Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-K
| |
|
|
|
(Mark One)
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the fiscal year ended: April 30,
2004 |
| |
|
OR |
| |
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the transition period
from to |
Commission File Number: 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its
charter)
| |
|
|
|
MISSOURI
|
|
44-0607856 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification Number) |
4400 Main Street, Kansas City, Missouri
64111
(Address of principal executive offices,
including zip code)
(816) 753-6900
(Registrant’s telephone number, including
area code)
Securities registered pursuant to
Section 12(b) of the Act:
| |
|
|
| Title of Each Class |
|
Name of Each Exchange on Which Registered |
|
|
|
|
Common Stock, without par value
|
|
New York Stock Exchange
|
|
Pacific Exchange
|
|
|
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act). Yes þ No o
The aggregate market value of the
registrant’s Common Stock (all voting stock) held by
non-affiliates of the registrant, computed by reference to the
price at which the stock was sold on October 31, 2003, was
$8,416,026,893.
Number of shares of registrant’s Common
Stock, without par value, outstanding on June 1, 2004:
168,292,888.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the
registrant’s Annual Meeting of Shareholders, to be held
September 8, 2004, is incorporated by reference in Part III
to the extent described therein.
H&R BLOCK, INC.
2004 FORM 10-K AND ANNUAL
REPORT
TABLE OF CONTENTS
Form
10-K – H&R
BLOCK
INTRODUCTION AND FORWARD LOOKING
STATEMENTS
This year we have chosen to combine our Annual
Report on Form 10-K, which we are required to file annually
with the Securities and Exchange Commission (“SEC”),
and our Annual Report to Shareholders. Certain portions of our
Annual Report to Shareholders, including our consolidated
financial statements and Management’s Discussion and
Analysis of Financial Condition and Results of Operations, have
historically been filed as exhibits to the Form 10-K. We
hope that by including all of this information in one document,
you will find this year’s Annual Report more useful and
informative.
Specified portions of our proxy statement, which
will be filed in July 2004, are listed as “incorporated by
reference” in response to certain items. Our proxy
statement will be printed within our Annual Report and mailed to
shareholders in July 2004 and will also be available on our
website at www.hrblock.com.
In this report, and from time to time throughout
the year, we share our expectations for the Company’s
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.
PART I
ITEM 1. BUSINESS
General Development of Business
H&R Block is a diversified company delivering
tax products and services and financial advice, investment and
mortgage products and services, and business and consulting
services. For nearly 50 years, we have been developing
relationships with millions of tax clients and our strategy is
to expand on these relationships. Our tax services segments
provide income tax return preparation services, electronic
filing services and other services and products related to
income tax return preparation to the general public in the
United States, and also in Canada, Australia and the United
Kingdom. We also offer investment services and securities
products through H&R Block Financial Advisors, Inc.
(“HRBFA”). Our mortgage services segment offers a full
range of home mortgage products and services through Option One
Mortgage Corporation (“OOMC”) and H&R Block
Mortgage Corporation (“HRBMC”). RSM McGladrey Business
Services, Inc. (“RSM”) is a national accounting, tax
and consulting firm primarily serving mid-sized businesses.
H&R BLOCK’S
MISSION
“To help our clients achieve their
financial
objectives by serving as their tax
and financial partner.”
H&R BLOCK’S
VISION
“To be the world’s leading provider
of financial
services through tax and accounting
based advisory relationships.”
Key to achieving our mission and vision is the
enhancement of client experiences through consistent delivery of
valuable services and advice. Operating through multiple lines
of business allows us to better meet the changing financial
needs of our customers. Developments during fiscal year 2004
within our operating segments are described below in
“Description of Business.”
H&R Block, Inc. was organized as a
corporation in 1955 under the laws of the State of Missouri, and
is a holding company with operating subsidiaries providing tax
and financial products and services to the general public.
“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.
Recent
Developments. We continue to believe
share repurchase is one of the best ways we return value to our
shareholders. On June 9, 2004, the Board of Directors
approved the repurchase of an additional 15 million shares.
On June 11, 2003, the Board of Directors approved the repurchase
of 20 million shares and we repurchased 10.6 million
shares during fiscal year 2004.
During fiscal year 2004, we began operating
former major franchise territories as company-owned tax
operations, as discussed further below in “Description of
Business” and in Item 7.
Financial Information About Industry
Segments
See discussion below and in Item 8,
note 21 to our consolidated financial statements.
Description of Business
U.S. Tax Operations
General.
Our U.S. Tax Operations segment is primarily engaged in
providing tax return preparation, filing and related services
and products in the United States. Revenues include fees earned
for tax-related services performed at company-owned retail tax
offices, royalties from franchise retail tax offices, sales of
Peace of Mind (“POM”) guarantees, sales of tax
preparation and other software, fees from online tax
preparation, and fees related to refund anticipation loans
(“RALs”). Segment revenues constituted 50% of our
consolidated revenues for fiscal years 2004 and 2003, and 56%
for fiscal year 2002.
Retail income tax return preparation and related
services is our original business. These services are provided
by tax professionals via a system of retail offices operated
directly by us or by franchisees. In addition to our retail
offices, we offer a number of digital tax preparation
alternatives.
1 –
H&R
BLOCK – Form
10-K
TaxCut® from H&R Block enables
do-it-yourself users to prepare their federal and state tax
returns easily and accurately. Our software products may be
purchased through third-party retail stores, direct mail or
online.
Clients also have many online options: multiple
versions of do-it-yourself tax preparation, professional tax
review, tax advice and tax preparation through a tax
professional, whereby the client completes a tax organizer and
sends it to a tax professional for preparation and/or signature.
By offering professional and do-it-yourself tax
preparation options through multiple channels, we can serve our
clients in the manner in which they choose to be served.
We also offer clients a number of options for
receiving their income tax refund, including a check directly
from the Internal Revenue Service (“IRS”), an
electronic deposit directly to their bank account, a refund
anticipation check or a RAL.
Block
Advantage. When clients have tax
returns prepared by our tax professionals or online, they also
receive a Block Advantage report and consultation, which
provides free, personalized tax and financial-related
information and guidance for use throughout the year. This
report also includes a summary of their tax return. The service
helps identify opportunities for clients to potentially minimize
tax liability, maximize tax refunds, take advantage of new
savings created by tax law changes, and, in some cases, take
advantage of government and other programs that may help the
client’s financial situation.
Peace of Mind
Guarantee. The POM guarantee is
offered to tax clients, whereby we will assume the cost, subject
to certain limits, of additional taxes owed by a client
resulting from errors attributable to one of our tax
professionals. The POM program has a per client cumulative limit
of $5,000 in additional taxes assessed with respect to the
federal, state and local tax returns we prepare for the taxable
year covered by the program. There is an additional charge for
the POM guarantee, except at H&R Block Premium offices.
RALs.
RALs are offered to our tax clients by a designated bank through
a contractual relationship with Household Tax Masters, Inc.
(“Household”). An eligible electronic filing client
may apply for a RAL at one of our offices. After meeting certain
eligibility criteria, clients are offered the opportunity to
apply for a loan from Imperial Capital Bank
(“Imperial”) in amounts up to $7,000 based upon their
anticipated federal income tax refund. We simultaneously
transmit the income tax return information to the IRS and the
lending bank. Within a few days or less after the filing date,
the client receives a check in the amount of the loan, less the
bank’s transaction fee, our tax return preparation fee, a
system administration fee, if applicable, and/or other fees for
client-selected services. Additionally, qualifying electronic
filing clients are eligible to receive their RAL proceeds, less
applicable fees, in approximately one hour after electronic
filing under a product known as Instant Money. For a RAL to be
repaid, the IRS directly deposits the participating
client’s federal income tax refund into a designated
account at the lending bank. See related discussion of RAL
participations below.
Software and online clients may obtain an
Electronic Refund Advance (“ERA”). ERAs are also loan
products, through Imperial, that allow a client to have a RAL
deposited directly into his or her bank account, usually within
two days after the IRS accepts the taxpayer’s
electronically filed return.
RACs.
Refund Anticipation Checks (“RACs”) are offered to
clients who may not wish to obtain a RAL or do not qualify for
the RAL program, but who would like to either (i) receive
their refund faster and do not have a bank account for the IRS
to direct deposit their refund or (ii) have their tax
preparation fees paid directly out of their refund. With a RAC,
the IRS directly deposits the client’s refund into an
account set up by the lending bank within approximately three
weeks after the tax return is electronically filed. A check is
then issued to the taxpayer in the amount of the refund, less
the bank’s transaction fee and our tax return preparation
fee, a system administration fee as applicable, and/or other
fees for client-selected services. A RAC is not a loan, but
allows our clients to receive their refund faster and allows
their tax preparation fees to be paid directly out of their
refund.
Additionally, digital tax clients can use a RAC
so their federal, state and electronic filing fees can be paid
directly out of their refund.
Other Services and
Products. We also offer the following
services and products:
|
|
|
| |
▪ |
If one of our tax professionals makes an error in
preparing a client’s tax return or if our online service or
TaxCut software causes an error that results in the assessment
of any interest or penalties on additional taxes due, we
guarantee payment of the interest and penalties, but not the
additional taxes, under our standard guarantee.
|
| |
▪ |
Beginning in fiscal year 2004, if due to our
error on a return the client is entitled to a larger refund or
smaller tax liability than what we calculated, we will refund
the tax preparation fee for that return, when claimed within the
calendar year, under our maximum refund guarantee.
|
| |
▪ |
Our Double Check Challenge encourages taxpayers
to bring previously filed returns, which were not prepared by
us, to one of our offices for review at no charge. One of our
tax professionals reviews the returns to determine if the
taxpayer should file an amended return for a tax refund which
otherwise would have been lost due to overlooked credits or
deductions or other reasons.
|
| |
▪ |
Electronic filing reduces the amount of time
required for a taxpayer to receive a federal tax refund and
provides additional assurance to the client the return is
mathematically accurate.
|
| |
▪ |
Individual retirement accounts (“Express
IRAs”), invested in FDIC-insured money market accounts,
are offered to tax clients as a tax savings strategy and as a
retirement savings tool. HRBFA acts as custodian on the
accounts, with the funds being invested at insured depository
institutions paying competitive money market interest rates.
|
| |
▪ |
“EasyPay”
revolving loans are offered by Imperial through a contractual
relationship with Household to clients whose tax returns reflect
a balance due to the IRS. The loan has “same as cash”
terms for approximately 90 days.
|
| |
▪ |
We offer income tax return preparation courses to
the public, which teach taxpayers how to prepare income tax
returns and provide us with a source of trained tax
professionals.
|
Online Tax
Preparation. We offer a comprehensive
range of tax products and services, from tax advice to complete
professional and do-it-yourself tax return preparation and
electronic filing, through our website at www.hrblock.com
and www.taxcut.com. Our branded websites and partner
sites provide clients the ability to purchase digital tax
services and products. These products and services allow them to
prepare their Federal and state income tax returns using the
Online Tax Program (“OTP”), access tax tips, advice
and tax-related news and use calculators for tax planning.
In addition to the standard OTP, we offer several
other online tax products and services, including Online
drop-off, OTP Premium, OTP Signature and OTP Young Adult, as
well as Ask a Tax Advisor. We also offer our online and software
customers ERAs as discussed above under “RALs.”
Beginning with the fiscal year 2003 tax season,
we participated in the newly formed Free File Alliance. This
alliance was created by the tax return preparation industry and
the IRS, and allows qualified lower-income filers to prepare and
file their federal return online at no charge.
– 2
Form
10-K – H&R
BLOCK
Software
Products. We develop and market TaxCut
income tax preparation software, H&R Block
DeductionProTM, Kiplinger’s Home and Business
Attorney and Kiplinger’s WILLPowerSM software
products.
TaxCut Standard Edition offers a simple
step-by-step tax preparation interview, data imports from money
management software and tax preparation software, calculations,
completion of the appropriate tax forms, checking for errors
and, for an additional charge, electronic filing.
TaxCut EZ Edition offers a simple step-by-step
tax interview, data imports from money management software and
tax preparation software for taxpayers qualified to file 1040EZ
forms and, for an additional charge, electronic filing.
The TaxCut Deluxe Edition offers all the features
in the Standard edition plus video tax advice from the experts
at H&R Block and Kiplinger Personal Finance magazine, access
to IRS publications, a tax and financial planning library, one
free TaxCut state program after mail-in rebate and free
electronic filing after mail-in rebate.
The TaxCut Premium Edition offers all the
features in the Deluxe Edition, plus access to free live
professional tax advice from an H&R Block tax professional
after mail-in-rebate (through H&R Block’s Ask a Tax
Advisor service) and a number of additional features to help
users address more complex tax situations.
The TaxCut Premium for Home & Business
Edition offers users all the features included in the Premium
Edition, plus an additional program to help business owners
complete their Federal business returns.
H&R Block DeductionPro helps taxpayers track
and accurately value their charitable deductions by providing
fair-market valuations for hundreds of commonly donated
household goods.
Clients
Served. We, together with our
franchisees, served approximately 19.2 million clients in
the United States during fiscal year 2004, compared to
19.4 million in fiscal year 2003 and 19.5 million in
fiscal year 2002. “Clients served” includes taxpayers
for whom we prepared income tax returns in offices, federal
software units sold, online completed and paid federal returns
and paid online state returns when no federal return was
purchased, as well as taxpayers for whom we provided only paid
electronic filing services. Returns for our clients constituted
15.6% of an IRS estimate of total individual income tax returns
filed as of April 30, 2004, compared to 15.9% in fiscal
year 2003 and 15.6% in fiscal year 2002.
Owned and Franchised
Offices. All offices are open during
the tax season. During the rest of the year, only a limited
number of offices are open, but H&R Block personnel are
available by telephone to provide service to clients throughout
the entire year. A summary of our company-owned and franchise
offices is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Company-owned offices
|
|
|
4,746 |
|
|
|
4,672 |
|
|
|
4,417 |
|
|
|
| |
Former major franchise territories(1)
|
|
|
459 |
|
|
|
— |
|
|
|
— |
|
|
|
| |
Company-owned shared locations(2)
|
|
|
947 |
|
|
|
607 |
|
|
|
600 |
|
|
|
| |
|
|
|
Total company-owned offices
|
|
|
6,152 |
|
|
|
5,279 |
|
|
|
5,017 |
|
|
|
| |
Franchise offices
|
|
|
3,374 |
|
|
|
3,398 |
|
|
|
3,373 |
|
|
|
| |
Former major franchise territories(1)
|
|
|
— |
|
|
|
529 |
|
|
|
524 |
|
|
|
| |
Franchise shared locations(2)
|
|
|
325 |
|
|
|
95 |
|
|
|
101 |
|
|
|
| |
|
|
|
Total franchise offices
|
|
|
3,699 |
|
|
|
4,022 |
|
|
|
3,998 |
|
|
|
|
Total offices
|
|
|
9,851 |
|
|
|
9,301 |
|
|
|
9,015 |
|
|
|
| |
|
|
|
|
|
| (1) |
Impact of company-owned offices in former
major franchise territories that commenced operations during
fiscal year 2004. |
| (2) |
Shared locations include offices located
within Wal-Mart, Sears or other third-party
businesses. |
In addition to our regular offices, we offer tax
return preparation services and products at H&R Block
Premium offices in the United States. Appealing to taxpayers
with more complex returns, H&R Block Premium stresses the
convenience of appointments, year-round tax service from the
same tax professional and private office interviews. The number
of H&R Block Premium offices in fiscal year 2004 was 405,
compared to 427 and 446 in fiscal years 2003 and 2002,
respectively. In fiscal year 2004, the number of H&R Block
Premium clients was 455,000 compared to 504,000 and 559,000 for
fiscal years 2003 and 2002, respectively.
Offices in shared locations include 742 offices
in Sears stores operated as “H&R Block at Sears”
and 553 offices operated in Wal-Mart stores. We are a party to
license agreements with both Sears and Wal-Mart relating to the
operation in these locations throughout the United States. The
Sears license agreement expires on December 31, 2004 and
the Wal-Mart agreement expires on May 30, 2005, both
subject to termination rights.
We have primarily granted two types of franchises
— franchises, formerly called “satellite”
franchises, and major franchises. Our franchise arrangements
provide us with certain rights designed to protect our brand;
however, these arrangements do not provide us with the right to
make significant decisions regarding franchise activities or
control over the day-to-day operations of the franchise.
Major franchisees cover larger cities and
counties and provide for payment of franchise royalties based
upon a percentage of gross revenues of their offices. At the end
of fiscal year 2004, we only have one remaining major
franchisee. Under the agreements, we granted to each franchisee
the right to use the name “H&R Block” and provided
a policy and procedure manual and other supervisory services. We
offer to sell furniture, signs, advertising materials, office
equipment and supplies to major franchisees. Each major
franchisee selects and trains the employees for its office or
offices. Since March 1993, HRB Royalty, Inc. has been the
franchisor under the major franchise agreements.
We have also granted other franchises in smaller
localities. These franchisees receive signs, designated
equipment, specialized forms, local advertising, initial
training, and supervisory services, and consequently, pay us a
higher percentage of gross tax return preparation and related
service revenues as a franchise royalty than do major
franchisees. Many of our franchises are located in cities with
populations of 15,000 or less. Some major franchisees also grant
franchises to sub-franchisees in their respective areas. Of the
total 3,699 franchise offices in fiscal year 2004, 304 were
operated by major franchisees, 230 were operated by franchisees
of major franchisees and 3,165 were operated by other
franchisees.
It has always been our policy to grant tax return
preparation franchises to qualified persons without an initial
franchise fee, although we do require a deposit to secure
compliance with franchise contracts.
From time to time, we have acquired the
territories of existing franchisees and other tax return
preparation businesses, and will continue to do so if future
conditions warrant and satisfactory terms can be negotiated.
During fiscal year 2000, we placed most of our
major franchises on notice that we would not be renewing their
respective franchise agreements as of the next renewal date. The
related major franchise agreements accordingly expired in fiscal
year 2004, and we began operating the tax preparation businesses
as company-owned operations in the former major franchise
territories. The major franchise agreements required us to pay
the franchisee a “fair and equitable price” for the
franchise business. During fiscal year 2004, we made payments of
$243.2 million related to the acquisition of assets and
stock in the franchise territories of ten of our former major
franchisees. Two former major franchises entered into new
franchise agreements. One franchisee is continuing litigation
3 –
H&R
BLOCK – Form
10-K
challenging the post-expiration restrictive
covenants and also disputing the payment due under the franchise
agreement terms.
RAL Participations and 2003
Tax Season Waiver. Since July 1996, we
have been a party to agreements with Household and others to
participate in RALs provided by a lending bank to H&R Block
tax clients. The 1996 agreement was amended and restated in
January 2003 and again in June 2003. In the June 2003 agreement,
we obtained the right to purchase a 49.9% participation interest
in RALs obtained through company-owned offices and a 25%
interest in RALs obtained through major franchise offices. The
current agreement continues through June 2006. Our purchases of
the participation interests are financed through short-term
borrowings, and we bear all of the credit risk associated with
our interests in the RALs. Revenue from our participation is
calculated as the rate of participation multiplied by the fee
paid by the borrower to the lending bank. During fiscal year
2002, we participated in RALs in substantially the same manner
as the current year. Our RAL participation revenue was $168.4 in
fiscal year 2004 and $160.0 million in fiscal year 2002.
In January 2003, we entered into an agreement
with Household, whereby we waived our right to purchase any
participation interests in and to receive fees related to RALs
during the period January 1 through April 30, 2003. In
consideration for waiving these rights, we received a series of
payments from Household, subject to certain adjustments based on
delinquency rates for the 2003 tax season. We recorded revenues
totaling $138.2 million during fiscal year 2003. The
initial payments were recognized as revenue over the waiver
period. We recorded an additional $6.5 million in revenues
in fiscal year 2004. The waiver agreement only covered the 2003
tax season.
Seasonality of
Business. Because most of our clients
file their tax returns during the period from January through
April of each year, substantially all of our revenues from
income tax return preparation and related services and products
are received during this period. As a result, our tax segment
generally operates at a loss through the first two quarters of
the fiscal year. Historically, these losses primarily reflect
wages of year-round personnel, training of tax professionals,
rental and furnishing of retail tax offices, and other costs and
expenses relating to preparation for the upcoming tax season.
Additionally, the tax business is affected by national economic
conditions and unemployment rates.
Competitive
Conditions. The tax return preparation
and electronic filing businesses are highly competitive. There
are a substantial number of tax return preparation firms and
accounting firms offering tax return preparation services. Many
tax return preparation firms and many firms not otherwise in the
tax return preparation business are involved in providing
electronic filing and RAL services to the public. Commercial tax
return preparers and electronic filers are highly competitive
with regard to price, service and reputation for quality. In
terms of the number of offices and personal tax returns prepared
in offices, online and via our software, we are the largest
company providing direct tax return preparation in the United
States. We are also, in terms of the number of offices and tax
returns electronically filed in fiscal year 2004, the largest
provider of electronic filing services in the United States.
The Digital Tax Solutions businesses compete with
a number of companies. Intuit, Inc. is the dominant supplier of
tax preparation software and is also our primary competitor in
the online tax preparation market. There are many smaller
competitors in the online market, as well as free state
sponsored online filing programs.
Government
Regulation. Primary efforts toward the
regulation of commercial tax return preparers have historically
been made at the federal level. Federal legislation requires
income tax return preparers to, among other things, set forth
their signatures and identification numbers on all tax returns
prepared by them, and retain all tax returns prepared for three
years. Federal laws also subject income tax return preparers to
accuracy-related penalties in connection with the preparation of
income tax returns. Preparers may be prohibited from further
acting as income tax return preparers if they continuously and
repeatedly engage in specified misconduct. With certain
exceptions, the Internal Revenue Code also prohibits the use or
disclosure by income tax return preparers of certain income tax
return information without the prior written consent of the
taxpayer. In addition, the Gramm-Leach-Bliley Act and Federal
Trade Commission regulations adopted thereunder require income
tax preparers to adopt and disclose consumer privacy policies,
and provide consumers a reasonable opportunity to “opt
out” of having personal information disclosed to
unaffiliated third parties for marketing purposes. Some states
have adopted or proposed strict “opt-in” requirements
in connection with use or disclosure of consumer information.
