal Home Loan Bank borrowings
|
25,000 | 25,000 | ||||||
Total current liabilities
|
2,382,867 | 2,398,280 | ||||||
Long-term debt
|
1,032,562 | 1,032,122 | ||||||
Federal Home Loan Bank borrowings
|
75,000 | 75,000 | ||||||
Other noncurrent liabilities
|
405,833 | 448,461 | ||||||
Total liabilities
|
3,896,262 | 3,953,863 | ||||||
Commitments and contingencies
|
||||||||
Stockholders equity:
|
||||||||
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 444,176,510
|
4,442 | 4,442 | ||||||
Additional paid-in capital
|
827,423 | 836,477 | ||||||
Accumulated other comprehensive income (loss)
|
66 | (11,639 | ) | |||||
Retained earnings
|
2,308,153 | 2,671,437 | ||||||
Less treasury shares, at cost
|
(2,068,987 | ) | (2,094,858 | ) | ||||
Total stockholders equity
|
1,071,097 | 1,405,859 | ||||||
Total liabilities and stockholders equity
|
$ | 4,967,359 | $ | 5,359,722 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499005.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, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues:
|
||||||||||||||||
Service revenues
|
$ | 294,958 | $ | 316,337 | $ | 542,943 | $ | 557,057 | ||||||||
Interest income
|
12,113 | 17,047 | 24,400 | 34,894 | ||||||||||||
Product and other revenues
|
19,010 | 18,085 | 34,243 | 31,427 | ||||||||||||
326,081 | 351,469 | 601,586 | 623,378 | |||||||||||||
Operating expenses:
|
||||||||||||||||
Cost of revenues
|
410,949 | 438,765 | 797,399 | 805,085 | ||||||||||||
Selling, general and administrative
|
129,685 | 138,036 | 232,902 | 255,240 | ||||||||||||
540,634 | 576,801 | 1,030,301 | 1,060,325 | |||||||||||||
Operating loss
|
(214,553 | ) | (225,332 | ) | (428,715 | ) | (436,947 | ) | ||||||||
Other income (expense), net
|
1,700 | (2,121 | ) | 4,989 | (3,476 | ) | ||||||||||
Loss from continuing operations before tax benefit
|
(212,853 | ) | (227,453 | ) | (423,726 | ) | (440,423 | ) | ||||||||
Income tax benefit
|
(86,381 | ) | (94,292 | ) | (166,637 | ) | (178,839 | ) | ||||||||
Net loss from continuing operations
|
(126,472 | ) | (133,161 | ) | (257,089 | ) | (261,584 | ) | ||||||||
Net loss from discontinued operations
|
(2,115 | ) | (2,713 | ) | (5,132 | ) | (7,009 | ) | ||||||||
Net loss
|
$ | (128,587 | ) | $ | (135,874 | ) | $ | (262,221 | ) | $ | (268,593 | ) | ||||
Basic and diluted loss per share:
|
||||||||||||||||
Net loss from continuing operations
|
$ | (0.38 | ) | $ | (0.40 | ) | $ | (0.77 | ) | $ | (0.80 | ) | ||||
Net loss from discontinued operations
|
- | (0.01 | ) | (0.01 | ) | (0.02 | ) | |||||||||
Net loss
|
$ | (0.38 | ) | $ | (0.41 | ) | $ | (0.78 | ) | $ | (0.82 | ) | ||||
Basic and diluted shares
|
335,346 | 329,810 | 334,939 | 328,475 | ||||||||||||
Dividends per share
|
$ | 0.15 | $ | 0.15 | $ | 0.30 | $ | 0.29 | ||||||||
Comprehensive income (loss):
|
||||||||||||||||
Net loss
|
$ | (128,587 | ) | $ | (135,874 | ) | $ | (262,221 | ) | $ | (268,593 | ) | ||||
Change in unrealized gain on
available-for-sale
securities, net
|
329 | (597 | ) | (418 | ) | (2,564 | ) | |||||||||
Change in foreign currency translation adjustments
|
2,586 | (11,472 | ) | 12,123 | (11,158 | ) | ||||||||||
Comprehensive loss
|
$ | (125,672 | ) | $ | (147,943 | ) | $ | (250,516 | ) | $ | (282,315 | ) | ||||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499004.gif)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
Six Months Ended October 31, | 2009 | 2008 | ||||||
Net cash used in operating activities
|
$ | (786,152 | ) | $ | (665,931 | ) | ||
Cash flows from investing activities:
|
||||||||
Principal repayments on mortgage loans held for investment, net
|
38,693 | 54,501 | ||||||
Purchases of property and equipment, net
|
(7,280 | ) | (58,586 | ) | ||||
Payments made for business acquisitions, net of cash acquired
|
(6,606 | ) | (4,709 | ) | ||||
Net cash used in investing activities of discontinued operations
|
- | (48,917 | ) | |||||
Other, net
|
18,473 | 8,910 | ||||||
Net cash provided by (used in) investing activities
|
43,280 | (48,801 | ) | |||||
Cash flows from financing activities:
|
||||||||
Repayments of Federal Home Loan Bank borrowings
|
- | (40,000 | ) | |||||
Proceeds from Federal Home Loan Bank borrowings
|
- | 15,000 | ||||||
Repayments of other short-term borrowings
|
- | (60,000 | ) | |||||
Proceeds from other short-term borrowings
|
- | 753,625 | ||||||
Customer banking deposits, net
|
638,466 | (40,595 | ) | |||||
Dividends paid
|
(100,784 | ) | (96,555 | ) | ||||
Acquisition of treasury shares
|
(3,785 | ) | (4,467 | ) | ||||
Proceeds from exercise of stock options
|
8,218 | 61,699 | ||||||
Proceeds from issuance of common stock, net
|
- | 141,558 | ||||||
Net cash provided by financing activities of discontinued
operations
|
- | 4,783 | ||||||
Other, net
|
(30,884 | ) | 8,413 | |||||
Net cash provided by financing activities
|
511,231 | 743,461 | ||||||
Effects of exchange rates on cash
|
9,221 | - | ||||||
Net increase (decrease) in cash and cash equivalents
|
(222,420 | ) | 28,729 | |||||
Cash and cash equivalents at beginning of the period
|
1,654,663 | 664,897 | ||||||
Cash and cash equivalents at end of the period
|
$ | 1,432,243 | $ | 693,626 | ||||
Supplementary cash flow data:
|
||||||||
Income taxes paid
|
$ | 196,427 | $ | 99,910 | ||||
Interest paid on borrowings
|
37,304 | 38,713 | ||||||
Interest paid on deposits
|
4,134 | 10,441 | ||||||
Transfers of loans to foreclosed assets
|
9,212 | 62,578 |
See Notes to
Condensed Consolidated Financial Statements
3
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | (unaudited) |
1. | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated balance sheet as of October 31,
2009, the condensed consolidated statements of operations and
comprehensive income (loss) for the three and six months ended
October 31, 2009 and 2008, and the condensed consolidated
statements of cash flows for the six months ended
October 31, 2009 and 2008 have been prepared by the
Company, without audit. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position, results of
operations and cash flows at October 31, 2009 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. In addition, we
realigned our segments as discussed in note 12, and
accordingly restated segment disclosures for prior periods.
These changes had no effect on our results of operations or
stockholders equity as previously reported.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in our April 30, 2009
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2009 or for
the year then ended, are derived from our April 30, 2009
Annual Report to Shareholders on
Form 10-K.
We have evaluated subsequent events through December 9,
2009, the date of issuance of our condensed consolidated
financial statements.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
periods. Significant estimates, assumptions and judgments are
applied in the determination of our allowance for loan losses,
potential losses from loan repurchase and indemnity obligations
associated with our discontinued mortgage business, contingent
losses associated with pending litigation, fair value of
reporting units, reserves for uncertain tax positions and
related matters. We revise our estimates when facts and
circumstances dictate. However, future events and their effects
cannot be determined with absolute certainty. As such, actual
results could differ materially from those estimates.
Seasonality of
Business
Our operating revenues are seasonal in nature with peak revenues
occurring in the months of January through April. Therefore,
results for interim periods are not indicative of results to be
expected for the full year.
Concentrations of
Risk
Our mortgage loans held for investment include concentrations of
loans to borrowers in certain states, which may result in
increased exposure to loss as a result of changes in real estate
values and underlying economic or market conditions related to a
particular geographical location. Approximately 52% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
2. | Recent Events |
RSM McGladrey, Inc. (RSM) and McGladrey & Pullen LLP
(M&P), an independent registered public accounting firm,
collaborate to provide accounting, tax and consulting services
to clients under an
4
Table of Contents
alternative practice structure. RSM and M&P also share in
certain common overhead costs through an administrative services
agreement. These services are provided by, and coordinated
through, RSM, for which RSM receives a management fee.
On July 21, 2009, M&P provided 210 days notice of
its intent to terminate the administrative services agreement.
The effect of the notice will be to terminate the alternative
practice structure on February 16, 2010, unless revoked or
modified prior to that time. As a protective measure, on
September 15, 2009, RSM provided notice of its intent to
terminate the administrative services agreement. Absent
revocation or modification by RSM, the effect of RSMs
notice will be to terminate the alternative practice structure
on April 13, 2010 even in the event M&P revokes or
modifies the M&P notice. Since July 23, 2009, RSM and
M&P have been engaged in arbitration to resolve various
disputes regarding their contractual relationship, including the
scope and enforceability of restrictive covenants agreed to by
M&P. On November 24, 2009, the arbitration panel
issued a final and binding ruling regarding the enforceability
of the covenants. The ruling is confidential. RSM and M&P
are continuing negotiations to determine if there are mutually
agreeable changes to the current arrangements that would allow
the alternative practice structure with M&P to continue.
There are no assurances as to the outcome of these negotiations.
3. | Earnings (Loss) Per Share and Stockholders Equity |
Basic and diluted loss per share is computed using the two-class
method. See note 13 for additional information on our
adoption of the two-class method. The two-class method is an
earnings allocation formula that determines net income per share
for each class of common stock and participating security
according to dividends declared and participation rights in
undistributed earnings. Per share amounts are computed by
dividing net income from continuing operations attributable to
common shareholders by the weighted average shares outstanding
during each period. The dilutive effect of potential common
shares is included in diluted earnings per share except in those
periods with a loss from continuing operations. Diluted earnings
per share excludes the impact of shares of common stock issuable
upon the lapse of certain restrictions or the exercise of
options to purchase 19.3 million shares for the three and
six months ended October 31, 2009, and 23.7 million
shares for the three and six months ended October 31, 2008,
as the effect would be antidilutive due to the net loss from
continuing operations during each period.
