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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
    For the fiscal year ended April 30, 2011
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
    For the transition period from          to          
 
Commission file number 1-6089
 
(H&R BLOCK LOGO)
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
 
     
MISSOURI   44-0607856
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
 
(816) 854-3000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class   Name of each exchange on which registered
Common Stock, without par value
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
 
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes þ No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
 
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 þ No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
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 þ No o
 
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 þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
                        (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 o No þ
 
The aggregate market value of the registrant’s Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on October 31, 2010, was $3,564,690,812.
 
Number of shares of the registrant’s Common Stock, without par value, outstanding on May 31, 2011: 305,383,646.
 
Documents incorporated by reference
 
The definitive proxy statement for the registrant’s Annual Meeting of Shareholders, to be held September 14, 2011, is incorporated by reference in Part III to the extent described therein.
 


 

(H&R BLOCK LOGO)
 
2011 FORM 10-K AND ANNUAL REPORT
 
TABLE OF CONTENTS
 
 
             
    Introduction and Forward-Looking Statements     1  
 
PART I
  Business     1  
  Risk Factors     7  
  Unresolved Staff Comments     12  
  Properties     12  
  Legal Proceedings     12  
 
PART II
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     16  
  Selected Financial Data     17  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     18  
  Quantitative and Qualitative Disclosures About Market Risk     32  
  Financial Statements and Supplementary Data     34  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     79  
  Controls and Procedures     79  
  Other Information     79  
 
PART III
  Directors, Executive Officers and Corporate Governance     81  
  Executive Compensation     82  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     82  
  Certain Relationships and Related Transactions, and Director Independence     82  
  Principal Accounting Fees and Services     82  
 
PART IV
  Exhibits and Financial Statement Schedules     82  
    Signatures     83  
    Exhibit Index     84  
 EX-3.1
 EX-3.2
 EX-10.6
 EX-10.33
 EX-10.34
 Ex-12
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
 


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INTRODUCTION AND FORWARD-LOOKING STATEMENTS
Specified portions of our proxy statement are listed as “incorporated by reference” in response to certain items. Our proxy statement will be made available to shareholders in August 2011, and will also be available on our website at www.hrblock.com.
This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “would,” “should,” “could” or “may.” Forward-looking statements provide management’s current expectations or predictions of future conditions, events or results. They may include projections of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made and management does not undertake to update them to reflect changes or events occurring after that date except as required by federal securities laws.
 
 
PART I
 
 
ITEM 1. BUSINESS
 
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. has subsidiaries that provide tax, banking and business and consulting services. Our Tax Services segment provides income tax return preparation, electronic filing and other services and products related to income tax return preparation to the general public primarily in the United States, and also in Canada and Australia. This segment also offers the H&R Block Prepaid Emerald MasterCard® and Emerald Advance lines of credit through H&R Block Bank (HRB Bank), along with other retail banking services. Our Business Services segment consists of RSM McGladrey, Inc. (RSM), a national tax and consulting firm primarily serving mid-sized businesses. Corporate operations 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.
H&R Block, Inc. was organized as a corporation in 1955 under the laws of the State of Missouri. “H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context. A complete list of our subsidiaries can be found in Exhibit 21.
  NEW DEVELOPMENTS – Historically, refund anticipation loans (RALs) were offered in our US retail tax offices through a contractual relationship with HSBC Holdings plc (HSBC). We purchased a 49.9% participation interest in all RALs obtained through our retail offices. In December 2010, HSBC terminated its contract with us based on restrictions placed on them by their regulator and RALs were not offered in our tax offices this tax season. In connection with the contract termination, we obtained the remaining rights to collect on the outstanding balances of RALs originated in years 2006 and later. The impact of this is discussed in the Tax Services segment results in Item 7.
 
 
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See discussion below and in Item 8, note 21 to our consolidated financial statements.
 
 
DESCRIPTION OF BUSINESS
 
TAX SERVICES
GENERAL – Our Tax Services segment is primarily engaged in providing tax return preparation and related services and products in the U.S. and its territories, Canada, and Australia. Major revenue sources include fees earned for tax preparation services performed at company-owned retail tax offices, royalties from franchise retail tax offices, fees for tax-related services, sales of tax preparation software, online tax preparation fees, refund anticipation checks (RACs), fees from activities related to H&R Block Prepaid Emerald MasterCard®, and interest and fees from Emerald Advance lines of credit (EAs). HRB Bank also offers traditional banking services including checking and savings accounts, individual retirement accounts and certificates of deposit. Segment revenues constituted 77.2% of our consolidated revenues from continuing operations for fiscal year 2011, 76.8% for 2010 and 76.7% for 2009.

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Retail income tax return preparation and related services are provided by tax professionals via a system of retail offices operated directly by us or by franchisees. We also offer our services through seasonal offices located inside major retailers.
TAX RETURNS PREPARED – We, together with our franchisees, prepared 24.5 million tax returns worldwide during fiscal year 2011, compared to 23.2 million in 2010 and 23.9 million in 2009. We prepared 21.4 million tax returns in the U.S. during fiscal year 2011, up from 20.1 million in 2010 and 21.0 million in 2009. Our U.S. tax returns prepared, including those prepared by our franchisees and those prepared and filed at no charge, for the 2011 tax season constituted 16.4% of an Internal Revenue Service (IRS) estimate of total individual income tax returns filed during the fiscal year 2011 tax season. This compares to 15.6% in the 2010 tax season and 15.8% in the 2009 tax season. See Item 7 for further discussion of changes in the number of tax returns prepared.
FRANCHISES – We offer franchises as a way to expand our presence in certain markets. Our franchise arrangements provide us with certain rights designed to protect our brand. Most of our franchisees receive use of our software, access to product offerings and expertise, signs, specialized forms, advertising, initial training and supervisory services, and pay us a percentage, typically approximately 30%, of gross tax return preparation and related service revenues as a franchise royalty in the U.S.
During fiscal years 2011, 2010 and 2009 we sold certain offices to existing franchisees for sales proceeds totaling $65.6 million, $65.7 million and $16.9 million, respectively. The net gain on these transactions totaled $45.1 million, $49.0 million and $14.9 million in fiscal years 2011, 2010 and 2009, respectively. The extent to which we sell company-owned offices will depend upon ongoing analysis regarding the optimal mix of offices for our network, including geographic location, as well as our ability to identify qualified franchisees.
From time to time, we have also acquired the territories of existing franchisees and other tax return preparation businesses, and may continue to do so if future conditions warrant and satisfactory terms can be negotiated. During fiscal year 2009, we acquired the assets and franchise rights of our last major independent franchise operator for an aggregate purchase price of $279.2 million.
OFFICES – A summary of our company-owned and franchise offices is as follows:
 
                         
 
April 30,   2011     2010     2009  
 
 
U.S. OFFICES:
                       
Company-owned offices
    5,921       6,431       7,029  
Company-owned shared locations(1)
    572       760       1,542  
   
                         
Total company-owned offices
    6,493       7,191       8,571  
   
Franchise offices
    4,178       3,909       3,565  
Franchise shared locations(1)
    397       406       787  
   
Total franchise offices
    4,575       4,315       4,352  
   
      11,068       11,506       12,923  
   
INTERNATIONAL OFFICES:
                       
Canada
    1,324       1,269       1,193  
Australia
    384       374       378  
   
      1,708       1,643       1,571  
   
 
(1)  Shared locations include offices located within Sears or other third-party businesses. In 2009, these locations also included offices within Wal-Mart stores.
 
We sold 280, 267 and 76 company-owned offices to franchisees in fiscal years 2011, 2010 and 2009, respectively. We closed more than 1,700 offices in fiscal year 2010, including over 1,000 offices in Wal-Mart stores.
The acquisition of our last major independent franchise operator in fiscal year 2009 included a network of over 600 tax offices, nearly two-thirds of which converted to company-owned offices upon the closing of the transaction, as reflected in the table above.
Offices in shared locations at April 30, 2011 and 2010 consist primarily of offices in Sears stores operated as “H&R Block at Sears.” The Sears license agreement expires in July 2012. Offices in shared locations at April 30, 2009 included offices in Wal-Mart stores. The Wal-Mart agreement expired in May 2009.
SERVICE AND PRODUCT OFFERINGS – In addition to our retail offices, we offer a number of digital tax preparation alternatives. By offering professional and do-it-yourself tax preparation options through multiple channels, we seek to serve our clients in the manner they choose to be served.
We also offer clients a number of options for receiving their income tax refund, including a check directly from the IRS, an electronic deposit directly to their bank account, a prepaid debit card or a RAC.
Software Products. We develop and market H&R Block At Hometm income tax preparation software. H&R Block At Hometm offers a simple step-by-step tax preparation interview, data imports from money management

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software, calculations, completion of the appropriate tax forms, error checking and electronic filing. Our software products may be purchased online, through third-party retail stores or direct mail.
Online Tax Preparation. We offer a comprehensive range of online tax services, from tax advice to complete professional and do-it-yourself tax return preparation and electronic filing, through our website at www.hrblock.com. This website allows clients to prepare their federal and state income tax returns using the H&R Block At Hometm Online Tax Program, access tax tips, advice and tax-related news and use calculators for tax planning.
We participate in the Free File Alliance (FFA). This alliance was created by the tax return preparation industry and the IRS, and allows qualified filers with adjusted gross incomes less than $58,000 to prepare and file their federal return online at no charge. We feel this program provides a valuable public service and increases our visibility with new clients, while also providing an opportunity to offer our state return preparation and other services to these clients.
RACs. Refund Anticipation Checks are offered to U.S. clients who would like to either: (1) receive their refund faster and do not have a bank account for the IRS to direct deposit their refund or (2) have their tax preparation fees paid directly out of their refund. A RAC is not a loan and is provided by HRB Bank.
Emerald Advance Lines of Credit. EAs are offered to clients in tax offices from late November through early January, currently in an amount not to exceed $1,000. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be increased and utilized year-round. These lines of credit are offered by HRB Bank.
H&R Block Prepaid Emerald Mastercard®. The H&R Block Prepaid Emerald MasterCard® allows a client to receive a tax refund from the IRS directly on a prepaid debit card, or to direct RAC proceeds to the card to avoid high-cost check-cashing fees. The card can be used for everyday purchases, bill payments and ATM withdrawals anywhere MasterCard® is accepted. Additional funds can be added to the card account year-round through direct deposit or at participating retail locations. The H&R Block Prepaid Emerald MasterCard® is issued by HRB Bank.
Peace of Mind Guarantee. The Peace of Mind (POM) guarantee is offered to U.S. clients, in addition to our standard guarantee, whereby we (1) represent our clients if audited by the IRS, and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to one of our tax professionals’ work. The POM program has a per client cumulative limit of $5,500 in additional taxes assessed with respect to the federal, state and local tax returns we prepared for the taxable year covered by the program.
Tax Return Preparation Courses. We offer income tax return preparation courses to the public, which teach students how to prepare income tax returns and provide us with a source of trained tax professionals.
CashBack Program. We offer a refund discount (CashBack) program to our customers in Canada. In accordance with current Canadian regulations, if a customer’s tax return indicates the customer is entitled to a tax refund, we issue a check to the client in the amount of the refund, less a discount. The client assigns to us the full amount of the tax refund to be issued by the Canada Revenue Agency (CRA) and the refund check is then sent by the CRA directly to us. In accordance with the law, the discount is deemed to include both the tax return preparation fee and the fee for tax refund discounting. This program is financed by short-term borrowings. The number of returns discounted under the CashBack program in fiscal year 2011 was 821,000, compared to 797,000 in 2010 and 782,000 in 2009.
LOAN PARTICIPATIONS – Since July 1996, we have been a party to agreements with HSBC and its predecessors to participate in RALs provided by a lending bank to H&R Block tax clients. These agreements were effective through June 2011, but were terminated by HSBC in December 2010. The impact of this is discussed in Item 7, under Tax Services operating results. During fiscal year 2006, we signed new agreements with HSBC in which we obtained the right to purchase a 49.9% participation interest in all RALs obtained through our retail offices. We received a signing bonus from HSBC during fiscal year 2006 in connection with these agreements, which was recorded as deferred revenue and was earned over the contract term. Our purchases of the participation interests were financed through short-term borrowings. Revenue from our participation was calculated as the rate of participation multiplied by the fee paid by the borrower to the lending bank. Our RAL participation revenue was $146.2 million and $139.8 million in fiscal years 2010 and 2009, respectively.
SEASONALITY OF BUSINESS – Because most of our clients file their tax returns during the period from January through April of each year, substantially all of our revenues from income tax return preparation and related services and products are earned during this period. As a result, this segment generally operates at a loss through the first eight months of the fiscal year. Peak revenues occur during the applicable tax season, as follows:
 
         
    United States and Canada
Australia
  January – April
July – October

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HRB Bank’s operating results are subject to seasonal fluctuations primarily related to the offering of the H&R Block Prepaid Emerald MasterCard® and Emerald Advance lines of credit, and therefore peak in January and February and taper off through the remainder of the tax season.
COMPETITIVE CONDITIONS – We provide both retail and do-it-yourself tax preparation products and services and face substantial competition throughout our businesses. The retail tax services business is highly competitive. There are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services, and we face significant competition from independent tax preparers and CPAs. Certain firms are involved in providing electronic filing services, RALs and RACs to the public. Commercial tax return preparers and electronic filers are highly competitive with regard to price and service and many firms offer services that may include federal and/or state returns at no charge. Additionally, certain tax return preparers were able to offer RALs this tax season while we were not. In terms of the number of offices and personal tax returns prepared and electronically filed in offices, online and via our software, we are one of the largest providers of tax return preparation and electronic filing services in the U.S. We also believe we operate the largest tax return preparation businesses in Canada and Australia.
Do-it-yourself tax preparation options include use of traditional paper forms, digital electronic forms and various forms of digital electronic assistance, including online and desktop software both of which we offer. Our digital tax solutions businesses compete with a number of companies. Based on tax return volumes, Intuit, Inc. is the largest supplier of tax preparation software and online tax preparation services. Many other companies offer digital and online services. Price and marketing competition for digital tax preparation services is intense among value and premium products and many firms offer services that may include federal and/or state returns at no charge.
HRB Bank provides banking services primarily to our tax clients, both retail and digital, and for many of these clients, HRB Bank is the only provider of banking services. HRB Bank does not seek to compete broadly with regional or national retail banks.
GOVERNMENT REGULATION – Federal legislation requires income tax return preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them and retain all tax returns prepared by them for three years. Federal laws also subject income tax return preparers to accuracy-related penalties in connection with the preparation of income tax returns. Preparers may be prohibited from further acting as income tax return preparers if they continuously and repeatedly engage in specified misconduct.
The federal government regulates the electronic filing of income tax returns in part by requiring electronic filers to comply with all publications and notices of the IRS applicable to electronic filing. We are required to provide certain electronic filing information to the taxpayer and comply with advertising standards for electronic filers. We are also subject to possible monitoring by the IRS, penalties for improper disclosure or use of income tax return preparation, other preparer penalties and suspension from the electronic filing program.
The Gramm-Leach-Bliley Act and related Federal Trade Commission (FTC) regulations require income tax preparers to adopt and disclose consumer privacy policies, and provide consumers a reasonable opportunity to “opt-out” of having personal information disclosed to unaffiliated third-parties for marketing purposes. Some states have adopted or proposed strict “opt-in” requirements in connection with use or disclosure of consumer information. In addition, the IRS generally prohibits the use or disclosure by tax return preparers of taxpayer information without the prior written consent of the taxpayer.
Certain states have regulations and requirements relating to offering income tax courses. These requirements include licensing, bonding and certain restrictions on advertising.
The IRS published final regulations in September 2010 that: (1) require all tax return preparers to use a Preparer Tax Identification Number (PTIN) as their identifying number on federal tax returns filed after December 31, 2010; (2) require all tax return preparers to be authorized to practice before the IRS as a prerequisite to obtaining or renewing a PTIN; (3) caused all previously issued PTINs to expire on December 31, 2010 unless properly renewed; (4) allow the IRS to conduct tax compliance checks on tax return preparers; (5) define the individuals who are considered “tax return preparers” for the PTIN requirement, and (6) set the amount of the PTIN user registration fee at $64.25 per year. The IRS is also conducting background checks on PTIN applicants. The IRS plans to review the amount of the PTIN user registration fee in the summer of 2011 and may adjust the fee amount. The IRS also published final regulations implementing the individual e-file mandate in March 2011.
Other changes are expected to be finalized in calendar year 2011. These include changes to: (1) establish a new class of practitioners who are authorized to practice before the IRS under Circular 230, called “registered tax return preparers” who would be required to (a) pass a competency examination as a prerequisite to becoming a registered tax return preparer, (b) complete annual continuing professional education requirements, and (c) comply with ethical standards; (2) revise the amount of the enrolled agent application and renewal fee; (3) set the amount of a sponsor fee for qualified continuing professional education sponsors; (4) set the amount of

