e10vq
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
|
|
|
(Mark One)
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|
[X]
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|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended January 31, 2008
|
OR
|
[ ]
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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|
For the transition period
from to
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Commission file
number 1-6089
H&R
Block, Inc.
(Exact name of registrant as
specified in its charter)
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MISSOURI
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|
44-0607856
|
(State or other jurisdiction
of
incorporation or organization)
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|
(I.R.S. Employer
Identification No.)
|
One
H&R Block Way
Kansas
City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes Ö No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer Ö
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Accelerated filer
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Non-accelerated filer
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Smaller Reporting company
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|
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
No Ö
The number of shares outstanding of the registrants Common
Stock, without par value, at the close of business on
February 29, 2008 was 325,369,713 shares.
Form 10-Q
for the Period Ended January 31, 2008
Table of
Contents
CONDENSED
CONSOLIDATED BALANCE
SHEETS (amounts
in 000s, except share and per share amounts)
|
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|
|
|
|
|
|
|
|
|
January 31,
2008
|
|
|
April 30,
2007
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|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,410,009
|
|
|
$
|
921,838
|
|
Cash and cash equivalents restricted
|
|
|
326,289
|
|
|
|
332,646
|
|
Receivables from customers, brokers, dealers and clearing
organizations, less allowance for doubtful accounts of $2,362
and $2,292
|
|
|
414,089
|
|
|
|
410,522
|
|
Receivables, less allowance for doubtful accounts of
$82,465 and $99,259
|
|
|
2,711,295
|
|
|
|
556,255
|
|
Prepaid expenses and other current assets
|
|
|
258,666
|
|
|
|
208,564
|
|
Assets of discontinued operations, held for sale
|
|
|
3,010,999
|
|
|
|
1,746,959
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,131,347
|
|
|
|
4,176,784
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, less allowance for
loan losses of $15,860 and $3,448
|
|
|
1,040,854
|
|
|
|
1,358,222
|
|
Property and equipment, at cost less accumulated depreciation
and amortization of $651,576 and $647,151
|
|
|
391,265
|
|
|
|
379,066
|
|
Intangible assets, net
|
|
|
154,163
|
|
|
|
181,413
|
|
Goodwill
|
|
|
1,010,721
|
|
|
|
993,919
|
|
Other assets
|
|
|
846,861
|
|
|
|
454,646
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,575,211
|
|
|
$
|
7,544,050
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities:
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|
|
|
|
|
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Short-term borrowings
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$
|
1,711,485
|
|
|
$
|
1,567,082
|
|
Customer banking deposits
|
|
|
1,958,490
|
|
|
|
1,129,263
|
|
Accounts payable to customers, brokers and dealers
|
|
|
593,732
|
|
|
|
633,189
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|
Accounts payable, accrued expenses and other current liabilities
|
|
|
525,882
|
|
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|
519,372
|
|
Accrued salaries, wages and payroll taxes
|
|
|
280,824
|
|
|
|
307,854
|
|
Accrued income taxes
|
|
|
78,547
|
|
|
|
439,472
|
|
Current portion of long-term debt
|
|
|
8,332
|
|
|
|
9,304
|
|
Liabilities of discontinued operations, held for sale
|
|
|
2,513,311
|
|
|
|
615,373
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,670,603
|
|
|
|
5,220,909
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,917,411
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|
|
|
519,807
|
|
Other noncurrent liabilities
|
|
|
523,265
|
|
|
|
388,835
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,111,279
|
|
|
|
6,129,551
|
|
|
|
|
|
|
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|
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Commitments and contingencies
|
|
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|
|
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Stockholders equity:
|
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|
|
|
|
|
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Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, 435,890,796 shares
issued at
January 31, 2008 and April 30, 2007
|
|
|
4,359
|
|
|
|
4,359
|
|
Additional paid-in capital
|
|
|
685,013
|
|
|
|
676,766
|
|
Accumulated other comprehensive income (loss)
|
|
|
(348
|
)
|
|
|
(1,320
|
)
|
Retained earnings
|
|
|
1,887,466
|
|
|
|
2,886,440
|
|
Less cost of 110,566,917 and 112,671,610 shares of
common stock in treasury
|
|
|
(2,112,558
|
)
|
|
|
(2,151,746
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
463,932
|
|
|
|
1,414,499
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
11,575,211
|
|
|
$
|
7,544,050
|
|
|
|
|
|
|
|
|
|
|
See Notes to
Condensed Consolidated Financial Statements
1
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF
INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
(unaudited,
amounts in 000s,
except per share amounts)
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Three Months Ended
January 31,
|
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|
Nine Months Ended
January 31,
|
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|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
776,411
|
|
|
$
|
749,000
|
|
|
$
|
1,471,891
|
|
|
$
|
1,399,738
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
58,655
|
|
|
|
35,961
|
|
|
|
140,092
|
|
|
|
91,646
|
|
Product and other revenues
|
|
|
137,545
|
|
|
|
146,218
|
|
|
|
176,661
|
|
|
|
178,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
972,611
|
|
|
|
931,179
|
|
|
|
1,788,644
|
|
|
|
1,670,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
604,153
|
|
|
|
576,935
|
|
|
|
1,416,286
|
|
|
|
1,339,714
|
|
Cost of other revenues
|
|
|
97,293
|
|
|
|
69,324
|
|
|
|
199,628
|
|
|
|
113,104
|
|
Selling, general and administrative
|
|
|
269,019
|
|
|
|
253,968
|
|
|
|
595,719
|
|
|
|
566,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
970,465
|
|
|
|
900,227
|
|
|
|
2,211,633
|
|
|
|
2,018,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,146
|
|
|
|
30,952
|
|
|
|
(422,989
|
)
|
|
|
(348,797
|
)
|
Interest expense
|
|
|
(624
|
)
|
|
|
(12,066
|
)
|
|
|
(1,871
|
)
|
|
|
(36,292
|
)
|
Other income, net
|
|
|
2,597
|
|
|
|
3,239
|
|
|
|
21,663
|
|
|
|
14,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
|
4,119
|
|
|
|
22,125
|
|
|
|
(403,197
|
)
|
|
|
(370,468
|
)
|
Income taxes (benefit)
|
|
|
(5,165
|
)
|
|
|
181
|
|
|
|
(166,553
|
)
|
|
|
(153,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
9,284
|
|
|
|
21,944
|
|
|
|
(236,644
|
)
|
|
|
(216,892
|
)
|
Net loss from discontinued operations
|
|
|
(56,642
|
)
|
|
|
(82,196
|
)
|
|
|
(615,565
|
)
|
|
|
(131,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(47,358
|
)
|
|
$
|
(60,252
|
)
|
|
$
|
(852,209
|
)
|
|
$
|
(348,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
(0.73
|
)
|
|
$
|
(0.67
|
)
|
Net loss from discontinued operations
|
|
|
(0.18
|
)
|
|
|
(0.26
|
)
|
|
|
(1.90
|
)
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.15
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
325,074
|
|
|
|
322,350
|
|
|
|
324,544
|
|
|
|
322,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
(0.73
|
)
|
|
$
|
(0.67
|
)
|
Net loss from discontinued operations
|
|
|
(0.17
|
)
|
|
|
(0.25
|
)
|
|
|
(1.90
|
)
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.14
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
327,202
|
|
|
|
326,048
|
|
|
|
324,544
|
|
|
|
322,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.143
|
|
|
$
|
0.135
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(47,358
|
)
|
|
$
|
(60,252
|
)
|
|
$
|
(852,209
|
)
|
|
$
|
(348,089
|
)
|
Change in unrealized gain (loss) on available-for-sale
securities, net
|
|
|
381
|
|
|
|
(14,350
|
)
|
|
|
1,544
|
|
|
|
(15,194
|
)
|
Change in foreign currency translation adjustments
|
|
|
(1,860
|
)
|
|
|
(268
|
)
|
|
|
(572
|
)
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(48,837
|
)
|
|
$
|
(74,870
|
)
|
|
$
|
(851,237
|
)
|
|
$
|
(363,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to
Condensed Consolidated Financial Statements
2
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(unaudited,
amounts in 000s)
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(852,209
|
)
|
|
$
|
(348,089
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
107,989
|
|
|
|
110,822
|
|
Stock-based compensation expense
|
|
|
32,988
|
|
|
|
28,826
|
|
Change in participation in tax client loans receivable
|
|
|
(1,693,506
|
)
|
|
|
(1,691,351
|
)
|
Changes in assets and liabilities of discontinued operations
|
|
|
(100,727
|
)
|
|
|
593,989
|
|
Other, net of business acquisitions
|
|
|
(862,500
|
)
|
|
|
(1,433,602
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,367,965
|
)
|
|
|
(2,739,405
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Mortgage loans originated or purchased for investment, net
|
|
|
106,721
|
|
|
|
(1,073,012
|
)
|
Purchases of property and equipment, net
|
|
|
(80,712
|
)
|
|
|
(127,325
|
)
|
Payments made for business acquisitions, net of cash acquired
|
|
|
(23,835
|
)
|
|
|
(21,679
|
)
|
Net cash provided by investing activities of discontinued
operations
|
|
|
913
|
|
|
|
12,751
|
|
Other, net
|
|
|
8,280
|
|
|
|
(9,422
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
11,367
|
|
|
|
(1,218,687
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
(5,125,279
|
)
|
|
|
(4,901,618
|
)
|
Proceeds from issuance of commercial paper
|
|
|
4,133,197
|
|
|
|
6,397,656
|
|
Repayments of line of credit borrowings
|
|
|
(2,161,177
|
)
|
|
|
(889,722
|
)
|
Proceeds from line of credit borrowings
|
|
|
5,097,662
|
|
|
|
2,320,105
|
|
Proceeds from issuance of Senior Notes
|
|
|
599,376
|
|
|
|
-
|
|
Customer deposits, net
|
|
|
828,872
|
|
|
|
1,632,875
|
|
Dividends paid
|
|
|
(137,049
|
)
|
|
|
(128,090
|
)
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
(180,897
|
)
|
Proceeds from exercise of stock options
|
|
|
14,527
|
|
|
|
19,183
|
|
Net cash provided by financing activities of discontinued
operations
|
|
|
644,173
|
|
|
|
172,201
|
|
Other, net
|
|
|
(49,533
|
)
|
|
|
(79,244
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,844,769
|
|
|
|
4,362,449
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
488,171
|
|
|
|
404,357
|
|
Cash and cash equivalents at beginning of the period
|
|
|
921,838
|
|
|
|
673,827
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
1,410,009
|
|
|
$
|
1,078,184
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow data:
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds received of $89,865 and $3,154
|
|
$
|
(55,975
|
)
|
|
$
|
378,377
|
|
Interest paid on borrowings
|
|
|
129,694
|
|
|
|
84,164
|
|
Interest paid on deposits
|
|
|
39,498
|
|
|
|
19,088
|
|
See Notes to
Condensed Consolidated Financial Statements
3
|
|
CONDENSED
CONSOLIDATED STATEMENT OF
STOCKHOLDERS EQUITY |
(unaudited,
amounts in 000s,
except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
|
Balances at April 30, 2006
|
|
|
435,891
|
|
|
$
|
4,359
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
653,053
|
|
|
$
|
21,948
|
|
|
$
|
3,492,059
|
|
|
|
(107,378
|
)
|
|
$
|
(2,023,620
|
)
|
|
$
|
2,147,799
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(348,089
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(348,089
|
)
|
Unrealized translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
221
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
221
|
|
Change in net unrealized gain (loss) on available-for-sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,194
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,194
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,669
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,669
|
|
Shares issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,010
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,246
|
|
|
|
23,763
|
|
|
|
16,753
|
|
Nonvested shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,332
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,041
|
|
|
|
19,826
|
|
|
|
(506
|
)
|
ESPP
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
863
|
|
|
|
-
|
|
|
|
-
|
|
|
|
465
|
|
|
|
8,860
|
|
|
|
9,723
|
|
Acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
396
|
|
|
|
450
|
|
Acquisition of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,466
|
)
|
|
|
(188,562
|
)
|
|
|
(188,562
|
)
|
Cash dividends paid $0.40 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(128,090
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(128,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 31, 2007
|
|
|
435,891
|
|
|
$
|
4,359
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
662,297
|
|
|
$
|
6,975
|
|
|
$
|
3,015,880
|
|
|
|
(113,071
|
)
|
|
$
|
(2,159,337
|
)
|
|
$
|
1,530,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at April 30, 2007
|
|
|
435,891
|
|
|
$
|
4,359
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
676,766
|
|
|
$
|
(1,320
|
)
|
|
$
|
2,886,440
|
|
|
|
(112,672
|
)
|
|
$
|
(2,151,746
|
)
|
|
$
|
1,414,499
|
|
Remeasurement of uncertain tax positions upon adoption of
FIN 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,716
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,716
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(852,209
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(852,209
|
)
|
Unrealized translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(572
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(572
|
)
|
Change in net unrealized gain (loss) on available-for-sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,544
|
|
Stock-based compensation-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,150
|
|
Shares issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,815
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,072
|
|
|
|
20,478
|
|
|
|
11,663
|
|
Nonvested shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,058
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
938
|
|
|
|
17,917
|
|
|
|
(2,141
|
)
|
ESPP
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
412
|
|
|
|
7,872
|
|
|
|
7,807
|
|
Acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
158
|
|
|
|
193
|
|
Acquisition of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(325
|
)
|
|
|
(7,237
|
)
|
|
|
(7,237
|
)
|
Cash dividends paid $0.42 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(137,049
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(137,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 31, 2008
|
|
|
435,891
|
|
|
$
|
4,359
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
685,013
|
|
|
$
|
(348
|
)
|
|
$
|
1,887,466
|
|
|
|
(110,567
|
)
|
|
$
|
(2,112,558
|
)
|
|
$
|
463,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to
Condensed Consolidated Financial Statements
4
|
|
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited)
|
The condensed consolidated balance sheet as of January 31,
2008, the condensed consolidated statements of income and
comprehensive income for the three and nine months ended
January 31, 2008 and 2007, the condensed consolidated
statements of cash flows for the nine months ended
January 31, 2008 and 2007, and the condensed consolidated
statement of stockholders equity for the nine months ended
January 31, 2008 and 2007 have been prepared by the
Company, without audit. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position, results of
operations, cash flows and changes in stockholders equity
at January 31, 2008 and for all periods presented have been
made. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.
H&R Block, the Company,
we, our and us are used
interchangeably to refer to H&R Block, Inc. or to H&R
Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in our April 30, 2007
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2007 or for
the year then ended, are derived from our April 30, 2007
Annual Report to Shareholders on
Form 10-K.
Operating revenues of the Tax Services and Business Services
segments are seasonal in nature with peak revenues occurring in
the months of January through April. Therefore, results for
interim periods are not indicative of results to be expected for
the full year.
Discontinued
Operations Recent Developments
On April 19, 2007, we entered into an agreement to sell
Option One Mortgage Corporation (OOMC) to Cerberus Capital
Management (Cerberus). In conjunction with this plan, we also
announced we would terminate the operations of H&R Block
Mortgage Corporation (HRBMC), a wholly-owned subsidiary of OOMC.
On December 4, 2007, we agreed to terminate the agreement
with Cerberus. We also announced that we would immediately
terminate all remaining origination activities and pursue the
sale of OOMCs loan servicing activities. During January
2008, OOMC funded the last loan in its pipeline.
We have estimated the fair values of our servicing and other
assets held for sale, and have recorded a valuation allowance of
$304.9 million at January 31, 2008, which resulted in
impairments of $116.3 million for the nine months ended
January 31, 2008.
During fiscal year 2007, we also committed to a plan to sell two
smaller lines of business and completed the wind-down of one
other line of business, all of which were previously reported in
our Business Services segment. One of these businesses was sold
during the nine months ended January 31, 2008.
Additionally, during fiscal year 2007, we completed the
wind-down of our tax operations in the United Kingdom, which
were previously reported in Tax Services.
As of January 31, 2008, these businesses are presented as
discontinued operations and the assets and liabilities of the
businesses being sold are presented as held-for-sale in the
condensed consolidated financial statements. All periods
presented have been reclassified to reflect our discontinued
operations. See additional information in note 12.
5
|
|
2.
|
Earnings (Loss)
Per Share
|
Basic and diluted earnings (loss) per share is computed using
the weighted average shares outstanding during each period. The
dilutive effect of potential common shares is included in
diluted earnings per share except in those periods with a loss
from continuing operations. The computations of basic and
diluted earnings (loss) per share from continuing operations are
as follows:
(in
000s, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
January 31,
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
|
2007
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
9,284
|
|
$
|
21,944
|
|
$
|
(236,644
|
)
|
|
$
|
(216,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
325,074
|
|
|
322,350
|
|
|
324,544
|
|
|
|
322,588
|
|
Potential dilutive shares from stock options and restricted stock
|
|
|
2,126
|
|
|
3,696
|
|
|
-
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
2
|
|
|
2
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average common shares
|
|
|
327,202
|
|
|
326,048
|
|
|
324,544
|
|
|
|
322,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.07
|
|
$
|
(0.73
|
)
|
|
$
|
(0.67
|
)
|
Diluted
|
|
|
0.03
|
|
|
0.07
|
|
|
(0.73
|
)
|
|
|
(0.67
|
)
|
|
|
Diluted earnings per share excludes the impact of nonvested
common shares or the exercise of options to purchase
18.0 million shares and 14.4 million shares for the
three months ended January 31, 2008 and 2007, respectively,
as the effect would be antidilutive. Diluted earnings per share
excludes the impact of nonvested common shares or the exercise
of options to purchase 24.8 million shares and
28.0 million shares for the nine months ended
January 31, 2008 and 2007, respectively, as the effect
would be antidilutive due to the net loss from continuing
operations during each period.
The weighted average shares outstanding for the nine months
ended January 31, 2008 increased to 324.5 million from
322.6 million for the nine months ended January 31,
2007, primarily due the issuance of treasury shares related to
our stock-based compensation plans.
During the nine months ended January 31, 2008 and 2007, we
issued 2.4 million and 2.8 million shares of common
stock, respectively, pursuant to the exercise of stock options,
employee stock purchases and awards of nonvested shares, in
accordance with our stock-based compensation plans.
During the nine months ended January 31, 2008, we acquired
0.3 million shares of our common stock, which represent
shares swapped or surrendered to us in connection with the
vesting of nonvested shares and the exercise of stock options,
at an aggregate cost of $7.2 million. During the nine
months ended January 31, 2007, we acquired 8.5 million
shares of our common stock, of which 8.1 million shares
were purchased from third parties with the remaining shares
swapped or surrendered to us, at an aggregate cost of
$188.6 million.
During the nine months ended January 31, 2008, we granted
5.1 million stock options and 1.0 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$4.48 for manager and director options and $3.07 for options
granted to our seasonal associates. At January 31, 2008,
the total unrecognized compensation cost for options and
nonvested shares and units was $19.1 million and
$45.1 million, respectively.
6
Receivables of continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
January 31,
2008
|
|
|
January 31,
2007
|
|
|
April 30,
2007
|
|
|
|
|
Participation in tax client loans
|
|
$
|
1,763,030
|
|
|
$
|
1,733,155
|
|
|
$
|
69,524
|
|
Emerald Advance lines of credit
|
|
|
361,263
|
|
|
|
-
|
|
|
|
-
|
|
Business Services accounts receivable
|
|
|
257,010
|
|
|
|
324,399
|
|
|
|
342,387
|
|
Receivables for tax-related fees
|
|
|
117,328
|
|
|
|
135,467
|
|
|
|
40,164
|
|
Loans to franchisees
|
|
|
71,349
|
|
|
|
62,962
|
|
|
|
48,530
|
|
Royalties from franchisees
|
|
|
68,573
|
|
|
|
68,153
|
|
|
|
2,890
|
|
Other
|
|
|
155,207
|
|
|
|
118,223
|
|
|
|
152,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,793,760
|
|
|
|
2,442,359
|
|
|
|
655,514
|
|
Allowance for doubtful accounts
|
|
|
(82,465
|
)
|
|
|
(70,621
|
)
|
|
|
(99,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,711,295
|
|
|
$
|
2,371,738
|
|
|
$
|
556,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Goodwill and
Intangible Assets
|
Changes in the carrying amount of goodwill of continuing
operations for the nine months ended January 31, 2008
consist of the following:
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2007
|
|
Additions
|
|
Other
|
|
|
January 31,
2008
|
|
|
Tax Services
|
|
$
|
415,077
|
|
$
|
14,515
|
|
$
|
6,529
|
|
|
$
|
436,121
|
Business Services
|
|
|
404,888
|
|
|
1,497
|
|
|
(5,739
|
)
|
|
|
400,646
|
Consumer Financial Services
|
|
|
173,954
|
|
|
-
|
|
|
-
|
|
|
|
173,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
993,919
|
|
$
|
16,012
|
|
$
|
790
|
|
|
$
|
1,010,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur indicating it
is more likely than not the fair value of a reporting
units net assets has been reduced below its carrying
value. No impairments of goodwill were identified within any of
our operating segments during the nine months ended
January 31, 2008.
Intangible assets of continuing operations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
January 31, 2008
|
|
April 30, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
|
|
|
|
Amount
|
|
Amortization
|
|
|
Net
|
|
Amount
|
|
Amortization
|
|
|
Net
|
|
|
Tax Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
46,654
|
|
$
|
(20,756
|
)
|
|
$
|
25,898
|
|
$
|
39,347
|
|
$
|
(14,654
|
)
|
|
$
|
24,693
|
Noncompete agreements
|
|
|
23,027
|
|
|
(19,691
|
)
|
|
|
3,336
|
|
|
21,237
|
|
|
(18,279
|
)
|
|
|
2,958
|
Purchased technology
|
|
|
12,500
|
|
|
(1,794
|
)
|
|
|
10,706
|
|
|
12,500
|
|
|
-
|
|
|
|
12,500
|
Trade name
|
|
|
1,025
|
|
|
(92
|
)
|
|
|
933
|
|
|
1,025
|
|
|
-
|
|
|
|
1,025
|
Business Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
144,107
|
|
|
(97,215
|
)
|
|
|
46,892
|
|
|
142,315
|
|
|
(90,900
|
)
|
|
|
51,415
|
Noncompete agreements
|
|
|
32,253
|
|
|
(16,891
|
)
|
|
|
15,362
|
|
|
31,352
|
|
|
(15,524
|
)
|
|
|
15,828
|
Trade name amortizing
|
|
|
3,290
|
|
|
(3,023
|
)
|
|
|
267
|
|
|
3,290
|
|
|
(2,430
|
)
|
|
|
860
|
Trade name
non-amortizing
|
|
|
55,637
|
|
|
(4,868
|
)
|
|
|
50,769
|
|
|
55,637
|
|
|
(4,868
|
)
|
|
|
50,769
|
Consumer Financial Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
293,000
|
|
|
(293,000
|
)
|
|
|
-
|
|
|
293,000
|
|
|
(271,635
|
)
|
|
|
21,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
611,493
|
|
$
|
(457,330
|
)
|
|
$
|
154,163
|
|
$
|
599,703
|
|
$
|
(418,290
|
)
|
|
$
|
181,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets of continuing operations for
the three and nine months ended January 31, 2008 was
$8.6 million and $39.1 million, respectively.
Amortization of intangible assets of continuing operations for
the three and nine months ended January 31, 2007 was
$14.0 million and $42.6 million, respectively.
Estimated amortization of intangible assets for fiscal years
2008 through 2012 is $48.4 million, $21.9 million,
$19.3 million, $17.5 million and $14.8 million,
respectively.
7
Borrowings of continuing operations consist of the following:
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
2008
|
|
January 31,
2007
|
|
April 30,
2007
|
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
HSBC credit facility
|
|
$
|
1,683,317
|
|
$
|
1,430,383
|
|
$
|
-
|
Other credit facilities
|
|
|
28,168
|
|
|
-
|
|
|
500,000
|
Commercial paper
|
|
|
-
|
|
|
1,496,038
|
|
|
992,082
|
FHLB advances
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,711,485
|
|
$
|
2,926,421
|
|
$
|
1,567,082
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
CLOC borrowings, due August 2010
|
|
$
|
1,800,000
|
|
$
|
-
|
|
$
|
-
|
Senior Notes, 7.875%, due January 2013
|
|
|
599,383
|
|
|
-
|
|
|
-
|
Senior Notes, 5.125%, due October 2014
|
|
|
398,412
|
|
|
398,177
|
|
|
398,236
|
FHLB borrowings, due April 2009
|
|
|
104,000
|
|
|
-
|
|
|
104,000
|
Senior Notes,
81/2%,
due April 2007
|
|
|
-
|
|
|
499,875
|
|
|
-
|
Other
|
|
|
23,948
|
|
|
27,861
|
|
|
26,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,925,743
|
|
|
925,913
|
|
|
529,111
|
Less: Current portion
|
|
|
8,332
|
|
|
509,730
|
|
|
9,304
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,917,411
|
|
$
|
416,183
|
|
$
|
519,807
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2008, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These unsecured committed
lines of credit (CLOCs), and outstanding borrowings thereunder,
have a maturity date of August 2010 and an annual facility fee
in a range of six to fifteen basis points per annum, based on
our credit ratings. We had a combined $1.8 billion
outstanding as of January 31, 2008. These borrowings are
included in long-term debt on our condensed consolidated balance
sheet due to their contractual maturity date. The CLOCs, among
other things, require we maintain at least $650.0 million
of adjusted net worth, as defined in the agreement, on the last
day of any fiscal quarter. On November 19, 2007, the CLOCs
were amended to, among other things, require $450.0 million
of adjusted net worth, for the fiscal quarters ending
October 31, 2007 and January 31, 2008. We had adjusted
net worth of $463.9 million at January 31, 2008.