We believe the federal legislation regulating
commercial tax return preparers and consumer privacy has not had
and will not have a material adverse effect on the operations of
H&R Block. In addition, no present state statutes of this
nature have had a material adverse effect on our business.
However, we cannot predict what the effect may be of the
enactment of new statutes or adoption of new regulations.
The federal government regulates the electronic
filing of income tax returns in part by requiring individuals
and businesses to be accepted into the electronic filing
program. Once accepted, electronic filers must comply with all
publications and notices of the IRS applicable to electronic
filing, provide certain information to the taxpayer, comply with
advertising standards for electronic filers, and be subjected to
possible monitoring by the IRS, penalties for disclosure or use
of income tax return preparation and other preparer penalties,
and suspension from the electronic filing program. States that
have adopted electronic filing programs for state income tax
returns have also enacted laws regulating electronic filers and
the advertising and offering of electronic filing services.
Federal statutes and regulations also regulate an
electronic filer’s involvement in RALs. Electronic filers
must clearly explain the RAL is a loan and not a substitute for
or a quicker way of receiving an income tax refund. Federal laws
place restrictions on the fees an electronic filer may charge in
connection with RALs. In addition, some states and localities
have enacted laws and adopted regulations for RAL facilitators
and/or the advertisement and offering of RALs. There are also
many states that have statutes regulating, through licensing and
other requirements, the activities of brokering loans, providing
credit services and offering “credit repair” services
to consumers for a fee (“Loan Activity Statutes”). We
believe the procedures under which we facilitate RALs are
structured so our activities are not included within the scope
of the activities regulated by these Loan Activity Statutes.
There can be no assurances, however, that states with these Loan
Activity Statutes will not contend successfully that these
statutes apply to the RAL business and that we will need to
become licensed under the Loan Activity Statutes, otherwise
comply with statutory requirements, or modify procedures so that
the Loan Activity Statutes are inapplicable.
Many states have statutes requiring the licensing
of persons offering contracts of insurance. We have received
from certain state insurance regulators inquiries about our POM
guarantee program and the applicability of the state insurance
statutes. In states where the inquiries are closed, the
regulators affirmed our position that the POM guarantee is not a
contract of insurance and is therefore not subject to state
insurance licensing laws. In the few states where inquiries are
pending, we believe there are no insurance laws under which the
POM guarantee constitutes a contract of insurance. There can be
no assurances, however, that the product, or other similar
products we may offer in the future, will not be scrutinized as
potential insurance products and held to be subject to various
insurance laws and regulations.
Many of our income tax courses are regulated and
licensed in select states. Failure to obtain a tax school
license could affect our revenues and limit our
– 4
Form
10-K – H&R
BLOCK
ability to develop interest in tax preparation as
a career or obtain qualified tax professionals.
We believe the federal, state and local laws and
legislation regulating electronic filing, RALs and the
facilitation of RALs, loan brokers, credit services, credit
repair services, insurance products, and proprietary schools
have not, and will not in the future, have a material adverse
effect on our operations. We cannot predict, however, what the
effect may be of the enactment of new statutes or the adoption
of new regulations pertaining to these matters.
As noted above under “Owned and Franchised
Offices,” many of the income tax return preparation offices
operating in the United States under the name “H&R
Block” are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of
regulation by the Federal Trade Commission and by various
states. The extent of regulation varies, but relates primarily
to disclosures to be made in connection with the grant of
franchises and limitations on termination by the franchisor
under the franchise agreement. To date, no such regulation has
materially affected our business. We cannot predict, however,
the effect of applicable statutes or regulations that may be
enacted or adopted in the future.
See discussion in “Risk Factors” for
additional information.
Mortgage Operations
General.
Our Mortgage Operations segment originates mortgage loans,
services non-prime loans and sells and securitizes mortgage
loans and residual interests in the United States. Revenues
consist of proceeds from sales and securitizations of mortgage
assets, accretion on residual and beneficial interests,
servicing fee income and interest received on loans. Segment
revenues constituted 31% of our consolidated revenues for fiscal
years 2004 and 2003, and 21% for fiscal year 2002.
Prime mortgages are those that may be offered
through government sponsored loan agencies. Non-prime mortgages
are those that may not be offered through government-sponsored
loan agencies and typically involve borrowers with impaired
credit. Even though these borrowers have impaired credit, they
also tend to have equity in the property that will be used to
secure the loan. We offer both types of loans and conduct
business through four channels:
|
|
|
| |
• |
Option One’s wholesale origination channel
works with brokers throughout the United States to fund mortgage
loans through a national branch network. Wholesale originations
represent the majority of Option One’s total loan
production.
|
| |
• |
Option One’s national accounts channel forms
partnerships with financial institutions, including national and
regional banks, to allow them to offer non-prime loans.
|
| |
• |
Option One’s bulk acquisitions channel
specializes in the purchase of performing non-prime mortgage
loan pools.
|
| |
• |
HRBMC originates residential mortgage loans
directly to retail consumers.
|
The following table details our originations by
channel for fiscal years 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Wholesale
|
|
$ |
16,828,138 |
|
|
$ |
11,434,138 |
|
|
$ |
8,078,192 |
|
|
|
|
National accounts
|
|
|
2,642,944 |
|
|
|
1,814,092 |
|
|
|
1,219,080 |
|
|
|
|
Bulk acquisitions
|
|
|
679,910 |
|
|
|
411,013 |
|
|
|
160,059 |
|
|
|
|
Retail
|
|
|
3,105,021 |
|
|
|
2,918,378 |
|
|
|
1,995,842 |
|
|
|
| |
|
|
| |
|
$ |
23,256,013 |
|
|
$ |
16,577,621 |
|
|
$ |
11,453,173 |
|
|
|
| |
|
|
|
Option
One. Option One, headquartered in
Irvine, California, operates in 49 states by serving more than
32,500 mortgage brokers and through its network of 33 wholesale
loan production branches and six national accounts branches.
Loan
Origination. We originated
$20.2 billion in non-prime mortgage loans in fiscal year
2004, compared to $13.7 billion in fiscal year 2003 and
$9.5 billion in fiscal year 2002. The average non-prime
loan during fiscal year 2004 had a $155,000 principal balance,
compared to $146,000 in fiscal year 2003 and $127,000 in fiscal
year 2002, and was secured by a first lien on a single-family
residence. The weighted-average loan-to-value ratio was 78.1%,
78.7% and 78.6% in fiscal years 2004, 2003 and 2002,
respectively.
Wholesale loan originations involve an
independent broker who assists the borrower in completing the
loan application, gathering necessary information and
identifying a lender who offers a loan product best suited to
the borrower’s financial needs. Brokers are free to submit
an application to one or more non-prime lenders, such as Option
One. No one broker originates more than 1.2% of our total
non-prime production.
Each applicant completes an application, which
includes information regarding his or her assets, liabilities,
income, credit history, employment history and personal
information. We require a credit report on each applicant from
an industry recognized credit reporting company. In evaluating
an applicant’s credit history, we utilize credit bureau
risk scores, generally known as a FICO score, which is a
statistical ranking of likely future credit performance
developed by Fair, Isaac & Company and provided by the three
national credit data repositories. Our weighted average FICO
score on our non-prime production was 608 and 604 for the years
ended April 30, 2004 and 2003, respectively. Qualified
independent appraisers are required to appraise mortgaged
properties that are used to secure mortgage loans.
Upon receipt of an application from a broker, a
credit report and an appraisal report, one of our branch offices
processes and underwrites the loan. Our underwriting guidelines
require mortgage loans be underwritten in a standardized
procedure that complies with federal and state laws and
regulations. The guidelines are primarily intended to assess the
value of the mortgaged property, evaluate the adequacy of the
property as collateral for the mortgage loan, and assess the
creditworthiness of the related borrower. Based upon this
assessment, we advise the broker whether the loan application
meets our underwriting guidelines and product description by
issuing a loan approval or denial. In some cases, we issue a
“conditional approval,” which requires the submission
of additional information or clarification. The mortgage loans
are underwritten with a view toward resale in the secondary
market.
Sale and Securitization of
Loans. Substantially all non-prime
mortgage loans we originate are sold daily to qualifying special
purpose entities (“Trusts”). See discussion of our
loan sale and securitization process in Item 7, under the
heading “Off-Balance Sheet Financing Arrangements.”
Servicing.
Mortgage loan servicing involves collecting and remitting
mortgage loan payments, making required advances, accounting for
principal and interest, holding escrow for payment of taxes and
insurance and contacting delinquent borrowers. We receive loan
servicing fees monthly over the life of the mortgage loans. We
only service non-prime mortgage loans. At the end of fiscal year
2004, we serviced 324,364 loans totaling $45.3 billion,
compared to 246,463 loans totaling $31.3 billion at
April 30, 2003 and 209,594 loans totaling
$23.8 billion at April 30, 2002.
5 –
H&R
BLOCK – Form
10-K
The following table summarizes our servicing
portfolio by origin and includes related mortgage servicing
rights (“MSRs”) and the rate we earn on each type of
servicing as of April 30, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
|
|
|
| Type of servicing |
|
Principal Balance |
|
MSR Balance |
|
Rate Earned |
|
|
|
|
Originated
|
|
$ |
36,131,752 |
|
|
$ |
112,800 |
|
|
|
0.43% |
|
|
|
|
Purchased
|
|
|
353,576 |
|
|
|
1,021 |
|
|
|
0.50% |
|
|
|
|
Sub-servicing
|
|
|
8,782,775 |
|
|
|
– |
|
|
|
0.30% |
|
|
|
| |
|
|
|
Total
|
|
$ |
45,268,103 |
|
|
$ |
113,821 |
|
|
|
0.41% |
|
|
|
| |
|
|
|
When non-prime loans are subsequently sold or
securitized, we generally retain the right to service the loans.
The resulting MSR assets are recorded at allocated carrying
amounts based on relative fair values when the loans are sold.
The fair values of MSRs are determined based on the present
value of estimated future cash flows related to servicing loans.
Assumptions used in estimating the value of MSRs are discussed
in Item 7, under “Critical Accounting Policies.”
In addition to servicing loans we originate, we also service
non-prime loans originated by other lenders. MSRs are recorded
only in conjunction with our originated or purchased loan
servicing portfolio.
Geographic
Distribution. The following table
details the percent of origination volume of our non-prime loans
for fiscal year 2004 and our loan origination branches by state.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| State |
|
Percent of Volume |
|
Number of Branches |
|
|
|
|
California
|
|
|
18.8% |
|
|
|
5 |
|
|
|
|
New York
|
|
|
14.4% |
|
|
|
2 |
|
|
|
|
Massachusetts
|
|
|
10.2% |
|
|
|
0 |
|
|
|
|
Florida
|
|
|
6.4% |
|
|
|
4 |
|
|
|
|
New Jersey
|
|
|
5.1% |
|
|
|
1 |
|
|
|
|
Texas
|
|
|
4.5% |
|
|
|
3 |
|
|
|
|
Illinois
|
|
|
3.6% |
|
|
|
3 |
|
|
|
|
Virginia
|
|
|
2.9% |
|
|
|
2 |
|
|
|
|
Connecticut
|
|
|
2.6% |
|
|
|
1 |
|
|
|
|
Pennsylvania
|
|
|
2.6% |
|
|
|
1 |
|
|
|
|
Michigan
|
|
|
2.3% |
|
|
|
1 |
|
|
|
|
Georgia
|
|
|
2.2% |
|
|
|
2 |
|
|
|
|
Colorado
|
|
|
2.1% |
|
|
|
1 |
|
|
|
|
Rhode Island
|
|
|
2.0% |
|
|
|
2 |
|
|
|
|
Ohio
|
|
|
1.9% |
|
|
|
2 |
|
|
|
|
North Carolina
|
|
|
1.7% |
|
|
|
1 |
|
|
|
|
Arizona
|
|
|
1.5% |
|
|
|
2 |
|
|
|
|
New Hampshire
|
|
|
1.3% |
|
|
|
1 |
|
|
|
|
Washington
|
|
|
1.3% |
|
|
|
1 |
|
|
|
|
Nevada
|
|
|
1.0% |
|
|
|
1 |
|
|
|
|
Wisconsin
|
|
|
.8% |
|
|
|
1 |
|
|
|
|
Other
|
|
|
10.8% |
|
|
|
0 |
|
|
|
|
H&R Block Mortgage
Corporation. HRBMC, a wholly-owned
subsidiary of Option One, is a retail mortgage lender for prime,
non-prime and government loans and is licensed to conduct
business in all 50 states. HRBMC is an approved seller/servicer
for Fannie Mae and Freddie Mac and is HUD authorized to
originate and underwrite FHA and VA mortgage loans. Through
HRBMC, we originated retail mortgage loans from various sales
channels, including 41 loan production offices and nine regional
offices in 26 states in fiscal year 2004. During fiscal year
2004, approximately 49% of HRBMC’s loans were made to
clients of our other affiliates compared to 54% in fiscal year
2003.
We originated $3.1 billion in retail
mortgage loans in fiscal year 2004, compared to
$2.9 billion in fiscal year 2003 and $2.0 billion in
fiscal year 2002. In fiscal year 2004, we originated
$1.3 billion in prime loans and $1.8 billion in
non-prime loans.
Substantially all of our retail prime mortgage
loans are sold to Countrywide Home Loans, Inc.
(“Countrywide”). The majority of mortgage loans sold
to Countrywide are underwritten through an automated system
under which Countrywide assumes our representations and
warranties, which comply with Countrywide’s underwriting
guidelines. This agreement allows us to achieve improved
execution due to price, efficiencies in delivery, and
elimination of redundancies in operations. We do not retain
servicing rights related to the prime mortgage loans we sell.
Non-prime mortgage loans are sold to Option One. See discussion
of our prime warehouse line in Item 7, under “Capital
Resources and Liquidity by Segment.”
Competitive
Conditions. Both the prime and
non-prime sectors of the residential mortgage loan market are
highly competitive. The principal methods of competition are in
service, product differentiation and price. There are a
substantial number of companies competing in the residential
loan market, including mortgage banking companies, commercial
banks, savings associations, credit unions and other financial
institutions. There are also numerous companies competing in the
business of servicing non-prime loans. No one firm is a dominant
supplier of prime and non-prime mortgage loans or a dominant
servicer of non-prime loans. We believe we are one of the top
originators and servicers of non-prime loans in the industry.
Seasonality of
Business. Residential mortgage volume
is not subject to significant seasonal fluctuations. The
mortgage business is cyclical, however, and directly affected by
national economic conditions, trends in business and finance and
is impacted by changes in interest rates.
Government
Regulation. Mortgage loans purchased,
originated and/or serviced are subject to federal laws and
regulations, including:
|
|
|
| |
• |
The federal Truth-in-Lending Act, as amended, and
Regulation Z promulgated thereunder;
|
| |
• |
The Equal Credit Opportunity Act, as amended, and
Regulation B promulgated thereunder;
|
| |
• |
The Fair Credit Reporting Act, as amended;
|
| |
• |
The federal Real Estate Settlement Procedures
Act, as amended, and Regulation X promulgated thereunder;
|
| |
• |
The Home Ownership Equity Protection Act
(“HOEPA”);
|
| |
• |
The Soldiers’ and Sailors’ Civil Relief
Act of 1940, as amended;
|
| |
• |
The Home Mortgage Disclosure Act and
Regulation C promulgated thereunder;
|
| |
• |
The federal Fair Housing Act;
|
| |
• |
The Gramm-Leach-Bliley Act and regulations
adopted thereunder; and
|
| |
• |
Certain other laws and regulations.
|
Under environmental legislation and case law
applicable in certain states, it is possible that liability for
environmental hazards in respect of real property may be imposed
on a holder of a deed to the property, which may impair the
underlying collateral.
Applicable state laws generally regulate interest
rates and other charges pertaining to non-prime loans. These
states also require certain disclosures and require originators
of certain mortgage loans to be licensed unless an exemption is
available. In addition, most states have other laws, public
policies and general principles of equity relating to consumer
protection, unfair and deceptive practices, and practices that
may apply to the origination, servicing and collection of
mortgage loans.
In recent years, there has been a noticeable
increase in state, county and municipal statutes, ordinances and
regulations that prohibit or regulate so-called “predatory
lending” practices. Predatory lending statutes such as
HOEPA, regulate “high-cost loans,” which are defined
separately by each state, county or municipal statute,
regulation or ordinance, but generally include mortgage loans
– 6
Form
10-K – H&R
BLOCK
with interest rates exceeding a
(1) specified margin over the Treasury Index for a
comparable maturity, or (2) designated percentage of points
and fees. Statutes, ordinances and regulations that regulate
high-cost loans generally prohibit mortgage lenders from
engaging in certain defined practices, or require mortgage
lenders to implement certain practices, in connection with any
mortgage loans that fit within the definition of a high-cost
loan. We believe that we do not originate loans falling under
the definition of high-cost loans under any law.
Certain state laws restrict or prohibit
prepayment penalties on mortgage loans, and we relied on the
federal Alternative Mortgage Transactions Parity Act
(“Parity Act”) and related rules issued in the past by
the Office of Thrift Supervision (“OTS”) to preempt
state limitations on prepayment penalties. The Parity Act was
enacted to extend to financial institutions, other than
federally chartered depository institutions, the federal
preemption that federally chartered depository institutions
enjoy. However, in September 2002, the OTS released a new rule
that reduced the scope of the Parity Act preemption effective
July 1, 2003 and, as a result, we can no longer rely on the
Parity Act to preempt state restrictions on prepayment
penalties. The elimination of this federal preemption requires
compliance with state restrictions on prepayment penalties.
These restrictions prohibit us from charging any prepayment
penalty in six states and restrict the amount or duration of
prepayment penalties that we may impose in an additional eleven
states. This places us at a competitive disadvantage relative to
financial institutions that continue to enjoy federal preemption
of such state restrictions. Such institutions can charge
prepayment penalties without regard to state restrictions and,
as a result, may be able to offer loans with interest rate and
loan fee structures that are more attractive than the interest
rate and loan fee structures that we are able to offer.
See discussion in “Risk Factors” for
additional information.
Business Services
General.
Our Business Services segment offers middle-market companies
accounting, tax and consulting services. We have continued to
expand the services we have to offer our clients by adding
wealth management, retirement resources, payroll services,
corporate finance and financial process outsourcing. Segment
revenues constituted 12% of our consolidated revenues for fiscal
years 2004 and 2003, and 13% for fiscal year 2002.
This segment consists primarily of RSM, which was
formed in August 1999 to acquire substantially all of the
non-attest assets of McGladrey & Pullen, LLP
(“M&P”). RSM has more than 90 offices in
23 states and offers services in 18 of the top 25
U.S. markets.
Services are also provided by the following
wholly-owned subsidiaries:
|
|
|
| |
▪ |
RSM McGladrey Retirement Resources administers
retirement plans, helps clients design the best plan for their
needs, and also provides retirement plan investment advice,
year-end compliance, tax reporting and consulting.
|
| |
▪ |
RSM EquiCo, Inc. is an investment banking firm
specializing in business valuations, acquisitions and
divestitures for private middle-market businesses.
|
| |
▪ |
RSM McGladrey Employer Services, Inc. (formerly
known as “MyBenefitSource, Inc.”) is a provider of
payroll and benefits administration services to middle-market
businesses.
|
| |
▪ |
PDI Global, Inc. provides marketing,
communications and visibility programs, tax and financial
planning guides, and marketing and management consulting
services to accountants, consultants, lawyers, banks, insurers,
and other financial service providers.
|
Relationship with McGladrey
& Pullen, LLP. By regulation, we
cannot provide audit and attest services. M&P, a public
accounting firm, provides audit and review services and other
services in which M&P issues written reports on client
financial statements to their clients. Through an administrative
services agreement with M&P, we provide accounting, payroll,
human resources and other administrative services to M&P and
receive a management fee for these services. M&P is a
limited liability partnership with its own governing body and,
accordingly, is a separate legal entity and is not an affiliate.
Some partners and employees of M&P are also our employees.
Seasonality of
Business. Revenues for this segment
are largely seasonal in nature, with peak revenues occurring
during January through April.
Competitive
Conditions. The accounting and
consulting business is highly competitive. The principal methods
of competition are price, service and reputation for quality.
There are a substantial number of accounting firms offering
similar services at the international, national, regional and
local levels. As our focus is on middle-market businesses, our
principal competition is with regional accounting firms. We
believe we have a competitive advantage in the geographic areas
in which we are currently located based on the breadth of
services we can offer to these clients above and beyond what a
traditional accounting firm can offer.
Government
Regulation. Many of the same federal
and state regulations relating to tax preparers and the
information concerning tax reform discussed above in the
“Government Regulation” section of “U.S. Tax
Operations” apply to the Business Services segment as well,
except accountants are not subject to the same prohibition on
the use or disclosure of certain income tax return information
as tax professionals are. Accounting firms are also subject to
state and federal regulations governing accountants, auditors
and financial planners. Various legislative and regulatory
proposals have been made relating to auditor independence and
accounting oversight, among others. Some of these proposals, if
adopted, could have an impact on RSM’s operations. We
believe current state and federal regulations and known
legislative and regulatory proposals do not and will not have a
material adverse effect on our operations, but we cannot predict
what the effect of future legislation, regulations and proposals
may be.
