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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended: April 30, 2004 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number: 1-6089
H&R Block, Inc.
MISSOURI | 44-0607856 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
4400 Main Street, Kansas City, Missouri 64111
(816) 753-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, without par value | New York Stock Exchange | |
Pacific Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The aggregate market value of the registrant’s Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on October 31, 2003, was $8,416,026,893.
Number of shares of registrant’s Common Stock, without par value, outstanding on June 1, 2004: 168,292,888.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant’s Annual Meeting of Shareholders, to be held September 8, 2004, is incorporated by reference in Part III to the extent described therein.
H&R BLOCK, INC.
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PART I
ITEM 1. BUSINESS
General Development of Business
H&R BLOCK’S MISSION
H&R BLOCK’S VISION
Financial Information About Industry Segments
Description of Business
U.S. Tax Operations
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▪ | If one of our tax professionals makes an error in preparing a client’s tax return or if our online service or TaxCut software causes an error that results in the assessment of any interest or penalties on additional taxes due, we guarantee payment of the interest and penalties, but not the additional taxes, under our standard guarantee. | |
▪ | Beginning in fiscal year 2004, if due to our error on a return the client is entitled to a larger refund or smaller tax liability than what we calculated, we will refund the tax preparation fee for that return, when claimed within the calendar year, under our maximum refund guarantee. | |
▪ | Our Double Check Challenge encourages taxpayers to bring previously filed returns, which were not prepared by us, to one of our offices for review at no charge. One of our tax professionals reviews the returns to determine if the taxpayer should file an amended return for a tax refund which otherwise would have been lost due to overlooked credits or deductions or other reasons. | |
▪ | Electronic filing reduces the amount of time required for a taxpayer to receive a federal tax refund and provides additional assurance to the client the return is mathematically accurate. | |
▪ | Individual retirement accounts (“Express IRAs”), invested in FDIC-insured money market accounts, are offered to tax clients as a tax savings strategy and as a retirement savings tool. HRBFA acts as custodian on the accounts, with the funds being invested at insured depository institutions paying competitive money market interest rates. | |
▪ | “EasyPay” revolving loans are offered by Imperial through a contractual relationship with Household to clients whose tax returns reflect a balance due to the IRS. The loan has “same as cash” terms for approximately 90 days. | |
▪ | We offer income tax return preparation courses to the public, which teach taxpayers how to prepare income tax returns and provide us with a source of trained tax professionals. |
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April 30, | 2004 | 2003 | 2002 | ||||||||||||
Company-owned offices | 4,746 | 4,672 | 4,417 | ||||||||||||
Former major franchise territories(1) | 459 | — | — | ||||||||||||
Company-owned shared locations(2) | 947 | 607 | 600 | ||||||||||||
Total company-owned offices | 6,152 | 5,279 | 5,017 | ||||||||||||
Franchise offices | 3,374 | 3,398 | 3,373 | ||||||||||||
Former major franchise territories(1) | — | 529 | 524 | ||||||||||||
Franchise shared locations(2) | 325 | 95 | 101 | ||||||||||||
Total franchise offices | 3,699 | 4,022 | 3,998 | ||||||||||||
Total offices | 9,851 | 9,301 | 9,015 | ||||||||||||
(1) | Impact of company-owned offices in former major franchise territories that commenced operations during fiscal year 2004. |
(2) | Shared locations include offices located within Wal-Mart, Sears or other third-party businesses. |
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• | Option One’s wholesale origination channel works with brokers throughout the United States to fund mortgage loans through a national branch network. Wholesale originations represent the majority of Option One’s total loan production. | |
• | Option One’s national accounts channel forms partnerships with financial institutions, including national and regional banks, to allow them to offer non-prime loans. | |
• | Option One’s bulk acquisitions channel specializes in the purchase of performing non-prime mortgage loan pools. | |
• | HRBMC originates residential mortgage loans directly to retail consumers. |
(in 000s) | ||||||||||||||
2004 | 2003 | 2002 | ||||||||||||
Wholesale | $ | 16,828,138 | $ | 11,434,138 | $ | 8,078,192 | ||||||||
National accounts | 2,642,944 | 1,814,092 | 1,219,080 | |||||||||||
Bulk acquisitions | 679,910 | 411,013 | 160,059 | |||||||||||
Retail | 3,105,021 | 2,918,378 | 1,995,842 | |||||||||||
$ | 23,256,013 | $ | 16,577,621 | $ | 11,453,173 | |||||||||
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(dollars in 000s) | ||||||||||||||
Type of servicing | Principal Balance | MSR Balance | Rate Earned | |||||||||||
Originated | $ | 36,131,752 | $ | 112,800 | 0.43% | |||||||||
Purchased | 353,576 | 1,021 | 0.50% | |||||||||||
Sub-servicing | 8,782,775 | – | 0.30% | |||||||||||
Total | $ | 45,268,103 | $ | 113,821 | 0.41% | |||||||||
State | Percent of Volume | Number of Branches | ||||||||
California | 18.8% | 5 | ||||||||
New York | 14.4% | 2 | ||||||||
Massachusetts | 10.2% | 0 | ||||||||
Florida | 6.4% | 4 | ||||||||
New Jersey | 5.1% | 1 | ||||||||
Texas | 4.5% | 3 | ||||||||
Illinois | 3.6% | 3 | ||||||||
Virginia | 2.9% | 2 | ||||||||
Connecticut | 2.6% | 1 | ||||||||
Pennsylvania | 2.6% | 1 | ||||||||
Michigan | 2.3% | 1 | ||||||||
Georgia | 2.2% | 2 | ||||||||
Colorado | 2.1% | 1 | ||||||||
Rhode Island | 2.0% | 2 | ||||||||
Ohio | 1.9% | 2 | ||||||||
North Carolina | 1.7% | 1 | ||||||||
Arizona | 1.5% | 2 | ||||||||
New Hampshire | 1.3% | 1 | ||||||||
Washington | 1.3% | 1 | ||||||||
Nevada | 1.0% | 1 | ||||||||
Wisconsin | .8% | 1 | ||||||||
Other | 10.8% | 0 | ||||||||
• | The federal Truth-in-Lending Act, as amended, and Regulation Z promulgated thereunder; | |
• | The Equal Credit Opportunity Act, as amended, and Regulation B promulgated thereunder; | |
• | The Fair Credit Reporting Act, as amended; | |
• | The federal Real Estate Settlement Procedures Act, as amended, and Regulation X promulgated thereunder; | |
• | The Home Ownership Equity Protection Act (“HOEPA”); | |
• | The Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended; | |
• | The Home Mortgage Disclosure Act and Regulation C promulgated thereunder; | |
• | The federal Fair Housing Act; | |
• | The Gramm-Leach-Bliley Act and regulations adopted thereunder; and | |
• | Certain other laws and regulations. |
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Business Services
▪ | RSM McGladrey Retirement Resources administers retirement plans, helps clients design the best plan for their needs, and also provides retirement plan investment advice, year-end compliance, tax reporting and consulting. | |
▪ | RSM EquiCo, Inc. is an investment banking firm specializing in business valuations, acquisitions and divestitures for private middle-market businesses. | |
▪ | RSM McGladrey Employer Services, Inc. (formerly known as “MyBenefitSource, Inc.”) is a provider of payroll and benefits administration services to middle-market businesses. | |
▪ | PDI Global, Inc. provides marketing, communications and visibility programs, tax and financial planning guides, and marketing and management consulting services to accountants, consultants, lawyers, banks, insurers, and other financial service providers. |
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(dollars in 000s) | ||||||||
Revenue | Total Production | |||||||
Per Advisor | Revenues | |||||||
Fiscal year 2004: | ||||||||
Pre-2003 class | $ | 216 | $ | 135,949 | ||||
2003 recruits | 84 | 17,717 | ||||||
2004 recruits | 61 | 7,664 | ||||||
Fiscal year 2003: | ||||||||
Pre-2003 class | $ | 135 | $ | 126,176 | ||||
2003 recruits | 34 | 4,604 | ||||||
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International Tax Operations
April 30, | 2004 | 2003 | 2002 | |||||||||||
Canada | 891 | 910 | 955 | |||||||||||
Australia | 378 | 362 | 362 | |||||||||||
Other | 65 | 62 | 59 | |||||||||||
Total offices | 1,334 | 1,334 | 1,376 | |||||||||||
Canada | January – April | |||||
Australia | July – October | |||||
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Service Marks, Trademarks and Patents
Employees
Risk Factors
U.S. Tax Operations
Mortgage Operations
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Business Services
Investment Services
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PART II
ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(shares in 000s) | ||||||||||||||||||
Total Number of | Maximum Number | |||||||||||||||||
Total | Average | Shares Purchased as | of Shares that May Be | |||||||||||||||
Number of Shares | Price Paid | Part of Publicly Announced | Purchased Under the | |||||||||||||||
Purchased(2) | per Share | Plans or Programs(1) | Plans or Programs(1)(3) | |||||||||||||||
February 1 – February 29 | 781 | $ | 55.28 | 780 | 13,367 | |||||||||||||
March 1 – March 31 | 1,460 | $ | 53.81 | 1,460 | 11,907 | |||||||||||||
April 1 – April 30 | 575 | $ | 46.75 | 575 | 11,332 | |||||||||||||
(1) | On June 11, 2003, our Board of Directors approved the repurchase of 20 million shares of H&R Block common stock. This authorization has no expiration date. |
(2) | Of the total number of shares purchased, 1,202 shares were purchased in connection with funding employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on restricted shares. |
(3) | On June 9, 2004, our Board of Directors approved the additional repurchase of 15 million shares of H&R Block common stock. This authorization has no expiration date. |
(in 000s, except per share amounts) | |||||||||||||||||||||||
April 30, | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
Revenues | $ | 4,205,570 | $ | 3,746,457 | $ | 3,285,701 | $ | 2,965,405 | $ | 2,420,923 | |||||||||||||
Net income before change in accounting principle | 704,256 | 580,064 | 434,405 | 276,748 | 251,895 | ||||||||||||||||||
Net income | 697,897 | 580,064 | 434,405 | 281,162 | 251,895 | ||||||||||||||||||
Basic earnings per share: | |||||||||||||||||||||||
Net income before change in accounting principle | $ | 3.98 | $ | 3.23 | $ | 2.38 | $ | 1.50 | $ | 1.28 | |||||||||||||
Net income | 3.94 | 3.23 | 2.38 | 1.53 | 1.28 | ||||||||||||||||||
Diluted earnings per share: | |||||||||||||||||||||||
Net income before change in accounting principle | $ | 3.90 | $ | 3.15 | $ | 2.31 | $ | 1.49 | $ | 1.27 | |||||||||||||
Net income | 3.86 | 3.15 | 2.31 | 1.52 | 1.27 | ||||||||||||||||||
Total assets | $ | 5,380,026 | $ | 4,767,308 | $ | 4,384,640 | $ | 4,166,044 | $ | 5,700,146 | |||||||||||||
Long-term debt | 545,811 | 822,302 | 868,387 | 870,974 | 872,396 | ||||||||||||||||||
Dividends per share | $ | .78 | $ | .70 | $ | .63 | $ | .59 | $ | .54 | |||||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
▪ | U.S. Tax Operations – expanding our office network, working on service and product differentiation and focusing on advice that supports client growth, increased brand loyalty and business extensions with a tax and financial connection. | |
▪ | Mortgage Operations – developing a diversified source of originations, distinguishing our service quality, minimizing risk and volatility in performance and using secondary markets to optimize value. | |
▪ | Business Services – developing a national accounting, tax and consulting firm, adding extended services to middle-market companies and enhancing our client service culture. | |
▪ | Investment Services – serving the broad consumer market through tax-based advisory relationships, brand differentiation through relevant advice and multi-channel access and providing services clients can use to readily implement that advice. |
Overview
▪ | Diluted earnings per share before change in accounting principle were $3.90, an increase of 23.8% over fiscal year 2003. | |
▪ | Revenues grew 12.3% over the prior year, primarily due to revenues from operations in former major franchise territories and growth in our Mortgage Operations segment. We achieved revenue growth in each of our segments. | |
▪ | Clients served in company-owned retail tax offices grew 5.2%, and the average fee per client served increased 6.7%. The increase in clients served is due entirely to company-owned operations in former major franchise territories. Excluding the former major franchise territories, clients served decreased 2.5%. | |
▪ | Software and online revenues increased 11.4% and 70.6%, respectively, compared to fiscal year 2003. | |
▪ | Mortgage originations totaled $23.3 billion for the year as a result of increases in the sales force, average loan size, loan applications and the closing ratio. | |
▪ | Gains on sales of mortgage assets reached $726.7 million, including $40.7 million realized on the sale of previously securitized residual interests. | |
▪ | The Business Services segment reported pretax income of $19.3 million, an improvement of $33.4 million over the prior year. Fiscal year 2003 includes an $11.8 million goodwill impairment. | |
▪ | The Investment Services segment reported a pretax loss of $64.4 million, an improvement of $63.8 million over prior year. Fiscal year 2003 includes a $24.0 million goodwill impairment. | |
▪ | We began expensing stock-based compensation as of May 1, 2003. We recorded $25.7 million in expense related to the issuance of stock options, restricted stock and our employee stock purchase plan during fiscal year 2004. |
Consolidated Results of Operations(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
REVENUES: | ||||||||||||||
U.S. Tax Operations | $ | 2,093,617 | $ | 1,861,681 | $ | 1,831,274 | ||||||||
Mortgage Operations | 1,281,399 | 1,165,411 | 702,333 | |||||||||||
Business Services | 499,210 | 434,140 | 416,926 | |||||||||||
Investment Services | 229,470 | 200,794 | 250,685 | |||||||||||
International Tax Operations | 97,560 | 85,082 | 78,710 | |||||||||||
Corporate Operations | 4,314 | (651 | ) | 5,773 | ||||||||||
$ | 4,205,570 | $ | 3,746,457 | $ | 3,285,701 | |||||||||
INCOME (LOSS): | ||||||||||||||
U.S. Tax Operations | $ | 627,592 | $ | 547,078 | $ | 533,468 | ||||||||
Mortgage Operations | 678,261 | 693,950 | 339,388 | |||||||||||
Business Services | 19,321 | (14,118 | ) | 22,716 | ||||||||||
Investment Services | (64,446 | ) | (128,292 | ) | (54,862 | ) | ||||||||
International Tax Operations | 11,097 | 10,464 | 7,093 | |||||||||||
Corporate Operations | (107,668 | ) | (122,005 | ) | (130,963 | ) | ||||||||
Pretax income | $ | 1,164,157 | $ | 987,077 | $ | 716,840 | ||||||||
CRITICAL ACCOUNTING POLICIES
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RESULTS OF OPERATIONS
Our business is divided into five reportable segments: U.S. Tax Operations, Mortgage Operations, Business Services, Investment Services and International Tax Operations.