In April 2007, we obtained a $500.0 million credit facility
to provide funding for $500.0 million of
81/2% Senior
Notes which were due April 16, 2007. This facility matured
on December 20, 2007, but was amended to extend the term of
the facility. Under the amended facility, $250.0 million
will mature on February 29, 2008 and $250.0 million
will mature on April 30, 2008. The facility is subject to
various covenants that are similar to our primary CLOCs. At
January 31, 2008, the balance under this facility was
$28.2 million, having been substantially repaid with the
proceeds of our Senior Notes as discussed below. This facility
was completely repaid as of February 15, 2008.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013, and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay
$471.8 million of the $500.0 million facility
discussed above, with the remaining proceeds used for working
capital and general corporate purposes. As of January 31,
2008, we had $250.0 million remaining under our shelf
registration for additional debt issuances.
We entered into a committed line of credit agreement with HSBC
Finance Corporation effective January 10, 2008 for use as a
funding source for the purchase of refund anticipation loan
(RAL) participations. This line will make available funding
totaling $3.0 billion through March 30, 2008 and
$120.0 million thereafter through June 30, 2008. This
line is subject to various covenants that are similar to our
amended CLOCs, and is secured by our RAL participations. At
January 31, 2008, there was $1.7 billion outstanding
on this facility.
H&R Block Bank (HRB Bank) is a member of the Federal Home
Loan Bank (FHLB) of Des Moines, which extends credit to member
banks based on eligible collateral. At January 31, 2008,
HRB Bank had FHLB advance capacity of $523.6 million, and
there was $104.0 million outstanding on this facility.
Mortgage loans held for investment of $940.0 million were
pledged as collateral on these advances.
8
In June 2006, FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48) was
issued. The interpretation clarifies the accounting for
uncertainty in income taxes recognized in a companys
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. The
interpretation prescribes a recognition threshold and
measurement attribute criteria for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. The interpretation also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
We adopted the provisions of FIN 48 on May 1, 2007
and, as a result, recognized a $9.7 million decrease to
retained earnings as of May 1, 2007. Total unrecognized tax
benefits as of May 1, 2007 were $133.3 million, of
which $89.0 million, on a gross basis, were tax positions
that, if recognized, would impact the effective tax rate. Net
unrecognized tax benefits that would impact the effective tax
rate totaled $50.0 million as of May 1, 2007.
We recognize interest and, if applicable, penalties related to
unrecognized tax benefits as a component of income tax expense.
As of May 1, 2007 we accrued $36.6 million for the
potential payment of interest and penalties. Interest was
estimated by applying the applicable statutory rate of interest
of each of the jurisdictions identified on uncertain tax
positions.
During the nine months ended January 31, 2008, we accrued
an additional $2.1 million of interest &
penalties related to our uncertain tax positions. As of
January 31, 2008 we had unrecognized tax benefits of
$135.5 million. The primary change during the quarter was
related to the expiration of statutes of limitations for various
jurisdictions during the quarter. We have classified the
liability for unrecognized tax benefits, including corresponding
accrued interest, as long-term at January 31, 2008, which
is included in other noncurrent liabilities on the condensed
consolidated balance sheet. Amounts that we expect to pay within
the next twelve months have been included in accounts payable,
accrued expenses and other current liabilities on the condensed
consolidated balance sheet.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the total amount of previously
unrecognized tax benefits may decrease by approximately
$15 million to $16 million within twelve months of
January 31, 2008.
We file a consolidated federal tax return in the United States
and income tax returns in various state and foreign
jurisdictions. We are no longer subject to U.S. federal
income tax audits for years before 1999. The U.S. federal
audit for years 1999 through 2003 is in its final stages. The
Internal Revenue Service (IRS) has commenced an audit for the
years 2004 and 2005. With respect to our Canadian operations,
audits for tax years 1996 through 2001 have been completed and
are in the final stages, and tax years 2002 and 2003 are
currently under audit. With respect to state and local
jurisdictions, with limited exceptions, H&R Block, Inc. and
its subsidiaries are no longer subject to income tax audits for
years before 1999.
|
|
7.
|
Regulatory
Requirements
|
Registered
Broker-Dealer
H&R Block Financial Advisors, Inc. (HRBFA) is subject to
regulatory requirements intended to ensure the general financial
soundness and liquidity of broker-dealers. At January 31,
2008, HRBFAs net capital of $80.1 million, which was
18.2% of aggregate debit items, exceeded its minimum required
net capital of $8.8 million by $71.3 million. During
the nine months ended January 31, 2008, HRBFA paid
dividends of $44.5 million to Block Financial LLC (BFC),
its direct corporate parent.
HRBFA had pledged customer-owned securities with a fair value of
$47.1 million at January 31, 2008 with a clearing
organization to satisfy margin deposit requirements of
$38.5 million.
9
Banking
HRB Bank and the Company are subject to various regulatory
capital guidelines and requirements administered by federal
banking agencies. Failure to meet minimum capital requirements
can trigger certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could
have a direct material effect on HRB Bank and the consolidated
financial statements. All savings associations are subject to
the capital adequacy guidelines and the regulatory framework for
prompt corrective action. HRB Bank must meet specific capital
guidelines that involve quantitative measures of HRB Banks
assets, liabilities and certain off-balance sheet items, as
calculated under regulatory accounting practices. HRB
Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components,
risk weightings and other factors. HRB Bank files its regulatory
Thrift Financial Report (TFR) on a calendar quarter basis.
Quantitative measures established by regulation to ensure
capital adequacy require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and
Tier 1 capital, as set forth in the table below. In
addition to these minimum ratio requirements, HRB Bank is
required to continually maintain a 12.0% minimum leverage ratio
as a condition of its charter-approval order through fiscal year
2009. This condition was extended through fiscal year 2012 as a
result of a Supervisory Directive issued on May 29, 2007.
See further discussion of the Supervisory Directive below. As of
January 31, 2008, HRB Banks leverage ratio was 12.0%.
As of December 31, 2007, our most recent TFR filing with
the Office of Thrift Supervision (OTS), HRB Bank was a
well capitalized institution under the prompt
corrective action provisions of the Federal Deposit Insurance
Corporation (FDIC). The five capital categories are:
(1) well capitalized (total risk-based capital
ratio of 10%, Tier 1 Risk-based capital ratio of 6% and
leverage ratio of 5%); (2) adequately
capitalized; (3) undercapitalized;
(4) significantly undercapitalized; and
(5) critically undercapitalized. There are no
conditions or events since December 31, 2007 that
management believes have changed HRB Banks category.
The following table sets forth HRB Banks regulatory
capital requirements at December 31, 2007, as calculated in
the most recently filed TFR:
(dollars
in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
Under Prompt
|
|
|
|
|
For Capital
Adequacy
|
|
Corrective Action
|
|
|
Actual
|
|
Purposes
|
|
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
Total risk-based capital
ratio(1)
|
|
$
|
194,188
|
|
|
21.6%
|
|
$
|
71,881
|
|
|
8.0%
|
|
$
|
89,851
|
|
|
10.0%
|
Tier 1 risk-based capital
ratio(2)
|
|
$
|
182,943
|
|
|
20.4%
|
|
|
n/a
|
|
|
n/a
|
|
$
|
53,910
|
|
|
6.0%
|
Tier 1 capital ratio
(leverage)(3)
|
|
$
|
182,943
|
|
|
12.2%
|
|
$
|
179,555
|
|
|
12.0%
|
|
$
|
74,814
|
|
|
5.0%
|
Tangible equity
ratio(4)
|
|
$
|
182,943
|
|
|
12.2%
|
|
$
|
22,444
|
|
|
1.5%
|
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
(1)
|
Total risk-based
capital divided by risk-weighted assets.
|
|
(2)
|
Tier 1 (core)
capital less deduction for low-level recourse and residual
interest divided by risk-weighted assets.
|
|
(3)
|
Tier 1 (core)
capital divided by adjusted total assets.
|
|
(4)
|
Tangible capital
divided by tangible assets.
|
BFC made an additional capital contribution to HRB Bank of
$107.1 million during the three months ended
January 31, 2008. This contribution was necessary for HRB
Bank to meet its capital requirements due to seasonal
fluctuations in its balance sheet. Also during the three months
ended January 31, 2008, we submitted an application to the
OTS requesting that HRB Bank be allowed to pay dividends to BFC
in an amount that will not exceed the capital necessary to
continuously maintain HRB Banks required 12.0% leverage
ratio. The OTS approved our application on February 29,
2008.
In conjunction with H&R Block, Inc.s application with
the OTS for HRB Bank, H&R Block, Inc. made commitments as
part of our charter approval order (Master Commitment) which
included, but were not limited to: (1) H&R Block, Inc.
to maintain a three percent minimum ratio of adjusted tangible
capital to adjusted total assets, as defined by the OTS;
(2) maintain all HRB Bank capital within HRB Bank in
accordance with the submitted three-year business plan; and
(3) follow federal regulations surrounding
10
intercompany transactions and approvals. H&R Block, Inc.
fell below the three percent minimum ratio at April 30,
2007 and the OTS issued a Supervisory Directive.
The Supervisory Directive included additional conditions that we
will be required to meet in addition to the Master Commitment.
The significant additional conditions included in the
Supervisory Directive are as follows: (1) requires HRB Bank
to extend its compliance with a minimum 12.0% leverage ratio
through fiscal year 2012; (2) requires H&R Block, Inc.
to comply with the Master Commitment at all times, except for
the projected capital levels and compliance with the three
percent minimum ratio, as provided in the fiscal year 2008 and
2009 capital adequacy projections presented to the OTS on
July 19, 2007; (3) institutes reporting requirements
to the OTS quarterly and monthly by the Board of Directors and
management, respectively; and (4) requires HRB Banks
Board of Directors to have an independent chairperson and at
least the same number of outside directors as inside directors.
H&R Block, Inc. continued to be below the three percent
minimum ratio during our third quarter, and had adjusted
tangible capital of negative $713.9 million, and a
requirement of $311.9 million to be in compliance at
January 31, 2008. We are currently seeking the elimination
or modification of the three percent minimum capital requirement
as a result of cessation of our mortgage business. At this time,
we do not expect to be in compliance with the three percent
minimum ratio at April 30, 2008. We currently believe that
upon disposition of our mortgage business the OTS will
reconsider the three percent minimum capital requirement,
although there is no assurance that an elimination or
modification will occur.
Failure to meet the conditions under the Master Commitment and
the Supervisory Directive, including capital levels of H&R
Block, Inc., could result in the OTS taking further regulatory
actions, such as a supervisory agreement,
cease-and-desist
orders and civil monetary penalties. The OTS could also require
us to sell assets, which could negatively impact our financial
results. At this time, the financial impact, if any, of
additional regulatory actions cannot be determined.
|
|
8.
|
Commitments and
Contingencies
|
Changes in the deferred revenue liability related to our Peace
of Mind (POM) program, the current portion of which is included
in accounts payable, accrued expenses and other current
liabilities and the long-term portion of which is included in
other noncurrent liabilities in the condensed consolidated
balance sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance, beginning of period
|
|
$
|
142,173
|
|
|
$
|
141,684
|
|
|
|
Amounts deferred for new guarantees issued
|
|
|
19,672
|
|
|
|
20,971
|
|
|
|
Revenue recognized on previous deferrals
|
|
|
(56,881
|
)
|
|
|
(59,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
104,964
|
|
|
$
|
103,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes certain of our other contractual
obligations and commitments:
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of
|
|
January 31,
2008
|
|
April 30,
2007
|
|
|
|
|
Commitment to fund Franchise Equity
Lines of Credit
|
|
$
|
80,471
|
|
$
|
79,628
|
|
|
Media advertising purchase obligation
|
|
|
28,353
|
|
|
37,749
|
|
|
Contingent business acquisition obligations
|
|
|
31,415
|
|
|
19,891
|
|
|
|
|
On November 1, 2006 we entered into an agreement to
purchase $57.2 million in media advertising between
November 1, 2006 and June 30, 2009. We expect to make
payments totaling $20.6 million and $17.2 million
during fiscal years 2008 and 2009, respectively.
Commitments exist to loan McGladrey & Pullen, LLP
(M&P) the lower of the value of their accounts receivable,
work-in-process
and fixed assets or $125.0 million, on a revolving basis
through January 31, 2011, subject to certain termination
clauses. This revolving facility bears interest at prime rate
plus two percent on the outstanding amount. The loan is fully
secured by the accounts receivable,
work-in-process
and fixed assets of M&P. At January 31, 2008, we had a
receivable from M&P totaling $95.1 million,
$80.0 million of which was assigned to the trust that
administers our deferred compensation plans, as allowed by the
underlying trust arrangement, to fund the estimated liability.
11
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees, including obligations to protect counterparties from
losses arising from the following: (a) tax, legal and other
risks related to the purchase or disposition of businesses;
(b) penalties and interest assessed by Federal and state
taxing authorities in connection with tax returns prepared for
clients; (c) litigation involving our directors and
officers; and (d) third-party claims relating to various
arrangements in the normal course of business. Typically, there
is no stated maximum payment related to these indemnifications,
and the term of indemnities may vary and in many cases is
limited only by the applicable statute of limitations. The
likelihood of any claims being asserted against us and the
ultimate liability related to any such claims, if any, is
difficult to predict. While we cannot provide assurance that
such claims will not be successfully asserted, we believe the
fair value of these guarantees and indemnifications is not
material as of January 31, 2008.
|
|
9.
|
Litigation and
Related Contingencies
|
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things, disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million.
We believe we have meritorious defenses to the remaining RAL
Cases and we intend to defend them vigorously. There can be no
assurances, however, as to the outcome of the pending RAL Cases
individually or in the aggregate. Likewise, there can be no
assurances regarding the impact of the RAL Cases on our
financial statements. There were no significant developments
regarding the RAL Cases during the fiscal quarter ended
January 31, 2008.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (the POM Cases). The POM Cases are described
below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al., Civil Action 2003L000004, in the Circuit Court
of Madison County, Illinois, is a class action case filed on
January 18, 2002, that was granted class certification on
August 27, 2003. Plaintiffs claims consist of five
counts relating to the POM program under which the applicable
tax return preparation subsidiary assumes liability for
additional tax assessments attributable to tax return
preparation error. The plaintiffs allege that the sale of POM
guarantees constitutes (i) statutory fraud by selling
insurance without a license, (ii) an unfair trade practice,
by omission and by cramming (i.e., charging
customers for the guarantee even though they did not request it
or want it), and (iii) a breach of fiduciary duty. In
August 2003, the court certified the plaintiff classes
consisting of all persons who from January 1, 1997 to final
judgment (i) were charged a separate fee for POM by
H&R Block or a defendant H&R Block class
member; (ii) reside in certain class states and were
charged a separate fee for POM by H&R Block or
a defendant H&R Block class member not licensed to sell
insurance; and (iii) had an unsolicited charge for POM
posted to their bills by H&R Block or a
defendant H&R Block class member. Persons who received the
POM guarantee through an H&R Block Premium office and
persons who reside in Alabama are excluded from the plaintiff
class. The court also certified a defendant class consisting of
any entity with names that include H&R Block or
HRB, or are otherwise affiliated or associated with
H&R Block Tax Services, Inc., and that sold or sells the
POM
12
product. The trial court subsequently denied the
defendants motion to certify class certification issues
for interlocutory appeal. Discovery is proceeding. No trial date
has been set.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is being tried
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains similar allegations. No class has been certified in
this case.
We believe the claims in the POM actions are without merit, and
we intend to defend them vigorously. The amounts claimed in the
POM actions are substantial, however, and there can be no
assurances as to the outcome of these pending actions
individually or in the aggregate.
Electronic Filing
Litigation
We are a defendant to a class action filed on August 30,
2002 and entitled Erin M. McNulty and Brian J. Erzar v.
H&R Block, Inc., et al., Case
No. 02-CIV-4654
in the Court of Common Pleas of Lackawanna County, Pennsylvania,
in which the plaintiffs allege that the defendants deceptively
portray electronic filing fees as a necessary and required
component of standard tax preparation services and do not inform
tax preparation clients that they may (i) file tax returns
free of charge by mailing the returns, (ii) electronically
file tax returns from personal computers either free of charge
or at significantly lower fees and (iii) be eligible to
electronically file tax returns free of charge via telephone.
The plaintiffs seek unspecified damages and disgorgement of all
electronic filing, tax preparation and related fees collected
during the applicable class period. Class certification was
granted in this case on September 5, 2007. We believe the
claims in this case are without merit, and we intend to defend
them vigorously, but there can be no assurances as to its
outcome.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) entitled The People of
New York v. H&R Block, Inc. and H&R Block
Financial Advisors, Inc. The complaint alleged fraudulent
business practices, deceptive acts and practices, common law
fraud and breach of fiduciary duty with respect to the Express
IRA product and sought equitable relief, disgorgement of
profits, damages and restitution, civil penalties and punitive
damages. On July 12, 2007, the Supreme Court of the State
of New York issued a ruling that dismissed all defendants other
than H&R Block Financial Advisors, Inc. and the claims of
common law fraud. We believe the claims in this case are without
merit, and we intend to defend this case vigorously, but there
are no assurances as to its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. We believe the claims in this
case are without merit, and we intend to defend this case
vigorously, but there are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against us
concerning the Express IRA matter, the first of which was filed
on March 17, 2006. Except for two cases pending in state
court, all of the civil actions have been consolidated by the
panel for Multi-District Litigation into a single action styled
In re H&R Block, Inc. Express IRA Marketing Litigation
in the United States District Court for the Western District
of Missouri. We believe the claims in this case are without
merit, and we intend to defend these cases vigorously, but there
are no assurances as to their outcome.
Securities Litigation
On April 6, 2007, a putative class action styled In re
H&R Block Securities Litigation was filed against the
Company and certain of its officers in the United States
District Court for the Western District of Missouri. The
complaint alleged, among other things, deceptive, material and
misleading financial statements, failure to prepare financial
statements in accordance with generally accepted accounting
principles and concealment of the potential for lawsuits
stemming from the allegedly fraudulent nature of
13
the Companys operations. The complaint sought unspecified
damages and equitable relief. On October 5, 2007, the court
dismissed the complaint and granted the plaintiffs leave to
re-file the portion of the complaint pertaining to the
Companys financial statements. On November 19, 2007,
the plaintiffs re-filed the complaint, alleging, among other
things, deceptive, material and misleading financial statements
and failure to prepare financial statements in accordance with
generally accepted accounting principles. The court dismissed
the re-filed complaint on February 19, 2008. We believe the
claims in this case are without merit. If the dismissal is
appealed, we intend to defend this litigation vigorously.
HRBFA Litigation
The NASD brought charges against HRBFA regarding the sale by
HRBFA of Enron debentures in 2001. The hearing for this matter
was concluded in August 2007, and post-hearing briefs were
submitted in October 2007. We intend to defend the NASD charges
vigorously, although there can be no assurances regarding the
outcome and resolution of the matter.
RSM McGladrey
Litigation
As part of an industry-wide review, the IRS is investigating
tax-planning strategies that certain RSM McGladrey, Inc. (RSM)
clients utilized during fiscal years 2000 through 2003.
Specifically, the IRS is examining these strategies to determine
whether RSM complied with tax shelter reporting and listing
regulations and whether such strategies were abusive as defined
by the IRS. The IRS has indicated that it will assess a fine
against RSM for RSMs alleged failure to comply with the
tax shelter reporting and listing regulations. RSM is in
discussions with the IRS regarding this penalty. In addition,
some clients that utilized the strategies are seeking recovery
from RSM for penalties and interest for underpayment of taxes.
We believe that the resolution of this matter will not have a
material adverse effect on RSMs operations or on our
consolidated financial statements.
RSM EquiCo, Inc., a subsidiary of RSM, is a party to a putative
class action filed on July 11, 2006 and entitled Do
Rights Plant Growers v. RSM EquiCo, Inc., RSM
McGladrey, Inc., H&R Block, Inc. and Does 1-100,
inclusive, Case No. 06 CC00137, in the California
Superior Court, Orange County. The complaint contains
allegations regarding business valuation services provided by
RSM EquiCo, Inc., including fraud, negligent misrepresentation,
breach of contract, breach of implied covenant of good faith and
fair dealing, breach of fiduciary duty and unfair competition
and seeks unspecified damages, restitution and equitable relief.
We are in the early stages of discovery in this case and intend
to defend this case vigorously, although there can be no
assurance regarding the outcome and resolution of this matter.
Other Litigation
We have from time to time been party to investigations, claims
and lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. The amounts
claimed in these claims and lawsuits are substantial in some
instances, and the ultimate liability with respect to such
litigation and claims is difficult to predict. Some of these
investigations, claims and lawsuits pertain to RALs, the
origination and servicing of mortgage loans, the electronic
filing of customers income tax returns, the POM guarantee
program, and our Express IRA program and other investment
products and RSM EquiCo, Inc. business valuation services. In
addition, it is possible that the number of these claims with
respect to the origination or servicing of mortgage loans may
increase in light of the current non-prime mortgage environment.
We believe we have meritorious defenses to each of these claims,
and we are defending or intend to defend them vigorously,
although there is no assurance as to their outcome. In the event
of an unfavorable outcome, the amounts we may be required to pay
in the discharge of liabilities or settlements could have a
material adverse effect on our consolidated financial statements.
In addition to the aforementioned types of cases, we are parties
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (Other Claims) concerning investment products, the
preparation of customers income tax returns, the fees
charged customers for various products and services, losses
incurred by customers with respect to their investment accounts,
relationships with franchisees, denials of mortgage loans,
contested mortgage
14
foreclosures, other aspects of the mortgage business,
intellectual property disputes, employment matters and contract
disputes. We believe we have meritorious defenses to each of the
Other Claims, and we are defending them vigorously. While we
cannot provide assurance that we will ultimately prevail in each
instance, we believe the amount, if any, we are required to pay
in the discharge of liabilities or settlements in these Other
Claims will not have a material adverse effect on our
consolidated financial statements.
Information concerning our operations by reportable operating
segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
661,787
|
|
|
$
|
627,846
|
|
|
$
|
822,454
|
|
|
$
|
775,488
|
|
Business Services
|
|
|
191,884
|
|
|
|
192,163
|
|
|
|
623,755
|
|
|
|
616,334
|
|
Consumer Financial Services
|
|
|
117,112
|
|
|
|
107,511
|
|
|
|
332,738
|
|
|
|
267,888
|
|
Corporate
|
|
|
1,828
|
|
|
|
3,659
|
|
|
|
9,697
|
|
|
|
10,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
972,611
|
|
|
$
|
931,179
|
|
|
$
|
1,788,644
|
|
|
$
|
1,670,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services
|
|
$
|
45,879
|
|
|
$
|
59,973
|
|
|
$
|
(325,559)
|
|
|
$
|
(259,974)
|
|
Business Services
|
|
|
6,614
|
|
|
|
1,207
|
|
|
|
16,489
|
|
|
|
(4,736)
|
|
Consumer Financial Services
|
|
|
12,988
|
|
|
|
10,959
|
|
|
|
10,113
|
|
|
|
5,572
|
|
Corporate
|
|
|
(61,362)
|
|
|
|
(50,014)
|
|
|
|
(104,240)
|
|
|
|
(111,330)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) of continuing operations before taxes (benefit)
|
|
$
|
4,119
|
|
|
$
|
22,125
|
|
|
$
|
(403,197)
|
|
|
$
|
(370,468)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2008, the related financial results of
OOMC, HRBMC and other smaller lines of business are presented as
discontinued operations and the assets and liabilities of the
businesses being sold are presented as held-for-sale in the
condensed consolidated financial statements. All periods
presented have been reclassified to reflect our discontinued
operations. See note 12 for additional information.
|
|
11.
|
Accounting
Pronouncements
|
In December 2007, Statement of Financial Accounting Standards
No. 141(R), Business
Combinations,
(SFAS 141R), and Statement of Financial Accounting
Standards No. 160, Non-Controlling Interests in
Consolidated Financial Statements An Amendment of
ARB No. 51 (SFAS 160) were issued. These
standards will require an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction,
including non-controlling interests, at the acquisition-date
fair value with limited exceptions. The provisions of these
standards are effective as of the beginning of our fiscal year
2010. We are currently evaluating what effect the adoption of
SFAS 141R and SFAS 160 will have on our consolidated
financial statements.
In March 2006, Statement of Financial Accounting Standards
No. 156, Accounting for Servicing of Financial
Assets An Amendment of FASB Statement
No. 140, (SFAS 156), was issued. The provisions
of this standard require mortgage servicing rights to be
initially valued at fair value. SFAS 156 allows servicers
to choose to subsequently measure their servicing rights at fair
value or to continue using the amortization method
under SFAS 140. We adopted SFAS 156 on May 1,
2007. Upon adoption we identified mortgage servicing rights
(MSRs) relating to all existing residential mortgage loans as a
class of servicing rights and elected to continue to use the
amortization method for these MSRs. Presently, this
class represents all of our MSRs. See note 12 for
additional information on our MSRs. The adoption of
SFAS 156 did not have a material impact on our condensed
consolidated financial statements.
