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H&R BLOCK INC - Quarter Report: 2009 October (Form 10-Q)

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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)
 
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
 
     
MISSOURI   44-0607856
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
One H&R Block Way
Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
 
(816) 854-3000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   Ö    No        
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   Ö    No        
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one) :
 
             
Large accelerated filer Ö 
  Accelerated filer        Non-accelerated filer         Smaller reporting company     
     
    (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes          No   Ö  
 
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on November 30, 2009 was 335,541,241 shares.


 

 
(H & R BLOCK LOGO)
 
Form 10-Q for the Period Ended October 31, 2009
 
 
Table of Contents
 
             
        Page
 
PART I
 
Financial Information
       
           
      1  
           
        2  
           
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        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)
 
 
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


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(H & R BLOCK LOGO)
 
 
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


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(H & R BLOCK LOGO)
 
 
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


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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


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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 RSM’s 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.


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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.


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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 unit’s 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.
RSM’s 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 Bank’s 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 Bank’s 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.


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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 court’s decertification decision is currently on appeal. We believe we have meritorious defenses to this case and intend to defend it vigorously. There can be no assurances, however, as to the outcome of this case or its impact on our consolidated results of operations.
 
Peace of Mind Litigation
We are defendants in lawsuits regarding our Peace of Mind program (collectively, the “POM Cases”), under which our applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al.  v. H&R Block Tax Services, Inc., et al., Case No. 08-CV-591 in the U.S. District Court for the Southern District of Illinois, is a putative class action case originally filed in the Circuit Court of Madison County, Illinois on January 18, 2002. The plaintiffs allege that the sale of POM guarantees constitutes (1) statutory fraud by selling insurance without a license, (2) an unfair trade practice, by omission and by “cramming” (i.e., charging customers for the guarantee even though they did not request it or want it), and (3) a breach of fiduciary duty. The plaintiffs seek unspecified damages, 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 court’s 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.


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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 Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et al. Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations relating to business valuation services provided by RSM EquiCo, including allegations of fraud, negligent misrepresentation, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair competition. Plaintiffs seek unspecified actual and punitive damages, in addition to pre-judgment interest and attorneys’ fees. On March 17, 2009, the court granted plaintiffs’ motion for class certification on all claims. The defendants filed two requests for interlocutory review of the decision, the last of which was denied by the Supreme Court of California on September 30, 2009. A trial date has been set for January 2011.
The certified class consists of all RSM EquiCo U.S. clients who signed platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. The fees paid to RSM EquiCo in connection with these agreements total approximately $185 million, a number which substantially exceeds the equity of RSM EquiCo. We intend to defend this case vigorously. The amount claimed in this action is substantial and could have a material adverse impact on our consolidated results of operations. There can be no assurance regarding the outcome of this matter.
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 RSM’s 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 RSM’s 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.


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Litigation and Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated and the loan servicing business was sold during fiscal year 2008, SCC remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state attorneys general, other state regulators, municipalities, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance, fraud, and violations of the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased over historical experience and is likely to continue at increased levels. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict. In the event of unfavorable outcomes, the amounts SCC may be required to pay in the discharge of liabilities or settlements could be substantial and, because SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County, Massachusetts (Case No. 08-2474-BLS) entitled Commonwealth of Massachusetts v. H&R Block, Inc., et al., alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeking equitable relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a preliminary injunction limiting the ability of the owner of SCC’s former loan servicing business to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. 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 SCC’s obligations. The amounts involved in these potential claims may be substantial, and the ultimate resulting liability is difficult to predict. Because SCC’s operating results are included in our consolidated financial statements, the amounts SCC may be required to pay in the discharge or settlement of these claims in the event of unfavorable outcomes could have a material adverse impact on our consolidated results of operations.
 
Other Claims and Litigation
We are from time to time party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits include actions by state attorneys general, other state regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others similarly situated. Some of these investigations, claims and lawsuits pertain to RALs, the electronic filing of customers’ income tax returns, the POM guarantee program, wage and hour claims and investment products. We believe we have meritorious defenses to each of these investigations, claims and lawsuits, and we are defending or intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances, however the ultimate liability with respect to such matters is difficult to predict. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse impact on our consolidated results of operations.
In addition to the aforementioned types of matters, we are party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (collectively,


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“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 vendor’s multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified beginning with our fiscal year 2012. We are currently evaluating the effect of this statement on our consolidated financial statements.


