H&R BLOCK INC - Quarter Report: 2009 July (Form 10-Q)
Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One) | ||
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended July 31, 2009 | ||
OR
|
||
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission file
number 1-6089
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340401.gif)
H&R
Block, Inc.
(Exact name of registrant as
specified in its charter)
MISSOURI (State or other jurisdiction of incorporation or organization) |
44-0607856 (I.R.S. Employer Identification No.) |
One
H&R Block Way
Kansas
City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes √
Ö No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes √
Ö No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer √
Ö
|
Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes No √
Ö
The number of shares outstanding of the registrants Common
Stock, without par value, at the close of business on
August 31, 2009 was 335,306,120 shares.
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340401.gif)
Form 10-Q
for the Period Ended July 31, 2009
Table of
Contents
Page | ||||||||
PART I
|
Financial Information
|
|||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
18 | ||||||||
22 | ||||||||
22 | ||||||||
PART II | ||||||||
23 | ||||||||
26 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
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 | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340401.gif)
CONDENSED
CONSOLIDATED BALANCE
SHEETS (amounts
in 000s, except share and per share amounts)
July 31, 2009 | April 30, 2009 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 1,006,303 | $ | 1,654,663 | ||||
Cash and cash equivalents restricted
|
46,639 | 51,656 | ||||||
Receivables, less allowance for doubtful accounts of $129,433
and $128,541
|
379,177 | 512,814 | ||||||
Prepaid expenses and other current assets
|
396,027 | 351,947 | ||||||
Total current assets
|
1,828,146 | 2,571,080 | ||||||
Mortgage loans held for investment, less allowance for loan
losses of $91,691 and $84,073
|
707,712 | 744,899 | ||||||
Property and equipment, at cost, less accumulated depreciation
and amortization of $643,978 and $625,075
|
359,408 | 368,289 | ||||||
Intangible assets, net
|
379,622 | 385,998 | ||||||
Goodwill
|
852,018 | 850,230 | ||||||
Other assets
|
418,856 | 439,226 | ||||||
Total assets
|
$ | 4,545,762 | $ | 5,359,722 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities:
|
||||||||
Customer banking deposits
|
$ | 712,008 | $ | 854,888 | ||||
Accounts payable, accrued expenses and other current liabilities
|
648,470 | 705,945 | ||||||
Accrued salaries, wages and payroll taxes
|
101,410 | 259,698 | ||||||
Accrued income taxes
|
330,145 | 543,967 | ||||||
Current portion of long-term debt
|
6,093 | 8,782 | ||||||
Federal Home Loan Bank borrowings
|
25,000 | 25,000 | ||||||
Total current liabilities
|
1,823,126 | 2,398,280 | ||||||
Long-term debt
|
1,032,395 | 1,032,122 | ||||||
Federal Home Loan Bank borrowings
|
75,000 | 75,000 | ||||||
Other noncurrent liabilities
|
424,527 | 448,461 | ||||||
Total liabilities
|
3,355,048 | 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
|
824,212 | 836,477 | ||||||
Accumulated other comprehensive income (loss)
|
(2,849 | ) | (11,639 | ) | ||||
Retained earnings
|
2,437,017 | 2,671,437 | ||||||
Less treasury shares, at cost
|
(2,072,108 | ) | (2,094,858 | ) | ||||
Total stockholders equity
|
1,190,714 | 1,405,859 | ||||||
Total liabilities and stockholders equity
|
$ | 4,545,762 | $ | 5,359,722 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340401.gif)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(Unaudited,
amounts in 000s, except per share amounts) |
Three Months Ended July 31, | 2009 | 2008 | ||||||
Revenues:
|
||||||||
Service revenues
|
$ | 247,985 | $ | 240,720 | ||||
Interest income
|
12,287 | 17,847 | ||||||
Product and other revenues
|
15,233 | 13,342 | ||||||
275,505 | 271,909 | |||||||
Operating expenses:
|
||||||||
Cost of revenues
|
386,450 | 360,138 | ||||||
Selling, general and administrative
|
103,217 | 123,386 | ||||||
489,667 | 483,524 | |||||||
Operating loss
|
(214,162 | ) | (211,615 | ) | ||||
Other income (expense), net
|
3,289 | (1,355 | ) | |||||
Loss from continuing operations before tax benefit
|
(210,873 | ) | (212,970 | ) | ||||
Income tax benefit
|
(80,256 | ) | (84,547 | ) | ||||
Net loss from continuing operations
|
(130,617 | ) | (128,423 | ) | ||||
Net loss from discontinued operations
|
(3,017 | ) | (4,296 | ) | ||||
Net loss
|
$ | (133,634 | ) | $ | (132,719 | ) | ||
Basic and diluted loss per share:
|
||||||||
Net loss from continuing operations
|
$ | (0.39 | ) | $ | (0.39 | ) | ||
Net loss from discontinued operations
|
(0.01 | ) | (0.02 | ) | ||||
Net loss
|
$ | (0.40 | ) | $ | (0.41 | ) | ||
Basic and diluted shares
|
334,533 | 327,141 | ||||||
Dividends paid per share
|
$ | 0.15 | $ | 0.14 | ||||
Comprehensive income (loss):
|
||||||||
Net loss
|
$ | (133,634 | ) | $ | (132,719 | ) | ||
Change in unrealized gain on
available-for-sale
securities, net
|
(747 | ) | (1,967 | ) | ||||
Change in foreign currency translation adjustments
|
9,537 | 314 | ||||||
Comprehensive loss
|
$ | (124,844 | ) | $ | (134,372 | ) | ||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340401.gif)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
Three Months Ended July 31, | 2009 | 2008 | ||||||
Net cash used in operating activities
|
$ | (454,577 | ) | $ | (364,923 | ) | ||
Cash flows from investing activities:
|
||||||||
Principal repayments on mortgage loans held for investment, net
|
19,264 | 31,619 | ||||||
Purchases of property and equipment, net
|
(8,760 | ) | (14,648 | ) | ||||
Other, net
|
4,856 | (901 | ) | |||||
Net cash provided by investing activities
|
15,360 | 16,070 | ||||||
Cash flows from financing activities:
|
||||||||
Repayments of Federal Home Loan Bank borrowings
|
- | (40,000 | ) | |||||
Proceeds from Federal Home Loan Bank borrowings
|
- | 15,000 | ||||||
Customer banking deposits, net
|
(143,199 | ) | (8,795 | ) | ||||
Dividends paid
|
(50,287 | ) | (46,790 | ) | ||||
Acquisition of treasury shares
|
(3,483 | ) | (4,116 | ) | ||||
Proceeds from issuance of common stock, net
|
6,651 | 28,507 | ||||||
Other, net
|
(25,888 | ) | (14,387 | ) | ||||
Net cash used in financing activities
|
(216,206 | ) | (70,581 | ) | ||||
Effects of exchange rates on cash
|
7,063 | - | ||||||
Net decrease in cash and cash equivalents
|
(648,360 | ) | (419,434 | ) | ||||
Cash and cash equivalents at beginning of the period
|
1,654,663 | 664,897 | ||||||
Cash and cash equivalents at end of the period
|
$ | 1,006,303 | $ | 245,463 | ||||
Supplementary cash flow data:
|
||||||||
Income taxes paid
|
$ | 155,804 | $ | 83,111 | ||||
Interest paid on borrowings
|
26,168 | 27,258 | ||||||
Interest paid on deposits
|
1,318 | 4,048 | ||||||
Transfers of loans to foreclosed assets
|
3,797 | 53,469 |
See Notes to
Condensed Consolidated Financial Statements
3
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | (unaudited) |
1. | Summary of Significant Accounting Policies |
Basis of
Presentation
The condensed consolidated balance sheet as of July 31,
2009, the condensed consolidated statements of operations and
comprehensive income (loss) for the three months ended
July 31, 2009 and 2008, and the condensed consolidated
statements of cash flows for the three months ended
July 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 July 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 in 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 September 4,
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 51% 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 alternative practice structure. RSM and
M&P also share in certain common overhead costs through an
4
Table of Contents
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. RSM and M&P are engaged in arbitration to determine
several of their rights and responsibilities under their
contractual obligations to each other. An arbitration hearing is
scheduled for November 2009. RSM and M&P are also engaged
in negotiations to determine if there are mutually agreeable
changes to the current arrangements that would allow our
collaboration to continue. There are no assurances as to the
outcome.