Independence rules established by the SEC,
American Institute of Certified Public Accountants
(“AICPA”) and the Public Company Accounting Oversight
Board (“PCAOB”) apply to M&P as a public
accounting firm. In applying its auditor independence rules, the
SEC views us and M&P as a single entity and requires that we
abide by its independence rules for M&P to be deemed
independent of any SEC audit client. The SEC regards any
financial interest or business relationship we have with a
client of M&P as a financial interest or business
relationship between M&P and the client for purposes of
applying its auditor independence rules.
We and M&P have jointly developed and
implemented policies, procedures and controls designed to
safeguard M&P’s independence and integrity as an audit
firm in compliance with applicable regulations and professional
responsibilities. These policies, procedures and controls are
designed to monitor and prevent violations of applicable
independence rules and include, among others, (i) informing
our officers, directors and other members of management
concerning auditor independence matters, (ii) procedures
for monitoring securities ownership, (iii) communicating
with SEC audit clients regarding the SEC’s interpretation
and application of relevant independence rules and guidelines,
and (iv) requiring RSM employees to comply with
M&P’s independence and relationship policies (including
M&P’s independence compliance questionnaire
procedures). We believe these policies, procedures and controls
are adequate, although there can be no assurances they will
ensure compliance with applicable independence rules and
requirements. Any noncompliance could cause M&P to lose the
ability to perform audits of financial statements filed with the
SEC.
See discussion in “Risk Factors” for
additional information.
7 –
H&R
BLOCK – Form
10-K
Investment Services
General.
Our Investment Services segment provides brokerage services and
investment planning through HRBFA. Products and services offered
to our customers include traditional brokerage products, 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. Segment revenues constituted approximately 5% of
our consolidated revenues for fiscal years 2004 and 2003 and 8%
for fiscal year 2002.
HRBFA is a registered broker-dealer with the SEC
and is a member of the New York Stock Exchange
(“NYSE”), other national securities exchanges, SIPC,
and the National Association of Securities Dealers, Inc.
(“NASD”). HRBFA is also a registered investment
advisor, offering financial advice with traditional products.
Our integration of investment advice with the tax
client base allows us to maximize an already established
relationship. In the past two years, new product offerings have
allowed us to shift our focus from a transaction-based client
relationship to a more advice-based focus.
Customer trades in fiscal year 2004 totaled
approximately 1.5 million, compared to approximately
1.2 million in fiscal year 2003 and approximately
1.5 million in fiscal year 2002. We had 863,116 active
accounts at April 30, 2004, compared to 752,903 at 2003 and
695,355 at 2002. Margin balances decreased to an average of
$545.0 million for fiscal year 2004 from
$577.0 million and $1.0 billion for fiscal years 2003 and
2002, respectively.
Financial Services
Offerings. We provide a full range of
financial services to our clients in the United States.
As previously discussed in “U.S. Tax
Operations,” we offer our tax clients the opportunity to
open an Express IRA through HRBFA as a part of the tax return
preparation process. Clients funded approximately
215,000 Express IRAs during tax season 2004, approximately
126,000 in tax season 2003 and approximately 130,000 in tax
season 2002.
We also offer account holders a service that
makes it possible for clients to transact all of their
investment activities from one convenient, flexible brokerage
account with cash management features. The cash management
features include no-minimum checking, unlimited check writing, a
credit interest program, a variety of tax-exempt money market
fund options, an FDIC insured deposit account, a VISA® Gold
ATM/check card with a 1% cash rebate on card purchases and an
airline miles program, one consolidated monthly statement and a
year-end account summary. HRBFA offers college savings
products – called 529 Plans – through
state-sponsored investment programs that allow clients to make
tax-free withdrawals for qualified education expenses and a
comprehensive line of insurance products. Clients may also open
professionally managed accounts.
We act as a dealer in fixed income markets
including corporate and municipal bonds, various U.S. Government
and U.S. Government Agency securities and certificates of
deposit.
Financial Advisors and Their
Compensation. Our financial advisors
receive compensation based on several different factors. They
receive commissions from individual customer transactions as
well as a percentage of quarterly fees for certain products
based on asset levels. In addition, they can receive salaries,
draws against commissions and bonuses based on the level of
assets they transfer and production achieved.
Key to our future success is retention of our
financial advisors and recruitment of new advisors. One of our
key initiatives is to build revenues through the addition of
financial advisors. During fiscal years 2004 and 2003, we added
255 and 260 advisors, respectively. These additions were offset
by attrition of 230 and 487 advisors, respectively. Our overall
retention rate for fiscal year 2004 was approximately 77%, but
the retention rate for our more experienced, higher-producing
advisors was approximately 93%. The retention and recruitment of
experienced advisors will continue to be a key initiative in
fiscal year 2005.
Advisor productivity by recruitment class is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
|
|
|
Revenue |
|
Total Production |
|
|
Per Advisor |
|
Revenues |
|
|
Fiscal year 2004:
|
|
|
|
|
|
|
|
|
|
Pre-2003 class
|
|
$ |
216 |
|
|
$ |
135,949 |
|
|
2003 recruits
|
|
|
84 |
|
|
|
17,717 |
|
|
2004 recruits
|
|
|
61 |
|
|
|
7,664 |
|
| |
|
Fiscal year 2003:
|
|
|
|
|
|
|
|
|
|
Pre-2003 class
|
|
$ |
135 |
|
|
$ |
126,176 |
|
|
2003 recruits
|
|
|
34 |
|
|
|
4,604 |
|
|
Licensed Referral Tax
Professional Program. The Licensed
Referral Tax Professional (“LRTP”) program encourages
a cooperative relationship between Investment Services and U.S.
Tax Operations by helping tax professionals become licensed to
sell securities, teaming them with a financial advisor and
providing a commission to the LRTP for business referred to
Investment Services. The LRTP program began in fiscal year 2003
and, as of April 30, 2004 there were 461 LRTPs with total
customer assets of $72 million compared to 126 LRTPs with
total customer assets of $2.0 million as of April 30,
2003. We will continue to increase the number of LRTPs in the
coming year.
Integrated Online
Services. We have an online investment
center on our website at www.hrblock.com. Online users
have the opportunity to open accounts, obtain research, create
investment plans, buy and sell securities, and view the status
of their accounts. Through April 2004, over 145,000 accounts had
been web enabled, compared to approximately 143,000 through
April 2003 and April 2002. In fiscal year 2004, 229,211
securities transactions were completed online compared to
126,055 in fiscal year 2003, and 107,308 in fiscal year 2002.
Office
Locations. HRBFA is authorized to do
business as a broker-dealer in all 50 states and the District of
Columbia. At the end of fiscal year 2004, we operated
approximately 358 branch offices, compared to approximately 600
offices in fiscal years 2003 and 2002. The reduced number of
branch offices is primarily due to the evolution of our
tax-partnering program, which now locates financial advisors
with tax professionals. Some HRBFA offices offer, in addition to
financial products and services, tax preparation and mortgage
services year-round to clients.
We believe the existence of retail locations
contributes to our growth and client satisfaction. The existence
of retail locations generally results in an increase in
unsolicited customer transactions in the geographic area near
the office. Many clients prefer to conduct business in person in
local offices rather than in distant offices or online. Clients
may also use retail locations to deliver checks and securities.
Competitive
Conditions. HRBFA competes directly
with a broad range of companies seeking to attract consumer
financial assets, including full-service brokerage firms,
discount and online brokerage firms, mutual fund companies,
investment banking firms, commercial and savings banks,
insurance companies and others. The financial services industry
has become considerably more concentrated as numerous securities
firms have been acquired by or merged into other firms. Some of
these competitors have greater financial resources than HRBFA
and offer additional financial products and services. In
addition, we expect competition from domestic and international
commercial banks and larger securities firms to continue to
increase as a result of legislative and regulatory initiatives
in the U.S., including the passage of the Gramm-Leach-Bliley Act
in November 1999 and the implementation of the U.S.A. Patriot
Act in April 2002. These initiatives strive to remove or relieve
certain restrictions on mergers between commercial banks and
other types of financial services providers and
– 8
Form
10-K – H&R
BLOCK
extend privacy provisions and anti-money
laundering procedures across the financial services industry.
Discount brokerage firms and online-only
financial services providers compete vigorously with HRBFA with
respect to commission charges. Full-commission brokerage firms
also offer more product breadth, discounted commissions and
online services to selected retail brokerage customers.
Additionally, some competitors in both the full-commission and
discount brokerage industries have substantially increased their
spending on advertising and direct solicitation of customers.
Competition in the online trading business has
become similarly intense as recent expansion and customer
acceptance of conducting financial transactions online has
attracted new brokerage firms to the market.
We compete based on quality of service, breadth
of products and services offered, prices, accessibility through
delivery channels, technological innovation and expertise and
integration with our tax services relationships.
Seasonality of
Business. The Investment Services
segment does not, as a whole, experience significant seasonal
fluctuations. The securities business is cyclical, however, and
directly affected by national and global economic and political
conditions, trends in business and finance and changes in the
conditions of the securities markets in which our clients invest.
Government
Regulation. The securities industry is
subject to extensive regulation covering all aspects of the
securities business, including registration of our offices and
personnel, sales methods, the acceptance and execution of
customer orders, the handling of customer funds and securities,
trading practices, capital structure, record keeping policies
and practices, margin lending, execution and settlement of
transactions, the conduct of directors, officers and employees,
and the supervision of employees. The various governmental
authorities and industry self-regulatory organizations that have
supervisory and regulatory jurisdiction over us generally have
broad enforcement powers to censure, fine, issue
cease-and-desist orders or suspend or expel a broker-dealer or
any of its officers or employees who violate applicable laws or
regulations.
The SEC is the federal agency responsible for the
administration of the federal securities laws. The SEC has
delegated much of the regulation of broker-dealers to
self-regulatory organizations, principally the Municipal
Securities Rulemaking Board, NASD, Inc. and the NYSE, which has
been designated as HRBFA’s primary regulator. These
self-regulatory organizations adopt rules, subject to SEC
approval, governing the industry and conduct periodic
examinations of HRBFA’s brokerage operations and clearing
activities. Securities firms are also subject to regulation by
state securities administrators in states in which they conduct
business.
As a registered broker-dealer, HRBFA is subject
to the Net Capital Rule (Rule 15c3-1) promulgated by the
SEC and adopted through incorporation by reference in NYSE
Rule 325. The Rule, which specifies minimum net capital
requirements for registered brokers and dealers, is designed to
measure the financial soundness and liquidity of a broker-dealer
and requires at least a minimum portion of its assets be kept in
liquid form. Additional discussion of this requirement and
HRBFA’s calculation of net capital is located in
Item 7, under “Capital Resources and Liquidity by
Segment.”
See discussion in “Risk Factors” for
additional information.
International Tax Operations
General.
Our International Tax Operations segment provides tax return
preparation, electronic filing and related services to the
general public, principally in Canada, Australia and the United
Kingdom. We also offer tax preparation of U.S. tax returns and
related services in company-owned and franchise offices in nine
countries and U.S. Territories. We offer electronic filing of
U.S. income tax returns at offices located in Europe, and the
electronic filing of Canadian, Australian, and United Kingdom
income tax returns at H&R Block offices in their respective
countries. Segment revenues constituted approximately 2% of our
consolidated revenues for fiscal years 2004, 2003 and 2002.
This segment served 2.3 million taxpayers in
each of fiscal years 2004, 2003 and 2002. Returns prepared at
1,334 company-owned and franchised offices in countries outside
of the United States in fiscal year 2004 constituted 12.8% of
the total returns prepared by H&R Block, compared to 12.4%
in fiscal year 2003 and 11.9% in fiscal year 2002. A summary of
our company-owned and franchise offices in countries outside the
United States is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Canada
|
|
|
891 |
|
|
|
910 |
|
|
|
955 |
|
|
|
|
Australia
|
|
|
378 |
|
|
|
362 |
|
|
|
362 |
|
|
|
|
Other
|
|
|
65 |
|
|
|
62 |
|
|
|
59 |
|
|
|
| |
|
|
|
Total offices
|
|
|
1,334 |
|
|
|
1,334 |
|
|
|
1,376 |
|
|
|
| |
|
|
|
Canadian
Operations. H&R Block Canada, Inc.
(“Block Canada”) and its franchisees prepared
approximately 1.7 million Canadian regular and discounted
returns filed with Revenue Canada in each of fiscal years 2004,
2003 and 2002. Of the 891 offices in Canada in fiscal year
2004, 489 were owned and operated by us and 402 were owned and
operated by franchisees. We operated 133 offices in
department stores in Canada in fiscal year 2004, including
79 offices in Sears’ facilities.
We offer a refund discount (“CashBack”)
program to our customers in Canada. Canadian law specifies the
procedures we must follow in conducting the program. In
accordance with current Canadian regulations, if a
customer’s tax return indicates the customer is entitled to
a tax refund, we issue a check to the client. The client assigns
to us the full amount of the tax refund to be issued by Revenue
Canada and the refund check is then sent by Revenue Canada
directly to us. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the
fee for tax refund discounting. This program is financed by
short-term borrowings. The number of returns discounted under
the CashBack program in fiscal year 2004 was approximately
552,000, compared to 531,000 in fiscal year 2003 and 525,000 in
fiscal year 2002.
During fiscal year 2004, we contracted with
Intuit Canada, Inc. to provide online tax preparation services
under the H&R Block brand to Canadian consumers. Users could
print and mail their return, or download their return and file
electronically.
Australian
Operations. The number of returns
prepared by our company-owned and franchise offices in
Australia, was approximately 519,000 in fiscal year 2004,
compared to 505,000 in fiscal year 2003 and 489,000 in fiscal
year 2002. Of the 378 offices in Australia in fiscal year 2004,
278 were company-owned and 100 were franchise offices.
Seasonality of
Business. Revenues in this segment are
seasonal in nature with peak revenues occurring during the
applicable tax season, as follows:
| |
|
|
|
|
|
|
|
| |
|
Canada
|
|
January – April
|
|
|
| |
|
Australia
|
|
July – October
|
|
|
|
Competitive
Conditions. The tax return preparation
business is highly competitive, with a substantial number of
firms offering tax preparation services. Commercial tax return
preparers are highly competitive with regard to price,
9 –
H&R
BLOCK – Form
10-K
service and reputation for quality. We believe we
operate the largest tax return preparation businesses in Canada
and Australia.
Government
Regulation. We seek to determine the
applicability of all government and self-regulatory organization
statutes, ordinances, rules and regulations in the countries in
which we operate (collectively, “Foreign Laws”) and to
comply with these Foreign Laws. We cannot predict what effect
the enactment of future Foreign Laws, changes in interpretations
of existing Foreign Laws, or the results of future regulator
inquiries regarding the applicability of Foreign Laws may have
on our segments, any particular subsidiary, or our consolidated
financial statements.
Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas
affecting the income tax business also exist outside of the
United States. In addition, the Canadian government regulates
the refund discounting program in Canada, as discussed under
“Canadian Operations,” above. These laws have not
materially affected the International Tax Operations segment.
See discussion in “Risk Factors” for
additional information.
Service Marks, Trademarks and
Patents
We have made a practice of selling our products
and services under service marks and trademarks and of obtaining
protection for these by all available means. Our service marks
and trademarks are protected by registration in the United
States and other countries where our products and services are
marketed. We consider these service marks and trademarks, in the
aggregate, to be of material importance to our business,
particularly our business segments providing products and
services under the “H&R Block” brand.
We have no registered patents that are material
to our business.
Employees
We have approximately 15,300 regular full-time
employees. The highest number of persons we employed during the
fiscal year ended April 30, 2004, including seasonal
employees, was approximately 111,300.
Risk Factors
In this report, and from time to time throughout
the year, we share our expectations for the Company’s
future performance. The following explains the critical risk
factors impacting our business and reasons actual results may
differ from our expectations. This discussion does not intend to
be a comprehensive list and there may be other risks and factors
that may have an effect on our business.
Liquidity and
Capital. We use capital primarily to
fund working capital requirements, pay dividends, repurchase our
shares and acquire businesses. We are dependent on the use of
our off-balance sheet arrangements to fund our daily non-prime
originations and the secondary market to securitize and sell
mortgage loans and residual interests. See “Off-Balance
Sheet Financing Arrangements” in Item 7. We are also
dependent on commercial paper issuances to fund RAL
participations and seasonal working capital needs. A disruption
in such markets could adversely affect our access to these
funds. In order to meet our future financing needs we may issue
additional debt or equity securities.
Litigation.
We are involved in lawsuits in the normal course of our business
related to RALs, our Peace of Mind guarantee program, electronic
filing of tax returns, Express IRAs, losses incurred by
customers in their investment accounts, mortgage lending
activities and other matters. Adverse outcomes related to
litigation could result in substantial damages and could
adversely affect our results of operations. Negative public
opinion can also result from our actual or alleged conduct in
such claims, possibly damaging our brand and adversely affecting
the market price of our stock. See Item 3, “Legal
Proceedings” for additional information.
Privacy of Client
Information. We manage highly
sensitive client information in all of our operating segments,
which is regulated by law. Problems with the safeguarding and
proper use of this information could result in regulatory
actions and negative publicity, which could adversely affect our
results of operations.
U.S. Tax Operations
Competitive
Position. Increased competition for
tax preparation clients in our retail offices, online and
software channels could adversely affect our current market
share and limit our ability to grow our client base. See clients
served statistics included under “U.S. Tax Operations”
in Item 7.
Refund Anticipation
Loans. Changes in government
regulation related to RALs could adversely affect our ability to
offer RALs or our ability to purchase participation interests.
Changes in IRS practices could adversely affect our ability to
utilize the IRS debt indicator to limit our bad debt exposure.
Changes in any of these, as well as possible litigation related
to RALs, may adversely affect our results of operations.
Mortgage Operations
Competitive
Position. The majority of our mortgage
loan applications are submitted through a network of brokers who
have relationships with many other mortgage lenders. Unfavorable
changes in our pricing, service or other factors could result in
a decline in our mortgage origination volume. A decline in our
service ratings could adversely affect our pricing and
origination volume. Increased competition among mortgage lenders
can also result in a decline in coupon rates offered to our
borrowers, which in turn lowers margins and could adversely
affect our gains on sales of mortgage loans. Additionally,
changes in legislation relating to our industry can adversely
affect our competitive position.
Asset Valuation
Assumptions. The valuation of residual
interests and mortgage servicing rights includes many estimates
and assumptions surrounding interest rates, prepayment speeds
and credit losses. If actual experience differs from our
estimates, we would be required to record write-ups or
write-downs to the related assets, which could either positively
or negatively affect our results of operations. See
“Critical Accounting Policies” in Item 7.
Legislation and
Regulations. Several states and cities
are considering or have passed laws, regulations or ordinances
aimed at curbing predatory lending and servicing practices. The
federal government is also considering legislative and
regulatory proposals in this regard. In general, these proposals
involve lowering the existing federal HOEPA thresholds for
defining a “high-cost” loan and establishing enhanced
protections and remedies for borrowers who receive such loans.
If unfavorable laws and regulations are passed, it could
restrict our ability to originate loans if rating agencies
refuse to rate our loans, loan buyers may not want to purchase
loans labeled as “high-cost,” and it could restrict
our ability to sell our loans in the secondary market.
Accordingly, all of these items could adversely affect our
results of operations.
– 10
Form
10-K – H&R
BLOCK
Business Services
Alternative Practice Structure
with M&P. Our relationship with
M&P requires us to comply with applicable auditor
independence rules and requirements. In addition, our
relationship with M&P closely links our RSM McGladrey brand
with M&P. If M&P were to encounter problems concerning
its independence as a result of its relationship with us or if
significant litigation arose concerning M&P or its services,
our brand reputation and our ability to realize the mutual
benefits of our relationship, such as the ability to attract and
retain quality professionals, could be impaired.
Investment Services
Regulatory
Environment. The broker-dealer
industry has recently come under more scrutiny by both Federal
and State regulators and, as a result, more focus has been
placed on compliance issues. If we do not comply with these
regulations, it could result in regulatory actions and negative
publicity, which could adversely affect our results of
operations. Negative public opinion about our industry could
damage our reputation even if we are in compliance with such
regulations.
Integration into the H&R
Block Brand. We are working to foster
an advice-based relationship with our tax clients through our
retail tax office network. This advice-based relationship is key
to the integration of Investment Services into the H&R Block
brand and deepening our current client relationships. If we are
unable to successfully integrate, it may significantly impact
our ability to differentiate our business from other tax
providers and grow our client base.
Availability of Reports and Other
Information
Our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
all amendments to those reports filed with or furnished to the
SEC are available, free of charge, through our website at
www.hrblock.com as soon as reasonably practicable after
such reports are electronically filed with or furnished to the
SEC.
Copies of the following corporate governance
documents are posted on our website: (1) The Amended and
Restated Bylaws of H&R Block, Inc., (2) The H&R
Block, Inc. Corporate Governance Guidelines, (3) the
H&R Block, Inc. Code of Business Ethics and Conduct,
(4) the H&R Block, Inc. Audit Committee Charter,
(5) the H&R Block, Inc. Governance and Nominating
Committee Charter, and (6) the H&R Block, Inc.
Compensation Committee Charter. If you would like a printed copy
of any of these corporate governance documents, please send your
request to the Office of the Secretary, H&R Block, Inc.,
4400 Main Street, Kansas City, Missouri 64111.
Information contained on our website does not
constitute any part of this report.
ITEM 2. PROPERTIES
We own our corporate headquarters, which are
located in Kansas City, Missouri. We have leased additional
office space for corporate, U. S. Tax Operations and
Investment Services personnel, as necessary, in Kansas City,
Missouri.
Most of our tax offices, except those in retail
outlets, are operated under leases throughout the United States.
Option One’s executive offices are located
in leased offices in Irvine, California. HRBMC is headquartered
in leased offices in Lake Forest, California. Option One and
HRBMC also lease offices for their loan origination and
servicing centers and branch office operations throughout the
United States.
The executive offices of HRBFA are located in
leased offices in Detroit, Michigan. Branch offices are operated
throughout the United States, in a combination of leased and
owned facilities.