U.S. TAX OPERATIONS
U.S. Tax Operations – Operating Statistics(in 000s, except average fee) | |||||||||||||||||
Year ended April 30, | 2004 | 2003(1) | 2002(1) | ||||||||||||||
Clients served: | |||||||||||||||||
Company-owned offices (2) | 9,811 | 10,058 | 10,513 | ||||||||||||||
Former major franchise territories (3) | 775 | ** | ** | ||||||||||||||
Total company-owned | 10,586 | 10,058 | 10,513 | ||||||||||||||
Franchise offices | 5,413 | 5,629 | 5,785 | ||||||||||||||
Former major franchise territories (3) | 16 | 830 | 850 | ||||||||||||||
Total franchise | 5,429 | 6,459 | 6,635 | ||||||||||||||
Digital tax solutions: | |||||||||||||||||
Software (4) | 2,027 | 1,963 | 1,825 | ||||||||||||||
Online (5) | 1,207 | 920 | 481 | ||||||||||||||
19,249 | 19,400 | 19,454 | |||||||||||||||
Average fee per client served: (7) | |||||||||||||||||
Company-owned offices (2) | $ | 147.38 | $ | 137.36 | $ | 128.69 | |||||||||||
Former major franchise territories (3) | 135.52 | ** | ** | ||||||||||||||
Total company-owned | 146.51 | 137.36 | 128.69 | ||||||||||||||
Franchise offices | 128.02 | 117.42 | 108.82 | ||||||||||||||
Former major franchise territories (3) | 126.13 | 122.96 | 112.31 | ||||||||||||||
Total franchise | 128.02 | 118.14 | 109.27 | ||||||||||||||
$ | 140.24 | $ | 129.84 | $ | 121.18 | ||||||||||||
RALs: (6) | |||||||||||||||||
Company-owned offices (2) | 2,521 | 2,758 | 2,844 | ||||||||||||||
Former major franchise territories (3) | 185 | ** | ** | ||||||||||||||
Total company-owned | 2,706 | 2,758 | 2,844 | ||||||||||||||
Franchise offices | 1,501 | 1,595 | 1,573 | ||||||||||||||
Former major franchise territories (3) | ** | 188 | 189 | ||||||||||||||
Total franchise | 1,501 | 1,783 | 1,762 | ||||||||||||||
Digital tax solutions: | |||||||||||||||||
Software | 5 | — | 11 | ||||||||||||||
Online | 57 | 75 | 33 | ||||||||||||||
4,269 | 4,616 | 4,650 | |||||||||||||||
U.S. Tax Operations – Financial Results(in 000s) | ||||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||
Tax preparation and related fees | $ | 1,519,238 | $ | 1,378,733 | $ | 1,364,673 | ||||||||||
Royalties | 173,754 | 163,519 | 154,780 | |||||||||||||
RAL waiver fees | 6,548 | 138,242 | — | |||||||||||||
RAL participation fees | 168,375 | 874 | 159,965 | |||||||||||||
Software sales | 69,474 | 62,368 | 54,823 | |||||||||||||
Online tax services | 44,860 | 26,290 | 14,606 | |||||||||||||
Peace of Mind revenue | 75,025 | 47,677 | 44,387 | |||||||||||||
Other | 36,343 | 43,978 | 38,040 | |||||||||||||
Total revenues | 2,093,617 | 1,861,681 | 1,831,274 | |||||||||||||
Compensation and benefits | 662,326 | 577,545 | 598,355 | |||||||||||||
Occupancy and equipment | 235,469 | 207,366 | 186,998 | |||||||||||||
Depreciation and amortization | 54,879 | 39,456 | 39,871 | |||||||||||||
Supplies, freight and postage | 39,666 | 39,579 | 35,989 | |||||||||||||
Cost of software sales | 25,274 | 20,085 | 19,947 | |||||||||||||
Bad debt | 44,155 | 17,358 | 38,235 | |||||||||||||
Legal | 7,645 | 69,783 | 7,641 | |||||||||||||
Other | 126,338 | 105,456 | 137,884 | |||||||||||||
Allocated corporate and shared costs: | ||||||||||||||||
Marketing | 110,807 | 90,142 | 99,560 | |||||||||||||
Information technology | 91,158 | 77,285 | 77,230 | |||||||||||||
Finance | 19,675 | 22,367 | 13,270 | |||||||||||||
Supply | 21,607 | 19,724 | 19,508 | |||||||||||||
Other | 27,026 | 28,457 | 23,318 | |||||||||||||
Total expenses | 1,466,025 | 1,314,603 | 1,297,806 | |||||||||||||
Pretax income | $ | 627,592 | $ | 547,078 | $ | 533,468 | ||||||||||
(1) | Company-owned and franchise numbers for fiscal years 2003 and 2002 have not been restated for franchise acquisitions during fiscal year 2004. |
(2) | Excludes company-owned offices in former major franchise territories, which commenced operations during fiscal year 2004. |
(3) | Impact of company-owned offices in former major franchise territories, which commenced operations during fiscal year 2004. |
(4) | Includes TaxCut federal units sold. |
(5) | Includes a) online completed and paid federal returns, and b) state returns only when no payment was made for a federal return. |
(6) | Data is for tax season (January 1 – April 30) only. |
(7) | Calculated as gross tax preparation and related fees divided by clients served. |
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Fiscal 2004 compared to fiscal 2003
Fiscal 2005 outlook
Fiscal 2003 compared to fiscal 2002
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RAL litigation
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MORTGAGE OPERATIONS
Mortgage Operations – Operating Statistics | (dollars in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||
Number of loans originated: | ||||||||||||||||
Wholesale (non-prime) | 130,356 | 93,497 | 74,208 | |||||||||||||
Retail: Prime | 9,763 | 12,361 | 7,935 | |||||||||||||
Non-prime | 15,220 | 9,983 | 7,190 | |||||||||||||
Total | 155,339 | 115,841 | 89,333 | |||||||||||||
Volume of loans originated: | ||||||||||||||||
Wholesale (non-prime) | $ | 20,150,992 | $ | 13,659,243 | $ | 9,457,331 | ||||||||||
Retail: Prime | 1,258,347 | 1,697,815 | 1,179,137 | |||||||||||||
Non-prime | 1,846,674 | 1,220,563 | 816,705 | |||||||||||||
Total | $ | 23,256,013 | $ | 16,577,621 | $ | 11,453,173 | ||||||||||
Loan sales: | ||||||||||||||||
Loans originated | $ | 23,234,935 | $ | 16,591,821 | $ | 11,440,190 | ||||||||||
Loans acquired | – | 633,953 | – | |||||||||||||
Total | $ | 23,234,935 | $ | 17,225,774 | $ | 11,440,190 | ||||||||||
Weighted average FICO score (2) | 608 | 604 | 600 | |||||||||||||
Execution price – Net gain on sale (1) | ||||||||||||||||
Loans originated and sold | 4.09% | 4.63% | 4.30% | |||||||||||||
Loans acquired and sold | – | .18% | – | |||||||||||||
Total | 4.09% | 4.46% | 4.30% | |||||||||||||
Weighted average interest rate for borrowers (2) | 7.39% | 8.15% | 9.09% | |||||||||||||
Weighted average loan-to-value (2) | 78.1% | 78.7% | 78.6% | |||||||||||||
(1) | Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses). |
(2) | Represents non-prime production. |
Mortgage Operations – Financial Results | (in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||
Components of gains on sales: | ||||||||||||||||
Gains on mortgage loans | $ | 716,690 | $ | 663,573 | $ | 455,388 | ||||||||||
Gains on sales of residual interests | 40,689 | 130,881 | – | |||||||||||||
Impairment of residual interests | (30,661 | ) | (54,111 | ) | (30,987 | ) | ||||||||||
Total gains on sales | 726,718 | 740,343 | 424,401 | |||||||||||||
Loan servicing revenue | 211,710 | 168,351 | 147,162 | |||||||||||||
Interest income: | ||||||||||||||||
Accretion-residual interests | 168,029 | 145,165 | 50,583 | |||||||||||||
Accretion-beneficial interest | 167,705 | 103,294 | 70,668 | |||||||||||||
Other interest income | 5,064 | 5,421 | 6,609 | |||||||||||||
Total interest income | 340,798 | 253,880 | 127,860 | |||||||||||||
Other | 2,173 | 2,837 | 2,910 | |||||||||||||
Total revenues | 1,281,399 | 1,165,411 | 702,333 | |||||||||||||
Compensation and benefits | 297,441 | 242,143 | 171,084 | |||||||||||||
Servicing and processing | 107,538 | 74,774 | 86,146 | |||||||||||||
Occupancy and equipment | 49,231 | 42,626 | 30,700 | |||||||||||||
Other | 148,928 | 111,918 | 75,015 | |||||||||||||
Total expenses | 603,138 | 471,461 | 362,945 | |||||||||||||
Pretax income | $ | 678,261 | $ | 693,950 | $ | 339,388 | ||||||||||
Fiscal 2004 compared to fiscal 2003
(dollars in 000s) | ||||||||||
Year ended April 30, | 2004 | 2003 | ||||||||
Number of sales associates (1) | 2,812 | 2,228 | ||||||||
Total number of applications | 269,267 | 216,492 | ||||||||
Closing ratio (2) | 57.7% | 53.5% | ||||||||
Total number of originations | 155,339 | 115,841 | ||||||||
Average loan size | $ | 150 | $ | 143 | ||||||
Total originations | $ | 23,256,013 | $ | 16,577,621 | ||||||
Non-prime/prime origination ratio | 17.5:1 | 8.8:1 | ||||||||
Loan sales | $ | 23,234,935 | $ | 17,225,774 | ||||||
Execution price – net gain on sale (3) | 4.09% | 4.46% | ||||||||
(1) | Includes all direct sales and back office sales support associates. |
(2) | Percentage of loans funded divided by total applications in the period. |
(3) | Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses). |
Table of Contents
(dollars in 000s) | |||||||||||
Year ended April 30, | 2004 | 2003 | |||||||||
Average servicing portfolio: | |||||||||||
With related MSRs | $ | 32,039,811 | $ | 23,858,490 | |||||||
Without related MSRs | 6,481,069 | 3,883,980 | |||||||||
$ | 38,520,880 | $ | 27,742,470 | ||||||||
Number of loans serviced | 324,364 | 246,463 | |||||||||
Average delinquency rate | 6.04% | 7.08% | |||||||||
Value of MSRs | $ | 113,821 | $ | 99,265 | |||||||
Fiscal 2005 outlook
Fiscal 2003 compared to fiscal 2002
Table of Contents
Table of Contents
BUSINESS SERVICES
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Accounting, tax and consulting: | |||||||||||||||
Chargeable hours | 2,598,397 | 2,583,505 | 2,675,704 | ||||||||||||
Chargeable hours per person | 1,414 | 1,388 | 1,399 | ||||||||||||
Net collected rate per hour | $ | 124 | $ | 120 | $ | 113 | |||||||||
Average margin per person | $ | 102,496 | $ | 97,117 | $ | 94,052 | |||||||||
Capital markets: | |||||||||||||||
Platforms delivered | 1,293 | 655 | (1 | ) | |||||||||||
(1) | Not comparable due to mid-year acquisition of capital markets business. |
Business Services – Financial Results(in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Accounting, tax and consulting | $ | 372,423 | $ | 352,102 | $ | 365,194 | |||||||||
Capital markets | 73,857 | 35,626 | 10,756 | ||||||||||||
Payroll, benefits and retirement services | 21,107 | 20,578 | 17,048 | ||||||||||||
Other | 31,823 | 25,834 | 23,928 | ||||||||||||
Total revenues | 499,210 | 434,140 | 416,926 | ||||||||||||
Compensation and benefits | 336,073 | 292,291 | 265,960 | ||||||||||||
Occupancy and equipment | 25,277 | 24,428 | 19,957 | ||||||||||||
Depreciation and amortization | 23,002 | 23,044 | 21,339 | ||||||||||||
Impairment of goodwill | – | 11,777 | – | ||||||||||||
Other | 95,537 | 96,718 | 86,954 | ||||||||||||
Total expenses | 479,889 | 448,258 | 394,210 | ||||||||||||
Pretax income (loss) | $ | 19,321 | $ | (14,118 | ) | $ | 22,716 | ||||||||
Fiscal 2004 compared to fiscal 2003
Fiscal 2005 outlook
Fiscal 2003 compared to fiscal 2002
INVESTMENT SERVICES
Table of Contents
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Customer trades (1) | 1,514,969 | 1,218,092 | 1,536,930 | ||||||||||||
Daily average trades | 5,918 | 4,853 | 6,123 | ||||||||||||
Average revenue per trade (2) | $ | 119.36 | $ | 120.15 | $ | 106.42 | |||||||||
Active accounts | 863,116 | 752,903 | 695,355 | ||||||||||||
Assets under administration (billions) | $ | 26.7 | $ | 22.3 | $ | 27.3 | |||||||||
Average assets per active account | $ | 30,970 | $ | 29,616 | $ | 39,261 | |||||||||
Ending margin balances (millions) | $ | 608 | $ | 486 | $ | 801 | |||||||||
Ending customer payables balances (millions) | $ | 1,007 | $ | 848 | $ | 825 | |||||||||
Number of advisors (3) | 1,009 | 984 | 1,211 | ||||||||||||
Included in the numbers above are the following relating to fee-based accounts: | |||||||||||||||
Customer accounts | 6,964 | 4,680 | 3,339 | ||||||||||||
Average revenue per account | $ | 1,572 | $ | 1,442 | $ | 449 | |||||||||
Assets under administration (millions) | $ | 1,494 | $ | 789 | $ | 512 | |||||||||
Average assets per active account | $ | 214,537 | $ | 168,522 | $ | 153,323 | |||||||||
(1) | Includes both trades on which commissions are earned (“commissionable trades”) and trades for which no commission is earned (“fee-based trades”). Excludes open-ended mutual fund redemptions. |
(2) | Calculated as total commissions divided by commissionable trades. |
(3) | Fiscal year 2003 and 2002 advisors have been adjusted to exclude sales assistants. |
Investment Services – Financial Results(in 000s) | ||||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||
Transactional revenue | $ | 101,634 | $ | 93,422 | $ | 123,990 | ||||||||||
Annuitized revenue | 59,696 | 37,358 | 25,677 | |||||||||||||
Production revenue | 161,330 | 130,780 | 149,667 | |||||||||||||
Other revenue | 34,732 | 32,714 | 33,169 | |||||||||||||
Non-interest revenue | 196,062 | 163,494 | 182,836 | |||||||||||||
Margin interest revenue | 33,408 | 37,300 | 67,849 | |||||||||||||
Less: interest expense | (1,358 | ) | (4,830 | ) | (14,744 | ) | ||||||||||
Net interest revenue | 32,050 | 32,470 | 53,105 | |||||||||||||
Total revenues (1) | 228,112 | 195,964 | 235,941 | |||||||||||||
Commissions | 53,851 | 41,748 | 46,490 | |||||||||||||
Other variable expenses | 3,866 | 4,234 | 9,266 | |||||||||||||
Total variable expenses | 57,717 | 45,982 | 55,756 | |||||||||||||
Gross profit | 170,395 | 149,982 | 180,185 | |||||||||||||
Compensation and benefits | 97,151 | 92,978 | 93,314 | |||||||||||||
Occupancy and equipment | 29,054 | 30,323 | 29,106 | |||||||||||||
Depreciation and amortization | 45,129 | 51,791 | 49,866 | |||||||||||||
Impairment of goodwill | – | 24,000 | – | |||||||||||||
Other | 44,426 | 63,933 | 48,067 | |||||||||||||
Allocated corporate and shared costs | 19,081 | 15,249 | 14,694 | |||||||||||||
Total fixed expenses | 234,841 | 278,274 | 235,047 | |||||||||||||
Pretax loss | $ | (64,446 | ) | $ | (128,292 | ) | $ | (54,862 | ) | |||||||
(1) | Total revenues, less interest expense |
Fiscal 2004 compared to fiscal 2003
Table of Contents
Fiscal 2005 outlook
Fiscal 2003 compared to fiscal 2002
INTERNATIONAL TAX OPERATIONS
International Tax Operations – Financial Results(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
Canada | $ | 64,238 | $ | 57,985 | $ | 55,753 | ||||||||
Australia | 26,577 | 20,614 | 17,701 | |||||||||||
Other | 6,745 | 6,483 | 5,256 | |||||||||||
Total revenues | 97,560 | 85,082 | 78,710 | |||||||||||
Canada | 8,888 | 8,108 | 7,728 | |||||||||||
Australia | 4,609 | 3,802 | 2,912 | |||||||||||
Other | (2,400 | ) | (1,446 | ) | (3,547 | ) | ||||||||
Pretax income | $ | 11,097 | $ | 10,464 | $ | 7,093 | ||||||||
Fiscal 2004 compared to fiscal 2003
Fiscal 2003 compared to fiscal 2002
Table of Contents
CORPORATE OPERATIONS
Corporate Operations – Financial Results(in 000s) | ||||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||
Operating revenues | $ | 12,532 | $ | 6,448 | $ | 12,603 | ||||||||||
Eliminations | (8,218 | ) | (7,099 | ) | (6,830 | ) | ||||||||||
Total revenues | 4,314 | (651 | ) | 5,773 | ||||||||||||
Corporate expenses: | ||||||||||||||||
Compensation and benefits | 12,670 | 14,959 | 14,703 | |||||||||||||
Interest expense: | ||||||||||||||||
Acquisition debt | 68,815 | 72,766 | 79,002 | |||||||||||||
Other interest | 693 | 1,106 | 3,777 | |||||||||||||
Marketing and advertising | 1,409 | 4,518 | 4,600 | |||||||||||||
Other | 36,299 | 33,438 | 36,392 | |||||||||||||
119,886 | 126,787 | 138,474 | ||||||||||||||
Support departments: | ||||||||||||||||
Information technology | 110,569 | 92,899 | 84,834 | |||||||||||||
Marketing | 110,507 | 88,819 | 85,087 | |||||||||||||
Finance | 33,829 | 30,232 | 19,795 | |||||||||||||
Other | 78,521 | 65,730 | 58,749 | |||||||||||||
333,426 | 277,680 | 248,465 | ||||||||||||||
Allocation of corporate and shared costs | (336,639 | ) | (280,677 | ) | (247,106 | ) | ||||||||||
Investment income, net | 4,691 | 2,436 | 3,097 | |||||||||||||
Pretax loss | $ | (107,668 | ) | $ | (122,005 | ) | $ | (130,963 | ) | |||||||
Fiscal 2004 compared to fiscal 2003
Fiscal 2003 compared to fiscal 2002
FINANCIAL CONDITION
CAPITAL RESOURCES & LIQUIDITY BY SEGMENT
Table of Contents
A condensed consolidating statement of cash flows by segment for the fiscal year ended April 30, 2004 follows. Generally, interest is not charged on intercompany activities between segments. Detailed consolidated statements of cash flows are located in Item 8.