3. | Earnings (Loss) Per Share and Stockholders Equity |
Basic and diluted loss per share is computed using the two-class
method per FASB Staff Position
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP 03-6-1).
See note 13 for additional information. 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
19.4 million shares and 25.7 million shares for the
three months ended July 31, 2009 and 2008, respectively, as
the effect would be antidilutive due to the net loss from
continuing operations during each period.
The computations of basic and diluted loss per share from
continuing operations are as follows:
(in 000s, except per share amounts) | ||||||||
Three Months Ended July 31, | 2009 | 2008 | ||||||
Net loss from continuing operations attributable to shareholders
|
$ | (130,617 | ) | $ | (128,423 | ) | ||
Income allocated to participating securities (nonvested shares)
|
(367 | ) | (199 | ) | ||||
Net loss from continuing operations attributable to common
shareholders
|
$ | (130,984 | ) | $ | (128,622 | ) | ||
Basic weighted average common shares
|
334,533 | 327,141 | ||||||
Potential dilutive shares from stock options and nonvested shares
|
- | - | ||||||
Convertible preferred stock
|
- | - | ||||||
Dilutive weighted average common shares
|
334,533 | 327,141 | ||||||
Earnings (loss) per share from continuing operations:
|
||||||||
Basic
|
$ | (0.39 | ) | $ | (0.39 | ) | ||
Diluted
|
(0.39 | ) | (0.39 | ) | ||||
The weighted average shares outstanding for the three months
ended July 31, 2009 increased to 334.5 million from
327.1 million for the three months ended July 31,
2008, primarily due to the issuance of shares of our common
stock in October 2008.
During the three months ended July 31, 2009 and 2008, we
issued 1.4 million and 2.3 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the three months ended July 31, 2009, we acquired
0.2 million shares of our common stock at an aggregate cost
of $3.5 million, and during the three months ended
July 31, 2008, we acquired 0.2 million shares at an
aggregate cost of $4.1 million. Shares acquired during
these periods represented shares swapped or surrendered to us in
connection with the vesting of nonvested shares and the exercise
of stock options.
At July 31, 2009, we had accrued but unpaid dividends
totaling $50.5 million. This amount is included in accounts
payable, accrued expenses and other current liabilities on the
condensed consolidated balance sheet.
During the three months ended July 31, 2009, we granted
4.0 million stock options and 0.8 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$3.14 for management options and $2.70 for options granted to
5
Table of Contents
our seasonal associates. Stock-based compensation expense of our
continuing operations totaled $7.3 million and
$4.5 million for the three months ended July 31, 2009
and 2008, respectively. At July 31, 2009, unrecognized
compensation cost for options totaled $17.0 million, and
for nonvested shares and units totaled $26.4 million.
4. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of
July 31, 2009 and April 30, 2009 is as follows:
(dollars in 000s) | ||||||||||||||||
July 31, 2009 | April 30, 2009 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Adjustable-rate loans
|
$ | 501,112 | 63 | % | $ | 534,943 | 65 | % | ||||||||
Fixed-rate loans
|
292,014 | 37 | % | 286,894 | 35 | % | ||||||||||
793,126 | 100 | % | 821,837 | 100 | % | |||||||||||
Unamortized deferred fees and costs
|
6,277 | 7,135 | ||||||||||||||
Less: Allowance for loan losses
|
(91,691 | ) | (84,073 | ) | ||||||||||||
$ | 707,712 | $ | 744,899 | |||||||||||||
Activity in the allowance for loan losses for the three months
ended July 31, 2009 and 2008 is as follows:
(in
000s)
Three Months Ended July 31, | 2009 | 2008 | ||||||||
Balance, beginning of the period
|
$ | 84,073 | $ | 45,401 | ||||||
Provision
|
13,600 | 14,991 | ||||||||
Recoveries
|
28 | - | ||||||||
Charge-offs
|
(6,010 | ) | (13,539 | ) | ||||||
Balance, end of the period
|
$ | 91,691 | $ | 46,853 | ||||||
Our loan loss reserve as a percent of mortgage loans was 11.56%
at July 31, 2009, compared to 10.23% at April 30, 2009.
In cases where we modify a loan and in so doing grant a
concession to a borrower experiencing financial difficulty, the
modification is considered a troubled debt restructuring (TDR).
TDR loans totaled $161.6 million and $160.7 million at
July 31, 2009 and April 30, 2009, respectively. The
principal balance of impaired loans as of July 31, 2009 and
April 30, 2009 is as follows:
(in
000s)
July 31, 2009 | April 30, 2009 | |||||||||
60 89 days
|
$ | 14,519 | $ | 21,415 | ||||||
90+ days, non-accrual
|
148,603 | 121,685 | ||||||||
TDR loans, accrual
|
90,275 | 60,044 | ||||||||
TDR loans, non-accrual
|
71,295 | 100,697 | ||||||||
$ | 324,692 | $ | 303,841 | |||||||
Activity related to our real estate owned is as follows:
(in
000s)
Three Months Ended July 31, | 2009 | 2008 | ||||||||
Balance, beginning of the period
|
$ | 44,533 | $ | 350 | ||||||
Additions
|
3,797 | 53,469 | ||||||||
Sales
|
(4,348 | ) | - | |||||||
Writedowns
|
(1,241 | ) | (5,409 | ) | ||||||
Balance, end of the period
|
$ | 42,741 | $ | 48,410 | ||||||
6
Table of Contents
5. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the three months
ended July 31, 2009 consist of the following:
(in
000s)
April 30, 2009 | Additions | Impairment | Other | July 31, 2009 | ||||||||||||||||
Tax Services
|
$ | 447,591 | $ | 1,004 | $ | - | $ | 1,483 | $ | 450,078 | ||||||||||
Business Services
|
402,639 | - | - | (699 | ) | 401,940 | ||||||||||||||
Total
|
$ | 850,230 | $ | 1,004 | $ | - | $ | 784 | $ | 852,018 | ||||||||||
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur which could,
more likely than not, reduce the fair value of a reporting
units net assets below its carrying value.
We considered the July 21, 2009 notice by M&P of its
intent to terminate the administrative services agreement with
RSM to represent a significant change in circumstances requiring
an interim evaluation of the fair value of our RSM reporting
unit. Goodwill of this reporting unit totaled
$372.7 million at July 31, 2009. The net carrying
value of other intangible assets of RSM totaled
$96.0 million at July 31, 2009, including
$50.8 million for an indefinite-lived trade name asset. We
have concluded that, as of July 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 that 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. | |
| 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. However, 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.
Intangible assets consist of the following:
(in 000s) | ||||||||||||||||||||||||
July 31, 2009 | April 30, 2009 | |||||||||||||||||||||||
Gross |
Gross |
|||||||||||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Tax Services:
|
||||||||||||||||||||||||
Customer relationships
|
$ | 54,907 | $ | (26,938 | ) | $ | 27,969 | $ | 54,655 | $ | (25,267 | ) | $ | 29,388 | ||||||||||
Noncompete agreements
|
23,271 | (21,272 | ) | 1,999 | 23,263 | (20,941 | ) | 2,322 | ||||||||||||||||
Reacquired franchise rights
|
229,438 | (2,942 | ) | 226,496 | 229,438 | (1,838 | ) | 227,600 | ||||||||||||||||
Franchise agreements
|
19,201 | (853 | ) | 18,348 | 19,201 | (533 | ) | 18,668 | ||||||||||||||||
Purchased technology
|
12,500 | (4,730 | ) | 7,770 | 12,500 | (4,240 | ) | 8,260 | ||||||||||||||||
Trade name
|
1,325 | (250 | ) | 1,075 | 1,025 | (217 | ) | 808 | ||||||||||||||||
Business Services:
|
||||||||||||||||||||||||
Customer relationships
|
146,011 | (113,408 | ) | 32,603 | 146,040 | (111,017 | ) | 35,023 | ||||||||||||||||
Noncompete agreements
|
33,061 | (20,468 | ) | 12,593 | 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 | ||||||||||||||||
$ | 577,951 | $ | (198,329 | ) | $ | 379,622 | $ | 577,427 | $ | (191,429 | ) | $ | 385,998 | |||||||||||
Amortization of intangible assets for the three months ended
July 31, 2009 and 2008 was $6.9 million and
$5.6 million, respectively. Estimated amortization of
intangible assets for fiscal years 2010 through 2014 is
$28.8 million, $26.5 million, $23.5 million,
$19.2 million and $15.8 million, respectively.
7
Table of Contents
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 (IRS). Tax years prior to 1999 are closed by
statute. Historically, tax returns in various foreign and state
jurisdictions are examined and settled upon completion of the
exam.
During the three months ended July 31, 2009, we accrued an
additional $1.2 million of interest and penalties related
to our uncertain tax positions. We had unrecognized tax benefits
of $126.0 million and $124.6 million at July 31,
2009 and April 30, 2009, respectively. The unrecognized tax
benefits increased $1.4 million in the current year, due
primarily to positions related to prior years. We have
classified the liability for unrecognized tax benefits,
including corresponding accrued interest, as long-term at
July 31, 2009, which is included in other noncurrent
liabilities on the condensed consolidated balance sheet. Amounts
that we expect to pay, or for which statutes expire, within the
next twelve months have been included in accounts payable,
accrued expenses and other current liabilities on the condensed
consolidated balance sheet.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the total amount of previously
unrecognized tax benefits may decrease by approximately
$18 million within twelve months of July 31, 2009.
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 July 31, | 2009 | 2008 | ||||||
Interest income:
|
||||||||
Mortgage loans, net
|
$ | 7,896 | $ | 13,265 | ||||
Other
|
4,391 | 4,582 | ||||||
$ | 12,287 | $ | 17,847 | |||||
Interest expense:
|
||||||||
Borrowings
|
$ | 18,957 | $ | 18,172 | ||||
Deposits
|
2,049 | 4,043 | ||||||
FHLB advances
|
509 | 1,328 | ||||||
$ | 21,515 | $ | 23,543 | |||||
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 July 31, 2009:
(dollars
in 000s)
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Recurring:
|
||||||||||||||||
Available-for-sale securities
|
$ | 42,430 | $ | - | $ | 42,430 | $ | - | ||||||||
Non-recurring:
|
||||||||||||||||
Impaired mortgage loans held for investment
|
248,529 | - | - | 248,529 | ||||||||||||
$ | 290,959 | $ | - | $ | 42,430 | $ | 248,529 | |||||||||
As a percentage of total assets
|
6.4% | -% | 0.9% | 5.5% | ||||||||||||
There were no significant changes to the unobservable inputs
used in determining the fair values of our level 2 and
level 3 financial assets.
The carrying amounts and estimated fair values of our financial
instruments at July 31, 2009 are as follows:
(in
000s)
Carrying |
Estimated |
|||||||||
Amount | Fair Value | |||||||||
Mortgage loans held for investment
|
$ | 707,712 | $ | 549,497 | ||||||
IRAs and other time deposits
|
479,758 | 479,375 | ||||||||
Long-term debt
|
1,038,488 | 1,064,855 | ||||||||
8
Table of Contents
9. | Regulatory Requirements |
H&R Block Bank (HRB Bank) files its regulatory Thrift
Financial Report (TFR) on a calendar quarter basis with the
Office of Thrift Supervision (OTS). The following table sets
forth HRB Banks regulatory capital requirements at
June 30, 2009, as calculated in the most recently filed TFR:
(dollars in 000s) | ||||||||||||||||||||||||
To Be Well |
||||||||||||||||||||||||
Capitalized |
||||||||||||||||||||||||
For Capital
Adequacy |
Under Prompt |
|||||||||||||||||||||||
Actual | Purposes | Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total risk-based capital
ratio(1)
|
$ | 142,490 | 21.9% | $ | 52,020 | 8.0% | $ | 65,025 | 10.0% | |||||||||||||||
Tier 1 risk-based capital
ratio(2)
|
$ | 133,811 | 20.6% | n/a | n/a | $ | 39,015 | 6.0% | ||||||||||||||||
Tier 1 capital ratio
(leverage)(3)
|
$ | 133,811 | 13.6% | $ | 118,381 | 12.0% | $ | 49,325 | 5.0% | |||||||||||||||
Tangible equity
ratio(4)
|
$ | 133,811 | 13.6% | $ | 14,798 | 1.5% | n/a | n/a |
(1) | Total risk-based capital divided by risk-weighted assets. | |
(2) | Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets. | |
(3) | Tier 1 (core) capital divided by adjusted total assets. | |
(4) | Tangible capital divided by tangible assets. |
As of July 31, 2009, HRB Banks leverage ratio was
13.8%.
10. | Commitments and Contingencies |
Changes in deferred revenue balances related to our Peace of
Mind (POM) program, the current portion of which is included in
accounts payable, accrued expenses and other current liabilities
and the long-term portion of which is included in other
noncurrent liabilities in the condensed consolidated balance
sheets, are as follows:
(in
000s)
Three Months Ended July 31, | 2009 | 2008 | ||||||||
Balance, beginning of period
|
$ | 146,807 | $ | 140,583 | ||||||
Amounts deferred for new guarantees issued
|
583 | 513 | ||||||||
Revenue recognized on previous deferrals
|
(27,913 | ) | (27,241 | ) | ||||||
Balance, end of period
|
$ | 119,477 | $ | 113,855 | ||||||
The following table summarizes certain of our other contractual
obligations and commitments:
(in
000s)
As of | July 31, 2009 | April 30, 2009 | ||||||||
Franchise Equity Lines of Credit undrawn commitment
|
$ | 35,976 | $ | 38,055 | ||||||
Contingent business acquisition obligations
|
24,504 | 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 July 31, 2009.
9
Table of Contents
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 July 31, 2009 and April 30, 2009, our loan
repurchase liability totaled $202.4 million and
$206.6 million, respectively. This liability is included in
accounts payable, accrued expenses and other current liabilities
on our consolidated balance sheets.
11. | Litigation and Related Contingencies |
We are party to investigations, legal claims and lawsuits
arising out of our business operations. We accrue our best
estimate of the probable loss upon resolution of such matters.
Amounts accrued, including obligations under indemnifications,
totaled $25.3 million and $27.9 million at
July 31, 2009 and April 30, 2009, respectively.
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. In
Basile, the court decertified the class in December 2003,
and the Pennsylvania appellate court subsequently reversed the
trial courts decertification decision. In September 2006,
the Pennsylvania Supreme Court reversed the appellate
courts reversal of the trial courts decertification
decision. In June 2007, the appellate court affirmed its earlier
decision to reverse the trial courts decertification
decision. In June 2009, the Pennsylvania Supreme Court again
reversed the appellate courts reversal of the trial
courts decertification decision and remanded the case to
the appellate court for additional review. We believe we have
meritorious defenses to this case and we intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our financial statements.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the POM Cases), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax
Services, Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a class action case originally filed in the Circuit
Court of Madison County, Illinois on January 18, 2002, in
which class certification was granted in August 2003. The
plaintiffs allege that the sale of POM guarantees constitutes
(1) statutory fraud by selling insurance without a license,
(2) an unfair trade practice, by omission and by
cramming (i.e., charging customers for the guarantee
even though they did not request it or want it), and (3) a
breach of fiduciary duty. A class was certified 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
10
Table of Contents
Premium office were excluded from the plaintiff class. In August
2008, we removed the case from state court in Madison County,
Illinois to the U.S. District Court for the Southern
District of Illinois. In December 2008, the U.S. District
Court remanded the case back to state court. On April 3,
2009, the United States Court of Appeals for the Seventh Circuit
reversed the decision to remand the case back to state court,
ruling that the case had been properly removed to federal court.
The plaintiffs filed a petition for rehearing of this decision
with the Seventh Circuit, which was denied in August 2009.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is pending
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains allegations similar to those in the Marshall
case. No class has been certified in this case.
We believe 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
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 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. We believe we have
meritorious defenses to the claims in this case and intend to
defend this case vigorously, but there are no assurances as to
its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint 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 are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 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 are
no assurances as to their outcome.
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 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
11
Table of Contents
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. We believe we have meritorious
defenses to the claims in these cases and intend to defend this
litigation vigorously. We currently do not believe that we will
incur a material loss with respect to this litigation.
RSM McGladrey
Litigation
RSM McGladrey Business Services, Inc. and certain of its
subsidiaries are parties to a class action filed on
July 11, 2006 and entitled Do Rights Plant
Growers, et al. v. RSM EquiCo, Inc., et al. Case
No. 06 CC00137, in the California Superior Court, Orange
County. The complaint contains allegations relating to business
valuation services provided by RSM EquiCo, Inc., 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 and
seeks unspecified damages, restitution and equitable relief. On
March 17, 2009, the court granted plaintiffs motion
for class certification on all claims. The 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. RSM EquiCo filed a writ petition for interlocutory appeal
of this certification ruling, which was denied. 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.
RSM McGladrey, Inc. (RSM) has a relationship with certain public
accounting firms (collectively, the Attest Firms)
pursuant to which (1) some RSM employees are also partners
or employees of the Attest Firms, (2) many clients of the
Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The
Attest Firms are parties to claims and lawsuits (collectively,
Attest Firm Claims) arising in the normal course of
business. Judgments or settlements arising from Attest Firm
Claims exceeding the Attest Firms insurance coverage could
have a direct adverse effect on Attest Firm operations and could
impair RSMs ability to attract and retain clients and
quality professionals. For example, accounting and auditing
firms (including one of the Attest Firms) have become subject to
claims based on losses their clients suffered from investments
in investment funds managed by third-parties. Although RSM may
not have a direct liability for significant Attest Firm Claims,
such Attest Firm Claims could have a material adverse effect on
RSMs operations and impair the value of our investment in
RSM. There is no assurance regarding the outcome of the Attest
Firm Claims.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
predict. In the event of unfavorable outcomes, the amounts SCC
may be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCCs
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
entitled Commonwealth of Massachusetts v. H&R
Block, Inc., et al., alleging unfair, deceptive and
discriminatory origination and servicing of mortgage loans and
seeking equitable relief, disgorgement of profits, restitution
and statutory penalties. In November
12
Table of Contents
2008, the court granted a preliminary injunction limiting the
ability of the owner of SCCs former loan servicing
business to initiate or advance foreclosure actions against
certain loans originated by SCC or its subsidiaries without
(1) advance notice to the Massachusetts Attorney General
and (2) if the Attorney General objects to foreclosure,
approval by the court. The preliminary injunction generally
applies to loans meeting all of the following four
characteristics: (1) adjustable rate mortgages with an
introductory period of three years or less; (2) the
borrower has a debt-to-income ratio generally exceeding
50 percent; (3) an introductory interest rate at least
2 percent lower than the fully indexed rate (unless the
debt-to-income ratio is 55% or greater); and
(4) loan-to-value ratio of 97 percent or certain
prepayment penalties. We have appealed this preliminary
injunction. We believe the claims in this case are without
merit, and we intend to defend this case vigorously, but there
are no assurances as to its outcome.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. Because SCCs
operating results are included in our consolidated financial
statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of
unfavorable outcomes could have a material adverse impact on our
consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these
investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could be material.
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, financial position or cash flows.
13
Table of Contents
12. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
(in 000s) | ||||||||
Three Months Ended July 31, | 2009 | 2008 | ||||||
Revenues:
|
||||||||
Tax Services
|
$ | 87,963 | $ | 81,700 | ||||
Business Services
|
177,618 | 174,651 | ||||||
Corporate
|
9,924 | 15,558 | ||||||
$ | 275,505 | $ | 271,909 | |||||
Pretax income (loss):
|
||||||||
Tax Services
|
$ | (171,974 | ) | $ | (163,657 | ) | ||
Business Services
|
1,321 | (295 | ) | |||||
Corporate
|
(40,220 | ) | (49,018 | ) | ||||
Loss from continuing operations before tax benefit
|
$ | (210,873 | ) | $ | (212,970 | ) | ||
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 shifting of assets
between segments. Identifiable assets by reportable segment at
July 31, 2009 were as follows:
(in 000s) | ||||
Tax Services
|
$ | 1,794,754 | ||
Business Services
|
829,772 | |||
Corporate
|
1,921,236 | |||
$ | 4,545,762 | |||
13. | Accounting Pronouncements |
In June 2009, Statement of Financial Accounting Standards
No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167) was issued.
SFAS 167 changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled
through voting, or similar rights, should be consolidated. The
determination of whether a reporting entity is required to
consolidate another entity is based on, among other things, the
other entitys purpose and design and the reporting
entitys ability to direct the activities of the other
entity that most significantly impact the other entitys
economic performance. SFAS 167 will require a reporting
entity to provide additional disclosures about its involvement
with variable interest entities and any significant changes in
risk exposure due to that involvement. SFAS 167 will be
effective for our fiscal year 2011. We are currently evaluating
the effect of this statement on our consolidated financial
statements.
In June 2009, Statement of Financial Accounting Standards
No. 166, Accounting for Transfers of Financial
Assets (SFAS 166), was issued. 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, changes the
requirements for derecognizing financial assets. SFAS 166
will be effective at the start of our fiscal year 2011. We are
currently evaluating the effect of this statement on its
consolidated financial statements.
In May 2009, Statement of Financial Accounting Standards
No. 165, Subsequent Events
(SFAS 165) was issued. SFAS 165 establishes
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.
SFAS 165 is effective for fiscal years and interim periods
ending after June 15, 2009 and is
14
Table of Contents
applied prospectively. We adopted the new disclosure
requirements in the condensed consolidated financial statements
effective July 31, 2009. See note 1 for the related
disclosure.