The computations of basic and diluted loss per share from
continuing operations are as follows:
(in 000s, except per share amounts) | ||||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss from continuing operations
attributable to shareholders |
$ | (126,472 | ) | $ | (133,161 | ) | $ | (257,089 | ) | $ | (261,584 | ) | ||||
Amounts allocated to participating
securities (nonvested shares) |
(27 | ) | 248 | 340 | 447 | |||||||||||
Net loss from continuing operations attributable
to common shareholders |
$ | (126,445 | ) | $ | (133,409 | ) | $ | (257,429 | ) | $ | (262,031 | ) | ||||
Basic weighted average common shares
|
335,346 | 329,810 | 334,939 | 328,475 | ||||||||||||
Potential dilutive shares from stock options
and nonvested shares |
- | - | - | - | ||||||||||||
Convertible preferred stock
|
- | - | - | - | ||||||||||||
Dilutive weighted average common shares
|
335,346 | 329,810 | 334,939 | 328,475 | ||||||||||||
Earnings (loss) per share from continuing operations
attributable to common shareholders:
|
||||||||||||||||
Basic
|
$ | (0.38 | ) | $ | (0.40 | ) | $ | (0.77 | ) | $ | (0.80 | ) | ||||
Diluted
|
(0.38 | ) | (0.40 | ) | (0.77 | ) | (0.80 | ) | ||||||||
The weighted average shares outstanding for the three and six
months ended October 31, 2009 increased to
335.3 million and 334.9 million, respectively, from
329.8 million and 328.5 million for the three and six
months ended October 31, 2008, respectively, primarily due
to the issuance of shares of our common stock in October 2008.
5
Table of Contents
During the six months ended October 31, 2009 and 2008, we
issued 1.6 million and 4.5 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, 2009, we acquired
0.2 million shares of our common stock at an aggregate cost
of $3.8 million, and during the six months ended
October 31, 2008, we acquired 0.2 million shares at an
aggregate cost of $4.5 million. Shares acquired during
these periods represented shares swapped or surrendered to us in
connection with the vesting of nonvested shares and the exercise
of stock options.
During the six months ended October 31, 2009, we granted
4.6 million stock options and 0.9 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$3.27 for management options and $2.70 for options granted to
our seasonal associates. Stock-based compensation expense
totaled $4.8 million and $12.1 million for the three
and six months ended October 31, 2009, respectively, and
$8.5 million and $13.0 million for the three and six
months ended October 31, 2008, respectively. At
October 31, 2009, unrecognized compensation cost for
options totaled $17.1 million, and for nonvested shares and
units totaled $23.4 million.
4. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of
October 31, 2009 and April 30, 2009 is as follows:
(dollars in 000s) | ||||||||||||||||
October 31, 2009 | April 30, 2009 | |||||||||||||||
As of | Amount | % of Total | Amount | % of Total | ||||||||||||
Adjustable-rate loans
|
$ | 472,292 | 62 | % | $ | 534,943 | 65 | % | ||||||||
Fixed-rate loans
|
288,824 | 38 | % | 286,894 | 35 | % | ||||||||||
761,116 | 100 | % | 821,837 | 100 | % | |||||||||||
Unamortized deferred fees and costs
|
5,926 | 7,135 | ||||||||||||||
Less: Allowance for loan losses
|
(95,993 | ) | (84,073 | ) | ||||||||||||
$ | 671,049 | $ | 744,899 | |||||||||||||
Activity in the allowance for loan losses for the six months
ended October 31, 2009 and 2008 is as follows:
(in
000s)
Six Months Ended October 31, | 2009 | 2008 | ||||||||
Balance, beginning of the period
|
$ | 84,073 | $ | 45,401 | ||||||
Provision
|
27,000 | 38,083 | ||||||||
Recoveries
|
29 | 3 | ||||||||
Charge-offs
|
(15,109 | ) | (19,835 | ) | ||||||
Balance, end of the period
|
$ | 95,993 | $ | 63,652 | ||||||
Our loan loss reserve as a percent of mortgage loans was 12.61%
at October 31, 2009, compared to 10.23% at April 30,
2009.
6
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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 $159.9 million and $160.7 million at
October 31, 2009 and April 30, 2009, respectively. The
principal balance of impaired loans and real estate owned as of
October 31, 2009 and April 30, 2009 is as follows:
(in
000s)
As of | October 31, 2009 | April 30, 2009 | ||||||||
Impaired loans:
|
||||||||||
60 89 days
|
$ | 19,976 | $ | 21,415 | ||||||
90+ days, non-accrual
|
157,282 | 121,685 | ||||||||
TDR loans, accrual
|
98,547 | 60,044 | ||||||||
TDR loans, non-accrual
|
61,318 | 100,697 | ||||||||
337,123 | 303,841 | |||||||||
Real estate
owned(1)
|
38,895 | 44,533 | ||||||||
Total non-performing assets
|
$ | 376,018 | $ | 348,374 | ||||||
(1) | Includes loans accounted for as in-substance foreclosures of $18.3 million and $27.4 million at October 31, 2009 and April 30, 2009, respectively. |
Activity related to our real estate owned is as follows:
(in
000s)
Six Months Ended October 31, | 2009 | 2008 | ||||||||
Balance, beginning of the period
|
$ | 44,533 | $ | 350 | ||||||
Additions
|
9,212 | 62,578 | ||||||||
Sales
|
(10,055 | ) | (3,787 | ) | ||||||
Impairments
|
(4,795 | ) | (5,938 | ) | ||||||
Balance, end of the period
|
$ | 38,895 | $ | 53,203 | ||||||
5. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the six months
ended October 31, 2009 consist of the following:
(in
000s)
April 30, 2009 | Additions | Impairment | Other | October 31, 2009 | ||||||||||||||||
Tax Services
|
$ | 447,591 | $ | 6,227 | $ | - | $ | 1,862 | $ | 455,680 | ||||||||||
Business Services
|
402,639 | - | - | (1,439 | ) | 401,200 | ||||||||||||||
Total
|
$ | 850,230 | $ | 6,227 | $ | - | $ | 423 | $ | 856,880 | ||||||||||
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur which could,
more likely than not, reduce the fair value of a reporting
units net assets below its carrying value.
We considered the July 21, 2009 notice by M&P of its
intent to terminate the administrative services agreement with
RSM to represent a significant change in circumstances requiring
an interim evaluation of the fair value of our RSM reporting
unit. Goodwill of this reporting unit totaled
$371.9 million at October 31, 2009. The net carrying
value of other intangible assets of RSM totaled
$92.4 million at October 31, 2009, including
$50.8 million for an indefinite-lived trade name asset. We
have concluded that, as of October 31, 2009, the fair value
of this reporting unit exceeds its carrying value and also that
the net carrying value of other intangible assets is recoverable.
Our conclusion is based on our current assumptions, including,
but not limited to, those listed below.
| We have assumed our noncompete rights are enforceable. | |
| We have assumed that, more likely than not, RSM and M&P will continue to collaborate; or, in the event of a separation, RSM will successfully establish an alliance with other attest firms. | |
| We have assumed that ongoing negotiations between RSM and M&P will not result in modifications of their relationship that would be materially adverse to the financial interests of RSM. |
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| In the event of a separation, we have made various assumptions concerning client retention and post-separation operating margins. | |
| In the event of a separation, we have assumed M&P would be able to repay its indebtedness to RSM. |
It is difficult to predict the outcome of the above matters,
including the outcome of mitigating factors that we are
currently pursuing. Therefore, it is possible that changes in
our assumptions, based on future events or circumstances, could
result in changes in our fair value estimates and corresponding
impairment charges.
RSMs subsidiary, RSM EquiCo, Inc. (RSM EquiCo), which
assists clients with capital markets transactions, has
experienced declining revenues in the current economic
environment. If availability of financing for acquisitions in
the middle-market remains limited, revenues may continue to fall
below our expectations, which could lead us to consider
impairment of the $29.3 million carrying value of goodwill
related to our capital markets business.
Intangible assets consist of the following:
(in 000s) | ||||||||||||||||||||||||
As of | October 31, 2009 | April 30, 2009 | ||||||||||||||||||||||
Gross |
Gross |
|||||||||||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Tax Services:
|
||||||||||||||||||||||||
Customer relationships
|
$ | 61,475 | $ | (29,237 | ) | $ | 32,238 | $ | 54,655 | $ | (25,267 | ) | $ | 29,388 | ||||||||||
Noncompete agreements
|
22,537 | (20,808 | ) | 1,729 | 23,263 | (20,941 | ) | 2,322 | ||||||||||||||||
Reacquired franchise rights
|
229,438 | (4,045 | ) | 225,393 | 229,438 | (1,838 | ) | 227,600 | ||||||||||||||||
Franchise agreements
|
19,201 | (1,173 | ) | 18,028 | 19,201 | (533 | ) | 18,668 | ||||||||||||||||
Purchased technology
|
12,500 | (5,219 | ) | 7,281 | 12,500 | (4,240 | ) | 8,260 | ||||||||||||||||
Trade name
|
1,325 | (300 | ) | 1,025 | 1,025 | (217 | ) | 808 | ||||||||||||||||
Business Services:
|
||||||||||||||||||||||||
Customer relationships
|
145,177 | (115,558 | ) | 29,619 | 146,040 | (111,017 | ) | 35,023 | ||||||||||||||||
Noncompete agreements
|
33,061 | (21,031 | ) | 12,030 | 33,068 | (19,908 | ) | 13,160 | ||||||||||||||||
Trade name amortizing
|
2,600 | (2,600 | ) | - | 2,600 | (2,600 | ) | - | ||||||||||||||||
Trade name
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||
$ | 582,951 | $ | (204,839 | ) | $ | 378,112 | $ | 577,427 | $ | (191,429 | ) | $ | 385,998 | |||||||||||
Amortization of intangible assets for the three and six months
ended October 31, 2009 was $7.5 million and
$14.4 million, respectively, and $8.0 million and
$13.6 million, for the three and six months ended
October 31, 2008, respectively. Estimated amortization of
intangible assets for fiscal years 2010 through 2014 is
$29.7 million, $27.1 million, $24.1 million,
$19.8 million and $16.4 million, respectively.
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 2007 are currently under examination by the Internal
Revenue Service. Tax years prior to 1999 are closed by statute.
Historically, tax returns in various foreign and state
jurisdictions are examined and settled upon completion of the
exam.
