UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | |
(Mark One) | | |
[X] | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended JanuaryJuly 31, 2011 |
| | |
OR |
[ ] | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
| | |
MISSOURI (State or other jurisdiction of incorporation or organization) | | 44-0607856 (I.R.S. Employer Identification No.) |
One H&R Block Way
Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes Ö No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes Ö No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule12b-2 of the Exchange Act. (Check one):
| | | | | | |
Large accelerated filer Ö | | Accelerated filer | | Non-accelerated filer | | Smaller reporting company |
| | |
| | (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes No Ö
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on February 28,July 31, 2011 was 305,250,229305,766,188 shares.
Form 10-Q for the Period Ended JanuaryJuly 31, 2011
Table of Contents
| | | | | | | | | | | | | | | | |
| | January 31, 2011 | | April 30, 2010 | | |
As of | | | July 31, 2011 | | April 30, 2011 | |
| | | | |
| | (Unaudited) | | | | | (Unaudited) | | | |
|
ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,465,690 | | | $ | 1,804,045 | | | $ | 1,012,709 | | | $ | 1,677,844 | |
Cash and cash equivalents – restricted | | | 36,113 | | | | 34,350 | | | | 44,402 | | | | 48,383 | |
Receivables, less allowance for doubtful accounts of $125,561 and $112,475 | | | 1,371,152 | | | | 517,986 | | |
Receivables, less allowance for doubtful accounts of $67,582 and $67,466 | | | | 329,388 | | | | 492,290 | |
Prepaid expenses and other current assets | | | 401,106 | | | | 292,655 | | | | 281,326 | | | | 259,214 | |
| | | | | | | | | | |
Total current assets | | | 3,274,061 | | | | 2,649,036 | | | | 1,667,825 | | | | 2,477,731 | |
Mortgage loans held for investment, less allowance for loan losses of $87,876 and $93,535 | | | 513,192 | | | | 595,405 | | |
Property and equipment, at cost, less accumulated depreciation and amortization of $700,649 and $657,008 | | | 321,075 | | | | 345,470 | | |
Mortgage loans held for investment, less allowance for loan losses of $91,303 and $92,087 | | | | 466,663 | | | | 485,008 | |
Property and equipment, at cost, less accumulated depreciation and amortization of $694,321 and $677,220 | | | | 295,220 | | | | 307,320 | |
Intangible assets, net | | | 375,644 | | | | 367,432 | | | | 360,035 | | | | 367,919 | |
Goodwill | | | 849,028 | | | | 840,447 | | | | 742,611 | | | | 846,245 | |
Other assets | | | 469,735 | | | | 436,528 | | | | 775,698 | | | | 723,738 | |
| | | | | | | | | | |
Total assets | | $ | 5,802,735 | | | $ | 5,234,318 | | | $ | 4,308,052 | | | $ | 5,207,961 | |
| | | | | | | | | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Customer banking deposits | | $ | 1,855,195 | | | $ | 852,555 | | | $ | 666,268 | | | $ | 852,220 | |
Accounts payable, accrued expenses and other current liabilities | | | 671,682 | | | | 756,577 | | | | 522,130 | | | | 618,070 | |
Accrued salaries, wages and payroll taxes | | | 153,613 | | | | 199,496 | | | | 83,257 | | | | 257,038 | |
Accrued income taxes | | | 95,990 | | | | 459,175 | | | | 275,639 | | | | 458,910 | |
Current portion of long-term debt | | | 3,583 | | | | 3,688 | | | | 30,940 | | | | 3,437 | |
Commercial paper borrowings | | | 632,566 | | | | - | | |
Federal Home Loan Bank borrowings | | | 50,000 | | | | 50,000 | | | | 25,000 | | | | 25,000 | |
| | | | | | | | | | |
Total current liabilities | | | 3,462,629 | | | | 2,321,491 | | | | 1,603,234 | | | | 2,214,675 | |
Long-term debt | | | 1,049,358 | | | | 1,035,144 | | | | 1,019,431 | | | | 1,049,754 | |
Federal Home Loan Bank borrowings | | | 25,000 | | | | 25,000 | | |
Other noncurrent liabilities | | | 438,065 | | | | 412,053 | | | | 451,510 | | | | 493,958 | |
| | | | | | | | | | |
Total liabilities | | | 4,975,052 | | | | 3,793,688 | | | | 3,074,175 | | | | 3,758,387 | |
| | | | | | | | | | |
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 | | |
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 412,440,599 | | | | 4,124 | | | | 4,124 | |
Additional paid-in capital | | | 809,733 | | | | 832,604 | | | | 808,668 | | | | 812,666 | |
Accumulated other comprehensive income | | | 7,162 | | | | 1,678 | | | | 12,692 | | | | 11,233 | |
Retained earnings | | | 2,045,447 | | | | 2,658,586 | | | | 2,437,011 | | | | 2,658,103 | |
Less treasury shares, at cost | | | (2,038,783 | ) | | | (2,056,552 | ) | | | (2,028,618 | ) | | | (2,036,552 | ) |
| | | | | | | | | | |
Total stockholders’ equity | | | 827,683 | | | | 1,440,630 | | | | 1,233,877 | | | | 1,449,574 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 5,802,735 | | | $ | 5,234,318 | | | $ | 4,308,052 | | | $ | 5,207,961 | |
| | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements
1
| | | | | | | | | | | | | | | | |
| |
| | Three Months Ended January 31, | | | Nine Months Ended January 31, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| |
|
Revenues: | | | | | | | | | | | | | | | | |
Service revenues | | $ | 677,295 | | | $ | 744,327 | | | $ | 1,220,853 | | | $ | 1,287,270 | |
Interest income | | | 56,109 | | | | 48,346 | | | | 77,046 | | | | 72,746 | |
Product and other revenues | | | 118,078 | | | | 142,179 | | | | 150,946 | | | | 176,422 | |
| | | | | | | | | | | | | | | | |
| | | 851,482 | | | | 934,852 | | | | 1,448,845 | | | | 1,536,438 | |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of revenues | | | 635,163 | | | | 645,747 | | | | 1,396,129 | | | | 1,443,146 | |
Selling, general and administrative | | | 235,799 | | | | 194,661 | | | | 461,771 | | | | 427,563 | |
| | | | | | | | | | | | | | | | |
| | | 870,962 | | | | 840,408 | | | | 1,857,900 | | | | 1,870,709 | |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | (19,480 | ) | | | 94,444 | | | | (409,055 | ) | | | (334,271 | ) |
Other income, net | | | 2,031 | | | | 3,007 | | | | 9,170 | | | | 7,996 | |
| | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before taxes (benefit) | | | (17,449 | ) | | | 97,451 | | | | (399,885 | ) | | | (326,275 | ) |
Income taxes (benefit) | | | (13,074 | ) | | | 43,848 | | | | (161,060 | ) | | | (122,789 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | | (4,375 | ) | | | 53,603 | | | | (238,825 | ) | | | (203,486 | ) |
Net loss from discontinued operations | | | (8,346 | ) | | | (2,968 | ) | | | (13,626 | ) | | | (8,100 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (12,721 | ) | | $ | 50,635 | | | $ | (252,451 | ) | | $ | (211,586 | ) |
| | | | | | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | $ | (0.01 | ) | | $ | 0.16 | | | $ | (0.77 | ) | | $ | (0.61 | ) |
Net loss from discontinued operations | | | (0.03 | ) | | | (0.01 | ) | | | (0.04 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (0.04 | ) | | $ | 0.15 | | | $ | (0.81 | ) | | $ | (0.63 | ) |
| | | | | | | | | | | | | | | | |
Basic shares | | | 305,144 | | | | 332,999 | | | | 310,546 | | | | 334,293 | |
| | | | | | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | $ | (0.01 | ) | | $ | 0.16 | | | $ | (0.77 | ) | | $ | (0.61 | ) |
Net loss from discontinued operations | | | (0.03 | ) | | | (0.01 | ) | | | (0.04 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (0.04 | ) | | $ | 0.15 | | | $ | (0.81 | ) | | $ | (0.63 | ) |
| | | | | | | | | | | | | | | | |
Diluted shares | | | 305,144 | | | | 334,297 | | | | 310,546 | | | | 334,293 | |
| | | | | | | | | | | | | | | | |
Dividends paid per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.45 | | | $ | 0.45 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (12,721 | ) | | $ | 50,635 | | | $ | (252,451 | ) | | $ | (211,586 | ) |
Change in unrealized gain onavailable-for-sale securities, net | | | 646 | | | | (464 | ) | | | 7 | | | | (882 | ) |
Change in foreign currency translation adjustments | | | 4,101 | | | | 1,484 | | | | 5,477 | | | | 13,607 | |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (7,974 | ) | | $ | 51,655 | | | $ | (246,967 | ) | | $ | (198,861 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| |
Three Months Ended July 31, | | 2011 | | | 2010 | |
| |
|
Revenues: | | | | | | | | |
Service revenues | | $ | 240,563 | | | $ | 247,419 | |
Product and other revenues | | | 16,638 | | | | 16,753 | |
Interest income | | | 10,433 | | | | 10,302 | |
| | | | | | | | |
| | | 267,634 | | | | 274,474 | |
| | | | | | | | |
Expenses: | | | | | | | | |
Cost of revenues: | | | | | | | | |
Compensation and benefits | | | 160,255 | | | | 168,047 | |
Occupancy and equipment | | | 94,045 | | | | 94,702 | |
Depreciation and amortization of property and equipment | | | 21,048 | | | | 23,065 | |
Provision for bad debt and loan losses | | | 8,823 | | | | 10,049 | |
Interest | | | 23,301 | | | | 22,962 | |
Other | | | 49,528 | | | | 49,191 | |
| | | | | | | | |
| | | 357,000 | | | | 368,016 | |
Impairment of goodwill | | | 99,697 | | | | – | |
Selling, general and administrative expenses | | | 108,166 | | | | 117,029 | |
| | | | | | | | |
| | | 564,863 | | | | 485,045 | |
| | | | | | | | |
Operating loss | | | (297,229 | ) | | | (210,571 | ) |
Other income, net | | | 4,087 | | | | 3,254 | |
| | | | | | | | |
Loss from continuing operations before tax benefit | | | (293,142 | ) | | | (207,317 | ) |
Income tax benefit | | | (119,699 | ) | | | (79,679 | ) |
| | | | | | | | |
Net loss from continuing operations | | | (173,443 | ) | | | (127,638 | ) |
Net loss from discontinued operations | | | (1,655 | ) | | | (3,043 | ) |
| | | | | | | | |
Net loss | | $ | (175,098 | ) | | $ | (130,681 | ) |
| | | | | | | | |
Basic and diluted loss per share: | | | | | | | | |
Net loss from continuing operations | | $ | (0.57 | ) | | $ | (0.40 | ) |
Net loss from discontinued operations | | | – | | | | (0.01 | ) |
| | | | | | | | |
Net loss | | $ | (0.57 | ) | | $ | (0.41 | ) |
| | | | | | | | |
Basic and diluted shares | | | 305,491 | | | | 319,690 | |
| | | | | | | | |
Dividends paid per share | | $ | 0.15 | | | $ | 0.15 | |
| | | | | | | | |
Comprehensive income (loss): | | | | | | | | |
Net loss | | $ | (175,098 | ) | | $ | (130,681 | ) |
Change in unrealized gain onavailable-for-sale securities, net | | | 975 | | | | (306 | ) |
Change in foreign currency translation adjustments | | | 484 | | | | (4,020 | ) |
| | | | | | | | |
Comprehensive loss | | $ | (173,639 | ) | | $ | (135,007 | ) |
| | | | | | | | |
See Notes to Condensed Consolidated Financial Statements
2
| | | | | | | | | | | | | | | | |
Nine Months Ended January 31, | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
|
Net cash used in operating activities | | $ | (1,505,418 | ) | | $ | (2,648,962 | ) | | $ | (394,549 | ) | | $ | (348,251 | ) |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchases ofavailable-for-sale securities | | | | (39,275 | ) | | | – | |
Principal repayments on mortgage loans held for investment, net | | | 45,316 | | | | 56,114 | | | | 11,192 | | | | 17,618 | |
Purchases of property and equipment, net | | | (51,198 | ) | | | (63,242 | ) | | | (10,953 | ) | | | (8,634 | ) |
Payments made for business acquisitions, net | | | (50,832 | ) | | | (10,828 | ) | | | (3,457 | ) | | | (33,226 | ) |
Proceeds from sale of businesses, net | | | 62,298 | | | | 66,760 | | | | 21,230 | | | | 26,387 | |
Loans made to franchisees | | | (90,304 | ) | | | (88,564 | ) | |
Franchise loans: | | | | | | | | | |
Loans funded | | | | (16,477 | ) | | | (33,720 | ) |
Payments received | | | | 5,320 | | | | 6,724 | |
Other, net | | | 48,577 | | | | 30,849 | | | | 18,167 | | | | 18,848 | |
| | | | | | | | | | |
Net cash used in investing activities | | | (36,143 | ) | | | (8,911 | ) | | | (14,253 | ) | | | (6,003 | ) |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Repayments of short-term borrowings | | | (2,654,653 | ) | | | (982,774 | ) | |
Proceeds from short-term borrowings | | | 3,286,603 | | | | 2,657,436 | | |
Customer banking deposits, net | | | 1,002,274 | | | | 1,365,163 | | | | (186,245 | ) | | | (121,401 | ) |
Dividends paid | | | (140,926 | ) | | | (151,317 | ) | | | (45,894 | ) | | | (48,692 | ) |
Repurchase of common stock, including shares surrendered | | | (283,494 | ) | | | (154,201 | ) | | | (2,002 | ) | | | (164,369 | ) |
Proceeds from exercise of stock options | | | (866 | ) | | | 15,678 | | | | 1,762 | | | | 1,500 | |
Other, net | | | (10,062 | ) | | | (29,434 | ) | | | (24,916 | ) | | | (15,987 | ) |
| | | | | | | | | | |
Net cash provided by financing activities | | | 1,198,876 | | | | 2,720,551 | | |
| | | | | | |
Net cash used in financing activities | | | | (257,295 | ) | | | (348,949 | ) |
| | | | | | |
Effects of exchange rates on cash | | | 4,330 | | | | 10,336 | | | | 962 | | | | (2,232 | ) |
| | |
Net increase (decrease) in cash and cash equivalents | | | (338,355 | ) | | | 73,014 | | |
Net decrease in cash and cash equivalents | | | | (665,135 | ) | | | (705,435 | ) |
Cash and cash equivalents at beginning of the period | | | 1,804,045 | | | | 1,654,663 | | | | 1,677,844 | | | | 1,804,045 | |
| | | | | | | | | | |
Cash and cash equivalents at end of the period | | $ | 1,465,690 | | | $ | 1,727,677 | | | $ | 1,012,709 | | | $ | 1,098,610 | |
| | | | | | | | | | |
Supplementary cash flow data: | | | | | | | | | | | | | | | | |
Income taxes paid | | $ | 159,916 | | | $ | 269,774 | | | $ | 99,357 | | | $ | 64,651 | |
Interest paid on borrowings | | | 69,313 | | | | 61,118 | | | | 37,634 | | | | 27,265 | |
Interest paid on deposits | | | 6,191 | | | | 8,654 | | | | 1,820 | | | | 1,915 | |
Transfers of loans to foreclosed assets | | | 12,931 | | | | 12,689 | | |
Transfers of foreclosed loans to other assets | | | | 1,573 | | | | 6,527 | |
See Notes to Condensed Consolidated Financial Statements
3
| |
1. | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated balance sheet as of JanuaryJuly 31, 2011, the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended JanuaryJuly 31, 2011 and 2010, and the condensed consolidated statements of cash flows for the ninethree months ended JanuaryJuly 31, 2011 and 2010 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at JanuaryJuly 31, 2011 and for all periods presented have been made.
A restatement was made to the historical condensed consolidated statement of cash flows for the nine months ended January 31, 2010. Loans made to franchisees and cash receipts from franchise loans of $88.6 million and $8.5 million, respectively, were previously reported in cash flows from operating activities and are now reported in cash flows from investing activities.
“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 20102011 Annual Report to Shareholders onForm 10-K. All amounts presented herein as of April 30, 20102011 or for the year then ended, are derived from our April 30, 20102011 Annual Report to Shareholders onForm 10-K.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the determination of our allowance for loan losses, potential losses from loan repurchase and indemnity obligations associated with our discontinued mortgage business, contingent losses associated with pending litigation, fair value of reporting units, valuation allowances based on future taxable income, reserves for uncertain tax positions, credit losses on receivable balances and related matters. We revise our estimates when factsEstimates have been prepared on the basis of the most current and circumstances dictate. However, future events and their effects cannot be determined with absolute certainty.best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
Seasonality of Business
Our operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
Concentrations of Risk
Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 51% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California and New York.
Financing Receivables and Related Allowances
Our financing receivables consist primarily of mortgage loans held for investment, Emerald Advance lines of Credit (EAs), tax client receivables related to refund anticipation loans (RALs) and loans made to franchisees. Policies related to our mortgage loans held for investment and the related allowance are included in our Annual Report onForm 10-K.
4
The current portion of EAs, tax client receivables and loans made to franchisees is included in accounts receivable, while the noncurrent portion is included in other assets in the condensed consolidated financial statements. These amounts as of January 31, 2011 are as follows:
| | | | | | | | | | | | |
(in 000s) | |
| | Emerald Advance
| | | Tax Client
| | | Loans
| |
| | Lines of Credit | | | Receivables - RALs | | | to Franchisees | |
| |
|
Current | | $ | 674,317 | | | $ | 4,874 | | | $ | 85,269 | |
Noncurrent | | | 13,608 | | | | 5,856 | | | | 131,340 | |
| | | | | | | | | | | | |
| | $ | 687,925 | | | $ | 10,730 | | | $ | 216,609 | |
| | | | | | | | | | | | |
|
|
Related allowance for doubtful accounts is detailed in note 4.
Emerald Advance lines of credit. Interest income on EAs is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or becomes delinquent. Loan commitment fees on EAs, net of related expenses, are initially deferred and recognized as revenue over the commitment period, which is typically two months. EAs are placed on non-accrual status as soon as they become delinquent.
We review the credit quality of these receivables based on the year the loans were originated, with different bad debt rates applied to each year. As of January 31, 2011, we had EA receivables of $648.1 million, $12.3 million and $14.7 million which were originated in fiscal years 2011, 2010 and 2009 and prior, respectively. We also had receivables of $12.8 million related to EA receivables of clients who paid off their original EA and qualified to maintain their loan year-round. As of January 31, 2011, $33.2 million of EAs were on non-accrual status. Payments on past due amounts are recorded as a reduction in the receivable balance.
We determine our allowance for these receivables collectively, based on a review of receipts taking into consideration historical experience. These receivables are not specifically identified and charged-off, but are evaluated on a pooled basis. Initial bad debt rates also consider whether the loan was made to a new or repeat client. At the end of each tax season the outstanding balances on these receivables are evaluated based on collections received and expected collections over the upcoming tax season. We adjust our allowance accordingly, with these adjustments reflected as bad debt expense.
Tax client receivables related to RALs. Historically, 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 HSBC by its regulator and RALs are not being 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. All tax client receivables outstanding at January 31, 2011 were originated prior to fiscal year 2011 and are past due. We do not accrue interest on these receivables. Payments on past due amounts are recorded as a reduction in the receivable balance.
We review the credit quality of these receivables based on the year the loans were originated, with different bad debt rates applied to each year. As of January 31, 2011, we had tax client receivables of $1.7 million, $2.7 million and $6.4 million which were originated by HSBC in fiscal years 2010, 2009 and 2008 and prior, respectively. These receivables are not specifically identified and charged-off, but are evaluated on a pooled basis. At the end of each tax season the outstanding balances on these receivables are evaluated based on collections received and expected collections over the upcoming tax season. We adjust our allowance accordingly, with these adjustments reflected as bad debt expense.
Loans made to franchisees. Interest income on loans made to franchisees is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or becomes delinquent. Loans made to franchisees totaled $216.6 million at January 31, 2011, and consisted of $145.4 million in term loans made to finance the purchase of franchises and $71.2 million in revolving lines of credit made to existing franchisees primarily for the purpose of funding their off-season needs. The credit quality of these receivables is determined on a specific franchisee basis, taking into account the franchisee’s credit score, their payment history on existing loans and operational amounts due to us, theloan-to-value ratio anddebt-to-income ratio. Credit scores,
5
loan-to-value ratio anddebt-to-income ratio are obtained at the time of underwriting. Payment history is monitored on a regular basis. We believe all loans to franchisees fall within the same credit quality category. Loans are evaluated for impairment when they become delinquent. Amounts deemed to be uncollectible are written off to bad debt expense and bad debt related to these loans has typically been insignificant. Additionally, the franchise office serves as collateral for the loan. In the event the franchisee is unable to repay the loans, we revoke their franchise rights, write off the remaining balance of the loans and assume control of the office. We had no loans to franchisees past due or on non-accrual status as of January 31, 2011 and we had no allowance for bad debts recorded related to loans to franchisees at January 31, 2011.
| |
2. | Business CombinationsSubsequent Event |
Effective July 20, 2010,In August 2011, our Board of Directors approved a non-binding letter of intent to sell substantially all assets of RSM McGladrey Business Services, Inc. (RSM) to McGladrey & Pullen LLP (M&P) which is described in a recently issuedForm 8-K. The sale is dependent on, among other factors, the ability of M&P to raise financing for the purchase, and is expected to be completed by calendar year end. We also announced we are evaluating strategic alternatives for RSM EquiCo, Inc. (EquiCo). We recorded a $99.7 million impairment of goodwill in the first quarter for reporting units in our Business Services segment acquired certain non-attest assets and liabilitiesbased on these events. These amounts related to the sale of Caturano & Company, Inc. (Caturano), a Boston-based accounting firm, for an aggregateRSM may fluctuate based on adjustments to the purchase price at closing as well as the additional realization 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 14 years. The following table summarizes the fair value of identifiable assets acquired and liabilities assumed and the resulting goodwill as of January 31, 2011:
| | | | |
(in 000s) | |
| |
|
Customer relationships(1) | | $ | 6,733 | |
Non-compete agreements(2) | | | 2,766 | |
Attest firm affiliation(3) | | | 7,629 | |
Goodwill | | | 27,289 | |
Fixed assets | | | 2,500 | |
Other assets | | | 831 | |
Other liabilities | | | (1,640) | |
Unfavorable leasehold(2) | | | (5,890) | |
| | | | |
Total purchase price | | $ | 40,218 | |
| | | | |
|
|
| | |
(1) | | Estimated life of 12 years. |
(2) | | Estimated life of 7 years. |
(3) | | Estimated life of 18 years. Represents thetax benefits to be received from the Alternative Practice Structure arrangement and affiliation with attest clients. |
In connection with the acquisition a deferred compensation plan, an employee retention program and a performance bonus plan were put in place for eligible employees. Expenses related to these plansthe sale. M&P will be treated as compensationalso assume substantially all liabilities, including contingent payments and will be expensed as incurred. We incurred expenses totaling $2.0 million under these plans during the nine months ended January 31, 2011.