In December 2007, Statement of Financial Accounting Standards
No. 141(R), Business Combinations,
(SFAS 141R), and Statement of Financial Accounting
Standards No. 160, Non-Controlling Interests in
Consolidated Financial Statements An Amendment of
ARB No. 51 (SFAS 160) were issued. These
standards require an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction,
including non-controlling interests, at the acquisition-date
fair value with limited exceptions. SFAS 141R will 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 SFAS 141R, subsequent
changes to deferred tax valuation allowances relating to
acquired businesses and acquired liabilities for uncertain tax
positions will no longer be applied to goodwill but will instead
be typically recognized as an adjustment to income tax expense.
We adopted the provisions of these standards as of May 1,
2009. The adoption of SFAS 141R and SFAS 160 did not
have a material impact on our consolidated financial statements.
In June 2008,
FSP 03-6-1
was
issued. FSP 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, should be included in the process of allocating
earnings for purposes of computing earnings per share. We
adopted the provisions of
FSP 03-6-1
as of May 1, 2009. The adoption and retrospective
application of the provisions of
FSP 03-6-1
did not change the current year or prior period earnings per
share amounts for the fiscal quarter. The adoption of this
standard 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 |
Block Financial LLC (BFC) is an indirect, wholly-owned
consolidated subsidiary of the Company. BFC is the Issuer and
the Company is the Guarantor of the Senior Notes issued on
January 11, 2008 and October 26, 2004, our unsecured
committed lines of credit (CLOCs) and other indebtedness issued
from time to time. These condensed consolidating financial
statements have been prepared using the equity method of
accounting. Earnings of subsidiaries are, therefore, reflected
in the Companys investment in subsidiaries account. The
elimination entries eliminate investments in subsidiaries,
related stockholders equity and other intercompany
balances and transactions.
Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
July 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 23,196 | $ | 252,365 | $ | (56 | ) | $ | 275,505 | |||||||||
Cost of revenues
|
- | 45,560 | 340,890 | - | 386,450 | |||||||||||||||
Selling, general and administrative
|
- | 2,498 | 100,775 | (56 | ) | 103,217 | ||||||||||||||
Total expenses
|
- | 48,058 | 441,665 | (56 | ) | 489,667 | ||||||||||||||
Operating income (loss)
|
- | (24,862 | ) | (189,300 | ) | - | (214,162 | ) | ||||||||||||
Other income (expense), net
|
(210,873 | ) | (1,233 | ) | 4,522 | 210,873 | 3,289 | |||||||||||||
Income (loss) from continuing operations before taxes (benefit)
|
(210,873 | ) | (26,095 | ) | (184,778 | ) | 210,873 | (210,873 | ) | |||||||||||
Income taxes (benefit)
|
(80,256 | ) | (10,692 | ) | (69,564 | ) | 80,256 | (80,256 | ) | |||||||||||
Net income (loss) from continuing operations
|
(130,617 | ) | (15,403 | ) | (115,214 | ) | 130,617 | (130,617 | ) | |||||||||||
Net loss from discontinued operations
|
(3,017 | ) | (3,017 | ) | - | 3,017 | (3,017 | ) | ||||||||||||
Net income (loss)
|
$ | (133,634 | ) | $ | (18,420 | ) | $ | (115,214 | ) | $ | 133,634 | $ | (133,634 | ) | ||||||
15
Table of Contents
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
July 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 20,775 | $ | 252,572 | $ | (1,438 | ) | $ | 271,909 | |||||||||
Cost of revenues
|
- | 39,362 | 320,772 | 4 | 360,138 | |||||||||||||||
Selling, general and administrative
|
- | 19,396 | 104,083 | (93 | ) | 123,386 | ||||||||||||||
Total expenses
|
- | 58,758 | 424,855 | (89 | ) | 483,524 | ||||||||||||||
Operating loss
|
- | (37,983 | ) | (172,283 | ) | (1,349 | ) | (211,615 | ) | |||||||||||
Other income, net
|
(212,970 | ) | (4,350 | ) | 2,995 | 212,970 | (1,355 | ) | ||||||||||||
Loss from continuing operations before tax benefit
|
(212,970 | ) | (42,333 | ) | (169,288 | ) | 211,621 | (212,970 | ) | |||||||||||
Income tax benefit
|
(84,547 | ) | (16,438 | ) | (67,535 | ) | 83,973 | (84,547 | ) | |||||||||||
Net loss from continuing operations
|
(128,423 | ) | (25,895 | ) | (101,753 | ) | 127,648 | (128,423 | ) | |||||||||||
Net loss from discontinued operations
|
(4,296 | ) | (5,071 | ) | - | 5,071 | (4,296 | ) | ||||||||||||
Net loss
|
$ | (132,719 | ) | $ | (30,966 | ) | $ | (101,753 | ) | $ | 132,719 | $ | (132,719 | ) | ||||||
Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
July 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 122,895 | $ | 883,968 | $ | (560 | ) | $ | 1,006,303 | |||||||||
Cash & cash equivalents restricted
|
- | 355 | 46,284 | - | 46,639 | |||||||||||||||
Receivables, net
|
1,110 | 109,803 | 268,264 | - | 379,177 | |||||||||||||||
Mortgage loans held for investment
|
- | 707,712 | - | - | 707,712 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 1,231,640 | - | 1,231,640 | |||||||||||||||
Investments in subsidiaries
|
3,055,015 | - | 185 | (3,055,015 | ) | 185 | ||||||||||||||
Other assets
|
- | 317,877 | 856,229 | - | 1,174,106 | |||||||||||||||
Total assets
|
$ | 3,056,125 | $ | 1,258,642 | $ | 3,286,570 | $ | (3,055,575 | ) | $ | 4,545,762 | |||||||||
Customer deposits
|
$ | - | $ | 712,568 | $ | - | $ | (560 | ) | $ | 712,008 | |||||||||
Long-term debt
|
- | 998,335 | 34,060 | - | 1,032,395 | |||||||||||||||
FHLB borrowings
|
- | 100,000 | - | - | 100,000 | |||||||||||||||
Other liabilities
|
50,500 | 124,914 | 1,335,231 | - | 1,510,645 | |||||||||||||||
Net intercompany advances
|
1,814,911 | (811,975 | ) | (1,002,936 | ) | - | - | |||||||||||||
Stockholders equity
|
1,190,714 | 134,800 | 2,920,215 | (3,055,015 | ) | 1,190,714 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 3,056,125 | $ | 1,258,642 | $ | 3,286,570 | $ | (3,055,575 | ) | $ | 4,545,762 | |||||||||
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 | |||||||||
16
Table of Contents
Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
July 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash used in operating activities:
|
$ | 868 | $ | (4,881 | ) | $ | (450,564 | ) | $ | - | $ | (454,577 | ) | |||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 19,264 | - | - | 19,264 | |||||||||||||||
Purchase property & equipment
|
- | - | (8,760 | ) | - | (8,760 | ) | |||||||||||||
Net intercompany advances
|
45,536 | - | - | (45,536 | ) | - | ||||||||||||||
Other, net
|
- | 6,803 | (1,947 | ) | - | 4,856 | ||||||||||||||
Net cash provided by (used in) investing activities
|
45,536 | 26,067 | (10,707 | ) | (45,536 | ) | 15,360 | |||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Customer banking deposits
|
- | (148,861 | ) | - | 5,662 | (143,199 | ) | |||||||||||||
Dividends paid
|
(50,287 | ) | - | - | - | (50,287 | ) | |||||||||||||
Acquisition of treasury shares
|
(3,483 | ) | - | - | - | (3,483 | ) | |||||||||||||
Proceeds from issuance of common stock, net
|
6,651 | - | - | - | 6,651 | |||||||||||||||
Net intercompany advances
|
- | 18,058 | (63,594 | ) | 45,536 | - | ||||||||||||||
Other, net
|
715 | (8,838 | ) | (17,765 | ) | - | (25,888 | ) | ||||||||||||