RSM’s executive offices are located in
leased offices in Bloomington, Minnesota. Its administrative
offices are located in leased offices in Davenport, Iowa. RSM
also leases office space throughout the United States.
Our Canadian executive offices are located in a
leased office in Calgary, Alberta. Our Canadian tax offices are
operated under leases throughout Canada.
We will begin construction of new corporate
headquarters during fiscal year 2005, which will allow us to
consolidate the majority of our Kansas City-based personnel into
one facility. The new building will be located in downtown
Kansas City, Missouri.
All current leased and owned facilities are in
good repair and adequate to meet our needs.
ITEM 3. LEGAL PROCEEDINGS
The information below should be read in
conjunction with the information included in Item 8, note
20 to our consolidated financial statements.
RAL
Litigation. We have been named as a
defendant in numerous lawsuits throughout the country regarding
our refund anticipation loan programs (collectively, “RAL
Cases”). Plaintiffs in the RAL Cases have alleged, among
other things, that disclosures in the RAL applications were
inadequate, misleading and untimely; that the RAL interest rates
were usurious and unconscionable; that we did not disclose that
we would receive part of the finance charges paid by the
customer for such loans; breach of state laws on credit service
organizations; breach of contract; unjust enrichment; unfair and
deceptive acts or practices; violations of the Racketeer
Influenced and Corrupt Organizations act; violations of the Fair
Debt Collection Practices Act; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program. In many of the RAL Cases, the plaintiffs seek to
proceed on behalf of a class of similarly situated RAL
customers, and in certain instances the courts have allowed the
cases to proceed as class actions. In other cases, courts have
held that plaintiffs must pursue their claims on an individual
basis, and may not proceed as a class action. The amounts
claimed in the RAL Cases have been very substantial in some
instances.
We have successfully defended against numerous
RAL Cases. Of these RAL Cases, some were dismissed on our
motions for dismissal or summary judgment and others were
dismissed voluntarily by the plaintiffs after denial of class
certification. Other cases were settled, with one settlement
resulting in a pretax expense of $43.5 million in fiscal
year 2003 (the “Texas RAL Settlement”).
We believe we have meritorious defenses to the
RAL Cases and we intend to defend the remaining RAL Cases
vigorously. We have accrued our best estimate of the probable
loss related to the RAL Cases. However, there can be no
assurances as to the outcome of the pending RAL Cases
individually or in the aggregate, and there can be no assurances
regarding the impact of the RAL Cases on our financial
statements. The following is updated information regarding the
pending RAL Cases that are class actions or putative class
actions:
Lynne A. Carnegie, et al. v. Household
International, Inc., H&R Block, Inc., et
al., (formerly Joel E. Zawikowski,
et al. v. Beneficial National Bank, H&R Block,
11 –
H&R
BLOCK – Form
10-K
Inc., Block Financial Corporation, et al.) Case
No. 98 C 2178, United States District Court for the
Northern District of Illinois, Eastern Division, instituted on
April 18, 1998. On April 15, 2003, the District Court
judge declined to approve a $25.0 million settlement of
this matter, finding that counsel for the settlement plaintiffs
had been inadequate representatives of the plaintiff class and
failed to sustain their burden of showing that the settlement
was fair. The judge subsequently appointed new counsel for the
plaintiffs who filed an amended complaint and a motion for
partial summary judgment. On March 29, 2004, the court
either dismissed or decertified all of the plaintiffs’
claims other than part of one count alleging violations of the
racketeering and conspiracy provisions of the Racketeer
Influenced and Corrupt Organizations act. We intend to continue
defending the case vigorously, but there are no assurances as to
its outcome.
Sandra J. Basile, et al. v. H&R Block,
Inc., et al, April Term 1992 Civil
Action No. 3246 in the Court of Common Pleas, First
Judicial District of Pennsylvania, Philadelphia County,
instituted on April 23, 1993. The court decertified the
class on December 31, 2003. Plaintiffs have appealed the
decertification.
Levon and Geral Mitchell, et al. v. H&R
Block and Ruth R. Wren, Case
No. CV-95-2067, in the Circuit Court of Mobile County,
Alabama, instituted on June 13, 1995. Plaintiffs’
motion for class certification was granted, and defendants have
filed a notice of appeal of the certification.
Deandra D. Cummins, et al. v. H&R Block,
Inc., et al., Case No. 03-C-134
in the Circuit Court of Kanawha County, West Virginia,
instituted on January 22, 2003. Defendants’ motions to
dismiss and to compel arbitration were heard in part in December
2003, during which the judge discontinued the hearing and
ordered the parties to mediation. Mediation occurred in February
2004 during which the parties were unable to reach agreement.
Defendants’ motion to dismiss and compel arbitration was
subsequently denied.
Roy Carbahal, et al. v. Household
International, H&R Block Tax Services, Inc. et
al., Case No. 00C0626 in the
United States District Court for the Northern District of
Illinois, instituted on January 31, 2000. Defendants’
motion to compel arbitration was granted and the case was
dismissed. Plaintiffs appealed such dismissal. On June 24,
2004, the Seventh Circuit Court of Appeals affirmed such
dismissal.
Abby Thomas, et al. v. Beneficial National
Bank, H&R Block, Inc., et al.,
Case No. 4:03-CV-00775 GTE in the United States District
Court for the Eastern District of Arkansas, Western Division,
instituted on August 12, 2003. Defendants moved to dismiss
and compel arbitration, and plaintiffs thereafter filed an
amended complaint and a motion to remand the case to state
court. On December 8, 2003, the federal court denied
plaintiffs’ motion to remand.
Lynn Becker v. H&R Block,
Case No. CV-2004-03-1680 in the
Court of Common Pleas, Summit County, Ohio, instituted on
April 15, 2004. Plaintiffs filed an amended complaint on
May 3, 2004, containing class allegations.
Peace of Mind
Litigation. Lorie J. Marshall, et
al. v. H&R Block Tax Services, Inc., et al., Civil
Action 2002L000004, in the Circuit Court of Madison County,
Illinois, is a class action case filed on January 18, 2002,
as to which the court granted plaintiffs’ first amended
motion for class certification on August 27, 2003.
Plaintiffs’ claims consist of five counts relating to the
defendants’ Peace of Mind program under which the
applicable tax return preparation subsidiary assumes liability
for the cost of additional tax assessments attributable to tax
return preparation error. The plaintiffs allege that
defendants’ sale of its Peace of Mind guarantee constitutes
statutory fraud by selling insurance without a license, an
unfair trade practice, by omission and by “cramming”
(i.e., charging customers for the guarantee even though they did
not request it and/or did not want it), and constitutes a breach
of fiduciary duty. In August 2003, the court certified the
following plaintiff classes: (1) all persons who were
charged a separate fee for Peace of Mind by “H&R
Block” or a defendant H&R Block class member from
January 1, 1997 to final judgment; (2) all persons who
reside in certain class states and who were charged a separate
fee for Peace of Mind by “H&R Block,” or a
defendant H&R Block class member, and that was not licensed
to sell insurance, from January 1, 1997 to final judgment;
and (3) all persons who had an unsolicited charge for Peace
of Mind posted to their bills by “H&R Block” or a
defendant H&R Block class member from January 1, 1997,
to final judgment. Among those excluded from the plaintiff
classes are all persons who received the Peace of Mind guarantee
through an H&R Block Premium office and all persons who
reside in Texas and Alabama. The court also certified a
defendant class consisting of any entity with the names
“H&R Block” or “HRB” in its name, or
otherwise affiliated or associated with H&R Block Tax
Services, Inc., and which sold or sells the Peace of Mind
product. The trial court subsequently denied the
defendants’ motion asking the trial court to certify the
class certification issues for interlocutory appeal. Discovery
is proceeding.
There is one other putative class action pending
against us in Texas that involves the Peace of Mind guarantee.
This case is being tried before the same judge that presided
over the Texas RAL Settlement and involves the same plaintiffs
attorneys that are involved in the Marshall litigation in
Illinois and substantially similar allegations. No class has
been certified in this case.
We believe the claims in these Peace of Mind
actions are without merit and we intend to defend them
vigorously. However, there can be no assurances as to the
outcome of these pending actions individually or in the
aggregate, and there can be no assurances on the impact of these
actions on our consolidated results of operations or financial
position.
Other Claims and
Litigation. As with other
broker-dealers that distribute mutual fund shares, HRBFA is the
subject of an investigation by the NASD into activities
characterized as “market timing” and “late
trading” of mutual fund shares by HRBFA. The NASD staff has
notified HRBFA that on the basis of its investigation it has
preliminarily determined to recommend a disciplinary action
against HRBFA for violating various federal securities laws and
NASD rules in connection with market timing activities that took
place primarily in one of HRBFA’s offices. HRBFA has
provided the NASD a written response to its allegations. HRBFA
is cooperating with the NASD and has conducted its own internal
investigation. While we cannot provide assurance regarding the
ultimate resolution of this matter, we believe the resolution of
this matter will not have a material adverse effect on our
operations, consolidated results of operations or financial
position.
As part of an industry-wide review, the IRS is
investigating tax planning strategies that certain RSM clients
utilized during fiscal years 2000 through 2003. Specifically,
the IRS is examining these strategies to determine whether RSM
complied with tax shelter registration and listing regulations
and whether such strategies were appropriate. If the IRS were to
determine that these strategies were inappropriate, clients that
utilized the strategies could face penalties and interest for
underpayment of taxes and may attempt to seek recovery from RSM.
While there can be no assurance regarding the outcome of this
matter, we do not believe that its resolution will have a
material adverse effect on our operations, consolidated results
of operations or financial position.
As reported in current report on Form 8-K
dated December 12, 2003, the United States SEC informed
outside counsel to the Company on December 11, 2003 that
the Commission had issued a Formal Order of Investigation
concerning our disclosures, in and before November 2002,
regarding RAL litigation to which we were and are a party. There
can be no assurances as to the outcome and resolution of this
matter.
We have from time to time been party to claims
and lawsuits not discussed herein arising out of our business
operations, including additional claims and lawsuits concerning
RALs, the Peace of Mind guarantee program, the Express IRA
program and claims and lawsuits concerning the preparation of
customers’ income tax returns, the electronic filing of
customers’ tax returns, the fees
– 12
Form
10-K – H&R
BLOCK
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, and
contract disputes. Such lawsuits include actions by individual
plaintiffs, as well as 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. We consider these
cases to be ordinary, routine litigation incidental to our
business, we believe we have meritorious defenses to each of
them, and we are defending, or intend to defend, 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 matters will not have a material
adverse effect on our consolidated results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security
holders during the fourth quarter of fiscal year 2004.
Information regarding executive officers is contained in
Item 10 of this report.
PART II
|
|
| ITEM 5. |
MARKET FOR THE REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
H&R Block’s common stock is traded
principally on the NYSE and is also traded on the Pacific
Exchange. The information called for by this item with respect
to H&R Block’s common stock appears in Item 8,
note 22 to our consolidated financial statements. The
remaining information called for by this item relating to
“Securities Authorized for Issuance under Equity
Compensation Plans” is reported in Item 8,
note 14 to our consolidated financial statements. On
June 15, 2004, there were 31,063 shareholders of record and
the closing stock price on the NYSE was $46.62 per share.
A summary of our purchases of H&R Block
common stock during the fourth quarter of fiscal year 2004 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (shares in 000s) |
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
|
|
Total |
|
Average |
|
Shares Purchased as |
|
of Shares that May Be |
|
|
|
|
Number of Shares |
|
Price Paid |
|
Part of Publicly Announced |
|
Purchased Under the |
|
|
|
|
Purchased(2) |
|
per Share |
|
Plans or Programs(1) |
|
Plans or Programs(1)(3) |
|
|
|
|
February 1 – February 29
|
|
|
781 |
|
|
$ |
55.28 |
|
|
|
780 |
|
|
|
13,367 |
|
|
|
|
March 1 – March 31
|
|
|
1,460 |
|
|
$ |
53.81 |
|
|
|
1,460 |
|
|
|
11,907 |
|
|
|
|
April 1 – April 30
|
|
|
575 |
|
|
$ |
46.75 |
|
|
|
575 |
|
|
|
11,332 |
|
|
|
|
|
|
| (1) |
On June 11, 2003, our Board of Directors
approved the repurchase of 20 million shares of H&R
Block common stock. This authorization has no expiration
date. |
| (2) |
Of the total number of shares purchased,
1,202 shares were purchased in connection with funding
employee income tax withholding obligations arising upon the
exercise of stock options or the lapse of restrictions on
restricted shares. |
| (3) |
On June 9, 2004, our Board of Directors
approved the additional repurchase of 15 million shares of
H&R Block common stock. This authorization has no expiration
date. |
ITEM 6. SELECTED FINANCIAL
DATA
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
Revenues
|
|
$ |
4,205,570 |
|
|
$ |
3,746,457 |
|
|
$ |
3,285,701 |
|
|
$ |
2,965,405 |
|
|
$ |
2,420,923 |
|
|
|
|
Net income before change in accounting principle
|
|
|
704,256 |
|
|
|
580,064 |
|
|
|
434,405 |
|
|
|
276,748 |
|
|
|
251,895 |
|
|
|
|
Net income
|
|
|
697,897 |
|
|
|
580,064 |
|
|
|
434,405 |
|
|
|
281,162 |
|
|
|
251,895 |
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income before change in accounting principle
|
|
$ |
3.98 |
|
|
$ |
3.23 |
|
|
$ |
2.38 |
|
|
$ |
1.50 |
|
|
$ |
1.28 |
|
|
|
| |
Net income
|
|
|
3.94 |
|
|
|
3.23 |
|
|
|
2.38 |
|
|
|
1.53 |
|
|
|
1.28 |
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income before change in accounting principle
|
|
$ |
3.90 |
|
|
$ |
3.15 |
|
|
$ |
2.31 |
|
|
$ |
1.49 |
|
|
$ |
1.27 |
|
|
|
| |
Net income
|
|
|
3.86 |
|
|
|
3.15 |
|
|
|
2.31 |
|
|
|
1.52 |
|
|
|
1.27 |
|
|
|
|
Total assets
|
|
$ |
5,380,026 |
|
|
$ |
4,767,308 |
|
|
$ |
4,384,640 |
|
|
$ |
4,166,044 |
|
|
$ |
5,700,146 |
|
|
|
|
Long-term debt
|
|
|
545,811 |
|
|
|
822,302 |
|
|
|
868,387 |
|
|
|
870,974 |
|
|
|
872,396 |
|
|
|
|
Dividends per share
|
|
$ |
.78 |
|
|
$ |
.70 |
|
|
$ |
.63 |
|
|
$ |
.59 |
|
|
$ |
.54 |
|
|
|
|
13 –
H&R
BLOCK – Form
10-K
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We are a diversified company with subsidiaries
delivering tax, financial, mortgage and business products and
services. We are the only major company offering a full range of
software, online and in-office tax solutions, combined with
personalized financial advice about retirement savings, home
ownership and other opportunities to help clients build a better
financial future.
Overall for fiscal 2004, we achieved strong
financial results and generally executed well against our
strategic priorities. We were able to increase our tax and
financial advice offerings, strengthen our multi-channel
offerings and continued to cross-sell our financial services and
products across segments, which we believe all help increase
brand loyalty and client retention. However, we saw a decline in
our retail tax clients served in our offices. Additionally, we
again saw Mortgage Operations deliver strong financial results.
Our key strategic priorities can be summarized as follows:
|
|
|
| |
▪ |
U.S. Tax Operations – expanding
our office network, working on service and product
differentiation and focusing on advice that supports client
growth, increased brand loyalty and business extensions with a
tax and financial connection.
|
| |
▪ |
Mortgage Operations – developing a
diversified source of originations, distinguishing our service
quality, minimizing risk and volatility in performance and using
secondary markets to optimize value.
|
| |
▪ |
Business Services – developing a
national accounting, tax and consulting firm, adding extended
services to middle-market companies and enhancing our client
service culture.
|
| |
▪ |
Investment Services – serving the broad
consumer market through tax-based advisory relationships, brand
differentiation through relevant advice and multi-channel access
and providing services clients can use to readily implement that
advice.
|
The analysis that follows should be read in
conjunction with the tables below, the consolidated income
statements and the information contained in Item 1 under
“Description of Business.”
Overview
A summary of our fiscal year 2004 results is as
follows:
|
|
|
| |
▪ |
Diluted earnings per share before change in
accounting principle were $3.90, an increase of 23.8% over
fiscal year 2003.
|
| |
▪ |
Revenues grew 12.3% over the prior year,
primarily due to revenues from operations in former major
franchise territories and growth in our Mortgage Operations
segment. We achieved revenue growth in each of our segments.
|
| |
▪ |
Clients served in company-owned retail tax
offices grew 5.2%, and the average fee per client served
increased 6.7%. The increase in clients served is due entirely
to company-owned operations in former major franchise
territories. Excluding the former major franchise territories,
clients served decreased 2.5%.
|
| |
▪ |
Software and online revenues increased 11.4% and
70.6%, respectively, compared to fiscal year 2003.
|
| |
▪ |
Mortgage originations totaled $23.3 billion
for the year as a result of increases in the sales force,
average loan size, loan applications and the closing ratio.
|
| |
▪ |
Gains on sales of mortgage assets reached
$726.7 million, including $40.7 million realized on
the sale of previously securitized residual interests.
|
| |
▪ |
The Business Services segment reported pretax
income of $19.3 million, an improvement of
$33.4 million over the prior year. Fiscal year 2003
includes an $11.8 million goodwill impairment.
|
| |
▪ |
The Investment Services segment reported a pretax
loss of $64.4 million, an improvement of $63.8 million
over prior year. Fiscal year 2003 includes a $24.0 million
goodwill impairment.
|
| |
▪ |
We began expensing stock-based compensation as of
May 1, 2003. We recorded $25.7 million in expense
related to the issuance of stock options, restricted stock and
our employee stock purchase plan during fiscal year 2004.
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated Results of Operations (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Tax Operations
|
|
$ |
2,093,617 |
|
|
$ |
1,861,681 |
|
|
$ |
1,831,274 |
|
|
|
|
Mortgage Operations
|
|
|
1,281,399 |
|
|
|
1,165,411 |
|
|
|
702,333 |
|
|
|
|
Business Services
|
|
|
499,210 |
|
|
|
434,140 |
|
|
|
416,926 |
|
|
|
|
Investment Services
|
|
|
229,470 |
|
|
|
200,794 |
|
|
|
250,685 |
|
|
|
|
International Tax Operations
|
|
|
97,560 |
|
|
|
85,082 |
|
|
|
78,710 |
|
|
|
|
Corporate Operations
|
|
|
4,314 |
|
|
|
(651 |
) |
|
|
5,773 |
|
|
|
| |
|
|
| |
|
$ |
4,205,570 |
|
|
$ |
3,746,457 |
|
|
$ |
3,285,701 |
|
|
|
| |
|
|
|
INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Tax Operations
|
|
$ |
627,592 |
|
|
$ |
547,078 |
|
|
$ |
533,468 |
|
|
|
|
Mortgage Operations
|
|
|
678,261 |
|
|
|
693,950 |
|
|
|
339,388 |
|
|
|
|
Business Services
|
|
|
19,321 |
|
|
|
(14,118 |
) |
|
|
22,716 |
|
|
|
|
Investment Services
|
|
|
(64,446 |
) |
|
|
(128,292 |
) |
|
|
(54,862 |
) |
|
|
|
International Tax Operations
|
|
|
11,097 |
|
|
|
10,464 |
|
|
|
7,093 |
|
|
|
|
Corporate Operations
|
|
|
(107,668 |
) |
|
|
(122,005 |
) |
|
|
(130,963 |
) |
|
|
| |
|
|
|
Pretax income
|
|
$ |
1,164,157 |
|
|
$ |
987,077 |
|
|
$ |
716,840 |
|
|
|
| |
|
|
|
CRITICAL ACCOUNTING POLICIES
We consider the policies discussed below to be
critical to securing an understanding of our financial
statements, as they require the use of significant judgment and
estimation in order to measure, at a specific point in time,
matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following
paragraphs. For all of these policies, we caution that future
events rarely develop precisely as forecast, and estimates
routinely require adjustment and may require material adjustment.
Revenue
recognition: We have many different
revenue streams with different revenue recognition policies. We
record retail and online tax preparation revenues when a
completed return is filed or accepted by the customer. RAL
participation revenue is recorded when we purchase our
participation interest in the RAL. Commission revenue is
recognized on a trade-date basis. Business Services revenues are
recognized on a time and materials basis.
We recognize interest income on customer margin
loan balances daily as earned, based on current rates charged to
customers for their margin balance. Accretion income represents
interest earned over the life of residual interests using the
effective interest method.
We record sales of software when the product is
ultimately sold to the end user. POM revenues are deferred and
recognized over the term of the guarantee based upon historic
and actual payment of claims.
– 14
Form
10-K – H&R
BLOCK
Franchise royalties, which are based upon the
contractual percentages of franchise revenues, are recorded in
the period in which the franchise provides the service.
Gains on sales of mortgage
loans: We sell substantially all of
the non-prime mortgage loans we originate to the Trusts, which
are qualifying special purpose entities (“QSPEs”),
with servicing rights generally retained. Prime mortgage loans
are sold in whole loan sales, servicing released, to third-party
buyers. We record the gain on sale as the difference between
cash proceeds and the allocated cost of loans sold.
We determine the allocated cost of loans sold
based on the relative fair values of loans sold, MSRs and the
beneficial interest in Trusts, which represents the ultimate
expected outcome from the disposition of the loans. The relative
fair value of the MSRs and the beneficial interest in Trust is
determined using discounted cash flow models, which require
various management assumptions (see discussion below in
“Valuation of residual interests” and “Valuation
of mortgage servicing rights”). Variations in these
assumptions affect the estimated fair values, which would affect
the reported gains on sales. Gains on sales of mortgage loans
totaled $716.7 million, $663.6 million and
$455.4 million for fiscal years 2004, 2003 and 2002,
respectively.