(in 000s) | |||||||||||||||||||||||||||||||
U.S. Tax | Mortgage | Business | Investment | International Tax | Corporate | Consolidated | |||||||||||||||||||||||||
Operations | Operations | Services | Services | Operations | Operations | H&R Block | |||||||||||||||||||||||||
Cash provided by (used in): | |||||||||||||||||||||||||||||||
Operations | $ | 521,646 | $ | 278,461 | $ | 61,875 | $ | (28,200 | ) | $ | 19,458 | $ | 73,567 | $ | 926,807 | ||||||||||||||||
Investing | (293,711 | ) | 219,111 | (39,373 | ) | (4,086 | ) | (4,679 | ) | (8,395 | ) | (131,133 | ) | ||||||||||||||||||
Financing | – | – | (59,003 | ) | – | (129 | ) | (540,219 | ) | (599,351 | ) | ||||||||||||||||||||
Net intercompany | (188,699 | ) | (546,609 | ) | 49,668 | 31,841 | (13,831 | ) | 667,630 | – | |||||||||||||||||||||
Table of Contents
(in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Cash: | |||||||||||||||
Whole loans sold by the Trusts | $ | 721,957 | $ | 347,241 | $ | 65,219 | |||||||||
Loans securitized | 198,226 | 389,449 | �� | 414,844 | |||||||||||
Sale of previously securitized residuals | 40,689 | 130,881 | – | ||||||||||||
Loan origination expenses, net | (325,605 | ) | (203,511 | ) | (116,699 | ) | |||||||||
635,267 | 664,060 | 363,364 | |||||||||||||
Non-cash: | |||||||||||||||
Retained mortgage servicing rights | 84,274 | 60,078 | 52,844 | ||||||||||||
Additions (reductions) to balance sheet (1) | 11,490 | (10,829 | ) | 22,910 | |||||||||||
Changes in beneficial interest in Trusts | 37,918 | 74,987 | 17,028 | ||||||||||||
Impairments to fair value of residual interests | (30,661 | ) | (54,111 | ) | (30,987 | ) | |||||||||
Net change in fair value of rate-lock commitments | (11,570 | ) | 6,158 | (758 | ) | ||||||||||
91,451 | 76,283 | 61,037 | |||||||||||||
Reported gains on sales of mortgage assets | $ | 726,718 | $ | 740,343 | $ | 424,401 | |||||||||
% of gains received as cash | 87% | 90% | 86% | ||||||||||||
(1) | Includes residual interests and interest rate caps. |
(in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Cash proceeds: | |||||||||||||||
Whole loans sold by the Trusts | $ | 721,957 | $ | 347,241 | $ | 65,219 | |||||||||
Loans securitized | 198,226 | 389,449 | 414,844 | ||||||||||||
Sale of previously securitized residuals | 40,689 | 130,881 | – | ||||||||||||
960,872 | 867,571 | 480,063 | |||||||||||||
Non-cash: | |||||||||||||||
Retained mortgage servicing rights | 84,274 | 60,078 | 52,844 | ||||||||||||
Additions (reductions) to balance sheet (1) | 11,490 | (10,829 | ) | 22,910 | |||||||||||
95,764 | 49,249 | 75,754 | |||||||||||||
Portion of gain on sale related to capital market transactions | $ | 1,056,636 | $ | 916,820 | $ | 555,817 | |||||||||
Other items included in gain on sale: | |||||||||||||||
Changes in beneficial interest in Trusts | 37,918 | 74,987 | 17,028 | ||||||||||||
Impairments to fair value of residual interests | (30,661 | ) | (54,111 | ) | (30,987 | ) | |||||||||
Net change in fair value of rate-lock commitments | (11,570 | ) | 6,158 | (758 | ) | ||||||||||
Loan origination expenses, net | (325,605 | ) | (203,511 | ) | (116,699 | ) | |||||||||
(329,918 | ) | (176,477 | ) | (131,416 | ) | ||||||||||
Reported gains on sales of mortgage assets | $ | 726,718 | $ | 740,343 | $ | 424,401 | |||||||||
% of gain on sale related to capital market transactions received as cash (2) | 91% | 95% | 86% | ||||||||||||
(1) | Includes residual interests and interest rate caps. |
(2) | Cash proceeds divided by portion of gain on sale related to capital market transactions. |
Table of Contents
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
Table of Contents
COMMERCIAL PAPER ISSUANCE
Short-term | Long-term | |||||||||
Fitch | F1 | A | ||||||||
Moody’s | P2 | A3 | ||||||||
S&P | A2 | BBB+ | ||||||||
Short-term | Corporate | Trend | ||||||||||||
DBRS | R-1(low) | A | Stable | |||||||||||
Moody’s | P | 2 | ||||||||||||
Table of Contents
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
(in 000s) | ||||||||||||||||||||||
Less Than | After 5 | |||||||||||||||||||||
Total | 1 Year | 1 - 3 Years | 4 - 5 Years | Years | ||||||||||||||||||
Debt | $ | 748,200 | $ | 249,975 | $ | 498,225 | $ | – | $ | – | ||||||||||||
Long-term obligation to government | 279,976 | – | 186,651 | 93,325 | – | |||||||||||||||||
Acquisition payments | 60,768 | 25,257 | 34,963 | 548 | – | |||||||||||||||||
Pension obligation assumed | 17,511 | 2,826 | 5,048 | 4,176 | 5,461 | |||||||||||||||||
Capital lease obligations | 12,512 | 437 | 1,035 | 1,132 | 9,908 | |||||||||||||||||
Operating leases | 597,883 | 199,292 | 258,385 | 91,609 | 48,597 | |||||||||||||||||
Total contractual cash obligations | $ | 1,716,850 | $ | 477,787 | $ | 984,307 | $ | 190,790 | $ | 63,966 | ||||||||||||
A summary of our commitments as of April 30, 2004, which may or may not require future payments, expire as follows:
(in 000s) | ||||||||||||||||||||||
Less Than 1 | After 5 | |||||||||||||||||||||
Total | Year | 1 - 3 Years | 4 - 5 Years | Years | ||||||||||||||||||
Commitments to fund mortgage loans | $ | 2,605,878 | $ | 2,605,878 | $ | – | $ | – | $ | – | ||||||||||||
Commitments to sell mortgage loans | 4,748,994 | 4,748,994 | – | – | – | |||||||||||||||||
Pledged securities | 46,340 | 46,340 | – | – | – | |||||||||||||||||
Commitment to fund M&P | 40,000 | 40,000 | – | – | – | |||||||||||||||||
Franchise Equity Lines of Credit | 26,990 | 9,149 | 5,995 | 11,846 | – | |||||||||||||||||
Mortgage loan repurchase obligations | 25,168 | 25,168 | – | – | – | |||||||||||||||||
Other commercial commitments | 10,255 | 5,880 | 3,595 | 780 | – | |||||||||||||||||
Total commercial commitments | $ | 7,503,625 | $ | 7,481,409 | $ | 9,590 | $ | 12,626 | $ | – | ||||||||||||
See discussion of commitments in Item 8, note 19 to our consolidated financial statements.
REGULATORY ENVIRONMENT
Table of Contents
NEW ACCOUNTING PRONOUNCEMENTS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Mortgage Operations
Table of Contents
Investment Services
International Tax Operations
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2004 are as follows:
(in 000s) | ||||||||||||||||||||||||||
- 50 | + 50 | + 100 | + 200 | + 300 | ||||||||||||||||||||||
Fair Value at | Basis | Basis | Basis | Basis | Basis | |||||||||||||||||||||
April 30, 2004 | Points | Points | Points | Points | Points | |||||||||||||||||||||
Residual interests in securitizations – available-for-sale | $ | 210,973 | $ | 45,449 | $ | (18,563 | ) | $ | (32,709 | ) | $ | (46,527 | ) | $ | (48,090 | ) | ||||||||||
Investments at captive insurance subsidiary | 44,667 | 1,079 | (1,069 | ) | (1,591 | ) | (3,146 | ) | (4,667 | ) | ||||||||||||||||
Fixed income – trading (net) | 13,639 | 677 | (637 | ) | (1,228 | ) | (2,271 | ) | (3,164 | ) | ||||||||||||||||
The table above represents hypothetical instantaneous and sustained parallel shifts in interest rates and should not be relied on as an indicator of future expected results.
Table of Contents
Management Report
/s/ Mark A. Ernst
/s/ Melanie K. Coleman
Report of Independent Registered Public Accounting Firm
/s/ KPMG LLP
Table of Contents
Report of Independent Registered Public Accounting Firm
/s/ PRICEWATERHOUSECOOPERS LLP
June 10, 2003
Table of Contents
CONSOLIDATED INCOME STATEMENTS
Amounts in thousands, except per share amounts | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
REVENUES: | |||||||||||||||
Service revenues | $ | 2,740,983 | $ | 2,398,081 | $ | 2,345,307 | |||||||||
Gains on sales of mortgage assets, net | 726,718 | 740,343 | 424,401 | ||||||||||||
Interest income | 379,064 | 297,185 | 206,433 | ||||||||||||
Product sales | 157,417 | 123,510 | 115,505 | ||||||||||||
Royalties | 184,882 | 174,659 | 164,615 | ||||||||||||
Other | 16,506 | 12,679 | 29,440 | ||||||||||||
4,205,570 | 3,746,457 | 3,285,701 | |||||||||||||
OPERATING EXPENSES: | |||||||||||||||
Employee compensation and benefits | 1,610,103 | 1,387,731 | 1,298,159 | ||||||||||||
Occupancy and equipment | 384,622 | 345,960 | 305,387 | ||||||||||||
Depreciation and amortization | 172,038 | 161,821 | 155,386 | ||||||||||||
Marketing and advertising | 188,317 | 150,847 | 155,729 | ||||||||||||
Interest | 84,556 | 92,644 | 116,141 | ||||||||||||
Supplies, freight and postage | 89,189 | 88,748 | 75,710 | ||||||||||||
Impairment of goodwill | – | 35,777 | – | ||||||||||||
Other | 522,442 | 502,687 | 463,761 | ||||||||||||
3,051,267 | 2,766,215 | 2,570,273 | |||||||||||||
Operating income | 1,154,303 | 980,242 | 715,428 | ||||||||||||
Other income, net | 9,854 | 6,835 | 1,412 | ||||||||||||
Income before taxes | 1,164,157 | 987,077 | 716,840 | ||||||||||||
Income taxes | 459,901 | 407,013 | 282,435 | ||||||||||||
Net income before change in accounting principle | 704,256 | 580,064 | 434,405 | ||||||||||||
Cumulative effect of change in accounting principle for multiple deliverable revenue arrangements, less taxes of $4,031 | (6,359 | ) | – | – | |||||||||||
NET INCOME | $ | 697,897 | $ | 580,064 | $ | 434,405 | |||||||||
BASIC EARNINGS PER SHARE: | |||||||||||||||
Before change in accounting principle | $ | 3.98 | $ | 3.23 | $ | 2.38 | |||||||||
Cumulative effect of change in accounting principle | (.04 | ) | – | – | |||||||||||
Net income | $ | 3.94 | $ | 3.23 | $ | 2.38 | |||||||||
DILUTED EARNINGS PER SHARE: | |||||||||||||||
Before change in accounting principle | $ | 3.90 | $ | 3.15 | $ | 2.31 | |||||||||
Cumulative effect of change in accounting principle | (.04 | ) | – | – | |||||||||||
Net income | $ | 3.86 | $ | 3.15 | $ | 2.31 | |||||||||
Table of Contents
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share and per share amounts | |||||||||||||
April 30, | 2004 | 2003 | |||||||||||
ASSETS | |||||||||||||
CURRENT ASSETS: | |||||||||||||
Cash and cash equivalents | $ | 1,071,676 | $ | 875,353 | |||||||||
Cash and cash equivalents – restricted | 545,428 | 438,242 | |||||||||||
Receivables from customers, brokers, dealers and clearing organizations, net | 625,076 | 517,037 | |||||||||||
Receivables, net | 347,910 | 403,197 | |||||||||||
Prepaid expenses and other current assets | 371,209 | 391,402 | |||||||||||
Total current assets | 2,961,299 | 2,625,231 | |||||||||||
Residual interests in securitizations – available-for-sale | 210,973 | 264,337 | |||||||||||
Beneficial interest in Trusts – trading | 137,757 | 122,130 | |||||||||||
Mortgage servicing rights | 113,821 | 99,265 | |||||||||||
Property and equipment, net | 279,220 | 288,594 | |||||||||||
Intangible assets, net | 325,829 | 341,865 | |||||||||||
Goodwill, net | 959,418 | 714,215 | |||||||||||
Other assets | 391,709 | 311,671 | |||||||||||
Total assets | $ | 5,380,026 | $ | 4,767,308 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||
LIABILITIES: | |||||||||||||
Current portion of long-term debt | $ | 275,669 | $ | 55,678 | |||||||||
Accounts payable to customers, brokers and dealers | 1,065,793 | 862,694 | |||||||||||
Accounts payable, accrued expenses and other | 456,167 | 468,933 | |||||||||||
Accrued salaries, wages and payroll taxes | 268,747 | 210,629 | |||||||||||
Accrued income taxes | 405,667 | 299,262 | |||||||||||
Total current liabilities | 2,472,043 | 1,897,196 | |||||||||||
Long-term debt | 545,811 | 822,302 | |||||||||||
Other noncurrent liabilities | 465,163 | 384,101 | |||||||||||
Total liabilities | 3,483,017 | 3,103,599 | |||||||||||
COMMITMENTS AND CONTINGENCIES | |||||||||||||
STOCKHOLDERS’ EQUITY: | |||||||||||||
Common stock, no par, stated value $.01 per share, 500,000,000 shares authorized, 217,945,398 shares issued at April 30, 2004 and 2003 | 2,179 | 2,179 | |||||||||||
Convertible preferred stock, no par, stated value $.01 per share, 500,000 shares authorized | – | – | |||||||||||
Additional paid-in capital | 545,065 | 496,393 | |||||||||||
Accumulated other comprehensive income | 57,953 | 36,862 | |||||||||||
Retained earnings | 2,781,368 | 2,221,868 | |||||||||||
Less treasury shares, at cost | (1,489,556 | ) | (1,093,593 | ) | |||||||||
Total stockholders’ equity | 1,897,009 | 1,663,709 | |||||||||||
Total liabilities and stockholders’ equity | $ | 5,380,026 | $ | 4,767,308 | |||||||||
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands | ||||||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||
Net income | $ | 697,897 | $ | 580,064 | $ | 434,405 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||
Depreciation and amortization | 172,038 | 161,821 | 155,386 | |||||||||||||||
Provision for bad debt | 53,663 | 49,748 | 76,804 | |||||||||||||||
Provision for deferred taxes on income | (3,632 | ) | (45,734 | ) | (89,688 | ) | ||||||||||||
Accretion of residual interests in securitizations | (168,029 | ) | (145,165 | ) | (50,583 | ) | ||||||||||||
Impairment of residual interests in securitizations | 30,661 | 54,111 | 30,987 | |||||||||||||||
Realized gain on sale of previously securitized residual interests | (40,689 | ) | (130,881 | ) | – | |||||||||||||
Additions to trading securities – residual interests in securitizations | (327,996 | ) | (542,544 | ) | (809,228 | ) | ||||||||||||
Proceeds from net interest margin transactions | 310,358 | 541,791 | 783,171 | |||||||||||||||
Additions to mortgage servicing rights | (84,274 | ) | (65,345 | ) | (65,630 | ) | ||||||||||||
Amortization of mortgage servicing rights | 69,718 | 47,107 | 33,890 | |||||||||||||||
Net change in beneficial interest in Trusts | (15,627 | ) | (69,529 | ) | (19,960 | ) | ||||||||||||
Impairment of goodwill | – | 35,777 | – | |||||||||||||||
Tax benefit from stock option exercises | 23,957 | 37,304 | 57,809 | |||||||||||||||
Stock-based compensation | 25,718 | 2,079 | – | |||||||||||||||
Cumulative effect of change in accounting principle | 6,359 | – | – | |||||||||||||||
Changes in assets and liabilities, net of acquisitions: | ||||||||||||||||||
Cash and cash equivalents – restricted | (107,186 | ) | (286,069 | ) | (67,976 | ) | ||||||||||||