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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 entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. 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 Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions.
 


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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 )
                                         
 
 
 

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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  
                                         
 
 

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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  
                                         
 
 
 


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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.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
H&R Block provides tax services, banking services and business and consulting services. Our Tax Services segment provides income tax return preparation services, electronic filing services and other services and products related to income tax return preparation to the general public primarily in the United States, Canada and Australia. This segment also offers The H&R Block Prepaid Emerald MasterCard® and Emerald Advance lines of credit through H&R Block Bank (HRB Bank), which was previously reported in our Consumer Financial Services segment. Our Business Services segment consists of RSM McGladrey, Inc. (RSM), a national accounting, tax and business consulting firm primarily serving mid-sized businesses. Corporate operating losses include interest income from U.S. passive investments, interest expense on borrowings, net interest margin and gains or losses relating to mortgage loans held for investment, real estate owned, residual interests in securitizations and other corporate expenses, principally related to finance, legal and other support departments. All periods presented reflect our new segment reporting structure.
Recent Events. RSM 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 RSM’s 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.


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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.

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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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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, Aurora’s 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 management’s current expectations or predictions of future conditions, events or results. They may include projections of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date made and management does not undertake to update them to reflect changes or events occurring after that date except as required by federal securities laws.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from those reported at April 30, 2009 in our Annual Report on Form 10-K.
 
ITEM 4. CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, 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.
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
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 court’s decertification decision is currently on appeal. We believe we have meritorious defenses to this case and intend to defend it vigorously. There can be no assurances, however, as to the outcome of this case or its impact on our consolidated results of operations.


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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 court’s 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 Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et al. Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations relating to business valuation services provided by RSM EquiCo, including allegations of fraud, negligent misrepresentation, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair competition. Plaintiffs seek unspecified actual and punitive damages, in addition to pre-judgment interest and attorneys’ fees. On March 17, 2009, the court granted plaintiffs’ motion for class certification on all claims. The defendants filed two requests for interlocutory review of the decision, the last of which was denied by the Supreme Court of California on September 30, 2009. A trial date has been set for January 2011.
The certified class consists of all RSM EquiCo U.S. clients who signed platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. The fees paid to RSM EquiCo in connection with these agreements total approximately $185 million, a number which substantially exceeds the equity of RSM EquiCo. We intend to defend this case vigorously. The amount claimed in this action is substantial and could have a material adverse impact on our consolidated results of operations. There can be no assurance regarding the outcome of this matter.
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 RSM’s 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 RSM’s 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 SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County, Massachusetts (Case No. 08-2474-BLS) entitled Commonwealth of Massachusetts v. H&R Block, Inc., et al., alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeking equitable relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a preliminary injunction limiting the ability of the owner of SCC’s former loan servicing business to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. 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 SCC’s obligations. The amounts involved in these potential claims may be substantial, and the ultimate resulting liability is difficult to predict. Because SCC’s operating results are included in our consolidated financial statements, the amounts SCC may be required to pay in the discharge or settlement of these claims in the event of unfavorable outcomes could have a material adverse impact on our consolidated results of operations.
 
Other Claims and Litigation
We are from time to time party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits include actions by state attorneys general, other state regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others similarly situated. Some of these investigations, claims and lawsuits pertain to RALs, the electronic filing of customers’ income tax returns, the POM guarantee program, wage and hour claims and investment products. We believe we have meritorious defenses to each of these investigations, claims and lawsuits, and we are defending or


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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.
 
ITEM 1A. RISK FACTORS
 
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 RSM’s 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 RSM’s 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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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
A summary of our purchases of H&R Block common stock during the second quarter of fiscal year 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.
 
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
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 Company’s 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  
 
ITEM 6. EXHIBITS
 
         
  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
 
 


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
H&R BLOCK, INC.
 
(-s- Russell P. Smyth)
 
Russell P. Smyth
President and Chief Executive Officer
December 9, 2009
 
(-s- Becky S. Shulman)
 
Becky S. Shulman
Senior Vice President and
Chief Financial Officer
December 9, 2009
 
(-s- Jeffrey T. Brown)
 
Jeffrey T. Brown
Vice President and
Corporate Controller
December 9, 2009


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