See discussion in “Off-Balance Sheet
Financing” related to the disposition of the loans by the
Trusts and subsequent securitization by the Company.
Valuation of residual
interests: We use discounted cash flow
models to arrive at the estimated fair values of our residual
interests. See Item 8, note 1 to our consolidated
financial statements for our methodology used in valuing
residual interests. Variations in our assumptions, including
loss, prepayment speeds, discount rate and interest rate
assumptions, could materially affect the estimated fair values,
which may require us to record impairments or unrealized gains.
In addition, variations will also affect the amount of residual
interest accretion recorded on a monthly basis. Residual
interests – available-for-sale valued at
$211.0 million and $264.3 million were recorded as of
April 30, 2004 and 2003, respectively. We recorded
$167.1 million in net write-ups in other comprehensive
income and $30.7 million in impairments in the income
statement related to our residual interests during fiscal year
2004 as actual results differed from our assumptions. See
Item 8, note 6 to our consolidated financial statements for
current assumptions and a sensitivity analysis of those
assumptions. See Item 7a for sensitivity analysis related
to interest rates.
Valuation of mortgage
servicing rights: We generally sell
non-prime mortgage loans with servicing retained. MSRs are
recorded at allocated carrying amounts based on relative fair
values when the loans are sold (see discussion above in
“Gains on sales of mortgage loans”). Fair values of
MSRs are determined based on the present value of estimated
future cash flows related to servicing loans. Assumptions used
in estimating the value of MSRs include discount rates,
prepayment speeds (including default) and other factors. The
prepayment speeds are somewhat correlated with the movement of
market interest rates. As market interest rates decline there is
a corresponding increase in actual and expected borrower
prepayments as customers refinance existing mortgages under more
favorable interest rate terms. This in turn reduces the
anticipated cash flows associated with servicing resulting in a
reduction, or impairment, to the fair value of the capitalized
MSR. Many non-prime loans have a prepayment penalty in place for
the first two to three years, which has the effect of making
prepayment speeds more predictable, regardless of market
interest rate movements. Prepayment rates are estimated using
our historical experience and third-party market sources.
Variations in these assumptions could materially affect the
carrying value of the MSRs.
MSRs are carried at the lower of cost or market
and are reviewed quarterly for potential impairment. Impairment
is assessed based on the fair value of each risk stratum. MSRs
are stratified by: the fiscal year of the loan sale date (which
approximates date of origination) and loan type (6-month
adjustable, 2-to 3-year adjustable and fixed rate). Fair values
take into account the historical prepayment activity of the
related loans and our estimates of the remaining future cash
flows to be generated through servicing the underlying mortgage
loans. If actual prepayment rates prove to be higher than the
estimate made by management, impairment of the MSRs could occur.
MSRs valued at $113.8 million and $99.3 million were
recorded as of April 30, 2004 and 2003, respectively. There
were no impairments to MSRs during fiscal year 2004. See
Item 8, note 6 to our consolidated financial statements for
current assumptions and a sensitivity analysis of those
assumptions.
Valuation of
goodwill: We test goodwill for
impairment annually or more frequently whenever events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying amount. We
have defined our reporting units as our operating segments or
one level below. The first step of the impairment test is to
compare the estimated fair value of the reporting unit to its
carrying value. If the carrying value is less than fair value,
no impairment exists. If the carrying value is greater than fair
value, a second step is performed to determine the fair value of
goodwill and the amount of impairment loss, if any. In
estimating each reporting unit’s fair value using
discounted cash flow projections and market comparables, when
available, we make assumptions, including discount rates, growth
rates and terminal values. Changes in the projections or
assumptions could materially affect fair values. Our goodwill
balances were $959.4 million and $714.2 million as of
April 30, 2004 and 2003, respectively. No goodwill
impairments were identified during fiscal year 2004.
In fiscal year 2003, a goodwill impairment charge
of $24.0 million was recorded in the Investment Services
segment due to unsettled market conditions. Also during 2003,
our annual impairment test resulted in an impairment of
$11.8 million for a reporting unit within the Business
Services segment. No other impairments were identified.
Litigation:
Our policy is to routinely assess the likelihood of any adverse
judgments or outcomes related to legal matters, as well as
ranges of probable losses. A determination of the amount of the
reserves required, if any, for these contingencies is made after
thoughtful analysis of each known issue and an analysis of
historical experience in accordance with Statement of Financial
Accounting Standards No. 5, “Accounting for
Contingencies,” and related pronouncements. Therefore, we
have recorded reserves related to certain legal matters for
which it is probable that a loss has been incurred and the range
of such loss can be estimated. With respect to other matters, we
have concluded that a loss is only reasonably possible or remote
and, therefore, no liability is recorded. In addition, there are
certain gain contingencies for which we have not recorded an
asset.
Stock-Based
Compensation: We record compensation
expense for the issuance of stock options, restricted shares and
our employee stock purchase plan (“ESPP”). The expense
is calculated based on the fair value of the options/shares and
the number of options/shares that vest. We use the Black-Scholes
model to calculate the fair value for stock options and ESPP
shares using the following assumptions: stock volatility,
expected life, risk-free interest rate and dividend yield. The
fair value of restricted shares is the stock price on the date
of the grant. We also estimate, based on historical data, the
percent of options/shares that we expect to vest. The total
expense is recognized on a straight-line basis over the vesting
period. Variations in the assumptions used to calculate fair
value could either positively or negatively affect the recorded
expense. Variations in the estimate of vesting could result in
timing adjustments recorded at the end of the vesting period.
We began expensing all stock-based compensation
grants issued beginning on May 1, 2003. Therefore, our
income statements do not fully reflect the expense related to
all of our stock options and restricted shares outstanding. We
recorded
15 –
H&R
BLOCK – Form
10-K
$25.7 million and $2.1 million in
stock-based compensation expense during fiscal year 2004 and
2003, respectively.
Additionally, changes in accounting rules related
to stock-based compensation could result in changes to our
assumptions of fair value and expense recognition.
Other significant accounting
policies: Other significant accounting
policies, not involving the same level of measurement
uncertainties as those discussed above, are nevertheless
important to an understanding of the financial statements. These
policies require difficult judgments on complex matters that are
often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under
reexamination by accounting standards setters and regulators.
Although no specific conclusions reached by these standard
setters appear likely to cause a material change in our
accounting policies, outcomes cannot be predicted with
confidence. Also see Item 8, note 1 to our
consolidated financial statements, which discusses accounting
policies we have selected when there are acceptable alternatives.
– 16
Form
10-K – H&R
BLOCK
RESULTS OF OPERATIONS
Our business is divided into five reportable
segments: U.S. Tax Operations, Mortgage Operations,
Business Services, Investment Services and International Tax
Operations.
U.S. TAX OPERATIONS
This segment primarily consists of our income tax
preparation businesses – retail, online and software.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Tax Operations – Operating Statistics (in 000s, except average fee) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003(1) |
|
2002(1) |
|
|
|
|
Clients served:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company-owned offices (2)
|
|
|
9,811 |
|
|
|
10,058 |
|
|
|
10,513 |
|
|
|
| |
Former major franchise
territories (3)
|
|
|
775 |
|
|
|
** |
|
|
|
** |
|
|
|
| |
|
|
| |
Total company-owned
|
|
|
10,586 |
|
|
|
10,058 |
|
|
|
10,513 |
|
|
|
| |
|
|
| |
Franchise offices
|
|
|
5,413 |
|
|
|
5,629 |
|
|
|
5,785 |
|
|
|
| |
Former major franchise
territories (3)
|
|
|
16 |
|
|
|
830 |
|
|
|
850 |
|
|
|
| |
|
|
| |
Total franchise
|
|
|
5,429 |
|
|
|
6,459 |
|
|
|
6,635 |
|
|
|
| |
|
|
| |
Digital tax solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Software (4)
|
|
|
2,027 |
|
|
|
1,963 |
|
|
|
1,825 |
|
|
|
| |
|
Online (5)
|
|
|
1,207 |
|
|
|
920 |
|
|
|
481 |
|
|
|
| |
|
|
| |
|
|
|
19,249 |
|
|
|
19,400 |
|
|
|
19,454 |
|
|
|
| |
|
|
| |
Average fee per client
served: (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company-owned offices (2)
|
|
$ |
147.38 |
|
|
$ |
137.36 |
|
|
$ |
128.69 |
|
|
|
| |
Former major franchise
territories (3)
|
|
|
135.52 |
|
|
|
** |
|
|
|
** |
|
|
|
| |
|
|
| |
Total company-owned
|
|
|
146.51 |
|
|
|
137.36 |
|
|
|
128.69 |
|
|
|
| |
|
|
| |
Franchise offices
|
|
|
128.02 |
|
|
|
117.42 |
|
|
|
108.82 |
|
|
|
| |
Former major franchise
territories (3)
|
|
|
126.13 |
|
|
|
122.96 |
|
|
|
112.31 |
|
|
|
| |
|
|
| |
Total franchise
|
|
|
128.02 |
|
|
|
118.14 |
|
|
|
109.27 |
|
|
|
| |
|
|
| |
|
|
$ |
140.24 |
|
|
$ |
129.84 |
|
|
$ |
121.18 |
|
|
|
| |
|
|
| |
RALs: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company-owned offices (2)
|
|
|
2,521 |
|
|
|
2,758 |
|
|
|
2,844 |
|
|
|
| |
|
Former major franchise
territories (3)
|
|
|
185 |
|
|
|
** |
|
|
|
** |
|
|
|
| |
|
|
| |
|
Total company-owned
|
|
|
2,706 |
|
|
|
2,758 |
|
|
|
2,844 |
|
|
|
| |
|
|
| |
|
Franchise offices
|
|
|
1,501 |
|
|
|
1,595 |
|
|
|
1,573 |
|
|
|
| |
|
Former major franchise
territories (3)
|
|
|
** |
|
|
|
188 |
|
|
|
189 |
|
|
|
| |
|
|
| |
|
Total franchise
|
|
|
1,501 |
|
|
|
1,783 |
|
|
|
1,762 |
|
|
|
| |
|
|
| |
|
Digital tax solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Software
|
|
|
5 |
|
|
|
— |
|
|
|
11 |
|
|
|
| |
|
|
Online
|
|
|
57 |
|
|
|
75 |
|
|
|
33 |
|
|
|
| |
|
|
| |
|
|
|
4,269 |
|
|
|
4,616 |
|
|
|
4,650 |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Tax Operations – Financial Results (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Tax preparation and related fees
|
|
$ |
1,519,238 |
|
|
$ |
1,378,733 |
|
|
$ |
1,364,673 |
|
|
|
|
Royalties
|
|
|
173,754 |
|
|
|
163,519 |
|
|
|
154,780 |
|
|
|
|
RAL waiver fees
|
|
|
6,548 |
|
|
|
138,242 |
|
|
|
— |
|
|
|
|
RAL participation fees
|
|
|
168,375 |
|
|
|
874 |
|
|
|
159,965 |
|
|
|
|
Software sales
|
|
|
69,474 |
|
|
|
62,368 |
|
|
|
54,823 |
|
|
|
|
Online tax services
|
|
|
44,860 |
|
|
|
26,290 |
|
|
|
14,606 |
|
|
|
|
Peace of Mind revenue
|
|
|
75,025 |
|
|
|
47,677 |
|
|
|
44,387 |
|
|
|
|
Other
|
|
|
36,343 |
|
|
|
43,978 |
|
|
|
38,040 |
|
|
|
| |
|
|
| |
|
Total revenues
|
|
|
2,093,617 |
|
|
|
1,861,681 |
|
|
|
1,831,274 |
|
|
|
| |
|
|
|
Compensation and benefits
|
|
|
662,326 |
|
|
|
577,545 |
|
|
|
598,355 |
|
|
|
|
Occupancy and equipment
|
|
|
235,469 |
|
|
|
207,366 |
|
|
|
186,998 |
|
|
|
|
Depreciation and amortization
|
|
|
54,879 |
|
|
|
39,456 |
|
|
|
39,871 |
|
|
|
|
Supplies, freight and postage
|
|
|
39,666 |
|
|
|
39,579 |
|
|
|
35,989 |
|
|
|
|
Cost of software sales
|
|
|
25,274 |
|
|
|
20,085 |
|
|
|
19,947 |
|
|
|
|
Bad debt
|
|
|
44,155 |
|
|
|
17,358 |
|
|
|
38,235 |
|
|
|
|
Legal
|
|
|
7,645 |
|
|
|
69,783 |
|
|
|
7,641 |
|
|
|
|
Other
|
|
|
126,338 |
|
|
|
105,456 |
|
|
|
137,884 |
|
|
|
|
Allocated corporate and shared costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketing
|
|
|
110,807 |
|
|
|
90,142 |
|
|
|
99,560 |
|
|
|
| |
Information technology
|
|
|
91,158 |
|
|
|
77,285 |
|
|
|
77,230 |
|
|
|
| |
Finance
|
|
|
19,675 |
|
|
|
22,367 |
|
|
|
13,270 |
|
|
|
| |
Supply
|
|
|
21,607 |
|
|
|
19,724 |
|
|
|
19,508 |
|
|
|
| |
Other
|
|
|
27,026 |
|
|
|
28,457 |
|
|
|
23,318 |
|
|
|
| |
|
|
| |
|
Total expenses
|
|
|
1,466,025 |
|
|
|
1,314,603 |
|
|
|
1,297,806 |
|
|
|
| |
|
|
| |
Pretax income
|
|
$ |
627,592 |
|
|
$ |
547,078 |
|
|
$ |
533,468 |
|
|
|
| |
|
|
|
|
|
| (1) |
Company-owned and franchise numbers for fiscal
years 2003 and 2002 have not been restated for franchise
acquisitions during fiscal year 2004. |
| (2) |
Excludes company-owned offices in former major
franchise territories, which commenced operations during fiscal
year 2004. |
| (3) |
Impact of company-owned offices in former
major franchise territories, which commenced operations during
fiscal year 2004. |
| (4) |
Includes TaxCut federal units sold. |
| (5) |
Includes a) online completed and paid
federal returns, and b) state returns only when no payment
was made for a federal return. |
| (6) |
Data is for tax season
(January 1 – April 30) only. |
| (7) |
Calculated as gross tax preparation and
related fees divided by clients served. |
17 –
H&R
BLOCK – Form
10-K
Fiscal 2004 compared to fiscal 2003
U.S. Tax Operations’ revenues increased
$231.9 million, or 12.5%, to $2.1 billion for fiscal
year 2004.
Tax preparation and related fees increased
$140.5 million, or 10.2%, for fiscal year 2004, compared to
fiscal year 2003. This increase is due to a 6.7% increase in the
average fee per client served in company-owned offices, coupled
with a 5.2% increase in clients served in those offices. The
average fee per client served increased to $146.51 in fiscal
year 2004, due to increases in our pricing and the complexity of
returns prepared. Clients served increased to 10.6 million
from 10.1 million as a result of the former major franchise
territories. Excluding the impact of our acquisition of former
major franchises, clients served declined 2.5%. We believe this
decline is due to a combination of factors including a lack of
office network density in some key areas of the country. Given
the competitive environment and lack of density in key areas, we
believe some potential clients, who are primarily motivated by
convenience and who do not want to wait for service in our
office or drive as far to our office, will instead go to a
competitor who is perceived to be more convenient. This is an
indication that, for certain consumers, we have not been able to
effectively differentiate our services from the competition. See
discussion of our future strategy in “Fiscal 2005
Outlook” below. We also believe our marketing campaign,
which focused primarily on our brand, did not effectively drive
clients, particularly early season filers, into our offices.
The average fee per client at our franchise
offices increased 8.4%, while clients served declined 15.9%. The
decline is due to the former major franchise territories being
operated as company-owned for the majority of fiscal year 2004.
These changes, coupled with the re-franchising of certain former
major franchise territories at higher royalty rates, resulted in
an increase in royalty revenue of 6.3%.
Revenues earned during the current year in
connection with RAL participations totaled $168.4 million.
These revenues are approximately $30.1 million higher than
waiver fees earned during fiscal year 2003 and $8.4 million
higher than participation fees earned in fiscal year 2002. See
discussion on the waiver below. Our RAL participation revenues
are benefiting from the new company-owned operations in former
major franchise territories. We participate in RALs at a rate of
nearly 50% for company-owned offices compared to 25% in major
franchise offices. This increased participation rate has allowed
our revenues to increase, although the number of RALs has
declined 8.2% since fiscal year 2002.
During fiscal year 2003, we entered into an
agreement with Household, whereby we waived our right to
purchase any participation interests in and receive license fees
for RALs during the period January 1 through April 30,
2003. In consideration for waiving these rights we received a
series of payments from Household in fiscal year 2003, subject
to certain adjustments in fiscal year 2004 based on delinquency
rates. See discussion in Item 1, “RAL Participations
and 2003 Tax Season Waiver.”
A total of 3.8 million software units were
sold during fiscal year 2004, an increase of 11.2% compared to
unit sales of 3.4 million in 2003. Software units include
TaxCut Federal, TaxCut State, DeductionPro, WillPower and Legal
Advisor. Revenues from software sales of $69.5 million in
fiscal year 2004 increased 11.4% as a result of the higher sales
volume.
Online tax preparation revenues increased 70.6%
to $44.9 million primarily as a result of an increase in
the average price and a 31.2% increase in clients served.
Increases in software and online unit sales have an especially
beneficial impact to our earnings, as these operations have
relatively low variable costs.
POM revenues for fiscal year 2004 increased
$27.3 million, or 57.4%, primarily due to a change in
accounting principle. Prior to the adoption of EITF 00-21,
revenues related to POM guarantees in premium offices were
recorded within tax preparation revenues. With the adoption of
EITF 00-21, the revenues are deferred and recognized over the
guarantee period. The increase over the prior year is a result
of the amortization of larger deferred revenue balances
established as part of the cumulative effect of a change in
accounting principle. The cumulative effect will increase
revenues this year and in future years, but is offset by the
$6.4 million reduction to consolidated net income in fiscal
year 2004.
Total expenses for fiscal year 2004 were up
$151.4 million, or 11.5%, from 2003. These increased
expenses were partially attributable to the operation of former
major franchise territories as company-owned. Compensation and
benefits increased $42.6 million as a result of the former
major franchises and $20.2 million due to field wages
during the later part of the tax season. Additionally,
$12.9 million was incurred for the expensing of stock
options awarded to seasonal tax associates. Occupancy and
equipment costs increased $28.1 million due primarily to a
5.7% increase in the average rent and a 3.4% increase in the
number of offices under lease. Depreciation and amortization
increased as a result of $9.0 million in intangible
amortization from the acquisition of assets of former major
franchisees and additional equipment purchased for new office
locations opened during the period. Bad debt expense increased
$26.8 million as a result of bad debt expense associated
with RAL participations, which was not recorded in the prior
year due to the waiver agreement. Allocated marketing costs
increased $20.7 million as a result of additional marketing
directed toward our brand repositioning and raising consumer
awareness of our advice offerings via the Block Advantage
Campaign. Allocated information technology costs increased
$13.9 million as a result of additional technology projects.
These increases were partially offset by a
$62.1 million decrease in legal expenses, which is
primarily a result of the Texas RAL litigation settlement and
other cases in the prior year. See discussion in “RAL
Litigation” below.
Pretax income for fiscal year 2004 increased
$80.5 million, or 14.7%, over 2003. The segment’s
operating margin improved sixty basis points to 30.0% in fiscal
year 2004.
Fiscal 2005 outlook
For us to successfully grow our client base in
future years, we must improve the convenience of our services
through office expansion and differentiate the value of our
services through advice and multi-channel access. In fiscal year
2005, we plan to expand our company-owned office locations by
500-600 offices. We believe by investing in our office
network, we can attract potential clients who are primarily
motivated by convenience. Although, we expect the additional tax
offices to result in incremental revenues during fiscal year
2005, due to the cost of expansion, we do not expect any growth
in pretax income from this office expansion.
Over the past few fiscal years, we have focused
on integrating actionable advice into our relationships with our
tax clients. We continue each year to add new areas of free
advice targeted at the individual client based on information
provided during the preparation of their tax return. We believe
our advice-based strategy is a key point of differentiation and
strengthens our competitive position. In addition, our Licensed
Referral Tax Professional (“LRTP”) program, which
provides referrals to HRBFA financial advisors, is key to
bringing financial advice and services to the portion of our
client base where more sophisticated investment services are
appropriate. Our fiscal year 2005 goal is to have
2,500 LRTPs. We believe this advice relationship, as well
as our ability to offer retail mortgage products to our client
base increases our tax client retention.
We will also continue to enhance our digital tax
solutions. We believe our multi-channel strategy not only allows
clients to choose how they want to be served, but also allows us
to appeal to a different client base than we do through our
offices.
Fiscal 2003 compared to fiscal 2002
U.S. Tax Operations’ revenues increased
$30.4 million, or 1.7%, to $1.9 billion for fiscal
year 2003.
– 18
Form
10-K – H&R
BLOCK
Tax preparation and related fees increased
$14.1 million, or 1.0%, for fiscal year 2003, compared to
fiscal year 2002. This increase is due to a 6.7% increase in our
average fee per client served, partially offset by a 4.3%
decrease in clients served in company-owned offices. The
increase in the average fee per client served is primarily due
to an increase in the complexity of returns prepared. The
decrease in clients served in company-owned offices during
fiscal year 2003 was driven primarily by the impact of the
sustained weak economy. Additionally, due to the absence of
substantive tax law changes, the marketing programs failed to
attract as much new business as in the previous year.
Royalty revenue increased $8.7 million, or
5.6%. The average fee per client served at franchise offices
increased 8.1%, while clients served declined 2.7%.
RAL waiver fees of $138.2 million were
recognized during fiscal year 2003. We participated in RALs in
fiscal year 2002 and recognized revenues of $160.0 million.
A total of 3.4 million software units were
sold during fiscal year 2003, an increase of 12.1% compared to
unit sales of 3.0 million in 2002. Revenues from software
sales of $62.4 million in fiscal year 2003 increased 13.8%
as a result of the higher sales volume. This increase was
partially offset by increases in the number of rebates offered
and customer rebate redemption rates.
Online tax preparation revenues increased 80.0%
primarily as a result of a 91.3% increase in clients served.
Total expenses for fiscal year 2003 were up
$16.8 million, or 1.3%, from 2002. These increased expenses
were primarily attributable to a litigation reserve of
$41.7 million recorded during the second quarter of fiscal
year 2003 relating to Texas RAL litigation. Other legal costs
increased $20.4 million due to various legal proceedings.
Occupancy and equipment costs increased
$20.4 million due primarily to a 5.2% increase in the
number of offices under lease and increases in related utility
and other support charges. Allocated finance expenses increased
$9.1 million, or 68.6%, primarily due to increased
insurance costs. These increases were partially offset by a
$20.8 million decrease in compensation and benefits. This
decrease was due to better management of support staff wages, a
decline in payroll taxes related to seasonal stock option
exercises and changes in the tax preparer compensation plan. Bad
debt expense declined $20.9 million as a result of
collections of RAL receivables, which were written off in prior
years, and the elimination of bad debt expense associated with
RAL participations. Other expenses decreased $32.4 million
from 2002 primarily due to reduced servicing expenses associated
with prior year RAL participations.
Pretax income for fiscal year 2003 increased
$13.6 million, or 2.6%, over 2002. The segment’s
operating margin improved thirty basis points to 29.4% in fiscal
year 2003.
RAL litigation
We have been named as a defendant in a number of
lawsuits around the country alleging that we engaged in
wrongdoing with respect to the RAL program. In particular, the
plaintiffs in these cases have alleged that disclosures in the
RAL applications were inadequate, misleading and untimely; that
the RAL interest rates were usurious and unconscionable; that we
suppressed the fact that we would receive part of the finance
charges paid by the customer for such loans; and that we owe,
and breached, a fiduciary duty to our customers in connection
with the RAL program. In many of these cases, the plaintiffs
seek to proceed on behalf of a class of similarly situated RAL
customers, and in certain instances the courts have allowed the
cases to proceed as class actions. In other cases, courts have
held that plaintiffs must pursue their claims on an individual
basis, and may not proceed as a class action. See Item 3,
Legal Proceedings for additional information.
On November 19, 2002, we announced a
settlement had been reached in the cases Ronnie and Nancy
Haese, et al. v. H&R Block, Inc., et al., Case
No. CV96-4213, District Court of Kleberg County, Texas
(Haese I) and Ronnie and Nancy Haese, et al. v. H&R
Block, Inc., et al., Case No. CV-99-314-D, District Court
of Kleberg County, Texas (Haese II), filed originally as
one action on July 30, 1996. As a result of that
settlement, we recorded a liability and pretax expense of
$43.5 million during the 2003 fiscal year. This represented
our best estimate of our share of the settlement, plaintiff
class legal fees and expenses, tax products and associated
mailing expenses. Our share of the settlement is less than the
total amount awarded due to amounts recoverable from a
co-defendant in the case.
We believe we have strong defenses to the various
RAL cases and will vigorously defend our position. Nevertheless,
the amounts claimed by the plaintiffs are, in some instances,
very substantial, and there can be no assurances as to the
ultimate outcome of the pending RAL cases, or as to the impact
of the RAL cases on our financial statements.
19 –
H&R
BLOCK – Form
10-K
MORTGAGE OPERATIONS
This segment is primarily engaged in the
origination of non-prime mortgage loans through an independent
broker network, the origination of prime and non-prime mortgage
loans through a retail office network, the sale and
securitization of mortgage loans and residual interests, and the
servicing of non-prime loans.
We believe offering retail mortgage products to
other segments’ clients results in added value to the total
client experience. During fiscal year 2004, 48.9% of our retail
loans were made to other segments’ clients. We estimate,
for those clients who purchase these products, their retention
as a tax client improves by more than six percentage points.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage Operations – Operating Statistics |
|
(dollars in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Number of loans
originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wholesale (non-prime)
|
|
|
130,356 |
|
|
|
93,497 |
|
|
|
74,208 |
|
|
|
| |
Retail: Prime
|
|
|
9,763 |
|
|
|
12,361 |
|
|
|
7,935 |
|
|
|
| |
|
Non-prime
|
|
|
15,220 |
|
|
|
9,983 |
|
|
|
7,190 |
|
|
|
| |
|
|
| |
|
Total
|
|
|
155,339 |
|
|
|
115,841 |
|
|
|
89,333 |
|
|
|
| |
|
|
|
Volume of loans
originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wholesale (non-prime)
|
|
$ |
20,150,992 |
|
|
$ |
13,659,243 |
|
|
$ |
9,457,331 |
|
|
|
| |
Retail: Prime
|
|
|
1,258,347 |
|
|
|
1,697,815 |
|
|
|
1,179,137 |
|
|
|
| |
|
Non-prime
|
|
|
1,846,674 |
|
|
|
1,220,563 |
|
|
|
816,705 |
|
|
|
| |
|
|
| |
|
Total
|
|
$ |
23,256,013 |
|
|
$ |
16,577,621 |
|
|
$ |
11,453,173 |
|
|
|
| |
|
|
|
Loan sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans originated
|
|
$ |
23,234,935 |
|
|
$ |
16,591,821 |
|
|
$ |
11,440,190 |
|
|
|
| |
Loans acquired
|
|
|
– |
|
|
|
633,953 |
|
|
|
– |
|
|
|
| |
|
|
| |
Total
|
|
$ |
23,234,935 |
|
|
$ |
17,225,774 |
|
|
$ |
11,440,190 |
|
|
|
| |
|
|
| |
|
Weighted average FICO score (2)
|
|
|
608 |
|
|
|
604 |
|
|
|
600 |
|
|
|
| |
|
Execution price –
Net gain on
sale (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans originated and sold
|
|
|
4.09% |
|
|
|
4.63% |
|
|
|
4.30% |
|
|
|
| |
Loans acquired and sold
|
|
|
– |
|
|
|
.18% |
|
|
|
– |
|
|
|
| |
|
|
| |
Total
|
|
|
4.09% |
|
|
|
4.46% |
|
|
|
4.30% |
|
|
|
| |
|
|
| |
|
Weighted average interest rate for
borrowers (2)
|
|
|
7.39% |
|
|
|
8.15% |
|
|
|
9.09% |
|
|
|
| |
|
Weighted average loan-to-value (2)
|
|
|
78.1% |
|
|
|
78.7% |
|
|
|
78.6% |
|
|
|
|
|
|
| (1) |
Defined as total premium received divided by
total balance of loans delivered to third-party investors or
securitization vehicles (excluding mortgage servicing rights and
the effect of loan origination expenses). |
| (2) |
Represents non-prime production. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage Operations – Financial Results |
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Components of gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gains on mortgage loans
|
|
$ |
716,690 |
|
|
$ |
663,573 |
|
|
$ |
455,388 |
|
|
|
| |
Gains on sales of residual interests
|
|
|
40,689 |
|
|
|
130,881 |
|
|
|
– |
|
|
|
| |
Impairment of residual interests
|
|
|
(30,661 |
) |
|
|
(54,111 |
) |
|
|
(30,987 |
) |
|
|
| |
|
|
| |
Total gains on sales
|
|
|
726,718 |
|
|
|
740,343 |
|
|
|
424,401 |
|
|
|
|
Loan servicing revenue
|
|
|
211,710 |
|
|
|
168,351 |
|
|
|
147,162 |
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accretion-residual interests
|
|
|
168,029 |
|
|
|
145,165 |
|
|
|
50,583 |
|
|
|
| |
Accretion-beneficial interest
|
|
|
167,705 |
|
|
|
103,294 |
|
|
|
70,668 |
|
|
|
| |
Other interest income
|
|
|
5,064 |
|
|
|
5,421 |
|
|
|
6,609 |
|
|
|
| |
|
|
| |
Total interest income
|
|
|
340,798 |
|
|
|
253,880 |
|
|
|
127,860 |
|
|
|
|
Other
|
|
|
2,173 |
|
|
|
2,837 |
|
|
|
2,910 |
|
|
|
| |
|
|
| |
|
Total revenues
|
|
|
1,281,399 |
|
|
|
1,165,411 |
|
|
|
702,333 |
|
|
|
| |
|
|
|
Compensation and benefits
|
|
|
297,441 |
|
|
|
242,143 |
|
|
|
171,084 |
|
|
|
|
Servicing and processing
|
|
|
107,538 |
|
|
|
74,774 |
|
|
|
86,146 |
|
|
|
|
Occupancy and equipment
|
|
|
49,231 |
|
|
|
42,626 |
|
|
|
30,700 |
|
|
|
|
Other
|
|
|
148,928 |
|
|
|
111,918 |
|
|
|
75,015 |
|
|
|
| |
|
|
| |
|
Total expenses
|
|
|
603,138 |
|
|
|
471,461 |
|
|
|
362,945 |
|
|
|
| |
|
|
|
Pretax income
|
|
$ |
678,261 |
|
|
$ |
693,950 |
|
|
$ |
339,388 |
|
|
|
| |
|
|
|
Fiscal 2004 compared to fiscal 2003
Mortgage Operations’ revenues increased
$116.0 million, or 10.0%, compared to the prior year. This
increase was primarily a result of higher servicing income,
increased production volumes and accretion.
The following table summarizes the key drivers of
gains on sales of mortgage loans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
|
|
|
Number of sales associates (1)
|
|
|
2,812 |
|
|
|
2,228 |
|
|
|
|
Total number of applications
|
|
|
269,267 |
|
|
|
216,492 |
|
|
|
|
Closing ratio (2)
|
|
|
57.7% |
|
|
|
53.5% |
|
|
|
|
Total number of originations
|
|
|
155,339 |
|
|
|
115,841 |
|
|
|
|
Average loan size
|
|
$ |
150 |
|
|
$ |
143 |
|
|
|
|
Total originations
|
|
$ |
23,256,013 |
|
|
$ |
16,577,621 |
|
|
|
|
Non-prime/prime origination ratio
|
|
|
17.5:1 |
|
|
|
8.8:1 |
|
|
|
|
Loan sales
|
|
$ |
23,234,935 |
|
|
$ |
17,225,774 |
|
|
|
|
Execution price – net gain on
sale (3)
|
|
|
4.09% |
|
|
|
4.46% |
|
|
|
|
|
|
| (1) |
Includes all direct sales and back office
sales support associates. |
| (2) |
Percentage of loans funded divided by total
applications in the period. |
| (3) |
Defined as total premium received divided by
total balance of loans delivered to third-party investors or
securitization vehicles (excluding mortgage servicing rights and
the effect of loan origination expenses). |
– 20
Form
10-K – H&R
BLOCK
Gains on sales of mortgage loans increased
$53.1 million to $716.7 million for the year ended
April 30, 2004. The increase over last year is a result of
a significant increase in loan origination volume, an increase
in the average loan size and the closing ratio, partially offset
by a decrease in the loan sale execution price and increased
loan sale repurchase reserves. During the year, the Company
originated $23.3 billion in mortgage loans compared to
$16.6 billion last year, an increase of 40.3%. The execution
price on mortgage loan sales decreased primarily due to lower
mortgage rates as the non-prime industry adjusted rates to
reflect changes in the market interest rates. The loan sale
repurchase reserves, which are netted against gains on sales,
increased $25.5 million over the prior year. This increase
is primarily a result of an increase in loan sales coupled with
the increase in whole loan sales compared to securitizations,
for which higher reserves are provided at the time of sale for
estimated repurchases. Whole loan sales accounted for 76% of
total loan sales, compared to 41% in the prior year.
In November 2002, the Company completed the sale
of previously securitized residual interests and recorded a gain
of $130.9 million. This sale accelerated cash flows from
these residual interests, effectively realizing previously
recorded unrealized gains included in other comprehensive
income. Two smaller transactions were completed in fiscal year
2004, which resulted in gains of $40.7 million.
Impairments of residual interests in
securitizations of $30.7 million were recognized during the
year compared with $54.1 million in the prior year. The
impairments were due primarily to loan performance of older
residuals and changes in assumptions to more closely align with
the current economic and interest rate environment.
The following table summarizes the key drivers of
loan servicing revenues:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (dollars in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
|
|
|
Average servicing portfolio:
|
|
|
|
|
|
|
|
|
|
|
| |
With related MSRs
|
|
$ |
32,039,811 |
|
|
$ |
23,858,490 |
|
|
|
| |
Without related MSRs
|
|
|
6,481,069 |
|
|
|
3,883,980 |
|
|
|
| |
|
|
| |
|
$ |
38,520,880 |
|
|
$ |
27,742,470 |
|
|
|
| |
|
|
|
Number of loans serviced
|
|
|
324,364 |
|
|
|
246,463 |
|
|
|
|
Average delinquency rate
|
|
|
6.04% |
|
|
|
7.08% |
|
|
|
|
Value of MSRs
|
|
$ |
113,821 |
|
|
$ |
99,265 |
|
|
|
|
Loan servicing revenues increased
$43.4 million, or 25.8%, this year. The increase reflects a
higher average loan servicing portfolio, which was partially
offset by the reduction of certain of our ancillary fees
previously charged to borrowers. The average servicing portfolio
for fiscal year 2004 increased 38.9%.
Total accretion of residual interests increased
$22.9 million over the prior year. This improvement is the
result of write-ups in the related asset values in fiscal years
2003 and 2004. Increases in fair value are realized in income
through accretion over the remaining expected life of the
residual interest.
For the majority of fiscal year 2004, our
residual interests continued to perform better than expected
primarily due to lower interest rates during the first part of
the year and due to lower credit losses than assumed during the
later part of the year. As a result of this performance, our
residuals have produced, or are expected to produce, more cash
proceeds than projected in previous valuation models. We
recorded favorable pretax mark-to-market adjustments, which
increased the fair value of our residual interests
$199.7 million during the year. These adjustments were
recorded, net of write-downs of $32.6 million and deferred
taxes of $63.8 million, in other comprehensive income and
will be accreted into income throughout the remaining life of
the residual interests. Future changes in interest rates, actual
loan pool performance or other assumptions could cause
additional favorable or unfavorable adjustments to the fair
value of the residual interests and could cause changes to the
accretion of these residual interests in future periods.
Additionally, sales of previously securitized residual interests
results in decreases to accretion income in future periods.
Accretion of beneficial interest in Trusts
increased $64.4 million, or 62.4%, in 2004. The balance of
loans held by the Trusts and the interest margin earned impacts
our accretion. The average balance of loans held by the Trusts
increased to $3.2 billion from $1.8 billion in the
prior year. The interest margin is the difference between the
rate on the underlying loans and the financing costs of the
Trusts. The interest rate margin decreased to 5.40% during
fiscal year 2004, from 5.76% in 2003.
Total expenses increased $131.7 million, or
27.9%, over the prior year. Servicing and processing expenses
increased $32.8 million, or 43.8%, as a result of a higher
average servicing portfolio and the acceleration of amortization
of certain MSRs. Compensation and benefits increased
$55.3 million as a result of a 22.9% increase in the number
of employees, reflecting resources needed to support higher loan
production volumes. Other expenses increased $37.0 million,
or 33.1%, for the current year, primarily due to
$10.4 million in increased marketing expenses primarily for
retail mortgage direct mail advertising, $13.5 million in
increased allocated corporate and shared costs and
$7.2 million in increased consulting expenses. Allocated
costs increased due to higher insurance costs and the expensing
of stock-based compensation. Occupancy and equipment expenses
increased $6.6 million due to nine additional branch
offices opened since October 2002, continued expansion of a
second servicing center that opened in August 2002 and
additional administrative office space.
Pretax income decreased $15.7 million, or
2.3%, for fiscal year 2004.
Fiscal 2005 outlook
We believe fiscal year 2005 will generally be a
rising interest rate environment. In a rising interest rate
environment, we expect our profit margins will narrow due to
less favorable loan execution pricing compared to the sustained
period of declining rates over the last two fiscal years. Actual
execution pricing for the fourth quarter and full fiscal year
2004 was 3.96% and 4.09%, respectively. As of April 30,
2004, we have forward loan sale commitments at an average
execution price of 4.38%.
With the rising interest rates we have raised our
coupon rate since year-end. Although the timing and magnitude of
changes to non-prime mortgage interest rates may differ from
changes in other market interest rates, we will be utilizing
various strategies in fiscal year 2005 to manage our pricing in
a competitive rate environment.
Additionally, we believe we can grow our
originations at a modest level by continued expansion of our
retail business and focusing on controllable drivers in our
wholesale business. These drivers include geographic expansion,
growing our sales force, increasing our penetration of existing
broker relationships and continuing to improve our closing
ratios.
Based on these assumptions, we expect our
mortgage segment pretax income to be flat to slightly down from
this year, excluding the gain on sale of previously securitized
residual interests.
Fiscal 2003 compared to fiscal 2002
Mortgage Operations’ revenues increased
$463.1 million, or 65.9%, compared to fiscal year 2002.
This increase was primarily a result of increased production
volumes and related sales execution pricing, gains on sales of
previously securitized residuals and accretion on residual
interests.
Gains on sales of mortgage loans increased
$208.2 million to $663.6 million for the year ended
April 30, 2003. The increase over the prior year is a
result of a significant increase in loan origination volume, an
increase in the average loan size, the closing ratio and the
loan sale execution price. During 2003, the Company
21 –
H&R
BLOCK – Form
10-K
originated $16.6 billion in mortgage loans
compared to $11.5 billion in 2002, an increase of 44.7%.
The execution price on mortgage loan sales increased primarily
due to declining interest rates during the year, offset by a
decline in the weighted-average coupon rate charged to borrowers.
In November 2002, the Company completed the sale
of previously securitized residual interests and recorded a gain
of $130.9 million.
Impairments of residual interests in
securitizations of $54.1 million were recognized during
fiscal year 2003, due primarily to loan performance of older
residuals and changes in assumptions to more closely align with
the current economic and interest rate environment.
Loan servicing revenues increased
$21.2 million, or 14.4%, over fiscal year 2002. The
increase reflects a higher average loan servicing portfolio. The
average servicing portfolio for fiscal year 2003 increased 39.4%.
Total accretion of residual interests increased
$94.6 million over fiscal year 2002. This improvement is
the result of increases in the related asset values in fiscal
years 2002 and 2003. Increases in fair value are realized in
income through accretion over the remaining expected life of the
residual interest.
We recorded favorable pretax mark-to-market
adjustments, which increased the fair value of our residual
interests $203.8 million during fiscal year 2003, and
write-downs of $19.1 million. These adjustments were
recorded, net of write-downs and deferred taxes of
$70.5 million, in other comprehensive income and will be
accreted into income throughout the remaining life of the
residual interests.
Accretion of beneficial interest in Trusts
increased $32.6 million, or 46.2%, in 2003, due to the
average balance on loans held by the Trusts increasing to
$1.8 billion from $1.2 billion in fiscal year 2002.
Also contributing to the increase was higher interest margin
earned. The interest rate margin increased to 5.76% during
fiscal year 2003, from 5.58% in 2002.
Total expenses increased $108.5 million, or
29.9%, over fiscal year 2002. This increase is primarily due to
a $71.1 million increase in compensation and benefits as a
result of a 23.2% increase in the number of employees,
reflecting resources needed to support higher loan production
volumes. Occupancy and equipment expenses increased
$11.9 million due to the opening of an additional servicing
center and expansion of the servicing and information technology
facilities to support the higher overall activity levels.
Servicing and processing expenses declined due to an impairment
of $11.6 million on servicing assets recorded during fiscal
year 2002, while only $866 thousand was recorded in fiscal year
2003. Other expenses increased $36.9 million, or 49.2%,
primarily due to increased consulting, depreciation and
marketing expenses.
Pretax income increased $354.6 million, or
104.5%, for fiscal year 2003.
– 22
Form
10-K – H&R
BLOCK
BUSINESS SERVICES
This segment offers middle-market companies
accounting, tax and consulting services, wealth management,
retirement resources, payroll services, corporate finance and
financial process outsourcing.
Business Services – Operating
Statistics
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Accounting, tax and consulting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Chargeable hours
|
|
|
2,598,397 |
|
|
|
2,583,505 |
|
|
|
2,675,704 |
|
|
|
| |
Chargeable hours per person
|
|
|
1,414 |
|
|
|
1,388 |
|
|
|
1,399 |
|
|
|
| |
Net collected rate per hour
|
|
$ |
124 |
|
|
$ |
120 |
|
|
$ |
113 |
|
|
|
| |
Average margin per person
|
|
$ |
102,496 |
|
|
$ |
97,117 |
|
|
$ |
94,052 |
|
|
|
|
Capital markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Platforms delivered
|
|
|
1,293 |
|
|
|
655 |
|
|
|
(1 |
) |
|
|
|
|
|
| (1) |
Not comparable due to mid-year acquisition of
capital markets business. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Business Services – Financial Results (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Accounting, tax and consulting
|
|
$ |
372,423 |
|
|
$ |
352,102 |
|
|
$ |
365,194 |
|
|
|
|
Capital markets
|
|
|
73,857 |
|
|
|
35,626 |
|
|
|
10,756 |
|
|
|
|
Payroll, benefits and retirement services
|
|
|
21,107 |
|
|
|
20,578 |
|
|
|
17,048 |
|
|
|
|
Other
|
|
|
31,823 |
|
|
|
25,834 |
|
|
|
23,928 |
|
|
|
| |
|
|
| |
Total revenues
|
|
|
499,210 |
|
|
|
434,140 |
|
|
|
416,926 |
|
|
|
| |
|
|
|
Compensation and benefits
|
|
|
336,073 |
|
|
|
292,291 |
|
|
|
265,960 |
|
|
|
|
Occupancy and equipment
|
|
|
25,277 |
|
|
|
24,428 |
|
|
|
19,957 |
|
|
|
|
Depreciation and amortization
|
|
|
23,002 |
|
|
|
23,044 |
|
|
|
21,339 |
|
|
|
|
Impairment of goodwill
|
|
|
– |
|
|
|
11,777 |
|
|
|
– |
|
|
|
|
Other
|
|
|
95,537 |
|
|
|
96,718 |
|
|
|
86,954 |
|
|
|
| |
|
|
| |
Total expenses
|
|
|
479,889 |
|
|
|
448,258 |
|
|
|
394,210 |
|
|
|
| |
|
|
| |
Pretax income (loss)
|
|
$ |
19,321 |
|
|
$ |
(14,118 |
) |
|
$ |
22,716 |
|
|
|
| |
|
|
|
Fiscal 2004 compared to fiscal 2003
Business Services’ revenues for fiscal year
2004 improved $65.1 million, or 15.0%, over the prior year.