In October 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of 2SS Holdings, Inc., developer of TaxACT digital tax preparation solutions, for $287.5 million in cash. Completion of the transaction is subject to the satisfaction of customary closing conditions, including regulatory approval.lease obligations.
| |
3. | Earnings (Loss)Loss Per Share and Stockholders’ Equity |
Basic and diluted earnings (loss)loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.
4
Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 9.614.5 million shares and 14.7 million shares for the three months ended JanuaryJuly 31, 2010, as the effect would be antidilutive. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 12.6 million shares for the three and nine months ended January 31,
6
2011 and 16.8 million shares for the nine months ended January 31, 2010, respectively, as the effect would be antidilutive due to the net loss from continuing operations during each period.
The computations of basic and diluted earnings (loss)loss per share from continuing operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (in 000s, except per share amounts) | | | (in 000s, except per share amounts) | |
| | | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | Three Months Ended January 31, | | Nine Months Ended January 31, | | | |
| | 2011 | | 2010 | | 2011 | | 2010 | |
| | |
| |
Net earnings (loss) from continuing operations attributable to shareholders | | $ | (4,375 | ) | | $ | 53,603 | | | $ | (238,825 | ) | | $ | (203,486 | ) | |
Net loss from continuing operations attributable to shareholders | | | $ | (173,443 | ) | | $ | (127,638 | ) |
Amounts allocated to participating securities (nonvested shares) | | | (148 | ) | | | (203 | ) | | | (142 | ) | | | (530 | ) | | | (114 | ) | | | (20 | ) |
| | | | | | | | | | | | | | |
Net earnings (loss) from continuing operations attributable to common shareholders | | $ | (4,523 | ) | | $ | 53,400 | | | $ | (238,967 | ) | | $ | (204,016 | ) | |
Net loss from continuing operations attributable to common shareholders | | | $ | (173,557 | ) | | $ | (127,658 | ) |
| | | | | | | | | | | | | | |
Basic weighted average common shares | | | 305,144 | | | | 332,999 | | | | 310,546 | | | | 334,293 | | | | 305,491 | | | | 319,690 | |
Potential dilutive shares | | | - | | | | 1,298 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | |
Dilutive weighted average common shares | | | 305,144 | | | | 334,297 | | | | 310,546 | | | | 334,293 | | | | 305,491 | | | | 319,690 | |
| | | | | | | | | | | | | | |
Earnings (loss) per share from continuing operations attributable to common shareholders: | | | | | | | | | | | | | | | | | |
Loss per share from continuing operations: | | | | | | | | | |
Basic | | $ | (0.01 | ) | | $ | 0.16 | | | $ | (0.77 | ) | | $ | (0.61 | ) | | $ | (0.57 | ) | | $ | (0.40 | ) |
Diluted | | | (0.01 | ) | | | 0.16 | | | | (0.77 | ) | | | (0.61 | ) | | | (0.57 | ) | | | (0.40 | ) |
| |
The weighted average shares outstanding for the three and nine months ended JanuaryJuly 31, 2011 decreased to 305.1305.5 million and 310.5 million, respectively, from 333.0 million and 334.3319.7 million for the three and nine months ended JanuaryJuly 31, 2010 respectively.primarily due to share repurchases completed in the prior year. During the ninethree months ended JanuaryJuly 31, 2011,2010, we purchased and immediately retired 19.015.5 million shares of our common stock at a cost of $279.9$235.7 million. We may continue to repurchase and retire common stock or retire shares held in treasury from time to time in the future. The cost of shares retired during the period was allocated to the components of stockholders’ equity as follows:
| | | | |
(in 000s) | |
| |
|
Common stock | | $ | 190 | |
Additional paid-in capital | | | 11,370 | |
Retained earnings | | | 268,387 | |
| | | | |
| | $ | 279,947 | |
| | | | |
|
|
During the ninethree months ended JanuaryJuly 31, 2011 and 2010, we issued 1.10.5 million and 2.20.9 million shares of common stock, respectively, due to the exercise of stock options, employee stock purchases and vesting of nonvested shares.
During the ninethree months ended JanuaryJuly 31, 2011, we acquired 0.20.1 million shares of our common stock at an aggregate cost of $3.5$2.0 million, and during the ninethree months ended JanuaryJuly 31, 2010, we acquired 0.2 million shares at an aggregate cost of $4.2$3.4 million. Shares acquired during these periods represented shares swapped or surrendered to us in connection with the vesting of nonvested shares and the exercise of stock options.
During the ninethree months ended JanuaryJuly 31, 2011, we granted 2.12.3 million stock options and 0.80.9 million nonvested shares and units in accordance with our stock-based compensation plans. The weighted average fair value of options granted was $2.25$3.37 for management options. These awards vest over a fourthree year period with one-fourthone-third vesting each year. Stock-based compensation expense of our continuing operations totaled $4.4$4.1 million and $10.6$3.4 million for the three and nine months ended JanuaryJuly 31, 2011 respectively, and $7.2 million and $19.3 million for the three and nine months ended January 31, 2010, respectively. At JanuaryJuly 31, 2011, unrecognized compensation cost for options totaled $5.4$9.6 million, and for nonvested shares and units totaled $13.8$22.5 million.
75
CurrentOur short-term receivables consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in 000s) | | | | | (in 000s) | |
| | | | |
As of | | January 31, 2011 | | January 31, 2010 | | April 30, 2010 | | | | | July 31, 2011 | | April 30, 2011 | |
| | | | |
|
Business Services receivables | | | $ | 224,631 | | | $ | 281,847 | |
Loans to franchisees | | | | 62,313 | | | | 62,181 | |
Receivables for tax preparation and related fees | | | | 36,203 | | | | 38,930 | |
Emerald Advance lines of credit | | $ | 674,317 | | | $ | 667,859 | | | $ | 57,914 | | | | | | | | 30,699 | | | | 31,645 | |
Business Services receivables | | | 220,404 | | | | 324,085 | | | | 326,681 | | | | | | |
Receivables for tax preparation and related fees | | | 280,364 | | | | 286,732 | | | | 45,248 | | | | | | |
Loans to franchisees | | | 85,269 | | | | 70,706 | | | | 55,047 | | | | | | |
Royalties from franchisees | | | 84,049 | | | | 82,943 | | | | 3,845 | | | | | | | | 707 | | | | 11,645 | |
RAC fees receivable | | | 51,704 | | | | 19,850 | | | | - | | | | | | |
Tax client receivables related to RALs | | | 4,874 | | | | 1,109,795 | | | | 21,646 | | | | | | | | 1,971 | | | | 2,412 | |
Other | | | 95,732 | | | | 91,713 | | | | 120,080 | | | | | | | | 40,446 | | | | 131,096 | |
| | | | | | | | | | | | |
| | | 1,496,713 | | | | 2,653,683 | | | | 630,461 | | | | | | | | 396,970 | | | | 559,756 | |
Allowance for doubtful accounts | | | (125,561 | ) | | | (86,853 | ) | | | (112,475 | ) | | | | | | | (67,582 | ) | | | (67,466 | ) |
| | | | | | | | | | | | |
| | $ | 1,371,152 | | | $ | 2,566,830 | | | $ | 517,986 | | | | | | | $ | 329,388 | | | $ | 492,290 | |
| | | | | | | | | | | | |
| |
The decrease inshort-term portion of Emerald Advance lines of credit (EAs), tax client receivables from January 2010related to refund anticipation loans (RALs) and loans made to franchisees is due toincluded in receivables, while the terminationlong-term portion is included in other assets in the condensed consolidated financial statements. These amounts are as follows:
| | | | | | | | | | | | |
| | | | | (in 000s) | |
| |
| | Emerald Advance
| | | Tax Client
| | | Loans
| |
| | Lines of Credit | | | Receivables - RALs | | | to Franchisees | |
| |
|
As of July 31, 2011: | | | | | | | | | | | | |
Short-term | | $ | 30,699 | | | $ | 1,971 | | | $ | 62,313 | |
Long-term | | | 18,539 | | | | 5,271 | | | | 123,962 | |
| | | | | | | | | | | | |
| | $ | 49,238 | | | $ | 7,242 | | | $ | 186,275 | |
| | | | | | | | | | | | |
As of April 30, 2011: | | | | | | | | | | | | |
Short-term | | $ | 31,645 | | | $ | 2,412 | | | $ | 62,181 | |
Long-term | | | 21,619 | | | | 5,855 | | | | 110,420 | |
| | | | | | | | | | | | |
| | $ | 53,264 | | | $ | 8,267 | | | $ | 172,601 | |
| | | | | | | | | | | | |
|
|
We review the credit quality of our contractEA receivables and tax client receivables related to RALs based on pools, which are segregated by the year of origination, with HSBColder years being deemed more unlikely to offerbe repaid. These amounts as of July 31, 2011, by year of origination, are as follows:
| | | | | | | | |
| | (in 000s) | |
| |
| | Emerald Advance
| | | Tax Client
| |
| | Lines of Credit | | | Receivables - RALs | |
| |
|
Credit Quality Indicator – Year of origination: | | | | | | | | |
2011 | | $ | 25,738 | | | $ | - | |
2010 | | | 5,006 | | | | 86 | |
2009 | | | 4,953 | | | | 2,124 | |
2008 and prior | | | 2,082 | | | | 5,032 | |
Revolving loans | | | 11,459 | | | | - | |
| | | | | | | | |
| | $ | 49,238 | | | $ | 7,242 | |
| | | | | | | | |
|
|
As of July 31, 2011 and April 30, 2011, $44.6 million and $46.8 million, respectively, of EAs were on non-accrual status and classified as impaired, or more than 60 days past due. All tax client receivables related to RALs duringare considered impaired.
Loans made to franchisees totaled $186.3 million at July 31, 2011, and consisted of $140.0 million in term loans made to finance the current tax season. See additional discussionpurchase of franchises and $46.3 million in note 1. The decrease in Business Services receivables from January 2010 isrevolving lines of credit made to existing franchisees primarily a resultfor the purpose of the change in the administrative services agreement between RSM and McGladrey & Pullen, LLP (M&P) in February 2010.funding their off-season needs.
6
Our allowance for doubtful accounts as of January 31, 2011 consists of the following:
| | | | | | | | | | | | |
(in 000s) | | |
| | | (in 000s) | |
| | | |
As of | | | July 31, 2011 | | April 30, 2011 | |
| | | | |
|
Allowance related to: | | | | | | | | | | | | |
Emerald Advance lines of credit | | $ | 73,645 | | | $ | 5,350 | | | $ | 4,400 | |
Tax client receivables related to RALs | | | - | | | | - | | | | - | |
Loans to franchisees | | | - | | | | - | | | | - | |
All other receivables | | | 51,916 | | | | 62,232 | | | | 63,066 | |
| | | | | | | | |
| | $ | 125,561 | | | $ | 67,582 | | | $ | 67,466 | |
| | | | | | | | |
| |
Activity in the allowance for doubtful accounts for the three months ended July 31, 2011 and 2010 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | (in 000s) | |
| |
| | Emerald Advance
| | | Tax Client
| | | Loans
| | | All
| | | | |
| | Lines of Credit | | | Receivables - RALs | | | to Franchisees | | | Other | | | Total | |
| |
|
Balance as of April 30, 2011 | | $ | 4,400 | | | $ | - | | | $ | - | | | $ | 63,066 | | | $ | 67,466 | |
Provision | | | 950 | | | | - | | | | - | | | | 1,955 | | | | 2,905 | |
Recoveries | | | - | | | | - | | | | - | | | | 51 | | | | 51 | |
Charge-offs | | | - | | | | - | | | | - | | | | (2,840 | ) | | | (2,840 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance as of July 31, 2011 | | $ | 5,350 | | | $ | - | | | $ | - | | | $ | 62,232 | | | $ | 67,582 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of April 30, 2010 | | $ | 35,239 | | | $ | 12,191 | | | $ | 4 | | | $ | 65,041 | | | $ | 112,475 | |
Provision | | | 710 | | | | 2 | | | | - | | | | 1,078 | | | | 1,790 | |
Recoveries | | | - | | | | - | | | | - | | | | 128 | | | | 128 | |
Charge-offs | | | - | | | | - | | | | (4 | ) | | | (2,015 | ) | | | (2,019 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance as of July 31, 2010 | | $ | 35,949 | | | $ | 12,193 | | | $ | - | | | $ | 64,232 | | | $ | 112,374 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
There were no changes to our methodology related to the calculation of our allowance for doubtful accounts during the quarter.three months ended July 31, 2011.
| |
5. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of JanuaryJuly 31, 2011 and April 30, 20102011 is as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | (dollars in 000s) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | (dollars in 000s) | | | July 31, 2011 | | April 30, 2011 | |
| | | | |
As of | | January 31, 2011 | | April 30, 2010 | | | Amount | | % of Total | | Amount | | % of Total | |
| | |
| | Amount | | % of Total | | Amount | | % of Total | | |
| | | | |
|
Adjustable-rate loans | | $ | 348,523 | | | | 58 | % | | $ | 411,122 | | | | 60 | % | | $ | 320,539 | | | | 58 | % | | $ | 333,828 | | | | 58 | % |
Fixed-rate loans | | | 248,252 | | | | 42 | % | | | 272,562 | | | | 40 | % | | | 233,452 | | | | 42 | % | | | 239,146 | | | | 42 | % |
| | | | | | | | | | | | | | | | | | |
| | | 596,775 | | | | 100 | % | | | 683,684 | | | | 100 | % | | | 553,991 | | | | 100 | % | | | 572,974 | | | | 100 | % |
Unamortized deferred fees and costs | | | 4,293 | | | | | | | | 5,256 | | | | | | | | 3,975 | | | | | | | | 4,121 | | | | | |
Less: Allowance for loan losses | | | (87,876 | ) | | | | | | | (93,535 | ) | | | | | | | (91,303 | ) | | | | | | | (92,087 | ) | | | | |
| | | | | | | | | | |
| | $ | 513,192 | | | | | | | $ | 595,405 | | | | | | | $ | 466,663 | | | | | | | $ | 485,008 | | | | | |
| | | | | | | | | | |
| |
Our loan loss allowance as a percent of mortgage loans was 16.5% at July 31, 2011, compared to 16.1% at April 30, 2011.
Activity in the allowance for loan losses for the ninethree months ended JanuaryJuly 31, 2011 and 2010 is as follows:
(in 000s)
| | | | | | | | | | | | | | | | | | | | |
| | | (in 000s) |
Nine Months Ended January 31, | | 2011 | | 2010 | | | |
| | |
Three Months Ended July 31, | | | 2011 | | 2010 | | |
| |
Balance, beginning of the period | | $ | 93,535 | | | $ | 84,073 | | | | | $ | 92,087 | | | $ | 93,535 | | | |
Provision | | | 24,100 | | | | 36,050 | | | | | | 5,625 | | | | 8,000 | | | |
Recoveries | | | 169 | | | | 38 | | | | | | 49 | | | | 33 | | | |
Charge-offs | | | (29,928 | ) | | | (22,892 | ) | | | | | (6,458 | ) | | | (13,172 | ) | | |
| | | | | | | | | | |
Balance, end of the period | | $ | 87,876 | | | $ | 97,269 | | | | | $ | 91,303 | | | $ | 88,396 | | | |
| | | | | | | | | | |
| |
8
Our loan loss reserve as a percent of mortgage loans was 14.7% at January 31, 2011 compared to 13.7% at April 30, 2010.
When determining our allowance for loan losses, we evaluate loans less than 60 days past due on a pooled basis, while loans we consider impaired, (which includesincluding those loans more than 60 days past due or that have been modified)
7
modified as troubled debt restructurings (TDRs), are evaluated individually. The balance of these loans and the related allowance is as follows at January 31, 2011:follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in 000s) | | | | | | (in 000s) | |
| | | |
| | Portfolio Balance | | Related Allowance | | | | July 31, 2011 | | April 30, 2011 | |
| | | |
As of | | | Portfolio Balance | | Related Allowance | | Portfolio Balance | | Related Allowance | |
| | | |
|
Pooled (less than 60 days past due) | | $ | 319,424 | | | $ | 11,071 | | | | | $ | 290,762 | | | $ | 10,914 | | | $ | 304,325 | | | $ | 11,238 | |
Individually (modified) | | | 112,433 | | | | 9,712 | | | | |
Impaired: | | | | | | | | | | | | | | | | | |
Individually (TDRs) | | | | 95,417 | | | | 9,499 | | | | 106,328 | | | | 11,056 | |
Individually (60 days or more past due) | | | 164,918 | | | | 67,093 | | | | | | 167,812 | | | | 70,890 | | | | 162,321 | | | | 69,793 | |
| | | | | | | | | | | | | | |
| | $ | 596,775 | | | $ | 87,876 | | | | | $ | 553,991 | | | $ | 91,303 | | | $ | 572,974 | | | $ | 92,087 | |
| | | | | | | | | | | | | | |
| |
We review the credit quality of our portfolio based on the following criteria: (1) originator, (2) the level of documentation obtained for loan at origination, (3) occupancy status of property at origination, (4) geography, and (5) credit score and loan to value at origination. We specifically evaluate each loan and assign an internal risk rating of high, medium or low to each loan. The risk rating is based upon multiple loan characteristics that correlate to delinquency and loss. These characteristics include, but are not limited to, the five criteria listed above, plus loan to value. These loan attributes are tested annually against a variety of additional characteristics to ensure the appropriate data is being utilized to determine the level of risk within the portfolio.
All criteria are obtained at the time of origination and are only subsequently updated if the loan is refinanced.
Our portfolio includes loans originated by Sand Canyon Corporation (SCC) and purchased by H&R Block Bank (HRB Bank) which constitute approximately 63% of the total loan portfolio at JanuaryJuly 31, 2011. We have experienced higher rates of delinquency and have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio totaled $221.9$207.3 million and is characteristic of a prime loan portfolio, and we believe subject to a lower loss exposure. Detail of our mortgage loans held for investment and the related allowance at JanuaryJuly 31, 2011 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (dollars in 000s) | | | | | | | (dollars in 000s) | |
| | | | |
| | Outstanding
| | Loan Loss Allowance | | %30+ Days
| | | Outstanding
| | Loan Loss Allowance | | % 30+ Days
| |
| | Principal Balance | | Amount | | % of Principal | | Past Due | | | Principal Balance | | Amount | | % of Principal | | Past Due | |
| | | | |
|
Purchased from SCC | | $ | 374,870 | | | $ | 73,900 | | | | 19.7% | | | | 41.5% | | | $ | 346,695 | | | $ | 80,640 | | | | 23.3 | % | | | 44.8 | % |
All other | | | 221,905 | | | | 13,976 | | | | 6.3% | | | | 11.2% | | | | 207,296 | | | | 10,663 | | | | 5.1 | % | | | 12.4 | % |
| | | | | | | | | | | | | | |
| | $ | 596,775 | | | $ | 87,876 | | | | 14.7% | | | | 30.3% | | | $ | 553,991 | | | $ | 91,303 | | | | 16.5 | % | | | 32.7 | % |
| | | | | | | | | | | | | | |
| |
Credit quality indicators at July 31, 2011 include the following:
| | | | | | | | | | | | |
| | | | | (in 000s) | |
| |
Credit Quality Indicators | | Purchased from SCC | | | All Other | | | Total Portfolio | |
| |
|
Occupancy status: | | | | | | | | | | | | |
Owner occupied | | $ | 244,259 | | | $ | 132,132 | | | $ | 376,391 | |
Non-owner occupied | | | 102,436 | | | | 75,164 | | | | 177,600 | |
| | | | | | | | | | | | |
| | $ | 346,695 | | | $ | 207,296 | | | $ | 553,991 | |
| | | | | | | | | | | | |
Documentation level: | | | | | | | | | | | | |
Full documentation | | $ | 105,547 | | | $ | 150,972 | | | $ | 256,519 | |
Limited documentation | | | 10,447 | | | | 22,411 | | | | 32,858 | |
Stated income | | | 198,898 | | | | 21,168 | | | | 220,066 | |
No documentation | | | 31,803 | | | | 12,745 | | | | 44,548 | |
| | | | | | | | | | | | |
| | $ | 346,695 | | | $ | 207,296 | | | $ | 553,991 | |
| | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | |
High | | $ | 143,931 | | | $ | 357 | | | $ | 144,288 | |
Medium | | | 202,764 | | | | - | | | | 202,764 | |
Low | | | - | | | | 206,939 | | | | 206,939 | |
| | | | | | | | | | | | |
| | $ | 346,695 | | | $ | 207,296 | | | $ | 553,991 | |
| | | | | | | | | | | | |
|
|
Loans given our internal risk rating of “high” are generally originated by SCC, have no documentation or are stated income and are non-owner occupied. Loans given our internal risk rating of “medium” are generally full documentation or stated income, withloan-to-value at origination of more than 80% and have credit scores at origination below 700. Loans given our internal risk rating of “low” are generally full documentation, withloan-to-value at origination of less than 80% and have credit scores greater than 700.
Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 52% of our
8
mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California and New York.