Net cash provided by financing activities
|
(46,404 | ) | (139,641 | ) | (81,359 | ) | 51,198 | (216,206 | ) | |||||||||||
Effects of exchange rates on cash
|
- | - | 7,063 | - | 7,063 | |||||||||||||||
Net increase (decrease) in cash
|
- | (118,455 | ) | (535,567 | ) | 5,662 | (648,360 | ) | ||||||||||||
Cash beginning of period
|
- | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||
Cash end of period
|
$ | - | $ | 122,895 | $ | 883,968 | $ | (560 | ) | $ | 1,006,303 | |||||||||
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
July 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash provided by (used in) operating activities:
|
$ | (11,615 | ) | $ | 58,425 | $ | (411,733 | ) | $ | - | $ | (364,923 | ) | |||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 31,619 | - | - | 31,619 | |||||||||||||||
Purchase property & equipment
|
- | (186 | ) | (14,462 | ) | - | (14,648 | ) | ||||||||||||
Net intercompany advances
|
29,630 | - | - | (29,630 | ) | - | ||||||||||||||
Other, net
|
- | 1,365 | (2,266 | ) | - | (901 | ) | |||||||||||||
Net cash provided by (used in) investing activities
|
29,630 | 32,798 | (16,728 | ) | (29,630 | ) | 16,070 | |||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Repayments of FHLB borrowings
|
- | (40,000 | ) | - | - | (40,000 | ) | |||||||||||||
Proceeds from FHLB borrowings
|
- | 15,000 | - | - | 15,000 | |||||||||||||||
Customer banking deposits
|
- | (8,964 | ) | - | 169 | (8,795 | ) | |||||||||||||
Dividends paid
|
(46,790 | ) | - | - | - | (46,790 | ) | |||||||||||||
Acquisition of treasury shares
|
(4,116 | ) | - | - | - | (4,116 | ) | |||||||||||||
Proceeds from issuance of common stock, net
|
28,507 | - | - | - | 28,507 | |||||||||||||||
Net intercompany advances
|
- | (50,203 | ) | 20,573 | 29,630 | - | ||||||||||||||
Other, net
|
4,384 | (3,828 | ) | (14,943 | ) | - | (14,387 | ) | ||||||||||||
Net cash provided by (used in) financing activities
|
(18,015 | ) | (87,995 | ) | 5,630 | 29,799 | (70,581 | ) | ||||||||||||
Net increase (decrease) in cash
|
- | 3,228 | (422,831 | ) | 169 | (419,434 | ) | |||||||||||||
Cash beginning of period
|
- | 34,611 | 630,933 | (647 | ) | 664,897 | ||||||||||||||
Cash end of period
|
$ | - | $ | 37,839 | $ | 208,102 | $ | (478 | ) | $ | 245,463 | |||||||||
17
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF
OPERATIONS
H&R Block provides tax services, banking services and
business and consulting services. Our Tax Services segment
provides income tax return preparation services, electronic
filing services and other services and products related to
income tax return preparation to the general public primarily in
the United States, Canada and Australia. This segment also
offers The H&R Block Prepaid Emerald
MasterCard®
and Emerald Advance lines of credit through H&R Block Bank
(HRB Bank), which was previously reported in our Consumer
Financial Services segment. Our Business Services segment
consists of RSM McGladrey, Inc. (RSM), a national accounting,
tax and business consulting firm primarily serving mid-sized
businesses. Corporate operating losses include interest income
from U.S. passive investments, interest expense on
borrowings, net interest margin and gains or losses relating to
mortgage loans held for investment, real estate owned, residual
interests in securitizations and other corporate expenses,
principally related to finance, legal and other support
departments. All periods presented reflect our new segment
reporting structure.
Recent
Events. RSM and McGladrey & Pullen LLP
(M&P), an independent registered public accounting firm,
collaborate to provide accounting, tax and consulting services
to clients under an alternative practice structure. 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. RSM and M&P are engaged in arbitration to determine
several of their rights and responsibilities under their
contractual obligations to each other. An arbitration hearing is
scheduled for November 2009. RSM and M&P are also engaged
in negotiations to determine if there are mutually agreeable
changes to the current arrangements that would allow our
collaboration to continue. There are no assurances as to the
outcome.
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 July 31, | 2009 | 2008 | ||||||
Tax preparation fees
|
$ | 33,625 | $ | 29,432 | ||||
Fees from Peace of Mind guarantees
|
27,913 | 27,241 | ||||||
Fees from Emerald Card activities
|
11,691 | 10,893 | ||||||
Royalties
|
3,607 | 3,684 | ||||||
Other
|
11,127 | 10,450 | ||||||
Total revenues
|
87,963 | 81,700 | ||||||
Compensation and benefits:
|
||||||||
Field wages
|
39,379 | 39,819 | ||||||
Corporate wages
|
29,880 | 28,810 | ||||||
Benefits and other compensation
|
21,316 | 13,903 | ||||||
90,575 | 82,532 | |||||||
Occupancy and equipment
|
87,920 | 86,056 | ||||||
Depreciation and amortization
|
22,316 | 17,110 | ||||||
Marketing and advertising
|
6,839 | 5,544 | ||||||
Other
|
52,287 | 54,115 | ||||||
Total expenses
|
259,937 | 245,357 | ||||||
Pretax loss
|
$ | (171,974 | ) | $ | (163,657 | ) | ||
18
Table of Contents
Three months
ended July 31, 2009 compared to July 31,
2008
Tax Services revenues increased $6.3 million, or
7.7%, for the three months ended July 31, 2009 compared to
the prior year. Tax preparation fees increased
$4.2 million, or 14.2%, primarily due to favorable results
in our Australian tax operations.
Total expenses increased $14.6 million, or 5.9%, for the
three months ended July 31, 2009. Approximately
$9 million of this increase was the result of the November
2008 acquisition of our last major independent franchise
operator, which includes approximately $2 million of
amortization due to higher intangible asset balances and
additional pre-season expenses. Benefits and other compensation
increased $7.4 million, or 53.3%, primarily as a result of
severance costs and related payroll taxes in the current year.
The pretax loss for the three months ended July 31, 2009
and 2008 was $172.0 million and $163.7 million,
respectively.
BUSINESS
SERVICES
This segment offers accounting, tax and consulting services to
middle-market companies.
Business Services Operating Results | (in 000s) | |||||||
Three Months Ended July 31, | 2009 | 2008 | ||||||
Tax services
|
$ | 77,584 | $ | 76,301 | ||||
Business consulting
|
61,921 | 53,508 | ||||||
Accounting services
|
11,529 | 12,960 | ||||||
Capital markets
|
1,517 | 5,818 | ||||||
Reimbursed expenses
|
4,149 | 4,205 | ||||||
Other
|
20,918 | 21,859 | ||||||
Total revenues
|
177,618 | 174,651 | ||||||
Compensation and benefits
|
134,380 | 122,908 | ||||||
Occupancy
|
19,449 | 19,834 | ||||||
Amortization of intangible assets
|
2,965 | 3,419 | ||||||
Other
|
19,503 | 28,785 | ||||||
Total expenses
|
176,297 | 174,946 | ||||||
Pretax income (loss)
|
$ | 1,321 | $ | (295 | ) | |||
Three months
ended July 31, 2009 compared to July 31,
2008
Business Services revenues for the three months ended
July 31, 2009 increased $3.0 million, or 1.7% from the
prior year. Revenues from core tax, consulting and accounting
services increased $8.3 million, or 5.8%, over the prior
year primarily due to revenues from consulting engagements
related to financial institutions.