This increase was primarily due to a $38.2 million increase
in capital markets revenue resulting from a 97.4% increase in
the number of platforms delivered.
Revenues in accounting, tax and consulting also
increased $20.3 million over the prior year as a result of
newly acquired tax businesses and increased productivity. The
acquisition of U.S. Tax Operations’ former major
franchises allowed us to acquire the tax businesses associated
with the original M&P acquisition. We were previously
unable to acquire and operate these businesses in direct
competition with major franchise territories. The acquired tax
businesses contributed $13.0 million in revenues in the
current fiscal year. The remainder of the increase was driven
primarily by a 3.3% increase in the net collected rate per
hour.
Total expenses increased $31.6 million, or
7.1%, over the prior year. Compensation and benefits costs
increased $43.8 million, primarily as a result of increased
activity in the capital markets business and increased costs in
traditional accounting. A goodwill impairment charge of
$11.8 million was recorded in the prior year. No such
impairment was recorded in fiscal year 2004.
Pretax income for the year ended April 30,
2004 was $19.3 million compared to a loss of
$14.1 million in fiscal year 2003.
Fiscal 2005 outlook
Our focus for fiscal year 2005 is growing the
business within our current markets by expanding our services to
existing clients and by targeting other mid-size companies in
those areas. To achieve this goal, we began the development of a
national sales force in fiscal year 2004 and we plan to continue
to roll this initiative out in fiscal year 2005. Additionally,
in May 2004 we initiated new marketing efforts designed to
promote brand awareness and the services we offer. We have no
major acquisition plans for fiscal year 2005.
Fiscal 2003 compared to fiscal 2002
Business Services’ revenues for fiscal year
2003 improved $17.2 million, or 4.1%, over fiscal year
2002. This increase was primarily due to the acquisition of
Equico Resources, LLC (“EquiCo”) in December 2001,
which contributed an increase of $24.9 million over fiscal
year 2002. Revenues from traditional accounting services
declined $13.1 million over fiscal year 2002 as a result of
a 20.0% reduction in tax planning services sold and lower
revenues per unit sold. This decline was somewhat offset by
growth in core accounting and tax services, driven primarily by
an increase in the net collected rate per hour. Additionally,
fiscal year 2003 was the first year there was no significant
year-over-year growth related to new acquisitions. In fiscal
year 2003 we acquired only a few businesses to add scale to
existing offices and only one new location was added, resulting
in an increase of $1.7 million in revenues.
Deferred revenue increased $12.2 million in
fiscal year 2003 due to a backlog of scheduled capital markets
platforms resulting from staffing shortages.
Total expenses increased $54.0 million, or
13.7%, over fiscal year 2002. Compensation and benefits costs
increased $26.3 million and occupancy and equipment costs
increased $4.5 million, primarily as a result of the EquiCo
and MyBenefitSource, Inc. (“MBS”) acquisitions in
December 2001. Other expenses increased by $9.8 million
primarily due to increased legal and travel expenses, both
related to EquiCo and MBS. As part of our annual goodwill
impairment testing, an impairment charge of $11.8 million
was recorded related to MBS in fiscal year 2003.
The pretax loss for fiscal year 2003 was
$14.1 million compared to pretax income of
$22.7 million in fiscal year 2002.
INVESTMENT SERVICES
This segment is primarily engaged in offering
advice-based investment services and securities products. Our
integration of investment advice and new product offerings have
allowed us to shift our focus from a transaction-based client
relationship to a more advice-based focus.
23 –
H&R
BLOCK – Form
10-K
Investment Services – Operating
Statistics
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Customer trades (1)
|
|
|
1,514,969 |
|
|
|
1,218,092 |
|
|
|
1,536,930 |
|
|
|
|
Daily average trades
|
|
|
5,918 |
|
|
|
4,853 |
|
|
|
6,123 |
|
|
|
|
Average revenue per trade (2)
|
|
$ |
119.36 |
|
|
$ |
120.15 |
|
|
$ |
106.42 |
|
|
|
|
Active accounts
|
|
|
863,116 |
|
|
|
752,903 |
|
|
|
695,355 |
|
|
|
|
Assets under administration (billions)
|
|
$ |
26.7 |
|
|
$ |
22.3 |
|
|
$ |
27.3 |
|
|
|
|
Average assets per active account
|
|
$ |
30,970 |
|
|
$ |
29,616 |
|
|
$ |
39,261 |
|
|
|
|
Ending margin balances (millions)
|
|
$ |
608 |
|
|
$ |
486 |
|
|
$ |
801 |
|
|
|
|
Ending customer payables balances (millions)
|
|
$ |
1,007 |
|
|
$ |
848 |
|
|
$ |
825 |
|
|
|
|
Number of advisors (3)
|
|
|
1,009 |
|
|
|
984 |
|
|
|
1,211 |
|
|
|
|
|
Included in the numbers above are the following
relating to fee-based accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer accounts
|
|
|
6,964 |
|
|
|
4,680 |
|
|
|
3,339 |
|
|
|
| |
Average revenue per account
|
|
$ |
1,572 |
|
|
$ |
1,442 |
|
|
$ |
449 |
|
|
|
| |
Assets under administration (millions)
|
|
$ |
1,494 |
|
|
$ |
789 |
|
|
$ |
512 |
|
|
|
| |
Average assets per active account
|
|
$ |
214,537 |
|
|
$ |
168,522 |
|
|
$ |
153,323 |
|
|
|
|
|
|
| (1) |
Includes both trades on which commissions are
earned (“commissionable trades”) and trades for which
no commission is earned (“fee-based trades”). Excludes
open-ended mutual fund redemptions. |
| (2) |
Calculated as total commissions divided by
commissionable trades. |
| (3) |
Fiscal year 2003 and 2002 advisors have been
adjusted to exclude sales assistants. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investment Services – Financial Results (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Transactional revenue
|
|
$ |
101,634 |
|
|
$ |
93,422 |
|
|
$ |
123,990 |
|
|
|
|
Annuitized revenue
|
|
|
59,696 |
|
|
|
37,358 |
|
|
|
25,677 |
|
|
|
| |
|
|
| |
Production revenue
|
|
|
161,330 |
|
|
|
130,780 |
|
|
|
149,667 |
|
|
|
|
Other revenue
|
|
|
34,732 |
|
|
|
32,714 |
|
|
|
33,169 |
|
|
|
| |
|
|
| |
Non-interest revenue
|
|
|
196,062 |
|
|
|
163,494 |
|
|
|
182,836 |
|
|
|
|
Margin interest revenue
|
|
|
33,408 |
|
|
|
37,300 |
|
|
|
67,849 |
|
|
|
|
Less: interest expense
|
|
|
(1,358 |
) |
|
|
(4,830 |
) |
|
|
(14,744 |
) |
|
|
| |
|
|
| |
Net interest revenue
|
|
|
32,050 |
|
|
|
32,470 |
|
|
|
53,105 |
|
|
|
| |
|
|
| |
|
Total revenues (1)
|
|
|
228,112 |
|
|
|
195,964 |
|
|
|
235,941 |
|
|
|
| |
|
|
|
Commissions
|
|
|
53,851 |
|
|
|
41,748 |
|
|
|
46,490 |
|
|
|
| |
Other variable expenses
|
|
|
3,866 |
|
|
|
4,234 |
|
|
|
9,266 |
|
|
|
| |
|
|
| |
Total variable expenses
|
|
|
57,717 |
|
|
|
45,982 |
|
|
|
55,756 |
|
|
|
|
Gross profit
|
|
|
170,395 |
|
|
|
149,982 |
|
|
|
180,185 |
|
|
|
|
Compensation and benefits
|
|
|
97,151 |
|
|
|
92,978 |
|
|
|
93,314 |
|
|
|
|
Occupancy and equipment
|
|
|
29,054 |
|
|
|
30,323 |
|
|
|
29,106 |
|
|
|
|
Depreciation and amortization
|
|
|
45,129 |
|
|
|
51,791 |
|
|
|
49,866 |
|
|
|
|
Impairment of goodwill
|
|
|
– |
|
|
|
24,000 |
|
|
|
– |
|
|
|
|
Other
|
|
|
44,426 |
|
|
|
63,933 |
|
|
|
48,067 |
|
|
|
|
Allocated corporate and shared costs
|
|
|
19,081 |
|
|
|
15,249 |
|
|
|
14,694 |
|
|
|
| |
|
|
| |
|
Total fixed expenses
|
|
|
234,841 |
|
|
|
278,274 |
|
|
|
235,047 |
|
|
|
| |
|
|
|
Pretax loss
|
|
$ |
(64,446 |
) |
|
$ |
(128,292 |
) |
|
$ |
(54,862 |
) |
|
|
| |
|
|
|
|
|
| (1) |
Total revenues, less interest
expense |
Fiscal 2004 compared to fiscal 2003
Investment Services’ revenues, net of
interest expense, for fiscal year 2004 increased
$32.1 million, or 16.4%, over the prior year. The
improvement is primarily due to the increase in annuitized
revenues.
Transactional revenue, which is based on
transaction or trade quantities, increased $8.2 million, or
8.8%, from the prior year due to a 24.4% increase in trading
activity, partially offset by a slight decline in average
revenue per trade. Annuitized revenues increased
$22.3 million, or 59.8%, due to increased sales of
annuities and mutual funds. The increase in production revenues
is also due to an increase in advisor productivity. We added a
net 25 advisors this year and advisor productivity continues to
improve. Productivity averaged approximately $166,000 per
advisor compared to $122,000 last year.
Margin interest revenue declined
$3.9 million, or 10.4%, from the prior year primarily as a
result of a 5.5% decline in average margin balances coupled with
lower interest rates. Margin balances declined from an average
of $577.0 million in fiscal year 2003 to
$545.0 million in the current year. Accordingly, interest
expense for fiscal year 2004 declined $3.5 million, or
71.9%, from fiscal year 2003. Margin balances, which steadily
declined during most of 2003, have steadily increased in the
last several months of fiscal year 2004 and averaged
$600.0 million for the fourth quarter.
Total expenses decreased $31.7 million, or
9.8%, primarily due to the $24.0 million goodwill
impairment charge recorded last year. Other expenses decreased
$19.5 million primarily as a result of a reduction in
consulting and legal expenses. These decreases were partially
offset by a $12.1 million increase in commissions expense
due to the increase in customer trading and higher average
commissions paid.
– 24
Form
10-K – H&R
BLOCK
The pretax loss for Investment Services for
fiscal year 2004 was $64.4 million compared to a loss of
$128.3 million last year.
Fiscal 2005 outlook
We believe the key to segment profitability is
the recruitment and retention of experienced financial advisors.
See additional discussion of our advisor production in
Item 1, “Description of Business.” Our goal is to
hire 250-300 experienced advisors in fiscal year 2005. We are
also partnering with the U.S. Tax Operation segment in the LRTP
program, which focuses on adding advice to our tax client
relationships through licensing and aligning tax professionals
with financial advisors. See additional discussion above in U.S.
Tax Operations outlook section.
Although we expect to see continued improvements
in our financial performance, we still expect to report an
operating loss for fiscal year 2005.
Fiscal 2003 compared to fiscal 2002
Investment Services’ revenues, net of
interest expense, for fiscal year 2003 declined
$40.0 million, or 16.9%, compared to fiscal year 2002. The
decrease was primarily due to lower net interest income and
lower transactional revenues.
Transactional revenue decreased
$30.6 million, or 24.7%, from the prior year due to a 20.7%
decline in trading activity, partially offset by an increase in
average revenue per trade. Additionally, syndicate fee revenues
of $6.7 million were included in Other revenues for fiscal
year 2003 and in fiscal year 2002 they were included in
Transactional revenue. Annuitized revenues increased
$11.7 million, or 45.5%, due to increased sales of
annuities and mutual funds.
Margin interest revenue declined
$30.5 million, or 45.0%, from fiscal year 2002 primarily as
a result of a 42.3% decline in average margin balances coupled
with lower interest rates. Margin balances declined from an
average of $1.0 billion for fiscal year 2002 to
$577.0 million in 2003. Accordingly, interest expense for
fiscal year 2003 declined $9.9 million, or 67.2%, from
fiscal year 2002.
Total expenses increased $33.5 million, or
11.5%, primarily due to a $24.0 million goodwill impairment
charge recorded during fiscal year 2003. During the first
quarter of fiscal year 2003, in light of unsettled market
conditions and the severe decline of comparable business
valuations in the investment industry, we engaged an independent
valuation firm to perform the goodwill impairment test, in
accordance with Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets,”
on the Investment Services segment. As a result, the
$24.0 million impairment charge was recorded.
Additional expense increases resulted from
various new initiatives to expand products and the business,
including the installation of a new back office brokerage
operating system, relocation to new offices and advisor
recruitment initiatives. These increases were partially offset
by a decrease in commissions expense due to the decline in
customer trading and cost containment measures.
As a result of meeting certain three-year
production goals established in connection with the acquisition
of OLDE Financial, certain long-term advisors were eligible to
receive a one-time retention payment. The retention period was
through December 31, 2002. Retention payments under this
plan of approximately $17.0 million were accrued through
the third quarter of fiscal year 2003. The retention payments
were paid out in February 2003.
The pretax loss for Investment Services for
fiscal year 2003 was $128.3 million compared to the prior year
loss of $54.9 million.
INTERNATIONAL TAX OPERATIONS
This segment is primarily engaged in providing
local tax return preparation, filing and related services in
Canada, Australia and the United Kingdom. In addition,
International Tax Operations includes Overseas operations, which
consists of company-owned and franchise offices preparing tax
returns for U.S. citizens living abroad.
Operations in this segment are transacted in the
local currencies of the countries in which they operate,
therefore the results can be affected by the translation into
U.S. dollars. The weakening of the U.S. dollar during the
current year had the impact of increasing reported revenues,
income and losses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| International Tax Operations – Financial Results (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Canada
|
|
$ |
64,238 |
|
|
$ |
57,985 |
|
|
$ |
55,753 |
|
|
|
|
Australia
|
|
|
26,577 |
|
|
|
20,614 |
|
|
|
17,701 |
|
|
|
|
Other
|
|
|
6,745 |
|
|
|
6,483 |
|
|
|
5,256 |
|
|
|
| |
|
|
|
Total revenues
|
|
|
97,560 |
|
|
|
85,082 |
|
|
|
78,710 |
|
|
|
| |
|
|
|
Canada
|
|
|
8,888 |
|
|
|
8,108 |
|
|
|
7,728 |
|
|
|
|
Australia
|
|
|
4,609 |
|
|
|
3,802 |
|
|
|
2,912 |
|
|
|
|
Other
|
|
|
(2,400 |
) |
|
|
(1,446 |
) |
|
|
(3,547 |
) |
|
|
| |
|
|
|
Pretax income
|
|
$ |
11,097 |
|
|
$ |
10,464 |
|
|
$ |
7,093 |
|
|
|
| |
|
|
|
Fiscal 2004 compared to fiscal 2003
International Tax Operations’ revenues for
the year ended April 30, 2004 increased $12.5 million,
or 14.7%, compared to the prior year. This improvement is due to
results in Canada and Australia. Revenues in Canada increased
$6.3 million, or 10.8%, entirely as a result of favorable
foreign exchange rates. Revenues in Canadian dollars declined
0.4% primarily due to a 3.5% decline in the average charge per
return, somewhat offset by an increase in company-owned tax
returns prepared, most of which were discounted returns. The
decline in average charge resulted from our current year
marketing program, which was designed to attract students and
younger filers. Of the $6.0 million increase in Australian
revenues, $4.9 million was due to favorable foreign
exchange rates. Additionally, tax returns prepared in
company-owned offices in fiscal year 2004 increased 3.7%
compared to the prior year and the average charge per return
increased 2.0%.
Pretax income improved $0.6 million, or
6.1%, primarily due to exchange rates, as earnings in local
currencies were similar to the prior year.
Fiscal 2003 compared to fiscal 2002
International Tax Operations’ revenues for
the year ended April 30, 2003 increased $6.4 million,
or 8.1%, compared to fiscal year 2002. This improvement is
primarily due to results in Australia, where tax returns
prepared in company-owned offices in fiscal year 2003 increased
3.7% compared to 2002 and the average charge per return
increased 3.0%. Revenues in Canada increased $2.2 million, or
4.0%, entirely as a result of foreign exchange rates. Revenues
in Canadian dollars declined 2.3% primarily due to the sale of
certain operations during 2003 and a decline in the number of
returns prepared. Tax returns prepared declined 3.7% as a result
of increased competition in the major metropolitan areas.
Pretax income improved $3.4 million, or
47.5%, primarily due to cost savings in the United Kingdom as a
result of business restructuring and the write-off of intangible
assets in the prior year, which is included in “Other”
in the above table.
25 –
H&R
BLOCK – Form
10-K
CORPORATE OPERATIONS
This segment consists primarily of corporate
support departments, which provide services to our operating
segments. These support departments consist of marketing,
information technology, facilities, human resources, executive,
legal, finance, government relations and corporate
communications. Support department costs are generally allocated
to our operating segments. Our captive insurance, franchise
financing and small business initiative subsidiaries are also
included within this segment.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate Operations – Financial Results (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Operating revenues
|
|
$ |
12,532 |
|
|
$ |
6,448 |
|
|
$ |
12,603 |
|
|
|
|
Eliminations
|
|
|
(8,218 |
) |
|
|
(7,099 |
) |
|
|
(6,830 |
) |
|
|
| |
|
|
|
Total revenues
|
|
|
4,314 |
|
|
|
(651 |
) |
|
|
5,773 |
|
|
|
| |
|
|
|
Corporate expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and benefits
|
|
|
12,670 |
|
|
|
14,959 |
|
|
|
14,703 |
|
|
|
| |
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Acquisition debt
|
|
|
68,815 |
|
|
|
72,766 |
|
|
|
79,002 |
|
|
|
| |
|
Other interest
|
|
|
693 |
|
|
|
1,106 |
|
|
|
3,777 |
|
|
|
| |
Marketing and advertising
|
|
|
1,409 |
|
|
|
4,518 |
|
|
|
4,600 |
|
|
|
| |
Other
|
|
|
36,299 |
|
|
|
33,438 |
|
|
|
36,392 |
|
|
|
| |
|
|
| |
|
|
119,886 |
|
|
|
126,787 |
|
|
|
138,474 |
|
|
|
|
Support departments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Information technology
|
|
|
110,569 |
|
|
|
92,899 |
|
|
|
84,834 |
|
|
|
| |
Marketing
|
|
|
110,507 |
|
|
|
88,819 |
|
|
|
85,087 |
|
|
|
| |
Finance
|
|
|
33,829 |
|
|
|
30,232 |
|
|
|
19,795 |
|
|
|
| |
Other
|
|
|
78,521 |
|
|
|
65,730 |
|
|
|
58,749 |
|
|
|
| |
|
|
| |
|
|
333,426 |
|
|
|
277,680 |
|
|
|
248,465 |
|
|
|
|
Allocation of corporate and shared costs
|
|
|
(336,639 |
) |
|
|
(280,677 |
) |
|
|
(247,106 |
) |
|
|
|
Investment income, net
|
|
|
4,691 |
|
|
|
2,436 |
|
|
|
3,097 |
|
|
|
| |
|
|
|
Pretax loss
|
|
$ |
(107,668 |
) |
|
$ |
(122,005 |
) |
|
$ |
(130,963 |
) |
|
|
| |
|
|
|
Fiscal 2004 compared to fiscal 2003
Corporate Operations’ revenues increased
$5.0 million primarily as a result of operating capital
gains of $1.0 million in the current year compared to a
$2.0 million write-off of investments at our captive
insurance subsidiary and improved results from our small
business subsidiary.
Corporate expenses declined $6.9 million, or
5.4%, due primarily to lower interest expense. Interest expense
on acquisition debt declined as a result of lower financing
costs and a scheduled payment of $45.1 million in
August 2003.
Information technology department expenses
increased $17.7 million, or 19.0%, primarily due to
additional resources needed to support additional projects on
behalf of the operating segments and other support departments.
Marketing department expenses increased $21.7 million, or
24.4%, primarily as a result of marketing initiatives for U.S.
Tax Operations directed toward our brand repositioning and
raising consumer awareness of our advice offerings.
The pretax loss was $107.7 million, compared
with last year’s loss of $122.0 million.
Our effective income tax rate for fiscal year
2004 decreased to 39.5% compared to 41.2% in fiscal year 2003,
primarily as a result of non-deductible goodwill impairment
charges recorded in the prior year.
Fiscal 2003 compared to fiscal 2002
Corporate Operations’ revenues declined
$6.4 million primarily as a result of a $4.2 million
decrease in operating interest income and a $2.0 million
write-off of investments at our captive insurance subsidiary.