Receivables for customers, brokers dealers and clearing organizations | (108,846 | ) | 326,824 | 465,926 | ||||||||||||||
Receivables | 23,887 | (87,140 | ) | (86,531 | ) | |||||||||||||
Mortgage loans held for sale: | ||||||||||||||||||
Originations and purchases | (23,255,483 | ) | (17,827,828 | ) | (11,771,688 | ) | ||||||||||||
Sales and principal repayments | 23,246,815 | 17,837,323 | 11,780,758 | |||||||||||||||
Prepaid expenses and other current assets | 26,978 | 43,818 | (159,734 | ) | ||||||||||||||
Accounts payable to customers, brokers and dealers | 203,099 | (40,507 | ) | (154,799 | ) | |||||||||||||
Accounts payable, accrued expenses and other | (34,326 | ) | 56,149 | 57,608 | ||||||||||||||
Accrued salaries, wages and payroll taxes | 58,468 | (42,772 | ) | 31,751 | ||||||||||||||
Accrued income taxes | 108,801 | 156,023 | 77,047 | |||||||||||||||
Other, net | 14,478 | 44,400 | 31,721 | |||||||||||||||
Net cash provided by operating activities | 926,807 | 690,825 | 741,446 | |||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||
Purchases of available-for-sale securities | (11,434 | ) | (14,614 | ) | (7,241 | ) | ||||||||||||
Cash received from residual interests in securitizations | 193,606 | 140,795 | 67,070 | |||||||||||||||
Cash proceeds from sale of previously securitized residuals | 53,391 | 142,486 | – | |||||||||||||||
Maturities of other available-for-sale securities | – | – | 8,250 | |||||||||||||||
Sales of other available-for-sale securities | 15,410 | 14,081 | 23,173 | |||||||||||||||
Purchases of property and equipment, net | (127,573 | ) | (150,897 | ) | (111,775 | ) | ||||||||||||
Payments made for business acquisitions, net of cash acquired | (280,865 | ) | (26,408 | ) | (46,738 | ) | ||||||||||||
Other, net | 26,332 | 19,896 | 8,228 | |||||||||||||||
Net cash provided by (used in) investing activities | (131,133 | ) | 125,339 | (59,033 | ) | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||
Repayments of commercial paper | (4,618,853 | ) | (9,925,516 | ) | (10,622,011 | ) | ||||||||||||
Proceeds from issuance of commercial paper | 4,618,853 | 9,925,516 | 10,622,011 | |||||||||||||||
Payments on acquisition debt | (59,003 | ) | (57,469 | ) | (50,594 | ) | ||||||||||||
Dividends paid | (138,397 | ) | (125,898 | ) | (115,725 | ) | ||||||||||||
Acquisition of treasury shares | (519,862 | ) | (317,570 | ) | (462,938 | ) | ||||||||||||
Proceeds from issuance of common stock | 119,956 | 126,325 | 195,233 | |||||||||||||||
Other, net | (2,045 | ) | (2,344 | ) | 140 | |||||||||||||
Net cash used in financing activities | (599,351 | ) | (376,956 | ) | (433,884 | ) | ||||||||||||
Net increase in cash and cash equivalents | 196,323 | 439,208 | 248,529 | |||||||||||||||
Cash and cash equivalents at beginning of the year | 875,353 | 436,145 | 187,616 | |||||||||||||||
Cash and cash equivalents at end of the year | $ | 1,071,676 | $ | 875,353 | $ | 436,145 | ||||||||||||
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Amounts in thousands, except per share amounts | ||||||||||||||||||||||||||||||||||||||||||
Convertible | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Additional | Other | Treasury Stock | ||||||||||||||||||||||||||||||||||||||
Paid-in | Comprehensive | Retained | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | Total Equity | |||||||||||||||||||||||||||||||||
Balances at April 30, 2001 | 217,945 | $ | 2,179 | – | $ | – | $ | 419,957 | $ | (42,767 | ) | $ | 1,449,022 | (34,337 | ) | $ | (654,650 | ) | $ | 1,173,741 | ||||||||||||||||||||||
Net income | – | – | – | – | – | – | 434,405 | – | – | – | ||||||||||||||||||||||||||||||||
Unrealized translation loss | – | – | – | – | – | (875 | ) | – | – | – | – | |||||||||||||||||||||||||||||||
Change in net unrealized gain on marketable securities | – | – | – | – | – | 87,770 | – | – | – | – | ||||||||||||||||||||||||||||||||
Comprehensive income | – | – | – | – | – | – | – | – | – | 521,300 | ||||||||||||||||||||||||||||||||
Stock options exercised | – | – | – | – | 47,590 | – | – | 9,662 | 202,500 | 250,090 | ||||||||||||||||||||||||||||||||
Restricted stock awards | – | – | – | – | 237 | – | – | 17 | 400 | 637 | ||||||||||||||||||||||||||||||||
Stock issued for ESPP | – | – | – | – | 268 | – | – | 97 | 2,047 | 2,315 | ||||||||||||||||||||||||||||||||
Acquisition of treasury shares | – | – | – | – | – | – | – | (12,259 | ) | (462,938 | ) | (462,938 | ) | |||||||||||||||||||||||||||||
Cash dividends paid – $.63 per share | – | – | – | – | – | – | (115,725 | ) | – | – | (115,725 | ) | ||||||||||||||||||||||||||||||
Balances at April 30, 2002 | 217,945 | 2,179 | – | – | 468,052 | 44,128 | 1,767,702 | (36,820 | ) | (912,641 | ) | 1,369,420 | ||||||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 580,064 | – | – | – | ||||||||||||||||||||||||||||||||
Unrealized translation gain | – | – | – | – | – | 17,415 | – | – | – | – | ||||||||||||||||||||||||||||||||
Change in net unrealized gain on marketable securities | – | – | – | – | – | (24,681 | ) | – | – | – | – | |||||||||||||||||||||||||||||||
Comprehensive income | – | – | – | – | – | – | – | – | – | 572,798 | ||||||||||||||||||||||||||||||||
Stock options exercised | – | – | – | – | 27,241 | – | – | 5,070 | 135,409 | 162,650 | ||||||||||||||||||||||||||||||||
Restricted stock awards | – | – | – | – | 5 | – | – | (64 | ) | (1,306 | ) | (1,301 | ) | |||||||||||||||||||||||||||||
Stock issued for ESPP | – | – | – | – | 1,095 | – | – | 94 | 2,515 | 3,610 | ||||||||||||||||||||||||||||||||
Acquisition of treasury shares | – | – | – | – | – | – | – | (6,624 | ) | (317,570 | ) | (317,570 | ) | |||||||||||||||||||||||||||||
Cash dividends paid – $.70 per share | – | – | – | – | – | – | (125,898 | ) | – | – | (125,898 | ) | ||||||||||||||||||||||||||||||
Balances at April 30, 2003 | 217,945 | 2,179 | – | – | 496,393 | 36,862 | 2,221,868 | (38,344 | ) | (1,093,593 | ) | 1,663,709 | ||||||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 697,897 | – | – | – | ||||||||||||||||||||||||||||||||
Unrealized translation gain | – | – | – | – | – | 12,355 | – | – | – | – | ||||||||||||||||||||||||||||||||
Change in net unrealized gain on marketable securities | – | – | – | – | – | 8,736 | – | – | – | – | ||||||||||||||||||||||||||||||||
Comprehensive income | – | – | – | – | – | – | – | – | – | 718,988 | ||||||||||||||||||||||||||||||||
Stock options exercised | – | – | – | – | 21,585 | – | – | 3,928 | 117,975 | 139,560 | ||||||||||||||||||||||||||||||||
Restricted stock awards | – | – | – | – | 385 | – | – | 72 | 2,103 | 2,488 | ||||||||||||||||||||||||||||||||
Stock issued for ESPP | – | – | – | – | 984 | – | – | 127 | 3,821 | 4,805 | ||||||||||||||||||||||||||||||||
Stock-based compensation | – | – | – | – | 25,718 | – | – | – | – | 25,718 | ||||||||||||||||||||||||||||||||
Acquisition of treasury shares | – | – | – | – | – | – | – | (10,633 | ) | (519,862 | ) | (519,862 | ) | |||||||||||||||||||||||||||||
Cash dividends paid – $.78 per share | – | – | – | – | – | – | (138,397 | ) | – | – | (138,397 | ) | ||||||||||||||||||||||||||||||
Balances at April 30, 2004 | 217,945 | $ | 2,179 | – | $ | – | $ | 545,065 | $ | 57,953 | $ | 2,781,368 | (44,850 | ) | $ | (1,489,556 | ) | $ | 1,897,009 | |||||||||||||||||||||||
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Table of Contents
(in 000s, except per share amounts) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Net income as reported | $ | 697,897 | $ | 580,064 | $ | 434,405 | |||||||||
Add: Stock-based compensation expense included in reported net income, net of taxes | 18,029 | 1,223 | — | ||||||||||||
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of taxes | (30,662 | ) | (21,025 | ) | (34,045 | ) | |||||||||
Pro forma net income | $ | 685,264 | $ | 560,262 | $ | 400,360 | |||||||||
Basic earnings per share: | |||||||||||||||
As reported | $ | 3.94 | $ | 3.23 | $ | 2.38 | |||||||||
Pro forma | 3.87 | 3.12 | 2.19 | ||||||||||||
Diluted earnings per share: | |||||||||||||||
As reported | $ | 3.86 | $ | 3.15 | $ | 2.31 | |||||||||
Pro forma | 3.80 | 3.06 | 2.13 | ||||||||||||
Derivative activities: The Company records derivative instruments as assets or liabilities, measured at fair value. The recognition of gains or losses resulting from changes in the values of those derivative instruments is based on the use of each derivative instrument and whether it qualifies for hedge accounting.
Table of Contents
(in 000s, except per share amounts) | |||||||||||
Year ended April 30, 2003 | As Reported | Pro Forma | |||||||||
Net income | $ | 580,064 | $ | 578,418 | |||||||
Earnings per share: | |||||||||||
Basic | $ | 3.23 | $ | 3.22 | |||||||
Diluted | 3.15 | 3.14 | |||||||||
(in 000s, except per share amounts) | |||||||||||
Year ended April 30, 2002 | As Reported | Pro Forma | |||||||||
Net income | $ | 434,405 | $ | 435,551 | |||||||
Earnings per share: | |||||||||||
Basic | $ | 2.38 | $ | 2.38 | |||||||
Diluted | 2.31 | 2.31 | |||||||||
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NOTE 2: BUSINESS COMBINATIONS AND DISPOSALS
(in 000s) | |||||||||||||||
Business | Asset Acquired | Estimated Life | Asset Value at Acquisition | ||||||||||||
Fiscal year 2004 | |||||||||||||||
Former major franchise territories | Property and equipment | $ | 2,697 | ||||||||||||
Goodwill | N/A | 205,313 | |||||||||||||
Customer relationships | 10 years | 18,167 | |||||||||||||
Noncompete agreements | 3 years | 17,069 | |||||||||||||
Weighted average life | 7 years | $ | 243,246 | ||||||||||||
Accounting firms | Goodwill | N/A | $ | 3,923 | |||||||||||
Customer relationships | 10 years | 1,794 | |||||||||||||
Noncompete agreements | 15 years | 747 | |||||||||||||
Weighted average life | 11 years | $ | 6,464 | ||||||||||||
Fiscal year 2003 | |||||||||||||||
Accounting firms | Goodwill | N/A | $ | 2,404 | |||||||||||
Customer relationships | 10 years | 2,242 | |||||||||||||
Noncompete agreements | 15 years | 728 | |||||||||||||
Weighted average life | 11 years | $ | 5,374 | ||||||||||||
Fiscal year 2002 | |||||||||||||||
MyBenefitSource, Inc. | Goodwill | N/A | $ | 11,929 | |||||||||||
Trade name | 5 years | 868 | |||||||||||||
Customer relationships | 8 years | 1,616 | |||||||||||||
Noncompete agreements | 5 years | 1,522 | |||||||||||||
Weighted average life | 6 years | $ | 15,935 | ||||||||||||
Equico Resources, LLC | Goodwill | N/A | $ | 28,383 | |||||||||||
Trade name | 6 years | 1,560 | |||||||||||||
Customer relationships | 3 years | 2,510 | |||||||||||||
Noncompete agreements | 5 years | 4,370 | |||||||||||||
Weighted average life | 5 years | $ | 36,823 | ||||||||||||
Accounting firms | Goodwill | N/A | $ | 15,842 | |||||||||||
Customer relationships | 10 years | 9,314 | |||||||||||||
Noncompete agreements | 15 years | 3,584 | |||||||||||||
Weighted average life | 11 years | $ | 28,740 | ||||||||||||
Table of Contents
NOTE 3: EARNINGS PER SHARE
(in 000s, except per share amounts) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Net income before change in accounting | $ | 704,256 | $ | 580,064 | $ | 434,405 | |||||||||
Basic weighted average common shares | 177,076 | 179,638 | 182,903 | ||||||||||||
Dilutive potential shares from stock options and restricted stock | 3,725 | 4,439 | 5,423 | ||||||||||||
Convertible preferred stock | 1 | 1 | 1 | ||||||||||||
Dilutive weighted average common shares | 180,802 | 184,078 | 188,327 | ||||||||||||
Earnings per share: | |||||||||||||||
Basic | $ | 3.98 | $ | 3.23 | $ | 2.38 | |||||||||
Diluted | 3.90 | 3.15 | 2.31 | ||||||||||||
NOTE 4: RECEIVABLES
(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Gross receivables | $ | 626,179 | $ | 518,558 | ||||||
Less: Allowance for doubtful accounts | (1,103 | ) | (1,521 | ) | ||||||
$ | 625,076 | $ | 517,037 | |||||||
(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Business Services accounts receivable | $ | 145,231 | $ | 185,023 | ||||||
Mortgage loans held for sale | 84,428 | 68,518 | ||||||||
Loans to franchisees | 35,872 | 33,341 | ||||||||
Refund anticipation loans (“RALs”) | 49,047 | 12,871 | ||||||||
Software receivables | 20,882 | 36,810 | ||||||||
Other | 65,868 | 89,054 | ||||||||
401,328 | 425,617 | |||||||||
Allowance for doubtful accounts | (38,266 | ) | (17,038 | ) | ||||||
Lower of cost or market adjustment – mortgage loans | (15,152 | ) | (5,382 | ) | ||||||
$ | 347,910 | $ | 403,197 | |||||||
Table of Contents
NOTE 5: MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The amortized cost and market value of marketable securities classified as available-for-sale at April 30, 2004 and 2003 are summarized below:
(in 000s) | ||||||||||||||||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Market | Amortized | Unrealized | Unrealized | Market | |||||||||||||||||||||||||||
Cost | Gains | Losses(1) | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||||
Municipal bonds | $ | 8,846 | $ | 27 | $ | 78 | $ | 8,795 | $ | 11,959 | $ | 516 | $ | 8 | $ | 12,467 | ||||||||||||||||||
Common stock | 4,661 | 450 | 82 | 5,029 | 4,491 | 169 | 97 | 4,563 | ||||||||||||||||||||||||||
13,507 | 477 | 160 | 13,824 | 16,450 | 685 | 105 | 17,030 | |||||||||||||||||||||||||||
Residual interests | 98,462 | 112,511 | – | 210,973 | 166,248 | 98,089 | – | 264,337 | ||||||||||||||||||||||||||
$ | 111,969 | $ | 112,988 | $ | 160 | $ | 224,797 | $ | 182,698 | $ | 98,774 | $ | 105 | $ | 281,367 | |||||||||||||||||||
(1) | Gross unrealized losses have been in a continuous loss position for less than 12 months. |
Proceeds from the sales of available-for-sale securities were $68.8 million, $156.6 million and $23.2 million during 2004, 2003 and 2002, respectively. Gross realized gains on those sales during 2004, 2003 and 2002 were $41.8 million, $131.4 million and $0.6 million, respectively; gross realized losses were $0.1 million, $0.7 million and $0.2 million, respectively.