During the six months ended October 31, 2009, we accrued an
additional $0.8 million for interest and penalties related
to our uncertain tax positions. We had unrecognized tax benefits
of $121.9 million and $124.6 million at
October 31, 2009 and April 30, 2009, respectively. The
unrecognized tax benefits decreased $2.7 million in the
current year, due primarily to positions related to prior years.
Except as noted below, we have classified the liability for
unrecognized tax benefits, including corresponding accrued
interest, as long-term at October 31, 2009, which is
included in other noncurrent liabilities on the condensed
consolidated balance sheets.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the total amount of reserves for
previously unrecognized tax benefits may decrease by
approximately $16 million within twelve months of
October 31, 2009. This portion of our liability for
unrecognized tax benefits has been classified as current and is
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included in accounts payable, accrued expenses and other current
liabilities on the condensed consolidated balance sheets.
7. | Interest Income and Expense |
The following table shows the components of interest income and
expense of our continuing operations:
(in 000s) | ||||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income:
|
||||||||||||||||
Mortgage loans
|
$ | 8,072 | $ | 12,098 | $ | 15,968 | $ | 25,363 | ||||||||
Other
|
4,041 | 4,949 | 8,432 | 9,531 | ||||||||||||
$ | 12,113 | $ | 17,047 | $ | 24,400 | $ | 34,894 | |||||||||
Interest expense:
|
||||||||||||||||
Borrowings
|
$ | 18,514 | $ | 21,054 | $ | 37,471 | $ | 39,226 | ||||||||
Deposits
|
2,284 | 3,884 | 4,333 | 7,927 | ||||||||||||
FHLB advances
|
508 | 1,327 | 1,017 | 2,655 | ||||||||||||
$ | 21,306 | $ | 26,265 | $ | 42,821 | $ | 49,808 | |||||||||
8. | Fair Value |
The following table presents for each hierarchy level the
financial assets that are measured at fair value on both a
recurring and non-recurring basis at October 31, 2009:
(dollars in 000s) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Recurring:
|
||||||||||||||||
Available-for-sale securities
|
$ | 40,702 | $ | - | $ | 40,702 | $ | - | ||||||||
Non-recurring:
|
||||||||||||||||
Impaired mortgage loans held for investment
|
252,351 | - | - | 252,351 | ||||||||||||
$ | 293,053 | $ | - | $ | 40,702 | $ | 252,351 | |||||||||
As a percentage of total assets
|
5.9% | -% | 0.8% | 5.1% | ||||||||||||
There were no significant changes to the unobservable inputs
used in determining the fair values of our level 2 and
level 3 financial assets.
The carrying amounts and estimated fair values of our financial
instruments at October 31, 2009 are as follows:
(in
000s)
Carrying |
Estimated |
|||||||||
Amount | Fair Value | |||||||||
Mortgage loans held for investment
|
$ | 671,049 | $ | 506,622 | ||||||
IRAs and other time deposits
|
732,355 | 732,245 | ||||||||
Long-term debt
|
1,032,562 | 1,106,878 | ||||||||
9. | Regulatory Requirements |
H&R Block Bank (HRB Bank) files its regulatory Thrift
Financial Report (TFR) on a calendar quarter basis with the
Office of Thrift Supervision (OTS). The following table sets
forth HRB Banks regulatory capital requirements at
September 30, 2009, as calculated in the most recently
filed TFR:
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(dollars in 000s) | ||||||||||||||||||||||||
To Be Well
Capitalized |
||||||||||||||||||||||||
For Capital
Adequacy |
Under Prompt
Corrective |
|||||||||||||||||||||||
Actual | Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total risk-based capital
ratio(1)
|
$ | 287,082 | 50.1% | $ | 45,883 | 8.0% | $ | 57,354 | 10.0% | |||||||||||||||
Tier 1 risk-based capital
ratio(2)
|
$ | 279,460 | 48.7% | N/A | N/A | $ | 34,412 | 6.0% | ||||||||||||||||
Tier 1 capital ratio
(leverage)(3)
|
$ | 279,460 | 19.4% | $ | 172,746 | 12.0% | $ | 71,977 | 5.0% | |||||||||||||||
Tangible equity
ratio(4)
|
$ | 279,460 | 19.4% | $ | 21,593 | 1.5% | N/A | N/A | ||||||||||||||||
(1) | Total risk-based capital divided by risk-weighted assets. | |
(2) | Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets. | |
(3) | Tier 1 (core) capital divided by adjusted total assets. | |
(4) | Tangible capital divided by tangible assets. |
Block Financial LLC (BFC) typically makes capital contributions
to HRB Bank to help it meet its capital requirements. Capital
contributions totaling $245.0 million were made by BFC
during the fiscal year ended April 30, 2009. BFC made
capital contributions to HRB Bank of $150.0 million during
the six months ended October 31, 2009 and, in November
2009, BFC made an additional capital contribution to HRB Bank of
$85.0 million. As of October 31, 2009, HRB Banks
leverage ratio was 14.6%.
10. | Commitments and Contingencies |
Changes in deferred revenue balances related to our Peace of
Mind (POM) program, the current portion of which is included in
accounts payable, accrued expenses and other current liabilities
and the long-term portion of which is included in other
noncurrent liabilities in the condensed consolidated balance
sheets, are as follows:
(in 000s) | ||||||||
Six Months Ended October 31, | 2009 | 2008 | ||||||
Balance, beginning of period
|
$ | 146,807 | $ | 140,583 | ||||
Amounts deferred for new guarantees issued
|
1,351 | 1,148 | ||||||
Revenue recognized on previous deferrals
|
(47,044) | (45,826) | ||||||
Balance, end of period
|
$ | 101,114 | $ | 95,905 | ||||
The following table summarizes certain of our other contractual
obligations and commitments:
(in 000s) | ||||||||
As of | October 31, 2009 | April 30, 2009 | ||||||
Franchise Equity Lines of Credit undrawn commitment
|
$ | 29,286 | $ | 38,055 | ||||
Contingent business acquisition obligations
|
24,973 | 24,165 | ||||||
Media advertising purchase obligation
|
45,768 | 45,768 | ||||||
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. Guarantees and indemnifications of the Company and
its subsidiaries include obligations to protect counterparties
from losses arising from the following: (1) tax, legal and
other risks related to the purchase or disposition of
businesses; (2) penalties and interest assessed by federal
and state taxing authorities in connection with tax returns
prepared for clients; (3) indemnification of our directors
and officers; and (4) third-party claims relating to
various arrangements in the normal course of business.
Typically, there is no stated maximum payment related to these
indemnifications, and the terms of the indemnities may vary and
in many cases are limited only by the applicable statute of
limitations. The likelihood of any claims being asserted against
us and the ultimate liability related to any such claims, if
any, is difficult to predict. While we cannot provide assurance
we will ultimately prevail in the event any such claims are
asserted, we believe the fair value of guarantees and
indemnifications relating to our continuing operations is not
material as of October 31, 2009.
10
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Discontinued
Operations
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. At October 31, 2009 and
April 30, 2009, our loan repurchase reserve totaled
$201.2 million and $206.6 million, respectively. This
liability is included in accounts payable, accrued expenses and
other current liabilities on our condensed consolidated balance
sheets.
11. | Litigation and Related Contingencies |
We are party to investigations, legal claims and lawsuits
arising out of our business operations. As required, we accrue
our best estimate of loss contingencies when we believe that a
loss is probable and that we can reasonably estimate the amount
of any such loss. Amounts accrued, including obligations under
indemnifications, totaled $32.9 million and
$27.9 million at October 31, 2009 and April 30,
2009, respectively. Litigation is inherently unpredictable and
it is difficult to predict the outcome of particular matters
with reasonable certainty and, therefore, the actual amount of
any loss may prove to be larger or smaller than the amounts
reflected in our consolidated financial statements.
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We have settled all but one of the RAL Cases. The sole remaining
RAL Case is a putative class action entitled Sandra J.
Basile, et al. v. H&R Block, Inc., et al., April
Term 1992 Civil Action No. 3246 in the Court of Common
Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. The trial courts
decertification decision is currently on appeal. We believe we
have meritorious defenses to this case and intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the POM Cases), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax
Services, Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes (1) statutory fraud by selling
insurance without a license, (2) an unfair trade practice,
by omission and by cramming (i.e., charging
customers for the guarantee even though they did not request it
or want it), and (3) a breach of fiduciary duty. The
plaintiffs seek unspecified damages, attorneys fees and
costs. The Madison County court ultimately certified a class
consisting of all persons residing in 13 states who from
January 1, 1997 to final judgment (1) were charged a
separate fee for POM by H&R Block;
(2) were charged a separate fee for POM by an
H&R Block entity not licensed to sell
insurance; or (3) had an unsolicited charge for POM posted
to their bills by H&R Block. Persons who
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received the POM guarantee through an H&R Block Premium
office were excluded from the class. We subsequently removed the
case to federal court in the Southern District of Illinois,
where it is now pending. In November 2009, the federal court
issued an order effectively vacating the state courts
class certification ruling and allowing plaintiffs time to file
a renewed motion for class certification under the federal rules.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al. (Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas and is pending before the same judge that
presided over the Texas RAL Settlement, involves the same
plaintiffs attorneys that are involved in the Marshall
litigation in Illinois, and contains allegations similar to
those in the Marshall case. The plaintiff seeks actual
and treble damages, equitable relief, attorney fees and costs.
No class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, however, and there can
be no assurances as to the outcome of these pending actions or
their impact on our consolidated results of operations
individually or in the aggregate.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) entitled The People of
New York v. H&R Block, Inc. and H&R Block
Financial Advisors, Inc. et al. The complaint asserts
nationwide jurisdiction and alleges fraudulent business
practices, deceptive acts and practices, common law fraud and
breach of fiduciary duty with respect to the Express IRA product
and seeks equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. In July 2007,
the Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than H&R Block Financial
Advisors, Inc. (HRBFA) and the claims of common law fraud. The
intermediate appellate court reversed this ruling in January
2009. The amount claimed in this case is substantial. We believe
we have meritorious defenses to the claims in this case and
intend to defend this case vigorously. There can be no
assurances, however, as to the outcome of this case or its
impact on our consolidated results of operations.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleges fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and seeks equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe we have meritorious defenses to
the claims in this case, and we intend to defend this case
vigorously, but there can be no assurances as to its outcome or
its impact on our consolidated results of operations.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 15, 2006. Except for two cases pending in
state court, all of the civil actions have been consolidated by
the panel for Multi-District Litigation into a single action
styled In re H&R Block, Inc. Express IRA Marketing
Litigation (Case
No. 06-1786-MD-RED)
in the United States District Court for the Western District of
Missouri. The amounts claimed in these cases are substantial. We
believe we have meritorious defenses to the claims in these
cases and intend to defend these cases vigorously, but there can
be no assurances as to their outcome or their impact on our
consolidated results of operations.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for any liabilities relating to the Express
IRA litigation through an indemnification agreement.