Detail of the aging of the mortgage loans in our portfolio that are past due as of JanuaryJuly 31, 2011 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (in 000s) | |
| |
| | Less than 60
| | | 60-89 Days
| | | 90+ Days
| | | Total
| | | | | | | |
| | Days Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Total | |
| |
|
Purchased from SCC | | $ | 33,484 | | | $ | 6,647 | | | $ | 134,503 | | | $ | 174,634 | | | $ | 200,236 | | | $ | 374,870 | |
All other | | | 12,146 | | | | 1,843 | | | | 18,610 | | | | 32,599 | | | | 189,306 | | | | 221,905 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 45,630 | | | $ | 8,490 | | | $ | 153,113 | | | $ | 207,233 | | | $ | 389,542 | | | $ | 596,775 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
|
9
Credit quality indicators at January 31, 2011 include the following:
| | | | |
| | (in 000s) | |
| |
Credit Quality Indicators | | Portfolio Balance | |
| |
|
Occupancy status: | | | | |
Owner occupied | | $ | 401,287 | |
Non-owner occupied | | | 195,488 | |
| | | | |
| | $ | 596,775 | |
| | | | |
Documentation level: | | | | |
Full documentation | | $ | 274,116 | |
Limited documentation | | | 35,200 | |
Stated income | | | 238,385 | |
No documentation | | | 49,074 | |
| | | | |
| | $ | 596,775 | |
| | | | |
Internal risk rating: | | | | |
High | | $ | 161,099 | |
Medium | | | 213,771 | |
Low | | | 221,905 | |
| | | | |
| | $ | 596,775 | |
| | | | |
|
|
In cases where we modify a loan and in so doing grant a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR). TDR loans totaled $112.4 million and $145.0 million at January 31, 2011 and April 30, 2010, respectively. The principal balance of non-performing assets as of January 31, 2011 and April 30, 2010 is as follows:
| | | | | | | | | | |
| | (in 000s) |
|
As of | | January 31, 2011 | | | April 30, 2010 | | | |
|
|
Impaired loans: | | | | | | | | | | |
30 – 59 days past due | | $ | 1,094 | | | $ | 330 | | | |
60 – 89 days past due | | | 8,490 | | | | 11,851 | | | |
90+ days past due, non-accrual | | | 153,113 | | | | 153,703 | | | |
TDR loans, accrual | | | 108,075 | | | | 113,471 | | | |
TDR loans, non-accrual | | | 4,358 | | | | 31,506 | | | |
| | | | | | | | | | |
| | | 275,130 | | | | 310,861 | | | |
Real estate owned(1) | | | 21,841 | | | | 29,252 | | | |
| | | | | | | | | | |
Total non-performing assets | | $ | 296,971 | | | $ | 340,113 | | | |
| | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (in 000s) | |
| |
| | Less than 60
| | | 60-89 Days
| | | 90+Days
| | | Total
| | | | | | | |
| | Days Past Due | | | Past Due | | | Past Due(1) | | | Past Due | | | Current | | | Total | |
| |
|
Purchased from SCC | | $ | 35,960 | | | $ | 8,886 | | | $ | 133,767 | | | $ | 178,613 | | | $ | 168,082 | | | $ | 346,695 | |
All other | | | 10,470 | | | | 1,735 | | | | 20,479 | | | | 32,684 | | | | 174,612 | | | | 207,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 46,430 | | | $ | 10,621 | | | $ | 154,246 | �� | | $ | 211,297 | | | $ | 342,694 | | | $ | 553,991 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| | |
(1) | | IncludesNo loans accounted for as in-substance foreclosures of $8.9 million and $12.5 million at January 31, 2011 and April 30, 2010, respectively.past due 90 days or more are still accruing interest. |
Information related to our non-accrual loans is as follows:
| | | | | | | | |
| | (in 000s) | |
| |
| | July 31,
| | | | |
As of | | 2011 | | | April 30, 2011 | |
| |
|
Loans: | | | | | | | | |
Purchased from SCC | | $ | 138,277 | | | $ | 143,358 | |
Other | | | 22,964 | | | | 14,106 | |
| | | | | | | | |
| | | 161,241 | | | | 157,464 | |
| | | | | | | | |
TDRs: | | | | | | | | |
Purchased from SCC | | | 3,767 | | | | 2,849 | |
Other | | | 178 | | | | 329 | |
| | | | | | | | |
| | | 3,945 | | | | 3,178 | |
| | | | | | | | |
Total non-accrual loans | | $ | 165,186 | | | $ | 160,642 | |
| | | | | | | | |
|
|
Information related to impaired loans is as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | (in 000s) | |
| |
| | Portfolio Balance
| | | Portfolio Balance
| | | Total
| | | | |
| | With Allowance | | | With No Allowance | | | Portfolio Balance | | | Related Allowance | |
| |
|
As of July 31, 2011: | | | | | | | | | | | | | | | | |
Purchased from SCC | | $ | 180,494 | | | $ | 47,081 | | | $ | 227,575 | | | $ | 70,964 | |
Other | | | 27,954 | | | | 7,700 | | | | 35,654 | | | | 9,425 | |
| | | | | | | | | | | | | | | | |
| | $ | 208,448 | | | $ | 54,781 | | | $ | 263,229 | | | $ | 80,389 | |
| | | | | | | | | | | | | | | | |
As of April 30, 2011: | | | | | | | | | | | | | | | | |
Purchased from SCC(1) | | $ | 180,387 | | | $ | 51,674 | | | $ | 232,061 | | | $ | 71,733 | |
Other(1) | | | 29,027 | | | | 7,561 | | | | 36,588 | | | | 9,116 | |
| | | | | | | | | | | | | | | | |
| | $ | 209,414 | | | $ | 59,235 | | | $ | 268,649 | | | $ | 80,849 | |
| | | | | | | | | | | | | | | | |
|
|
| | |
(1) | | Classification of amounts as of April 30, 2011 have been restated to conform to the current period presentation. |
Information related to the allowance for impaired loans is as follows:
| | | | | | | | |
| | (in 000s) | |
| |
As of | | July 31, 2011 | | | April 30, 2011 | |
| |
|
Portion of total allowance for loan losses allocated to impaired loans and TDR loans: | | | | | | | | |
Based on collateral value method | | $ | 70,890 | | | $ | 69,794 | |
Based on discounted cash flow method | | | 9,499 | | | | 11,055 | |
| | | | | | | | |
| | $ | 80,389 | | | $ | 80,849 | |
| | | | | | | | |
|
|
9
Information related to activities of our non-performing assets is as follows:
| | | | | | | | |
| | (in 000s) | |
| |
Three Months Ended July 31, | | 2011 | | | 2010 | |
| |
|
Average impaired loans: | | | | | | | | |
Purchased from SCC | | $ | 230,150 | | | | | |
All other | | | 36,477 | | | | | |
| | | | | | | | |
| | $ | 266,627 | | | $ | 303,767 | |
| | | | | | | | |
Interest income on impaired loans: | | | | | | | | |
Purchased from SCC | | $ | 1,556 | | | | | |
All other | | | 119 | | | | | |
| | | | | | | | |
| | $ | 1,675 | | | $ | 1,749 | |
| | | | | | | | |
Interest income on impaired loans recognized on a cash basis on non-accrual status: | | | | | | | | |
Purchased from SCC | | $ | 1,498 | | | | | |
All other | | | 114 | | | | | |
| | | | | | | | |
| | $ | 1,612 | | | $ | 1,636 | |
| | | | | | | | |
|
|
Our real estate owned includes loans accounted for as in-substance foreclosures of $7.2 million and $7.7 million at July 31, 2011 and April 30, 2011, respectively. Activity related to our real estate owned (REO) is as follows:
(in 000s)
| | | | | | | | | | | | | | | | | | |
| | | (in 000s) | |
Nine Months Ended January 31, | | 2011 | | 2010 | | | |
| | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | |
|
Balance, beginning of the period | | $ | 29,252 | | | $ | 44,533 | | | | | $ | 19,532 | | | $ | 29,252 | |
Additions | | | 12,931 | | | | 12,689 | | | | | | 1,573 | | | | 6,527 | |
Sales | | | (16,900 | ) | | | (17,528 | ) | | | | | (3,722 | ) | | | (8,827 | ) |
Writedowns | | | (3,442 | ) | | | (8,183 | ) | | | | | (793 | ) | | | (643 | ) |
| | | | | | | | | | |
Balance, end of the period | | $ | 21,841 | | | $ | 31,511 | | | | | $ | 16,590 | | | $ | 26,309 | |
| | | | | | | | | | |
| |
| |
6. | Assets and Liabilities Measured at Fair Value |
We use the following valuation methodologies for assets and liabilities measured at fair value and the general classification of these instruments pursuant to the fair value hierarchy.
| | |
| • | Available-for-sale securities –Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, we use a third-party pricing service to determine fair values are estimated using quoted prices ofvalue and classify the securities with similar characteristics.as Level 2. The service’s pricing model is based on market data and utilizes available trade, bid and other market information.Available-for-sale securities that we classify as Level 2 |
10
include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities.
| | |
| • | Real estate owned –REO includes foreclosed properties securing mortgage loans. Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to REO. Fair value is generally based on independent market prices or appraised values of the collateral. Subsequent holding period losses and losses arising from the sale of REO are expensed as incurred. Because our REO is included in prepaid expenses and other current assetsvalued based on significant inputs that are unobservable in the condensed consolidated balance sheets. Thesemarket and our own estimates of assumptions that we believe market participants would use in pricing the asset, these assets are classified as Level 3. |
| • | Impaired mortgage loans held for investment –The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. These loans are classified as Level 3. |
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The following table presents for each hierarchy level the assets that were remeasured at fair value on both a recurring and non-recurring basis during the ninethree months ended JanuaryJuly 31, 2011 and 2010:2010 and the gains (losses) on those remeasurements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (dollars in 000s) | | | (dollars in 000s) | |
| | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | | Total | | Level 1 | | Level 2 | | Level 3 | | Gain (loss) | |
| | | | |
|
Nine months ended January 31, 2011: | | | | | | | | | | | | | | | | | |
As of July 31, 2011: | | | | | | | | | | | | | | | | | | | | | |
Recurring: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 19,927 | | | $ | - | | | $ | 19,927 | | | $ | - | | | $ | 192,491 | | | $ | - | | | $ | 192,491 | | | $ | - | | | $ | 1,936 | |
Municipal bonds | | | 8,740 | | | | - | | | | 8,740 | | | | - | | | | 7,758 | | | | - | | | | 7,758 | | | | - | | | | 449 | |
Non-recurring: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REO | | | 19,532 | | | | - | | | | - | | | | 19,532 | | | | 3,446 | | | | - | | | | - | | | | 3,446 | | | | (482) | |
Impaired mortgage loans held for investment | | | 174,062 | | | | - | | | | - | | | | 174,062 | | | | 61,997 | | | | - | | | | - | | | | 61,997 | | | | (1,473) | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 222,261 | | | $ | - | | | $ | 28,667 | | | $ | 193,594 | | | $ | 265,692 | | | $ | - | | | $ | 200,249 | | | $ | 65,443 | | | $ | 430 | |
| | | | | | | | | | | | | | | | | | | | |
As a percentage of total assets | | | 3.8% | | | | -% | | | | 0.5% | | | | 3.3% | | | | 6.2% | | | | -% | | | | 4.7% | | | | 1.5% | | | | | |
Nine months ended January 31, 2010: | | | | | | | | | | | | | | | | | |
As of July 31, 2010:(1) | | | | | | | | | | | | | | | | | | | | | |
Recurring: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 24,259 | | | $ | - | | | $ | 24,259 | | | $ | - | | | $ | 21,893 | | | $ | - | | | $ | 21,893 | | | $ | - | | | $ | (20) | |
Municipal bonds | | | 9,966 | | | | - | | | | 9,966 | | | | - | | | | 8,981 | | | | - | | | | 8,981 | | | | - | | | | 566 | |
Trust preferred security | | | | 32 | | | | - | | | | 32 | | | | - | | | | (1,618) | |
Non-recurring: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REO | | | 27,492 | | | | - | | | | - | | | | 27,492 | | | | 3,321 | | | | - | | | | - | | | | 3,321 | | | | (589) | |
Impaired mortgage loans held for investment | | | 188,891 | | | | - | | | | - | | | | 188,891 | | | | 69,467 | | | | - | | | | - | | | | 69,467 | | | | (2,227) | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 250,608 | | | $ | - | | | $ | 34,225 | | | $ | 216,383 | | | $ | 103,694 | | | $ | - | | | $ | 30,906 | | | $ | 72,788 | | | $ | (3,888) | |
| | | | | | | | | | | | | | | | | | | | |
As a percentage of total assets | | | 3.4% | | | | -% | | | | 0.5% | | | | 2.9% | | | | 2.3% | | | | -% | | | | 0.7% | | | | 1.6% | | | | | |
| |
| | |
(1) | | Amounts have been restated to conform to the current period presentation. |
There were no changes to the unobservable inputs used in determining the fair values of our level 2 and level 3 financial assets.
The following methods were used to determine the fair values of our other financial instruments:
| | |
| • | Cash equivalents, accounts receivable, demand deposits,investment in FHLB stock, accounts payable, accrued liabilities, commercial paper borrowings and the current portion of long-term debt –The carrying values reported in the balance sheet for these items approximate fair market value due to the relative short-term nature of the respective instruments. |
| • | Mortgage loans held for investment –The fair value of mortgage loans held for investment is generally determined using market pricing sources based on origination channel and performance characteristics. |
| • | Deposits – The estimated fair value of demand deposits is the amount payable on demand at the reporting date. The estimated fair value of IRAs and other time deposits –The fair value is calculated based onestimated by discounting the discounted value of contractualfuture cash flows.flows using the rates currently offered by HRB Bank for products with similar remaining maturities. |
| • | Long-term borrowings and Federal Home Loan Bank (FHLB)FHLB borrowings –The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market ratesyields on our Senior Notes. |
11
The carrying amounts and estimated fair values of our financial instruments at JanuaryJuly 31, 2011 are as follows:
(in 000s)
| | | | | | | | | | | | | | | | | | | | |
| | | Carrying
| | Estimated
| | | | Carrying
| | Estimated
| | |
| | Amount | | Fair Value | | | | Amount | | Fair Value | | |
| |
Mortgage loans held for investment | | $ | 513,192 | | | $ | 306,962 | | | | | $ | 466,663 | | | $ | 282,546 | | | |
IRAs and other time deposits | | | 669,786 | | | | 672,614 | | | | |
Deposits | | | | 678,071 | | | | 678,352 | | | |
Long-term borrowings | | | 1,052,941 | | | | 1,085,456 | | | | | | 1,050,371 | | | | 1,105,686 | | | |
FHLB advances | | | 75,000 | | | | 75,417 | | | | | | 25,000 | | | | 24,998 | | | |
| |
11
| |
7. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the ninethree months ended JanuaryJuly 31, 2011 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in 000s) | (in 000s) | | (in 000s) | |
| | | | |
| | Tax Services | | Business Services | | Total | | | Tax Services | | Business Services | | Total | |
| | | | |
|
Balance at April 30, 2010: | | | | | | | | | | | | | |
Balance at April 30, 2011: | | | | | | | | | | | | | |
Goodwill | | $ | 453,884 | | | $ | 403,751 | | | $ | 857,635 | | | $ | 459,039 | | | $ | 427,094 | | | $ | 886,133 | |
Accumulated impairment losses | | | (2,188 | ) | | | (15,000 | ) | | | (17,188 | ) | | | (24,888 | ) | | | (15,000 | ) | | | (39,888 | ) |
| | | | | | | | | | | | | | |
| | | 451,696 | | | | 388,751 | | | | 840,447 | | | | 434,151 | | | | 412,094 | | | | 846,245 | |
| | | | | | | | | | | | | | |
Changes: | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisitions | | | 14,674 | | | | 28,544 | | | | 43,218 | | | | 3,478 | | | | 34 | | | | 3,512 | |
Disposals and other | | | (8,681 | ) | | | (3,256 | ) | | | (11,937 | ) | |
Disposals and foreign currency changes | | | | 112 | | | | (7,561 | ) | | | (7,449 | ) |
Impairments | | | (22,700 | ) | | | - | | | | (22,700 | ) | | | - | | | | (99,697 | ) | | | (99,697 | ) |
| | | | | | | | | | | | | | |
Balance at January 31, 2011: | | | | | | | | | | | | | |
Balance at July 31, 2011: | | | | | | | | | | | | | |
Goodwill | | | 459,877 | | | | 429,039 | | | | 888,916 | | | | 462,629 | | | | 419,567 | | | | 882,196 | |
Accumulated impairment losses | | | (24,888 | ) | | | (15,000 | ) | | | (39,888 | ) | | | (24,888 | ) | | | (114,697 | ) | | | (139,585 | ) |
| | | | | | | | | | | | | | |
| | $ | 434,989 | | | $ | 414,039 | | | $ | 849,028 | | | $ | 437,741 | | | $ | 304,870 | | | $ | 742,611 | |
| | | | | | | | | | | | | | |
| |
We test goodwill and other indefinite-life intangible assets for impairment annually at the beginning of our fourth quarter, or more frequently if events occur or circumstances change which could,would, more likely than not, reduce the fair value of a reporting unit’s net assetsunit below its carrying value. In August 2011, our Board of Directors approved a non-binding letter of intent to sell substantially all assets of RSM to M&P. The sale is dependent on, among other factors, the ability of M&P to raise financing for the purchase. In conjunction with this sale, we are also evaluating strategic alternatives for EquiCo. Both of these businesses are separate reporting units within the Business Services segment.
The RedGear reporting unit within our Tax Services segment experienced lower than expected settlement product revenues, and as a result, we evaluated this reporting unit’sThese decisions triggered an interim review of the goodwill for impairment at January 31, 2011.our RSM and EquiCo reporting units. The measurementfair values of impairment of goodwill consists of two steps. Inboth reporting units were reviewed based on expected sale prices in the first step, wemarket compared the fair value of this reporting unit, determined using discounted cash flows, to its carryingbook value. As the results of the first test indicated that the fair value was less than its carrying value, we then performed the second step, which was to determine the implied fair value of its goodwill and to compare that to its carrying value. The second step included hypothetically valuing all of the tangible and intangible assets of this reporting unit. As a result of that review, we recorded ana goodwill impairment of the$85.4 million related to our RSM reporting unit’s goodwill of $22.7 million during the three months ended January 31, 2011,unit, leaving a remaining goodwill balance of approximately $14$304.9 million. TheWe have also recorded a goodwill impairment of $14.3 million related to our EquiCo reporting unit, leaving no remaining goodwill balance.
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | (in 000s) | |
| |
As of | | July 31, 2011 | | | April 30, 2011 | |
| |
| | Gross
| | | | | | | | | Gross
| | | | | | | |
| | Carrying
| | | Accumulated
| | | | | | Carrying
| | | Accumulated
| | | | |
| | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
| |
|
Tax Services: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 86,678 | | | $ | (43,031 | ) | | $ | 43,647 | | | $ | 87,624 | | | $ | (41,076 | ) | | $ | 46,548 | |
Noncompete agreements | | | 23,451 | | | | (22,278 | ) | | | 1,173 | | | | 23,456 | | | | (22,059 | ) | | | 1,397 | |
Reacquired franchise rights | | | 214,330 | | | | (10,991 | ) | | | 203,339 | | | | 214,330 | | | | (9,961 | ) | | | 204,369 | |
Franchise agreements | | | 19,201 | | | | (3,414 | ) | | | 15,787 | | | | 19,201 | | | | (3,093 | ) | | | 16,108 | |
Purchased technology | | | 14,700 | | | | (9,070 | ) | | | 5,630 | | | | 14,700 | | | | (8,505 | ) | | | 6,195 | |
Trade name | | | 1,325 | | | | (650 | ) | | | 675 | | | | 1,325 | | | | (600 | ) | | | 725 | |
Business Services: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | | 147,208 | | | | (125,848 | ) | | | 21,360 | | | | 152,079 | | | | (128,738 | ) | | | 23,341 | |
Noncompete agreements | | | 35,551 | | | | (25,101 | ) | | | 10,450 | | | | 35,818 | | | | (24,662 | ) | | | 11,156 | |
Attest firm affiliation | | | 7,629 | | | | (424 | ) | | | 7,205 | | | | 7,629 | | | | (318 | ) | | | 7,311 | |
Trade name –amortizing | | | 2,600 | | | | (2,600 | ) | | | - | | | | 2,600 | | | | (2,600 | ) | | | - | |
Trade name –non-amortizing | | | 55,637 | | | | (4,868 | ) | | | 50,769 | | | | 55,637 | | | | (4,868 | ) | | | 50,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 608,310 | | | $ | (248,275 | ) | | $ | 360,035 | | | $ | 614,399 | | | $ | (246,480 | ) | | $ | 367,919 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
|
Amortization of intangible assets for the three months ended July 31, 2011 and 2010 was $7.7 and $6.9 million respectively. Estimated amortization of intangible assets for fiscal years 2012 through 2016 is included in selling, general$27.1 million, $22.7 million, $19.2 million, $14.4 million and administrative expenses on the condensed consolidated statements of operations.$13.0 million, respectively.
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Intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | (in 000s) | |
| |
As of | | January 31, 2011 | | | April 30, 2010 | |
| |
| | Gross
| | | | | | | | | Gross
| | | | | | | |
| | Carrying
| | | Accumulated
| | | | | | Carrying
| | | Accumulated
| | | | |
| | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
| |
|
Tax Services: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 88,311 | | | $ | (38,940 | ) | | $ | 49,371 | | | $ | 67,705 | | | $ | (33,096 | ) | | $ | 34,609 | |
Noncompete agreements | | | 23,461 | | | | (21,859 | ) | | | 1,602 | | | | 23,062 | | | | (21,278 | ) | | | 1,784 | |
Reacquired franchise rights | | | 214,330 | | | | (8,983 | ) | | | 205,347 | | | | 223,773 | | | | (6,096 | ) | | | 217,677 | |
Franchise agreements | | | 19,201 | | | | (2,773 | ) | | | 16,428 | | | | 19,201 | | | | (1,813 | ) | | | 17,388 | |
Purchased technology | | | 14,700 | | | | (7,941 | ) | | | 6,759 | | | | 14,500 | | | | (6,266 | ) | | | 8,234 | |
Trade name | | | 1,325 | | | | (550 | ) | | | 775 | | | | 1,325 | | | | (400 | ) | | | 925 | |
Business Services: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | | 152,082 | | | | (126,723 | ) | | | 25,359 | | | | 145,149 | | | | (120,037 | ) | | | 25,112 | |
Noncompete agreements | | | 35,818 | | | | (24,001 | ) | | | 11,817 | | | | 33,052 | | | | (22,118 | ) | | | 10,934 | |
Attest firm affiliation | | | 7,629 | | | | (212 | ) | | | 7,417 | | | | - | | | | - | | | | - | |
Trade name – amortizing | | | 2,600 | | | | (2,600 | ) | | | - | | | | 2,600 | | | | (2,600 | ) | | | - | |
Trade name –non-amortizing | | | 55,637 | | | | (4,868 | ) | | | 50,769 | | | | 55,637 | | | | (4,868 | ) | | | 50,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 615,094 | | | $ | (239,450 | ) | | $ | 375,644 | | | $ | 586,004 | | | $ | (218,572 | ) | | $ | 367,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
|
Amortization of intangible assets for the three and nine months ended January 31, 2011 was $7.4 and $21.6 million respectively, and $7.1 million and $21.4 million for the three and nine months ended January 31, 2010, respectively. Estimated amortization of intangible assets for fiscal years 2011 through 2015 is $30.7 million, $29.1 million, $24.7 million, $21.1 million and $15.7 million, respectively.
In connection with thea prior acquisition, of Caturano, as discussed in note 2, we recordedhave a liability related to unfavorable operating lease terms in the amount of $5.9 million, which will be amortized over the remaining contractual life of the operating lease. The net balance was $5.6$5.3 million at JanuaryJuly 31, 2011.