NOTE 6: MORTGAGE BANKING ACTIVITIES
Table of Contents
(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Balance, beginning of year | $ | 264,337 | $ | 365,371 | ||||||
Additions (resulting from NIM transactions) | 9,007 | 753 | ||||||||
Cash received | (193,606 | ) | (140,795 | ) | ||||||
Cash received on sales of residual interests | (53,391 | ) | (142,486 | ) | ||||||
Accretion | 165,817 | 145,165 | ||||||||
Impairments of fair value | (30,661 | ) | (54,111 | ) | ||||||
Other | (6,203 | ) | – | |||||||
Change in unrealized holding gains (losses) arising during the period | 55,673 | 90,440 | ||||||||
Balance, end of year | $ | 210,973 | $ | 264,337 | ||||||
(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Balance, beginning of year | $ | 99,265 | $ | 81,893 | ||||||
Additions | 84,274 | 65,345 | ||||||||
Amortization | (69,718 | ) | (47,107 | ) | ||||||
Impairments of fair value | – | (866 | ) | |||||||
Balance, end of year | $ | 113,821 | $ | 99,265 | ||||||
2004 | 2003 | 2002 | ||||||||||||
Estimated annual prepayments | 30-90% | 30-90% | 30-90% | |||||||||||
Estimated credit losses | 3.63% | 3.60% | 3.06% | |||||||||||
Discount rate | 16.25% | 13.03% | 14.43% | |||||||||||
Variable returns to third-party beneficial interest holders | LIBOR forward curve at closing | |||||||||||||
April 30, | 2004 | 2003 | ||||||||
Estimated annual prepayments | 25-90% | 20-90% | ||||||||
Estimated credit losses | 4.16% | 5.14% | ||||||||
Discount rate – residual interests | 19.09% | 24.22% | ||||||||
Discount rate – MSRs | 12.80% | 12.80% | ||||||||
Variable returns to third-party Beneficial interest holders | LIBOR forward curve at valuation date | |||||||||
Mortgage loans securitized in | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
April 30, 2004 | 3.58% | 4.35% | 3.92% | |||||||||||
Table of Contents
(dollars in 000s) | |||||||||||||||
Residential Mortgage Loans | |||||||||||||||
NIM | Beneficial Interest | Servicing | |||||||||||||
Residuals | in Trusts(1) | Assets | |||||||||||||
Carrying amount/fair value of residuals | $ | 210,973 | $ | 137,757 | $ 113,821 | ||||||||||
Weighted average life (in years) | 1.4 | 2.2 | 1.2 | ||||||||||||
Prepayments (including defaults): | |||||||||||||||
Adverse 10% – $impact on fair value | $ | 6,352 | $ | (3,836 | ) | $ (12,239) | |||||||||
Adverse 20% – $impact on fair value | 11,458 | (1,967 | ) | (23,003) | |||||||||||
Credit losses: | |||||||||||||||
Adverse 10% – $impact on fair value | $ | (23,156 | ) | $ | (2,962 | ) | Not applicable | ||||||||
Adverse 20% – $impact on fair value | (47,198 | ) | (5,831 | ) | Not applicable | ||||||||||
Discount rate: | |||||||||||||||
Adverse 10% – $impact on fair value | $ | (4,176 | ) | $ | (590 | ) | $ (1,545) | ||||||||
Adverse 20% – $impact on fair value | (8,063 | ) | (3,685 | ) | (3,055) | ||||||||||
Variable interest rates: | |||||||||||||||
Adverse 10% – $impact on fair value | $ | (9,597 | ) | $ | (10,571 | ) | Not applicable | ||||||||
Adverse 20% – $impact on fair value | (18,771 | ) | (21,910 | ) | Not applicable | ||||||||||
(1) | Adverse changes are minimized by the Trusts ability to deliver loans into the Company’s forward loan sale commitments. See Item 7a for additional analysis. |
Mortgage loans which have been securitized at April 30, 2004 and 2003, past due sixty days or more and the related net credit losses are presented below:
(in 000s) | ||||||||||||||||||||||||||
Total Principal | Principal Amount of Loans | Net Credit Losses | ||||||||||||||||||||||||
Amount of Loans Outstanding | 60 Days or More Past | (net of recoveries) | ||||||||||||||||||||||||
April 30, | Due April 30, | Year ended April 30, | ||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Residual mortgage loans | $ | 15,732,953 | $ | 19,835,641 | $ | 1,286,069 | $ | 1,308,991 | $ | 159,253 | $ | 130,065 | ||||||||||||||
Warehouse | 3,244,141 | 2,186,224 | – | – | – | – | ||||||||||||||||||||
Total loans | $ | 18,977,094 | $ | 22,021,865 | $ | 1,286,069 | $ | 1,308,991 | $ | 159,253 | $ | 130,065 | ||||||||||||||
Table of Contents
NOTE 7: | GOODWILL AND INTANGIBLE ASSETS |
(in 000s) | ||||||||||||||||||
2003 | Additions | Other | 2004 | |||||||||||||||
U.S. Tax Operations | $ | 130,502 | $ | 212,200 | $ | – | $ | 342,702 | ||||||||||
Mortgage Operations | 152,467 | – | – | 152,467 | ||||||||||||||
Business Services | 279,650 | 31,525 | – | 311,175 | ||||||||||||||
Investment Services | 145,732 | – | – | 145,732 | ||||||||||||||
International Tax Operations | 5,666 | 849 | 619 | 7,134 | ||||||||||||||
Corporate Operations | 198 | 10 | – | 208 | ||||||||||||||
Total goodwill | $ | 714,215 | $ | 244,584 | $ | 619 | $ | 959,418 | ||||||||||
The components of intangible assets are as follows:
(in 000s) | |||||||||||||||||||
April 30, 2004 | April 30, 2003 | ||||||||||||||||||
Gross | Gross | ||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
Amount | Amortization | Amount | Amortization | ||||||||||||||||
U.S. Tax Operations: | |||||||||||||||||||
Customer relationships | $ | 18,167 | $ | (3,311 | ) | $ | – | $ | – | ||||||||||
Noncompete agreements | 17,069 | (5,690 | ) | – | – | ||||||||||||||
Business Services: | |||||||||||||||||||
Customer relationships | 121,229 | (56,313 | ) | 120,178 | (44,192 | ) | |||||||||||||
Noncompete agreements | 27,424 | (8,670 | ) | 26,909 | (6,157 | ) | |||||||||||||
Trade name – amortizing | 1,450 | (926 | ) | 1,450 | (205 | ) | |||||||||||||
Trade name – non-amortizing | 55,637 | (4,868 | ) | 55,637 | (4,868 | ) | |||||||||||||
Investment Services: | |||||||||||||||||||
Customer relationships | 293,000 | (129,408 | ) | 293,000 | (100,108 | ) | |||||||||||||
Corporate Operations: | |||||||||||||||||||
Customer relationships | 844 | (66 | ) | 172 | (10 | ) | |||||||||||||
Noncompete agreements | 295 | (34 | ) | 60 | (1 | ) | |||||||||||||
Total intangible assets | $ | 535,115 | $ | (209,286 | ) | $ | 497,406 | $ | (155,541 | ) | |||||||||
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NOTE 8: PROPERTY AND EQUIPMENT
(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Land | $ | 29,925 | $ | 37,614 | ||||||
Buildings | 78,136 | 81,631 | ||||||||
Computers and other equipment | 498,373 | 433,649 | ||||||||
Capitalized software | 137,784 | 113,826 | ||||||||
Leasehold improvements | 114,537 | 107,482 | ||||||||
858,755 | 774,202 | |||||||||
Less: Accumulated depreciation and amortization | 579,535 | 485,608 | ||||||||
$ | 279,220 | $ | 288,594 | |||||||
NOTE 9: DERIVATIVE INSTRUMENTS
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NOTE 10: | LONG-TERM DEBT |
(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Senior Notes, 8 1/2%, due April 2007 | $ | 498,225 | $ | 497,625 | ||||||
Senior Notes, 6 3/4%, due November 2004 | 249,975 | 249,925 | ||||||||
Business Services acquisition obligations, due from August 2004 to January 2008 | 60,768 | 115,874 | ||||||||
Mortgage notes | – | 1,543 | ||||||||
Capital lease obligations | 12,512 | 13,013 | ||||||||
821,480 | 877,980 | |||||||||
Less: Current portion | 275,669 | 55,678 | ||||||||
$ | 545,811 | $ | 822,302 | |||||||
NOTE 11: | OTHER NONCURRENT LIABILITIES |
NOTE 12: STOCKHOLDERS’ EQUITY
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NOTE 13: | COMPREHENSIVE INCOME |
(in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Net income | $ | 697,897 | $ | 580,064 | $ | 434,405 | |||||||||
Unrealized gains on securities (less applicable taxes (benefit) of $5,412, ($15,290) and $56,156): | |||||||||||||||
Unrealized holding gains arising during the period (less applicable taxes of $64,174, $70,983 and $58,248) | 103,886 | 114,885 | 92,629 | ||||||||||||
Less: Reclassification adjustment for gains included in income (less applicable taxes of $58,762, $86,273 and $2,092) | (95,150 | ) | (139,566 | ) | (4,859 | ) | |||||||||
Change in foreign currency translation adjustments | 12,355 | 17,415 | (875 | ) | |||||||||||
Comprehensive income | $ | 718,988 | $ | 572,798 | $ | 521,300 | |||||||||
NOTE 14: | STOCK-BASED COMPENSATION AND RETIREMENT BENEFITS |
Changes during the years ended April 30, 2004, 2003 and 2002 under the stock-based compensation plans were as follows:
(in 000s, except per share amounts) | ||||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | |||||||||||||||||||||
Options outstanding, beginning of year | 15,772 | $ | 32.14 | 15,910 | $ | 26.33 | 18,908 | $ | 20.40 | |||||||||||||||||
Options granted | 3,744 | 44.05 | 5,364 | 44.32 | 8,816 | 32.85 | ||||||||||||||||||||
Options exercised | (3,927 | ) | 29.11 | (5,098 | ) | 24.65 | (9,659 | ) | 19.82 | |||||||||||||||||
Options expired/cancelled | (1,107 | ) | 34.51 | (404 | ) | 34.53 | (2,155 | ) | 30.21 | |||||||||||||||||
Options outstanding, end of year | 14,482 | 35.86 | 15,772 | 32.14 | 15,910 | 26.33 | ||||||||||||||||||||
Shares exercisable, end of year | 6,668 | 30.78 | 6,836 | 25.21 | 6,410 | 20.46 | ||||||||||||||||||||
Restricted shares granted | 514 | 43.93 | 45 | 44.64 | 17 | 36.85 | ||||||||||||||||||||
Restricted shares vested | 72 | 23.79 | 63 | 21.02 | 81 | 19.56 | ||||||||||||||||||||
Shares reserved for future option or restricted stock grants, end of year | 9,880 | 14,563 | 19,523 | |||||||||||||||||||||||
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A summary of stock options outstanding and exercisable at April 30, 2004 follows:
(shares in 000s) | ||||||||||||||||||||||
Outstanding | Exercisable | |||||||||||||||||||||
Number | Weighted-Average | Weighted- | Number | Weighted- | ||||||||||||||||||
Outstanding | Remaining | Average | Exercisable | Average | ||||||||||||||||||
at April 30 | Contractual Life | Exercise Price | at April 30 | Exercise Price | ||||||||||||||||||
$ 16.13 – 21.91 | 2,292 | 4 years | $ | 18.22 | 2,135 | $ | 18.08 | |||||||||||||||
$ 22.13 – 27.81 | 1,693 | 5 years | 25.94 | 1,092 | 25.82 | |||||||||||||||||
$ 32.10 – 39.96 | 3,447 | 8 years | 33.41 | 1,613 | 33.56 | |||||||||||||||||
$ 40.00 – 46.26 | 6,814 | 9 years | 44.79 | 1,828 | 46.11 | |||||||||||||||||
$ 47.00 – 58.95 | 236 | 10 years | 56.60 | – | – | |||||||||||||||||
14,482 | 6,668 | |||||||||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Stock option grants: | |||||||||||||||
Risk-free interest rate | 1.76% | 3.37% | 4.48% | ||||||||||||
Expected life | 3 years | 4 years | 3 years | ||||||||||||
Expected volatility | 31.65% | 29.04% | 28.81% | ||||||||||||
Dividend yield | 1.65% | 1.50% | 1.84% | ||||||||||||
Purchase right grants: | |||||||||||||||
Risk-free interest rate | .97% | 1.45% | 2.70% | ||||||||||||
Expected life | 6 months | 6 months | 6 months | ||||||||||||
Expected volatility | 38.14% | 44.38% | 33.07% | ||||||||||||
Dividend yield | 1.55% | 1.60% | 1.60% | ||||||||||||
NOTE 15: SHAREHOLDER RIGHTS PLAN
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NOTE 16: INTEREST INCOME AND INTEREST EXPENSE
(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
Mortgage loans | $ | 5,064 | $ | 5,421 | $ | 6,609 | ||||||||
Accretion – residual interests | 168,029 | 145,165 | 50,583 | |||||||||||
Accretion – beneficial interest | 167,705 | 103,294 | 70,668 | |||||||||||
Broker-dealer activities | 33,408 | 37,300 | 67,849 | |||||||||||
Other | 4,858 | 6,005 | 10,724 | |||||||||||
$ | 379,064 | $ | 297,185 | $ | 206,433 | |||||||||
(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
Acquisition debt | $ | 68,816 | $ | 72,766 | $ | 79,002 | ||||||||
Accretion of liabilities and other | 7,517 | 7,724 | 12,588 | |||||||||||
RAL-related | 4,482 | 3,244 | 3,902 | |||||||||||
Mortgage loans | 1,836 | 3,229 | 4,955 | |||||||||||
Margin lending | 1,358 | 4,830 | 14,744 | |||||||||||
Loans to franchises | 547 | 851 | 950 | |||||||||||
$ | 84,556 | $ | 92,644 | $ | 116,141 | |||||||||
NOTE 17: INCOME TAXES
(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
Domestic | $ | 1,151,632 | $ | 976,078 | $ | 709,940 | ||||||||
Foreign | 12,525 | 10,999 | 6,900 | |||||||||||
$ | 1,164,157 | $ | 987,077 | $ | 716,840 | |||||||||
(in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Current | |||||||||||||||
Federal | $ | 421,787 | $ | 415,083 | $ | 335,082 | |||||||||
State | 41,169 | 29,608 | 33,116 | ||||||||||||
Foreign | 577 | 8,056 | 3,925 | ||||||||||||
463,533 | 452,747 | 372,123 | |||||||||||||
Deferred: | |||||||||||||||
Federal | (3,305 | ) | (42,512 | ) | (80,275 | ) | |||||||||
State | (323 | ) | (2,534 | ) | (8,416 | ) | |||||||||
Foreign | (4 | ) | (688 | ) | (997 | ) | |||||||||
(3,632 | ) | (45,734 | ) | (89,688 | ) | ||||||||||
Total provision for income taxes before change in accounting principle | 459,901 | 407,013 | 282,435 | ||||||||||||
Income tax on cumulative effect of change in accounting principle | (4,031 | ) | – | – | |||||||||||
Income tax included in comprehensive income | 5,412 | (15,290 | ) | 56,156 | |||||||||||
Total provision for income taxes | $ | 461,282 | $ | 391,723 | $ | 338,591 | |||||||||
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(dollars in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
Statutory tax | $ | 407,455 | $ | 345,477 | $ | 250,894 | |||||||||
Increases (reductions) in income taxes resulting from: | |||||||||||||||
State income taxes, net of Federal income tax benefit | 27,408 | 25,978 | 16,433 | ||||||||||||
Amortization and impairment of goodwill and intangibles | 10,893 | 23,337 | 11,023 | ||||||||||||
Other | 14,145 | 12,221 | 4,085 | ||||||||||||
Total income tax expense | $ | 459,901 | $ | 407,013 | $ | 282,435 | |||||||||
Effective tax rate | 39.5% | 41.2% | 39.4% | ||||||||||||
(in 000s) | |||||||||||||
Year ended April 30, | 2004 | 2003 | |||||||||||
Gross deferred tax assets: | |||||||||||||
Accrued expenses | $ | 46,097 | $ | 58,635 | |||||||||
Allowance for credit losses | 23,099 | 35,817 | |||||||||||
Current | 69,196 | 94,452 | |||||||||||
Deferred compensation | 34,723 | 24,940 | |||||||||||
Residual interest income | 210,826 | 197,747 | |||||||||||
Depreciation | 5,612 | – | |||||||||||
Noncurrent | 251,161 | 222,687 | |||||||||||
Gross deferred tax liabilities: | |||||||||||||
Accrued income | (15,040 | ) | (24,865 | ) | |||||||||
Current | (15,040 | ) | (24,865 | ) | |||||||||
Mortgage servicing rights | (38,005 | ) | (39,339 | ) | |||||||||
Amortization of intangibles | (31,985 | ) | (19,451 | ) | |||||||||
Depreciation | – | (494 | ) | ||||||||||
Noncurrent | (69,990 | ) | (59,284 | ) | |||||||||
Net deferred tax assets (liabilities) | $ | 235,327 | $ | 232,990 | |||||||||
NOTE 18: SUPPLEMENTAL CASH FLOW INFORMATION
(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