Securities and
Shareholder Litigation
On April 6, 2007, a putative class action styled In re
H&R Block Securities Litigation (Case
No. 06-0236-CV-W-ODS)
was filed against the Company and certain of its officers in the
United States District Court for the Western District of
Missouri. The complaint alleged, among other things, deceptive,
material and misleading financial statements and failure to
prepare financial statements in accordance with generally
accepted accounting principles. The complaint sought unspecified
damages and equitable relief. The court dismissed the complaint
in February 2008, and the plaintiffs appealed the dismissal in
March 2008.
12
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In addition, plaintiffs in a shareholder derivative action that
was consolidated into the securities litigation filed a separate
appeal in March 2008, contending that the derivative action was
improperly consolidated. The derivative action is Iron
Workers Local 16 Pension Fund v. H&R Block, et
al., in the United States District Court for the Western
District of Missouri, Case
No. 06-cv-00466-ODS
(instituted on June 8, 2006) and was brought against
certain of our directors and officers purportedly on behalf of
the Company. The derivative action alleged breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. In September 2009, the
appellate court affirmed the dismissal of the securities fraud
class action, but reversed the dismissal of the shareholder
derivative action. We believe we have meritorious defenses to
the claims in the shareholder derivative action and intend to
defend the action vigorously. There can be no assurances,
however, as to its outcome.
RSM McGladrey
Litigation
RSM EquiCo, its parent and certain of its subsidiaries and
affiliates, are parties to a class action filed on July 11,
2006 and entitled Do 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 relating to business valuation
services provided by RSM EquiCo, including allegations of fraud,
negligent misrepresentation, breach of contract, breach of
implied covenant of good faith and fair dealing, breach of
fiduciary duty and unfair competition. Plaintiffs seek
unspecified actual and punitive damages, in addition to
pre-judgment interest and attorneys fees. On
March 17, 2009, the court granted plaintiffs motion
for class certification on all claims. The defendants filed two
requests for interlocutory review of the decision, the last of
which was denied by the Supreme Court of California on
September 30, 2009. A trial date has been set for January
2011.
The certified class consists of all RSM EquiCo U.S. clients
who signed platform agreements and for whom RSM EquiCo did not
ultimately market their business for sale. The fees paid to RSM
EquiCo in connection with these agreements total approximately
$185 million, a number which substantially exceeds the
equity of RSM EquiCo. We intend to defend this case vigorously.
The amount claimed in this action is substantial and could have
a material adverse impact on our consolidated results of
operations. There can be no assurance regarding the outcome of
this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block entitled Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al. The complaint, which
was filed by the trustee for certain bankrupt investment funds,
seeks unspecified damages and asserts claims against M&P
for failure to meet generally accepted auditing standards and
failure to detect fraud in financial statement audits. The
complaint also asserts claims for vicarious liability and alter
ego liability against RSM, and for equitable restitution against
H&R Block. We are evaluating the claims asserted and have
not yet formed an opinion about the case or its materiality.
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) arising in the normal course of business.
Judgments or settlements arising from Attest Firm Claims
exceeding 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. For example, accounting and auditing firms
(including one of the Attest Firms) have become subject to
claims based on losses their clients suffered from investments
in investment funds managed by third parties. 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.
See note 2 for discussion of the arbitration proceeding
between RSM and M&P.
13
Table of Contents
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. In November 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 (1) advance notice to the
Massachusetts Attorney General and (2) 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. There can
be no assurances, however, as to its outcome or its impact on
our consolidated results of operations.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. Because SCCs
operating results are included in our consolidated financial
statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of
unfavorable outcomes could have a material adverse impact on our
consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these
investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could have a material adverse impact on our consolidated results
of operations.
In addition to the aforementioned types of matters, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively,
14
Table of Contents
Other Claims) concerning the preparation of
customers income tax returns, the fees charged customers
for various products and services, relationships with
franchisees, intellectual property disputes, employment matters
and contract disputes. While we cannot provide assurance that we
will ultimately prevail in each instance, we believe the amount,
if any, we are required to pay in the discharge of liabilities
or settlements in these Other Claims will not have a material
adverse effect on our consolidated operating results.
12. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
(in 000s) | ||||||||||||||||
Six Months Ended |
||||||||||||||||
Three Months Ended October 31, | October 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues:
|
||||||||||||||||
Tax Services
|
$ | 109,305 | $ | 104,734 | $ | 197,268 | $ | 186,434 | ||||||||
Business Services
|
206,602 | 233,045 | 384,220 | 407,696 | ||||||||||||
Corporate
|
10,174 | 13,690 | 20,098 | 29,248 | ||||||||||||
$ | 326,081 | $ | 351,469 | $ | 601,586 | $ | 623,378 | |||||||||
Pretax income (loss):
|
||||||||||||||||
Tax Services
|
$ | (172,188 | ) | $ | (188,125 | ) | $ | (344,162 | ) | $ | (351,782 | ) | ||||
Business Services
|
174 | 13,081 | 1,495 | 12,786 | ||||||||||||
Corporate
|
(40,839 | ) | (52,409 | ) | (81,059 | ) | (101,427 | ) | ||||||||
Loss from continuing operations before tax benefit
|
$ | (212,853 | ) | $ | (227,453 | ) | $ | (423,726 | ) | $ | (440,423 | ) | ||||
Effective May 1, 2009, we realigned certain segments of our
business to reflect a new management reporting structure. The
operations of HRB Bank, which was previously reported as the
Consumer Financial Services segment, have now been reclassified,
with activities that support our retail tax network included in
the Tax Services segment, and the net interest margin and gains
and losses relating to our portfolio of mortgage loans held for
investment and related assets included in corporate.
Presentation of prior period results reflects the new segment
reporting structure.
These segment changes also resulted in the reclassification of
assets between segments. Identifiable assets by reportable
segment at October 31, 2009 are as follows:
(in 000s) | ||||
Tax Services
|
$ | 2,790,766 | ||
Business Services
|
857,698 | |||
Corporate
|
1,318,895 | |||
$ | 4,967,359 | |||
13. | Accounting Pronouncements |
In October 2009, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update
2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
This guidance amends the criteria for separating consideration
in multiple-deliverable arrangements to enable vendors to
account for products or services (deliverables) separately
rather than as a combined unit. This guidance establishes a
selling price hierarchy for determining the selling price of a
deliverable, which is based on: (1) vendor-specific
objective evidence; (2) third-party evidence; or
(3) estimates. This guidance also eliminates the residual
method of allocation and requires that arrangement consideration
be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. In
addition, this guidance significantly expands required
disclosures related to a vendors multiple-deliverable
revenue arrangements. This guidance is effective prospectively
for revenue arrangements entered into or materially modified
beginning with our fiscal year 2012. We are currently evaluating
the effect of this statement on our consolidated financial
statements.
15
Table of Contents
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167). SFAS 167 changes how
a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
or similar rights should be consolidated. The determination of
whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entitys
purpose and design and the reporting entitys ability to
direct the activities of the other entity that most
significantly impact the other entitys economic
performance. SFAS 167 will require a reporting entity to
provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 will be
effective for our fiscal year 2011. We are currently evaluating
the effect of this statement on our consolidated financial
statements.
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 166, Accounting for Transfers of
Financial Assets (SFAS 166). SFAS 166 is a
revision to FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and will require more disclosure about
transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the
concept of a qualifying special purpose entity and changes the
requirements for derecognizing financial assets. SFAS 166
will be effective at the beginning of our fiscal year 2011. We
are currently evaluating the effect of this statement on our
consolidated financial statements.
In May 2009, the FASB issued guidance, under Topic
855 Subsequent Events, to establish general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. This guidance is effective
for fiscal years and interim periods ending after June 15,
2009 and is applied prospectively. We adopted the new disclosure
requirements in our condensed consolidated financial statements
effective July 31, 2009.
In December 2007, the FASB issued guidance, under Topic
805 Business Combinations, requiring an acquiring
entity to recognize all the assets acquired and liabilities
assumed in a transaction, including non-controlling interests,
at the acquisition-date fair value with limited exceptions. This
guidance will require acquisition-related expenses to be
expensed and will generally require contingent consideration to
be recorded as a liability at the time of acquisition. Under
this guidance, subsequent changes to deferred tax valuation
allowances relating to acquired businesses and acquired
liabilities for uncertain tax positions will no longer be
applied to goodwill but will instead be typically recognized as
an adjustment to income tax expense. We adopted the provisions
of this guidance as of May 1, 2009. The adoption did not
have a material impact on our consolidated financial statements.
In June 2008, the FASB issued guidance, under Topic
260 Earnings Per Share, addressing whether
instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, should
be included in the process of allocating earnings for purposes
of computing earnings per share. We adopted the provisions of
this guidance as of May 1, 2009. The adoption and
retrospective application of this guidance did not change the
current year or prior period earnings per share amounts for the
fiscal quarter. The adoption of this accounting guidance will
reduce earnings per share as previously reported for fiscal year
2009 by $0.01. See additional discussion in note 3.
14. | Condensed Consolidating Financial Statements |
BFC is an indirect, wholly-owned consolidated subsidiary of the
Company. BFC is the Issuer and the Company is the Guarantor of
the Senior Notes issued on January 11, 2008 and
October 26, 2004, our unsecured committed lines of credit
(CLOCs) and other indebtedness issued from time to time. These
condensed consolidating financial statements have been prepared
using the equity method of accounting. Earnings of subsidiaries
are, therefore, reflected in the Companys investment in
subsidiaries account. The elimination entries eliminate
investments in subsidiaries, related stockholders equity
and other intercompany balances and transactions.