Borrowings consist of the following:
| | | | | | | | | | | | |
| |
As of | | | | | (in 000s) | |
| |
| | January 31, 2011 | | | January 31, 2010 | | | April 30, 2010 | |
| |
|
Short-term borrowings: | | | | | | | | | | | | |
Commercial paper | | $ | 632,566 | | | $ | 792,594 | | | $ | - | |
HSBC credit facility | | | - | | | | 882,500 | | | | - | |
| | | | | | | | | | | | |
| | $ | 632,566 | | | $ | 1,675,094 | | | $ | - | |
| | | | | | | | | | | | |
Long-term borrowings: | | | | | | | | | | | | |
Senior Notes, 7.875%, due January 2013 | | $ | 599,758 | | | $ | 599,633 | | | $ | 599,664 | |
Senior Notes, 5.125%, due October 2014 | | | 399,117 | | | | 398,882 | | | | 398,941 | |
Other | | | 54,066 | | | | 36,861 | | | | 40,227 | |
| | | | | | | | | | | | |
| | | 1,052,941 | | | | 1,035,376 | | | | 1,038,832 | |
Less: Current portion | | | (3,583 | ) | | | (2,576 | ) | | | (3,688 | ) |
| | | | | | | | | | | | |
| | $ | 1,049,358 | | | $ | 1,032,800 | | | $ | 1,035,144 | |
| | | | | | | | | | | | |
|
|
We had commercial paper borrowings of $632.6 million at January 31, 2011, compared to $792.6 million at the same time last year. These borrowings were used to fund our off-season losses and cover our seasonal working capital needs. We also had other short-term borrowings of $882.5 million outstanding at January 31, 2010 to fund our participation interests in RALs.
At January 31, 2011, we maintained a committed line of credit (CLOC) agreement to support commercial paper issuances, general corporate purposes or for working capital needs. This facility provides funding up to $1.7 billion and matures July 31, 2013. This facility bears interest at an annual rate of LIBOR plus 1.30% to 2.80% or PRIME plus 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
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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 January 31, 2011, we were in compliance with these covenants and had net worth of $827.7 million. We had no balance outstanding under the CLOCs at January 31, 2011.
HRB Bank is a member of the FHLB of Des Moines, which extends credit to member banks based on eligible collateral. At January 31, 2011, HRB Bank had total FHLB advance capacity of $226.2 million. There was $75.0 million outstanding on this facility, leaving remaining availability of $151.2 million. Mortgage loans held for investment of $381.5 million serve as eligible collateral and are used to determine total capacity.
We file a consolidated federal income tax return in the United States and file tax returns in various state and foreign jurisdictions. The U.S. Federal consolidated tax returns for the years 1999 through 20072009 are currently under examination by the Internal Revenue Service, with the1999-2005 years currently at the appellate level. Federal returns for tax years prior to 1999 are closed by statute. Historically, tax returns in various foreign and state jurisdictions are examined and settled upon completion of the exam.
During the ninethree months ended JanuaryJuly 31, 2011, we accrued additionalreduced our gross interest and penalties of $4.5accrued by $3.1 million related to our uncertain tax positions.positions due to statute of limitations expirations and settlements made with various taxing authorities. We had gross unrecognized tax benefits of $131.5$145.5 million and $129.8$154.8 million at JanuaryJuly 31, 2011 and April 30, 2010,2011, respectively. The gross unrecognized tax benefits increased $1.7decreased $9.3 million net in the current year, due to statute of limitations expirations and settlements with taxing authorities, partially offset by accruals of tax and interest on positions related to prior years. Except as noted below, we have classified the liability for unrecognized tax benefits, including corresponding accrued interest, as long-term at JanuaryJuly 31, 2011, and included this amount in other noncurrent liabilities on the condensed consolidated balance sheet.
Based upon the expiration of statutes of limitations, payments of tax and other factors in several jurisdictions, we believe it is reasonably possible that the gross amount of reserves for previously unrecognized tax benefits may decrease by approximately $16.5$16.9 million within twelve months of JanuaryJuly 31, 2011. This portion of our liability for unrecognized tax benefits has been classified as current and is included in accounts payable, accrued expenses and other current liabilities on the condensed consolidated balance sheets.
| |
10.9. | Interest Income and Expense |
The following table shows the components of interest income and expense of our continuing operations:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in 000s) | (in 000s) | | (in 000s) | |
| | | | |
| | Three Months Ended January 31, | | Nine Months Ended January 31, | | |
| | 2011 | | 2010 | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
|
Interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage loans held for investment | | $ | 5,923 | | | $ | 7,567 | | | $ | 18,771 | | | $ | 23,535 | | |
Emerald Advance lines of credit | | | 46,132 | | | | 36,867 | | | | 47,590 | | | | 39,944 | | |
Mortgage loans, net | | | $ | 5,661 | | | $ | 6,323 | |
Other | | | 4,054 | | | | 3,912 | | | | 10,685 | | | | 9,267 | | | | 4,772 | | | | 3,979 | |
| | | | | | | | | | | | | | |
| | $ | 56,109 | | | $ | 48,346 | | | $ | 77,046 | | | $ | 72,746 | | | $ | 10,433 | | | $ | 10,302 | |
| | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings | | $ | 22,244 | | | $ | 19,617 | | | $ | 63,778 | | | $ | 57,088 | | | $ | 21,494 | | | $ | 20,643 | |
Deposits | | | 2,587 | | | | 3,340 | | | | 6,457 | | | | 7,673 | | | | 1,656 | | | | 1,923 | |
FHLB advances | | | 397 | | | | 509 | | | | 1,189 | | | | 1,526 | | | | 151 | | | | 396 | |
| | | | | | | | | | | | | | |
| | $ | 25,228 | | | $ | 23,466 | | | $ | 71,424 | | | $ | 66,287 | | | $ | 23,301 | | | $ | 22,962 | |
| | | | | | | | | | | | | | |
| |
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| |
11.10. | Regulatory Requirements |
HRB Bank files its regulatory Thrift Financial Report (TFR) on a calendar quarter basis with the Office of Thrift Supervision (OTS). In July 2011, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act), the responsibility and authority of the OTS moved to the Office of the Comptroller of the Currency (OCC). HRB Bank will continue to file TFR reports with the OCC through December 31, 2011. Beginning March 31, 2012, HRB Bank will file Reports of Condition and Income (Call Report) with the OCC quarterly.
13
The following table sets forth HRB Bank’s regulatory capital requirements, at December 31, 2010, as calculated in the most recently filedits TFR:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | (dollars in 000s) | | | | | | | | | | | | (dollars in 000s) |
| | | | | | | To Be Well
| | | | | | To Be Well
|
| | | | | | Capitalized
| | | | | | Capitalized
|
| | | | | | Under Prompt
| | | | | | Under Prompt
|
| | | | For Capital Adequacy
| | Corrective
| | | | For Capital Adequacy
| | Corrective
|
| | Actual | | Purposes | | Action Provisions | | Actual | | Purposes | | Action Provisions |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| |
As of June 30, 2011: | | | | | | | | | | | | | |
Total risk-based capital ratio(1) | | | $ | 411,062 | | | 94.5% | | $ | 34,813 | | | 8.0% | | $ | 43,516 | | | 10.0% |
Tier 1 risk-based capital ratio(2) | | | $ | 405,333 | | | 93.1% | | | N/A | | | N/A | | $ | 26,110 | | | 6.0% |
Tier 1 capital ratio (leverage)(3) | | | $ | 405,333 | | | 35.0% | | $ | 139,141 | | | 12.0% | | $ | 57,975 | | | 5.0% |
Tangible equity ratio(4) | | | $ | 405,333 | | | 35.0% | | $ | 17,393 | | | 1.5% | | | N/A | | | N/A |
As of March 31, 2011: | | | | | | | | | | | | | |
Total risk-based capital ratio(1) | | $ | 426,848 | | | 36.4% | | $ | 93,864 | | | 8.0% | | $ | 117,330 | | | 10.0% | | $ | 405,000 | | | 92.5% | | $ | 35,019 | | | 8.0% | | $ | 43,773 | | | 10.0% |
Tier 1 risk-based capital ratio(2) | | $ | 412,139 | | | 35.1% | | | N/A | | | N/A | | $ | 70,398 | | | 6.0% | | $ | 399,187 | | | 91.2% | | | N/A | | | N/A | | $ | 26,264 | | | 6.0% |
Tier 1 capital ratio (leverage)(3) | | $ | 412,139 | | | 23.0% | | $ | 215,244 | | | 12.0% | | $ | 89,685 | | | 5.0% | | $ | 399,187 | | | 22.8% | | $ | 209,758 | | | 12.0% | | $ | 87,399 | | | 5.0% |
Tangible equity ratio(4) | | $ | 412,139 | | | 23.0% | | $ | 26,905 | | | 1.5% | | | N/A | | | N/A | | $ | 399,187 | | | 22.8% | | $ | 26,220 | | | 1.5% | | | N/A | | | N/A |
| |
| | |
(1) | | Total risk-based capital divided by risk-weighted assets. |
(2) | | Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets. |
(3) | | Tier 1 (core) capital divided by adjusted total assets. |
(4) | | Tangible capital divided by tangible assets. |
As of JanuaryJuly 31, 2011, HRB Bank’s leverage ratio was 20.7%35.3%.
In June 2009, the Financial Accounting Standards Board (FASB) issued revised authoritative guidance associated with the consolidation of variable interest entities (VIEs). The revised guidance replaced the previous quantitative-based assessment for determining whether an enterprise is the primary beneficiary of a VIE and focuses primarily on a qualitative assessment. This assessment requires identifying the enterprise that has (1) the power to direct the activities of the VIE that can most significantly impact the entity’s performance; and (2) the obligation to absorb losses and the right to receive benefits from the VIE that could potentially be significant to such entity. The revised guidance also requires that the enterprise continually reassess whether it is the primary beneficiary of a VIE rather than conducting a reassessment only upon the occurrence of specific events.
We implemented this guidance on May 1, 2010 and evaluated our financial interests to determine if we had interests in VIEs and if we are the primary beneficiary of the VIE.
The following is a description of our financial interests in VIEs which we consider significant or where we are the sponsor. For these VIEs we have determined that we are not the primary beneficiary and, therefore have not consolidated the VIEs. Prior to implementation of this new guidance we did not consolidate these entities.
| | |
| • | McGladrey & Pullen LLP – The administrative services agreement with M&P and compensation arrangements between RSM McGladrey (RSM) and their managing directors represent a variable interest in M&P. These agreements are described more fully in our 2010 Annual Report to Shareholders onForm 10-K. |
We have concluded that RSM is not the primary beneficiary of M&P and, therefore, we have not consolidated M&P. RSM does not have an equity interest in M&P, nor does it have the power to direct any activities of M&P and does not receive any of its income. We have no assets or liabilities included in our condensed consolidated balance sheets related to our variable interests. We believe RSM’s maximum exposure to economic loss, resulting from various agreements with M&P, relates primarily to shared office space from operating leases under the administrative services agreement equal to approximately $112.4 million at January 31, 2011, and variability in our operating results due to the compensation agreements with RSM managing directors. We do not provide any support that is not contractually required.
| | |
| • | Securitization Trusts– SCC holds an interest in and is the sponsor (issuer) of 56 REMIC Trusts and 14 NIM Trusts (collectively, “Trusts”) related to previously originated mortgage loans that were securitized. These Trusts are variable interest entities. The REMIC Trusts hold static pools ofsub-prime residential mortgage loans. The NIM Trusts hold beneficial interests in certain REMIC Trusts. The |
15
| | |
| | Trusts were designed to collect and pass through to the beneficial interest holders the cash flows of the underlying mortgage loans. The REMIC Trusts were financed with bonds and equity. The NIM Trusts were financed with notes and equity. All bonds and notes are held by third-party investors. |
Our identification of the primary beneficiary of the Trusts was based on a determination that the servicer of the underlying mortgage loans has the power to direct the most significant activities of the Trusts because the servicer handles all of the loss mitigation activities for the mortgage loans.
SCC is not the servicer of the mortgage loans underlying the REMIC Trusts. Therefore, SCC is not the primary beneficiary of the REMIC Trusts because it does not have the power to direct the most significant activities of the REMIC Trusts, which is the servicing of the underlying mortgage loans.
SCC does have the exclusive right to appoint a servicer when certain conditions have been met for specific loans related to two of the NIM Trusts. As of January 31, 2011, those conditions have been met for a minority portion of the loans underlying those Trusts. As this right pertains only to a minority of the loans, we have concluded that SCC does not have the power to direct the most significant activities of these two NIM Trusts, as the servicer has the power to direct significant activities over the majority of the mortgage loans. In the remaining NIM Trusts, SCC has a shared right to appoint a servicer under certain conditions. For these NIM Trusts, we have concluded that SCC is not the primary beneficiary because the power to direct the most significant activities, which is the servicing of the underlying mortgage loans, is shared with other unrelated parties.
At January 31, 2011, we had no significant assets or liabilities included in our condensed consolidated balance sheets related to SCC’s variable interests in the Trusts. We have a liability, as discussed in note 13, and a deferred tax asset recorded in our condensed consolidated balance sheets related to obligations for representations and warranties SCC made in connection with the transfer of mortgage loans, including mortgage loans held by the securitization trusts. We have no remaining exposure to economic loss arising from impairment of SCC’s beneficial interest in the Trusts. If SCC receives cash flows in the future as a holder of beneficial interests we would record gains as other income in our income statement. Neither we nor SCC has liquidity arrangements, guarantees or other commitments for the Trusts, nor has any support been provided that was not contractually required.
| |
13.11. | Commitments and Contingencies |
Changes in deferred revenue balances related to our Peace of Mind (POM) program, the current portion of which is included in accounts payable, accrued expenses and other current liabilities and the long-term portion of which is included in other noncurrent liabilities in the condensed consolidated balance sheets, are as follows:
| | | | | | | | | | | | | | | | |
| | | | (in 000s) | | | | | (in 000s) | |
| | | | |
Nine Months Ended January 31, | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
|
Balance, beginning of period | | $ | 141,542 | | | $ | 146,807 | | | $ | 140,603 | | | $ | 141,542 | |
Amounts deferred for new guarantees issued | | | 19,376 | | | | 21,139 | | | | 553 | | | | 654 | |
Revenue recognized on previous deferrals | | | (59,882) | | | | (58,122) | | | | (27,181) | | | | (28,547) | |
| | | | | | | | | | |
Balance, end of period | | $ | 101,036 | | | $ | 109,824 | | | $ | 113,975 | | | $ | 113,649 | |
| | | | | | | | | | |
| |
In addition to amounts accrued for our POM guarantee, we had accrued $11.9$13.0 million and $14.5$14.7 million at JanuaryJuly 31, 2011 and April 30, 2010,2011, respectively, related to our standard guarantee which is included with our standard tax preparation services.
The following table summarizes certain of our other contractual obligations and commitments:
| | | | | | | | | | | | | | |
| | | | (in 000s) | | | | | (in 000s) |
| | | |
As of | | January 31, 2011 | | April 30, 2010 | | | July 31, 2011 | | April 30, 2011 |
| | | |
|
Franchise Equity Lines of Credit – undrawn commitment | | $ | 13,828 | | | $ | 36,806 | | | $ | 38,319 | | $ | 37,695 |
Contingent business acquisition obligations | | | 25,765 | | | | 20,697 | | |
Media advertising purchase obligation | | | 8,897 | | | | 26,548 | | | | 9,690 | | | 9,498 |
| |
We have various contingent purchase price obligations for acquisitions prior to May 2009. In many cases, contingent payments to be made in connection with these acquisitions are not subject to a stated limit. We estimate the potential payments (undiscounted) for which we have not recorded a liability totaling $1.4 million and $3.8 million as of July 31, 2011 and April 30, 2011, respectively. We have recorded liabilities totaling $10.2 million and $11.0 million as of July 31, 2011 and April 30, 2011, respectively, in conjunction with contingent payments related to more recent acquisitions, with the short-term amount recorded in accounts payable, accrued expenses and deposits and the long-term portion included in other noncurrent liabilities. Our estimate is based on current financial conditions. Should actual results differ materially from our assumptions, the potential payments will differ from the above estimate.
14
We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks
16
related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the terms of the indemnities may vary and in many cases are limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance we will ultimately prevail in the event any such claims are asserted, we believe the fair value of guarantees and indemnifications relating to our continuing operations is not material as of JanuaryJuly 31, 2011.
Variable Interests
We evaluated our financial interests in variable interest entities (VIEs) as of July 31, 2011 and determined that there have been no significant changes related to those financial interests. As of July 31, 2011, we believe RSM’s maximum exposure to economic loss related to their shared office space with McGladrey & Pullen, LLP from operating leases under the administrative services agreement totaled $95.2 million.
Discontinued Operations
SCC, previously known as Option One Mortgage Corporation, ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans.
In connection with the securitization and sale of loans, SCC made certain representations and warranties, including, but not limited to, representations relating to matters such as ownership of the loan, validity of lien securing the loan, and the 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.
Claims received by SCC have primarily related to alleged breaches of representations and warranties related to a loan’s compliance with the underwriting standards established by SCC at origination, borrower fraud and credit exceptions without sufficient compensating factors. Claims received since May 1, 2008 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | Fiscal Year 2009 | | Fiscal Year 2010 | | Fiscal Year 2011 | | | | Fiscal Year | | Fiscal Year 2010 | | Fiscal Year 2011 | | Fiscal Year 2012 | | |
| | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Total | | 2009 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Total |
| |
Loan Origination Year: | Loan Origination Year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2005 | | $ | 40 | | $ | 21 | | $ | 1 | | $ | - | | $ | - | | $ | 15 | | $ | - | | $ | - | | $ | 6 | | $ | 1 | | $ | - | | $ | 84 | | $ | 62 | | $ | - | | $ | 15 | | $ | - | | $ | - | | $ | 6 | | $ | 1 | | $ | - | | $ | 1 | | $ | - | | $ | 85 |
2006 | | | 89 | | | 10 | | | 111 | | | 7 | | | 2 | | | 57 | | | 4 | | | 45 | | | 100 | | | 15 | | | 29 | | | 469 | | | 217 | | | 2 | | | 57 | | | 4 | | | 45 | | | 100 | | | 15 | | | 29 | | | 50 | | | 29 | | | 548 |
2007 | | | 43 | | | 10 | | | 85 | | | 15 | | | 4 | | | 11 | | | 7 | | | - | | | 3 | | | 5 | | | 4 | | | 187 | | | 153 | | | 4 | | | 11 | | | 7 | | | - | | | 3 | | | 5 | | | 4 | | | 4 | | | 2 | | | 193 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 172 | | $ | 41 | | $ | 197 | | $ | 22 | | $ | 6 | | $ | 83 | | $ | 11 | | $ | 45 | | $ | 109 | | $ | 21 | | $ | 33 | | $ | 740 | | $ | 432 | | $ | 6 | | $ | 83 | | $ | 11 | | $ | 45 | | $ | 109 | | $ | 21 | | $ | 33 | | $ | 55 | | $ | 31 | | $ | 826 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
Note: The table above excludes amounts related to an indemnity agreement dated April 2008, which is discussed below.
For those claims received, reviewed and determined to be valid, SCC has complied with its obligations by either repurchasing the mortgage loans or REO properties, providing for the reimbursement of losses in connection with liquidated REO properties, or reaching other settlements. SCC has denied approximately 85% of all claims received, excluding resolution reached under other settlements. Counterparties could reassert claims that SCC has denied. Of claims determined to be valid, approximately 23%22% resulted in loan
15
repurchases, and 77%78% resulted in indemnification or settlement payments. Losses on loan repurchase, indemnification and settlement payments totaled approximately $88$117 million for the period May 1, 2008 through JanuaryJuly 31, 2011. Loss severity rates on repurchases and indemnification have approximated 60%57% and SCC has not observed any material trends related to average losses by counterparty.losses. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The net balance of all mortgage loans held for sale by SCC was $13.8$11.9 million at JanuaryJuly 31, 2011.
SCC generally has 60 to 120 days to respond to representation and warranty claims and performs aloan-by-loan review of all repurchase claims during this time. SCC has completed its review of all claims, with the exception of claims totaling approximately $14$66 million, which remained subject to review as of
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January July 31, 2011. Of the claims still subject to review, approximately $2$52 million are from private-label securitizations, related to rescissions of mortgage insurance, and $10$14 million are from monoline insurers, withinsurers. Approximately $8 million of claims under review represent requests by the remainder from government sponsored entities.counterparty for additional information related to denied claims, or are a reassertion of previously denied claims.
All claims asserted against SCC since May 1, 2008 relate to loans originated during calendar years 2005 through 2007, of which, approximately 89% relate to loans originated in calendar years 2006 and 2007. During calendar year 2005 through 2007, SCC originated approximately $84 billion in loans, of which less than 1% were sold to government sponsored entities. SCC is not subject to loss on loans that have been paid in full, repurchased, or were sold without recourse.
The majority of claims asserted since May 1, 2008, which have been determined by SCC to represent a valid breach of its representations and warranties, relate to loans that became delinquent within the first two years following the origination of the mortgage loan. SCC believes the longer a loan performs prior to an event of default, the less likely the default will be related to a breach of a representation and warranty. The balance of loans originated in 2005, 2006 and 2007 which defaulted in the first two years is $4.0 billion, $6.3 billion and $2.9 billion, respectively, at JanuaryJuly 31, 2011.
SCC estimates losses relating to representation and warranty claims by estimating loan repurchase and indemnification obligations on both known claims and projections of future claims. Projections of future claims are based on an analysis that includes a combination of reviewing repurchase demands and actual defaults and loss severities by counterparty, inquiries from various third-parties, the terms and provisions of related agreements and the historical rate of repurchase and indemnification obligations related to breaches of representations and warranties. SCC’s methodology for calculating this liability considers the probability that individual counterparties (whole-loan purchasers, private label securitization trustees and monoline insurers) will assert future claims.
SCC has recorded a liability for estimated contingent losses related to representation and warranty claims as of JanuaryJuly 31, 2011, of $155.0$125.8 million, which represents SCC’s best estimate of the probable loss that may occur. This overall liability amount includes $24.2During the prior year, payments totaling $49.8 million that was establishedwere 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. ThisThe indemnity agreement was given as part of obtaining the counterparty’s consent to SCC’s sale of its mortgage servicing business in 2008. During the current year, payments totaling $25.6 million were madeWe have no remaining payment obligations under this indemnity agreement. We expect the remaining obligation of $24.2 million to be paid in the fourth quarter of this fiscal year.
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 abovebeyond SCC’s accrual of approximately $21$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 levelvolume of asserted claims, asserted, the level of valid claim volumes,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.
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A rollforward of our liability for losses on repurchases for the ninethree months ended JanuaryJuly 31, 2011 and 2010 is as follows:
| | | | | | | | | | | | | | | | |
| | | | (in 000s) | | | | | (in 000s) | |
| | | | |
Nine Months Ended January 31, | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
|
Balance, beginning of period: | | | | | | | | | |
Balance at beginning of period: | | | | | | | | | |
Amount related to repurchase and indemnifications | | $ | 138,415 | | | $ | 156,659 | | | $ | 126,260 | | | $ | 138,415 | |
Amount related to indemnity agreement dated April 2008 | | | 49,785 | | | | 49,936 | | | | – | | | | 49,785 | |
| | | | | | | | | | |
| | | 188,200 | | | | 206,595 | | | | 126,260 | | | | 188,200 | |
| | | | | | | | | | |
Changes: | | | | | | | | | | | | | | | | |
Provisions | | | - | | | | - | | | | – | | | | – | |
Losses on repurchase and indemnifications | | | (7,652) | | | | (8,234) | | | | (485) | | | | – | |
Payments under indemnity agreement dated April 2008 | | | (25,562) | | | | (103) | | | | – | | | | (70) | |
| | | | | | | | | | |
Balance, end of period: | | | | | | | | | |
Balance at end of period: | | | | | | | | | |
Amount related to repurchase and indemnifications | | | 130,763 | | | | 148,425 | | | | 125,775 | | | | 138,415 | |
Amount related to indemnity agreement dated April 2008 | | | 24,223 | | | | 49,833 | | | | – | | | | 49,715 | |
| | | | | | | | | | |
| | $ | 154,986 | | | $ | 198,258 | | | $ | 125,775 | | | $ | 188,130 | |
| | | | | | | | | | |
| |
The repurchase liability is included in accounts payable, accrued expenses and other current liabilities on our condensed consolidated balance sheets. There have been no provisions for additional losses included in the income statement since April 30, 2008; however, loss provisions would be recorded net of tax in discontinued operations.
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14.12. | Litigation and Related Contingencies |
We are party to investigations, legal claims and lawsuits arising out of our business operations. As required, we accrue our best estimate of loss contingencies when we believe a loss is probable and we can reasonably estimate the amount of any such loss. Amounts accrued, including obligations under indemnifications, totaled $43.9$86.3 million and $35.5$70.6 million at JanuaryJuly 31, 2011 and April 30, 2010,2011, respectively. Litigation is inherently unpredictable and it is difficult to project the outcome of particular matters with reasonable certainty and, therefore, the actual amount of any loss may prove to be larger or smaller than the amounts reflected in our consolidated financial statements.
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 SCC’s mortgage business activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state and federal regulators, municipalities, third party indemnitees, 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, rights to indemnification, 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 to increase. 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 be paid 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 (CaseNo. 08-2474-BLS) styledCommonwealth 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. To avoid the cost and inherent risk associated with litigation, the parties have reached an agreement to settle this case. The settlement requires a cash payment from SCC to the Attorney General of $9.8 million, in addition to certain loan modification relief to Massachusetts borrowers estimated at $115 million in benefits. The agreement also provides for a contingent cash payment of up to $5 million in the event certain loan
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modification relief is not available. We have a liability recorded for our best estimate of the expected loss. 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.
On February 1, 2008, a class action lawsuit was filed in the United States District Court for the District of Massachusetts against SCC and other related entities styledCecil Barrett, et al. v. Option One Mortgage Corp., et al.(Civil ActionNo. 08-10157-RWZ). Plaintiffs allege discriminatory practices relating to the origination of mortgage loans in violation of the Fair Housing Act and Equal Credit Opportunity Act, and seek declaratory and injunctive relief in addition to actual and punitive damages. The court dismissed H&R Block, Inc. from the lawsuit for lack of personal jurisdiction. In March 2011, the court issued an order certifying a class, which defendants sought to appeal. On August 24, 2011, the First Circuit Court of Appeals declined to hear the appeal, noting that the district court could reconsider its certification decision in light of a recent ruling by the United States Supreme Court in an unrelated matter. 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 believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
On December 9, 2009, a putative class action lawsuit was filed in the United States District Court for the Central District of California against SCC and H&R Block, Inc. styledJeanne Drake, et al. v. Option One Mortgage Corp., et al.(CaseNo. SACV09-1450 CJC). Plaintiffs allege breach of contract, promissory fraud, intentional interference with contractual relations, wrongful withholding of wages and unfair business practices in connection with the failure to pay severance benefits to employees when their employment transitioned to American Home Mortgage Servicing, Inc. in connection with the sale of certain assets and operations of Option One. Plaintiffs seek to recover severance benefits of approximately $8 million, interest and attorney’s fees, in addition to penalties and punitive damages on certain claims. Plaintiffs’ motion for class certification is pending. All parties have filed motions for summary judgment. The court has set a hearing on all pending motions on August 29, 2011. 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 we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
On October 15, 2010, the Federal Home Loan Bank of Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styledFederal 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.
Employment-Related Claims and Litigation
We have been named in several wage and hour class action lawsuits throughout the country, includingAlice 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.,CaseNo. 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 for all hours worked and to provide meal periods); andBarbara Petroski v. H&R Block Eastern Enterprises, Inc., et al.,CaseNo. 10-CV-00075 (United States District Court, Western District of Missouri, filed January 25, 2010) (alleging failure to compensate tax professionals nationwide for off-
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season training). A class was certified in theLemuscase in December 2010 (consisting of tax professionals who worked in company-owned offices in California from 2007 to 2010); in theWilliamscase in March 2011 (consisting of office managers who worked in company-owned offices in California from 2004 to 2011); and in theUgascase in August 2011 (consisting of tax professionals who worked in company-owned offices in California from 2006 to 2011). A conditional class was certified in thePetroskicase in March 2011 (consisting of tax professionals nationwide who worked in company-owned offices and 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 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.
RAL Litigation
We have been named in multiple lawsuits as defendants in litigation regarding our refund anticipation loan program in past years. All of those lawsuits have been settled or otherwise resolved, except for one.
The sole remaining case is a putative class action styledSandra 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 styledJim 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
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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.
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Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.
RSM McGladrey Litigation
RSM EquiCo, its parent and certain of its subsidiaries and affiliates, are parties to a class action filed on July 11, 2006 and styledDo 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, negligent misrepresentation, breach of contract, 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 reached an agreement to settle the case, subject to approval by the California Superior Court. The settlement requires a maximum payment of $41.5 million, although the actual cost of the settlement will depend on the number of valid claims submitted by class members. The California Superior Court preliminarily approved the settlement on July 29, 2011. A final approval hearing is set for October 20, 2011. The defendants filed two requests for interlocutory review of the decision, the last of which was denied by the Supreme Court of California on September 30, 2009. A trial date has been set for May 2011.
The certified class consists of RSM EquiCo’s U.S. clients who signed platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable, although it is possible that our losses could exceed the amount we have accrued. The fees paid to RSM EquiCo in connection with these agreements total approximately $185 million, a number which substantially exceeds the equity of RSM EquiCo. Plaintiffs seek to recover restitution in an amount equal to the fees paid, in addition to punitive damages and attorney fees. We believe the RSM Partiesthey have meritorious defenses to the claims in this case and, intendif for any reason the settlement is not approved, they will continue to defend the case vigorously. The amount claimed in this action is substantial and couldAlthough we have a material adverse impact on our consolidated results of operations. Thereliability recorded 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 styledRonald 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 (CaseNo. 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 which remains pending.with respect to the claims against M&P and RSM. No claims remain against H&R Block.
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 adverse 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.
Litigation and Claims PertainingOther
In October 2010, we signed a definitive merger agreement to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated andacquire all of the loan servicing business was sold during fiscal year 2008, SCC and HRB remain subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state attorneys general, other state and federal regulators, municipalities, individual plaintiffs, and casesoutstanding shares of 2SS Holdings, Inc. (“2SS”), developer of TaxACT digital tax preparation solutions, for $287.5 million in which plaintiffs seek to representcash. In May 2011, the United States Department of Justice (DOJ) filed a class of others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege
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discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance, fraud, and violations of securities laws, the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased over historical experience and is likely to continue at increased levels. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict and thus cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts that may be required to pay in the discharge of liabilities or settlements could be substantial and, because SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed acivil antitrust lawsuit in the Superior Court of Suffolk County, MassachusettsU.S. district court in Washington, D.C., (CaseNo. 08-2474-BLS)1:11-cv-00948) against H&R Block and 2SS styledCommonwealth of MassachusettsUnited States v. H&R Block, Inc., et al.2SS Holdings, Inc., and TA IX L.P.,alleging unfair, deceptive and discriminatory origination and servicingto block our proposed acquisition of mortgage loans and seeking equitable relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a2SS. A preliminary injunction limiting the ability of the owner of SCC’s former loan servicing businesshearing is set to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. An appeal of the preliminary injunction was denied. A trial date has been set for Juneoccur in September 2011. 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 beare no assurances however, as to its outcomethat the DOJ’s lawsuit will be resolved in our favor or its impact on our consolidated results of operations.
On October 15, 2010,that the Federal Home Loan Bank of Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styledFederal 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 FHLB’s purchase of mortgage-backed securities. Plaintiff asserts claims for rescission and damages under Illinois securities law and for common law negligent misrepresentation in connection with its purchase of two securities originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50 million, of which approximately $42 million remains outstanding. We have not concluded that a loss related to this matter is probable nor have we established a loss contingency related to this matter. We believe the claims in this case are without merit and we intend to defend them vigorously. There cantransaction will be no assurances, however, as to its outcome or its impact on our consolidated results of operations.
Other Claims and Litigation
We have been named in several wage and hour class action lawsuits throughout the country, respectively styledAlice 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.,CaseNo. 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); andBarbara Petroski v. H&R Block Eastern Enterprises, Inc., et al.,CaseNo. 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 theLemuscase in December 2010 consisting of all tax professionals who worked in company-owned offices in California from 2007 to 2010. 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 of wages per tax season for class members who worked in California. The potential loss related to the wage and hour class action lawsuits cannot be reasonably estimated, but our losses could
21
exceed the amount we have accrued. We believe we have meritorious defenses to the claims in these cases and intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances 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.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
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be required to pay in the discharge of liabilities or settlements could have a material adverse impact on our consolidated results of operations.
We are also party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (collectively, “Other Claims”) concerning the preparation of customers’ income tax returns, the fees charged customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters and contract disputes. While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay in the discharge of liabilities or settlements in these Other Claims will not have a material adverse impact on our consolidated results of operations.
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15.13. | Segment Information |
Results of our continuing operations by reportable operating segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | (in 000s) | | | | | (in 000s) | |
| | | | |
| | Three Months Ended January 31, | | Nine Months Ended January 31, | | |
| | |
| | 2011 | | 2010 | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
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Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Tax Services | | $ | 672,810 | | | $ | 747,685 | | | $ | 875,376 | | | $ | 944,953 | | | $ | 91,425 | | | $ | 91,645 | |
Business Services | | | 171,309 | | | | 178,482 | | | | 549,445 | | | | 562,702 | | | | 167,263 | | | | 174,710 | |
Corporate | | | 7,363 | | | | 8,685 | | | | 24,024 | | | | 28,783 | | | | 8,946 | | | | 8,119 | |
| | | | | | | | | | | | | | |
| | $ | 851,482 | | | $ | 934,852 | | | $ | 1,448,845 | | | $ | 1,536,438 | | | $ | 267,634 | | | $ | 274,474 | |
| | | | | | | | | | | | | | |
Pretax income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Tax Services | | $ | 4,114 | | | $ | 131,189 | | | $ | (324,865) | | | $ | (212,973) | | | $ | (169,483) | | | $ | (174,624) | |
Business Services | | | 8,587 | | | | (11,222) | | | | 16,551 | | | | (9,727) | | | | (92,541) | | | | (433) | |
Corporate | | | (30,150) | | | | (22,516) | | | | (91,571) | | | | (103,575) | | | | (31,118) | | | | (32,260) | |
| | | | | | | | | | | | | | |
Income (loss) from continuing operations before taxes (benefit) | | $ | (17,449) | | | $ | 97,451 | | | $ | (399,885) | | | $ | (326,275) | | |
Loss from continuing operations before tax benefit | | | $ | (293,142) | | | $ | (207,317) | |
| | | | | | | | | | | | | | |
| |
| |
16.14. | Accounting Pronouncements |
In July 2010June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update2011-05, “Comprehensive Income (Topic 220): Statement of Comprehensive Income.” Under the amendments in this guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this guidance do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. These amendments are effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. We elected to adopt this guidance as of May 1, 2011, and it did not have an effect on our presentation of comprehensive income in our condensed consolidated financial statements.
In April 2011, the FASB issued Accounting Standards Update2010-20,2011-02, “Disclosures About Credit Quality“Receivables (Topic 310) — A Creditor’s Determination of Financing Receivables and Allowance for Credit Losses.Whether a Restructuring is a Troubled Debt Restructuring.” This guidance assists in determining if a loan modification qualifies as a TDR and requires enhanced disclosures about the allowance for credit lossesthat creditors must determine that a concession has been made and the credit quality of financing receivables and would apply to financing receivables held by all creditors. The requirements for period end disclosures are effective beginning with the first interim or annual reporting period ending after December 15, 2010.borrower is having financial difficulties. We have included all required disclosures in notes 1, 4 and 5. The requirements for activity-based disclosures will be adopted this guidance as of April 30,May 1, 2011. The requirements for TDR disclosures will be adopted when finalized by the FASB.We did not identify any new TDRs attributable to this new guidance and it did not have a material effect on our condensed consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update2009-13, “Revenue Recognition (Topic 605) –— Multiple-Deliverable Revenue Arrangements.” This guidance amends the criteria for separating consideration in multiple-deliverable arrangements to enable vendors to account for products or
22
services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (1) vendor-specific objective evidence; (2) third-party evidence; or (3) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance
21
significantly expands required disclosures related to a vendor’s new multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified beginning with our fiscal year 2012. We believeadopted this guidance willas of May 1, 2011 and it did not have a material effect on our condensed consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update2010-28, “Intangibles –— Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments affect reporting units whose carrying amount is zero or negative, and require performance of Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, a reporting unit would consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance. The reporting unit would evaluate if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This guidance is effective beginning with our fiscal year 2012. We believe this guidance will not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued guidance, under Topic 860 – Transfers and Servicing. This guidance requires more disclosure about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity and changes the requirements for derecognizing financial assets. We adopted this guidance as of May 1, 20102011 and it did not have a material effect on our condensed consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” The amendments in this guidance specify that if a public entity presents comparative financial statements, the entity would disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Additionally, disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. We adopted this guidance as of May 1, 2011 and it did not have a material effect on our condensed consolidated financial statements.
| |
17.15. | Condensed Consolidating Financial Statements |
Block Financial LLC (BFC) is an indirect, wholly-owned consolidated subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the Senior Notes issued on January 11, 2008 and October 26, 2004, our CLOCs and other indebtedness issued from time to time. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statements of Operations | Condensed Consolidating Statements of Operations | | | | | | | | (in 000s) | Condensed Consolidating Statements of Operations | | | | | | | | (in 000s) |
| Three Months Ended
| | H&R Block, Inc.
| | BFC
| | Other
| | | | Consolidated
| | H&R Block, Inc.
| | BFC
| | Other
| | | | Consolidated
|
January 31, 2011 | | (Guarantor) | | (Issuer) | | Subsidiaries | | Elims | | H&R Block | |
July 31, 2011 | | | (Guarantor) | | (Issuer) | | Subsidiaries | | Elims | | H&R Block |
| |
Total revenues | | $ | - | | $ | 74,103 | | $ | 777,379 | | $ | - | | $ | 851,482 | | $ | – | | $ | 21,773 | | $ | 245,861 | | $ | – | | $ | 267,634 |
| | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | - | | | 118,708 | | | 516,455 | | | - | | | 635,163 | | | – | | | 37,662 | | | 319,338 | | | – | | | 357,000 |
Selling, general and administrative | | | - | | | 10,220 | | | 225,579 | | | - | | | 235,799 | | | – | | | 7,895 | | | 199,968 | | | – | | | 207,863 |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | | - | | | 128,928 | | | 742,034 | | | - | | | 870,962 | | | – | | | 45,557 | | | 519,306 | | | – | | | 564,863 |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | - | | | (54,825) | | | 35,345 | | | - | | | (19,480) | |
Operating loss | | | | – | | | (23,784) | | | (273,445) | | | – | | | (297,229) |
Other income (expense), net | | | (17,449) | | | (521) | | | 2,552 | | | 17,449 | | | 2,031 | | | (293,142) | | | 3,281 | | | 806 | | | 293,142 | | | 4,087 |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before taxes (benefit) | | | (17,449) | | | (55,346) | | | 37,897 | | | 17,449 | | | (17,449) | |
Income taxes (benefit) | | | (13,074) | | | (26,783) | | | 13,709 | | | 13,074 | | | (13,074) | |
Loss from continuing operations before tax benefit | | | | (293,142) | | | (20,503) | | | (272,639) | | | 293,142 | | | (293,142) |
Income tax benefit | | | | (119,699) | | | (1,850) | | | (117,849) | | | 119,699 | | | (119,699) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | | (4,375) | | | (28,563) | | | 24,188 | | | 4,375 | | | (4,375) | |
Net loss from continuing operations | | | | (173,443) | | | (18,653) | | | (154,790) | | | 173,443 | | | (173,443) |
Net loss from discontinued operations | | | (8,346) | | | (8,283) | | | (63) | | | 8,346 | | | (8,346) | | | (1,655) | | | (1,637) | | | (18) | | | 1,655 | | | (1,655) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (12,721) | | $ | (36,846) | | $ | 24,125 | | $ | 12,721 | | $ | (12,721) | |
Net loss | | | $ | (175,098) | | $ | (20,290) | | $ | (154,808) | | $ | 175,098 | | $ | (175,098) |
| | | | | | | | | | | | | | | | | | | | |
| |
22
| | | | | | | | | | | | | | | | | | | | |
| |
Three Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
July 31, 2010 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Total revenues | | $ | – | | | $ | 21,000 | | | $ | 253,474 | | | $ | – | | | $ | 274,474 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | – | | | | 39,028 | | | | 328,988 | | | | – | | | | 368,016 | |
Selling, general and administrative | | | – | | | | 2,090 | | | | 114,939 | | | | – | | | | 117,029 | |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | | – | | | | 41,118 | | | | 443,927 | | | | – | | | | 485,045 | |
| | | | | | | | | | | | | | | | | | | | |
Operating loss | | | – | | | | (20,118 | ) | | | (190,453 | ) | | | – | | | | (210,571 | ) |
Other income (expense), net | | | (207,317 | ) | | | 382 | | | | 2,872 | | | | 207,317 | | | | 3,254 | |
Loss from continuing operations before tax benefit | | | (207,317 | ) | | | (19,736 | ) | | | (187,581 | ) | | | 207,317 | | | | (207,317 | ) |
Income tax benefit | | | (79,679 | ) | | | (7,841 | ) | | | (71,838 | ) | | | 79,679 | | | | (79,679 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations | | | (127,638 | ) | | | (11,895 | ) | | | (115,743 | ) | | | 127,638 | | | | (127,638 | ) |
Net loss from discontinued operations | | | (3,043 | ) | | | (3,004 | ) | | | (39 | ) | | | 3,043 | | | | (3,043 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (130,681 | ) | | $ | (14,899 | ) | | $ | (115,782 | ) | | $ | 130,681 | | | $ | (130,681 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| |
Condensed Consolidating Balance Sheets | | | | | | | | | | | | (in 000s) | |
| |
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
July 31, 2011 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Cash & cash equivalents | | $ | – | | | $ | 413,141 | | | $ | 599,595 | | | $ | (27 | ) | | $ | 1,012,709 | |
Cash & cash equivalents – restricted | | | – | | | | 849 | | | | 43,553 | | | | – | | | | 44,402 | |
Receivables, net | | | – | | | | 224,573 | | | | 104,815 | | | | – | | | | 329,388 | |
Mortgage loans held for investment | | | – | | | | 466,663 | | | | – | | | | – | | | | 466,663 | |
Intangible assets and goodwill, net | | | – | | | | – | | | | 1,102,646 | | | | – | | | | 1,102,646 | |
Investments in subsidiaries | | | 2,478,748 | | | | – | | | | 94 | | | | (2,478,748 | ) | | | 94 | |
Other assets | | | 12,474 | | | | 299,379 | | | | 1,040,297 | | | | – | | | | 1,352,150 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,491,222 | | | $ | 1,404,605 | | | $ | 2,891,000 | | | $ | (2,478,775 | ) | | $ | 4,308,052 | |
| | | | | | | | | | | | | | | | | | | | |
Customer deposits | | $ | – | | | $ | 666,295 | | | $ | – | | | $ | (27 | ) | | $ | 666,268 | |
Long-term debt | | | – | | | | 999,055 | | | | 20,376 | | | | – | | | | 1,019,431 | |
FHLB borrowings | | | – | | | | 25,000 | | | | – | | | | – | | | | 25,000 | |
Other liabilities | | | 214 | | | | (132,742 | ) | | | 1,496,004 | | | | – | | | | 1,363,476 | |
Net intercompany advances | | | 1,257,131 | | | | 40,201 | | | | (1,297,332 | ) | | | – | | | | – | |
Stockholders’ equity | | | 1,233,877 | | | | (193,204 | ) | | | 2,671,952 | | | | (2,478,748 | ) | | | 1,233,877 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,491,222 | | | $ | 1,404,605 | | | $ | 2,891,000 | | | $ | (2,478,775 | ) | | $ | 4,308,052 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
23
| | | | | | | | | | | | | | | | | | | | |
| |
Three Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
January 31, 2010 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Total revenues | | $ | – | | | $ | 83,291 | | | $ | 851,581 | | | $ | (20 | ) | | $ | 934,852 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | – | | | | 86,020 | | | | 559,799 | | | | (72 | ) | | | 645,747 | |
Selling, general and administrative | | | – | | | | 2,881 | | | | 191,800 | | | | (20 | ) | | | 194,661 | |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | | – | | | | 88,901 | | | | 751,599 | | | | (92 | ) | | | 840,408 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | – | | | | (5,610 | ) | | | 99,982 | | | | 72 | | | | 94,444 | |
Other income (expense), net | | | 97,451 | | | | (1,609 | ) | | | 4,688 | | | | (97,523 | ) | | | 3,007 | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before taxes (benefit) | | | 97,451 | | | | (7,219 | ) | | | 104,670 | | | | (97,451 | ) | | | 97,451 | |
Income taxes (benefit) | | | 43,848 | | | | (2,721 | ) | | | 46,569 | | | | (43,848 | ) | | | 43,848 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | | 53,603 | | | | (4,498 | ) | | | 58,101 | | | | (53,603 | ) | | | 53,603 | |
Net loss from discontinued operations | | | (2,968 | ) | | | (2,968 | ) | | | – | | | | 2,968 | | | | (2,968 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 50,635 | | | $ | (7,466 | ) | | $ | 58,101 | | | $ | (50,635 | ) | | $ | 50,635 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| |
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
April 30, 2011 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Cash & cash equivalents | | $ | – | | | $ | 616,238 | | | $ | 1,061,656 | | | $ | (50 | ) | | $ | 1,677,844 | |
Cash & cash equivalents – restricted | | | – | | | | 9,522 | | | | 38,861 | | | | – | | | | 48,383 | |
Receivables, net | | | 88 | | | | 102,011 | | | | 390,191 | | | | – | | | | 492,290 | |
Mortgage loans held for investment, net | | | – | | | | 485,008 | | | | – | | | | – | | | | 485,008 | |
Intangible assets and goodwill, net | | | – | | | | – | | | | 1,214,164 | | | | – | | | | 1,214,164 | |
Investments in subsidiaries | | | 2,699,555 | | | | – | | | | 32 | | | | (2,699,555 | ) | | | 32 | |
Other assets | | | 13,613 | | | | 469,461 | | | | 807,166 | | | | – | | | | 1,290,240 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,713,256 | | | $ | 1,682,240 | | | $ | 3,512,070 | | | $ | (2,699,605 | ) | | $ | 5,207,961 | |
| | | | | | | | | | | | | | | | | | | | |
Customer deposits | | $ | – | | | $ | 852,270 | | | $ | – | | | $ | (50 | ) | | $ | 852,220 | |
Long-term debt | | | – | | | | 998,965 | | | | 50,789 | | | | – | | | | 1,049,754 | |
FHLB borrowings | | | – | | | | 25,000 | | | | – | | | | – | | | | 25,000 | |
Other liabilities | | | 178 | | | | (26,769 | ) | | | 1,858,004 | | | | – | | | | 1,831,413 | |
Net intercompany advances | | | 1,263,504 | | | | 24,173 | | | | (1,287,677 | ) | | | – | | | | – | |
Stockholders’ equity | | | 1,449,574 | | | | (191,399 | ) | | | 2,890,954 | | | | (2,699,555 | ) | | | 1,449,574 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,713,256 | | | $ | 1,682,240 | | | $ | 3,512,070 | | | $ | (2,699,605 | ) | | $ | 5,207,961 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| |
Nine Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
January 31, 2011 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Total revenues | | $ | – | | | $ | 112,423 | | | $ | 1,336,422 | | | $ | – | | | $ | 1,448,845 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | – | | | | 193,695 | | | | 1,202,434 | | | | – | | | | 1,396,129 | |
Selling, general and administrative | | | – | | | | 21,689 | | | | 440,082 | | | | – | | | | 461,771 | |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | | – | | | | 215,384 | | | | 1,642,516 | | | | – | | | | 1,857,900 | |
| | | | | | | | | | | | | | | | | | | | |
Operating loss | | | – | | | | (102,961 | ) | | | (306,094 | ) | | | – | | | | (409,055 | ) |
Other income (expense), net | | | (399,885 | ) | | | 4,751 | | | | 4,419 | | | | 399,885 | | | | 9,170 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations before tax benefit | | | (399,885 | ) | | | (98,210 | ) | | | (301,675 | ) | | | 399,885 | | | | (399,885 | ) |
Income tax benefit | | | (161,060 | ) | | | (42,278 | ) | | | (118,782 | ) | | | 161,060 | | | | (161,060 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations | | | (238,825 | ) | | | (55,932 | ) | | | (182,893 | ) | | | 238,825 | | | | (238,825 | ) |
Net loss from discontinued operations | | | (13,626 | ) | | | (12,617 | ) | | | (1,009 | ) | | | 13,626 | | | | (13,626 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (252,451 | ) | | $ | (68,549 | ) | | $ | (183,902 | ) | | $ | 252,451 | | | $ | (252,451 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | |
|
Condensed Consolidating Statements of Cash Flows | | | | | | | | (in 000s) |
|
Three Months Ended
| | H&R Block, Inc.
| | BFC
| | Other
| | | | Consolidated
|
July 31, 2011 | | (Guarantor) | | (Issuer) | | Subsidiaries | | Elims | | H&R Block |
|
|
Net cash provided by (used in) operating activities: | | $ | 2,048 | | $ | (22,900) | | $ | (373,697) | | $ | – | | $ | (394,549) |
| | | | | | | | | | | | | | | |
Cash flows from investing: | | | | | | | | | | | | | | | |
Purchases ofavailable-for-sale securities | | | – | | | (39,275) | | | – | | | – | | | (39,275) |
Mortgage loans originated for investment, net | | | – | | | 11,192 | | | – | | | – | | | 11,192 |
Purchase property & equipment | | | – | | | (54) | | | (10,899) | | | – | | | (10,953) |
Payments made for business acquisitions, net | | | – | | | – | | | (3,457) | | | – | | | (3,457) |
Proceeds from sale of businesses, net | | | – | | | – | | | 21,230 | | | – | | | 21,230 |
Loans made to franchisees | | | – | | | (16,477) | | | – | | | – | | | (16,477) |
Repayments from franchisees | | | – | | | 5,320 | | | – | | | – | | | 5,320 |
Net intercompany advances | | | 44,084 | | | – | | | – | | | (44,084) | | | – |
Other, net | | | – | | | 12,031 | | | 6,136 | | | – | | | 18,167 |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 44,084 | | | (27,263) | | | 13,010 | | | (44,084) | | | (14,253) |
| | | | | | | | | | | | | | | |
Cash flows from financing: | | | | | | | | | | | | | | | |
Customer banking deposits | | | – | | | (186,268) | | | – | | | 23 | | | (186,245) |
Dividends paid | | | (45,894) | | | – | | | – | | | – | | | (45,894) |
Repurchase of common stock | | | (2,002) | | | – | | | – | | | – | | | (2,002) |
Proceeds from exercise of stock options | | | 1,762 | | | – | | | – | | | – | | | 1,762 |
Net intercompany advances | | | – | | | 33,312 | | | (77,396) | | | 44,084 | | | – |
Other, net | | | 2 | | | 22 | | | (24,940) | | | – | | | (24,916) |
| | | | | | | | | | | | | | | |
Net cash used in financing activities | | | (46,132) | | | (152,934) | | | (102,336) | | | 44,107 | | | (257,295) |
| | | | | | | | | | | | | | | |
Effects of exchange rates on cash | | | – | | | – | | | 962 | | | – | | | 962 |
| | | | | | | | | | | | | | | |
Net decrease in cash | | | – | | | (203,097) | | | (462,061) | | | 23 | | | (665,135) |
Cash – beginning of period | | | – | | | 616,238 | | | 1,061,656 | | | (50) | | | 1,677,844 |
| | | | | | | | | | | | | | | |
Cash –end of period | | $ | – | | $ | 413,141 | | $ | 599,595 | | $ | (27) | | $ | 1,012,709 |
| | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| |
Nine Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
January 31, 2010 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Total revenues | | $ | – | | | $ | 127,513 | | | $ | 1,409,001 | | | $ | (76 | ) | | $ | 1,536,438 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | – | | | | 177,441 | | | | 1,265,777 | | | | (72 | ) | | | 1,443,146 | |
Selling, general and administrative | | | – | | | | 7,836 | | | | 419,803 | | | | (76 | ) | | | 427,563 | |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | | – | | | | 185,277 | | | | 1,685,580 | | | | (148 | ) | | | 1,870,709 | |
| | | | | | | | | | | | | | | | | | | | |
Operating loss | | | – | | | | (57,764 | ) | | | (276,579 | ) | | | 72 | | | | (334,271 | ) |
Other income (expense), net | | | (326,275 | ) | | | (5,449 | ) | | | 13,517 | | | | 326,203 | | | | 7,996 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations before tax benefit | | | (326,275 | ) | | | (63,213 | ) | | | (263,062 | ) | | | 326,275 | | | | (326,275 | ) |
Income tax benefit | | | (122,789 | ) | | | (25,707 | ) | | | (97,082 | ) | | | 122,789 | | | | (122,789 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations | | | (203,486 | ) | | | (37,506 | ) | | | (165,980 | ) | | | 203,486 | | | | (203,486 | ) |
Net loss from discontinued operations | | | (8,100 | ) | | | (8,100 | ) | | | – | | | | 8,100 | | | | (8,100 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (211,586 | ) | | $ | (45,606 | ) | | $ | (165,980 | ) | | $ | 211,586 | | | $ | (211,586 | ) |
| | | | | | | | | | | | | | | | | | | | |
|
|
24
| | | | | | | | | | | | | | | | | | | | |
| |
Condensed Consolidating Balance Sheets | | | | | | | | | | | | (in 000s) | |
| |
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
January 31, 2011 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Cash & cash equivalents | | $ | – | | | $ | 1,289,689 | | | $ | 177,320 | | | $ | (1,319 | ) | | $ | 1,465,690 | |
Cash & cash equivalents – restricted | | | - | | | | 783 | | | | 35,330 | | | | – | | | | 36,113 | |
Receivables, net | | | 27 | | | | 707,713 | | | | 663,412 | | | | – | | | | 1,371,152 | |
Mortgage loans held for investment | | | - | | | | 513,192 | | | | – | | | | – | | | | 513,192 | |
Intangible assets and goodwill, net | | | – | | | | – | | | | 1,224,672 | | | | – | | | | 1,224,672 | |
Investments in subsidiaries | | | 2,664,240 | | | | – | | | | 19 | | | | (2,664,240 | ) | | | 19 | |
Other assets | | | 12,733 | | | | 365,198 | | | | 813,966 | | | | – | | | | 1,191,897 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,677,000 | | | $ | 2,876,575 | | | $ | 2,914,719 | | | $ | (2,665,559 | ) | | $ | 5,802,735 | |
| | | | | | | | | | | | | | | | | | | | |
Customer deposits | | $ | – | | | $ | 1,856,514 | | | $ | – | | | $ | (1,319 | ) | | $ | 1,855,195 | |
Long-term debt | | | – | | | | 998,875 | | | | 50,483 | | | | – | | | | 1,049,358 | |
FHLB borrowings | | | – | | | | 75,000 | | | | – | | | | – | | | | 75,000 | |
Short-term borrowings | | | – | | | | 632,566 | | | | – | | | | – | | | | 632,566 | |
Other liabilities | | | 160 | | | | 35,406 | | | | 1,327,367 | | | | – | | | | 1,362,933 | |
Net intercompany advances | | | 1,849,157 | | | | (736,295 | ) | | | (1,112,862 | ) | | | – | | | | – | |
Stockholders’ equity | | | 827,683 | | | | 14,509 | | | | 2,649,731 | | | | (2,664,240 | ) | | | 827,683 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,677,000 | | | $ | 2,876,575 | | | $ | 2,914,719 | | | $ | (2,665,559 | ) | | $ | 5,802,735 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
April 30, 2010 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Cash & cash equivalents | | $ | – | | | $ | 702,021 | | | $ | 1,102,135 | | | $ | (111 | ) | | $ | 1,804,045 | |
Cash & cash equivalents – restricted | | | – | | | | 6,160 | | | | 28,190 | | | | – | | | | 34,350 | |
Receivables, net | | | 57 | | | | 105,192 | | | | 412,737 | | | | – | | | | 517,986 | |
Mortgage loans held for investment, net | | | - | | | | 595,405 | | | | – | | | | – | | | | 595,405 | |
Intangible assets and goodwill, net | | | – | | | | – | | | | 1,207,879 | | | | – | | | | 1,207,879 | |
Investments in subsidiaries | | | 3,276,597 | | | | – | | | | 231 | | | | (3,276,597 | ) | | | 231 | |
Other assets | | | 19,014 | | | | 332,782 | | | | 722,626 | | | | – | | | | 1,074,422 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 3,295,668 | | | $ | 1,741,560 | | | $ | 3,473,798 | | | $ | (3,276,708 | ) | | $ | 5,234,318 | |
| | | | | | | | | | | | | | | | | | | | |
Customer deposits | | $ | – | | | $ | 852,666 | | | $ | – | | | $ | (111 | ) | | $ | 852,555 | |
Long-term debt | | | – | | | | 998,605 | | | | 36,539 | | | | – | | | | 1,035,144 | |
FHLB borrowings | | | – | | | | 75,000 | | | | – | | | | – | | | | 75,000 | |
Other liabilities | | | 48,775 | | | | 153,154 | | | | 1,629,060 | | | | – | | | | 1,830,989 | |
Net intercompany advances | | | 1,806,263 | | | | (431,696 | ) | | | (1,374,567 | ) | | | – | | | | – | |
Stockholders’ equity | | | 1,440,630 | | | | 93,831 | | | | 3,182,766 | | | | (3,276,597 | ) | | | 1,440,630 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,295,668 | | | $ | 1,741,560 | | | $ | 3,473,798 | | | $ | (3,276,708 | ) | | $ | 5,234,318 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| |
Three Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
July 31, 2010 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Net cash provided by (used in) operating activities: | | $ | 22,849 | | | $ | (43,301 | ) | | $ | (327,799 | ) | | $ | – | | | $ | (348,251 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from investing: | | | | | | | | | | | | | | | | | | | | |
Mortgage loans originated for investment, net | | | – | | | | 17,618 | | | | – | | | | – | | | | 17,618 | |
Purchase property & equipment | | | – | | | | – | | | | (8,634 | ) | | | – | | | | (8,634 | ) |
Payments made for business acquisitions, net | | | – | | | | – | | | | (33,226 | ) | | | – | | | | (33,226 | ) |
Proceeds from sale of businesses, net | | | – | | | | – | | | | 26,387 | | | | – | | | | 26,387 | |
Loans made to franchisees | | | – | | | | (33,720 | ) | | | – | | | | – | | | | (33,720 | ) |
Repayments from franchisees | | | – | | | | 6,724 | | | | – | | | | – | | | | 6,724 | |
Net intercompany advances | | | 188,324 | | | | – | | | | – | | | | (188,324 | ) | | | – | |
Other, net | | | – | | | | 40,668 | | | | (21,820 | ) | | | – | | | | 18,848 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 188,324 | | | | 31,290 | | | | (37,293 | ) | | | (188,324 | ) | | | (6,003 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from financing: | | | | | | | | | | | | | | | | | | | | |
Customer banking deposits | | | – | | | | (121,166 | ) | | | – | | | | (235 | ) | | | (121,401 | ) |
Dividends paid | | | (48,692 | ) | | | – | | | | – | | | | – | | | | (48,692 | ) |
Repurchase of common stock | | | (164,369 | ) | | | – | | | | – | | | | – | | | | (164,369 | ) |
Proceeds from exercise of stock options | | | 1,500 | | | | – | | | | – | | | | – | | | | 1,500 | |
Net intercompany advances | | | – | | | | 35,507 | | | | (223,831 | ) | | | 188,324 | | | | – | |
Other, net | | | 388 | | | | 176 | | | | (16,551 | ) | | | – | | | | (15,987 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in financing activities | | | (211,173 | ) | | | (85,483 | ) | | | (240,382 | ) | | | 188,089 | | | | (348,949 | ) |
| | | | | | | | | | | | | | | | | | | | |
Effects of exchange rates on cash | | | – | | | | – | | | | (2,232 | ) | | | – | | | | (2,232 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net decrease in cash | | | – | | | | (97,494 | ) | | | (607,706 | ) | | | (235 | ) | | | (705,435 | ) |
Cash –beginning of period | | | – | | | | 702,021 | | | | 1,102,135 | | | | (111 | ) | | | 1,804,045 | |
| | | | | | | | | | | | | | | | | | | | |
Cash –end of period | | $ | – | | | $ | 604,527 | | | $ | 494,429 | | | $ | (346 | ) | | $ | 1,098,610 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
25
| | | | | | | | | | | | | | | | | | | | |
| |
Condensed Consolidating Statements of Cash Flows | | | | | | | | | | | | (in 000s) | |
| |
Nine Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
January 31, 2011 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Net cash used in operating activities: | | $ | (43,026 | ) | | $ | (725,197 | ) | | $ | (737,195 | ) | | $ | – | | | $ | (1,505,418 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from investing: | | | | | | | | | | | | | | | | | | | | |
Mortgage loans originated for investment, net | | | – | | | | 45,316 | | | | – | | | | – | | | | 45,316 | |
Purchase property & equipment | | | – | | | | – | | | | (51,198 | ) | | | – | | | | (51,198 | ) |
Payments made for business acquisitions, net | | | – | | | | – | | | | (50,832 | ) | | | – | | | | (50,832 | ) |
Proceeds from sale of businesses, net | | | – | | | | – | | | | 62,298 | | | | – | | | | 62,298 | |
Loans made to franchisees | | | – | | | | (90,304 | ) | | | – | | | | – | | | | (90,304 | ) |
Net intercompany advances | | | 467,873 | | | | – | | | | – | | | | (467,873 | ) | | | – | |
Other, net | | | – | | | | 38,538 | | | | 10,039 | | | | – | | | | 48,577 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 467,873 | | | | (6,450 | ) | | | (29,693 | ) | | | (467,873 | ) | | | (36,143 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from financing: | | | | | | | | | | | | | | | | | | | | |
Repayments of short-term borrowings | | | – | | | | (2,654,653 | ) | | | – | | | | – | | | | (2,654,653 | ) |
Proceeds from short-term borrowings | | | – | | | | 3,286,603 | | | | – | | | | – | | | | 3,286,603 | |
Customer banking deposits | | | – | | | | 1,003,482 | | | | – | | | | (1,208 | ) | | | 1,002,274 | |
Dividends paid | | | (140,926 | ) | | | – | | | | – | | | | – | | | | (140,926 | ) |
Repurchase of common stock | | | (283,494 | ) | | | – | | | | – | | | | – | | | | (283,494 | ) |
Proceeds from exercise of stock options | | | (866 | ) | | | – | | | | – | | | | – | | | | (866 | ) |
Net intercompany advances | | | – | | | | (315,752 | ) | | | (152,121 | ) | | | 467,873 | | | | – | |
Other, net | | | 439 | | | | (365 | ) | | | (10,136 | ) | | | – | | | | (10,062 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (424,847 | ) | | | 1,319,315 | | | | (162,257 | ) | | | 466,665 | | | | 1,198,876 | |
| | | | | | | | | | | | | | | | | | | | |
Effects of exchange rates on cash | | | – | | | | – | | | | 4,330 | | | | – | | | | 4,330 | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash | | | – | | | | 587,668 | | | | (924,815 | ) | | | (1,208 | ) | | | (338,355 | ) |
Cash – beginning of period | | | – | | | | 702,021 | | | | 1,102,135 | | | | (111 | ) | | | 1,804,045 | |
| | | | | | | | | | | | | | | | | | | | |
Cash – end of period | | $ | – | | | $ | 1,289,689 | | | $ | 177,320 | | | $ | (1,319 | ) | | $ | 1,465,690 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
26
| | | | | | | | | | | | | | | | | | | | |
| |
Nine Months Ended
| | H&R Block, Inc.
| | | BFC
| | | Other
| | | | | | Consolidated
| |
January 31, 2010 | | (Guarantor) | | | (Issuer) | | | Subsidiaries | | | Elims | | | H&R Block | |
| |
|
Net cash provided by (used in) operating activities: | | $ | 11,590 | | | $ | (1,788,487 | ) | | $ | (872,065 | ) | | $ | – | | | $ | (2,648,962 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from investing: | | | | | | | | | | | | | | | | | | | | |
Mortgage loans originated for investment, net | | | – | | | | 56,114 | | | | – | | | | – | | | | 56,114 | |
Purchase property & equipment | | | – | | | | 616 | | | | (63,858 | ) | | | – | | | | (63,242 | ) |
Payments made for business acquisitions, net of cash acquired | | | – | | | | – | | | | (10,828 | ) | | | – | | | | (10,828 | ) |
Proceeds from sale of businesses, net | | | – | | | | – | | | | 66,760 | | | | – | | | | 66,760 | |
Loans made to franchisees | | | – | | | | (88,564 | ) | | | – | | | | – | | | | (88,564 | ) |
Net intercompany advances | | | 276,743 | | | | – | | | | – | | | | (276,743 | ) | | | – | |
Other, net | | | – | | | | 32,468 | | | | (1,619 | ) | | | – | | | | 30,849 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 276,743 | | | | 634 | | | | (9,545 | ) | | | (276,743 | ) | | | (8,911 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from financing: | | | | | | | | | | | | | | | | | | | | |
Repayments of short-term borrowings | | | – | | | | (982,774 | ) | | | – | | | | – | | | | (982,774 | ) |
Proceeds from short-term borrowings | | | – | | | | 2,657,436 | | | | – | | | | – | | | | 2,657,436 | |
Customer banking deposits | | | – | | | | 1,366,106 | | | | – | | | | (943 | ) | | | 1,365,163 | |
Dividends paid | | | (151,317 | ) | | | – | | | | – | | | | – | | | | (151,317 | ) |
Repurchase of common stock | | | (154,201 | ) | | | – | | | | – | | | | – | | | | (154,201 | ) |
Proceeds from stock options | | | 15,678 | | | | – | | | | – | | | | – | | | | 15,678 | |
Net intercompany advances | | | – | | | | (151,334 | ) | | | (125,409 | ) | | | 276,743 | | | | – | |
Other, net | | | 1,507 | | | | (9,052 | ) | | | (21,889 | ) | | | – | | | | (29,434 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (288,333 | ) | | | 2,880,382 | | | | (147,298 | ) | | | 275,800 | | | | 2,720,551 | |
| | | | | | | | | | | | | | | | | | | | |
Effects of exchange rates on cash | | | – | | | | – | | | | 10,336 | | | | – | | | | 10,336 | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash | | | – | | | | 1,092,529 | | | | (1,018,572 | ) | | | (943 | ) | | | 73,014 | |
Cash – beginning of period | | | – | | | | 241,350 | | | | 1,419,535 | | | | (6,222 | ) | | | 1,654,663 | |
| | | | | | | | | | | | | | | | | | | | |
Cash – end of period | | $ | – | | | $ | 1,333,879 | | | $ | 400,963 | | | $ | (7,165 | ) | | $ | 1,727,677 | |
| | | | | | | | | | | | | | | | | | | | |
|
|
27
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF OPERATIONS
Our subsidiaries provide tax preparation, retail banking and various business advisory and consulting services. We are the only major company offering a full range of software, online and in-office tax preparation solutions to individual tax clients.
RECENT EVENTS
Historically, refund anticipation loans (RALs) were offeredIn August 2011, we signed a non-binding letter of intent to sell substantially all assets of RSM McGladrey Business Services, Inc (RSM) to McGladrey & Pullen LLP (M&P) and began an evaluation of strategic alternatives for RSM EquiCo, Inc. (EquiCo). The RSM sale is dependent on, among other factors, the ability of M&P to raise financing for the purchase. We recorded a $99.7 million impairment of goodwill in the first quarter for reporting units 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 usBusiness Services segment based on restrictions placedthese events. This loss was offset partially by the sale of an ancillary business within the Business Services segment during the quarter which resulted in a $9.9 million gain. On an after-tax basis, the net result of these events is a charge of $53.2 million, or $0.17 per share. These amounts related to the sale of RSM may fluctuate based on HSBC by its regulatoradjustments to the purchase price at closing as well as the additional realization of tax benefits related to the sale. M&P will also assume substantially all liabilities, including contingent payments and therefore, RALs are not being offeredlease obligations. See discussion in our tax offices this tax season. In connection withnotes 2 and 7 to the contract termination, we obtained the remaining rights to collect on the outstanding balances of RALs originated in years 2006condensed consolidated financial statements and later. The impact of this is discussed in the TaxBusiness Services segment results below.
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 H&R Block Bank (HRB Bank) that primarily support the tax network, refund anticipation checks, our prior participations in refund anticipation loans, and our commercial tax businesses,business, which provideprovides tax preparation software to CPAs and other tax preparers.
| | | | | | | | |
| |
Tax Services – Operating Statistics (U.S. only) | |
| |
| | Three Months Ended January 31, | |
| | 2011 | | | 2010 | |
| |
|
Tax returns prepared (in 000s):(1) Company-owned operations | | | 2,046 | | | | 2,292 | |
Franchise operations | | | 1,382 | | | | 1,347 | |
| | | | | | | | |
Total retail operations | | | 3,428 | | | | 3,639 | |
| | | | | | | | |
Software | | | 601 | | | | 635 | |
Online | | | 942 | | | | 719 | |
Free File Alliance | | | 167 | | | | 201 | |
| | | | | | | | |
Total digital tax solutions | | | 1,710 | | | | 1,555 | |
| | | | | | | | |
| | | 5,138 | | | | 5,194 | |
| | | | | | | | |
Net average fee per tax return prepared:(2) Company-owned operations | | $ | 191.20 | | | | 205.06 | |
Franchise operations | | | 175.03 | | | | 181.20 | |
| | | | | | | | |
| | $ | 184.68 | | | $ | 196.23 | |
| | | | | | | | |
Offices: | | | | | | | | |
Company-owned | | | 5,921 | | | | 6,431 | |
Company-owned shared locations(3) | | | 572 | | | | 760 | |
| | | | | | | | |
Total company-owned offices | | | 6,493 | | | | 7,191 | |
| | | | | | | | |
Franchise | | | 4,178 | | | | 3,909 | |
Franchise shared locations(3) | | | 397 | | | | 406 | |
| | | | | | | | |
Total franchise offices | | | 4,575 | | | | 4,315 | |
| | | | | | | | |
| | | 11,068 | | | | 11,506 | |
| | | | | | | | |
|
|
| | |
(1) | | Fiscal year 2011 returns include approximately 69,000 and 35,000 company-owned and franchise returns, respectively, which were completed and ready to file at January 31, 2011, but could not be filed due to delays by the IRS in processing returns including Schedule A. Revenue related to these returns was deferred at January 31, 2011 and will be recognized in our fourth quarter. Fiscal year 2010 returns |
28
| | |
| | include approximately 102,000 returns prepared in offices we sold or franchised in fiscal year 2011. Tax returns prepared in these offices are presented within company-owned operations for fiscal year 2010. |
|
(2) | | Calculated as net tax preparation fees divided by retail tax returns prepared. |
|
(3) | | Shared locations include offices located within Sears and other third-party businesses. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
Tax Services – Operating Results | Tax Services – Operating Results | | (in 000s) | | Tax Services – Operating Results | | (in 000s) | |
| | | | |
| | Three Months Ended January 31, | | Nine Months Ended January 31, | | |
| | 2011 | | 2010 | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
|
Tax preparation fees | | $ | 387,558 | | | $ | 485,277 | | | $ | 485,693 | | | $ | 578,207 | | | $ | 34,921 | | | $ | 34,545 | |
Fees from refund anticipation checks | | | 74,010 | | | | 31,119 | | | | 75,321 | | | | 32,593 | | |
Fees from Peace of Mind guarantees | | | | 27,181 | | | | 28,547 | |
Fees from Emerald Card activities | | | | 11,241 | | | | 10,575 | |
Royalties | | | 72,008 | | | | 75,174 | | | | 84,640 | | | | 84,836 | | | | 5,703 | | | | 5,605 | |
Interest income on Emerald Advance | | | 46,132 | | | | 36,867 | | | | 47,590 | | | | 39,944 | | |
Fees from Emerald Card activities | | | 18,864 | | | | 21,814 | | | | 36,132 | | | | 42,933 | | |
Loan participation and related fees | | | 16,252 | | | | 38,163 | | | | 17,144 | | | | 38,463 | | |
Fees from Peace of Mind guarantees | | | 11,524 | | | | 11,079 | | | | 59,882 | | | | 58,122 | | |
Other | | | 46,462 | | | | 48,192 | | | | 68,974 | | | | 69,855 | | | | 12,379 | | | | 12,373 | |
| | | | | | | | | | | | | | |
Total revenues | | | 672,810 | | | | 747,685 | | | | 875,376 | | | | 944,953 | | | | 91,425 | | | | 91,645 | |
| | | | | | | | | | | | | | |
Compensation and benefits: | | | | | | | | | | | | | | | | | | | | | | | | |
Field wages | | | 178,006 | | | | 208,466 | | | | 269,443 | | | | 302,783 | | | | 36,847 | | | | 39,249 | |
Other wages | | | 27,963 | | | | 29,634 | | | | 84,955 | | | | 88,355 | | |
Corporate wages | | | | 33,055 | | | | 35,800 | |
Benefits and other compensation | | | 39,475 | | | | 44,023 | | | | 91,872 | | | | 85,134 | | | | 17,489 | | | | 34,304 | |
| | | | | | | | | | | | | | |
| | | 245,444 | | | | 282,123 | | | | 446,270 | | | | 476,272 | | | | 87,391 | | | | 109,353 | |
Occupancy and equipment | | | | 83,337 | | | | 82,624 | |
Depreciation and amortization | | | | 21,450 | | | | 22,395 | |
Marketing and advertising | | | 97,419 | | | | 87,670 | | | | 117,938 | | | | 109,770 | | | | 6,721 | | | | 8,413 | |
Occupancy and equipment | | | 90,211 | | | | 98,625 | | | | 260,977 | | | | 279,568 | | |
Bad debt | | | 92,228 | | | | 56,762 | | | | 94,654 | | | | 59,034 | | |
Depreciation and amortization | | | 22,450 | | | | 23,226 | | | | 67,413 | | | | 67,952 | | |
Supplies | | | 11,049 | | | | 15,409 | | | | 18,273 | | | | 23,255 | | |
Goodwill impairment | | | 22,700 | | | | – | | | | 22,700 | | | | – | | |
Other | | | 86,122 | | | | 64,676 | | | | 176,079 | | | | 155,659 | | | | 62,009 | | | | 43,484 | |
Loss (gain) on sale of tax offices, net | | | 1,073 | | | | (11,995 | ) | | | (4,063 | ) | | | (13,584 | ) | |
| | | | | | | | | | | | | | |
Total expenses | | | 668,696 | | | | 616,496 | | | | 1,200,241 | | | | 1,157,926 | | | | 260,908 | | | | 266,269 | |
| | | | | | | | | | | | | | |
Pretax income (loss) | | $ | 4,114 | | | $ | 131,189 | | | $ | (324,865 | ) | | $ | (212,973 | ) | |
Pretax loss | | | $ | (169,483 | ) | | $ | (174,624 | ) |
| | | | | | | | | | | | | | |
| |
Three months ended JanuaryJuly 31, 2011 compared to JanuaryJuly 31, 2010
Tax Services’ revenues were essentially flat compared to the prior year, as declines in U.S. tax returns prepared were offset by an increase in international tax returns due to the extended filing season in Canada.
Total expenses decreased $74.9$5.4 million, or 10.0%2.0%, for the three months ended JanuaryJuly 31, 2011 compared to the prior year. Tax preparation fees2011. Compensation and benefits decreased $97.7$22.0 million, or 20.1%, primarily due to a decline of 10.7%severance costs recorded in tax returns prepared in company-owned offices coupled with a decline of 6.8% in our net average charge. Declines in tax returns prepared were primarily the result of an industry-wide slow start to the tax season, which resulted in part from an IRS delay in processing returns including Schedule A. Additionally, we deferred $17.4 million of revenue related to tax returns prepared which we were unable to file electronically with the IRS due to the processing delay. This revenue will be recognized in our fourth quarter. Our net average charge declined due to the IRS processing delay, which primarily impacted more complex filings with higher fees, and new client growth resulting from our promotion of a free Federal EZ filing. We expect our net average charge for the full fiscal year will be between 2% and 4% lower than the average in fiscal year 2010. We also expect tax returns prepared for the full fiscal year to increase 0.5% to 1.5%
The business of our Tax Services segment is highly seasonal and results for our third quarter represent only a small portion of the tax season. Third quarter results are not indicative of the results we expect for the entire fiscal year. Tax returns prepared in company-owned and franchise offices through February 28, 2011 increased 3.2% from the prior year compared with a 5.8% decrease through January 31.
Fees earned on refund anticipation checks (RACs)year. Other expenses increased $42.9$18.5 million, or 137.8%42.6%, 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 are not being offered this tax season. Current quarter revenues include the recognition of net deferred fees from HSBC of $16.3 million that
29
would have normally been recognized over the 2011 tax season, but was accelerated upon the termination of our contract with HSBC. This compares with revenues resulting from loans participations and related fees in the prior year of $38.2 million. Termination of this contract could have adverse effects on our operating results this fiscal year, including declines in tax returns prepared as a result of clients seeking alternate preparers who continue to offer RALs, and declines in settlement product and related revenues 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.
Interest income earned on Emerald Advance lines of credit (EAs) increased $9.3 million, or 25.1%, over the prior year primarily due to an increase in loan volume, which resulted from offering the product to a wider client base.
Total expenses increased $52.2 million, or 8.5%, for the three months ended January 31, 2011. Compensation and benefits decreased $36.7 million, or 13.0%, primarily due to lower commission-based wages and related payroll taxes resulting from the decline in the number of tax returns prepared. Marketing and advertising expenses increased $9.7 million, or 11.1%, as a result of additional media spend focused on early-season clients. Occupancy and equipment expenses decreased $8.4 million, or 8.5%, primarily due to the decline in the number of offices. Bad debt expense increased $35.5 million, or 62.5%, primarily due to increased volumes on EAs and RACs, which typically have higher bad debt rates than RALs. Additionally, bad debt was negatively impacted by a decline in tax returns prepared for certain client segments. During the current quarter, we recorded a $22.7 million impairment of goodwill in an ancillary reporting unit, as discussed in note 7 to the condensed consolidated financial statements. Other expenses increased $21.4 million, or 33.2%, primarily due to $17.5 million in incremental legal accruals recorded in the current quarter.
During the current quarter, we recognized net losses of $1.1 million on the sale of certain company-owned offices to franchises, compared to gains of $12.0 million in the prior year.
Pretax income for the three months ended January 31, 2011 and 2010 was $4.1 million and $131.2 million, respectively.
Nine months ended January 31, 2011 compared to January 31, 2010
Tax Services’ revenues decreased $69.6 million, or 7.4%, for the nine months ended January 31, 2011 compared to the prior year. Tax preparation fees decreased $92.5 million, or 16.0%, primarily due to a decline in tax returns prepared in company-owned offices coupled with a decline in our net average charge. These declines were the result of an industry-wide slow start to the tax season, which resulted in part due to the IRS’ delay in accepting certain forms that were updated for changes in tax laws. Additionally, we deferred $17.4 million of revenue related to tax returns prepared which were not filed electronically with the IRS due to the IRS acceptance delay.
Fees earned on RACs increased $42.7 million, or 131.1%, 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.
As a result of RALs not being offered this tax season, revenue related to RAL participations and related fees were $21.3 million lower than in the prior year.
Emerald Card revenues declined $6.8 million, or 15.8%, as a result of fewer income tax refunds funding directly to our prepaid debit cards, primarily due to the decline in clients.
Interest income earned on EAs increased $7.6 million, or 19.1%, over the prior year primarily due to an increase in EAs, which resulted from offering the product to a wider client base.
Total expenses increased $42.3 million, or 3.7%, for the nine months ended January 31, 2011. Compensation and benefits decreased $30.0 million, or 6.3%, primarily due to lower commission-based wages resulting from the decline in the number of tax returns prepared. This decline was partially offset by severance costs and related payroll taxes recorded during the first quarter of this year. Marketing and advertising expenses increased $8.2 million, or 7.4%, as a result of additional media spend focused on early-season clients. Occupancy and equipment expenses decreased $18.6 million, or 6.6%, primarily due to the decrease in the number of offices. Bad debt expense increased $35.6 million, or 60.3%, primarily due to increased volumes on RACs and EAs, which typically have higher bad debt rates than RALs. During the current year, we recorded a $22.7 million impairment of goodwill in an ancillary reporting unit, as discussed in note 7 to the condensed consolidated financial statements. Other expenses increased $20.4 million, or 13.1%, primarily due to $16.2 million in incremental legal accrualscharges recorded in the current year.
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During the current year, we recognized net gains of $4.1 million on the sale of certain company-owned offices to franchises, compared to $13.6 million in the prior year.
The pretax loss for the ninethree months ended JanuaryJuly 31, 2011 and 2010 was $324.9$169.5 million and $213.0$174.6 million, respectively.
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 | Business Services – Operating Results | | (in 000s) | | Business Services – Operating Results | | (in 000s) | |
| | | | |
| | Three Months Ended January 31, | | Nine Months Ended January 31, | | |
| | 2011 | | 2010 | | 2011 | | 2010 | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | | | |
|
Tax services | | $ | 84,078 | | | $ | 79,707 | | | $ | 277,068 | | | $ | 269,988 | | | $ | 88,329 | | | $ | 81,331 | |
Business consulting | | | 60,015 | | | | 70,499 | | | | 186,215 | | | | 192,490 | | | | 58,111 | | | | 61,678 | |
Accounting services | | | 9,143 | | | | 11,716 | | | | 29,238 | | | | 35,123 | | | | 3,675 | | | | 10,842 | |
Capital markets | | | 3,952 | | | | 3,225 | | | | 7,824 | | | | 5,754 | | | | 3,072 | | | | 2,390 | |
Reimbursed expenses | | | 3,920 | | | | 5,658 | | | | 16,047 | | | | 16,011 | | | | 2,914 | | | | 6,331 | |
Other | | | 10,201 | | | | 7,677 | | | | 33,053 | | | | 43,336 | | | | 11,162 | | | | 12,138 | |
| | | | | | | | | | | | | | |
Total revenues | | | 171,309 | | | | 178,482 | | | | 549,445 | | | | 562,702 | | | | 167,263 | | | | 174,710 | |
| | | | | | | | | | | | | | |
Compensation and benefits | | | 119,508 | | | | 116,606 | | | | 385,424 | | | | 400,295 | | | | 126,245 | | | | 127,113 | |
Occupancy | | | 9,805 | | | | 14,678 | | | | 34,376 | | | | 33,601 | | | | 10,719 | | | | 11,930 | |
Depreciation | | | 4,801 | | | | 5,224 | | | | 14,336 | | | | 16,054 | | |
Marketing and advertising | | | 2,779 | | | | 4,733 | | | | 16,952 | | | | 14,287 | | |
Amortization of intangible assets | | | 2,888 | | | | 2,896 | | | | 8,781 | | | | 8,803 | | | | 2,630 | | | | 2,836 | |
Impairment of goodwill | | | | 99,697 | | | | — | |
Other | | | 22,941 | | | | 45,567 | | | | 73,025 | | | | 99,389 | | | | 20,513 | | | | 33,264 | |
| | | | | | | | | | | | | | |
Total expenses | | | 162,722 | | | | 189,704 | | | | 532,894 | | | | 572,429 | | | | 259,804 | | | | 175,143 | |
| | | | | | | | | | | | | | |
Pretax income (loss) | | $ | 8,587 | | | $ | (11,222 | ) | | $ | 16,551 | | | $ | (9,727 | ) | |
Pretax loss | | | $ | (92,541 | ) | | $ | (433 | ) |
| | | | | | | | | | | | | | |
| |
Three months ended JanuaryJuly 31, 2011 compared to JanuaryJuly 31, 2010
Business Services’ revenues for the three months ended JanuaryJuly 31, 2011 decreased $7.2$7.4 million, or 4.0%4.3% from the prior year. Tax services revenues increased primarily as a result of the acquisition of Caturano & Company, Inc. (Caturano)Accounting services revenues declined $7.2 million, or 66.1%, primarily due to the sale of an ancillary business during the current quarter.
Total expenses increased $84.7 million, or 48.3%, from the prior year. During the quarter, we recorded goodwill impairments of $85.4 million and $14.3 million in our RSM and EquiCo reporting units, respectively, as discussed in notenotes 2 and 7 to the condensed consolidated financial statements. Business consulting revenues declined $10.5This loss was offset partially by the sale of an ancillary business during the quarter which resulted in a $9.9 million gain. On an after-tax basis, the net result of these events is a charge of $53.2 million, or 14.9%, primarily due to the slowdown of services performed on a large multi-year engagement in our consulting practice.$0.17 per share.
Total expenses decreased $27.0 million, or 14.2%, from the prior year. Other expenses declined $22.6 million, or 49.7%, primarily due to a $15.0 million impairment of goodwill and litigation costs recorded in the prior year.
Pretax incomeThe pretax loss for the three months ended JanuaryJuly 31, 2011 was $8.6$92.5 million compared to a loss of $11.2$0.4 million in the prior year.
Nine months ended January 31, 2011 compared to January 31, 2010
Business Services’ revenues for the nine months ended January 31, 2011 decreased $13.3 million, or 2.4% from the prior year. Tax services revenues increased primarily as a result of the acquisition of Caturano. Business consulting revenues declined $6.3 million, or 3.3%, primarily due to the slowdown of services performed on a large multi-year engagement in our consulting practice. Other revenues declined $10.3 million, or 23.7%, primarily as a result of a reduction in management fees received related to the new administrative services agreement with McGladrey & Pullen LLP (M&P), as discussed in note 12 to the condensed consolidated financial statements.
Total expenses decreased $39.5 million, or 6.9%, from the prior year. Compensation and benefits decreased $14.9 million, or 3.7%, primarily due to reduced spend on employee insurance benefits and a reduction of costs directly related to the large multi-year consulting engagement detailed above.
Other expenses declined $26.4 million, or 26.5%, primarily due to a $15.0 million impairment of goodwill and litigation costs recorded in the prior year.
Pretax income for the nine months ended January 31, 2011 was $16.6 million compared to a loss of $9.7 million in the prior year.
31
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.expenses.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
Corporate – Operating Results | Corporate – Operating Results | | (in 000s) | | Corporate – Operating Results | | (in 000s) | |
| | | | |
Three Months Ended July 31, | | | 2011 | | 2010 | |
| | Three Months Ended January 31, | | Nine Months Ended January 31, | | | |
| | 2011 | | 2010 | | 2011 | | 2010 | |
| | |
| |
Interest income on mortgage loans held for investment | | $ | 5,923 | | | $ | 7,567 | | | $ | 18,771 | | | $ | 23,535 | | |
Interest income on mortgage loans held for investment, net | | | $ | 5,661 | | | $ | 6,323 | |
Other | | | 1,440 | | | | 1,118 | | | | 5,253 | | | | 5,248 | | | | 3,285 | | | | 1,796 | |
| | | | | | | | | | | | | | |
Total revenues | | | 7,363 | | | | 8,685 | | | | 24,024 | | | | 28,783 | | | | 8,946 | | | | 8,119 | |
| | | | | | | | | | | | | | |
Interest expense | | | 21,715 | | | | 19,762 | | | | 63,364 | | | | 58,636 | | | | 21,018 | | | | 20,788 | |
Compensation and benefits | | | | 6,765 | | | | 5,071 | |
Provision for loan losses | | | 7,800 | | | | 9,050 | | | | 24,100 | | | | 36,050 | | | | 5,625 | | | | 8,000 | |
Compensation and benefits | | | 6,643 | | | | 11,805 | | | | 29,307 | | | | 38,592 | | |
Other, net | | | 1,355 | | | | (9,416 | ) | | | (1,176 | ) | | | (920 | ) | |
Other | | | | 6,656 | | | | 6,520 | |
| | | | | | | | | | | | | | |
Total expenses | | | 37,513 | | | | 31,201 | | | | 115,595 | | | | 132,358 | | | | 40,064 | | | | 40,379 | |
| | | | | | | | | | | | | | |
Pretax loss | | $ | (30,150 | ) | | $ | (22,516 | ) | | $ | (91,571 | ) | | $ | (103,575 | ) | | $ | (31,118 | ) | | $ | (32,260 | ) |
| | | | | | | | | | | | | | |
| |
Three months ended JanuaryJuly 31, 2011 compared to JanuaryJuly 31, 2010
Compensation and benefits declined $5.2 million, or 43.7%, primarily dueResults of our corporate operations were essentially flat compared to reductions in force during the current year. Other expenses increased $10.8 million primarily due to a gain of $9.5 million recorded in the prior year on the transfer of liabilities relating to previously retained insurance risk to a third-party, which is reported above as a reduction of other expenses, net.year.
27
Nine months ended January 31, 2011 compared to January 31, 2010
Interest income earned on mortgage loans held for investment decreased $4.8 million, or 20.2%, from the prior year, primarily as a result of declining rates and non-performing loans. The provision for loan losses declined $12.0 million from the prior year as a result of the continued run-off of our portfolio. Compensation and benefits declined $9.3 million, or 24.1%, primarily due to reductions in force.
Income Taxes
Our effective tax rate for continuing operations was 40.3%40.8% and 37.6%38.4% for the ninethree months ended JanuaryJuly 31, 2011 and 2010, respectively. This increase resulted from a declinelosses in gains fromour investments in company-owned life insurance assets for which arewe do not subject toreceive a tax benefit, and 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. During the current quarter, therate. This increase was partially offset by a decrease in our basereserve for uncertain tax rate, coupled with a discrete adjustment to taxes for the release of a valuation allowance due to changes in certain state tax positions, resulted in a tax benefit of $13.1 million on a consolidated pretax loss of $17.4 million. We expect our effective tax rate for full fiscal year 2011 to be approximately 39%.positions.
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 $8.3$1.7 million and $13.6$3.0 million for the three and nine months ended JanuaryJuly 31, 2011 compared to $3.0 million and $8.1 million for the three and nine months ended January 31, 2010. Increased losses are primarily attributable to higher litigation costs.2010, respectively.
32
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 asresulting from a resultliquidation of loan liquidation. Losses on valid claims totaled $7.7 million and $8.2 million for the nine months ended January 31, 2011 and 2010, respectively. Additionally, SCC made payments of $25.6 million under its indemnity obligation dated April 2008.
These amounts were recorded as reductions of our loan repurchase liability. Claims received since May 1, 2008 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | |
| |
| | Fiscal Year 2009 | | | Fiscal Year 2010 | | | Fiscal Year 2011 | | | | |
| | Q1 | | | Q2 | | | Q3 | | | Q4 | | | Q1 | | | Q2 | | | Q3 | | | Q4 | | | Q1 | | | Q2 | | | Q3 | | | Total | |
| |
|
Loan Origination Year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2005 | | $ | 40 | | | $ | 21 | | | $ | 1 | | | $ | – | | | $ | – | | | $ | 15 | | | $ | – | | | $ | – | | | $ | 6 | | | $ | 1 | | | $ | – | | | $ | 84 | |
2006 | | | 89 | | | | 10 | | | | 111 | | | | 7 | | | | 2 | | | | 57 | | | | 4 | | | | 45 | | | | 100 | | | | 15 | | | | 29 | | | | 469 | |
2007 | | | 43 | | | | 10 | | | | 85 | | | | 15 | | | | 4 | | | | 11 | | | | 7 | | | | – | | | | 3 | | | | 5 | | | | 4 | | | | 187 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 172 | | | $ | 41 | | | $ | 197 | | | $ | 22 | | | $ | 6 | | | $ | 83 | | | $ | 11 | | | $ | 45 | | | $ | 109 | | | $ | 21 | | | $ | 33 | | | $ | 740 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
Note: The table above excludes amounts related to an indemnity agreement dated April 2008, which is discussed below.
collateral.
SCC has recorded a liability for estimated contingent losses related to representation and warranty claims as of JanuaryJuly 31, 2011, of $155.0$125.8 million, which represents SCC’s best estimate of the probable loss that may occur. This overall liability amount includes $24.2Losses on valid claims totaled $0.5 million which was established under an indemnity agreement dated April 2008 with a specific counterparty in exchangeand $0.1 million for a fullthe three months ended July 31, 2011 and complete release2010, respectively. These amounts were recorded as reductions of such party’s ability to assert representation and warranty claims. This indemnity agreement was given as part of obtaining the counterparty’s consent to SCC’s sale of its mortgage servicing business in 2008. During the current quarter, payments totaling $25.6 million were made under this agreement. We expect the remaining obligation of $24.2 million to be paid in the fourth quarter of this fiscal year.
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 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 above SCC’s accrual of approximately $21 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 warrantiesour loan repurchase 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 areis inherently difficult to estimate and requirerequires considerable management judgment. Although net losses on settled claims since May 1, 2008 have been within initial loss estimates, to the extent that the levelvolume of asserted claims, asserted, the level of valid claim volumes,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 note 11 to the condensed consolidated financial statements.
FINANCIAL CONDITION
These comments should be read in conjunction with the condensed consolidated balance sheets and condensed consolidated statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES AND LIQUIDITY –Our sources of capital include cash from operations, cash from customer deposits, issuances of common stock and debt. We use capital primarily to fund working capital, pay dividends, repurchase shares of common stock and acquire businesses. Our operations are highly seasonal and therefore generally require the use of cash to fund operating losses during the period May through mid-January.
Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under our unsecured committed lines of credit (CLOCs), we believe, that in the absence of any unexpected developments, our existing sources of capital at JanuaryJuly 31, 2011 are sufficient to meet our operating needs.
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CASH FROM OPERATING ACTIVITIES –Cash used in operations totaled $1.5 billion$394.5 million for the first ninethree months of fiscal year 2011,2012, compared with $2.6 billion$348.3 million for the same period last year. The decrease was primarily due to the lack of RAL participations purchased in the current year. See discussion under Recent Events at the beginning of Part I, Item 2.
CASH FROM INVESTING ACTIVITIES –Cash used in investing activities totaled $36.1$14.3 million for the first ninethree months of fiscal year 2011,2012, compared to $8.9$6.0 million in the same period last year.
Purchases ofAvailable-for-Sale Securities. During the three months ended July 31, 2011, HRB Bank purchased $39.3 million in mortgage-backed securities. No such purchases were made in the first quarter of the prior year.
Mortgage Loans Held for Investment. We received net payments of $45.3$11.2 million and $56.1$17.6 million on our mortgage loans held for investment for the first ninethree months of fiscal years 20112012 and 2010,2011, respectively. Cash payments declined primarily due to non-performing loans and continued run-off of our portfolio.
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Purchases of Property and Equipment. Total cash paid for property and equipment was $51.2$11.0 million and $63.2$8.6 million for the first ninethree months of fiscal years 2012 and 2011, and 2010, respectively.
Business Acquisitions. Total cash paid for acquisitions was $50.8$3.5 million and $10.8$33.2 million during the ninethree months ended JanuaryJuly 31, 2011 and 2010, respectively. In July 2010 our Business Services segment acquired a Boston-based accounting firm, and cash used in investing activities includes payments totaling $32.6 million related to this acquisition. See additional discussion in note 2 to the condensed consolidated financial statements.
In October 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of 2SS Holdings, Inc. (2SS), developer of TaxACT digital tax preparation solutions, for $287.5 million in cash. We expect this acquisition will be funded by excess available liquidity fromcash-on-hand or short-term borrowings. 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 (DOJ) filed a civil antitrust lawsuit to block our proposed acquisition of 2SS, and a preliminary hearing on this matter has been set for September 6, 2011. There are no assurances that the DOJ’s lawsuit will be resolved in our favor or that the transaction will be consummated.
Sales of Businesses. Proceeds from the sales of businesses totaled $62.3$21.2 million and $66.8$26.4 million for the ninethree months ended JanuaryJuly 31, 2011 and 2010, respectively. During the first ninequarter of fiscal year 2012, our Business Services segment sold one of their ancillary businesses for $20.3 million. During the first three months of fiscal year 2011, we sold 280127 tax offices to franchisees, compared to the sale of 267 tax offices in the prior year.franchisees. The majority of these sales were financed through affiliate loans.
Loans Made to Franchisees. Loans made to franchisees totaled $90.3$16.5 million and $88.6$33.7 million for the ninethree months ended JanuaryJuly 31, 2011 and 2010, respectively. These amounts included both the financing of sales of tax offices and franchisee draws under our Franchise Equity Lines of Credit (FELCs).
CASH FROM FINANCING ACTIVITIES –Cash provided byused in financing activities totaled $1.2 billion$257.3 million for the first ninethree months of fiscal year 2011,2012, compared to $2.7 billion$348.9 million in the same period last year.
Short-Term Borrowings.Customer Banking Deposits. We had commercial paper borrowings of $632.6 Customer banking deposits declined $186.2 million at Januaryfor the three months ended July 31, 2011 compared to $792.6 million at the same time last year. These borrowings were used to fund our off-season losses and cover our seasonal working capital needs. We also had other short-term borrowings of $882.5 million outstanding at January 31, 2010 to fund our participation interests in RALs. Our commercial paper borrowings peaked at $674.7$121.4 million in the current year.
Customer Banking Deposits. Customer banking deposits increased $1.0 billion for the nine months ended January 31, 2011 comparedprior year due to an increase of $1.4 billionseasonal fluctuations in the prior year. We utilize cash provided by deposit balances as a funding source for our Emerald Advance lines of credit during the tax season.prepaid debit card deposits.
Dividends. We have consistently paid quarterly dividends. Dividends paid totaled $140.9$45.9 million and $151.3$48.7 million for the ninethree months ended JanuaryJuly 31, 2011 and 2010, respectively.
Repurchase and Retirement of Common Stock. During the nine months ended January 31, 2011,prior year, we purchased and immediately retired 19.015.5 million shares of our common stock at a cost of $279.9$235.7 million. Cash payments of $161.0 million were made during the three months ended July 31, 2010 for the share purchases with settlement of the remaining $74.7 million occurring in August 2010. We mayexpect to continue to repurchase and retire common stock or retire treasury stock in the future.
Issuances of Common Stock. Cash used for Proceeds from the issuance of common stock totaled $0.9$1.8 million for the ninethree months ended JanuaryJuly 31, 2011 compared to proceeds of $15.7$1.5 million forin the prior year. This declineyear, and is duerelated to a reduction in stock option exercises and the related tax benefits.
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BORROWINGS
The following chart provides the debt ratings for Block Financial LLC (BFC) as of JanuaryJuly 31, 2011 and April 30, 2010:2011:
| | | | | | | | | | | | | | | | | | | | | | | | |
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| | January 31, 2011 | | | April 30, 2010 | |
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| | Short-term | | | Long-term | | | Outlook | | | Short-term | | | Long-term | | | Outlook | |
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Moody’s | | | P-2 | | | | Baa2 | | | | Negative(1 | ) | | | | P-2 | | | | Baa1 | | | | Stable | |
S&P(1) | | | A-2 | | | | BBB | | | | Negative | | | | A-2 | | | | BBB | | | | Positive | |
DBRS | | | R-2 (high | ) | | | BBB (high | ) | | | Stable | | | | R-2 (high | ) | | | BBB (high | ) | | | Positive | |
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| | |
(1) | | In August 2011, the outlook was changed to “Stable.” |
At JanuaryJuly 31, 2011, we maintained a committed line of credit (CLOC)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 the new facility are substantially similar to those in the previous CLOCs including: (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
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30 of each year (“Clean-down requirement”). At JanuaryJuly 31, 2011, we were in compliance with these covenants and had net worth of $827.7 million.$1.2 billion. We had no balance outstanding under the CLOCs at JanuaryJuly 31, 2011.
There have been no other material changes in our borrowings or debt ratings from those reported at April 30, 20102011 in our Annual Report onForm 10-K.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual obligations and commercial commitments from those reported at April 30, 20102011 in our Annual Report onForm 10-K.
REGULATORY ENVIRONMENT
There have been no material changes in our regulatory environment from those reported at April 30, 20102011 in our Annual Report onForm 10-K.
FORWARD-LOOKING INFORMATION
This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “would,” “should,” “could” or “may.” Forward-looking statements provide management’s current expectations or predictions of future conditions, events or results. They may include projections of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date made and management does not undertake to update them to reflect changes or events occurring after that date except as required by federal securities laws.
There have been no material changes in our market risks from those reported at April 30, 20102011 in our Annual Report onForm 10-K.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by thisForm 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and
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15d-15(e)). The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report onForm 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 SCC’s mortgage business activities that occurred prior to such termination and sale. These investigations, claims and
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lawsuits include actions by state and federal regulators, municipalities, third party indemnitees, 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, rights to indemnification, 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 to increase. 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 be paid 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 (CaseNo. 08-2474-BLS) styledCommonwealth 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. To avoid the cost and inherent risk associated with litigation, the parties have reached an agreement to settle this case. The settlement requires a cash payment from SCC to the Attorney General of $9.8 million, in addition to certain loan modification relief to Massachusetts borrowers estimated at $115 million in benefits. The agreement also provides for a contingent cash payment of up to $5 million in the event certain loan modification relief is not available. We have a liability recorded for our best estimate of the expected loss. 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.
On February 1, 2008, a class action lawsuit was filed in the United States District Court for the District of Massachusetts against SCC and other related entities styledCecil Barrett, et al. v. Option One Mortgage Corp., et al.(Civil ActionNo. 08-10157-RWZ). Plaintiffs allege discriminatory practices relating to the origination of mortgage loans in violation of the Fair Housing Act and Equal Credit Opportunity Act, and seek declaratory and injunctive relief in addition to actual and punitive damages. The court dismissed H&R Block, Inc. from the lawsuit for lack of personal jurisdiction. In March 2011, the court issued an order certifying a class, which defendants sought to appeal. On August 24, 2011, the First Circuit Court of Appeals declined to hear the appeal, noting that the district court could reconsider its certification decision in light of a recent ruling by the United States Supreme Court in an unrelated matter. 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 believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
On December 9, 2009, a putative class action lawsuit was filed in the United States District Court for the Central District of California against SCC and H&R Block, Inc. styledJeanne Drake, et al. v. Option One Mortgage Corp., et al.(CaseNo. SACV09-1450 CJC). Plaintiffs allege breach of contract, promissory fraud, intentional interference with contractual relations, wrongful withholding of wages and unfair business practices in connection with the failure to pay severance benefits to employees when their employment transitioned to American Home Mortgage Servicing, Inc. in connection with the sale of certain assets and operations of Option One. Plaintiffs seek to recover severance benefits of approximately $8 million, interest and attorney’s fees, in addition to penalties and punitive damages on certain claims. Plaintiffs’ motion for class certification is pending. All parties have filed motions for summary judgment. The court has set a hearing on all pending motions on August 29, 2011. 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 we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
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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) styledFederal 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.
Employment-Related Claims and Litigation
We have been named in several wage and hour class action lawsuits throughout the country, includingAlice 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.,CaseNo. 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 for all hours worked and to provide meal periods); andBarbara Petroski v. H&R Block Eastern Enterprises, Inc., et al.,CaseNo. 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 theLemuscase in December 2010 (consisting of tax professionals who worked in company-owned offices in California from 2007 to 2010); in theWilliamscase in March 2011 (consisting of office managers who worked in company-owned offices in California from 2004 to 2011); and in theUgascase in August 2011 (consisting of tax professionals who worked in company-owned offices in California from 2006 to 2011). A conditional class was certified in thePetroskicase in March 2011 (consisting of tax professionals nationwide who worked in company-owned offices and 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 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.
RAL Litigation
We have been named in multiple lawsuits as defendants in litigation regarding our refund anticipation loan program in past years. All of those lawsuits have been settled or otherwise resolved, except for one.
The sole remaining case is a putative class action styledSandra 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
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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 styledJim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc.,et al.The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. We are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims in this case, and we intend to defend this case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.
RSM McGladrey Litigation
RSM EquiCo, its parent and certain of its subsidiaries and affiliates, are parties to a class action filed on July 11, 2006 and styledDo 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, negligent misrepresentation, breach of contract, 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 reached an agreement to settle the case, subject to approval by the California Superior Court. The settlement requires a maximum payment of $41.5 million, although the actual cost of the settlement will depend on the number of valid claims submitted by class members. The California Superior Court preliminarily approved the settlement on July 29, 2011. A final approval hearing is set for October 20, 2011. The defendants filed two requests for interlocutory review
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of the decision, the last of which was denied by the Supreme Court of California on September 30, 2009. A trial date has been set for May 2011.
The certified class consists of RSM EquiCo’s U.S. clients who signed platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable, although it is possible that our losses could exceed the amount we have accrued. The fees paid to RSM EquiCo in connection with these agreements total approximately $185 million, a number which substantially exceeds the equity of RSM EquiCo. Plaintiffs seek to recover restitution in an amount equal to the fees paid, in addition to punitive damages and attorney fees. We believe the RSM Partiesthey have meritorious defenses to the claims in this case and, intendif for any reason the settlement is not approved, they will continue to defend the case vigorously. The amount claimed in this action is substantial and couldAlthough we have a material adverse impact on our consolidated results of operations. Thereliability recorded 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 styledRonald 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 (CaseNo. 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 which remains pending.with respect to the claims against M&P and RSM. No claims remain against H&R Block.
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
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professionals. This could, in turn, have a material adverse effect on RSM’s operations and impair the value of our investment in RSM. There is no assurance regarding the outcome of any claims or litigation involving M&P.
Litigation and Claims PertainingOther
In October 2010, we signed a definitive merger agreement to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated andacquire all of the loan servicing business was sold during fiscal year 2008, SCC and HRB remain subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state attorneys general, other state and federal regulators, municipalities, individual plaintiffs, and casesoutstanding shares of 2SS Holdings, Inc. (“2SS”), developer of TaxACT digital tax preparation solutions, for $287.5 million in which plaintiffs seek to representcash. In May 2011, the United States Department of Justice (DOJ) filed a class of others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance, fraud, and violations of securities laws, the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased over historical experience and is likely to continue at increased levels. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict and thus cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts that may be required to pay in the discharge of liabilities or settlements could be substantial and, because SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed acivil antitrust lawsuit in the Superior Court of Suffolk County, MassachusettsU.S. district court in Washington, D.C., (CaseNo. 08-2474-BLS)1:11-cv-00948) against H&R Block and 2SS styledCommonwealth of MassachusettsUnited States v. H&R Block, Inc., et al.2SS Holdings, Inc., and TA IX L.P.,alleging unfair, deceptive and discriminatory origination and servicingto block our proposed acquisition of mortgage loans and seeking equitable relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a2SS. A preliminary injunction limiting the ability of the owner of SCC’s former loan servicing businesshearing is set to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. An appeal of the preliminary injunction was denied. A trial date has been set for Juneoccur in September 2011. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable
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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 beare no assurances however, as to its outcomethat the DOJ’s lawsuit will be resolved in our favor or its impact on our consolidated results of operations.
On October 15, 2010,that the Federal Home Loan Bank of Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styledFederal 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 FHLB’s purchase of mortgage-backed securities. Plaintiff asserts claims for rescission and damages under Illinois securities law and for common law negligent misrepresentation in connection with its purchase of two securities originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50 million, of which approximately $42 million remains outstanding. We have not concluded that a loss related to this matter is probable nor have we established a loss contingency related to this matter. We believe the claims in this case are without merit and we intend to defend them vigorously. There cantransaction will be no assurances, however, as to its outcome or its impact on our consolidated results of operations.
Other Claims and Litigation
We have been named in several wage and hour class action lawsuits throughout the country, respectively styledAlice 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.,CaseNo. 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); andBarbara Petroski v. H&R Block Eastern Enterprises, Inc., et al.,CaseNo. 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 theLemuscase in December 2010 consisting of all tax professionals who worked in company-owned offices in California from 2007 to 2010. 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 of wages per tax season for class members who worked in California. The potential loss related to the wage and hour class action lawsuits cannot be reasonably estimated, but our losses could exceed the amount we have accrued. We believe we have meritorious defenses to the claims in these cases and intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances 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.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 adverse impact on our consolidated results of operations.
We are also party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (collectively, “Other Claims”) concerning the preparation of customers’ income tax returns, the fees charged customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters and contract disputes. While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay in the discharge of liabilities or settlements in these Other Claims will not have a material adverse impact on our consolidated results of operations.
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ITEM 1A. RISK FACTORS
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 upcoming tax season, it would no longer furnish the debt indicator (DI), to tax preparers or financial institutions. The DI is an underwriting tool that lenders use when considering whether to loan money to taxpayers who apply for a RAL, which is short term loan, secured by the taxpayer’s federal tax refund.
On December 23, 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 this tax season. Subsequently, two other banks offering RALs this 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 this tax season through our competitors announced that it was appealing 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.
In addition, termination of the contract with HSBC could have adverse effects on our operating results this fiscal year, including declines in tax returns prepared as a result of clients seeking alternate preparers who continue to offers RALs this tax season, and declines in settlement product and related revenues to the extent prior RAL clients do not purchase a refund anticipation check 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.
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 Office of Thrift Supervision moves to the Office of the Comptroller of the Currency 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 |
• | 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
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Reform Act and any related legislation or regulations could have a material adverse effect on our business, results of operations and financial condition.
There have been no other material changes in our risk factors from those reported at April 30, 20102011 in our Annual Report onForm 10-K.
A summary of our purchases of H&R Block common stock during the thirdfirst quarter of fiscal year 20112012 is as follows:
| | | | | | | | | | | | |
(in 000s, except per share amounts) |
| | | | | | Total Number of Shares
| | Maximum $Value
|
| | Total
| | Average
| | Purchased as Part of
| | of Shares that May
|
| | Number of Shares
| | Price Paid
| | Publicly Announced
| | Be Purchased Under
|
| | Purchased(1) | | per Share | | Plans or Programs(2) | | the Plans or Programs |
|
|
November 1 – November 30 | | | 1 | | $ | 11.63 | | | - | | $ | 1,371,957 |
December 1 – December 31 | | | - | | $ | - | | | - | | $ | 1,371,957 |
January 1 – January 31 | | | 1 | | $ | 11.91 | | | - | | $ | 1,371,957 |
|
|
| | | | | | | | | | | | |
(in 000s, except per share amounts) |
| | | | | | Total Number of Shares
| | Maximum $Value
|
| | Total
| | Average
| | Purchased as Part of
| | of Shares that May
|
| | Number of Shares
| | Price Paid
| | Publicly Announced
| | Be Purchased Under
|
| | Purchased(1) | | per Share | | Plans or Programs(2) | | the Plans or Programs |
|
|
May 1 – May 31 | | | 2 | | $ | 17.16 | | | – | | $ | 1,371,957 |
June 1 – June 30 | | | 14 | | $ | 17.23 | | | – | | $ | 1,371,957 |
July 1 – July 31 | | | 106 | | $ | 16.31 | | | – | | $ | 1,371,957 |
|
|
| | |
(1) | | We purchased 2,067the above shares in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares. |
|
(2) | | In June 2008, our Board of Directors rescinded previous authorizations to repurchase shares of our common stock, and approved an authorization to purchase up to $2.0 billion of our common stock through June 2012. |
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| | | | |
| 31 | .1 | | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31 | .2 | | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | .1 | | Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32 | .2 | | Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 | .INS | | XBRL Instance Document |
| 101 | .SCH | | XBRL Taxonomy Extension Schema |
| 101 | .CAL | | XBRL Extension Calculation Linkbase |
| 101 | .LAB | | XBRL Taxonomy Extension Label Linkbase |
| 101 | .PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| 101 | .REF | | XBRL Taxonomy Extension Reference Linkbase |
|
|
| | | | |
| 10 | .1* | | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Restricted Shares. |
| 10 | .2* | | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Stock Options. |
| 10 | .3* | | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Performance Shares. |
| 10 | .4* | | Grant Agreement between H&R Block, Inc. and William C. Cobb in connection with award of Restricted Shares as of May 2, 2011. |
| 10 | .5* | | Grant Agreement between H&R Block, Inc. and William C. Cobb in connection with award of Stock Options as of May 2, 2011. |
| 10 | .6 | | Amendment to Agreement and Plan of Merger dated June 21, 2011, among H&R Block, Inc., HRB Island Acquisition, Inc., 2SS Holdings, Inc., TA Associates Management, L.P. and Lance Dunn, filed as Exhibit 10.34 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2011, file number 1-6089, is incorporated herein by reference. |
| 31 | .1 | | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31 | .2 | | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | .1 | | Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32 | .2 | | Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 | .INS | | XBRL Instance Document |
| 101 | .SCH | | XBRL Taxonomy Extension Schema |
| 101 | .CAL | | XBRL Extension Calculation Linkbase |
| 101 | .LAB | | XBRL Taxonomy Extension Label Linkbase |
| 101 | .PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| 101 | .REF | | XBRL Taxonomy Extension Reference Linkbase |
|
|
| | |
* | | Indicates management contracts, compensatory plans or arrangements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
H&R BLOCK, INC.
Alan M. BennettWilliam C. Cobb
President and Chief Executive Officer
March 9,September 1, 2011
Jeffrey T. Brown
Senior Vice President and
Chief Financial Officer
March 9,September 1, 2011
Colby R. Brown
Vice President and
Corporate Controller
March 9,September 1, 2011
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