Income taxes paid | $ | 331,635 | $ | 247,057 | $ | 236,784 | ||||||||
Interest paid | 84,551 | 84,094 | 105,072 | |||||||||||
(in 000s) | ||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||
Additions to residual interests | $ | 9,007 | $ | 753 | $ | 26,057 | ||||||||
Residual interest mark-to-market | 167,065 | 38,880 | 148,188 | |||||||||||
NOTE 19: COMMITMENTS, CONTINGENCIES AND RISKS
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(in 000s) | ||||||||||
April 30, | 2004 | 2003 | ||||||||
Balance, beginning of year | $ | 49,280 | $ | 44,982 | ||||||
Amounts deferred for new guarantees issued | 81,803 | 28,854 | ||||||||
Revenue recognized on previous deferrals | (69,522 | ) | (24,556 | ) | ||||||
Adjustment resulting from change in accounting principle | 61,487 | – | ||||||||
Balance, end of year | $ | 123,048 | $ | 49,280 | ||||||
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(in 000s) | ||||||
2005 | $ | 199,292 | ||||
2006 | 150,441 | |||||
2007 | 107,944 | |||||
2008 | 56,694 | |||||
2009 | 34,915 | |||||
2010 and beyond | 48,597 | |||||
$ | 597,883 | |||||
NOTE 20: LITIGATION COMMITMENTS AND CONTINGENCIES
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NOTE 21: SEGMENT INFORMATION
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(in 000s) | ||||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | |||||||||||||
REVENUES: | ||||||||||||||||
U.S. Tax Operations | $ | 2,093,617 | $ | 1,861,681 | $ | 1,831,274 | ||||||||||
Mortgage Operations | 1,281,399 | 1,165,411 | 702,333 | |||||||||||||
Business Services | 499,210 | 434,140 | 416,926 | |||||||||||||
Investment Services | 229,470 | 200,794 | 250,685 | |||||||||||||
International Tax Operations | 97,560 | 85,082 | 78,710 | |||||||||||||
Corporate Operations | 4,314 | (651 | ) | 5,773 | ||||||||||||
$ | 4,205,570 | $ | 3,746,457 | $ | 3,285,701 | |||||||||||
INCOME (LOSS) BEFORE TAXES: | ||||||||||||||||
U.S. Tax Operations | $ | 627,592 | $ | 547,078 | $ | 533,468 | ||||||||||
Mortgage Operations | 678,261 | 693,950 | 339,388 | |||||||||||||
Business Services | 19,321 | (14,118 | ) | 22,716 | ||||||||||||
Investment Services | (64,446 | ) | (128,292 | ) | (54,862 | ) | ||||||||||
International Tax Operations | 11,097 | 10,464 | 7,093 | |||||||||||||
Corporate Operations | (107,668 | ) | (122,005 | ) | (130,963 | ) | ||||||||||
$ | 1,164,157 | $ | 987,077 | $ | 716,840 | |||||||||||
DEPRECIATION AND AMORTIZATION: | ||||||||||||||||
U.S. Tax Operations | $ | 73,029 | $ | 58,131 | $ | 59,258 | ||||||||||
Mortgage Operations | 24,428 | 21,703 | 14,753 | |||||||||||||
Business Services | 23,104 | 23,134 | 21,390 | |||||||||||||
Investment Services | 47,285 | 53,984 | 52,182 | |||||||||||||
International Tax Operations | 3,250 | 3,356 | 4,854 | |||||||||||||
Corporate Operations | 942 | 1,513 | 2,949 | |||||||||||||
$ | 172,038 | $ | 161,821 | $ | 155,386 | |||||||||||
Goodwill impairments: | ||||||||||||||||
Business Services | – | 11,777 | – | |||||||||||||
Investment Services | – | 24,000 | – | |||||||||||||
– | 35,777 | – | ||||||||||||||
$ | 172,038 | $ | 197,598 | $ | 155,386 | |||||||||||
(in 000s) | |||||||||||||||
Year ended April 30, | 2004 | 2003 | 2002 | ||||||||||||
CAPITAL EXPENDITURES: | |||||||||||||||
U.S. Tax Operations | $ | 46,729 | $ | 62,383 | $ | 58,683 | |||||||||
Mortgage Operations | 28,176 | 38,204 | 23,087 | ||||||||||||
Business Services | 18,003 | 15,248 | 10,676 | ||||||||||||
Investment Services | 14,278 | 15,562 | 10,268 | ||||||||||||
International Tax Operations | 3,475 | 3,086 | 4,407 | ||||||||||||
Corporate Operations | 16,912 | 16,414 | 4,654 | ||||||||||||
$ | 127,573 | $ | 150,897 | $ | 111,775 | ||||||||||
IDENTIFIABLE ASSETS: | |||||||||||||||
U.S. Tax Operations | $ | 622,884 | $ | 281,340 | $ | 269,476 | |||||||||
Mortgage Operations | 1,200,928 | 1,320,233 | 1,387,774 | ||||||||||||
Business Services | 636,492 | 674,566 | 665,018 | ||||||||||||
Investment Services | 1,685,190 | 1,489,297 | 1,656,469 | ||||||||||||
International Tax Operations | 40,390 | 33,142 | 47,820 | ||||||||||||
Corporate Operations | 1,194,142 | 968,730 | 358,083 | ||||||||||||
$ | 5,380,026 | $ | 4,767,308 | $ | 4,384,640 | ||||||||||
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NOTE 22: QUARTERLY FINANCIAL DATA (UNAUDITED)
(in 000s, except per share amounts) | |||||||||||||||||||||||
Fiscal Year 2004 Quarter Ended | April 30, 2004 | January 31, 2004 | October 31, 2003 | July 31, 2003 | Total | ||||||||||||||||||
Revenues | $ | 2,191,793 | $ | 959,541 | $ | 562,912 | $ | 491,324 | $ | 4,205,570 | |||||||||||||
Income before taxes | 952,074 | 176,120 | 17,134 | 18,829 | 1,164,157 | ||||||||||||||||||
Income taxes | 376,439 | 69,394 | 6,758 | 7,310 | 459,901 | ||||||||||||||||||
Net income before change in accounting principle | 575,635 | 106,726 | 10,376 | 11,519 | 704,256 | ||||||||||||||||||
Cumulative effect of change in accounting principle | – | – | – | (6,359 | ) | (6,359 | ) | ||||||||||||||||
Net income | $ | 575,635 | $ | 106,726 | $ | 10,376 | $ | 5,160 | $ | 697,897 | |||||||||||||
Basic earnings per share: | |||||||||||||||||||||||
Before change in accounting principle | $ | 3.30 | $ | .60 | $ | .06 | $ | .06 | $ | 3.98 | |||||||||||||
Net income | 3.30 | .60 | .06 | .03 | 3.94 | ||||||||||||||||||
Diluted earnings per share: | |||||||||||||||||||||||
Before change in accounting principle | $ | 3.23 | $ | .59 | $ | .06 | $ | .06 | $ | 3.90 | |||||||||||||
Net income | 3.23 | .59 | .06 | .03 | 3.86 | ||||||||||||||||||
Dividends per share | $ | .20 | $ | .20 | $ | .20 | $ | .18 | $ | .78 | |||||||||||||
Stock price range: | |||||||||||||||||||||||
High | $ | 61.00 | $ | 60.18 | $ | 48.36 | $ | 46.00 | $ | 61.00 | |||||||||||||
Low | 44.50 | 47.14 | 40.55 | 36.30 | 36.30 |
(in 000s, except per share amounts) | |||||||||||||||||||||||
Fiscal Year 2003 Quarter Ended | April 30, 2003 | January 31, 2003 | October 31, 2002 | July 31, 2002 | Total | ||||||||||||||||||
Revenues | $ | 1,909,755 | $ | 949,272 | $ | 465,041 | $ | 422,389 | $ | 3,746,457 | |||||||||||||
Income (loss) before taxes (benefit) | 842,294 | 222,934 | (62,245 | ) | (15,906 | ) | 987,077 | ||||||||||||||||
Income taxes (benefit) | 347,652 | 90,621 | (24,898 | ) | (6,362 | ) | 407,013 | ||||||||||||||||
Net income (loss) | $ | 494,642 | $ | 132,313 | $ | (37,347 | ) | $ | (9,544 | ) | $ | 580,064 | |||||||||||
Basic earnings per share | $ | 2.76 | $ | .74 | $ | (.21 | ) | $ | (.05 | ) | $ | 3.23 | |||||||||||
Diluted earnings per share | 2.71 | .73 | (.21 | ) | (.05 | ) | 3.15 | ||||||||||||||||
Dividends per share | $ | .18 | $ | .18 | $ | .18 | $ | .16 | $ | .70 | |||||||||||||
Stock price range: | |||||||||||||||||||||||
High | $ | 44.35 | $ | 43.05 | $ | 53.15 | $ | 48.28 | $ | 53.15 | |||||||||||||
Low | 35.47 | 30.74 | 37.45 | 40.00 | 30.74 | ||||||||||||||||||
NOTE 23: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
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Condensed Consolidating Income Statements
(in 000s) | |||||||||||||||||||||||
H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||||||
Year Ended April 30, 2004 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | ||||||||||||||||||
Total revenues | $ | – | $ | 1,802,461 | $ | 2,404,669 | $ | (1,560 | ) | $ | 4,205,570 | ||||||||||||
Expenses: | |||||||||||||||||||||||
Compensation & benefits | – | 465,839 | 1,144,544 | (280 | ) | 1,610,103 | |||||||||||||||||
Occupancy & equipment | – | 79,399 | 305,226 | (3 | ) | 384,622 | |||||||||||||||||
Interest | – | 45,580 | 38,976 | – | 84,556 | ||||||||||||||||||
Depreciation & amortization | – | 72,482 | 99,556 | – | 172,038 | ||||||||||||||||||
Marketing & advertising | – | 42,664 | 146,117 | (464 | ) | 188,317 | |||||||||||||||||
Supplies, freight & postage | – | 19,555 | 69,634 | – | 89,189 | ||||||||||||||||||
Other | – | 382,073 | 140,809 | (440 | ) | 522,442 | |||||||||||||||||
– | 1,107,592 | 1,944,862 | (1,187 | ) | 3,051,267 | ||||||||||||||||||
Operating income | – | 694,869 | 459,807 | (373 | ) | 1,154,303 | |||||||||||||||||
Other income, net | 1,164,157 | – | 9,854 | (1,164,157 | ) | 9,854 | |||||||||||||||||
Income before taxes | 1,164,157 | 694,869 | 469,661 | (1,164,530 | ) | 1,164,157 | |||||||||||||||||
Income taxes | 459,901 | 280,956 | 179,092 | (460,048 | ) | 459,901 | |||||||||||||||||
Income before change in accounting | 704,256 | 413,913 | 290,569 | (704,482 | ) | 704,256 | |||||||||||||||||
Cumulative effect of change in accounting | (6,359 | ) | – | (6,359 | ) | 6,359 | (6,359 | ) | |||||||||||||||
Net income | $ | 697,897 | $ | 413,913 | $ | 284,210 | $ | (698,123 | ) | $ | 697,897 | ||||||||||||
H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||||||
Year Ended April 30, 2003 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | ||||||||||||||||||
Total revenues | $ | – | $ | 1,567,917 | $ | 2,180,009 | $ | (1,469 | ) | $ | 3,746,457 | ||||||||||||
Expenses: | |||||||||||||||||||||||
Compensation & benefits | – | 391,603 | 995,867 | 261 | 1,387,731 | ||||||||||||||||||
Occupancy & equipment | – | 73,837 | 272,123 | – | 345,960 | ||||||||||||||||||
Interest | – | 62,294 | 30,350 | – | 92,644 | ||||||||||||||||||
Depreciation & amortization | – | 101,613 | 95,985 | – | 197,598 | ||||||||||||||||||
Marketing & advertising | – | 34,612 | 117,110 | (875 | ) | 150,847 | |||||||||||||||||
Supplies, freight & postage | – | 21,717 | 67,031 | – | 88,748 | ||||||||||||||||||
Other | – | 256,004 | 247,518 | (835 | ) | 502,687 | |||||||||||||||||
– | 941,680 | 1,825,984 | (1,449 | ) | 2,766,215 | ||||||||||||||||||
Operating income | – | 626,237 | 354,025 | (20 | ) | 980,242 | |||||||||||||||||
Other income, net | 987,077 | – | 6,835 | (987,077 | ) | 6,835 | |||||||||||||||||
Income before taxes | 987,077 | 626,237 | 360,860 | (987,097 | ) | 987,077 | |||||||||||||||||
Income taxes | 407,013 | 265,079 | 141,926 | (407,005 | ) | 407,013 | |||||||||||||||||
Net income | $ | 580,064 | $ | 361,158 | $ | 218,934 | $ | (580,092 | ) | $ | 580,064 | ||||||||||||
Table of Contents
Year Ended April 30, | H&R Block, Inc. | BFC | Other | Consolidated | |||||||||||||||||||
2002 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | ||||||||||||||||||
Total revenues | $ | – | $ | 1,187,955 | $ | 2,112,438 | $ | (14,692 | ) | $ | 3,285,701 | ||||||||||||
Expenses: | |||||||||||||||||||||||
Compensation & benefits | – | 323,600 | 974,622 | (63 | ) | 1,298,159 | |||||||||||||||||
Occupancy & equipment | – | 65,305 | 240,015 | 67 | 305,387 | ||||||||||||||||||
Interest | – | 100,800 | 15,341 | – | 116,141 | ||||||||||||||||||
Depreciation & amortization | – | 69,497 | 85,889 | – | 155,386 | ||||||||||||||||||
Marketing & advertising | – | 20,642 | 136,342 | (1,255 | ) | 155,729 | |||||||||||||||||
Supplies, freight & postage | – | 15,000 | 60,804 | (94 | ) | 75,710 | |||||||||||||||||
Other | – | 291,986 | 184,993 | (13,218 | ) | 463,761 | |||||||||||||||||
– | 886,830 | 1,698,006 | (14,563 | ) | 2,570,273 | ||||||||||||||||||
Operating income | – | 301,125 | 414,432 | (129 | ) | 715,428 | |||||||||||||||||
Other income, net | 716,840 | (2,028 | ) | 3,440 | (716,840 | ) | 1,412 | ||||||||||||||||
Income before taxes | 716,840 | 299,097 | 417,872 | (716,969 | ) | 716,840 | |||||||||||||||||
Income taxes | 282,435 | 123,884 | 158,602 | (282,486 | ) | 282,435 | |||||||||||||||||
Net income | $ | 434,405 | $ | 175,213 | $ | 259,270 | $ | (434,483 | ) | $ | 434,405 | ||||||||||||
Condensed Consolidating Balance Sheets
(in 000s) | |||||||||||||||||||||||
H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||||||
April 30, 2004 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | ||||||||||||||||||
Cash & cash equivalents | $ | – | $ | 132,076 | $ | 939,600 | $ | – | $ | 1,071,676 | |||||||||||||
Cash & cash equivalents – restricted | – | 532,201 | 13,227 | – | 545,428 | ||||||||||||||||||
Receivables from customers, brokers and dealers, net | – | 625,076 | – | – | 625,076 | ||||||||||||||||||
Receivables, net | 180 | 168,879 | 178,851 | – | 347,910 | ||||||||||||||||||
Intangible assets and goodwill, net | – | 461,791 | 823,456 | – | 1,285,247 | ||||||||||||||||||
Investments in subsidiaries | 4,291,693 | 205 | 297 | (4,291,693 | ) | 502 | |||||||||||||||||
Other assets | (145 | ) | 1,115,435 | 389,270 | (373 | ) | 1,504,187 | ||||||||||||||||
Total assets | $ | 4,291,728 | $ | 3,035,663 | $ | 2,344,701 | $ | (4,292,066 | ) | $ | 5,380,026 | ||||||||||||
Accounts payable to customers, brokers and dealers | $ | – | $ | 1,065,793 | $ | – | $ | – | $ | 1,065,793 | |||||||||||||
Long-term debt | – | 498,225 | 47,586 | – | 545,811 | ||||||||||||||||||
Other liabilities | 15,879 | 509,151 | 1,345,822 | 561 | 1,871,413 | ||||||||||||||||||
Net intercompany advances | 2,378,840 | (327,834 | ) | (2,050,445 | ) | (561 | ) | – | |||||||||||||||
Stockholders’ equity | 1,897,009 | 1,290,328 | 3,001,738 | (4,292,066 | ) | 1,897,009 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 4,291,728 | $ | 3,035,663 | $ | 2,344,701 | $ | (4,292,066 | ) | $ | 5,380,026 | ||||||||||||
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(in 000s) | |||||||||||||||||||||||
H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||||||
April 30, 2003 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | ||||||||||||||||||
Cash & cash equivalents | $ | – | $ | 180,181 | $ | 695,172 | $ | – | $ | 875,353 | |||||||||||||
Cash & cash equivalents – restricted | – | 420,787 | 17,455 | – | 438,242 | ||||||||||||||||||
Receivables from customers, brokers and dealers, net | – | 517,037 | – | – | 517,037 | ||||||||||||||||||
Receivables, net | 168 | 171,612 | 231,417 | – | 403,197 | ||||||||||||||||||
Intangible assets and goodwill, net | – | 491,091 | 564,989 | – | 1,056,080 | ||||||||||||||||||
Investments in subsidiaries | 3,546,734 | 215 | 1,105 | (3,546,734 | ) | 1,320 | |||||||||||||||||
Other assets | (1,321 | ) | 1,182,521 | 293,930 | 949 | 1,476,079 | |||||||||||||||||
Total assets | $ | 3,545,581 | $ | 2,963,444 | $ | 1,804,068 | $ | (3,545,785 | ) | $ | 4,767,308 | ||||||||||||
Accounts payable to customers, brokers and dealers | $ | – | $ | 862,694 | $ | – | $ | – | $ | 862,694 | |||||||||||||
Long-term debt | – | 747,550 | 74,752 | – | 822,302 | ||||||||||||||||||
Other liabilities | 2,654 | 360,125 | 1,055,860 | (36 | ) | 1,418,603 | |||||||||||||||||
Net intercompany advances | 1,879,218 | 125,627 | (2,005,346 | ) | 501 | – | |||||||||||||||||