16
Table of Contents
Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 21,026 | $ | 305,055 | $ | - | $ | 326,081 | ||||||||||
Cost of revenues
|
- | 45,861 | 365,088 | - | 410,949 | |||||||||||||||
Selling, general and administrative
|
- | 2,457 | 127,228 | - | 129,685 | |||||||||||||||
Total expenses
|
- | 48,318 | 492,316 | - | 540,634 | |||||||||||||||
Operating loss
|
- | (27,292 | ) | (187,261 | ) | - | (214,553 | ) | ||||||||||||
Other income (expense), net
|
(212,853 | ) | (2,607 | ) | 4,307 | 212,853 | 1,700 | |||||||||||||
Loss from continuing operations before tax benefit
|
(212,853 | ) | (29,899 | ) | (182,954 | ) | 212,853 | (212,853 | ) | |||||||||||
Income tax benefit
|
(86,381 | ) | (12,294 | ) | (74,087 | ) | 86,381 | (86,381 | ) | |||||||||||
Net loss from continuing operations
|
(126,472 | ) | (17,605 | ) | (108,867 | ) | 126,472 | (126,472 | ) | |||||||||||
Net loss from discontinued operations
|
(2,115 | ) | (2,115 | ) | - | 2,115 | (2,115 | ) | ||||||||||||
Net loss
|
$ | (128,587 | ) | $ | (19,720 | ) | $ | (108,867 | ) | $ | 128,587 | $ | (128,587 | ) | ||||||
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 revenues
|
- | 46,744 | 392,040 | (19 | ) | 438,765 | ||||||||||||||
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 | ) | ||||||
Six
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 44,222 | $ | 557,420 | $ | (56 | ) | $ | 601,586 | |||||||||
Cost of revenues
|
- | 91,421 | 705,978 | - | 797,399 | |||||||||||||||
Selling, general and administrative
|
- | 4,955 | 228,003 | (56 | ) | 232,902 | ||||||||||||||
Total expenses
|
- | 96,376 | 933,981 | (56 | ) | 1,030,301 | ||||||||||||||
Operating loss
|
- | (52,154 | ) | (376,561 | ) | - | (428,715 | ) | ||||||||||||
Other income (expense), net
|
(423,726 | ) | (3,840 | ) | 8,829 | 423,726 | 4,989 | |||||||||||||
Loss from continuing operations before tax benefit
|
(423,726 | ) | (55,994 | ) | (367,732 | ) | 423,726 | (423,726 | ) | |||||||||||
Income tax benefit
|
(166,637 | ) | (22,986 | ) | (143,651 | ) | 166,637 | (166,637 | ) | |||||||||||
Net loss from continuing operations
|
(257,089 | ) | (33,008 | ) | (224,081 | ) | 257,089 | (257,089 | ) | |||||||||||
Net loss from discontinued operations
|
(5,132 | ) | (5,132 | ) | - | 5,132 | (5,132 | ) | ||||||||||||
Net loss
|
$ | (262,221 | ) | $ | (38,140 | ) | $ | (224,081 | ) | $ | 262,221 | $ | (262,221 | ) | ||||||
17
Table of Contents
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 revenues
|
- | 92,444 | 712,656 | (15 | ) | 805,085 | ||||||||||||||
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 | ) | ||||||
Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
October 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 1,088,485 | $ | 346,151 | $ | (2,393 | ) | $ | 1,432,243 | |||||||||
Cash & cash equivalents restricted
|
- | 386 | 45,686 | - | 46,072 | |||||||||||||||
Receivables, net
|
3 | 111,025 | 350,457 | - | 461,485 | |||||||||||||||
Mortgage loans held for investment
|
- | 671,049 | - | - | 671,049 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 1,234,992 | - | 1,234,992 | |||||||||||||||
Investments in subsidiaries
|
2,926,151 | - | 190 | (2,926,151 | ) | 190 | ||||||||||||||
Other assets
|
- | 314,954 | 806,374 | - | 1,121,328 | |||||||||||||||
Total assets
|
$ | 2,926,154 | $ | 2,185,899 | $ | 2,783,850 | $ | (2,928,544 | ) | $ | 4,967,359 | |||||||||
Customer deposits
|
$ | - | $ | 1,496,119 | $ | - | $ | (2,393 | ) | $ | 1,493,726 | |||||||||
Long-term debt
|
- | 998,425 | 34,137 | - | 1,032,562 | |||||||||||||||
FHLB borrowings
|
- | 100,000 | - | - | 100,000 | |||||||||||||||
Other liabilities
|
45 | 122,724 | 1,147,205 | - | 1,269,974 | |||||||||||||||
Net intercompany advances
|
1,855,012 | (644,470 | ) | (1,210,542 | ) | - | - | |||||||||||||
Stockholders equity
|
1,071,097 | 113,101 | 2,813,050 | (2,926,151 | ) | 1,071,097 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 2,926,154 | $ | 2,185,899 | $ | 2,783,850 | $ | (2,928,544 | ) | $ | 4,967,359 | |||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
April 30, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 241,350 | $ | 1,419,535 | $ | (6,222 | ) | $ | 1,654,663 | |||||||||
Cash & cash equivalents restricted
|
- | 4,303 | 47,353 | - | 51,656 | |||||||||||||||
Receivables, net
|
38 | 114,442 | 398,334 | - | 512,814 | |||||||||||||||
Mortgage loans held for investment
|
- | 744,899 | - | - | 744,899 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 1,236,228 | - | 1,236,228 | |||||||||||||||
Investments in subsidiaries
|
3,289,435 | - | 194 | (3,289,435 | ) | 194 | ||||||||||||||
Other assets
|
- | 308,481 | 850,787 | - | 1,159,268 | |||||||||||||||
Total assets
|
$ | 3,289,473 | $ | 1,413,475 | $ | 3,952,431 | $ | (3,295,657 | ) | $ | 5,359,722 | |||||||||
Customer deposits
|
$ | - | $ | 861,110 | $ | - | $ | (6,222 | ) | $ | 854,888 | |||||||||
Long-term debt
|
- | 998,245 | 33,877 | - | 1,032,122 | |||||||||||||||
FHLB borrowings
|
- | 100,000 | - | - | 100,000 | |||||||||||||||
Other liabilities
|
2 | 130,362 | 1,836,477 | 12 | 1,966,853 | |||||||||||||||
Net intercompany advances
|
1,883,612 | (827,453 | ) | (1,056,147 | ) | (12 | ) | - | ||||||||||||
Stockholders equity
|
1,405,859 | 151,211 | 3,138,224 | (3,289,435 | ) | 1,405,859 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 3,289,473 | $ | 1,413,475 | $ | 3,952,431 | $ | (3,295,657 | ) | $ | 5,359,722 | |||||||||
18
Table of Contents
Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
Six
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
October 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash provided by (used in) operating activities:
|
$ | 5,880 | $ | (14,655 | ) | $ | (777,377 | ) | $ | - | $ | (786,152 | ) | |||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 38,693 | - | - | 38,693 | |||||||||||||||
Purchase property & equipment
|
- | 546 | (7,826 | ) | - | (7,280 | ) | |||||||||||||
Net intercompany advances
|
89,577 | - | - | (89,577 | ) | - | ||||||||||||||
Other, net
|
- | 13,847 | (1,980 | ) | - | 11,867 | ||||||||||||||
Net cash provided by (used in) investing activities
|
89,577 | 53,086 | (9,806 | ) | (89,577 | ) | 43,280 | |||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Customer banking deposits
|
- | 634,637 | - | 3,829 | 638,466 | |||||||||||||||
Dividends paid
|
(100,784 | ) | - | - | - | (100,784 | ) | |||||||||||||
Acquisition of treasury shares
|
(3,785 | ) | - | - | - | (3,785 | ) | |||||||||||||
Proceeds from stock options
|
8,218 | - | - | - | 8,218 | |||||||||||||||
Net intercompany advances
|
- | 183,042 | (272,619 | ) | 89,577 | - | ||||||||||||||
Other, net
|
894 | (8,975 | ) | (22,803 | ) | - | (30,884 | ) | ||||||||||||
Net cash provided by (used in) financing activities
|
(95,457 | ) | 808,704 | (295,422 | ) | 93,406 | 511,231 | |||||||||||||
Effects of exchange rates on cash
|
- | - | 9,221 | - | 9,221 | |||||||||||||||
Net increase (decrease) in cash
|
- | 847,135 | (1,073,384 | ) | 3,829 | (222,420 | ) | |||||||||||||
Cash beginning of period
|
- | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||
Cash end of period
|
$ | - | $ | 1,088,485 | $ | 346,151 | $ | (2,393 | ) | $ | 1,432,243 | |||||||||
19
Table of Contents
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 | ) | ||||||||||||
Net intercompany advances
|
(112,550 | ) | - | - | 112,550 | - | ||||||||||||||
Investing cash flows of discontinued operations
|
- | (48,917 | ) | - | - | (48,917 | ) | |||||||||||||
Other, net
|
- | 4,407 | (206 | ) | - | 4,201 | ||||||||||||||
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 banking 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 | |||||||||
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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. This segment also
offers The H&R Block Prepaid Emerald
MasterCard®
and Emerald Advance lines of credit through H&R Block Bank
(HRB Bank), which was previously reported in our Consumer
Financial Services segment. Our Business Services segment
consists of RSM McGladrey, Inc. (RSM), a national accounting,
tax and business consulting firm primarily serving mid-sized
businesses. Corporate operating losses include interest income
from U.S. passive investments, interest expense on
borrowings, net interest margin and gains or losses relating to
mortgage loans held for investment, real estate owned, residual
interests in securitizations and other corporate expenses,
principally related to finance, legal and other support
departments. All periods presented reflect our new segment
reporting structure.
Recent
Events. RSM McGladrey, Inc. (RSM) and
McGladrey & Pullen LLP (M&P), an independent
registered public accounting firm, collaborate to provide
accounting, tax and consulting services to clients under an
alternative practice structure. RSM and M&P also share in
certain common overhead costs through an administrative services
agreement. These services are provided by, and coordinated
through, RSM, for which RSM receives a management fee.
On July 21, 2009, M&P provided 210 days notice of
its intent to terminate the administrative services agreement.
The effect of the notice will be to terminate the alternative
practice structure on February 16, 2010, unless revoked or
modified prior to that time. As a protective measure, on
September 15, 2009, RSM provided notice of its intent to
terminate the administrative services agreement. Absent
revocation or modification by RSM, the effect of RSMs
notice will be to terminate the alternative practice structure
on April 13, 2010 even in the event M&P revokes or
modifies the M&P notice. Since July 23, 2009, RSM and
M&P have been engaged in arbitration to resolve various
disputes regarding their contractual relationship, including the
scope and enforceability of restrictive covenants agreed to by
M&P. On November 24, 2009, the arbitration panel
issued a final and binding ruling regarding the enforceability
of the covenants. The ruling is confidential. RSM and M&P
are continuing negotiations to determine if there are mutually
agreeable changes to the current arrangements that would allow
the alternative practice structure with M&P to continue.
There are no assurances as to the outcome of these negotiations.
21
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TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses retail, online and software.
Additionally, this segment includes the product offerings and
activities of HRB Bank that primarily support the tax network,
our participations in refund anticipation loans, and our
commercial tax businesses, which provide tax preparation
software to CPAs and other tax preparers.
Tax Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Tax preparation fees
|
$ | 59,305 | $ | 56,907 | $ | 92,930 | $ | 86,339 | ||||||||
Fees from Peace of Mind guarantees
|
19,130 | 18,586 | 47,044 | 45,826 | ||||||||||||
Fees from Emerald Card activities
|
9,428 | 7,757 | 21,119 | 18,650 | ||||||||||||
Royalties
|
6,055 | 5,299 | 9,662 | 8,983 | ||||||||||||
Other
|
15,387 | 16,185 | 26,513 | 26,636 | ||||||||||||
Total revenues
|
109,305 | 104,734 | 197,268 | 186,434 | ||||||||||||
Compensation and benefits:
|
||||||||||||||||
Field wages
|
54,938 | 56,085 | 94,317 | 95,904 | ||||||||||||
Other wages
|
28,841 | 28,072 | 58,721 | 56,882 | ||||||||||||
Benefits and other compensation
|
19,795 | 19,819 | 41,111 | 33,722 | ||||||||||||
103,574 | 103,976 | 194,149 | 186,508 | |||||||||||||
Occupancy and equipment
|
93,023 | 89,700 | 180,943 | 175,756 | ||||||||||||
Depreciation and amortization
|
22,410 | 19,757 | 44,726 | 36,867 | ||||||||||||
Marketing and advertising
|
15,261 | 14,396 | 22,100 | 19,940 | ||||||||||||
Other
|
47,225 | 65,030 | 99,512 | 119,145 | ||||||||||||
Total expenses
|
281,493 | 292,859 | 541,430 | 538,216 | ||||||||||||
Pretax loss
|
$ | (172,188 | ) | $ | (188,125 | ) | $ | (344,162 | ) | $ | (351,782 | ) | ||||
Three months
ended October 31, 2009 compared to October 31,
2008
Tax Services revenues increased $4.6 million, or
4.4%, for the three months ended October 31, 2009 over the
prior year. Tax preparation fees increased $2.4 million, or
4.2%, primarily as a result of an increase in the volume of tax
returns prepared and the November 2008 acquisition of our last
major independent franchise operator. This increase was
partially offset by the impact of unfavorable exchange rates on
our foreign operations.
Total expenses decreased $11.4 million, or 3.9%, for the
three months ended October 31, 2009. Occupancy and
equipment, and depreciation and amortization expenses combined
increased approximately $6 million as a result of the
acquisition discussed above. Occupancy costs also increased as
we incurred expenses associated with the closure of certain
offices. These items were offset by declines in other expenses,
which decreased $17.8 million, or 27.4%, primarily as a
result of a goodwill impairment and tax and legal expenses in
the prior year that did not recur in the current quarter, and,
to a lesser extent, cost-saving initiatives.
The pretax loss for the three months ended October 31, 2009
and 2008 was $172.2 million and $188.1 million,
respectively.
Six months ended
October 31, 2009 compared to October 31,
2008
Tax Services revenues increased $10.8 million, or
5.8%, for the six months ended October 31, 2009 over the
prior year. Tax preparation fees increased $6.6 million, or
7.6%, primarily as a result of an increase in the volume of tax
returns prepared and the acquisition discussed above. This
increase was partially offset by the impact of unfavorable
exchange rates on our foreign operations.
Total expenses increased $3.2 million, or 0.6%, for the six
months ended October 31, 2009 over the prior year. Benefits
and other compensation increased $7.4 million, or 21.9%,
primarily as a result of severance costs and related payroll
taxes in the current year. Occupancy and equipment, and
depreciation and amortization expenses combined increased
approximately $12 million as a result of the acquisition
discussed above. Other expenses decreased $19.6 million or
16.5% primarily as a result of expenses in the prior year that
did not recur, as discussed above, and cost-saving initiatives.
The pretax loss for the six months ended October 31, 2009
and 2008 was $344.2 million and $351.8 million,
respectively.
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BUSINESS
SERVICES
This segment offers accounting, tax and consulting services to
middle-market companies.
Business Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Tax services
|
$ | 100,709 | $ | 110,569 | $ | 178,293 | $ | 186,870 | ||||||||
Business consulting
|
61,224 | 73,249 | 123,145 | 126,757 | ||||||||||||
Accounting services
|
12,520 | 13,421 | 24,049 | 26,381 | ||||||||||||
Capital markets
|
1,012 | 4,965 | 2,529 | 10,783 | ||||||||||||
Reimbursed expenses
|
6,204 | 4,330 | 10,353 | 8,535 | ||||||||||||
Other
|
24,933 | 26,511 | 45,851 | 48,370 | ||||||||||||
Total revenues
|
206,602 | 233,045 | 384,220 | 407,696 | ||||||||||||
Compensation and benefits
|
149,309 | 161,381 | 283,689 | 284,289 | ||||||||||||
Occupancy
|
19,053 | 20,650 | 38,502 | 40,484 | ||||||||||||
Depreciation
|
5,540 | 5,480 | 10,830 | 11,129 | ||||||||||||
Marketing and advertising
|
4,721 | 6,116 | 9,554 | 12,206 | ||||||||||||
Amortization of intangible assets
|
2,942 | 3,350 | 5,907 | 6,769 | ||||||||||||
Other
|
24,863 | 22,987 | 34,243 | 40,033 | ||||||||||||
Total expenses
|
206,428 | 219,964 | 382,725 | 394,910 | ||||||||||||
Pretax income
|
$ | 174 | $ | 13,081 | $ | 1,495 | $ | 12,786 | ||||||||
Three months
ended October 31, 2009 compared to October 31,
2008
Business Services revenues for the three months ended
October 31, 2009 decreased $26.4 million, or 11.3%
from the prior year. Revenues from tax services decreased
$9.9 million, or 8.9%, from the prior year primarily due to
lower rates and fewer chargeable hours resulting from reduced
client demand given the current economic conditions. Business
consulting revenues declined $12.0 million primarily due to
decreased demand for discretionary projects, including a large
one-time financial institution engagement in the prior year.
Capital markets revenues decreased $4.0 million, or 79.6%,
primarily due to an 80% decline in the number of transactions
closed in the current year due to the continued weak economic
conditions.
Total expenses decreased $13.5 million, or 6.2%, from the
prior year. Compensation and benefits decreased
$12.1 million, or 7.5%, primarily due to declines in
employee compensation and outside contractor costs, both driven
by lower revenues. Other expenses increased over the prior year
primarily due to increased costs related to litigation,
partially offset by our cost reduction program.
Pretax income for the three months ended October 31, 2009
was $0.2 million compared to $13.1 million in the
prior year.
Six months ended
October 31, 2009 compared to October 31,
2008
Business Services revenues for the six months ended
October 31, 2009 decreased $23.5 million, or 5.8% from
the prior year. Revenues from tax services decreased
$8.6 million, or 4.6%, from the prior year primarily due to
lower rates and chargeable hours resulting from reduced client
demand given the current economic conditions.
Capital markets revenues decreased $8.3 million, or 76.5%,
primarily due to a 75% decline in the number of transactions
closed in the current year due to the continued weak economic
conditions.
Total expenses decreased $12.2 million, or 3.1%, from the
prior year. Other expenses decreased $5.8 million primarily
as a result of our cost reduction program, partially offset by
increased costs related to litigation.
Pretax income for the six months ended October 31, 2009 was
$1.5 million compared to $12.8 million in the prior
year.
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
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Corporate Operating Results | (in 000s) | |||||||||||||||
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income on mortgage loans held for investment
|
$ | 8,072 | $ | 12,098 | $ | 15,968 | $ | 25,363 | ||||||||
Other
|
2,102 | 1,592 | 4,130 | 3,885 | ||||||||||||
Total revenues
|
10,174 | 13,690 | 20,098 | 29,248 | ||||||||||||
Interest expense
|
19,216 | 23,632 | 38,874 | 46,374 | ||||||||||||
Provision for loan losses
|
13,400 | 23,092 | 27,000 | 38,083 | ||||||||||||
Compensation and benefits
|
13,486 | 12,443 | 26,787 | 25,191 | ||||||||||||
Other
|
4,911 | 6,932 | 8,496 | 21,027 | ||||||||||||
Total expenses
|
51,013 | 66,099 | 101,157 | 130,675 | ||||||||||||
Pretax loss
|
$ | (40,839 | ) | $ | (52,409 | ) | $ | (81,059 | ) | $ | (101,427 | ) | ||||
Three months
ended October 31, 2009 compared to October 31,
2008
Interest income earned on mortgage loans held for investment for
the three months ended October 31, 2009 decreased
$4.0 million, or 33.3%, from the prior year, primarily as a
result of non-performing loans. Interest expense decreased
$4.4 million, or 18.7% due to lower funding costs related
to our mortgage loan portfolio and lower corporate borrowings.
Our provision for loan losses decreased $9.7 million from
the prior year as a result of declining rates of new
delinquencies in our static loan portfolio. See related
discussion below under Mortgage Loans Held for
Investment.
Six months ended
October 31, 2009 compared to October 31,
2008
Interest income earned on mortgage loans held for investment for
the six months ended October 31, 2009 decreased
$9.4 million, or 37.0%, from the prior year, primarily as a
result of non-performing loans. Interest expense decreased
$7.5 million, or 16.2%, due to lower funding costs related
to our mortgage loan portfolio and lower corporate borrowings.
Our provision for loan losses decreased $11.1 million from
the prior year. See related discussion below under
Mortgage Loans Held for Investment.
Other expenses declined $12.5 million, or 59.6%, primarily
due to impairments of residual interests totaling
$5.2 million recorded in the prior year, compared with
gains of $3.9 million in the current year and a
$1.1 million decline in impairments of real estate owned.
Income
Taxes
Our effective tax rate for continuing operations was 40.6% and
39.3% for the three and six months ended October 31, 2009,
respectively, compared to 41.5% and 40.6% for the three and six
months ended October 31, 2008, respectively. Our effective
tax rates declined from the prior year due to non-deductible
losses from investments in company-owned life insurance assets
recorded in the first fiscal quarter of last year. We expect our
effective tax rate for full fiscal year 2010 to be approximately
40%.
Mortgage Loans
Held for Investment
Mortgage loans held for investment include loans originated by
our affiliate, Sand Canyon Corporation (SCC), and purchased by
HRB Bank totaling $490.9 million, or approximately 64% of
the total loan portfolio at October 31, 2009. We have
experienced higher rates of delinquency and have greater
exposure to loss with respect to this segment of our loan
portfolio. Our remaining loan portfolio totaled
$270.2 million and is characteristic of a prime loan
portfolio, and we believe subject to a lower loss exposure.
24
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Detail of our mortgage loans held for investment and the related
allowance at October 31, 2009 and April 30, 2009 is as
follows:
(dollars in 000s) | ||||||||||||||||
Outstanding |
Loan Loss Allowance |
%30+ Days |
||||||||||||||
Principal Balance | Amount | % of Principal | Past Due | |||||||||||||
As of October 31, 2009:
|
||||||||||||||||
Purchased from SCC
|
$ | 490,873 | $ | 89,438 | 18.22 | % | 35.69 | % | ||||||||
All other
|
270,243 | 6,555 | 2.43 | % | 7.96 | % | ||||||||||
$ | 761,116 | $ | 95,993 | 12.61 | % | 25.98 | % | |||||||||
As of April 30, 2009:
|
||||||||||||||||
Purchased from SCC
|
$ | 531,233 | $ | 78,067 | 14.70 | % | 28.74 | % | ||||||||
All other
|
290,604 | 6,006 | 2.07 | % | 4.44 | % | ||||||||||
$ | 821,837 | $ | 84,073 | 10.23 | % | 20.23 | % | |||||||||
We recorded provisions for loan losses of $13.4 million and
$27.0 million during the three and six months ended
October 31, 2009, respectively, compared to
$23.1 million and $38.1 million during the three and
six months ended October 31, 2008, respectively. Our
allowance for loan losses as a percent of mortgage loans was
12.61%, or $96.0 million, at October 31, 2009,
compared to 10.23%, or $84.1 million, at April 30,
2009. This allowance represents our best estimate of credit
losses inherent in the loan portfolio as of the balance sheet
dates.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets and condensed consolidated
statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES
AND LIQUIDITY Our sources of capital
include cash from operations, issuances of common stock and
debt. We use capital primarily to fund working capital, pay
dividends, repurchase treasury shares and acquire businesses.
Our operations are highly seasonal and therefore generally
require the use of cash to fund operating losses during the
period May through mid-January.
Given the likely availability of a number of liquidity options
discussed herein, including borrowing capacity under our
commercial paper program, unsecured committed lines of credit
(CLOCs) and seasonal CLOC used to purchase RAL participations,
we believe, that in the absence of any unexpected developments,
our existing sources of capital at October 31, 2009 are
sufficient to meet our operating needs.
CASH FROM
OPERATING ACTIVITIES Cash used in
operations totaled $786.2 million for the first six months
of fiscal year 2010, compared with $665.9 million for the
same period last year. The increase was primarily due to
increases in income tax payments made during the current year.
CASH FROM
INVESTING ACTIVITIES Cash provided by
investing activities totaled $43.3 million for the first
six months of fiscal year 2010, compared to a use of
$48.8 million for the same period last year, primarily as a
result of lower capital expenditures and the prior year impact
of discontinued operations.
Mortgage Loans
Held for Investment. We received net payments of
$38.7 million and $54.5 million on our mortgage loans
held for investment for the first six months of fiscal years
2010 and 2009, respectively. Cash payments declined primarily
due to non-performing loans and continued run-off of our
portfolio.
Purchases of
Property and Equipment. Total cash paid for property
and equipment was $7.3 million and $58.6 million for
the first six months of fiscal years 2010 and 2009, respectively.
CASH FROM
FINANCING ACTIVITIES Cash provided by
financing activities totaled $511.2 million for the first
six months of fiscal year 2010, compared to $743.5 million
for the same period last year.
Short-Term
Borrowings. In the prior year, we borrowed a net
$693.6 million on our CLOCs to fund our off-season working
capital needs. Similar borrowings were not required in the
current year.
Customer Banking
Deposits. Customer banking deposits provided cash of
$638.5 million for the six months ended October 31,
2009 compared to using cash of $40.6 million in the prior
year. We utilize cash provided by deposit balances as a funding
source for our Emerald Advance lines of credit during the tax
season. Funding from customer deposits was obtained earlier in
the current fiscal year compared to the prior year.
Dividends.
We have consistently paid quarterly dividends. Dividends paid
totaled $100.8 million and $96.6 million for the six
months ended October 31, 2009 and 2008, respectively.
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Table of Contents
Issuances of
Common Stock. Proceeds from the issuance of common
stock resulting from stock compensation plans totaled
$8.2 million and $61.7 million for the six months
ended October 31, 2009 and 2008, respectively. This decline
is due to a reduction in stock option exercises and the related
tax benefits.
In the prior year, we sold 8.3 million shares of our common
stock, without par value, at a price of $17.50 per share in a
registered direct offering through subscription agreements with
selected institutional investors. We received net proceeds of
$141.6 million.
CAPITAL
CONTRIBUTIONS TO HRB BANK Block Financial
LLC (BFC) typically makes capital contributions to HRB Bank to
help it meet its capital requirements. Capital contributions
totaling $245.0 million were made by BFC during the fiscal
year ended April 30, 2009. BFC made capital contributions
to HRB Bank of $150.0 million during the six months ended
October 31, 2009 and, in November 2009, BFC made an
additional capital contribution to HRB Bank of
$85.0 million.
Historically, capital contributions by BFC have been repaid as a
return of capital by HRB Bank as capital requirements decline.
During the fiscal year ended April 30, 2009, HRB Bank
returned capital of $235.0 million. A return of capital or
dividend paid by HRB bank must be approved by the Office of
Thrift Supervision (OTS). Although the OTS has approved such
payments in the past, there is no assurance that they will
continue to do so in the future, in particular if they determine
that higher capital levels at HRB Bank are necessary due to
non-performing asset levels. In addition, BFC may elect to
maintain higher capital levels at HRB Bank.
BORROWINGS
At October 31, 2009, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These CLOCs 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 no balance outstanding as of October 31, 2009. 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 $1.1 billion at
October 31, 2009.
Aurora Bank, FSB (Aurora), formerly known as Lehman Brothers
Bank, FSB, is a participating lender in our $2.0 billion
CLOCs, with a $50.0 million credit commitment. In September
2008, Auroras parent company declared bankruptcy. Since
then, Aurora 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.
There have been no material changes in our borrowings or debt
ratings from those reported at April 30, 2009 in our Annual
Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual
obligations and commercial commitments from those reported at
April 30, 2009 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
There have been no material changes in our regulatory
environment from those reported at April 30, 2009 in our
Annual Report on
Form 10-K.
FORWARD-LOOKING
INFORMATION
This report and other documents filed with the Securities and
Exchange Commission (SEC) may contain forward-looking
statements. In addition, our senior management may make
forward-looking statements orally to analysts, investors, the
media and others. Forward-looking statements can be identified
by the fact that they do not relate strictly to historical or
current facts. They often include words such as
expects, anticipates,
intends, plans, believes,
seeks, estimates, will,
would, should, could or
may. Forward-looking statements provide
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.
26
Table of Contents
There have been no material changes in our market risks from
those reported at April 30, 2009 in our Annual Report on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. The controls evaluation
was done under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective as of the end
of the period covered by this Quarterly Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
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 have settled all but one of the RAL Cases. The sole remaining
RAL Case is a putative class action entitled Sandra J.
Basile, et al. v. H&R Block, Inc., et al., April
Term 1992 Civil Action No. 3246 in the Court of Common
Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. The trial courts
decertification decision is currently on appeal. We believe we
have meritorious defenses to this case and intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
27
Table of Contents
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the POM Cases), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax
Services, Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes (1) statutory fraud by selling
insurance without a license, (2) an unfair trade practice,
by omission and by cramming (i.e., charging
customers for the guarantee even though they did not request it
or want it), and (3) a breach of fiduciary duty. The
plaintiffs seek unspecified damages, attorneys fees and
costs. The Madison County court ultimately certified a class
consisting of all persons residing in 13 states who from
January 1, 1997 to final judgment (1) were charged a
separate fee for POM by H&R Block;
(2) were charged a separate fee for POM by an
H&R Block entity not licensed to sell
insurance; or (3) had an unsolicited charge for POM posted
to their bills by H&R Block. Persons who
received the POM guarantee through an H&R Block Premium
office were excluded from the class. We subsequently removed the
case to federal court in the Southern District of Illinois,
where it is now pending. In November 2009, the federal court
issued an order effectively vacating the state courts
class certification ruling and allowing plaintiffs time to file
a renewed motion for class certification under the federal rules.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al. (Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas and is pending before the same judge that
presided over the Texas RAL Settlement, involves the same
plaintiffs attorneys that are involved in the Marshall
litigation in Illinois, and contains allegations similar to
those in the Marshall case. The plaintiff seeks actual
and treble damages, equitable relief, attorney fees and costs.
No class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, however, and there can
be no assurances as to the outcome of these pending actions or
their impact on our consolidated results of operations
individually or in the aggregate.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) entitled The People of
New York v. H&R Block, Inc. and H&R Block
Financial Advisors, Inc. et al. The complaint asserts
nationwide jurisdiction and alleges fraudulent business
practices, deceptive acts and practices, common law fraud and
breach of fiduciary duty with respect to the Express IRA product
and seeks equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. In July 2007,
the Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than H&R Block Financial
Advisors, Inc. (HRBFA) and the claims of common law fraud. The
intermediate appellate court reversed this ruling in January
2009. The amount claimed in this case is substantial. We believe
we have meritorious defenses to the claims in this case and
intend to defend this case vigorously. There can be no
assurances, however, as to the outcome of this case or its
impact on our consolidated results of operations.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleges fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and seeks equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe we have meritorious defenses to
the claims in this case, and we intend to defend this case
vigorously, but there can be no assurances as to its outcome or
its impact on our consolidated results of operations.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 15, 2006. Except for two cases pending in
state court, all of the civil actions have been consolidated by
the panel for Multi-District Litigation into a single action
styled In re H&R Block, Inc. Express IRA Marketing
Litigation (Case
No. 06-1786-MD-RED)
in the United States District Court for the Western District of
Missouri. The
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amounts claimed in these cases are substantial. We believe we
have meritorious defenses to the claims in these cases and
intend to defend these cases vigorously, but there can be no
assurances as to their outcome or their impact on our
consolidated results of operations.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for any liabilities relating to the Express
IRA litigation through an indemnification agreement.