Capital markets revenues decreased $4.3 million, or 73.9%,
primarily due to a 72.7% decline in the number of transactions
closed in the current year due to the continued weak economic
conditions. Given the continued limited availability of
financing for acquisitions in the middle-market, our capital
markets 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.
Total expenses increased $1.4 million, or 0.8%, from the
prior year. Compensation and benefits increased
$11.5 million, or 9.3%, primarily due to increases in
managing director compensation and outside contractor costs
related to consulting engagements. Other expenses decreased
$9.3 million primarily as a result of our cost reduction
program.
Pretax income for the three months ended July 31, 2009 was
$1.3 million compared to a loss of $0.3 million in the
prior year.
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate
19
Table of Contents
owned, residual interests in securitizations and other corporate
expenses, principally related to finance, legal and other
support departments.
Corporate Operating Results | (in 000s) | |||||||
Three Months Ended July 31, | 2009 | 2008 | ||||||
Interest income:
|
||||||||
Mortgage loans held for investment, net
|
$ | 7,896 | $ | 13,265 | ||||
Other investments
|
824 | 1,094 | ||||||
8,720 | 14,359 | |||||||
Other
|
1,204 | 1,199 | ||||||
Total revenues
|
9,924 | 15,558 | ||||||
Interest expense:
|
||||||||
Borrowings HRB Bank
|
2,011 | 5,125 | ||||||
Borrowings Corporate
|
17,647 | 17,617 | ||||||
19,658 | 22,742 | |||||||
Provision for loan losses
|
13,600 | 14,991 | ||||||
Compensation and benefits
|
13,301 | 12,748 | ||||||
Other
|
3,585 | 14,095 | ||||||
Total expenses
|
50,144 | 64,576 | ||||||
Pretax loss
|
$ | (40,220 | ) | $ | (49,018 | ) | ||
Three months
ended July 31, 2009 compared to July 31,
2008
Interest income earned on mortgage loans held for investment
decreased $5.4 million from the prior year, primarily as a
result of declining rates and non-performing loans. Other
expenses declined $10.5 million due to impairments of
residual interests totaling $5.0 million recorded in the
prior year, coupled with a $4.2 million decline in
impairments of real estate owned.
Income Taxes
Our effective tax rate for continuing operations was 38.1% and
39.7% for the three months ended July 31, 2009 and 2008,
respectively. Our effective tax rate 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 $514.3 million, or approximately 65% of
the total loan portfolio at July 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
$278.9 million and is characteristic of a prime loan
portfolio, and we believe subject to a lower loss exposure.
Detail of our mortgage loans held for investment and the related
allowance at July 31, 2009 and April 30, 2009 is as
follows:
(dollars in 000s) | ||||||||||||
Outstanding |
Loan Loss |
%30+Days |
||||||||||
Principal Balance | Allowance | Past Due | ||||||||||
As of July 31, 2009:
|
||||||||||||
Purchased from SCC
|
$ | 514,267 | $ | 85,644 | 32.55 | % | ||||||
All other
|
278,859 | 6,047 | 6.94 | % | ||||||||
$ | 793,126 | $ | 91,691 | 23.67 | % | |||||||
As of April 30, 2009:
|
||||||||||||
Purchased from SCC
|
$ | 531,233 | $ | 78,067 | 28.74 | % | ||||||
All other
|
290,604 | 6,006 | 4.44 | % | ||||||||
$ | 821,837 | $ | 84,073 | 20.23 | % | |||||||
20
Table of Contents
We recorded a provision for loan losses of $13.6 million
during the current quarter, compared to $15.0 million in
the prior year. Our allowance for loan losses as a percent of
mortgage loans was 11.56%, or $91.7 million, at
July 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.
Our non-performing assets consist of the following:
(in 000s) | ||||||||
As of | July 31, 2009 | April 30, 2009 | ||||||
Impaired loans:
|
||||||||
60 89 days
|
$ | 14,519 | $ | 21,415 | ||||
90+ days, non-accrual
|
148,603 | 121,685 | ||||||
TDR loans, accrual
|
90,275 | 60,044 | ||||||
TDR loans, non-accrual
|
71,295 | 100,697 | ||||||
324,692 | 303,841 | |||||||
Real estate
owned(1)
|
42,741 | 44,533 | ||||||
Total non-performing assets
|
$ | 367,433 | $ | 348,374 | ||||
(1) | Includes loans accounted for as in-substance foreclosures of $23.5 million and $27.4 million at July 31, 2009 and April 30, 2009, respectively. |
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
unsecured committed lines of credit (CLOCs), we believe, that in
the absence of any unexpected developments, our existing sources
of capital at July 31, 2009 are sufficient to meet our
operating needs.
CASH FROM
OPERATING ACTIVITIES Cash used by
operations totaled $454.6 million for the first three
months of fiscal year 2010, compared with $364.9 million
for the same period last year. The increase was primarily due to
increases in income tax payments made during the quarter.
CASH FROM
INVESTING ACTIVITIES Cash provided by
investing activities totaled $15.4 million for the first
three months of fiscal year 2010, compared to $16.1 million
for the same period last year.
Mortgage Loans
Held for Investment. We received net payments of
$19.3 million and $31.6 million on our mortgage loans
held for investment for the first three months of fiscal years
2010 and 2009, respectively. Cash payments declined due
primarily due to non-performing loans and continued run-off of
our portfolio.
Purchases of
Property and Equipment. Total cash paid for property
and equipment was $8.8 million and $14.6 million for
the first three months of fiscal years 2010 and 2009,
respectively.
CASH FROM
FINANCING ACTIVITIES Cash used in
financing activities totaled $216.2 million for the first
three months of fiscal year 2010, compared to $70.6 million
for the same period last year.
Customer Banking
Deposits. Customer banking deposits used cash of
$143.2 million for the three months ended July 31,
2009 compared to $8.8 million in the prior year, due to
declines in prepaid debit card deposits.
Dividends.
We have consistently paid quarterly dividends. Dividends paid
totaled $50.3 million and $46.8 million for the three
months ended July 31, 2009 and 2008, respectively.
Issuances of
Common Stock. Proceeds from the issuance of common
stock resulting from stock compensation plans totaled
$6.7 million and $28.5 million for the three months
ended July 31, 2009 and 2008, respectively. This decline is
due to a reduction in stock option exercises and the related tax
benefits.
BORROWINGS
At July 31, 2009, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These CLOCs, and outstanding
borrowings thereunder, have a maturity date of August 2010 and
an annual facility fee in a range of six to fifteen basis points
per annum, based on our
21
Table of Contents
credit ratings. We had no balance outstanding as of
July 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 $1.2 billion
at July 31, 2009.
Aurora Bank, FSB (Aurora), formerly known as Lehman Brothers
Bank, FSB, is a participating lender in our $2.0 billion
CLOCs, with a $50.0 million credit commitment. In September
2008, Auroras parent company declared bankruptcy. Since
then, Aurora has not honored any funding requests under these
facilities, thereby effectively reducing our available liquidity
under our CLOCs to $1.95 billion. We do not expect this
change to have a material impact on our liquidity.
There have been no material changes in our borrowings or debt
ratings from those reported at April 30, 2009 in our Annual
Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual
obligations and commercial commitments from those reported at
April 30, 2009 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
There have been no material changes in our regulatory
environment from those reported at April 30, 2009 in our
Annual Report on
Form 10-K.
FORWARD-LOOKING
INFORMATION
This report and other documents filed with the Securities and
Exchange Commission (SEC) may contain forward-looking
statements. In addition, our senior management may make
forward-looking statements orally to analysts, investors, the
media and others. Forward-looking statements can be identified
by the fact that they do not relate strictly to historical or
current facts. They often include words such as
expects, anticipates,
intends, plans, believes,
seeks, estimates, will,
would, should, could or
may. Forward-looking statements provide
managements current expectations or predictions of future
conditions, events or results. They may include projections of
revenues, income, earnings per share, capital expenditures,
dividends, liquidity, capital structure or other financial
items, descriptions of managements plans or objectives for
future operations, products or services, or descriptions of
assumptions underlying any of the above. They are not guarantees
of future performance. By their nature, forward-looking
statements are subject to risks and uncertainties. These
statements speak only as of the date made and management does
not undertake to update them to reflect changes or events
occurring after that date except as required by federal
securities laws.
There have been no material changes in our market risks from
those reported at April 30, 2009 in our Annual Report on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. The controls evaluation
was done under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer. Based on this evaluation, we have concluded
that our disclosure controls and procedures were effective as of
the end of the period covered by this Quarterly Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
22
Table of Contents
The information below should be read in conjunction with the
information included in note 11 to our condensed
consolidated financial statements.
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We 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. In
Basile, the court decertified the class in December 2003,
and the Pennsylvania appellate court subsequently reversed the
trial courts decertification decision. In September 2006,
the Pennsylvania Supreme Court reversed the appellate
courts reversal of the trial courts decertification
decision. In June 2007, the appellate court affirmed its earlier
decision to reverse the trial courts decertification
decision. In June 2009, the Pennsylvania Supreme Court again
reversed the appellate courts reversal of the trial
courts decertification decision and remanded the case to
the appellate court for additional review. We believe we have
meritorious defenses to this case and we intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our financial statements.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the POM Cases), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax
Services, Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a class action case originally filed in the Circuit
Court of Madison County, Illinois on January 18, 2002, in
which class certification was granted in August 2003. The
plaintiffs allege that the sale of POM guarantees constitutes
(1) statutory fraud by selling insurance without a license,
(2) an unfair trade practice, by omission and by
cramming (i.e., charging customers for the guarantee
even though they did not request it or want it), and (3) a
breach of fiduciary duty. A class was certified 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 plaintiff
class. In August 2008, we removed the case from state court in
Madison County, Illinois to the U.S. District Court for the
Southern District of Illinois. In December 2008, the
U.S. District Court remanded the case back to state court.
On April 3, 2009, the United States Court of Appeals for
the Seventh Circuit reversed the decision to remand the case
back to state court, ruling that the case had been properly
removed to federal court. The plaintiffs filed a petition for
rehearing of this decision with the Seventh Circuit, which was
denied in August 2009.
23
Table of Contents
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is pending
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains allegations similar to those in the Marshall
case. No class has been certified in this case.
We believe 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
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 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. We believe we have
meritorious defenses to the claims in this case and intend to
defend this case vigorously, but there are no assurances as to
its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint 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 are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 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 are
no assurances as to their outcome.
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 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. We believe we have meritorious
defenses to the claims in these cases and intend to defend this
litigation vigorously. We currently do not believe that we will
incur a material loss with respect to this litigation.
24
Table of Contents
RSM McGladrey
Litigation
RSM McGladrey Business Services, Inc. and certain of its
subsidiaries are parties to a class action filed on
July 11, 2006 and entitled Do Rights Plant
Growers, et al. v. RSM EquiCo, Inc., et al. Case
No. 06 CC00137, in the California Superior Court, Orange
County. The complaint contains allegations relating to business
valuation services provided by RSM EquiCo, Inc., 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 and
seeks unspecified damages, restitution and equitable relief. On
March 17, 2009, the court granted plaintiffs motion
for class certification on all claims. The 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. RSM EquiCo filed a writ petition for interlocutory appeal
of this certification ruling, which was denied. 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.
RSM McGladrey, Inc. (RSM) has a relationship with certain public
accounting firms (collectively, the Attest Firms)
pursuant to which (1) some RSM employees are also partners
or employees of the Attest Firms, (2) many clients of the
Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The
Attest Firms are parties to claims and lawsuits (collectively,
Attest Firm Claims) arising in the normal course of
business. Judgments or settlements arising from Attest Firm
Claims exceeding the Attest Firms insurance coverage could
have a direct adverse effect on Attest Firm operations and could
impair RSMs ability to attract and retain clients and
quality professionals. For example, accounting and auditing
firms (including one of the Attest Firms) have become subject to
claims based on losses their clients suffered from investments
in investment funds managed by third-parties. Although RSM may
not have a direct liability for significant Attest Firm Claims,
such Attest Firm Claims could have a material adverse effect on
RSMs operations and impair the value of our investment in
RSM. There is no assurance regarding the outcome of the Attest
Firm Claims.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
predict. In the event of unfavorable outcomes, the amounts SCC
may be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCCs
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
entitled Commonwealth of Massachusetts v. H&R
Block, Inc., et al., alleging unfair, deceptive and
discriminatory origination and servicing of mortgage loans and
seeking equitable relief, disgorgement of profits, restitution
and statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCCs former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. The
preliminary injunction generally applies to loans meeting all of
the following four characteristics: (1) adjustable rate
mortgages with an introductory period of three years or less;
(2) the borrower has a
debt-to-income
ratio generally exceeding 50 percent; (3) an
introductory interest rate at least 2 percent lower than
the fully indexed rate (unless the
debt-to-income
ratio is 55% or greater); and
(4) loan-to-value
ratio of 97 percent or certain prepayment penalties. We
have appealed this preliminary injunction. We believe
25
Table of Contents
the claims in this case are without merit, and we intend to
defend this case vigorously, but there are no assurances as to
its outcome.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. Because SCCs
operating results are included in our consolidated financial
statements, the amounts SCC may be required to pay in the
discharge or settlement of these claims in the event of
unfavorable outcomes could have a material adverse impact on our
consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these
investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could be material.
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, financial position or cash flows.
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. RSM and M&P are
engaged in arbitration to determine several of their rights and
responsibilities under their contracts, including rights of RSM
relating to noncompete provisions of the contracts. In addition,
the parties have held a series of meetings and discussions
regarding several aspects of the relationship between RSM and
M&P. If the parties do not reach an agreement to continue
their relationship, RSM intends to seek alternative attest firms
with which to affiliate and to continue to directly provide a
full range of tax and business consulting services. The extent
of the impact of a separation by M&P cannot be determined
at this time, although it could be material to RSMs
financial condition and results of operations.
26
Table of Contents
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.
A summary of our purchases of H&R Block common stock during
the first 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 | |||||||||
May 1 May 31
|
- | $ | - | - | $ | 1,901,419 | ||||||
June 1 June 30
|
134 | $ | 17.13 | - | $ | 1,901,419 | ||||||
July 1 July 31
|
70 | $ | 16.89 | - | $ | 1,901,419 | ||||||
(1) | We purchased 204,373 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. |
10 | .1 | Separation and Release Agreement dated July 28, 2009, by and between HRB Tax Group, Inc. and Timothy C. Gokey.* | ||
10 | .2 | H&R Block, Inc. Executive Severance Plan* | ||
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 | ||
101 | .REF | XBRL Taxonomy Extension Reference Linkbase | ||
* | Indicates management contracts, compensatory plans or arrangements. |
27
Table of Contents
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)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340402.gif)
Russell
P. Smyth
President and Chief
Executive Officer
September 4,
2009
![(-s- Becky S. Shulman)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340403.gif)
Becky
S. Shulman
Senior Vice
President, Treasurer and
Chief Financial
Officer
September 4,
2009
![(-s- Jeffrey T. Brown)](https://www.sec.gov/Archives/edgar/data/0000012659/000095012309041361/c53404c5340404.gif)
Jeffrey
T. Brown
Vice President and
Corporate Controller
September 4,
2009
28