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the competency examination user fee, and (5) set the amount of the registered tax return preparer application and renewal fee. The IRS also issued interim guidance for tax preparers, which includes allowing certain supervised tax preparers to obtain a PTIN and work on returns without passing a competency exam.
As noted above under “Offices,” many of the income tax return preparation offices operating in the U.S. under the name “H&R Block” are operated by franchisees. Our franchising activities are subject to the rules and regulations of the FTC and various state laws regulating the offer and sale of franchises. The FTC and various state laws require us to furnish to prospective franchisees a franchise offering circular containing prescribed information. A number of states in which we are currently franchising regulate the sale of franchises and require registration of the franchise offering circular with state authorities and the delivery of a franchise offering circular to prospective franchisees. We are currently operating under exemptions from registration in several of these states based on our net worth and experience. Substantive state laws regulating the franchisor/franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. From time to time, we may make appropriate amendments to our franchise offering circular to comply with our disclosure obligations under federal and state law.
We also seek to determine the applicability of all government and self-regulatory organization statutes, ordinances, rules and regulations in the other countries in which we operate (collectively, Foreign Laws) and to comply with these Foreign Laws. In addition, the Canadian government regulates the refund-discounting program in Canada. These laws have not materially affected our international operations.
HRB Bank is subject to regulation, supervision and examination by the Office of Thrift Supervision (OTS), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). All savings associations are subject to the capital adequacy guidelines and the regulatory framework for prompt corrective action. HRB Bank must meet specific capital guidelines involving quantitative measures of HRB Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. HRB Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. As a savings and loan holding company, H&R Block, Inc. is also subject to regulation by the OTS.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act) was signed into law, which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. The full impact of the Reform Act is difficult to assess because many provisions require federal agencies to adopt implementing regulations. In addition, the Reform Act mandates multiple studies, which could result in additional legislative or regulatory action. In July 2011, the responsibility and authority of the OTS moves to the Office of the Comptroller of the Currency (OCC). The Reform Act, as well as other legislative and regulatory changes, could have a significant impact on us and on our subsidiary, HRB Bank.
See Item 7, “Regulatory Environment” and Item 8, note 20 to the consolidated financial statements for additional discussion of regulatory requirements.
See discussion in Item 1A, “Risk Factors” for additional information.
 
 
BUSINESS SERVICES
GENERAL – Our Business Services segment offers tax, consulting and accounting services and capital markets services to middle-market companies. Segment revenues constituted 22.0% of our consolidated revenues from continuing operations for fiscal year 2011, 22.2% for fiscal year 2010 and 22.0% for fiscal year 2009.
This segment consists primarily of RSM, which provides tax and consulting services in 85 cities and 25 states and offers services in 20 of the 25 top U.S. markets.
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 deferred and will be paid over the next 13 years. See additional discussion in Item 8, note 2 to the consolidated financial statements.
From time to time, we have acquired related businesses and may continue to do so if future conditions warrant and satisfactory terms can be negotiated.
ALTERNATIVE PRACTICE STRUCTURE WITH McGLADREY & PULLEN LLP – McGladrey & Pullen LLP (M&P) is a limited liability partnership, owned 100% by certified public accountants (CPAs), which provides attest services to middle-market clients.

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Under state accountancy regulations, a firm cannot provide attest services unless it is properly licensed which requires that the firm be majority-owned and controlled by licensed CPAs. As such, RSM cannot be a licensed CPA firm and cannot provide attest services. Since 1999, RSM and M&P have operated in what is known as an “alternative practice structure” (APS). Through the APS, RSM and M&P offer clients a full range of attest and non-attest services in compliance with applicable accountancy regulations. In fiscal year 2010, RSM and M&P entered into new agreements related to the operation of the APS.
An administrative services agreement between RSM and M&P obligates RSM to provide M&P with administrative services, information technology, office space, non-professional staff, and other infrastructure in exchange for market rate fees from M&P. In addition, the agreement allows for professional staff to be sub-contracted between RSM and M&P at market rates.
All partners of M&P, with the exception of M&P’s Managing Partner, are also managing directors employed by RSM. Approximately 84% of RSM’s managing directors are also partners in M&P. Certain other personnel are also employed by both M&P and RSM. M&P partners receive distributions of M&P’s earnings in their capacity as partners, as well as compensation from RSM in their capacity as managing directors. Distributions to M&P partners are based on the profitability of M&P and are not capped by the APS. Pursuant to the Governance and Operations Agreement, effective May 1, 2010, the aggregate compensation payable to RSM managing directors by RSM in any given year generally equals 67 percent of the combined profits of M&P and RSM less any amounts paid in their capacity as M&P partners. Historically, RSM followed a similar practice, except that the compensation pool for managing directors was based on 65 percent of combined profits, less amounts paid to M&P partners. In practice, this means that variability in the amounts paid to RSM managing directors under these contracts can cause variability in RSM’s operating results. RSM is not entitled to any profits or residual interests of M&P, nor is it obligated to fund losses or capital deficiencies of M&P. Managing directors of RSM have historically participated in stock-based compensation plans of H&R Block. Beginning in fiscal 2011, participation in those plans ceased and was replaced by a non-contributory, non-qualified defined contribution plan.
See additional discussion in Item 8, note 17 to the consolidated financial statements.
SEASONALITY OF BUSINESS – Revenues for this segment are largely seasonal in nature, with peak revenues occurring during January through April.
COMPETITIVE CONDITIONS – The tax and consulting business is highly competitive. The principal methods of competition are price, service and reputation for quality. There are a substantial number of accounting firms offering similar services at the international, national, regional and local levels. As our focus is on middle-market businesses, our principal competition is with national and regional accounting firms.
GOVERNMENT REGULATION – Many of the same federal and state regulations relating to tax preparers and the information concerning tax reform and tax preparer registration discussed previously in the Tax Services segment apply to the Business Services segment as well. RSM is not, and is not eligible to be, a licensed public accounting firm and takes measures to ensure that it does not provide any services that require a CPA license. In addition to tax and consulting services, RSM provides wealth management services and, through a separate subsidiary, capital market services. Accordingly, RSM is subject to state and federal regulations governing investment advisors and securities brokers and dealers.
M&P and other accounting firms (collectively, the “Attest Firms”) operate in an alternative practice structure with RSM. Auditor independence rules of the SEC, the Public Company Accounting Oversight Board (PCAOB) and various states apply to the Attest Firms as public accounting firms. In applying its auditor independence rules, the SEC views RSM and its affiliates and the Attest Firms as a single entity and requires that RSM and its affiliates be independent of any SEC audit client of the Attest Firms. The SEC attributes any financial interest or business relationship that RSM or its affiliates has with a client of the Attest Firms as a financial interest or business relationship between the Attest Firms and the client, and applies its auditor independence rules accordingly.
We and the Attest Firms have jointly developed and implemented policies, procedures and controls designed to ensure the Attest Firms’ independence is preserved in compliance with applicable SEC regulations and professional responsibilities. These policies, procedures and controls are designed to monitor and prevent violations of applicable independence rules and include, among other things: (1) informing our officers, directors and other members of senior management concerning auditor independence matters; (2) procedures for monitoring securities ownership; (3) communicating with SEC audit clients regarding the SEC’s interpretation and application of relevant independence rules and guidelines; and (4) requiring RSM employees to comply with the Attest Firms’ independence and relationship policies (including the Attest Firms’ independence compliance questionnaire procedures).
See discussion in Item 1A, “Risk Factors” for additional information.

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SERVICE MARKS, TRADEMARKS AND PATENTS
We have made a practice of selling our services and products under service marks and trademarks and of obtaining protection for these by all available means. Our service marks and trademarks are protected by registration in the U.S. and other countries where our services and products are marketed. We consider these service marks and trademarks, in the aggregate, to be of material importance to our business, particularly our business segments providing services and products under the “H&R Block” brand.
We have no registered patents material to our business.
 
 
EMPLOYEES
We have approximately 7,900 regular full-time employees as of April 30, 2011. The highest number of persons we employed during the fiscal year ended April 30, 2011, including seasonal employees, was approximately 107,200.
 
 
AVAILABILITY OF REPORTS AND OTHER INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.hrblock.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other information regarding issuers who file electronically with the SEC.
Copies of the following corporate governance documents are posted on our website:
  §  The Amended and Restated Articles of Incorporation of H&R Block, Inc.;
  §  The Amended and Restated Bylaws of H&R Block, Inc.;
  §  The H&R Block, Inc. Corporate Governance Guidelines;
  §  The H&R Block, Inc. Code of Business Ethics and Conduct;
  §  The H&R Block, Inc. Board of Directors Independence Standards;
  §  The H&R Block, Inc. Audit Committee Charter;
  §  The H&R Block, Inc. Governance and Nominating Committee Charter; and
  §  The H&R Block, Inc. Compensation Committee Charter.
If you would like a printed copy of any of these corporate governance documents, please send your request to the Office of the Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105.
Information contained on our website does not constitute any part of this report.
 
 
ITEM 1A. RISK FACTORS
An investment in our common stock involves risk, including the risk that the value of an investment may decline or that returns on that investment may fall below expectations. There are a number of significant factors which could cause actual conditions, events or results to differ materially from those described in forward-looking statements, many of which are beyond management’s control or its ability to accurately forecast or predict, or could adversely affect our operating results and the value of any investment in our stock.
 
Our access to liquidity may be negatively impacted as disruptions in credit markets occur, if credit rating downgrades occur or if we fail to meet certain covenants. Funding costs may increase, leading to reduced earnings.
We need liquidity to meet our off-season working capital requirements, to service debt obligations including refinancing of maturing obligations and for other related activities. Our access to and the cost of liquidity could be negatively impacted in the event of credit-rating downgrades or if we fail to meet existing debt covenants. In addition, events could occur which could increase our need for liquidity above current levels.
If rating agencies downgrade our credit rating, the cost of debt would likely increase and capital market access could decrease or become unavailable. Our unsecured committed line of credit (CLOC) is subject to various covenants, including a covenant requiring that we maintain minimum net worth equal to $650.0 million and a requirement that we reduce the aggregate outstanding principal amount of short-term debt (as defined) to $200.0 million or less for a minimum period of thirty consecutive days during the period from March 1 to June 30 of each year. Violation of a covenant could impair our access to liquidity currently available through the CLOC. If current sources of liquidity were to become unavailable, we would need to obtain additional sources of funding, which may not be possible or may be available under less favorable terms.

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We are subject to potential contingent liabilities related to the loan repurchase obligations of Sand Canyon Corporation, which may result in significant financial losses.
Sand Canyon Corporation (SCC) remains exposed to losses relating to mortgage loans it previously originated. Mortgage loans originated by SCC were sold either as whole-loans to single third-party buyers or in the form of a securitization.
In connection with the securitization and sale of mortgage loans, SCC made certain representations and warranties. These representations and warranties vary based on the nature of the transaction and the buyer’s requirements but generally pertain to the ownership of the loan, the property securing the loan and compliance with applicable laws and SCC underwriting guidelines. 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. In some instances, H&R Block, Inc. was required to guarantee SCC’s obligations related to breaches of representations and warranties. These representations and warranties and corresponding repurchase obligations generally are not subject to stated limits or a stated term, but would be subject to statutes of limitations applicable to the contractual provisions.
SCC records a liability for contingent losses relating to representation and warranty claims by estimating loan repurchase and indemnification obligations for both known claims and projections of future claims. To the extent that future valid claim volumes exceed current estimates, or the value of mortgage loans and residential home prices decline, future losses may be greater than these estimates and those differences may be significant. See Item 8, note 18 to the consolidated financial statements for additional information.
 
SCC is subject to potential investigations and lawsuits stemming from its discontinued mortgage operations, which may result in significant financial losses.
Although SCC terminated its mortgage loan origination activities and sold its loan servicing business during fiscal year 2008, it remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities prior to such termination and sale. The costs involved in defending against and/or resolving these investigations, claims and lawsuits may be substantial in some instances and the ultimate resulting liability is difficult to predict. In the current non-prime mortgage environment, the number and frequency of investigations, claims and lawsuits has increased over historical experience and is likely to continue at increased levels. In the event of unfavorable outcomes, the amount SCC may be required to pay in the discharge of liabilities or settlements could be substantial and, because SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
 
Failure to comply with laws and regulations that protect our customers’ personal and financial information could result in significant fines, penalties and damages and could harm our brand and reputation.
Privacy concerns relating to the disclosure of consumer financial information have drawn increased attention from federal and state governments. The IRS generally prohibits the use or disclosure by tax return preparers of taxpayers’ information without the prior written consent of the taxpayer. In addition, other regulations require financial service providers to adopt and disclose consumer privacy policies and provide consumers with a reasonable opportunity to “opt-out” of having personal information disclosed to unaffiliated third-parties for marketing purposes. Breaches of our clients’ privacy may occur. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our brand and reputation.
In addition, changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change business practices, including how information is disclosed. Establishing systems and processes to achieve compliance with these new requirements may increase costs and/or limit our ability to pursue certain business opportunities.
 
The lines of business in which we operate face substantial litigation, and such litigation may damage our reputation or result in material liabilities and losses.
We, and/or our subsidiaries, have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation arising in connection with our various business activities. Adverse outcomes related to litigation could result in substantial damages and could cause our earnings to decline. Negative public opinion can also result from our actual or alleged conduct in such claims, possibly damaging our reputation and could cause the market price of our stock to decline. See Item 3, “Legal Proceedings” for additional information.

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We are subject to operational risk and risks associated with our controls and procedures, which may result in incurring financial and reputational losses.
There is a risk of loss resulting from inadequate or failed processes or systems, theft or fraud. These can occur in many forms including, among others, errors, business interruptions arising from natural disasters or other events, inadequate design and development of products and services, inappropriate behavior of or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements. These events could potentially result in financial losses or other damages. We utilize internally developed processes, internal and external information and technological systems to manage our operations. We are exposed to risk of loss resulting from breaches in the security or other failures of these processes and systems. Our ability to recover or replace our major operational systems and processes could have a significant impact on our core business operations and increase our risk of loss due to disruptions of normal operating processes and procedures that may occur while re-establishing or implementing information and transaction systems and processes. As our businesses are seasonal, our systems must be capable of processing high volumes during peak season. Therefore, service interruptions resulting from system failures could negatively impact our ability to serve our customers, which in turn could damage our brand and reputation, or adversely impact our profitability. Additionally, due to the seasonality of our tax business, we employ a substantial amount of seasonal tax professionals on an annual basis. If we were unable to hire a sufficient amount of seasonal tax professionals, it could negatively impact our ability to serve customers, which in turn could damage our brand and reputation, or adversely impact our profitability.
We also face the risk that the design of our controls and procedures may prove to be inadequate or that our controls and procedures may be circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. It is possible that any lapses in the effective operations of controls and procedures could materially affect earnings or harm our reputation. Lapses or deficiencies in internal control over financial reporting could also be material to us.
 
Our businesses may be adversely affected by difficult economic conditions, particularly if unemployment levels do not improve or continue to increase.
The difficult economic conditions we are currently experiencing are frequently characterized by higher unemployment levels and declining consumer and business spending. Poor economic conditions may negatively affect demand and pricing for our services. Higher unemployment levels, especially within client segments we serve, may result in clients no longer being required to file tax returns, electing not to file tax returns, or clients seeking lower cost preparation and filing alternatives. Continued higher unemployment levels may negatively impact our ability to increase tax preparation clients.
In addition to mortgage loans, we also extend secured and unsecured credit to other customers, including EAs to our tax clients. We may incur significant losses on credit we extend, which in turn could reduce our profitability.
 
Economic conditions that negatively affect housing prices and the job market may result in deterioration in credit quality of our loan portfolio primarily held by HRB Bank, and such deterioration could have a negative impact on our business and profitability.
The overall credit quality of mortgage loans held for investment is impacted by the strength of the U.S. economy and local economic conditions, including residential housing prices. Economic trends that negatively affect housing prices and the job market could result in deterioration in credit quality of our mortgage loan portfolio and a decline in the value of associated collateral. Future interest rate resets could also lead to increased delinquencies in our mortgage loans held for investment. Trends in the residential mortgage loan market continue to reflect high loan delinquencies and lower collateral values. As a result, we recorded loan loss provisions totaling $35.6 million, $47.8 million and $63.9 million during fiscal years 2011, 2010 and 2009, respectively.
Our loan portfolio is concentrated in the states of Florida, California, New York and Wisconsin, which represented 20%, 14%, 17% and 8%, respectively, of our total mortgage loans held for investment at April 30, 2011. No other state held more than 5% of our loan balances. If adverse trends in the residential mortgage loan market continue, particularly in geographic areas in which we own a greater concentration of mortgage loans, we could incur additional significant loan loss provisions.
Mortgage loans purchased from SCC represent 62% of total loans held for investment at April 30, 2011. These loans have experienced higher delinquency rates than other loans in our portfolio, and may expose us to greater risk of credit loss.

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TAX SERVICES
 
Government initiatives that simplify tax return preparation or expedite refunds could reduce the need for our services as a third-party tax return preparer. In addition, changes in government regulations or processes regarding the preparation and filing of tax returns and funding of tax refunds may increase our operating costs or reduce our revenues.
Many taxpayers seek assistance from paid tax return preparers such as us not only because of the level of complexity involved in the tax return preparation and filing process, but also because of paid tax return preparers’ ability to expedite refund proceeds under certain circumstances. From time to time, government officials propose measures seeking to simplify the preparation and filing of tax returns or to provide additional assistance with respect to preparing and filing such tax returns or expediting refunds. During tax season 2011, the U.S. Department of the Treasury (the Treasury) introduced a prepaid debit card pilot program designed to facilitate the refund process. HRB Bank provides this service as well through its H&R Block Prepaid Emerald MasterCard®. Additionally, during tax season 2011, the IRS increased its emphasis on a process to allow taxpayers to allocate their refund to multiple accounts. The adoption or expansion of any measures that significantly simplify tax return preparation, expedite refunds or otherwise reduce the need for a third-party tax return preparer could reduce demand for our services, causing our revenues or results of operations to decline.
Governmental regulations and processes affect how we provide services to our clients. Changes in these regulations and processes may require us to make corresponding changes to our client service systems and procedures. The degree and timing of changes in governmental regulations and processes may impair our ability to serve our clients in an effective and cost-efficient manner or reduce demand for our services, resulting in the loss of a significant number of clients, causing our revenues or results of operations to decline.
Certain regulators have alleged that some of our competitors are lending tax preparation fees when they issue products similar to a RAC to their clients. An adverse ruling in this area could have a material impact on our offering of RACs resulting in the loss of a significant number of clients, causing our revenues or results of operations to decline.
 
Increased competition for tax preparation clients in our retail offices and our online and software channels could adversely affect our current market share and profitability, and could limit our ability to grow our client base. Offers of free tax preparation services could adversely affect our revenues and profitability.
We provide both retail and do-it-yourself tax preparation products and services and face substantial competition throughout our businesses. The retail tax services business is highly competitive. There are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services. Many tax return preparation firms and many firms not otherwise in the tax return preparation business are involved in providing electronic filing and other related services to the public, and certain firms provide RALs and RACs. Commercial tax return preparers and electronic filers are highly competitive with regard to price and service, and many firms offer services that may include federal and/or state returns at no charge. Do-it-yourself tax preparation options include use of traditional paper forms, digital electronic forms and various forms of digital electronic assistance, including online and desktop software, both of which we offer. Our digital tax solutions businesses also compete with in-office tax preparation services and a number of online and software companies, primarily on the basis of price and functionality.
Federal and certain state taxing authorities currently offer, or facilitate the offer of, tax return preparation and electronic filing options to taxpayers at no charge. In addition, many of our direct competitors offer certain free online tax preparation and electronic filing options. We have free offerings as well and prepared 767,000, 810,000 and 788,000 federal income tax returns in fiscal years 2011, 2010 and 2009, respectively, at no charge as part of the FFA. In addition, we have free online tax preparation offerings and also provided free preparation of Federal 1040EZ forms in fiscal year 2011. Government tax authorities and direct competitors may elect to expand free offerings in the future. Intense price competition, including offers of free service, could result in a loss of market share, lower revenues or lower margins.
See tax returns prepared statistics included in Item 7, under “Tax Services.”
 
The elimination of the IRS debt indicator has caused federal and state regulators to scrutinize the RAL underwriting practices of third-party financial institutions that provide RALs.
In August 2010, the Internal Revenue Service (IRS) announced that, as of the beginning of the 2011 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 have historically used when considering whether to loan money to taxpayers who applied for a RAL, which is a short term loan, secured by the taxpayer’s federal tax refund.

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In December 2010, HSBC terminated its contract with us to provide RALs in our retail tax offices based on restrictions placed on HSBC by its regulators due to the DI no longer being available. As a result, RALs were not offered in our retail tax offices in the 2011 tax season. Subsequently, two other banks offering RALs during the 2011 tax season through our competitors announced that due to regulatory concerns they will not be offering RALs next tax season. Additionally, a third bank offering RALs during the 2011 tax season through our competitors announced that it was requesting an administrative hearing regarding a notice it had received from its regulator that its practice of originating RALs without the DI is “unsafe and unsound” and has recently filed a lawsuit in federal court against its regulator. Based on these developments and the overall limited amount of banks that offer RALs, there can be no assurances as to the availability of RALs in our retail tax offices in the future.
Termination of the contract with HSBC and our inability to secure a RAL originator in the future could continue to have adverse effects on our operating results, including declines in tax returns prepared as a result of clients seeking alternate preparers who may be able to offers RALs, to the extent prior RAL clients do not purchase a RAC or change their refund disbursement elections. A decline in clients could have other adverse impacts, including increased credit losses on loan balances with those clients.
 
We are subject to extensive government regulation, including banking rules and regulations. If we fail to comply with applicable banking laws, rules and regulations, we could be subject to disciplinary actions, damages, penalties or restrictions that could significantly harm our business.
The OTS can, among other things, censure, fine, issue cease-and-desist orders or suspend or expel a bank or any of its officers or employees with respect to banking activities. Similarly, the attorneys general of each state could bring legal action on behalf of the citizens of the various states to ensure compliance with local laws.
HRB Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements may trigger actions by regulators that, if undertaken, could have a direct material effect on HRB Bank, and potentially us, as HRB Bank’s holding company. HRB Bank must meet specific capital guidelines involving quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. A bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about the strength of components of its capital, risk-weightings of assets, off-balance sheet transactions and other factors. Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain minimum amounts and ratios of tangible equity, total risk-based capital and Tier 1 capital. In addition to these minimum ratio requirements, HRB Bank is required to continually maintain a 12.0% minimum leverage ratio.
In addition, the OTS may deem certain products offered by HRB Bank, including EAs, to be “unsafe and unsound” and thus require us to discontinue offering such products. To the extent such products are instrumental in attracting clients to our offices for tax preparation services, we could experience a significant loss of clients should such products be discontinued. This could cause our revenues or profitability to decline. See Item 8, note 20 to the consolidated financial statements for additional discussion of regulatory capital requirements and classifications.
 
Recent legislative and regulatory reforms may have a significant impact on our business, results of operations and financial condition.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act) was signed into law, which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets.
The full impact of the Reform Act is difficult to assess because many provisions require federal agencies to adopt implementing regulations. In addition, the Reform Act mandates multiple studies, which could result in additional legislative or regulatory action. The Reform Act, as well as other legislative and regulatory changes, could have a significant impact on us and on our subsidiary, HRB Bank, by, for example, requiring us to change our business practices, requiring us to meet more stringent capital, liquidity and leverage ratio requirements, limiting our ability to pursue business opportunities, imposing additional costs on us, limiting fees we can charge for services, impacting the value of our assets, or otherwise adversely affecting our businesses. Specific provisions of the Reform Act include:
  §  changes to the thrift supervisory structure as the responsibility and authority of the OTS moves to the OCC in July 2011;
  §  changes which may require the Company, as a thrift holding company, to meet regulatory capital, liquidity, leverage or other standards;
  §  regulation of interchange fees charged by payment card issuers for transactions in which a person uses a debit or general-use prepaid card, and enforcement of a new statutory requirement that such fees be reasonable and proportional to the actual cost of the transaction to the issuer; and

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  §  establishment of a Consumer Financial Protection Bureau with broad authority to implement new consumer protection regulations.
The effect of the Reform Act on our business and operations could be significant, depending upon final implementation of regulations, the actions of our competitors and the behavior of other marketplace participants. In addition, we may be required to invest significant management time and resources to address the various provisions of the Reform Act and the numerous regulations that are required to be issued under it. The Reform Act and any related legislation or regulations could have a material adverse effect on our business, results of operations and financial condition.
 
BUSINESS SERVICES
 
RSM receives a significant portion of its revenues from clients that are also clients of the Attest Firms. A termination of the alternative practice structure between RSM and the Attest Firms could result in a material loss of revenue to RSM and an impairment of our investment in RSM.
Under the alternative practice structure, RSM and the Attest Firms market their services and provide services to a significant number of common clients under a common brand – McGladrey. RSM also provides operational and administrative support services to the Attest Firms, including information technology, office space, non-professional staff, and other infrastructure in exchange for market rate fees from M&P. If the RSM/Attest Firms relationship under the alternative practice structure were terminated, RSM could lose key employees and clients. In addition, RSM may not be able to recoup its costs associated with the infrastructure used to provide the operational and administrative support services to the Attest Firms. This in turn could result in reduced revenue, increased costs and reduced earnings and, if sufficiently significant, impairment of our investment in RSM.
 
The RSM alternative practice structure involves relationships with Attest Firms that are subject to regulatory restrictions and other constraints. Failure to comply with these restrictions, or operational difficulties or litigation involving the Attest Firms, could damage our brand reputation, lead to reduced earnings and impair our investment in RSM.
RSM’s relationship with the Attest Firms requires compliance with applicable regulations related to the practice of public accounting and auditor independence. Many of RSM’s clients are also clients of the Attest Firms. In addition, the relationship with the Attest Firms and the common brand closely links RSM and the Attest Firms. If the Attest Firms encounter regulatory or independence issues pertaining to the alternative practice structure or if significant litigation arose involving the Attest Firms or their services, such developments could have an adverse effect on our reputation and the mutual benefits of our relationship. In addition, a significant judgment or settlement of a claim against an Attest Firm could (1) impair the Attest Firm’s, particularly M&P’s, ability to meet its payment obligations under various service arrangements with RSM, (2) impair the profitability of the APS, (3) impact RSM’s ability to attract and retain clients and quality professionals, (4) have a significant indirect adverse effect on RSM, as the Attest Firm partners are also RSM employees and (5) divert significant management attention. This, in turn, could result in reduced revenue and earnings and, if significant, impairment of our investment in RSM.
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
 
 
ITEM 2. PROPERTIES
Most of our tax offices, except those in shared locations, are operated under leases throughout the U.S. Our Canadian executive offices are located in a leased office in Calgary, Alberta. Our Canadian tax offices are operated under leases throughout Canada. Our Australian executive offices are located in a leased office in Thornleigh, New South Wales. Our Australian tax offices are operated under leases throughout Australia. HRB Bank is headquartered and its single branch location is located in our corporate headquarters.
RSM’s executive offices are located in leased offices in Bloomington, Minnesota. Its administrative offices are located in leased offices in Davenport, Iowa. RSM also leases office space throughout the U.S.
We own our corporate headquarters, which is located in Kansas City, Missouri. All current leased and owned facilities are in good repair and adequate to meet our needs.
 
 
ITEM 3. LEGAL PROCEEDINGS
 
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.

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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.
 
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, Inc. (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 Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et al. (the “RSM Parties”), 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, conversion 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. To avoid the cost and inherent risk associated with litigation, the parties have reached an agreement in principle to settle this case, subject to approval by the California Superior Court. The settlement would require a maximum payment of $41.5 million, although the actual cost of the settlement depends on the number of valid claims submitted by class members. The defendants believe they have meritorious defenses to the claims in this case and, if for any reason the settlement is not approved, they will continue to defend the case vigorously. Although we have recorded a liability for expected losses, 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 (2010-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. The trustee has filed an appeal to the Seventh Circuit Court of Appeals with respect to the claims against M&P and RSM. The appeal remains pending.
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&P’s 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 effect on RSM’s 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.

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Litigation and Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated and the loan servicing business was sold during fiscal year 2008, SCC and HRB remain subject to investigations, claims and lawsuits pertaining to its mortgage business 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, fraud, and violations of securities laws, the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. Given the 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 that may be required to pay in the discharge of liabilities or settlements could be substantial and could have a material 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 SCC’s former loan servicing business to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. An appeal of the preliminary injunction was denied. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable. We do not believe losses in excess of our accrual would be material to our financial statements, although it is possible that our losses could exceed the amount we have accrued. We and SCC believe we have meritorious defenses to the claims presented and intend to defend them vigorously. There can be no assurances, however, as to the outcome of this matter 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 Federal Home Loan Bank’s (FHLB’s) purchase of mortgage-backed securities. Plaintiff asserts claims for rescission and damages under state 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, including Alice Williams v. H&R Block Enterprises LLC, Case No.RG08366506 (Superior Court of California, County of Alameda, filed January 17, 2008) (alleging improper classification of office managers in California); 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) (alleging failure to timely pay compensation to tax professionals in California and to include itemized information on wage statements); 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) (alleging failure to compensate tax professionals in California and eighteen other states for all hours worked and to provide meal periods); and 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) (alleging failure to compensate tax professionals nationwide for off-season training). A class was certified in the Lemus case in December 2010 (consisting of tax professionals who worked in company-owned offices in California from 2007 to 2010) and in the Williams case in March 2011 (consisting of office managers who worked in company-owned offices in California from 2004 to 2011). A conditional class was certified in the Petroski case in March 2011 (consisting of tax professionals who were not compensated for certain training courses occurring on or after April 15, 2007).
The plaintiffs in the wage and hour class action lawsuits seek actual damages, pre-judgment interest and attorneys’ fees, in addition to statutory penalties under California and federal law, which could equal up to 30 days

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of wages per tax season for class members who worked in California. A portion of our loss contingency accrual is related to these lawsuits for the amount of loss that we consider probable and estimable. For those wage and hour class action lawsuits for which we are able to estimate a range of possible loss, the current estimated range is $0 to $70 million in excess of the accrued liability related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Because this estimated range does not include matters for which an estimate is not possible, the range does not represent our maximum loss exposure for the wage and hour class action lawsuits. We believe we have meritorious defenses to the claims in these lawsuits and intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances 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 October 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of 2SS Holdings, Inc. (“2SS”), developer of TaxACT digital tax preparation solutions, for $287.5 million in cash. In May 2011, the United States Department of Justice (the “DOJ”) filed a civil antitrust lawsuit in the U.S. district court in Washington, D.C., (Case No. 1:11-cv-00948) against H&R Block and 2SS styled United States v. H&R Block, Inc., 2SS Holdings, Inc., and TA IX L.P., to block our proposed acquisition of 2SS. There are no assurances that the DOJ’s lawsuit will be resolved in our favor or that the transaction will be consummated.
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 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 impact on our consolidated results of operations.
 

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PART II
 
 
ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
H&R Block’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol HRB. On May 31, 2011, there were 22,982 shareholders of record and the closing stock price on the NYSE was $16.20 per share.
The quarterly information regarding H&R Block’s common stock prices and dividends appears in Item 8, note 22 to our consolidated financial statements.
A summary of our securities authorized for issuance under equity compensation plans as of April 30, 2011 is as follows:
                             
(in 000s, except per share amounts) 
    Number of securities
    Weighted-average
    Number of securities remaining
     
    to be issued upon
    exercise price of
    available for future issuance under
     
    exercise of options
    outstanding options
    equity compensation plans (excluding
     
    warrants and rights     warrants and rights     securities reflected in the first column)      
 
Equity compensation plans approved by security holders
    10,650     $ 18.71       11,476      
Equity compensation plans not approved by security holders
    –         –         –       
                             
Total
    10,650     $ 18.71       11,476      
                             
                             
The remaining information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is reported in Item 8, note 14 to our consolidated financial statements.
A summary of our purchases of H&R Block common stock during the fourth quarter of fiscal year 2011 is as follows:
                                     
(in 000s, except per share amounts) 
          Average
    Total Number of Shares
    Maximum Dollar Value of
     
    Total Number of
    Price Paid
    Purchased as Part of Publicly
    Shares that May be Purchased
     
    Shares Purchased(1)     per Share     Announced Plans or Programs(2)     Under the Plans or Programs(2)      
 
February 1 – February 28
    1     $ 12.67           $ 1,371,957      
March 1 – March 31
        $ 14.70           $ 1,371,957      
April 1 – April 30
    2     $ 17.31           $ 1,371,957      
                                     
(1)  All share purchases above were purchased in connection with funding employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on restricted shares.
(2)  In June 2008, our Board of Directors rescinded the previous authorizations to repurchase shares of our common stock, and approved an authorization to purchase up to $2.0 billion of our common stock through June 2012.

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PERFORMANCE GRAPH – The following graph compares the cumulative five-year total return provided shareholders on H&R Block, Inc.’s common stock relative to the cumulative total returns of the S&P 500 index and the S&P Diversified Commercial & Professional Services index. An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock and in each of the indexes on April 30, 2006, and its relative performance is tracked through April 30, 2011.
 
(LINE GRAPH)
 
 
ITEM 6.  SELECTED FINANCIAL DATA
We derived the selected consolidated financial data presented below as of and for each of the five years in the period ended April 30, 2011, from our audited consolidated financial statements. Results of operations of fiscal years 2011, 2010 and 2009 are discussed in Item 7. Results of operations for fiscal years 2008 and 2007 included significant losses of our discontinued mortgage businesses. The data set forth below should be read in conjunction with Item 7 and our consolidated financial statements in Item 8.
                                             
                (in 000s, except per share amounts)      
April 30,   2011     2010     2009     2008     2007      
 
Revenues
  $ 3,774,296     $ 3,874,332     $ 4,083,577     $ 4,086,630     $ 3,710,362      
Net income from continuing operations
    419,405       488,946       513,055       445,947       369,460      
Net income (loss)
    406,110       479,242       485,673       (308,647 )     (433,653 )    
Basic earnings (loss) per share:
                                           
Net income from continuing operations
  $ 1.35     $ 1.47     $ 1.53     $ 1.37     $ 1.14      
Net income (loss)
    1.31       1.44       1.45       (0.95 )     (1.35 )    
Diluted earnings (loss) per share:
                                           
Net income from continuing operations
  $ 1.35     $ 1.46     $ 1.53     $ 1.35     $ 1.13      
Net income (loss)
    1.31       1.43       1.45       (0.95 )     (1.33 )    
Total assets
  $  5,207,961     $  5,234,318     $  5,359,722     $  5,623,425     $  7,544,050      
Long-term debt
    1,049,754       1,035,144       1,032,122       1,031,784       537,134      
Dividends per share(1)
  $ 0.45     $ 0.75     $ 0.59     $ 0.56     $ 0.53      
 
(1)   Amounts represent dividends declared. In fiscal year 2010, the dividend payable in July 2010 was declared in April.

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our subsidiaries provide tax preparation, retail banking and various business advisory and consulting services. We are the only major company offering a full range of software, online and in-office tax preparation solutions to individual tax clients.
 
 
OVERVIEW
A summary of our fiscal year 2011 results is as follows:
  §  Revenues for the fiscal year were $3.8 billion, down 2.6% from prior year results.
  §  Diluted earnings per share from continuing operations decreased 7.5% from the prior year to $1.35.
  §  U.S. tax returns prepared by us increased 6.5% from the prior year primarily due to strong results in our retail offices related to a free Federal 1040 EZ offer during the first half of the season as well as improved results during the second half. Online results also improved due to enhancements to our client interface and improved traffic to our website.
  §  Revenues in our Tax Services segment decreased 2.1% from the prior year, primarily due to the sale of 280 company-owned offices to franchisees and a decline in revenues from RAL participations, which were partially offset by higher RAC fees.
  §  Pretax income for the Tax Services segment decreased $99.9 million, or 11.5%, due primarily to a $34.3 million increase in bad debt expense, goodwill impairment of $22.7 million and litigation charges of $15.0 million.
  §  Pretax income for the Business Services segment decreased $9.7 million, or 16.5%, primarily due to lower revenues and higher litigation expenses, partially offset by a goodwill impairment charge recorded in the prior year.
 
                             
Consolidated Results of Operations Data   (in 000s, except per share amounts)      
Year Ended April 30,   2011     2010     2009      
 
REVENUES:
                           
Tax Services
  $ 2,912,361     $ 2,975,252     $ 3,132,077      
Business Services
    829,794       860,349       897,809      
Corporate and eliminations
    32,141       38,731       53,691      
   
    $  3,774,296     $  3,874,332     $  4,083,577      
   
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
                           
Tax Services
  $ 767,498     $ 867,362     $ 927,048      
Business Services
    49,003       58,714       96,097      
Corporate and eliminations
    (139,476 )     (141,941 )     (183,775 )    
   
      677,025       784,135       839,370      
Income taxes
    257,620       295,189       326,315      
   
Net income from continuing operations
    419,405       488,946       513,055      
Net loss of discontinued operations
    (13,295 )     (9,704 )     (27,382 )    
   
Net income
  $ 406,110     $ 479,242     $ 485,673      
   
BASIC EARNINGS (LOSS) PER SHARE:
                           
Net income from continuing operations
  $ 1.35     $ 1.47     $ 1.53      
Net loss of discontinued operations
    (0.04 )     (0.03 )     (0.08 )    
   
Net income
  $ 1.31     $ 1.44     $ 1.45      
   
DILUTED EARNINGS (LOSS) PER SHARE:
                           
Net income from continuing operations
  $ 1.35     $ 1.46     $ 1.53      
Net loss of discontinued operations
    (0.04 )     (0.03 )     (0.08 )    
   
Net income
  $ 1.31     $ 1.43     $ 1.45      
   

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RESULTS OF OPERATIONS
 
 
TAX SERVICES
This segment primarily consists of our income tax preparation businesses — retail, online and software. This segment includes our tax operations in the U.S. and its territories, Canada, and Australia. Additionally, this segment includes the product offerings and activities of HRB Bank that primarily support the tax network, RACs, our prior participations in RALs, and our commercial tax business, which provides tax preparation software to CPAs and other tax preparers.
 
                         
Tax Services – Operating Statistics              
 
(in 000s, except average fee)  
 
Year Ended April 30,   2011     2010     2009  
 
 
TAX RETURNS PREPARED :
                       
United States:
                       
Company-owned operations
    9,168       9,182       10,231  
Franchise operations
    5,588       5,064       4,936  
   
Total retail operations
    14,756       14,246       15,167  
   
Software
    2,201       2,193       2,309  
Online
    3,722       2,893       2,775  
Free File Alliance
    767       810       788  
   
Total digital tax solutions
    6,690       5,896       5,872  
   
Total U.S. operations
    21,446       20,142       21,039  
International operations (1)
    3,055       3,019       2,864  
   
      24,501       23,161       23,903  
   
NET AVERAGE FEE PER U.S. TAX RETURN PREPARED – RETAIL OPERATIONS (2):
                       
Company-owned operations
  $ 189.73     $ 197.42     $ 196.16  
Franchise operations
    171.86       174.32       169.04  
   
    $ 182.96     $ 189.21     $ 187.36  
   
 
(1)  In fiscal year 2011, the end of the Canadian tax season was extended from April 30 to May 2, 2011. Tax returns prepared in our international operations in fiscal year 2011 includes 51,000 returns in both company-owned and franchise offices which were accepted by the client on May 1 or 2. The revenues related to these returns will be recognized in fiscal year 2012.
(2)  Calculated as net tax preparation fees divided by retail tax returns prepared.
 
                         
 
Tax Services – Financial Results     (dollars in 000s)  
 
Year Ended April 30,   2011     2010     2009  
 
 
Tax preparation fees
  $  1,914,876     $  1,991,989     $  2,154,822  
Royalties
    304,194       275,559       255,536  
Fees from refund anticipation checks
    181,661       87,541       100,021  
Interest income on Emerald Advance
    94,300       77,882       91,010  
Fees from Emerald Card activities
    90,451       99,822       98,031  
Fees from Peace of Mind guarantees
    78,413       79,888       78,205  
Loan participation fees and related revenue
    17,151       146,160       139,770  
Other
    231,315       216,411       214,682  
   
Total revenues
    2,912,361       2,975,252       3,132,077  
   
Compensation and benefits:
                       
Field wages
    692,561       713,792       757,835  
Other wages
    133,183       111,326       117,291  
Benefits and other compensation
    162,544       175,904       167,005  
   
      988,288       1,001,022       1,042,131  
Occupancy and equipment
    385,130       410,709       412,335  
Marketing and advertising
    242,538       233,748       226,483  
Bad debt
    139,059       104,716       112,032  
Depreciation and amortization
    90,672       93,424       79,543  
Supplies
    42,300       49,781       52,438  
Goodwill impairment
    22,700             2,188  
Other
    279,277       263,556       292,795  
Gains on sale of tax offices
    (45,101 )     (49,066 )     (14,916 )
   
Total expenses
    2,144,863       2,107,890       2,205,029  
   
Pretax income
  $ 767,498     $ 867,362     $ 927,048  
   
Pretax margin
    26.4%       29.2%       29.6%  

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FISCAL 2011 COMPARED TO FISCAL 2010 – Tax Services’ revenues decreased $62.9 million, or 2.1%, compared to the prior year. Tax preparation fees decreased $77.1 million, or 3.9%, due primarily to the sale of company-owned offices to franchisees and the loss of certain clients as a result of not having a RAL offering in our tax offices this year. Although we believe we gained clients through the free Federal EZ filing we began offering this year, that increase did not have a significant impact on our revenues.  
Royalties increased $28.6 million, or 10.4%, primarily due to the conversion of 280 company-owned offices into franchises.
Fees earned on RACs increased $94.1 million, or 107.5%, primarily due to an increase in the number of RACs issued as a portion of our clients chose to receive their refunds via RAC, as an alternative to a RAL.
RALs were historically offered to our clients by HSBC. In December 2010, HSBC terminated its contract with us based on restrictions placed on HSBC by its regulator and, therefore, RALs were not offered this tax season. Current year revenues of $17.2 million include the recognition of net deferred fees from HSBC. This compares with revenues resulting from loans participations and related fees in the prior year of $146.2 million.
Interest income earned on EAs increased $16.4 million, or 21.1%, over the prior year primarily due to an increase in loan volume, which resulted from offering the product to a wider client base.
Other revenue increased $14.9 million, or 6.9%, primarily due to an increase in online revenues.
Total expenses increased $37.0 million, or 1.8%, compared to the prior year. Compensation and benefits decreased $12.7 million, or 1.3%, primarily due to lower commission-based wages due to conversions to franchise offices, reduced headcount and related payroll taxes. This decline was partially offset by severance costs and related payroll taxes of $27.4 million. Occupancy costs declined $25.6 million, or 6.2%, due to office closures and cost-saving initiatives. Bad debt expense increased $34.3 million, or 32.8%, primarily due to increased volumes on EAs, as well as a decline in tax returns prepared for those clients. During the current year, we recorded a $22.7 million impairment of goodwill in our RedGear reporting unit, as discussed in Item 8, note 9 to the consolidated financial statements. Other expenses increased $15.7 million, or 6.0%, primarily due to incremental litigation expenses recorded in the current year.
Pretax income for fiscal year 2011 decreased $99.9 million, or 11.5%, from 2010. As a result of the declines in revenues and higher expenses, primarily bad debt expense and goodwill impairment, pretax margin for the segment decreased to 26.4% from 29.2% in fiscal year 2010.
 
FISCAL 2010 COMPARED TO FISCAL 2009 – Tax Services’ revenues decreased $156.8 million, or 5.0%, compared to fiscal year 2009. Tax preparation fees decreased $162.8 million, or 7.6%, due to a 10.3% decrease in U.S. retail tax returns prepared in company-owned offices, partially offset by a 0.6% increase in the net average fee per U.S. retail tax return. Adjusting for the effect of company-owned offices sold to franchisees during fiscal year 2010, the decline in tax returns prepared in company-owned offices was 6.7% from fiscal 2009 to 2010. The 6.7% decrease in U.S. retail tax returns prepared in company-owned offices is primarily due to the following factors:  
  §  Tax returns filed with the IRS declined 1.7%.
  §  Lower employment levels disproportionately impacted our key client segments. Fourth quarter 2009 unemployment levels ranged from 15-30%, far in excess of national unemployment levels for key client segments.
  §  We closed certain under-performing offices and exited offices serving clients in Wal-Mart locations. We believe that tax returns prepared declined by approximately 1% (net of client retention through other office locations) as a result of these office closures.
Royalties increased $20.0 million, or 7.8%, due to the conversion of 267 company-owned offices into franchises, partially offset by a decline in tax returns prepared in existing franchise offices.
Interest income on EAs decreased $13.1 million, or 14.4%. This decline was primarily a result of lower loan volumes due to these lines of credit only being offered to prior year tax clients in fiscal year 2010, while being offered to both prior and new clients in fiscal year 2009.
Total expenses decreased $97.1 million, or 4.4%, compared to fiscal year 2009. Total compensation and benefits decreased $41.1 million, or 3.9%, primarily as a result of lower commission-based wages due to the decline in the number of tax returns prepared. Bad debt expense decreased $7.3 million, or 6.5%, primarily as a result of lower EA and RAL volumes, and more restrictive underwriting criteria. Depreciation and amortization expenses increased $13.9 million, or 17.5%, primarily as a result of amortization of intangible assets, related to the November 2008 acquisition of our last major independent franchise operator. Other expenses decreased $31.4 million, or 10.7%, primarily as a result of lower legal expenses. During fiscal year 2010 we recognized gains of $49.1 million on the sale of certain company-owned offices to franchisees, compared to $14.9 million in fiscal year 2009.
Pretax income for fiscal year 2010 decreased $59.7 million, or 6.4%, from 2009. As a result of the declines in revenues, pretax margin for the segment decreased from 29.6% in fiscal year 2009, to 29.2% in fiscal year 2010.

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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              
 
(dollars in 000s)  
 
Year Ended April 30,   2011     2010     2009  
 
 
Tax services
  $  465,406     $  454,551     $  484,825  
Business consulting
    243,189       260,339       246,724  
Accounting services
    38,903       47,706       52,496  
Capital markets
    12,243       11,855       18,220  
Reimbursed expenses
    19,910       22,929       19,863  
Other
    50,143       62,969       75,681  
   
Total revenues
    829,794       860,349       897,809  
   
Compensation and benefits
    552,775       574,901       588,866  
Occupancy
    48,274       49,154       49,070  
Depreciation
    18,970       21,122       22,626  
Marketing and advertising
    20,914       18,960       23,803  
Amortization of intangible assets
    11,563       11,639       13,018  
Litigation
    39,317       19,968       6,712  
Other
    88,978       105,891       97,617  
   
Total expenses
    780,791       801,635       801,712  
   
Pretax income
  $ 49,003     $ 58,714     $ 96,097  
   
Pretax margin
    5.9%       6.8%       10.7%  
 
 
FISCAL 2011 COMPARED TO FISCAL 2010 – Business Services’ revenues decreased $30.6 million, or 3.6%, from the prior year. Tax services revenues increased primarily as a result of the acquisition of Caturano, as discussed in Item 8, note 2 to the consolidated financial statements. Business consulting revenues declined $17.2 million, or 6.6%, primarily due to a decline in services performed on a large multi-year engagement in our consulting practice.  
Other revenues declined $12.8 million, or 20.4%, primarily as a result of a reduction in management fees received related to the new administrative services agreement with M&P, as discussed in Item 8, note 17 to the consolidated financial statements.
Total expenses decreased $20.8 million, or 2.6%, from the prior year. Compensation and benefits decreased $22.1 million, or 3.8%, primarily due to a reduction of costs directly related to the large multi-year consulting engagement discussed above and reduced spend on employee insurance benefits. Litigation expenses increased $19.3 million, or 96.9%, over the prior year. Other expenses declined $16.9 million, or 16.0%, primarily due to an impairment of goodwill recorded in the prior year.
Pretax income for the year ended April 30, 2011 of $49.0 million compares to $58.7 million in the prior year. Pretax margin for the segment decreased to 5.9% from 6.8% in fiscal year 2010, primarily due to litigation costs.
 
FISCAL 2010 COMPARED TO FISCAL 2009 – Business Services’ revenues for fiscal year 2010 decreased $37.5 million, or 4.2%, from fiscal year 2009. Revenues from core tax, consulting and accounting services decreased $21.4 million, or 2.7%, from fiscal year 2009. Tax and accounting services revenues decreased $30.3 million and $4.8 million, respectively, primarily due to decreases in chargeable hours and pressures on billable rates. Business consulting revenues increased $13.6 million, or 5.5%, primarily due to a large engagement in our operational consulting practice.  
Continued weak economic conditions in recent years have severely reduced investment and transaction activity. As a result, revenues from our capital markets business have been declining severely, including a decline of $6.4 million, or 34.9%, from fiscal year 2009. As noted below, we recorded an impairment of goodwill associated with this business during fiscal year 2010.
Other revenue declined $12.7 million, or 16.8%, primarily due to lower management fee revenues and interest income received from M&P.
Total expenses were essentially flat compared to fiscal year 2009. Compensation and benefits decreased $14.0 million, or 2.4%, primarily due to headcount reductions driven by reduced client demand. Marketing and advertising costs decreased $4.8 million, or 20.3%, primarily due to fewer sponsorships and lower advertising costs. Litigation expenses increased $13.3 million from fiscal year 2009. Other expenses increased $8.3 million primarily due to a $15.0 million impairment of goodwill at RSM EquiCo, as discussed in Item 8, note 9 to the consolidated financial statements.

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Pretax income for the year ended April 30, 2010 of $58.7 million compares to $96.1 million in fiscal year 2009. Pretax margin for the segment decreased from 10.7% in fiscal year 2009, to 6.8% in fiscal year 2010, primarily due to poor results in our capital markets business and a reduction of revenue in our core businesses.
 
 
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)        
 
Year Ended April 30,   2011     2010     2009        
 
 
Interest income on mortgage loans held for investment
  $ 24,693     $ 31,877     $ 46,396          
Other
    7,448       6,854       7,295          
   
Total revenues
    32,141       38,731       53,691          
   
Interest expense
    84,288       79,929       92,945          
Provision for loan losses
    35,567       47,750       63,897          
Compensation and benefits
    49,463       53,607       48,973          
Other, net
    2,299       (614 )     31,651          
   
Total expense
    171,617       180,672       237,466          
   
Pretax loss
  $  (139,476 )   $  (141,941 )   $  (183,775 )        
   
 
 
FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010
Interest income earned on mortgage loans held for investment decreased $7.2 million, or 22.5%, from the prior year, primarily as a result of declining rates and non-performing loans. Our provision for loan losses decreased $12.2 million, or 25.5%, from the prior year as a result of the continued run-off of our portfolio.
 
Income Taxes on Continuing Operations
Our effective tax rate for continuing operations was 38.1% for the fiscal year ended April 30, 2011, compared to 37.6% in the prior year. This increase resulted from a decline in gains from investments in company-owned life insurance assets which are not subject to tax, an increase in the state effective tax rate and other favorable net discrete adjustments booked in the current year compared to unfavorable adjustments recorded in the prior year.
 
FISCAL YEAR 2010 COMPARED TO FISCAL YEAR 2009
Interest income earned on mortgage loans held for investment for the fiscal year ended April 30, 2010 decreased $14.5 million, or 31.3%, from fiscal year 2009, primarily as a result of non-performing loans. Interest expense decreased $13.0 million, or 14.0%, due to lower funding costs related to our mortgage loan portfolio and lower corporate borrowings. Our provision for loan losses decreased $16.1 million from fiscal year 2009.
Other expenses declined $32.3 million primarily due to gains of $9.0 million on residual interests in fiscal year 2010, compared to impairments of $3.1 million recorded in fiscal year 2009. Additionally, we transferred liabilities relating to previously retained insurance risk to a third-party, and recorded a gain of $9.5 million in fiscal year 2010.
 
Income Taxes on Continuing Operations
Our effective tax rate for continuing operations was 37.6% for the fiscal year ended April 30, 2010, compared to 38.9% in fiscal year 2009. Our effective tax rates declined from fiscal year 2009 due to a reduction in our valuation allowance related to tax-planning strategies and favorable tax benefits related to investment gains on our corporate owned life insurance investments.
 
 
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 $13.3 million, $9.7 million and $27.4 million for the fiscal years ended April 30, 2011, 2010 and 2009, respectively.
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.

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SCC has recorded a liability for estimated contingent losses related to representation and warranty claims as of April 30, 2011, of $126.3 million, which represents SCC’s best estimate of the probable loss that may occur. Losses on valid claims totaled $12.2 million, $18.2 million and $36.4 million for fiscal years 2011, 2010 and 2009, respectively. These amounts were recorded as reductions of our loan repurchase liability. During the current year, payments totaling $49.8 million were made under an indemnity agreement dated April 2008 with a specific counterparty in exchange for a full and complete release of such party’s ability to assert representation and warranty claims. These payments were also recorded as a reduction in our loan repurchase liability. The indemnity agreement was given as part of obtaining the counterparty’s consent to SCC’s sale of its mortgage servicing business in 2008. We have no remaining payment obligations under this indemnity agreement.
While SCC uses the best information available to it in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating probable losses is inherently difficult and requires considerable management judgment. Although net losses on settled claims since May 1, 2008 have been within initial loss estimates, to the extent that the volume of asserted claims, the level of valid claims, the counterparties asserting claims, the nature of claims, 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. See additional discussion in Item 8, note 18 to the consolidated financial statements.
 
 
CRITICAL ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are inherently uncertain. Specific risks for these critical accounting estimates are described in the following paragraphs. We have reviewed and discussed each of these estimates with the Audit Committee of our Board of Directors. For all of these estimates, we caution that future events rarely develop precisely as forecasted and estimates routinely require adjustment and may require material adjustment.
See Item 8, note 1 to our consolidated financial statements, which discusses accounting estimates we have selected when there are acceptable alternatives and new or proposed accounting standards that may affect our financial reporting in the future.
ALLOWANCE FOR LOAN LOSSES – The principal amount of mortgage loans held for investment totaled $573.0 million at April 30, 2011. We are exposed to the risk that borrowers may not repay amounts owed to us when they become contractually due. We record an allowance representing our estimate of credit losses inherent in the portfolio of loans held for investment at the balance sheet date. Determination of our allowance for loan losses is considered a critical accounting estimate because loss provisions can be material to our operating results, projections of loan delinquencies and related matters are inherently subjective, and actual losses are impacted by factors outside of our control including economic conditions, unemployment rates and residential home prices.  
We record a loan loss allowance for loans less than 60 days past due on a pooled basis. The aggregate principal balance of these loans totaled $304.3 million at April 30, 2011, and the portion of our allowance for loan losses allocated to these loans totaled $11.2 million. In estimating our loan loss allowance for these loans, we stratify the loan portfolio based on our view of risk associated with various elements of the pool and assign estimated loss rates based on those risks. Loss rates are based primarily on historical experience and our assessment of economic and market conditions. Loss rates consider both the rate at which loans will become delinquent (frequency) and the amount of loss that will ultimately be realized upon occurrence of a liquidation of collateral (severity). Frequency rates are based primarily on historical migration analysis of loans to delinquent status. Severity rates are based primarily on recent broker quotes or appraisals of collateral. Because of imprecision and uncertainty inherent in developing estimates of future credit losses, in particular during periods of rapidly declining collateral values or increasing delinquency rates, our estimation process includes development of ranges of possible outcomes. Ranges were developed by stressing initial estimates of both frequency and severity rates. Stressing of frequency and severity assumptions is intended to model deterioration in credit quality that is difficult to predict during declining economic conditions. Future deterioration in credit quality may exceed our modeled assumptions.
Mortgage loans held for investment include loans originated by our affiliate, SCC, and purchased by HRB Bank. We have greater exposure to loss with respect to this segment of our loan portfolio as a result of historically higher delinquency rates. Therefore, we assign higher frequency rate assumptions to SCC-originated loans compared with loans originated by other third-party banks as we consider estimates of future losses. At April 30, 2011 our weighted-average frequency assumption was 9.4% for SCC-originated loans compared to 2.8% for remaining loans in the portfolio.
Loans 60 days past due are considered impaired and are reviewed individually. We record loss estimates typically based on the value of the underlying collateral. Our specific loan loss allowance for these impaired loans reflected an average loss severity of 43% at April 30, 2011. The aggregate principal balance of impaired loans

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totaled $162.3 million at April 30, 2011, and the portion of our allowance for loan losses allocated to these loans totaled $69.8 million.
Modified loans that meet the definition of a troubled debt restructuring (TDR) are also considered impaired and are reviewed individually. We record impairment equal to the difference between the principal balance of the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate. However, if we assess that foreclosure of a modified loan is probable, we record impairment based on the estimated fair value of the underlying collateral. The aggregate principal balance of TDR loans totaled $106.3 million at April 30, 2011, and the portion of our allowance for loan losses allocated to these loans totaled $11.1 million.
The loan loss allowance as a percent of mortgage loans held for investment was 16.1% at April 30, 2011, compared to 13.7% at April 30, 2010. The increase during the current year is primarily as a result of declining collateral values due to lower residential home prices and modeled expectations for future loan delinquencies in the portfolio. The residential mortgage industry has experienced significant adverse trends for an extended period. If adverse trends continue for a sustained period or at rates worse than modeled by us, we may be required to record additional loan loss provisions, and those losses may be significant.
Determining the allowance for loan losses for loans held for investment requires us to make estimates of losses that are highly uncertain and requires a high degree of judgment. If our underlying assumptions prove to be inaccurate, the allowance for loan losses could be insufficient to cover actual losses. Our mortgage loan portfolio is a static pool, as we are no longer originating or purchasing new mortgage loans, and we believe that factor, over time, will limit variability in our loss estimates.
MORTGAGE LOAN REPURCHASE OBLIGATION – 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 loan’s compliance with SCC’s underwriting criteria. Representations and warranties in whole loan sale transactions to institutional investors included a “knowledge 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.  
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, 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. SCC’s methodology for calculating this liability considers the likelihood that individual counterparties will assert future claims.
SCC recorded a liability for estimated contingent losses related to representation and warranty claims of $126.3 million as of April 30, 2011. Actual losses charged against this reserve during fiscal year 2011 totaled $61.9 million, which included payments totaling $49.8 million made under an indemnity agreement dated April 2008 with a specific counterparty in exchange for a full and complete release of such party’s ability to assert representation and warranty claims. The recorded liability represents SCC’s estimate of losses from future claims where assertion of a claim and a related contingent loss are both deemed probable. Because the rate at which future claims may be deemed valid and actual loss severity rates may differ significantly from historical experience, SCC is not able to estimate reasonably possible loss outcomes in excess of its current accrual. A 1% increase in both assumed validity rates and loss severities would result in losses beyond SCC’s accrual of approximately $16 million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on the representations and warranties liability. In reality, changes in one assumption may result in changes in other assumptions, which may or may not counteract the sensitivity.
While SCC uses the best information available to it in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating probable losses are inherently difficult to estimate and require considerable management judgment. Although net losses on settled claims since May 1, 2008 have been within initial loss estimates, to the extent that the volume of asserted claims, the level of valid claims, the counterparties asserting claims, the nature of claims, 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.
See Item 8, note 18 to our consolidated financial statements.
LITIGATION – It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any,

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for these contingencies is made after analysis of each known issue and an analysis of historical experience. Therefore, we have recorded reserves related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be estimated. With respect to other matters, we have concluded that a loss is only reasonably possible or remote, or is not estimable and, therefore, no liability is recorded.
Assessing the likely outcome of pending litigation, including the amount of potential loss, if any, is highly subjective. Our judgments regarding likelihood of loss and our estimates of probable loss amounts may differ from actual results due to difficulties in predicting the outcome of jury trials, arbitration hearings, settlement discussions and related activity, predicting the outcome of class certification actions and various other uncertainties. Due to the number of claims which are periodically asserted against us, and the magnitude of damages sought in those claims, actual losses in the future may significantly exceed our current estimates.
See Item 8, note 19 to our consolidated financial statements.
VALUATION OF GOODWILL – The evaluation of goodwill for impairment is a critical accounting estimate due both to the magnitude of our goodwill balances, and the judgment involved in determining the fair value of our reporting units. Goodwill balances totaled $846.2 million as of April 30, 2011 and $840.4 million as of April 30, 2010.  
We test goodwill and other indefinite-life intangible assets for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value. Our goodwill impairment analysis is based on a discounted cash flow approach and market comparables. This analysis, at the reporting unit level, requires significant management judgment with respect to revenue and expense forecasts, anticipated changes in working capital and the selection and application of an appropriate discount rate. Changes in projections or assumptions could materially affect our estimate of reporting unit fair values. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could affect our conclusions regarding the existence or amount of potential impairment. Finally, strategic changes in our outlook regarding reporting units or intangible assets may alter our valuation approach and could result in changes to our conclusions regarding impairment.
Future estimates of fair value may be adversely impacted by declining economic conditions. In addition, if future operating results of our reporting units are below our current modeled expectations, fair value estimates may decline. Any of these factors could result in future impairments, and those impairments could be significant.
We recorded a goodwill impairment of $22.7 million related to our RedGear reporting unit within our Tax Services segment in the third quarter of fiscal year 2011, leaving a remaining goodwill balance of approximately $14 million. Revenues for this reporting unit have been below our estimates. Poor results in future years could result in further impairment.
We recorded a goodwill impairment of $15.0 million related to our RSM EquiCo reporting unit within our Business Services segment in the third quarter of fiscal year 2010, leaving a remaining goodwill balance of $14.3 million. Continued poor results for this reporting unit could result in further impairment.
See Item 8, note 9 to our consolidated financial statements.
INCOME TAXES – Income taxes are accounted for using the asset and liability approach under U.S. GAAP. We calculate our current and deferred tax provision for the fiscal year based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the applicable calendar year. Adjustments based on filed returns are recorded in the appropriate periods when identified. We file a consolidated federal tax return on a calendar year basis, generally in the second fiscal quarter of the subsequent year.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered taxable income in carry-back periods, historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and tax planning strategies in determining the need for a valuation allowance against our deferred tax assets. Determination of a valuation allowance for deferred tax assets requires that we make judgments about future matters that are not certain, including projections of future taxable income and evaluating potential tax-planning strategies. To the extent that actual results differ from our current assumptions, the valuation allowance will increase or decrease. In the event we were to determine we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination. Likewise, if we later determine it is more likely than not that the deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.
The income tax laws of jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and applicable government taxing authorities. Income tax returns filed by us are based on our interpretation of these rules. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments, including assessments of interest and/or penalties. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and based on our best judgments. Actual results may differ from our current judgments due to a variety of factors, including changes

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in law, interpretations of law by taxing authorities that differ from our assessments, changes in the jurisdictions in which we operate and results of routine tax examinations. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate on a quarterly basis.
REVENUE RECOGNITION – We have many different revenue sources, each governed by specific revenue recognition policies. Our revenue recognition policies can be found in Item 8, note 1 to our consolidated financial statements.  
 
 
FINANCIAL CONDITION
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 treasury shares and acquire businesses. Our operations are highly seasonal and therefore generally require the use of cash to fund operating losses during the period May through mid-January.
Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under our CLOC, we believe, that in the absence of any unexpected developments, our existing sources of capital at April 30, 2011 are sufficient to meet our operating needs.
These comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in Item 8.
 
                                 
                (in 000s)        
 
Year Ended April 30,   2011     2010     2009        
 
 
Net cash provided by (used in):
                               
Operating activities
  $ 512,503     $  587,469     $  1,024,439          
Investing activities
    (110,157 )     31,353       5,560          
Financing activities
    (534,391 )     (481,118 )     (40,233 )        
Effect of exchange rates on cash
    5,844       11,678                
   
Net change in cash and cash equivalents
  $  (126,201 )   $ 149,382     $ 989,766          
   
CASH FROM OPERATING ACTIVITIES – Cash provided by operations, which consists primarily of cash received from customers, decreased $75.0 million from fiscal year 2010. Cash payments for representation and warranty obligations of our discontinued mortgage business totaled $61.9 million in fiscal year 2011, compared to $18.4 million in fiscal year 2010 and $36.5 million in fiscal year 2009.
Restricted Cash. We hold certain cash balances that are restricted as to use. Cash and cash equivalents – restricted totaled $48.4 million at April 30, 2011, and primarily consisted of cash held by our captive insurance subsidiary that will be used to pay claims.
CASH FROM INVESTING ACTIVITIES – Changes in cash provided by investing activities primarily relate to the following:
Purchases of Available-for-Sale Securities. During fiscal year 2011, HRB Bank purchased $138.8 million in mortgage-backed securities for regulatory purposes. See additional discussion in Item 8, note 4 to the consolidated financial statements.
Mortgage Loans Held for Investment. We received net proceeds of $58.5 million, $72.8 million and $91.3 million on our mortgage loans held for investment in fiscal years 2011, 2010 and 2009, respectively.
Purchases of Property and Equipment. Total cash paid for property and equipment was $63.0 million, $90.5 million and $97.9 million for fiscal years 2011, 2010 and 2009, respectively.
Business Acquisitions. Total cash paid for acquisitions was $54.2 million, $10.5 million and $293.8 million during fiscal years 2011, 2010 and 2009, respectively. In July 2010 our Business Services segment acquired Caturano, 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 Item 8, note 2 to the consolidated financial statements. In November 2008, we acquired our last major independent franchise operator for an aggregate purchase price of $279.2 million.
In October 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of 2SS Holdings, Inc. (“2SS”), 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. In May 2011, the United States Department of Justice (the “DOJ”) filed a civil antitrust lawsuit to block our proposed acquisition of 2SS. On June 21, 2011, the parties to the merger agreement signed an amendment to the merger agreement, which is discussed in Item 9B. There are no assurances that the DOJ’s lawsuit will be resolved in our favor or that the transaction will be consummated.

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If the closing conditions are satisfied and this acquisition is consummated, we expect this acquisition will be funded by excess available liquidity from cash-on-hand or short-term borrowings.
Sales of Businesses. In fiscal year 2011, we sold 280 tax offices to franchisees for proceeds of $65.6 million. In fiscal year 2010, we sold 267 tax offices to franchisees for proceeds of $65.7 million. In fiscal year 2009, we sold certain tax offices to franchisees for proceeds of $16.9 million. The majority of these sales were financed through loans we made to our franchisees.
Loans Made to Franchisees. Loans made to franchisees totaled $92.5 million and $89.7 million for fiscal years 2011 and 2010, respectively. We received payments from franchisees totaling $57.6 million and $40.7 million, respectively. These amounts include both the financing of sales of tax offices and franchisee draws under our Franchise Equity Lines of Credit (FELCs).
Discontinued Operations. In fiscal year 2009, we sold our financial advisor business for proceeds of $304.0 million.
CASH FROM FINANCING ACTIVITIES – Changes in cash used in financing activities primarily relate to the following:  
Short-Term Borrowings. We use commercial paper borrowings to fund our off-season losses and cover our seasonal working capital needs, however we had no commercial paper borrowings outstanding as of April 30, 2011 or 2010. Our commercial paper borrowings peaked at $674.7 million in the current year. We had other short-term borrowings in prior years to fund our participation interests in RALs.
FHLB Borrowings. HRB Bank obtains borrowings from the FHLB in accordance with regulatory and capital requirements. During fiscal years 2011, 2010 and 2009, we had net repayments of $50.0 million, $25.0 million and $29.0 million, respectively.
Customer Banking Deposits. Customer banking deposits used $11.4 million in the current year compared to $17.5 million provided in fiscal year 2010 and $64.4 million in fiscal year 2009. These deposits are held by HRB Bank
Dividends. We have consistently paid quarterly dividends. Dividends paid totaled $186.8 million, $200.9 million and $198.7 million in fiscal years 2011, 2010 and 2009, respectively.
Repurchase and Retirement of Common Stock. During fiscal year 2011, we purchased and immediately retired 19.0 million shares of our common stock at a cost of $279.9 million. During fiscal year 2010, we purchased and immediately retired 12.8 million shares of our common stock at a cost of $250.0 million. We may continue to repurchase and retire common stock or retire treasury stock in the future.
In June 2008, our Board of Directors rescinded the previous authorizations to repurchase shares of our common stock and approved an authorization to purchase up to $2.0 billion of our common stock through June 2012. There was $1.4 billion remaining under this authorization at April 30, 2011.
Issuances of Common Stock. In October 2008, we sold 8.3 million shares of our common stock, without par value, at a price of $17.50 per share in a registered direct offering through subscription agreements with selected institutional investors. We received net proceeds of $141.4 million, after deducting placement agent fees and other offering expenses. The purpose of the equity offering was to ensure we maintained adequate equity levels, as a condition of our CLOC, during our off-season. Proceeds were used for general corporate purposes.
Proceeds from the issuance of common stock in accordance with our stock-based compensation plans totaled $0.4 million, $16.7 million and $71.6 million in fiscal years 2011, 2010 and 2009, respectively.
 
HRB BANK – Block Financial LLC (BFC) typically makes capital contributions to HRB Bank to help it meet its capital requirements. BFC made capital contributions to HRB Bank of $235.0 million during fiscal years 2011 and 2010, and $245.0 million in fiscal year 2009.  
Historically, capital contributions by BFC have been repaid as a return of capital by HRB Bank as capital requirements decline. A return of capital or dividend paid by HRB Bank must be approved by the OTS. Although the OTS has approved such payments in the past, there is no assurance that they will continue to do so in the future, in particular if they determine that higher capital levels at HRB Bank are necessary due to non-performing asset levels. In addition, BFC may elect to maintain higher capital levels at HRB Bank. HRB Bank paid dividends and returned of capital of $262.5 million during fiscal year 2011, comprised of $37.5 million in REO properties and loans and $225.0 million in cash. At April 30, 2011, HRB Bank had cash balances of $615.1 million. Distribution of those cash balances would be subject to OTS approval and are therefore not currently available for general corporate purposes.

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See additional discussion of regulatory and capital requirements of HRB Bank in “Regulatory Environment” below.
 
 
 
BORROWINGS
We continually monitor our funding requirements and execute strategies to manage our overall asset and liability profile. The following chart provides the debt ratings for BFC as of April 30, 2011 and 2010:
 
                                                 
 
As of         April 30, 2011                 April 30, 2010        
 
    Short-term     Long-term     Outlook     Short-term     Long-term     Outlook  
 
 
Moody’s
    P-2       Baa2       Negative       P-2       Baa1       Stable  
S&P
    A-2       BBB       Negative       A-2       BBB       Positive  
DBRS
    R-2 (high )     BBB (high )     Stable       R-2 (high )     BBB (high )     Positive  
At April 30, 2011, we maintained a 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 0.30% to 1.80% (depending on the type of borrowing) and includes an annual facility fee of 0.20% to 0.70% of the committed amounts, based on our credit ratings. Covenants in this facility 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 April 30, 2011, we were in compliance with these covenants and had net worth of $1.4 billion. We had no balance outstanding under the CLOCs at April 30, 2011.
During fiscal years 2011, 2010 and 2009, borrowing needs in our Canadian operations were funded by corporate borrowings in the U.S. To mitigate the foreign currency exchange rate risk, we used foreign exchange forward contracts. We do not enter into forward contracts for speculative purposes. In estimating the fair value of derivative positions, we utilize quoted market prices, if available, or quotes obtained from external sources. There were no forward contracts outstanding as of April 30, 2011.
 
 
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our obligations to make future payments as of April 30, 2011, is as follows:
 
                                             
(in 000s)
    Total     Less Than 1 Year     1 - 3 Years     4 - 5 Years     After 5 Years      
 
Long-term debt (including interest)
  $ 1,151,434     $ 67,750     $ 674,257     $ 409,427     $ –        
Customer deposits
    863,898       511,010       11,656       22       341,210      
FHLB borrowings
    25,000       25,000       –         –         –        
Retirement plan contribution
    50,000       10,000       20,000       20,000       –        
Acquisition payments
    43,273       2,880       31,376       2,909       6,108      
Contingent acquisition payments
    11,000       8,652       2,318       30       –        
Media advertising purchase obligation
    9,498       6,665       2,833       –         –        
Capital lease obligations
    10,953       557       1,411       1,545       7,440      
Operating leases
    735,048       238,167       309,107       120,080       67,694      
   
Total contractual cash obligations
  $ 2,900,104     $ 870,681     $ 1,052,958     $ 554,013     $ 422,452      
   
                                             
                                             
The amount of liabilities recorded in connection with unrecognized tax positions that we reasonably expect to pay within twelve months is $16.6 million at April 30, 2011 and is included in accrued income taxes on our consolidated balance sheet. The remaining amount is included in other noncurrent liabilities on our consolidated balance sheet. Because the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, the estimated unrecognized tax position liability has been excluded from the table above. See Item 8, note 15 to the consolidated financial statements for additional information.
See discussion of contractual obligations and commitments in Item 8, within the notes to our consolidated financial statements.

28   H&R BLOCK 2011 Form 10K


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REGULATORY ENVIRONMENT
HRB Bank is a federal savings bank and H&R Block, Inc. is a savings and loan holding company. As a result, each is subject to regulation by the OTS. Federal savings banks are subject to extensive regulation and examination by the OTS, their primary federal regulator, as well as the FDIC.
All savings associations are subject to the capital adequacy guidelines and the regulatory framework for prompt corrective action. HRB Bank must meet specific capital guidelines involving quantitative measures of HRB Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. HRB Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. As of March 31, 2011, our most recent Thrift Financial Report (TFR) filing with the OTS, HRB bank was a “well capitalized” institution under the prompt corrective action provisions of the FDIC. See Item 8, note 20 to the consolidated financial statements for additional discussion of regulatory capital requirements and classifications.
HRB Bank is an indirect wholly-owned subsidiary of H&R Block, Inc. and its customer deposits are insured by the FDIC. If an insured institution fails, claims for administrative expenses of the receiver and for deposits in U.S. branches (including claims of the FDIC as subrogee of the failed institution) have priority over the claims of general unsecured creditors. In addition, the FDIC has authority to require H&R Block, Inc. to reimburse it for losses it incurs in connection with the failure of HRB Bank or with the FDIC’s provision of assistance to a banking subsidiary that is in danger of failure.
H&R Block, Inc. is a legal entity separate and distinct from its subsidiary, HRB Bank. Various federal and state statutory provisions and regulations limit the amount of dividends HRB Bank may pay without regulatory approval. The OTS has authority to prohibit HRB Bank from engaging in unsafe or unsound practices in conducting their business. The payment of dividends, depending on the financial condition of the bank, could be deemed an unsafe or unsound practice. The ability of HRB Bank to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines.
The U.S., various state, local, provincial and foreign governments and some self-regulatory organizations have enacted statutes and ordinances, and/or adopted rules and regulations, regulating aspects of our business. These aspects include, but are not limited to, commercial income tax return preparers, income tax courses, the electronic filing of income tax returns, the offering of RACs, the facilitation of RALs, loan originations and assistance in loan originations, mortgage lending, privacy, consumer protection, franchising, sales methods, banking, accountants and the accounting practice. We seek to determine the applicability of such statutes, ordinances, rules and regulations (collectively, “Laws”) and comply with those Laws.
From time to time in the ordinary course of business, we receive inquiries from governmental and self-regulatory agencies regarding the applicability of Laws to our services and products. In response to past inquiries, we have agreed to comply with such Laws, convinced the authorities that such Laws were not applicable or that compliance already exists and/or modified our activities in the applicable jurisdiction to avoid the application of all or certain parts of such Laws. We believe the past resolution of such inquiries and our ongoing compliance with Laws has not had a material effect on our consolidated financial statements. We cannot predict what effect future Laws, changes in interpretations of existing Laws or the results of future regulator inquiries with respect to the applicability of Laws may have on our consolidated financial statements. See additional discussion of legal matters in Item 3, “Legal Proceedings” and Item 8, note 19 to our consolidated financial statements.
 
 
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
This section presents information required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.” The tables in this section include HRB Bank information only.

H&R BLOCK 2011 Form 10K  29


Table of Contents

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL – The following table presents average balance data and interest income and expense data for our banking operations, as well as the related interest yields and rates for fiscal years 2011, 2010 and 2009:  
                                                                         
                                              (dollars in 000s)  
 
Year Ended April 30,   2011     2010     2009  
 
          Interest
    Average
          Interest
    Average
          Interest
    Average
 
    Average
    Income/
    Yield/
    Average
    Income/
    Yield/
    Average
    Income/
    Yield/
 
    Balance     Expense     Cost     Balance     Expense     Cost     Balance     Expense     Cost  
 
 
Interest-earning assets:
                                                                       
Mortgage loans, net
  $ 545,052     $ 24,693       4.53 %   $ 677,115     $ 31,877       4.12 %   $ 839,253     $ 46,396       5.14 %
Federal funds sold
    2,649       3       0.10 %     9,471       9       0.09 %     311,138       801       0.26 %
Emerald Advance (1)
    141,127       94,300       35.21 %     106,093       77,891       35.21 %     133,252       91,019       35.31 %
Available-for-sale investment securities
    22,243       174       0.78 %     25,144       181       0.71 %     29,500       791       2.68 %
FHLB stock
    5,953       171       2.88 %     6,703       119       1.77 %     6,557       127       1.93 %
Cash and due from banks
    930,666       2,338       0.25 %     747,504       1,976       0.26 %     12,474       123       0.99 %
                                                                         
      1,647,690     $ 121,679       7.38 %     1,572,030     $ 112,053       7.00 %     1,332,174     $ 139,257       10.45 %
             
                     
                     
         
                                                                         
Non-interest-earning assets
    57,899                       94,499                       71,759                  
                                                                         
Total HRB Bank assets
  $ 1,705,589                     $ 1,666,529                     $ 1,403,933                  
     
                     
                     
                 
Interest-bearing liabilities:
                                                                       
Customer deposits
  $ 830,597     $ 8,488       1.02 %   $ 1,019,664     $ 10,174       1.00 %   $ 863,072     $ 14,069       1.63 %
FHLB borrowing
    72,534       1,526       2.10 %     98,767       1,997       2.02 %     103,885       5,113       4.92 %
                                                                         
      903,131     $ 10,014       1.11 %     1,118,431     $ 12,171       1.09 %     966,957     $ 19,182       1.98 %
             
                     
                     
         
                                                                         
Non-interest-bearing liabilities
    366,666                       267,159                       230,271                  
                                                                         
Total liabilities
    1,269,797                       1,385,590                       1,197,228                  
Total shareholders’ equity
    435,792                       280,939                       206,705                  
                                                                         
Total liabilities and shareholders’ equity
  $ 1,705,589                     $ 1,666,529                     $ 1,403,933                  
     
                     
                     
                 
                                                                         
Net yield on interest-earning assets (1)
          $ 111,665       6.78 %           $ 99,882       6.23 %           $ 120,075       9.06 %
 
(1)  Includes all interest income related to Emerald Advance activities. Amounts recognized as interest income also include certain fees, which are amortized into interest income over the life of the loan, of $48.5 million, $39.2 million and $44.0 million for fiscal years 2011, 2010 and 2009, respectively.
 
 
The following table presents the rate/volume variance in interest income and expense for the last two fiscal years:
                                                                         
                            (in 000s)  
 
Year Ended April 30,   2011     2010        
 
    Total Change
    Change
    Change
    Change
    Total Change
    Change
    Change
    Change
       
    in Interest
    Due to
    Due to
    Due to
    in Interest
    Due to
    Due to
    Due to
       
    Income/Expense     Rate/Volume     Rate     Volume     Income/Expense     Rate/Volume     Rate     Volume        
 
 
Interest income:
                                                                       
Loans, net(1)
  $ 9,225     $ 4,485     $ (1,211 )   $ 5,951     $ (27,646 )   $ 1,233     $ (8,192 )   $ (20,687 )        
Available-for-sale investment securities
    (7 )     (2 )     16       (21 )     (611 )     86       (580 )     (117 )        
Federal funds sold
    (6 )     (1 )     1       (6 )     (792 )     500       (515 )     (777 )        
FHLB stock
    52       (8 )     73       (13 )     (8 )           (11 )     3          
Cash & due from banks
    362       40       (128 )     450       1,853       (5,305 )     (90 )     7,248          
   
    $ 9,626     $  4,514     $  (1,249 )   $ 6,361     $  (27,204 )   $  (3,486 )   $  (9,388 )   $  (14,330 )        
   
Interest expense:
                                                                       
Customer deposits
  $  (1,686 )   $ (264 )   $ 56     $  (1,478 )   $ (3,895 )   $ (573 )   $ (5,457 )   $ 2,135          
FHLB borrowings
    (471 )     (22 )     81       (530 )     (3,116 )     149       (3,013 )     (252 )        
   
    $ (2,157 )   $ (286 )   $ 137     $ (2,008 )   $ (7,011 )   $ (424 )   $ (8,470 )   $ 1,883          
   

(1)  Non-accruing loans have been excluded.
 
 
INVESTMENT PORTFOLIO – The following table presents the cost basis and fair value of HRB Bank’s investment portfolio at April 30, 2011, 2010 and 2009:  
                                                         
(in 000s)  
 
April 30,   2011     2010     2009        
 
    Cost Basis     Fair Value     Cost Basis     Fair Value     Cost Basis     Fair Value        
 
 
Mortgage-backed securities
  $  157,970     $  158,177     $  23,026     $  23,016     $ 27,466     $ 26,793          
Federal funds sold
    8,727       8,727       2,338       2,338       157,326       157,326          
FHLB stock
    3,315       3,315       6,033       6,033       6,730       6,730          
Trust preferred security
    –         –         1,854       31       3,454       292          
   
    $ 170,012     $ 170,219     $ 33,251     $ 31,418     $  194,976     $  191,141          
   

30   H&R BLOCK 2011 Form 10K


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The following table shows the cost basis, scheduled maturities and average yields for HRB Bank’s investment portfolio at April 30, 2011:
                                                             
    (dollars in 000s) 
          Less Than One Year     After Ten Years     Total      
    Cost
    Balance
    Average
    Balance
    Average
    Balance
    Average
     
    Basis     Due     Yield     Due     Yield     Due     Yield      
 
Mortgage-backed securities
  $ 157,970     $       %   $ 157,970       2.32 %   $ 157,970       2.32 %    
Federal funds sold
    8,727       8,727       0.08 %           %     8,727       0.08 %    
FHLB stock
    3,315       3,315       2.88 %           %     3,315       2.88 %    
                                                             
    $ 170,012     $ 12,042             $ 157,970             $ 170,012              
     
     
             
             
             
 
LOAN PORTFOLIO AND SUMMARY OF LOAN LOSS EXPERIENCE – The following table shows the composition of HRB Bank’s mortgage loan portfolio as of April 30, 2011, 2010, 2009, 2008 and 2007, and information on delinquent loans:
                                                 
    (in 000s)  
 
As of April 30,   2011     2010     2009     2008     2007        
 
 
Residential real estate mortgages
  $  569,610     $  683,452     $  821,583     $  1,004,283     $  1,350,612          
Home equity lines of credit
    183       232       254       357       280          
                                                 
    $ 569,793     $ 683,684     $ 821,837     $ 1,004,640     $ 1,350,892          
     
     
     
     
     
         
Loans and TDRs on non-accrual
  $ 155,645     $ 185,209     $ 222,382     $ 110,759     $ 22,909          
Loans past due 90 days or more
    149,501       153,703       121,685       73,600       22,909          
Total TDRs
    106,328       144,977       160,741       37,159       –            
 
 
Concentrations of loans to borrowers located in a single state may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. The table below presents outstanding loans by state for our portfolio of mortgage loans held for investment as of April 30, 2011:
                                                 
    (dollars in 000s)  
 
          Loans
                         
    Loans
    Purchased
                         
    Purchased
    from Other
          Percent
    Delinquency
       
    from SCC     Parties     Total     of Total     Rate (30+ Days)        
 
 
Florida
  $  47,378     $  68,499     $  115,877       20%       33 %        
California
    67,662       12,219       79,881       14%       32 %        
New York
    88,004       10,101       98,105       17%       46 %        
Wisconsin
    1,998       44,551       46,549       8%       8 %        
All others
    149,949       79,432       229,381       41%       26 %        
                                                 
Total
  $  354,991     $  214,802     $  569,793       100%                  
     
     
     
                         
 
 
A rollforward of HRB Bank’s allowance for loss on mortgage loans is as follows:
                                                 
    (dollars in 000s)  
 
Year Ended April 30,   2011     2010     2009     2008     2007        
 
 
Balance at beginning of the year
  $  93,535     $  84,073     $ 45,401     $ 3,448     $          
Provision
    35,200       47,750       63,897       42,004       3,622          
Recoveries
    272       88       54       999       –            
Charge-offs and transfers
    (38,520 )     (38,376 )     (25,279 )     (1,050 )     (174 )        
                                                 
Balance at end of the year
  $ 90,487     $ 93,535     $  84,073     $  45,401     $   3,448          
                                                 
Ratio of net charge-offs to average loans outstanding during the year
    5.96 %     4.95%       2.80%       0.09%       0.02%          
 

H&R BLOCK 2011 Form 10K  31


Table of Contents

DEPOSITS – The following table shows HRB Bank’s average deposit balances and the average rate paid on those deposits for fiscal years 2011, 2010 and 2009:  
                                                 
                            (dollars in 000s)  
 
Year Ended April 30,   2011     2010     2009  
 
    Average
    Average
    Average
    Average
    Average
    Average
 
    Balance     Rate     Balance     Rate     Balance     Rate  
 
 
Money market and savings
  $ 279,162       0.81 %   $ 400,920       0.50 %   $ 467,864       1.37 %
Interest-bearing checking accounts
    10,782       0.87 %     13,677       0.61 %     13,579       2.25 %
IRAs
    353,902       1.01 %     377,973       1.02 %     289,814       1.27 %
Certificates of deposit
    186,742       1.36 %     227,094       1.86 %     91,815       3.98 %
                                                 
      830,588       1.02 %     1,019,664       1.00 %     863,072       1.63 %
Non-interest-bearing deposits
    310,781               233,717               212,607          
                                                 
    $  1,141,369             $  1,253,381             $  1,075,679          
                                                 
 
 
RATIOS – The following table shows certain of HRB Bank’s key ratios for fiscal years 2011, 2010 and 2009:
 
                       
 
Year Ended April 30,   2011   2010     2009  
 
 
Pretax return on assets
    2.36%     2.12%       (1.03 )%
Net return on equity
    5.43%     21.04%       (6.67 )%
Equity to assets ratio
    30.81%     28.83%       12.44%  
 
During fiscal year 2009, HRB Bank shared the revenues and expenses of the H&R Block Prepaid MasterCard® program with an affiliate, and as a result, transferred revenues and expenses of $49.4 million and $13.4 million, respectively, to this affiliate. During fiscal year 2010, the agreement with the affiliate was terminated and HRB Bank now retains the revenues and expenses of the program.
SHORT-TERM BORROWINGS – The following table shows HRB Bank’s short-term borrowings for fiscal years 2011, 2010 and 2009:  
                                                 
                                  (dollars in 000s)  
 
Year Ended April 30,   2011     2010     2009  
 
    Balance     Rate     Balance     Rate     Balance     Rate  
 
 
Ending balance of FHLB advances
  $  25,000       2.36%     $  50,000       1.92%     $ 25,000       1.76%  
Average balance of FHLB advances
    72,534       2.10%       98,767       2.07%        103,885       4.92%  
 
The maximum amount of FHLB advances outstanding during fiscal years 2011, 2010 and 2009 was $75.0 million, $100.0 million and $129.0 million, respectively.
 
NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial statements for a discussion of recently issued accounting pronouncements.
 
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
INTEREST RATE RISK
GENERAL – We have a formal investment policy that strives to minimize the market risk exposure of our cash equivalents and available-for-sale (AFS) securities, which are primarily affected by credit quality and movements in interest rates. These guidelines focus on managing liquidity and preserving principal and earnings.  
Our cash equivalents are primarily held for liquidity purposes and are comprised of high quality, short-term investments, including qualified money market funds. Because our cash and cash equivalents have a relatively short maturity, our portfolio’s market value is relatively insensitive to interest rate changes.
As our short-term borrowings are generally seasonal, interest rate risk typically increases through our third fiscal quarter and declines to zero by fiscal year-end. While the market value of short-term borrowings is relatively insensitive to interest rate changes, interest expense on short-term borrowings will increase and decrease with changes in the underlying short-term interest rates.
Our long-term debt at April 30, 2011, consists primarily of fixed-rate Senior Notes; therefore, a change in interest rates would have no impact on consolidated pretax earnings. See Item 8, note 11 to our consolidated financial statements.
HRB BANK – At April 30, 2011, residential mortgage loans held for investment consisted of 42% fixed-rate loans and 58% adjustable-rate loans. These loans are sensitive to changes in interest rates as well as expected prepayment levels. As interest rates increase, fixed-rate residential mortgages tend to exhibit lower

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prepayments. The opposite is true in a falling rate environment. When mortgage loans prepay, mortgage origination costs are written off. Depending on the timing of the prepayment, the write-offs of mortgage origination costs may result in lower than anticipated yields.
At April 30, 2011, HRB Bank’s other investments consisted primarily of mortgage-backed securities and FHLB stock. See table below for sensitivity analysis of our mortgage-backed securities.
HRB Bank’s liabilities consist primarily of transactional deposit relationships, such as prepaid debit card accounts and checking accounts. Other liabilities include money market accounts, certificates of deposit and collateralized borrowings from the FHLB. Money market accounts re-price as interest rates change. Certificates of deposit re-price over time depending on maturities. FHLB advances generally have fixed rates ranging from one day through multiple years.
Under criteria published by the OTS, HRB Bank’s overall interest rate risk exposure at March 31, 2011, the most recent date an evaluation was completed, was characterized as “minimal.” We actively manage our interest rate risk positions. As interest rates change, we will adjust our strategy and mix of assets and liabilities to optimize our position.
 
EQUITY PRICE RISK
We have limited exposure to the equity markets. Our primary exposure is through our deferred compensation plans. Within the deferred compensation plans, we have mismatches in asset and liability amounts and investment choices (both fixed-income and equity). At April 30, 2011 and 2010, the impact of a 10% market value change in the combined equity assets held by our deferred compensation plans and other equity investments would be $10.9 million and $9.7 million, respectively, assuming no offset for the liabilities.
 
FOREIGN EXCHANGE RATE RISK
Our operations in international markets are exposed to movements in currency exchange rates. The currencies involved are the Canadian dollar and the Australian dollar. We translate revenues and expenses related to these operations at the average of exchange rates in effect during the period. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end of the year. Translation adjustments are recorded as a separate component of other comprehensive income in stockholders’ equity. Translation of financial results into U.S. dollars does not presently materially affect and has not historically materially affected our consolidated financial results, although such changes do affect the year-to-year comparability of the operating results in U.S. dollars of our international businesses. We estimate a 10% change in foreign exchange rates by itself would impact consolidated net income in fiscal years 2011 and 2010 by $3.7 million and $5.1 million, respectively, and cash balances at April 30, 2011 and 2010 by $7.6 million and $7.1 million, respectively.
During fiscal year 2011, borrowing needs in our Canadian operations were funded by corporate borrowings in the U.S. To mitigate the foreign currency exchange rate risk, we used forward foreign exchange contracts. We do not enter into forward contracts for speculative purposes. In estimating the fair value of derivative positions, we utilized quoted market prices, if available, or quotes obtained from external sources. When foreign currency financial instruments are outstanding, exposure to market risk on these instruments results from fluctuations in currency rates during the periods in which the contracts are outstanding. The counterparties to our currency exchange contracts consist of major financial institutions, each of which is rated investment grade. We are exposed to credit risk to the extent of potential non-performance by counterparties on financial instruments. Any potential credit exposure does not exceed the fair value. We believe the risk of incurring losses due to credit risk is remote. At April 30, 2011 we had no forward exchange contracts outstanding.
 
SENSITIVITY ANALYSIS
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2011 and 2010 are presented below. The following table represents hypothetical instantaneous and sustained parallel shifts in interest rates and should not be relied on as an indicator of future expected results. The impact of a change in interest rates on other factors, such as delinquency and prepayment rates, is not included in the analysis below.
 
                                                 
    (in 000s)    
        Basis Point Change
    Carrying Value at
 
    April 30, 2011   −300   −200   −100   +100   +200   +300    
 
Mortgage loans held for investment
  $   485,008   $   53,949   $   36,810   $   18,844   $   (16,601)   $   (31,228)   $   (46,280)      
Mortgage-backed securities
    158,177     640     611     1,161     (5,325)     (11,700)     (17,978)      
                                                 
    Carrying Value at
  Basis Point Change    
    April 30, 2010   −300   −200   −100   +100   +200   +300  
 
Mortgage loans held for investment
  $   595,405   $   60,251   $   43,363   $   20,780   $   (7,906)   $   (12,525)   $   (14,664)      
Mortgage-backed securities
    23,016     123     125     134     (272)     (411)     (510)      
 

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
DISCUSSION OF FINANCIAL RESPONSIBILITY
H&R Block’s management is responsible for the integrity and objectivity of the information contained in this document. Management is responsible for the consistency of reporting this information and for ensuring that accounting principles generally accepted in the United States are used. In discharging this responsibility, management maintains an extensive program of internal audits and requires the management teams of our individual subsidiaries to certify their respective financial information. Our system of internal control over financial reporting also includes formal policies and procedures, including a Code of Business Ethics and Conduct program designed to encourage and assist all employees and directors in living up to high standards of integrity.
The Audit Committee of the Board of Directors, composed solely of outside and independent directors, meets periodically with management, the independent auditors and the chief internal auditor to review matters relating to our financial statements, internal audit activities, internal accounting controls and non-audit services provided by the independent auditors. The independent auditors and the chief internal auditor have full access to the Audit Committee and meet, both with and without management present, to discuss the scope and results of their audits, including internal control, audit and financial matters.
Deloitte & Touche LLP audited our consolidated financial statements for fiscal years 2011, 2010 and 2009. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
 
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 12a-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of April 30, 2011.
Based on our assessment, management concluded that as of April 30, 2011, the Company’s internal control over financial reporting was effective based on the criteria set forth by COSO. The Company’s external auditors, Deloitte & Touche LLP, an independent registered public accounting firm, have issued an audit report on the effectiveness of the Company’s internal control over financial reporting.
 
     
-s- William C. Cobb
William C. Cobb
President and Chief Executive Officer
  -s- Jeffrey T. Brown

Jeffrey T. Brown
Senior Vice President and Chief Financial Officer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
H&R Block, Inc.
Kansas City, Missouri
 
We have audited the accompanying consolidated balance sheets of H&R Block, Inc. and subsidiaries (the “Company”) as of April 30, 2011 and 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of H&R Block, Inc. and subsidiaries as of April 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2011, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 17 to the consolidated financial statements, the Company adopted an accounting standard related to consolidation of variable interest entities effective May 1, 2010.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of April 30, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 23, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
-s- Deloitte & Touche LLP
Kansas City, Missouri
June 23, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
H&R Block, Inc.
Kansas City, Missouri
 
We have audited the internal control over financial reporting of H&R Block, Inc. and subsidiaries (the “Company”) as of April 30, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended April 30, 2011 of the Company and our report dated June 23, 2011 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of an accounting standard related to consolidation of variable interest entities on May 1, 2010.
 
-s- Deloitte & Touche LLP
Kansas City, Missouri
June 23, 2011

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CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in 000s, except per share amounts)
                         
 
Year Ended April 30,   2011     2010     2009  
 
 
REVENUES:
                       
Service revenues
  $ 3,225,861     $ 3,231,487     $ 3,437,906  
Product and other revenues
    414,282       520,440       491,155  
Interest income
    134,153       122,405       154,516  
   
      3,774,296       3,874,332       4,083,577  
   
OPERATING EXPENSES:
                       
Cost of revenues
    2,414,590       2,467,996       2,596,218  
Selling, general and administrative
    694,136       631,499       648,490  
   
      3,108,726       3,099,495       3,244,708  
   
Operating income
    665,570       774,837       838,869  
Other income, net
    11,455       9,298       501  
   
Income from continuing operations before income taxes
    677,025       784,135       839,370  
Income taxes
    257,620       295,189       326,315  
   
Net income from continuing operations
    419,405       488,946       513,055  
Net loss from discontinued operations
    (13,295 )     (9,704 )     (27,382 )
   
NET INCOME
  $ 406,110     $ 479,242     $ 485,673  
   
BASIC EARNINGS (LOSS) PER SHARE:
                       
Net income from continuing operations
  $ 1.35     $ 1.47     $ 1.53  
Net loss from discontinued operations
    (0.04 )     (0.03 )     (0.08 )
   
Net income
  $ 1.31     $ 1.44     $ 1.45  
   
DILUTED EARNINGS (LOSS) PER SHARE:
                       
Net income from continuing operations
  $ 1.35     $ 1.46     $ 1.53  
Net loss from discontinued operations
    (0.04 )     (0.03 )     (0.08 )
   
Net income
  $ 1.31     $ 1.43     $ 1.45  
   
COMPREHENSIVE INCOME:
                       
Net income
  $ 406,110     $ 479,242     $ 485,673  
Unrealized gains (losses) on securities, net of taxes:
                       
Unrealized holding gains (losses) arising during the year, net of taxes of $58, $188 and $(1,736)
    73       274       (2,836 )
Reclassification adjustment for gains included in income, net of taxes of ($133), $811 and $762
    55       (1,399 )     (1,164 )
Change in foreign currency translation adjustments
    9,427       14,442       (10,125 )
   
Comprehensive income
  $ 415,665     $ 492,559     $ 471,548  
   
 
See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS (in 000s, except share and per share amounts)
                 
 
As of April 30,   2011     2010  
 
 
ASSETS
               
Cash and cash equivalents
  $ 1,677,844     $ 1,804,045  
Cash and cash equivalents — restricted
    48,383       34,350  
Receivables, less allowance for doubtful accounts of $67,466 and $112,475
    492,290       517,986  
Prepaid expenses and other current assets
    259,214       292,655  
   
Total current assets
    2,477,731       2,649,036  
Mortgage loans held for investment, less allowance for loan
losses of $92,087 and $93,535
    485,008       595,405  
Property and equipment, at cost less accumulated depreciation
and amortization of $677,220 and $657,008
    307,320       345,470  
Intangible assets, net
    367,919       367,432  
Goodwill
    846,245       840,447  
Other assets
    723,738       436,528  
   
Total assets
  $ 5,207,961     $ 5,234,318  
   
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES:
               
Customer banking deposits
  $ 852,220     $ 852,555  
Accounts payable, accrued expenses and other current liabilities
    618,070       756,577  
Accrued salaries, wages and payroll taxes
    257,038       199,496  
Accrued income taxes
    458,910       459,175  
Current portion of long-term debt
    3,437       3,688  
Federal Home Loan Bank borrowings
    25,000       50,000  
   
Total current liabilities
    2,214,675       2,321,491  
Long-term debt
    1,049,754       1,035,144  
Federal Home Loan Bank borrowings
    –         25,000  
Other noncurrent liabilities
    493,958       412,053  
   
Total liabilities
    3,758,387       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  
Convertible preferred stock, no par, stated value $0.01 per share,
500,000 shares authorized
    –         –    
Additional paid-in capital
    812,666       832,604  
Accumulated other comprehensive income
    11,233       1,678  
Retained earnings
    2,658,103       2,658,586  
Less treasury shares, at cost
    (2,036,552 )     (2,056,552 )
   
Total stockholders’ equity
    1,449,574       1,440,630  
   
Total liabilities and stockholders’ equity
  $ 5,207,961     $ 5,234,318  
   

 
See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (in 000s)
                                 
 
Year Ended April 30,   2011     2010     2009        
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
Net income
  $ 406,110     $ 479,242     $ 485,673          
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Depreciation and amortization
    121,633       126,901       123,631          
Provision for bad debts and loan losses
    180,951       161,296       181,829          
Provision for deferred taxes
    9,432       170,566       73,213          
Stock-based compensation
    14,500       29,369       26,557          
Net cash provided by discontinued operations
    –         –         97,578          
Changes in assets and liabilities, net of acquisitions:
                               
Cash and cash equivalents — restricted
    (14,033 )     2,497       (44,625 )        
Receivables
    (105,708 )     (87,889 )     (77,447 )        
Prepaid expenses and other current assets
    (37,892 )     (2,320 )     84,279          
Other noncurrent assets
    (98,818 )     (59,429 )     176,864          
Accounts payable, accrued expenses and
other current liabilities
    (111,727 )     (305 )     (36,024 )        
Accrued salaries, wages and payroll taxes
    56,009       (59,617 )     (106,014 )        
Accrued income taxes
    5,962       (77,254 )     126,594          
Other noncurrent liabilities
    119,428       (65,261 )     (56,001 )        
Other, net
    (33,344 )     (30,327 )     (31,668 )        
   
Net cash provided by operating activities
    512,503       587,469       1,024,439          
   
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Available-for-sale securities:
                               
Purchases of available-for-sale securities
    (138,824 )     (5,365 )     (5,092 )        
Maturities of and payments received on available-for-sale securities
    16,797       15,758       15,075          
Principal payments on mortgage loans held for investment, net
    58,471       72,832       91,329          
Purchases of property and equipment
    (62,959 )     (90,515 )     (97,880 )        
Payments made for business acquisitions, net of cash acquired
    (54,171 )     (10,539 )     (293,805 )        
Proceeds from sale of businesses, net
    71,083       66,623       18,865          
Franchise loans:
                               
Loans funded
    (92,455 )     (89,664 )     –            
Payments received
    57,552       40,710       –            
Net cash provided by investing activities of discontinued operations
    –         –         255,066          
Other, net
    34,349       31,513       22,002          
   
Net cash provided by (used in) investing activities
    (110,157 )     31,353       5,560          
   
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Repayments of commercial paper
    (4,818,766 )     (1,406,013 )     –            
Proceeds from issuance of commercial paper
    4,818,766       1,406,013       –            
Repayments of other borrowings
    (50,000 )     (4,267,773 )     (4,762,294 )        
Proceeds from other borrowings
    –         4,242,727       4,733,294          
Customer banking deposits, net
    (11,440 )     17,539       64,357          
Dividends paid
    (186,802 )     (200,899 )     (198,685 )        
Repurchase of common stock, including shares surrendered
    (283,534 )     (254,250 )     (106,189 )        
Proceeds from issuance of common stock, net
    –         –         141,415          
Proceeds from exercise of stock options
    424       16,682       71,594          
Net cash provided by financing activities of discontinued operations