Securities and
Shareholder Litigation
On April 6, 2007, a putative class action styled In re
H&R Block Securities Litigation (Case
No. 06-0236-CV-W-ODS)
was filed against the Company and certain of its officers in the
United States District Court for the Western District of
Missouri. The complaint alleged, among other things, deceptive,
material and misleading financial statements and failure to
prepare financial statements in accordance with generally
accepted accounting principles. The complaint sought unspecified
damages and equitable relief. The court dismissed the complaint
in February 2008, and the plaintiffs appealed the dismissal in
March 2008. In addition, plaintiffs in a shareholder derivative
action that was consolidated into the securities litigation
filed a separate appeal in March 2008, contending that the
derivative action was improperly consolidated. The derivative
action is Iron Workers Local 16 Pension Fund v. H&R
Block, et al., in the United States District Court for the
Western District of Missouri, Case
No. 06-cv-00466-ODS
(instituted on June 8, 2006) and was brought against
certain of our directors and officers purportedly on behalf of
the Company. The derivative action alleged breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. In September 2009, the
appellate court affirmed the dismissal of the securities fraud
class action, but reversed the dismissal of the shareholder
derivative action. We believe we have meritorious defenses to
the claims in the shareholder derivative action and intend to
defend the action vigorously. There can be no assurances,
however, as to its outcome.
RSM McGladrey
Litigation
RSM EquiCo, Inc. (RSM EquiCo), its parent and certain of its
subsidiaries and affiliates, are parties to a class action filed
on July 11, 2006 and entitled Do 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 relating to business
valuation services provided by RSM EquiCo, including allegations
of fraud, negligent misrepresentation, breach of contract,
breach of implied covenant of good faith and fair dealing,
breach of fiduciary duty and unfair competition. Plaintiffs seek
unspecified actual and punitive damages, in addition to
pre-judgment interest and attorneys fees. On
March 17, 2009, the court granted plaintiffs motion
for class certification on all claims. The defendants filed two
requests for interlocutory review of the decision, the last of
which was denied by the Supreme Court of California on
September 30, 2009. A trial date has been set for January
2011.
The certified class consists of all RSM EquiCo U.S. clients
who signed platform agreements and for whom RSM EquiCo did not
ultimately market their business for sale. The fees paid to RSM
EquiCo in connection with these agreements total approximately
$185 million, a number which substantially exceeds the
equity of RSM EquiCo. We intend to defend this case vigorously.
The amount claimed in this action is substantial and could have
a material adverse impact on our consolidated results of
operations. There can be no assurance regarding the outcome of
this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block entitled Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al. The complaint, which
was filed by the trustee for certain bankrupt investment funds,
seeks unspecified damages and asserts claims against M&P
for failure to meet generally accepted auditing standards and
failure to detect fraud in financial statement audits. The
complaint also asserts claims for vicarious liability and alter
ego liability against RSM, and for equitable restitution against
H&R Block. We are evaluating the claims asserted and have
not yet formed an opinion about the case or its materiality.
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) arising in the normal course of business.
Judgments or settlements arising from Attest Firm Claims
exceeding the Attest Firms insurance coverage could have a
direct adverse effect on Attest Firm operations and could impair
RSMs ability to attract
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and retain clients and quality professionals. For example,
accounting and auditing firms (including one of the Attest
Firms) have become subject to claims based on losses their
clients suffered from investments in investment funds managed by
third parties. 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.
See note 2 to the condensed consolidated financial
statements for discussion of the arbitration proceeding between
RSM and M&P.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state 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. In November 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 (1) advance notice to the
Massachusetts Attorney General and (2) 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. There can be no assurances, however, as to its
outcome or its impact on our consolidated results of operations.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. Because SCCs
operating results are included in our consolidated financial
statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of
unfavorable outcomes could have a material adverse impact on our
consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these
investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
30
Table of Contents
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could have a material adverse impact on our consolidated results
of operations.
In addition to the aforementioned types of matters, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning the
preparation of customers income tax returns, the fees
charged customers for various products and services,
relationships with franchisees, intellectual property disputes,
employment matters and contract disputes. While we cannot
provide assurance that we will ultimately prevail in each
instance, we believe the amount, if any, we are required to pay
in the discharge of liabilities or settlements in these Other
Claims will not have a material adverse effect on our
consolidated operating results.
Alternative
Practice Structure with Public Accounting
Firms. As
previously disclosed, under an alternative practice structure
arrangement, RSM and M&P and other public accounting firms
(collectively, the Attest Firms) market their
services jointly and provide services to a significant number of
common clients. Through an administrative services agreement,
RSM also provides operational and administrative support
services to the Attest Firms, including accounting, payroll,
human resources, marketing, administrative services and
personnel, and office space and equipment. In return for these
services, RSM receives a management fee and reimbursement of
certain costs, mainly for the use of RSM-owned or leased real
estate, property and equipment. If the RSM/Attest Firms
relationship under the alternative practice structure were to be
terminated, RSM could lose key employees and clients and may not
be able to recoup its costs associated with the infrastructure
used to provide the operational and administrative support
services to the Attest Firms. A separation from M&P could
result in reduced revenue, increased costs and reduced earnings
and, if sufficiently significant, impairment of our investment
in RSM.
On July 21, 2009, M&P provided notice of its intent to
terminate the administrative services agreement between RSM and
M&P. The effect of the notice will be to terminate the
alternative practice structure on February 16, 2010, unless
revoked or modified prior to that time. As a protective measure,
on September 15, 2009, RSM provided notice of its intent to
terminate the administrative services agreement. Absent
revocation or modification by RSM, the effect of RSMs
notice will be to terminate the alternative practice structure
on April 13, 2010, even in the event M&P revokes or
modifies the M&P notice. Since July 23, 2009, RSM and
M&P have been engaged in arbitration to resolve various
disputes regarding their contractual relationship, including the
scope and enforceability of restrictive covenants agreed to by
M&P. On November 24, 2009, the arbitration panel
issued a final and binding ruling regarding the enforceability
of the covenants. The ruling is confidential. RSM and M&P
are continuing negotiations to determine if there are mutually
agreeable changes to the current arrangements that would allow
the alternative practice structure with M&P to continue.
There are no assurances as to the outcome of these negotiations.
If the parties do not reach an agreement to continue their
relationship, RSM intends to seek alternative attest firms with
which to affiliate and to continue to directly provide a full
range of tax and business consulting services. The extent of the
impact of a separation by M&P cannot be determined at this
time, although it could be material to RSMs financial
condition and results of operations.
There have been no other material changes in our risk factors
from those reported at April 30, 2009 in our Annual Report
on
Form 10-K.
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A summary of our purchases of H&R Block common stock during
the second quarter of fiscal year 2010 is as follows:
(in 000s, except per share amounts) | ||||||||||||
Total Number of
Shares |
Maximum $ Value |
|||||||||||
Total |
Average |
Purchased as Part
of |
of Shares that
May |
|||||||||
Number of Shares |
Price Paid |
Publicly
Announced |
Be Purchased
Under |
|||||||||
Purchased(1) | per Share | Plans or Programs | the Plans or Programs | |||||||||
August 1 August 31
|
6 | $ | 16.72 | - | $ | 1,901,419 | ||||||
September 1 September 30
|
11 | $ | 16.95 | - | $ | 1,901,419 | ||||||
October 1 October 31
|
1 | $ | 18.48 | - | $ | 1,901,419 | ||||||
(1) | We purchased 17,782 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. |
Our annual meeting of shareholders was held on
September 24, 2009, at which time the following directors
were elected to serve until the 2010 annual meeting, and the
proposals set forth below were voted upon at the meeting and
approved by the shareholders.
Nominee | Votes FOR | Votes AGAINST | ABSTAIN | |||||||||
Alan M. Bennett
|
279,622,213 | 2,103,069 | 339,411 | |||||||||
Thomas M. Bloch
|
280,087,477 | 1,709,735 | 267,481 | |||||||||
Richard C. Breeden
|
277,318,953 | 4,389,884 | 355,856 | |||||||||
Robert A. Gerard
|
277,906,346 | 2,333,171 | 1,825,176 | |||||||||
Len J. Lauer
|
277,356,118 | 2,878,854 | 1,829,721 | |||||||||
David B. Lewis
|
277,785,382 | 2,442,647 | 1,836,664 | |||||||||
Tom D. Seip
|
277,157,681 | 3,068,581 | 1,838,431 | |||||||||
L. Edward Shaw, Jr.
|
277,154,982 | 3,093,990 | 1,815,721 | |||||||||
Russell P. Smyth
|
279,254,106 | 2,208,856 | 601,731 | |||||||||
Christianna Wood
|
277,188,689 | 3,058,557 | 1,817,447 | |||||||||
Approval of an
advisory proposal on the Companys executive
pay-for-performance
compensation policies and procedures
Votes For
|
274,756,904 | |||
Votes Against
|
6,590,018 | |||
Abstain
|
717,771 | |||
Approval of a
proposal regarding an amendment to the 2003 Long-Term Executive
Compensation Plan to increase the aggregate number of shares of
Common Stock issuable under the Plan from 10,000,000 to
14,000,000
Votes For
|
239,445,784 | |||
Votes Against
|
17,628,605 | |||
Abstain
|
380,978 | |||
Broker Non-Votes
|
24,609,326 | |||
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Ratification of the
Appointment of Deloitte & Touche LLP as our
Independent Accountants for the Fiscal Year Ended April 30,
2010
Votes For
|
280,963,609 | |||
Votes Against
|
765,650 | |||
Abstain
|
335,434 |
31 | .1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31 | .2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | .1 | Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32 | .2 | Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101 | .INS | XBRL Instance Document | ||
101 | .SCH | XBRL Taxonomy Extension Schema | ||
101 | .CAL | XBRL Extension Calculation Linkbase | ||
101 | .LAB | XBRL Taxonomy Extension Label Linkbase | ||
101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase | ||
33
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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)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499001.gif)
Russell
P. Smyth
President
and Chief Executive Officer
December 9,
2009
![(-s- Becky S. Shulman)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499002.gif)
Becky
S. Shulman
Senior
Vice President and
Chief
Financial Officer
December 9,
2009
![(-s- Jeffrey T. Brown)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309069608/c54990c5499003.gif)
Jeffrey
T. Brown
Vice
President and
Corporate
Controller
December 9,
2009
34