Stockholders’ equity | 1,663,709 | 867,448 | 2,678,802 | (3,546,250 | ) | 1,663,709 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,545,581 | $ | 2,963,444 | $ | 1,804,068 | $ | (3,545,785 | ) | $ | 4,767,308 | ||||||||||||
Condensed Consolidating Statements of Cash Flows
�� | |||||||||||||||||||||||
(in 000s) | |||||||||||||||||||||||
H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||||||
Year Ended April 30, 2004 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | ||||||||||||||||||
Net cash provided by operating activities: | $ | 64,782 | $ | 184,949 | $ | 677,076 | $ | – | $ | 926,807 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Purchases of available-for-sale securities | – | – | (11,434 | ) | – | (11,434 | ) | ||||||||||||||||
Cash received on residual interests | – | 193,606 | – | – | 193,606 | ||||||||||||||||||
Sales of available-for-sale securities | – | 53,391 | 15,410 | – | 68,801 | ||||||||||||||||||
Purchases of property & equipment, net | – | (39,229 | ) | (88,344 | ) | – | (127,573 | ) | |||||||||||||||
Payments made for business acquisitions | – | – | (280,865 | ) | – | (280,865 | ) | ||||||||||||||||
Net intercompany advances | 473,521 | – | – | (473,521 | ) | – | |||||||||||||||||
Other, net | – | 12,655 | 13,677 | – | 26,332 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 473,521 | 220,423 | (351,556 | ) | (473,521 | ) | (131,133 | ) | |||||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Repayments of commercial paper | – | (4,618,853 | ) | – | – | (4,618,853 | ) | ||||||||||||||||
Proceeds from issuance of commercial paper | – | 4,618,853 | – | – | 4,618,853 | ||||||||||||||||||
Payments on acquisition debt | – | – | (59,003 | ) | – | (59,003 | ) | ||||||||||||||||
Dividends paid | (138,397 | ) | – | – | – | (138,397 | ) | ||||||||||||||||
Acquisition of treasury shares | (519,862 | ) | – | – | – | (519,862 | ) | ||||||||||||||||
Proceeds from issuance of common stock | 119,956 | – | – | – | 119,956 | ||||||||||||||||||
Net intercompany advances | – | (453,477 | ) | (20,044 | ) | 473,521 | – | ||||||||||||||||
Other, net | – | �� | – | (2,045 | ) | – | (2,045 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | (538,303 | ) | (453,477 | ) | (81,092 | ) | 473,521 | (599,351 | ) | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | – | (48,105 | ) | 244,428 | – | 196,323 | |||||||||||||||||
Cash and cash equivalents at beginning of the year | – | 180,181 | 695,172 | – | 875,353 | ||||||||||||||||||
Cash and cash equivalents at end of the year | $ | – | $ | 132,076 | $ | 939,600 | $ | – | $ | 1,071,676 | |||||||||||||
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H&R Block, Inc. | BFC | Other | Consolidated | |||||||||||||||||||||
Year Ended April 30, 2003 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | |||||||||||||||||||
Net cash provided by operating activities | $ | 36,560 | $ | 140,617 | $ | 513,648 | $ | – | $ | 690,825 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Purchases of available-for-sale securities | – | – | (14,614 | ) | – | (14,614 | ) | |||||||||||||||||
Maturities of available-for-sale securities | – | 140,795 | – | – | 140,795 | |||||||||||||||||||
Sales of available-for-sale securities | – | 142,486 | 14,081 | – | 156,567 | |||||||||||||||||||
Purchases of property & equipment, net | – | (37,999 | ) | (112,898 | ) | – | (150,897 | ) | ||||||||||||||||
Payments made for business acquisitions | – | – | (26,408 | ) | – | (26,408 | ) | |||||||||||||||||
Net intercompany advances | 280,583 | – | – | (280,583 | ) | – | ||||||||||||||||||
Other, net | – | (1,480 | ) | 21,376 | – | 19,896 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 280,583 | 243,802 | (118,463 | ) | (280,583 | ) | 125,339 | |||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Repayments of commercial paper | – | (9,925,516 | ) | – | – | (9,925,516 | ) | |||||||||||||||||
Proceeds from issuance of commercial paper | – | 9,925,516 | – | – | 9,925,516 | |||||||||||||||||||
Payments on acquisition debt | – | – | (57,469 | ) | – | (57,469 | ) | |||||||||||||||||
Dividends paid | (125,898 | ) | – | – | – | (125,898 | ) | |||||||||||||||||
Acquisition of treasury shares | (317,570 | ) | – | – | – | (317,570 | ) | |||||||||||||||||
Proceeds from issuance of common stock | 126,325 | – | – | – | 126,325 | |||||||||||||||||||
Net intercompany advances | – | (402,197 | ) | 121,614 | 280,583 | – | ||||||||||||||||||
Other, net | – | – | (2,344 | ) | – | (2,344 | ) | |||||||||||||||||
Net cash provided by (used in) financing activities | (317,143 | ) | (402,197 | ) | 61,801 | 280,583 | (376,956 | ) | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents | – | (17,778 | ) | 456,986 | – | 439,208 | ||||||||||||||||||
Cash and cash equivalents at beginning of the year | – | 197,959 | 238,186 | – | 436,145 | |||||||||||||||||||
Cash and cash equivalents at end of the year | $ | – | $ | 180,181 | $ | 695,172 | $ | – | $ | 875,353 | ||||||||||||||
H&R Block, Inc. | BFC | Other | Consolidated | |||||||||||||||||||||
Year Ended April 30, 2002 | (Guarantor) | (Issuer) | Subsidiaries | Eliminations | H&R Block | |||||||||||||||||||
Net cash provided by operating activities | $ | 58,927 | $ | 256,188 | $ | 426,331 | $ | – | $ | 741,446 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Purchases of available-for-sale securities | – | – | (7,241 | ) | – | (7,241 | ) | |||||||||||||||||
Maturities of available-for-sale securities | – | 67,070 | 8,250 | – | 75,320 | |||||||||||||||||||
Sales of available-for-sale securities | – | – | 23,173 | – | 23,173 | |||||||||||||||||||
Purchases of property & equipment, net | – | (36,434 | ) | (75,341 | ) | – | (111,775 | ) | ||||||||||||||||
Payments made for business acquisitions | – | – | (46,738 | ) | – | (46,738 | ) | |||||||||||||||||
Net intercompany advances | 324,503 | – | – | (324,503 | ) | – | ||||||||||||||||||
Other, net | – | (4,069 | ) | 12,297 | – | 8,228 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 324,503 | 26,567 | (85,600 | ) | (324,503 | ) | (59,033 | ) | ||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Repayments of commercial paper | – | (10,622,011 | ) | – | – | (10,622,011 | ) | |||||||||||||||||
Proceeds from issuance of commercial paper | – | 10,622,011 | – | – | 10,622,011 | |||||||||||||||||||
Payments on acquisition debt | – | – | (50,594 | ) | – | (50,594 | ) | |||||||||||||||||
Dividends paid | (115,725 | ) | – | – | – | (115,725 | ) | |||||||||||||||||
Acquisition of treasury shares | (462,938 | ) | – | – | – | (462,938 | ) | |||||||||||||||||
Proceeds from issuance of common stock | 195,233 | – | – | – | 195,233 | |||||||||||||||||||
Net intercompany advances | – | (167,738 | ) | (156,765 | ) | 324,503 | – | |||||||||||||||||
Other, net | – | – | 140 | – | 140 | |||||||||||||||||||
Net cash used in financing activities | (383,430 | ) | (167,738 | ) | (207,219 | ) | 324,503 | (433,884 | ) | |||||||||||||||
Net increase in cash and cash equivalents | – | 115,017 | 133,512 | – | 248,529 | |||||||||||||||||||
Cash and cash equivalents at beginning of the year | – | 82,942 | 104,674 | – | 187,616 | |||||||||||||||||||
Cash and cash equivalents at end of the year | $ | – | $ | 197,959 | $ | 238,186 | $ | – | $ | 436,145 | ||||||||||||||
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• | Information appearing under the heading “Election of Directors” | |
• | Information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” | |
• | Information appearing under the heading “Board of Directors’ Meetings and Committees” regarding identification of the Audit Committee and Audit Committee financial experts. |
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Information about our executive officers as of May 15, 2004 is as follows:
Name, age | Current Position | Business Experience Since May 1, 1999 | ||||
Mark A. Ernst, age 46 | Chairman of the Board, President and Chief Executive Officer | Chairman of the Board of Directors since September 2002; Chief Executive Officer since January 2001; President of the Company since September 1999; Chief Operating Officer from September 1998 through December 2000; Executive Vice President from September 1998 until September 1999. Mr. Ernst has been a Member of the Board of Directors since September 1999. | ||||
Jeffery W. Yabuki, age 44 | Executive Vice President and Chief Operating Officer | Chief Operating Officer since April 2002; Executive Vice President since October 2000; President, H&R Block Services, Inc. since October 2000; President, H&R Block International from September 1999 until October 2000; President and Chief Executive Officer of American Express Tax & Business Services, Inc., from 1998 to September 1999. | ||||
Melanie K. Coleman, age 39 | Vice President and Corporate Controller | Vice President and Corporate Controller since October 2002; Assistant Vice President and Assistant Controller at Sprint Corporation (“Sprint”), from December 2000 until October 2002; Executive Assistant to the Chief Financial Officer of Sprint from September 1999 until December 2000; Director, Capital Asset Accounting at Sprint from October 1998 until September 1999. | ||||
Robert E. Dubrish, age 52 | President and Chief Executive Officer, Option One Mortgage Corporation | President and Chief Executive Officer, Option One Mortgage Corporation, since March 1996. | ||||
Brad C. Iversen, age 54 | Senior Vice President and Chief Marketing Officer | Senior Vice President and Chief Marketing Officer since September 2003; Founded Catamount Marketing in 2002; Executive Vice President and Director of Marketing at Bank One Corporation from 1997 to 2002. | ||||
Linda M. McDougall, age 51 | Vice President, Communications | Vice President, Communications since July 1999; Assistant Vice President, Communications from November 1995 through June 1999. | ||||
Timothy R. Mertz, age 53 | Vice President, Corporate Tax | Vice President, Corporate Tax since October 2000; Vice President of Treasury for Payless Cashways, Inc., from September 1998 through September 2000. | ||||
Brian L. Nygaard, age 46 | President and Chief Executive Officer, H&R Block Financial Advisors, Inc. | President and Chief Executive Officer, H&R Block Financial Advisors, Inc., since November 2001; President, ING Advisors Network, ING Group, from October 2000 until October 2001; Chief Operating Officer, Advisors Network, ING Advisors Network, from October 1999 until October 2000; Senior Vice President, Strategic Marketing, ING Advisors Network, from May 1999 until October 1999. | ||||
Tammy S. Serati, age 45 | Senior Vice President, Human Resources | Senior Vice President, Human Resources since December 2002; Vice President, Human Resources Corporate Staffs, for Monsanto Agricultural Company, from May 2000 through November 2002; Vice President, Human Resources, Monsanto Nutrition & Consumer Sector, from January 1997 through April 2000. | ||||
Becky S. Shulman, age 39 | Vice President and Treasurer | Vice President and Treasurer since September 2001; Chief Investment Officer of U.S. Central Credit Union, from September 1998 until August 2001. | ||||
Nicholas J. Spaeth, age 54 | Senior Vice President and Chief Legal Officer | Senior Vice President and Chief Legal Officer since February 2004; Senior Vice President, General Counsel and Secretary of Intuit, Inc. from August 2003 to February 2004; Senior Vice President, General Counsel and Secretary, GE Employers Reinsurance Corporation from September 2000 until August 2003; Partner at Cooley Godward LLP from March 1998 until September 2000. | ||||
Steven Tait, age 44 | President, RSM McGladrey Business Services, Inc. | President, RSM McGladrey Business Services, Inc. since April 2003; Executive Vice President, Sales & Client Operations, Gartner, Inc., from June 2001 through March 2003; Senior Vice President, Sales and Operations at Gartner, Inc. from July 2000 until May 2001; President and Chief Executive Officer of Xerox Connect, a wholly-owned subsidiary of Xerox Corporation, from November 1999 until June 2000; Vice President, Xerox Global Services/ VP Xerox Offsite Document Management Services, from September 1998 until October 1999. | ||||
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Name, age | Current Position | Business Experience Since May 1, 1999 | ||||
Robert A. Weinberger, age 60 | Vice President, Government Relations | Vice President, Government Relations, since March 1996. | ||||
Bret G. Wilson, age 45 | Vice President and Secretary | Vice President and Secretary since October 2002; Vice President, Corporate Development and Risk Management from October 2000 until October 2002; Vice President, Corporate Planning and Development from September 1999 until October 2000; Vice President, Corporate Development, from December 1997 until September 1999. |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
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PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
1. | The following financial statements appearing in Item 8: “Consolidated Income Statements;” “Consolidated Balance Sheets;” “Consolidated Statements of Cash Flows;” and “Consolidated Statements of Stockholders’ Equity.” | |
2. | Financial Statement Schedule II – Valuation and Qualifying Accounts with the related Reports of Independent Registered Public Accounting Firms. These will be filed with the SEC but will not be included in the printed version of the Annual Report to Shareholders. | |
3. | Exhibits: The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference. The following exhibits are required to be filed as exhibits to this Form 10-K: |
3.3 | Amended and Restated Bylaws of H&R Block, Inc., as amended and restated as of June 9, 2004. | |
10.16 | Employment Agreement dated February 2, 2004 between HRB Management, Inc. and Nicholas J. Spaeth. | |
10.23 | Severance and Release Agreement dated February 10, 2004 between HRB Management, Inc. and James H. Ingraham. | |
10.24 | Termination Agreement dated April 16, 2004 between HRB Management, Inc. and Jeffrey G. Brandmaier. | |
12 | Computation of Ratio of Earnings to Fixed Charges for the five years ended April 30, 2004. | |
21 | Subsidiaries of the Company. | |
23.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm. | |
23.2 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. | |
31.1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification by Principal Accounting Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes- Oxley Act of 2002. |
The exhibits will be filed with the SEC but will not be included in the printed version of the Annual Report to Shareholders.
