10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For the fiscal year ended April 30, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
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For the transition period
from to
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Commission file
number 1-6089
H&R Block,
Inc.
(Exact name of registrant as
specified in its charter)
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MISSOURI
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44-0607856
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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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)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Name of each
exchange on which registered
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Common Stock, without par value
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New York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant is a well-known
seasoned issuer as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes
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No
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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
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No
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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 during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do
not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
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No
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The aggregate market value of the registrants Common Stock
(all voting stock) held by non-affiliates of the registrant,
computed by reference to the price at which the stock was sold
on October 31, 2008, was $6,539,980,861.
Number of shares of the registrants Common Stock, without
par value, outstanding on May 31, 2009: 334,140,455.
Documents
incorporated by reference
The definitive proxy statement for the registrants Annual
Meeting of Shareholders, to be held September 10, 2009, is
incorporated by reference in Part III to the extent
described therein.
2009
FORM 10-K
AND ANNUAL REPORT
TABLE
OF CONTENTS
Specified portions of our proxy statement, which will be filed
in July 2009, are listed as incorporated by
reference in response to certain items. Our proxy
statement will be made available to shareholders in July 2009,
and will also be available on our website at
www.hrblock.com.
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 they are 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.
PART I
ITEM 1.
BUSINESS
GENERAL
DEVELOPMENT OF BUSINESS
H&R Block, Inc. has subsidiaries that provide tax, retail
banking, accounting and business consulting services and
products. Our Tax Services segment primarily consists of our
income tax preparation businesses retail, online and
software. These businesses serve the general public in the
United States (U.S.), Canada and Australia. Additionally, this
segment includes commercial tax businesses, which provide tax
preparation software to certified public accountants (CPAs) and
other tax preparers in the U.S. Our Business Services
segment consists of a national accounting, tax and business
consulting firm primarily serving middle-market companies under
the RSM McGladrey, Inc. (RSM) brand. Our Consumer Financial
Services segment is engaged in retail banking through H&R
Block Bank (HRB Bank).
H&R Block, Inc. was organized as a corporation in 1955
under the laws of the State of Missouri. 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. A complete list of
our subsidiaries can be found in Exhibit 21.
DISCONTINUED
OPERATIONS
Effective
November 1, 2008, we sold H&R Block Financial
Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc.
(Ameriprise). We received cash proceeds, net of selling costs,
of $304.0 million and repayment of $46.6 million in
intercompany liabilities. At April 30, 2009, HRBFA and its
direct corporate parent are presented as discontinued operations
in the consolidated financial statements. All periods presented
have been reclassified to reflect our discontinued operations.
See additional discussion in Item 8, note 19 to our
consolidated financial statements.
Our discontinued operations also include the wind-down of our
mortgage loan origination business and the sale of our mortgage
loan servicing business in the prior year. Also included in the
prior years are the results of three smaller lines of business
previously reported in our Business Services segment.
ISSUANCE
OF COMMON
STOCK
In October 2008, we
sold 8.3 million shares of our common stock, without par
value, at a price of $17.50 per share in a registered direct
offering through subscription agreements with selected
institutional investors. We received net proceeds of
$141.4 million, after deducting placement agent fees and
other offering expenses. The purpose of the equity offering was
to ensure we maintained adequate equity levels, as a condition
of certain borrowings, during our off-season. Proceeds were used
for general corporate purposes.
FINANCIAL
INFORMATION ABOUT INDUSTRY SEGMENTS
See discussion below and in Item 8, note 20 to our
consolidated financial statements.
DESCRIPTION OF
BUSINESS
TAX
SERVICES
GENERAL
Our Tax Services segment is primarily engaged in
providing tax return preparation and related services and
products in the U.S. and its territories, Canada and
Australia. Major revenue sources include fees earned for tax
preparation services performed at company-owned retail tax
offices, royalties from franchise retail tax offices, sales of
tax-related services, sales of tax preparation and other
software, online tax preparation fees,
H&R
BLOCK 2009
Form 10K 1
participation in refund
anticipation loans (RALs) and Emerald Advance lines of credit.
Segment revenues constituted 74.3% of our consolidated revenues
from continuing operations for fiscal year 2009, 73.1% for 2008
and 72.4% for 2007.
Retail income tax return preparation and related services are
provided by tax professionals via a system of retail offices
operated directly by us or by franchisees. We also offer our
services through seasonal offices located inside major retailers.
TAX RETURNS
PREPARED
We, together with our franchisees, prepared approximately
24.0 million tax returns worldwide during fiscal year 2009,
compared to 24.6 million in 2008 and 24.0 million in
2007. We prepared 21.1 million tax returns in the
U.S. during fiscal year 2009, down from 21.8 million
in 2008 and 21.5 million in 2007. Our U.S. tax returns
prepared, including those prepared and filed at no charge, for
the 2009 tax season constituted 15.8% of an Internal Revenue
Service (IRS) estimate of total individual income tax returns
filed during the fiscal year 2009 tax season. This compares to
16.2% in the 2008 tax season, excluding tax returns filed as a
result of the Economic Stimulus Act of 2008 (Stimulus Act), and
16.5% in 2007.
FRANCHISES
We offer franchises as a way to expand our presence in
the market. Our franchise arrangements provide us with certain
rights designed to protect our brand. Most of our franchisees
receive use of our software, access to product offerings and
expertise, signs, specialized forms, local advertising, initial
training and supervisory services, and pay us a percentage,
typically approximately 30%, of gross tax return preparation and
related service revenues as a franchise royalty.
From time to time, we have acquired the territories of existing
franchisees and other tax return preparation businesses, and may
continue to do so if future conditions warrant and satisfactory
terms can be negotiated. During fiscal year 2009, we acquired
the assets and franchise rights of our last major independent
franchise operator for an aggregate purchase price of
$279.2 million. Results of the acquisition are included in
our consolidated financial statements at April 30, 2009.
See Item 8, note 2 to our consolidated financial
statements for additional information.
We have also initiated a program to optimize our retail tax
office network, including the mix of franchised and
company-owned offices. During fiscal year 2009 we sold certain
offices to existing franchisees for sales proceeds totaling
$16.9 million. The net gain on these transactions totaled
$14.9 million. We expect to continue this program in the
coming years. The extent to which we refranchise offices will
depend upon ongoing analysis regarding the optimal mix of
offices for our network, including geographic location, as well
as our ability to identify qualified franchisees.
OFFICES
A summary of our company-owned and franchise offices is
as follows:
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April 30,
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2009
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2008
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2007
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U.S. OFFICES:
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Company-owned offices
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7,029
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6,835
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6,669
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Company-owned shared
locations(1)
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1,542
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1,478
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1,488
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Total company-owned offices
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8,571
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8,313
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8,157
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Franchise offices
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3,565
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3,812
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3,784
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Franchise shared
locations(1)
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787
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913
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843
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Total franchise offices
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4,352
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4,725
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4,627
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12,923
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13,038
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12,784
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INTERNATIONAL OFFICES:
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Canada
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1,193
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1,143
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1,070
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Australia
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378
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366
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360
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1,571
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1,509
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1,430
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(1)
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Shared locations
include offices located within Sears, Wal-Mart or other
third-party businesses.
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The acquisition of our last major independent franchise operator
included a network of over 600 tax offices, nearly two-thirds of
which converted to company-owned offices upon the closing of the
transaction, as reflected in the table above.
Offices in shared locations at April 30, 2009, include 722
offices in Sears stores operated as H&R Block at
Sears and 1,030 offices operated in Wal-Mart stores. The
Sears license agreement expires in July 2010. The Wal-Mart
agreement expired in May 2009, and the related offices have been
closed.
During fiscal year 2007, we acquired ExpressTax, a national
franchisor of tax preparation businesses, for an aggregate cash
purchase price of $5.7 million. This acquisition added 249
offices to our network, which continue to operate under the
ExpressTax brand. There are currently 368 offices operating
under the ExpressTax brand.
2 H&R
BLOCK 2009 Form 10K
SERVICE AND
PRODUCT
OFFERINGS
We offer a number of digital tax preparation
alternatives.
TaxCut®
from H&R Block enables do-it-yourself users to prepare
their federal and state tax returns easily and accurately. Our
software products may be purchased through third-party retail
stores, direct mail or online.
We also offer our clients many online options: multiple versions
of do-it-yourself tax preparation; professional tax review; tax
advice; and tax preparation through a tax professional, whereby
the client completes a tax organizer and sends it to a tax
professional for preparation
and/or
signature.
By offering professional and do-it-yourself tax preparation
options through multiple channels, we seek to serve our clients
in the manner they choose to be served.
We also offer clients a number of options for receiving their
income tax refund, including a check directly from the IRS, an
electronic deposit directly to their bank account, a prepaid
debit card, a refund anticipation check (RAC) or a RAL.
The following are some of the services and products we offer in
addition to our tax preparation service:
RALs. RALs
are offered to our U.S. clients by a designated bank
primarily through a contractual relationship with HSBC Holdings
plc (HSBC). An eligible, electronic filing client may apply for
a RAL at one of our offices. After meeting certain eligibility
criteria, clients are offered the opportunity to apply for a
loan from HSBC in amounts up to $9,999 based on their
anticipated federal income tax refund. We simultaneously
transmit the income tax return information to the IRS and the
lending bank. Within a few days after the filing date, the
client receives a check, direct deposit or prepaid debit card in
the amount of the loan, less the banks transaction fee,
our tax return preparation fee and other fees for
client-selected services. Additionally, qualifying electronic
filing clients are eligible to receive their RAL proceeds, less
applicable fees, in approximately one hour after electronic
filing using the Instant Money service. A RAL is repaid when the
IRS directly deposits the participating clients federal
income tax refund into a designated account at the lending bank.
See related discussion in Loan Participations below.
RACs. Refund
Anticipation Checks are offered to U.S. clients who would
like to either: (1) receive their refund faster and do not
have a bank account for the IRS to direct deposit their refund;
(2) have their tax preparation fees paid directly out of
their refund; or (3) receive their refund faster but do not
qualify for a RAL under the existing credit criteria. A RAC is
not a loan and is provided through a contractual relationship
with HSBC.
Peace of Mind
(POM)
Guarantee. The
POM guarantee is offered to U.S. clients, in addition to
our standard guarantee, whereby we (1) represent our
clients if audited by the IRS, and (2) assume the cost,
subject to certain limits, of additional taxes owed by a client
resulting from errors attributable to one of our tax
professionals work. The POM program has a per client
cumulative limit of $5,000 in additional taxes assessed with
respect to the federal, state and local tax returns we prepared
for the taxable year covered by the program.
Emerald Advance
Lines of
Credit. Emerald
Advance lines of credit are offered to clients in tax offices
from mid-November through early January, currently in an amount
not to exceed $1,000 (previously $500). If the borrower meets
certain criteria as agreed in the loan terms, the line of credit
can be increased and utilized year-round. These lines of credit
are offered by HRB Bank.
H&R Block
Prepaid Emerald
Mastercard®. The
H&R Block Prepaid Emerald
MasterCard®
allows a client to receive a tax refund from the IRS directly on
a prepaid debit card, or to direct RAL or RAC proceeds to the
card to avoid high-cost check-cashing fees. The card can be used
for everyday purchases, bill payments and ATM withdrawals
anywhere
MasterCard®
is accepted. Additional funds can be added to the card account
year-round through direct deposit or at participating retail
locations. The H&R Block Prepaid Emerald
MasterCard®
is issued by HRB Bank.
Tax Return
Preparation
Courses. We
offer income tax return preparation courses to the public, which
teach students how to prepare income tax returns and provide us
with a source of trained tax professionals.
Software
Products. We
develop and market
TaxCut®
income tax preparation software.
TaxCut®
offers a simple
step-by-step
tax preparation interview, data imports from money management
software and tax preparation software, calculations, completion
of the appropriate tax forms, checking for errors and electronic
filing.
During fiscal year 2007, we acquired TaxWorks LLC and its
affiliated entities, a provider of commercial tax preparation
software targeting the independent tax preparer market. The
primary software product,
TaxWorks®,
is designed for small to mid-sized CPA firms who file tax
returns for individuals and businesses. See Item 8,
note 2 to our consolidated financial statements.
Online Tax
Preparation. We
offer a comprehensive range of online tax services, from tax
advice to complete professional and do-it-yourself tax return
preparation and electronic filing, through our websites at
www.hrblock.com and www.taxcut.com. These websites
allow clients to prepare their federal and state income tax
returns using the
TaxCut®
Online Tax Program, access tax tips, advice and tax-related news
and use calculators for tax planning.
H&R
BLOCK 2009
Form 10K 3
We participate in the Free File Alliance (FFA). This alliance
was created by the tax return preparation industry and the IRS,
and allows qualified filers with adjusted gross incomes less
than $56,000 to prepare and file their federal return online at
no charge. We feel this program provides a valuable public
service and increases our visibility with new clients, while
also providing an opportunity to offer our state return
preparation and other services to these clients.
CashBack
Program. We
offer a refund discount (CashBack) program to our customers in
Canada. In accordance with current Canadian regulations, if a
customers tax return indicates the customer is entitled to
a tax refund, we issue a check to the client in the amount of
the refund, less a discount. The client assigns to us the full
amount of the tax refund to be issued by the Canada Revenue
Agency (CRA) and the refund check is then sent by the CRA
directly to us. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the
fee for tax refund discounting. This program is financed by
short-term borrowings. The number of returns discounted under
the CashBack program in fiscal year 2009 was approximately
782,000, compared to 749,000 in 2008 and 670,000 in 2007.
LOAN
PARTICIPATIONS
Since July 1996, we have been a party to agreements with
HSBC and its predecessors to participate in RALs provided by a
lending bank to H&R Block tax clients. During fiscal year
2006, we signed a new agreement with HSBC in which we obtained
the right to purchase a 49.9% participation interest in all RALs
obtained through our retail offices. We received a signing bonus
from HSBC during fiscal year 2006 in connection with this
agreement, which was recorded as deferred revenue and is earned
over the contract term. The agreement is effective through June
2011 and we have extensions through 2013. Our purchases of the
participation interests are financed through short-term
borrowings and we bear all of the credit risk associated with
our participation interests. Revenue from our participation is
calculated as the rate of participation multiplied by the fee
paid by the borrower to the lending bank. Our RAL participation
revenue was $142.7 million, $190.2 million and
$192.4 million in fiscal years 2009, 2008 and 2007,
respectively.
SEASONALITY OF
BUSINESS
Because most of our clients file their tax returns during
the period from January through April of each year,
substantially all of our revenues from income tax return
preparation and related services and products are received
during this period. As a result, our tax segment generally
operates at a loss through the first eight months of the fiscal
year. Peak revenues occur during the applicable tax season, as
follows:
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United States and Canada
Australia
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January April
July October
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COMPETITIVE
CONDITIONS
The retail tax services business is highly competitive.
There are a substantial number of tax return preparation firms
and accounting firms offering tax return preparation services.
Many tax return preparation firms and many firms not otherwise
in the tax return preparation business are involved in providing
electronic filing and RAL services to the public. Commercial tax
return preparers and electronic filers are highly competitive
with regard to price and service. In terms of the number of
offices and personal tax returns prepared and electronically
filed in offices, online and via our software, we believe we are
the largest company providing direct tax return preparation and
electronic filing services in the U.S. We also believe we
operate the largest tax return preparation businesses in Canada
and Australia.
Our digital tax solutions businesses compete with a number of
companies. Intuit, Inc. is the largest supplier of tax
preparation software and online tax preparation services. There
are many smaller competitors in the online market, as well as
free state-sponsored online filing programs. Price and marketing
competition for digital tax preparation services is increasing,
including offers of free tax preparation services.
GOVERNMENT
REGULATION
Federal legislation requires income tax return preparers
to, among other things, set forth their signatures and
identification numbers on all tax returns prepared by them and
retain all tax returns prepared by them for three years. Federal
laws also subject income tax return preparers to
accuracy-related penalties in connection with the preparation of
income tax returns. Preparers may be prohibited from further
acting as income tax return preparers if they continuously and
repeatedly engage in specified misconduct.
The federal government regulates the electronic filing of income
tax returns in part by requiring electronic filers to comply
with all publications and notices of the IRS applicable to
electronic filing. We are required to provide certain electronic
filing information to the taxpayer and comply with advertising
standards for electronic filers. We are also subject to possible
monitoring by the IRS, penalties for improper disclosure or use
of income tax return preparation, other preparer penalties and
suspension from the electronic filing program.
The Gramm-Leach-Bliley Act and related Federal Trade Commission
(FTC) regulations require income tax preparers to adopt and
disclose consumer privacy policies, and provide consumers a
reasonable opportunity to opt-out of having personal
information disclosed to unaffiliated third-parties for
marketing purposes. Some states have adopted or proposed strict
opt-in requirements in connection with use or
disclosure of consumer
4 H&R
BLOCK 2009 Form 10K
information. In addition, the IRS
generally prohibits the use or disclosure by tax return
preparers of taxpayer information without the prior written
consent of the taxpayer.
Federal statutes and regulations also regulate an electronic
filers involvement in RALs. Electronic filers must clearly
explain the RAL is a loan and not a substitute for or a quicker
way of receiving an income tax refund. Federal laws place
restrictions on the fees an electronic filer may charge in
connection with RALs. In addition, some states and localities
have enacted laws and adopted regulations for RAL facilitators
and/or the
advertising of RALs.
Certain states have regulations and requirements relating to
offering income tax courses. These requirements include
licensing, bonding and certain restrictions on advertising.
As noted above under Offices, many of the income tax
return preparation offices operating in the U.S. under the
name H&R Block are operated by franchisees. Our
franchising activities are subject to the rules and regulations
of the FTC and various state laws regulating the offer and sale
of franchises. The FTC and various state laws require us to
furnish to prospective franchisees a franchise offering circular
containing prescribed information. A number of states in which
we are currently franchising regulate the sale of franchises and
require registration of the franchise offering circular with
state authorities and the delivery of a franchise offering
circular to prospective franchisees. We are currently operating
under exemptions from registration in several of these states
based on our net worth and experience. Substantive state laws
regulating the franchisor/franchisee relationship presently
exist in a substantial number of states, and bills have been
introduced in Congress from time to time that would provide for
federal regulation of the franchisor/franchisee relationship in
certain respects. The state laws often limit, among other
things, the duration and scope of non-competition provisions,
the ability of a franchisor to terminate or refuse to renew a
franchise and the ability of a franchisor to designate sources
of supply. From time to time, we may make appropriate amendments
to our franchise offering circular to comply with our disclosure
obligations under federal and state law.
We also seek to determine the applicability of all government
and self-regulatory organization statutes, ordinances, rules and
regulations in the other countries in which we operate
(collectively, Foreign Laws) and to comply with these Foreign
Laws. In addition, the Canadian government regulates the
refund-discounting program in Canada. These laws have not
materially affected our international operations.
See discussion in Item 1A, Risk Factors for
additional information.
BUSINESS
SERVICES
GENERAL
Our Business Services segment offers accounting, tax and
business consulting services, wealth management and capital
markets services to middle-market companies. Segment revenues
constituted
22.0% of our consolidated revenues from continuing
operations for fiscal year 2009, 23.0% for fiscal year 2008 and
25.1% for fiscal year 2007.
This segment consists primarily of RSM, which provides
accounting, tax and business consulting services in
93 cities and 25 states and offers services in 21 of
the 25 top U.S. markets.
From time to time, we have acquired related businesses and may
continue to do so if future conditions warrant and satisfactory
terms can be negotiated.
RELATIONSHIP WITH
ATTEST
FIRMS
By regulation, we cannot provide financial statement
attest services. McGladrey & Pullen LLP (M&P) and
other public accounting firms (collectively, the Attest
Firms) operate in an alternative practice structure with
RSM, and provide attest and other services related to client
financial statements. Through a number of agreements with these
Attest Firms, we provide accounting, payroll, human resources,
marketing and other administrative services to the Attest Firms.
We receive a management fee for these services. We also have a
cost-sharing arrangement with the Attest Firms, whereby they
reimburse us for certain costs, mainly for the use of RSM-owned
or leased real estate, property and equipment. The Attest Firms
generally may terminate these arrangements upon 210 days
notice. Following such a termination, the Attest Firms generally
are prohibited for a period of three years from engaging in
businesses in which RSM engages or soliciting RSM clients. In
addition, we provide working capital to M&P through a
revolving credit facility in an amount equal to the lower of the
value of their accounts receivable,
work-in-process
and fixed assets or $125.0 million. This credit facility is
secured by M&Ps accounts receivable,
work-in-process
and fixed assets. The Attest Firms are limited liability
partnerships with their own independent management, legal and
business advisors, professional liability insurance, quality
assurance and risk management policies. Accordingly, the Attest
Firms are separate legal entities and not affiliates. Some
partners and employees of the Attest Firms are also employees of
RSM. The terms of the RSM/Attest Firms arrangements are based on
the mutual agreement of the parties. As a result, from time to
time, the parties assess various aspects of the relationship,
such as the extent and cost of the RSM services, mutually
supportive marketing initiatives, acquisition strategies and
financing, and, when mutually agreed, have
H&R
BLOCK 2009
Form 10K 5
implemented appropriate changes in
the relationship. Such a discussion is currently underway, which
could lead to additional changes in the relationship.
SEASONALITY OF
BUSINESS
Revenues for this segment are largely seasonal in nature,
with peak revenues occurring during January through April.
COMPETITIVE
CONDITIONS
The accounting, tax and consulting business is highly
competitive. The principal methods of competition are price,
service and reputation for quality. There are a substantial
number of accounting firms offering similar services at the
international, national, regional and local levels. As our focus
is on middle-market businesses, our principal competition is
with national and regional accounting firms.
GOVERNMENT
REGULATION
Many of the same federal and state regulations relating
to tax preparers and the information concerning tax reform
discussed previously in Tax Services apply to the Business
Services segment as well. RSM is not, and is not eligible to be,
a licensed public accounting firm and takes measures to ensure
that it does not provide services prohibited by regulation, such
as attest services. RSM, through its subsidiaries, provides
capital markets and wealth management services and is subject to
state and federal regulations governing investment advisors and
securities brokers and dealers.
Auditor independence rules of the SEC, the Public Company
Accounting Oversight Board (PCAOB) and various states apply to
the Attest Firms as public accounting firms. In applying its
auditor independence rules, the SEC views us and the Attest
Firms as a single entity and requires that the SEC independence
rules for the Attest Firms apply to us and requires us to be
independent of any SEC audit client of the Attest Firms. The SEC
regards any financial interest or prohibited business
relationship we have with a client of the Attest Firms as a
financial interest or prohibited business relationship between
the Attest Firms and the client for purposes of applying its
auditor independence rules.
We and the Attest Firms have jointly developed and implemented
policies, procedures and controls designed to ensure the Attest
Firms independence as audit firms complying with
applicable SEC regulations and professional responsibilities.
These policies, procedures and controls are designed to monitor
and prevent violations of applicable independence rules and
include, among other things: (1) informing our officers,
directors and other members of senior management concerning
auditor independence matters; (2) procedures for monitoring
securities ownership; (3) communicating with SEC audit
clients regarding the SECs interpretation and application
of relevant independence rules and guidelines; and
(4) requiring RSM employees to comply with the Attest
Firms independence and relationship policies (including
the Attest Firms independence compliance questionnaire
procedures).
See discussion in Item 1A, Risk Factors for
additional information.
CONSUMER
FINANCIAL SERVICES
GENERAL
Our Consumer Financial Services segment is engaged in
providing retail banking offerings through HRB Bank, primarily
to Tax Services clients in the U.S. HRB Bank offers the
H&R Block Prepaid Emerald
MasterCard®
and Emerald Advance lines of credit through our Tax Services
segment. HRB Bank also offers traditional banking services
including prepaid debit card accounts, checking and savings
accounts, individual retirement accounts and certificates of
deposit. Segment revenues constituted 3.5% of our consolidated
revenues from continuing operations for fiscal year 2009, 3.5%
for 2008 and 2.1% for 2007. This segment previously included
HRBFA, which was sold to Ameriprise during fiscal year 2009 and
has been presented as a discontinued operation in the
accompanying consolidated financial statements.
The operations of HRB Bank are primarily focused on providing
limited retail banking services to tax clients of H&R
Block. In fiscal years 2008 and 2007, HRB Bank purchased
mortgage loans, primarily from former affiliates. Although HRB
Bank no longer intends to purchase mortgage loans, it continues
to hold mortgage loans for investment purposes. HRB Bank had
mortgage loans held for investment of $744.9 million and
$966.3 million at April 30, 2009 and 2008,
respectively.
HRB Bank earns interest income on mortgage loans held for
investment and other investments, bank card transaction fees on
the use of debit cards, fees from the use of ATM networks and
interest and fees related to Emerald Advance lines of credit.
H&R Block and its affiliates provide certain administrative
services to HRB Bank. A significant portion of HRB Banks
deposit base includes deposits relating to the business of
affiliates.
The information required by the SECs Industry Guide 3,
Statistical Disclosure by Bank Holding Companies, is
included in Item 7.
SEASONALITY OF
BUSINESS
HRB Banks operating results are subject to seasonal
fluctuations primarily related to the offering of the H&R
Block Prepaid Emerald
MasterCard®
and Emerald Advance lines of credit. These services are
primarily offered to Tax Services clients, and therefore peak in
January and February and taper off through the remainder of the
tax season.
6 H&R
BLOCK 2009 Form 10K
COMPETITIVE
CONDITIONS
HRB Bank is highly integrated with our Tax Services
segment and its customer base of tax preparation clients. For
many of these clients, HRB Bank is their only access to banking
services. HRB Bank does not seek to compete broadly with
regional or national retail banks.
GOVERNMENT
REGULATION
HRB Bank is subject to regulation, supervision and
examination by the Office of Thrift Supervision (OTS), the
Federal Reserve and the Federal Deposit Insurance Corporation
(FDIC). All savings associations are subject to the capital
adequacy guidelines and the regulatory framework for prompt
corrective action. HRB Bank must meet specific capital
guidelines involving quantitative measures of HRB Banks
assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. HRB
Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components,
risk-weightings and other factors. As a savings and loan holding
company, H&R Block, Inc. is also subject to regulation by
the OTS.
See Item 7, Regulatory Environment and
Item 8, note 16 to the consolidated financial
statements for additional discussion of regulatory requirements.
Also see discussion in 1A, Risk Factors for
additional information.
SERVICE MARKS,
TRADEMARKS AND PATENTS
We have made a practice of selling our services and products
under service marks and trademarks and of obtaining protection
for these by all available means. Our service marks and
trademarks are protected by registration in the U.S. and
other countries where our services and products are marketed. We
consider these service marks and trademarks, in the aggregate,
to be of material importance to our business, particularly our
business segments providing services and products under the
H&R Block brand.
We have no registered patents material to our business.
EMPLOYEES
We have approximately 8,300 regular full-time employees as of
April 30, 2009. The highest number of persons we employed
during the fiscal year ended April 30, 2009, including
seasonal employees, was approximately 133,700.
AVAILABILITY OF
REPORTS AND OTHER INFORMATION
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports filed with or furnished to
the SEC are available, free of charge, through our website at
www.hrblock.com as soon as reasonably practicable after
such reports are electronically filed with or furnished to the
SEC. The public may read and copy any materials we file with the
SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website at www.sec.gov containing
reports, proxy and information statements and other information
regarding issuers who file electronically with the SEC.
Copies of the following corporate governance documents are
posted on our website:
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The Amended and Restated Articles of Incorporation of H&R
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The Amended and Restated Bylaws of H&R Block, Inc.;
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The H&R Block, Inc. Corporate Governance Guidelines;
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The H&R Block, Inc. Code of Business Ethics and Conduct;
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The H&R Block, Inc. Board of Directors Independence
Standards;
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The H&R Block, Inc. Audit Committee Charter;
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The H&R Block, Inc. Governance and Nominating Committee
Charter; and
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The H&R Block, Inc. Compensation Committee Charter.
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If you would like a printed copy of any of these corporate
governance documents, please send your request to the Office of
the Secretary, H&R Block, Inc., One H&R Block Way,
Kansas City, Missouri 64105.
Information contained on our website does not constitute any
part of this report.
ITEM 1A.
RISK FACTORS
An investment in our common stock involves risk, including the
risk that the value of an investment may decline or that returns
on that investment may fall below expectations. There are a
number of significant factors which could cause actual
conditions, events or results to differ materially from those
described in forward-looking statements, many of which are
beyond managements control or its ability to accurately
forecast or predict, or could adversely affect our operating
results and the value of any investment in our stock. Other
factors besides those listed below or discussed in reports filed
with the SEC could adversely affect our results.
H&R
BLOCK 2009
Form 10K 7
Our businesses
may be adversely affected by economic conditions generally,
including the current economic recession.
An economic recession, as we are currently experiencing, is
frequently characterized by rising unemployment and declining
consumer and business spending. Poor economic conditions may
negatively affect demand and pricing for our services. In
addition, the recent downturn in the residential housing market
and increase in mortgage defaults has negatively impacted our
operating results and may continue to do so. An economic
recession will likely reduce the ability of our borrowers to
repay mortgage loans, and declining home values could increase
the severity of loss we may incur in the event of default. In
addition to mortgage loans, we also extend secured and unsecured
credit to other customers, including RALs and Emerald Advance
lines of credit to our tax preparation customers. We may incur
significant losses on credit we extend, which in turn could
reduce our profitability.
Our access to
liquidity may be negatively impacted if disruptions in credit
markets occur, if credit rating downgrades occur or if we fail
to meet certain covenants. Funding costs may increase, leading
to reduced earnings.
We need liquidity to meet our off-season working capital
requirements, to service debt obligations including refinancing
of maturing obligations, to purchase RAL participations and for
other related activities. Although we believe we have sufficient
liquidity to meet our current needs, our access to and the cost
of liquidity could be negatively impacted in the event of
credit-rating downgrades or if we fail to meet existing debt
covenants. In addition, events could occur which could increase
our need for liquidity above current levels.
If rating agencies downgrade our credit rating, the cost of debt
would likely increase and capital market availability could
decrease or become unavailable. Our unsecured committed lines of
credit (CLOCs) are subject to various covenants, including a
covenant requiring that we maintain minimum net worth equal to
$650.0 million and a requirement that we reduce the
aggregate outstanding principal amount of short-term debt (as
defined) to $200.0 million or less for a minimum period of
thirty consecutive days during the period from March 1 to June
30 of each year. Violation of a covenant could impair our access
to liquidity currently available through the CLOCs. If current
sources of liquidity were to become unavailable, we would need
to obtain additional sources of funding, which may not be
possible or may be available under less favorable terms.
The industries in
which we operate face substantial litigation, and such
litigation may damage our reputation or result in material
liabilities and losses.
We have been named, from time to time, as a defendant in various
legal actions, including arbitrations, class actions and other
litigation arising in connection with our various business
activities. Adverse outcomes related to litigation could result
in substantial damages and could cause our earnings to decline.
Negative public opinion can also result from our actual or
alleged conduct in such claims, possibly damaging our reputation
and could cause the market price of our stock to decline. See
Item 3, Legal Proceedings for additional
information.
Failure to comply
with laws and regulations that protect our customers
personal and financial information could result in significant
fines, penalties and damages and could harm our brand and
reputation.
Privacy concerns relating to the disclosure of consumer
financial information have drawn increased attention from
federal and state governments. The IRS generally prohibits the
use or disclosure by tax return preparers of taxpayers
information without the prior written consent of the taxpayer.
In addition, other regulations require financial service
providers to adopt and disclose consumer privacy policies and
provide consumers with a reasonable opportunity to
opt-out of having personal information disclosed to
unaffiliated third-parties for marketing purposes. Although we
have established security procedures to protect against identity
theft, breaches of our clients privacy may occur. To the
extent the measures we have taken prove to be insufficient or
inadequate, we may become subject to litigation or
administrative sanctions, which could result in significant
fines, penalties or damages and harm to our brand and reputation.
In addition, changes in these federal and state regulatory
requirements could result in more stringent requirements and
could result in a need to change business practices, including
how information is disclosed. Establishing systems and processes
to achieve compliance with these new requirements may increase
costs and/or
limit our ability to pursue certain business opportunities.
We are subject to
operational risk and risks associated with our controls and
procedures, which may result in incurring financial and
reputational losses.
There is a risk of loss resulting from inadequate or failed
processes or systems, theft or fraud. These can occur in many
forms including, among others, errors, business interruptions
arising from natural disasters or other events, inadequate
design and development of products and services, inappropriate
behavior of or misconduct by our employees or those contracted
to perform services for us, and vendors that do not perform in
accordance with
8 H&R
BLOCK 2009 Form 10K
their contractual agreements. These
events could potentially result in financial losses or other
damages. We utilize internally developed processes, internal and
external information and technological systems to manage our
operations. We are exposed to risk of loss resulting from
breaches in the security or other failures of these processes
and systems. Our ability to recover or replace our major
operational systems and processes could have a significant
impact on our core business operations and increase our risk of
loss due to disruptions of normal operating processes and
procedures that may occur while re-establishing or implementing
information and transaction systems and processes. As our
businesses are seasonal, our systems must be capable of
processing high volumes during peak season. Therefore, service
interruptions resulting from system failures could negatively
impact our ability to serve our customers, which in turn could
damage our brand and reputation, or adversely impact our
profitability.
We also face the risk that the design of our controls and
procedures may prove to be inadequate or that our controls and
procedures may be circumvented, thereby causing delays in
detection of errors or inaccuracies in data and information. It
is possible that any lapses in the effective operations of
controls and procedures could materially affect earnings or harm
our reputation. Lapses or deficiencies in internal control over
financial reporting could also be material to us.
TAX
SERVICES
Government
initiatives that simplify tax return preparation could reduce
the need for our services as a third-party tax return preparer.
In addition, changes in government regulations or processes
regarding the preparation and filing of tax returns may increase
our operating costs or reduce our revenues.
Many taxpayers seek assistance from paid tax return preparers
such as us because of the level of complexity involved in the
tax return preparation and filing process. From time to time,
government officials propose measures seeking to simplify the
preparation and filing of tax returns or to provide additional
assistance with respect to preparing and filing such tax
returns. The passage of any measures that significantly simplify
tax return preparation or otherwise reduce the need for a
third-party tax return preparer could reduce demand for our
services, causing our revenues or results of operations to
decline.
Governmental regulations and processes affect how we provide
services to our clients. Changes in these regulations and
processes may require us to make corresponding changes to our
client service systems and procedures. The degree and timing of
changes in governmental regulations and processes may impair our
ability to serve our clients in an effective and cost-efficient
manner or reduce demand for our services, causing our revenues
or results of operations to decline.
Federal and state
legislators and regulators have increasingly taken an active
role in regulating financial products such as RALs. In addition,
we are dependent on third-party financial institutions to
provide certain of these financial products to our clients and
these institutions could cease or significantly reduce the
offering of such products. These trends or potential
developments could impede our ability to facilitate these
financial products, reduce demand for our services and harm our
business.
Changes in government regulation related to RALs could limit the
offering of RALs to our clients or our ability to purchase
participation interests. In addition, third-party financial
institutions currently originating RALs and similar products
could decide to cease or significantly limit such offerings and
related collection practices. Changes in IRS practices could
impair our ability to limit our bad debt exposure. Changes in
any of these, as well as possible litigation related to
financial products offered through our distribution channels,
may cause our revenues or profitability to decline. See
discussion of RAL litigation in Item 3, Legal
Proceedings. In addition to the loss of revenues and
income directly attributable to the RAL program, the inability
to offer RALs could indirectly result in the loss of retail tax
clients and associated tax preparation revenues, unless we were
able to take mitigating actions.
Total revenues related directly to the RAL program (including
revenues from participation interests) were $141.0 million
for the year ended April 30, 2009, representing 3.5% of
consolidated revenues and contributed $56.8 million to the
Tax Services segments pretax results. Revenues related
directly to the RAL program totaled $189.8 million for the
year ended April 30, 2008, representing 4.6% of
consolidated revenues and contributed $87.0 million to
pretax results.
Increased
competition for tax preparation clients in our retail offices
and our online and software channels could adversely affect our
current market share and profitability, and could limit our
ability to grow our client base. Offers of free tax preparation
services could adversely affect our revenues and
profitability.
The retail tax services business is highly competitive. There
are a substantial number of tax return preparation firms and
accounting firms offering tax return preparation services. Many
tax return preparation firms and many firms not otherwise in the
tax return preparation business are involved in providing
electronic filing, RALs and
H&R
BLOCK 2009
Form 10K 9
other related services to the
public. Commercial tax return preparers and electronic filers
are highly competitive with regard to price and service. Our
digital tax solutions businesses also compete with in-office tax
preparation services and a number of online and software
companies, primarily on the basis of price and functionality.
Federal and certain state taxing authorities currently offer, or
facilitate the offer of, tax return preparation and electronic
filing options to taxpayers at no charge. In addition, many of
our direct competitors offer certain free online tax preparation
and electronic filing options. We have free offerings as well
and prepared 788,000 federal income tax returns in fiscal year
2009 at no charge as part of the FFA. Government tax authorities
and direct competitors may elect to expand free offerings in the
future. Intense price competition, including offers of free
service, could result in a loss of market share, lower revenues
or lower margins.
See tax returns prepared statistics included in Item 7,
under Tax Services.
BUSINESS
SERVICES
The RSM
alternative practice structure involves relationships with
Attest Firms that are subject to regulatory restrictions and
other constraints. Failure to comply with these restrictions, or
operational difficulties involving the Attest Firms, could
damage our brand reputation, lead to reduced earnings and impair
our investment in RSM.
RSMs relationship with the Attest Firms requires
compliance with applicable regulations regarding the practice of
public accounting and auditor independence rules and
requirements. Many of RSMs clients are also clients of the
Attest Firms. In addition, the relationship with the Attest
Firms closely links our RSM McGladrey brand with the Attest
Firms. If the Attest Firms were to encounter regulatory or
independence issues pertaining to the alternative practice
structure or if significant litigation arose involving the
Attest Firms or their services, such developments could have an
adverse effect on our brand reputation and our ability to
realize the mutual benefits of our relationship. In addition, a
significant judgment or settlement of a claim against the Attest
Firms could (1) impair M&Ps ability to meet its
payment obligations under various service arrangements with RSM
and to repay amounts borrowed under the revolving credit
facility it maintains with us, (2) impact RSMs
ability to attract and retain clients and quality professionals,
(3) have a significant indirect adverse effect on RSM, as
the Attest Firm partners are also RSM employees and
(4) result in significant management distraction. This in
turn could result in reduced revenue and earnings and, if
sufficiently significant, impairment of our investment in RSM.
RSM receives a
significant portion of its revenues from clients that are also
clients of the Attest Firms. A termination of the alternative
practice structure between RSM and the Attest Firms could result
in a material loss of revenue to RSM and an impairment of our
investment in RSM.
Under the alternative practice structure, RSM and the Attest
Firms market their services jointly and provide services to a
significant number of common clients. 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. In addition, RSM 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. This in turn could result in reduced revenue,
increased costs and reduced earnings and, if sufficiently
significant, impairment of our investment in RSM.
CONSUMER
FINANCIAL SERVICES
We are subject to
extensive government regulation, including banking rules and
regulations. If we fail to comply with applicable banking laws,
rules and regulations, we could be subject to disciplinary
actions, damages, penalties or restrictions that could
significantly harm our business.
The OTS can, among other things, censure, fine, issue
cease-and-desist
orders or suspend or expel a bank or any of its officers or
employees with respect to banking activities. Similarly, the
attorneys general of each state could bring legal action on
behalf of the citizens of the various states to ensure
compliance with local laws.
HRB Bank is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital
requirements may trigger actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank. HRB
Bank must meet specific capital guidelines involving
quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory
accounting practices. A banks capital amounts and
classification are also subject to qualitative judgments by the
regulators about the strength of components of its capital,
risk-weightings of assets, off-balance sheet transactions and
other factors. Quantitative measures established by regulation
to ensure capital adequacy require HRB Bank to maintain minimum
amounts and ratios of tangible equity, total risk-based capital
and Tier 1 capital. In addition to these minimum ratio
requirements, HRB Bank is required to continually maintain a
12.0% minimum leverage ratio through fiscal year 2012.
10 H&R
BLOCK 2009 Form 10K
See Item 8, note 16 to the consolidated financial
statements for the calculation of required ratios.
Economic
conditions that negatively affect housing prices and the job
market may result in deterioration in credit quality of our loan
portfolio, and such deterioration could have a negative impact
on our business and profitability.
The overall credit quality of mortgage loans held for investment
is impacted by the strength of the U.S. economy and local
economic conditions, including residential housing prices.
Economic trends that negatively affect housing prices and the
job market could result in deterioration in credit quality of
our mortgage loan portfolio and a decline in the value of
associated collateral. Future interest rate resets could also
lead to increased delinquencies in our mortgage loans held for
investment. Recent trends in the residential mortgage loan
market reflect an increase in loan delinquencies and declining
collateral values. As a result of similar trends in our loan
portfolio, we recorded significant loan loss provisions totaling
$63.9 million during fiscal year 2009.
Our loan portfolio is concentrated in the states of Florida,
California, New York and Wisconsin, which represented 19.4%,
17.0%, 13.7% and 8.3%, respectively, of our total mortgage loans
held for investment at April 30, 2009. No other state held
more than 5% of our loan balances. If adverse trends in the
residential mortgage loan market continue, particularly in
geographic areas in which we own a greater concentration of
mortgage loans, we could incur additional significant loan loss
provisions.
Mortgage loans purchased from Sand Canyon Corporation (SCC),
formerly Option One Mortgage Corporation, represented
approximately 65% of total loans held for investment at
April 30, 2009. These loans have been subject to higher
delinquency rates than other loans in our portfolio, and may
expose us to greater risk of credit loss.
Significant
changes have been proposed relating to the regulation of
financial institutions. Although the ultimate impact of pending
proposals is uncertain at this time, increased regulation could
impact operating activities of our bank.
Various legislative proposals have been made regarding changes
in the regulation of financial institutions, including the
recently released Financial Regulatory Reform Plan. Prior
proposals included legislation which would have empowered courts
to modify the terms of mortgage loans including a reduction in
the principal amount to reflect lower underlying property values.
Future changes in regulation could increase compliance
requirements and operating costs of HRB Bank, and could
potentially limit operating activities of the bank. Should
proposals be enacted into law allowing government modification
of mortgage loans, we could report losses on mortgage loans in
excess of current levels. The availability of principal
reductions or other mortgage loan modifications could make
bankruptcy a more attractive option for troubled borrowers,
leading to increased bankruptcy filings and accelerated defaults.
DISCONTINUED
OPERATIONS
SCC is subject to
potential litigation stemming from discontinued mortgage
operations, which may result in significant financial
losses.
Although SCC terminated its mortgage loan origination activities
and sold its loan servicing business during fiscal year 2008, it
remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities
prior to such termination and sale. The costs involved in
defending against
and/or
resolving these investigations, claims and lawsuits may be
substantial in some instances and the ultimate resulting
liability is difficult to predict. In the current non-prime
mortgage environment, the number and frequency of
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. In the event of unfavorable outcomes, the amount 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.
We are subject to
potential contingent liabilities related to loan repurchase
obligations, which may result in significant financial
losses.
SCC remains exposed to losses relating to mortgage loans it
previously originated. Non-prime mortgage loans originated by
SCC were sold either as whole-loan sales to single third-party
buyers or in the form of a securitization.
SCC entered into indemnification agreements with third-parties
relating to the mortgage loans transferred through such
whole-loan sales or securitizations. In some instances, H&R
Block, Inc. was required to guarantee SCCs obligations.
Obligations to repurchase loans or indemnify a third-party up to
an agreed upon amount may arise from breaches of various
representations and warranties SCC made under such
indemnification agreements. These representations and warranties
vary based on the nature of the transaction and the buyers
requirements but generally pertain to the ownership of the loan,
the property securing the loan and compliance with applicable
laws
H&R
BLOCK 2009
Form 10K 11
and SCC underwriting guidelines.
These representations and warranties and corresponding
repurchase obligations generally are not subject to stated
limits or a stated term.
SCC records a liability for contingent losses relating to
representation and warranty claims by estimating loan repurchase
volumes and indemnification obligations for both known claims
and projections of expected future claims. To the extent that
future valid claim volumes exceed current estimates, or the
value of mortgage loans and residential home prices decline,
future losses may be greater than these estimates and those
differences may be significant.
None.
Most of our tax offices, except those in shared locations, are
operated under leases throughout the U.S. Our Canadian
executive offices are located in a leased office in Calgary,
Alberta. Our Canadian tax offices are operated under leases
throughout Canada.
RSMs executive offices are located in leased offices in
Bloomington, Minnesota. Its administrative offices are located
in leased offices in Davenport, Iowa. RSM also leases office
space throughout the U.S.
HRB Bank is headquartered and its single branch location is
located in our corporate headquarters.
We own our corporate headquarters, which is located in Kansas
City, Missouri. All current leased and owned facilities are in
good repair and adequate to meet our needs.
ITEM 3.
LEGAL PROCEEDINGS
The information below should be read in conjunction with the
information included in Item 8, note 18 to our
consolidated financial statements.
RAL
LITIGATION
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We have settled all but one of the RAL Cases. The sole remaining
RAL Case is a putative class action entitled Sandra J.
Basile, et al. v. H&R Block, Inc., et al., April
Term 1992 Civil Action No. 3246 in the Court of Common
Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. 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. The Pennsylvania Supreme Court has granted our request
to review the appellate court ruling. 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
12 H&R
BLOCK 2009 Form 10K
want it), and (3) a breach of
fiduciary duty. The court has certified plaintiff classes
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 have filed a petition for rehearing of this
decision with the Seventh Circuit.
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 alleged
fraudulent business practices, deceptive acts and practices,
common law fraud and breach of fiduciary duty with respect to
the Express IRA product and sought equitable relief,
disgorgement of profits, damages and restitution, civil
penalties and punitive damages. In July 2007, the Supreme Court
of the State of New York issued a ruling that dismissed all
defendants other than HRBFA and the claims of common law fraud.
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 alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe 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 the Express IRA litigation through an
indemnification agreement with Ameriprise. See additional
discussion in Item 8, note 19 to the consolidated
financial statements.
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 alleges breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. We believe we have meritorious
defenses to the claims in these cases and intend to defend
H&R
BLOCK 2009
Form 10K 13
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 regarding business
valuation services provided by RSM EquiCo, Inc., including
fraud, negligent misrepresentation, breach of contract, breach
of implied covenant of good faith and fair dealing, breach of
fiduciary duty and unfair competition and seeks unspecified
damages, restitution and equitable relief. 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 has filed an appeal of this certification
ruling and intends 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 has a relationship with 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 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
14 H&R
BLOCK 2009 Form 10K
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 claims,
and we are defending or intend to defend them vigorously. The
amounts claimed in these claims and lawsuits are substantial in
some instances, however the ultimate liability with respect to
such litigation and claims is difficult to predict. In the event
of an unfavorable outcome, the amounts we may be required to pay
in the discharge of liabilities or settlements could be material.
In addition to the aforementioned types of cases, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning 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.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 2009.
PART II
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ITEM 5. |
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
H&R Blocks common stock is traded on the New York
Stock Exchange (NYSE) under the symbol HRB. On May 31,
2009, there were 24,835 shareholders of record and the
closing stock price on the NYSE was $14.60 per share.
In October 2008, we sold 8.3 million shares of our common
stock in a registered direct offering through subscription
agreements with selected institutional investors. See additional
information in Item 8, note 11 to the consolidated
financial statements.
During the fiscal year ended April 30, 2009, we issued
approximately 8,500 shares of our common stock as purchase
price consideration for acquisitions. These issuances were
private offerings exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
On March 4, 2009, we also issued a total of
8,604 shares of our common stock to former members of our
Board of Directors (4,302 shares each to Roger W. Hale and
Henry F. Frigon) as compensation pursuant to the 2008 Deferred
Stock Unit Plan for Outside Directors, in reliance upon the
administrative position set forth in SEC Release
No. 33-6188
(February 1, 1980) 17 C.F.R. 231.6188
(1989) and SEC Release
No. 33-6281
(January 15, 1981) 17 C.F.R. 231.6281 (1989).
The information regarding H&R Blocks common stock
regarding quarterly sales prices and dividends declared appears
in Item 8, note 21 to our consolidated financial
statements.
A summary of our securities authorized for issuance under equity
compensation plans as of April 30, 2009 is as follows:
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|
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(in 000s, except per
share amounts)
|
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Number of
securities
|
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Weighted-average
|
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Number of securities
remaining
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to be issued upon
|
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exercise price of
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available for future
issuance under
|
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exercise of
options
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outstanding
options
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equity compensation
plans (excluding
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warrants and rights
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|
warrants and rights
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securities reflected
in the first column)
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Equity compensation plans approved by security holders
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16,081
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$
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21.83
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11,540
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Equity compensation plans not approved by security holders
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Total
|
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16,081
|
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|
$
|
21.83
|
|
|
|
11,540
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|
|
|
|
|
|
|
|
|
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|
|
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The remaining information called for by this item relating to
Securities Authorized for Issuance under Equity
Compensation Plans is reported in Item 8,
note 12 to our consolidated financial statements.
H&R
BLOCK 2009
Form 10K 15
A summary of our purchases of H&R Block common stock during
the fourth quarter of fiscal year 2009 is as follows:
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(in 000s, except per
share amounts)
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Average
|
|
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Total Number of
Shares
|
|
|
Maximum Dollar Value
of
|
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|
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Total Number of
|
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Price Paid
|
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Purchased as Part of
Publicly
|
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Shares that May be
Purchased
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Shares
Purchased(1)
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per Share
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Announced Plans or
Programs(2)
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Under the Plans or
Programs(2)
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February 1 February 28
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5
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$
|
20.75
|
|
|
|
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|
$
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2,000,000
|
|
|
|
March 1 March 31
|
|
|
5,630
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|
$
|
17.53
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|
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|
5,630
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$
|
1,901,419
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|
April 1 April 30
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1
|
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|
$
|
18.51
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|
$
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1,901,419
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(1)
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Of the shares listed
above, approximately six thousand shares were purchased in
connection with funding employee income tax withholding
obligations arising upon the exercise of stock options or the
lapse of restrictions on restricted shares.
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(2)
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In June 2008, our
Board of Directors rescinded the previous authorizations to
repurchase shares of our common stock, and approved an
authorization to purchase up to $2.0 billion of our common
stock through June 2012.
|
PERFORMANCE
GRAPH
The following graph compares the cumulative five-year
total return provided shareholders on H&R Block,
Inc.s common stock relative to the cumulative total
returns of the S&P 500 index and the S&P Diversified
Commercial & Professional Services index. An
investment of $100, with reinvestment of all dividends, is
assumed to have been made in our common stock and in each of the
indexes on April 30, 2004, and its relative performance is
tracked through April 30, 2009.
|
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ITEM 6. |
SELECTED
FINANCIAL DATA
|
We derived the selected consolidated financial data presented
below as of and for each of the five years in the period ended
April 30, 2009, from our audited consolidated financial
statements. At April 30, 2009, HRBFA and its direct
corporate parent are presented as discontinued operations in the
consolidated financial statements. All periods presented have
been reclassified to reflect our discontinued operations. The
data set forth below should be read in conjunction with
Item 7 and our consolidated financial statements in
Item 8.
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(in 000s, except per
share amounts)
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April 30,
|
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2009
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2008
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2007
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2006
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2005
|
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Revenues
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$
|
4,083,577
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|
|
$
|
4,086,630
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|
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$
|
3,710,362
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|
|
$
|
3,286,798
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|
|
$
|
2,907,125
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|
|
|
Net income before discontinued operations and
change in accounting principle
|
|
|
513,055
|
|
|
|
445,947
|
|
|
|
369,460
|
|
|
|
310,811
|
|
|
|
358,327
|
|
|
|
Net income (loss)
|
|
|
485,673
|
|
|
|
(308,647
|
)
|
|
|
(433,653
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)
|
|
|
490,408
|
|
|
|
623,910
|
|
|
|
Basic earnings (loss) per share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Net income before discontinued operations and change in
accounting principle
|
|
$
|
1.54
|
|
|
$
|
1.37
|
|
|
$
|
1.14
|
|
|
$
|
0.95
|
|
|
$
|
1.08
|
|
|
|
Net income (loss)
|
|
|
1.46
|
|
|
|
(0.95
|
)
|
|
|
(1.34
|
)
|
|
|
1.49
|
|
|
|
1.88
|
|
|
|
Diluted earnings (loss) per share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before discontinued operations and change in
accounting principle
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.13
|
|
|
$
|
0.93
|
|
|
$
|
1.06
|
|
|
|
Net income (loss)
|
|
|
1.45
|
|
|
|
(0.94
|
)
|
|
|
(1.33
|
)
|
|
|
1.47
|
|
|
|
1.85
|
|
|
|
Total assets
|
|
$
|
5,359,722
|
|
|
$
|
5,623,425
|
|
|
$
|
7,544,050
|
|
|
$
|
5,989,135
|
|
|
$
|
5,538,056
|
|
|
|
Long-term debt
|
|
|
1,032,122
|
|
|
|
1,031,784
|
|
|
|
537,134
|
|
|
|
417,262
|
|
|
|
922,933
|
|
|
|
Dividends per share
|
|
$
|
0.59
|
|
|
$
|
0.56
|
|
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
|
16 H&R
BLOCK 2009 Form 10K
|
|
ITEM 7. |
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Our subsidiaries provide tax preparation, retail banking and
various business advisory and consulting services. We are the
only major company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
OVERVIEW
A summary of our fiscal year 2009 results is as follows:
|
|
|
|
§
|
Revenues for the fiscal year were $4.1 billion, essentially
flat compared with prior year results.
|
|
§
|
Diluted earnings per share of our continuing operations
increased 12.5% from the prior year to $1.53, primarily due to
cost containment measures implemented across all our segments.
|
|
§
|
Tax returns prepared in the U.S. declined 3.2% from the
prior year due to a decline in overall IRS filings and a weak
economy, which we believe resulted in clients seeking lower-cost
alternatives.
|
|
§
|
Increases in net average fee per tax return prepared of 7.2%
resulted primarily from higher return-complexity.
|
|
§
|
Tax Services segment revenues increased 1.5% over the prior
year. Segment pretax income increased $108.0 million, or
13.7%, due primarily to cost containment measures resulting in a
year-over-year increase to pretax margin of 320 basis
points to 29.5%. Revenues and margins also benefitted from the
November 2008 acquisition of our last major franchise operator.
|
|
§
|
Business Services pretax income increased 8.2% over the prior
year, as lower than expected revenues were offset by cost
containment measures.
|
|
§
|
Consumer Financial Services reported a pretax loss of
$14.5 million compared to income of $11.5 million in
the prior year, due primarily to increases in loan loss
provisions.
|
|
§
|
Our brokerage advisor business previously conducted through
HRBFA was sold to Ameriprise effective November 1, 2008 and
results for that business have been reported as discontinued
operations for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Results of Operations Data
|
|
(in 000s, except per
share amounts)
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
3,033,123
|
|
|
$
|
2,988,617
|
|
|
$
|
2,685,858
|
|
|
|
Business Services
|
|
|
897,809
|
|
|
|
941,686
|
|
|
|
932,361
|
|
|
|
Consumer Financial Services
|
|
|
141,801
|
|
|
|
142,706
|
|
|
|
77,178
|
|
|
|
Corporate and eliminations
|
|
|
10,844
|
|
|
|
13,621
|
|
|
|
14,965
|
|
|
|
|
|
|
|
|
$
|
4,083,577
|
|
|
$
|
4,086,630
|
|
|
$
|
3,710,362
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
|
Tax Services
|
|
$
|
893,805
|
|
|
$
|
785,839
|
|
|
$
|
705,171
|
|
|
|
Business Services
|
|
|
96,097
|
|
|
|
88,797
|
|
|
|
57,661
|
|
|
|
Consumer Financial Services
|
|
|
(14,508
|
)
|
|
|
11,484
|
|
|
|
23,086
|
|
|
|
Corporate and eliminations
|
|
|
(136,024
|
)
|
|
|
(151,049
|
)
|
|
|
(158,657
|
)
|
|
|
|
|
|
|
|
|
839,370
|
|
|
|
735,071
|
|
|
|
627,261
|
|
|
|
Income taxes
|
|
|
326,315
|
|
|
|
289,124
|
|
|
|
257,801
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
513,055
|
|
|
|
445,947
|
|
|
|
369,460
|
|
|
|
Net loss of discontinued operations
|
|
|
(27,382
|
)
|
|
|
(754,594
|
)
|
|
|
(803,113
|
)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
485,673
|
|
|
$
|
(308,647
|
)
|
|
$
|
(433,653
|
)
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.54
|
|
|
$
|
1.37
|
|
|
$
|
1.14
|
|
|
|
Net loss of discontinued operations
|
|
|
(0.08
|
)
|
|
|
(2.32
|
)
|
|
|
(2.48
|
)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.46
|
|
|
$
|
(0.95
|
)
|
|
$
|
(1.34
|
)
|
|
|
|
|
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.13
|
|
|
|
Net loss of discontinued operations
|
|
|
(0.08
|
)
|
|
|
(2.30
|
)
|
|
|
(2.46
|
)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.45
|
|
|
$
|
(0.94
|
)
|
|
$
|
(1.33
|
)
|
|
|
|
|
|
H&R
BLOCK 2009
Form 10K 17
RESULTS OF
OPERATIONS
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses retail, online and software. This segment
includes our tax operations in the U.S., Canada and Australia.
The following discussion excludes the results of our former tax
business in the United Kingdom, which is reported in
discontinued operations for fiscal year 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Services Operating Statistics
|
|
|
|
|
|
|
|
(in 000s, except
average fee)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
TAX RETURNS PREPARED
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations
|
|
|
10,231
|
|
|
|
10,530
|
|
|
|
10,336
|
|
Franchise operations
|
|
|
4,936
|
|
|
|
5,577
|
|
|
|
5,460
|
|
|
|
|
Total retail operations
|
|
|
15,167
|
|
|
|
16,107
|
|
|
|
15,796
|
|
|
|
|
Software
|
|
|
2,418
|
|
|
|
2,378
|
|
|
|
2,708
|
|
Online
|
|
|
2,775
|
|
|
|
1,911
|
|
|
|
1,723
|
|
Free File Alliance
|
|
|
788
|
|
|
|
1,453
|
|
|
|
1,224
|
|
|
|
|
Total digital tax solutions
|
|
|
5,981
|
|
|
|
5,742
|
|
|
|
5,655
|
|
|
|
|
Total U.S operations
|
|
|
21,148
|
|
|
|
21,849
|
|
|
|
21,451
|
|
International operations
|
|
|
2,864
|
|
|
|
2,725
|
|
|
|
2,569
|
|
|
|
|
|
|
|
24,012
|
|
|
|
24,574
|
|
|
|
24,020
|
|
|
|
|
NET AVERAGE FEE PER U.S. TAX RETURN PREPARED
(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations
|
|
$
|
196.16
|
|
|
$
|
183.68
|
|
|
$
|
172.45
|
|
Franchise operations
|
|
|
169.04
|
|
|
|
157.72
|
|
|
|
151.06
|
|
|
|
|
|
|
$
|
187.36
|
|
|
$
|
174.70
|
|
|
$
|
165.06
|
|
|
|
|
LOAN PRODUCTS :
|
|
|
|
|
|
|
|
|
|
|
|
|
RALs(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations
|
|
|
1,904
|
|
|
|
2,446
|
|
|
|
2,402
|
|
Franchise operations
|
|
|
1,042
|
|
|
|
1,460
|
|
|
|
1,450
|
|
|
|
|
|
|
|
2,946
|
|
|
|
3,906
|
|
|
|
3,852
|
|
|
|
|
Emerald Advance lines of credit
|
|
|
1,047
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fiscal year 2009 tax
returns prepared in company-owned offices include approximately
470,000 returns prepared in offices of our last major franchise
operator, which we acquired in November 2008. Tax returns
prepared in the same acquired offices are reported in franchise
operations for fiscal years 2008 and 2007. Clients who were
prompted to file a tax return to receive a rebate under the
Economic Stimulus Act of 2008 have been excluded from all
periods.
|
(2)
|
Calculated as net
tax preparation fees divided by retail tax returns prepared.
|
(3)
|
Data is for tax
season (January 1 April 30) only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Services Financial Results
|
|
|
(dollars in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax preparation fees
|
|
$
|
2,155,217
|
|
|
$
|
2,096,236
|
|
|
$
|
1,896,269
|
|
Other services
|
|
|
367,153
|
|
|
|
363,579
|
|
|
|
301,411
|
|
|
|
|
|
|
|
2,522,370
|
|
|
|
2,459,815
|
|
|
|
2,197,680
|
|
Royalties
|
|
|
255,536
|
|
|
|
237,986
|
|
|
|
220,136
|
|
Loan participation fees and related revenue
|
|
|
142,740
|
|
|
|
190,201
|
|
|
|
210,040
|
|
Other
|
|
|
112,477
|
|
|
|
100,615
|
|
|
|
58,002
|
|
|
|
|
Total revenues
|
|
|
3,033,123
|
|
|
|
2,988,617
|
|
|
|
2,685,858
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
870,044
|
|
|
|
889,923
|
|
|
|
826,064
|
|
Occupancy
|
|
|
377,846
|
|
|
|
376,350
|
|
|
|
346,937
|
|
Supplies
|
|
|
47,852
|
|
|
|
56,731
|
|
|
|
58,013
|
|
Bad debt
|
|
|
43,327
|
|
|
|
42,248
|
|
|
|
25,228
|
|
Depreciation and amortization
|
|
|
37,521
|
|
|
|
36,378
|
|
|
|
42,043
|
|
Allocated shared services and other
|
|
|
209,473
|
|
|
|
203,695
|
|
|
|
189,595
|
|
|
|
|
|
|
|
1,586,063
|
|
|
|
1,605,325
|
|
|
|
1,487,880
|
|
Cost of other revenues, selling, general and administrative
|
|
|
553,255
|
|
|
|
597,453
|
|
|
|
492,807
|
|
|
|
|
Total expenses
|
|
|
2,139,318
|
|
|
|
2,202,778
|
|
|
|
1,980,687
|
|
|
|
|
Pretax income
|
|
$
|
893,805
|
|
|
$
|
785,839
|
|
|
$
|
705,171
|
|
|
|
|
Pretax margin
|
|
|
29.5%
|
|
|
|
26.3%
|
|
|
|
26.3%
|
|
18 H&R
BLOCK 2009 Form 10K
FISCAL 2009
COMPARED TO FISCAL 2008 Tax
Services revenues increased $44.5 million, or 1.5%,
compared to the prior year.
Tax preparation fees from our retail offices increased
$59.0 million, or 2.8%, for fiscal year 2009. This increase
is primarily due to an increase of 6.8% in the net average fee
per U.S. tax return prepared in company-owned offices,
offset by a 2.8% decrease in the number of U.S. tax returns
prepared in those offices. Tax return volume was positively
affected by the November 2008 acquisition of our last major
independent franchise operator, which resulted in an increase of
470,000 tax returns prepared in company-owned offices. See
Item 8, note 2 to the consolidated financial
statements for additional information on this acquisition.
Excluding operating results attributable to the acquired
franchise operator, tax returns prepared in company-owned
offices decreased 7.3% from the prior year and tax preparation
fees decreased $32.9 million.
Increases in our net average fee are due primarily to increased
tax return complexity. In addition, planned pricing increases of
approximately 1% and lower discounts contributed to an increase
in net average fee. We believe that declines during the year in
tax return volume were attributable to a decline of
approximately 6% in IRS tax filings overall, and difficult
economic conditions which resulted in clients seeking lower-cost
tax preparation alternatives.
Tax returns prepared in our international operations grew 5.1%,
and the related tax preparation revenues increased 8.9% in local
currencies. However, unfavorable exchange rates caused these
revenues in U.S. dollars to decline $9.5 million, or
5.6%, from the prior year.
Other service revenue increased $3.6 million, or 1.0%,
primarily due to $10.7 million in additional license fees
earned from bank products, mainly RACs, coupled with additional
revenues from online tax preparation. We also earned an
incremental $6.6 million in connection with an agreement
with HRB Bank for the H&R Block Emerald Prepaid
MasterCard®
program, under which, this segment shares in the revenues and
expenses associated with the program. These increases were
partially offset by a $10.6 million decline in
e-filing
revenues, as a result of the elimination of separate
e-filing
fees related to our
TaxCut®
software product.
Royalty revenue increased $17.6 million, or 7.4%, primarily
due to a 7.2% increase in the net average fee and an increase in
royalty rates at sub-franchises of the acquired franchise
operator.
Loan participation fees and related revenues decreased
$47.5 million, or 25.0%, from the prior year. This decrease
is primarily due to a 24.6% decline in RAL volume, mainly as a
result of many clients choosing lower cost alternatives such as
RACs rather than a loan. In addition, stricter credit criteria
were required by our third-party loan originator.
Other revenues increased $11.9 million, or 11.8%, primarily
due to $22.7 million in incremental fees earned in
connection with the Emerald Advance loan program, also under a
revenue and expense sharing agreement with HRB Bank. This
increase was partially offset by a decline in software revenues.
Total expenses decreased $63.5 million, or 2.9%, compared
with the prior year, due primarily to lower tax return volumes,
lower bad debt on loan products and planned cost reduction
initiatives. Cost of services decreased $19.3 million, or
1.2%, from the prior year almost exclusively as a result of a
decrease in commission-based wages resulting from a
corresponding decrease in tax returns prepared.
Cost of other revenues, selling, general and administrative
expenses decreased $44.2 million, or 7.4%. This decrease
was due, in part, to a $17.1 million decline in bad debt
expense due to lower RAL volumes and the impact of loss
provisions in the prior year which did not repeat in fiscal year
2009, partially offset by an increase in Emerald Advance loan
volumes. We also saw a decline of $32.4 million in
allocated corporate and support department costs due to cost
reduction efforts, offset by a planned increase of
$43.0 million in marketing costs. During fiscal year 2009
we sold certain company-owned offices to franchisees,
recognizing a net gain of $14.9 million, which is included
above as a reduction to cost of other revenues, selling, general
and administrative expenses.
Pretax income for fiscal year 2009 increased
$108.0 million, or 13.7%, from 2008. As a result of cost
reduction initiatives and the acquisition of our last major
franchise operator, pretax margin for the segment increased from
26.3% in fiscal year 2008, to 29.5% in fiscal year 2009, in
excess of our stated minimum goal to achieve a 200 basis
point margin improvement.
FISCAL 2008
COMPARED TO FISCAL 2007 Tax
Services revenues increased $302.8 million, or 11.3%,
compared to fiscal year 2007.
Tax preparation fees from our retail offices increased
$200.0 million, or 10.5%, for fiscal year 2008. This
increase was primarily due to an increase of 6.5% in the net
average fee per U.S. tax return prepared in company-owned
offices, and a 1.9% increase in the number of U.S. tax
returns prepared in those offices. Our international operations
contributed $33.2 million to the increase, resulting from a
6.1% increase in tax returns prepared.
Other service revenue increased $62.2 million, or 20.6%,
primarily due to $23.9 million in additional license fees
earned from bank products and $16.2 million in additional
revenues from our online tax preparation and
e-filing
H&R
BLOCK 2009
Form 10K 19
services. This segment also earned
$15.1 million in additional customer fees based on an
agreement with HRB Bank for the H&R Block Emerald Prepaid
MasterCard®
program.
Royalty revenue increased $17.9 million, or 8.1%, due to a
2.1% increase in tax returns prepared in franchise offices and a
4.4% increase in the net average fee.
Loan participation fees and related revenues decreased
$19.8 million, or 9.4%, from fiscal year 2007. This
decrease was primarily due to participation fees earned on
Instant Money Advance Loans (IMALs) in fiscal year 2007. IMALs
were not offered during fiscal year 2008. This decrease was
offset by an increase in other revenues related to Emerald
Advance lines of credit.
Other revenues increased $42.6 million, or 73.5%, primarily
due to $24.1 million in fees earned in connection with the
Emerald Advance loan program, also under a revenue and expense
sharing agreement with HRB Bank. Additionally,
$16.2 million of the increase was due to sales of
commercial tax preparation software,
TaxWorks®,
which was acquired in February 2007.
Total expenses increased $222.1 million, or 11.2%, compared
to fiscal year 2007. Cost of services increased
$117.4 million, or 7.9%, from fiscal year 2007.
Compensation and benefits increased $63.9 million, or 7.7%,
primarily as a result of a 6.5% increase in commission-based
wages resulting from a corresponding increase in tax returns
prepared and net average charge. Occupancy expenses increased
$29.4 million, or 8.5%, primarily as a result of higher
rent expenses, due to a 2.8% increase in company-owned offices
under lease and a 3.4% increase in the average rent. Bad debt
expense increased $17.0 million due to increased settlement
product withholdings and increased delinquency rates. Other cost
of services increased $14.1 million, or 7.4%, primarily due
to additional support department costs for information
technology and other projects and costs associated with the
H&R Block Emerald Prepaid
MasterCard®
program, which this segment shares with HRB Bank.
Cost of other revenues, selling, general and administrative
expenses increased $104.6 million, or 21.2%. This increase
was primarily due to $58.1 million of incremental bad debt
expense related to RALs and our new Emerald Advance program.
Approximately $14.2 million of the increase in bad debt
expense was due to the elimination of third-party cross-collect
practices, whereby banks no longer collect amounts due from
clients on our behalf, and an additional $12.0 million
resulted from changes in IRS taxpayer fraud detection practices.
The remaining increase was primarily due to an incremental
$31.5 million in bad debt expense related to the Emerald
Advance loan program, which replaced the IMAL. This increase was
primarily due to the participation rate on IMALs, which was 26%,
while Emerald Advances are funded by HRB Bank with nearly 100%
participation by this segment in loans outstanding at
April 30, 2008. We also saw increases of
$23.3 million, $10.6 million and $9.8 million in
corporate wages, amortization of intangibles and legal expenses,
respectively.
Pretax income for fiscal year 2008 increased $80.7 million,
or 11.4%, from 2007.
20 H&R
BLOCK 2009 Form 10K
BUSINESS
SERVICES
This segment offers accounting, tax and business consulting
services, wealth management and capital market services to
middle-market companies. The following discussion excludes the
results of three businesses reported in discontinued operations
in fiscal years 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Services Operating Statistics
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
ACCOUNTING, TAX AND BUSINESS CONSULTING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable hours (000s)
|
|
|
4,724
|
|
|
|
4,971
|
|
|
|
5,075
|
|
Chargeable hours per person
|
|
|
1,406
|
|
|
|
1,423
|
|
|
|
1,373
|
|
Net billed rate per hour
|
|
$
|
151
|
|
|
$
|
147
|
|
|
$
|
148
|
|
Average margin per person
|
|
$
|
121,492
|
|
|
$
|
120,638
|
|
|
$
|
118,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Services Operating Results
|
|
|
(dollars in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Tax services
|
|
$
|
458,439
|
|
|
$
|
442,521
|
|
|
$
|
408,857
|
|
Business consulting
|
|
|
249,346
|
|
|
|
237,113
|
|
|
|
205,541
|
|
Accounting services
|
|
|
54,217
|
|
|
|
57,399
|
|
|
|
65,372
|
|
Capital markets
|
|
|
18,220
|
|
|
|
51,144
|
|
|
|
48,886
|
|
Leased employee revenue
|
|
|
55
|
|
|
|
25,100
|
|
|
|
83,244
|
|
Reimbursed expenses
|
|
|
19,863
|
|
|
|
18,654
|
|
|
|
13,436
|
|
Other
|
|
|
97,669
|
|
|
|
109,755
|
|
|
|
107,025
|
|
|
|
|
Total revenues
|
|
|
897,809
|
|
|
|
941,686
|
|
|
|
932,361
|
|
|
|
|
Compensation and benefits
|
|
|
521,513
|
|
|
|
535,920
|
|
|
|
541,861
|
|
Occupancy
|
|
|
79,817
|
|
|
|
74,841
|
|
|
|
68,859
|
|
Other
|
|
|
61,732
|
|
|
|
65,349
|
|
|
|
65,699
|
|
|
|
|
Cost of revenues
|
|
|
663,062
|
|
|
|
676,110
|
|
|
|
676,419
|
|
Amortization of intangible assets
|
|
|
13,018
|
|
|
|
14,439
|
|
|
|
15,521
|
|
Selling, general and administrative
|
|
|
125,632
|
|
|
|
162,340
|
|
|
|
182,760
|
|
|
|
|
Total expenses
|
|
|
801,712
|
|
|
|
852,889
|
|
|
|
874,700
|
|
|
|
|
Pretax income
|
|
$
|
96,097
|
|
|
$
|
88,797
|
|
|
$
|
57,661
|
|
|
|
|
Pretax margin
|
|
|
10.7%
|
|
|
|
9.4%
|
|
|
|
6.2%
|
|
FISCAL 2009
COMPARED TO FISCAL 2008 Business
Services revenues for fiscal year 2009 decreased
$43.9 million, or 4.7%, from the prior year, primarily due
to declines in capital markets, leased employee revenues and
outside contractor services.
Revenues from core tax, consulting and accounting services
increased $25.0 million, or 3.4%, over the prior year. Tax
services revenues increased $15.9 million, or 3.6%, over
the prior year due to increases in net billed rate per hour.
Business consulting revenues increased $12.2 million, or
5.2%, over the prior year primarily due to a large one-time
financial institutions engagement.
Weak economic conditions in the current year severely reduced
investment and transaction activity. As a result, capital
markets revenues decreased $32.9 million, or 64.4%, from
the prior year primarily due to a 57.4% decline in the number of
transactions closed.
Leased employee revenue decreased due to a change in
organizational structure between the businesses we acquired from
American Express Tax and Business Services, Inc. (AmexTBS) and
the Attest Firms that, while not affiliates of our company, also
serve our clients. Employees we previously leased to the Attest
Firms were transferred to the separate attest practices over the
last two fiscal years. As a result, we no longer record the
revenues and expenses associated with leasing these employees,
which resulted in a reduction of $25.0 million to current
year revenues, and a similar reduction in compensation and
benefits.
Other revenue declined $12.1 million, or 11.0%, primarily
due to a decrease in outside contractor services provided to our
clients.
Total expenses decreased $51.2 million, or 6.0%, compared
to the prior year. Compensation and benefits decreased
$14.4 million, primarily due to the change in
organizational structure with AmexTBS and fewer capital markets
commissions resulting from the decline in transactions, as
discussed above. These decreases were partially offset by
severance costs incurred in the current year.
Selling, general and administrative expenses decreased
$36.7 million, or 22.6%, primarily due to declines in
external consulting fees, allocated corporate and support
department costs and travel and entertainment expenses.
Pretax income for the year ended April 30, 2009 of
$96.1 million compares to $88.8 million in the prior
year. Pretax margin for the segment increased from 9.4% in
fiscal year 2008, to 10.7% in fiscal year 2009, below our stated
H&R
BLOCK 2009
Form 10K 21
goal to achieve a 12.0% pretax
margin primarily due to poor results in our capital markets
business and lower than expected revenue growth in our core
businesses.
FISCAL 2008
COMPARED TO FISCAL 2007 Business
Services revenues for fiscal year 2008 increased
$9.3 million, or 1.0%, over fiscal year 2007.
Tax services revenues increased $33.7 million, or 8.2% and
business consulting revenues increased $31.6 million, or
15.4%, over fiscal year 2007. These increases resulted primarily
from both an increase in the number of client service
professionals as well as an improvement in productivity per
professional.
Capital markets revenues increased $2.3 million, primarily
due to a $12.6 million increase in underwriting revenues
due to a 37.4% increase in revenue per transaction. Valuation
and seminar revenues declined $10.4 million due to a 70.3%
decline in the number of business valuation projects as a result
of the wind-down of this service line.
Leased employee revenue decreased due to the change in
organizational structure with AmexTBS as discussed above, which
resulted in a reduction of $58.1 million to fiscal year
2008 revenues, and a similar reduction in compensation and
benefits.
Total expenses decreased $21.8 million, or 2.5%, for fiscal
year 2008 compared to 2007. Compensation and benefits decreased
due to the change in organizational structure with AmexTBS as
discussed above, which was almost entirely offset by additional
compensation resulting from increases in the number of personnel
and the average wage per employee.
Selling, general and administrative expenses decreased
$20.4 million, or 11.2%, primarily due to decreases in
external consulting and legal fees. During fiscal year 2007,
additional consulting fees were incurred related to our
marketing initiatives, and additional legal expenses were
incurred related to international acquisitions that were
ultimately not completed.
Pretax income for the year ended April 30, 2008 of
$88.8 million compares to $57.7 million in fiscal year
2007.
CONSUMER
FINANCIAL SERVICES
This segment is engaged in providing retail banking offerings
primarily to Tax Services clients through HRB Bank. HRB Bank
offers traditional banking services including prepaid debit card
accounts, Emerald Advance lines of credit, checking and savings
accounts, individual retirement accounts and certificates of
deposit. This segment previously included HRBFA, which has been
presented as a discontinued operation in the accompanying
consolidated financial statements.
22 H&R
BLOCK 2009 Form 10K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Financial Services Operating
Statistics
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net interest margin
(1)
|
|
|
9.06%
|
|
|
|
5.54%
|
|
|
|
2.77%
|
|
Pretax return on average assets
(2)
|
|
|
(1.03%
|
)
|
|
|
0.80%
|
|
|
|
2.60%
|
|
Total assets (in 000s)
|
|
$
|
1,117,000
|
|
|
$
|
1,078,188
|
|
|
$
|
1,501,390
|
|
Mortgage loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan loss reserve as a % of mortgage loans
|
|
|
10.23%
|
|
|
|
4.49%
|
|
|
|
0.25%
|
|
Delinquency rate (30+ days)
|
|
|
20.23%
|
|
|
|
11.71%
|
|
|
|
3.86%
|
|
|
|
|
|
(1)
|
Defined as net
interest income divided by average earning assets. See
Reconciliation of Non-GAAP Financial
Information at the end of Item 7.
|
(2)
|
Defined as pretax
income divided by average assets. See Reconciliation of
Non-GAAP Financial Information at the end of
Item 7.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Financial Services Operating Results
|
|
|
(in 000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
$
|
46,396
|
|
|
$
|
74,895
|
|
|
$
|
53,396
|
|
|
|
|
|
Emerald Advance lines of credit
|
|
|
44,171
|
|
|
|
21,224
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,845
|
|
|
|
7,151
|
|
|
|
3,531
|
|
|
|
|
|
|
|
|
|
|
|
92,412
|
|
|
|
103,270
|
|
|
|
56,927
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
14,069
|
|
|
|
42,878
|
|
|
|
32,128
|
|
|
|
|
|
FHLB advances
|
|
|
5,113
|
|
|
|
6,008
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
19,182
|
|
|
|
48,886
|
|
|
|
32,964
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
73,230
|
|
|
|
54,384
|
|
|
|
23,963
|
|
|
|
|
|
Provision for loan losses
|
|
|
(63,897)
|
|
|
|
(42,004)
|
|
|
|
(3,622)
|
|
|
|
|
|
Other
|
|
|
49,389
|
|
|
|
39,436
|
|
|
|
20,251
|
|
|
|
|
|
|
|
|
Total revenues
(1)
|
|
|
58,722
|
|
|
|
51,816
|
|
|
|
40,592
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
73,230
|
|
|
|
40,332
|
|
|
|
17,506
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
(14,508)
|
|
|
$
|
11,484
|
|
|
$
|
23,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Total revenues, less
interest expense and provision for loan losses on mortgage loans
held for investment.
|
FISCAL 2009
COMPARED TO FISCAL 2008 Consumer
Financial Services revenues, net of interest expense and
provision for loan losses, for fiscal year 2009 increased
$6.9 million, or 13.3% over the prior year.
Net interest income increased $18.8 million, or 34.7%, over
the prior year. Interest income earned from our Emerald Advance
loan program increased $22.9 million as a result of higher
volumes. Interest expense on deposits declined
$28.8 million due to lower interest rates and lower average
balances. Interest income on mortgage loans held for investment
declined $28.5 million due to lower balances and an
increase in non-accrual loans from $110.8 million at
April 30, 2008 to $222.4 million at April 30,
2009. The following table summarizes the key drivers of net
interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
000s)
|
|
|
|
|
|
Average Balance
|
|
|
Average Rate Earned
(Paid)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
$
|
839,253
|
|
|
$
|
1,157,360
|
|
|
|
5.14%
|
|
|
|
6.40%
|
|
|
|
|
|
Emerald Advance lines of credit
|
|
|
133,252
|
|
|
|
68,932
|
|
|
|
35.31%
|
|
|
|
32.31%
|
|
|
|
|
|
Investments
|
|
|
354,102
|
|
|
|
196,262
|
|
|
|
0.50%
|
|
|
|
3.64%
|
|
|
|
|
|
Deposits, interest-bearing
|
|
|
863,072
|
|
|
|
904,836
|
|
|
|
(1.63)%
|
|
|
|
(4.74%)
|
|
|
|
|
|
|
H&R
BLOCK 2009
Form 10K 23
Our non-performing assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
60 89 days
|
|
$
|
21,415
|
|
|
$
|
18,182
|
|
|
|
|
90+ days, non-accrual
|
|
|
121,685
|
|
|
|
73,600
|
|
|
|
|
TDR loans, current
|
|
|
60,044
|
|
|
|
|
|
|
|
|
TDR loans, non-accrual
|
|
|
100,697
|
|
|
|
37,159
|
|
|
|
|
|
|
|
|
|
|
303,841
|
|
|
|
128,941
|
|
|
|
|
Real estate owned
(1)
|
|
|
44,533
|
|
|
|
350
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
348,374
|
|
|
$
|
129,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes loans
classified as in-substance foreclosures of $27.4 million at
April 30, 2009.
|
Details of our mortgage loans held for investment and the
related allowance at April 30, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
000s)
|
|
|
|
Outstanding
|
|
Loan Loss
|
|
% 30-Days
|
|
|
|
|
|
|
Principal Balance
|
|
Allowance
|
|
Past Due
|
|
Average FICO
|
|
|
|
|
As of April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from SCC
|
|
$
|
531,233
|
|
$
|
78,067
|
|
|
28.74%
|
|
|
639
|
|
|
|
All other
|
|
|
290,604
|
|
|
6,006
|
|
|
4.44%
|
|
|
715
|
|
|
|
|
|
|
|
|
$
|
821,837
|
|
$
|
84,073
|
|
|
20.23%
|
|
|
666
|
|
|
|
|
|
|
As of April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from SCC
|
|
$
|
683,889
|
|
$
|
43,769
|
|
|
17.53%
|
|
|
664
|
|
|
|
All other
|
|
|
320,751
|
|
|
1,632
|
|
|
2.07%
|
|
|
721
|
|
|
|
|
|
|
|
|
$
|
1,004,640
|
|
$
|
45,401
|
|
|
11.71%
|
|
|
682
|
|
|
|
|
|
|
|
Mortgage loans held for investment include loans originated by
our affiliate, SCC, and purchased by HRB Bank totaling
$531.2 million, or approximately 65% of the total loan
portfolio at April 30, 2009. Loans originated by and
purchased from SCC have characteristics which are representative
of Alt-A loans loans to customers who have credit
ratings above
sub-prime,
but may not conform to government-sponsored standards. As such,
we have experienced higher rates of delinquency and have greater
exposure to loss with respect to this segment of our loan
portfolio. Cumulative losses on our original loan portfolio
purchased from SCC and retained for investment, including losses
on loans now classified as other real estate, totaled
approximately 14% at April 30, 2009. Our remaining loan
portfolio totaled $290.6 million and is characteristic of a
prime loan portfolio, and we believe subject to a lower loss
exposure.
We recorded a provision for loan losses on our mortgage loans
held for investment of $63.9 million during the current
year, compared to $42.0 million in the prior year. Our loan
loss provision increased primarily as a result of continued
declines in residential home prices, particularly in certain
states where we have a higher concentration of loans. In
addition, loan loss reserves increased due to higher projected
delinquencies and higher reserves on modified loans. Our
allowance for loan losses as a percent of mortgage loans was
10.23%, or $84.1 million, at April 30, 2009, compared
to 4.49%, or $45.4 million, at April 30, 2008. This
allowance represents our best estimate of losses inherent in the
loan portfolio as of the balance sheet dates.
Residential real estate markets are experiencing significant
declines in property values and mortgage default rates are
increasing. If adverse market trends continue, including trends
within our portfolio specifically, we may be required to record
additional loan loss provisions, and those losses may be
significant.
Other revenue increased $10.0 million, or 25.2%, primarily
due to incremental fees earned related to our H&R Block
Prepaid Emerald
MasterCard®
program.
Non-interest expenses increased $32.9 million, or 81.6%,
from the prior year, primarily related higher expenses from the
H&R Block Prepaid Emerald
MasterCard®
and Emerald Advance line of credit programs, reflecting higher
volumes. The revenues and expenses from these programs are
shared with the Tax Services segment.
The pretax loss for fiscal year 2009 was $14.5 million
compared to prior year income of $11.5 million, primarily
due to a $21.9 million increase in provision for loan
losses.
FISCAL 2008
COMPARED TO FISCAL 2007 Consumer Financial
Services revenues, net of interest expense and provision
for loan loss reserves, for fiscal year 2008 increased
$11.2 million, or 27.7%, over fiscal year 2007.
24 H&R
BLOCK 2009 Form 10K
Net interest income increased $30.4 million due to interest
income received on our Emerald Advance loan products and an
increase in average mortgage loans held for investment,
partially offset by an increase in average deposits. The
following table summarizes the key drivers of net interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
000s)
|
|
|
|
|
|
Average Balance
|
|
|
Average Rate Earned
(Paid)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
$
|
1,157,360
|
|
|
$
|
746,387
|
|
|
|
6.40%
|
|
|
|
6.80%
|
|
|
|
|
|
Emerald Advance lines of credit
|
|
|
68,932
|
|
|
|
|
|
|
|
32.31%
|
|
|
|
%
|
|
|
|
|
|
Investments
|
|
|
196,262
|
|
|
|
117,350
|
|
|
|
3.64%
|
|
|
|
5.25%
|
|
|
|
|
|
Deposits, interest-bearing
|
|
|
904,836
|
|
|
|
596,104
|
|
|
|
(4.74%)
|
|
|
|
(5.39%)
|
|
|
|
|
|
|
Detail of our mortgage loans held for investment and the related
allowance at April 30, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
000s)
|
|
|
|
Outstanding
|
|
Loan Loss
|
|
% 30-Days
|
|
|
|
|
|
|
Principal Balance
|
|
Allowance
|
|
Past Due
|
|
Average FICO
|
|
|
|
|
As of April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from SCC
|
|
$
|
683,889
|
|
$
|
43,769
|
|
|
17.53%
|
|
|
664
|
|
|
|
All other
|
|
|
320,751
|
|
|
1,632
|
|
|
2.07%
|
|
|
721
|
|
|
|
|
|
|
|
|
$
|
1,004,640
|
|
$
|
45,401
|
|
|
11.71%
|
|
|
682
|
|
|
|
|
|
|
As of April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from SCC
|
|
$
|
1,010,028
|
|
$
|
3,341
|
|
|
4.70%
|
|
|
710
|
|
|
|
All other
|
|
|
340,864
|
|
|
107
|
|
|
0.50%
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,350,892
|
|
$
|
3,448
|
|
|
3.86%
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a provision for loan losses on our mortgage loans
held for investment of $42.0 million during fiscal year
2008, compared to $3.6 million in 2007. Our loan loss
provision increased significantly during 2008 as a result of
declining collateral values due to declining residential home
prices and increasing delinquencies occurring in our portfolio.
Our loan loss reserve as a percent of mortgage loans was 4.49%,
or $45.4 million, at April 30, 2008, compared to
0.25%, or $3.4 million, at April 30, 2007.
Other revenues increased $19.2 million, primarily due to
increases in fees received in connection with the H&R Block
Prepaid Emerald
MasterCard®
program.
Non-interest expenses increased $22.8 million from the
prior year, primarily due to additional expenses associated with
the H&R Block Prepaid Emerald
MasterCard®
program and the Emerald Advance lines of credit.
Pretax income for fiscal year 2008 was $11.5 million
compared to prior year income of $23.1 million.
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
FISCAL 2009
COMPARED TO FISCAL 2008 The pretax loss
recorded in our corporate operations for fiscal year 2009 was
$136.0 million compared to $151.0 million in the prior
year. The decreased loss was primarily due to severance-related
costs of $11.3 million recorded in the prior year, coupled
with benefits in the current year resulting from the cost
reduction program implemented in fiscal year 2008.
Our effective tax rate for continuing operations was 38.9% for
fiscal year 2009 compared to 39.3% in the prior year.
FISCAL 2008
COMPARED TO FISCAL 2007 The pretax loss
recorded in our corporate operations for fiscal year 2008 was
$151.0 million compared to $158.7 million in 2007. The
decreased loss was primarily due to a decline in interest
expense, which resulted from increased allocation of interest
expense to our discontinued mortgage operations.
Our effective tax rate for continuing operations was 39.3% for
fiscal year 2008 compared to 41.1% in 2007. The decrease was
primarily due to decreases in our state effective rates and
releases of valuation allowances.
DISCONTINUED
OPERATIONS
Effective November 1, 2008, we sold HRBFA to Ameriprise.
HRBFA and its direct corporate parent are presented as
discontinued operations in the consolidated financial statements
for all periods presented.
Our discontinued operations also include our former mortgage
loan origination and servicing business, as well as three
smaller lines of business previously reported in our Business
Services segment.
H&R
BLOCK 2009
Form 10K 25
FISCAL 2009
COMPARED TO FISCAL 2008 The pretax loss of
our discontinued operations for fiscal year 2009 was
$47.6 million compared to a loss of $1.2 billion in
the prior year. The loss from discontinued operations for the
prior year period included significant losses from our former
mortgage loan businesses, including losses relating to loan
repurchase obligations of $582.4 million and impairments of
residual interests of $137.8 million. Net of applicable tax
benefits, the loss from discontinued operations for fiscal year
2009 was $27.4 million compared to a loss of
$754.6 million in the prior year.
Our effective tax rate for discontinued operations was 42.5% and
35.3% for the fiscal years 2009 and 2008, respectively. Our
effective tax rate increased primarily due to a tax benefit
recorded in conjunction with the sale of HRBFA.
FISCAL 2008
COMPARED TO FISCAL 2007 The pretax loss
of our discontinued operations for fiscal year 2008 was
$1.2 billion, which was essentially flat compared to fiscal
year 2007. The loss from discontinued operations for both
periods included significant losses from our former mortgage
loans businesses.
Our effective tax rate for discontinued operations was 35.3% and
34.4% for the fiscal years 2008 and 2007, respectively.
CRITICAL
ACCOUNTING POLICIES
We consider the policies discussed below to be critical to
understanding our financial statements, as they require the use
of significant judgment and estimation in order to measure, at a
specific point in time, matters that are inherently uncertain.
Specific risks for these critical accounting policies are
described in the following paragraphs. We have reviewed and
discussed each of these policies with the Audit Committee of our
Board of Directors. For all of these policies, we caution that
future events rarely develop precisely as forecasted and
estimates routinely require adjustment and may require material
adjustment.
ALLOWANCE FOR
LOAN LOSSES The principal amount of
mortgage loans held for investment totaled $821.8 million
at April 30, 2009. We are exposed to the risk that
borrowers may not repay amounts owed to us when they become
contractually due. We record an allowance representing our
estimate of credit losses inherent in the portfolio of loans
held for investment at the balance sheet date. Determination of
our allowance for loan losses is considered a critical
accounting policy because loss provisions can be material to our
operating results, projections of loan delinquencies and related
matters are inherently subjective, and actual losses are
impacted by factors outside of our control including economic
conditions, unemployment rates and residential home prices.
We record a loan loss allowance for loans less than 60 days
past due on a pooled basis. The aggregate principal balance of
these loans totaled $518.0 million at April 30, 2009,
and the portion of our allowance for loan losses allocated to
these loans totaled $18.8 million. In estimating our loan
loss allowance for these loans, we stratify the loan portfolio
based on our view of risk associated with various elements of
the pool and assign estimated loss rates based on those risks.
Loss rates are based primarily on historical experience and our
assessment of economic and market conditions. Loss rates
consider both the rate at which loans will become delinquent
(frequency) and the amount of loss that will ultimately be
realized upon occurrence of a liquidation of collateral
(severity). Frequency rates are based primarily on historical
migration analysis of loans to delinquent status. Severity rates
are based primarily on recent broker quotes or appraisals of
collateral. Because of imprecision and uncertainty inherent in
developing estimates of future credit losses, in particular
during periods of rapidly declining collateral values or
increasing delinquency rates, our estimation process during
fiscal year 2009 included development of ranges of possible
outcomes. Ranges were developed by stressing initial estimates
of both frequency and severity rates. Stressing of frequency and
severity assumptions is intended to model deterioration in
credit quality that is difficult to predict during declining
economic conditions. Future deterioration in credit quality may
exceed our modeled assumptions.
Mortgage loans held for investment include loans originated by
our affiliate, SCC, and purchased by HRB Bank. We have greater
exposure to loss with respect to this segment of our loan
portfolio as a result of historically higher delinquency rates.
Therefore, we assign higher frequency rate assumptions to
SCC-originated loans compared with loans originated by other
third-party banks as we consider estimates of future losses. At
April 30, 2009 our weighted-average frequency assumption
was 10.6% for SCC-originated loans compared to 1.3% for
remaining loans in the portfolio.
Loans 60 days past due are considered impaired and are
reviewed individually. We record loss estimates typically based
on the value of the underlying collateral. Our specific loan
loss allowance for these impaired loans reflected an average
loss severity of approximately 38.5% at April 30, 2009. The
aggregate principal balance of loans 60 days past due or
more totaled $143.1 million at April 30, 2009, and the
portion of our allowance for loan losses allocated to these
loans totaled $55.2 million.
26 H&R
BLOCK 2009 Form 10K
Modified loans that meet the definition of a troubled debt
restructuring (TDR) are also considered impaired and are
reviewed individually. We record impairment equal to the
difference between the principal balance of the loan and the
present value of expected future cash flows discounted at the
loans effective interest rate. However, if we assess that
foreclosure of a modified loan is probable, we record impairment
based on the estimated fair value of the underlying collateral.
The aggregate principal balance of TDR loans totaled
$160.7 million at April 30, 2009, and the portion of
our allowance for loan losses allocated to these loans totaled
$10.1 million.
The loan loss allowance as a percent of mortgage loans held for
investment was 10.23% at April 30, 2009, compared to 4.49%
at April 30, 2008. The loan loss provision increased
significantly during the current year primarily as a result of
declining collateral values due to lower residential home prices
and modeled expectations for future loan delinquencies in the
portfolio. The residential mortgage industry has experienced
significant adverse trends for an extended period. If adverse
trends continue for a sustained period or at rates worse than
modeled by us, we may be required to record additional loan loss
provisions, and those losses may be significant.
Determining the allowance for credit losses for loans held for
investment requires us to make estimates of losses that are
highly uncertain and requires a high degree of judgment. If our
underlying assumptions prove to be inaccurate, the allowance for
loan losses could be insufficient to cover actual losses. Our
mortgage loan portfolio is a static pool, as we are no longer
originating or purchasing new mortgage loans, and we believe
that factor over time will limit variability in our loss
estimates. Our allowance at April 30, 2009 currently
assumes that loans in the principal amount of approximately
$280 million will become delinquent and that we will incur
losses on delinquent loans at an approximate loss severity of
40%. We have estimated that future delinquencies where a loss is
probable as of April 30, 2009, may be as high as
$315 million and that loss-severity rates may be subject to
variability up to 200 basis points. We have estimated the
high end of a range of possible outcomes to be approximately
$20 million greater than presently recorded.
MORTGAGE LOAN
REPURCHASE OBLIGATION SCC is obligated to
repurchase loans sold or securitized in the event of a breach of
representations and warranties it made to purchasers or insurers
of such loans, or otherwise indemnify certain third-parties for
losses incurred by them. SCC records a liability for contingent
losses relating to representation and warranty claims by
estimating loan repurchase volumes and indemnification
obligations for both known claims and projections of expected
future claims. Projections of future claims are based on an
analysis that includes a combination of reviewing historical
repurchase trends, developing loss expectations on loans sold or
securitized, and predicting the level at which previously
originated loans may be subject to valid claims regarding
representation and warranty breaches.
Based on an analysis as of April 30, 2009, SCC estimated
its liability for loan repurchase and indemnification
obligations pertaining to claims of breach of representation and
warranties to be $206.6 million. Actual losses charged
against this reserve during fiscal year 2009 totaled
$44.2 million. To the extent that valid claim volumes in
the future exceed current estimates, or the value of mortgage
loans and residential home prices decline, future losses may be
greater than our current estimates and those differences may be
significant. See Item 8, note 17 to our consolidated
financial statements.
LITIGATION It
is our policy to routinely assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as
ranges of probable losses. A determination of the amount of the
reserves required, if any, for these contingencies is made after
analysis of each known issue and an analysis of historical
experience in accordance with Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies,
and related pronouncements. Therefore, we have recorded reserves
related to certain legal matters for which we believe it is
probable that a loss will be incurred and the range of such loss
can be estimated. With respect to other matters, we have
concluded that a loss is only reasonably possible or remote, or
is not estimable and, therefore, no liability is recorded.
Assessing the likely outcome of pending litigation, including
the amount of potential loss, if any, is highly subjective. Our
judgments regarding likelihood of loss and our estimates of
probable loss amounts may differ from actual results due to
difficulties in predicting the outcome of jury trials,
arbitration hearings, settlement discussions and related
activity, predicting the outcome of class certification actions
and various other uncertainties. Due to the number of claims
which are periodically asserted against us, and the magnitude of
damages sought in those claims, actual losses in the future may
significantly exceed our current estimates.
VALUATION OF
GOODWILL The evaluation of goodwill
for impairment is a critical accounting estimate due both to the
magnitude of our goodwill balances, and the judgment involved in
determining the fair value of our reporting units. Goodwill
balances in our continuing operations totaled
$850.2 million as of April 30, 2009 and
$831.3 million as of April 30, 2008.
We test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently if events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. Our
goodwill impairment analysis is based on a discounted cash flow
approach and market
H&R
BLOCK 2009
Form 10K 27
comparables. This analysis, at the
reporting unit level, requires significant management judgment
with respect to revenue and expense forecasts, anticipated
changes in working capital and the selection and application of
an appropriate discount rate. Changes in projections or
assumptions could materially affect our estimate of reporting
unit fair values. The use of different assumptions would
increase or decrease estimated discounted future operating cash
flows and could affect our conclusions regarding the existence
or amount of potential impairment. Finally, strategic changes in
our outlook regarding reporting units or intangible assets may
alter our valuation approach and could result in changes to our
conclusions regarding impairment.
Estimates of fair value for certain of our reporting units
exceed the corresponding carrying value by a significant margin.
In certain instances, however, the excess of estimated fair
value over carrying value is not significant. Future estimates
of fair value may be adversely impacted by declining economic
conditions. In addition, if future operating results of our
reporting units are below our current modeled expectations, fair
value estimates may decline. Any of these factors could result
in future impairments, and those impairments could be
significant.
In assessing potential goodwill impairment of our RSM reporting
unit, we estimate fair value based on an assumption that the
collaboration between RSM and M&P under their alternative
practice structure arrangement will continue. Were M&P to
exit the alternative practice structure, or the collaboration
between these two businesses otherwise cease, we believe our
fair value estimates could be lower than presently assumed. In
addition, adverse business results for M&P could also
negatively impact our fair value estimates for RSM. Goodwill
balances for RSM totaled $402.6 million at April 30,
2009. Changes in our future assessment of fair value for this
reporting unit could result in an impairment of goodwill and
such impairment could be significant.
We recorded goodwill impairments within our Tax Services segment
of $2.2 million and $5.7 million during fiscal years
2009 and 2008, respectively. There was no goodwill impairment in
our continuing operations during fiscal year 2007, however, we
recorded $154.9 million in goodwill impairments in
discontinued operations related to the sale and wind-down of our
mortgage operations.
INCOME
TAXES We account for income taxes in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(SFAS 109), as further interpreted by FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48).
We calculate our current and deferred tax provision for the
fiscal year based on estimates and assumptions that could differ
from the actual results reflected in income tax returns filed
during the applicable calendar year. Adjustments based on filed
returns are recorded in the appropriate periods when identified.
We file a consolidated federal tax return on a calendar year
basis, generally in the second fiscal quarter of the subsequent
year.
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. We have considered taxable income in carry-back
periods, historical and forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we
operate, and tax planning strategies in determining the need for
a valuation allowance against our deferred tax assets.
Determination of a valuation allowance for deferred tax assets
requires that we make judgments about future matters that are
not certain, including projections of future taxable income and
evaluating potential tax-planning strategies. To the extent that
actual results differ from our current assumptions, the
valuation allowance will increase or decrease. In the event we
were to determine we would not be able to realize all or part of
our deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to earnings in the period
in which we make such determination. Likewise, if we later
determine it is more likely than not that the deferred tax
assets would be realized, we would reverse the applicable
portion of the previously provided valuation allowance.
The income tax laws of jurisdictions in which we operate are
complex and subject to different interpretations by the taxpayer
and applicable government taxing authorities. Income tax returns
filed by us are based on our interpretation of these rules. The
amount of income taxes we pay is subject to ongoing audits by
federal, state and foreign tax authorities, which may result in
proposed assessments, including assessments of interest
and/or
penalties. Our estimate for the potential outcome for any
uncertain tax issue is highly subjective and based on our best
judgments. Actual results may differ from our current judgments
due to a variety of factors, including changes in law,
interpretations of law by taxing authorities that differ from
our assessments, changes in the jurisdictions in which we
operate and results of routine tax examinations. We believe we
have adequately provided for any reasonably foreseeable outcome
related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated
tax liabilities in the period the assessments are made or
resolved, or when statutes of limitation on potential
assessments expire. As a result, our effective tax rate may
fluctuate on a quarterly basis.
REVENUE
RECOGNITION We have many different
revenue sources, each governed by specific revenue recognition
policies. Our revenue recognition policies can be found in
Item 8, note 1 to our consolidated financial
statements.
28 H&R
BLOCK 2009 Form 10K
OTHER SIGNIFICANT
ACCOUNTING POLICIES Other
significant accounting policies, not involving the same level of
judgment or uncertainty as those discussed above are
nevertheless important to an understanding of the financial
statements. These policies may require judgments on complex
matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among
topics currently under reexamination by accounting standard
setters and regulators. Although specific conclusions reached by
these standard setters may cause a material change in our
accounting policies, outcomes cannot be predicted with
confidence. See Item 8, note 1 to our consolidated
financial statements, which discusses accounting policies we
have selected when there are acceptable alternatives and new or
proposed accounting standards that may affect our financial
reporting in the future.
FINANCIAL
CONDITION
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 CLOCs,
we believe, that in the absence of any unexpected developments,
our existing sources of capital at April 30, 2009 are
sufficient to meet our operating needs.
CASH FROM
OPERATING ACTIVITIES Cash provided
by operations totaled $1.0 billion for fiscal year 2009,
compared to cash provided by operations of $258.8 million
in 2008 and cash used in operations of $557.0 million in
2007. Operating cash flows in fiscal year 2009 increased from
fiscal year 2008 primarily due to net income of
$485.7 million in the current year compared to a net loss
of $308.6 million in the prior year.
Restricted
Cash. We hold certain cash balances that
are restricted as to use. Cash and cash equivalents
restricted totaled $51.7 million at April 30, 2009,
and primarily consisted of cash held by our captive insurance
subsidiary that will be used to pay claims.
CASH FROM
INVESTING ACTIVITIES Cash provided
by investing activities totaled $5.6 million for fiscal
year 2009, compared to $1.1 billion in fiscal year 2008 and
$1.2 billion used in fiscal year 2007.
Acquisitions and
Sales. Total cash paid for acquisitions
was $293.8 million, $24.9 million and
$57.6 million during fiscal years 2009, 2008 and 2007,
respectively. On November 3, 2008, we acquired the assets
and franchise rights of our last major independent franchise
operator for an aggregate purchase price of $279.2 million.
See Item 8, note 2 to our consolidated financial
statements.
Total cash received from sales of discontinued operations
totaled $304.0 million and $1.1 billion during fiscal
years 2009 and 2008, respectively.
Mortgage Loans
Held for Investment. We received net
proceeds of $91.3 million and $207.6 million on our
mortgage loans held for investment in fiscal years 2009 and
2008, respectively. We used $954.3 million for originating
and purchasing mortgage loans held for investment in fiscal year
2007.
CASH FROM
FINANCING ACTIVITIES Cash used in
financing activities totaled $40.2 million for fiscal year
2009, compared to $1.6 billion in fiscal year 2008 and cash
provided of $2.0 billion in fiscal year 2007. Changes from
prior year amounts are primarily the result of significant
borrowings in fiscal year 2007, which were then repaid in fiscal
year 2008.
Debt. We
borrow under our CLOCs to support working capital requirements
primarily arising from off-season operating losses in our Tax
Services and Business Services segments, pay dividends,
repurchase treasury shares and acquire businesses. We had no
balance outstanding under our CLOCs at April 30, 2009, 2008
or 2007. See additional discussion below in
Borrowings.
We may from time to time seek to retire or purchase our
outstanding debt through cash purchases
and/or
exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases
or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material.
Issuances of
Common Stock. In October 2008, we sold
8.3 million shares of our common stock, without par value,
at a price of $17.50 per share in a registered direct offering
through subscription agreements with selected institutional
investors. We received net proceeds of $141.4 million,
after deducting placement agent fees and other offering
expenses. The purpose of the equity offering was to ensure we
maintained adequate equity levels, as a condition of our CLOCs,
during our off-season. Proceeds were used for general corporate
purposes.
Proceeds from the issuance of common stock in accordance with
our stock-based compensation plans totaled $71.6 million,
$23.3 million and $25.7 million in fiscal years 2009,
2008 and 2007, respectively.
Dividends. We
have consistently paid quarterly dividends. Dividends paid
totaled $198.7 million, $183.6 million and
$172.0 million in fiscal years 2009, 2008 and 2007,
respectively.
H&R
BLOCK 2009
Form 10K 29
Share
Repurchases. In June 2008, our Board of
Directors rescinded the previous authorizations to repurchase
shares of our common stock and approved an authorization to
purchase up to $2.0 billion of our common stock through
June 2012. During the fourth quarter of fiscal year 2009, we
repurchased 5.6 million shares pursuant to this
authorization at an aggregate price of $98.7 million, or an
average price of $17.53 per share. There was $1.9 billion
remaining under this authorization at April 30, 2009.
Customer
Deposits. Customer deposits provided
$64.4 million in the current year compared to
$345.4 million used in fiscal year 2008 and
$1.1 billion provided in fiscal year 2007. These deposits
are held by HRB Bank, which is included in the Consumer
Financial Services segment.
SEGMENT CASH
FLOWS A condensed consolidating
statement of cash flows by segment for the fiscal year ended
April 30, 2009, follows. Generally, interest is not charged
on intercompany activities between segments. Our consolidated
statements of cash flows are located in Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
Business
|
|
|
Financial
|
|
|
|
|
|
Discontinued
|
|
|
Consolidated
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
Corporate(1)
|
|
|
Operations
|
|
|
H&R Block
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
531,151
|
|
|
$
|
62,213
|
|
|
$
|
62,419
|
|
|
$
|
298,460
|
|
|
$
|
70,196
|
|
|
$
|
1,024,439
|
|
|
|
Investing
|
|
|
(313,981
|
)
|
|
|
(24,691
|
)
|
|
|
104,760
|
|
|
|
(15,594
|
)
|
|
|
255,066
|
|
|
|
5,560
|
|
|
|
Financing
|
|
|
(7,678
|
)
|
|
|
(2,786
|
)
|
|
|
41,037
|
|
|
|
(75,589
|
)
|
|
|
4,783
|
|
|
|
(40,233
|
)
|
|
|
Net intercompany
|
|
|
(199,582
|
)
|
|
|
(44,567
|
)
|
|
|
19,663
|
|
|
|
554,531
|
|
|
|
(330,045
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
Income tax payments,
net of refunds of $158.9 million received during fiscal
year 2009, are included in Corporate operating cash flows.
|
Tax
Services. Tax Services has historically been our
largest provider of annual operating cash flows. The seasonal
nature of Tax Services generally results in a large positive
operating cash flow in the fiscal fourth quarter. Tax Services
generated $531.2 million in operating cash flows primarily
related to net income, as cash is generally collected from
clients at the time services are rendered. Cash used in
investing activities of $314.0 million was primarily for
business acquisitions and capital expenditures.
Our international operations are generally self-funded. However,
H&R Block Canada, Inc. (Block Canada) utilized intercompany
borrowings to fund its CashBack program and working capital
requirements during the last two fiscal years. Cash balances are
held in Canada and Australia independently in local currencies.
Business
Services. Business Services funding
requirements are largely related to receivables for completed
work and work in process and funding relating to
acquired businesses. We have provided funding in the normal
course of business sufficient to cover these working capital
needs. Business Services also has future obligations and
commitments, which are summarized in Contractual
Obligations and Commercial Commitments.
This segment generated $62.2 million in operating cash
flows primarily related to net income. Additionally, Business
Services used $24.7 million in investing activities
primarily related to capital expenditures.
Consumer
Financial Services. In fiscal year 2009,
Consumer Financial Services provided $104.8 million in
investing activities primarily due to principal payments
received on mortgage loans held for investment. Cash provided by
financing activities of $41.0 million is primarily due to
changes in customer deposits net of payments on Federal Home
Loan Bank (FHLB) borrowings.
HRB Banks current liquidity needs are generally met
through deposits from banking clients. HRB Bank has access to
traditional funding sources such as deposits, federal funds
purchased and repurchase agreements. HRB Bank maintains a credit
facility with the FHLB. At April 30, 2009,
$100.0 million was drawn under this facility.
Block Financial LLC (BFC) made additional capital contributions
to HRB Bank of $245.0 million during fiscal year 2009.
These contributions were provided for HRB Bank to meet its
capital requirements due to seasonal fluctuations in the size of
its balance sheet. Also during fiscal year 2009, we submitted an
application to the OTS requesting that HRB Bank be allowed to
pay dividends to BFC in an amount that would not exceed the
capital necessary to continuously maintain HRB Banks
required 12.0% leverage ratio. The OTS approved our application
on January 12, 2009. HRB Bank paid dividends of
$235.0 million to BFC in fiscal year 2009.
See additional discussion of regulatory and capital requirements
of HRB Bank in Regulatory Environment.
We believe the funding sources for Consumer Financial Services
are stable. Liquidity risk within this segment is primarily
limited to maintaining sufficient capital levels at HRB Bank.
Discontinued
Operations. Discontinued operations provided
$255.1 million in cash from investing activities primarily
due to proceeds received from the sale of HRBFA.
30 H&R
BLOCK 2009 Form 10K
BORROWINGS
The following chart provides the debt ratings for BFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook
|
|
|
|
|
|
Moodys
|
|
|
P-2
|
|
|
|
Baa1
|
|
|
|
Stable
|
|
|
|
P-2
|
|
|
|
Baa1
|
|
|
|
Negative
|
|
|
|
S&P
|
|
|
A-2
|
|
|
|
BBB
|
|
|
|
Positive
|
|
|
|
A-3
|
|
|
|
BBB-
|
|
|
|
Negative
|
|
|
|
Fitch
|
|
|
F2
|
|
|
|
BBB
|
|
|
|
Stable
|
|
|
|
F3
|
|
|
|
BBB
|
|
|
|
Negative
|
|
|
|
DBRS
|
|
|
R-2 (high
|
)
|
|
|
BBB (high
|
)
|
|
|
Positive
|
|
|
|
R-2 (high
|
)
|
|
|
BBB (high
|
)
|
|
|
Negative
|
|
|
|
|
At April 30, 2009, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These CLOCs, and any
outstanding borrowings thereunder, have a maturity date of
August 2010, bear interest in a range of LIBOR plus 14 to
45 basis points per annum and an annual facility fee in a
range of 6 to 15 basis points per annum, based on our
credit ratings. These lines are subject to various affirmative
and negative covenants, including (1) a minimum net worth
covenant requiring us to maintain at least $650.0 million
of net worth on the last day of any fiscal quarter,
(2) limits on our indebtedness and (3) a requirement
that we reduce the aggregate outstanding principal amount of
short-term debt, as defined in the agreement, to
$200.0 million or less for a minimum period of thirty
consecutive days during the period from March 1 to June 30 of
each year (the Clean-down requirement). At
April 30, 2009, we were in compliance with these covenants
and had net worth of $1.4 billion. There was no balance
outstanding on this facility at April 30, 2009.
Lehman Brothers Bank, FSB (Lehman) is a participating lender in
our $2.0 billion CLOCs, with a $50.0 million credit
commitment. In September 2008, Lehmans parent company
declared bankruptcy. Since then, Lehman has not honored any
funding requests under these facilities, thereby effectively
reducing our available liquidity under our CLOCs to
$1.95 billion. We do not expect this change to have a
material impact on our liquidity or consolidated financial
statements.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay a
$500.0 million facility, with the remaining proceeds used
for working capital and general corporate purposes. As of
April 30, 2009, we had $250.0 million remaining under
our shelf registration for additional debt issuances.
We entered into a committed line of credit agreement with HSBC
Finance Corporation effective January 14, 2009 for use as a
funding source for the purchase of RAL participations. This line
provided funding totaling $2.5 billion through
March 30, 2009 and $120.0 million thereafter through
June 30, 2009. This line is subject to various covenants
that are similar to our CLOCs and is secured by our RAL
participations. All borrowings on this facility were repaid as
of April 30, 2009 and the facility is now closed.
During fiscal year 2009, borrowing needs in our Canadian
operations were funded by corporate borrowings in the
U.S. To mitigate the foreign currency exchange rate risk,
we used foreign exchange forward contracts. We do not enter into
forward contracts for speculative purposes. In estimating the
fair value of derivative positions, we utilize quoted market
prices, if available, or quotes obtained from external sources.
There were no forward contracts outstanding as of April 30,
2009.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our obligations to make future payments as of
April 30, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
4 - 5 Years
|
|
|
After 5 Years
|
|
|
|
|
|
Long-term debt (including interest)
|
|
$
|
1,286,214
|
|
|
$
|
67,750
|
|
|
$
|
135,500
|
|
|
$
|
674,008
|
|
|
$
|
408,956
|
|
|
|
Customer deposits
|
|
|
854,888
|
|
|
|
442,683
|
|
|
|
17,649
|
|
|
|
8,698
|
|
|
|
385,858
|
|
|
|
FHLB borrowings
|
|
|
100,000
|
|
|
|
25,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition payments
|
|
|
30,658
|
|
|
|
8,263
|
|
|
|
22,258
|
|
|
|
91
|
|
|
|
46
|
|
|
|
Media advertising purchase obligation
|
|
|
45,768
|
|
|
|
11,442
|
|
|
|
22,884
|
|
|
|
11,442
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
12,001
|
|
|
|
519
|
|
|
|
1,091
|
|
|
|
1,411
|
|
|
|
8,980
|
|
|
|
Operating leases
|
|
|
762,298
|
|
|
|
248,712
|
|
|
|
315,263
|
|
|
|
118,859
|
|
|
|
79,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
3,091,827
|
|
|
$
|
804,369
|
|
|
$
|
589,645
|
|
|
$
|
814,509
|
|
|
$
|
883,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of liabilities recorded in connection with
FIN 48 that we expect to pay within twelve months is
$15.1 million at April 30, 2009 and is included in
accounts payable, accrued expenses and other current liabilities
on our consolidated balance sheet. The remaining amount is
included in other noncurrent liabilities on our
H&R
BLOCK 2009
Form 10K 31
consolidated balance sheet. Because
the ultimate amount and timing of any future cash settlements
cannot be predicted with reasonable certainty, the estimated
FIN 48 liability has been excluded from the table above.
See Item 8, note 13 to the consolidated financial
statements for additional information.
A summary of our commitments as of April 30, 2009, which
may or may not require future payments, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
4 - 5 Years
|
|
|
After 5 Years
|
|
|
|
|
|
Franchise Equity Lines of Credit
|
|
$
|
38,055
|
|
|
$
|
20,569
|
|
|
$
|
9,075
|
|
|
$
|
8,411
|
|
|
$
|
|
|
|
|
Commitment to fund M&P
|
|
|
88,581
|
|
|
|
88,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent acquisition payments
|
|
|
24,165
|
|
|
|
5,062
|
|
|
|
18,487
|
|
|
|
227
|
|
|
|
389
|
|
|
|
Other commercial commitments
|
|
|
2,206
|
|
|
|
1,724
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments
|
|
$
|
153,007
|
|
|
$
|
115,936
|
|
|
$
|
28,044
|
|
|
$
|
8,638
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See discussion of contractual obligations and commitments in
Item 8, within the notes to our consolidated financial
statements.
REGULATORY
ENVIRONMENT
HRB Bank is a federal savings bank and H&R Block, Inc. is a
savings and loan holding company. As a result, each is subject
to regulation by the OTS. Federal savings banks are subject to
extensive regulation and examination by the OTS, their primary
federal regulator, as well as the FDIC. In conjunction with
H&R Block, Inc.s application with the OTS for HRB
Bank, H&R Block, Inc. made commitments as part of our
charter approval order (Master Commitment) which included, but
were not limited to: (1) H&R Block, Inc. to maintain a
three percent minimum ratio of adjusted tangible capital to
adjusted total assets, as defined by the OTS; (2) maintain
all HRB Bank capital within HRB Bank in accordance with the
submitted three-year business plan; and (3) follow federal
regulations surrounding intercompany transactions and approvals.
Effective April 30, 2008, the three percent minimum ratio
of adjusted tangible capital to adjusted total assets
requirement was eliminated and a Supervisory Directive relating
to prior non-compliance with this requirement was rescinded.
All savings associations are subject to the capital adequacy
guidelines and the regulatory framework for prompt corrective
action. HRB Bank must meet specific capital guidelines involving
quantitative measures of HRB Banks assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. HRB Banks capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
As of March 31, 2009, our most recent Thrift Financial
Report (TFR) filing with the OTS, HRB bank was a well
capitalized institution under the prompt corrective action
provisions of the FDIC. See Item 8, note 16 to the
consolidated financial statements for additional discussion of
regulatory capital requirements and classifications.
HRB Bank is an indirect wholly-owned subsidiary of H&R
Block, Inc. and its customer deposits are insured by the FDIC.
If an insured institution fails, claims for administrative
expenses of the receiver and for deposits in U.S. branches
(including claims of the FDIC as subrogee of the failed
institution) have priority over the claims of general unsecured
creditors. In addition, the FDIC has authority to require
H&R Block, Inc. to reimburse it for losses it incurs in
connection with the failure of HRB Bank or with the FDICs
provision of assistance to a banking subsidiary that is in
danger of failure.
H&R Block, Inc. is a legal entity separate and distinct
from its subsidiary, HRB Bank. Various federal and state
statutory provisions and regulations limit the amount of
dividends HRB Bank may pay without regulatory approval. The OTS
has authority to prohibit HRB Bank from engaging in unsafe or
unsound practices in conducting their business. The payment of
dividends, depending on the financial condition of the bank,
could be deemed an unsafe or unsound practice. The ability of
HRB Bank to pay dividends in the future is currently, and could
be further, influenced by bank regulatory policies and capital
guidelines.
The U.S., various state, local, provincial and foreign
governments and some self-regulatory organizations have enacted
statutes and ordinances,
and/or
adopted rules and regulations, regulating aspects of our
business. These aspects include, but are not limited to,
commercial income tax return preparers, income tax courses, the
electronic filing of income tax returns, the facilitation of
RALs, loan originations and assistance in loan originations,
mortgage lending, privacy, consumer protection, franchising,
sales methods, banking, accountants and the accounting practice.
We seek to determine the applicability of such statutes,
ordinances, rules and regulations (collectively,
Laws) and comply with those Laws.
From time to time in the ordinary course of business, we receive
inquiries from governmental and self-regulatory agencies
regarding the applicability of Laws to our services and
products. In response to past inquiries, we have agreed to
comply with such Laws, convinced the authorities that such Laws
were not applicable or that
32 H&R
BLOCK 2009 Form 10K
compliance already exists
and/or
modified our activities in the applicable jurisdiction to avoid
the application of all or certain parts of such Laws. We believe
the past resolution of such inquiries and our ongoing compliance
with Laws has not had a material adverse effect on our
consolidated financial statements. We cannot predict what effect
future Laws, changes in interpretations of existing Laws or the
results of future regulator inquiries with respect to the
applicability of Laws may have on our consolidated financial
statements. See additional discussion of legal matters in
Item 3, Legal Proceedings and Item 8,
note 18 to our consolidated financial statements.
FUTURE
LEGISLATION In light of current
conditions in the U.S. and global financial markets and the
U.S. and global economy, regulators have increased their
focus on the regulation of the financial services industry.
Proposals that could substantially intensify the regulation of
the financial services industry are expected to be introduced in
the U.S. Congress, in state legislatures and from
applicable regulatory authorities. These proposals may change
banking statutes and regulation and our operating environment in
substantial and unpredictable ways. If enacted, these proposals
could increase or decrease the cost of doing business, limit or
expand permissible activities or affect the competitive balance
among banks, savings associations, credit unions and other
financial institutions. We cannot predict whether any of these
proposals will be enacted and, if enacted, the effect that it,
or any impending regulations, would have on our business,
results of operations or financial condition.
STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
This section presents information required by the SECs
Industry Guide 3, Statistical Disclosure by Bank Holding
Companies. The tables in this section include HRB Bank
information only.
DISTRIBUTION OF
ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL The
following table presents average balance data and interest
income and expense data for our banking operations, as well as
the related interest yields and rates for fiscal years 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
$
|
839,253
|
|
|
$
|
46,396
|
|
|
|
5.14
|
%
|
|
$
|
1,157,360
|
|
|
$
|
74,895
|
|
|
|
6.40
|
%
|
|
$
|
746,387
|
|
|
$
|
50,767
|
|
|
|
6.80
|
%
|
Federal funds sold
|
|
|
311,138
|
|
|
|
801
|
|
|
|
0.26
|
%
|
|
|
153,332
|
|
|
|
4,981
|
|
|
|
3.25
|
%
|
|
|
91,975
|
|
|
|
4,747
|
|
|
|
5.16
|
%
|
Emerald Advance
(1)
|
|
|
133,252
|
|
|
|
91,019
|
|
|
|
35.31
|
%
|
|
|
68,932
|
|
|
|
45,339
|
|
|
|
32.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Available-for-sale
investment securities
|
|
|
29,500
|
|
|
|
791
|
|
|
|
2.68
|
%
|
|
|
36,055
|
|
|
|
1,847
|
|
|
|
5.12
|
%
|
|
|
24,405
|
|
|
|
1,389
|
|
|
|
5.69
|
%
|
FHLB stock
|
|
|
6,557
|
|
|
|
127
|
|
|
|
1.93
|
%
|
|
|
6,876
|
|
|
|
322
|
|
|
|
4.70
|
%
|
|
|
970
|
|
|
|
24
|
|
|
|
2.47
|
%
|
Cash and due from banks
|
|
|
12,474
|
|
|
|
123
|
|
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,332,174
|
|
|
$
|
139,257
|
|
|
|
10.45
|
%
|
|
|
1,422,555
|
|
|
$
|
127,384
|
|
|
|
8.95
|
%
|
|
|
863,737
|
|
|
$
|
56,927
|
|
|
|
6.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
71,759
|
|
|
|
|
|
|
|
|
|
|
|
20,313
|
|
|
|
|
|
|
|
|
|
|
|
24,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HRB Bank assets
|
|
$
|
1,403,933
|
|
|
|
|
|
|
|
|
|
|
$
|
1,442,868
|
|
|
|
|
|
|
|
|
|
|
$
|
888,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
863,072
|
|
|
$
|
14,069
|
|
|
|
1.63
|
%
|
|
$
|
904,836
|
|
|
$
|
42,878
|
|
|
|
4.74
|
%
|
|
$
|
596,104
|
|
|
$
|
32,128
|
|
|
|
5.39
|
%
|
FHLB borrowing
|
|
|
103,885
|
|
|
|
5,113
|
|
|
|
4.92
|
%
|
|
|
117,743
|
|
|
|
6,008
|
|
|
|
5.10
|
%
|
|
|
16,055
|
|
|
|
836
|
|
|
|
5.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
966,957
|
|
|
$
|
19,182
|
|
|
|
1.98
|
%
|
|
|
1,022,579
|
|
|
$
|
48,886
|
|
|
|
4.78
|
%
|
|
|
612,159
|
|
|
$
|
32,964
|
|
|
|
5.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
230,271
|
|
|
|
|
|
|
|
|
|
|
|
210,767
|
|
|
|
|
|
|
|
|
|
|
|
110,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,197,228
|
|
|
|
|
|
|
|
|
|
|
|
1,233,346
|
|
|
|
|
|
|
|
|
|
|
|
722,769
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
206,705
|
|
|
|
|
|
|
|
|
|
|
|
209,522
|
|
|
|
|
|
|
|
|
|
|
|
165,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,403,933
|
|
|
|
|
|
|
|
|
|
|
$
|
1,442,868
|
|
|
|
|
|
|
|
|
|
|
$
|
888,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest-earning assets
(1)
|
|
|
|
|
|
$
|
120,075
|
|
|
|
9.06
|
%
|
|
|
|
|
|
$
|
78,498
|
|
|
|
5.54
|
%
|
|
|
|
|
|
$
|
23,963
|
|
|
|
2.77
|
%
|
|
|
|
|
(1)
|
Includes all
interest income related to Emerald Advance activities. Amounts
recognized as interest income also include certain fees, which
are amortized into interest income over the life of the loan, of
$44.0 million and $23.1 million for fiscal years 2009
and 2008, respectively.
|
H&R
BLOCK 2009
Form 10K 33
The following table presents the rate/volume variance in
interest income and expense for the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Total Change
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
Total Change
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
in Interest
|
|
|
Due to
|
|
|
Due to
|
|
|
Due to
|
|
|
in Interest
|
|
|
Due to
|
|
|
Due to
|
|
|
Due to
|
|
|
|
|
|
|
Income/Expense
|
|
|
Rate/Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Income/Expense
|
|
|
Rate/Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net(1)
|
|
$
|
17,182
|
|
|
$
|
(11,253
|
)
|
|
$
|
53,654
|
|
|
$
|
(25,219
|
)
|
|
$
|
69,466
|
|
|
$
|
14,490
|
|
|
$
|
23,027
|
|
|
$
|
31,949
|
|
|
|
|
|
Available-for-sale investment securities
|
|
|
(1,056
|
)
|
|
|
160
|
|
|
|
(881
|
)
|
|
|
(335
|
)
|
|
|
458
|
|
|
|
(63
|
)
|
|
|
(133
|
)
|
|
|
654
|
|
|
|
|
|
Federal funds sold
|
|
|
(4,180
|
)
|
|
|
(4,720
|
)
|
|
|
(4,586
|
)
|
|
|
5,126
|
|
|
|
234
|
|
|
|
(1,016
|
)
|
|
|
(1,659
|
)
|
|
|
2,909
|
|
|
|
|
|
FHLB stock
|
|
|
(196
|
)
|
|
|
9
|
|
|
|
(190
|
)
|
|
|
(15
|
)
|
|
|
303
|
|
|
|
153
|
|
|
|
25
|
|
|
|
125
|
|
|
|
|
|
Cash & due from banks
|
|
|
123
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,873
|
|
|
$
|
(15,681
|
)
|
|
$
|
47,997
|
|
|
$
|
(20,443
|
)
|
|
$
|
70,461
|
|
|
$
|
13,564
|
|
|
$
|
21,260
|
|
|
$
|
35,637
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
(28,809
|
)
|
|
$
|
1,298
|
|
|
$
|
(28,128
|
)
|
|
$
|
(1,979
|
)
|
|
$
|
10,750
|
|
|
$
|
(1,880
|
)
|
|
$
|
(3,004
|
)
|
|
$
|
15,634
|
|
|
|
|
|
FHLB borrowings
|
|
|
(895
|
)
|
|
|
25
|
|
|
|
(213
|
)
|
|
|
(707
|
)
|
|
|
5,176
|
|
|
|
(81
|
)
|
|
|
(13
|
)
|
|
|
5,270
|
|
|
|
|
|
|
|
|
|
|
$
|
(29,704
|
)
|
|
$
|
1,323
|
|
|
$
|
(28,341
|
)
|
|
$
|
(2,686
|
)
|
|
$
|
15,926
|
|
|
$
|
(1,961
|
)
|
|
$
|
(3,017
|
)
|
|
$
|
20,904
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-accruing loans
have been excluded from the analysis above.
|
INVESTMENT
PORTFOLIO
The following table presents the cost basis and fair value of
HRB Banks investment portfolio at April 30, 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
27,466
|
|
|
$
|
26,793
|
|
|
$
|
30,809
|
|
|
$
|
29,401
|
|
|
$
|
35,122
|
|
|
$
|
35,084
|
|
|
|
|
|
Federal funds sold
|
|
|
157,326
|
|
|
|
157,326
|
|
|
|
9,938
|
|
|
|
9,938
|
|
|
|
53,946
|
|
|
|
53,946
|
|
|
|
|
|
FHLB stock
|
|
|
6,730
|
|
|
|
6,730
|
|
|
|
7,536
|
|
|
|
7,536
|
|
|
|
9,091
|
|
|
|
9,091
|
|
|
|
|
|
Trust preferred security
|
|
|
3,454
|
|
|
|
292
|
|
|
|
3,500
|
|
|
|
2,809
|
|
|
|
3,500
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
$
|
194,976
|
|
|
$
|
191,141
|
|
|
$
|
51,783
|
|
|
$
|
49,684
|
|
|
$
|
101,659
|
|
|
$
|
101,621
|
|
|
|
|
|
|
|
|
|
The following table shows the cost basis, scheduled maturities
and average yields for HRB Banks investment portfolio at
April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
000s)
|
|
|
|
|
|
Less Than One Year
|
|
|
After Ten Years
|
|
|
Total
|
|
|
|
|
|
Cost
|
|
|
Balance
|
|
|
Average
|
|
|
Balance
|
|
|
Average
|
|
|
Balance
|
|
|
Average
|
|
|
|
|
|
Basis
|
|
|
Due
|
|
|
Yield
|
|
|
Due
|
|
|
Yield
|
|
|
Due
|
|
|
Yield
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
27,466
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
27,466
|
|
|
|
2.68
|
%
|
|
$
|
27,466
|
|
|
|
2.68
|
%
|
|
|
Federal funds sold
|
|
|
157,326
|
|
|
|
157,326
|
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
%
|
|
|
157,326
|
|
|
|
0.26
|
%
|
|
|
FHLB stock
|
|
|
6,730
|
|
|
|
|
|
|
|
|
%
|
|
|
6,730
|
|
|
|
1.93
|
%
|
|
|
6,730
|
|
|
|
1.93
|
%
|
|
|
Trust preferred security
|
|
|
3,454
|
|
|
|
|
|
|
|
|
%
|
|
|
3,454
|
|
|
|
2.37
|
%
|
|
|
3,454
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194,976
|
|
|
$
|
157,326
|
|
|
|
|
|
|
$
|
37,650
|
|
|
|
|
|
|
$
|
194,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOAN PORTFOLIO
AND SUMMARY OF LOAN LOSS
EXPERIENCE
The following table shows the composition of HRB Banks
mortgage loan portfolio as of April 30, 2009, 2008 and
2007, and information on delinquent loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Residential real estate mortgages
|
|
$
|
821,583
|
|
|
$
|
1,004,283
|
|
|
$
|
1,350,612
|
|
|
|
|
|
Home equity lines of credit
|
|
|
254
|
|
|
|
357
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
821,837
|
|
|
$
|
1,004,640
|
|
|
$
|
1,350,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and TDRs on non-accrual
|
|
$
|
222,382
|
|
|
$
|
110,759
|
|
|
$
|
22,909
|
|
|
|
|
|
Loans past due 90 days or more
|
|
|
121,685
|
|
|
|
73,600
|
|
|
|
22,909
|
|
|
|
|
|
Total TDRs
|
|
|
160,741
|
|
|
|
37,159
|
|
|
|
|
|
|
|
|
|
|
|
34 H&R
BLOCK 2009 Form 10K
Of total loans outstanding at April 30, 2009, 65% were
adjustable-rate loans and 35% were fixed-rate loans.
Concentrations of loans to borrowers located in a single state
may result in increased exposure to loss as a result of changes
in real estate values and underlying economic or market
conditions related to a particular geographical location. The
table below presents outstanding loans by state for our
portfolio of mortgage loans held for investment as of
April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
from Other
|
|
|
|
|
|
Percent
|
|
|
Delinquency
|
|
|
|
from SCC
|
|
|
Parties
|
|
|
Total
|
|
|
of Total
|
|
|
Rate (30+ Days)
|
|
|
|
|
Florida
|
|
$
|
68,080
|
|
|
$
|
91,707
|
|
|
$
|
159,787
|
|
|
|
19.4
|
%
|
|
|
19.78
|
%
|
California
|
|
|
124,750
|
|
|
|
14,965
|
|
|
|
139,715
|
|
|
|
17.0
|
%
|
|
|
30.10
|
%
|
New York
|
|
|
103,325
|
|
|
|
9,386
|
|
|
|
112,711
|
|
|
|
13.7
|
%
|
|
|
22.84
|
%
|
Wisconsin
|
|
|
2,241
|
|
|
|
65,882
|
|
|
|
68,123
|
|
|
|
8.3
|
%
|
|
|
2.54
|
%
|
All others
|
|
|
232,837
|
|
|
|
108,664
|
|
|
|
341,501
|
|
|
|
41.6
|
%
|
|
|
19.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
531,233
|
|
|
$
|
290,604
|
|
|
$
|
821,837
|
|
|
|
100.0
|
%
|
|
|
20.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A rollforward of HRB Banks allowance for loss on mortgage
loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
45,401
|
|
|
$
|
3,448
|
|
|
$
|
|
|
Provision
|
|
|
63,897
|
|
|
|
42,004
|
|
|
|
3,622
|
|
Recoveries
|
|
|
54
|
|
|
|
999
|
|
|
|
|
|
Charge-offs
|
|
|
(25,279
|
)
|
|
|
(1,050
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
84,073
|
|
|
$
|
45,401
|
|
|
$
|
3,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average loans outstanding during the
year
|
|
|
2.80%
|
|
|
|
0.09%
|
|
|
|
0.02%
|
|
|
|
DEPOSITS
The following table shows HRB Banks average deposit
balances and the average rate paid on those deposits for fiscal
years 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
Money market and savings
|
|
$
|
467,864
|
|
|
|
1.37
|
%
|
|
$
|
653,126
|
|
|
|
4.92
|
%
|
|
$
|
509,915
|
|
|
|
5.46
|
%
|
Interest-bearing checking accounts
|
|
|
13,579
|
|
|
|
2.25
|
%
|
|
|
141,328
|
|
|
|
4.31
|
%
|
|
|
75,077
|
|
|
|
4.96
|
%
|
IRAs
|
|
|
289,814
|
|
|
|
1.27
|
%
|
|
|
101,085
|
|
|
|
4.12
|
%
|
|
|
10,534
|
|
|
|
5.05
|
%
|
Certificates of deposit
|
|
|
91,815
|
|
|
|
3.98
|
%
|
|
|
9,297
|
|
|
|
5.45
|
%
|
|
|
578
|
|
|
|
5.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
863,072
|
|
|
|
1.63
|
%
|
|
|
904,836
|
|
|
|
4.74
|
%
|
|
|
596,104
|
|
|
|
5.39
|
%
|
Non-interest-bearing deposits
|
|
|
212,607
|
|
|
|
|
|
|
|
189,325
|
|
|
|
|
|
|
|
104,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,679
|
|
|
|
|
|
|
$
|
1,094,161
|
|
|
|
|
|
|
$
|
700,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS
The following table shows certain of HRB Banks key ratios
for fiscal years 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
2008
|
|
|
2007
|
|
|
|
|
Pretax return on assets
|
|
|
(1.03)%
|
|
|
0.80%
|
|
|
|
2.60%
|
|
Net return on equity
|
|
|
(6.67)%
|
|
|
3.32%
|
|
|
|
13.95%
|
|
Equity to assets ratio
|
|
|
12.44%
|
|
|
12.80%
|
|
|
|
11.59%
|
|
|
|
SHORT-TERM
BORROWINGS
The following table shows HRB Banks short-term borrowings
for fiscal years 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Year Ended
April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
Ending balance of FHLB advances
|
|
$
|
25,000
|
|
|
|
1.76%
|
|
|
$
|
25,000
|
|
|
|
2.64%
|
|
|
$
|
75,000
|
|
|
|
5.31%
|
|
Average balance of FHLB advances
|
|
|
103,885
|
|
|
|
4.92%
|
|
|
|
13,743
|
|
|
|
5.32%
|
|
|
|
16,055
|
|
|
|
5.18%
|
|
|
|
The maximum amount of FHLB advances outstanding during fiscal
years 2009, 2008 and 2007 was $129.0 million,
$179.0 million and $179.0 million, respectively.
H&R
BLOCK 2009
Form 10K 35
NEW ACCOUNTING
PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial
statements for a discussion of recently issued accounting
pronouncements.
RECONCILIATION OF
NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally
accepted accounting principles (GAAP). However, we believe
certain non-GAAP performance measures and ratios used in
managing the business may provide additional meaningful
comparisons between current year results and prior periods.
Reconciliations to GAAP financial measures for common banking
ratios are provided below. These non-GAAP financial measures
should be viewed in addition to, not as an alternative for, our
reported GAAP results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Banking
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net Interest Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income(1)
|
|
$
|
120,075
|
|
|
$
|
78,498
|
|
|
$
|
23,963
|
|
Divided by average earning assets
|
|
$
|
1,324,645
|
|
|
$
|
1,417,366
|
|
|
$
|
863,737
|
|
|
|
|
9.06%
|
|
|
|
5.54%
|
|
|
|
2.77%
|
|
Pretax Return on Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
(14,508
|
)
|
|
$
|
11,484
|
|
|
$
|
23,086
|
|
Divided by average assets
|
|
$
|
1,403,933
|
|
|
$
|
1,442,868
|
|
|
$
|
888,320
|
|
|
|
|
(1.03)%
|
|
|
|
0.80%
|
|
|
|
2.60%
|
|
|
|
|
(1)
|
Includes all
interest income related to Emerald Advance activities.
|
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
INTEREST RATE
RISK We
have a formal investment policy that strives to minimize the
market risk exposure of our cash equivalents and
available-for-sale (AFS) securities, which are primarily
affected by credit quality and movements in interest rates.
These guidelines focus on managing liquidity and preserving
principal and earnings.
Our cash equivalents are primarily held for liquidity purposes
and are comprised of high quality, short-term investments,
including qualified money market funds. Because our cash and
cash equivalents have a relatively short maturity, our
portfolios market value is relatively insensitive to
interest rate changes. See additional discussion of interest
rate risk included below in Consumer Financial Services.
As our short-term borrowings are generally seasonal, interest
rate risk typically increases through our third fiscal quarter
and declines to zero by fiscal year-end. While the market value
of short-term borrowings is relatively insensitive to interest
rate changes, interest expense on short-term borrowings will
increase and decrease with changes in the underlying short-term
interest rates. See Item 7, Financial Condition
for additional information.
Our long-term debt at April 30, 2009, consists primarily of
fixed-rate Senior Notes; therefore, a change in interest rates
would have no impact on consolidated pretax earnings. See
Item 8, note 9 to our consolidated financial
statements.
EQUITY PRICE
RISK We
have limited exposure to the equity markets. Our primary
exposure is through our deferred compensation plans. Within the
deferred compensation plans, we have mismatches in asset and
liability amounts and investment choices (both fixed-income and
equity). At April 30, 2009 and 2008, the impact of a 10%
market value change in the combined equity assets held by our
deferred compensation plans and other equity investments would
be approximately $7.3 million and $12.2 million,
respectively, assuming no offset for the liabilities.
TAX
SERVICES
FOREIGN EXCHANGE
RATE
RISK Our
operations in international markets are exposed to movements in
currency exchange rates. The currencies involved are the
Canadian dollar and the Australian dollar. We translate revenues
and expenses related to these operations at the average of
exchange rates in effect during the period. Assets and
liabilities of foreign subsidiaries are translated into
U.S. dollars at exchange rates prevailing at the end of the
year. Translation adjustments are recorded as a separate
component of other comprehensive income in stockholders
equity. Translation of financial results into U.S. dollars
does not presently materially affect and has not historically
materially affected our consolidated financial results, although
such changes do affect the year-to-year comparability of the
operating results in U.S. dollars of our international
businesses. We estimate a 10% change in foreign exchange rates
by itself would impact consolidated net income in fiscal years
2009 and 2008 by
36 H&R
BLOCK 2009 Form 10K
approximately $3.0 million and
$3.2 million, respectively, and cash balances at
April 30, 2009 and 2008 by $5.4 million and
$4.0 million, respectively.
During fiscal year 2009, borrowing needs in our Canadian
operations were funded by corporate borrowings in the
U.S. To mitigate the foreign currency exchange rate risk,
we used forward foreign exchange contracts. We do not enter into
forward contracts for speculative purposes. In estimating the
fair value of derivative positions, we utilized quoted market
prices, if available, or quotes obtained from external sources.
When foreign currency financial instruments are outstanding,
exposure to market risk on these instruments results from
fluctuations in currency rates during the periods in which the
contracts are outstanding. The counterparties to our currency
exchange contracts consist of major financial institutions, each
of which is rated investment grade. We are exposed to credit
risk to the extent of potential non-performance by
counterparties on financial instruments. Any potential credit
exposure does not exceed the fair value. We believe the risk of
incurring losses due to credit risk is remote. At April 30,
2009 we had no forward exchange contracts outstanding.
CONSUMER
FINANCIAL SERVICES
INTEREST RATE
RISK At
April 30, 2009, approximately 67% of HRB Banks total
assets were residential mortgage loans with 35% of these
fixed-rate loans and 65% adjustable-rate loans. These loans are
sensitive to changes in interest rates as well as expected
prepayment levels. As interest rates increase, fixed-rate
residential mortgages tend to exhibit lower prepayments. The
opposite is true in a falling rate environment. When mortgage
loans prepay, mortgage origination costs are written off.
Depending on the timing of the prepayment, the write-offs of
mortgage origination costs may result in lower than anticipated
yields.
At April 30, 2009, HRB Banks other investments
consisted primarily of mortgage-backed securities and FHLB
stock. See table below for sensitivity analysis of our
mortgage-backed securities.
HRB Banks liabilities consist primarily of transactional
deposit relationships, such as prepaid debit card accounts and
checking accounts. Other liabilities include money market
accounts, certificates of deposit and collateralized borrowings
from the FHLB. Money market accounts re-price as interest rates
change. Certificates of deposit re-price over time depending on
maturities. FHLB advances generally have fixed rates ranging
from one day through multiple years.
Under criteria published by the OTS, HRB Banks overall
interest rate risk exposure at March 31, 2009, the most
recent date an evaluation was completed, was characterized as
minimal. We actively manage our interest rate risk
positions. As interest rates change, we will adjust our strategy
and mix of assets and liabilities to optimize our position.
SENSITIVITY
ANALYSIS
The sensitivities of certain financial instruments to changes in
interest rates as of April 30, 2009 and 2008 are presented
below. The following table represents hypothetical instantaneous
and sustained parallel shifts in interest rates and should not
be relied on as an indicator of future expected results. The
impact of a change in interest rates on other factors, such as
delinquency and prepayment rates, is not included in the
analysis below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
Basis Point
Change
|
|
|
Carrying Value at
|
|
|
|
|
April 30, 2009
|
|
−300
|
|
−200
|
|
−100
|
|
+100
|
|
+200
|
|
+300
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
744,899
|
|
$
|
115,319
|
|
$
|
76,202
|
|
$
|
33,253
|
|
$
|
(28,847)
|
|
$
|
(58,293)
|
|
$
|
(85,922)
|
|
|
|
Mortgage-backed securities
|
|
|
26,793
|
|
|
803
|
|
|
727
|
|
|
398
|
|
|
(1,188)
|
|
|
(1,675)
|
|
|
(1,906)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Point
Change
|
|
|
|
|
Carrying Value at
|
|
|
|
|
|
|
April 30, 2008
|
|
−300
|
|
−200
|
|
−100
|
|
+100
|
|
+200
|
|
+300
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
966,301
|
|
$
|
33,382
|
|
$
|
22,618
|
|
$
|
14,291
|
|
$
|
(22,135)
|
|
$
|
(44,639)
|
|
$
|
(65,274)
|
|
|
|
Mortgage-backed securities
|
|
|
29,401
|
|
|
941
|
|
|
681
|
|
|
624
|
|
|
(165)
|
|
|
(198)
|
|
|
(227)
|
|
|
|
H&R
BLOCK 2009
Form 10K 37
|
|
ITEM 8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
DISCUSSION OF
FINANCIAL RESPONSIBILITY
We at H&R Block are guided by our core values of client
focus, integrity, excellence, respect and teamwork. These values
govern the manner in which we serve clients and each other and
are embedded in the execution and delivery of our
responsibilities to our shareholders. H&R Blocks
management is responsible for the integrity and objectivity of
the information contained in this document. Management is
responsible for the consistency of reporting this information
and for ensuring that accounting principles generally accepted
in the United States are used. In discharging this
responsibility, management maintains an extensive program of
internal audits and requires the management teams of our
individual subsidiaries to certify their respective financial
information. Our system of internal control over financial
reporting also includes formal policies and procedures,
including a Code of Business Ethics and Conduct program designed
to encourage and assist all employees and directors in living up
to high standards of integrity.
The Audit Committee of the Board of Directors, composed solely
of outside and independent directors, meets periodically with
management, the independent auditors and the chief internal
auditor to review matters relating to our financial statements,
internal audit activities, internal accounting controls and
non-audit services provided by the independent auditors. The
independent auditors and the chief internal auditor have full
access to the Audit Committee and meet, both with and without
management present, to discuss the scope and results of their
audits, including internal control, audit and financial matters.
Deloitte & Touche LLP audited our consolidated
financial statements for fiscal years 2009 and 2008. Their
audits were conducted in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 12a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as of April 30, 2009.
Based on our assessment, management concluded that as of
April 30, 2009, the Companys internal control over
financial reporting was effective based on the criteria set
forth by COSO. The Companys external auditors,
Deloitte & Touche LLP, an independent registered
public accounting firm, have issued an audit report on the
effectiveness of the Companys internal control over
financial reporting.
|
|
|
Russell P. Smyth
President and Chief Executive Officer
|
|
Becky S. Shulman
Senior Vice President, Treasurer and Chief Financial Officer
|
38 H&R
BLOCK 2009 Form 10K
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of
H&R Block, Inc. and subsidiaries (the Company)
as of April 30, 2009 and 2008, and the related consolidated
statements of operations and comprehensive income (loss),
stockholders equity, and cash flows for the years then
ended. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and financial
statement schedule based on our audits. The consolidated
financial statements of the Company for the year ended
April 30, 2007, before the effects of the retrospective
adjustments for operations discontinued in 2009 as discussed in
Note 19 to the consolidated financial statements, were
audited by other auditors whose report, dated June 29,
2007, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2009 and 2008 consolidated financial
statements present fairly, in all material respects, the
financial position of H&R Block, Inc. and subsidiaries as
of April 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
As discussed in Note 13 to the consolidated financial
statements, the Company adopted the provisions of Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes on
May 1, 2007.
We also have audited the retrospective adjustments to the
consolidated financial statements for the year ended
April 30, 2007 for operations discontinued in 2009, as
discussed in Note 19 to the consolidated financial
statements. Our procedures included (1) obtaining the
Companys underlying accounting analysis prepared by
management of the retrospective adjustments for discontinued
operations and comparing the retrospectively adjusted amounts
shown in the 2007 financial statements to such analysis,
(2) comparing previously reported amounts to the previously
issued financial statements for such year, (3) testing the
mathematical accuracy of the accounting analysis, and
(4) on a test basis, comparing the adjustments to
retrospectively adjust the financial statements for discontinued
operations to the Companys supporting documentation. In
our opinion, such retrospective adjustments are appropriate and
have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2007 consolidated
financial statements of the Company other than with respect to
the retrospective adjustments and, accordingly, we do not
express an opinion or any other form of assurance on the 2007
consolidated financial statements taken as a whole.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
April 30, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 29, 2009 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
June 29, 2009
H&R
BLOCK 2009
Form 10K 39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the internal control over financial reporting of
H&R Block, Inc. and subsidiaries (the Company)
as of April 30, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of April 30, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended April 30, 2009 of the
Company and our report dated June 29, 2009 expressed an
unqualified opinion on those financial statements and financial
statement schedule and included an explanatory paragraph
regarding the Companys adoption of Financial Accounting
Standards Board Interpretation No. 48 Accounting
for Uncertainty in Income Taxes on May 1, 2007.
June 29, 2009
40 H&R
BLOCK 2009 Form 10K
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
H&R Block, Inc.:
We have audited, before the effects of the retrospective
adjustments to present the results of operations of HRB
Financial Corporation as discontinued operations described in
note 19, the accompanying consolidated statements of
operations and comprehensive income (loss), stockholders
equity, and cash flows of H&R Block, Inc. and subsidiaries
(the Company) for the year ended April 30, 2007. In
connection with our audit of the consolidated financial
statements, we have also audited before the effects of the
retrospective adjustments described in note 19, the financial
statement schedule as of April 30, 2007 listed in the Index
at Item 15. The 2007 consolidated financial statements and
financial statement schedule before the effects of the
adjustments discussed in note 19 are not presented herein.
The 2007 consolidated financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the 2007 consolidated financial statements,
before the effects of the retrospective adjustments to present
the results of operations of HRB Financial Corporation as
discontinued operations described in note 19, present
fairly, in all material respects, the results of operations and
cash flows of H&R Block, Inc. and its subsidiaries for the
year ended April 30, 2007 in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, before the
effects of the retrospective adjustments described in
note 19, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
We were not engaged to audit, review or apply any procedures to
the retrospective adjustments to present the results of
operations of HRB Financial Corporation as discontinued
operations described in note 19, and, accordingly, we do
not express an opinion or any other form of assurance about
whether such adjustments are appropriate and have been properly
applied. These adjustments were audited by a successor auditor.
Kansas City, Missouri
June 29, 2007
H&R
BLOCK 2009
Form 10K 41
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per
share amounts)
|
|
Year ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
3,437,906
|
|
|
$
|
3,393,906
|
|
|
$
|
3,108,335
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and other revenues
|
|
|
491,155
|
|
|
|
541,166
|
|
|
|
528,775
|
|
Interest income
|
|
|
154,516
|
|
|
|
151,558
|
|
|
|
73,252
|
|
|
|
|
|
|
|
4,083,577
|
|
|
|
4,086,630
|
|
|
|
3,710,362
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
2,296,449
|
|
|
|
2,280,478
|
|
|
|
2,157,838
|
|
Cost of other revenues
|
|
|
299,769
|
|
|
|
307,715
|
|
|
|
172,656
|
|
Selling, general and administrative
|
|
|
648,490
|
|
|
|
788,898
|
|
|
|
728,540
|
|
|
|
|
|
|
|
3,244,708
|
|
|
|
3,377,091
|
|
|
|
3,059,034
|
|
|
|
|
Operating income
|
|
|
838,869
|
|
|
|
709,539
|
|
|
|
651,328
|
|
Other income (expense), net
|
|
|
501
|
|
|
|
25,532
|
|
|
|
(24,067
|
)
|
|
|
|
Income from continuing operations before income taxes
|
|
|
839,370
|
|
|
|
735,071
|
|
|
|
627,261
|
|
Income taxes
|
|
|
326,315
|
|
|
|
289,124
|
|
|
|
257,801
|
|
|
|
|
Net income from continuing operations
|
|
|
513,055
|
|
|
|
445,947
|
|
|
|
369,460
|
|
Net loss from discontinued operations
|
|
|
(27,382
|
)
|
|
|
(754,594
|
)
|
|
|
(803,113
|
)
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
485,673
|
|
|
$
|
(308,647
|
)
|
|
$
|
(433,653
|
)
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.54
|
|
|
$
|
1.37
|
|
|
$
|
1.14
|
|
Net loss from discontinued operations
|
|
|
(0.08
|
)
|
|
|
(2.32
|
)
|
|
|
(2.48
|
)
|
|
|
|
Net income (loss)
|
|
$
|
1.46
|
|
|
$
|
(0.95
|
)
|
|
$
|
(1.34
|
)
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.53
|
|
|
$
|
1.36
|
|
|
$
|
1.13
|
|
Net loss from discontinued operations
|
|
|
(0.08
|
)
|
|
|
(2.30
|
)
|
|
|
(2.46
|
)
|
|
|
|
Net income (loss)
|
|
$
|
1.45
|
|
|
$
|
(0.94
|
)
|
|
$
|
(1.33
|
)
|
|
|
|
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
485,673
|
|
|
$
|
(308,647
|
)
|
|
$
|
(433,653
|
)
|
Unrealized gains (losses) on securities, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the year, net
of taxes of $(1,736), $2,683 and $(5,072)
|
|
|
(2,836
|
)
|
|
|
4,402
|
|
|
|
(8,151
|
)
|
Reclassification adjustment for gains included in income, net of
taxes of $762, $130 and $11,120
|
|
|
(1,164
|
)
|
|
|
(205
|
)
|
|
|
(18,001
|
)
|
Change in foreign currency translation adjustments
|
|
|
(10,125
|
)
|
|
|
(391
|
)
|
|
|
2,884
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
471,548
|
|
|
$
|
(304,841
|
)
|
|
$
|
(456,921
|
)
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
42 H&R
BLOCK 2009 Form 10K
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except
share and per share amounts)
|
|
|
|
April 30,
2009
|
|
|
April 30, 2008
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,654,663
|
|
|
$
|
664,897
|
|
Cash and cash equivalents restricted
|
|
|
51,656
|
|
|
|
7,031
|
|
Receivables, less allowance for doubtful accounts of $128,541
and $120,155
|
|
|
512,814
|
|
|
|
534,229
|
|
Prepaid expenses and other current assets
|
|
|
351,947
|
|
|
|
420,738
|
|
Assets of discontinued operations, held for sale
|
|
|
|
|
|
|
987,592
|
|
|
|
|
Total current assets
|
|
|
2,571,080
|
|
|
|
2,614,487
|
|
Mortgage loans held for investment, less allowance for loan
losses of $84,073 and $45,401
|
|
|
744,899
|
|
|
|
966,301
|
|
Property and equipment, at cost less accumulated depreciation
and amortization of $625,075 and $620,460
|
|
|
368,289
|
|
|
|
363,664
|
|
Intangible assets, net
|
|
|
385,998
|
|
|
|
147,368
|
|
Goodwill
|
|
|
850,230
|
|
|
|
831,314
|
|
Other assets
|
|
|
439,226
|
|
|
|
700,291
|
|
|
|
|
Total assets
|
|
$
|
5,359,722
|
|
|
$
|
5,623,425
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Customer banking deposits
|
|
$
|
854,888
|
|
|
$
|
785,624
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
705,945
|
|
|
|
739,887
|
|
Accrued salaries, wages and payroll taxes
|
|
|
259,698
|
|
|
|
365,712
|
|
Accrued income taxes
|
|
|
543,967
|
|
|
|
439,380
|
|
Current portion of long-term debt
|
|
|
8,782
|
|
|
|
7,286
|
|
Federal Home Loan Bank borrowings
|
|
|
25,000
|
|
|
|
129,000
|
|
Liabilities of discontinued operations, held for sale
|
|
|
|
|
|
|
644,446
|
|
|
|
|
Total current liabilities
|
|
|
2,398,280
|
|
|
|
3,111,335
|
|
Long-term debt
|
|
|
1,032,122
|
|
|
|
1,031,784
|
|
Federal Home Loan Bank borrowings
|
|
|
75,000
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
448,461
|
|
|
|
492,488
|
|
|
|
|
Total liabilities
|
|
|
3,953,863
|
|
|
|
4,635,607
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 444,176,510
and 435,890,796, respectively
|
|
|
4,442
|
|
|
|
4,359
|
|
Convertible preferred stock, no par, stated value $0.01 per
share, 500,000 shares authorized
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
836,477
|
|
|
|
695,959
|
|
Accumulated other comprehensive income (loss)
|
|
|
(11,639
|
)
|
|
|
2,486
|
|
Retained earnings
|
|
|
2,671,437
|
|
|
|
2,384,449
|
|
Less treasury shares, at cost
|
|
|
(2,094,858
|
)
|
|
|
(2,099,435
|
)
|
|
|
|
Total stockholders equity
|
|
|
1,405,859
|
|
|
|
987,818
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
5,359,722
|
|
|
$
|
5,623,425
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
H&R
BLOCK 2009
Form 10K 43
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
Year ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
485,673
|
|
|
$
|
(308,647
|
)
|
|
$
|
(433,653
|
)
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
123,631
|
|
|
|
119,514
|
|
|
|
107,479
|
|
|
|
|
|
Provision for bad debts and loan losses
|
|
|
181,829
|
|
|
|
174,813
|
|
|
|
64,066
|
|
|
|
|
|
Provision for deferred taxes
|
|
|
73,213
|
|
|
|
(51,695
|
)
|
|
|
(26,236
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
26,557
|
|
|
|
40,373
|
|
|
|
37,014
|
|
|
|
|
|
Operating cash flows of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of discontinued operations
|
|
|
10,626
|
|
|
|
45,510
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
86,952
|
|
|
|
167,535
|
|
|
|
97,754
|
|
|
|
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents restricted
|
|
|
(44,625
|
)
|
|
|
(3,168
|
)
|
|
|
12,793
|
|
|
|
|
|
Receivables
|
|
|
(57,155
|
)
|
|
|
(116,846
|
)
|
|
|
(66,331
|
)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
84,279
|
|
|
|
6,796
|
|
|
|
(2,969
|
)
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
(36,024
|
)
|
|
|
16,215
|
|
|
|
(72,326
|
)
|
|
|
|
|
Accrued salaries, wages and payroll taxes
|
|
|
(106,014
|
)
|
|
|
65,845
|
|
|
|
47,356
|
|
|
|
|
|
Accrued income taxes
|
|
|
126,594
|
|
|
|
204,472
|
|
|
|
(275,337
|
)
|
|
|
|
|
Other noncurrent liabilities
|
|
|
(56,001
|
)
|
|
|
(34,738
|
)
|
|
|
20,538
|
|
|
|
|
|
Other, net
|
|
|
124,904
|
|
|
|
(67,219
|
)
|
|
|
(67,123
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,024,439
|
|
|
|
258,760
|
|
|
|
(556,975
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
(5,092
|
)
|
|
|
(11,794
|
)
|
|
|
(54,375
|
)
|
|
|
|
|
Sales of and payments received on available-for-sale securities
|
|
|
15,075
|
|
|
|
18,175
|
|
|
|
5,983
|
|
|
|
|
|
Mortgage loans originated or purchased for investment, net
|
|
|
91,329
|
|
|
|
207,606
|
|
|
|
(954,281
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(97,880
|
)
|
|
|
(101,554
|
)
|
|
|
(158,460
|
)
|
|
|
|
|
Payments made for business acquisitions, net of cash acquired
|
|
|
(293,805
|
)
|
|
|
(24,872
|
)
|
|
|
(57,554
|
)
|
|
|
|
|
Net cash provided by (used in) investing activities of
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of operating units, net of cash
|
|
|
303,983
|
|
|
|
1,114,535
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(48,917
|
)
|
|
|
(69,545
|
)
|
|
|
22,081
|
|
|
|
|
|
Other, net
|
|
|
40,867
|
|
|
|
14,738
|
|
|
|
38,230
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
5,560
|
|
|
|
1,147,289
|
|
|
|
(1,158,376
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
|
|
|
|
(5,125,279
|
)
|
|
|
(8,264,561
|
)
|
|
|
|
|
Proceeds from issuance of commercial paper
|
|
|
|
|
|
|
4,133,197
|
|
|
|
9,256,643
|
|
|
|
|
|
Repayments of Senior Notes
|
|
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
Proceeds from issuance of Senior Notes
|
|
|
|
|
|
|
599,376
|
|
|
|
|
|
|
|
|
|
Repayments of other borrowings
|
|
|
(4,762,294
|
)
|
|
|
(9,055,426
|
)
|
|
|
(6,010,432
|
)
|
|
|
|
|
Proceeds from other borrowings
|
|
|
4,733,294
|
|
|
|
8,505,426
|
|
|
|
6,689,432
|
|
|
|
|
|
Customer banking deposits, net
|
|
|
64,357
|
|
|
|
(345,391
|
)
|
|
|
1,129,263
|
|
|
|
|
|
Dividends paid
|
|
|
(198,685
|
)
|
|
|
(183,628
|
)
|
|
|
(171,966
|
)
|
|
|
|
|
Acquisition of treasury shares
|
|
|
(106,189
|
)
|
|
|
(7,280
|
)
|
|
|
(188,802
|
)
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
141,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
71,594
|
|
|
|
23,322
|
|
|
|
25,703
|
|
|
|
|
|
Net cash provided by (used in) financing activities of
discontinued operations
|
|
|
4,783
|
|
|
|
(64,439
|
)
|
|
|
42,926
|
|
|
|
|
|
Other, net
|
|
|
11,492
|
|
|
|
(37,947
|
)
|
|
|
(17,095
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(40,233
|
)
|
|
|
(1,558,069
|
)
|
|
|
1,991,111
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
989,766
|
|
|
|
(152,020
|
)
|
|
|
275,760
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
664,897
|
|
|
|
816,917
|
|
|
|
541,157
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$
|
1,654,663
|
|
|
$
|
664,897
|
|
|
$
|
816,917
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds received of $158,862, $317,849
and $3,861
|
|
$
|
(1,593
|
)
|
|
$
|
(238,803
|
)
|
|
$
|
405,445
|
|
|
|
|
|
Interest paid on borrowings
|
|
|
89,541
|
|
|
|
173,181
|
|
|
|
151,436
|
|
|
|
|
|
Interest paid on deposits
|
|
|
14,004
|
|
|
|
44,501
|
|
|
|
27,475
|
|
|
|
|
|
Transfers of loans to foreclosed assets
|
|
|
65,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
44 H&R
BLOCK 2009 Form 10K
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(amounts
in 000s, except
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
|
Balances at May 1, 2006
|
|
|
435,891
|
|
|
$
|
4,359
|
|
|
|
|
|
|
$
|
|
|
|
$
|
653,053
|
|
|
$
|
21,948
|
|
|
$
|
3,492,059
|
|
|
|
(107,378
|
)
|
|
$
|
(2,023,620
|
)
|
|
$
|
2,147,799
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(433,653
|
)
|
|
|
|
|
|
|
|
|
|
|
(433,653
|
)
|
Unrealized translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,884
|
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,152
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,495
|
|
Shares issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,219
|
)
|
|
|
|
|
|
|
|
|
|
|
1,638
|
|
|
|
31,246
|
|
|
|
24,027
|
|
Nonvested shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,619
|
)
|
|
|
|
|
|
|
|
|
|
|
1,053
|
|
|
|
20,067
|
|
|
|
(552
|
)
|
ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
|
|
8,967
|
|
|
|
9,969
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
396
|
|
|
|
450
|
|
Acquisition of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,476
|
)
|
|
|
(188,802
|
)
|
|
|
(188,802
|
)
|
Cash dividends paid $0.53 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(171,966
|
)
|
|
|
|
|
|
|
|
|
|
|
(171,966
|
)
|
|
|
|
Balances at April 30, 2007
|
|
|
435,891
|
|
|
|
4,359
|
|
|
|
|
|
|
|
|
|
|
|
676,766
|
|
|
|
(1,320
|
)
|
|
|
2,886,440
|
|
|
|
(112,672
|
)
|
|
|
(2,151,746
|
)
|
|
|
1,414,499
|
|
Remeasurement of uncertain tax positions upon adoption of
FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,716
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,716
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308,647
|
)
|
|
|
|
|
|
|
|
|
|
|
(308,647
|
)
|
Unrealized translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(391
|
)
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,197
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,410
|
|
Shares issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,090
|
)
|
|
|
|
|
|
|
|
|
|
|
1,736
|
|
|
|
33,174
|
|
|
|
22,084
|
|
Nonvested shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,097
|
)
|
|
|
|
|
|
|
|
|
|
|
963
|
|
|
|
18,387
|
|
|
|
(1,710
|
)
|
ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
413
|
|
|
|
7,872
|
|
|
|
7,807
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
158
|
|
|
|
193
|
|
Acquisition of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(328
|
)
|
|
|
(7,280
|
)
|
|
|
(7,280
|
)
|
Cash dividends paid $0.56 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(183,628
|
)
|
|
|
|
|
|
|
|
|
|
|
(183,628
|
)
|
|
|
|
Balances at April 30, 2008
|
|
|
435,891
|
|
|
|
4,359
|
|
|
|
|
|
|
|
|
|
|
|
695,959
|
|
|
|
2,486
|
|
|
|
2,384,449
|
|
|
|
(109,880
|
)
|
|
|
(2,099,435
|
)
|
|
|
987,818
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
485,673
|
|
|
|
|
|
|
|
|
|
|
|
485,673
|
|
Unrealized translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,125
|
)
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
Proceeds from common stock issuance, net of expenses
|
|
|
8,286
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
141,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,415
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,600
|
|
Shares issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,624
|
)
|
|
|
|
|
|
|
|
|
|
|
4,481
|
|
|
|
85,624
|
|
|
|
73,000
|
|
Nonvested shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,392
|
)
|
|
|
|
|
|
|
|
|
|
|
1,015
|
|
|
|
19,402
|
|
|
|
(990
|
)
|
ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
5,577
|
|
|
|
5,154
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
163
|
|
|
|
188
|
|
Acquisition of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,991
|
)
|
|
|
(106,189
|
)
|
|
|
(106,189
|
)
|
Cash dividends paid $0.59 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198,685
|
)
|
|
|
|
|
|
|
|
|
|
|
(198,685
|
)
|
|
|
|
Balances at April 30, 2009
|
|
|
444,177
|
|
|
$
|
4,442
|
|
|
|
|
|
|
$
|
|
|
|
$
|
836,477
|
|
|
$
|
(11,639
|
)
|
|
$
|
2,671,437
|
|
|
|
(110,075
|
)
|
|
$
|
(2,094,858
|
)
|
|
$
|
1,405,859
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
H&R
BLOCK 2009
Form 10K 45
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1: |
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
NATURE OF
OPERATIONS Our
operating subsidiaries provide a variety of services to the
general public, principally in the United States (U.S.).
Specifically, we offer: tax return preparation; accounting, tax
and consulting services to business clients; certain retail
banking services; tax preparation and related software; and
refund anticipation loans (RALs) offered by third-party lending
institutions. Tax preparation services are also provided in
Canada and Australia. Our Tax Services segment comprised 74.3%
of our consolidated revenues from continuing operations for
fiscal year 2009.
Our discontinued operations were primarily engaged in the
origination, sale and servicing of non-prime and prime mortgage
loans and investment services through a registered
broker-dealer. See additional information on our discontinued
operations in note 19.
PRINCIPLES OF
CONSOLIDATION The
consolidated financial statements include the accounts of the
Company and our wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated.
Some of our subsidiaries operate in regulated industries and
their underlying accounting records reflect the policies and
requirements of these industries.
RECLASSIFICATIONS Certain
reclassifications have been made to prior year amounts to
conform to the current year presentation. These
reclassifications had no effect on our results of operations or
stockholders equity as previously reported. Effective
November 1, 2008, we sold H&R Block Financial
Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc.
(Ameriprise). As of April 30, 2009, HRBFA and its direct
corporate parent are presented as discontinued operations in the
consolidated financial statements. Operating results of this
business for all periods presented have been reclassified in the
consolidated statements of operations to discontinued
operations. We elected to present assets and liabilities of the
business as held for sale as of April 30, 2008, both
classified as current. See additional discussion in note 19.
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 seek to change 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.
CONCENTRATIONS OF
RISK Cash
deposits in bank accounts in excess of insured or guaranteed
limits are exposed to loss in the event of nonperformance by the
financial institution. We had cash deposits in excess of these
limits of less than $70 million at April 30, 2009. We
have not historically experienced any losses on bank deposits.
In addition to cash deposits with financial institutions, we had
investments totaling approximately $1.3 billion and
$157.3 million in money market funds and federal funds
sold, respectively, at April 30, 2009.
The overall credit quality of our mortgage loans held for
investment is impacted by the strength of the U.S. economy
and local economies. 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 50.1% of our mortgage loan portfolio consists of
loans to borrowers located in the states of Florida, California
and New York.
CASH AND CASH
EQUIVALENTS Cash
and cash equivalents include cash on hand, cash due from banks
and federal funds sold. For purposes of the consolidated balance
sheets and consolidated statements of cash flows, all
non-restricted highly liquid instruments purchased with an
original maturity of three months or less are considered to be
cash equivalents. We present cash flow activities utilizing the
indirect method. Book overdrafts included in accounts payable
totaled $48.0 million and $42.2 million at
April 30, 2009 and 2008, respectively.
CASH AND CASH
EQUIVALENTS RESTRICTED
Cash and cash equivalents restricted
consists primarily of cash held by our captive insurance
subsidiary that will be used to pay claims.
RECEIVABLES Receivables
consist primarily of accounts receivable from customers of our
Business Services segment, receivables from tax clients for tax
return preparation, refund anticipation loan participations and
receivables of our franchise financing subsidiary. The allowance
for doubtful accounts requires managements
46 H&R
BLOCK 2009 Form 10K
judgment regarding collectibility
and current economic conditions to establish an amount
considered by management to be adequate to cover estimated
losses as of the balance sheet date.
MARKETABLE
SECURITIES AVAILABLE-FOR-SALE
Marketable securities we hold are classified as
available-for-sale
(AFS) and are reported at fair value. Unrealized gains and
losses are calculated using the specific identification method
and reported, net of applicable taxes, as a component of
accumulated other comprehensive income. Realized gains and
losses on the sale of these securities are determined using the
specific identification method. These securities are included in
other assets in the consolidated balance sheets.
We monitor our AFS investment portfolio for impairment and
consider many factors in determining whether the impairment is
deemed to be
other-than-temporary.
These factors include, but are not limited to, the length of
time the security has had a market value less than the cost
basis, the severity of loss, our intent to sell, including
regulatory or contractual requirements to sell, recent events
specific to the issuer or industry, external credit ratings and
recent downgrades in such ratings.
For investments in mortgage-backed securities, amortization of
premiums and accretion of discounts are recognized in interest
income using the interest method, adjusted for anticipated
prepayments where applicable. We update our estimates of
expected cash flows periodically and recognize changes in
calculated effective yields as appropriate.
Our investment in the stock of the Federal Home Loan Bank (FHLB)
is carried at cost, as it is a restricted security, which is
required to be maintained by H&R Block Bank (HRB Bank) for
borrowing availability. The cost of the stock represents its
redemption value, as there is no ready market value.
REAL ESTATE
OWNED Real
estate owned (REO) includes foreclosed properties securing
mortgage loans. Foreclosed assets are adjusted to fair value
less costs to sell upon transfer of the loans to REO.
Subsequently, REO is carried at the lower of carrying value or
fair value less costs to sell. Fair value is generally based on
independent market prices or appraised values of the collateral.
Subsequent holding period losses and losses arising from the
sale of REO are expensed as incurred. REO is included in prepaid
expenses and other current assets in the consolidated balance
sheets.
MORTGAGE LOANS
HELD FOR
INVESTMENT
Mortgage loans held for investment represent loans originated or
acquired with the ability and current intent to hold to
maturity. Loans held for investment are carried at amortized
cost adjusted for charge-offs, net allowance for loan losses,
deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans. Loan fees and certain
direct loan origination costs are deferred and the net fee or
cost is recognized in interest income over the lives of the
related loans. Unearned income, premiums and discounts on
purchased loans are amortized or accreted into income over the
estimated life of the loan using methods that approximate the
interest method based on assumptions regarding the loan
portfolio, including prepayments adjusted to reflect actual
experience.
We record an allowance representing our estimate of credit
losses inherent in the loan portfolio at the balance sheet date.
Loan recoveries and the provision for credit losses increase the
allowance, while loan charge-offs decrease the allowance. A
current assessment of the value of the loan is made when the
loan is no later than 180 days past due and any loan
balance in excess of the value less costs to sell the property
is charged off.
We evaluate mortgage loans less than 60 days past due on a
pooled basis and record a loan loss allowance for those loans in
the aggregate. We stratify these loans based on our view of risk
associated with various elements of the pool and assign
estimated loss rates based on those risks. Loss rates consider
both the rate at which loans will become delinquent (frequency)
and the amount of loss that will ultimately be realized upon
occurrence of a liquidation of collateral (severity), and are
primarily based on historical experience and our assessment of
economic and market conditions.
Loans are considered impaired when we believe it is probable we
will be unable to collect all principal and interest due
according to the contractual terms of the note, or when the loan
is 60 days past due. Impaired loans are reviewed
individually and a specific loan loss allowance is recorded
based on the fair value of the underlying collateral.
We classify loans as non-accrual when full and timely collection
of interest or principal becomes uncertain, or when they are
90 days past due. Interest previously accrued, but not
collected, is reversed against current interest income when a
loan is placed on non-accrual status. Accretion of deferred fees
is discontinued for non-accrual loans. Payments received on
non-accrual loans are recognized as interest income when the
loan is considered collectible and applied to principal when it
is doubtful that full payment will be collected. Loans are not
placed back on accrual status until collection of principal and
interest is reasonably assured as a result of the borrower
bringing the loan into compliance with the contractual terms of
the loan. Prior to restoring a loan to accrual status,
management considers a borrowers prospects for continuing
future contractual payments.
From time to time, as part of our loss mitigation process, we
may agree to modify the contractual terms of a borrowers
loan. We have developed loan modification programs designed to
help borrowers refinance adjustable-
H&R
BLOCK 2009
Form 10K 47
rate mortgage (ARM) loans prior to
rate reset. 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). We may consider the borrowers payment
status and history, the borrowers ability to pay upon a
rate reset on an adjustable-rate mortgage, the size of the
payment increase upon a rate reset, the period of time remaining
prior to the rate reset and other relevant factors in
determining whether a borrower is experiencing financial
difficulty. A borrower who is current may be deemed to be
experiencing financial difficulty in instances where the
evidence suggests an inability to pay based on the original
terms of the loan after the interest rate reset and, in the
absence of a modification, may default on the loan. We evaluate
whether the modification represents a concession we would not
otherwise consider, such as a lower interest rate than what a
new borrower of similar credit risk would be offered. A loan
modified in a troubled debt restructuring, including a loan that
was current at the time of modification, is placed on
non-accrual status until we determine future collection of
principal and interest is reasonably assured, which generally
requires the borrower to demonstrate a period of performance
according to the restructured terms. TDR loans totaled
$160.7 million and $37.2 million at April 30,
2009 and 2008, respectively. At the time of the modification, we
record impairment for TDR loans equal to the difference between
the principal balance of the loan and the present value of
expected future cash flows discounted at the loans
effective interest rate. However, if we later assess that
foreclosure of a modified loan is probable, we record impairment
based on the estimated fair value of the underlying collateral.
PROPERTY AND
EQUIPMENT
Buildings and equipment are initially recorded at cost and are
depreciated over the estimated useful life of the assets using
the straight-line method. Leasehold improvements are initially
recorded at cost and are amortized over the lesser of the term
of the respective lease or the estimated useful life, using the
straight-line method. Estimated useful lives are 15 to
40 years for buildings, 3 to 5 years for computers and
other equipment and up to 8 years for leasehold
improvements.
We capitalize certain allowable costs associated with software
developed or purchased for internal use. These costs are
typically amortized over 36 months using the straight-line
method.
Substantially all of the operations of our subsidiaries are
conducted in leased premises. For all lease agreements,
including those with escalating rent payments or rent holidays,
we recognize rent expense on a straight-line basis.
INTANGIBLE ASSETS
AND
GOODWILL We
test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently, whenever events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. The
first step of the impairment test is to compare the estimated
fair value of the reporting unit to its carrying value. If the
carrying value is less than fair value, no impairment exists. If
the carrying value is greater than fair value, a second step is
performed to determine the fair value of goodwill and the amount
of impairment loss, if any.
In addition, long-lived assets, including intangible assets with
finite lives, are assessed for impairment whenever events or
circumstances indicate the carrying value may not be fully
recoverable by comparing the carrying value to future
undiscounted cash flows. Impairment is recorded for long-lived
assets determined not to be fully recoverable equal to the
excess of the carrying amount of the asset over its estimated
fair value.
We recorded $2.2 million and $5.7 million in goodwill
impairments in our Tax Services segment in fiscal years 2009 and
2008, respectively. There was no goodwill impairment in our
continuing operations during fiscal year 2007. In fiscal year
2007, we recorded $154.9 million in goodwill impairments
related to the sale or wind-down of our discontinued operations.
No material impairment adjustments to other intangible assets or
other long-lived assets of continuing operations were made
during the three-year period ended April 30, 2009.
The weighted-average life of intangible assets with finite lives
is 28 years. Intangible assets are typically amortized over
the estimated useful life of the assets using the straight-line
method.
MORTGAGE LOAN
REPURCHASE
LIABILITY Sand
Canyon Corporations (SCC), formerly Option One Mortgage
Corporation, mortgage loan repurchase liability relates to
potential losses that could be incurred in connection with the
repurchase of sold loans or indemnification of losses as a
result of breaches of representations and warranties customary
to the mortgage banking industry.
The amount of expected losses depends primarily on the frequency
of valid claims and the severity of loss incurred on loans. To
the extent actual losses related to repurchase and
indemnification activity are different from estimates, the
repurchase reserve may increase or decrease. See note 17
for additional information.
LITIGATION It
is our policy to routinely assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as
ranges of probable losses. A determination of the amount of the
reserves required, if any, for these contingencies is made after
analysis of each known issue and an analysis of historical
experience in accordance with Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies
(SFAS 5), and related pronouncements. We record reserves
related to certain legal matters for which we believe it is
probable that a loss will be incurred and the range of such loss
can be estimated. With respect to other matters,
48 H&R
BLOCK 2009 Form 10K
management has concluded that a
loss is only reasonably possible or remote, or not estimable
and, therefore, no liability is recorded. Management discloses
the facts regarding material matters, and potential exposure if
determinable, for losses assessed as reasonably possible to
occur. Costs incurred with defending claims are expensed as
incurred. Any receivable for insurance recoveries is recorded
separately from the corresponding litigation reserve, and only
if recovery is determined to be probable.
INCOME
TAXES We
account for income taxes under the asset and liability method,
which requires us to record deferred income tax assets and
liabilities for future tax consequences attributable to
differences between the financial statement carrying value of
existing assets and liabilities and their respective tax basis.
Deferred taxes are determined separately for each tax-paying
component within each tax jurisdiction based on provisions of
enacted tax law. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Our deferred tax assets
include state and foreign tax loss carry-forwards and are
reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Our current
deferred tax assets are included in prepaid expenses and other
current assets in the consolidated balance sheets. Noncurrent
deferred tax assets are included in other assets on our
consolidated balance sheets.
We evaluate the sustainability of each uncertain tax position
based on its technical merits. If we determine it is more likely
than not a tax position will be sustained based on its technical
merits, we record the impact of the position in our consolidated
financial statements at the largest amount that is greater than
fifty percent likely of being realized upon ultimate settlement.
We record no tax benefit for tax positions where we have
concluded it is not more likely than not to be sustained.
Differences between a tax position taken or expected to be taken
in our tax returns and the amount of benefit recognized and
measured in the financial statements result in unrecognized tax
benefits, which are recorded in the balance sheet as either a
liability for unrecognized tax benefits or reductions to
recorded tax assets, as applicable.
We file a consolidated federal tax return on a calendar year
basis and state tax returns on a consolidated or combined basis,
as permitted by authorities. We report interest and penalties as
a component of income tax expense.
TREASURY
SHARES Shares
of common stock repurchased by us are recorded, at cost, as
treasury shares and result in a reduction of stockholders
equity. We reissue treasury shares as part of our stock-based
compensation programs. When shares are reissued, we determine
the cost using the average cost method. Periodically, we may
permanently retire shares held in treasury as determined by our
Board of Directors.
REVENUE
RECOGNITION Service
revenues consist primarily of fees for preparation and filing of
tax returns, both in offices and through our online programs,
fees associated with our Peace of Mind (POM) guarantee program
and fees for consulting services. Service revenues are recorded
in the period in which the service is performed. Retail and
online tax preparation revenues are recorded when a completed
return is filed or accepted by the customer. POM revenues are
deferred and recognized over the term of the guarantee, based on
historical and actual payment of claims. Revenues for services
rendered in connection with the Business Services segment
include fees based on time and materials, which are recognized
as the services are performed and amounts are earned. Revenues
associated with our H&R Block Prepaid Emerald
MasterCard®
program consist of interchange income from the use of debit
cards and fees from the use of ATM networks. Interchange income
is a fee paid by a merchant bank to the card-issuing bank
through the interchange network, and is based on cardholder
purchase volumes. HRB Bank recognizes interchange income as
earned.
Interest income consists primarily of interest earned on
mortgage loans held for investment and Emerald Advance lines of
credit. Interest income on mortgage loans held for investment
includes deferred origination fees and costs and purchase
discounts and premiums, which are amortized to income over the
life of the loan using the interest method. Interest income on
Emerald Advance lines of credit is calculated using the average
daily balance method and is recognized based on the principal
amount outstanding until the outstanding balance is paid or
written-off. Loan commitment fees, net of related expenses, are
initially deferred and recognized as revenue over the commitment
period.
Product and other revenues include royalties from franchisees,
RAL participation revenues and sales of software products, and
are recognized as follows:
|
|
|
|
§
|
Upon granting of a franchise, franchisees pay a refundable
deposit generally in the amount of $2,500, but pay no initial
franchise fee. We record the payment as a deposit liability and
recognize no revenue in connection with the initial granting of
a franchise. Franchise royalties, which are based on contractual
percentages of franchise revenues, are recorded in the period in
which the franchise provides the service.
|
|
§
|
Loan participation revenue is recognized over the life of the
loan.
|
H&R
BLOCK 2009
Form 10K 49
|
|
|
|
§
|
Software revenues consist mainly of tax preparation software and
other personal productivity software. Revenue from the sale of
software such as
TaxCut®
is recognized when the product is sold to the end user, either
through retail, online or other channels. Rebates, slotting fees
and other incentives paid in connection with these sales are
recorded as a reduction of revenue. Revenue from the sale of
TaxWorks®
software is deferred and recognized over the period for which
upgrades and support are provided to the customer.
|
Revenue recognition is evaluated separately for each unit in
multiple-deliverable arrangements. Sales tax we collect and
remit to taxing authorities is recorded net in our consolidated
income statements.
ADVERTISING
EXPENSE Advertising
costs are primarily expensed as incurred, or the first time the
advertisement takes place. Total advertising costs of continuing
operations for fiscal years 2009, 2008 and 2007 totaled
$249.2 million, $204.8 million and
$213.9 million, respectively.
DEFINED
CONTRIBUTION
PLANS We
have 401(k) defined contribution plans covering all full-time
and seasonal employees following the completion of an
eligibility period. Contributions of our continuing operations
to these plans are discretionary and totaled $26.7 million,
$27.3 million and $23.3 million for fiscal years 2009,
2008 and 2007, respectively.
FOREIGN CURRENCY
TRANSLATION Assets
and liabilities of foreign subsidiaries are translated into
U.S. dollars at exchange rates prevailing at the end of the
year. Revenues and expenses of our foreign operations are
translated at the average exchanges rates in effect during the
fiscal year. Translation adjustments are recorded as a separate
component of other comprehensive income in stockholders
equity.
COMPREHENSIVE
INCOME Our
comprehensive income (loss) is comprised of net income (loss),
foreign currency translation adjustments and the change in net
unrealized gains or losses on AFS marketable securities.
Included in stockholders equity at April 30, 2009 and
2008, the net unrealized holding gain on AFS securities was
$(1.5) million and $5.5 million, respectively, and the
foreign currency translation adjustment was $13.1 million
and $(3.0) million, respectively. Translation adjustments
recorded in fiscal year 2009 totaled $10.1 million, and are
net of income taxes of $4.1 million.
NEW ACCOUNTING
STANDARDS In
June 2008, FASB Staff Position on
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP 03-6-1)
was issued.
FSP 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, should be included in the process of allocating
earnings for purposes of computing earnings per share. This
guidance is effective for financial statements issued for fiscal
years and the related interim periods beginning after
December 15, 2008. Early application is not permitted. The
provisions of
FSP 03-6-1
are effective for the first quarter of our fiscal year 2010. We
do not expect the adoption of
FSP 03-6-1
will have a material effect on our consolidated financial
statements.
In December 2007, Statement of Financial Accounting Standards
No. 141(R), Business Combinations,
(SFAS 141R) and Statement of Financial Accounting Standards
No. 160, Non-Controlling Interests in Consolidated
Financial Statements An Amendment of ARB
No. 51 (SFAS 160) were issued. These
standards will require an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction,
including non-controlling interests, at the acquisition date
fair value with limited exceptions. SFAS 141R will further
require acquisition-related expenses to be expensed and will
generally require contingent consideration 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. The provisions of these standards are effective as of
the beginning of our fiscal year 2010. We do not expect the
adoption of SFAS 141R and SFAS 160 will have a
material effect on our consolidated financial statements.
As discussed in note 15, we adopted Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157) and Statement of
Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities (SFAS 159) as of May 1, 2008,
and FASB Staff Position
No. 115-2
and 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments
(FSP 115-2)
as of April 30, 2009.
NOTE 2:
BUSINESS COMBINATIONS AND DISPOSALS
Effective November 3, 2008, we acquired the assets and
franchise rights of our last major independent franchise
operator for an aggregate purchase price of $279.2 million.
Results related to the acquired business have been included in
our consolidated financial statements since November 3,
2008. Pro forma results of operations have not been presented as
the effects of this acquisition were not material to our
results. Goodwill recognized on this
50 H&R
BLOCK 2009 Form 10K
transaction is included in the Tax
Services segment and is deductible for tax purposes. The
allocation of the purchase price to assets acquired and
liabilities assumed has been completed and is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in 000s)
|
|
|
|
|
|
|
Asset Acquired
|
|
Estimated Life
|
|
|
Fair Value at
Acquisition
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
various
|
|
|
$
|
6,169
|
|
|
|
|
|
Goodwill
|
|
|
N/A
|
|
|
|
18,111
|
|
|
|
|
|
Reacquired franchise rights
|
|
|
52 years
|
|
|
|
229,438
|
|
|
|
|
|
Sub-franchise
agreements
|
|
|
15 years
|
|
|
|
19,201
|
|
|
|
|
|
Customer relationships
|
|
|
5 years
|
|
|
|
5,691
|
|
|
|
|
|
Noncompete agreements
|
|
|
3 years
|
|
|
|
756
|
|
|
|
|
|
Other assets
|
|
|
N/A
|
|
|
|
830
|
|
|
|
|
|
Liabilities
|
|
|
N/A
|
|
|
|
(954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average life of intangible assets
|
|
|
48 years
|
|
|
$
|
279,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2007, we acquired TaxWorks LLC, a provider of
commercial tax preparation software targeting the independent
tax preparer market. The initial cash purchase price was
$24.8 million, including the present value of a
$10.0 million payment made in April 2007 and a payment of
$23.6 million due in May 2012. An additional payment of up
to $8.0 million, contingent on meeting certain performance
targets, could be paid in April 2012 and would typically be
recorded as additional purchase price, generally goodwill.
Goodwill recognized in this transaction is included in the Tax
Services segment and is deductible for tax purposes.
During fiscal years 2009, 2008 and 2007, we made other
acquisitions, which were accounted for as purchases with cash
payments totaling $12.6 million, $21.4 million and
$32.8 million, respectively. Operating results of the
acquired businesses, which are not material, are included in the
consolidated income statements since the date of acquisition.
During fiscal years 2009, 2008 and 2007 we also paid
$1.9 million, $3.6 million and $5.4 million,
respectively, for contingent payments on prior acquisitions.
We periodically acquire the businesses of franchisees and
account for the transaction as a business combination. We also
periodically sell company-operated offices to franchisees and
record a gain if the sale qualifies as a divestiture for
accounting purposes and upon determination that collection of
the sales proceeds is reasonably assured. Gains are reported in
operating income because the transactions are considered a
recurring part of our business. During fiscal year 2009, we sold
certain offices to existing franchisees for cash proceeds of
$16.9 million, and recorded gains on these sales of
$14.9 million.
NOTE 3:
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average
number of common shares outstanding. The dilutive effect of
potential common shares outstanding is included in diluted
earnings per share. The computations of basic and diluted
earnings per share from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per
share amounts)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
513,055
|
|
|
$
|
445,947
|
|
|
$
|
369,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
332,787
|
|
|
|
324,810
|
|
|
|
322,688
|
|
|
|
|
|
Dilutive potential shares from stock options and nonvested stock
|
|
|
1,750
|
|
|
|
2,656
|
|
|
|
3,464
|
|
|
|
|
|
Convertible preferred stock
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Dilutive weighted-average common shares
|
|
|
334,539
|
|
|
|
327,468
|
|
|
|
326,154
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.54
|
|
|
$
|
1.37
|
|
|
$
|
1.14
|
|
|
|
|
|
Diluted
|
|
|
1.53
|
|
|
|
1.36
|
|
|
|
1.13
|
|
|
|
|
|
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 15.7 million,
18.2 million and 16.8 million shares of stock for
fiscal years 2009, 2008 and 2007, respectively, as the effect
would be antidilutive.
H&R
BLOCK 2009
Form 10K 51
NOTE 4:
MARKETABLE SECURITIES
AVAILABLE-FOR-SALE
The amortized cost and fair value of securities classified as
available-for-sale
held at April 30, 2009 and 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses(1)
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses(1)
|
|
|
Value
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
27,466
|
|
|
$
|
25
|
|
|
$
|
(698
|
)
|
|
$
|
26,793
|
|
|
$
|
30,809
|
|
|
$
|
10
|
|
|
$
|
(1,418
|
)
|
|
$
|
29,401
|
|
|
|
|
|
Municipal bonds
|
|
|
9,560
|
|
|
|
491
|
|
|
|
(4
|
)
|
|
|
10,047
|
|
|
|
9,449
|
|
|
|
233
|
|
|
|
|
|
|
|
9,682
|
|
|
|
|
|
Trust preferred security
|
|
|
3,454
|
|
|
|
|
|
|
|
(3,162
|
)
|
|
|
292
|
|
|
|
3,500
|
|
|
|
|
|
|
|
(691
|
)
|
|
|
2,809
|
|
|
|
|
|
Residual interests in securitizations
|
|
|
166
|
|
|
|
5,627
|
|
|
|
|
|
|
|
5,793
|
|
|
|
4,289
|
|
|
|
10,170
|
|
|
|
|
|
|
|
14,459
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,359
|
|
|
|
586
|
|
|
|
(113
|
)
|
|
|
3,832
|
|
|
|
|
|
|
|
|
|
|
$
|
40,646
|
|
|
$
|
6,143
|
|
|
$
|
(3,864
|
)
|
|
$
|
42,925
|
|
|
$
|
51,406
|
|
|
$
|
10,999
|
|
|
$
|
(2,222
|
)
|
|
$
|
60,183
|
|
|
|
|
|
|
|
|
|
|
(1)
|
At April 30,
2009, investments with a cost of $30.3 million and gross
unrealized losses of $3.9 million had been in continuous
loss position for more than twelve months. At April 30,
2008, investments in common stock with a cost of approximately
$33 thousand and gross unrealized losses of $3 thousand had been
in continuous loss position for more than twelve months.
|
Proceeds from the sales of AFS securities were
$8.3 million, $13.9 million and $3.5 million
during fiscal years 2009, 2008 and 2007, respectively. Gross
realized gains on those sales during fiscal years 2009, 2008 and
2007 were $0.7 million, $0.4 million and
$0.3 million, respectively; gross realized losses were
$1.3 million, $0.1 million and $0.1 million,
respectively. During fiscal years 2009 and 2008, we recorded
other-than-temporary
impairments of AFS securities totaling $1.5 million and
$0.4 million, respectively, due to our inability to hold
the investments until potential recovery of market value.
Contractual maturities of AFS debt securities at April 30,
2009, occur at varying dates over the next one to 28 years,
and are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
|
|
|
|
|
Maturing in:
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
1,012
|
|
|
$
|
1,028
|
|
|
|
|
|
Two to five years
|
|
|
4,140
|
|
|
|
4,411
|
|
|
|
|
|
Five to ten years
|
|
|
4,408
|
|
|
|
4,608
|
|
|
|
|
|
Beyond
|
|
|
3,454
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,014
|
|
|
$
|
10,339
|
|
|
|
|
|
|
|
|
HRB Bank is required to maintain a restricted investment in FHLB
stock for borrowing availability. The cost of this investment,
$6.7 million, represents its redemption value, as these
investments do not have a ready market.
NOTE 5:
MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS
The composition of our mortgage loan portfolio as of
April 30, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
April 30,
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
|
|
|
|
Adjustable-rate loans
|
|
$
|
534,943
|
|
|
|
65
|
%
|
|
$
|
715,919
|
|
|
|
71
|
%
|
|
|
|
|
Fixed-rate loans
|
|
|
286,894
|
|
|
|
35
|
%
|
|
|
288,721
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
821,837
|
|
|
|
100
|
%
|
|
|
1,004,640
|
|
|
|
100
|
%
|
|
|
|
|
Unamortized deferred fees and costs
|
|
|
7,135
|
|
|
|
|
|
|
|
7,062
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(84,073
|
)
|
|
|
|
|
|
|
(45,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
744,899
|
|
|
|
|
|
|
$
|
966,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 H&R
BLOCK 2009 Form 10K
The table below analyzes the composition of our mortgage loans
held for investment as of April 30, 2009 and 2008, by
reference to their
loan-to-value
ratios at each date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
Current
Loan-to-Value Ratio
|
|
|
|
|
|
<80%
|
|
|
80 90%
|
|
|
>90%
|
|
|
Total
|
|
|
|
|
At April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate loans
|
|
$
|
349,035
|
|
|
$
|
170,626
|
|
|
$
|
15,282
|
|
|
$
|
534,943
|
|
Fixed-rate loans
|
|
|
180,159
|
|
|
|
81,147
|
|
|
|
25,588
|
|
|
|
286,894
|
|
|
|
|
|
|
$
|
529,194
|
|
|
$
|
251,773
|
|
|
$
|
40,870
|
|
|
$
|
821,837
|
|
|
|
|
At April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate loans
|
|
$
|
450,621
|
|
|
$
|
242,425
|
|
|
$
|
22,873
|
|
|
$
|
715,919
|
|
Fixed-rate loans
|
|
|
182,883
|
|
|
|
86,056
|
|
|
|
19,782
|
|
|
|
288,721
|
|
|
|
|
|
|
$
|
633,504
|
|
|
$
|
328,481
|
|
|
$
|
42,655
|
|
|
$
|
1,004,640
|
|
|
|
|
Activity in the allowance for mortgage loans for the years ended
April 30, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
45,401
|
|
|
$
|
3,448
|
|
|
|
|
|
Provision
|
|
|
63,897
|
|
|
|
42,004
|
|
|
|
|
|
Recoveries
|
|
|
54
|
|
|
|
999
|
|
|
|
|
|
Charge-offs
|
|
|
(25,279
|
)
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
84,073
|
|
|
$
|
45,401
|
|
|
|
|
|
|
|
|
The loan loss provision increased significantly during the
current year as a result of declining collateral values due to
declining residential home prices and increasing delinquencies
occurring in our portfolio. Our loan loss reserve as a percent
of mortgage loans was 10.23% at April 30, 2009, compared to
4.49% at April 30, 2008. Mortgage loans held for investment
include loans originated by SCC and affiliates, which were
purchased by HRB Bank. Those loans have experienced higher rates
of delinquency than other loans in our portfolio and expose us
to a higher risk of potential credit loss. Residential real
estate markets are experiencing significant declines in property
values and mortgage default rates are increasing. If adverse
market trends continue, including trends within our portfolio
specifically, we may be required to record additional loan loss
provisions, and those losses may be significant.
Information related to our non-performing assets as of
April 30, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
60 89 days
|
|
$
|
21,415
|
|
|
$
|
18,182
|
|
|
|
|
|
90+ days, non-accrual
|
|
|
121,685
|
|
|
|
73,600
|
|
|
|
|
|
TDR loans, current
|
|
|
60,044
|
|
|
|
|
|
|
|
|
|
TDR loans, non-accrual
|
|
|
100,697
|
|
|
|
37,159
|
|
|
|
|
|
|
|
|
|
|
$
|
303,841
|
|
|
$
|
128,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average impaired loans
|
|
$
|
216,391
|
|
|
$
|
46,679
|
|
|
|
|
|
Interest income on impaired loans
|
|
$
|
5,964
|
|
|
$
|
1,678
|
|
|
|
|
|
Interest income on impaired loans recognized on a cash basis on
non-accrual status
|
|
$
|
4,927
|
|
|
$
|
585
|
|
|
|
|
|
Portion of total allowance for loan losses allocated to impaired
loans and TDR loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on collateral value method
|
|
$
|
55,134
|
|
|
$
|
16,705
|
|
|
|
|
|
Based on discounted cash flow method
|
|
|
10,139
|
|
|
|
1,144
|
|
|
|
|
|
|
|
|
|
|
$
|
65,273
|
|
|
$
|
17,849
|
|
|
|
|
|
|
|
|
As of April 30, 2009 and 2008, accrued interest receivable
on mortgage loans held for investment totaled $3.5 million
and $5.4 million, respectively. At April 30, 2009, HRB
Bank had interest-only mortgage loans in its investment
portfolio totaling $5.6 million.
Amounts classified as real estate owned as of April 30,
2009 and 2008 totaled $44.5 million and $0.3 million,
respectively, and are included in prepaid expenses and other
current assets in the consolidated balance sheets. The
H&R
BLOCK 2009
Form 10K 53
increase over the prior year is
primarily due to higher delinquency rates and foreclosures
related to our mortgage loan portfolio. Activity related to our
real estate owned for fiscal year 2009 is as follows:
|
|
|
|
|
(in 000s)
|
|
|
|
|
Balance, beginning of the year
|
|
$
|
350
|
|
Additions
|
|
|
65,171
|
|
Sales
|
|
|
(9,072
|
)
|
Writedowns
|
|
|
(11,916
|
)
|
|
|
|
|
|
Balance, end of the year
|
|
$
|
44,533
|
|
|
|
|
|
|
NOTE 6:
PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Land and other non-depreciable assets
|
|
$
|
5,353
|
|
|
$
|
1,887
|
|
|
|
|
|
Buildings
|
|
|
171,785
|
|
|
|
170,790
|
|
|
|
|
|
Computers and other equipment
|
|
|
469,066
|
|
|
|
490,365
|
|
|
|
|
|
Capitalized software
|
|
|
153,771
|
|
|
|
142,164
|
|
|
|
|
|
Leasehold improvements
|
|
|
187,180
|
|
|
|
172,572
|
|
|
|
|
|
Construction in process
|
|
|
6,209
|
|
|
|
6,346
|
|
|
|
|
|
|
|
|
|
|
|
993,364
|
|
|
|
984,124
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(625,075
|
)
|
|
|
(620,460
|
)
|
|
|
|
|
|
|
|
|
|
$
|
368,289
|
|
|
$
|
363,664
|
|
|
|
|
|
|
|
|
|
Property and equipment included above and subject to capital
lease arrangements included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Property and equipment under capital lease
|
|
$
|
47,913
|
|
|
$
|
47,913
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(25,368
|
)
|
|
|
(17,090
|
)
|
|
|
|
|
|
|
|
|
|
$
|
22,545
|
|
|
$
|
30,823
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense of continuing operations
for fiscal years 2009, 2008 and 2007 was $96.6 million,
$90.1 million and $87.5 million, respectively.
Included in depreciation and amortization expense of continuing
operations is amortization of capitalized software of
$23.4 million, $19.9 million and $15.5 million,
respectively.
NOTE 7:
GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment for the
year ended April 30, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
2008
|
|
|
Additions
|
|
|
Impairment
|
|
|
Other
|
|
|
2009
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
431,981
|
|
|
$
|
22,692
|
|
|
$
|
(2,188
|
)
|
|
$
|
(4,894
|
)
|
|
$
|
447,591
|
|
|
|
|
|
Business Services
|
|
|
399,333
|
|
|
|
3,306
|
|
|
|
|
|
|
|
|
|
|
|
402,639
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
831,314
|
|
|
$
|
25,998
|
|
|
$
|
(2,188
|
)
|
|
$
|
(4,894
|
)
|
|
$
|
850,230
|
|
|
|
|
|
|
|
|
|
Goodwill and other indefinite-life intangible assets were tested
for impairment in the fourth quarter of fiscal year 2009. We
recorded $2.2 million and $5.7 million in goodwill
impairments in our Tax Services segment in fiscal years 2009 and
2008, respectively. The goodwill impairment recorded in fiscal
year 2009 was a result of the closure of a previously acquired
business. There was no goodwill impairment in our continuing
operations during fiscal year 2007. Goodwill of our discontinued
operations totaled $174.0 million at April 30, 2008,
and is included in assets of discontinued operations held for
sale in the consolidated balance sheet at that date, as the
business was sold in November 2008. In fiscal year 2007, we
recorded $154.9 million in goodwill impairments related to
the sale or wind-down of our discontinued mortgage operations.
54 H&R
BLOCK 2009 Form 10K
The components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
April
30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
Tax Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
54,655
|
|
|
$
|
(25,267
|
)
|
|
$
|
29,388
|
|
|
$
|
46,479
|
|
|
$
|
(22,007
|
)
|
|
$
|
24,472
|
|
|
|
|
|
Noncompete agreements
|
|
|
23,263
|
|
|
|
(20,941
|
)
|
|
|
2,322
|
|
|
|
22,966
|
|
|
|
(19,981
|
)
|
|
|
2,985
|
|
|
|
|
|
Reacquired franchise rights
|
|
|
229,438
|
|
|
|
(1,838
|
)
|
|
|
227,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise agreements
|
|
|
19,201
|
|
|
|
(533
|
)
|
|
|
18,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
|
12,500
|
|
|
|
(4,240
|
)
|
|
|
8,260
|
|
|
|
12,500
|
|
|
|
(2,283
|
)
|
|
|
10,217
|
|
|
|
|
|
Trade name
|
|
|
1,025
|
|
|
|
(217
|
)
|
|
|
808
|
|
|
|
1,025
|
|
|
|
(117
|
)
|
|
|
908
|
|
|
|
|
|
Business Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
146,040
|
|
|
|
(111,017
|
)
|
|
|
35,023
|
|
|
|
143,402
|
|
|
|
(100,346
|
)
|
|
|
43,056
|
|
|
|
|
|
Noncompete agreements
|
|
|
33,068
|
|
|
|
(19,908
|
)
|
|
|
13,160
|
|
|
|
32,303
|
|
|
|
(17,589
|
)
|
|
|
14,714
|
|
|
|
|
|
Trade name amortizing
|
|
|
2,600
|
|
|
|
(2,600
|
)
|
|
|
|
|
|
|
3,290
|
|
|
|
(3,043
|
)
|
|
|
247
|
|
|
|
|
|
Trade name
non-amortizing
|
|
|
55,637
|
|
|
|
(4,868
|
)
|
|
|
50,769
|
|
|
|
55,637
|
|
|
|
(4,868
|
)
|
|
|
50,769
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
577,427
|
|
|
$
|
(191,429
|
)
|
|
$
|
385,998
|
|
|
$
|
317,602
|
|
|
$
|
(170,234
|
)
|
|
$
|
147,368
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets of continuing operations for
the years ended April 30, 2009, 2008 and 2007 was
$24.9 million, $23.7 million and $19.9 million,
respectively. Estimated amortization of intangible assets for
fiscal years 2010, 2011, 2012, 2013 and 2014 is
$28.7 million, $26.4 million, $23.5 million,
$19.2 million and $15.8 million, respectively.
NOTE 8:
CUSTOMER BANKING DEPOSITS
The components of customer banking deposits at April 30,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
April
30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Interest
|
|
|
Outstanding
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Balance
|
|
|
Expense
|
|
|
|
|
|
|
|
Money-market deposits
|
|
$
|
144,617
|
|
|
$
|
6,148
|
|
|
$
|
297,320
|
|
|
$
|
31,242
|
|
|
|
|
|
Savings deposits
|
|
|
16,943
|
|
|
|
270
|
|
|
|
27,538
|
|
|
|
877
|
|
|
|
|
|
Checking deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
|
1,728
|
|
|
|
306
|
|
|
|
140,529
|
|
|
|
6,093
|
|
|
|
|
|
Non-interest-bearing
|
|
|
196,221
|
|
|
|
|
|
|
|
162,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,949
|
|
|
|
306
|
|
|
|
303,516
|
|
|
|
6,093
|
|
|
|
|
|
|
|
|
IRAs and other time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year
|
|
|
83,164
|
|
|
|
|
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
Due in two years
|
|
|
7,207
|
|
|
|
|
|
|
|
4,290
|
|
|
|
|
|
|
|
|
|
Due in three years
|
|
|
10,442
|
|
|
|
|
|
|
|
4,784
|
|
|
|
|
|
|
|
|
|
Due in four years
|
|
|
5,670
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
|
|
|
|
Due in five years
|
|
|
3,028
|
|
|
|
|
|
|
|
5,656
|
|
|
|
|
|
|
|
|
|
IRAs
|
|
|
385,868
|
|
|
|
|
|
|
|
139,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495,379
|
|
|
|
7,345
|
|
|
|
157,250
|
|
|
|
4,666
|
|
|
|
|
|
|
|
|
|
|
$
|
854,888
|
|
|
$
|
14,069
|
|
|
$
|
785,624
|
|
|
$
|
42,878
|
|
|
|
|
|
|
|
|
|
H&R
BLOCK 2009
Form 10K 55
Accrued but unpaid interest on deposits totaled
$0.2 million and $0.1 million at April 30, 2009
and 2008, respectively.
Time deposit accounts totaling $6.9 million were in excess
of Federal Deposit Insurance Corporation (FDIC) insured limits
at April 30, 2009, and mature as follows:
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
Three months or less
|
|
$
|
1,019
|
|
Three to six months
|
|
|
1,760
|
|
Six to twelve months
|
|
|
1,719
|
|
Over twelve months
|
|
|
2,448
|
|
|
|
|
|
|
|
|
$
|
6,946
|
|
|
|
|
|
|
NOTE 9:
LONG-TERM DEBT
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Senior Notes, 7.875%, due January 2013
|
|
$
|
599,539
|
|
|
$
|
599,414
|
|
|
|
|
|
Senior Notes, 5.125%, due October 2014
|
|
|
398,706
|
|
|
|
398,471
|
|
|
|
|
|
Acquisition obligations, due from May 2009 to May 2015
|
|
|
30,658
|
|
|
|
28,398
|
|
|
|
|
|
Capital lease obligations
|
|
|
12,001
|
|
|
|
12,514
|
|
|
|
|
|
Other obligations
|
|
|
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
1,040,904
|
|
|
|
1,039,070
|
|
|
|
|
|
Less: Current portion
|
|
|
(8,782
|
)
|
|
|
(7,286
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1,032,122
|
|
|
$
|
1,031,784
|
|
|
|
|
|
|
|
|
|
At April 30, 2009, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These unsecured committed
lines of credit (CLOCs), and any outstanding borrowings
thereunder, have a maturity date of August 2010, bear interest
in a range of LIBOR plus 14 to 45 basis points per annum
and an annual facility fee in a range of 6 to 15 basis
points per annum, based on our credit ratings. These lines are
subject to various affirmative and negative covenants, including
(1) a minimum net worth covenant requiring us to maintain
at least $650.0 million of net worth on the last day of any
fiscal quarter, (2) limits on our indebtedness and
(3) a requirement that we reduce the aggregate outstanding
principal amount of short-term debt, as defined in the
agreement, to $200.0 million or less for a minimum period
of thirty consecutive days during the period from March 1 to
June 30 of each year (the Clean-down requirement).
At April 30, 2009, we were in compliance with these
covenants and had net worth of $1.4 billion. We had no
balance outstanding under the CLOCs at April 30, 2009 or
2008.
Lehman Brothers Bank, FSB (Lehman) is a participating lender in
our $2.0 billion CLOCs, with a $50.0 million credit
commitment. In September 2008, Lehmans parent company
declared bankruptcy. Since then, Lehman has not honored any
funding requests under these facilities, thereby effectively
reducing our available liquidity under our CLOCs to
$1.95 billion. We do not expect this change to have a
material impact on our liquidity or consolidated financial
statements.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay a
$500.0 million facility, with the remaining proceeds used
for working capital and general corporate purposes. As of
April 30, 2009, we had $250.0 million remaining under
our shelf registration for additional debt issuances.
On October 26, 2004, we issued $400.0 million of
5.125% Senior Notes under a shelf registration statement.
The Senior Notes are due October 30, 2014 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay
$250.0 million in
63/4% Senior
Notes that were due in November 2004. The remaining proceeds
were used for working capital, capital expenditures, repayment
of other debt and other general corporate purposes.
We had obligations related to various acquisitions of
$30.7 million and $28.4 million at April 30, 2009
and 2008, respectively, which are due from May 2009 to May 2015.
We have a capitalized lease obligation of $12.0 million at
April 30, 2009, that is collateralized by land and
buildings. The obligation is due in 12 years.
We entered into a committed line of credit agreement with HSBC
Finance Corporation effective January 14, 2009 for use as a
funding source for the purchase of RAL participations. This line
provided funding totaling $2.5 billion
56 H&R
BLOCK 2009 Form 10K
through March 30, 2009 and
$120.0 million thereafter through June 30, 2009. All
borrowings on this facility were repaid as of April 30,
2009 and the facility is now closed.
The aggregate payments required to retire long-term debt are
$8.8 million, $3.2 million, $20.2 million,
$0.7 million, $600.3 million and $407.7 million
in fiscal years 2010, 2011, 2012, 2013, 2014 and beyond,
respectively.
HRB Bank is a member of the FHLB of Des Moines, which extends
credit to member banks based on eligible collateral, which
consists primarily of mortgage loans held for investment and
certain AFS securities. At April 30, 2009, HRB Bank had
FHLB advance capacity of $319.7 million based on eligible
pledged collateral of $632.6 million. On April 13,
2009, we borrowed $100.0 million from the FHLB for
liquidity purposes, leaving remaining availability of
$219.7 million. The maturities and related interest rates
related to this borrowing are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in 000s)
|
|
|
|
|
|
Amount
Due
|
|
|
Interest
Rate
|
|
|
|
|
Fiscal year:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
25,000
|
|
|
|
1.76%
|
|
2011
|
|
|
50,000
|
|
|
|
1.92%
|
|
2012
|
|
|
25,000
|
|
|
|
2.36%
|
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10:
OTHER NONCURRENT ASSETS AND LIABILITIES
We have deferred compensation plans that permit certain
employees to defer portions of their compensation and accrue
income on the deferred amounts. Included in other noncurrent
liabilities is $112.6 million and $155.5 million at
April 30, 2009 and 2008, respectively, reflecting our
obligation under these plans. We may purchase whole-life
insurance contracts on certain employee participants to recover
distributions made or to be made under the plans. The cash
surrender value of the policies and other assets held by the
Deferred Compensation Trust is recorded in other noncurrent
assets and totaled $104.0 million and $163.1 million
at April 30, 2009 and 2008, respectively. These assets are
restricted, as they are only available to fund the related
liability. The decrease in value of these assets and liabilities
is primarily due to current market conditions. Losses on certain
invested assets are not deductible for income taxes and
therefore had an impact on our income tax rates in the current
fiscal year.
NOTE 11:
STOCKHOLDERS EQUITY
On October 27, 2008, we sold 8.3 million shares of our
common stock, without par value, at a price of $17.50 per share
in a registered direct offering through subscription agreements
with selected institutional investors. We received net proceeds
of $141.4 million, after deducting placement agent fees and
other offering expenses. The purpose of the equity offering was
to ensure we maintained adequate equity levels, as a condition
of our CLOCs, during our off-season. Proceeds were used for
general corporate purposes.
We are authorized to issue 6.0 million shares of Preferred
Stock without par value. At April 30, 2009, we had
5.6 million shares of authorized but unissued Preferred
Stock. Of the unissued shares, 0.6 million shares have been
designated as Participating Preferred Stock.
On March 8, 1995, our Board of Directors authorized the
issuance of a series of 0.5 million shares of non-voting
Preferred Stock designated as Convertible Preferred Stock
without par value. At April 30, 2009, we had
0.5 million shares of authorized but unissued Convertible
Preferred Stock. The holders of the Convertible Preferred Stock
are not entitled to receive dividends paid in cash, property or
securities and, in the event of any dissolution, liquidation or
wind-up of
the Company, will share ratably with the holders of Common Stock
then outstanding in the assets of the Company after any
distribution or payments are made to the holders of
Participating Preferred stock or the holders of any other class
or series of stock of the Company with preference over the
Common Stock.
NOTE 12:
STOCK-BASED COMPENSATION
We utilize the fair value method to account for stock-based
awards. Stock-based compensation expense of $32.6 million,
$50.4 million and $50.5 million was recorded in fiscal
years 2009, 2008 and 2007, respectively. The related tax
benefits of $12.2 million, $17.3 million and
$17.9 million are included in our results for fiscal years
2009, 2008 and 2007, respectively. Stock-based compensation
expense of our continuing operations totaled $26.6 million,
$40.4 million and $37.0 million in fiscal years 2009,
2008 and 2007, respectively.
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment (SFAS 123R) requires excess
tax benefits from stock-based compensation to be included as a
financing activity in the statements of cash flows. As a result,
we classified $8.6 million, $3.2 million and
$3.2 million as cash inflows from financing activities
rather
H&R
BLOCK 2009
Form 10K 57
than as operating activities for
fiscal years 2009, 2008 and 2007, respectively. We realized tax
benefits of $20.2 million, $12.6 million and
$13.3 million in fiscal years 2009, 2008 and 2007,
respectively.
We have four stock-based compensation plans which have been
approved by our shareholders. As of April 30, 2009, we had
11.5 million shares reserved for future awards under these
plans. We issue shares from our treasury stock to satisfy the
exercise or release of stock-based awards. We believe we have
adequate treasury stock to issue for the exercise or release of
stock-based awards.
Our 2003 Long-Term Executive Compensation Plan provides for
awards of options (both incentive and nonqualified), nonvested
shares, performance nonvested share units and other stock-based
awards to employees. These awards entitle the holder to shares
or the right to purchase shares of common stock as the award
vests, typically over a three-year period with one-third vesting
each year. Nonvested shares receive dividends during the vesting
period and performance nonvested share units receive cumulative
dividends at the end of the vesting period. We measure the fair
value of options on the grant date or modification date using
the Black-Scholes option valuation model. We measure the fair
value of nonvested shares and performance nonvested share units
based on the closing price of our common stock on the grant
date. Generally, we expense the grant-date fair value, net of
estimated forfeitures, over the vesting period on a
straight-line basis. Upon adoption of SFAS 123R, awards
granted to employees who are of retirement age or reach
retirement age at least one year after the grant date, but prior
to the end of the service period of the awards, are expensed
over the shorter of the two periods. Options are generally
granted at a price equal to the fair market value of our common
stock on the grant date and have a contractual term of ten years.
Our 1999 Stock Option Plan for Seasonal Employees provides for
awards of nonqualified options to certain employees. These
awards are granted to seasonal employees in our Tax Services
segment and entitle the holder to the right to purchase shares
of common stock as the award vests, typically over a two-year
period. We measure the fair value of options on the grant date
using the Black-Scholes option valuation model. We expense the
grant-date fair value, net of estimated forfeitures, over the
seasonal service period. Options are granted at a price equal to
the fair market value of our common stock on the grant date, are
exercisable during September through November in each of the two
years following the calendar year of the grant, and have a
contractual term of 29 months.
Our 1989 Stock Option Plan for Outside Directors, which provided
for awards of nonqualified options to outside directors, was
terminated effective June 11, 2008, except for outstanding
awards thereunder. The plan was replaced by the 2008 Deferred
Stock Unit Plan for Outside Directors. The number of deferred
stock units credited to an outside directors account
pursuant to an award is determined by dividing the dollar amount
of the award by the average current market value per share of
common stock for the ten consecutive trading dates ending on the
date the deferred stock units are granted to the outside
directors. Each deferred stock unit granted is vested upon award
and the settlement of shares occurs six months after separation
of service from the Board of Directors.
Our 2000 Employee Stock Purchase Plan (ESPP) provides employees
the option to purchase shares of our common stock through
payroll deductions. The purchase price of the stock is 90% of
the lower of either the fair market value of our common stock on
the first trading day within the Option Period or on the last
trading day of the Option Period. The Option Periods are
six-month periods beginning on January 1 and July 1 each year.
We measure the fair value of options on the grant date utilizing
the Black-Scholes option valuation model in accordance with FASB
Technical
Bulletin 97-1,
Accounting under Statement 123 for Certain Employee Stock
Purchase Plans with a Look-Back Option. The fair value of
the option includes the value of the 10% discount and the
look-back feature. We expense the grant-date fair value over the
six-month vesting period.
A summary of options for the year ended April 30, 2009, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
Outstanding, beginning of the year
|
|
|
21,641
|
|
|
$
|
21.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,153
|
|
|
|
22.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,442
|
)
|
|
|
16.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(5,951
|
)
|
|
|
23.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of the year
|
|
|
16,401
|
|
|
|
21.85
|
|
|
|
3 years
|
|
|
$
|
4,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of the year
|
|
|
10,666
|
|
|
$
|
21.27
|
|
|
|
2 years
|
|
|
$
|
4,081
|
|
|
|
|
|
Exercisable and expected to vest
|
|
|
16,081
|
|
|
|
21.83
|
|
|
|
3 years
|
|
|
|
4,081
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal
years 2009, 2008 and 2007 was $33.0 milllion, $12.9 million
and $11.8 million, respectively. As of April 30, 2009,
we had $9.0 million of total unrecognized compensation cost
related to these options. The cost is expected to be recognized
over a weighted-average period of two years.
58 H&R
BLOCK 2009 Form 10K
We utilize the Black-Scholes option valuation model to value our
options on the grant date. We typically estimate the expected
volatility using our historical stock price data, unless
historical volatility is not representative of expected
volatility. We also use historical exercise and forfeiture
behaviors to estimate the options expected term and our
forfeiture rate. The dividend yield is calculated based on the
current dividend and the market price of our common stock on the
grant date. The risk-free interest rate is based on the
U.S. Treasury zero-coupon yield curve in effect on the
grant date. Both expected volatility and the risk-free interest
rate are based on a period that approximates the expected term.
The following assumptions were used to value options during the
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Options management and director:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
23.41% - 25.20%
|
|
|
|
21.92% - 25.74%
|
|
|
|
21.70% - 29.06%
|
|
|
|
|
|
Expected term
|
|
|
4 years
|
|
|
|
4-7 years
|
|
|
|
4-7 years
|
|
|
|
|
|
Dividend yield
|
|
|
2.35% - 3.04%
|
|
|
|
2.36% - 3.12%
|
|
|
|
2.15% - 2.62%
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.54% - 3.26%
|
|
|
|
2.35% - 5.01%
|
|
|
|
4.33% - 5.10%
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
3.80
|
|
|
$
|
4.44
|
|
|
$
|
5.15
|
|
|
|
|
|
Options seasonal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
25.35%
|
|
|
|
20.75%
|
|
|
|
20.05%
|
|
|
|
|
|
Expected term
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
|
|
Dividend yield
|
|
|
2.80%
|
|
|
|
2.44%
|
|
|
|
2.26%
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.54%
|
|
|
|
4.81%
|
|
|
|
5.11%
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
2.83
|
|
|
$
|
3.07
|
|
|
$
|
3.17
|
|
|
|
|
|
ESPP options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
29.13% - 43.82%
|
|
|
|
29.96% - 31.10%
|
|
|
|
19.55% - 26.30%
|
|
|
|
|
|
Expected term
|
|
|
0.5 years
|
|
|
|
0.5 years
|
|
|
|
0.5 years
|
|
|
|
|
|
Dividend yield
|
|
|
2.67% - 2.78%
|
|
|
|
2.46% - 3.06%
|
|
|
|
2.26% - 2.33%
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.27% - 2.13%
|
|
|
|
3.32% - 4.98%
|
|
|
|
5.08% - 5.24%
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
4.38
|
|
|
$
|
3.87
|
|
|
$
|
3.90
|
|
|
|
|
|
|
A summary of nonvested shares and performance nonvested share
units for the year ended April 30, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares
in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
Outstanding, beginning of the year
|
|
|
1,727
|
|
|
$
|
23.79
|
|
|
|
|
|
Granted
|
|
|
1,016
|
|
|
|
22.14
|
|
|
|
|
|
Released
|
|
|
(1,024
|
)
|
|
|
23.83
|
|
|
|
|
|
Forfeited
|
|
|
(262
|
)
|
|
|
22.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of the year
|
|
|
1,457
|
|
|
|
22.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vesting during fiscal years 2009,
2008 and 2007 was $21.1 million, $21.4 million and
$24.9 million, respectively. Upon the grant of nonvested
shares and performance nonvested share units, unearned
compensation cost is recorded as an offset to additional paid-in
capital and is amortized as compensation expense over the
vesting period. As of April 30, 2009, we had
$17.4 million of total unrecognized compensation cost
related to these shares. This cost is expected to be recognized
over a weighted-average period of two years.
NOTE 13:
INCOME TAXES
The components of income from continuing operations upon which
domestic and foreign income taxes have been provided are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
815,614
|
|
|
$
|
700,162
|
|
|
$
|
600,964
|
|
|
|
|
|
Foreign
|
|
|
23,756
|
|
|
|
34,909
|
|
|
|
26,297
|
|
|
|
|
|
|
|
|
|
|
$
|
839,370
|
|
|
$
|
735,071
|
|
|
$
|
627,261
|
|
|
|
|
|
|
|
|
|
H&R
BLOCK 2009
Form 10K 59
The components of income tax expense (benefit) for continuing
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
243,085
|
|
|
$
|
196,676
|
|
|
$
|
240,688
|
|
|
|
|
|
State
|
|
|
38,418
|
|
|
|
54,096
|
|
|
|
35,332
|
|
|
|
|
|
Foreign
|
|
|
1,393
|
|
|
|
16,901
|
|
|
|
7,388
|
|
|
|
|
|
|
|
|
|
|
|
282,896
|
|
|
|
267,673
|
|
|
|
283,408
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
36,739
|
|
|
|
48,788
|
|
|
|
(28,117
|
)
|
|
|
|
|
State
|
|
|
6,582
|
|
|
|
(27,471
|
)
|
|
|
(26
|
)
|
|
|
|
|
Foreign
|
|
|
98
|
|
|
|
134
|
|
|
|
2,536
|
|
|
|
|
|
|
|
|
|
|
|
43,419
|
|
|
|
21,451
|
|
|
|
(25,607
|
)
|
|
|
|
|
|
|
|
Total income taxes for continuing operations
|
|
$
|
326,315
|
|
|
$
|
289,124
|
|
|
$
|
257,801
|
|
|
|
|
|
|
|
|
|
The reconciliation between the income tax provision and the
amount computed by applying the statutory federal tax rate of
35% to income taxes of continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
U.S. statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
|
Change in tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
federal income tax benefit
|
|
|
4.2
|
%
|
|
|
5.0
|
%
|
|
|
3.6
|
%
|
|
|
|
|
Permanent differences
|
|
|
1.6
|
%
|
|
|
0.7
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
FIN 48 liabilities
|
|
|
0.5
|
%
|
|
|
2.9
|
%
|
|
|
|
%
|
|
|
|
|
Net decrease in valuation allowance
|
|
|
(1.2
|
%)
|
|
|
(3.7
|
)%
|
|
|
|
%
|
|
|
|
|
Other
|
|
|
(1.2
|
%)
|
|
|
(0.6
|
)%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
38.9
|
%
|
|
|
39.3
|
%
|
|
|
41.1
|
%
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and
liabilities of continuing operations are reflected in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
49,239
|
|
|
$
|
78,618
|
|
|
|
|
|
Allowance for credit losses and related reserves
|
|
|
179,508
|
|
|
|
154,320
|
|
|
|
|
|
Net operating loss carryovers
|
|
|
5,495
|
|
|
|
8,771
|
|
|
|
|
|
Other
|
|
|
2,119
|
|
|
|
2,523
|
|
|
|
|
|
Valuation allowance
|
|
|
(4,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
231,588
|
|
|
|
244,232
|
|
|
|
|
|
|
|
|
Deferred and stock-based compensation
|
|
|
65,493
|
|
|
|
88,797
|
|
|
|
|
|
Property and equipment
|
|
|
5,743
|
|
|
|
34,180
|
|
|
|
|
|
Deferred revenue
|
|
|
39,489
|
|
|
|
40,339
|
|
|
|
|
|
Basis difference in mortgage-related investment
|
|
|
18,288
|
|
|
|
40,394
|
|
|
|
|
|
Net operating loss carryovers
|
|
|
27,315
|
|
|
|
36,829
|
|
|
|
|
|
Accrued expenses
|
|
|
42,291
|
|
|
|
12,914
|
|
|
|
|
|
Capital loss carryover
|
|
|
145,572
|
|
|
|
2,300
|
|
|
|
|
|
Other
|
|
|
6,480
|
|
|
|
2,383
|
|
|
|
|
|
Valuation allowance
|
|
|
(160,642
|
)
|
|
|
(36,929
|
)
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
190,029
|
|
|
|
221,207
|
|
|
|
|
|
|
|
|
|
|
|
421,617
|
|
|
|
465,439
|
|
|
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(5,607
|
)
|
|
|
(6,580
|
)
|
|
|
|
|
|
|
|
Current
|
|
|
(5,607
|
)
|
|
|
(6,580
|
)
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(105,366
|
)
|
|
|
(78,685
|
)
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
(105,366
|
)
|
|
|
(78,685
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
310,644
|
|
|
$
|
380,174
|
|
|
|
|
|
|
|
|
|
The deferred tax assets and liabilities reported at
April 30, 2008 do not include deferred tax assets totaling
$21.4 million and deferred tax liabilities totaling
$1.1 million, as these were disclosed on a net basis as
assets of discontinued operations held for sale in the prior
year. The loss from discontinued operations for fiscal years
2009,
60 H&R
BLOCK 2009 Form 10K
2008 and 2007 of
$27.4 million, $754.6 million and $803.1 million,
respectively are net of tax benefits of $20.3 million,
$411.1 million and $421.4 million, respectively. Our
effective tax rate for discontinued operations was 42.5% and
35.3% for fiscal years 2009 and 2008, respectively.
During the current year, we recorded a deferred tax asset of
$145.6 million, representing the tax effects of the
difference between the tax and book basis in the stock of our
brokerage business sold to Ameriprise in November 2008. For tax
purposes, we incurred a capital loss upon disposition of that
business, which generally can only be utilized to the extent we
realize capital gains within five years subsequent to the date
of the loss. We do not currently expect to be able to realize a
tax benefit for substantially all of this loss and, therefore,
recorded a valuation allowance of $137.4 million, resulting
in a net tax benefit during fiscal year 2009 of approximately
$9 million. We have a capital loss carryover of
approximately $369 million which will expire if not used to
offset future capital gains before December 31, 2013.
Certain of our subsidiaries file stand-alone returns in various
states and foreign jurisdictions, and others join in filing
consolidated of combined returns in such jurisdictions. At
April 30, 2009, we had net operating losses (NOLs) in
various states and foreign jurisdictions. The amount of state
NOLs vary by taxing jurisdiction. We recorded deferred tax
assets of $32.8 million for the tax effects of such losses
and a valuation allowance of $19.5 million for the portion
of such losses that, more likely than not, will not be realized.
If not used, the NOLs will expire in varying amounts during
fiscal years 2010 through 2029.
We intend to indefinitely reinvest foreign earnings, therefore,
a provision has not been made for income taxes that might be
payable upon remittance of such earnings. Determination of the
amount of unrecognized deferred tax liability on unremitted
foreign earnings is not practicable.
As a result of the initial adoption of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) in fiscal year 2008, we
recognized an additional reserve for uncertain tax positions of
$9.7 million and a corresponding decrease to retained
earnings.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits for fiscal years 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Balance, beginning of the year
|
|
$
|
137,608
|
|
|
$
|
133,263
|
|
|
|
|
|
Additions based on tax positions related to prior years
|
|
|
14,541
|
|
|
|
26,283
|
|
|
|
|
|
Reductions based on tax positions related to prior years
|
|
|
(6,096
|
)
|
|
|
(16,500
|
)
|
|
|
|
|
Additions based on tax positions related to the current year
|
|
|
4,110
|
|
|
|
17,736
|
|
|
|
|
|
Reductions related to settlements with tax authorities
|
|
|
(18,189
|
)
|
|
|
(18,633
|
)
|
|
|
|
|
Expiration of statute of limitations
|
|
|
(5,007
|
)
|
|
|
(5,692
|
)
|
|
|
|
|
Foreign currency translation
|
|
|
(2,362
|
)
|
|
|
1,151
|
|
|
|
|
|
|
|
|
Balance, end of the year
|
|
$
|
124,605
|
|
|
$
|
137,608
|
|
|
|
|
|
|
|
|
|
Of the $124.6 million ending gross unrecognized tax benefit
balance, $107.0 million if recognized, would impact the
effective rate. This difference results from adjusting the gross
balances for such items as federal, state and foreign deferred
items, interest and deductible taxes. We believe it is
reasonably possible that the balance of unrecognized tax
benefits could decrease by approximately $15.5 million
within the next twelve months due to anticipated settlements of
audit issues with various states. This amount is included in
accounts payable, accrued expenses and other current
liabilities. The remaining amount is classified as long-term and
is included in other noncurrent liabilities in the consolidated
balance sheet.
Interest and penalties, if any, accrued on the unrecognized tax
benefits are reflected in income tax expense. The amount of
gross interest and penalties accrued on FIN 48 positions
during fiscal year 2009 totaled $15.4 million. The total
gross interest and penalties accrued as of April 30, 2009
totaled $42.4 million.
We file a consolidated federal income tax return in the
U.S. and file tax returns in various state and foreign
jurisdictions. The consolidated tax returns for the years 2006
and 2007 are currently under examination by the Internal Revenue
Service (IRS). The consolidated tax returns for the years
1999 2005 are at the appellate level. Tax years
prior to 1999 are closed by statute. Historically, tax returns
in various foreign and state jurisdictions are examined and
settled upon completion of the examination.
H&R
BLOCK 2009
Form 10K 61
|
|
NOTE 14: |
INTEREST INCOME
AND INTEREST EXPENSE
|
The following table shows the components of interest income and
expense of our continuing operations. Operating interest expense
is included in cost of other revenues, and interest expense on
acquisition debt is included in other income (expense), net on
our consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
$
|
46,396
|
|
|
$
|
74,895
|
|
|
$
|
53,396
|
|
|
|
|
|
Emerald Advance lines of credit
|
|
|
91,019
|
|
|
|
45,339
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
4,896
|
|
|
|
12,143
|
|
|
|
8,174
|
|
|
|
|
|
Other
|
|
|
12,205
|
|
|
|
19,181
|
|
|
|
11,682
|
|
|
|
|
|
|
|
|
|
|
$
|
154,516
|
|
|
$
|
151,558
|
|
|
$
|
73,252
|
|
|
|
|
|
|
|
|
Operating interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
83,193
|
|
|
$
|
56,482
|
|
|
$
|
43,378
|
|
|
|
|
|
Deposits
|
|
|
14,069
|
|
|
|
42,878
|
|
|
|
32,128
|
|
|
|
|
|
FHLB advances
|
|
|
5,113
|
|
|
|
6,008
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
102,375
|
|
|
|
105,368
|
|
|
|
76,342
|
|
|
|
|
|
Interest expense acquisition debt
|
|
|
1,653
|
|
|
|
2,019
|
|
|
|
46,920
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
104,028
|
|
|
$
|
107,387
|
|
|
$
|
123,262
|
|
|
|
|
|
|
|
|
NOTE 15:
FAIR VALUE
On May 1, 2008, we adopted Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosure requirements for fair value measurements. We
elected to defer the application of SFAS 157 for
nonfinancial assets and nonfinancial liabilities until fiscal
year 2010, as provided for by FASB Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
We adopted FASB Staff Position
No. 115-2
and 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments
(FSP 115-2),
which provides guidance on determining
other-than-temporary
impairments for debt securities, as of April 30, 2009. The
adoption of these pronouncements did not have a material impact
on our consolidated results of operations or financial position.
FAIR VALUE
HIERARCHY SFAS 157 establishes a
fair value hierarchy that prioritizes the inputs used to measure
fair value into three broad levels, considering the relative
reliability of the inputs, as follows:
|
|
|
|
§
|
Level 1 Quoted prices in active markets for
identical assets or liabilities. An active market for the asset
or liability is a market in which transactions for the asset or
liability occur with sufficient frequency and volume to provide
pricing information on an ongoing basis.
|
|
§
|
Level 2 Quoted prices for similar instruments
in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuations in which all significant inputs are observable in the
market.
|
|
§
|
Level 3 Valuation is modeled using significant
inputs that are unobservable in the market. These unobservable
inputs reflect our own estimates of assumptions that market
participants would use in pricing the asset or liability.
|
ESTIMATION OF
FAIR VALUE The following is a description
of the valuation methodologies used for assets and liabilities
measured at fair value and the general classification of these
instruments pursuant to the fair value hierarchy.
|
|
|
|
§
|
Available-for-sale
securities
Available-for-sale
securities are carried at fair value on a recurring basis. When
available, fair value is based on quoted prices in an active
market and as such, would be classified as Level 1. If
quoted market prices are not available, fair values are
estimated using quoted prices of securities with similar
characteristics, discounted cash flows or other pricing models.
Available-for-sale
securities that we classify as Level 2 include certain
agency and non-agency mortgage-backed securities,
U.S. states and political subdivisions debt securities and
other debt and equity securities.
|
|
§
|
Residual interests in securitizations Determination
of the fair value of residual interests in securitizations
requires the use of unobservable inputs. We value these
securities using a discounted cash flow approach that
incorporates expectations of prepayment speeds and expectations
of delinquencies and losses. Risk-adjusted discount rates are
based on quotes from third-party sources. These assets are
classified as Level 3.
|
|
§
|
Impaired mortgage loans held for investment The fair
value of impaired mortgage loans held for investment are
generally based on the lower of (1) the amortized cost
adjusted for charge-offs, net of allowance for loan losses,
deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans
|
62 H&R
BLOCK 2009 Form 10K
|
|
|
|
|
or (2) the appraised value of
the underlying collateral less estimated selling costs. These
loans are classified as Level 3.
|
ASSETS AND
LIABILITIES MEASURED AT FAIR VALUE The
following table presents for each hierarchy level the financial
assets of our continuing operations that are measured at fair
value on both a recurring and non-recurring basis at
April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in 000s)
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
43,863
|
|
|
$
|
|
|
|
$
|
43,863
|
|
|
$
|
|
|
|
|
|
|
Residual interests in securitizations
|
|
|
5,793
|
|
|
|
|
|
|
|
|
|
|
|
5,793
|
|
|
|
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired mortgage loans held for investment
|
|
|
238,568
|
|
|
|
|
|
|
|
|
|
|
|
238,568
|
|
|
|
|
|
|
|
|
|
|
$
|
288,224
|
|
|
$
|
|
|
|
$
|
43,863
|
|
|
$
|
244,361
|
|
|
|
|
|
|
|
|
As a percentage of total assets
|
|
|
5.4
|
%
|
|
|
|
%
|
|
|
0.8
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
The following table presents changes in residual interests in
securitizations, our only Level 3 financial assets measured
at fair value on a recurring basis, at April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
|
Fair value, beginning of period
|
|
$
|
16,678
|
|
|
|
|
|
Losses:
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(5,830
|
)
|
|
|
|
|
Included in other comprehensive income (loss)
|
|
|
(1,707
|
)
|
|
|
|
|
Cash received
|
|
|
(3,348
|
)
|
|
|
|
|
|
|
|
Fair value, end of period
|
|
$
|
5,793
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities and residual interests in securitizations are
included in other assets on our consolidated balance sheets.
Losses included in earnings are reported in results from
operations, except for losses from residual interests in
securitizations which are reported in other non-operating income
(expense) of our continuing operations.
The following methods were used to determine the fair values of
our other financial instruments:
|
|
|
|
§
|
Cash equivalents, accounts receivable, demand deposits, accounts
payable, accrued liabilities and the current portion of
long-term debt The carrying values reported in the
balance sheet for these items approximate fair market value due
to the relative short-term nature of the respective instruments.
|
|
§
|
Mortgage loans held for investment The fair value of
mortgage loans held for investment is generally determined using
a pricing model based on current market information obtained
from origination data, and bids received from time to time. The
fair value of certain impaired loans held for investment is
primarily based on the appraised value of the underlying
collateral less estimated selling costs.
|
|
§
|
IRAs and other time deposits The fair value is
calculated based on the discounted value of contractual cash
flows.
|
|
§
|
Long-term debt The fair value of borrowings is based
on rates currently available to us for obligations with similar
terms and maturities, including current market rates on our
Senior Notes.
|
The carrying amounts and estimated fair values of our financial
instruments at April 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
744,899
|
|
|
$
|
568,920
|
|
|
|
|
|
IRAs and other time deposits
|
|
|
495,379
|
|
|
|
494,795
|
|
|
|
|
|
Long-term debt
|
|
|
1,040,904
|
|
|
|
1,000,483
|
|
|
|
|
|
|
FAIR VALUE
OPTION We adopted Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS 159) on May 1, 2008. SFAS 159 permits
an instrument by instrument irrevocable election to account for
selected financial assets and financial liabilities at fair
value. We did not elect to apply the fair value option to any
eligible financial assets or financial liabilities on
May 1, 2008 or during the fiscal year ended April 30,
2009. Subsequent to the initial adoption, we may elect to
account for selected financial assets and financial liabilities
at fair value. Such an election could be made at the time an
eligible financial asset, financial liability or firm commitment
is recognized or when certain specified reconsideration events
occur.
H&R
BLOCK 2009
Form 10K 63
NOTE 16:
REGULATORY REQUIREMENTS
BANKING
HRB Bank and the Company are subject to various regulatory
requirements, including capital guidelines for HRB Bank,
administered by federal banking agencies. Failure to meet
minimum capital requirements can trigger certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank and
our consolidated financial statements. All savings associations
are subject to the capital adequacy guidelines and the
regulatory framework for prompt corrective action. HRB Bank must
meet specific capital guidelines that involve quantitative
measures of HRB Banks assets, liabilities and certain
off-balance sheet items, as calculated under regulatory
accounting practices. HRB Banks capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis.
Quantitative measures established by regulation to ensure
capital adequacy require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and
Tier 1 capital, as set forth in the table below. In
addition to these minimum ratio requirements, HRB Bank is
required to continually maintain a 12.0% minimum leverage ratio
as a condition of its charter-approval order through fiscal year
2009. This condition was extended through fiscal year 2012 as a
result of a Supervisory Directive issued on May 29, 2007.
As of April 30, 2009, HRB Banks leverage ratio was
12.4%.
As of March 31, 2009, our most recent TFR filing with the
Office of Thrift Supervision (OTS), HRB Bank was a well
capitalized institution under the prompt corrective action
provisions of the FDIC. The five capital categories are:
(1) well capitalized (total risk-based capital
ratio of 10%, Tier 1 Risk-based capital ratio of 6% and
leverage ratio of 5%); (2) adequately
capitalized; (3) undercapitalized;
(4) significantly undercapitalized; and
(5) critically undercapitalized. There are no
conditions or events since March 31, 2009 that management
believes have changed HRB Banks category.
The following table sets forth HRB Banks regulatory
capital requirements at March 31, 2009, as calculated in
the most recently filed TFR:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prompt Corrective
|
|
|
|
|
|
|
Actual
|
|
|
For
Capital Adequacy Under Purposes
|
|
|
Action
Provisions
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
Total risk-based capital ratio
(1)
|
|
$
|
182,459
|
|
|
|
28.4%
|
|
|
$
|
51,320
|
|
|
|
8.0%
|
|
|
$
|
64,150
|
|
|
|
10.0%
|
|
|
|
|
|
Tier 1 risk-based capital ratio
(2)
|
|
$
|
175,159
|
|
|
|
27.3%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
38,490
|
|
|
|
6.0%
|
|
|
|
|
|
Tier 1 capital ratio (leverage)
(3)
|
|
$
|
175,159
|
|
|
|
13.7%
|
|
|
$
|
153,752
|
|
|
|
12.0%
|
|
|
$
|
64,063
|
|
|
|
5.0%
|
|
|
|
|
|
Tangible equity ratio
(4)
|
|
$
|
175,159
|
|
|
|
13.7%
|
|
|
$
|
19,219
|
|
|
|
1.5%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
(1)
|
Total risk-based
capital divided by risk-weighted assets.
|
(2)
|
Tier 1 (core)
capital less deduction for low-level recourse and residual
interest divided by risk-weighted assets.
|
(3)
|
Tier 1 (core)
capital divided by adjusted total assets.
|
(4)
|
Tangible capital
divided by tangible assets.
|
Block Financial LLC (BFC) made additional capital contributions
to HRB Bank of $245.0 million during fiscal year 2009.
These contributions were provided for HRB Bank to meet its
capital requirements due to seasonal fluctuations in the size of
its balance sheet. Also during fiscal year 2009, we submitted an
application to the OTS requesting that HRB Bank be allowed to
pay dividends to BFC in an amount that would not exceed the
capital necessary to continuously maintain HRB Banks
required 12.0% leverage ratio. The OTS approved our application
on January 12, 2009. HRB Bank paid dividends of
$235.0 million to BFC in fiscal year 2009.
NOTE 17:
COMMITMENTS AND CONTINGENCIES
We offer guarantees under our POM program to tax clients whereby
we will assume the cost of additional tax assessments, up to a
cumulative per client limit of $5,000, attributable to tax
return preparation error for which we are responsible. We defer
all revenues and direct costs associated with these guarantees,
recognizing these amounts over the term of the guarantee based
on historical and actual payment of claims. The related current
asset is included in prepaid expenses and other current assets.
The related liability is included in accounts payable, accrued
expenses and other current liabilities in the consolidated
balance sheets. The related noncurrent asset and liability are
included in other assets and other noncurrent liabilities,
respectively, in the consolidated balance
64 H&R
BLOCK 2009 Form 10K
sheets. A loss on these POM
guarantees would be recognized if the sum of expected costs for
services exceeded unearned revenue. The changes in the deferred
revenue liability for fiscal years 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Balance, beginning of the year
|
|
$
|
140,583
|
|
|
$
|
142,173
|
|
|
|
|
|
Amounts deferred for new guarantees issued
|
|
|
84,429
|
|
|
|
78,913
|
|
|
|
|
|
Revenue recognized on previous deferrals
|
|
|
(78,205
|
)
|
|
|
(80,503
|
)
|
|
|
|
|
|
|
|
Balance, end of the year
|
|
$
|
146,807
|
|
|
$
|
140,583
|
|
|
|
|
|
|
|
|
|
During fiscal year 2009, we entered into an agreement to
purchase $45.8 million in media advertising between
July 1, 2009 and June 30, 2013. We expect to make
payments totaling $11.4 million during each fiscal year
through 2013.
We have various contingent purchase price obligations in
connection with prior acquisitions. In many cases, contingent
payments to be made in connection with these acquisitions are
not subject to a stated limit. We estimate the potential
payments (undiscounted) total $24.2 million as of
April 30, 2009. Our estimate is based on current financial
conditions. Should actual results differ materially from our
assumptions, the potential payments will differ from the above
estimate. Such payments, if and when paid, would typically be
recorded as additional purchase price, generally goodwill.
Commitments exist to loan McGladrey & Pullen LLP
(M&P) the lower of the value of their accounts receivable,
work-in-process
and fixed assets or $125.0 million, on a revolving basis
through January 31, 2011, subject to certain termination
clauses. This revolving facility bears interest at prime rate
plus two percent on the outstanding amount. The loan is secured
by the accounts receivable,
work-in-process
and fixed assets of M&P. At April 30, 2009, we had a
receivable from M&P totaling $36.4 million related to
this commitment.
During fiscal year 2009, we entered into an agreement to advance
funds to M&P through April 2018 to fund acquisitions that
would be mutually beneficial to both entities. This facility
bears interest at prime rate plus two percent on the outstanding
amount. Loans are secured by the accounts receivable,
work-in-process
and fixed assets of M&P and are due fifteen years from the
date of each advance. At April 30, 2009, we had a
receivable from M&P totaling $23.2 million related to
this commitment.
We have contractual commitments to fund certain franchises
requesting Franchise Equity Lines of Credit (FELCs). Our total
obligation under these lines of credit was $83.1 million at
April 30, 2009, and net of amounts drawn and outstanding,
our remaining commitment to fund totaled $38.1 million.
We are self-insured for certain risks, including, workers
compensation, property and casualty, professional liability and
claims related to our POM program. These programs maintain
various self-insured retentions. In all but POM, commercial
insurance is purchased in excess of the self-insured retentions.
We accrue estimated losses for self-insured retentions using
actuarial models and assumptions based on historical loss
experience. The nature of our business may subject us to error
and omissions, casualty and professional liability lawsuits. To
the extent that we are subject to claims exceeding our insurance
coverage, such suits could have a material adverse effect on our
financial position, results of operations or liquidity.
We issued three standby letters of credit to servicers paying
claims related to our POM, errors and omissions, and property
and casualty insurance policies. These letters of credit are for
amounts not to exceed $6.7 million in the aggregate. At
April 30, 2009, there were no balances outstanding on these
letters of credit.
Our self-insured health benefits plan provides medical benefits
to employees electing coverage under the plan. We maintain a
reserve for incurred but not reported medical claims and claim
development. The reserve is an estimate based on historical
experience and other assumptions, some of which are subjective.
We adjust our self-insured medical benefits reserve as our loss
experience changes due to medical inflation, changes in the
number of plan participants and an aging employee base.
During fiscal year 2006, we entered into a transaction with the
City of Kansas City, Missouri, to provide us with sales and
property tax savings on the furniture, fixtures and equipment
for our corporate headquarters facility. Under the transaction,
the City purchased equipment by issuing $31.0 million in
Industrial Revenue Bonds due in December 2015, and leased the
furniture, fixtures and equipment to us for an identical term
under a capital lease. The Citys bonds were purchased by
us. Because the City has assigned the lease to the bond trustee
for our benefit as the sole bondholder, we, in effect, control
enforcement of the lease against ourselves. As a result of the
capital lease treatment, the furniture, fixtures and equipment
will remain a component of property, plant and equipment in our
consolidated balance sheets. As a result of the legal right of
offset, the capital lease obligation and the corresponding bond
investments have been eliminated in consolidation. The
transaction provides us with property tax exemptions for the
leased furniture, fixtures and equipment. As of April 30,
2009, we have purchased $31.0 million in bonds in
connection with this arrangement.
H&R
BLOCK 2009
Form 10K 65
Substantially all of the operations of our subsidiaries are
conducted in leased premises. Most of the operating leases are
for periods ranging from three years to five years, with renewal
options and provide for fixed monthly rentals. Future minimum
operating lease commitments of our continuing operations at
April 30, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
|
2010
|
|
$
|
248,712
|
|
|
|
|
|
2011
|
|
|
186,389
|
|
|
|
|
|
2012
|
|
|
128,874
|
|
|
|
|
|
2013
|
|
|
74,714
|
|
|
|
|
|
2014
|
|
|
44,145
|
|
|
|
|
|
2015 and beyond
|
|
|
79,464
|
|
|
|
|
|
|
|
|
|
|
$
|
762,298
|
|
|
|
|
|
|
|
|
|
Rent expense of our continuing operations for fiscal years 2009,
2008 and 2007 totaled $308.1 million, $299.6 million
and $284.9 million, respectively.
DISCONTINUED
OPERATIONS SCC maintains recourse with
respect to loans previously sold or securitized under
indemnification of loss provisions relating to breach of
representations and warranties made to purchasers or insurers.
As a result, SCC may be required to repurchase loans or
otherwise indemnify third-parties for losses. These
representations and warranties and corresponding repurchase
obligations generally are not subject to stated limits or a
stated term and, therefore, may continue. SCC has established a
liability related to potential losses under these
indemnifications and monitors the adequacy of the repurchase
liability on an ongoing basis. To the extent that future claim
volumes differ from current estimates, or the value of mortgage
loans and residential home prices change, future losses may be
different than these estimates and those differences may be
significant.
At April 30, 2009 and 2008, our loan repurchase liability
totaled $206.6 million and $243.1 million,
respectively. This liability is included in accounts payable,
accrued expenses and other current liabilities on our
consolidated balance sheets. During fiscal year 2009, we made
payments to third-parties totaling $44.2 million
representing loan repurchases or loss indemnifications for
various representation and warranties claims.
As described more fully in note 19, we entered into
indemnifications in connection with our November 2008 sale of
HRBFA and recorded a liability with an estimated fair value of
$15.5 million in connection with the sale.
We have recorded a restructuring liability which primarily
relates to estimated lease obligations for vacant space
resulting from office closings and employee severance costs for
our discontinued mortgage businesses. These liabilities are
included in accounts payable, accrued expenses and other current
liabilities and accrued salaries, wages and payroll taxes on our
consolidated balance sheets, respectively. Actual results could
differ from these estimates. Changes in our restructuring
liability during the year ended April 30, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
|
|
Accrual Balance as
of
|
|
|
Cash
|
|
|
Other
|
|
|
Accrual Balance
as of
|
|
|
|
|
|
|
April 30, 2008
|
|
|
Payments
|
|
|
Adjustments
|
|
|
April 30,
2009
|
|
|
|
|
|
|
|
Employee severance costs
|
|
$
|
4,807
|
|
|
$
|
(5,068
|
)
|
|
$
|
408
|
|
|
$
|
147
|
|
|
|
|
|
Contract termination costs
|
|
|
23,113
|
|
|
|
(15,594
|
)
|
|
|
(133
|
)
|
|
|
7,386
|
|
|
|
|
|
|
|
|
|
|
$
|
27,920
|
|
|
$
|
(20,662
|
)
|
|
$
|
275
|
|
|
$
|
7,533
|
|
|
|
|
|
|
|
|
|
GENERAL
In the regular course of business, we are subject to
routine examinations by federal, state and local taxing
authorities. In managements opinion, the disposition of
matters raised by such taxing authorities, if any, would not
have a material adverse impact on our consolidated financial
statements.
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. Other guarantees and indemnifications of the Company
and its subsidiaries include obligations to protect
counterparties from losses arising from the following:
(1) tax, legal and other risks related to the purchase or
disposition of businesses; (2) penalties and interest
assessed by federal and state taxing authorities in connection
with tax returns prepared for clients; (3) indemnification
of our directors and officers; and (4) third-party claims
relating to various arrangements in the normal course of
business. Typically, there is no stated maximum payment related
to these indemnifications, and the terms of the indemnities may
vary and in many cases is 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
66 H&R
BLOCK 2009 Form 10K
provide assurance we will
ultimately prevail in the event any such claims are asserted, we
believe the fair value of these guarantees and indemnifications
is not material as of April 30, 2009.
NOTE 18:
LITIGATION AND RELATED CONTINGENCIES
We are party to investigations, legal claims and lawsuits
arising out of our business operations. We accrue our best
estimate of the probable loss upon resolution of investigations,
legal claims and lawsuits, which totaled $11.7 million and
$11.5 million at April 30, 2009 and 2008,
respectively. With respect to most of the matters described
below, we have concluded that a loss is not probable and
therefore no liability has been recorded.
RAL
LITIGATION We have been named as a defendant
in numerous lawsuits throughout the country regarding our refund
anticipation loan programs (collectively, RAL
Cases). The RAL Cases have involved a variety of legal
theories asserted by plaintiffs. These theories include
allegations that, among other things: disclosures in the RAL
applications were inadequate, misleading and untimely; the RAL
interest rates were usurious and unconscionable; we did not
disclose that we would receive part of the finance charges paid
by the customer for such loans; untrue, misleading or deceptive
statements in marketing RALs; breach of state laws on credit
service organizations; breach of contract, unjust enrichment,
unfair and deceptive acts or practices; violations of the
federal Racketeer Influenced and Corrupt Organizations Act;
violations of the federal Fair Debt Collection Practices Act and
unfair competition regarding debt collection activities; and
that we owe, and breached, a fiduciary duty to our customers in
connection with the RAL program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We 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. The Pennsylvania Supreme Court has granted our request
to review the appellate court ruling. 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. The court has certified plaintiff
classes 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 have filed a petition for rehearing of this
decision with the Seventh Circuit.
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.
H&R
BLOCK 2009
Form 10K 67
EXPRESS IRA
LITIGATION On March 15, 2006, the New
York Attorney General filed a lawsuit in the Supreme Court of
the State of New York, County of New York (Index
No. 06/401110) entitled The People of New York v.
H&R Block, Inc. and H&R Block Financial Advisors, Inc.
et al. The complaint alleged fraudulent business practices,
deceptive acts and practices, common law fraud and breach of
fiduciary duty with respect to the Express IRA product and
sought equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. In July 2007,
the Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than HRBFA and the claims of
common law fraud. 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 alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe 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 the Express IRA litigation through an
indemnification agreement with Ameriprise. See additional
discussion in note 19.
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 alleges breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. We believe 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
regarding business valuation services provided by RSM EquiCo,
Inc., including fraud, negligent misrepresentation, breach of
contract, breach of implied covenant of good faith and fair
dealing, breach of fiduciary duty and unfair competition and
seeks unspecified damages, restitution and equitable relief. 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 has filed an appeal of this certification
ruling and intends 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
68 H&R
BLOCK 2009 Form 10K
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 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 claims,
and we are defending or intend to defend them vigorously. The
amounts claimed in these claims and lawsuits are substantial in
some instances, however the ultimate liability with respect to
such litigation and claims is difficult to predict. In the event
of an unfavorable outcome, the amounts we may be required to pay
in the discharge of liabilities or settlements could be material.
In addition to the aforementioned types of cases, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning 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
H&R
BLOCK 2009
Form 10K 69
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.
|
|
NOTE 19: |
DISCONTINUED
OPERATIONS
|
Effective November 1, 2008, we sold HRB Financial
Corporation, including our securities brokerage business
formerly conducted through HRBFA, to Ameriprise. As a result of
this transaction, we received cash proceeds, net of selling
costs, of $304.0 million, plus repayment of net
intercompany liabilities of $46.6 million. The carrying
value of our investment in this business at the date of
disposition was $293.7 million, which included
$174.0 million of goodwill from our initial acquisition of
HRB Financial Corporation. We deferred recognition of a portion
of the sale proceeds totaling $7.0 million, which
represents the estimated value of an ongoing collaboration
arrangement with our Tax Services businesses.
In connection with the sale, we indemnified Ameriprise against
certain losses relating to pre-acquisition contingencies,
including matters involving compliance with the Employment
Retirement Income Security Act of 1974 (ERISA) and the Fair
Labor Standards Act, tax matters and certain pending litigation.
Certain indemnities are subject to a maximum aggregate payment
of $31.5 million, while other indemnities are not subject
to any stated limit. The indemnities are not subject to a stated
term. FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, requires
that we recognize a liability for the estimated fair value of
guarantee and indemnification obligations at the inception of
the arrangement. We estimated an aggregate fair value of
$15.5 million relating to the Ameriprise indemnifications
and recorded a liability in that amount as of the date of sale.
Subsequent changes in this liability will be determined in
accordance with SFAS 5 and recorded in discontinued
operations.
The transaction resulted in a capital loss for income tax
purposes and, with the exception of benefits of approximately
$9 million recorded during fiscal year 2009, is not
currently expected to result in a tax benefit. Net of selling
expenses, deferrals and indemnification liabilities, we recorded
a loss during fiscal year 2009 in connection with the
disposition of this business totaling $12.2 million.
At April 30, 2009, HRBFA had $10.0 million invested in
the Reserve Primary Fund (Reserve Fund), a money market fund.
The Reserve Fund is currently in orderly liquidation under the
supervision of the Securities and Exchange Commission (SEC) and
its net asset value has fallen below its stated value of $1.00
per share. The most recent net asset values communicated by the
Reserve Fund were $0.97 per share as of June 1, 2009.
However, the Reserve Fund has indicated that it has established
a special reserve for contingent damages and defense
costs relating to pending litigation and, accordingly, fund
distributions are currently being made at $0.917 per share. This
asset was sold to Ameriprise in connection with the sale of
HRBFA at a contractually agreed to value of $0.92 per share.
Although this investment is no longer reported in our balance
sheet we are subject to contingent gains or losses, through
post-closing purchase price adjustments, to the extent ultimate
redemptions from the Reserve Fund are greater or less than $0.92
per share. Assuming HRBFA recovered its invested principal in
full, we would recognize a gain at that time of approximately
$8 million. Assuming HRBFA received no further
distributions from the Reserve Fund, we would ultimately record
additional losses of approximately $2 million.
As of April 30, 2009, the results of operations of HRBFA
and its direct corporate parent are presented as discontinued
operations in the consolidated financial statements. All periods
presented have been retrospectively adjusted to reflect our
discontinued operations.
Overhead costs which would have previously been allocated to
discontinued businesses totaled $4.6 million,
$14.7 million and $24.5 million for fiscal years 2009,
2008 and 2007, respectively. These amounts are included in
continuing operations. Prior year amounts include overhead
allocations which were previously allocated to our discontinued
mortgage operations.
The financial results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
000s)
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net revenue
|
|
$
|
129,863
|
|
|
$
|
(105,964
|
)
|
|
$
|
385,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss from operations
|
|
$
|
(37,015
|
)
|
|
$
|
(1,120,216
|
)
|
|
$
|
(873,593
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
(157,511
|
)
|
Loss on sale and estimated impairments
|
|
|
(10,626
|
)
|
|
|
(45,510
|
)
|
|
|
(193,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
|
(47,641
|
)
|
|
|
(1,165,726
|
)
|
|
|
(1,224,471
|
)
|
Income tax benefit
|
|
|
(20,259
|
)
|
|
|
(411,132
|
)
|
|
|
(421,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(27,382
|
)
|
|
$
|
(754,594
|
)
|
|
$
|
(803,113
|
)
|
|
|
|
|
70 H&R
BLOCK 2009 Form 10K
During fiscal year 2008, we exited the mortgage business
operated through a subsidiary and sold the related loan
servicing business. Our discontinued operations include pretax
losses related to our mortgage business of $17.0 million
for fiscal year 2009, compared to $1.2 billion in each of
the fiscal years 2008 and 2007.
NOTE 20:
SEGMENT INFORMATION
Management has determined the reportable segments identified
below according to types of services offered and the manner in
which operational decisions are made. Operating results of our
reportable segments are all seasonal.
TAX
SERVICES This segment is primarily
engaged in providing tax return preparation and related services
and products in the U.S., Canada and Australia. Segment revenues
include fees earned for tax-related services performed at
company-owned tax offices, royalties from franchise offices,
sales of tax preparation and other software, fees from online
tax preparation and RAL participations. This segment includes
the Companys tax preparation software,
TaxCut®
from H&R Block as well as software designed for small to
mid-sized CPA firms who file tax returns for individuals and
businesses. This segment also offers online do-it-yourself tax
preparation and online tax advice to the general public through
various websites.
Our international operations contributed $160.7 million,
$170.2 million and $131.8 million in revenues for
fiscal years 2009, 2008 and 2007, respectively, and
$31.6 million, $32.1 million and $20.1 million of
pretax income, respectively.
BUSINESS
SERVICES This segment offers accounting,
tax and business consulting services, wealth management, and
capital markets services to middle-market companies in offices
located throughout the U.S.
CONSUMER
FINANCIAL SERVICES This segment is
engaged in providing retail banking offerings to our Tax
Services clients through HRB Bank. HRB Bank offers traditional
banking services including checking and savings accounts, lines
of credit, individual retirement accounts, certificates of
deposit and prepaid debit card accounts. HRB Bank operates
through a single stand-alone branch office. HRB Bank offers the
H&R Block Prepaid Emerald
MasterCard®
and Emerald Advance lines of credit through our Tax Services
segment. HRB Bank also historically purchased loans from former
affiliates, in addition to prime loan purchases from
third-parties. During fiscal year 2008, HRB Bank stopped
purchasing loans and currently does not intend to purchase
mortgage loans from third-parties. This segment previously
included HRBFA, which has been presented as a discontinued
operation in our consolidated financial statements.
CORPORATE
Corporate support departments provide services to our operating
segments, consisting of marketing, information technology,
facilities, human resources, executive, legal, finance,
government relations and corporate communications. These support
department costs are largely allocated to our operating
segments. Our captive insurance and franchise financing
subsidiaries are also included within Corporate.
IDENTIFIABLE
ASSETS Identifiable assets are those
assets, including goodwill and intangible assets, associated
with each reportable segment. The remaining assets are
classified as Corporate assets, which consist primarily of cash,
marketable securities and equipment. The carrying value of
assets held outside the U.S. totaled $126.8 million,
$124.8 million and $120.9 million at April 30,
2009, 2008 and 2007, respectively.
H&R
BLOCK 2009
Form 10K 71
Information concerning the Companys operations by
reportable segment is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
Year Ended April 30,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
3,033,123
|
|
|
$
|
2,988,617
|
|
|
$
|
2,685,858
|
|
|
|
|
|
Business Services
|
|
|
897,809
|
|
|
|
941,686
|
|
|
|
932,361
|
|
|
|
|
|
Consumer Financial Services
|
|
|
141,801
|
|
|
|
142,706
|
|
|
|
77,178
|
|
|
|
|
|
Corporate
|
|
|
10,844
|
|
|
|
13,621
|
|
|
|
14,965
|
|
|
|
|
|
|
|
|
|
|
$
|
4,083,577
|
|
|
$
|
4,086,630
|
|
|
$
|
3,710,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
893,805
|
|
|
$
|
785,839
|
|
|
$
|
705,171
|
|
|
|
|
|
Business Services
|
|
|
96,097
|
|
|
|
88,797
|
|
|
|
57,661
|
|
|
|
|
|
Consumer Financial Services
|
|
|
(14,508
|
)
|
|
|
11,484
|
|
|
|
23,086
|
|
|
|
|
|
Corporate
|
|
|
(136,024
|
)
|
|
|
(151,049
|
)
|
|
|
(158,657
|
)
|
|
|
|
|
|
|
|
|
|
$
|
839,370
|
|
|
$
|
735,071
|
|
|
$
|
627,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
78,729
|
|
|
$
|
76,828
|
|
|
$
|
68,369
|
|
|
|
|
|
Business Services
|
|
|
36,748
|
|
|
|
36,523
|
|
|
|
35,046
|
|
|
|
|
|
Consumer Financial Services
|
|
|
686
|
|
|
|
379
|
|
|
|
59
|
|
|
|
|
|
Corporate
|
|
|
7,468
|
|
|
|
5,784
|
|
|
|
4,005
|
|
|
|
|
|
|
|
|
|
|
$
|
123,631
|
|
|
$
|
119,514
|
|
|
$
|
107,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EXPENDITURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
46,884
|
|
|
$
|
32,712
|
|
|
$
|
41,809
|
|
|
|
|
|
Business Services
|
|
|
21,185
|
|
|
|
32,918
|
|
|
|
31,770
|
|
|
|
|
|
Consumer Financial Services
|
|
|
32
|
|
|
|
17
|
|
|
|
112
|
|
|
|
|
|
Corporate
|
|
|
29,779
|
|
|
|
35,907
|
|
|
|
84,769
|
|
|
|
|
|
|
|
|
|
|
$
|
97,880
|
|
|
$
|
101,554
|
|
|
$
|
158,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDENTIFIABLE ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
1,351,335
|
|
|
$
|
941,769
|
|
|
$
|
961,415
|
|
|
|
|
|
Business Services
|
|
|
897,250
|
|
|
|
920,945
|
|
|
|
941,754
|
|
|
|
|
|
Consumer Financial Services
|
|
|
1,281,618
|
|
|
|
1,068,436
|
|
|
|
1,493,090
|
|
|
|
|
|
Corporate
|
|
|
1,829,519
|
|
|
|
1,704,683
|
|
|
|
1,273,976
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
987,592
|
|
|
|
2,873,815
|
|
|
|
|
|
|
|
|
|
|
$
|
5,359,722
|
|
|
$
|
5,623,425
|
|
|
$
|
7,544,050
|
|
|
|
|
|
|
|
|
|
72 H&R
BLOCK 2009 Form 10K
NOTE 21:
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per
share amounts)
|
|
|
|
|
|
|
|
|
Fiscal Year 2009
|
|
|
Apr 30, 2009
|
|
|
Jan 31, 2009
|
|
|
Oct 31, 2008
|
|
|
Jul 31, 2008
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,083,577
|
|
|
$
|
2,466,753
|
|
|
$
|
993,446
|
|
|
$
|
351,469
|
|
|
$
|
271,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
$
|
839,370
|
|
|
$
|
1,178,054
|
|
|
$
|
101,739
|
|
|
$
|
(227,453
|
)
|
|
$
|
(212,970
|
)
|
|
|
|
|
Income taxes (benefit)
|
|
|
326,315
|
|
|
|
470,245
|
|
|
|
34,909
|
|
|
|
(94,292
|
)
|
|
|
(84,547
|
)
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
513,055
|
|
|
|
707,809
|
|
|
|
66,830
|
|
|
|
(133,161
|
)
|
|
|
(128,423
|
)
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(27,382
|
)
|
|
|
(906
|
)
|
|
|
(19,467
|
)
|
|
|
(2,713
|
)
|
|
|
(4,296
|
)
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
485,673
|
|
|
$
|
706,903
|
|
|
$
|
47,363
|
|
|
$
|
(135,874
|
)
|
|
$
|
(132,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
1.54
|
|
|
$
|
2.10
|
|
|
$
|
0.20
|
|
|
$
|
(0.40
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.46
|
|
|
$
|
2.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.41
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
1.53
|
|
|
$
|
2.09
|
|
|
$
|
0.20
|
|
|
$
|
(0.40
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.45
|
|
|
$
|
2.09
|
|
|
$
|
0.14
|
|
|
$
|
(0.41
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
Apr 30, 2008
|
|
|
Jan 31, 2008
|
|
|
Oct 31, 2007
|
|
|
Jul 31, 2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,086,630
|
|
|
$
|
2,541,116
|
|
|
$
|
894,804
|
|
|
$
|
356,692
|
|
|
$
|
294,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
$
|
735,071
|
|
|
$
|
1,143,977
|
|
|
$
|
416
|
|
|
$
|
(221,823
|
)
|
|
$
|
(187,499
|
)
|
|
|
|
|
Income taxes (benefit)
|
|
|
289,124
|
|
|
|
458,017
|
|
|
|
(6,674
|
)
|
|
|
(86,890
|
)
|
|
|
(75,329
|
)
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
445,947
|
|
|
|
685,960
|
|
|
|
7,090
|
|
|
|
(134,933
|
)
|
|
|
(112,170
|
)
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(754,594
|
)
|
|
|
(142,398
|
)
|
|
|
(54,448
|
)
|
|
|
(367,338
|
)
|
|
|
(190,410
|
)
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(308,647
|
)
|
|
$
|
543,562
|
|
|
$
|
(47,358
|
)
|
|
$
|
(502,271
|
)
|
|
$
|
(302,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
1.37
|
|
|
$
|
2.11
|
|
|
$
|
0.02
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.35
|
)
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(2.32
|
)
|
|
|
(0.44
|
)
|
|
|
(0.17
|
)
|
|
|
(1.13
|
)
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.95
|
)
|
|
$
|
1.67
|
|
|
$
|
(0.15
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
1.36
|
|
|
$
|
2.09
|
|
|
$
|
0.02
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.35
|
)
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(2.30
|
)
|
|
|
(0.43
|
)
|
|
|
(0.16
|
)
|
|
|
(1.13
|
)
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.94
|
)
|
|
$
|
1.66
|
|
|
$
|
(0.14
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
Results of discontinued operations for the fourth quarter of
fiscal year 2008 included pretax provisions for estimated loan
repurchase obligations totaling $202.9 million.
The accumulation of four quarters in fiscal years 2009 and 2008
for earnings per share may not equal the related per share
amounts for the years ended April 30, 2009 and 2008 due to
the timing of the exercise of stock options and
H&R
BLOCK 2009
Form 10K 73
lapse of certain restrictions on
nonvested shares and the antidilutive effect of stock options
and nonvested shares in the first two quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
|
|
|
|
|
|
Fiscal year 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.59
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
|
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
27.97
|
|
|
$
|
22.98
|
|
|
$
|
23.27
|
|
|
$
|
27.97
|
|
|
$
|
24.65
|
|
|
|
|
|
Low
|
|
|
14.69
|
|
|
|
14.69
|
|
|
|
15.37
|
|
|
|
15.00
|
|
|
|
20.40
|
|
|
|
|
|
Fiscal year 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.56
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
|
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
24.02
|
|
|
$
|
22.27
|
|
|
$
|
21.84
|
|
|
$
|
23.00
|
|
|
$
|
24.02
|
|
|
|
|
|
Low
|
|
|
16.89
|
|
|
|
17.13
|
|
|
|
16.89
|
|
|
|
17.96
|
|
|
|
19.90
|
|
|
|
|
|
NOTE 22:
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
BFC is an indirect, wholly-owned consolidated subsidiary of the
Company. BFC is the Issuer and the Company is the Guarantor of
the Senior Notes issued on January 11, 2008 and
October 26, 2004, the 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Year Ended
April 30, 2009
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
|
|
|
$
|
251,758
|
|
|
$
|
3,834,880
|
|
|
$
|
(3,061
|
)
|
|
$
|
4,083,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
46,282
|
|
|
|
2,250,145
|
|
|
|
22
|
|
|
|
2,296,449
|
|
|
|
|
|
Cost of other revenues
|
|
|
|
|
|
|
232,507
|
|
|
|
67,294
|
|
|
|
(32
|
)
|
|
|
299,769
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
66,230
|
|
|
|
582,812
|
|
|
|
(552
|
)
|
|
|
648,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
|
|
|
345,019
|
|
|
|
2,900,251
|
|
|
|
(562
|
)
|
|
|
3,244,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
(93,261
|
)
|
|
|
934,629
|
|
|
|
(2,499
|
)
|
|
|
838,869
|
|
|
|
|
|
Other income (expense), net
|
|
|
839,370
|
|
|
|
(5,992
|
)
|
|
|
6,461
|
|
|
|
(839,338
|
)
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
|
839,370
|
|
|
|
(99,253
|
)
|
|
|
941,090
|
|
|
|
(841,837
|
)
|
|
|
839,370
|
|
|
|
|
|
Income taxes (benefit)
|
|
|
326,315
|
|
|
|
(40,386
|
)
|
|
|
367,660
|
|
|
|
(327,274
|
)
|
|
|
326,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
513,055
|
|
|
|
(58,867
|
)
|
|
|
573,430
|
|
|
|
(514,563
|
)
|
|
|
513,055
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(27,382
|
)
|
|
|
(29,176
|
)
|
|
|
|
|
|
|
29,176
|
|
|
|
(27,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
485,673
|
|
|
$
|
(88,043
|
)
|
|
$
|
573,430
|
|
|
$
|
(485,387
|
)
|
|
$
|
485,673
|
|
|
|
|
|
|
|
|
|
74 H&R
BLOCK 2009 Form 10K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Year Ended
April 30, 2008
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
|
|
|
$
|
338,688
|
|
|
$
|
3,755,118
|
|
|
$
|
(7,176
|
)
|
|
$
|
4,086,630
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
8,141
|
|
|
|
2,272,746
|
|
|
|
(409
|
)
|
|
|
2,280,478
|
|
|
|
|
|
Cost of other revenues
|
|
|
|
|
|
|
222,884
|
|
|
|
84,831
|
|
|
|
|
|
|
|
307,715
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
148,218
|
|
|
|
639,986
|
|
|
|
694
|
|
|
|
788,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
|
|
|
379,243
|
|
|
|
2,997,563
|
|
|
|
285
|
|
|
|
3,377,091
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
(40,555
|
)
|
|
|
757,555
|
|
|
|
(7,461
|
)
|
|
|
709,539
|
|
|
|
|
|
Other income, net
|
|
|
735,071
|
|
|
|
|
|
|
|
25,532
|
|
|
|
(735,071
|
)
|
|
|
25,532
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
|
735,071
|
|
|
|
(40,555
|
)
|
|
|
783,087
|
|
|
|
(742,532
|
)
|
|
|
735,071
|
|
|
|
|
|
Income taxes (benefit)
|
|
|
289,124
|
|
|
|
(10,351
|
)
|
|
|
302,873
|
|
|
|
(292,522
|
)
|
|
|
289,124
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
445,947
|
|
|
|
(30,204
|
)
|
|
|
480,214
|
|
|
|
(450,010
|
)
|
|
|
445,947
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(754,594
|
)
|
|
|
(752,386
|
)
|
|
|
(6,288
|
)
|
|
|
758,674
|
|
|
|
(754,594
|
)
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(308,647
|
)
|
|
$
|
(782,590
|
)
|
|
$
|
473,926
|
|
|
$
|
308,664
|
|
|
$
|
(308,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Year Ended
April 30, 2007
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
|
|
|
$
|
663,752
|
|
|
$
|
3,060,409
|
|
|
$
|
(13,799
|
)
|
|
$
|
3,710,362
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
|
|
|
|
37,966
|
|
|
|
2,121,431
|
|
|
|
(1,559
|
)
|
|
|
2,157,838
|
|
|
|
|
|
Cost of other revenues
|
|
|
|
|
|
|
147,411
|
|
|
|
25,245
|
|
|
|
|
|
|
|
172,656
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
182,848
|
|
|
|
546,233
|
|
|
|
(541
|
)
|
|
|
728,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
|
|
|
368,225
|
|
|
|
2,692,909
|
|
|
|
(2,100
|
)
|
|
|
3,059,034
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
295,527
|
|
|
|
367,500
|
|
|
|
(11,699
|
)
|
|
|
651,328
|
|
|
|
|
|
Other income (expense), net
|
|
|
627,261
|
|
|
|
(25,157
|
)
|
|
|
1,090
|
|
|
|
(627,261
|
)
|
|
|
(24,067
|
)
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
627,261
|
|
|
|
270,370
|
|
|
|
368,590
|
|
|
|
(638,960
|
)
|
|
|
627,261
|
|
|
|
|
|
Income taxes
|
|
|
257,801
|
|
|
|
108,989
|
|
|
|
153,915
|
|
|
|
(262,904
|
)
|
|
|
257,801
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
369,460
|
|
|
|
161,381
|
|
|
|
214,675
|
|
|
|
(376,056
|
)
|
|
|
369,460
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(803,113
|
)
|
|
|
(789,657
|
)
|
|
|
(20,362
|
)
|
|
|
810,019
|
|
|
|
(803,113
|
)
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(433,653
|
)
|
|
$
|
(628,276
|
)
|
|
$
|
194,313
|
|
|
$
|
433,963
|
|
|
$
|
(433,653
|
)
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING BALANCE SHEETS
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, net
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
H&R
BLOCK 2009
Form 10K 75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
April 30, 2008
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
|
|
|
$
|
34,611
|
|
|
$
|
630,933
|
|
|
$
|
(647
|
)
|
|
$
|
664,897
|
|
|
|
|
|
Cash & cash equivalents restricted
|
|
|
|
|
|
|
6,214
|
|
|
|
817
|
|
|
|
|
|
|
|
7,031
|
|
|
|
|
|
Receivables, net
|
|
|
139
|
|
|
|
122,756
|
|
|
|
411,334
|
|
|
|
|
|
|
|
534,229
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
|
|
|
|
|
966,301
|
|
|
|
|
|
|
|
|
|
|
|
966,301
|
|
|
|
|
|
Intangible assets and goodwill, net
|
|
|
|
|
|
|
|
|
|
|
978,682
|
|
|
|
|
|
|
|
978,682
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
4,131,345
|
|
|
|
|
|
|
|
322
|
|
|
|
(4,131,345
|
)
|
|
|
322
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
987,592
|
|
|
|
|
|
|
|
|
|
|
|
987,592
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
514,463
|
|
|
|
969,896
|
|
|
|
12
|
|
|
|
1,484,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,131,484
|
|
|
$
|
2,631,937
|
|
|
$
|
2,991,984
|
|
|
$
|
(4,131,980
|
)
|
|
$
|
5,623,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
|
|
|
$
|
786,271
|
|
|
$
|
|
|
|
$
|
(647
|
)
|
|
$
|
785,624
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
997,885
|
|
|
|
33,899
|
|
|
|
|
|
|
|
1,031,784
|
|
|
|
|
|
FHLB borrowings
|
|
|
|
|
|
|
129,000
|
|
|
|
|
|
|
|
|
|
|
|
129,000
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
644,446
|
|
|
|
|
|
|
|
|
|
|
|
644,446
|
|
|
|
|
|
Other liabilities
|
|
|
2
|
|
|
|
466,236
|
|
|
|
1,578,464
|
|
|
|
51
|
|
|
|
2,044,753
|
|
|
|
|
|
Net intercompany advances
|
|
|
3,143,664
|
|
|
|
(632,522
|
)
|
|
|
(2,511,103
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
987,818
|
|
|
|
240,621
|
|
|
|
3,890,724
|
|
|
|
(4,131,345
|
)
|
|
|
987,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,131,484
|
|
|
$
|
2,631,937
|
|
|
$
|
2,991,984
|
|
|
$
|
(4,131,980
|
)
|
|
$
|
5,623,425
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Year Ended
April 30, 2009
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
3,835
|
|
|
$
|
(13,225
|
)
|
|
$
|
1,033,829
|
|
|
$
|
|
|
|
$
|
1,024,439
|
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
|
|
|
|
|
91,329
|
|
|
|
|
|
|
|
|
|
|
|
91,329
|
|
|
|
|
|
Purchases of property & equipment
|
|
|
|
|
|
|
(43
|
)
|
|
|
(97,837
|
)
|
|
|
|
|
|
|
(97,880
|
)
|
|
|
|
|
Payments for business acquisitions
|
|
|
|
|
|
|
|
|
|
|
(293,805
|
)
|
|
|
|
|
|
|
(293,805
|
)
|
|
|
|
|
Net intercompany advances
|
|
|
73,820
|
|
|
|
|
|
|
|
|
|
|
|
(73,820
|
)
|
|
|
|
|
|
|
|
|
Investing cash flows of discontinued operations
|
|
|
|
|
|
|
255,066
|
|
|
|
|
|
|
|
|
|
|
|
255,066
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
17,598
|
|
|
|
33,252
|
|
|
|
|
|
|
|
50,850
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
73,820
|
|
|
|
363,950
|
|
|
|
(358,390
|
)
|
|
|
(73,820
|
)
|
|
|
5,560
|
|
|
|
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term borrowings
|
|
|
|
|
|
|
(4,762,294
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,762,294
|
)
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
|
|
|
|
4,733,294
|
|
|
|
|
|
|
|
|
|
|
|
4,733,294
|
|
|
|
|
|
Customer banking deposits, net
|
|
|
|
|
|
|
69,932
|
|
|
|
|
|
|
|
(5,575
|
)
|
|
|
64,357
|
|
|
|
|
|
Dividends paid
|
|
|
(198,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198,685
|
)
|
|
|
|
|
Acquisition of treasury shares
|
|
|
(106,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106,189
|
)
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
141,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,415
|
|
|
|
|
|
Proceeds from stock options
|
|
|
71,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,594
|
|
|
|
|
|
Net intercompany advances
|
|
|
|
|
|
|
(199,032
|
)
|
|
|
125,212
|
|
|
|
73,820
|
|
|
|
|
|
|
|
|
|
Financing cash flows of discontinued operations
|
|
|
|
|
|
|
4,783
|
|
|
|
|
|
|
|
|
|
|
|
4,783
|
|
|
|
|
|
Other, net
|
|
|
14,210
|
|
|
|
9,331
|
|
|
|
(12,049
|
)
|
|
|
|
|
|
|
11,492
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(77,655
|
)
|
|
|
(143,986
|
)
|
|
|
113,163
|
|
|
|
68,245
|
|
|
|
(40,233
|
)
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
|
|
|
|
206,739
|
|
|
|
788,602
|
|
|
|
(5,575
|
)
|
|
|
989,766
|
|
|
|
|
|
Cash beginning of the year
|
|
|
|
|
|
|
34,611
|
|
|
|
630,933
|
|
|
|
(647
|
)
|
|
|
664,897
|
|
|
|
|
|
|
|
|
Cash end of the year
|
|
$
|
|
|
|
$
|
241,350
|
|
|
$
|
1,419,535
|
|
|
$
|
(6,222
|
)
|
|
$
|
1,654,663
|
|
|
|
|
|
|
|
|
|
76 H&R
BLOCK 2009 Form 10K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Year Ended
April 30, 2008
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
47,521
|
|
|
$
|
(686,591
|
)
|
|
$
|
897,830
|
|
|
$
|
|
|
|
$
|
258,760
|
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
|
|
|
|
|
207,606
|
|
|
|
|
|
|
|
|
|
|
|
207,606
|
|
|
|
|
|
Purchases of property & equipment
|
|
|
|
|
|
|
(17
|
)
|
|
|
(101,537
|
)
|
|
|
|
|
|
|
(101,554
|
)
|
|
|
|
|
Payments for business acquisitions
|
|
|
|
|
|
|
|
|
|
|
(24,872
|
)
|
|
|
|
|
|
|
(24,872
|
)
|
|
|
|
|
Net intercompany advances
|
|
|
112,027
|
|
|
|
|
|
|
|
|
|
|
|
(112,027
|
)
|
|
|
|
|
|
|
|
|
Investing cash flows of discontinued operations
|
|
|
|
|
|
|
1,041,260
|
|
|
|
3,730
|
|
|
|
|
|
|
|
1,044,990
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
13,410
|
|
|
|
7,709
|
|
|
|
|
|
|
|
21,119
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
112,027
|
|
|
|
1,262,259
|
|
|
|
(114,970
|
)
|
|
|
(112,027
|
)
|
|
|
1,147,289
|
|
|
|
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
|
|
|
|
(5,125,279
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,125,279
|
)
|
|
|
|
|
Proceeds from commercial paper
|
|
|
|
|
|
|
4,133,197
|
|
|
|
|
|
|
|
|
|
|
|
4,133,197
|
|
|
|
|
|
Proceeds from issuance of Senior Notes
|
|
|
|
|
|
|
599,376
|
|
|
|
|
|
|
|
|
|
|
|
599,376
|
|
|
|
|
|
Repayments of other borrowings
|
|
|
|
|
|
|
(9,055,426
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,055,426
|
)
|
|
|
|
|
Proceeds from other borrowings
|
|
|
|
|
|
|
8,505,426
|
|
|
|
|
|
|
|
|
|
|
|
8,505,426
|
|
|
|
|
|
Customer banking deposits, net
|
|
|
|
|
|
|
(344,744
|
)
|
|
|
|
|
|
|
(647
|
)
|
|
|
(345,391
|
)
|
|
|
|
|
Dividends paid
|
|
|
(183,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(183,628
|
)
|
|
|
|
|
Acquisition of treasury shares
|
|
|
(7,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,280
|
)
|
|
|
|
|
Proceeds from stock options
|
|
|
23,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,322
|
|
|
|
|
|
Net intercompany advances
|
|
|
|
|
|
|
753,873
|
|
|
|
(865,900
|
)
|
|
|
112,027
|
|
|
|
|
|
|
|
|
|
Financing cash flows of discontinued operations
|
|
|
|
|
|
|
(63,249
|
)
|
|
|
(1,190
|
)
|
|
|
|
|
|
|
(64,439
|
)
|
|
|
|
|
Other, net
|
|
|
8,038
|
|
|
|
(4,428
|
)
|
|
|
(41,557
|
)
|
|
|
|
|
|
|
(37,947
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(159,548
|
)
|
|
|
(601,254
|
)
|
|
|
(908,647
|
)
|
|
|
111,380
|
|
|
|
(1,558,069
|
)
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
|
|
|
|
(25,586
|
)
|
|
|
(125,787
|
)
|
|
|
(647
|
)
|
|
|
(152,020
|
)
|
|
|
|
|
Cash beginning of the year
|
|
|
|
|
|
|
60,197
|
|
|
|
756,720
|
|
|
|
|
|
|
|
816,917
|
|
|
|
|
|
|
|
|
Cash end of the year
|
|
$
|
|
|
|
$
|
34,611
|
|
|
$
|
630,933
|
|
|
$
|
(647
|
)
|
|
$
|
664,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Year Ended
April 30, 2007
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
47,638
|
|
|
$
|
(217,027
|
)
|
|
$
|
(387,586
|
)
|
|
$
|
|
|
|
$
|
(556,975
|
)
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
|
|
|
|
|
(954,281
|
)
|
|
|
|
|
|
|
|
|
|
|
(954,281
|
)
|
|
|
|
|
Purchases of property & equipment
|
|
|
|
|
|
|
(432
|
)
|
|
|
(158,028
|
)
|
|
|
|
|
|
|
(158,460
|
)
|
|
|
|
|
Payments for business acquisitions
|
|
|
|
|
|
|
|
|
|
|
(57,554
|
)
|
|
|
|
|
|
|
(57,554
|
)
|
|
|
|
|
Net intercompany advances
|
|
|
276,450
|
|
|
|
|
|
|
|
|
|
|
|
(276,450
|
)
|
|
|
|
|
|
|
|
|
Investing cash flows of discontinued operations
|
|
|
|
|
|
|
26,463
|
|
|
|
(4,382
|
)
|
|
|
|
|
|
|
22,081
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
(5,395
|
)
|
|
|
(4,767
|
)
|
|
|
|
|
|
|
(10,162
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
276,450
|
|
|
|
(933,645
|
)
|
|
|
(224,731
|
)
|
|
|
(276,450
|
)
|
|
|
(1,158,376
|
)
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
|
|
|
|
(7,908,668
|
)
|
|
|
(355,893
|
)
|
|
|
|
|
|
|
(8,264,561
|
)
|
|
|
|
|
Proceeds from commercial paper
|
|
|
|
|
|
|
8,900,750
|
|
|
|
355,893
|
|
|
|
|
|
|
|
9,256,643
|
|
|
|
|
|
Repayments of Senior Notes
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
Repayments of other borrowings
|
|
|
|
|
|
|
(6,010,432
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,010,432
|
)
|
|
|
|
|
Proceeds from other borrowings
|
|
|
|
|
|
|
6,689,432
|
|
|
|
|
|
|
|
|
|
|
|
6,689,432
|
|
|
|
|
|
Customer banking deposits, net
|
|
|
|
|
|
|
1,129,263
|
|
|
|
|
|
|
|
|
|
|
|
1,129,263
|
|
|
|
|
|
Dividends paid
|
|
|
(171,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(171,966
|
)
|
|
|
|
|
Acquisition of treasury shares
|
|
|
(188,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188,802
|
)
|
|
|
|
|
Proceeds from stock options
|
|
|
25,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,703
|
|
|
|
|
|
Net intercompany advances
|
|
|
|
|
|
|
(1,134,416
|
)
|
|
|
857,966
|
|
|
|
276,450
|
|
|
|
|
|
|
|
|
|
Financing cash flows of discontinued operations
|
|
|
|
|
|
|
43,203
|
|
|
|
(277
|
)
|
|
|
|
|
|
|
42,926
|
|
|
|
|
|
Other, net
|
|
|
10,977
|
|
|
|
|
|
|
|
(28,072
|
)
|
|
|
|
|
|
|
(17,095
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(324,088
|
)
|
|
|
1,209,132
|
|
|
|
829,617
|
|
|
|
276,450
|
|
|
|
1,991,111
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
|
|
|
|
58,460
|
|
|
|
217,300
|
|
|
|
|
|
|
|
275,760
|
|
|
|
|
|
Cash beginning of the year
|
|
|
|
|
|
|
1,737
|
|
|
|
539,420
|
|
|
|
|
|
|
|
541,157
|
|
|
|
|
|
|
|
|
Cash end of the year
|
|
$
|
|
|
|
$
|
60,197
|
|
|
$
|
756,720
|
|
|
$
|
|
|
|
$
|
816,917
|
|
|
|
|
|
|
|
|
|
H&R
BLOCK 2009
Form 10K 77
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There were no disagreements or reportable events requiring
disclosure pursuant to Item 304(b) of
Regulation S-K.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
(a) EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES We
have established disclosure controls and procedures (Disclosure
Controls) to ensure that information required to be disclosed in
the Companys reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the
U.S. Securities and Exchange Commissions rules and
forms. Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure. Our Disclosure Controls were designed to
provide reasonable assurance that the controls and procedures
would meet their objectives. Our management, including the Chief
Executive Officer and Chief Financial Officer, does not expect
that our Disclosure Controls will prevent all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
designed control objectives and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusions of two or more people or by management
override of the control. Because of the inherent limitations in
a cost-effective, maturing control system, misstatements due to
error or fraud may occur and not be detected.
As of the end of the period covered by this
Form 10-K,
we evaluated the effectiveness of the design and operations of
our Disclosure Controls. The controls evaluation was done under
the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded our Disclosure
Controls were effective as of the end of the period covered by
this Annual Report on
Form 10-K.
(b) MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING Management is responsible for
establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as of April 30, 2009.
Based on our assessment, management concluded that, as of
April 30, 2009, the Companys internal control over
financial reporting was effective based on the criteria set
forth by COSO.
The Companys external auditors, Deloitte &
Touche LLP, an independent registered public accounting firm,
have issued an audit report on the effectiveness of the
Companys internal control over financial reporting. This
report appears near the beginning of Item 8.
(c) CHANGES
IN INTERNAL CONTROL OVER FINANCIAL
REPORTING During the quarter ended
April 30, 2009, there were no changes that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
78 H&R
BLOCK 2009 Form 10K
The following information appearing in our definitive proxy
statement, to be filed no later than 120 days after
April 30, 2009, is incorporated herein by reference:
|
|
|
|
§
|
Information appearing under the heading Election of
Directors,
|
|
§
|
Information appearing under the heading Section 16(a)
Beneficial Ownership Reporting Compliance,
|
|
§
|
Information appearing under the heading Board of
Directors Meetings and Committees regarding
identification of the Audit Committee and Audit Committee
financial experts.
|
We have adopted a code of business ethics and conduct that
applies to our directors, officers and employees, including our
chief executive officer, chief financial officer, principal
accounting officer and persons performing similar functions. A
copy of the code of business ethics and conduct is available on
our website at www.hrblock.com. We intend to provide
information on our website regarding amendments to or waivers
from the code of business ethics and conduct.
Information about our executive officers as of May 15,
2009, is as follows:
|
|
|
|
|
|
Name,
age
|
|
Current
position
|
|
Business
experience since May 1, 2004
|
|
|
Russell P. Smyth,
age 52
|
|
President and Chief Executive Officer
|
|
President and Chief Executive Officer since August 2008;
Consultant, equity owner and active board member for several
private equity firms and served on the boards of several
privately held companies from January 2005 to July 2008;
President McDonalds Europe from January 2003 to
January 2005.
|
|
Becky S. Shulman,
age 44
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
|
Chief Financial Officer since November 2007; Senior Vice
President and Treasurer since September 2001.
|
|
Jeffrey T. Brown,
age 50
|
|
Vice President and Corporate Controller
|
|
Vice President and Corporate Controller since March 2008;
Assistant Vice President and Assistant Controller from August
2005 until March 2008; Director of Corporate Accounting, from
September 2002 to August 2005.
|
|
Timothy C. Gokey,
age 47
|
|
President, Retail Tax Services*
|
|
President, Retail Tax Services since June 2004; McKinsey &
Company from 1986 until June 2004.
|
|
Tammy S. Serati,
age 50
|
|
Senior Vice President, Human Resources
|
|
Senior Vice President, Human Resources since December 2002.
|
|
|
|
*
|
On May 8, 2009,
Mr. Gokey resigned from his positions with all of the
Companys subsidiaries.
|
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2009, in the
sections entitled Director Compensation and
Executive Compensation and is incorporated herein by
reference.
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2009, in the
section titled Equity Compensation Plans and in the
section titled Information Regarding Security
Holders and is incorporated herein by reference.
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2009, in the
section titled Employee Agreements,
Change-of-Control
and Other Arrangements and is incorporated herein by
reference.
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2009, in the
section titled Audit Fees and is incorporated herein
by reference.
H&R
BLOCK 2009
Form 10K 79
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents filed as part of this Report:
|
|
|
|
1.
|
The following financial statements appearing in Item 8:
Consolidated Statements of Operations and Comprehensive
Income (Loss), Consolidated Balance Sheets,
Consolidated Statements of Cash Flows and
Consolidated Statements of Stockholders Equity.
|
|
2.
|
Financial Statement Schedule II Valuation
and Qualifying Accounts with the related Reports of
Independent Registered Public Accounting Firms. These will be
filed with the SEC but will not be included in the printed
version of the Annual Report to Shareholders.
|
|
3.
|
Exhibits: The list of exhibits in the Exhibit Index to this
Report is incorporated herein by reference. The following
exhibits are required to be filed as exhibits to this
Form 10-K:
|
|
|
|
10.18
|
|
2008 Deferred Stock Unit Plan for Outside Directors.
|
10.35
|
|
Administrative Services Agreement dated January 30, 2006,
by and among RSM McGladrey, Inc. and McGladrey &
Pullen, LLP.
|
10.36
|
|
Amendment Number One, dated June 1, 2008, to the
Administrative Services Agreement dated January 30, 2006,
by and among RSM McGladrey, Inc. and McGladrey &
Pullen, LLP.
|
10.37
|
|
Operations Agreement, dated as of August 2, 1999, by and
among McGladrey & Pullen, LLP, MP Active Partners
Trust, Mark W. Scalley, Thomas G. Rotherham, RSM McGladrey,
Inc., HRB Business Services, Inc., and H&R Block, Inc.
|
12
|
|
Computation of Ratio of Earnings to Fixed Charges for the five
years ended April 30, 2009.
|
21
|
|
Subsidiaries of the Company.
|
23.1
|
|
Consent of Deloitte & Touche, Independent Registered
Public Accounting Firm.
|
23.2
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
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 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 pursuant to
18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
The exhibits will be filed with the SEC but will not be included
in the printed version of the Annual Report to Shareholders.
80 H&R
BLOCK 2009 Form 10K
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
Russell P. Smyth
|
|
|
President and Chief Executive Officer
June 29, 2009
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated on June 29, 2009.
H&R
BLOCK 2009
Form 10K 81
The following exhibits are numbered in accordance with the
Exhibit Table of Item 601 of
Regulation S-K:
|
|
|
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of H&R
Block, Inc., filed as Exhibit 3.1 to the Companys
quarterly report on
Form 10-Q
for the quarter ended October 31, 2008, file number 1-6089,
is incorporated herein by reference.
|
|
3
|
.2
|
|
Amended and Restated Bylaws of H&R Block, Inc., as amended
and restated as of May 5, 2008, filed as Exhibit 3.1
to the Companys current report on
Form 8-K
dated May 5, 2009, file number 1-6089, is incorporated
herein by reference.
|
|
4
|
.1
|
|
Indenture dated as of October 20, 1997, among H&R
Block, Inc., Block Financial Corporation and Bankers
Trust Company, as Trustee, filed as Exhibit 4(a) to
the Companys quarterly report on
Form 10-Q
for the quarter ended October 31, 1997, file number 1-6089,
is incorporated herein by reference.
|
|
4
|
.2
|
|
First Supplemental Indenture, dated as of April 18, 2000,
among H&R Block, Inc., Block Financial Corporation, Bankers
Trust Company and the Bank of New York, filed as
Exhibit 4(a) to the Companys current report on
Form 8-K
dated April 13, 2000, file number 1-6089, is incorporated
herein by reference.
|
|
4
|
.3
|
|
Officers Certificate, dated October 26, 2004, in
respect of 5.125% Notes due 2014 of Block Financial
Corporation, filed as Exhibit 4.1 to the Companys
current report on
Form 8-K
dated October 21, 2004, file number 1-6089, is incorporated
herein by reference.
|
|
4
|
.4
|
|
Officers Certificate, dated January 11, 2008, in
respect of 7.875% Notes due 2013 of Block Financial LLC,
filed as Exhibit 4.1 to the Companys current report
on
Form 8-K
dated January 8, 2008, file number 1-6089, is incorporated
herein by reference.
|
|
4
|
.5
|
|
Form of 5.125% Note due 2014 of Block Financial
Corporation, filed as Exhibit 4.2 to the Companys
current report on
Form 8-K
dated October 21, 2004, file number 1-6089, is incorporated
herein by reference.
|
|
4
|
.6
|
|
Form of 7.875% Note due 2013 of Block Financial LLC, filed
as Exhibit 4.2 to the Companys current report on
Form 8-K
dated January 8, 2008, file number 1-6089, is incorporated
herein by reference.
|
|
4
|
.7
|
|
Form of Certificate of Designation, Preferences and Rights of
Participating Preferred Stock of H&R Block, Inc., filed as
Exhibit 4(e) to the Companys annual report on
Form 10-K
for the fiscal year ended April 30, 1995, file number
1-6089, is incorporated by reference.
|
|
4
|
.8
|
|
Form of Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Participating Preferred Stock of
H&R Block, Inc., filed as Exhibit 4(j) to the
Companys annual report on
Form 10-K
for the fiscal year ended April 30, 1998, file number
1-6089, is incorporated by reference.
|
|
4
|
.9
|
|
Form of Certificate of Designation, Preferences and Rights of
Delayed Convertible Preferred Stock of H&R Block, Inc.,
filed as Exhibit 4(f) to the Companys annual report
on
Form 10-K
for the fiscal year ended April 30, 1995, file number
1-6089, is incorporated by reference.
|
|
10
|
.1*
|
|
The Companys 2003 Long-Term Executive Compensation Plan,
as amended and restated as of February 1, 2008, filed as
Exhibit 10.1 to the Companys annual report on
Form 10-K
for the fiscal year ended April 30, 2008, file number
1-6089, is incorporated herein by reference.
|
|
10
|
.2*
|
|
Form of 2003 Long-Term Executive Compensation Plan Award
Agreement, filed as Exhibit 10.2 to the Companys
annual report on
Form 10-K
for the fiscal year ended April 30, 2007, file number
1-6089, is incorporated by reference.
|
|
10
|
.3*
|
|
H&R Block Deferred Compensation Plan for Executives
(amended and restated effective December 31, 2008), filed
as Exhibit 10.4 to the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2009, file number 1-6089,
is incorporated by reference.
|
|
10
|
.4*
|
|
Amendment No. 1 to the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated, effective as of
March 12, 2003, filed as Exhibit 10.5 to the
Companys annual report on
Form 10-K
for the fiscal year ended April 30, 2003, file number
1-6089, is incorporated herein by reference.
|
|
10
|
.5*
|
|
The H&R Block Executive Performance Plan, filed as
Exhibit 10.6 to the companys annual report on
Form 10-K
for the fiscal year ended April 30, 2006, file number
1-6089, is incorporated herein by reference.
|
|
10
|
.6*
|
|
The H&R Block, Inc. 2000 Employee Stock Purchase Plan, as
amended August 1, 2001, filed as Exhibit 10.2 to the
Companys quarterly report on
Form 10-Q
for the quarter ended October 31, 2001, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.7*
|
|
The H&R Block, Inc. Executive Survivor Plan (as Amended and
Restated) filed as Exhibit 10.4 to the Companys
quarterly report on
Form 10-Q
for the quarter ended October 31, 2000, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.8*
|
|
First Amendment to the H&R Block, Inc. Executive Survivor
Plan (as Amended and Restated), filed as Exhibit 10.9 to
the Companys annual report on
Form 10-K
for the fiscal year ended April 30, 2002, file number
1-6089, is incorporated by reference.
|
|
10
|
.9*
|
|
Second Amendment to the H&R Block, Inc. Executive Survivor
Plan (as Amended and Restated), effective as of March 12,
2003, filed as Exhibit 10.12 to the companys annual
report on
Form 10-K
for the fiscal year ended April 30, 2003, file number
1-6089, is incorporated herein by reference.
|
|
10
|
.10*
|
|
H&R Block Severance Plan, filed as Exhibit 10.1 to the
Companys quarterly report on
Form 10-Q
for the quarter ended October 31, 2008, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.11*
|
|
Employment Agreement dated July 19, 2008 between H&R
Block Management LLC and Russell P. Smyth, filed as
Exhibit 10.1 to the Companys quarterly report on
Form 10-Q
for the quarter ended July 31, 2008, file number 1-6089, is
incorporated herein by reference.
|
82 H&R
BLOCK 2009 Form 10K
|
|
|
|
|
|
10
|
.12*
|
|
Employment Agreement dated December 3, 2007 between HRB
Management, Inc. and Alan M. Bennett, filed as Exhibit 10.5
to the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2008, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.13*
|
|
Employment Agreement dated December 2, 2002 between HRB
Management, Inc. and Tammy S. Serati, filed as Exhibit 10.4
to the quarterly report on
Form 10-Q
for the quarter ended January 31, 2003, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.14*
|
|
Employment Agreement dated as of April 1, 2003 between HRB
Business Services, Inc. and Steven Tait, filed as
Exhibit 10.23 to the annual report on
Form 10-K
for the fiscal year ended April 30, 2003, file number
1-6089, is incorporated herein by reference.
|
|
10
|
.15*
|
|
Separation and Release Agreement dated January 21, 2009
between RSM McGladrey Business Services and Steven Tait, filed
as Exhibit 10.3 to the quarterly report on
Form 10-Q
for the quarter ended January 31, 2009, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.16*
|
|
Employment Agreement dated as of June 28, 2004 between
H&R Block Services, Inc. and Timothy C. Gokey, filed as
Exhibit 10.4 to the quarterly report on
Form 10-Q
for the quarter ended July 31, 2004, file number 1-6089, is
incorporated herein by reference.
|
|
10
|
.17*
|
|
Form of Indemnification Agreement for directors, filed as
Exhibit 10.1 to the Companys current report on
Form 8-K
dated December 14, 2005, file number 1-6089, is
incorporated herein by reference.
|
|
10
|
.18*
|
|
2008 Deferred Stock Unit Plan for Outside Directors.
|
|
10
|
.19
|
|
HSBC Retail Settlement Products Distribution Agreement dated as
of September 23, 2005, among HSBC Bank USA, National
Association, HSBC Taxpayer Financial Services Inc., Beneficial
Franchise Company Inc., Household Tax Masters Acquisition
Corporation, H&R Block Services, Inc., H&R Block Tax
Services, Inc., H&R Block Enterprises, Inc., H&R Block
Eastern Enterprises, Inc., H&R Block Digital Tax Solutions,
LLC, H&R Block Associates, L.P., HRB Royalty, Inc., HSBC
Finance Corporation and H&R Block, Inc., filed as
Exhibit 10.14 to the quarterly report on
Form 10-Q
for the quarter ended October 31, 2005, file number 1-6089,
is incorporated herein by reference.**
|
|
10
|
.20
|
|
HSBC Digital Settlement Products Distribution Agreement dated as
of September 23, 2005, among HSBC Bank USA, National
Association, HSBC Taxpayer Financial Services Inc., H&R
Block Digital Tax Solutions, LLC, and H&R Block Services,
Inc., filed as Exhibit 10.15 to the quarterly report on
Form 10-Q
for the quarter ended October 31, 2005, file number 1-6089,
is incorporated herein by reference.**
|
|
10
|
.21
|
|
HSBC Program Appendix of Defined Terms and Rules of
Construction, filed as Exhibit 10.18 to the quarterly
report on
Form 10-Q
for the quarter ended October 31, 2005, file number 1-6089,
is incorporated herein by reference.**
|
|
10
|
.22
|
|
Joinder and First Amendment to Program Contracts dated as of
November 10, 2006, among HSBC Bank USA, National
Association, HSBC Trust Company (Delaware), N.A., HSBC
Taxpayer Financial Services Inc., Beneficial Franchise Company
Inc., Household Tax Masters Acquisition Corporation, H&R
Block Services, Inc., H&R Block Tax Services, Inc.,
H&R Block Enterprises, Inc., H&R Block Eastern
Enterprises, Inc., H&R Block Digital Solutions, LLC,,
H&R Block and Associates, L.P., HRB Royalty, Inc., HSBC
Finance Corporation, H&R Block, Inc. and Block Financial
Corporation, filed as Exhibit 10.25 to the Companys
quarterly report on
Form 10-Q
for the quarter ended January 31, 2007, file number 1-6089,
is incorporated by reference.**
|
|
10
|
.23
|
|
Second Amendment to Program Contracts dated as of
November 13, 2006, among HSBC Bank USA, National
Association, HSBC Trust Company (Delaware), N.A., HSBC
Taxpayer Financial Services, Inc., Beneficial Franchise Company
Inc., H&R Block Services, Inc., H&R Block Tax Service,
Inc., H&R Block Enterprises, Inc., H&R Block Eastern
Enterprises, Inc., H&R Block Digital Solutions,, LLC,
H&R Block and Associates, L.P., HRB Royalty, Inc., HSBC
Finance Corporation, and H&R Block, Inc., filed as
Exhibit 10.26 to the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2007, file number 1-6089,
is incorporated by reference.**
|
|
10
|
.24
|
|
Third Amendment to Program Contracts dated as of
December 5, 2008, by and among HSBC Bank USA, HSBC
Trust Company (Delaware), N.A., HSBC Taxpayer Financial
Services Inc., Beneficial Franchise Company Inc., HRB Tax Group,
Inc., H&R Block Tax Services LLC, H&R Block
Enterprises LLC, H&R Block Eastern enterprises, Inc., HRB
Digital LLC, Block Financial LLC, HRB Innovations, Inc., HSBC
Finance Corporation, and H&R Block, Inc., filed as
Exhibit 10.1 to the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2009, file number 1-6089,
is incorporated by reference.**
|
|
10
|
.25
|
|
First Amended and Restated HSBC Refund Anticipation Loan and IMA
Participation Agreement Participation Agreement dated as of
November 13, 2006 among Block Financial Corporation, HSBC
Bank USA, National Association, HSBC Trust Company
(Delaware), National Association, and HSBC Taxpayer Financial
Services, Inc., filed as Exhibit 10.27 to the
Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2007, file number 1-6089,
is incorporated by reference.**
|
|
10
|
.26
|
|
First Amended and Restated HSBC Settlements Products Servicing
Agreement dated as of November 13, 2006 among Block
Financial Corporation, HSBC Bank USA, National Association, HSBC
Trust Company (Delaware), National Association, and HSBC
Taxpayer Financial Services, Inc., filed as Exhibit 10.28
to the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2007, file number 1-6089,
is incorporated by reference.**
|
|
10
|
.27
|
|
Amended and Restated Five-Year Credit and Guarantee Agreement
dated as of August 10, 2005 among Block Financial
Corporation, H&R Block, Inc., the lenders party thereto,
Bank of America, N.A., HSBC Bank USA, National Association,
Royal Bank of Scotland PLC, JPMorgan Chase Bank, N.A., and
J.P. Morgan Securities Inc., filed as Exhibit 10.3 to
the quarterly report on
Form 10-Q
for the quarter ended October 31, 2005, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.28
|
|
First Amendment dated as of November 28, 2006 to Amended
and Restated Five-Year Credit and Guarantee Agreement among
Block Financial Corporation, H&R Block, Inc., JP Morgan
Chase Bank and various financial institutions, filed as
Exhibit 10.31 to the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2007, file number 1-6089,
is incorporated by reference.
|
|
10
|
.29
|
|
Second Amendment dated as of November 19, 2007, to the
Amended and Restated Five-Year Credit and Guarantee Agreement
dated as of August 10, 2005, filed as Exhibit 10.4 to
the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2008, file number 1-6089,
is incorporated by reference.
|
H&R
BLOCK 2009
Form 10K 83
|
|
|
|
|
|
10
|
.30
|
|
Five-Year Credit and Guarantee Agreement dated as of
August 10, 2005 among Block Financial Corporation, H&R
Block, Inc., the lenders party thereto, Bank of America, N.A.,
HSBC Bank USA, National Association, The Royal Bank of Scotland
PLC, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities,
Inc., filed as Exhibit 10.4 to the quarterly report on
Form 10-Q
for the quarter ended October 31, 2005, file number 1-6089,
is incorporated herein by reference.
|
|
10
|
.31
|
|
First Amendment dated as of November 28, 2006 to Five-Year
Credit and Guarantee Agreement among Block Financial
Corporation, H&R Block, Inc., JP Morgan Chase Bank and
various financial institutions, filed as Exhibit 10.30 to
the Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2007, file number 1-6089,
is incorporated by reference.
|
|
10
|
.32
|
|
Second Amendment dated as of November 19, 2007, to the
Five-Year Credit and Guarantee Agreement dated as of
August 10, 2005, filed as Exhibit 10.3 to the
Companys quarterly report on
Form 10-Q
for the quarter ended January 31, 2008, file
number 1-6089,
is incorporated by reference.
|
|
10
|
.33
|
|
License Agreement effective August 1, 2007 between H&R
Block Services, Inc. and Sears, Roebuck and Co., filed as
Exhibit 10.1 to the quarterly report on
Form 10-Q
for the quarter ended July 31, 2007, file number 1-6089, is
incorporated herein by reference.**
|
|
10
|
.34
|
|
Advances, Pledge and Security Agreement dated April 17,
2006, between H&R Block Bank and the Federal Home Loan Bank
of Des Moines, filed as Exhibit 10.11 to the Companys
quarterly report on
Form 10-Q
for the quarter ended October 31, 2007, file number 1-6089,
is incorporated by reference.**
|
|
10
|
.35
|
|
Administrative Services Agreement dated January 30, 2006,
by and among RSM McGladrey, Inc. and McGladrey &
Pullen, LLP.
|
|
10
|
.36
|
|
Amendment Number One, dated June 1, 2008, to the
Administrative Services Agreement dated January 30, 2006,
by and among RSM McGladrey, Inc. and McGladrey &
Pullen, LLP.
|
|
10
|
.37
|
|
Operations Agreement, dated as of August 2, 1999, by and
among McGladrey & Pullen, LLP, MP Active Partners
Trust, Mark W. Scally, Thomas G. Rotherham, RSM
McGladrey, Inc., HRB Business Services, Inc., and H&R
Block, Inc.
|
|
12
|
|
|
Computation of Ratio of Earnings to Fixed Charges for the five
years ended April 30, 2009.
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, Independent
Registered Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
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 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 pursuant to
18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Indicates
management contracts, compensatory plans or arrangements.
|
|
**
|
|
Confidential
Information has been omitted from this exhibit and filed
separately with the Commission pursuant to a confidential
treatment request under
Rule 24b-2.
|
84 H&R
BLOCK 2009 Form 10K
H&R
BLOCK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2009, 2008 AND 2007
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
Balance at End
|
|
|
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
of Period
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts - deducted from accounts
receivable in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
120,155,000
|
|
|
$
|
181,829,000
|
|
|
$
|
173,443,000
|
|
|
$
|
128,541,000
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
95,161,000
|
|
|
$
|
174,813,000
|
|
|
$
|
149,819,000
|
|
|
$
|
120,155,000
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
61,784,000
|
|
|
$
|
64,066,000
|
|
|
$
|
30,689,000
|
|
|
$
|
95,161,000
|
|
|
|
|
|
|
|
|
Liability related to Mortgage Services restructuring charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
27,920,000
|
|
|
$
|
|
|
|
$
|
20,387,000
|
|
|
$
|
7,533,000
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
14,607,000
|
|
|
$
|
76,388,000
|
|
|
$
|
63,075,000
|
|
|
$
|
27,920,000
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
7,558,000
|
|
|
$
|
18,740,000
|
|
|
$
|
11,691,000
|
|
|
$
|
14,607,000
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Deductions from the
Allowance for Doubtful Accounts reflect recoveries and
charge-offs.
|
Deductions
from the restructuring charge liability represent payments made.
EX-10.18
Exhibit 10.18
H&R BLOCK, INC.
2008 DEFERRED STOCK UNIT PLAN FOR OUTSIDE DIRECTORS
Purposes. The purposes of this 2008 Deferred Stock Unit Plan for Outside Directors are to attract,
retain and reward experienced and qualified directors who are not employees of the Company or any
Subsidiary of the Company, and to secure for the Company and its shareholders the benefits of stock
ownership in the Company by those directors.
Definitions.
(a) Account shall mean a recordkeeping account for each Recipient reflecting the number of
Deferred Stock Units credited to such a Recipient.
(b) Beneficiary or Beneficiaries shall mean the persons or trusts designated by a
Recipient in writing pursuant to Section 10(a) of the Plan as being entitled to receive any benefit
payable under the Plan by reason of the death of a Recipient, or, in the absence of such
designation, the persons specified in Section 10(b) of the Plan.
(c) Board of Directors shall mean the board of directors of the Company.
(d) Closing Price shall mean the last reported market price for one share of Common Stock,
regular way, on the New York Stock Exchange (or any successor exchange or stock market on which
such last reported market price is reported) on the day in question. If such exchange or market is
closed on the day on which Closing Price is to be determined or if there were no sales reported on
such date, Closing Price shall be computed as of the last date preceding such date on which such
exchange or market was open and a sale was reported.
(e) Code shall mean the Internal Revenue Code of 1986, as amended.
(f) Common Stock shall mean the common stock, without par value, of the Company.
(g) Company shall mean H&R Block, Inc., a Missouri corporation.
(h) Deferred Stock Unit shall mean the unit of measurement of a Recipients interest in the
Plan.
(i) Director shall mean a member of the Board of Directors of the Company or a member of the
Board of Directors of any Subsidiary of the Company, as the case may be. With respect only to
awards made within thirty (30) days after initial approval of this Plan by shareholders of the
Company, Director shall include an individual who was a Director in June, 2008 and whose term
expired at the 2008 annual meeting of shareholders at which this Plan was initially approved.
(j) Outside Director shall mean a Director who is not an employee of the Company on the date
of grant of the Deferred Stock Unit. As used herein, employee of the
Company means any full-time employee of the Company, its subsidiaries and their respective
divisions, departments and subsidiaries and the respective divisions, departments and subsidiaries
of such subsidiaries who is employed at least thirty-five (35) hours a week; provided, however, it
is expressly understood that an employee of the Company does not include independent contractors or
other persons not otherwise employed by the Company or any Subsidiary of the Company but who
provide legal, accounting, investment banking or other professional services to the Company or any
Subsidiary of the Company.
(k) Plan shall mean this 2008 Deferred Stock Unit Plan for Outside Directors, as the same
may be amended from time to time.
(l) Recipient shall mean an Outside Director of the Company or any Subsidiary of the Company
who has been granted a Deferred Stock Unit under the Plan or any person who succeeds to the rights
of such Outside Director under this Plan by reason of the death of such Outside Director.
(m) Related Company shall mean (i) any corporation that is a member of a controlled group of
corporations (as defined in Section 414(b) of the Code) that includes that Company; and (ii) any
trade or business (whether or not incorporated) that is under common control (as defined in Section
414(c) of the Code) with the Company (for purposes of applying Sections 414(b) and (c) of the Code,
twenty-five percent (25%) is substituted for the eighty percent (80%) ownership level).
(n) Separation from Service shall mean that a Director ceases to be a Director and it is not
anticipated that the individual will thereafter perform services for the Company or a Related
Company. For this purpose, services provided as an employee are disregarded if this Plan is not
aggregated with any plan in which a Director participates as an employee pursuant to Treasury
Regulation section 1.409A-1(c)(2)(ii).
(o) Subsidiary of the Company shall mean a subsidiary of the Company, its divisions,
departments, and subsidiaries and the respective divisions, departments and subsidiaries of such
subsidiaries.
Administration of the Plan. The Plan may be administered by the Board of Directors. A majority of
the Board of Directors shall constitute a quorum and the acts of a majority of the members present
at any meeting at which a quorum is present, or acts approved in writing by all members of the
Board of Directors, shall be valid acts of the Board of Directors.
The Board of Directors shall have full power and authority to construe, interpret and
administer the Plan and, subject to the other provisions of this Plan, to make determinations which
shall be final, conclusive and binding upon all persons, including, without limitation, the
Company, the shareholders of the Company, the Board of Directors, the Recipients and any persons
having any interest in any Deferred Stock Units which may be granted under this Plan. The Board of
Directors shall impose such additional conditions upon Deferred Stock Units granted under this Plan
and the exercise thereof as may from time to time be deemed necessary or advisable, in the opinion
of counsel to the Company, to comply with applicable laws and regulations. The Board of Directors
from time to time may adopt rules and regulations for
2
carrying out the Plan and written policies for implementation of the Plan. Such policies may
include, but need not be limited to, the type, size and terms of Deferred Stock Units to be granted
to Outside Directors.
Awards. The Board of Directors may, in its sole and absolute discretion, from time to time during
the continuance of the Plan, (i) determine which Outside Directors shall be granted Deferred Stock
Units under the Plan, (ii) grant Deferred Stock Units to any Outside Directors so selected, (iii)
determine the date of grant, size and terms of Deferred Stock Units to be granted to Outside
Directors of any Subsidiary of the Company (subject to
Sections 7, 13 and 14 hereof, as the same may
be hereafter amended), and (iv) do all other things necessary and proper to carry out the
intentions of this Plan.
Eligibility. Deferred Stock Units may be granted to any Outside Director; however, no Outside
Director or other person shall have any claim or right to be granted a Deferred Stock Unit under
the Plan.
Credits. The number of Deferred Stock Units credited to a Recipients Account pursuant to an award
shall equal the dollar amount of the award divided by the Closing Price on the date of award. If a
cash dividend is paid on Common Stock, a Recipients Account shall be credited with the number of
Deferred Stock Units equal to the amount of dividend that would have been paid with respect to the
Deferred Stock Units if they were shares of Common Stock, divided by the Closing Price on the date
the dividends were paid. If a stock dividend is paid on Common Stock, a Recipients Account shall
be credited with the same number of Deferred Stock Units as the number of shares of Common Stock
the Recipient would have received as a dividend if the Deferred Stock Units credited to his Account
were shares of Common Stock.
Stock Subject to the Plan. The total number of shares of Common Stock issuable under this Plan may
not at any time exceed three hundred thousand (300,000) shares, subject to adjustment as provided
in Sections 16 and 17 hereof. Shares of Common Stock not actually issued pursuant to Deferred Stock
Units shall be available for future awards of Deferred Stock Units. Shares of Common Stock to be
delivered under the Plan may be either authorized but unissued Common Stock or treasury shares.
Vesting. All Deferred Stock Units credited to a Recipients Account shall be fully vested at all
times.
Payment.
(p) Time and Form of Payment Upon Separation from Service. If a Recipient has a Separation
from Service for a reason other than death, payment of his Account shall be made in one lump sum on
the six month anniversary of the date the Recipient had a Separation from Service. If the New York
Stock Exchange (or any successor exchange or stock market on which shares of the Common Stock are
traded) is not open on such day, then payment shall be made on the next day the New York Stock
Exchange (or any successor exchange or stock market on which shares of the Common Stock are traded)
is open.
(q) Payment Following Death. If a Recipient dies prior to the payment in full of all amounts
due him under the Plan, the balance of his Account shall be payable to his
3
designated Beneficiary in a lump sum as soon as reasonably practical following death, but no
later than ninety (90) days following the Recipients death. The beneficiary designation shall be
revocable and must be made in writing in a manner approved by the Company.
(r) Medium of Payment. Payment of a Directors Account shall be made in shares of Common
Stock. The number of shares of Common Stock issued shall equal the number, rounded up to the next
whole number, of Deferred Stock Units credited to a Directors Account.
Beneficiary.
(s) Designation by Recipient. Each Recipient has the right to designate primary and contingent
Beneficiaries for death benefits payable under the Plan. Such Beneficiaries may be individuals or
trusts for the benefit of individuals. A beneficiary designation by a Recipient shall be in writing
on a form acceptable to the Company and shall only be effective upon delivery to the Company. In
the event a Recipient is married at the time he or she designates a beneficiary other than his or
her spouse, such designation will not be valid unless the Recipients spouse consents in writing to
such designation. A beneficiary designation may be revoked by a Recipient at any time by delivering
to the Company either written notice of revocation or a new beneficiary designation form. The
beneficiary designation form last delivered to the Company prior to the death of a Recipient shall
control.
(t) Failure to Designate Beneficiary. In the event there is no beneficiary designation on file
with the Company, or all Beneficiaries designated by a Recipient have predeceased the Recipient,
the benefits payable by reason of the death of the Recipient shall be paid to the Recipients
spouse, if living; if the Recipient does not leave a surviving spouse, to the Recipients issue by
right of representation; or, if there are no such issue then living, to the Recipients estate. In
the event there are benefits remaining unpaid at the death of a sole Beneficiary and no successor
Beneficiary has been designated, either by the Recipient or the Recipients spouse pursuant to
Section 10(a), the remaining balance of such benefit shall be paid to the deceased Beneficiarys
estate; or, if the deceased Beneficiary is one of multiple concurrent Beneficiaries, such remaining
benefits shall be paid proportionally to the surviving Beneficiaries.
Unfunded. This Plan is unfunded and payable solely from the general assets of the Company. The
Recipients shall be unsecured creditors of the Company with respect to their interests in the Plan.
No Claim on Specific Assets. No Recipient shall be deemed to have, by virtue of being a Recipient,
any claim on any specific assets of the Company such that the Recipient would be subject to income
taxation on his or her benefits under the Plan prior to distribution and the rights of Recipients
and Beneficiaries to benefits to which they are otherwise entitled under the Plan shall be those of
an unsecured general creditor of the Company.
Continuation as Director. The Board of Directors shall require that a Recipient be an Outside
Director at the time a Deferred Stock Unit is granted. The Board of Directors shall have the sole
power to determine the date of any circumstances which shall constitute cessation as a Director and
to determine whether such cessation is the result of death or any other reason.
4
Registration of Stock. No shares of Common Stock may be issued at any time when its exercise or the
delivery of shares of Common Stock or other securities thereunder would, in the opinion of counsel
for the Company, be in violation of any state or federal law, rule or ordinance, including any
state or federal securities laws or any regulation or ruling of the Securities and Exchange
Commission.
Non-Assignability. No Deferred Stock Unit granted pursuant to the Plan shall be transferable or
assignable by the Recipient other than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
Dilution or Other Adjustments. In the event of any change in the capital structure of the Company,
including but not limited to a change resulting from a stock dividend or split, or combination or
reclassification of shares, the Board of Directors shall make such equitable adjustments with
respect to the Deferred Stock Units or any provisions of this Plan as it deems necessary or
appropriate, including, if necessary, any adjustment in the maximum number of shares of Common
Stock subject to an outstanding Deferred Stock Unit.
Merger, Consolidation, Reorganization, Liquidation, Etc. If the Company shall become a party to any
corporate merger, consolidation, major acquisition of property for stock, reorganization or
liquidation, the Board of Directors shall make such arrangements it deems advisable with respect to
outstanding Deferred Stock Units, which shall be binding upon the Recipients of outstanding
Deferred Stock Units, including, but not limited to, the substitution of new Deferred Stock Units
for any Deferred Stock Units then outstanding, the assumption of such Deferred Stock Units and the
termination of or payment for such Deferred Stock Units.
Costs and Expenses. The cost and expenses of administering the Plan shall be borne by the Company
and not charged to any Deferred Stock Unit nor to any Recipient.
Deferred Stock Unit Agreements. The Board of Directors shall have the power to specify the form of
Deferred Stock Unit agreements to be granted from time to time pursuant to and in accordance with
the provisions of the Plan and such agreements shall be final, conclusive and binding upon the
Company, the shareholders of the Company and the Recipients. No Recipient shall have or acquire any
rights under the Plan except such as are evidenced by a duly executed agreement in the form thus
specified.
No Shareholder Privileges. Neither the Recipient nor any person claiming under or through him or
her shall be or have any of the rights or privileges of a shareholder of the Company in respect to
any of the Common Stock issuable with respect to any Deferred Stock Unit, unless and until
certificates evidencing such shares of Common Stock shall have been duly issued and delivered.
Guidelines. The Board of Directors shall have the power to provide guidelines for administration of
the Plan and to make any changes in such guidelines as from time to time the Board deems necessary.
Amendment and Discontinuance. The Board of Directors shall have the right at any time during the
continuance of the Plan to amend, modify, supplement, suspend or terminate the Plan, provided that
(a) no amendment, supplement, modification, suspension or termination of the Plan
5
shall in any material manner affect any Deferred Stock Unit of any kind theretofore granted under
the Plan without the consent of the Recipient of the Deferred Stock Unit, unless such amendment,
supplement, modification, suspension or termination is by reason of any change in capital structure
referred to in Section 16 hereof or unless the same is by reason of the matters referred to in
Section 17 hereof; (b) Section 409A of the Code is not violated thereby, and (c) if the Plan is duly
approved by the shareholders of the Company, no amendment, modification or supplement to the Plan
shall thereafter, in the absence of the approval of the holders of a majority of the shares of
Common Stock present in person or by proxy at a duly constituted meeting of shareholders of the
Company, (i) increase the aggregate number of shares which may be issued under the Plan, unless
such increase is by reason of any change in capital structure
referred to in Section 16 hereof, or
(ii) change the termination date of the Plan provided in
Section 23 hereof.
Termination. Deferred Stock Units may be granted in accordance with the terms of the Plan until
September ___, 2018, on which date this Plan will terminate except as to Deferred Stock Units then
outstanding hereunder, which Deferred Stock Units shall remain in effect until they have been paid
out according to their terms.
Notices. Any notice permitted or required under the Plan shall be in writing and shall be hand
delivered or sent, postage prepaid, by certified mail with return receipt requested, to the
principal office of the Company, if to the Company, or to the address last shown on the records of
the Company, if to a Recipient or Beneficiary. Any such notice shall be effective as of the date of
hand delivery or mailing.
No Guarantee of Membership. Neither the adoption and maintenance of the Plan nor the award of
Deferred Stock Units by the Company to any Director shall be deemed to be a contract between the
Company and any Recipient to retain his or her position as a Director.
Withholding. The Company may withhold from any payment of benefits under the Plan such amounts as
the Company determines are reasonably necessary to pay any taxes (and interest thereon) required to
be withheld or for which the Company may become liable under applicable law. Any amounts withheld
pursuant to this Section 26 in excess of the amount of taxes due (and interest thereon) shall be
paid to the Recipient or Beneficiary upon final determination, as determined by the Company, of
such amount. No interest shall be payable by the Company to any Recipient or Beneficiary by reason
of any amounts withheld pursuant to this Section 26.
409A Compliance. To the extent provisions of this Plan do not comply with 409A of the Code, the
non-compliant provisions shall be interpreted and applied in the manner that complies with 409A of
the Code and implements the intent of this Plan as closely as possible.
Release. Any payment of benefits to or for the benefit of a Recipient or Beneficiaries that is made
in good faith by the Company in accordance with the Companys interpretation of its obligations
hereunder, shall be in full satisfaction of all claims against the Company for benefits under this
Plan to the extent of such payment.
Captions. Article and section headings and captions are provided for purposes of reference and
convenience only and shall not be relied upon in any way to construe, define, modify, limit, or
extend the scope of any provision of the Plan.
6
Approval. This Plan shall take effect upon due approval by the Board of Directors and the
shareholders of the Company.
7
EX-10.35
Exhibit 10.35
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (the Agreement) is dated and effective as of January
30, 2006 (the Effective Date), by and among RSM McGladrey, Inc. (RSMM), which is an indirect
wholly-owned subsidiary of H&R Block, Inc. (Block),
and McGladrey & Pullen, LLP (M&P).
RECITALS
WHEREAS, M&P is licensed to hold itself out as a licensed certified public accounting firm in
numerous states and jurisdictions; and
WHEREAS, RSMM has performed certain administrative services under an Administrative
Services Agreement dated August 2, 1999 (the Original Agreement); and
WHEREAS, the Original Agreement provided that its term shall end on August 2, 2004, which term
was extended to January 30, 2006; and
WHEREAS, the parties have decided to terminate the Original Agreement as of the Effective
Date and execute this Agreement in its place; and
WHEREAS, M&P desires to continue to focus its effort, energy and expertise generally on the
provision of accounting services including Public Accounting Services (as defined below) and
certain tax preparation services to clients (the Business), and to accomplish this goal, desires
to outsource certain administrative functions of the Business to RSMM; and
WHEREAS, M&P desires to retain the administrative services of RSMM in connection with the
provision of certain services and products relating to the Business that do not involve the
provision of Public Accounting Services; and
WHEREAS, M&P and RSMM have agreed upon a fair compensation for the
administrative services provided by RSMM hereunder; and
WHEREAS, the parties also entered into a letter agreement dated August 2, 1999 relating
to the mutual provisions of professional services to each other on a subcontract basis; and
WHEREAS,
such letter agreement was of indefinite duration and the parties wish to
incorporate its provisions, as revised, into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1.
Obligations of RSMM.
1.1. Appointment of RSMM; Administrative Services. M&P hereby retains RSMM and RSMM
agrees to provide the administrative services described in Schedule 1.1 hereto (collectively, the
Administrative Services). From time to time RSMM may replace any of its employees or independent
contractors (including hiring and firing employees and terminating the relationship with any
independent contractors providing the Administrative Services hereunder), and may obtain
alternative types or sources of the Administrative Services in RSMMs reasonable discretion.
1.2. Records. For purposes of performing records management services for M&P, RSMM
shall be granted access to all M&P files. M&P may impose reasonable restrictions on RSMMs
management of client engagement files for Public Accounting Services (as defined below). Such
files shall be maintained at RSMMs and/or M&Ps offices and such offsite storage as may be
obtained by RSMM.
1.3. Limitation on RSMMs Authority. Administrative Services shall not include, and
RSMM shall not at any time or in any manner engage, pursuant to this Agreement, in providing to M&P
or any client or customer of M&P, any services which, under applicable state law, constitute the
practice of public accounting, or which require registration with the Public Company Accounting
Oversight Board (PCAOB), such services to be collectively referred to herein as Public
Accounting Services. If any Administrative Services or acts required or requested of RSMM herein
would be reasonably likely to be construed by a court of competent jurisdiction or the applicable
state agency, board or other authority charged under the laws of the state with the licensing,
registration and/or regulation of public accountants (each a State Board) or by the PCAOB to be
Public Accounting Services, the requirement or other request to perform that act shall be deemed
waived. M&P shall have complete control and supervision over its provision of any Public Accounting
Services including, but not limited to (i) the establishment and maintenance of quality assurance
policies, (ii) the hiring, training, promotion and termination of professional staff and partners,
(iii) the acceptance and continuation of clients, and (iv) the management and supervision of client
engagements. Anything in this Agreement to the contrary notwithstanding, although M&P has
delegated to RSMM under the terms of this Agreement various ministerial administrative matters, M&P
retains the exclusive right, through its own personnel, to manage its own Business (including
Public Accounting Services) subject to the surviving terms and conditions of the Asset Purchase
Agreement of June 28, 1999 and the Operations Agreement of August 2, 1999 and the Amended and
Restated Loan Agreement of even date herewith.
1.4. Execution of Contracts. RSMM is hereby authorized to execute contracts on
behalf of M&P provided that the contracts so executed relate to the provision of Administrative
Services, and do not relate to the performance of Public Accounting Services. M&P grants to RSMM a
limited and special power of attorney (the Power of Attorney) for the execution of contracts
(with amounts due and payable thereunder not to exceed Fifty Thousand Dollars ($50,000)).
Notwithstanding the foregoing, RSMM may execute contracts (including
those exceeding $50,000 in
annual expenditures) that benefit both RSMM and M&P and relate to services provided by RSMM under
this Agreement. A form of the Power of Attorney is set forth as Exhibit 1.4 hereto. The M&P Board
of Directors (the McGladrey Board) or Managing
Partner, or his/her or its designees, must authorize contracts with total amounts due and
payable thereunder in excess of such amount or which relate to the performance of Public
Accounting Services.
2. Term. The term of this Agreement shall commence on the Effective Date and shall end at
midnight central time on January 31, 2011 (unless sooner terminated pursuant to Section 9 hereof)
(the Initial Term), provided that, if not sooner terminated, this Agreement shall continue
thereafter from year to year, subject to termination by either party at any time following the
Initial Term, with or without cause, upon two hundred ten (210) days prior written notice or as
otherwise set forth in Section 9. The Initial Term and any continuation thereafter shall be
collectively referred to herein as the Term.
3. Shared Expenses and Fee. RSMM and M&P shall agree to jointly share in certain common
overhead costs which are necessary operating expenses for the
performance of attest, accounting,
tax and consulting services (the Shared Expenses). Such Shared Expenses may include but are not
limited to certain human resources, client service, sales and marketing, lease and occupancy,
equipment and technology, and administrative expenses. RSMM and M&P agree that such annual cost
sharing arrangement will be allocated based upon budgeted Shared Expenses and an allocation method
(the Allocation Method) based to the extent feasible and reasonable on actual usage by the
respective parties and agreed upon in advance by the President of RSMM and the Board of Directors
of M&P. RSMM will be responsible for payment of the Shared Expenses (except those expenses directly
related to the practice of Public Accounting Services) and will be reimbursed monthly by M&P for
its portion based on the Allocation Method. M&P shall pay RSMM an annual administration fee for all
of its Administrative Services equal to 15% of M&Ps share of the budgeted Shared Expenses, payable
monthly.
4. Occupancy and Partner Benefits.
4.1. Occupancy and Notice to Vacate Premises. M&P shall be entitled to occupy all
office space from time to time occupied by RSMM. M&P agrees to give RSMM at least 210 days prior
written notice of its intention to vacate any particular office space then occupied by M&P. RSMM
agrees to give M&P at least 210 days prior written notice of its intention to vacate any office
space at the time occupied by both RSMM and M&P, unless such intent to vacate is due to an office
relocation or closing which is generally known. In the event of any
termination of this Agreement
by either party for any reason, except an M&P default for nonpayment of fees, M&P shall in any case
be entitled if it so elects to occupy all office space which it then occupies for 210 days after
such termination, subject to having received earlier notice of RSMMs intention to vacate such
space as stated above. In the event M&P occupies such office space after termination of the
Administrative Services, the parties shall agree on rent payable during M&Ps continued occupancy,
or if they fail to do so, the rent shall be prorated according to the Allocation Method.
4.2. Partner Benefits. RSMM and M&P agree that certain partner benefits may, if the
parties agree, be paid by RSMM and in such case M&P will reimburse RSMM for the payment of those
benefits. In such case, RSMM and M&P will agree to the allocation methodology as a part of the
annual budgeting process and payment for such benefits will be made monthly by M&P.
4.3. Independent Identity. M&P shall maintain a separate legal
identity and shall observe all legal requirements and customary practices necessary to maintain
M&P as a separate and distinct legal entity from any other person or entity. M&P shall also
maintain its own business identity, including, without limitation, letterhead and business cards
and shall have the right at its option to conduct its own marketing activities. Nothing herein
shall prevent M&P from being acquired by or otherwise combining with any other person.
5. Engagement Letters, Billing and Collection of Fees; Accounting.
5.1. Engagement Letters. M&P will prepare engagement letters in accordance with its
policies for services and/or products to be provided by M&P to its clients. The content of such
letters shall be solely under the control of M&P and shall be
executed only by a partner or employee
of M&P.
5.2. Billing and Collection. As part of the Administrative Services, RSMM shall
prepare and mail statements for all services provided by or on behalf of M&P to clients of M&P
based upon time records, expense payments and other information provided by M&P to RSMM. M&P shall
and shall cause its partners and employers to provide RSMM all records reasonably necessary for
billing and collection of accounts pursuant to the provisions of this Section.
5.3. Accounting. As a part of the Administrative Services, RSMM shall maintain
books of account for M&P. In addition, RSMM shall prepare the monthly and annual operational
and financial reports for M&P.
6. Mutual Nondisclosure. Neither M&P nor RSMM shall at any time or in any manner,
directly or indirectly, use or disclose to any third party any trade secrets or other Confidential
Information (defined herein) learned or obtained from the other party hereto as a result of its
relationship with the other party hereto or any direct or indirect subsidiary or affiliate (i.e.,
a person which controls, is controlled by or under common control with a party) of the other party.
As used herein, the term Confidential Information means information disclosed to or known by one
party herein as a consequence of its relationship with the other party hereto (whether before or
after the date of this Agreement) and not generally known in the industry in which the parties or
any of their direct or indirect subsidiaries or (in the case of information of or about clients of
either party) clients is engaged, and that in any way relates to the products, processes,
services, inventions (whether patentable or not), formulas, techniques or know-how, including, but
not limited to, information relating to distribution systems and methods, research, development,
purchasing, accounting, procedures, marketing, customers, vendors, merchandising and selling, of
RSMM or M&P or any of their direct or indirect subsidiaries or affiliates, or the clients of either
party, and regardless of the format in which it is presented or embodied (written, graphic,
electromagnetic or otherwise). The term Confidential Information, as used herein, does not
include information (a) which was already in the public domain through disclosure by the party or
a person owning such Confidential Information or (b) which is disclosed as a matter of right by a
third party source after the execution of this Agreement provided such third party source is not
bound by confidentiality obligations in favor of the owner of the Confidential Information in
question. This Section 6 shall survive the termination of this Agreement. Each party agrees that
it will adopt reasonable precautions to guard against unauthorized release or use of Confidential
Information, and that it will not use or disclose such Confidential Information in any manner that
will
unfairly benefit itself or damage the other party hereto. Each party agrees to return
to the other party all such Confidential Information pertaining to the other party upon
termination of this Agreement. In lieu of returning all Confidential Information, a party may
destroy such Confidential Information provided that the other party hereto has agreed in writing
that destruction is acceptable.
7. Administrative Services, Warranties, Disclaimers, Limitations on Liability and
Required Notices. RSMM will act diligently and use reasonable care in providing
Administrative Services to M&P. M&P and each Partner hereby release and forever discharge RSMM and
its affiliates, parents, employees, agents and assigns from any liability in any way connected with
this Agreement, except for any liability for intentional torts or gross negligence. RSMM does not
warrant the success or results of M&P. RSMM shall not be liable to M&P or any Partner under any
circumstances for special, exemplary, punitive or consequential damages relating to the
Administrative Services except for intentional torts or gross negligence. Neither M&P nor any
Partner shall be liable to RSMM for special, exemplary, punitive or consequential damages relating
to this Agreement.
8. Mutual Provision of Professional Services. RSMM and M&P may from time to time request
assistance from the others professionals and other personnel in meeting the Contractors
professional service obligations to its clients (the Professional Services). The party requesting
such assistance and billing the client for the Professional Services rendered is referred to in
this Section 8 as the Contractor. The party providing the requested Professional Services to on
or behalf of the Contractor and billing the Contractor is referred to in this Section 8 as the
Subcontractor. In no case shall the Administrative Services rendered by RSMM to M&P pursuant to
other sections of this Agreement be subject to this Section 8. The Subcontractor may at its sole
option and discretion, provide or decline to provide the requested Professional Services to the
Contractor. The provisions set forth below shall apply with respect to all Professional Services so
provided pursuant to this Section 8.
8.1. Nature of Requests. Such a request may be made by any person authorized by the
Contractor to do so, and such request may be accepted by any person authorized by the Subcontractor
to do so. No formalities are required.
8.2.
Contractor to Bill Client. The Contractor shall have sole responsibility for
billing and collecting from its own client with respect to the Subcontractors Professional
Services. No delay or failure by the client to pay for such Professional Services shall relieve the
Contractor from its obligations to pay the Subcontractor for such Professional Services as provided
herein.
8.3. Subcontractors Billing for Services Rendered. The Subcontractor shall bill the
Contractor for actual hours expended by its personnel to provide Professional Services to the
client of the Contractor. The rate to be charged shall be mutually
agreed upon from time to time
between Contractor and Subcontractor, in writing. The fees in effect as of the date hereof are 69%
of the standard rate typically charged by the Subcontractor to its own clients. The objective of
Contractor and Subcontractor is to establish a rate that results in an approximately equal sharing
of the net profit on an hour of services and that approximates the negotiated borrowed-loaned rate
for services provided between M&P economic units prior to the sale of M & Ps non-attest assets and
business to RSMM in 1999. Contractor shall make payment to the
Subcontractor for Professional Services provided hereunder within 30 days after the
end of the month in which the Professional Services were provided by the Subcontractor.
8.4. Subcontractor Responsible for Own Expenses. Subcontractor is solely responsible
for the payroll, benefits, training, equipment and facilities necessary for its personnel to
provide Professional Services to the Contractors client, and for its own profitability or lack
thereof, relating to the rendition of such Professional Services. Travel and living expenses away
from Subcontractors office normally employing personnel used to perform the Professional Services
shall be billed to Contractor as disbursements at the actual amount paid to vendors.
8.5. Compliance With Laws, Rules and Professional Standards. Contractor and
Subcontractor agree to comply, and to cause their respective partners and employees to comply, with
Rule 301, Confidential Client Information, of the Code of Professional Conduct of the American
Institute of Certified Public Accountants, and all related interpretations and rulings in effect
from time to time in connection with providing Professional Services to each others clients. In
addition, the parties shall, in connection with providing of such Professional Services, observe
the mutual nondisclosure provisions of Section 6 of this Agreement. The parties also agree to
comply, and to cause their respective partners and employees to comply, with Section 7216 of the
Internal Revenue Code in connection with providing Professional Services to each others clients.
RSMM agrees to take all action necessary to comply with Interpretation 101-14 under Rule 101 of the
Code of Professional Conduct of the American Institute of Certified Public Accountants and, unless
an exception is agreed to by M & P (which agreement shall not be unreasonably withheld), M&Ps
Independence and Relationship Policies as in effect from time to time with respect to all attest
clients. The parties agree that RSMM shall not perform any Professional Service which violates any
state law governing the practice of public accounting. It is specifically contemplated that M&P
will utilize Professional Services of RSMM only in a manner or in instances consistent with the
requirements of the governing public accounting licensing laws.
8.6. Professional Services Indemnity. Contractor agrees to indemnify and hold
harmless Subcontractor and its partners, directors, officers, employees, agents and members, as
applicable, with respect to any and all claims, losses, damages, liabilities, judgments or
settlements (including but not limited to reasonable attorneys fees, costs and other expenses)
incurred by Subcontractor on account of any Professional Services conducted by Subcontractor
pursuant to this Section 8 except those arising in the ordinary course of business of performing
requested services and allocated to Subcontractor by Section 8.4 hereof; provided, however, this
indemnification shall not extend to cover any claims, losses, damages, liabilities, judgments or
settlements (including attorneys fees, costs and other expenses) incurred by the Contractor on
account of the bad faith misconduct or intentional fraud of Subcontractor (or its partners,
directors, officers, employees, agents or members, as applicable).
9. Termination. In addition to any termination pursuant to Section 2 or Section 10 hereof,
this Agreement may be terminated in accordance with the provisions of this Section 9.
9.1. By RSMM. RSMM may terminate this Agreement: (a) on at least 210 days prior
written notice of intention to terminate this Agreement without cause; (b) on at least 210 days
prior written notice, if M&P loses or has suspended its license or certification to practice
public accounting in any state significant to its business and to hold itself out as a firm
engaged in public accounting; (c) if M&P is wound up or liquidated or files a voluntary petition in
bankruptcy or other action is taken voluntarily or involuntarily under any statute for the
protection of creditors; or (d) if M&P materially breaches a provision hereof and fails either to
commence cure of the breach within thirty (30) days after the delivery of notice of such breach by
RSMM (such notice to detail specifically the breach being complained of), or having so commenced
cure fails thereafter to prosecute cure promptly to completion within sixty (60) days after receipt
of such initial notice.
9.2. By M&P. M&P may terminate this Agreement: (a) if RSMM breaches a provision hereof
and fails either to commence cure of the breach within thirty (30) days after its receipt of notice
of such breach from M&P, such notice to detail specifically the breach being complained of, or
having so commenced cure fails thereafter to prosecute cure promptly to completion within sixty
(60) days after receipt of such initial notice; or (b) on at least 210 days prior written notice
of intention to terminate this Agreement without cause.
9.3. Effect of Termination.
9.3.1.
Payment of Money Owed. Upon the termination of this Agreement for any
reason, M&P shall pay all amounts due to RSMM and RSMM shall pay all amounts due to M&P under
this Agreement as soon as practicable but in no event later than one hundred eighty (180)
days after the effective date of such termination (such effective date being referred to
herein as the Termination Date).
9.3.2. Survival of Certain Provisions. Sections 4.1, 6, 8.5 and 8.6, 9.3.4
and 9.3.5, 13, 14 and 17 shall survive the termination of this Agreement.
9.3.3.
Records; Files. In the event of termination for any reason, RSMM may, at
its expense, and, subject to RSMMs compliance with any requirements for prior client
consent, copy all records or files of M&P, except for client engagement files which contain
or reflect the performance of Public Accounting Services.
9.3.4. License of Billing System. Effective upon any termination by either
party (except on the bankruptcy or insolvency of M&P), RSMM shall grant M&P a world-wide
royalty-free paid-up nonexclusive nontransferable license and right to use the billing system
then in use by RSMM relating to M&Ps accounts receivable for a period (at M&Ps election) of
up to eighteen (18) months after termination hereof. Additionally, RSMM will use
commercially reasonable efforts to help M&P obtain licensing rights from the third party
providers of the payroll, payables, fixed assets, general ledger and financial statement
software systems that are being utilized at the time of the termination. This provision shall
survive termination of this Agreement.
9.3.5. Transition Services and Return of Data. RSMM shall cooperate with M&P in
transitioning performance of the Administrative Services to M&P or to any third party service
provider designated by M&P; provided, however that M&P shall pay RSMM an agreed upon amount
for any work RSMM needs to perform to segregate data, delete it and/or integrate such data
with M&P and/or its third party vendor, in conjunction
with such transition upon the written request of M&P. RSMM shall return all
copies of all M&P data, materials, and information in the possession or control of RSMM to
M&P in such form or format as reasonably requested by M&P. RSMM shall not retain any
copies of such data, materials, or information except as required by law. This provision
shall survive termination of this Agreement.
10. Regulatory or Legislative Change. In the event of any material change in any
statute, regulation or official interpretation thereof (Laws), or an enforcement action arising
under any Laws, any of which is reasonably likely to materially and adversely affect the manner in
which either party may perform or be compensated for its services under this Agreement, or which
shall make this Agreement unlawful in whole or in material part, the parties shall immediately
enter into good faith negotiations regarding a new service arrangement or basis for compensation
for the Administrative Services provided hereunder which is consistent with such Laws and
approximates as closely as possible the economic position of the parties hereunder prior to the
change. If the parties are unable to reach such an agreement within fifteen business days following
written notice from one party to the other, then either party may terminate this Agreement
effective upon thirty (30) days prior written notice. Termination of this Agreement pursuant to
this provision shall not, however, terminate M&Ps right to occupy such office space as it then
may occupy on premises leased by RSMM.
11. Miscellaneous. This Agreement shall be binding upon and shall inure to the benefit of
the successors and assignees of the parties. M&P shall not assign its rights under this Agreement
without the prior written consent of the RSMM. RSMM may, in its discretion, assign this Agreement
to any other direct or indirect parent, subsidiary or affiliate of RSMM, and M&P shall be liable
hereon to the same extent as if such agreement were originally made with such other person, firm or
corporation, but no such assignment shall constitute a novation or relieve RSMM of any of its
obligations or liabilities hereunder. This Agreement contains the complete understanding of the
parties with respect to the subject matter hereof and no modification or waiver of any provision
hereof shall be valid unless in writing and signed by the parties, unless specifically provided to
the contrary. This Agreement may not be amended except by an instrument in writing signed by RSMM
and M&P. Notwithstanding anything to the contrary herein, no party shall be required to violate any
law or the good faith reasonable exercise of such partys professional responsibility.
12. Governing Law. This Agreement shall be governed by the laws of the State of Missouri,
without reference to its choice of law provisions.
13. Right to Offset. M&P agrees that RSMM may offset amounts due M&P hereunder against
amounts due RSMM hereunder. Such right to offset shall arise if M&P fails to pay such amounts owed
to RSMM within thirty (30) days after written notice to the M&Ps Representative. In the event that
any such offset is made but is finally determined by mediation,
arbitration or a court of competent
jurisdiction to be improper and such offset is revised, RSMM shall pay interest, at the Prime Rate,
on the amount of such offset for the period such offset was in effect.
14. Arbitration. Any controversy, claim, or dispute arising out of or relating to this
Agreement or any breach thereof, including without limitation any dispute concerning the scope
of the arbitration clause set forth below (a Dispute), shall be resolved as set forth
below, except that this Section 14 shall not apply to any controversy, claim or dispute asserted
by either party hereto against the other arising out of or related to a controversy, claim or
dispute asserted by a third person (other than M&P and/or any of its Partners or RSMM) against
either or both parties to this Agreement, nor to any controversy, claim or dispute where a third
party (other than M&P and/or any of its Partners or RSMM) would be an indispensable party under
the Federal Rules of Civil Procedure.
14.1. In the event a Dispute arises, any party may demand mediation by notifying the
American Arbitration Association (AAA) in the location where any arbitration would be conducted
as set forth below, in writing with copies to all other parties involved in the Dispute. The
notification will state with specificity the nature of the Dispute and the amount of any claims.
Upon receipt of the mediation demand, the AAA will immediately convene a pre-mediation telephone
conference of the parties hereto. The parties will make a representative, with full authority to
settle, available for such a conference within five (5) business days of being contacted by the AAA
or its designated mediator (Mediator). During the pre-mediation telephone conference, the parties
will agree on mediation procedures or, in the event they cannot agree, Mediator will set the
mediation procedures. The mediation procedures will provide for the mediation to be completed
within thirty (30) business days of the date of the initial demand for mediation. The parties will
participate in good faith in the mediation and will use their best efforts to reach a resolution
within the thirty (30) day time period. Each party will make available in a timely fashion a
representative with authority to resolve the Dispute. In the event that the Dispute has not been
resolved within thirty (30) days, the mediation may continue if the parties so desire. If not, the
Mediator will so notify the parties and declare the mediation terminated. In the event that the
mediation continues beyond thirty (30) days, but is not resolved within what the Mediator believes
is a reasonable time thereafter, the Mediator will so notify the parties, and declare the
mediation terminated. Fees of the mediator shall be split equally between the parties.
14.2. After the mediation has been declared terminated, the matters in dispute shall be
settled by binding arbitration in accordance with the Commercial Arbitration Rules (the Rules)
of the AAA as supplemented or modified herein and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The governing law of this
Agreement shall be the law used by the arbitrators in rendering their award, except that the
Federal Rules of Evidence shall apply and that the parties have the right and shall be permitted to
conduct and enforce full pre-hearing discovery in accordance with and to the same extent permitted
by the Federal Rules of Civil Procedure. There shall be three neutral arbitrators. Pending final
award, the arbitrators compensation and expenses shall be advanced equally by the parties. The AAA
shall hold an administrative conference with counsel for the parties within twenty (20) days after
the filing of the demand for arbitration by any one or more of the parties. The parties and the
AAA shall thereafter cooperate in order to complete the appointment of three arbitrators as quickly
as possible. Within fifteen (15) days after all three arbitrators have been appointed, an initial
meeting (which, if the arbitrators so determine, may be by phone) among the arbitrators and
counsel for the parties shall be held for the purpose of establishing a plan for administration of
the arbitration, including: (1) definition of issues; (2) scope, timing, and types of discovery;
(3) exchange of documents and filing of detailed statements of claims, prehearing
memoranda and dispositive motions; (4) schedule and place of hearings; and (5) any other
matters that may promote the efficient, expeditious, and cost effective conduct of the proceeding.
14.3. The majority decision of the arbitrators shall contain findings of fact on which the
decision is based, including any specific factual findings requested by either party, and shall
further contain the reasons for the decision with reference to the legal principles on which the
arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties.
The arbitration shall take place in Minneapolis, Minnesota if the party requesting same is RSMM,
or Kansas City, Missouri, if the party requesting same is McGladrey or any Partner. The final
award may grant such relief as authorized by the Rules, including damages and out-of-pocket costs
but which may not include exemplary, consequential or punitive damages to the extent inconsistent
with this Agreement.
15. Notices. Any notices or other communications requiring or permitted hereunder
shall be sufficiently given if in writing and sent by certified or registered mail, postage prepaid
or by facsimile (receipt confirmed) addressed as follows:
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If to RSMM:
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RSM McGladrey Business Services, Inc. |
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4400 Main Street |
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Kansas City, MO 64111 |
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Attn.: Steven Tait |
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Facsimile: 816-753-8628 |
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with a copy to:
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RSM McGladrey Business Services, Inc. |
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3600 American Boulevard West, Third Floor |
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Bloomington, MN 55431 |
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Attn: General Counsel |
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Facsimile: 952.921.7701 |
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If to M&P:
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McGladrey & Pullen, LLP |
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3600 West 80th Street, Third Floor |
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Bloomington MN 55431-4502 |
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Attn: William D. Travis |
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Facsimile: (952) 921-7701 |
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with a copy to:
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Quentin T. Johnson |
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Fredrikson & Byron, P.A. |
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200 South Sixth Street, Suite 4000 |
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Minneapolis, MN 55402 |
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Facsimile: (612) 492-7077 |
or in each case to such other address as shall have been furnished in writing, and such notice or
communication shall be deemed to have been given as of the date so mailed.
16. Integration. This Agreement supersedes and replaces the Original Agreement and
that certain letter agreement dated August 2, 1999 between Contractor and M&P, relating to the
mutual provision of professional services between RSMM and M&P, and the Original Agreement
and such letter agreement shall have no further applicability after
the Effective Date.
17. Operations Agreement, Letter Agreement. On August 2, 1999, the parties hereto
(along with others not a party hereto) entered into an Operations Agreement (attached hereto as
Exhibit 17-1). Most of the provisions thereof have by their terms expired, however, the parties
agree that several of the provisions are still in effect and that the Operations Agreement has not
terminated. As between themselves, the parties hereto, H&R Block Inc. (HRB) and RSM McGladrey
Business Services, Inc. agree that the following provisions thereof shall remain in effect: (i)
Section 13; and (ii) Section 15. On June 22, 2005, the parties hereto entered into a Letter
Agreement (attached hereto as Exhibit 17-2) which sets forth a process by which RSM McGladrey, Inc.
may authorize, in its sole discretion, exceptions to the non-compete provisions in the Operations
Agreement.
THIS AGREEMENT CONTAINS AN ARBITRATION PROVISION WHICH IS BINDING ON THE PARTIES HERETO.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be effective as of the day and
year first above written.
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RSM MCGLADREY, INC.
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By: |
/s/ Steven Tait |
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Steven Tait, President |
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MCGLADREY & PULLEN, LLP
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By: |
/s/ William D. Travis |
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William D. Travis, Managing Partner |
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The following agree as to Section 17 hereof only:
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H&R BLOCK, INC. |
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By |
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/s/ Nicholas Spaeth |
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Its
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SVP Chief Legal Officer |
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RSM McGLADREY BUSINESS SERVICES, INC. |
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By
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/s/ Steven Tait |
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Steven Tait, President |
SCHEDULE 1.1
Administrative Services
Administrative Services to be provided by RSMM to M&P:
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Provision and maintenance of suitable office space. |
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Recruiting, training and provision of nonprofessional staff, including clerical services. |
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Provision of office supplies, furniture, fixtures and equipment. |
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4. |
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Provision of Information Systems development, management and support, including but not
limited to hardware, software, operating systems, network systems and Internet Services. |
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5. |
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Provision and maintenance of a computer system and data processing activities. |
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6. |
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Provision of billing services. |
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Scheduling and payment of accounts payable. |
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Assistance in collection of accounts receivable. |
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9. |
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Preparation of payroll and related tax matters. |
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10. |
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Records management as provided in Section 1.2. |
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11. |
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Development of policies and procedures relating to the Administrative Services (except those
relating to the performance of Public Accounting Services or otherwise inconsistent with those
adopted by M&P). |
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Assistance in compliance with all regulatory requirements as requested by M&P. |
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Assistance in maintenance of the books and records of M&P. |
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Provision of annual budgeting assistance. |
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15. |
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Provision and maintenance of a system of internal accounting. |
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16. |
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Provision of insurance policies and provision of risk manager services except in each case,
as to the professional liability of M&P, including the gathering of underwriting data to
submit to broker (payroll, losses, locations, autos, etc.), securing and managing the third
party administer to administer workers compensation, general liability or auto claims that
M&P may have, obtaining Certificates or Evidences of Insurance for distribution with proposals
and reviewing contract language as it pertains to insurance. |
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17. |
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Settlement of client disputes re bills in the ordinary course of business, but not to exceed
$ reduction of M&Ps fees in any dispute, but RSMM shall have no such authority to
settle any dispute where the client or anyone acting on its behalf has threatened legal
action, which such threat shall be promptly reported in writing to M&Ps managing partner. |
EXHIBIT 1.4
Form of Power of Attorney
LIMITED POWER OF ATTORNEY
On
this day of
, 20 ,
McGladrey & Pullen, LLP, an Iowa limited liability partnership
(hereinafter referred to as M&P), hereby authorizes and appoints as its attorney-in-fact RSM
McGladrey, Inc. (hereinafter referred to as RSMM), a corporation organized under the laws of the
State of Delaware and having its principal place of business at 4400 Main Street, Kansas City,
Missouri 64111, and its successors, to carry out its duties under the Administrative Services
Agreement of even date herewith (the ASA) in accordance with, but not limited to, the following:
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To enter into and execute contracts (with amounts due and payable thereunder not to
exceed Fifty Thousand Dollars ($50,000)) relating to the performance of Administrative
Services as defined in the ASA but do not relate to the performance of Public Accounting
Services; and |
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To deposit into M&P account(s), all funds, fees and revenues generated from the
Business and to make withdrawals from the M&P account(s) for payment to creditors,
including without limitation, RSMM and the employees of M&P and other persons who perform
services on behalf of M&P. |
This Limited Power of Attorney is coupled with an interest and shall be irrevocable except
with RSMMs prior written consent, but in any event shall terminate as provided below.
This Limited Power of Attorney shall terminate on the expiration or earlier termination of the
Administrative Services Agreement.
All capitalized terms not otherwise defined herein shall have the meaning given to
them in that certain Administrative Services Agreement of even date hereto.
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McGLADREY & PULLEN, LLP
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By: |
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William D. Travis, Managing Partner |
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STATE
OF )
)ss.
COUNTY
OF )
On
this
day of
, 2006, before me,
, a Notary public in and for said
state, personally appeared William D. Travis and
of McGladrey & Pullen, LLP, who
executed the above document, and acknowledged to me that he is the Managing Partner of McGladrey &
Pullen, LLP, and executed the same for the purposes therein stated.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal the day and
year last above written.
My
commission expires:
EX-10.36
Exhibit 10.36
AMENDMENT NO. ONE (1) TO ADMINISTRATIVE SERVICES AGREEMENT
This Amendment to the Administrative Services Agreement dated January 30, 2006 by and
among RSM McGladrey, Inc. (RSMM), which is an indirect wholly-owned subsidiary of H&R
Block, Inc. (Block), and McGladrey & Pullen, LLP (M&P), (the Agreement) is
effective as of June 01, 2008. The parties intend and agree that this Amendment will
override and supersede any inconsistent or conflicting terms in the Agreement, but,
otherwise, the Agreement will remain in full force and effect.
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Section 5.3 of the Agreement provides that, as a part of the Administrative
Services, RSMM shall maintain books of account and prepare monthly and annual
operational and financial reports for M&P. Such services are referred to herein
as the Accounting Services. RSMM desires to use the instance of PeopleSoft
financial reporting software that Block has licensed for itself and its
subsidiaries (referred to herein as the PeopleSoft Application) to perform the
Accounting Services for M&P, and M&P hereby authorizes RSMM to do so, subject to
and in accordance with the terms and conditions of the Agreement, as amended by
this Amendment: |
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RSMM represents that RSMM and Block have confirmed that the terms of Blocks
license for the PeopleSoft Application permit the application to be used by RSMM
to perform the Accounting Services for M&P. |
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RSMM will assure that RSMM and Block implement and maintain procedures
reasonably designed to ensure that only authorized RSMM employees and
RSMM-authorized Block employees are allowed to access and use the PeopleSoft
Application to perform the Accounting Services. |
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M&P understands and agrees that one or more Block employee(s) who are
responsible for granting access to the PeopleSoft Application, and one or more
RSMM employee(s) who are responsible for the Accounting Services, will grant and
terminate access to and use of the People Soft Application for the RSMM
employee(s) who perform the Accounting Services. M&P further acknowledges and
agrees that the designated Block information systems employee(s) will have
production read only access to M&Ps books of accounts and financial reports
maintained in the PeopleSoft Application, except for those individuals who will
have global PeopleSoft Application table and/or database access. This access
will be solely for the purpose of support for the PeopleSoft Application and for
no other purpose. This access is in line with the current security model
currently administered by RSMM on behalf of M&P today. |
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Section 6 of the Agreement sets forth RSMMs and M&Ps Mutual Nondisclosure
obligations with respect to each partys Confidential Information. M&P agrees
that Blocks read only access to the M&P books of account and financial reports
stored in the PeopleSoft Application shall not be deemed to violate Section 6 of
the Agreement, provided Block agrees to treat such information as M&Ps
confidential information and comply with the terms of Section 6 of the Agreement
and this Amendment, Blocks agreement to comply with the terms of this Amendment
and Section 6 of the Agreement shall be evidenced by its signature below. |
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RSM MCGLADREY, INC. |
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MCGLADREY & PULLEN LLP |
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By:
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/s/ Rene Ordogne
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By:
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/s/ Dave Scudder
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Name: Rene Ordogne |
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Name: Dave Scudder |
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Title: Chief of Staff, Chief Financial Officer & Treasurer |
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Title: Managing Partner |
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ACCEPTED AND AGREED FOR H&R BLOCK, INC. |
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By:
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/s/ Jeffrey Brown |
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Name: Jeffrey Brown |
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Title: Vice President, Corporate Controller |
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EX-10.37
Exhibit 10.37
OPERATIONS AGREEMENT
THIS
OPERATIONS AGREEMENT (the Agreement), dated as of
August 2, 1999 is made by and among MCGLADREY & PULLEN, LLP (M&P), an Iowa limited liability partnership,
MP ACTIVE PARTNERS TRUST, Clifford Newman, Trustee (Trust), MARK W. SCALLY, a resident of
Minneapolis, Minnesota (Scally), THOMAS G. ROTHERHAM, a resident of Eden Prairie, Minnesota
(Rotherham), RSM MCGLADREY, INC., a Delaware corporation (RSM), HRB BUSINESS SERVICES, INC., a
Delaware corporation (HRB) and H&R BLOCK, INC., a Missouri corporation (Block). Capitalized
terms used and not otherwise defined herein shall have the meaning ascribed to them in the Purchase
Agreement (hereinafter defined).
RECITALS
WHEREAS, M&P, Trust, Scally, Rotherham, RSM, Block and certain other persons and entities are
parties to the Asset Purchase Agreement dated as of June 28, 1999 (the Purchase Agreement)
providing for, among other things, the purchase of certain assets of M&P by RSM; and
WHEREAS, M&P and RSM are parties to the Administrative Services Agreement dated as of August
2, 1999 (Administrative Services Agreement) providing for, among other things, the provision by
RSM to M&P of certain administrative and other services; and
WHEREAS, Block is the ultimate parent corporation of RSM and HRB, and RSM is a direct
subsidiary of HRB; and
WHEREAS, Scally and Rotherham were formerly appointed to the Office of Managing Partner of and
were partners of M&P, but effective the date hereof have resigned such positions and partnership
and are parties to respective Managing Director Employment Agreements with RSM dated the date
hereof (the Employment Agreements); and
WHEREAS, the parties hereto desire to set forth certain understandings and agreements
regarding the respective business operations of M&P and RSM after the Closing, as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual premises and the covenants, representations and
warranties herein contained, the receipt and adequacy of which are hereby acknowledged, the parties
hereto agree as follows:
1. Board of Directors of RSM. Effective the date hereof and for the
duration of the Earnout Period but subject to Section 16 hereof, HRB will cause the Board of
Directors of RSM to be comprised of five (5) directors, consisting of (1) the Chief Executive
Officer of RSM, (2) the Chief Operating Officer of RSM and (3) three other directors nominated by
Block (such three nominees, the Block Nominees).
2. Chief Executive Officer and Chief Operating Officer of RSM.
Effective the date hereof and for the duration of the Earnout Period but subject to Section 16
hereof, Block will cause the Block Nominees to vote in favor of the appointment of Scally as the
Chief Executive Officer, and Rotherham as the Chief Operating
Officer, of RSM, provided that
Scallys and/or Rotherhams respective Employment Agreement has not then been terminated or
expired. In the event that such employment of Scally or Rotherham is terminated prior to the end of
the Earnout Period, the Executive Management Committee shall recommend his or their replacement,
subject to the good faith approval of Block, which shall not be unreasonably withheld or delayed.
3. Executive Management Committee.
a) Formation. Effective the date hereof and for the duration of the
Earnout Period but subject to Section 16 hereof, Block or HRB will use its best efforts to
cause the Block Nominees to, and Scally and Rotherham shall as directors of RSM, vote in
favor:
i) of the establishment and maintenance of the Executive
Management Committee of the RSM Board of Directors (the Committee), which
Committee shall initially consist of the Chief Executive Officer of RSM (as sole
voting member), the Chief Operating Officer of RSM, and up to seven (7) other
persons (each a Committee Member) who are selected on the basis set forth in
Schedule 3 hereof. The resolution of the RSM Board initially establishing such
Committee and the initial members thereof is attached hereto as Schedule 3.
ii) of the RSM Boards authorization and direction of the Committee to
(i) establish, on an annual basis, the allocation of the Annual Compensation among
the Senior Managing Directors and Managing Directors of RSM as provided in Schedule
5 of each of the forms of Managing Director Employment Agreement and the Senior
Managing Director Employment Agreement, respectively, dated of even date hereof,
(ii) promote or terminate Managing Directors and Senior Managing Directors, (iii)
allocate Closing Block Options and Post Closing Block Options and (iv) recommend any
replacement for Scally or Rotherham in the event of termination of their employment
with RSM during the Earnout Period, as provided in Section 2. The resolution of the
RSM Board making such authorization and direction is included within Schedule 3
hereof.
2
4. Capital for Acquisitions. Subject to Section 16 hereof, the parties acknowledge that:
a) Block management has set a strategic goal of building a national
accounting and consulting firm. In pursuing this strategy. Block has to date acquired
non-attest assets of accounting firms with aggregate revenues of approximately
$102,000,000 for an approximate aggregate base purchase price of $102,000,000. Upon
consummation of the transaction contemplated by the Purchase Agreement (the Transactions),
Block shall have acquired non-attest assets of accounting firms with aggregate revenues of
approximately $342,000,000 for an approximate aggregate minimum base price of $342,000,000.
b) After consummation of the Transactions, Block intends to continue to build a
national accounting and consulting firm by expanding Buyer through the acquisition of
non-attest assets of other accounting, tax and consulting firms. Block expects to consummate
between $300,000,000 to $400,000,000 (in base purchase price) of such acquisitions during
the two-year period following the Closing Date. Block anticipates that it will continue to
make similar acquisitions after such two-year period.
c) The foregoing expressed goals, intentions, expectations and anticipations of Block
are not, and do not constitute, legally binding obligations of Block or its affiliates and
Block may, by decision of its Board of Directors (the Board), change such goals,
intentions, expectations and anticipations because of a number of factors, including
(without limitation) concerns regarding the performance of Buyer, increased costs of
capital, adverse economic, regulatory or industry trends or events, and the good faith
exercise of fiduciary and other duties owed by the Board to the shareholders of Block.
5. Working Capital Funds. Effective the date hereof and for the duration of the
Earnout Period, Block or a subsidiary or affiliate of Block will provide working capital funds to
RSM, bearing interest at the Prime Rate quoted in The Wall Street Journal (adjusted
quarterly based upon the Prime Rate reported for the first business day of such quarter and applied
against the average of the beginning and closing balance for each month within such quarter) during
the Earnout Period. Such working capital funds shall be in such amounts as are reasonably required
by the business of RSM (including the purchase of fixed assets), consistent with that funded in
past practice and for similarly situated firms, and agreed by Block in its good faith, reasonable
discretion considering the foregoing.
6. Post-Closing Development Expenditures. Block either directly or through any direct
or indirect subsidiary of Block agrees to provide capital to M&P for development expenditures in an
amount not to exceed Six Million Dollars ($6,000,000) per year for each of the one year periods
commencing on the Closing Date and each of the first four anniversary dates of the Closing Date,
respectively, regardless of whether such development expenditures are capitalized or expensed for
accounting purposes. Such capital shall be used for the development of RSMs infrastructure,
mergers, integration resources, branding or related
3
promotional
efforts, acquisitions or similar purposes (Development Purposes) set forth in an
annual preliminary budget (for each such annual period) and for which a year end (for each such
annual period) accounting is prepared by RSM and delivered to Block. For purposes of this Section
1.6, it is assumed that such $6,000,000 annual amount is expended ratably over the course of such
year.
7. Certain Acquisitions. Effective
the date hereof and for the duration of the Earnout
Period, the acquisition of accounting, consulting or financial services businesses to be integrated
into RSM, shall be subject to the prior written approval of both Block (whether directly or through
HRB) and the Executive Management Committee.
8. Allocation of Costs to Foundation Firms. Effective the date hereof and for the
duration of the Earnout Period, RSM shall not allocate to any Foundation Firm or Prior Add-On Firm
any costs for services provided by RSM unless and only to the extent that the Foundation Firm or
Prior Add-On Firm has a tangible cost reduction or revenue enhancement derived or resulting from
such services; provided however, this Section shall not prohibit M&P from charging Foundation Firms
or Prior Add-On Firms for services rendered by M&P for or on behalf of clients of Foundation Firms
or Prior Add-On Firms and which services are billed or are billable to such clients.
9. Use of Block Corporate Services; Reimbursement of Certain Costs.
Effective the date hereof and for the duration of the Earnout Period:
a)
RSM shall not be charged an overhead or similar charge by Block or
HRB (or any Block Entity not within Group) for use of general administrative, legal, marketing or
similar services unless and only to the extent that RSMs use of such services results or
demands incremental costs relating to the hiring of additional personnel, use of additional
office space or material, out-of-pocket supply or independent contractor costs; and
b) Block shall pay, or reimburse M&P, for its reasonable and necessary out of pocket
incremental costs incurred by TP Services, LLC (TPS), including but not limited to the
legal organization of TPS in Delaware, ongoing filing/qualification costs (in Delaware and
as a foreign company in other states in which it does business) and annual state franchise
taxes or fees (excluding, however, any taxes or fees or portions of taxes or fees
representing tax on income or profits of TPS).
10. Putney Compensation. Effective the date hereof and for the duration of
the Earnout Period, the employment and compensation of Terrence E. Putney, an officer of HRB,
shall be the obligation and expense of HRB (or another Block Entity not within Group).
Terrence E. Putney shall perform work under the direction and on behalf of Block, HRB or
RSM.
4
11. Professional
Liability Insurance Expense.
a) RSM and M&P shall each have, and pay for, separate professional liability insurance
on a claims made coverage basis. Since it is anticipated that professional liability
claims made after the Closing will, on a declining basis over time, relate to services
performed prior to Closing (for which the Trust has assumed
liability), the parties agree
that Trust shall have certain obligations regarding the reimbursement of professional
liability insurance costs after Closing, as set forth in subsection (b), below.
b) The professional liability insurance costs (including premiums and payments of
deductible and copay amounts) of RSM and M&P (for themselves and their respective
employees/partners) shall be allocated as follows, with RSM/M&P paying the insurer(s)
directly for their respective entire costs and being reimbursed by Trust for Trusts
respective portion, upon demand from RSM/M&P:
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M&P/RSM |
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12. New Partners. M&P shall require that all persons acquiring equity or capital or
rights to equity or capital in M&P or rights similar thereto, agree as a condition to becoming a
partner of M&P to be bound by the terms of the Amended Partnership Agreement and a Managing
Director Employment Agreement or a Senior Managing Director Employment Agreement. RSM intends to,
but shall have no obligation to, enter into any employment agreement with any person who becomes a
partner of M&P.
13. Non-Solicitation/Non-Disclosure Covenants.
a) Certain Acknowledgments. M&P acknowledges and agrees as
follows in exchange for valuable consideration, the receipt and sufficiency of which
M&P acknowledges:
i) RSM and Block have obtained and will maintain an
advantage over their respective competitors as a result of name, location and
reputation developed at great expense;
ii) M&Ps relationship with RSM involves the understanding of and access to
certain trade secrets and confidential information pertaining to the property,
business and operations of RSM and its Affiliates;
iii) M&Ps recognition of the value of the special, unique and extraordinary
knowledge and skill required to accept, undertake and perform the
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type of work normally undertaken and performed by M&P, RSM, the Partners and RSMs other
employees and agents;
iv)
All clients/customers of RSM, regardless of when or by whom acquired, are RSM
assets and not assets of M&P;
v) M&P has carefully considered the restrictions contained
herein, and M&P specifically agrees that same are reasonable and necessary and essential
to the preservation of the business of RSM; and
vi)
M&Ps agreements and covenants under this Section 13 are an essential part of the
inducement to RSM to enter into this Agreement.
b) Scope. Until the later to occur of (i) August 2, 2004 or (ii) that
date which is three (3) years after the expiration or termination of this Agreement (the Covenant
Period), for any reason or for no reason except as set forth in Section 13(d), M&P agrees as
follows in consideration for entering into the Asset Purchase Agreement.
i) Except with the prior written consent of RSM, M&P shall
not directly or indirectly, either individually or as a principal, partner, member,
manager, agent, employee, employer, consultant, stockholder, joint venturer, or investor,
or as a director or officer of any corporation, company, partnership or association, or in
any other manner or capacity whatsoever, engage in, assist or have any active interest in a
business located anywhere in the United States, on its own behalf or for others, that
provides, sells, develops, markets, designs, distributes, coordinates, conducts or
publishes, to or for the benefit of any person or entity, investment advisory services,
asset management services, financial planning services or products, estate planning
services or products, seminars, training materials, industry newsletters, practice
development tools or programs, accounting services (not including Public Accountancy
services), consulting services, tax preparation services, management advisory services or
such other service or product that otherwise competes with or is substantially similar in
concept, design, format or otherwise to the business conducted by the RSM on the date
hereof, or at any time during the Covenant Period. Notwithstanding the above, this
paragraph shall not be construed to prohibit M&P from mere ownership of less than three
percent (3%) of the outstanding securities of a corporation which is publicly traded on a
securities exchange or through Nasdaq.
ii) Except with the prior written consent of RSM, M&P shall not, directly or
indirectly, either individually, or as a principal, partner, member, manager, agent,
employer, consultant, stockholder, joint venturer, or investor, or in any other manner or
capacity whatsoever,
(1) solicit, divert or take away, or attempt to solicit, divert or take
away, from RSM, or any direct or indirect subsidiary or
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Affiliate of RSM, any business with any client of RSM or any of its direct or
indirect subsidiaries or Affiliates,
(2)
solicit, divert or take away, or attempt to solicit, divert or take away,
from RSM or any direct or indirect subsidiary or Affiliate of RSM, any business
with any person or entity who was being solicited as a potential client by RSM or
any of its direct or indirect subsidiaries or Affiliates (other than for the
provision of Public Accounting Services), within one year prior to the
commencement of this Agreement and during the Covenant Period,
(3) induce or cause, or attempt to induce or cause, any salesperson,
distributor, supplier, vendor, manufacturer, representative, agent, or other
person transacting business with RSM or any of its direct or indirect subsidiaries
or Affiliates to terminate or modify such relationship or association,
(4) induce or cause, or attempt to induce or cause, any employee, accountant,
member, manager, shareholder, partner, director or officer of RSM or any of its
direct or indirect subsidiaries or Affiliates to leave the employ of RSM or any of
its direct or indirect subsidiaries or Affiliates, or
(5) For purposes of this Agreement, an Affiliate shall mean, with respect to
any person, (a) any person which, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with, such
person, or (b) any person which RSM or any of its Affiliates (as determined
pursuant to (a) above) provides Services of the type contemplated in this
Agreement, or other similar agreements. For purposes of this definition control
of a person shall mean the power, direct or indirect to, (x) vote or direct the
voting of 50% or more of the outstanding shares of voting stock or similar
interests of such person, or (y) direct or cause the direction of the management of
such person, whether by contract or otherwise.
iii)
If M&P violates any of the provisions of Section 16(b)(i) or Section 16(b)(ii)
after the date hereof, the Covenant Period shall be extended for a period of time equal to
the period of any such violation.
iv) In addition to any other rights or remedies RSM may possess, RSM shall be
entitled to injunctive and other equitable relief to prevent any breach, threatened
breach, or continuing breach of any part of this Agreement.
c) Limitations On Enforcement. If any restriction set forth in this
Section 13 is found by any court of competent jurisdiction to be unenforceable because it extends
for too long a period of time, over too great a range of activities or in too broad a
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geographic
area, it shall be interpreted to extend only over the maximum period of time,
range of activities or geographic area as to which such court shall consider enforceable.
d)
Termination of Restrictive Covenants. The restrictive covenants
set forth in Section 13(b)(i) and 13(b)(ii) hereof shall expire if a Payment Event of
Default (defined below) occurs under the Guaranty dated August
, 1999 by Block in
favor of McGladrey (the Guaranty). For purposes of this Section, a Payment Event of
Default shall be deemed to occur if (i) any undisputed Guaranteed Obligation (as defined
in the Guaranty) is not timely paid by RSM McGladrey when due and owing and (ii)
Block fails to pay the amount of any such Guaranteed Obligation (provided that RSM
McGladreys nonpayment then exists and is continuing) within thirty (30) days after delivery
of written notice thereof to Block pursuant to the notice provisions of the Guaranty. Any
expiration of such restrictive covenants pursuant to this Section
shall not, however, act or
be deemed to work on or effect any expiration, termination, waiver, forfeiture, or release
of such restrictive covenants or in any way affect their enforcement for any period prior to
the occurrence of the applicable Payment Event of Default.
14. Network Firm Mergers.
a) The parties agree that until a Foundation
Firm is merged into M&P then a Network
Firm (as defined below) operating in the Territory of a Foundation Firm may continue as a
Network Firm. At such time that an agreement is executed with a Foundation Firm to merge
into M&P, then the Network Firm in the same Territory will have ninety (90) days to
determine if it also wants to merge or terminate its Network Firm membership. If a Network
Firm determines not to merge with M&P, then (i) such Network Firm shall have an additional
ninety (90) days to continue in the Network until Network services are suspended; and (ii)
the Network Firm will have the option to continue as a Subscriber Firm (as defined below)
and thereafter be entitled to the services provided a Subscriber Firm.
b) Definitions. For purposes of this Section 14, the following definitions
shall have the following meanings.
i) Territory of a Foundation Firm shall mean a circle with a
50 mile radius around a Foundation Firm with its office at the center.
ii) Network Firm shall mean an entity that has entered into an
agreement with M&P to be a member of M&Ps network.
iii) Subscriber Firm shall mean an entity that subscribes to certain
services provided by M&P.
15. Compliance with Independence Policies. RSM, HRB and Block agree
that subsequent to closing M&P retains the right and authority to (i) establish the
independence
policies of the attest practice and that such policies will be binding upon RSM and HRB, and
(ii) monitor and enforce the compliance with such policies within RSM and HRB organizations
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through the methodology deemed reasonably necessary by the attest firm to accomplish such
objectives and to ensure that independence exists between the clients of the attest firm and the
non-attest firm and HRB and their respective officers, directors and employees, as appropriate. M&P
will resign from any engagement where a satisfactory resolution cannot be achieved whereby M&P can
retain its independence.
16. Obligations Contingent. Except upon occurrence of a Force Majeure Event (as
defined below), in the event that (i) RSM fails to have at least 80% of the projected proforma
pretax earnings levels set forth in Schedule 16 to this Agreement for any fiscal period during the
Earnout Period and (ii) Block, HRB and RSM are otherwise in compliance in all material respects
with the provisions of this Agreement and the Employment Agreements, Block, HRB, RSM and the Block
Nominees may, in Blocks sole discretion, unilaterally and without liability terminate, modify,
amend or ignore any of the provisions, rights, obligations, and/or duties under Sections 1 through
4 hereof (effective the first day of the fiscal annual period immediately following the annual
period in which such earnings were deficient or such other later date as designated by Block), by
providing written notice of same to M&P, Scally and Rotherham. Force Majeure Event shall mean any
inability of M&P or RSM to provide service to their clients due to any strike, lockout or other
labor or industrial disturbance, civil disturbance, lightning, earthquake, fire, storm, hurricane,
tornado, flood, washout, explosion, regulatory action or any other similar cause beyond the
reasonable control of M&P or RSM or any of their contractors or other representatives.
17. Miscellaneous.
a) Amendment and Modification. This Agreement may be amended, modified and
supplemented only by written agreement of the parties hereto.
b) Waiver of Compliance; Consents. Any failure of any party to comply with any
obligation, covenant, agreement or condition herein may be waived in writing by other
benefited parties, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
c) Notices. Any notice, request, consent or communication (collectively, a
Notice) under this Agreement shall be effective only if it is in writing and (a)
personally delivered, (b) sent by certified or registered mail, return receipt requested,
postage prepaid, (c) sent by a nationally recognized overnight delivery service, with
delivery confirmed, or (d) telexed or telecopied, with receipt confirmed, addressed as
follows:
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If to M&P: |
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Bill Travis
McGladrey & Pullen, LLP
3600 West 80th Street
Suite 500
Bloomington, MN 55431 |
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If to Rotherham or Scally: |
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McGladrey & Pullen, LLP
3600 West 80th Street
Suite 500
Bloomington, MN 55431 |
|
|
(iii) |
|
If to the Block, HRB or RSM, to: |
|
|
|
|
Bret G. Wilson
H&R Block, Inc.
4400 Main Street
Kansas City, MO 64111
Facsimile: (816) 753-8628 |
|
|
|
|
with a copy to: |
|
|
|
|
James H. Ingraham, Esq.
H&R Block, Inc.
4400 Main Street
Kansas City, MO 64111
Facsimile: (816) 753-8628
|
|
|
|
|
and |
|
|
|
|
Gregory G. Johnson, Esq.
Bryan Cave LLP
One Kansas City Place
1200 Main, Suite 3500
Kansas City, MO 64105
Facsimile: (816) 374-3300
|
or such other persons or addresses as shall be furnished in writing by any party to the other
party. A Notice shall be deemed to have been given as of the date when (i) personally delivered,
(ii) three (3) days after the date when deposited with the United States mail properly addressed,
(iii) when receipt of a Notice sent by an overnight delivery service is confirmed by such
10
overnight delivery service, or (4) when receipt of the telex or telecopy is confirmed, as the case
may be.
d) Assignment. This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs, successors
and permitted assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any party without the prior written consent of
other parties.
e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
f) Neutral Interpretation. This Agreement constitutes the product of
the negotiation of the parties hereto and the enforcement hereof shall be interpreted in
a neutral manner, and not more strongly for or against any party based upon the source of
the draftsmanship hereof.
g) Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
h) Governing Law. The provisions hereof shall be governed and
interpreted in all respects pursuant to the internal and substantive laws of the State of
Missouri without regard to conflict of laws principles which might cause the law of another
jurisdiction to apply.
i) Arbitration. Any controversy, claim, or dispute arising out of or
relating to this Agreement or any breach thereof, including without limitation any dispute
concerning the scope of the arbitration clause set forth below, shall be resolved as set
forth below. Any party may seek injunctive relief pending the completion of mediation and
arbitration under this Agreement.
i) In the event a dispute arises relating to this Agreement, any
party may demand mediation by notifying the American Arbitration Association (AAA)
in the location where any arbitration would be conducted as set forth below, in
writing with copies to all other parties involved in the dispute. The notification
will state with specificity the nature of the dispute and the amount of any claims.
Upon receipt of the mediation demand, the AAA will immediately convene a
pre-mediation telephone conference of the parties hereto. The parties will make a
representative, with full authority to settle, available for such a conference
within five (5) business days of being contacted by the AAA or its designated
mediator (Mediator). During the pre-mediation telephone conference, the parties
will agree on mediation procedures or, in the event they cannot agree, Mediator will
set the mediation procedures. The mediation procedures will provide for the
mediation to be completed within thirty (30)
11
business days of the date of the initial demand for mediation. The parties will participate in
good faith in the mediation and will use their best efforts to reach a resolution within the
thirty (30) day time period. Each party will make available in a timely fashion a representative
with authority to resolve the dispute. In the event that the dispute has not been resolved within
thirty (30) days, the mediation may continue if the parties so desire. If not, the Mediator will
so notify the parties and declare the mediation terminated. In the event that the mediation
continues beyond thirty (30) days, but is not resolved within what Mediator believes is a
reasonable time thereafter, the Mediator will so notify the parties, and declare the mediation
terminated. Fees of the mediator shall be split equally between Block, HRB and RSM, on the one
hand, and M&P, Scally and Rotherham, on the other hand.
ii) After the mediation has been declared terminated, the matters in dispute shall be settled
by binding arbitration in accordance with the Commercial Arbitration Rules (the Rules) of the AAA
as supplemented herein and judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. The governing law of this Agreement shall be the law used by
the arbitrators in rendering their award, except that the Federal Rules of Evidence shall apply.
There shall be three arbitrators. Each party shall choose one arbitrator, and the two chosen
arbitrators shall choose the third arbitrator. Pending final award, the arbitrators compensation
and expenses shall be advanced equally by the parties. The AAA shall hold an administrative
conference with counsel for the parties within twenty (20) days after the filing of the demand for
arbitration by any one or more of the parties. The parties and the AAA shall thereafter cooperate
in order to complete the appointment of three arbitrators as quickly as possible. Within 15 days
after all three arbitrators have been appointed, an initial meeting (which, if the arbitrators so
determine, may be by phone) among the arbitrators and counsel for the parties shall be held for the
purpose of establishing a plan for administration of the arbitration, including: (1) definition of
issues; (2) scope, timing, and types of discovery, which may at the discretion of the arbitrators
include production of documents in the possession of the parties, but may not without consent of
all parties include depositions; (3) exchange of documents and filing of detailed statements of
claims, prehearing memoranda and dispositive motions; (4) schedule and place of hearings; and (5)
any other matters that may promote the efficient, expeditious, and cost-effective conduct of the
proceeding. Each party shall have the right to request the arbitrator to make specific findings of
fact.
iii) The majority decision of the arbitrators shall contain findings of facts on which the
decision is based, including any specific factual findings requested by either party, and shall
further contain the reasons for the decision with reference to the legal principles on which the
arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties.
The arbitration shall take place in Chicago, Illinois. The final award shall award to the
12
prevailing party its reasonable attorneys fees and costs incurred in connection
with the arbitration (but if the prevailing party is not awarded all of the damages
sought, only to the extent, pro rata, of its award compared to the damages sought)
and may grant such other, further, and different relief as authorized by the Rules,
including damages and out-of-pocket costs but which may not include exemplary,
consequential or punitive damages.
j) Entire Agreement. This Agreement, which term as used throughout
includes the Schedules hereto, embodies the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no restrictions, promises,
representations, warranties, covenants or undertakings other than those expressly set forth or
referred to herein. This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
[SIGNATURES ON THE FOLLOWING PAGE]
13
THIS AGREEMENT IS SUBJECT TO AN ARBITRATION PROVISION THAT IS
BINDING ON THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first herein
above set forth.
|
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|
RSM MCGLADREY, INC. |
|
|
|
|
|
/s/ Bret G. Wilson |
|
|
|
Bret G. Wilson, Vice President |
|
|
|
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H&R BLOCK, INC. |
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|
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|
By:
Name:
|
|
/s/ Bret G. Wilson
Bret G. Wilson
|
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|
Title:
|
|
Vice President, Corporate Development |
|
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|
HRB BUSINESS SERVICES, INC. |
|
|
|
|
|
By:
Name:
|
|
/s/ Bret G. Wilson
Bret G. Wilson
|
|
|
Title:
|
|
Vice President |
|
|
|
|
|
|
|
MCGLADREY & PULLEN, LLP |
|
|
|
|
|
By:
|
|
/s/ Mark W. Scally
Mark W. Scally
|
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|
|
|
|
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By:
|
|
/s/ Thomas G. Rotherham
Thomas G. Rotherham
|
|
|
BEING ALL THE MEMBERS OF THE OFFICE OF MANAGING PARTNER
EX-12
EXHIBIT 12
H&R BLOCK
Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Pretax income from continuing operations
before change in accounting principle |
|
$ |
839,370 |
|
|
$ |
735,071 |
|
|
$ |
627,261 |
|
|
$ |
531,320 |
|
|
$ |
588,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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FIXED CHARGES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
89,959 |
|
|
|
64,509 |
|
|
|
91,134 |
|
|
|
69,724 |
|
|
|
79,197 |
|
Interest on deposits |
|
|
14,069 |
|
|
|
42,878 |
|
|
|
32,128 |
|
|
|
|
|
|
|
|
|
Interest portion of net rent expense (a) |
|
|
102,685 |
|
|
|
99,871 |
|
|
|
94,978 |
|
|
|
95,189 |
|
|
|
76,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges |
|
|
206,713 |
|
|
|
207,258 |
|
|
|
218,240 |
|
|
|
164,913 |
|
|
|
155,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and fixed charges |
|
$ |
1,046,083 |
|
|
$ |
942,329 |
|
|
$ |
845,501 |
|
|
$ |
696,233 |
|
|
$ |
744,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits |
|
|
5.1 |
|
|
|
4.5 |
|
|
|
3.9 |
|
|
|
4.2 |
|
|
|
4.8 |
|
Excluding interest on deposits |
|
|
5.4 |
|
|
|
5.7 |
|
|
|
4.5 |
|
|
|
4.2 |
|
|
|
4.8 |
|
|
|
|
(a) |
|
One-third of net rent expense is the portion deemed representative of the interest factor. |
|
Note: |
|
In computing the ratio of earnings to fixed charges: (a) earnings have been based on income
from continuing operations before income taxes and fixed charges (exclusive of interest
capitalized) and (b) fixed charges consist of interest expense and the estimated interest portion
of rents. Interest expense on uncertain tax positions has been excluded from fixed charges, as it
is included as a component of income taxes in the consolidated financial statements. |
EX-21
Exhibit 21
Subsidiaries of H&R Block, Inc.
The following is a list of the direct and indirect subsidiaries of H&R Block, Inc., a Missouri corporation.
|
|
|
Company Name |
|
Domestic Jurisdiction |
Aculink Mortgage Solutions, LLC
|
|
Florida |
AcuLink of Alabama, LLC
|
|
Alabama |
Ada Services Corporation
|
|
Massachusetts |
BFC Transactions, Inc.
|
|
Delaware |
Birchtree Financial Services, Inc.
|
|
Oklahoma |
Birchtree Insurance Agency, Inc.
|
|
Missouri |
Block Financial LLC
|
|
Delaware |
CFS-McGladrey, LLC
|
|
Massachusetts |
Cfstaffing, Ltd.
|
|
British Columbia |
Cityfront, Inc.
|
|
Delaware |
Companion Insurance, Ltd.
|
|
Bermuda |
Companion Mortgage Corporation
|
|
Delaware |
Creative Financial Staffing of Western Washington, LLC
|
|
Massachusetts |
EquiCo, Inc.
|
|
California |
Express Tax Service, Inc.
|
|
Delaware |
Financial Marketing Services, Inc.
|
|
Michigan |
Financial Stop Inc.
|
|
British Columbia |
FM Business Services, Inc.
|
|
Delaware |
Franchise Partner, Inc.
|
|
Nevada |
H&R Block (India) Private Limited
|
|
India |
H&R Block (Nova Scotia), Incorporated
|
|
Nova Scotia |
H&R Block Bank
|
|
Missouri |
H&R Block Canada Financial Services, Inc.
|
|
Federally Chartered |
H&R Block Canada, Inc.
|
|
Federally Chartered |
H&R Block Eastern Enterprises, Inc.
|
|
Missouri |
H&R Block Enterprises LLC
|
|
Missouri |
H&R Block Global Solutions (Hong Kong) Limited
|
|
Hong Kong |
H&R Block Group, Inc.
|
|
Delaware |
H&R Block Insurance Agency, Inc.
|
|
Delaware |
H&R Block Limited
|
|
New South Wales |
H&R Block Management, LLC
|
|
Delaware |
|
|
|
Company Name |
|
Domestic Jurisdiction |
H&R Block Tax and Business Services, Inc. |
|
Delaware |
H&R Block Tax Institute, LLC |
|
Missouri |
H&R Block Tax Services LLC |
|
Missouri |
H&R Block, Inc. |
|
Missouri |
HRB Advance LLC |
|
Delaware |
HRB Center LLC |
|
Missouri |
HRB Concepts LLC |
|
Delaware |
HRB Corporate Enterprises LLC |
|
Delaware |
HRB Corporate Services LLC |
|
Missouri |
HRB Digital LLC |
|
Delaware |
HRB Digital Technology Resources LLC |
|
Delaware |
HRB Expertise LLC |
|
Missouri |
HRB Innovations, Inc. |
|
Delaware |
HRB International LLC |
|
Missouri |
HRB Products LLC |
|
Missouri |
HRB Support Services LLC |
|
Delaware |
HRB Tax & Technology Leadership LLC |
|
Missouri |
HRB Tax Group, Inc. |
|
Missouri |
HRB Technology Holding LLC |
|
Delaware |
HRB Technology LLC |
|
Missouri |
McGladrey Capital Markets Canada Inc. |
|
Federally Chartered |
McGladrey Capital Markets Europe Limited |
|
United Kingdom |
McGladrey Capital Markets LLC |
|
Delaware |
OOMC Holdings LLC |
|
Delaware |
OOMC Residual Corporation |
|
New York |
ORourke Career Connections, LLC |
|
California |
Pension Resources, Inc. |
|
Illinois |
Provident Mortgage Services, Inc. |
|
Delaware |
RedGear Technologies, Inc. |
|
Missouri |
RSM Employer Services Agency of Florida, Inc. |
|
Florida |
RSM Employer Services Agency, Inc. |
|
Georgia |
RSM EquiCo, Inc. |
|
Delaware |
RSM McGladrey Business Services, Inc. |
|
Delaware |
RSM McGladrey Business Solutions, Inc. |
|
Delaware |
RSM McGladrey Employer Services, Inc. |
|
Georgia |
RSM McGladrey Insurance Services, Inc. |
|
Delaware |
RSM McGladrey TBS, LLC |
|
Delaware |
|
|
|
Company Name |
|
Domestic Jurisdiction |
RSM McGladrey, Inc. |
|
Delaware |
Sand Canyon Acceptance Corporation |
|
Delaware |
Sand Canyon Corporation |
|
California |
Sand Canyon Securities Corp. |
|
Delaware |
Sand Canyon Securities II Corp. |
|
Delaware |
Sand Canyon Securities III Corp. |
|
Delaware |
Sand Canyon Securities IV LLC |
|
Delaware |
ServiceWorks, Inc. |
|
Delaware |
TaxNet Inc. |
|
California |
TaxWorks, Inc. |
|
Delaware |
Vantive Partners LLC |
|
Missouri |
West Estate Investors, LLC |
|
Missouri |
Woodbridge Mortgage Acceptance Corporation |
|
Delaware |
EX-23.1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-118020 on Form S-3
of Block Financial Corporation and Registration Statement Nos. 333-118020-01 and 333-154611 on Form
S-3 and Nos. 333-119070, 333-42143, 333-42736, 333-56400, 333-70402, and 333-106710 on Form S-8 of
H&R Block, Inc. of our reports dated June 29, 2009, relating to (1) the 2009 and 2008 consolidated
financial statements and financial statement schedule and the retrospective adjustments to the 2007
consolidated financial statements of H&R Block, Inc. (which report expresses an unqualified opinion
and includes an explanatory paragraph regarding H&R Block, Inc.s adoption of Financial Accounting
Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes on May 1, 2007)
and (2) the effectiveness of H&R Block, Inc.s internal control over financial reporting as of
April 30, 2009, appearing in this Annual Report on Form 10-K of H&R Block, Inc. for the year ended
April 30, 2009.
June 29, 2009
EX-23.2
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
H&R Block, Inc.:
We consent to the incorporation by reference in the registration statements on Form S-3 (Nos.
333-33655 and 333-118020) of Block Financial Corporation and in the registration statements on Form
S-3 (No. 333-33655-01) and Form S-8 (Nos. 333-119070, 333-42143, 333-42736, 333-42738, 333-42740,
333-56400, 333-70400, 333-70402, and 333-106710) of H&R Block, Inc. of our report dated June 29,
2007 with respect to the consolidated statements of operations
and comprehensive income (loss), stockholders equity, and cash
flows
of H&R Block, Inc. and
subsidiaries for the year ended April 30, 2007, and the related financial statement schedule, which report appears in the April 30, 2009 annual report on
Form 10-K of H&R Block, Inc. Our report
includes an explanatory paragraph that states we did not apply
any procedures to or express any assurance on the retrospective
adjustments to present the results of operations of HRB Financial
Corporation as discontinued operations, as these adjustments were
audited by a successor auditor.
|
|
Kansas City, Missouri |
June 29, 2009 |
EX-31.1
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Russell P. Smyth, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of H&R Block, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principals;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
Date: June 29, 2009 |
/s/ Russell P. Smyth
|
|
|
Russell P. Smyth |
|
|
Chief Executive Officer
H&R Block, Inc. |
|
EX-31.2
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Becky S. Shulman, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of H&R Block, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principals;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
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|
|
|
|
|
|
Date: June 29, 2009 |
/s/ Becky S. Shulman
|
|
|
Becky S. Shulman |
|
|
Executive Vice President and Chief Financial Officer
H&R Block, Inc. |
|
EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of H&R Block, Inc. (the Company) on Form 10-K for the
fiscal year ending April 30, 2009 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Russell P. Smyth, Chief Executive Officer of the Company, certify
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
|
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/s/ Russell P. Smyth
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Russell P. Smyth |
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Chief Executive Officer
H&R Block, Inc. June 29, 2009 |
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EX-32.2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of H&R Block, Inc. (the Company) on Form 10-K for the
fiscal year ending April 30, 2009 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Becky S. Shulman, Senior Vice President and Chief Financial Officer of
the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
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(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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/s/ Becky S. Shulman
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Becky S. Shulman |
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Executive Vice President and Chief
Financial Officer
H&R Block, Inc. June 29, 2009 |
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