In February 2006, Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid
Instruments An Amendment of FASB Statements
No. 133 and 140 (SFAS 155), was issued. The
provisions of this standard establish a requirement to evaluate
all newly acquired interests in securitized financial assets to
identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an
15
embedded derivative requiring bifurcation. The standard permits
a hybrid financial instrument required to be bifurcated to be
accounted for in its entirety if the holder irrevocably elects
to measure the hybrid financial instrument at fair value, with
changes in fair value recognized currently in earnings. We
adopted SFAS 155 on May 1, 2007. Our residual
interests typically have interests in derivative instruments
embedded within the securitization trusts, which were previously
excluded from evaluation. Concurrent with the adoption of
SFAS 155, we elected to account for all newly-acquired
residual interests on a fair value basis as trading securities,
with changes in fair value recorded in earnings in the period in
which the change occurs. Prior to adoption, we accounted for our
residual interests as available-for-sale (AFS) securities with
unrealized gains recorded in other comprehensive income. For
residual interests recorded prior to the adoption of
SFAS 155, we continue to record unrealized gains as a
component of other comprehensive income. The adoption of
SFAS 155 did not have a material impact on our condensed
consolidated financial statements.
As discussed in note 6, we adopted the provisions of
FIN 48 effective May 1, 2007.
|
|
12.
|
Discontinued
Operations
|
On April 19, 2007, we entered into an agreement to sell
OOMC to Cerberus. In conjunction with this plan, we also
announced we would terminate the operations of HRBMC, a
wholly-owned subsidiary of OOMC. On December 4, 2007, we
agreed to terminate the agreement. We also announced that we
would immediately terminate all remaining origination activities
and pursue the sale of OOMCs loan servicing activities.
During January 2008, OOMC funded the last loan in its pipeline.
See additional discussion of recent developments in note 1.
During fiscal year 2007, we also committed to a plan to sell two
smaller lines of business and completed the wind-down of one
other line of business, all of which were previously reported in
our Business Services segment. One of these businesses was sold
during the nine months ended January 31, 2008.
Additionally, during fiscal year 2007, we completed the
wind-down of our tax operations in the United Kingdom, which
were previously reported in Tax Services.
As of January 31, 2008, these businesses are presented as
discontinued operations and the assets and liabilities of the
businesses being sold are presented as held-for-sale in the
condensed consolidated financial statements. All periods
presented have been reclassified to reflect our discontinued
operations.
Financial Statement
Presentation
At January 31, 2008, we had fully impaired the carrying
value of goodwill and long-lived assets of our mortgage
businesses. Cumulative impairments in excess of amounts related
to the write-off of goodwill and other long-lived assets totaled
$304.9 million at January 31, 2008 and are reflected
as a valuation allowance relating to remaining assets
held-for-sale. At April 30, 2007, this amount totaled
$193.4 million, and was reflected as a liability under the
April 2007 agreement with Cerberus. We recorded impairments of
$116.3 million during the nine months ended
January 31, 2008 and $345.8 million in fiscal year
2007 relating to the disposition of our mortgage businesses.
Overhead costs which would have previously been allocated to
discontinued businesses totaled $1.1 million and
$3.6 million for the three and nine months ended
January 31, 2008, respectively, and $3.1 million and
$9.4 million for the three and nine months ended
January 31, 2007, respectively. These amounts are included
in continuing operations.
As provided by in EITF
No. 87-24,
Allocation of Interest to Discontinued Operations,
our losses from discontinued operations include interest on debt
that will be repaid as a result of the disposal transaction and
the allocation of other consolidated interest. Interest to be
repaid as a result of the disposal transaction primarily relates
to interest on our Servicing Advance Facility. The allocation of
other consolidated interest is based on borrowings specifically
attributable to these operations at a rate of LIBOR plus
250 basis points. Losses of our discontinued operations
include interest expense of $36.9 million and
$83.0 million for the three and nine months ended
January 31, 2008, respectively, including other
consolidated interest expense of $23.1 million and
$65.9 million that was allocated to discontinued
operations, respectively. Interest expense of $12.0 million
and $20.7 million was allocated to discontinued operations
for the three and nine months ended January 31, 2007,
respectively. The increase in allocated interest expense over
the prior year is due to the significant operating losses and
other working capital needs of our mortgage operations during
the last nine months. Concurrent with the completion of the sale
of our loan servicing activities, we will cease allocating other
consolidated interest expense to mortgage
16
operations. Remaining interest costs associated with debt that
is not repaid as a result of the sale will be reported in
continuing operations.
The major classes of assets and liabilities reported as
held-for-sale are as follows:
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
January 31,
2008
|
|
|
April 30,2007
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,641
|
|
|
$
|
65,019
|
|
|
Cash and cash equivalents restricted
|
|
|
277
|
|
|
|
43,754
|
|
|
Residual interests in securitizations trading
|
|
|
558
|
|
|
|
72,691
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
Held for sale, net
|
|
|
21,870
|
|
|
|
101,567
|
|
|
Repurchase option
|
|
|
1,630,664
|
|
|
|
121,243
|
|
|
Servicing and related assets
|
|
|
1,157,016
|
|
|
|
445,354
|
|
|
Beneficial interest in Trusts
|
|
|
-
|
|
|
|
41,057
|
|
|
Residual interests in securitizations AFS
|
|
|
25,371
|
|
|
|
90,283
|
|
|
Mortgage servicing rights
|
|
|
165,490
|
|
|
|
253,067
|
|
|
Deferred tax assets, net
|
|
|
200,142
|
|
|
|
299,559
|
|
|
Prepaid expenses and other assets
|
|
|
83,837
|
|
|
|
213,365
|
|
|
Valuation allowance
|
|
|
(304,867
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
3,010,999
|
|
|
$
|
1,746,959
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and deposits
|
|
$
|
155,407
|
|
|
$
|
248,983
|
|
|
Servicing advance facility,
net(1)
|
|
|
696,871
|
|
|
|
-
|
|
|
Mortgage loan repurchase liability
|
|
|
1,630,664
|
|
|
|
121,243
|
|
|
Other liabilities
|
|
|
30,369
|
|
|
|
245,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities directly associated with assets held for sale
|
|
$
|
2,513,311
|
|
|
$
|
615,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes
outstanding borrowings of $857.1 million, net of
collections and reserves of $160.2 million.
|
The financial results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on sales of mortgage assets, net
|
|
$
|
(67,061
|
)
|
|
$
|
(65,671
|
)
|
|
$
|
(623,082
|
)
|
|
$
|
36,843
|
|
Interest income
|
|
|
8,015
|
|
|
|
12,184
|
|
|
|
34,642
|
|
|
|
42,108
|
|
Loan servicing revenue
|
|
|
85,677
|
|
|
|
109,833
|
|
|
|
276,092
|
|
|
|
332,336
|
|
Other
|
|
|
4,925
|
|
|
|
23,737
|
|
|
|
16,441
|
|
|
|
33,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,556
|
|
|
$
|
80,083
|
|
|
$
|
(295,907
|
)
|
|
$
|
445,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before impairment and income tax benefit
|
|
$
|
(127,069
|
)
|
|
$
|
(165,254
|
)
|
|
$
|
(867,406
|
)
|
|
$
|
(254,112
|
)
|
Change in valuation allowance
|
|
|
29,926
|
|
|
|
-
|
|
|
|
(116,303
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
|
(97,143
|
)
|
|
|
(165,254
|
)
|
|
|
(983,709
|
)
|
|
|
(254,112
|
)
|
Income tax benefit
|
|
|
(40,501
|
)
|
|
|
(83,058
|
)
|
|
|
(368,144
|
)
|
|
|
(122,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(56,642
|
)
|
|
$
|
(82,196
|
)
|
|
$
|
(615,565
|
)
|
|
$
|
(131,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Mortgage Loans
We have entered into servicing agreements for loans we have
securitized which include a removal of accounts
provision that gives us the right, but not the obligation,
to repurchase mortgage loans from the securitization trust.
Rights under this provision can generally be exercised for loans
that are 90 to 119 days delinquent. At the time this right
becomes exercisable by us, Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS 140) requires that we record
both the mortgage loans on our balance sheet and an offsetting
mortgage loan repurchase liability. Mortgage loans, and the
corresponding liability, recorded pursuant to this accounting
requirement totaled $1.6 billion at January 31, 2008
and $121.2 million at April 30, 2007. We do not intend
to exercise our right under these provisions and, therefore,
these do not represent mortgage loans that we are required to
sell or repurchase obligations we are required to fulfill.
The gross principal amount of mortgage loans we are holding for
sale at January 31, 2008, totaled $57.7 million. We
have recorded valuation adjustments relating to these loans
totaling $35.8 million, resulting in net loans held for
sale of $21.9 million.
Mortgage Banking
Activities
We ceased origination activities during the three months ended
January 31, 2008. Historically, we originated mortgage
loans and sold most non-prime loans the same day the loans were
funded to qualifying special purpose entities (QSPEs or Trusts).
The Trusts are not consolidated. The sale was recorded in
accordance with SFAS 140. The Trusts purchased the loans
from us using warehouse facilities. As origination activities
had ceased, the off-balance sheet Trusts held no loans as of
January 31, 2008, compared to $1.5 billion at
April 30, 2007. The beneficial interest in Trusts was
written down to zero at January 31, 2008 compared to a
balance of $41.1 million at April 30, 2007.
Trading residual interests totaled $0.6 million at
January 31, 2008. During the nine months ended
January 31, 2008, we recorded impairments of
$45.9 million, while no such impairments were recorded
during the nine months ended January 31, 2007.
We adopted SFAS 155 on May 1, 2007 and concurrently
elected to account for all newly-acquired residual interests on
a fair value basis, with changes in fair value recorded in
earnings in the period in which the change occurs. Residual
interests existing prior to the adoption of SFAS 155 will
continue to be accounted for with unrealized gains recorded in
other comprehensive income.
AFS residual interests in securitizations totaled
$25.4 million and $90.3 million at January 31,
2008 and April 30, 2007, respectively. We recorded
impairments of fair value of $80.0 million and
$73.1 million during the nine months ended January 31,
2008 and 2007, respectively.
We did not securitize any mortgage loans during the third
quarter of fiscal year 2008. Cash flows from AFS residual
interests of $1.6 million and $13.1 million were
received from the securitization trusts for the nine months
ended January 31, 2008 and 2007, respectively, and are
included in investing activities of discontinued operations in
the condensed consolidated statements of cash flows.
The following transactions were treated as non-cash investing
activities in the condensed consolidated statement of cash flows:
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
2007
|
|
|
|
|
Residual interest mark-to-market
|
|
$
|
3,446
|
|
$
|
2,861
|
|
|
Additions to residual interests
|
|
|
-
|
|
|
39,379
|
|
|
Transfer of loans from held for investment to held for sale
|
|
|
193,648
|
|
|
-
|
|
|
|
|
18
Activity related to MSRs, which are initially measured at fair
value and subsequently amortized and assessed for impairment,
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
253,067
|
|
|
$
|
272,472
|
|
|
|
Additions
|
|
|
29,082
|
|
|
|
134,216
|
|
|
|
Amortization
|
|
|
(115,203
|
)
|
|
|
(143,548
|
)
|
|
|
Impairment of fair value
|
|
|
(1,456
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
165,490
|
|
|
$
|
263,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization of MSRs for fiscal years 2008 through
2012 is $27.9 million, $74.4 million,
$34.7 million, $14.1 million and $5.8 million,
respectively.
In conjunction with our adoption of SFAS 156, we identified
all of our residential mortgage loans as a class of servicing
rights and elected to continue the amortization method. See
additional discussion of our adoption of SFAS 156 in
note 11. Servicing fees earned during the nine months ended
January 31, 2008 and 2007 totaled $279.8 million and
$317.4 million, respectively, and are included in
discontinued operations on our condensed consolidated income
statements.
As part of our loan servicing responsibilities, we are required
to advance funds to cover delinquent scheduled principal and
interest payments to security holders, as well as to cover
delinquent tax and insurance payments and other costs required
to protect the investors interest in the collateral
securing the loans. Generally, servicing advances are
recoverable from either the mortgagor, the insurer of the loan
or the investor through the non-recourse provision of the loan
servicing contract. During the nine months ended
January 31, 2008 we entered into a facility to fund
servicing advances. See additional discussion under
Financing.
The key weighted average assumptions we used to estimate the
cash flows and values of the residual interests initially
recorded during the nine months ended January 31, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
Nine
months ended January 31,
|
|
2008
|
|
2007
|
|
|
|
Estimated credit losses
|
|
|
6.36%
|
|
|
3.24%
|
|
|
Discount rate
|
|
|
28.00%
|
|
|
21.91%
|
|
|
Variable returns to third-party beneficial interest holders
|
|
LIBOR forward curve at closing date
|
|
|
The key weighted average assumptions we used to estimate the
cash flows and values of residual interests and MSRs at
January 31, 2008 and April 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
2008
|
|
April 30,
2007
|
|
|
|
|
Estimated credit losses residual interests
|
|
|
17.24%
|
|
|
5.04%
|
|
|
Discount rate residual interests
|
|
|
30.00%
|
|
|
24.82%
|
|
|
Discount rate MSRs
|
|
|
20.00%
|
|
|
20.00%
|
|
|
Variable returns to third-party beneficial interest holders
|
|
LIBOR forward curve at valuation date
|
|
|
Estimated credit losses in the table above includes residual
interests from all fiscal years with outstanding underlying loan
balances using unpaid principal balances as part of the weighted
average calculation. See credit losses table below for detailed
information by fiscal year.
19
A key assumption used to estimate the cash flows and values of
residual interests and MSRs is average annualized prepayment
speeds. Prepayment speeds include voluntary prepayments,
involuntary prepayments and scheduled principal payments.
Prepayment rate assumptions used during the current fiscal
quarter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Outstanding
After
|
|
|
Prior to Initial
|
|
Initial Rate Reset
Date
|
|
|
Rate
Reset Date
|
|
Zero
- 3
|
|
Remaining
Life
|
|
|
Adjustable-rate mortgage loans:
|
|
|
|
|
|
|
|
|
|
With prepayment penalties
|
|
|
11%
|
|
|
24%
|
|
|
15%
|
Without prepayment penalties
|
|
|
11%
|
|
|
24%
|
|
|
15%
|
Fixed-rate mortgage loans:
|
|
|
|
|
|
|
|
|
|
With prepayment penalties
|
|
|
9%
|
|
|
11%
|
|
|
11%
|
|
|
For fixed-rate mortgages without prepayment penalties, we use an
average prepayment rate of 22% over the life of the loans.
Prepayment rate is projected based on actual paydown including
voluntary, involuntary and scheduled principal payments.
Expected static pool credit losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
Securitized in Fiscal Year
|
|
|
|
Prior
to 2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
As of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008
|
|
|
-%
|
|
|
-%
|
|
|
-%
|
|
|
-%
|
|
|
-%
|
|
|
17.15%
|
|
|
17.49%
|
April 30, 2007
|
|
|
5.11%
|
|
|
2.57%
|
|
|
3.45%
|
|
|
5.48%
|
|
|
6.79%
|
|
|
6.41%
|
|
|
-
|
April 30, 2006
|
|
|
4.22%
|
|
|
2.13%
|
|
|
2.18%
|
|
|
2.48%
|
|
|
3.05%
|
|
|
-
|
|
|
-
|
April 30, 2005
|
|
|
4.01%
|
|
|
2.08%
|
|
|
2.30%
|
|
|
2.83%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Static pool credit losses are calculated by summing the actual
and projected future credit losses and dividing them by the
original balance of each pool of assets.
At January 31, 2008, the sensitivities of the current fair
value of residual interests and MSRs to 10% and 20% adverse
changes in the above key assumptions are as presented in the
following table. These sensitivities are hypothetical and should
be used with caution. As the figures indicate, changes in fair
value based on a 10% variation in assumptions generally cannot
be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also
in this table, the effect of a variation of a particular
assumption on the fair value of the retained interest is
calculated without changing any other assumptions; in reality,
changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities.
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Residual
Interests
|
|
|
|
|
|
|
|
|
Securitizations
|
|
|
MSRs
|
|
|
|
|
|
Carrying amount/fair value
|
|
$
|
25,929
|
|
|
$
|
165,490
|
|
|
|
Weighted average remaining life (in years)
|
|
|
14.5
|
|
|
|
1.5
|
|
|
|
Dollar impact on fair value:
|
|
|
|
|
|
|
|
|
|
|
Prepayments (including defaults):
|
|
|
|
|
|
|
|
|
|
|
Adverse 10%
|
|
$
|
(3,797
|
)
|
|
$
|
(8,873
|
)
|
|
|
Adverse 20%
|
|
|
(5,546
|
)
|
|
|
(17,201
|
)
|
|
|
Credit losses:
|
|
|
|
|
|
|
|
|
|
|
Adverse 10%
|
|
$
|
(8,036
|
)
|
|
|
Not applicable
|
|
|
|
Adverse 20%
|
|
|
(11,112
|
)
|
|
|
Not applicable
|
|
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
Adverse 10%
|
|
$
|
(4,116
|
)
|
|
$
|
(8,159
|
)
|
|
|
Adverse 20%
|
|
|
(7,142
|
)
|
|
|
(15,644
|
)
|
|
|
Variable interest rates:
|
|
|
|
|
|
|
|
|
|
|
Adverse 10%
|
|
$
|
(1,170
|
)
|
|
|
Not applicable
|
|
|
|
Adverse 20%
|
|
|
(1,164
|
)
|
|
|
Not applicable
|
|
|
|
|
|
20
Mortgage loans that have been securitized and mortgage loans
held for sale at January 31, 2008 and April 30, 2007,
past due sixty days or more and the related credit losses
incurred are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Total Principal
|
|
Principal Amount
of
|
|
Credit Losses
|
|
|
Amount of Loans
|
|
Loans 60 Days or
|
|
(net of recoveries)
|
|
|
Outstanding
|
|
More Past Due
|
|
Three Months Ended
|
|
|
|
January 31,
|
|
April 30,
|
|
January 31,
|
|
April 30,
|
|
January 31,
|
|
April 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Securitized mortgage loans
|
|
$
|
18,730,052
|
|
$
|
18,434,940
|
|
$
|
3,929,653
|
|
$
|
1,383,832
|
|
$
|
90,491
|
|
$
|
41,235
|
Mortgage loans in warehouse Trusts
|
|
|
-
|
|
|
1,456,078
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Mortgage loans held for
sale(1)
|
|
|
57,698
|
|
|
295,208
|
|
|
30,985
|
|
|
202,941
|
|
|
77,697
|
|
|
104,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
18,787,750
|
|
$
|
20,186,226
|
|
$
|
3,960,638
|
|
$
|
1,586,773
|
|
$
|
168,188
|
|
$
|
146,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does
not include loans recorded pursuant to removal of accounts
provisions as we do not intend to exercise our right under
these provisions and, therefore, we are not subject to market
risk with respect to these loans.
|
Derivative
Instruments
A summary of our derivative instruments as of January 31,
2008 and April 30, 2007, and gains or losses incurred
during the three and nine months ended January 31, 2008 and
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
|
|
Gain (Loss) For
|
|
|
Gain (Loss) For
|
|
|
|
|
|
|
the Three
|
|
|
the Nine
|
|
|
|
Asset (Liability)
Balance at
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
|
January 31,
|
|
April 30,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Rate-lock equivalents
|
|
$
|
-
|
|
$
|
(987
|
)
|
|
$
|
516
|
|
|
$
|
(9,237
|
)
|
|
$
|
987
|
|
|
$
|
(5,207
|
)
|
Interest rate swaps
|
|
|
-
|
|
|
10,774
|
|
|
|
(59
|
)
|
|
|
46,640
|
|
|
|
(738
|
)
|
|
|
26,372
|
|
Put options on Eurodollar futures
|
|
|
-
|
|
|
1,212
|
|
|
|
-
|
|
|
|
400
|
|
|
|
942
|
|
|
|
(1,657
|
)
|
Prime short sales
|
|
|
-
|
|
|
75
|
|
|
|
(162
|
)
|
|
|
(131
|
)
|
|
|
49
|
|
|
|
864
|
|
Forward loan sale commitments
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,493
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
11,074
|
|
|
$
|
295
|
|
|
$
|
35,179
|
|
|
$
|
1,240
|
|
|
$
|
20,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We discontinued our hedging activities during our second quarter
of fiscal year 2008, and therefore had no derivative instruments
to which we were a party at January 31, 2008.
Commitments and
Contingencies
As of December 4, 2007, OOMC and HRBMC stopped accepting
mortgage loan applications, and in January 2008, OOMC funded its
last loan. As a result, we have no commitments to fund mortgage
loans at January 31, 2008, compared to commitments of
$2.4 billion at April 30, 2007.
21
In the normal course of business, we maintain recourse with
standard representations and warranties. Violations of these
representations and warranties or early payment defaults by
borrowers may require us to repurchase loans previously sold.
Repurchased loans are normally sold in subsequent sale
transactions. The following table summarizes our loan repurchase
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
Three Months
Ended
|
|
Nine Months Ended
|
|
Fiscal Year Ended
|
|
|
January 31,
|
|
January 31,
|
|
April 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2007
|
|
|
Loans repurchased from third parties
|
|
$
|
99,501
|
|
$
|
403,502
|
|
$
|
480,943
|
|
$
|
812,293
|
|
$
|
978,756
|
Repurchase reserves added
during the period
|
|
$
|
49,474
|
|
$
|
111,122
|
|
$
|
379,440
|
|
$
|
251,083
|
|
$
|
388,733
|
Repurchase reserves added
as a percent of originations
|
|
|
115.07%
|
|
|
1.77%
|
|
|
9.37%
|
|
|
1.18%
|
|
|
1.44%
|
|
|
A liability has been established related to the potential loss
on repurchase of loans previously sold of $69.0 million and
$38.4 million at January 31, 2008 and April 30,
2007, respectively. This reserve relates to potential losses
that could be incurred as a result of loan repurchases arising
from either early payment defaults or breaches of
representations and warranties customary to the mortgage banking
industry. On an ongoing basis, we monitor the adequacy of our
repurchase liability, which is included in liabilities
held-for-sale in the condensed consolidated balance sheets.
During the nine months ended January 31, 2008, we increased
our reserve for losses on loan repurchases primarily due to
expected repurchases under representation and warranty
provisions. The portion of our reserve balance related to losses
on representation and warranty repurchases totaled
$66.8 million and $5.6 million at January 31,
2008 and April 30, 2007, respectively. Expected repurchases
arising from early payment defaults has declined significantly,
as our contractual obligation to repurchase loans relating to
delinquency has lapsed on many of our previous loan sales. In
establishing our reserve for early payment defaults, weve
assumed all loans that are currently delinquent and subject to
contractual repurchase terms will be repurchased. Based on
historical experience, we assumed an average 50% loss severity
at January 31, 2008, compared to 42% at October 31,
2007 and 26% at April 30, 2007, on all loans repurchased
and expected to be repurchased. At January 31, 2008, our
repurchase reserve of $69.0 million covered estimated
future losses on the repurchase of loans with an outstanding
principal balance of $137.8 million.
Financing
In connection with our decision to cease all loan origination
activities, we terminated all remaining on- and off-balance
sheet warehouse facilities during the three months ended
January 31, 2008. OOMC held $57.7 million in gross
principle of mortgage loans for sale as of January 31, 2008.
On October 1, 2007, OOMC entered into a facility to fund
servicing advances (the Servicing Advance Facility),
in which the servicing advances are collateral for the facility.
The Servicing Advance Facility originally provided funding of up
to $400.0 million to fund servicing advances through
October 1, 2008. During the three months ended
January 31, 2008, the facility was amended, increasing the
available funding to $1.2 billion. This facility is subject
to various triggers, events or occurrences that could result in
earlier termination, and bears interest at one-month LIBOR plus
an additional margin rate. The Servicing Advance Facility
terminates upon a change in control of OOMC, in
which (i) a party or parties acting in concert acquire a
20% or more equity interest in OOMC or (ii) the Company
does not own more than a 50% equity interest in OOMC. This
on-balance sheet facility had a balance of $857.1 million
at January 31, 2008, which is reported in liabilities
held-for-sale. If and when our loan servicing activities are
sold, this facility will be paid off with the proceeds from that
sale.
Restructuring Charge
During fiscal year 2007, we initiated a restructuring plan to
reduce costs within our mortgage operations. Restructuring
activities continued through fiscal year 2008, including our
previously announced closure of all mortgage origination
activities. Charges incurred during the nine months ended
January 31, 2008 totaled $105.0 million, which
included $33.9 million in fixed asset write-offs, with the
remainder included in other adjustments in the table
below. These charges are included in the net loss from
discontinued
22
operations on our condensed consolidated income statements.
Changes in our restructuring charge liability during the nine
months ended January 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Accrual Balance as
of
|
|
Cash
|
|
|
Other
|
|
Accrual Balance as
of
|
|
|
April 30,
2007
|
|
Payments
|
|
|
Adjustments
|
|
January 31,
2008
|
|
|
Employee severance costs
|
|
$
|
3,688
|
|
$
|
(37,462
|
)
|
|
$
|
50,232
|
|
$
|
16,458
|
Contract termination costs
|
|
|
10,919
|
|
|
(7,298
|
)
|
|
|
17,023
|
|
|
20,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,607
|
|
$
|
(44,760
|
)
|
|
$
|
67,255
|
|
$
|
37,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining liability related to this restructuring charge is
included in liabilities held-for-sale on our condensed
consolidated balance sheet and relates to lease obligations for
vacant space resulting from branch office closings and employee
severance costs.
|
|
13.
|
Condensed
Consolidating Financial Statements
|
BFC, formerly Block Financial Corporation, is an indirect,
wholly owned consolidated subsidiary of the Company. BFC was
converted to a Delaware limited liability company effective
January 1, 2008. BFC is the Issuer and the Company is the
Guarantor of the $500.0 million credit facility entered
into in April 2007, the Senior Notes issued on January 11,
2008 and October 26, 2004, the CLOCs and other indebtedness
issued from time to time. These condensed consolidating
financial statements have been prepared using the equity method
of accounting. Earnings of subsidiaries are, therefore,
reflected in the Companys investment in subsidiaries
account. The elimination entries eliminate investments in
subsidiaries, related stockholders equity and other
intercompany balances and transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Income Statements
|
|
|
(in 000s)
|
|
|
|
Three
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
January 31, 2008
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
211,150
|
|
|
$
|
774,765
|
|
|
$
|
(13,304
|
)
|
|
$
|
972,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
-
|
|
|
|
70,088
|
|
|
|
534,018
|
|
|
|
47
|
|
|
|
604,153
|
|
Cost of other revenues
|
|
|
-
|
|
|
|
78,126
|
|
|
|
19,167
|
|
|
|
-
|
|
|
|
97,293
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
137,674
|
|
|
|
144,566
|
|
|
|
(13,221
|
)
|
|
|
269,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
285,888
|
|
|
|
697,751
|
|
|
|
(13,174
|
)
|
|
|
970,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
-
|
|
|
|
(74,738
|
)
|
|
|
77,014
|
|
|
|
(130
|
)
|
|
|
2,146
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(624
|
)
|
|
|
-
|
|
|
|
(624
|
)
|
Other income, net
|
|
|
4,119
|
|
|
|
9
|
|
|
|
2,588
|
|
|
|
(4,119
|
)
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
|
4,119
|
|
|
|
(74,729
|
)
|
|
|
78,978
|
|
|
|
(4,249
|
)
|
|
|
4,119
|
|
Income taxes (benefit)
|
|
|
(5,165
|
)
|
|
|
(32,407
|
)
|
|
|
27,299
|
|
|
|
5,108
|
|
|
|
(5,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
9,284
|
|
|
|
(42,322
|
)
|
|
|
51,679
|
|
|
|
(9,357
|
)
|
|
|
9,284
|
|
Net loss from discontinued operations
|
|
|
(56,642
|
)
|
|
|
(55,707
|
)
|
|
|
(2,622
|
)
|
|
|
58,329
|
|
|
|
(56,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(47,358
|
)
|
|
$
|
(98,029
|
)
|
|
$
|
49,057
|
|
|
$
|
48,972
|
|
|
$
|
(47,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
January 31, 2007
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
255,407
|
|
|
$
|
679,261
|
|
|
$
|
(3,489
|
)
|
|
$
|
931,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
-
|
|
|
|
54,818
|
|
|
|
522,149
|
|
|
|
(32
|
)
|
|
|
576,935
|
|
Cost of other revenues
|
|
|
-
|
|
|
|
60,453
|
|
|
|
8,871
|
|
|
|
-
|
|
|
|
69,324
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
86,017
|
|
|
|
169,829
|
|
|
|
(1,878
|
)
|
|
|
253,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
201,288
|
|
|
|
700,849
|
|
|
|
(1,910
|
)
|
|
|
900,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
-
|
|
|
|
54,119
|
|
|
|
(21,588
|
)
|
|
|
(1,579
|
)
|
|
|
30,952
|
|
Interest expense
|
|
|
-
|
|
|
|
(11,811
|
)
|
|
|
(255
|
)
|
|
|
-
|
|
|
|
(12,066
|
)
|
Other income, net
|
|
|
22,125
|
|
|
|
(3,958
|
)
|
|
|
7,197
|
|
|
|
(22,125
|
)
|
|
|
3,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before tax (benefit)
|
|
|
22,125
|
|
|
|
38,350
|
|
|
|
(14,646
|
)
|
|
|
(23,704
|
)
|
|
|
22,125
|
|
Income taxes (benefit)
|
|
|
181
|
|
|
|
28,043
|
|
|
|
(27,849
|
)
|
|
|
(194
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
21,944
|
|
|
|
10,307
|
|
|
|
13,203
|
|
|
|
(23,510
|
)
|
|
|
21,944
|
|
Net income (loss) from discontinued operations
|
|
|
(82,196
|
)
|
|
|
(87,293
|
)
|
|
|
2,257
|
|
|
|
85,036
|
|
|
|
(82,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(60,252
|
)
|
|
$
|
(76,986
|
)
|
|
$
|
15,460
|
|
|
$
|
61,526
|
|
|
$
|
(60,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
January 31, 2008
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
504,001
|
|
|
$
|
1,301,716
|
|
|
$
|
(17,073
|
)
|
|
$
|
1,788,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
-
|
|
|
|
185,058
|
|
|
|
1,231,236
|
|
|
|
(8
|
)
|
|
|
1,416,286
|
|
Cost of other revenues
|
|
|
-
|
|
|
|
165,402
|
|
|
|
34,226
|
|
|
|
-
|
|
|
|
199,628
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
234,503
|
|
|
|
377,934
|
|
|
|
(16,718
|
)
|
|
|
595,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
584,963
|
|
|
|
1,643,396
|
|
|
|
(16,726
|
)
|
|
|
2,211,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
-
|
|
|
|
(80,962
|
)
|
|
|
(341,680
|
)
|
|
|
(347
|
)
|
|
|
(422,989
|
)
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,871
|
)
|
|
|
-
|
|
|
|
(1,871
|
)
|
Other income, net
|
|
|
(403,197
|
)
|
|
|
(12
|
)
|
|
|
21,675
|
|
|
|
403,197
|
|
|
|
21,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before tax benefit
|
|
|
(403,197
|
)
|
|
|
(80,974
|
)
|
|
|
(321,876
|
)
|
|
|
402,850
|
|
|
|
(403,197
|
)
|
Income tax benefit
|
|
|
(166,553
|
)
|
|
|
(36,012
|
)
|
|
|
(130,398
|
)
|
|
|
166,410
|
|
|
|
(166,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(236,644
|
)
|
|
|
(44,962
|
)
|
|
|
(191,478
|
)
|
|
|
236,440
|
|
|
|
(236,644
|
)
|
Net loss from discontinued operations
|
|
|
(615,565
|
)
|
|
|
(609,717
|
)
|
|
|
(6,212
|
)
|
|
|
615,929
|
|
|
|
(615,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(852,209
|
)
|
|
$
|
(654,679
|
)
|
|
$
|
(197,690
|
)
|
|
$
|
852,369
|
|
|
$
|
(852,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
January 31, 2007
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
540,530
|
|
|
$
|
1,138,702
|
|
|
$
|
(9,200
|
)
|
|
$
|
1,670,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
-
|
|
|
|
147,698
|
|
|
|
1,192,015
|
|
|
|
1
|
|
|
|
1,339,714
|
|
Cost of other revenues
|
|
|
-
|
|
|
|
99,040
|
|
|
|
14,064
|
|
|
|
-
|
|
|
|
113,104
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
184,345
|
|
|
|
386,363
|
|
|
|
(4,697
|
)
|
|
|
566,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
-
|
|
|
|
431,083
|
|
|
|
1,592,442
|
|
|
|
(4,696
|
)
|
|
|
2,018,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
-
|
|
|
|
109,447
|
|
|
|
(453,740
|
)
|
|
|
(4,504
|
)
|
|
|
(348,797
|
)
|
Interest expense
|
|
|
-
|
|
|
|
(35,429
|
)
|
|
|
(863
|
)
|
|
|
-
|
|
|
|
(36,292
|
)
|
Other income, net
|
|
|
(370,468
|
)
|
|
|
5
|
|
|
|
14,616
|
|
|
|
370,468
|
|
|
|
14,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before tax (benefit)
|
|
|
(370,468
|
)
|
|
|
74,023
|
|
|
|
(439,987
|
)
|
|
|
365,964
|
|
|
|
(370,468
|
)
|
Income tax (benefit)
|
|
|
(153,576
|
)
|
|
|
45,114
|
|
|
|
(196,823
|
)
|
|
|
151,709
|
|
|
|
(153,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(216,892
|
)
|
|
|
28,909
|
|
|
|
(243,164
|
)
|
|
|
214,255
|
|
|
|
(216,892
|
)
|
Net loss from discontinued operations
|
|
|
(131,197
|
)
|
|
|
(124,067
|
)
|
|
|
(12,200
|
)
|
|
|
136,267
|
|
|
|
(131,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(348,089
|
)
|
|
$
|
(95,158
|
)
|
|
$
|
(255,364
|
)
|
|
$
|
350,522
|
|
|
$
|
(348,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Balance Sheets
|
|
|
(in 000s)
|
|
|
|
H&R Block,
Inc.
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
January 31,
2008
|
|
(Guarantor)
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R
Block
|
|
|
Cash & cash equivalents
|
|
$
|
-
|
|
$
|
994,400
|
|
|
$
|
415,609
|
|
|
$
|
-
|
|
|
$
|
1,410,009
|
Cash & cash equivalents restricted
|
|
|
-
|
|
|
324,934
|
|
|
|
1,355
|
|
|
|
-
|
|
|
|
326,289
|
Receivables from customers, brokers and dealers, net
|
|
|
-
|
|
|
414,089
|
|
|
|
-
|
|
|
|
-
|
|
|
|
414,089
|
Receivables, net
|
|
|
348
|
|
|
2,241,112
|
|
|
|
469,835
|
|
|
|
-
|
|
|
|
2,711,295
|
Mortgage loans held for investment
|
|
|
-
|
|
|
1,040,854
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,040,854
|
Intangible assets and goodwill, net
|
|
|
-
|
|
|
176,409
|
|
|
|
988,475
|
|
|
|
-
|
|
|
|
1,164,884
|
Investments in subsidiaries
|
|
|
3,572,710
|
|
|
-
|
|
|
|
493
|
|
|
|
(3,572,710
|
)
|
|
|
493
|
Assets held for sale
|
|
|
-
|
|
|
2,996,798
|
|
|
|
14,201
|
|
|
|
-
|
|
|
|
3,010,999
|
Other assets
|
|
|
-
|
|
|
264,171
|
|
|
|
1,232,125
|
|
|
|
3
|
|
|
|
1,496,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,573,058
|
|
$
|
8,452,767
|
|
|
$
|
3,122,093
|
|
|
$
|
(3,572,707
|
)
|
|
$
|
11,575,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
-
|
|
$
|
1,711,485
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,711,485
|
Customer deposits
|
|
|
-
|
|
|
1,958,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,958,490
|
Accts. payable to customers, brokers and dealers
|
|
|
-
|
|
|
593,732
|
|
|
|
-
|
|
|
|
-
|
|
|
|
593,732
|
Long-term debt
|
|
|
-
|
|
|
2,901,795
|
|
|
|
15,616
|
|
|
|
-
|
|
|
|
2,917,411
|
Liabilities held for sale
|
|
|
-
|
|
|
2,512,904
|
|
|
|
407
|
|
|
|
-
|
|
|
|
2,513,311
|
Other liabilities
|
|
|
2
|
|
|
251,256
|
|
|
|
1,165,592
|
|
|
|
-
|
|
|
|
1,416,850
|
Net intercompany advances
|
|
|
3,109,124
|
|
|
(1,930,498
|
)
|
|
|
(1,178,976
|
)
|
|
|
350
|
|
|
|
-
|
Stockholders equity
|
|
|
463,932
|
|
|
453,603
|
|
|
|
3,119,454
|
|
|
|
(3,573,057
|
)
|
|
|
463,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,573,058
|
|
$
|
8,452,767
|
|
|
$
|
3,122,093
|
|
|
$
|
(3,572,707
|
)
|
|
$
|
11,575,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block,
Inc.
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
April 30,
2007
|
|
(Guarantor)
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R
Block
|
|
|
Cash & cash equivalents
|
|
$
|
-
|
|
$
|
165,118
|
|
|
$
|
756,720
|
|
|
$
|
-
|
|
|
$
|
921,838
|
Cash & cash equivalents restricted
|
|
|
-
|
|
|
329,000
|
|
|
|
3,646
|
|
|
|
-
|
|
|
|
332,646
|
Receivables from customers, brokers and dealers, net
|
|
|
-
|
|
|
410,522
|
|
|
|
-
|
|
|
|
-
|
|
|
|
410,522
|
Receivables, net
|
|
|
233
|
|
|
154,060
|
|
|
|
401,962
|
|
|
|
-
|
|
|
|
556,255
|
Mortgage loans held for investment
|
|
|
-
|
|
|
1,358,222
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,358,222
|
Intangible assets and goodwill, net
|
|
|
-
|
|
|
197,914
|
|
|
|
977,418
|
|
|
|
-
|
|
|
|
1,175,332
|
Investments in subsidiaries
|
|
|
4,586,474
|
|
|
-
|
|
|
|
414
|
|
|
|
(4,586,474
|
)
|
|
|
414
|
Assets held for sale
|
|
|
-
|
|
|
1,720,984
|
|
|
|
25,975
|
|
|
|
-
|
|
|
|
1,746,959
|
Other assets
|
|
|
-
|
|
|
129,879
|
|
|
|
911,976
|
|
|
|
7
|
|
|
|
1,041,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,586,707
|
|
$
|
4,465,699
|
|
|
$
|
3,078,111
|
|
|
$
|
(4,586,467
|
)
|
|
$
|
7,544,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
-
|
|
$
|
1,567,082
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,567,082
|
Customer deposits
|
|
|
-
|
|
|
1,129,263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,129,263
|
Accts. payable to customers, brokers and dealers
|
|
|
-
|
|
|
633,189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
633,189
|
Long-term debt
|
|
|
-
|
|
|
502,236
|
|
|
|
17,571
|
|
|
|
-
|
|
|
|
519,807
|
Liabilities held for sale
|
|
|
-
|
|
|
610,391
|
|
|
|
4,982
|
|
|
|
-
|
|
|
|
615,373
|
Other liabilities
|
|
|
2
|
|
|
254,906
|
|
|
|
1,409,929
|
|
|
|
-
|
|
|
|
1,664,837
|
Net intercompany advances
|
|
|
3,172,206
|
|
|
(1,341,912
|
)
|
|
|
(1,830,294
|
)
|
|
|
-
|
|
|
|
-
|
Stockholders equity
|
|
|
1,414,499
|
|
|
1,110,544
|
|
|
|
3,475,923
|
|
|
|
(4,586,467
|
)
|
|
|
1,414,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,586,707
|
|
$
|
4,465,699
|
|
|
$
|
3,078,111
|
|
|
$
|
(4,586,467
|
)
|
|
$
|
7,544,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statements of Cash Flows
|
|
|
(in 000s)
|
|
|
|
Nine
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
January 31, 2008
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
35,374
|
|
|
$
|
(2,814,643
|
)
|
|
$
|
(588,696
|
)
|
|
$
|
-
|
|
|
$
|
(3,367,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans originated for investment, net
|
|
|
-
|
|
|
|
106,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,721
|
|
Purchase property & equipment
|
|
|
-
|
|
|
|
(479
|
)
|
|
|
(80,233
|
)
|
|
|
-
|
|
|
|
(80,712
|
)
|
Payments for business acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,835
|
)
|
|
|
-
|
|
|
|
(23,835
|
)
|
Net intercompany advances
|
|
|
89,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(89,728
|
)
|
|
|
-
|
|
Investing cash flows from discontinued operations
|
|
|
-
|
|
|
|
(2,836
|
)
|
|
|
3,749
|
|
|
|
-
|
|
|
|
913
|
|
Other, net
|
|
|
-
|
|
|
|
7,944
|
|
|
|
336
|
|
|
|
-
|
|
|
|
8,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
89,728
|
|
|
|
111,350
|
|
|
|
(99,983
|
)
|
|
|
(89,728
|
)
|
|
|
11,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
-
|
|
|
|
(5,125,279
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,125,279
|
)
|
Proceeds from commercial paper
|
|
|
-
|
|
|
|
4,133,197
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,133,197
|
|
Repayments of other borrowings
|
|
|
-
|
|
|
|
(2,161,177
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,161,177
|
)
|
Proceeds from other borrowings
|
|
|
-
|
|
|
|
5,097,662
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,097,662
|
|
Proceeds from issuance of LT debt
|
|
|
-
|
|
|
|
599,376
|
|
|
|
-
|
|
|
|
-
|
|
|
|
599,376
|
|
Customer deposits
|
|
|
-
|
|
|
|
828,872
|
|
|
|
-
|
|
|
|
-
|
|
|
|
828,872
|
|
Dividends paid
|
|
|
(137,049
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(137,049
|
)
|
Proceeds from issuance of common stock
|
|
|
14,527
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,527
|
|
Net intercompany advances
|
|
|
-
|
|
|
|
(469,856
|
)
|
|
|
380,128
|
|
|
|
89,728
|
|
|
|
-
|
|
Financing cash flows from discontinued operations
|
|
|
-
|
|
|
|
644,173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
644,173
|
|
Other, net
|
|
|
(2,580
|
)
|
|
|
(14,393
|
)
|
|
|
(32,560
|
)
|
|
|
-
|
|
|
|
(49,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(125,102
|
)
|
|
|
3,532,575
|
|
|
|
347,568
|
|
|
|
89,728
|
|
|
|
3,844,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
829,282
|
|
|
|
(341,111
|
)
|
|
|
-
|
|
|
|
488,171
|
|
Cash beginning of period
|
|
|
-
|
|
|
|
165,118
|
|
|
|
756,720
|
|
|
|
-
|
|
|
|
921,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
-
|
|
|
$
|
994,400
|
|
|
$
|
415,609
|
|
|
$
|
-
|
|
|
$
|
1,410,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
H&R
Block, Inc.
|
|
|
BFC
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
January 31, 2007
|
|
(Guarantor)
|
|
|
(Issuer)
|
|
|
Subsidiaries
|
|
|
Elims
|
|
|
H&R Block
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
32,882
|
|
|
$
|
(1,549,046
|
)
|
|
$
|
(1,223,241
|
)
|
|
$
|
-
|
|
|
$
|
(2,739,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans originated for investment, net
|
|
|
-
|
|
|
|
(1,073,012
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,073,012
|
)
|
Purchase property & equipment
|
|
|
-
|
|
|
|
(3,407
|
)
|
|
|
(123,918
|
)
|
|
|
-
|
|
|
|
(127,325
|
)
|
Payments for business acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,679
|
)
|
|
|
-
|
|
|
|
(21,679
|
)
|
Net intercompany advances
|
|
|
247,754
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(247,754
|
)
|
|
|
-
|
|
Investing cash flows from discontinued operations
|
|
|
-
|
|
|
|
18,322
|
|
|
|
(5,571
|
)
|
|
|
-
|
|
|
|
12,751
|
|
Other, net
|
|
|
-
|
|
|
|
(36,009
|
)
|
|
|
26,587
|
|
|
|
-
|
|
|
|
(9,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
247,754
|
|
|
|
(1,094,106
|
)
|
|
|
(124,581
|
)
|
|
|
(247,754
|
)
|
|
|
(1,218,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of commercial paper
|
|
|
-
|
|
|
|
(4,893,093
|
)
|
|
|
(8,525
|
)
|
|
|
-
|
|
|
|
(4,901,618
|
)
|
Proceeds from commercial paper
|
|
|
-
|
|
|
|
6,372,135
|
|
|
|
25,521
|
|
|
|
-
|
|
|
|
6,397,656
|
|
Repayments of short-term borrowings
|
|
|
-
|
|
|
|
(889,722
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(889,722
|
)
|
Proceeds from short-term borrowings
|
|
|
-
|
|
|
|
2,320,105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,320,105
|
|
Customer deposits
|
|
|
-
|
|
|
|
1,632,875
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,632,875
|
|
Dividends paid
|
|
|
(128,090
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(128,090
|
)
|
Acquisition of treasury shares
|
|
|
(180,897
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(180,897
|
)
|
Proceeds from stock options
|
|
|
19,183
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,183
|
|
Net intercompany advances
|
|
|
-
|
|
|
|
(1,413,234
|
)
|
|
|
1,165,480
|
|
|
|
247,754
|
|
|
|
-
|
|
Financing cash flows from discontinued operations
|
|
|
-
|
|
|
|
172,301
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
172,201
|
|
Other, net
|
|
|
9,168
|
|
|
|
(14,425
|
)
|
|
|
(73,987
|
)
|
|
|
-
|
|
|
|
(79,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(280,636
|
)
|
|
|
3,286,942
|
|
|
|
1,108,389
|
|
|
|
247,754
|
|
|
|
4,362,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
643,790
|
|
|
|
(239,433
|
)
|
|
|
-
|
|
|
|
404,357
|
|
Cash beginning of period
|
|
|
-
|
|
|
|
134,407
|
|
|
|
539,420
|
|
|
|
-
|
|
|
|
673,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
-
|
|
|
$
|
778,197
|
|
|
$
|
299,987
|
|
|
$
|
-
|
|
|
$
|
1,078,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
ITEM 2. |
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
RESULTS OF
OPERATIONS
H&R Block is a diversified company delivering tax services
and financial advice, investment, and banking services, and
business and consulting services. Our Tax Services segment
provides income tax return preparation services, electronic
filing services and other services and products related to
income tax return preparation to the general public primarily in
the United States, Canada and Australia. RSM McGladrey, Inc.
(RSM) is a national accounting, tax and business consulting firm
primarily serving midsized businesses. Our Consumer Financial
Services segment offers investment services through H&R
Block Financial Advisors, Inc. (HRBFA) and full-service banking
through H&R Block Bank (HRB Bank).
Corporate Cost
Reduction
Program.
During the third quarter we announced the implementation
of a program to reduce corporate staff and overhead expenses by
approximately $110 million per year. As a result of this
initiative, we eliminated approximately 325 filled and 180 open
positions, representing approximately 23% of corporate support
staffing, and recorded a pretax charge for severance-related
benefits of $17.1 million during the quarter ended
January 31, 2008. Of the total severance charge,
$11.3 million was recorded in our corporate operations,
while $3.1 million and $2.7 million was recorded in
our Tax Services and Consumer Financial Services segments,
respectively. We expect these actions will result in reduced
compensation expense of approximately $50 million per year.
In addition, we are seeking to eliminate approximately
$60 million of non-compensation overhead expenses such as
consulting, marketing, travel and entertainment.
Discontinued
Operations Recent
Developments.
On April 19, 2007, we entered into an agreement to
sell Option One Mortgage Corporation (OOMC) to Cerberus Capital
Management (Cerberus). In conjunction with this plan, we also
announced we would terminate the operations of H&R Block
Mortgage Corporation (HRBMC), a wholly-owned subsidiary of OOMC.
On December 4, 2007, we agreed to terminate the agreement
with Cerberus. We also announced that we would immediately
terminate all remaining origination activities and pursue the
sale of OOMCs loan servicing activities. During January
2008, OOMC funded the last loan in its pipeline.
We have estimated the fair values of our servicing and other
assets held for sale, and have recorded a valuation allowance of
$304.9 million at January 31, 2008, which resulted in
impairments of $116.3 million for the nine months ended
January 31, 2008.
During fiscal year 2007, we also committed to a plan to sell two
smaller lines of business and completed the wind-down of one
other line of business, all of which were previously reported in
our Business Services segment. One of these businesses was sold
during the nine months ended January 31, 2008.
Additionally, during fiscal year 2007, we completed the
wind-down of our tax operations in the United Kingdom, which
were previously reported in Tax Services.
As of January 31, 2008, these businesses are presented as
discontinued operations and the assets and liabilities of the
businesses being sold are presented as held-for-sale in the
condensed consolidated financial statements. All periods
presented have been reclassified to reflect our discontinued
operations.
See discussion of operating results under Discontinued
Operations.
29
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses retail, online and software.
Additionally, this segment includes commercial tax businesses,
which provide tax preparation software and educational materials
to CPAs and other tax preparers.
|
|
|
|
|
|
|
|
|
|
|
Tax
Services Operating Statistics (U.S.
only)
|
|
|
|
Period
November 1 through January 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
Clients served (in 000s):
|
|
|
|
|
|
|
|
|
Company-owned operations
|
|
|
2,430
|
|
|
|
2,512
|
|
Franchise operations
|
|
|
1,427
|
|
|
|
1,485
|
|
Early season
loans(1)
|
|
|
245
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
Total retail operations
|
|
|
4,102
|
|
|
|
4,341
|
|
Digital tax solutions
|
|
|
1,136
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,238
|
|
|
|
5,615
|
|
|
|
|
|
|
|
|
|
|
Net average fee per retail
client:(2)
|
|
|
|
|
|
|
|
|
Company-owned operations
|
|
$
|
181.19
|
|
|
$
|
169.47
|
|
Franchise operations
|
|
|
157.91
|
|
|
|
147.42
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172.58
|
|
|
$
|
161.27
|
|
|
|
|
|
|
|
|
|
|
Offices:
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
6,835
|
|
|
|
6,669
|
|
Company-owned shared
locations(3)
|
|
|
1,478
|
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
Total company-owned offices
|
|
|
8,313
|
|
|
|
8,157
|
|
|
|
|
|
|
|
|
|
|
Franchise
|
|
|
3,812
|
|
|
|
3,784
|
|
Franchise shared
locations(3)
|
|
|
913
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
Total franchise offices
|
|
|
4,725
|
|
|
|
4,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,038
|
|
|
|
12,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Clients
who received an Emerald Advance in 2008 or an Instant Money
Advance Loan (IMAL) in 2007 but had not yet returned for tax
preparation and/or
e-filing
services.
|
(2) |
|
Calculated
as net tax preparation fees divided by retail clients served,
excluding early season loan clients.
|
(3) |
|
Shared
locations include offices located within Wal-Mart, Sears and
other third-party businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Services Operating Results
|
|
|
(in 000s)
|
|
|
|
Three Months
Ended January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax preparation fees
|
|
$
|
455,036
|
|
|
$
|
437,296
|
|
|
$
|
529,423
|
|
|
$
|
506,868
|
|
Other services
|
|
|
65,766
|
|
|
|
55,913
|
|
|
|
134,693
|
|
|
|
122,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
520,802
|
|
|
|
493,209
|
|
|
|
664,116
|
|
|
|
628,992
|
|
Royalties
|
|
|
61,350
|
|
|
|
59,631
|
|
|
|
69,111
|
|
|
|
67,012
|
|
Loan participation and related fees
|
|
|
40,584
|
|
|
|
55,409
|
|
|
|
41,737
|
|
|
|
55,709
|
|
Other
|
|
|
39,051
|
|
|
|
19,597
|
|
|
|
47,490
|
|
|
|
23,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
661,787
|
|
|
|
627,846
|
|
|
|
822,454
|
|
|
|
775,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
236,048
|
|
|
|
224,181
|
|
|
|
343,661
|
|
|
|
328,628
|
|
Occupancy
|
|
|
90,818
|
|
|
|
88,726
|
|
|
|
245,886
|
|
|
|
226,408
|
|
Depreciation
|
|
|
9,399
|
|
|
|
10,774
|
|
|
|
26,009
|
|
|
|
29,731
|
|
Other
|
|
|
74,943
|
|
|
|
71,090
|
|
|
|
176,410
|
|
|
|
161,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411,208
|
|
|
|
394,771
|
|
|
|
791,966
|
|
|
|
746,168
|
|
Cost of other revenues, selling, general and administrative
|
|
|
204,700
|
|
|
|
173,102
|
|
|
|
356,047
|
|
|
|
289,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
615,908
|
|
|
|
567,873
|
|
|
|
1,148,013
|
|
|
|
1,035,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
45,879
|
|
|
$
|
59,973
|
|
|
$
|
(325,559
|
)
|
|
$
|
(259,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Three months
ended January 31, 2008 compared to January 31,
2007
Tax Services revenues increased $33.9 million, or
5.4%, for the three months ended January 31, 2008 compared
to the prior year.
Tax preparation fees increased $17.7 million, or 4.1%,
primarily due to an increase of 6.9% in the net average fee per
U.S. retail client served, partially offset by a 3.3%
decline in tax returns prepared
and/or
e-filed in
U.S. company-owned offices. The decline in clients served
is due to a delay in the start of the tax season, which we
believe is primarily a result of the late changes to the
Alternative Minimum Tax (AMT) program. See additional discussion
of AMT changes in Regulatory Environment. Results
for our third quarter represent only a small portion of the tax
season and are not indicative of the results we expect for the
entire fiscal year. Clients served in company-owned offices
through February 29, 2008 were up 2.8%, as the changes in
the AMT program shifted clients normally served in our third
quarter into the fourth quarter. We continue to expect retail
client growth of zero to two percent for the full fiscal year.
Other service revenues increased $9.9 million, or 17.6%,
primarily due to customer fees earned in connection with an
agreement with HRB Bank for the H&R Block Emerald Prepaid
MasterCard®,
under which, this segment shares in the revenues and expenses
associated with this program. We also realized a smaller
increase in license fees earned from bank products during the
quarter.
Loan participation and related fees decreased
$14.8 million, or 26.8%, primarily due to participation
fees earned on IMALs in the prior year.
Other revenues increased $19.5 million primarily due to
fees earned in connection with the Emerald Advance loan program,
also under a revenue and expense sharing agreement with HRB Bank.
Total expenses increased $48.0 million, or 8.5%, for the
three months ended January 31, 2008. Cost of services
increased $16.4 million, or 4.2%, from the prior year, due
to higher compensation and benefits. Compensation and benefits
expenses increased $11.9 million, or 5.3%, primarily as a
result of a 3.2% increase in commission-based wages.
Cost of other revenues, selling, general and administrative
expenses increased $31.6 million, or 18.3%. This increase
was primarily due to incremental bad debt expense related to our
refund anticipation loan (RAL) and new Emerald Advance programs.
Approximately $14.2 million of the increase was a one-time
charge due to the elimination of cross-collect practices. As a
result, banks no longer collect amounts due from clients on our
behalf. The remaining increase is primarily due to an
incremental $15.8 million in bad debt expense related to
our new Emerald Advance loan program, which replaced last
years IMAL. This expected increase is primarily due to the
participation rate on IMALs, which was 26%, while Emerald
Advances are funded by HRB Bank. Corporate wages also increased
$6.9 million over the prior year due primarily to
commercial tax acquisitions. These increases were partially
offset by declines in servicing and collection expenses and
marketing expenses.
Pretax income for the three months ended January 31, 2008
was $45.9 million, compared to $60.0 million in the
prior year.
Nine months ended
January 31, 2008 compared to January 31,
2007
Tax Services revenues increased $47.0 million, or
6.1%, for the nine months ended January 31, 2008 compared
to the prior year.
Tax preparation fees increased $22.6 million, or 4.4%,
primarily due to an increase of 6.9% in the net average fee per
U.S. retail client served, partially offset by a 3.3%
decline in tax returns prepared
and/or
e-filed in
company-owned offices in the current tax season. Our Australian
operations contributed $8.1 million to this increase, due
to an increase in clients served and favorable changes in
foreign currency exchange rates.
Other service revenues increased $12.6 million, or 10.3%,
primarily due to customer fees earned in connection with an
agreement with HRB Bank for the H&R Block Emerald Prepaid
MasterCard®,
under which this segment shares in the revenues and expenses
associated with this program. This increase was partially offset
by a decline in revenues from our Peace of Mind (POM) guarantee,
resulting from lower claims in the current year.
Loan participation and related fees decreased
$14.0 million, or 25.1%, primarily due to participation
fees earned on IMALs in the prior year.
Other revenues increased $23.7 million primarily due to
fees earned in connection with the Emerald Advance loan program,
also under a revenue and expense sharing agreement with HRB Bank.
Total expenses increased $112.6 million, or 10.9%, for the
nine months ended January 31, 2008. Cost of services
increased $45.8 million, or 6.1%, from the prior year.
Occupancy expenses increased $19.5 million, or
31
8.6%, primarily as a result of higher rent and utilities
expenses due to a 2.7% increase in company-owned offices under
lease and a 3.4% increase in the average rent.
Compensation and benefits expenses increased $15.0 million,
or 4.6%, primarily as a result of a 3.7% increase in
commission-based wages. Other cost of services increased
$15.0 million, or 9.3%, due to $7.7 million in
additional corporate shared services, primarily related to
information technology projects, and additional costs associated
with the H&R Block Emerald Prepaid
MasterCard®.
Cost of other revenues, selling, general and administrative
expenses increased $66.8 million, or 23.1%. This increase
was primarily due to $48.4 million of incremental bad debt
expense related to our RAL program, which resulted from the
change in cross-collect practices mentioned above and a larger
number of refund claims denied by the IRS for the 2007 tax
season. The IRS made changes to its taxpayer fraud detection
system and penalty collection practices, both of which
contributed to the increased expense. In addition, we recorded
an incremental $15.8 million in incremental bad debt
expense related to our new Emerald Advance loan program, which
replaced last years IMAL. Corporate wages also increased
$17.1 million over the prior year due primarily to
commercial tax acquisitions. Amortization of intangible assets
increased $4.0 million over the prior year, while servicing
and collection expenses declined due to changes in the early
season loan product and changes in RAL collection expectations.
The pretax loss for the nine months ended January 31, 2008
was $325.6 million, compared to a loss of
$260.0 million in the prior year.
BUSINESS
SERVICES
This segment offers accounting, tax and consulting services to
middle-market companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Services Operating Statistics
|
|
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Accounting, tax and consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable hours
|
|
|
984,851
|
|
|
|
1,024,572
|
|
|
|
3,297,153
|
|
|
|
3,245,598
|
|
Chargeable hours per person
|
|
|
319
|
|
|
|
305
|
|
|
|
918
|
|
|
|
894
|
|
Net billed rate per hour
|
|
$
|
144
|
|
|
$
|
147
|
|
|
$
|
145
|
|
|
$
|
146
|
|
Average margin per person
|
|
$
|
27,659
|
|
|
$
|
23,216
|
|
|
$
|
76,708
|
|
|
$
|
67,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Services Operating Results
|
|
|
(in 000s)
|
|
|
|
Three
Months Ended January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting, tax and consulting
|
|
$
|
160,884
|
|
|
$
|
165,652
|
|
|
$
|
527,284
|
|
|
$
|
523,801
|
|
Other services
|
|
|
18,690
|
|
|
|
13,912
|
|
|
|
58,959
|
|
|
|
58,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,574
|
|
|
|
179,564
|
|
|
|
586,243
|
|
|
|
582,440
|
|
Other
|
|
|
12,310
|
|
|
|
12,599
|
|
|
|
37,512
|
|
|
|
33,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
191,884
|
|
|
|
192,163
|
|
|
|
623,755
|
|
|
|
616,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
98,698
|
|
|
|
100,309
|
|
|
|
345,021
|
|
|
|
349,056
|
|
Occupancy
|
|
|
19,138
|
|
|
|
16,001
|
|
|
|
54,814
|
|
|
|
50,623
|
|
Other
|
|
|
17,640
|
|
|
|
21,318
|
|
|
|
60,871
|
|
|
|
62,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,476
|
|
|
|
137,628
|
|
|
|
460,706
|
|
|
|
462,387
|
|
Amortization of intangible assets
|
|
|
3,372
|
|
|
|
3,692
|
|
|
|
10,572
|
|
|
|
11,969
|
|
Cost of other revenues, selling, general and administrative
|
|
|
46,422
|
|
|
|
49,636
|
|
|
|
135,988
|
|
|
|
146,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
185,270
|
|
|
|
190,956
|
|
|
|
607,266
|
|
|
|
621,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
6,614
|
|
|
$
|
1,207
|
|
|
$
|
16,489
|
|
|
$
|
(4,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended January 31, 2008 compared to January 31,
2007
Business Services revenues for the three months ended
January 31, 2008 were essentially flat compared to the
prior year, as improvements in our tax and consulting businesses
were offset by a decrease in leased employee revenues, as
discussed below.
32
Accounting, tax and consulting service revenues declined
$4.8 million, or 2.9%, from the prior year primarily due to
a change in organizational structure between the businesses we
acquired from American Express Tax and Business Services, Inc.
(AmexTBS) and the attest firms that, while not affiliates of our
company, also serve our clients. Employees we previously leased
to the attest firms have now been transferred to the separate
attest practices. As a result, we no longer record the revenues
and expenses associated with leasing these employees, which
resulted in a reduction of $12.4 million to current quarter
revenues. This decline was partially offset by increases of 7.1%
and 8.7% in our tax and consulting service revenues,
respectively.
Other service revenues increased $4.8 million, or 3.4%, due
primarily to a higher number of capital market transactions
during the current quarter.
Total expenses were down $5.7 million, or 3.0%, for the
three months ended January 31, 2008 compared to the prior
year. Cost of services decreased $2.2 million, due
primarily to the elimination of employee leasing arrangements
with AmexTBS as discussed above, and lower bad debt expense for
the current quarter. These decreases were offset by increases in
the number of employees and the average wage per employee.
Cost of other revenues, selling, general and administrative
expenses decreased $3.2 million, or 6.5%, primarily due to
a decrease of $3.1 million in external consulting fees.
Pretax income for the three months ended January 31, 2008
was $6.6 million compared to income of $1.2 million in
the prior year.
Nine months ended
January 31, 2008 compared to January 31,
2007
Business Services revenues for the nine months ended
January 31, 2008 increased $7.4 million, or 1.2%, over
the prior year, as increases in our tax and consulting
businesses were partially offset by a decrease in leased
employee revenue.
Accounting, tax and consulting service revenues increased
$3.5 million, or 6.6%, over the prior year primarily due to
increases of 9.7% and 11.0% in our tax and consulting service
revenues, respectively. These increases were partially offset by
the change in organizational structure with AmexTBS discussed
above, which resulted in a reduction of $31.1 million to
current year revenues.
Other revenues increased $3.6 million, or 10.7%, due to
increased sales of computer hardware and software products and
additional fees received from our accounting network.
Total expenses decreased $13.8 million, or 2.2%, for the
nine months ended January 31, 2008 compared to the prior
year. Cost of services was down slightly from the prior year, as
a decrease in compensation and benefits was offset by increases
in occupancy expenses. The decrease in compensation and benefits
was primarily due to the change in organizational structure with
AmexTBS as discussed above.
Cost of other revenues, selling, general and administrative
expenses decreased $10.7 million, or 7.3%, primarily due to
decreases of $9.6 million and $4.0 million in external
consulting and legal fees, respectively. Additional consulting
fees were incurred in the prior year related to our marketing
initiatives, and additional legal expenses were incurred in the
prior year related to international acquisitions that were
ultimately not completed. These decreases were partially offset
by increased costs associated with our business development
initiatives.
Pretax income for the nine months ended January 31, 2008
was $16.5 million compared to a pretax loss of
$4.7 million in the prior year.
33
CONSUMER
FINANCIAL SERVICES
This segment is primarily engaged in offering brokerage
services, along with investment planning and related financial
advice through HRBFA and full-service banking through HRB Bank.
HRBFA offers traditional brokerage services, as well as
annuities, insurance, fee-based accounts, online account access,
equity research and focus lists, model portfolios, asset
allocation strategies, and other investment tools and
information. HRB Bank offers traditional banking services
including checking and savings accounts, home equity lines of
credit, individual retirement accounts, certificates of deposit
and prepaid debit card accounts. HRBFA utilizes HRB Bank for
certain FDIC-insured deposits for its clients. HRB Bank has also
historically purchased loans from OOMC and HRBMC, in addition to
prime loan purchases from third-party sellers. During the first
quarter of fiscal year 2008, HRB Bank stopped purchasing loans
from OOMC and HRBMC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Financial Services Operating
Statistics
|
|
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Broker-dealer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional brokerage
accounts(1)
|
|
|
378,399
|
|
|
|
394,767
|
|
|
|
378,399
|
|
|
|
394,767
|
|
New traditional brokerage accounts funded by tax clients
|
|
|
2,486
|
|
|
|
2,270
|
|
|
|
8,694
|
|
|
|
7,425
|
|
Cross-service revenue as a percent of total production
revenue(2)
|
|
|
16.6%
|
|
|
|
14.8%
|
|
|
|
17.7%
|
|
|
|
16.1%
|
|
Average assets per traditional brokerage account
|
|
$
|
84,133
|
|
|
$
|
81,774
|
|
|
$
|
84,133
|
|
|
$
|
81,774
|
|
Average margin balances (millions)
|
|
$
|
398
|
|
|
$
|
390
|
|
|
$
|
373
|
|
|
$
|
414
|
|
Average customer payable balances (millions)
|
|
$
|
522
|
|
|
$
|
630
|
|
|
$
|
537
|
|
|
$
|
626
|
|
Number of advisors
|
|
|
971
|
|
|
|
911
|
|
|
|
971
|
|
|
|
911
|
|
Banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio(3)
|
|
|
63%
|
|
|
|
36%
|
|
|
|
54%
|
|
|
|
37%
|
|
Annualized net interest
margin(4)
|
|
|
7.28%
|
|
|
|
2.62%
|
|
|
|
4.01%
|
|
|
|
2.88%
|
|
Annualized pretax return on average
assets(5)
|
|
|
3.47%
|
|
|
|
2.63%
|
|
|
|
1.23%
|
|
|
|
1.96%
|
|
Total assets (thousands)
|
|
$
|
2,395,156
|
|
|
$
|
1,814,259
|
|
|
$
|
2,395,156
|
|
|
$
|
1,814,259
|
|
Mortgage loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average FICO score
|
|
|
717
|
|
|
|
715
|
|
|
|
717
|
|
|
|
715
|
|
Average loan-to-value
|
|
|
76.8%
|
|
|
|
79.2%
|
|
|
|
76.8%
|
|
|
|
79.2%
|
|
Average debt-to-income ratio
|
|
|
34.3%
|
|
|
|
39.3%
|
|
|
|
34.3%
|
|
|
|
39.3%
|
|
Delinquency rate
|
|
|
7.13%
|
|
|
|
2.66%
|
|
|
|
7.13%
|
|
|
|
2.66%
|
|
Loans purchased from affiliates (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased from affiliates
|
|
$
|
-
|
|
|
$
|
311,883
|
|
|
$
|
56,341
|
|
|
$
|
1,035,007
|
|
Repurchased by affiliates
|
|
|
(1,990)
|
|
|
|
(11,235)
|
|
|
|
(193,648)
|
|
|
|
(11,235)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,990)
|
|
|
$
|
300,648
|
|
|
$
|
(137,307)
|
|
|
$
|
1,023,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes
only accounts with a positive balance.
|
(2) |
|
Defined
as revenue generated from referred customers divided by total
production revenue.
|
(3) |
|
Defined
as non-interest expense divided by revenue net of interest
expense. See Reconciliation of Non-GAAP Financial
Information at the end of Part I, Item 2.
|
(4) |
|
Defined
as annualized net interest revenue divided by average bank
earning assets. See Reconciliation of
Non-GAAP Financial Information at the end of
Part I, Item 2.
|
(5) |
|
Defined
as annualized pretax banking income divided by average bank
assets. See Reconciliation of Non-GAAP Financial
Information at the end of Part I, Item 2.
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Financial Services Operating Results
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial advisor production revenue
|
|
$
|
53,592
|
|
|
$
|
52,843
|
|
|
$
|
165,274
|
|
|
$
|
145,306
|
|
Other
|
|
|
22,795
|
|
|
|
22,710
|
|
|
|
54,249
|
|
|
|
40,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,387
|
|
|
|
75,553
|
|
|
|
219,523
|
|
|
|
185,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin lending
|
|
|
10,485
|
|
|
|
13,278
|
|
|
|
34,034
|
|
|
|
40,173
|
|
Banking activities
|
|
|
16,266
|
|
|
|
6,188
|
|
|
|
31,416
|
|
|
|
14,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,751
|
|
|
|
19,466
|
|
|
|
65,450
|
|
|
|
54,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan loss reserves
|
|
|
(419)
|
|
|
|
(1,684)
|
|
|
|
(12,345)
|
|
|
|
(3,386)
|
|
Other
|
|
|
101
|
|
|
|
309
|
|
|
|
429
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues(1)
|
|
|
102,820
|
|
|
|
93,644
|
|
|
|
273,057
|
|
|
|
237,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
39,560
|
|
|
|
35,145
|
|
|
|
119,525
|
|
|
|
99,467
|
|
Occupancy
|
|
|
6,321
|
|
|
|
5,112
|
|
|
|
16,390
|
|
|
|
15,020
|
|
Other
|
|
|
12,926
|
|
|
|
4,494
|
|
|
|
22,826
|
|
|
|
14,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,807
|
|
|
|
44,751
|
|
|
|
158,741
|
|
|
|
129,339
|
|
Amortization of intangible assets
|
|
|
3,053
|
|
|
|
9,157
|
|
|
|
21,365
|
|
|
|
27,469
|
|
Selling, general and administrative
|
|
|
27,972
|
|
|
|
28,777
|
|
|
|
82,838
|
|
|
|
75,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
89,832
|
|
|
|
82,685
|
|
|
|
262,944
|
|
|
|
232,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
12,988
|
|
|
$
|
10,959
|
|
|
$
|
10,113
|
|
|
$
|
5,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information
Revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-dealer
|
|
$
|
76,748
|
|
|
$
|
82,617
|
|
|
$
|
238,431
|
|
|
$
|
219,801
|
|
Bank
|
|
|
26,072
|
|
|
|
11,027
|
|
|
|
34,626
|
|
|
|
17,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,820
|
|
|
$
|
93,644
|
|
|
$
|
273,057
|
|
|
$
|
237,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-dealer
|
|
$
|
670
|
|
|
$
|
4,506
|
|
|
$
|
(2,638)
|
|
|
$
|
(4,470)
|
|
Bank
|
|
|
12,318
|
|
|
|
6,453
|
|
|
|
12,751
|
|
|
|
10,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,988
|
|
|
$
|
10,959
|
|
|
$
|
10,113
|
|
|
$
|
5,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total
revenues, less loan loss reserves on mortgage loans held for
investment and interest expense.
|
Three months
ended January 31, 2008 compared to January 31,
2007
Consumer Financial Services revenues, net of interest
expense and provision for loan loss reserves, for the three
months ended January 31, 2008 increased $9.2 million,
or 9.8%, over the prior year. The increase was due to higher
revenues at HRB Bank of $15.0 million, offset by a
$5.9 million decrease at HRBFA.
Financial advisor production revenue, which consists primarily
of fees earned on assets under administration and commissions on
client trades, was essentially flat compared to the prior year
as higher annuitized revenues were offset by lower closed-end
fund revenues. The following table summarizes the key drivers of
production revenue:
|
|
|
|
|
|
|
|
|
|
Three
Months Ended January 31,
|
|
2008
|
|
2007
|
|
|
|
|
Client trades
|
|
|
253,554
|
|
|
234,417
|
|
|
Average revenue per trade
|
|
$
|
110.47
|
|
$
|
139.25
|
|
|
Ending balance of assets under administration (billions)
|
|
$
|
31.8
|
|
$
|
32.3
|
|
|
Annualized productivity per advisor
|
|
$
|
228,000
|
|
$
|
237,000
|
|
|
|
|
35
Net interest income on margin lending activities declined
$2.8 million, or 21.0%, due to declining interest rates. In
January 2008, the Federal Funds rate was reduced by a total of
125 basis points. As this rate is reduced, we reduce the
rates on margin and other asset balances, and therefore, net
interest income is reduced. The impact of the January rate
reductions had a small impact on our third quarter results but
will have a larger negative impact on net interest income in our
fourth quarter.
Net interest income on banking activities increased
$10.1 million from the prior year primarily due to interest
income received on our new Emerald Advance loan products and an
increase in mortgage loans held for investment, partially offset
by an increase in deposits. The following table summarizes the
key drivers of net interest revenue on banking activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
Average Balance
|
|
|
Average Rate Earned
(Paid)
|
|
Three
Months Ended January 31,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
1,089,566
|
|
|
$
|
817,578
|
|
|
|
6.31%
|
|
|
|
6.91%
|
|
Emerald Advance lines of credit
|
|
|
171,925
|
|
|
|
-
|
|
|
|
36.00%
|
|
|
|
-%
|
|
Other investments
|
|
|
154,498
|
|
|
|
136,999
|
|
|
|
4.20%
|
|
|
|
5.31%
|
|
Deposits
|
|
|
1,117,946
|
|
|
|
787,160
|
|
|
|
(4.07)%
|
|
|
|
(4.77%)
|
|
|
|
Although the target rate on Federal Funds decreased during the
third quarter, the impact to the HRB Banks net interest
margin was minimal. On an annualized basis the rate decrease
should have a positive impact to HRB Banks net interest
margin.
Total expenses rose $7.1 million, or 8.6%, from the prior
year. Compensation and benefits increased $4.4 million, or
12.6%, primarily due to higher commission and bonus payouts
related to an increased number of recently recruited advisors.
Other cost of services increased $8.4 million primarily due
to higher expenses associated with the H&R Block Prepaid
Emerald
MasterCard®
program.
Amortization of intangible assets decreased $6.1 million,
or 66.7%, as the related intangible assets were fully amortized
in November 2007.
Pretax income for the three months ended January 31, 2008
was $13.0 million compared to prior year income of
$11.0 million, as the decline at HRBFA was offset by
improvements at HRB Bank.
Nine months ended
January 31, 2008 compared to January 31,
2007
Consumer Financial Services revenues, net of interest
expense and provision for loan loss reserves, for the nine
months ended January 31, 2008 increased $35.5 million,
or 14.9%, over the prior year. The increase was due to increases
at HRBFA of $18.6 million and HRB Bank of
$16.8 million.
Financial advisor production revenue was up $20.0 million,
or 13.7%, from the prior year primarily due to higher annualized
production per advisor driven by an increase in fee-based
account revenue and annuity transactions. The following table
summarizes the key drivers of production revenue:
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
2007
|
|
|
|
|
Client trades
|
|
|
736,256
|
|
|
673,754
|
|
|
Average revenue per trade
|
|
$
|
120.88
|
|
$
|
124.86
|
|
|
Ending balance of assets under administration (billions)
|
|
$
|
31.8
|
|
$
|
32.3
|
|
|
Annualized productivity per advisor
|
|
$
|
234,000
|
|
$
|
207,000
|
|
|
|
|
Other service revenues increased $14.0 million due an
increase in fees received on sweep products and the H&R
Block Prepaid Emerald
MasterCard®
program.
Net interest income on margin lending activities declined
$6.1 million, or 15.3%, due to declining balances and
interest rates. In January 2008, the Federal Funds rate was
reduced by a total of 125 basis points. As this rate is
reduced, we reduce the rates on margin and other asset balances,
and therefore, net interest income is reduced. The impact of the
January rate reductions had a small impact on our third quarter
results but will have a larger negative impact on net interest
income in our fourth quarter.
Net interest income on banking activities increased
$17.1 million from the prior year due to interest income
received on our new Emerald Advance loan products and an
increase in mortgage loans held for investment,
36
partially offset by an increase in deposits. The following table
summarizes the key drivers of net interest revenue on banking
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
|
|
|
Average Balance
|
|
|
Average Rate Earned
(Paid)
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
1,207,583
|
|
|
$
|
603,051
|
|
|
|
6.64%
|
|
|
|
6.92%
|
|
Emerald Advance lines of credit
|
|
|
57,930
|
|
|
|
-
|
|
|
|
36.00%
|
|
|
|
-%
|
|
Other investments
|
|
|
101,979
|
|
|
|
65,596
|
|
|
|
4.77%
|
|
|
|
5.24%
|
|
Deposits
|
|
|
1,063,370
|
|
|
|
509,394
|
|
|
|
(4.72)%
|
|
|
|
(5.01%)
|
|
|
|
Although the target rate on Federal Funds decreased during the
third quarter, the impact to the HRB Banks net interest
margin was minimal. On an annualized basis the rate decrease
should have a positive impact to HRB Banks net interest
margin.
We recorded a provision for loan losses on our mortgage loans
held for investment of $12.3 million during the current
year, compared to $3.4 million in the prior year. Our loan
loss provision increased significantly during the current year
as a result of declining collateral values due to declining
residential home prices, and increasing delinquencies occurring
in our portfolio. The residential mortgage industry has
experienced similar trends. If adverse trends continue, we may
be required to record additional loan loss provisions, and those
losses may be significant.
Our loan loss reserve as a percent of mortgage loans was 1.49%,
or $15.9 million, at January 31, 2008, compared to
0.27%, or $2.9 million, at January 31, 2007. Mortgage
loans held for investment at January 31, 2008 totaled
$1.0 billion, $778.0 million of which were purchased
from OOMC and HRBMC. The delinquency rate of mortgage loans
greater than thirty days past due was 7.13% compared to 2.66% at
January 31, 2007.
Total expenses rose $30.9 million, or 13.3%, from the prior
year. Compensation and benefits increased $20.1 million, or
20.2%, primarily due to higher commission and bonus payouts
resulting from improved production revenue and a higher number
of recently recruited advisors. Other cost of services increased
primarily due to higher expenses from the H&R Block Prepaid
Emerald
MasterCard®
program.
Amortization of intangible assets decreased $6.1 million,
or 22.2%, as the related intangible assets were fully amortized
in November 2007.
Selling, general and administrative expenses increased
$7.6 million, or 10.1%, primarily due to gains on the
disposition of certain assets recorded in the prior year.
Pretax income for the nine months ended January 31, 2008
was $10.1 million compared to prior year income of
$5.6 million, as HRBFA and HRB Bank posted improvements of
$1.8 million and $2.7 million, respectively.
CORPORATE
OPERATIONS, INTEREST AND INCOME TAXES
Three months
ended January 31, 2008 compared to January 31,
2007
The pretax loss recorded in our corporate operations for the
three months ended January 31, 2008 was $61.4 million
compared to $50.0 million in the prior year. The increased
loss is primarily due to $11.3 million of severance costs
related to our corporate cost reduction activities and
$9.1 million in severance costs related to our former chief
executive and financial officers. These incremental costs were
partially offset by a $7.6 million decline in interest
expense, which resulted from increased allocation of interest
expense to our discontinued operations. See discussion in
note 12 to the condensed consolidated financial statements.
We reported pretax income from continuing operations during the
quarter of $4.1 million and, assuming a 35% federal tax
rate, our expected tax expense for the quarter would be
$1.4 million. We reported a tax benefit of
$5.2 million, a difference of $6.6 million from our
expected tax. During the current quarter, we recorded discrete
tax benefits of $3.5 million, relating to the adjustment of
estimated tax provisions in fiscal year 2007, partially offset
by reserves for uncertain tax positions. The remaining
difference related to an adjustment of estimated taxes provided
during the six months ended October 31, 2007. Our estimated
annual effective tax rate for continuing operations in fiscal
year 2008 is approximately 40%.
Income taxes for continuing operations for the prior year
includes one-time benefits of $8.6 million during the three
months ended January 31, 2007. The benefit in the prior
year related primarily to a permanent deduction for our
investment in a foreign subsidiary and net adjustments of our
prior year estimated tax provision and tax reserves.
37
Our effective tax rate for discontinued operations was 41.7% and
50.3% for the three months ended January 31, 2008 and 2007,
respectively. Our effective tax rate for discontinued operations
for the full fiscal year ended April 30, 2007, was 34.5%.
Nine months ended
January 31, 2008 compared to January 31,
2007
The pretax loss recorded in our corporate operations for the
nine months ended January 31, 2008 was $104.2 million
compared to $111.3 million in the prior year. The lower
loss is primarily due to a $23.6 million decline in
interest expense, which resulted from increased allocation of
interest expense to our discontinued operations. See discussion
in note 12 to the condensed consolidated financial
statements. We also recorded $5.8 million in additional
investment income in the current year. These improvements were
partially offset by $11.3 million of severance costs
related to our corporate cost reduction activities and
$9.1 million in severance costs related to our former chief
executive and financial officers.
Our effective tax rate for continuing operations was 41.3% and
41.5% for the nine months ended January 31, 2008 and 2007,
respectively. Our effective tax rate for continuing operations
in both periods was higher than expected primarily due to net
discrete tax benefits discussed above. Our effective tax rate
for discontinued operations was 37.4% and 48.4% for the nine
months ended January 31, 2008 and 2007, respectively.
DISCONTINUED
OPERATIONS
Discontinued operations includes OOMC and HRBMC, mortgage
businesses historically engaged in the origination and
acquisition of non-prime and prime mortgage loans, the sale and
securitization of mortgage loans and residual interests, and the
servicing of non-prime loans. During the quarter ended
January 31, 2008, we terminated all origination activities.
Also included are the results of three smaller lines of business
previously reported in our Business Services segment, as well as
our tax operations in the United Kingdom previously reported in
our Tax Services segment. Income statement data presented below
is net of eliminations of intercompany activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations Operating Statistics
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended January 31,
|
|
|
Nine Months Ended January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Volume of loans originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale (non-prime)
|
|
$
|
14,214
|
|
|
$
|
5,666,513
|
|
|
$
|
3,568,822
|
|
|
$
|
19,023,438
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
28,780
|
|
|
|
268,866
|
|
|
|
382,737
|
|
|
|
826,917
|
|
Non-prime
|
|
|
-
|
|
|
|
325,020
|
|
|
|
97,471
|
|
|
|
1,380,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,994
|
|
|
$
|
6,260,399
|
|
|
$
|
4,049,030
|
|
|
$
|
21,230,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan delivery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party buyers, net of repurchases
|
|
$
|
122,063
|
|
|
$
|
6,030,094
|
|
|
$
|
4,166,051
|
|
|
$
|
20,470,751
|
|
HRB Bank, net of repurchases
|
|
|
(1,990)
|
|
|
|
300,648
|
|
|
|
(137,307)
|
|
|
|
1,023,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,073
|
|
|
$
|
6,330,742
|
|
|
$
|
4,028,744
|
|
|
$
|
21,494,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations Operating Results
|
|
|
(in 000s)
|
|
|
|
|
|
Three Months Ended January 31,
|
|
|
Nine Months Ended January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Components of gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on mortgage loans
|
|
$
|
(3,230)
|
|
|
$
|
46,533
|
|
|
$
|
(118,934)
|
|
|
$
|
333,317
|
|
Gain (loss) on derivatives
|
|
|
295
|
|
|
|
35,179
|
|
|
|
1,240
|
|
|
|
20,372
|
|
Loan sale repurchase reserves
|
|
|
(49,474)
|
|
|
|
(111,122)
|
|
|
|
(379,440)
|
|
|
|
(251,083)
|
|
Gain on sale of residual interests
|
|
|
-
|
|
|
|
7,296
|
|
|
|
-
|
|
|
|
7,296
|
|
Impairment of residual interests
|
|
|
(14,652)
|
|
|
|
(43,557)
|
|
|
|
(125,948)
|
|
|
|
(73,059)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,061)
|
|
|
|
(65,671)
|
|
|
|
(623,082)
|
|
|
|
36,843
|
|
Interest income
|
|
|
8,015
|
|
|
|
12,184
|
|
|
|
34,642
|
|
|
|
42,108
|
|
Loan servicing revenue
|
|
|
85,677
|
|
|
|
109,833
|
|
|
|
276,092
|
|
|
|
332,336
|
|
Other
|
|
|
4,925
|
|
|
|
23,737
|
|
|
|
16,441
|
|
|
|
33,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
31,556
|
|
|
|
80,083
|
|
|
|
(295,907)
|
|
|
|
445,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
64,213
|
|
|
|
101,383
|
|
|
|
202,859
|
|
|
|
281,249
|
|
Cost of other revenues
|
|
|
56,673
|
|
|
|
79,700
|
|
|
|
173,975
|
|
|
|
223,908
|
|
Change in valuation allowance
|
|
|
(29,926)
|
|
|
|
|
|
|
|
116,303
|
|
|
|
|
|
Selling, general and administrative
|
|
|
37,739
|
|
|
|
64,254
|
|
|
|
194,665
|
|
|
|
194,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
128,699
|
|
|
|
245,337
|
|
|
|
687,802
|
|
|
|
699,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
|
(97,143)
|
|
|
|
(165,254)
|
|
|
|
(983,709)
|
|
|
|
(254,112)
|
|
Income tax benefit
|
|
|
(40,501)
|
|
|
|
(83,058)
|
|
|
|
(368,144)
|
|
|
|
(122,915)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(56,642)
|
|
|
$
|
(82,196)
|
|
|
$
|
(615,565)
|
|
|
$
|
(131,197)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-prime residential mortgage loan market has been
adversely affected by a weakening housing market and increasing
rates of delinquencies and defaults. We have been significantly
and negatively impacted by the events and conditions impacting
the broader non-prime residential mortgage loan market,
resulting in significant impairments and operating losses during
fiscal 2007 and 2008.
Three months
ended January 31, 2008 compared to January 31,
2007
On December 4, 2007, we announced we would terminate all
origination activities, although we would fulfill loan
commitments in our pipeline. In January 2008, OOMC funded its
last loan.
The pretax loss of $97.1 million for the three months ended
January 31, 2008 includes $49.5 million for loss
provisions and repurchase reserves, impairments of residual
interests of $14.7 million and expenses related to the
closing of origination and corporate activities. Restructuring
costs recorded during the quarter totaled $27.9 million.
All other non-cost of service expenses are declining as the
business winds down. We have estimated the fair values of the
servicing business and other assets, which resulted in a
reduction in asset impairment for the third quarter ending
January 31, 2008 of $29.9 million.
39
The following table summarizes the key metrics related to our
loan servicing business:
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
Three
Months Ended January 31,
|
|
2008
|
|
2007
|
|
|
|
|
Average servicing portfolio:
|
|
|
|
|
|
|
|
|
With related MSRs
|
|
$
|
56,046,269
|
|
$
|
63,809,435
|
|
|
Without related MSRs
|
|
|
2,089,728
|
|
|
6,412,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,135,997
|
|
$
|
70,222,223
|
|
|
|
|
|
|
|
|
|
|
|
Ending servicing portfolio:
|
|
|
|
|
|
|
|
|
With related MSRs
|
|
$
|
54,039,841
|
|
$
|
63,942,819
|
|
|
Without related MSRs
|
|
|
1,453,186
|
|
|
3,589,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,493,027
|
|
$
|
67,532,174
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans serviced
|
|
|
309,521
|
|
|
395,390
|
|
|
Average delinquency rate
|
|
|
24.38%
|
|
|
11.22%
|
|
|
Weighted average FICO score
|
|
|
621
|
|
|
621
|
|
|
Weighted average interest rate (WAC) of portfolio
|
|
|
8.57%
|
|
|
8.14%
|
|
|
Carrying value of MSRs
|
|
$
|
165,490
|
|
$
|
263,140
|
|
|
|
|
Loan servicing revenues decreased $24.2 million, or 22.0%,
compared to the prior year. The decrease reflects a decline in
our average servicing portfolio, which decreased 17.2%, to
$58.1 billion. The decline in our average servicing
portfolio is the result of a decline in the subservicing
portfolio and the absence of new originations. As a result of
our decision to terminate remaining loan origination activities,
loan servicing revenues are expected to continue to decline.
Cost of services decreased $37.2 million primarily due to
lower amortization of MSRs.
The pretax loss of our discontinued operations for the three
months ended January 31, 2008 was $97.1 million
compared to a loss of $165.3 million in the prior year. The
loss from discontinued operations for the current period of
$56.6 million is net of tax benefits of $40.5 million,
and primarily includes income tax benefits related to OOMC.
Nine months ended
January 31, 2008 compared to January 31,
2007
The pretax loss of $983.7 million for the nine months ended
January 31, 2008 includes losses of $7.2 million from
our Business Services discontinued operations, with the
remainder from our mortgage business. As discussed more fully
below, mortgage results include $379.4 million in loss
provisions and repurchase reserves, impairments of residual
interests of $125.9 million and impairments of other assets
totaling $116.3 million.
The following table summarizes the key drivers of loan
origination volumes and related gains on sales of mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
2007
|
|
|
|
|
Application process:
|
|
|
|
|
|
|
|
|
Total number of applications
|
|
|
35,170
|
|
|
203,198
|
|
|
Originations:
|
|
|
|
|
|
|
|
|
Total number of loans originated
|
|
|
16,347
|
|
|
102,544
|
|
|
WAC
|
|
|
8.75%
|
|
|
8.64%
|
|
|
Average loan size
|
|
$
|
248
|
|
$
|
207
|
|
|
Total volume of loans originated
|
|
$
|
4,049,030
|
|
$
|
21,230,982
|
|
|
Direct origination and acquisition expenses, net
|
|
$
|
23,535
|
|
$
|
135,442
|
|
|
Revenue (loan value):
|
|
|
|
|
|
|
|
|
Net gain on sale gross
margin(1)
|
|
|
(12.28)%
|
|
|
0.48%
|
|
|
|
|
|
(1) |
|
Defined
as gain on sale of mortgage loans (including gain or loss on
derivatives, mortgage servicing rights and net of direct
origination and acquisition expenses) divided by origination
volume.
|
We recorded losses on sales of mortgage assets of
$623.1 million during the current year, compared to gains
of $36.8 million in the prior year. This decrease resulted
primarily from significantly lower origination volumes and loan
sale premiums, and increases in loan repurchase reserves and
impairments of residual interests.
40
During the current year, concerns about credit quality in the
non-prime industry resulted in lower demand for non-prime loans
and a higher yield requirement by investors that purchase the
loans. As a result, during the current year we originated
mortgage loans that, by the time we sold them in the secondary
market, were valued at less than par. Our net gain on sale gross
margin for the nine months ended January 31, 2008 was a
negative 12.28%. Additionally, our loan sale premium declined
467 basis points to a negative 3.51% in the current year,
from 1.16% in the prior year.
We recorded total loss provisions relating to the repurchase and
disposition of loans previously sold of $379.4 million
during the current year compared to $251.1 million in the
prior year. The provision recorded in the current year consists
of $189.1 million recorded on loans sold during the current
year and $190.3 million related to loans sold in the prior
year. After we repurchased the loans, we have experienced higher
severity of losses on those loans. Based on historical
experience, we assumed an average 50% loss severity at
January 31, 2008, compared to 26% at April 30, 2007,
on loans repurchased and expected to be repurchased due to early
payment defaults and violations of representations and
warranties. See additional discussion of our reserves and
repurchase obligations in Critical Accounting
Policies and in note 12 to our condensed consolidated
financial statements.
During the current year, the disruption in the secondary market
also impacted our residual interests. We recorded impairments of
residual interests of $125.9 million due to higher expected
credit losses resulting from the decline in performance of the
underlying collateral and an increase in our discount rate
assumption from 25% to 30%. As of January 31, 2008,
substantially all residual interests from originations prior to
January 2007 were written down to zero value. Residual
interests at January 31, 2008 have a current carrying value
of $25.9 million.
During the current year, we recorded a net $1.2 million in
gains, compared to $20.4 million in the prior year, related
to our various derivative instruments. We ceased all derivative
activities during the second quarter. See note 12 to the
condensed consolidated financial statements.
The following table summarizes the key metrics related to our
loan servicing business:
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
Nine
Months Ended January 31,
|
|
2008
|
|
2007
|
|
|
|
|
Average servicing portfolio:
|
|
|
|
|
|
|
|
|
With related MSRs
|
|
$
|
59,461,814
|
|
$
|
63,794,781
|
|
|
Without related MSRs
|
|
|
2,601,676
|
|
|
8,728,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,063,490
|
|
$
|
72,523,671
|
|
|
|
|
|
|
|
|
|
|
|
Ending servicing portfolio:
|
|
|
|
|
|
|
|
|
With related MSRs
|
|
$
|
54,039,841
|
|
$
|
63,942,819
|
|
|
Without related MSRs
|
|
|
1,453,186
|
|
|
3,589,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,493,027
|
|
$
|
67,532,174
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans serviced
|
|
|
309,521
|
|
|
395,390
|
|
|
Average delinquency rate
|
|
|
19.61%
|
|
|
9.03%
|
|
|
Weighted average FICO score
|
|
|
622
|
|
|
621
|
|
|
Weighted average interest rate (WAC) of portfolio
|
|
|
8.46%
|
|
|
8.04%
|
|
|
Carrying value of MSRs
|
|
$
|
165,490
|
|
$
|
263,140
|
|
|
|
|
Loan servicing revenues decreased $56.2 million, or 16.9%,
compared to the prior year. The decrease reflects a decline in
our average servicing portfolio, which decreased 14.4%, to
$62.1 billion. The decline in our average servicing
portfolio is the result of a decline in the subservicing
portfolio and significantly lower origination volumes, as
discussed above. As a result of our decision to terminate
remaining loan origination activities, loan servicing revenues
are expected to continue to decline.
Total expenses for the nine months ended January 31, 2008
decreased $11.6 million, or 1.7%, from the prior year. Cost
of services decreased $78.4 million primarily due to lower
amortization of MSRs.
Cost of other revenues decreased $49.9 million, primarily
due to our ongoing restructuring plans. As a result,
compensation and benefits declined due to lower staffing levels,
although this reduction was partially offset by increased
occupancy expenses as a result of early termination costs on
leases.
We also recorded $116.3 million in asset impairments
related to the pending sale and closure of our mortgage
operations and other discontinued operations. See discussion of
the termination of our agreement to sell
41
OOMC in note 1 to the condensed consolidated financial
statements and Part II, Item 1A, under Potential
Sale Transaction.
Selling, general and administrative expenses were flat compared
to the prior year, as restructuring charges recorded in the
current year were offset by lower operating expenses resulting
from prior year restructuring activities.
The pretax loss for the nine months ended January 31, 2008
was $983.7 million compared to a loss of
$254.1 million in the prior year.
The loss from discontinued operations for the current period of
$615.6 million is net of tax benefits of
$368.1 million, and primarily includes income tax benefits
related to OOMC. Losses from discontinued operations for all of
fiscal year 2007 totaled $808.0 million, net of tax
benefits of $425.0 million, including tax benefits related
to OOMC of $374.6 million. Although the tax position
associated with deferred tax benefits of discontinued businesses
will more likely than not be sustained, there is a level of
uncertainty associated with the amount of benefit. We believe
the net deferred tax asset at January 31, 2008 is, more
likely than not, realizable.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets and condensed consolidated
statements of cash flows found on pages 1 and 3, respectively.
CAPITAL
RESOURCES & LIQUIDITY BY SEGMENT
Our sources of capital primarily include cash from operations,
issuances of common stock and debt. We use capital primarily to
fund working capital requirements, pay dividends and acquire
businesses. Our Tax Services and Business Services segments are
highly seasonal and therefore generally require the use of cash
to fund operating losses during the period May through December.
Our mortgage operations have incurred significant operating
losses in recent quarters, also requiring the use of cash and
working capital.
Given the likely availability of a number of liquidity options,
we believe, that in the absence of any unexpected developments,
our existing sources of capital at January 31, 2008 are
sufficient to meet our operating needs.
Cash From
Operations. Cash used in operating activities for the
first nine months of fiscal 2008 totaled $3.4 billion,
compared with $2.7 billion for the same period of the prior
fiscal year. The change was due primarily to increased losses
and working capital requirements of our discontinued mortgage
businesses, partially offset by lower net income tax payments,
which declined $434.4 million from the prior year.
Issuance of
Common Stock. We issue shares of common stock, in
accordance with our stock-based compensation plans, out of
treasury shares. Proceeds from the issuance of common stock
totaled $17.4 million and $26.0 million for the nine
months ended January 31, 2008 and 2007, respectively.
Dividends.
Dividends paid totaled $137.0 million and
$128.1 million for the nine months ended January 31,
2008 and 2007, respectively.
Share
Repurchases. There are 22.4 million shares
remaining under share repurchase authorizations at
January 31, 2008. We purchase shares on the open market in
accordance with existing authorizations, subject to various
factors including the price of the stock, our ability to
maintain liquidity and financial flexibility, securities laws
restrictions, internally and regulatory targeted capital levels
and other investment opportunities.
The OTS requires us to maintain a three percent minimum ratio of
adjusted tangible capital to adjusted total assets. Due to
significant losses in our mortgage operations, we did not meet
this minimum capital requirement at April 30, 2007 and at
January 31, 2008. We are currently seeking the elimination
or modification of the three percent minimum capital requirement
as a result of cessation of our mortgage business. To the extent
the minimum capital requirement remains applicable or is not
modified by the OTS, our ability to repurchase shares of our
common stock may be restricted.
Debt.
In April 2007, we obtained a $500.0 million credit facility
to provide funding for the $500.0 million of
81/2% Senior
Notes which were due April 16, 2007. This facility was
amended on December 20, 2007 to extend the term of the
facility. Under the amended facility, $250.0 million will
mature on February 29, 2008 and $250.0 million will
mature on April 30, 2008. The facility is subject to
various covenants that are similar to our
42
primary unsecured committed lines of credit (CLOCs). At
January 31, 2008, the balance under this facility was
$28.2 million, having been substantially repaid with the
proceeds of Senior Notes as discussed below.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013, and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay
$471.8 million of the $500.0 million facility
discussed above, with the remaining proceeds used for working
capital and general corporate purposes. As of January 31,
2008, we had $250.0 million remaining under our shelf
registration for additional debt issuances.
We had no commercial paper outstanding at January 31, 2008,
compared to $1.5 billion at January 31, 2007. As an
alternative to commercial paper issuance, we have been borrowing
under our CLOCs to support working capital requirements
primarily arising from off-season operating losses in our Tax
Services and Business Services segments and operating losses
from our mortgage businesses. We had $1.8 billion
outstanding under our CLOCs at January 31, 2008. See
additional discussion in Commercial Paper Issuance and
Other Borrowings and note 5 to the condensed
consolidated financial statements.
We entered into a committed line of credit agreement with HSBC
Finance Corporation (HSBC Finance) effective January 10,
2008 for use as a funding source for the purchase of RAL
participations. This line will make available funding totaling
$3.0 billion through March 30, 2008 and
$120.0 million thereafter through June 30, 2008. This
line is subject to various covenants that are similar to our
amended CLOCs, and is secured by our RAL participations. At
January 31, 2008, there was $1.7 billion outstanding
on this facility.
Restricted
Cash. We hold certain cash balances that are
restricted as to use. Cash and cash equivalents
restricted totaled $326.3 million at January 31, 2008
compared to $332.6 million at April 30, 2007. Consumer
Financial Services held $256.0 million of this total
segregated in a special reserve account for the exclusive
benefit of its broker-dealer clients. Our corporate operations
also held $60.0 million in restricted cash related to our
$3.0 billion line of credit with HSBC Finance.
Segment Cash
Flows. A condensed consolidating statement of cash
flows by segment for the nine months ended January 31, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
Business
|
|
|
Financial
|
|
|
|
|
|
Discontinued
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
Corporate(1)
|
|
|
Operations
|
|
|
H&R
Block
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
(2,052,613
|
)
|
|
$
|
97,257
|
|
|
$
|
(282,686
|
)
|
|
$
|
(413,631
|
)
|
|
$
|
(716,292
|
)
|
|
$
|
(3,367,965
|
)
|
Investing
|
|
|
(55,624
|
)
|
|
|
(14,818
|
)
|
|
|
111,348
|
|
|
|
(30,452
|
)
|
|
|
913
|
|
|
|
11,367
|
|
Financing
|
|
|
(25,380
|
)
|
|
|
(5,208
|
)
|
|
|
743,907
|
|
|
|
2,487,277
|
|
|
|
644,173
|
|
|
|
3,844,769
|
|
Net intercompany
|
|
|
2,195,616
|
|
|
|
(94,702
|
)
|
|
|
255,480
|
|
|
|
(2,427,600
|
)
|
|
|
71,206
|
|
|
|
-
|
|
|
|
|
|
(1)
|
Income tax payments,
net of refunds of $89.9 million received during the nine
months ended January 31, 2008, are included in Corporate.
|
Net intercompany activities are excluded from investing and
financing activities within the segment cash flows. We believe
that by excluding intercompany activities, the cash flows by
segment more clearly depicts the cash generated and used by each
segment. Had intercompany activities been included, those
segments in a net lending situation would have been included in
investing activities, and those in a net borrowing situation
would have been included in financing activities.
Tax
Services. Tax Services has historically been our
largest provider of annual operating cash flows. The seasonal
nature of Tax Services generally results in a large positive
operating cash flow in the fourth quarter. Tax Services used
$2.1 billion in its current nine-month operations to cover
off-season costs and working capital requirements. This segment
used $55.6 million in investing activities primarily
related to capital expenditures and acquisitions, and used
$25.4 million in financing activities related to book
overdrafts.
Business
Services. Business Services funding requirements are
largely related to receivables for completed work and work
in process. We provide funding sufficient to cover their
working capital needs. This segment provided $97.3 million
in operating cash flows during the first nine months of the
year, primarily due to collections on receivables. Business
Services used $14.8 million in investing activities
primarily related to capital expenditures.
Consumer
Financial Services. In the first nine months of
fiscal year 2008, Consumer Financial Services used
$282.7 million in cash from its operating activities
primarily due to the timing of cash deposits that are
43
restricted for the benefit of its broker-dealer clients. The
segment provided $111.3 million in investing activities
primarily from principal payments received on mortgage loans
held for investment and provided $743.9 million in
financing activities due primarily to FDIC-insured deposits held
at HRB Bank.
HRB Bank is a member of the Federal Home Loan Bank (FHLB) of Des
Moines, which extends credit to member banks based on eligible
collateral. At January 31, 2008, HRB Bank had FHLB advance
capacity of $523.6 million, and there was
$104.0 million outstanding on this facility. Mortgage loans
held for investment of $940.0 million were pledged as
collateral on these advances.
BFC made an additional capital contribution to HRB Bank of
$107.1 million during the three months ended
January 31, 2008. This contribution was necessary for HRB
Bank to meet its capital requirements due to seasonal
fluctuations in its balance sheet. Also during the three months
ended January 31, 2008, we submitted an application to the
OTS requesting that HRB Bank be allowed to pay dividends to BFC
in an amount that will not exceed the capital necessary to
continuously maintain HRB Banks required 12.0% leverage
ratio. The OTS approved our application on February 29,
2008.
Discontinued
Operations. These operations have historically
generated cash as a result of the sale and securitization of
mortgage loans and residual interests, and as residual interests
begin to cash flow. Our discontinued operations used
$716.3 million in cash from operating activities primarily
due to losses during the nine months ended January 31,
2008. Operating cash flows of discontinued operations in the
table above includes the net loss from discontinued operations
of $615.6 million. Cash provided by financing activities of
$644.2 million reflects the proceeds from a servicing
advance facility, as discussed below, less the repayment of an
on-balance sheet warehouse line.
On October 1, 2007, OOMC entered into a facility to fund
servicing advances (the Servicing Advance Facility),
in which the servicing advances are collateral for the facility.
The Servicing Advance Facility originally provided funding of up
to $400.0 million to fund servicing advances through
October 1, 2008. During the three months ended
January 31, 2008, the facility was amended, increasing the
available funding to $1.2 billion as of January 31,
2008. This facility is subject to various triggers, events or
occurrences that could result in earlier termination, and bears
interest at one-month LIBOR plus an additional margin rate. The
Servicing Advance Facility terminates upon a change in
control of OOMC, in which (i) a party or parties
acting in concert acquire a 20% or more equity interest in OOMC
or (ii) the Company does not own more than a 50% equity
interest in OOMC. This on-balance sheet facility had a balance
of $857.1 million at January 31, 2008, with the
related liability reported in liabilities held-for-sale.
Due to market conditions, OOMC had significant borrowings on its
line of credit from Block Financial LLC (BFC), its direct
corporate parent. BFC provides a line of credit of at least
$150 million for working capital needs. There is no
commitment to fund any further operations of OOMC.
See discussion of changes in the off-balance sheet arrangements
of our discontinued operations below.
OFF-BALANCE SHEET
FINANCING ARRANGEMENTS
In connection with our decision to cease all loan origination
activities, we terminated all remaining on- and off-balance
sheet warehouse facilities during the three months ended
January 31, 2008.
Other than the changes outlined above, there have been no
material changes in our off-balance sheet financing arrangements
from those reported at April 30, 2007 in our Annual Report
on
Form 10-K.
COMMERCIAL PAPER
ISSUANCE AND OTHER BORROWINGS
The following chart provides the debt ratings for BFC as of
January 31, 2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008
|
|
|
|
|
|
|
|
|
April 30,
2007
|
|
|
|
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook
|
|
|
|
|
Fitch
|
|
|
F3
|
|
|
|
BBB
|
|
|
|
Negative
|
|
|
|
F1
|
|
|
|
A
|
|
|
|
Stable
|
|
Moodys
|
|
|
P2
|
|
|
|
Baa1
|
|
|
|
Negative
|
|
|
|
P2
|
|
|
|
A3
|
|
|
|
Negative
|
|
S&P
|
|
|
A3
|
|
|
|
BBB-
|
|
|
|
Negative
|
|
|
|
A2
|
|
|
|
BBB+
|
|
|
|
Negative
|
|
DBRS
|
|
|
R-2(high
|
)
|
|
|
BBB(high
|
)
|
|
|
Negative
|
|
|
|
R-1(low
|
)
|
|
|
A
|
|
|
|
Stable
|
|
|
|
Market conditions and credit-rating downgrades have negatively
impacted our ability to issue commercial paper. As a result, we
had no commercial paper outstanding at January 31, 2008. As
an alternative to commercial paper issuance, we have been
borrowing under our CLOCs to support working capital
requirements arising from
44
off-season operating losses in our Tax Services and Business
Services segments and operating losses from our mortgage
businesses.
At January 31, 2008, we maintained $2.0 billion in
revolving credit facilities to support issuance of commercial
paper and for general corporate purposes. These CLOCs, and
borrowings thereunder, have a maturity date of August 2010 and
an annual facility fee in a range of six to fifteen basis points
per annum, based on our credit ratings. We had a combined
$1.8 billion outstanding as of January 31, 2008, and
$950.0 million as of March 5, 2008. These borrowings
are included in long-term debt on our condensed consolidated
balance sheet due to their contractual maturity date. The CLOCs,
among other things, require we maintain at least
$650.0 million of adjusted net worth, as defined in the
agreement, on the last day of any fiscal quarter. On
November 19, 2007, the CLOCs were amended to, among other
things, require $450.0 million of adjusted net worth, for
the fiscal quarters ending October 31, 2007 and
January 31, 2008. We had adjusted net worth of
$463.9 million at January 31, 2008, primarily due to
operating losses of our discontinued operations.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013, and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay
$471.8 million of the $500.0 million facility
discussed above, with the remaining proceeds used for working
capital and general corporate purposes. As of January 31,
2008, we had $250.0 million remaining under our shelf
registration for additional debt issuances.
We entered into a line of credit agreement with HSBC Finance
Corporation effective January 10, 2008 for use as a funding
source for the purchase of RAL participations. This line will
make available funding totaling $3.0 billion through
March 30, 2008 and $120.0 million thereafter through
June 30, 2008. This line is subject to various covenants
that were similar to our amended CLOCs, and was secured by our
RAL participations. At January 31, 2008, there was
$1.7 billion outstanding on this facility.
Other than the changes outlined above, there have been no
material changes in our commercial paper program and other
borrowings from those reported at April 30, 2007 in our
Annual Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) on May 1, 2007. Total unrecognized tax
benefits as of May 1, 2007 were $133.3 million, of
which $89.0 million, on a gross basis, were tax positions
that, if recognized, would impact the effective tax rate. We
have classified the liability for unrecognized tax benefits as
long term in the condensed consolidated balance sheet. We are
unable to determine when, and if, unrecognized tax positions
will result in obligations requiring future cash payments. See
note 6 to the condensed consolidated financial statements
for additional information.
Other than the change outlined above, there have been no
material changes in our contractual obligations and commercial
commitments from those reported at April 30, 2007 in our
Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
In March 2006, the OTS approved the federal savings bank charter
of HRB Bank. HRB Bank commenced operations on May 1, 2006,
at which time H&R Block, Inc. became a savings and loan
holding company. As a savings and loan holding company, H&R
Block, Inc. is subject to regulation by the OTS. Federal savings
banks are subject to extensive regulation and examination by the
OTS, their primary federal regulator, as well as the FDIC. In
conjunction with H&R Block, Inc.s application with
the OTS for HRB Bank, H&R Block, Inc. made commitments as
part of our charter approval order (Master Commitment) which
included, but were not limited to: (1) H&R Block, Inc.
to maintain a three percent minimum ratio of adjusted tangible
capital to adjusted total assets, as defined by the OTS;
(2) maintain all HRB Bank capital within HRB Bank in
accordance with the submitted three-year business plan; and
(3) follow federal regulations surrounding intercompany
transactions and approvals. H&R Block, Inc. fell below the
three percent minimum ratio at April 30, 2007 and the OTS
issued a Supervisory Directive.
The Supervisory Directive included additional conditions that we
will be required to meet in addition to the Master Commitment.
The significant additional conditions included in the
Supervisory Directive are as follows: (1) requires HRB Bank
to extend its compliance with a minimum 12.0% leverage ratio
through fiscal year 2012; (2) requires H&R Block, Inc.
to comply with the Master Commitment at all times, except for
the projected capital levels and compliance with the three
percent minimum ratio, as provided in the fiscal year 2008 and
45
2009 capital adequacy projections presented to the OTS on
July 19, 2007; (3) institutes reporting requirements
to the OTS quarterly and monthly by the Board of Directors and
management, respectively; and (4) requires HRB Banks
Board of Directors to have an independent chairperson and at
least the same number of outside directors as inside directors.
H&R Block, Inc. continued to be below the three percent
minimum ratio during our third quarter, and had adjusted
tangible capital of negative $713.9 million, and a
requirement of $311.9 million to be in compliance at
January 31, 2008. We are currently seeking the elimination
or modification of the three percent minimum capital requirement
as a result of cessation of our mortgage business. At this time,
we do not expect to be in compliance with the three percent
minimum ratio at April 30, 2008. We currently believe that
upon disposition of our mortgage business the OTS will
reconsider the three percent minimum capital requirement,
although there is no assurance that an elimination or
modification will occur.
Failure to meet the conditions under the Master Commitment and
the Supervisory Directive, including capital levels of H&R
Block, Inc., could result in the OTS taking further regulatory
actions, such as a supervisory agreement,
cease-and-desist
orders and civil monetary penalties. The OTS could also require
us to sell assets, which could negatively impact our financial
results. At this time, the financial impact, if any, of
additional regulatory actions cannot be determined.
HRBFA is subject to regulatory requirements intended to ensure
the general financial soundness and liquidity of broker-dealers.
At January 31, 2008, HRBFAs net capital of
$80.1 million, which was 18.2% of aggregate debit items,
exceeded its minimum required net capital of $8.8 million
by $71.3 million. During the nine months ended
January 31, 2008, HRBFA paid dividends of
$44.5 million to BFC, its direct corporate parent.
The Alternative Minimum Tax (AMT) was enacted in 1969 to ensure
that a small number of high-income taxpayers could not use
special tax deductions to substantially eliminate their tax.
Because this initial legislation was not indexed for inflation,
an increasing number of taxpayers are becoming subject to AMT.
We believe the current tax season was delayed as a result of
late enactment by the IRS of the AMT patch. The IRS
began processing returns for the vast majority of taxpayers in
mid-January. However, as many as 13.5 million taxpayers
using five forms related to the AMT legislation postponed filing
tax returns until February 11, 2008. Delays by the IRS in
return-processing resulted in a shifting of Tax Services
revenues from our fiscal third quarter to our fourth quarter.
On January 3, 2008, the IRS issued an Advanced Notice of
Proposed Rulemaking (ANPR) concerning RALs. In this ANPR, the
IRS states that it is considering proposing a rule that would
prohibit the sharing of taxpayer information for the purpose of
marketing RALs in connection with the preparation of a tax
return. Until such time as final regulations are issued on this
matter, we are unable to determine what impact, if any, this
proposal would have on our operating results.
Other than the items discussed above, there have been no
material changes in our regulatory environment from those
reported at April 30, 2007 in our Annual Report on
Form 10-K.
CRITICAL
ACCOUNTING POLICIES
The following discussion is an update to previous disclosure
regarding certain of our critical accounting policies and should
be read in conjunction with the complete critical accounting
policies disclosures included in our Annual Report on
Form 10-K
for the year ended April 30, 2007. For all of our critical
accounting policies, we caution that future events rarely
develop precisely as forecasted, and estimates routinely require
adjustment and may require material adjustment.
Valuation of
Mortgage Loans Held for Investment
Determining the allowance for credit losses for loans held for
investment requires us to make estimates of losses that are
highly uncertain and requires a high degree of judgment.
We record an allowance representing our estimate of credit
losses inherent in our portfolio of loans held for investment at
the balance sheet date. The majority of our estimated credit
loss is evaluated for mortgage loans on a pooled basis. We
stratify the loan portfolio based on our view of risk associated
with various elements of the pool and assign estimated loss
rates based on those risks. Loss rates are based on historical
experience, our assessment of economic and market conditions and
loss rates of comparable financial institutions. We review
non-performing loans, including loans meeting the definition of
troubled debt restructurings, individually and
46
record loss estimates typically based on the value of the
underlying collateral. Changes in our estimates can affect our
operating results.
Our loan loss provision increased significantly during the
current year as a result of declining collateral values due to
declining residential home prices, and increasing delinquencies
occurring in our portfolio during October and November of 2007.
The residential mortgage industry has experienced similar
trends. If adverse trends continue, we may be required to record
additional loan loss provisions, and those losses may be
significant.
Our loan loss reserve as a percent of mortgage loans was 1.49%
at January 31, 2008, compared to 0.35% at April 30,
2007. Mortgage loans held for investment at January 31,
2008 totaled $1.0 billion, $778.0 million of which
were purchased from OOMC and HRBMC.
Sales of Mortgage
Assets Loan Repurchase Liability
Our repurchase reserves relate to potential losses that could be
incurred related to the repurchase of sold loans or
indemnification of losses as a result of early payment defaults
or breaches of other representations and warranties customary to
the mortgage banking industry. Loans are repurchased due to a
combination of factors, including delinquency and other
violations of representations and warranties. In whole loan sale
transactions, we guarantee the first payment to the purchaser.
If this payment is not collected, it is referred to as an early
payment default.
For early payment default-related losses, the amount of losses
we expect to incur depends primarily on the frequency of early
payment defaults, the rate at which defaulted loans subsequently
become current on payments (cure rate), the
propensity of the buyer of the loans to demand recourse under
the loan sale agreement and the severity of loss incurred on
loans which have been repurchased. The frequency of early
payment defaults, cure rates and loss severity may vary
depending on the creditworthiness of the borrower and economic
factors such as home price appreciation and interest rates. To
the extent actual losses related to repurchase activity are
different from our estimates, the value of our repurchase
reserves will increase or decrease. See note 12 to our
condensed consolidated financial statements under
Commitments and Contingencies.
Declining credit quality coupled with increasing early payment
defaults, caused investors in our loans to become increasingly
more likely to execute on first payment default provisions
available to them in loan sale agreements. Investors have also
begun performing additional due diligence on loan pools, causing
unprecedented numbers of loans to be excluded from loan pools
before the sale. During the nine months ended January 31,
2008, we increased our reserve for losses on representations and
warranties repurchases as a result of rising repurchase trends.
The portion of our reserve balance related to losses on
representation and warranty repurchases totaled
$66.8 million and $5.6 million at January 31,
2008 and April 30, 2007, respectively. We also experienced
high levels of early payment defaults, resulting in significant
loan repurchase activity. We recorded total loss provisions of
$379.4 million during the current year compared to
$251.1 million in the prior year. The provision recorded in
the current year consists of $189.1 million recorded on
loans sold during the current period and $190.3 million
related to loans sold in the prior year. At January 31,
2008, we assumed that substantially all loans that failed to
make timely payments according to contractual early payment
default provisions will be repurchased. Based on historical
experience, we assumed an average 50% loss severity, up from 26%
at April 30, 2007, on all loans repurchased and expected to
be repurchased as of January 31, 2008. The increase in our
loan repurchase liability was primarily due to the increase in
our loss severity assumption.
Based on our analysis as of January 31, 2008, we estimated
our liability for recourse obligations to be $69.0 million.
The sensitivity of the recourse liability to 10% and 20% adverse
changes in loss assumptions is $6.9 million and
$13.8 million, respectively.
Valuation of
Residual Interests
We use discounted cash flow models to determine the estimated
fair values of our residual interests. We develop our
assumptions for expected credit losses, prepayment speeds,
discount rates and interest rates based on historical
experience. Variations in our assumptions could materially
affect the estimated fair values, which may require us to record
impairments. In addition, variations will also affect the amount
of residual interest accretion recorded on a monthly basis.
47
We recorded impairments totaling $125.9 million in our
condensed consolidated income statements for the nine months
ended January 31, 2008. During the current year, we
increased our discount rate assumption from 25% to 30% as a
result of continued uncertainty and volatility in the market and
higher investor yield requirements. The fair value of our
residual interests was $25.9 million at January 31,
2008. See note 12 to our condensed consolidated financial
statements and Part I, Item 3 for additional
discussion.
FORWARD-LOOKING
INFORMATION
In this report, and from time to time throughout the year, we
share our expectations for our future performance. These
forward-looking statements are based upon current information,
expectations, estimates and projections regarding the Company,
the industries and markets in which we operate, and our
assumptions and beliefs at that time. These statements speak
only as of the date on which they are made, are not guarantees
of future performance, and involve certain risks, uncertainties
and assumptions, which are difficult to predict. Therefore,
actual outcomes and results could materially differ from what is
expressed, implied or forecast in these forward-looking
statements. Words such as believe, will,
plan, expect, intend,
estimate, approximate, and similar
expressions may identify such forward-looking statements.
RECONCILIATION OF
NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally
accepted accounting principles (GAAP). However, we believe
certain non-GAAP performance measures and ratios used in
managing the business may provide additional meaningful
comparisons between current year results and prior periods.
Reconciliations to GAAP financial measures are provided below.
These non-GAAP financial measures should be viewed in addition
to, not as an alternative for, our reported GAAP results.
|
|
Banking
Ratios |
(dollars in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31,
|
|
Nine Months Ended January 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Efficiency Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Financial Services expenses
|
|
$
|
104,124
|
|
$
|
96,552
|
|
$
|
322,625
|
|
$
|
262,316
|
Less: Interest and
non-banking
expenses
|
|
|
81,516
|
|
|
91,983
|
|
|
292,222
|
|
|
254,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
banking expense
|
|
$
|
22,608
|
|
$
|
4,569
|
|
$
|
30,403
|
|
$
|
7,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Financial Services revenues
|
|
$
|
117,112
|
|
$
|
107,511
|
|
$
|
332,738
|
|
$
|
267,888
|
Less:
Non-banking
revenues and interest expense
|
|
|
81,355
|
|
|
94,800
|
|
|
276,296
|
|
|
246,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking revenue net of interest expense
|
|
$
|
35,757
|
|
$
|
12,711
|
|
$
|
56,442
|
|
$
|
21,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63%
|
|
|
36%
|
|
|
54%
|
|
|
37%
|
Net Interest Margin (annualized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net banking interest
revenue(1)
|
|
$
|
25,531
|
|
$
|
6,188
|
|
$
|
40,681
|
|
$
|
14,309
|
Net banking interest revenue (annualized)
|
|
$
|
101,870
|
|
$
|
25,027
|
|
$
|
54,438
|
|
$
|
19,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by average bank earning assets
|
|
$
|
1,398,583
|
|
$
|
954,577
|
|
$
|
1,357,562
|
|
$
|
668,277
|
|
|
|
7.28%
|
|
|
2.62%
|
|
|
4.01%
|
|
|
2.88%
|
Return on Average Assets (annualized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax banking income
|
|
$
|
12,318
|
|
$
|
6,453
|
|
$
|
12,751
|
|
$
|
10,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax banking income (annualized)
|
|
$
|
49,272
|
|
$
|
25,812
|
|
$
|
17,001
|
|
$
|
13,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by average bank assets
|
|
$
|
1,420,599
|
|
$
|
982,633
|
|
$
|
1,379,865
|
|
$
|
682,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.47%
|
|
|
2.63%
|
|
|
1.23%
|
|
|
1.96%
|
|
|
(1)
|
Excludes revenue
sharing with Tax Services on Emerald Advance activities.
|
48
Item 7A of our Annual Report on
Form 10-K
for fiscal year 2007 presents discussions of market risks that
may impact our future results. The following risk factors should
be read in conjunction with that discussion.
Interest Rate
Risk and Credit Spreads − Discontinued Mortgage
Operations. Interest rate changes and credit spreads
impact the value of the loans on our balance sheet, as well as
residual interests in securitizations and MSRs.
At January 31, 2008, we had $1.7 billion of mortgage
loans held for sale on our balance sheet. Substantially all of
these loans were recorded pursuant to removal of accounts
provisions whereby we are required to record both the
mortgage loan and an offsetting mortgage loan repurchase
liability on our balance sheet. We do not intend to exercise our
right under these provisions and, therefore, these do not
represent mortgage loans that we are required to sell or
repurchase obligations we are required to fulfill. Accordingly,
we are not subject to market risk with respect to these loans.
Remaining mortgage loans totaling $57.7 million were
repurchased from whole loan investors or the Trusts, and are
recorded net of a $35.8 million allowance for loan losses.
We are subject to market risk with respect to these remaining
loans, including market risk arising from changes in interest
rates, loan sale prices, collateral performance and other market
factors including credit spreads.
Residual
Interests. Relative to modeled assumptions, an
increase or decrease in interest rates would impact the value of
our residual interests. Residual interests bear the interest
rate risk embedded within the securitization due to an initial
fixed-rate period on the loans versus a floating-rate funding
cost. Residual interests also bear the ongoing risk that the
floating interest rate earned after the fixed period on the
mortgage loans is different from the floating interest rate on
the bonds sold in the securitization.
Foreign Currency
Risk. During the third quarter of fiscal year 2008,
borrowing needs in our Canadian operations were funded by
corporate borrowings in the U.S. To mitigate the foreign
currency exchange rate risk, we are using forward foreign
exchange contracts. We do not enter into forward contracts for
trading purposes. In estimating the fair value of derivative
positions, we utilize quoted market prices, if available, or
quotes obtained from external sources.
When foreign currency financial instruments are outstanding,
exposure to market risk on these instruments results from
fluctuations in currency rates during the periods in which the
contracts are outstanding. The counterparties to our currency
exchange contracts consist of major financial institutions, each
of which is rated investment grade. We are exposed to credit
risk to the extent of potential nonperformance by counterparties
on financial instruments. Any potential credit exposure does not
exceed the fair value. We believe the risk of incurring losses
due to credit risk is remote. At January 31, 2008 forward
exchange contracts outstanding had a notional value of
$29.8 million and a market value of $29.7 million. We
estimate a 10% change in exchange rates would result in a
$3.0 million loss on our forward foreign exchange contract,
presumably offset by a change in the value of loans to our
Canadian operations.
Interest Rate
Risk − Broker-Dealer. HRBFA holds interest
bearing receivables from customers, brokers, dealers and
clearing organizations, which consist primarily of amounts due
on margin transactions and also earns a spread on customer
balances held in FDIC-insured bank accounts. We fund short-term
margin balances with short-term variable rate liabilities from
customers, brokers and dealers, including stock loan activity.
Our fixed income portfolio is affected by changes in market
rates and prices. We value the trading portfolio at quoted
market prices and the market value at January 31, 2008 was
approximately $12.7 million. See the table below for
sensitivities to changes in interest rates.
49
Sensitivity
Analysis. The sensitivities of certain financial
instruments to changes in interest rates as of January 31,
2008 are presented below. The following table represents
hypothetical instantaneous and sustained parallel shifts in
interest rates and should not be relied on as an indicator of
future expected results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Carrying
Value at
|
|
|
Basis
Point Change
|
|
|
|
January 31, 2008
|
|
|
-300
|
|
|
-200
|
|
|
-100
|
|
|
+100
|
|
|
+200
|
|
|
+300
|
|
|
|
|
|
Mortgage loans held for investment
|
|
$
|
1,040,854
|
|
|
$
|
18,470
|
|
|
$
|
14,086
|
|
|
$
|
9,045
|
|
|
$
|
(19,600
|
)
|
|
$
|
(41,596
|
)
|
|
$
|
(63,225
|
)
|
|
|
|
Mortgage loans held for
sale(1)
|
|
|
21,870
|
|
|
|
2,379
|
|
|
|
1,569
|
|
|
|
774
|
|
|
|
(738
|
)
|
|
|
(1,366
|
)
|
|
|
(1,891
|
)
|
|
|
|
Residual interests in securitizations
|
|
|
25,929
|
|
|
|
(2,125
|
)
|
|
|
(2,223
|
)
|
|
|
(1,979
|
)
|
|
|
123
|
|
|
|
1,696
|
|
|
|
2,313
|
|
|
|
|
Broker -dealer activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer sweep
balances(2)
|
|
|
1,354,687
|
|
|
|
(20,862
|
)
|
|
|
(11,774
|
)
|
|
|
(3,515
|
)
|
|
|
3,782
|
|
|
|
5,847
|
|
|
|
11,246
|
|
|
|
|
Restricted cash
|
|
|
256,000
|
|
|
|
(7,424
|
)
|
|
|
(5,120
|
)
|
|
|
(2,560
|
)
|
|
|
2,560
|
|
|
|
5,120
|
|
|
|
7,680
|
|
|
|
|
Receivables from customers, brokers and dealers
|
|
|
365,253
|
|
|
|
(10,958
|
)
|
|
|
(7,305
|
)
|
|
|
(3,653
|
)
|
|
|
3,653
|
|
|
|
7,305
|
|
|
|
10,958
|
|
|
|
|
Payables to customers, brokers and dealers
|
|
|
(501,657
|
)
|
|
|
1,254
|
|
|
|
752
|
|
|
|
502
|
|
|
|
(2,509
|
)
|
|
|
(5,017
|
)
|
|
|
(7,525
|
)
|
|
|
|
|
|
(1)
|
Does not include
loans recorded pursuant to removal of accounts
provisions as we do not intend to exercise our right under
these provisions and, therefore, we are not subject to market
risk with respect to these loans.
|
(2)
|
Represents balances
not recorded on HRBFAs balance sheet. These amounts are
held by banks participating in the FDIC sweep program.
|
The table above addresses changes in interest rates only. See
additional discussion of the impact of changes in the markets on
mortgage-related assets and the impact to our financial
condition and results of operations in note 12 to the
condensed consolidated financial statements.
There have been no other material changes in our market risks
from those reported at April 30, 2007 in our Annual Report
on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. The controls evaluation
was done under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer. Based on this evaluation, we have concluded
that our disclosure controls and procedures were effective as of
the end of the period covered by this Quarterly Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
50
The information below should be read in conjunction with the
information included in note 9 to our condensed
consolidated financial statements.
RAL
Litigation. We reported in our annual report on
Form 10-K
for the year ended April 30, 2007, certain events and
information regarding lawsuits regarding the RAL Cases. The RAL
Cases have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things, disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million. We believe we have meritorious defenses to
the remaining RAL Cases and we intend to defend them vigorously.
There can be no assurances, however, as to the outcome of the
pending RAL Cases individually or in the aggregate. Likewise,
there can be no assurances regarding the impact of the RAL Cases
on our financial results. There were no significant developments
regarding the RAL Cases during the fiscal quarter ended
January 31, 2008.
Peace of Mind
Litigation. Lorie J. Marshall, et al. v.
H&R Block Tax Services, Inc., et al., Civil Action
2003L000004, in the Circuit Court of Madison County, Illinois,
is a class action case filed on January 18, 2002, that was
granted class certification on August 27, 2003.
Plaintiffs claims consist of five counts relating to the
Peace of Mind (POM) program under which the applicable tax
return preparation subsidiary assumes liability for additional
tax assessments attributable to tax return preparation error.
The plaintiffs allege that the sale of POM guarantees
constitutes (i) statutory fraud by selling insurance
without a license, (ii) an unfair trade practice, by
omission and by cramming (i.e., charging customers
for the guarantee even though they did not request it or want
it), and (iii) a breach of fiduciary duty. In August 2003,
the court certified the plaintiff classes consisting of all
persons who from January 1, 1997 to final judgment
(i) were charged a separate fee for POM by H&R
Block or a defendant H&R Block class member;
(ii) reside in certain class states and were charged a
separate fee for POM by H&R Block or a
defendant H&R Block class member not licensed to sell
insurance; and (iii) had an unsolicited charge for POM
posted to their bills by H&R Block or a
defendant H&R Block class member. Persons who received the
POM guarantee through an H&R Block Premium office and
persons who reside in Alabama are excluded from the plaintiff
class. The court also certified a defendant class consisting of
any entity with names that include H&R Block or
HRB, or are otherwise affiliated or associated with
H&R Block Tax Services, Inc., and that sold or sells the
POM product. The trial court subsequently denied the
defendants motion to certify class certification issues
for interlocutory appeal. Discovery is proceeding. No trial date
has been set.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is being tried
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains similar allegations. No class has been certified in
this case.
We believe the claims in the POM actions are without merit, and
we intend to defend them vigorously. The amounts claimed in the
POM actions are substantial, however, and there can be no
assurances as to the outcome of these pending actions
individually or in the aggregate.
Electronic Filing
Litigation. We are a defendant to a class action
filed on August 30, 2002 and entitled Erin M. McNulty
and Brian J. Erzar v. H&R Block, Inc., et al.,
Case
No. 02-CIV-4654
in the Court of Common Pleas of Lackawanna County, Pennsylvania,
in which the plaintiffs allege that the defendants deceptively
portray electronic filing fees as a necessary and required
component of standard tax preparation services and do not inform
tax preparation clients that they may (i) file tax returns
free of charge by mailing the returns,
51
(ii) electronically file tax returns from personal
computers either free of charge or at significantly lower fees
and (iii) be eligible to electronically file tax returns
free of charge via telephone. The plaintiffs seek unspecified
damages and disgorgement of all electronic filing, tax
preparation and related fees collected during the applicable
class period. Class certification was granted in this case on
September 5, 2007. We believe the claims in this case are
without merit, and we intend to defend them vigorously, but
there can be no assurances as to its outcome.
Express IRA
Litigation. On March 15, 2006, the New York
Attorney General filed a lawsuit in the Supreme Court of the
State of New York, County of New York (Index No. 06/401110)
entitled The People of New York v. H&R Block, Inc.
and H&R Block Financial Advisors, Inc. The complaint
alleged fraudulent business practices, deceptive acts and
practices, common law fraud and breach of fiduciary duty with
respect to the Express IRA product and sought equitable relief,
disgorgement of profits, damages and restitution, civil
penalties and punitive damages. On July 12, 2007, the
Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than H&R Block Financial
Advisors, Inc. and the claims of common law fraud. We believe
the claims in this case are without merit, and we intend to
defend this case vigorously, but there are no assurances as to
its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. We believe the claims in this
case are without merit, and we intend to defend this case
vigorously, but there are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against us
concerning the Express IRA matter, the first of which was filed
on March 17, 2006. Except for two cases pending in state
court, all of the civil actions have been consolidated by the
panel for Multi-District Litigation into a single action styled
In re H&R Block, Inc. Express IRA Marketing Litigation
in the United States District Court for the Western District
of Missouri. We believe the claims in this case are without
merit, and we intend to defend these cases vigorously, but there
are no assurances as to their outcome.
Securities
Litigation. On April 6, 2007, a putative class
action styled In re H&R Block Securities Litigation
was filed against the Company and certain of its officers in
the United States District Court for the Western District of
Missouri. The complaint alleged, among other things, deceptive,
material and misleading financial statements, failure to prepare
financial statements in accordance with generally accepted
accounting principles and concealment of the potential for
lawsuits stemming from the allegedly fraudulent nature of the
Companys operations. The complaint sought unspecified
damages and equitable relief. On October 5, 2007, the court
dismissed the complaint and granted the plaintiffs leave to
re-file the portion of the complaint pertaining to the
Companys financial statements. On November 19, 2007,
the plaintiffs re-filed the complaint, alleging, among other
things, deceptive, material and misleading financial statements
and failure to prepare financial statements in accordance with
generally accepted accounting principles. The court dismissed
the re-filed complaint on February 19, 2008. We believe the
claims in this case are without merit. If the dismissal is
appealed, we intend to defend this litigation vigorously.
Other Claims and
Litigation. The NASD brought charges against HRBFA
regarding the sale by HRBFA of Enron debentures in 2001. The
hearing for this matter was concluded in August 2007, and
post-hearing briefs were submitted in October 2007. We intend to
defend the NASD charges vigorously, although there can be no
assurances regarding the outcome and resolution of the matter.
As part of an industry-wide review, the IRS is investigating
tax-planning strategies that certain RSM McGladrey, Inc. (RSM)
clients utilized during fiscal years 2000 through 2003.
Specifically, the IRS is examining these strategies to determine
whether RSM complied with tax shelter reporting and listing
regulations and whether such strategies were abusive as defined
by the IRS. The IRS has indicated that it will assess a fine
against RSM for RSMs alleged failure to comply with the
tax shelter reporting and listing regulations. RSM is in
discussions with the IRS regarding this penalty. In addition,
some clients that utilized the strategies are seeking recovery
from RSM for penalties and interest for underpayment of taxes.
We believe the resolution of this matter will not have a
material adverse effect on RSMs operations or on our
financial results.
52
RSM EquiCo, Inc., a subsidiary of RSM, is a party to a putative
class action filed on July 11, 2006 and entitled Do
Rights Plant Growers v. RSM EquiCo, Inc., RSM
McGladrey, Inc., H&R Block, Inc. and Does 1-100,
inclusive, Case No. 06 CC00137, in the California
Superior Court, Orange County. The complaint contains
allegations regarding business valuation services provided by
RSM EquiCo, Inc. including fraud, negligent misrepresentation,
breach of contract, breach of implied covenant of good faith and
fair dealing, breach of fiduciary duty and unfair competition
and seeks unspecified damages, restitution and equitable relief.
We are in the early stages of discovery in this case and intend
to defend this case vigorously, although there can be no
assurance regarding the outcome and resolution of this matter.
We have from time to time been party to investigations, claims
and lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of similarly situated customers. The amounts
claimed in these claims and lawsuits are substantial in some
instances, and the ultimate liability with respect to such
litigation and claims is difficult to predict. Some of these
investigations, claims and lawsuits pertain to RALs, the
origination and servicing of mortgage loans, the electronic
filing of customers income tax returns, the POM guarantee
program, and our Express IRA program and other investment
products and RSM EquiCo, Inc. business valuation services. In
addition, it is possible that the number of these claims with
respect to the origination or servicing of mortgage loans may
increase in light of the current non-prime mortgage environment.
We believe we have meritorious defenses to each of these claims,
and we are defending or intend to defend them vigorously,
although there is no assurance as to their outcome. In the event
of an unfavorable outcome, the amounts we may be required to pay
in the discharge of liabilities or settlements could have a
material adverse effect on our financial results.
In addition to the aforementioned types of cases, we are parties
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (Other Claims) concerning investment products, the
preparation of customers income tax returns, the fees
charged customers for various products and services, losses
incurred by customers with respect to their investment accounts,
relationships with franchisees, denials of mortgage loans,
contested mortgage foreclosures, other aspects of the mortgage
business, intellectual property disputes, employment matters and
contract disputes. We believe we have meritorious defenses to
each of the Other Claims, and we are defending them vigorously.
While we cannot provide assurance that we will ultimately
prevail in each instance, we believe the amount, if any, we are
required to pay in the discharge of liabilities or settlements
in these Other Claims will not have a material adverse effect on
our financial results.
Item 1A of our Annual Report on
Form 10-K
for fiscal year 2007 presents risk factors that may impact our
future results. In light of recent developments in the mortgage,
housing and secondary markets, the following risk factors should
be read in conjunction with that discussion.
Potential Sale
Transaction. In fiscal year 2007, we entered into an
agreement to sell OOMC. On December 4, 2007, we agreed to
terminate the agreement. We also announced that we would
immediately terminate all remaining origination activities and
pursue the sale of OOMCs loan servicing activities. During
January 2008, OOMC funded the last loan in its pipeline.
OOMC will continue to carry out its servicing activities and
collect servicing revenues. Because of the cessation of new
originations, the volume of mortgage loans serviced will
gradually decline as the aggregate principal amount of existing
loans being serviced declines without replacement. The majority
of servicing activities are carried out with respect to loans
owned by third parties.
We have estimated the fair values of the servicing business and
other assets, which resulted in impairments recorded in
discontinued operations of $116.3 million for the nine
months ended January 31, 2008. Although we are actively
pursuing the sale of our remaining loan servicing activities, it
is possible that we will be unsuccessful in selling or selling
at a price that does not result in further impairment.
Liquidity and
Capital. We use capital primarily to fund working
capital requirements, pay dividends and acquire businesses.
Market conditions and credit-rating downgrades have negatively
impacted our ability to issue commercial paper. As a result, we
had no commercial paper outstanding at January 31, 2008. As
an alternative to commercial paper issuance, we have been
borrowing under our unsecured revolving committed lines of
credit
53
(CLOCs) to support working capital requirements arising from
off-season operating losses in our Tax Services and Business
Services segments and operating losses from our mortgage
businesses. We had borrowings totaling $1.8 billion
outstanding under our CLOCs at January 31, 2008, of a total
borrowing capacity of $2.0 billion.
The CLOCs, among other things, require we maintain at least
$650.0 million of adjusted net worth, as defined in the
agreement, on the last day of any fiscal quarter. On
November 19, 2007, the CLOCs were amended to, among other
things, require $450.0 million of adjusted net worth, for
the fiscal quarters ending October 31, 2007 and
January 31, 2008. We had adjusted net worth of
$463.9 million at January 31, 2008, primarily due to
operating losses of our discontinued operations.
A further disruption in credit markets, or a violation of
covenants under our CLOCs, could adversely affect our access to
these funds. To meet our future financing needs we may issue
additional debt or equity securities.
As part of our loan servicing responsibilities, we are required
to advance funds to cover delinquent scheduled principal and
interest payments to security holders, as well as to cover
delinquent tax and insurance payments and other costs required
to protect the investors interest in the collateral
securing the loans. Generally, servicing advances are
recoverable from either the mortgagor, the insurer of the loan
or the investor through the non-recourse provision of the loan
servicing contract. In light of increased delinquencies of
mortgage loans that we service, the amount of funds we are
required to advance on a monthly basis has been increasing.
Servicing advances and related assets totaled $1.2 billion
and $445.4 million at January 31, 2008 and
April 30, 2007, respectively. We expect the volume of
servicing advances to increase, although we cannot know the
volume of servicing advances that are likely to be required in
any given period.
On October 1, 2007, OOMC entered into a facility to fund
servicing advances (the Servicing Advance Facility),
in which the servicing advances are collateral for the facility.
The Servicing Advance Facility originally provided funding of up
to $400.0 million to fund servicing advances through
October 1, 2008. During the three months ended
January 31, 2008, the facility was amended, increasing the
available funding to $1.2 billion as of January 31,
2008. This facility is subject to various triggers, events or
occurrences that could result in earlier termination, and bears
interest at one-month LIBOR plus an additional margin rate. The
Servicing Advance Facility terminates upon a change in
control of OOMC, in which (i) a party or parties
acting in concert acquire a 20% or more equity interest in OOMC
or (ii) the Company does not own more than a 50% equity
interest in OOMC. This on-balance sheet facility had a balance
of $857.1 million at January 31, 2008, with the
related liability reported in liabilities held-for-sale. We
expect the volume of servicing advances to increase and, as a
result, may need to increase the funding capacity of this
facility or obtain other servicing advance financing.
Delinquencies and corresponding servicing advances increase
significantly when adjustable rate mortgages (ARMs) initially
reset. HRB Bank and OOMC are actively working with borrowers to
minimize delinquencies, including modifying loans and notifying
borrowers of upcoming rate changes prior to their reset date.
Market and Credit
Risks. The valuation of our retained residual
interests and mortgage servicing rights includes many estimates
and assumptions made by management surrounding interest rates,
prepayment speeds and credit losses. Variation in interest rates
or the factors underlying our assumptions could affect our
results of operations.
Conditions in the non-prime mortgage industry resulted in
significant losses in our mortgage operations during fiscal
years 2007 and 2008. The mortgage industry continues to be
extremely volatile, which could result in further impairments to
our residual interests and loans held for sale, or further
losses as a result of obligations to repurchase loans previously
sold. To the extent that market conditions remain volatile, or
fail to improve, our mortgage business may continue to incur
operating losses and asset impairments. See additional
discussion of the performance of our mortgage operations in
Part I, Item 2, under Discontinued
Operations.
HRB Bank held mortgage loans for investment totaling
$1.0 billion at January 31, 2008. The overall credit
quality of mortgage loans held for investment is impacted by the
strength of the U.S. economy and local economic conditions,
including residential housing prices. Economic trends that
negatively affect housing prices and the job market could result
in deterioration in credit quality of our mortgage loan
portfolio and a decline in the value of associated collateral.
As discussed above, future ARM resets could also lead to
increased delinquencies in our mortgage loans held for
investment. Recent trends in the residential mortgage loan
market reflect an increase in loan delinquencies and declining
collateral values. As a result of similar trends in our loan
portfolio, we recorded loan loss provisions totaling
$12.3 million during the nine months ended
54
January 31, 2008. If adverse trends in the residential
mortgage loan market continue, including adverse trends in our
mortgage loan portfolio specifically, we could incur additional
significant loan loss provisions.
Regulatory
Environment Banking. H&R Block, Inc.
is subject to a three percent minimum ratio of adjusted tangible
capital to adjusted total assets, as defined by the OTS. We fell
below the three percent minimum ratio at April 30, 2007. We
notified the OTS of our failure to meet this requirement, and on
May 29, 2007, the OTS issued a Supervisory Directive. We
submitted a revised capital plan to the OTS on July 19,
2007, in which we expected to meet the three percent minimum
ratio at April 30, 2008. The OTS accepted our revised
capital plan.
The Supervisory Directive included additional conditions that we
will be required to meet in addition to the Master Commitment.
The significant additional conditions included in the
Supervisory Directive are as follows: (1) requires HRB Bank
to extend its compliance with a minimum 12.0% leverage ratio
through fiscal year 2012; (2) requires H&R Block, Inc.
to comply with the Master Commitment at all times, except for
the projected capital levels and compliance with the three
percent minimum ratio, as provided in the fiscal year 2008 and
2009 capital adequacy projections presented to the OTS on
July 19, 2007; (3) institutes reporting requirements
to the OTS quarterly and monthly by the Board of Directors and
management, respectively; and (4) requires HRB Banks
Board of Directors to have an independent chairperson and at
least the same number of outside directors as inside directors.
Operating losses of our discontinued operations for the first
nine months of fiscal year 2008 were higher than projected in
our revised capital plan that was submitted to the OTS in July
2007. As a result, our capital levels are lower than those
projections. H&R Block, Inc. continued to be below the
three percent minimum ratio during our third quarter, and had
adjusted tangible capital of negative $713.9 million, and a
requirement of $311.9 million to be in compliance at
January 31, 2008. We are currently seeking the elimination
or modification of the three percent minimum capital requirement
as a result of cessation of our mortgage business. At this time,
we do not expect to be in compliance with the three percent
minimum ratio at April 30, 2008. We currently believe that
upon disposition of our mortgage business the OTS will
reconsider the three percent minimum capital requirement,
although there is no assurance that an elimination or
modification will occur.
Failure to meet the conditions under the Master Commitment and
the Supervisory Directive, including capital levels of H&R
Block, Inc., could result in the OTS taking further regulatory
actions, such as a supervisory agreement,
cease-and-desist
orders and civil monetary penalties. The OTS could also require
us to sell assets, which could negatively impact our financial
results. At this time, the financial impact, if any, of
additional regulatory actions cannot be determined. See
note 7 to the condensed consolidated financial statements
for additional information.
Regulatory
Environment Tax Services. On
January 3, 2008, the IRS issued an Advanced Notice of
Proposed Rulemaking (ANPR) concerning RALs. In this ANPR, the
IRS states that it is considering proposing a rule that would
prohibit the sharing of taxpayer information for the purpose of
marketing RALs in connection with the preparation of a tax
return. Until such time as final regulations are issued on this
matter, we are unable to determine what impact, if any, this
proposal would have on our operating results.
Other than the items discussed above, there have been no
material changes in our risk factors from those reported at
April 30, 2007 in our annual Report on
Form 10-K.
55
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES
A summary of our purchases of H&R Block common stock during
the third quarter of fiscal year 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in 000s)
|
|
|
|
|
|
|
|
Total Number of
Shares
|
|
Maximum Number
|
|
|
Total
|
|
Average
|
|
Purchased as Part
of
|
|
of Shares that
May
|
|
|
Number of Shares
|
|
Price Paid
|
|
Publicly
Announced
|
|
Be Purchased
Under
|
|
|
Purchased(1)
|
|
per
Share
|
|
Plans
or
Programs(2)
|
|
the
Plans or
Programs(2)
|
|
|
November 1 November 30
|
|
|
70
|
|
$
|
19.50
|
|
|
-
|
|
|
22,352
|
December 1 December 31
|
|
|
1
|
|
$
|
19.74
|
|
|
-
|
|
|
22,352
|
January 1 January 31
|
|
|
10
|
|
$
|
18.22
|
|
|
-
|
|
|
22,352
|
|
|
|
(1) |
|
We
purchased 80,906 shares in connection with the funding of
employee income tax withholding obligations arising upon the
exercise of stock options or the lapse of restrictions on
nonvested shares.
|
(2) |
|
On
June 9, 2004, our Board of Directors approved the
repurchase of 15.0 million shares of H&R Block, Inc.
common stock. On June 7, 2006, our Board approved an
additional authorization to repurchase 20.0 million shares.
These authorizations have no expiration date.
|
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
A special meeting of shareholders was held on December 14,
2007, at which a proposal to amend the Companys Restated
Articles of Incorporation to eliminate the classified structure
of the Companys Board of Directors was submitted to a vote
of shareholders. The number of votes cast for or against and the
number of abstentions were as follows:
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|
|
|
|
|
|
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Votes For
|
|
|
267,235,436
|
|
|
Votes Against
|
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2,781,279
|
|
|
Abstain
|
|
|
2,438,685
|
|
|
|
|
|
|
|
|
10
|
.1
|
|
Amendment Number One dated as of November 16, 2007, to the
Note Purchase Agreement dated as of October 1, 2007 among
Option One Advance
Trust 2007-ADV2
and Greenwich Capital Financial Products, Inc.
|
|
10
|
.2
|
|
Amendment Number Two dated as of November 16, 2007, to the
Indenture dated as of October 1, 2007, among Option One
Advance
Trust 2007-ADV2
and Wells Fargo Bank, National Association.
|
|
10
|
.3
|
|
Second Amendment, dated as of November 19, 2007, to the
Five-Year Credit and Guarantee Agreement dated as of
August 10, 2005.
|
|
10
|
.4
|
|
Second Amendment, dated as of November 19, 2007, to the
Amended and Restated Five-Year Credit and Guarantee Agreement
dated as of August 10, 2005.
|
|
10
|
.5
|
|
Employment Agreement dated December 3, 2007, between HRB
Management, Inc. and Alan M. Bennett.*
|
|
10
|
.6
|
|
Amended and Restated Bridge Credit and Guarantee Agreement
(HSBC) dated as of December 20, 2007, among Block Financial
Corporation, H&R Block, Inc., the lenders party thereto and
HSBC Bank USA, National Association.
|
|
10
|
.7
|
|
Amended and Restated Bridge Credit and Guarantee Agreement
(BNPP) dated as of December 20, 2007, among Block Financial
Corporation, H&R Block, Inc., the lenders party thereto and
BNP Paribas.
|
|
10
|
.8
|
|
Amended and Restated Note Purchase Agreement dated as of
December 24, 2007, among Option One Advance
Trust 2007-ADV2,
Greenwich Capital Financial Products, Inc. and The CIT
Group/Business Credit, Inc.
|
|
10
|
.9
|
|
Amendment Number One dated as of December 24, 2007, to the
Receivables Purchase Agreement dated as of October 1, 2007,
among Option One Mortgage Corporation, Option One Advance
Corporation and Option One Advance
Trust 2007-ADV2.
|
|
10
|
.10
|
|
Amendment Number Four dated as of December 24, 2007, to the
Indenture dated as of October 1, 2007, between Option One
Advance
Trust 2007-ADV2
and Wells Fargo Bank, National Association.
|
|
10
|
.11
|
|
Separation and Release Agreement dated December 28, 2007,
between HRB Management, Inc. and Mark A. Ernst.*
|
|
10
|
.12
|
|
Separation and Release Agreement dated December 28, 2007,
between HRB Management, Inc. and William L. Trubeck*
|
56
|
|
|
|
|
|
10
|
.13
|
|
Credit and Guarantee Agreement dated January 10, 2008,
among Block Financial LLC, H&R Block, Inc., and HSBC
Finance Corporation.**
|
|
10
|
.14
|
|
Second Amended and Restated Note Purchase Agreement dated as of
January 18, 2008, among Option One Advance
Trust 2007-ADV2,
Greenwich Capital Financial Products, Inc., The CIT
Group/Business Credit, Inc. and DB Structured Products, Inc.
|
|
10
|
.15
|
|
Amended and Restated Receivables Purchase Agreement dated as of
January 18, 2008, among Option One Mortgage Corporation,
Option One Advance Corporation and Option One Advance
Trust 2007-ADV2.
|
|
10
|
.16
|
|
Amended and Restated Indenture dated as of January 18,
2008, between Option One Advance
Trust 2007-ADV2
and Wells Fargo Bank, National Association.
|
|
10
|
.17
|
|
Separation and Release Agreement dated as of January 28,
2008, between H&R Block Management, LLC and Marc West.*
|
|
31
|
.1
|
|
Certification by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification by Chief Executive Officer furnished pursuant to
18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification by Chief Financial Officer furnished pursuant to
18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Indicates
management contracts, compensatory plans or arrangements.
|
**
|
|
Confidential
Information has been omitted from this exhibit and filed
separately with the Commission pursuant to a confidential
treatment request under
Rule 24b-2.
|
57
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
H&R BLOCK,
INC.
Alan
M. Bennett
Interim Chief
Executive Officer
March 5, 2008
Becky
S. Shulman
Senior Vice
President, Treasurer and
Interim Chief
Financial Officer
March 5, 2008
Jeffrey
E. Nachbor
Senior Vice
President and
Corporate Controller
March 5, 2008
58