We filed on February 24, 2004 an amended report on Form 8-K/ A dated May 12, 2003, with updated Item 4 disclosures as of and through the date of PricewaterhouseCoopers LLP’s resignation (the termination date of the client/auditor relationship) as the Company’s independent accountants.
We filed on February 26, 2004 a report on Form 8-K dated February 24, 2004, reporting under Item 12, Results of Operations and Financial Condition, our issuance of a press release regarding our results of operations for the fiscal quarter ended January 31, 2004.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC. |
By | /s/ MARK A. ERNST |
Mark A. Ernst | |
Chairman of the Board, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature | Title | |||||
/s/ MARK A. ERNST Mark A. Ernst | Chairman of the Board, President, Chief Executive Officer and Director (principal executive officer) | |||||
/s/ G. KENNETH BAUM G. Kenneth Baum | Director | |||||
/s/ THOMAS M. BLOCH Thomas M. Bloch | Director | |||||
/s/ DONNA R. ECTON Donna R. Ecton | Director | |||||
/s/ ROGER W. HALE Roger W. Hale | Director | |||||
/s/ TOM D. SEIP Tom D. Seip | Director | |||||
/s/ LOUIS W. SMITH Louis W. Smith | Director | |||||
/s/ RAYFORD WILKINS, JR. Rayford Wilkins, Jr. | Director | |||||
/s/ MELANIE K. COLEMAN Melanie K. Coleman | Vice President and Corporate Controller (principal accounting officer) |
(Signed as to each on June 9, 2004)
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The following exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
3 | .1 | Restated Articles of Incorporation of H&R Block, Inc., as amended, filed as Exhibit 3.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, are incorporated herein by reference. | ||
3 | .2 | Certificate of Amendment of Articles of Incorporation effective October 15, 2001, filed as Exhibit 3.1 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, is incorporated herein by reference. | ||
3 | .3 | Amended and Restated Bylaws of H&R Block, Inc., as amended and restated as of June 9, 2004. | ||
4 | .1 | Indenture dated as of October 20, 1997, among H&R Block, Inc., Block Financial Corporation and Bankers Trust Company, as Trustee, filed as Exhibit 4(a) to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 1997, file number 1-6089, is incorporated herein by reference. | ||
4 | .2 | First Supplemental Indenture, dated as of April 18, 2000, among H&R Block, Inc., Block Financial Corporation, Bankers Trust Company and the Bank of New York, filed as Exhibit 4(a) to the Company’s current report on Form 8-K dated April 13, 2000, file number 1-6089, is incorporated herein by reference. | ||
4 | .3 | Form of 6 3/4% Senior Note due 2004 of Block Financial Corporation, filed on October 23, 1997 as Exhibit 2.2 to the Company’s current report on Form 8-K, file number 1-6089, is incorporated herein by reference. | ||
4 | .4 | Form of 8 1/2% Senior Note due 2007 of Block Financial Corporation, filed as Exhibit 4(b) to the Company’s current report on Form 8-K dated April 13, 2000, file number 1-6089, is incorporated herein by reference. | ||
4 | .5 | Copy of Rights Agreement dated March 25, 1998, between H&R Block, Inc. and ChaseMellon Shareholder Services, L.L.C., filed on July 22, 1998 as Exhibit 1 to the Company’s Registration Statement on Form 8-A, file number 1-6089, is incorporated herein by reference. | ||
4 | .6 | Form of Certificate of Designation, Preferences and Rights of Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(e) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1995, file number 1-6089, is incorporated by reference. | ||
4 | .7 | Form of Certificate of Amendment of Certificate of Designation, Preferences and Rights of Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(j) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1998, file number 1-6089, is incorporated by reference. | ||
4 | .8 | Form of Certificate of Designation, Preferences and Rights of Delayed Convertible Preferred Stock of H&R Block, Inc., filed as Exhibit 4(f) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1995, file number 1-6089, is incorporated by reference. | ||
10 | .1 * | The Company’s 1993 Long-Term Executive Compensation Plan, as amended and restated as of September 11, 2002, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2002, file number 1-6089, is incorporated by reference. | ||
10 | .2 * | The Company’s 2003 Long-Term Executive Compensation Plan, as amended and restated as of September 10, 2003, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2003, file number 1-6089, is incorporated by reference. | ||
10 | .3 * | The H&R Block Deferred Compensation Plan for Directors, as Amended and Restated effective July 1, 2002, filed as Exhibit 10.2 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2002, file number 1-6089, is incorporated by reference. | ||
10 | .4 * | The H&R Block Deferred Compensation Plan for Executives, as Amended and Restated July 1, 2002, filed as Exhibit 10.3 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2002, file number 1-6089, is incorporated by reference. | ||
10 | .5 * | Amendment No. 1 to the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated, effective as of March 12, 2003, filed as Exhibit 10.5 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .6 * | The H&R Block Short-Term Incentive Plan, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2000, file number 1-6089, is incorporated herein by reference. | ||
10 | .7 * | The Company’s 1989 Stock Option Plan for Outside Directors, as amended September 12, 2001, filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, is incorporated herein by reference. | ||
10 | .8 * | The H&R Block Stock Plan for Non-Employee Directors, as amended August 1, 2001, filed as Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, is incorporated herein by reference. | ||
10 | .9 * | The H&R Block, Inc. 2000 Employee Stock Purchase Plan, as amended August 1, 2001, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, is incorporated herein by reference. | ||
10 | .10 * | The H&R Block, Inc. Executive Survivor Plan (as Amended and Restated) filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2000, file number 1-6089, is incorporated herein by reference. | ||
10 | .11 * | First Amendment to the H&R Block, Inc. Executive Survivor Plan (as Amended and Restated), filed as Exhibit 10.9 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2002, file number 1-6089, is incorporated by reference. |
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10 | .12 * | Second Amendment to the H&R Block, Inc. Executive Survivor Plan (as Amended and Restated), effective as of March 12, 2003, filed as Exhibit 10.12 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .13 * | Employment Agreement dated July 16, 1998, between the Company and Mark A. Ernst, filed as Exhibit 10(a) to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 1998, file number 1-6089, is incorporated herein by reference. | ||
10 | .14 * | Amendment to Employment Agreement dated June 30, 2000, between HRB Management, Inc. and Mark A. Ernst, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2000, file number 1-6089, is incorporated herein by reference. | ||
10 | .15 * | Employment Agreement dated September 7, 1999, between HRB Management, Inc. and Jeffery W. Yabuki, filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2000, file number 1-6089, is incorporated herein by reference. | ||
10 | .16 * | Employment Agreement dated as of February 2, 2004, between HRB Management, Inc. and Nicholas J. Spaeth. | ||
10 | .17 * | Employment Agreement dated September 2, 2003, between HRB Management, Inc. and Brad C. Iversen, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2004, file number 1-6089, is incorporated herein by reference. | ||
10 | .18 * | Employment Agreement between Option One Mortgage Corporation and Robert E. Dubrish, executed on February 9, 2002, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2002, file number 1-6089, is incorporated herein by reference. | ||
10 | .19 * | Employment Agreement dated as of November 5, 2001, between H&R Block Financial Advisors, Inc. and Brian L. Nygaard, filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2002, file number 1-6089, is incorporated herein by reference. | ||
10 | .20 * | Employment Agreement dated December 2, 2002 between HRB Management, Inc. and Tammy S. Serati, filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the quarter ended January 31, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .21 * | Employment Agreement dated as of April 1, 2003 between HRB Business Services, Inc. and Steven Tait, filed as Exhibit 10.23 to the annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .22 * | Separation Agreement dated September 4, 2003 between HRB Management, Inc. and Frank J. Cotroneo, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2003, file number 1-6089, is incorporated herein by reverence | ||
10 | .23 * | Severance and Release Agreement dated February 2, 2004 between HRB Management, Inc. and James H. Ingraham. | ||
10 | .24 * | Termination Agreement dated April 16, 2004 between HRB Management, Inc. and Jeffrey G. Brandmaier. | ||
10 | .25 | Second Amended and Restated Refund Anticipation Loan Operations Agreement dated as of June 9, 2003, between H&R Block Services, Inc., Household Tax Masters, Inc. and Beneficial Franchise Company, filed as Exhibit 10.27 to the annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .26 | Third Amended and Restated Refund Anticipation Loan Participation Agreement dated as of January 1, 2004, between Block Financial Corporation and Household Tax Masters, Inc., filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended January 31, 2004, file number 1-6089, is incorporated herein by reference. | ||
10 | .27 | Agreement of Settlement dated March 31, 2003 by and between H&R Block, Inc., H&R Block and Associates L.P., H&R Block Tax Services, Inc., HRBO, Limited, H&R Block of South Texas, Inc., HRB-Delaware, Inc., H&R Block, Ltd., HRBOI, Ltd., HRBO III, Ltd., HRBOII, Inc., H&R Block of Dallas, Inc., H&R Block of Houston, Ltd., Houston Block, L.C., Block Management, Ltd., and STI-Block, L.C., and Ronnie and Nancy Haese, on behalf of themselves individually and on behalf of the Class as defined in such Agreement, filed as Exhibit 10.29 to the annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .28 | Credit and Guarantee Agreement dated as of August 12, 2003 among Block Financial Corporation, H&R Block, Inc., The Royal Bank of Scotland PLC, Bank of America, N.A., JPMorgan Chase Bank, J.P. Morgan Securities, Inc. and other lending parties thereto, filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended July 31, 2003, file number 1-6089, is incorporated herein by reference. | ||
10 | .29 | Settlement Agreement dated January 8, 2004 between (a) Herbert Dicker; HBD, Inc.; Robert Hildorf; RKL, Inc.; Ray Jiruska; HRB, LLC; RLJ Enterprises, Inc.; DFJ Enterprises, Inc.; RRJ Enterprises, Inc.; DEJ Enterprises, Inc.; Moore Business Service, Inc.; T.J. Enterprises, Inc.; Block Mountain West, Inc.; Orr Enterprises Limited Partnership; S.E. Iowa Business Services, Inc.; Taxsavers, Inc.; and JBW Limited Partnership and (b) H&R Block, Inc.; Block Financial Corporation; HRB Royalty, Inc.; H&R Block Tax Services, Inc.; and H&R Block Eastern Tax Services, Inc., filed as Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended January 31, 2004, file number 1-6089, is incorporated herein by reference. |
* | Indicates management contracts, compensatory plans or arrangements. |
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2004, 2003 AND 2002
Additions | |||||||||||||||||||||||
Balance at | Charged to | ||||||||||||||||||||||
Beginning of | Costs and | Charged to | Balance at End | ||||||||||||||||||||
Description | Period | Expenses | Other | Deductions | of Period | ||||||||||||||||||
Allowance for Doubtful Accounts – deducted from accounts receivable in the balance sheet | |||||||||||||||||||||||
2004 | $ | 23,941,000 | $ | 53,663,000 | — | $ | 23,083,000 | $ | 54,521,000 | ||||||||||||||
2003 | $ | 65,842,000 | $ | 49,748,000 | — | $ | 91,649,000 | $ | 23,941,000 | ||||||||||||||
2002 | $ | 48,817,000 | $ | 76,804,000 | — | $ | 59,779,000 | $ | 65,842,000 | ||||||||||||||
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Report of Independent Registered Public Accounting Firm on Schedule
To the Board of Directors and Stockholders of H&R Block, Inc.:
Under date of June 9, 2004, we reported on the consolidated balance sheet of H&R Block, Inc. (the Company) as of April 30, 2004, and the related consolidated income statement, statement of cash flows and statement of stockholders’ equity for the year then ended, which are included in the Company’s annual report filed on Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related financial statement schedule for the year ended April 30, 2004 included in the Form 10-K. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The audit report on the consolidated financial statements of H&R Block, Inc. referred to above contains an explanatory paragraph stating that as discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting to adopt Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments,” Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” during the year ended April 30, 2004.
/s/ KPMG LLP
Kansas City, Missouri
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Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
To the Board of Directors of H&R Block, Inc.:
Our audits of the consolidated financial statements referred to in our report dated June 10, 2003 appearing in the 2004 Annual Report to Shareholders of H&R Block, Inc. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K for the years ended April 30, 2003 and 2002. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri