e10vq
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
|
|
(Mark One)
|
|
|
[X]
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended October 31,
2010
|
|
|
|
OR
|
[ ]
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file
number 1-6089
H&R
Block, Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
MISSOURI
(State or other jurisdiction of
incorporation or organization)
|
|
44-0607856
(I.R.S. Employer
Identification No.)
|
One
H&R Block Way
Kansas City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes Ö No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes Ö No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer Ö
|
|
Accelerated filer
|
|
Non-accelerated filer
|
|
Smaller reporting company
|
|
|
|
|
|
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes No Ö
The number of shares outstanding of the registrants Common
Stock, without par value, at the close of business on
November 30, 2010 was 305,110,195 shares.
Form 10-Q
for the Period Ended October 31, 2010
Table of
Contents
|
|
|
|
|
|
|
|
|
|
|
October 31,
2010
|
|
|
April 30,
2010
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
959,746
|
|
|
$
|
1,804,045
|
|
Cash and cash equivalents restricted
|
|
|
35,473
|
|
|
|
34,350
|
|
Receivables, less allowance for doubtful accounts of $115,505
and $112,475
|
|
|
416,333
|
|
|
|
517,986
|
|
Prepaid expenses and other current assets
|
|
|
324,014
|
|
|
|
292,655
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,735,566
|
|
|
|
2,649,036
|
|
Mortgage loans held for investment, less allowance for loan
losses of $87,567 and $93,535
|
|
|
537,226
|
|
|
|
595,405
|
|
Property and equipment, at cost, less accumulated depreciation
and amortization of $683,537 and $657,008
|
|
|
327,881
|
|
|
|
345,470
|
|
Intangible assets, net
|
|
|
373,324
|
|
|
|
367,432
|
|
Goodwill
|
|
|
867,417
|
|
|
|
840,447
|
|
Other assets
|
|
|
466,368
|
|
|
|
436,528
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,307,782
|
|
|
$
|
5,234,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Customer banking deposits
|
|
$
|
929,898
|
|
|
$
|
852,555
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
660,999
|
|
|
|
756,577
|
|
Accrued salaries, wages and payroll taxes
|
|
|
81,163
|
|
|
|
199,496
|
|
Accrued income taxes
|
|
|
151,708
|
|
|
|
459,175
|
|
Current portion of long-term debt
|
|
|
3,407
|
|
|
|
3,688
|
|
Commercial paper borrowings
|
|
|
39,517
|
|
|
|
-
|
|
Federal Home Loan Bank borrowings
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,916,692
|
|
|
|
2,321,491
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,041,103
|
|
|
|
1,035,144
|
|
Federal Home Loan Bank borrowings
|
|
|
25,000
|
|
|
|
25,000
|
|
Other noncurrent liabilities
|
|
|
445,182
|
|
|
|
412,053
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,427,977
|
|
|
|
3,793,688
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 412,440,599
and 431,390,599
|
|
|
4,124
|
|
|
|
4,314
|
|
Additional paid-in capital
|
|
|
810,403
|
|
|
|
832,604
|
|
Accumulated other comprehensive income
|
|
|
2,757
|
|
|
|
1,678
|
|
Retained earnings
|
|
|
2,104,050
|
|
|
|
2,658,586
|
|
Less treasury shares, at cost
|
|
|
(2,041,529
|
)
|
|
|
(2,056,552
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
879,805
|
|
|
|
1,440,630
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,307,782
|
|
|
$
|
5,234,318
|
|
|
|
|
|
|
|
|
|
|
See Notes to
Condensed Consolidated Financial Statements
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
296,139
|
|
|
$
|
294,958
|
|
|
$
|
543,558
|
|
|
$
|
542,943
|
|
Interest income
|
|
|
10,635
|
|
|
|
12,113
|
|
|
|
20,937
|
|
|
|
24,400
|
|
Product and other revenues
|
|
|
16,115
|
|
|
|
19,010
|
|
|
|
32,868
|
|
|
|
34,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,889
|
|
|
|
326,081
|
|
|
|
597,363
|
|
|
|
601,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
392,950
|
|
|
|
410,949
|
|
|
|
760,966
|
|
|
|
797,399
|
|
Selling, general and administrative
|
|
|
108,943
|
|
|
|
129,685
|
|
|
|
225,972
|
|
|
|
232,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,893
|
|
|
|
540,634
|
|
|
|
986,938
|
|
|
|
1,030,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(179,004
|
)
|
|
|
(214,553
|
)
|
|
|
(389,575
|
)
|
|
|
(428,715
|
)
|
Other income, net
|
|
|
3,885
|
|
|
|
1,700
|
|
|
|
7,139
|
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
|
(175,119
|
)
|
|
|
(212,853
|
)
|
|
|
(382,436
|
)
|
|
|
(423,726
|
)
|
Income tax benefit
|
|
|
(68,307
|
)
|
|
|
(86,381
|
)
|
|
|
(147,986
|
)
|
|
|
(166,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(106,812
|
)
|
|
|
(126,472
|
)
|
|
|
(234,450
|
)
|
|
|
(257,089
|
)
|
Net loss from discontinued operations
|
|
|
(2,237
|
)
|
|
|
(2,115
|
)
|
|
|
(5,280
|
)
|
|
|
(5,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109,049
|
)
|
|
$
|
(128,587
|
)
|
|
$
|
(239,730
|
)
|
|
$
|
(262,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(0.35
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(0.77
|
)
|
Net loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.36
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares
|
|
|
306,804
|
|
|
|
335,346
|
|
|
|
313,247
|
|
|
|
334,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109,049
|
)
|
|
$
|
(128,587
|
)
|
|
$
|
(239,730
|
)
|
|
$
|
(262,221
|
)
|
Change in unrealized gain on
available-for-sale
securities, net
|
|
|
(333
|
)
|
|
|
329
|
|
|
|
(639
|
)
|
|
|
(418
|
)
|
Change in foreign currency translation adjustments
|
|
|
5,396
|
|
|
|
2,586
|
|
|
|
1,376
|
|
|
|
12,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(103,986
|
)
|
|
$
|
(125,672
|
)
|
|
$
|
(238,993
|
)
|
|
$
|
(250,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to
Condensed Consolidated Financial Statements
2
|
|
|
|
|
|
|
|
|
Six
Months Ended October 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(548,001
|
)
|
|
$
|
(786,152
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Principal repayments on mortgage loans held for investment, net
|
|
|
30,829
|
|
|
|
38,693
|
|
Purchases of property and equipment, net
|
|
|
(35,005
|
)
|
|
|
(7,280
|
)
|
Payments made for business acquisitions, net
|
|
|
(43,310
|
)
|
|
|
(6,606
|
)
|
Other, net
|
|
|
30,851
|
|
|
|
18,473
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(16,635
|
)
|
|
|
43,280
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
(75,000
|
)
|
|
|
-
|
|
Proceeds from commercial paper
|
|
|
114,490
|
|
|
|
-
|
|
Customer banking deposits, net
|
|
|
77,023
|
|
|
|
638,466
|
|
Dividends paid
|
|
|
(95,068
|
)
|
|
|
(100,784
|
)
|
Repurchase of common stock, including shares surrendered
|
|
|
(283,470
|
)
|
|
|
(3,785
|
)
|
Proceeds from exercise of stock options
|
|
|
1,493
|
|
|
|
8,218
|
|
Other, net
|
|
|
(21,352
|
)
|
|
|
(30,884
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(281,884
|
)
|
|
|
511,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
|
2,221
|
|
|
|
9,221
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(844,299
|
)
|
|
|
(222,420
|
)
|
Cash and cash equivalents at beginning of the period
|
|
|
1,804,045
|
|
|
|
1,654,663
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
959,746
|
|
|
$
|
1,432,243
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow data:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
103,803
|
|
|
$
|
196,427
|
|
Interest paid on borrowings
|
|
|
30,933
|
|
|
|
37,304
|
|
Interest paid on deposits
|
|
|
3,828
|
|
|
|
4,134
|
|
Transfers of loans to foreclosed assets
|
|
|
11,185
|
|
|
|
9,212
|
|
See Notes to
Condensed Consolidated Financial Statements
3
|
|
1.
|
Summary of
Significant Accounting Policies
|
Basis of Presentation
The condensed consolidated balance sheet as of October 31,
2010, the condensed consolidated statements of operations and
comprehensive income (loss) for the three and six months ended
October 31, 2010 and 2009, and the condensed consolidated
statements of cash flows for the six months ended
October 31, 2010 and 2009 have been prepared by the
Company, without audit. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position, results of
operations and cash flows at October 31, 2010 and for all
periods presented have been made.
H&R Block, the Company,
we, our and us are used
interchangeably to refer to H&R Block, Inc. or to H&R
Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in our April 30, 2010
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2010 or for
the year then ended, are derived from our April 30, 2010
Annual Report to Shareholders on
Form 10-K.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
periods. Significant estimates, assumptions and judgments are
applied in the determination of our allowance for loan losses,
potential losses from loan repurchase and indemnity obligations
associated with our discontinued mortgage business, contingent
losses associated with pending litigation, fair value of
reporting units, reserves for uncertain tax positions and
related matters. We revise our estimates when facts and
circumstances dictate. However, future events and their effects
cannot be determined with absolute certainty. As such, actual
results could differ materially from those estimates.
Seasonality of
Business
Our operating revenues are seasonal in nature with peak revenues
occurring in the months of January through April. Therefore,
results for interim periods are not indicative of results to be
expected for the full year.
Concentrations of
Risk
Our mortgage loans held for investment include concentrations of
loans to borrowers in certain states, which may result in
increased exposure to loss as a result of changes in real estate
values and underlying economic or market conditions related to a
particular geographical location. Approximately 51% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
Effective July 20, 2010, our Business Services segment
acquired certain non-attest assets and liabilities of
Caturano & Company, Inc. (Caturano), a Boston-based
accounting firm, for an aggregate purchase price of
$40.2 million. We expect this acquisition to expand our
presence in the Boston market. We made cash payments of
$32.6 million, including $29.8 million at closing.
Payment of the remaining purchase price is
4
deferred and will be paid over 14 years. The following
table summarizes the fair value of identifiable assets acquired
and liabilities assumed and the resulting goodwill as of
October 31, 2010:
|
|
|
|
|
(in
000s)
|
|
|
|
|
Customer
relationships(1)
|
|
$
|
6,733
|
|
Non-compete
agreements(2)
|
|
|
2,766
|
|
Attest firm
affiliation(3)
|
|
|
7,629
|
|
Goodwill
|
|
|
27,289
|
|
Fixed assets
|
|
|
2,500
|
|
Other assets
|
|
|
831
|
|
Other liabilities
|
|
|
(1,640)
|
|
Unfavorable
leasehold(2)
|
|
|
(5,890)
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
40,218
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimated
life of 12 years.
|
(2) |
|
Estimated
life of 7 years.
|
(3) |
|
Estimated
life of 18 years. Represents the benefits to be received
from the Alternative Practice Structure arrangement and
Administrative Services Agreement with the attest firm of
Caturano.
|
In connection with the acquisition a deferred compensation plan,
an employee retention program and a performance bonus plan were
put in place for eligible employees. Expenses related to these
plans will be treated as compensation and will be expensed as
incurred. We incurred expenses totaling $1.3 million under
these plans during the six months ended October 31, 2010.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.,
developer of TaxACT digital tax preparation solutions, for
$287.5 million in cash. Completion of the transaction is
subject to the satisfaction of customary closing conditions,
including regulatory approval.
|
|
3.
|
Earnings (Loss)
Per Share and Stockholders Equity
|
Basic and diluted earnings (loss) per share is computed using
the two-class method. The two-class method is an earnings
allocation formula that determines net income per share for each
class of common stock and participating security according to
dividends declared and participation rights in undistributed
earnings. Per share amounts are computed by dividing net income
from continuing operations attributable to common shareholders
by the weighted average shares outstanding during each period.
The dilutive effect of potential common shares is included in
diluted earnings per share except in those periods with a loss
from continuing operations. Diluted earnings per share excludes
the impact of shares of common stock issuable upon the lapse of
certain restrictions or the exercise of options to purchase
15.6 million shares and 19.3 million shares for the
three and six months ended October 31, 2010, respectively
and 19.3 million shares for the three and six months ended
October 31, 2009, as the effect would be antidilutive due
to the net loss from continuing operations during each period.
The computations of basic and diluted loss per share from
continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per
share amounts)
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Net loss from continuing operations attributable to shareholders
|
|
$
|
(106,812
|
)
|
|
$
|
(126,472
|
)
|
|
$
|
(234,450
|
)
|
|
$
|
(257,089
|
)
|
Amounts allocated to participating securities (nonvested shares)
|
|
|
(26
|
)
|
|
|
(27
|
)
|
|
|
(7
|
)
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to common
shareholders
|
|
$
|
(106,786
|
)
|
|
$
|
(126,445
|
)
|
|
$
|
(234,443
|
)
|
|
$
|
(257,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
306,804
|
|
|
|
335,346
|
|
|
|
313,247
|
|
|
|
334,939
|
|
Potential dilutive shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average common shares
|
|
|
306,804
|
|
|
|
335,346
|
|
|
|
313,247
|
|
|
|
334,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(0.77
|
)
|
Diluted
|
|
|
(0.35
|
)
|
|
|
(0.38
|
)
|
|
|
(0.75
|
)
|
|
|
(0.77
|
)
|
|
|
5
The weighted average shares outstanding for the three and six
months ended October 31, 2010 decreased to
306.8 million and 313.2 million, respectively, from
335.3 million and 334.9 million for the three and six
months ended October 31, 2009, respectively. During the six
months ended October 31, 2010, we purchased and immediately
retired 19.0 million shares of our common stock at a cost
of $279.9 million. We may continue to repurchase and retire
common stock or retire shares held in treasury from time to time
in the future. The cost of shares retired during the period was
allocated to the components of stockholders equity as
follows:
|
|
|
|
|
(in
000s)
|
|
|
|
|
Common stock
|
|
$
|
190
|
|
Additional paid-in capital
|
|
|
11,370
|
|
Retained earnings
|
|
|
268,387
|
|
|
|
|
|
|
|
|
$
|
279,947
|
|
|
|
|
|
|
|
|
During the six months ended October 31, 2010 and 2009, we
issued 1.0 million and 1.6 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the six months ended October 31, 2010, we acquired
0.2 million shares of our common stock at an aggregate cost
of $3.5 million, and during the six months ended
October 31, 2009, we acquired 0.2 million shares at an
aggregate cost of $3.8 million. Shares acquired during
these periods represented shares swapped or surrendered to us in
connection with the vesting of nonvested shares and the exercise
of stock options.
During the six months ended October 31, 2010, we granted
2.1 million stock options and 0.6 nonvested shares and
units in accordance with our stock-based compensation plans. The
weighted average fair value of options granted was $2.25 for
management options. These awards vest over a four year period
with one-fourth vesting each year. Stock-based compensation
expense of our continuing operations totaled $2.7 million
and $6.2 million for the three and six months ended
October 31, 2010, respectively, and $4.8 million and
$12.1 million for the three and six months ended
October 31, 2009, respectively. At October 31, 2010,
unrecognized compensation cost for options totaled
$6.4 million, and for nonvested shares and units totaled
$16.4 million.
|
|
4.
|
Mortgage Loans
Held for Investment and Related Assets
|
The composition of our mortgage loan portfolio as of
October 31, 2010 and April 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
As of
|
|
October 31, 2010
|
|
|
April 30, 2010
|
|
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
|
|
|
Adjustable-rate loans
|
|
$
|
365,262
|
|
|
|
59
|
%
|
|
$
|
411,122
|
|
|
|
60
|
%
|
Fixed-rate loans
|
|
|
254,995
|
|
|
|
41
|
%
|
|
|
272,562
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620,257
|
|
|
|
100
|
%
|
|
|
683,684
|
|
|
|
100
|
%
|
Unamortized deferred fees and costs
|
|
|
4,536
|
|
|
|
|
|
|
|
5,256
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(87,567
|
)
|
|
|
|
|
|
|
(93,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
537,226
|
|
|
|
|
|
|
$
|
595,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses for the six months
ended October 31, 2010 and 2009 is as follows:
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended October 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Balance, beginning of the period
|
|
$
|
93,535
|
|
|
$
|
84,073
|
|
|
|
Provision
|
|
|
16,300
|
|
|
|
27,000
|
|
|
|
Recoveries
|
|
|
86
|
|
|
|
29
|
|
|
|
Charge-offs
|
|
|
(22,354
|
)
|
|
|
(15,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
87,567
|
|
|
$
|
95,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Our loan loss reserve as a percent of mortgage loans was 14.1%
at October 31, 2010 compared to 13.7% at April 30,
2010.
In cases where we modify a loan and in so doing grant a
concession to a borrower experiencing financial difficulty, the
modification is considered a troubled debt restructuring (TDR).
TDR loans totaled $121.7 million and $145.0 million at
October 31, 2010 and April 30, 2010, respectively. The
principal balance of non-performing assets as of
October 31, 2010 and April 30, 2010 is as follows:
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
October 31,
2010
|
|
|
April 30,
2010
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
30 59 days
|
|
$
|
1,366
|
|
|
$
|
330
|
|
|
|
60 89 days
|
|
|
12,398
|
|
|
|
11,851
|
|
|
|
90+ days, non-accrual
|
|
|
149,040
|
|
|
|
153,703
|
|
|
|
TDR loans, accrual
|
|
|
111,249
|
|
|
|
113,471
|
|
|
|
TDR loans, non-accrual
|
|
|
10,440
|
|
|
|
31,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284,493
|
|
|
|
310,861
|
|
|
|
Real estate
owned(1)
|
|
|
25,577
|
|
|
|
29,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
310,070
|
|
|
$
|
340,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes
loans accounted for as in-substance foreclosures of
$9.4 million and $12.5 million at October 31,
2010 and April 30, 2010, respectively.
|
Activity related to our real estate owned is as follows:
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended October 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Balance, beginning of the period
|
|
$
|
29,252
|
|
|
$
|
44,533
|
|
|
|
Additions
|
|
|
11,185
|
|
|
|
9,212
|
|
|
|
Sales
|
|
|
(12,784
|
)
|
|
|
(10,055
|
)
|
|
|
Writedowns
|
|
|
(2,076
|
)
|
|
|
(4,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
25,577
|
|
|
$
|
38,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Goodwill and
Intangible Assets
|
Changes in the carrying amount of goodwill for the six months
ended October 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
Tax
Services
|
|
|
Business
Services
|
|
|
Total
|
|
|
|
|
Balance at April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
453,884
|
|
|
$
|
403,751
|
|
|
$
|
857,635
|
|
Accumulated impairment losses
|
|
|
(2,188
|
)
|
|
|
(15,000
|
)
|
|
|
(17,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451,696
|
|
|
|
388,751
|
|
|
|
840,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
6,778
|
|
|
|
27,655
|
|
|
|
34,433
|
|
Disposals and other
|
|
|
(5,175
|
)
|
|
|
(2,288
|
)
|
|
|
(7,463
|
)
|
Impairments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
455,487
|
|
|
|
429,118
|
|
|
|
884,605
|
|
Accumulated impairment losses
|
|
|
(2,188
|
)
|
|
|
(15,000
|
)
|
|
|
(17,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
453,299
|
|
|
$
|
414,118
|
|
|
$
|
867,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur which could,
more likely than not, reduce the fair value of a reporting
units net assets below its carrying value. No events
indicating possible impairment of goodwill were identified
during the six months ended October 31, 2010.
7
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
As of
|
|
October 31, 2010
|
|
|
|
|
|
April 30, 2010
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
Tax Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
75,270
|
|
|
$
|
(37,009
|
)
|
|
$
|
38,261
|
|
|
$
|
67,705
|
|
|
$
|
(33,096
|
)
|
|
$
|
34,609
|
|
Noncompete agreements
|
|
|
22,508
|
|
|
|
(21,685
|
)
|
|
|
823
|
|
|
|
23,062
|
|
|
|
(21,278
|
)
|
|
|
1,784
|
|
Reacquired franchise rights
|
|
|
219,665
|
|
|
|
(8,167
|
)
|
|
|
211,498
|
|
|
|
223,773
|
|
|
|
(6,096
|
)
|
|
|
217,677
|
|
Franchise agreements
|
|
|
19,201
|
|
|
|
(2,453
|
)
|
|
|
16,748
|
|
|
|
19,201
|
|
|
|
(1,813
|
)
|
|
|
17,388
|
|
Purchased technology
|
|
|
14,500
|
|
|
|
(7,381
|
)
|
|
|
7,119
|
|
|
|
14,500
|
|
|
|
(6,266
|
)
|
|
|
8,234
|
|
Trade name
|
|
|
1,325
|
|
|
|
(500
|
)
|
|
|
825
|
|
|
|
1,325
|
|
|
|
(400
|
)
|
|
|
925
|
|
Business Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
151,882
|
|
|
|
(124,601
|
)
|
|
|
27,281
|
|
|
|
145,149
|
|
|
|
(120,037
|
)
|
|
|
25,112
|
|
Noncompete agreements
|
|
|
35,818
|
|
|
|
(23,341
|
)
|
|
|
12,477
|
|
|
|
33,052
|
|
|
|
(22,118
|
)
|
|
|
10,934
|
|
Attest firm affiliation
|
|
|
7,629
|
|
|
|
(106
|
)
|
|
|
7,523
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Trade name amortizing
|
|
|
2,600
|
|
|
|
(2,600
|
)
|
|
|
-
|
|
|
|
2,600
|
|
|
|
(2,600
|
)
|
|
|
-
|
|
Trade name
non-amortizing
|
|
|
55,637
|
|
|
|
(4,868
|
)
|
|
|
50,769
|
|
|
|
55,637
|
|
|
|
(4,868
|
)
|
|
|
50,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
606,035
|
|
|
$
|
(232,711
|
)
|
|
$
|
373,324
|
|
|
$
|
586,004
|
|
|
$
|
(218,572
|
)
|
|
$
|
367,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets for the three and six months
ended October 31, 2010 was $7.3 and $14.2 million
respectively, and $7.5 million and $14.4 million for
the three and six months ended October 31, 2009,
respectively. Estimated amortization of intangible assets for
fiscal years 2011 through 2015 is $30.1 million,
$27.7 million, $23.2 million, $19.8 million and
$14.5 million, respectively.
In connection with the acquisition of Caturano, as discussed in
note 2, we recorded a liability related to unfavorable
operating lease terms in the amount of $5.9 million, which
will be amortized over the remaining contractual life of the
operating lease.
We file a consolidated federal income tax return in the United
States and file tax returns in various state and foreign
jurisdictions. The U.S. Federal consolidated tax returns
for the years 1999 through 2007 are currently under examination
by the Internal Revenue Service, with the
1999-2005 years
currently at the appellate level. Federal returns for tax years
prior to 1999 are closed by statute. Historically, tax returns
in various foreign and state jurisdictions are examined and
settled upon completion of the exam.
During the six months ended October 31, 2010, we accrued
additional gross interest and penalties of $2.7 million
related to our uncertain tax positions. We had gross
unrecognized tax benefits of $130.5 million and
$129.8 million at October 31, 2010 and April 30,
2010, respectively. The gross unrecognized tax benefits
increased $0.7 million in the current year, due to accruals
of tax and interest on positions related to prior years. Except
as noted below, we have classified the liability for
unrecognized tax benefits, including corresponding accrued
interest, as long-term at October 31, 2010, and included
this amount in other noncurrent liabilities on the condensed
consolidated balance sheet.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the gross amount of reserves for
previously unrecognized tax benefits may decrease by
approximately $21.1 million within twelve months of
October 31, 2010. This portion of our liability for
unrecognized tax benefits has been classified as current and is
included in accounts payable, accrued expenses and other current
liabilities on the condensed consolidated balance sheets.
8
|
|
7.
|
Interest Income
and Expense
|
The following table shows the components of interest income and
expense of our continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
6,525
|
|
|
$
|
8,072
|
|
|
$
|
12,848
|
|
|
$
|
15,968
|
|
Other
|
|
|
4,110
|
|
|
|
4,041
|
|
|
|
8,089
|
|
|
|
8,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,635
|
|
|
$
|
12,113
|
|
|
$
|
20,937
|
|
|
$
|
24,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
20,891
|
|
|
$
|
18,514
|
|
|
$
|
41,534
|
|
|
$
|
37,471
|
|
Deposits
|
|
|
1,947
|
|
|
|
2,284
|
|
|
|
3,870
|
|
|
|
4,333
|
|
FHLB advances
|
|
|
396
|
|
|
|
508
|
|
|
|
792
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,234
|
|
|
$
|
21,306
|
|
|
$
|
46,196
|
|
|
$
|
42,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the following valuation methodologies 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.
|
|
|
Impaired mortgage
loans held for investment The fair value of
impaired mortgage loans held for investment are generally based
on the net present value of discounted cash flows for TDR loans
or the appraised value of the underlying collateral for all
other loans. These loans are classified as Level 3.
|
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.
|
9
The following table presents for each hierarchy level the
financial assets that are measured at fair value on both a
recurring and non-recurring basis at October 31, 2010 and
April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
As of October 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
28,834
|
|
|
$
|
-
|
|
|
$
|
28,834
|
|
|
$
|
-
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired mortgage loans held for investment
|
|
|
226,837
|
|
|
|
-
|
|
|
|
-
|
|
|
|
226,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
255,671
|
|
|
$
|
-
|
|
|
$
|
28,834
|
|
|
$
|
226,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total assets
|
|
|
5.9%
|
|
|
|
-%
|
|
|
|
0.7%
|
|
|
|
5.3%
|
|
As of April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
31,948
|
|
|
$
|
-
|
|
|
$
|
31,948
|
|
|
$
|
-
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired mortgage loans held for investment
|
|
|
249,549
|
|
|
|
-
|
|
|
|
-
|
|
|
|
249,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
281,497
|
|
|
$
|
-
|
|
|
$
|
31,948
|
|
|
$
|
249,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total assets
|
|
|
5.4%
|
|
|
|
-%
|
|
|
|
0.6%
|
|
|
|
4.8%
|
|
|
|
There were no significant changes to the unobservable inputs
used in determining the fair values of our level 2 and
level 3 financial assets.
The carrying amounts and estimated fair values of our financial
instruments at October 31, 2010 are as follows:
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
537,226
|
|
|
$
|
317,183
|
|
|
|
IRAs and other time deposits
|
|
|
490,993
|
|
|
|
488,890
|
|
|
|
Long-term debt
|
|
|
1,044,510
|
|
|
|
1,055,225
|
|
|
|
FHLB advances
|
|
|
75,000
|
|
|
|
75,132
|
|
|
|
|
|
|
|
9.
|
Regulatory
Requirements
|
H&R Block Bank (HRB Bank) files its regulatory Thrift
Financial Report (TFR) on a calendar quarter basis with the
Office of Thrift Supervision (OTS). The following table sets
forth HRB Banks regulatory capital requirements at
September 30, 2010, as calculated in the most recently
filed TFR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
Capitalized
|
|
|
|
|
|
|
For Capital
Adequacy
|
|
|
Under Prompt
Corrective
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Action Provisions
|
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
Total risk-based capital
ratio(1)
|
|
$
|
386,088
|
|
|
|
81.0%
|
|
|
$
|
38,141
|
|
|
|
8.0%
|
|
|
$
|
47,677
|
|
|
|
10.0%
|
|
Tier 1 risk-based capital
ratio(2)
|
|
$
|
379,758
|
|
|
|
79.7%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
28,606
|
|
|
|
6.0%
|
|
Tier 1 capital ratio
(leverage)(3)
|
|
$
|
379,758
|
|
|
|
30.7%
|
|
|
$
|
148,485
|
|
|
|
12.0%
|
|
|
$
|
61,869
|
|
|
|
5.0%
|
|
Tangible equity
ratio(4)
|
|
$
|
379,758
|
|
|
|
30.7%
|
|
|
$
|
18,561
|
|
|
|
1.5%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
(1) |
|
Total
risk-based capital divided by risk-weighted assets.
|
(2) |
|
Tier 1
(core) capital less deduction for low-level recourse and
residual interest divided by risk-weighted assets.
|
(3) |
|
Tier 1
(core) capital divided by adjusted total assets.
|
(4) |
|
Tangible
capital divided by tangible assets.
|
As of October 31, 2010, HRB Banks leverage ratio was
26.2%.
10
In June 2009, the Financial Accounting Standards Board (FASB)
issued revised authoritative guidance associated with the
consolidation of variable interest entities (VIEs). The revised
guidance replaced the previous quantitative-based assessment for
determining whether an enterprise is the primary beneficiary of
a VIE and focuses primarily on a qualitative assessment. This
assessment requires identifying the enterprise that has
(1) the power to direct the activities of the VIE that can
most significantly impact the entitys performance; and
(2) the obligation to absorb losses and the right to
receive benefits from the VIE that could potentially be
significant to such entity. The revised guidance also requires
that the enterprise continually reassess whether it is the
primary beneficiary of a VIE rather than conducting a
reassessment only upon the occurrence of specific events.
We implemented this guidance on May 1, 2010 and evaluated
our financial interests to determine if we had interests in VIEs
and if we are the primary beneficiary of the VIE.
The following is a description of our financial interests in
VIEs which we consider significant or where we are the sponsor.
For these VIEs we have determined that we are not the primary
beneficiary and, therefore have not consolidated the VIEs. Prior
to implementation of this new guidance we did not consolidate
these entities.
|
|
|
|
|
McGladrey &
Pullen LLP The administrative services
agreement with McGladrey & Pullen, LLP (M&P) and
compensation arrangements between RSM McGladrey (RSM) and their
managing directors represent a variable interest in M&P.
These agreements are described more fully in our 2010 Annual
Report to Shareholders on
Form 10-K.
|
We have concluded that RSM is not the primary beneficiary of
M&P and, therefore, we have not consolidated M&P. RSM
does not have an equity interest in M&P, nor does it have
the power to direct any activities of M&P and does not
receive any of its income. We have no assets or liabilities
included in our condensed consolidated balance sheets related to
our variable interests. We believe RSMs maximum exposure
to economic loss, resulting from various agreements with
M&P, relates primarily to shared office space from
operating leases under the administrative services agreement
equal to approximately $106.3 million, and variability in
our operating results due to the compensation agreements with
RSM managing directors. We do not provide any support that is
not contractually required.
|
|
|
|
|
Securitization
Trusts Sand Canyon Corporation (SCC) holds an
interest in and is the sponsor (issuer) of 56 REMIC Trusts and
14 NIM Trusts (collectively, Trusts) related to
previously originated mortgage loans that were securitized.
These Trusts are variable interest entities. The REMIC Trusts
hold static pools of
sub-prime
residential mortgage loans. The NIM Trusts hold beneficial
interests in certain REMIC Trusts. The Trusts were designed to
collect and pass through to the beneficial interest holders the
cash flows of the underlying mortgage loans. The REMIC Trusts
were financed with bonds and equity. The NIM Trusts were
financed with notes and equity. All bonds and notes are held by
third-party investors.
|
Our identification of the primary beneficiary of the Trusts was
based on a determination that the servicer of the underlying
mortgage loans has the power to direct the most significant
activities of the Trusts because the servicer handles all of the
loss mitigation activities for the mortgage loans.
SCC is not the servicer of the mortgage loans underlying the
REMIC Trusts. Therefore, SCC is not the primary beneficiary of
the REMIC Trusts because it does not have the power to direct
the most significant activities of the REMIC Trusts, which is
the servicing of the underlying mortgage loans.
SCC does have the exclusive right to appoint a servicer when
certain conditions have been met for specific loans related to
two of the NIM Trusts. As of October 31, 2010, those
conditions have been met for a minority portion of the loans
underlying those Trusts. As this right pertains only to a
minority of the loans, we have concluded that SCC does not have
the power to direct the most significant activities of these two
NIM Trusts, as the servicer has the power to direct significant
activities over the majority of the mortgage loans. In the
remaining NIM Trusts, SCC has a shared right to appoint a
servicer under certain conditions. For these NIM Trusts, we have
concluded that SCC is not the primary beneficiary because the
power to direct the most significant activities, which is the
servicing of the underlying mortgage loans, is shared with other
unrelated parties.
11
At October 31, 2010, we had no significant assets or
liabilities included in our condensed consolidated balance
sheets related to SCCs variable interests in the Trusts.
We have a liability, as discussed in note 11, and a
deferred tax asset recorded in our condensed consolidated
balance sheets related to obligations for representations and
warranties SCC made in connection with the transfer of mortgage
loans, including mortgage loans held by the securitization
trusts. We have no remaining exposure to economic loss arising
from impairment of SCCs beneficial interest in the Trusts.
If SCC receives cash flows in the future as a holder of
beneficial interests we would record gains as other income in
our income statement. Neither we nor SCC has liquidity
arrangements, guarantees or other commitments for the Trusts,
nor has any support been provided that was not contractually
required.
|
|
11.
|
Commitments and
Contingencies
|
Changes in deferred revenue balances related to our Peace of
Mind (POM) program, the current portion of which is included in
accounts payable, accrued expenses and other current liabilities
and the long-term portion of which is included in other
noncurrent liabilities in the condensed consolidated balance
sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Six
Months Ended October 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
Balance, beginning of period
|
|
$
|
141,542
|
|
|
$
|
146,807
|
|
Amounts deferred for new guarantees issued
|
|
|
1,422
|
|
|
|
1,351
|
|
Revenue recognized on previous deferrals
|
|
|
(48,358)
|
|
|
|
(47,044)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
94,066
|
|
|
$
|
101,114
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to amounts accrued for our POM guarantee, we had
accrued $11.5 million and $14.5 million at
October 31, 2010 and April 30, 2010, respectively,
related to our standard guarantee which is included with our
standard tax preparation services.
The following table summarizes certain of our other contractual
obligations and commitments:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
As of
|
|
October 31,
2010
|
|
|
April 30,
2010
|
|
|
|
|
Franchise Equity Lines of Credit undrawn commitment
|
|
$
|
30,683
|
|
|
$
|
36,806
|
|
Contingent business acquisition obligations
|
|
|
22,154
|
|
|
|
20,697
|
|
Media advertising purchase obligation
|
|
|
26,548
|
|
|
|
26,548
|
|
|
|
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. Guarantees and indemnifications of the Company and
its subsidiaries include obligations to protect counterparties
from losses arising from the following: (1) tax, legal and
other risks related to the purchase or disposition of
businesses; (2) penalties and interest assessed by federal
and state taxing authorities in connection with tax returns
prepared for clients; (3) indemnification of our directors
and officers; and (4) third-party claims relating to
various arrangements in the normal course of business.
Typically, there is no stated maximum payment related to these
indemnifications, and the terms of the indemnities may vary and
in many cases are limited only by the applicable statute of
limitations. The likelihood of any claims being asserted against
us and the ultimate liability related to any such claims, if
any, is difficult to predict. While we cannot provide assurance
we will ultimately prevail in the event any such claims are
asserted, we believe the fair value of guarantees and
indemnifications relating to our continuing operations is not
material as of October 31, 2010.
Discontinued
Operations
Sand Canyon Corporation (SCC, previously known as
Option One Mortgage Corporation) ceased originating mortgage
loans in December 2007 and, in April 2008, sold its servicing
assets and discontinued its remaining operations. The sale of
servicing assets did not include the sale of any mortgage loans.
In connection with the securitization and sale of loans, SCC
made certain representations and warranties, including, but not
limited to, representations relating to matters such as
ownership of the loan, validity of lien securing the loan, and
the loans compliance with SCCs underwriting
criteria. Representations and warranties in whole loan sale
transactions to institutional investors included a
knowledge
12
qualifier which limits SCC liability for borrower fraud to
those instances where SCC had knowledge of the fraud at the time
the loans were sold. In the event that there is a breach of a
representation and warranty and such breach materially and
adversely affects the value of a mortgage loan, SCC may be
obligated to repurchase a loan or otherwise indemnify certain
parties for losses incurred as a result of loan liquidation.
Generally, these representations and warranties are not subject
to a stated term, but would be subject to statutes of limitation
applicable to the contractual provisions.
Claims received by SCC have primarily related to alleged
breaches of representations and warranties related to a
loans compliance with the underwriting standards
established by SCC at origination, borrower fraud and credit
exceptions without sufficient compensating factors. Claims
received since May 1, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Fiscal Year 2009
|
|
Fiscal Year 2010
|
|
Fiscal Year 2011
|
|
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Total
|
|
|
Loan Origination Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
40
|
|
$
|
21
|
|
$
|
1
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6
|
|
$
|
1
|
|
$
|
84
|
2006
|
|
|
89
|
|
|
10
|
|
|
111
|
|
|
7
|
|
|
2
|
|
|
57
|
|
|
4
|
|
|
45
|
|
|
100
|
|
|
15
|
|
|
440
|
2007
|
|
|
43
|
|
|
10
|
|
|
85
|
|
|
15
|
|
|
4
|
|
|
11
|
|
|
7
|
|
|
-
|
|
|
3
|
|
|
5
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172
|
|
$
|
41
|
|
$
|
197
|
|
$
|
22
|
|
$
|
6
|
|
$
|
83
|
|
$
|
11
|
|
$
|
45
|
|
$
|
109
|
|
$
|
21
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For those claims determined to be valid, SCC has complied with
its obligations by either repurchasing the mortgage loans or REO
properties, providing for the reimbursement of losses in
connection with liquidated REO properties, or reaching other
settlements. SCC has denied approximately 84% of all claims
received, excluding resolution reached under other settlements.
Counterparties could reassert claims that SCC has denied. Of
claims determined to be valid, approximately 24% resulted in
loan repurchases, and 76% resulted in indemnification or
settlement payments. Losses on loan repurchase, indemnification
and settlement payments totaled approximately $58 million
for the period May 1, 2008 through October 31, 2010.
Loss severity rates on repurchases and indemnification have
approximated 60% and SCC has not observed any material trends
related to average losses by counterparty. Repurchased loans are
considered held for sale and are included in prepaid expenses
and other current assets on the condensed consolidated balance
sheets. The net balance of all mortgage loans held for sale by
SCC was $14.6 million at October 31, 2010.
SCC generally has 60 to 120 days to respond to
representation and warranty claims and performs a
loan-by-loan
review of all repurchase claims during this time. SCC has
completed its review of all claims, with the exception of claims
totaling approximately $121 million, which remained subject
to review as of October 31, 2010. Of the claims still
subject to review, approximately $97 million are from
private-label securitizations, related to rescissions of
mortgage insurance, and $24 million are from monoline
insurers.
All claims asserted against SCC since May 1, 2008 relate to
loans originated during calendar years 2005 through 2007, of
which, approximately 88% relate to loans originated in calendar
years 2006 and 2007. During calendar year 2005 through 2007, SCC
originated approximately $84 billion in loans, of which
less than 1% were sold to government sponsored entities. SCC is
not subject to loss on loans that have been paid in full,
repurchased, or were sold without recourse.
The majority of claims asserted since May 1, 2008, which
have been determined by SCC to represent a valid breach of its
representations and warranties, relate to loans that became
delinquent within the first two years following the origination
of the mortgage loan. SCC believes the longer a loan performs
prior to an event of default, the less likely the default will
be related to a breach of a representation and warranty. The
balance of loans originated in 2005, 2006 and 2007 which
defaulted in the first two years is $4.0 billion,
$6.3 billion and $2.9 billion, respectively, at
October 31, 2010.
SCC estimates losses relating to representation and warranty
claims by estimating loan repurchase and indemnification
obligations on both known claims and projections of future
claims. Projections of future claims are based on an analysis
that includes a combination of reviewing repurchase demands and
actual defaults and loss severities by counterparty, inquiries
from various third-parties, the terms and provisions of related
agreements and the historical rate of repurchase and
indemnification obligations related to breaches of
representations and warranties. SCCs methodology for
calculating this liability considers the
13
probability that individual counterparties (whole-loan
purchasers, private label securitization trustees and monoline
insurers) will assert future claims.
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
October 31, 2010, of $184.7 million, which represents
SCCs best estimate of the probable loss that may occur.
This overall liability amount includes $49.7 million, which
was established under an indemnity agreement dated April 2008
with a specific counterparty in exchange for a full and complete
release of such partys ability to assert representation
and warranty claims. This indemnity agreement was given as part
of obtaining the counterpartys consent to SCCs sale
of its mortgage servicing business in 2008. Though disbursements
related to this agreement have not been significant, SCC
believes that the full amount under this indemnity agreement
will ultimately be paid.
While SCC uses the best information available to it in
estimating its liability, probable losses are inherently
difficult to estimate and require considerable management
judgment. There may be a wide range of reasonably possible
losses in excess of the recorded liability that cannot be
estimated, primarily due to difficulties inherent in estimating
the level of future claims that will be asserted and the
percentage of those claims that are ultimately determined to be
valid. Although net losses on settled claims since May 1,
2008 have been within initial loss estimates, to the extent that
valid claim volumes or the value of residential home prices
differ in the future from current estimates, future losses may
be greater than the current estimates and those differences may
be significant.
A rollforward of our liability for losses on repurchases for the
six months ended October 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Six
Months Ended October 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
Balance, beginning of period
|
|
$
|
188,200
|
|
|
$
|
206,595
|
|
Provisions
|
|
|
-
|
|
|
|
-
|
|
Losses on repurchase and indemnifications
|
|
|
(3,478)
|
|
|
|
(5,382)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
184,722
|
|
|
$
|
201,213
|
|
|
|
|
|
|
|
|
|
|
|
|
The repurchase liability is included in accounts payable,
accrued expenses and other current liabilities on our condensed
consolidated balance sheets. There have been no provisions for
additional losses included in the income statement since
April 30, 2008; however, loss provisions would be recorded
net of tax in discontinued operations.
|
|
12.
|
Litigation and
Related Contingencies
|
We are party to investigations, legal claims and lawsuits
arising out of our business operations. As required, we accrue
our best estimate of loss contingencies when we believe a loss
is probable and we can reasonably estimate the amount of any
such loss. Amounts accrued, including obligations under
indemnifications, totaled $24.6 million and
$35.5 million at October 31, 2010 and April 30,
2010, respectively. Litigation is inherently unpredictable and
it is difficult to predict the outcome of particular matters
with reasonable certainty and, therefore, the actual amount of
any loss may prove to be larger or smaller than the amounts
reflected in our consolidated financial statements.
RAL Litigation
We have been named in multiple lawsuits as defendants in
litigation regarding our refund anticipation loan program in
past years. All of those lawsuits have been settled or otherwise
resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al., April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. An appellate court subsequently
reversed the decertification decision. We are appealing the
reversal. We have not concluded that a loss related to this
matter is probable nor have we accrued a loss contingency
related to this matter.
14
Plaintiffs have not provided a dollar amount of their claim and
we are not able to estimate a possible range of loss. We believe
we have meritorious defenses to this case and intend to defend
it vigorously. There can be no assurances, however, as to the
outcome of this case or its impact on our consolidated results
of operations.
Peace of Mind
Litigation
We have been named defendants in lawsuits regarding our Peace of
Mind program (collectively, the POM Cases), under
which our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes statutory fraud, an unfair trade
practice and breach of a fiduciary duty. The plaintiffs seek
unspecified damages, injunctive relief, attorneys fees and
costs. On September 17, 2010, the federal court denied
plaintiffs motion for class certification. The parties
subsequently reached an agreement to settle the case, along with
the Soliz case referenced below.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al. (Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas. This case involves the same
plaintiffs attorneys that are involved in the Marshall
litigation in Illinois and contains allegations similar to
those in the Marshall litigation. The plaintiff seeks
actual and treble damages, equitable relief, attorneys
fees and costs. No class has been certified. Following the
denial of class certification in the Marshall litigation,
the parties reached an agreement to settle this case, along with
the Marshall litigation. Settlement amounts related to
the POM Cases are immaterial to the financial statements and are
accrued at October 31, 2010.
Express IRA
Litigation
We have been named defendants in lawsuits regarding our former
Express IRA product. All of those lawsuits have been settled or
otherwise resolved, except for one.
The one remaining case was filed on January 2, 2008 by the
Mississippi Attorney General in the Chancery Court of Hinds
County, Mississippi First Judicial District (Case No. G
2008 6 S 2) and is styled Jim Hood, Attorney for the
State of Mississippi v. H&R Block, Inc., H&R
Block Financial Advisors, Inc., et al. The complaint
alleges fraudulent business practices, deceptive acts and
practices, common law fraud and breach of fiduciary duty with
respect to the sale of the product in Mississippi and seeks
equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. We are not
able to estimate a possible range of loss. We believe we have
meritorious defenses to the claims in this case, and we intend
to defend this case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated results of
operations.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA)
effective November 1, 2008, we remain responsible for any
liabilities relating to the Express IRA litigation, among other
things, through an indemnification agreement. A portion of our
accrual is related to these indemnity obligations.
RSM McGladrey
Litigation
RSM EquiCo, its parent and certain of its subsidiaries and
affiliates, are parties to a class action filed on July 11,
2006 and styled Do Rights Plant Growers, et al. v.
RSM EquiCo, Inc., et al., Case No. 06 CC00137, in the
California Superior Court, Orange County. The complaint contains
allegations relating to business valuation services provided by
RSM EquiCo, including allegations of fraud, negligent
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, breach of fiduciary
duty and unfair competition. Plaintiffs seek unspecified actual
and punitive damages, in addition to pre-judgment interest and
attorneys fees. On March 17, 2009, the court granted
plaintiffs motion for class certification on all claims.
The defendants filed two requests for interlocutory review of
the decision, the last of which was denied by the Supreme Court
of California on September 30, 2009. A trial date has been
set for May 2011.
The certified class consists of RSM EquiCos
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale. A
portion of our loss contingency accrual is related to this
matter for the amount of loss that we consider probable and
estimable, although it is
15
possible that our losses could exceed the amount we have
accrued. The fees paid to RSM EquiCo in connection with these
agreements total approximately $185 million, a number which
substantially exceeds the equity of RSM EquiCo. Plaintiffs seek
to recover restitution in an amount equal to the fees paid, in
addition to punitive damages and attorney fees. We believe we
have meritorious defenses to the case and intend to defend the
case vigorously. The amount claimed in this action is
substantial and could have a material adverse impact on our
consolidated results of operations. There can be no assurance
regarding the outcome of this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block styled Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al. The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009 (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. On November 3, 2010, the court
dismissed the case against all defendants in its entirety with
prejudice.
RSM and M&P operate in an alternative practice structure
(APS). Accordingly, certain claims and lawsuits
against M&P could have an impact on RSM. More specifically,
any judgments or settlements arising from claims and lawsuits
against M&P that exceed its insurance coverage could have a
direct adverse effect on M&Ps operations. Although
RSM is not responsible for the liabilities of M&P,
significant M&P litigation and claims could impair the
profitability of the APS and impair the ability to attract and
retain clients and quality professionals. This could, in turn,
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 any claims or litigation involving
M&P.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state and federal 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 securities laws, 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 and thus cannot be
reasonably estimated. 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)
styled 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. An appeal
of the preliminary injunction was denied. A trial date has been
set for June 2011. A portion of our loss contingency accrual is
related to this matter for the amount of loss that we consider
probable and estimable, although it is possible that our losses
could exceed the amount we have accrued. We are not able to
estimate a possible range of loss. We believe we have
meritorious defenses to the claims presented and we intend to
defend them vigorously. There can be no assurances, however, as
to its outcome or its impact on our consolidated results of
operations.
16
On October 15, 2010, the Federal Home Loan Bank of Chicago
filed a lawsuit in the Circuit Court of Cook County, Illinois
(Case No. 10CH45033) styled Federal Home Loan Bank of
Chicago v. Bank of America Funding Corporation, et al.
against multiple defendants, including various SCC related
entities and H&R Block, Inc. related entities, arising out
of FHLBs purchase of mortgage-backed securities. Plaintiff
asserts claims for rescission and damages under Illinois
securities law and for common law negligent misrepresentation in
connection with its purchase of two securities originated and
securitized by SCC. These two securities had a total initial
principal amount of approximately $50 million, of which
approximately $42 million remains outstanding. We have not
concluded that a loss related to this matter is probable nor
have we established a loss contingency related to this matter.
We believe the claims in this case are without merit and we
intend to defend them vigorously. There can be no assurances,
however, as to its outcome or its impact on our consolidated
results of operations.
Other Claims and
Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, respectively styled Alice
Williams v. H&R Block Enterprises LLC, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008); Arabella Lemus v. H&R
Block Enterprises LLC, et al., Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009); Delana Ugas v. H&R Block
Enterprises LLC, et al., Case No. BC417700 (United
States District Court, Central District of California, filed
July 13, 2009); Barbara Petroski v. H&R Block
Eastern Enterprises, Inc., et al., Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010); Lance Hom v. H&R
Block Enterprises LLC, et al., Case No. 10CV0476 H
(United States District Court, Southern District of
California, filed March 4, 2010); and Stacy Oyer v.
H&R Block Eastern Enterprises, Inc., et al., Case
No. 10-CV-00387-WMS
(United States District Court, Western District of New York,
filed May 10, 2010). These cases involve a variety of legal
theories and allegations including, among other things, failure
to compensate employees for all hours worked; failure to provide
employees with meal periods; failure to provide itemized wage
statements; failure to pay wages due upon termination; failure
to compensate for mandatory off-season training; and/or
misclassification of non-exempt employees. The parties have
agreed to consolidate certain of these cases into a single
action because they allege substantially identical claims. The
plaintiffs seek actual damages, in addition to statutory
penalties, pre-judgment interest and attorneys fees. We
have not concluded that a loss related to these matters is
probable nor have we accrued a loss contingency related to these
matters. Moreover, we are not able to estimate a possible range
of loss. We believe we have meritorious defenses to the claims
in these cases and intend to defend them vigorously. The amounts
claimed in these matters are substantial in some instances,
however, and the ultimate liability with respect to these
matters is difficult to predict. There can be no assurances as
to the outcome of these cases or their impact on our
consolidated results of operations, individually or in the
aggregate.
In addition, 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. We
believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however, the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could have a material adverse impact on our consolidated results
of operations.
We are also 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 impact on our consolidated results of operations.
17
Results of our continuing operations by reportable operating
segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
110,921
|
|
|
$
|
109,305
|
|
|
$
|
202,566
|
|
|
$
|
197,268
|
|
Business Services
|
|
|
203,426
|
|
|
|
206,602
|
|
|
|
378,136
|
|
|
|
384,220
|
|
Corporate
|
|
|
8,542
|
|
|
|
10,174
|
|
|
|
16,661
|
|
|
|
20,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
322,889
|
|
|
$
|
326,081
|
|
|
$
|
597,363
|
|
|
$
|
601,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
(154,355
|
)
|
|
$
|
(172,188
|
)
|
|
$
|
(328,979
|
)
|
|
$
|
(344,162
|
)
|
Business Services
|
|
|
8,397
|
|
|
|
174
|
|
|
|
7,964
|
|
|
|
1,495
|
|
Corporate
|
|
|
(29,161
|
)
|
|
|
(40,839
|
)
|
|
|
(61,421
|
)
|
|
|
(81,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
$
|
(175,119
|
)
|
|
$
|
(212,853
|
)
|
|
$
|
(382,436
|
)
|
|
$
|
(423,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Accounting
Pronouncements
|
In July 2010 the Financial Accounting Standard Board (FASB)
issued Accounting Standards Update
2010-20,
Disclosures About Credit Quality of Financing Receivables
and Allowance for Credit Losses. This guidance would
require enhanced disclosures about the allowance for credit
losses and the credit quality of financing receivables and would
apply to financing receivables held by all creditors. This
guidance is effective beginning with the first interim or annual
reporting period ending after December 15, 2010. Early
application is encouraged. We are currently evaluating the
effect of this guidance on our financial statement disclosures.
In October 2009, the FASB issued Accounting Standards Update
2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements. This guidance
amends the criteria for separating consideration in
multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than
as a combined unit. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable,
which is based on: (1) vendor-specific objective evidence;
(2) third-party evidence; or (3) estimates. This
guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the
inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance
significantly expands required disclosures related to a
vendors multiple-deliverable revenue arrangements. This
guidance is effective prospectively for revenue arrangements
entered into or materially modified beginning with our fiscal
year 2012. We believe this guidance will not have a material
effect on our consolidated financial statements.
In June 2009, the FASB issued guidance, under Topic
860 Transfers and Servicing. This guidance will
require more disclosure about transfers of financial assets,
including securitization transactions, and where entities have
continuing exposure to the risks related to transferred
financial assets. It eliminates the concept of a qualifying
special purpose entity and changes the requirements for
derecognizing financial assets. We adopted this guidance as of
May 1, 2010 and it did not have a material effect on our
consolidated financial statements.
|
|
15.
|
Condensed
Consolidating Financial Statements
|
Block Financial LLC (BFC) is an indirect, wholly-owned
consolidated subsidiary of the Company. BFC is the Issuer and
the Company is the Guarantor of the Senior Notes issued on
January 11, 2008 and October 26, 2004, our unsecured
committed lines of credit (CLOCs) and other indebtedness issued
from time to time. These condensed consolidating financial
statements have been prepared using the equity method of
accounting. Earnings of subsidiaries are, therefore, reflected
in the Companys investment in
18
subsidiaries account. The elimination entries eliminate
investments in subsidiaries, related stockholders equity
and other intercompany balances and transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Income Statements
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Three
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31, 2010
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
17,320
|
|
|
$
|
305,569
|
|
|
$
|
-
|
|
|
$
|
322,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
35,959
|
|
|
|
356,991
|
|
|
|
-
|
|
|
|
392,950
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
9,379
|
|
|
|
99,564
|
|
|
|
-
|
|
|
|
108,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
45,338
|
|
|
|
456,555
|
|
|
|
-
|
|
|
|
501,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
-
|
|
|
|
(28,018
|
)
|
|
|
(150,986
|
)
|
|
|
-
|
|
|
|
(179,004
|
)
|
Other income (expense), net
|
|
|
(175,119
|
)
|
|
|
4,890
|
|
|
|
(1,005
|
)
|
|
|
175,119
|
|
|
|
3,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
|
(175,119
|
)
|
|
|
(23,128
|
)
|
|
|
(151,991
|
)
|
|
|
175,119
|
|
|
|
(175,119
|
)
|
Income tax benefit
|
|
|
(68,307
|
)
|
|
|
(7,654
|
)
|
|
|
(60,653
|
)
|
|
|
68,307
|
|
|
|
(68,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(106,812
|
)
|
|
|
(15,474
|
)
|
|
|
(91,338
|
)
|
|
|
106,812
|
|
|
|
(106,812
|
)
|
Net loss from discontinued operations
|
|
|
(2,237
|
)
|
|
|
(1,330
|
)
|
|
|
(907
|
)
|
|
|
2,237
|
|
|
|
(2,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109,049
|
)
|
|
$
|
(16,804
|
)
|
|
$
|
(92,245
|
)
|
|
$
|
109,049
|
|
|
$
|
(109,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31, 2009
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
21,026
|
|
|
$
|
305,055
|
|
|
$
|
-
|
|
|
$
|
326,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
45,861
|
|
|
|
365,088
|
|
|
|
-
|
|
|
|
410,949
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
2,457
|
|
|
|
127,228
|
|
|
|
-
|
|
|
|
129,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
48,318
|
|
|
|
492,316
|
|
|
|
-
|
|
|
|
540,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
-
|
|
|
|
(27,292
|
)
|
|
|
(187,261
|
)
|
|
|
-
|
|
|
|
(214,553
|
)
|
Other income (expense), net
|
|
|
(212,853
|
)
|
|
|
(2,607
|
)
|
|
|
4,307
|
|
|
|
212,853
|
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
|
(212,853
|
)
|
|
|
(29,899
|
)
|
|
|
(182,954
|
)
|
|
|
212,853
|
|
|
|
(212,853
|
)
|
Income tax benefit
|
|
|
(86,381
|
)
|
|
|
(12,294
|
)
|
|
|
(74,087
|
)
|
|
|
86,381
|
|
|
|
(86,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(126,472
|
)
|
|
|
(17,605
|
)
|
|
|
(108,867
|
)
|
|
|
126,472
|
|
|
|
(126,472
|
)
|
Net loss from discontinued operations
|
|
|
(2,115
|
)
|
|
|
(2,115
|
)
|
|
|
-
|
|
|
|
2,115
|
|
|
|
(2,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(128,587
|
)
|
|
$
|
(19,720
|
)
|
|
$
|
(108,867
|
)
|
|
$
|
128,587
|
|
|
$
|
(128,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31, 2010
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
38,320
|
|
|
$
|
559,043
|
|
|
$
|
-
|
|
|
$
|
597,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
74,987
|
|
|
|
685,979
|
|
|
|
-
|
|
|
|
760,966
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
11,469
|
|
|
|
214,503
|
|
|
|
-
|
|
|
|
225,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
86,456
|
|
|
|
900,482
|
|
|
|
-
|
|
|
|
986,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
-
|
|
|
|
(48,136
|
)
|
|
|
(341,439
|
)
|
|
|
-
|
|
|
|
(389,575
|
)
|
Other income (expense), net
|
|
|
(382,436
|
)
|
|
|
5,272
|
|
|
|
1,867
|
|
|
|
382,436
|
|
|
|
7,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
|
(382,436
|
)
|
|
|
(42,864
|
)
|
|
|
(339,572
|
)
|
|
|
382,436
|
|
|
|
(382,436
|
)
|
Income tax benefit
|
|
|
(147,986
|
)
|
|
|
(15,495
|
)
|
|
|
(132,491
|
)
|
|
|
147,986
|
|
|
|
(147,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(234,450
|
)
|
|
|
(27,369
|
)
|
|
|
(207,081
|
)
|
|
|
234,450
|
|
|
|
(234,450
|
)
|
Net loss from discontinued operations
|
|
|
(5,280
|
)
|
|
|
(4,334
|
)
|
|
|
(946
|
)
|
|
|
5,280
|
|
|
|
(5,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(239,730
|
)
|
|
$
|
(31,703
|
)
|
|
$
|
(208,027
|
)
|
|
$
|
239,730
|
|
|
$
|
(239,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31, 2009
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
44,222
|
|
|
$
|
557,420
|
|
|
$
|
(56
|
)
|
|
$
|
601,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
91,421
|
|
|
|
705,978
|
|
|
|
-
|
|
|
|
797,399
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
4,955
|
|
|
|
228,003
|
|
|
|
(56
|
)
|
|
|
232,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
96,376
|
|
|
|
933,981
|
|
|
|
(56
|
)
|
|
|
1,030,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
-
|
|
|
|
(52,154
|
)
|
|
|
(376,561
|
)
|
|
|
-
|
|
|
|
(428,715
|
)
|
Other income (expense), net
|
|
|
(423,726
|
)
|
|
|
(3,840
|
)
|
|
|
8,829
|
|
|
|
423,726
|
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
|
(423,726
|
)
|
|
|
(55,994
|
)
|
|
|
(367,732
|
)
|
|
|
423,726
|
|
|
|
(423,726
|
)
|
Income tax benefit
|
|
|
(166,637
|
)
|
|
|
(22,986
|
)
|
|
|
(143,651
|
)
|
|
|
166,637
|
|
|
|
(166,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(257,089
|
)
|
|
|
(33,008
|
)
|
|
|
(224,081
|
)
|
|
|
257,089
|
|
|
|
(257,089
|
)
|
Net loss from discontinued operations
|
|
|
(5,132
|
)
|
|
|
(5,132
|
)
|
|
|
-
|
|
|
|
5,132
|
|
|
|
(5,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(262,221
|
)
|
|
$
|
(38,140
|
)
|
|
$
|
(224,081
|
)
|
|
$
|
262,221
|
|
|
$
|
(262,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31,
2010
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R
Block
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
-
|
|
|
$
|
810,258
|
|
|
$
|
149,499
|
|
|
$
|
(11
|
)
|
|
$
|
959,746
|
|
Cash & cash equivalents restricted
|
|
|
-
|
|
|
|
140
|
|
|
|
35,333
|
|
|
|
-
|
|
|
|
35,473
|
|
Receivables, net
|
|
|
-
|
|
|
|
223,131
|
|
|
|
193,202
|
|
|
|
-
|
|
|
|
416,333
|
|
Mortgage loans held for investment
|
|
|
-
|
|
|
|
537,226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
537,226
|
|
Intangible assets and goodwill, net
|
|
|
-
|
|
|
|
-
|
|
|
|
1,240,741
|
|
|
|
-
|
|
|
|
1,240,741
|
|
Investments in subsidiaries
|
|
|
2,722,826
|
|
|
|
-
|
|
|
|
234
|
|
|
|
(2,722,826
|
)
|
|
|
234
|
|
Other assets
|
|
|
15,022
|
|
|
|
243,462
|
|
|
|
859,545
|
|
|
|
-
|
|
|
|
1,118,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,737,848
|
|
|
$
|
1,814,217
|
|
|
$
|
2,478,554
|
|
|
$
|
(2,722,837
|
)
|
|
$
|
4,307,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
-
|
|
|
$
|
929,909
|
|
|
$
|
-
|
|
|
$
|
(11
|
)
|
|
$
|
929,898
|
|
Long-term debt
|
|
|
-
|
|
|
|
998,785
|
|
|
|
45,725
|
|
|
|
-
|
|
|
|
1,044,510
|
|
FHLB borrowings
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
39,517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,517
|
|
Other liabilities
|
|
|
123
|
|
|
|
125,343
|
|
|
|
1,213,586
|
|
|
|
-
|
|
|
|
1,339,052
|
|
Net intercompany advances
|
|
|
1,857,920
|
|
|
|
(404,933
|
)
|
|
|
(1,452,987
|
)
|
|
|
-
|
|
|
|
-
|
|
Stockholders equity
|
|
|
879,805
|
|
|
|
50,596
|
|
|
|
2,672,230
|
|
|
|
(2,722,826
|
)
|
|
|
879,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,737,848
|
|
|
$
|
1,814,217
|
|
|
$
|
2,478,554
|
|
|
$
|
(2,722,837
|
)
|
|
$
|
4,307,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
April 30,
2010
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R
Block
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
-
|
|
|
$
|
702,021
|
|
|
$
|
1,102,135
|
|
|
$
|
(111
|
)
|
|
$
|
1,804,045
|
|
Cash & cash equivalents restricted
|
|
|
-
|
|
|
|
6,160
|
|
|
|
28,190
|
|
|
|
-
|
|
|
|
34,350
|
|
Receivables, net
|
|
|
57
|
|
|
|
105,192
|
|
|
|
412,737
|
|
|
|
-
|
|
|
|
517,986
|
|
Mortgage loans held for investment, net -
|
|
|
|
|
|
|
595,405
|
|
|
|
-
|
|
|
|
-
|
|
|
|
595,405
|
|
Intangible assets and goodwill, net
|
|
|
-
|
|
|
|
-
|
|
|
|
1,207,879
|
|
|
|
-
|
|
|
|
1,207,879
|
|
Investments in subsidiaries
|
|
|
3,276,597
|
|
|
|
-
|
|
|
|
231
|
|
|
|
(3,276,597
|
)
|
|
|
231
|
|
Other assets
|
|
|
19,014
|
|
|
|
332,782
|
|
|
|
722,626
|
|
|
|
-
|
|
|
|
1,074,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,295,668
|
|
|
$
|
1,741,560
|
|
|
$
|
3,473,798
|
|
|
$
|
(3,276,708
|
)
|
|
$
|
5,234,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
-
|
|
|
$
|
852,666
|
|
|
$
|
-
|
|
|
$
|
(111
|
)
|
|
$
|
852,555
|
|
Long-term debt
|
|
|
-
|
|
|
|
998,605
|
|
|
|
36,539
|
|
|
|
-
|
|
|
|
1,035,144
|
|
FHLB borrowings
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Other liabilities
|
|
|
48,775
|
|
|
|
153,154
|
|
|
|
1,629,060
|
|
|
|
-
|
|
|
|
1,830,989
|
|
Net intercompany advances
|
|
|
1,806,263
|
|
|
|
(431,696
|
)
|
|
|
(1,374,567
|
)
|
|
|
-
|
|
|
|
-
|
|
Stockholders equity
|
|
|
1,440,630
|
|
|
|
93,831
|
|
|
|
3,182,766
|
|
|
|
(3,276,597
|
)
|
|
|
1,440,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,295,668
|
|
|
$
|
1,741,560
|
|
|
$
|
3,473,798
|
|
|
$
|
(3,276,708
|
)
|
|
$
|
5,234,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Six
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31, 2010
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash used in operating activities:
|
|
$
|
(46,961
|
)
|
|
$
|
(15,379
|
)
|
|
$
|
(485,661
|
)
|
|
$
|
-
|
|
|
$
|
(548,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans originated for investment, net
|
|
|
-
|
|
|
|
30,829
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,829
|
|
Purchase property & equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
(35,005
|
)
|
|
|
-
|
|
|
|
(35,005
|
)
|
Payments made for business acquisitions, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(43,310
|
)
|
|
|
-
|
|
|
|
(43,310
|
)
|
Net intercompany advances
|
|
|
423,572
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(423,572
|
)
|
|
|
-
|
|
Other, net
|
|
|
-
|
|
|
|
(40,237
|
)
|
|
|
71,088
|
|
|
|
-
|
|
|
|
30,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
423,572
|
|
|
|
(9,408
|
)
|
|
|
(7,227
|
)
|
|
|
(423,572
|
)
|
|
|
(16,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term borrowings
|
|
|
-
|
|
|
|
(75,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(75,000
|
)
|
Proceeds from short-term borrowings
|
|
|
-
|
|
|
|
114,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114,490
|
|
Customer banking deposits
|
|
|
-
|
|
|
|
76,923
|
|
|
|
-
|
|
|
|
100
|
|
|
|
77,023
|
|
Dividends paid
|
|
|
(95,068
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(95,068
|
)
|
Repurchase of common stock
|
|
|
(283,470
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(283,470
|
)
|
Proceeds from exercise of stock options
|
|
|
1,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,493
|
|
Net intercompany advances
|
|
|
-
|
|
|
|
15,851
|
|
|
|
(439,423
|
)
|
|
|
423,572
|
|
|
|
-
|
|
Other, net
|
|
|
434
|
|
|
|
760
|
|
|
|
(22,546
|
)
|
|
|
-
|
|
|
|
(21,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(376,611
|
)
|
|
|
133,024
|
|
|
|
(461,969
|
)
|
|
|
423,672
|
|
|
|
(281,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
2,221
|
|
|
|
-
|
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
108,237
|
|
|
|
(952,636
|
)
|
|
|
100
|
|
|
|
(844,299
|
)
|
Cash beginning of period
|
|
|
-
|
|
|
|
702,021
|
|
|
|
1,102,135
|
|
|
|
(111
|
)
|
|
|
1,804,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
-
|
|
|
$
|
810,258
|
|
|
$
|
149,499
|
|
|
$
|
(11
|
)
|
|
$
|
959,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
October 31, 2009
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
5,880
|
|
|
$
|
(14,655
|
)
|
|
$
|
(777,377
|
)
|
|
$
|
-
|
|
|
$
|
(786,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans originated for investment, net
|
|
|
-
|
|
|
|
38,693
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,693
|
|
Purchase property & equipment
|
|
|
-
|
|
|
|
546
|
|
|
|
(7,826
|
)
|
|
|
-
|
|
|
|
(7,280
|
)
|
Net intercompany advances
|
|
|
89,577
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(89,577
|
)
|
|
|
-
|
|
Other, net
|
|
|
-
|
|
|
|
13,847
|
|
|
|
(1,980
|
)
|
|
|
-
|
|
|
|
11,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
89,577
|
|
|
|
53,086
|
|
|
|
(9,806
|
)
|
|
|
(89,577
|
)
|
|
|
43,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer banking deposits
|
|
|
-
|
|
|
|
634,637
|
|
|
|
-
|
|
|
|
3,829
|
|
|
|
638,466
|
|
Dividends paid
|
|
|
(100,784
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,784
|
)
|
Acquisition of treasury shares
|
|
|
(3,785
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,785
|
)
|
Proceeds from stock options
|
|
|
8,218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,218
|
|
Net intercompany advances
|
|
|
-
|
|
|
|
183,042
|
|
|
|
(272,619
|
)
|
|
|
89,577
|
|
|
|
-
|
|
Other, net
|
|
|
894
|
|
|
|
(8,975
|
)
|
|
|
(22,803
|
)
|
|
|
-
|
|
|
|
(30,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(95,457
|
)
|
|
|
808,704
|
|
|
|
(295,422
|
)
|
|
|
93,406
|
|
|
|
511,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
|
-
|
|
|
|
-
|
|
|
|
9,221
|
|
|
|
-
|
|
|
|
9,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
847,135
|
|
|
|
(1,073,384
|
)
|
|
|
3,829
|
|
|
|
(222,420
|
)
|
Cash beginning of period
|
|
|
-
|
|
|
|
241,350
|
|
|
|
1,419,535
|
|
|
|
(6,222
|
)
|
|
|
1,654,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
-
|
|
|
$
|
1,088,485
|
|
|
$
|
346,151
|
|
|
$
|
(2,393
|
)
|
|
$
|
1,432,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
ITEM 2. |
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
RESULTS OF
OPERATIONS
Our subsidiaries provide tax preparation, retail banking and
various business advisory and consulting services. We are the
only company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
RECENT
EVENTS
In August 2010, the Internal Revenue Service (IRS) announced
that, as of the beginning of the upcoming tax season, it would
no longer furnish the debt indicator (DI), to tax preparers or
financial institutions. The DI is an underwriting tool that
lenders use when considering whether to loan money to taxpayers
who apply for a refund anticipation loan (RAL), which is short
term loan, secured by the taxpayers federal tax refund. As
a result of the IRS decision, approval rates and loan amounts
will likely be lower, and lenders may issue RALs that have a
greater probability of not being repaid. Our participation
interests in any RALs issued without the DI used in the credit
assessment of the client may have a higher risk of default,
which could increase our bad debt expense and reduce our
profitability. During the fiscal year ended April 30, 2010,
our revenues from RAL participations (including RALs which were
based on underwriting standards that included use of the
DI) totaled $146.2 million. RAL volumes are expected
to decline in fiscal year 2011, and alternate products may have
lower margins resulting in reduced profitability. We estimate
that the impact of the discontinuation of the DI will reduce our
profitability by approximately $0.05 per diluted share. Our
estimate is based on a number of assumptions and actual results
could differ.
On October 15, 2010, we filed a complaint in the United
States District Court for the Eastern District of Missouri for
injunctive relief against HSBC Bank USA, National Association
and certain of its affiliates (collectively, HSBC) seeking to
require HSBC to perform its contractual obligations to offer
RALs in our retail offices. At the time of the filing of our
Form 10-Q
for the period ended October 31, 2010, the ultimate outcome
of this matter, its effect on our ability to offer RALs in our
retail offices and its impact on our financial results is
unknown.
24
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.
Additionally, this segment includes the product offerings and
activities of H&R Block Bank (HRB Bank) that primarily
support the tax network, our participations in refund
anticipation loans, and our commercial tax businesses, which
provide tax preparation software to CPAs and other tax preparers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Services Operating Results
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Tax preparation fees
|
|
$
|
63,590
|
|
|
$
|
59,305
|
|
|
$
|
98,135
|
|
|
$
|
92,930
|
|
Fees from Peace of Mind guarantees
|
|
|
19,811
|
|
|
|
19,130
|
|
|
|
48,358
|
|
|
|
47,044
|
|
Fees from Emerald Card activities
|
|
|
6,693
|
|
|
|
9,428
|
|
|
|
17,268
|
|
|
|
21,119
|
|
Royalties
|
|
|
7,027
|
|
|
|
6,055
|
|
|
|
12,632
|
|
|
|
9,662
|
|
Other
|
|
|
13,800
|
|
|
|
15,387
|
|
|
|
26,173
|
|
|
|
26,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
110,921
|
|
|
|
109,305
|
|
|
|
202,566
|
|
|
|
197,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Field wages
|
|
|
52,188
|
|
|
|
54,938
|
|
|
|
91,437
|
|
|
|
94,317
|
|
Other wages
|
|
|
28,506
|
|
|
|
28,841
|
|
|
|
56,992
|
|
|
|
58,721
|
|
Benefits and other compensation
|
|
|
18,093
|
|
|
|
19,795
|
|
|
|
52,397
|
|
|
|
41,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,787
|
|
|
|
103,574
|
|
|
|
200,826
|
|
|
|
194,149
|
|
Occupancy and equipment
|
|
|
88,142
|
|
|
|
93,023
|
|
|
|
170,766
|
|
|
|
180,943
|
|
Depreciation and amortization
|
|
|
22,568
|
|
|
|
22,410
|
|
|
|
44,963
|
|
|
|
44,726
|
|
Marketing and advertising
|
|
|
12,106
|
|
|
|
15,261
|
|
|
|
20,519
|
|
|
|
22,100
|
|
Other
|
|
|
50,386
|
|
|
|
48,814
|
|
|
|
99,607
|
|
|
|
101,101
|
|
Gain on sale of tax offices, net
|
|
|
(6,713
|
)
|
|
|
(1,589
|
)
|
|
|
(5,136
|
)
|
|
|
(1,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
265,276
|
|
|
|
281,493
|
|
|
|
531,545
|
|
|
|
541,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(154,355
|
)
|
|
$
|
(172,188
|
)
|
|
$
|
(328,979
|
)
|
|
$
|
(344,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended October 31, 2010 compared to October 31,
2009
Tax Services revenues increased $1.6 million, or
1.5%, for the three months ended October 31, 2010 compared
to the prior year. Tax preparation fees increased
$4.3 million, or 7.2%, primarily due to favorable foreign
exchange rates in the current year.
Total expenses decreased $16.2 million, or 5.8%, for the
three months ended October 31, 2010. Compensation and
benefits decreased $4.8 million, or 4.6%, primarily as a
result of reductions in force during the first quarter of this
year. Occupancy and equipment expenses decreased
$4.9 million, or 5.2%, primarily due to the closure of
offices.
During the current quarter, we recognized net gains of
$6.7 million on the sale of certain company-owned offices
to franchises, compared to $1.6 million in the prior year.
The pretax loss for the three months ended October 31, 2010
and 2009 was $154.4 million and $172.2 million,
respectively.
Six months ended
October 31, 2010 compared to October 31,
2009
Tax Services revenues increased $5.3 million, or
2.7%, for the six months ended October 31, 2010 compared to
the prior year. Tax preparation fees increased
$5.2 million, or 5.6%, primarily due to favorable foreign
exchange rates in the current year.
Total expenses decreased $9.9 million, or 1.8%, for the six
months ended October 31, 2010. Compensation and benefits
increased $6.7 million, or 3.4%, primarily as a result of
severance costs and related payroll taxes recorded during the
first quarter of this year. Occupancy and equipment expenses
decreased $10.2 million, or 5.6%, primarily due to the
closure of offices.
During the current year, we recognized net gains of
$5.1 million on the sale of certain company-owned offices
to franchises, compared to $1.6 million in the prior year.
The pretax loss for the six months ended October 31, 2010
and 2009 was $329.0 million and $344.2 million,
respectively.
25
BUSINESS
SERVICES
This segment consists of RSM McGladrey, Inc. (RSM), a national
firm offering tax, consulting and accounting services and
capital market services to middle-market companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Services Operating Results
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Tax services
|
|
$
|
111,659
|
|
|
$
|
107,612
|
|
|
$
|
192,990
|
|
|
$
|
190,281
|
|
Business consulting
|
|
|
64,522
|
|
|
|
60,070
|
|
|
|
126,200
|
|
|
|
121,991
|
|
Accounting services
|
|
|
9,253
|
|
|
|
11,878
|
|
|
|
20,095
|
|
|
|
23,407
|
|
Capital markets
|
|
|
1,482
|
|
|
|
1,012
|
|
|
|
3,872
|
|
|
|
2,529
|
|
Reimbursed expenses
|
|
|
5,796
|
|
|
|
6,204
|
|
|
|
12,127
|
|
|
|
10,353
|
|
Other
|
|
|
10,714
|
|
|
|
19,826
|
|
|
|
22,852
|
|
|
|
35,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
203,426
|
|
|
|
206,602
|
|
|
|
378,136
|
|
|
|
384,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
138,803
|
|
|
|
149,309
|
|
|
|
265,916
|
|
|
|
283,689
|
|
Occupancy
|
|
|
12,641
|
|
|
|
9,671
|
|
|
|
24,571
|
|
|
|
18,923
|
|
Depreciation
|
|
|
4,883
|
|
|
|
5,540
|
|
|
|
9,535
|
|
|
|
10,830
|
|
Marketing and advertising
|
|
|
9,514
|
|
|
|
4,721
|
|
|
|
14,173
|
|
|
|
9,554
|
|
Amortization of intangible assets
|
|
|
3,057
|
|
|
|
2,942
|
|
|
|
5,893
|
|
|
|
5,907
|
|
Other
|
|
|
26,131
|
|
|
|
34,245
|
|
|
|
50,084
|
|
|
|
53,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
195,029
|
|
|
|
206,428
|
|
|
|
370,172
|
|
|
|
382,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
8,397
|
|
|
$
|
174
|
|
|
$
|
7,964
|
|
|
$
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended October 31, 2010 compared to October 31,
2009
Business Services revenues for the three months ended
October 31, 2010 decreased $3.2 million, or 1.5% from
the prior year. Tax services and consulting revenues increased
primarily as a result of the acquisition of Caturano &
Company, Inc. (Caturano), as discussed in note 2 to the
condensed consolidated financial statements. Other revenues
declined primarily as a result of a reduction in management fees
received related to the new administrative services agreement
with McGladrey & Pullen LLP (M&P), as discussed
in note 10 to the condensed consolidated financial
statements.
Total expenses decreased $11.4 million, or 5.5%, from the
prior year. Compensation and benefits decreased
$10.5 million, or 7.0%, primarily due to decreases in
managing director compensation in the current year. Other
expenses declined $8.1 million, or 23.7%, primarily due to
litigation costs recorded in the prior year.
Pretax income for the three months ended October 31, 2010
was $8.4 million compared to $0.2 million in the prior
year.
Six months ended
October 31, 2010 compared to October 31,
2009
Business Services revenues for the six months ended
October 31, 2010 decreased $6.1 million, or 1.6% from
the prior year. Tax services and consulting revenues increased
primarily as a result of the acquisition of Caturano. Other
revenues declined primarily as a result of a reduction in
management fees received related to the new administrative
services agreement with M&P.
Total expenses decreased $12.6 million, or 3.3%, from the
prior year. Compensation and benefits decreased
$17.8 million, or 6.3%, primarily due to decreases in
managing director compensation in the current year. Other
expenses declined $3.7 million, or 6.9%, primarily due to
litigation costs recorded in the prior year.
Pretax income for the six months ended October 31, 2010 was
$8.0 million compared to $1.5 million in the prior
year.
26
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Operating
Results
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Interest income on mortgage loans held for investment
|
|
$
|
6,525
|
|
|
$
|
8,072
|
|
|
$
|
12,848
|
|
|
$
|
15,968
|
|
Other
|
|
|
2,017
|
|
|
|
2,102
|
|
|
|
3,813
|
|
|
|
4,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
8,542
|
|
|
|
10,174
|
|
|
|
16,661
|
|
|
|
20,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
20,861
|
|
|
|
19,216
|
|
|
|
41,649
|
|
|
|
38,874
|
|
Provision for loan losses
|
|
|
8,300
|
|
|
|
13,400
|
|
|
|
16,300
|
|
|
|
27,000
|
|
Compensation and benefits
|
|
|
10,279
|
|
|
|
13,486
|
|
|
|
22,664
|
|
|
|
26,787
|
|
Other
|
|
|
(1,737
|
)
|
|
|
4,911
|
|
|
|
(2,531
|
)
|
|
|
8,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
37,703
|
|
|
|
51,013
|
|
|
|
78,082
|
|
|
|
101,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(29,161
|
)
|
|
$
|
(40,839
|
)
|
|
$
|
(61,421
|
)
|
|
$
|
(81,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended October 31, 2010 compared to October 31,
2009
Interest income earned on mortgage loans held for investment
decreased $1.5 million from the prior year, primarily as a
result of declining rates and non-performing loans. The
provision for loan losses declined $5.1 million from the
prior year as a result of the continued run-off of our
portfolio. See additional discussion below under Mortgage
Loans Held for Investment. Other expenses declined
$6.6 million primarily due to expense reductions.
Six months ended
October 31, 2010 compared to October 31,
2009
Interest income earned on mortgage loans held for investment
decreased $3.1 million from the prior year, primarily as a
result of declining rates and non-performing loans. The
provision for loan losses declined $10.7 million from the
prior year as a result of the continued run-off of our
portfolio. Other expenses declined $11.0 million primarily
due to expense reductions.
Income Taxes
Our effective tax rate for continuing operations was 39.0% and
38.7% for the three and six months ended October 31, 2010,
respectively, compared to 40.6% and 39.3% for the three and six
months ended and October 31, 2009, respectively. Our
effective tax rate decreased from the prior year due primarily
to audit settlements and changes to the state income tax
reserves. We expect our effective tax rate for full fiscal year
2011 to be approximately 39%.
Mortgage Loans Held
for Investment
Mortgage loans held for investment at October 31, 2010
totaled $537.2 million. The portfolio includes loans
originated by Sand Canyon Corporation (SCC) and purchased by HRB
Bank which constitutes approximately 63% of the total loan
portfolio at October 31, 2010. We have experienced higher
rates of delinquency and have greater exposure to loss with
respect to this segment of our loan portfolio. Our remaining
loan portfolio totaled $229.8 million and is characteristic
of a prime loan portfolio, and we believe subject to a lower
loss exposure.
27
Detail of our mortgage loans held for investment and the related
allowance, excluding unamortized deferred fees and costs of
$4.5 million and $5.3 million at October 31, 2010
and April 30, 2010, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
Outstanding
|
|
|
Loan Loss Allowance
|
|
|
% 30 + Days
|
|
|
|
Principal
Balance
|
|
|
Amount
|
|
|
% of
Principal
|
|
|
Past
Due
|
|
|
|
|
As of October 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from SCC
|
|
$
|
390,448
|
|
|
$
|
78,488
|
|
|
|
20.1
|
%
|
|
|
39.3
|
%
|
All other
|
|
|
229,809
|
|
|
|
9,079
|
|
|
|
4.0
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
620,257
|
|
|
$
|
87,567
|
|
|
|
14.1
|
%
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from SCC
|
|
$
|
434,644
|
|
|
$
|
82,793
|
|
|
|
19.1
|
%
|
|
|
37.8
|
%
|
All other
|
|
|
249,040
|
|
|
|
10,742
|
|
|
|
4.3
|
%
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
683,684
|
|
|
$
|
93,535
|
|
|
|
13.7
|
%
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded provisions for loan losses of $8.3 million and
$16.3 million during the three and six months ended
October 31, 2010, respectively, compared to
$13.4 million and $27.0 million during the three and
six months ended October 31, 2009, respectively. Our
allowance for loan losses as a percent of mortgage loans was
14.1%, or $87.6 million, at October 31, 2010, compared
to 13.7%, or $93.5 million, at April 30, 2010. This
allowance represents our best estimate of credit losses inherent
in the loan portfolio as of the balance sheet dates.
Discontinued
Operations
Sand Canyon Corporation (SCC, previously known as
Option One Mortgage Corporation) ceased originating mortgage
loans in December of 2007 and, in April 2008, sold its servicing
assets and discontinued its remaining operations. The sale of
servicing assets did not include the sale of any mortgage loans.
SCC retained contingent liabilities that arose from the
operations of SCC prior to its disposal, including certain
mortgage loan repurchase obligations, contingent liabilities
associated with litigation and related claims, lease
commitments, and employee termination benefits. SCC also
retained residual interests in certain mortgage loan
securitization transactions prior to cessation of its
origination business. The net loss from discontinued operations
totaled $2.2 million and $5.3 million for the three
and six months ended October 31, 2010 compared to
$2.1 million and $5.1 million for the three and six
months ended October 31, 2009.
In connection with the securitization and sale of mortgage
loans, SCC made certain representations and warranties. In the
event that there is a breach of a representation and warranty
and such breach materially and adversely affects the value of a
mortgage loan, SCC may be obligated to repurchase a loan or
otherwise indemnify certain parties for losses incurred as a
result of loan liquidation. Losses on valid claims totaled
$3.5 million and $5.4 million for the six months ended
October 31, 2010 and 2009, respectively. These amounts were
recorded as reductions of our loan repurchase liability. Claims
received since May 1, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Fiscal Year 2009
|
|
|
Fiscal Year 2010
|
|
|
Fiscal Year 2011
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Total
|
|
|
|
|
Loan Origination Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
40
|
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
84
|
|
2006
|
|
|
89
|
|
|
|
10
|
|
|
|
111
|
|
|
|
7
|
|
|
|
2
|
|
|
|
57
|
|
|
|
4
|
|
|
|
45
|
|
|
|
100
|
|
|
|
15
|
|
|
|
440
|
|
2007
|
|
|
43
|
|
|
|
10
|
|
|
|
85
|
|
|
|
15
|
|
|
|
4
|
|
|
|
11
|
|
|
|
7
|
|
|
|
-
|
|
|
|
3
|
|
|
|
5
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172
|
|
|
$
|
41
|
|
|
$
|
197
|
|
|
$
|
22
|
|
|
$
|
6
|
|
|
$
|
83
|
|
|
$
|
11
|
|
|
$
|
45
|
|
|
$
|
109
|
|
|
$
|
21
|
|
|
$
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
October 31, 2010, of $184.7 million, which represents
SCCs best estimate of the probable loss that may occur.
This overall liability amount includes $49.7 million, which
was established under an indemnity agreement dated April 2008
with a specific counterparty in exchange for a full and complete
release of such partys ability to assert representation
and warranty claims. This indemnity agreement was given as part
of obtaining the counterpartys consent to SCCs sale
of its mortgage servicing business in 2008. Though
disbursements
28
related to this agreement have not been significant, SCC
believes that the full amount under this indemnity agreement
will ultimately be paid.
While SCC uses the best information available to it in
estimating its liability, probable losses are inherently
difficult to estimate and require considerable management
judgment. There may be a wide range of reasonably possible
losses in excess of the recorded liability that cannot be
estimated, primarily due to difficulties inherent in estimating
the level of future claims that will be asserted and the
percentage of those claims that are ultimately determined to be
valid. Although net losses on settled claims since May 1,
2008 have been within initial loss estimates, to the extent that
valid claim volumes or residential home prices differ in the
future from current estimates, future losses may be greater than
the current estimates and those differences may be significant.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets and condensed consolidated
statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES
AND
LIQUIDITY
Our sources of capital include cash from operations, cash from
customer deposits, issuances of common stock and debt. We use
capital primarily to fund working capital, pay dividends,
repurchase shares of common stock and acquire businesses. Our
operations are highly seasonal and therefore generally require
the use of cash to fund operating losses during the period May
through mid-January.
Given the likely availability of a number of liquidity options
discussed herein, including borrowing capacity under our
unsecured committed lines of credit (CLOCs), we believe, that in
the absence of any unexpected developments, our existing sources
of capital at October 31, 2010 are sufficient to meet our
operating needs.
CASH FROM
OPERATING
ACTIVITIES
Cash used by operations totaled $548.0 million for the
first six months of fiscal year 2011, compared with
$786.2 million for the same period last year. The decrease
was primarily due to lower income tax payments made during the
current year and other changes in working capital.
CASH FROM
INVESTING
ACTIVITIES
Cash used in investing activities totaled $16.6 million for
the first six months of fiscal year 2011, compared to
$43.3 million provided in the same period last year.
Mortgage Loans
Held for
Investment.
We received net payments of $30.8 million and
$38.7 million on our mortgage loans held for investment for
the first six months of fiscal years 2011 and 2010,
respectively. Cash payments declined primarily due to
non-performing loans and continued run-off of our portfolio.
Purchases of
Property and
Equipment.
Total cash paid for property and equipment was
$35.0 million and $7.3 million for the first six
months of fiscal years 2011 and 2010, respectively.
Business
Acquisitions.
Total cash paid for acquisitions was $43.3 million and
$6.6 million during the six months ended
October 31, 2010 and 2009, respectively. In July 2010 our
Business Services segment acquired a Boston-based accounting
firm, and cash used in investing activities includes payments
totaling $32.6 million related to this acquisition. See
additional discussion in note 2 to the condensed
consolidated financial statements.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.,
developer of TaxACT digital tax preparation solutions, for
$287.5 million in cash. We expect this acquisition will be
funded by excess available liquidity from
cash-on-hand
or short-term borrowings. Completion of the transaction is
subject to the satisfaction of customary closing conditions,
including regulatory approval.
Sales of
Businesses.
During the first half of fiscal year 2011, we sold nearly 250
tax offices to franchisees for proceeds of $58.0 million.
During fiscal year 2010, we sold 267 tax offices to franchisees
for proceeds of $65.7 million. The majority of these sales
were financed through affiliate loans. Sales proceeds and cash
payments under the lines of credit are both included in
investing activities.
CASH FROM
FINANCING
ACTIVITIES
Cash used in financing activities totaled $281.9 million
for the first six months of fiscal year 2011, compared to
$511.2 million provided in the same period last year.
Short-Term
Borrowings.
We had commercial paper borrowings of $39.5 million at
October 31, 2010, while we had no similar borrowings in the
same period last year. These borrowings were used to fund our
off-season losses and cover our seasonal working capital needs.
Customer Banking
Deposits.
Customer banking deposits increased $77.0 million for the
six months ended October 31, 2010 compared to an increase
of $638.5 million in the prior year. We utilize cash
provided by deposit balances as a funding source for our Emerald
Advance lines of credit during the tax season. Funding from
customer deposits will be obtained later this year than in the
prior year.
29
Dividends.
We have consistently paid quarterly dividends. Dividends paid
totaled $95.1 million and $100.8 million for the six
months ended October 31, 2010 and 2009, respectively.
Repurchase and
Retirement of Common
Stock.
During the six months ended October 31, 2010, we purchased
and immediately retired 19.0 million shares of our common
stock at a cost of $279.9 million. We may continue to
repurchase and retire common stock or retire treasury stock in
the future.
Issuances of
Common
Stock.
Proceeds from the issuance of common stock totaled
$1.5 million and $8.2 million for the six months ended
October 31, 2010 and 2009, respectively. This decline is
due to a reduction in stock option exercises and the related tax
benefits.
BORROWINGS
The following chart provides the debt ratings for Block
Financial LLC (BFC) as of October 31, 2010 and
April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010
|
|
|
April 30, 2010
|
|
|
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook
|
|
|
|
|
Moodys
|
|
|
P-2
|
|
|
|
Baa2
|
|
|
|
Negative
|
|
|
|
P-2
|
|
|
|
Baa1
|
|
|
|
Stable
|
|
S&P(1)
|
|
|
A-2
|
|
|
|
BBB
|
|
|
|
Negative
|
|
|
|
A-2
|
|
|
|
BBB
|
|
|
|
Positive
|
|
DBRS
|
|
|
R-2 (high
|
)
|
|
|
BBB (high
|
)
|
|
|
Stable
|
|
|
|
R-2 (high
|
)
|
|
|
BBB (high
|
)
|
|
|
Positive
|
|
|
|
|
|
|
(1) |
|
Placed
on CreditWatch Negative, effective October 20, 2010.
|
We maintain a committed line of credit (CLOC) agreement to
support commercial paper issuances, general corporate purposes
or for working capital needs. This facility provides funding up
to $1.7 billion and matures July 31, 2013. This
facility bears interest at an annual rate of LIBOR plus 1.30% to
2.80% or PRIME plus .30% to 1.80% (depending on the type of
borrowing) and includes an annual facility fee of .20% to .70%
of the committed amounts, based on our credit ratings. Covenants
include: (1) maintenance of a minimum net worth of
$650.0 million on the last day of any fiscal quarter; and
(2) reduction of the aggregate outstanding principal amount
of short-term debt, as defined in the agreement, to
$200.0 million or less for thirty consecutive days during
the period March 1 to June 30 of each year (Clean-down
requirement). At October 31, 2010, we were in
compliance with these covenants and had net worth of
$879.8 million. We had no balance outstanding under the
CLOCs at October 31, 2010 or April 30, 2010.
There have been no other material changes in our borrowings or
debt ratings from those reported at April 30, 2010 in our
Annual Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual
obligations and commercial commitments from those reported at
April 30, 2010 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
There have been no material changes in our regulatory
environment from those reported at April 30, 2010 in our
Annual Report on
Form 10-K.
FORWARD-LOOKING
INFORMATION
This report and other documents filed with the Securities and
Exchange Commission (SEC) may contain forward-looking
statements. In addition, our senior management may make
forward-looking statements orally to analysts, investors, the
media and others. Forward-looking statements can be identified
by the fact that they do not relate strictly to historical or
current facts. They often include words such as
expects, anticipates,
intends, plans, believes,
seeks, estimates, will,
would, should, could or
may. Forward-looking statements provide
managements current expectations or predictions of future
conditions, events or results. They may include projections of
revenues, income, earnings per share, capital expenditures,
dividends, liquidity, capital structure or other financial
items, descriptions of managements plans or objectives for
future operations, products or services, or descriptions of
assumptions underlying any of the above. They are not guarantees
of future performance. By their nature, forward-looking
statements are subject to risks and uncertainties. These
statements speak only as of the date made and management does
not undertake to update them to reflect changes or events
occurring after that date except as required by federal
securities laws.
30
There have been no material changes in our market risks from
those reported at April 30, 2010 in our Annual Report on
Form 10-K.
ITEM 4. CONTROLS
AND PROCEDURES
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e)
and
15d-15(c)).
The controls evaluation was done under the supervision and with
the participation of management, including our Chief Executive
Officer and Chief Financial Officer. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this Quarterly
Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
RAL Litigation
We have been named in multiple lawsuits as defendants in
litigation regarding our refund anticipation loan program in
past years. All of those lawsuits have been settled or otherwise
resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al., April Term 1992 Civil Action No. 3246 in the
Court of Common Pleas, First Judicial District Court of
Pennsylvania, Philadelphia County, instituted on April 23,
1993. The plaintiffs allege inadequate disclosures with respect
to the RAL product and assert claims for violation of consumer
protection statutes, negligent misrepresentation, breach of
fiduciary duty, common law fraud, usury, and violation of the
Truth In Lending Act. Plaintiffs seek unspecified actual and
punitive damages, injunctive relief, attorneys fees and
costs. A Pennsylvania class was certified, but later decertified
by the trial court in December 2003. An appellate court
subsequently reversed the decertification decision. We are
appealing the reversal. We have not concluded that a loss
related to this matter is probable nor have we accrued a loss
contingency related to this matter. Plaintiffs have not provided
a dollar amount of their claim and we are not able to estimate a
possible range of loss. We believe we have meritorious defenses
to this case and intend to defend it vigorously. There can be no
assurances, however, as to the outcome of this case or its
impact on our consolidated results of operations.
Peace of Mind
Litigation
We have been named defendants in lawsuits regarding our Peace of
Mind program (collectively, the POM Cases), under
which our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a putative class action case originally filed in
the Circuit Court of Madison County, Illinois on
January 18, 2002. The plaintiffs allege that the sale of
POM guarantees constitutes statutory fraud, an unfair trade
practice and breach of a fiduciary duty. The plaintiffs seek
unspecified damages, injunctive relief, attorneys fees and
costs. On September 17, 2010, the federal court denied
plaintiffs motion for class certification. The parties
subsequently reached an agreement to settle the case, along with
the Soliz case referenced below.
31
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case, styled
Desiri L. Soliz v. H&R Block, et al. (Cause
No. 03-032-D),
was filed on January 23, 2003 in the District Court of
Kleberg County, Texas. This case involves the same
plaintiffs attorneys that are involved in the Marshall
litigation in Illinois and contains allegations similar to
those in the Marshall litigation. The plaintiff seeks
actual and treble damages, equitable relief, attorneys
fees and costs. No class has been certified. Following the
denial of class certification in the Marshall litigation,
the parties reached an agreement to settle this case, along with
the Marshall litigation. Settlement amounts related to
the POM Cases are immaterial to the financial statements and are
accrued at October 31, 2010.
Express IRA
Litigation
We have been named defendants in lawsuits regarding our former
Express IRA product. All of those lawsuits have been settled or
otherwise resolved, except for one.
The one remaining case was filed on January 2, 2008 by the
Mississippi Attorney General in the Chancery Court of Hinds
County, Mississippi First Judicial District (Case No. G
2008 6 S 2) and is styled Jim Hood, Attorney for the
State of Mississippi v. H&R Block, Inc., H&R
Block Financial Advisors, Inc., et al. The complaint
alleges fraudulent business practices, deceptive acts and
practices, common law fraud and breach of fiduciary duty with
respect to the sale of the product in Mississippi and seeks
equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. We are not
able to estimate a possible range of loss. We believe we have
meritorious defenses to the claims in this case, and we intend
to defend this case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated results of
operations.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA)
effective November 1, 2008, we remain responsible for any
liabilities relating to the Express IRA litigation, among other
things, through an indemnification agreement. A portion of our
accrual is related to these indemnity obligations.
RSM McGladrey
Litigation
RSM EquiCo, its parent and certain of its subsidiaries and
affiliates, are parties to a class action filed on July 11,
2006 and styled Do Rights Plant Growers, et al. v.
RSM EquiCo, Inc., et al., Case No. 06 CC00137, in the
California Superior Court, Orange County. The complaint contains
allegations relating to business valuation services provided by
RSM EquiCo, including allegations of fraud, negligent
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, breach of fiduciary
duty and unfair competition. Plaintiffs seek unspecified actual
and punitive damages, in addition to pre-judgment interest and
attorneys fees. On March 17, 2009, the court granted
plaintiffs motion for class certification on all claims.
The defendants filed two requests for interlocutory review of
the decision, the last of which was denied by the Supreme Court
of California on September 30, 2009. A trial date has been
set for May 2011.
The certified class consists of RSM EquiCos
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale. A
portion of our loss contingency accrual is related to this
matter for the amount of loss that we consider probable and
estimable, although it is possible that our losses could exceed
the amount we have accrued. The fees paid to RSM EquiCo in
connection with these agreements total approximately
$185 million, a number which substantially exceeds the
equity of RSM EquiCo. Plaintiffs seek to recover restitution in
an amount equal to the fees paid, in addition to punitive
damages and attorney fees. We believe we have meritorious
defenses to the case and intend to defend the case vigorously.
The amount claimed in this action is substantial and could have
a material adverse impact on our consolidated results of
operations. There can be no assurance regarding the outcome of
this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2009-L-014920) against M&P,
RSM and H&R Block styled Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al. The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009 (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. On November 3, 2010, the court
dismissed the case against all defendants in its entirety with
prejudice.
32
RSM and M&P operate in an alternative practice structure
(APS). Accordingly, certain claims and lawsuits
against M&P could have an impact on RSM. More specifically,
any judgments or settlements arising from claims and lawsuits
against M&P that exceed its insurance coverage could have a
direct adverse effect on M&Ps operations. Although
RSM is not responsible for the liabilities of M&P,
significant M&P litigation and claims could impair the
profitability of the APS and impair the ability to attract and
retain clients and quality professionals. This could, in turn,
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 any claims or litigation involving
M&P.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state and federal 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 securities laws, 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 and thus cannot be
reasonably estimated. 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)
styled 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. An appeal
of the preliminary injunction was denied. A trial date has been
set for June 2011. A portion of our loss contingency accrual is
related to this matter for the amount of loss that we consider
probable and estimable, although it is possible that our losses
could exceed the amount we have accrued. We are not able to
estimate a possible range of loss. We believe we have
meritorious defenses to the claims presented and we intend to
defend them vigorously. There can be no assurances, however, as
to its outcome or its impact on our consolidated results of
operations.
On October 15, 2010, the Federal Home Loan Bank of Chicago
filed a lawsuit in the Circuit Court of Cook County, Illinois
(Case No. 10CH45033) styled Federal Home Loan Bank of
Chicago v. Bank of America Funding Corporation, et al.
against multiple defendants, including various SCC related
entities and H&R Block, Inc. related entities, arising out
of FHLBs purchase of mortgage-backed securities. Plaintiff
asserts claims for rescission and damages under Illinois
securities law and for common law negligent misrepresentation in
connection with its purchase of two securities originated and
securitized by SCC. These two securities had a total initial
principal amount of approximately $50 million, of which
approximately $42 million remains outstanding. We have not
concluded that a loss related to this matter is probable nor
have we established a loss contingency related to this matter.
We believe the claims in this case are without merit and we
intend to defend them vigorously. There can be no assurances,
however, as to its outcome or its impact on our consolidated
results of operations.
Other Claims and
Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, respectively styled Alice
Williams v. H&R Block Enterprises LLC, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008); Arabella Lemus v. H&R
Block Enterprises LLC, et al., Case
No. CGC-09-489251
33
(United States District Court, Northern District of California,
filed June 9, 2009); Delana Ugas v. H&R Block
Enterprises LLC, et al., Case No. BC417700 (United
States District Court, Central District of California, filed
July 13, 2009); Barbara Petroski v. H&R Block
Eastern Enterprises, Inc., et al., Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010); Lance Hom v. H&R
Block Enterprises LLC, et al., Case No. 10CV0476 H
(United States District Court, Southern District of California,
filed March 4, 2010); and Stacy Oyer v. H&R
Block Eastern Enterprises, Inc., et al., Case
No. 10-CV-00387-WMS
(United States District Court, Western District of New York,
filed May 10, 2010). These cases involve a variety of legal
theories and allegations including, among other things, failure
to compensate employees for all hours worked; failure to provide
employees with meal periods; failure to provide itemized wage
statements; failure to pay wages due upon termination; failure
to compensate for mandatory off-season training;
and/or
misclassification of non-exempt employees. The parties have
agreed to consolidate certain of these cases into a single
action because they allege substantially identical claims. The
plaintiffs seek actual damages, in addition to statutory
penalties, pre-judgment interest and attorneys fees. We
have not concluded that a loss related to these matters is
probable nor have we accrued a loss contingency related to these
matters. Moreover, we are not able to estimate a possible range
of loss. We believe we have meritorious defenses to the claims
in these cases and intend to defend them vigorously. The amounts
claimed in these matters are substantial in some instances,
however, and the ultimate liability with respect to these
matters is difficult to predict. There can be no assurances as
to the outcome of these cases or their impact on our
consolidated results of operations, individually or in the
aggregate.
In addition, 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. We
believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however, the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could have a material adverse impact on our consolidated results
of operations.
We are also 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 impact on our consolidated results of operations.
ITEM 1A. RISK
FACTORS
The elimination
of the IRS debt indicator may increase the risk of default on
RALs and may reduce our profitability.
In August 2010, the Internal Revenue Service (IRS) announced
that, as of the beginning of the upcoming tax season, it would
no longer furnish the debt indicator (DI), to tax preparers or
financial institutions. The DI is an underwriting tool that
lenders use when considering whether to loan money to taxpayers
who apply for a refund anticipation loan (RAL), which is short
term loan, secured by the taxpayers federal tax refund. As
a result of the IRS decision, approval rates and loan amounts
will likely be lower, and lenders may issue RALs that have a
greater probability of not being repaid. Our participation
interests in any RALs issued without the DI used in the credit
assessment of the client may have a higher risk of default,
which could increase our bad debt expense and reduce our
profitability. During the fiscal year ended April 30, 2010,
our revenues from RAL participations (including RALs which were
based on underwriting standards that included use of the
DI) totaled $146.2 million. RAL volumes are expected
to decline in fiscal year 2011, and alternate products may have
lower margins resulting in reduced profitability. We estimate
that the impact of the discontinuation of the DI will reduce our
profitability by approximately $0.05 per diluted share. Our
estimate is based on a number of assumptions and actual results
could differ.
34
On October 15, 2010, we filed a complaint in the United
States District Court for the Eastern District of Missouri for
injunctive relief against HSBC Bank USA, National Association
and certain of its affiliates (collectively, HSBC) seeking to
require HSBC to perform its contractual obligations to offer
RALs in our retail offices. At the time of the filing of our
Form 10-Q
for the period ended October 31, 2010, the ultimate outcome
of this matter, its effect on our ability to offer RALs in our
retail offices and its impact on our financial results is
unknown.
There have been no other material changes in our risk factors
from those reported at April 30, 2010 in our Annual Report
on
Form 10-K.
A summary of our purchases of H&R Block common stock during
the second quarter of fiscal year 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per
share amounts)
|
|
|
|
|
|
|
Total Number of
Shares
|
|
Maximum $ Value
|
|
|
Total
|
|
Average
|
|
Purchased as Part
of
|
|
of Shares that
May
|
|
|
Number of Shares
|
|
Price Paid
|
|
Publicly
Announced
|
|
Be Purchased
Under
|
|
|
Purchased(1)
|
|
per
Share
|
|
Plans
or
Programs(2)
|
|
the
Plans or Programs
|
|
|
August 1 August 31
|
|
|
5
|
|
$
|
15.67
|
|
|
-
|
|
$
|
1,416,177
|
September 1 September 30
|
|
|
3,455
|
|
$
|
12.83
|
|
|
3,450
|
|
$
|
1,371,957
|
October 1 October 31
|
|
|
1
|
|
$
|
13.14
|
|
|
-
|
|
$
|
1,371,957
|
|
|
|
|
|
(1) |
|
We
purchased 11,406 shares in connection with the funding of
employee income tax withholding obligations arising upon the
exercise of stock options or the lapse of restrictions on
nonvested shares.
|
|
(2) |
|
In
June 2008, our Board of Directors rescinded previous
authorizations to repurchase shares of our common stock, and
approved an authorization to purchase up to $2.0 billion of
our common stock through June 2012.
|
|
|
|
|
|
|
10
|
.1
|
|
Offer Letter from H&R Block Management, LLC to Alan M.
Bennett dated August 12, 2010, filed as Exhibit 10.1
to the Companys current report on
Form 8-K
dated August 12, 2010, file number 1-6089, is incorporated
herein by reference.*
|
|
10
|
.2
|
|
H&R Block, Inc. 2003 Long-Term Executive Compensation Plan
(restated effective September 30, 2010).*
|
|
10
|
.3
|
|
Agreement and Plan of Merger by and among H&R Block, Inc.,
HRB Island Acquisition, Inc., 2SS Holdings, Inc.,
TA Associates Management, L.P. in its capacity as a
Stockholder Representative, and Lance Dunn in his capacity as a
Stockholder Representative dated as of October 13, 2010,
filed as Exhibit 10.1 to the Companys current report
on
Form 8-K
dated October 14, 2010, file number 1-6089, is incorporated
herein by reference.
|
|
31
|
.1
|
|
Certification by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification by Chief Executive Officer furnished pursuant to
18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification by Chief Financial Officer furnished pursuant to
18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101
|
.INS
|
|
XBRL Instance Document
|
|
101
|
.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101
|
.CAL
|
|
XBRL Extension Calculation Linkbase
|
|
101
|
.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101
|
.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
101
|
.REF
|
|
XBRL Taxonomy Extension Reference Linkbase
|
|
|
|
|
|
*
|
|
Indicates
management contracts, compensatory plans or arrangements.
|
35
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
H&R BLOCK,
INC.
Alan
M. Bennett
President
and Chief Executive Officer
December
8, 2010
Jeffrey
T. Brown
Senior
Vice President and
Chief
Financial Officer
December
8, 2010
Colby
R. Brown
Vice
President and
Corporate
Controller
December
8, 2010
36
exv10w2
Exhibit 10.2
H&R BLOCK, INC.
2003 LONG-TERM EXECUTIVE COMPENSATION PLAN
(As Restated September 30, 2010)
1. Purposes. The purposes of this 2003 Long-Term Executive Compensation Plan are to provide
incentives and rewards to those employees and persons largely responsible for the success and
growth of H&R Block, Inc. and its subsidiary corporations, and to assist all such corporations in
attracting and retaining executives and other key employees and persons with experience and
ability.
2. Definitions.
(a) Award means one or more of the following: shares of Common Stock, Restricted
Shares, Stock Options, Incentive Stock Options, Stock Appreciation Rights, Performance
Shares, Performance Units and any other rights which may be granted to a Recipient under the
Plan.
(b) Committee means the Compensation Committee described in Section 3.
(c) Common Stock means the Common Stock, without par value, of the Company.
(d) Company means H&R Block, Inc., a Missouri corporation, and, unless the context
otherwise requires, includes its subsidiary corporations (as defined in Section 424(f) of
the Internal Revenue Code) and their respective divisions, departments and subsidiaries and
the respective divisions, departments and subsidiaries of such subsidiaries.
(e) Incentive Stock Option means a Stock Option which meets all of the requirements of
an incentive stock option as defined in Section 422(b) of the Internal Revenue Code.
(f) Internal Revenue Code means the Internal Revenue Code of 1986, as now in effect or
hereafter amended.
(g) Performance Period means that period of time specified by the Committee during
which a Recipient must satisfy any designated performance goals in order to receive an
Award.
(h) Performance Share means the right to receive, upon satisfying designated
performance goals within a Performance Period, shares of Common Stock, cash, or a
combination of cash and shares of Common Stock, based on the market value of shares of
Common Stock covered by such Performance Shares at the close of the Performance Period.
(i) Performance Unit means the right to receive, upon satisfying designated performance
goals within a Performance Period, shares of Common Stock, cash, or a combination of cash
and shares of Common Stock.
(j) Plan means this 2003 Long-Term Executive Compensation Plan, as the same may be
amended from time to time
(k) Recipient means an employee of the Company or other person who has been granted an
Award under the Plan.
(l) Restricted Share means a share of Common Stock issued to a Recipient hereunder
subject to such terms and conditions, including, without limitation, forfeiture or resale to
the Company, and to such restrictions against sale, transfer or other disposition, as the
Committee may determine at the time of issuance.
(m) Stock Appreciation Right means the right to receive, upon exercise of a stock
appreciation right granted under this Plan, shares of Common Stock, cash, or a combination
of cash and shares of Common Stock, based on the increase in the market value of the shares
of Common Stock covered by such stock appreciation right from the initial day of the
Performance Period for such stock appreciation right to the date of exercise.
(n) Stock Option means the right to purchase, upon exercise of a stock option granted
under this Plan, shares of the Companys Common Stock.
3. Administration of the Plan. The Plan shall be administered by the Committee which shall
consist of directors of the Company, to be appointed by and to serve at the pleasure of the Board
of Directors of the Company. A majority of the Committee members 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 a majority of the Committee, shall be valid acts of the Committee, however
designated, or the Board of Directors of the Company if the Board has not appointed a Committee.
The Committee shall have full power and authority to construe, interpret and administer the
Plan and, subject to the powers herein specifically reserved to the Board of Directors 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 Awards
which may be granted under the Plan. The Committee shall impose such additional conditions upon the
grant and exercise of Awards under this Plan 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 Committee from time to time may adopt rules and regulations for 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 Awards to be made to Recipients and the conditions for
payment of such Awards.
4. Absolute Discretion. The Committee may, in its sole and absolute discretion (subject to the
Committees power to delegate certain authority in accordance with the second
2
paragraph of this Section 4), at any time and from time to time during the continuance of the
Plan, (i) determine which Recipients shall be granted Awards under the Plan, (ii) grant to any
Recipient so selected such an Award, (iii) determine the type, size and terms of Awards to be
granted (subject to Sections 6, 10 and 11 hereof), (iv) establish objectives and conditions for
receipt of Awards, (v) place conditions or restrictions on the payment or exercise of Awards, and
(vi) do all other things necessary and proper to carry out the intentions of this Plan; provided,
however, that, in each and every case, those Awards which are Incentive Stock Options shall contain
and be subject to those requirements specified in Section 422 of the Internal Revenue Code and
shall be granted only to those persons eligible thereunder to receive the same.
The Committee may at any time and from time to time delegate to the Chief Executive Officer of
the Company authority to take any or all of the actions that may be taken by the Committee as
specified in this Section 4 or in other sections of the Plan in connection with the determination
of Recipients, types, sizes, terms and conditions of Awards under the Plan and the grant of any
such Awards, provided that any authority so delegated (a) shall apply only to Awards to employees
of the Company that are not officers of Company under Regulation Section 240.16a-1(f) promulgated
pursuant to Section 16 of the Securities Exchange Act of 1934, and (b) shall be exercised only in
accordance with the Plan and such rules, regulations, guidelines, and limitations as the Committee
shall prescribe.
5. Eligibility. Awards may be granted to any employee of the Company or to the non- executive
Chairman of the Board of the Company. No member of the Committee (other than any ex officio member
or the non-executive Chairman of the Board of the Company) shall be eligible for grants of Awards
under the Plan. A Recipient may be granted multiple forms of Awards under the Plan. Incentive Stock
Options may be granted under the Plan to a Recipient during any calendar year only if the aggregate
fair market value (determined as of the date the Incentive Stock Option is granted) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time by such Recipient
during any calendar year under the Plan and any other incentive stock option plans (as defined in
the Internal Revenue Code) maintained by the Company does not exceed the sum of $100,000.
6. Stock Subject to the Plan. The total number of shares of Common Stock issuable under this
Plan may not at any time exceed 24,000,000 shares, subject to adjustment as provided herein. All of
such shares may be issued or issuable in connection with the exercise of Incentive Stock Options.
Shares of Common Stock not actually issued pursuant to an Award shall be available for future
Awards. Shares of common Stock to be delivered or purchased under the Plan may be either authorized
but unissued Common Stock or treasury shares. The total number of shares of Common Stock that may
be subject to one or more Awards granted to any one Recipient during a calendar year may not exceed
1,000,000, subject to adjustment as provided in Section 16 of the Plan.
7. Awards.
(a) Awards under the Plan may include, but need not be limited to, shares of Common
Stock, Restricted Shares, Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Performance Shares and Performance Units. The amount of each Award may be based upon the
market value of a share of Common Stock. The
3
Committee may make any other type of Award which it shall determine is consistent with
the objectives and limitations of the Plan.
(b) The Committee may establish performance goals to be achieved within such
Performance Periods as may be selected by it using such measures of the performance of the
Company as it may select as a condition to the receipt of any Award.
8. Vesting Requirements. The Committee may determine that all or a portion of an Award or a
payment to a Recipient pursuant to an Award, in any form whatsoever, shall be vested at such times
and upon such terms as may be selected by it.
9. Deferred Payments and Dividend and Interest Equivalents.
(a) The Committee may determine that the receipt of all or a portion of an Award or a
payment to a Recipient pursuant to an Award, in any form whatsoever, shall be deferred.
Deferrals shall be for such periods and upon such terms as the Committee may determine.
(b) Unless the Committee provides otherwise in an Award agreement, dividends and
dividend equivalents will not be paid with respect to any Award, except for dividends with
respect to which the dividend record date is on or after the date of issuance of
unrestricted vested shares of Common Stock with respect to such Award. The Committee may
provide, in its sole and absolute discretion, that a Recipient to whom an Award is payable
in whole or in part at a future time in shares of Common Stock shall be entitled to receive
an amount per share equal in value to the cash dividends paid per share on issued and
outstanding shares as of the dividend record dates occurring during the period from the date
of the Award to the date of delivery of such share to the Recipient. The Committee may also
authorize, in its sole and absolute discretion, payment of an amount which a Recipient would
have received in interest on (i) any Award payable at a future time in cash during the
period from the date of the Award to the date of payment, and (ii) any cash dividends paid
on issued and outstanding shares as of the dividend record dates occurring during the period
from the date of an Award to the date of delivery of shares pursuant to the Award. Any
amounts provided under this subsection shall be payable in such manner, at such time or
times, and subject to such terms and conditions as the Committee may determine in its sole
and absolute discretion.
10. Stock Option Price. The purchase price per share of Common Stock under each Stock Option
shall be determined by the Committee, but shall not be less than market value (as determined by the
Committee) of one share of Common Stock on the date the Stock Option or Incentive Stock Option is
granted. Payment for exercise of any Stock Option granted hereunder shall be made (a) in cash, or
(b) by delivery of Common Stock having a market value equal to the aggregate option price, or (c)
by a combination of payment of cash and delivery of Common Stock in amounts such that the amount of
cash plus the market value of the Common Stock equals the aggregate option price.
4
11. Stock Appreciation Right Value. The base value per share of Common Stock covered by an
Award in the form of a Stock Appreciation Right shall be the market value of one share of Common
Stock on the date the Award is granted.
12. Continuation of Employment. The Committee shall require that a Recipient be an employee or
director of the Company at the time an Award is paid or exercised. The Committee may provide for
the termination of an outstanding Award if a Recipient ceases to be an employee or director of the
Company and may establish such other provisions with respect to the termination or disposition of
an Award on the death or retirement of a Recipient (or not being re-elected to the Board of
Directors) as it, in its sole discretion, deems advisable. The Committee shall have the sole power
to determine the date of any circumstances which shall constitute a cessation of employment or term
as a director and to determine whether such cessation is the result of retirement, death or any
other reason.
13. Registration of Stock. Each Award shall be subject to the requirement that if at any time
the Committee shall determine that qualification or registration under any state or federal law of
the shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, or other
securities thereby covered or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of or in connection with the granting of such Award or the
purchase of shares thereunder, the Award may not be paid or exercised in whole or in part unless
and until such qualification, registration, consent or approval shall have been effected or
obtained free of any conditions the Committee, in its discretion, deems unacceptable.
14. Employment Status. No Award shall be construed as imposing upon the company the obligation
to continue the employment or term of a Recipient. No employee or other person shall have any claim
or right to be granted an Award under the Plan.
15. Assignability. No Award granted pursuant to the Plan shall be transferable or assignable
by the Recipient other than by will or the laws of descent and distribution and during the lifetime
of the Recipient shall be exercisable or payable only by or to him or her; provided, however, that
a Recipient who was granted an Award in consideration for serving as the Companys non-executive
Chairman of the Board may transfer or assign an Award to an entity that is or was a shareholder of
the Company at any time during which the Recipient served as the Companys non-executive Chairman
of the Board (a Shareholder Entity) if (i) the Recipient is affiliated with the manager of the
investments made by such Shareholder Entity or otherwise serves on the Companys Board of Directors
at the Shareholder Entitys direction or request, and (ii) pursuant to the Shareholder Entitys
governance documents or any regulatory, contractual or other requirement, any consideration the
Recipient may receive as compensation for serving as a director of the Company must be transferred,
assigned, surrendered or otherwise paid to the Shareholder Entity.
16. Dilution or Other Adjustments. In the event of any changes in the capital structure of the
Company, including but not limited to a change resulting from a stock dividend or split-up, or
combination or reclassification of shares, the Board of Directors shall make such equitable
adjustments with respect to Awards or any provisions of this Plan as it deems necessary and
appropriate, including, if necessary, any adjustment in the maximum number of
5
shares of Common Stock subject to the Plan, the maximum number of shares that may be subject
to one or more Awards granted to any one Recipient during a calendar year, or the number of shares
of Common Stock subject to an outstanding Award.
17. 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 Awards, which shall be binding upon the Recipients of
outstanding Awards, including, but not limited to, the substitution of new Awards for any Awards
then outstanding, the assumption of any such Awards and the termination of or payment for such
Awards.
18. Withholding Taxes. The Company shall have the right to deduct from all Awards hereunder
paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect
to such Awards and, with respect to Awards paid in other than cash, to require the payment (through
withholding from the Recipients salary or otherwise) of any such taxes. Subject to such conditions
as the Committee may establish, Awards payable in shares of Common Stock, or in the form of an
Incentive Stock Option or Stock Option, may provide that the Recipients thereof may elect, in
accordance with any applicable regulations, to satisfy all or any part of the tax required to be
withheld by the Company in connection with such Award, or the exercise of such Incentive Stock
Option or Stock Option, by electing to have the Company withhold a number of shares of Common Stock
awarded, or purchased pursuant to such exercise, having a fair market value on the date the tax
withholding is required to be made equal to or less than the amount required to be withheld.
19. Costs and Expenses. The cost and expenses of administering the Plan shall be borne by the
Company and not charged to any Award or to any Recipient.
20. Funding of Plan. The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of assets to assure the
payment of any Award under the Plan.
21. Award Contracts. The Committee shall have the power to specify the form of Award contracts
to be granted from time to time pursuant to and in accordance with the provisions of the Plan and
such contracts 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 contract in the form thus specified. No Recipient shall
have any rights as a holder of Common Stock with respect to Awards hereunder unless and until
certificates for shares of Common Stock or Restricted Shares are issued to the Recipient.
22. Guidelines. The Board of Directors of the Company shall have the power to provide
guidelines for administration of the Plan by the Committee and to make any changes in such
guidelines as from time to time the Board deems necessary.
23. Amendment and Discontinuance. The Board of Directors of the Company shall have the right
at any time during the continuance of the Plan to amend, modify, supplement,
6
suspend or terminate the Plan, provided that in the absence of the approval of the holders of
a majority of the shares of Common Stock of the Company present in person or by proxy at a duly
constituted meeting of shareholders of the Company, no such amendment, modification or supplement
shall (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, (ii)
change the termination date of the Plan provided in Section 24, (iii) delete or amend the market
value restrictions contained in Sections 10 and 11 hereof, (iv) materially modify the requirements
as to eligibility for participation in the Plan, or (v) materially increase the benefits accruing
to participants under the Plan, and provided further, that no amendment, modification or
termination of the Plan shall in any manner affect any Award of any kind theretofore granted under
the Plan without the consent of the Recipient of the Award, unless such amendment, modification 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.
24. Termination. The Committee may grant Awards at any time prior to July 1, 2013, on which
date this Plan will terminate except as to Awards then outstanding hereunder, which Awards shall
remain in effect until they have expired according to their terms or until July 1, 2023, whichever
first occurs. No Incentive Stock Option shall be exercisable later than 10 years following the date
it is granted.
25. Approval. This restated Plan shall take effect September 30, 2010 (the Restatement
Effective Date), contingent upon approval by the shareholders of the Company, and shall apply to
Awards made on and after the Restatement Effective Date. The Plan as in effect the day before the
Restatement Effective Date shall apply to Awards made prior to the Restatement Effective Date,
unless the Committee determines in its discretion to apply any provisions of this Plan as in effect
upon the Restatement Effective Date to Awards made prior to the Restatement Effective Date.
7
exv31w1
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan M. Bennett, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 principles;
(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
fiscal 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: December 8, 2010 |
/s/ Alan M. Bennett
|
|
|
Alan M. Bennett |
|
|
Chief Executive Officer
H&R Block, Inc. |
|
|
exv31w2
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey T. Brown, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 principles;
(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
fiscal 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: December 8, 2010 |
/s/ Jeffrey T. Brown
|
|
|
Jeffrey T. Brown |
|
|
Senior Vice President and Chief Financial Officer
H&R Block, Inc. |
|
|
exv32w1
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 quarterly report of H&R Block, Inc. (the Company) on Form 10-Q for
the fiscal quarter ending October 31, 2010 as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Alan M. Bennett, 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. |
|
|
|
|
|
|
|
|
|
/s/ Alan M. Bennett
|
|
|
Alan M. Bennett |
|
|
Chief Executive Officer
H&R Block, Inc. December 8, 2010 |
|
|
exv32w2
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 quarterly report of H&R Block, Inc. (the Company) on Form 10-Q for
the fiscal quarter ending October 31, 2010 as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Jeffrey T. Brown, 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:
|
(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. |
|
|
|
|
|
|
|
|
|
/s/ Jeffrey T. Brown
|
|
|
Jeffrey T. Brown |
|
|
Senior Vice President and
Chief Financial Officer
H&R Block, Inc. December 8, 2010 |
|
|