Corporate expenses declined $11.7 million,
or 8.4%, due primarily to lower interest expense. Interest
expense on acquisition debt declined as a result of lower
financing costs and a payment of $39.8 million in
August 2002.
Information technology department expenses
increased $8.1 million, or 9.5%, primarily due to a 20.5%
increase in department personnel to support additional projects
on behalf of the operating segments. Finance department expenses
increased $10.4 million, or 52.7%, primarily as a result of
$4.7 million in increased insurance costs and
$2.4 million in additional consulting fees over fiscal year
2002.
The pretax loss was $122.0 million, compared
with the fiscal year 2002 loss of $131.0 million.
Our effective income tax rate for fiscal year
2003 increased to 41.2% compared to 39.4% in fiscal year 2002,
primarily as a result of non-deductible goodwill impairment
charges recorded in 2003.
FINANCIAL CONDITION
CAPITAL RESOURCES & LIQUIDITY BY
SEGMENT
Our sources of capital include cash from
operations, issuances of common stock and debt. We use capital
primarily to fund working capital requirements, pay dividends,
repurchase our shares and acquire businesses.
Cash From
Operations. Operating cash flows
totaled $926.8 million, $690.8 million and
$741.4 million in fiscal years 2004, 2003 and 2002,
respectively. Operating cash flows in fiscal year 2004 improved
compared to fiscal year 2003 due to an increase of
$117.8 million in net income and increased cash flows from
both Mortgage Operations and U.S. Tax Operations. Mortgage
Operations contributed $278.5 million to cash from
operations in the current year compared to $145.0 million
in fiscal year 2003. U.S. Tax Operations contributed $521.6
million in operating cash flows this year compared to
$410.2 million in the prior year.
Issuances of Common
Stock. We issue shares of our common
stock in accordance with our stock-based compensation plans out
of our treasury shares. Proceeds from the issuance of common
stock totaled $120.0 million, $126.3 million and
$195.2 million in fiscal years 2004, 2003 and 2002,
respectively.
Dividends.
We have consistently paid quarterly dividends. Dividends paid
totaled $138.4 million, $125.9 million and
$115.7 million in fiscal years 2004, 2003 and 2002,
respectively.
Share
Repurchases. On June 9, 2004, our
Board of Directors approved an authorization to repurchase an
additional 15 million shares. This authorization is in
addition to the authorization of 20 million shares on
June 11, 2003 and 15 million shares on
September 12, 2001. During fiscal year 2004, we repurchased
10.6 million shares pursuant to these authorizations at an
aggregate price of
– 26
Form
10-K – H&R
BLOCK
$518.5 million or an average price of $48.90
per share. There were 11.3 million shares remaining under
the 2003 authorization and no shares remaining under the 2001
authorization at the end of fiscal year 2004.
We plan to continue to purchase shares on the
open market in accordance with these authorizations, subject to
various factors including the price of the stock, the
availability of excess cash, our ability to maintain liquidity
and financial flexibility, securities laws restrictions and
other investment opportunities available.
Acquisitions.
We, from time to time, acquire businesses that are a good
strategic fit to our organization. Significant acquisitions
during fiscal year 2004 were the former major franchise
territories we now operate as company-owned. Cash paid in fiscal
year 2004 related to the acquisition of these territories
totaled $243.2 million. Total cash paid for acquisitions
was $280.9 million during fiscal year 2004 and
$26.4 million during fiscal year 2003.
Restricted
Cash. We hold certain cash balances
that are restricted as to use. Cash and cash
equivalents – restricted totaled $545.4 million
at fiscal year end. Investment Services held $531.6 million
of this total segregated in a special reserve account for the
exclusive benefit of customers pursuant to Rule 15c3-3 of the
Securities Exchange Act of 1934. The Investment Services
restricted cash balance has grown from $400.1 million at
the beginning of fiscal year 2004 as customer credit balances
have increased at a faster pace than customer debit balances.
Restricted cash of $13.2 million at April 30, 2004
held by Business Services is related to funds held to pay
payroll taxes on behalf of its customers. Restricted cash held
by Mortgage Operations totaled $0.6 million at
April 30, 2004 as a result of cash held for outstanding
commitments to fund mortgage loans.
Fiscal year 2005
outlook. We are planning on
refinancing our $250.0 million in Senior Notes, which are due in
November 2004.
We are also beginning construction on a new world
headquarters facility during fiscal year 2005. Estimated
construction costs during fiscal year 2005 of $18 million
will be financed from operating cash flows.
A condensed consolidating statement of cash flows
by segment for the fiscal year ended April 30, 2004
follows. Generally, interest is not charged on intercompany
activities between segments. Detailed consolidated statements of
cash flows are located in Item 8.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) |
|
|
|
|
|
|
|
U.S. Tax |
|
Mortgage |
|
Business |
|
Investment |
|
International Tax |
|
Corporate |
|
Consolidated |
|
|
|
|
Operations |
|
Operations |
|
Services |
|
Services |
|
Operations |
|
Operations |
|
H&R Block |
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operations
|
|
$ |
521,646 |
|
|
$ |
278,461 |
|
|
$ |
61,875 |
|
|
$ |
(28,200 |
) |
|
$ |
19,458 |
|
|
$ |
73,567 |
|
|
$ |
926,807 |
|
|
|
| |
Investing
|
|
|
(293,711 |
) |
|
|
219,111 |
|
|
|
(39,373 |
) |
|
|
(4,086 |
) |
|
|
(4,679 |
) |
|
|
(8,395 |
) |
|
|
(131,133 |
) |
|
|
| |
Financing
|
|
|
– |
|
|
|
– |
|
|
|
(59,003 |
) |
|
|
– |
|
|
|
(129 |
) |
|
|
(540,219 |
) |
|
|
(599,351 |
) |
|
|
| |
Net intercompany
|
|
|
(188,699 |
) |
|
|
(546,609 |
) |
|
|
49,668 |
|
|
|
31,841 |
|
|
|
(13,831 |
) |
|
|
667,630 |
|
|
|
– |
|
|
|
|
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.
U.S. Tax
Operations: U.S. Tax Operations
has historically been our largest provider of annual operating
cash flows. The seasonal nature of U.S. Tax Operations
generally results in a large positive operating cash flow in the
fourth quarter. U.S. Tax Operations generated
$521.6 million in operating cash flows primarily related to
net income, as cash is generally collected from clients at the
time services are rendered. Cash requirements for investing
activities of $293.7 million includes $243.2 million
paid to former major franchisees.
Household and its designated bank provide funding
of all RALs offered pursuant to a contract that expires in June
2006. If Household and its designated bank do not continue to
provide funding for RALs, we could seek other RAL lenders to
continue offering RALs to our clients or consider alternative
funding strategies. We believe that a number of suitable lenders
would be available to replace Household should the need arise.
We also believe that the RAL program is a
productive product line for the Company and a useful product for
our customers. The RAL program is regularly reviewed both from a
business perspective and to ensure compliance with applicable
state and federal laws. It is our intention to continue to offer
the RAL program in the foreseeable future.
Loss of the RAL program could adversely affect
our operating results. In addition to the loss of revenues and
income directly attributable to the RAL program, the inability
to offer RALs could indirectly result in the loss of retail tax
clients and associated tax preparation revenues, unless we were
able to take mitigating actions. Revenues from RAL
participations were $168.4 million for the year ended
April 30, 2004, and after direct costs, contributed
$92.7 million to the segment’s results. Total revenues
related to the RAL program (including revenues from
participation interests) were $174.2 million for the year
ended April 30, 2004, representing 4.1% of consolidated
revenues. Revenues related to the RAL program totaled
$142.1 million for the year ended April 30, 2003,
representing 3.8% of consolidated revenues.
Mortgage
Operations: This segment primarily
generates cash as a result of the sale and securitization of
mortgage loans and residual interests and as its residual
interests mature. Mortgage Operations provided
$278.5 million in cash from operating activities primarily
due to the sale of mortgage loans. This segment also generated
$219.1 million in cash from investing activities primarily
related to cash received from the maturity and sales of residual
interests.
Gains on
Sales. Gains on sales of mortgage
loans and related assets totaled $726.7 million, of which
87% was received as cash. The cash was primarily recorded as
operating activities.
27 –
H&R
BLOCK – Form
10-K
The percent of gains on sales of mortgage assets
received as cash is calculated as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Whole loans sold by the Trusts
|
|
$ |
721,957 |
|
|
$ |
347,241 |
|
|
$ |
65,219 |
|
|
|
| |
Loans securitized
|
|
|
198,226 |
|
|
|
389,449 |
|
|
|
414,844 |
|
|
|
| |
Sale of previously securitized residuals
|
|
|
40,689 |
|
|
|
130,881 |
|
|
|
– |
|
|
|
| |
Loan origination expenses, net
|
|
|
(325,605 |
) |
|
|
(203,511 |
) |
|
|
(116,699 |
) |
|
|
| |
|
|
| |
|
|
635,267 |
|
|
|
664,060 |
|
|
|
363,364 |
|
|
|
|
Non-cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Retained mortgage servicing rights
|
|
|
84,274 |
|
|
|
60,078 |
|
|
|
52,844 |
|
|
|
| |
Additions (reductions) to balance
sheet (1)
|
|
|
11,490 |
|
|
|
(10,829 |
) |
|
|
22,910 |
|
|
|
| |
Changes in beneficial interest in Trusts
|
|
|
37,918 |
|
|
|
74,987 |
|
|
|
17,028 |
|
|
|
| |
Impairments to fair value of residual interests
|
|
|
(30,661 |
) |
|
|
(54,111 |
) |
|
|
(30,987 |
) |
|
|
| |
Net change in fair value of rate-lock commitments
|
|
|
(11,570 |
) |
|
|
6,158 |
|
|
|
(758 |
) |
|
|
| |
|
|
| |
|
|
91,451 |
|
|
|
76,283 |
|
|
|
61,037 |
|
|
|
| |
|
|
|
Reported gains on sales of mortgage assets
|
|
$ |
726,718 |
|
|
$ |
740,343 |
|
|
$ |
424,401 |
|
|
|
| |
|
|
|
% of gains received as cash
|
|
|
87% |
|
|
|
90% |
|
|
|
86% |
|
|
|
|
|
|
| (1) |
Includes residual interests and interest rate
caps. |
Another important measure of cash generation is
the percentage of cash proceeds we receive from our capital
market transactions. These amounts are also included within the
gain on sale of mortgage assets as reconciled below. The percent
calculation is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Cash proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Whole loans sold by the Trusts
|
|
$ |
721,957 |
|
|
$ |
347,241 |
|
|
$ |
65,219 |
|
|
|
| |
Loans securitized
|
|
|
198,226 |
|
|
|
389,449 |
|
|
|
414,844 |
|
|
|
| |
Sale of previously securitized residuals
|
|
|
40,689 |
|
|
|
130,881 |
|
|
|
– |
|
|
|
| |
|
|
| |
|
|
960,872 |
|
|
|
867,571 |
|
|
|
480,063 |
|
|
|
|
Non-cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Retained mortgage servicing rights
|
|
|
84,274 |
|
|
|
60,078 |
|
|
|
52,844 |
|
|
|
| |
Additions (reductions) to balance
sheet (1)
|
|
|
11,490 |
|
|
|
(10,829 |
) |
|
|
22,910 |
|
|
|
| |
|
|
| |
|
|
95,764 |
|
|
|
49,249 |
|
|
|
75,754 |
|
|
|
| |
|
|
|
Portion of gain on sale related to capital market
transactions
|
|
$ |
1,056,636 |
|
|
$ |
916,820 |
|
|
$ |
555,817 |
|
|
|
|
Other items included in gain on sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Changes in beneficial interest in Trusts
|
|
|
37,918 |
|
|
|
74,987 |
|
|
|
17,028 |
|
|
|
| |
Impairments to fair value of residual interests
|
|
|
(30,661 |
) |
|
|
(54,111 |
) |
|
|
(30,987 |
) |
|
|
| |
Net change in fair value of rate-lock commitments
|
|
|
(11,570 |
) |
|
|
6,158 |
|
|
|
(758 |
) |
|
|
| |
Loan origination expenses, net
|
|
|
(325,605 |
) |
|
|
(203,511 |
) |
|
|
(116,699 |
) |
|
|
| |
|
|
| |
|
|
(329,918 |
) |
|
|
(176,477 |
) |
|
|
(131,416 |
) |
|
|
|
Reported gains on sales of mortgage assets
|
|
$ |
726,718 |
|
|
$ |
740,343 |
|
|
$ |
424,401 |
|
|
|
| |
|
|
|
% of gain on sale related to capital market
transactions received as cash (2)
|
|
|
91% |
|
|
|
95% |
|
|
|
86% |
|
|
|
|
|
|
| (1) |
Includes residual interests and interest rate
caps. |
| (2) |
Cash proceeds divided by portion of gain on
sale related to capital market transactions. |
Warehouse
Funding. We regularly sell loans as a
source of liquidity. Loan sales in fiscal year 2004 were
$23.2 billion compared with $17.2 billion in fiscal
year 2003. Additionally, Block Financial Corporation
(“BFC”) provides an additional $150 million line
of credit for working capital needs.
To finance our prime originations, we utilize a
warehouse facility with capacity up to $50 million. This
annual facility is currently in the final stage of
renegotiation, during which time the original maturity has been
extended on a month-to-month basis. This facility bears interest
at one-month LIBOR plus 64 to 175 basis points. As of
April 30, 2004 and 2003, the balance outstanding under this
facility was $4.0 million and $6.3 million,
respectively, and is included in accounts payable, accrued
expenses and other on the consolidated balance sheets.
See discussion of our non-prime warehouse
facilities below in “Off-Balance Sheet Financing
Arrangements.”
We believe the sources of liquidity available to
the Mortgage Operations segment are sufficient for its needs.
Risks to the stability of these sources include, but are not
limited to, adverse changes in the perception of the non-prime
industry, adverse changes in the regulation of non-prime
lending, changes in the rating criteria of non-prime lending by
third-party rating agencies and, to a lesser degree, reduction
in the availability of third parties that provide credit
– 28
Form
10-K – H&R
BLOCK
enhancement. Past performance of the
securitizations will also impact the segment’s future
participation in these markets. The five off-balance sheet
warehouse facilities used by the Trusts, which have a total
current capacity of $7.0 billion, are subject to annual
renewal, each at a different time during the year, and any of
the above events could lead to difficulty in renewing the lines.
These risks are mitigated by a staggering of the renewal dates
related to these warehouse lines and through the use of multiple
lending institutions to secure these lines.
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. Business
Services also has future obligations and commitments, which are
summarized in the tables below under “Contractual
Obligations and Commercial Commitments.”
This segment generated $61.9 million in
operating cash flows primarily related to the collection of
receivables and net income. Additionally, Business Services used
$39.4 million in investing activities primarily related to
contingent payments on prior acquisitions, and
$59.0 million in financing activities as a result of
payments on acquisition debt.
Investment
Services: Investment Services, through
HRBFA, is subject to regulatory requirements intended to ensure
the general financial soundness and liquidity of broker-dealers.
HRBFA is required to maintain minimum net capital
as defined under Rule 15c3-1 of the Securities Exchange Act of
1934 and complies with the alternative capital requirement,
which requires a broker-dealer to maintain net capital equal to
the greater of $250,000 or 2% of the combined aggregate debit
balances arising from customer transactions. The net capital
rule also provides that equity capital may not be withdrawn or
cash dividends paid if resulting net capital would be less than
the greater of 5% of combined aggregate debit items or 120% of
the minimum required net capital. At the end of fiscal year
2004, HRBFA’s net capital of $115.5 million, which was
17.6% of aggregate debit items, exceeded its minimum required
net capital of $13.2 million by $102.3 million. During
fiscal year 2004, we contributed additional capital of $32.0
million, even though HRBFA was in excess of the minimum net
capital requirement, and we may continue to do so in the future.
In fiscal year 2004, Investment Services used
$28.2 million in its operating activities primarily due to
the timing of cash deposits that are restricted for the benefit
of customers.
To manage short-term liquidity, BFC provides
HRBFA a $300 million unsecured credit facility. At the end
of fiscal year 2004 there was no outstanding balance on this
facility.
Liquidity needs relating to client trading and
margin-borrowing activities are met primarily through cash
balances in client brokerage accounts and working capital. We
believe these sources of funds will continue to be the primary
sources of liquidity for Investment Services. Stock loans have
historically been used as a secondary source of funding and
could be used in the future, if warranted.
Securities borrowed and securities loaned
transactions are generally reported as collateralized
financings. These transactions require us to deposit cash and/or
collateral with the lender. Securities loaned consist of
securities owned by customers, which were purchased on margin.
When loaning securities, we receive cash collateral
approximately equal to the value of the securities loaned. The
amount of cash collateral is adjusted, as required, for market
fluctuations in the value of the securities loaned. Interest
rates paid on the cash collateral fluctuate as short-term
interest rates change.
To satisfy the margin deposit requirement of
client option transactions with the Options Clearing Corporation
(“OCC”), Investment Services pledges customers’
margined securities. Pledged securities at the end of fiscal
year 2004 totaled $46.3 million, an excess of
$7.9 million over the margin requirement. Pledged
securities at the end of fiscal year 2003 totaled $39.7 million,
an excess of $4.3 million over the margin requirement.
We believe the funding sources for Investment
Services are stable. Liquidity risk within this segment is
primarily limited to maintaining sufficient capital levels to
obtain securities lending liquidity to support margin borrowing
by customers.
International Tax
Operations: International Tax
Operations generated $19.5 million in cash flows from operating
activities primarily due to its net income as cash is generally
collected from clients when services are rendered.
International Tax Operations are generally
self-funded. Cash balances are held in Canada, Australia and the
United Kingdom independently in local currencies. Block Canada
has a commercial paper program up to $125 million
(Canadian). At April 30, 2004, there was no commercial
paper outstanding. The peak borrowing during fiscal year 2004
was $61.0 million (Canadian).
OFF-BALANCE SHEET FINANCING
ARRANGEMENTS
We are party to various transactions with an
off-balance sheet component, including loan commitments and
QSPEs, or Trusts.
We have commitments to fund mortgage loans in our
pipeline of $2.6 billion at April 30, 2004, which are
subject to conditions and loan contract verification. There is
no commitment on the part of the borrower to close and fund on
the mortgage loan at this stage of the lending process and
external market forces impact the probability of these loan
commitments being closed. Therefore, total commitments
outstanding do not necessarily represent future cash
requirements. If the loan commitments are exercised, they will
be funded as described below.
Our relationships with the Trusts serve to reduce
our capital investment in our non-prime mortgage operations.
These arrangements are primarily used to sell mortgage loans,
but a portion may also be used to sell servicing advances and
finance residual interests. Additionally, these arrangements
have freed up cash and short-term borrowing capacity, improved
liquidity and flexibility, and reduced balance sheet risk, while
providing stability and access to liquidity in the secondary
market for mortgage loans.
Substantially all non-prime mortgage loans we
originate are sold daily to the Trusts. The Trusts purchase the
loans from us utilizing five warehouse facilities, arranged by
us, totaling $7.0 billion. These facilities are subject to
various Option One performance triggers, limits and financial
covenants, including tangible net worth and leverage ratios. In
addition, these facilities contain cross-default features in
which a default in one facility would trigger a default under
the other facilities as well. These various facilities bear
interest at one-month LIBOR plus 50 to 100 basis points and
expire on various dates during the year.
When we sell loans to the Trusts, we remove the
mortgage loans from our balance sheet and record the gain on the
sale, cash and a beneficial interest in Trusts, which represents
the ultimate expected outcome from the disposition of the loans.
Our beneficial interest in Trusts totaled $137.8 million and
$122.1 million at April 30, 2004 and 2003,
respectively.
Subsequently, the Trusts, as directed by their
third-party beneficial interest holders, either sell the loans
directly to third-party investors or back to us to pool the
loans for securitization. The decision to complete a whole loan
sale or a securitization is dependent on market conditions.
29 –
H&R
BLOCK – Form
10-K
For fiscal year 2004, the final disposition of
loans was 24% securitizations and 76% whole loan sales. For
fiscal year 2003, the final disposition was 59% securitizations
and 41% whole loan sales. The current year shift to whole loan
sales is due to the more favorable pricing in the whole loan
market. Increased whole loan sale transactions result in cash
being received earlier. Additionally, whole loan sales do not
add residual interests to our balance sheet, and therefore do
not retain balance sheet risk.
If the Trusts choose to sell the mortgage loans
in a whole loan sale, we receive cash for our beneficial
interest in Trusts. In a securitization transaction, after the
Trusts transfer the loans, and the right to receive all payments
on the loans, to our consolidated special purpose entity, we
transfer our beneficial interest in Trusts and the loans to a
securitization trust. The securitization trust meets the
definition of a QSPE and is therefore not consolidated. The
securitization trust issues bonds, which are supported by the
cash flows from the pooled loans, to third-party investors. We
retain an interest in the loans in the form of a residual
interest and, therefore, usually assume the first risk of loss
for credit losses in the loan pool. As the cash flows of the
underlying loans and market conditions change, the value of our
residual interests may also change, resulting in potential
write-ups or impairment of our residual interests.
At the settlement of each securitization, we
record cash received and our residual interests. Additionally,
we reverse the beneficial interest in Trusts. These residual
interests are classified as trading securities. See Item 8,
note 1 to our consolidated financial statements for our
methodology used in valuing our residual interests.
To accelerate the cash flows from our residual
interests, we securitize the majority of our residual interests
in net interest margin (“NIM”) transactions. In a NIM
transaction, the residual interests are transferred to another
QSPE (“NIM trust”), which then issues bonds to
third-party investors. The proceeds from the bonds are returned
to us as payment for the residual interests. The bonds are
secured by the pooled residual interests and are obligations of
the NIM trust. We retain a subordinated interest in the NIM
trust, and receive cash flows on our residual interest generally
after the bonds issued to the third-party investors are paid in
full.
At the settlement of each NIM transaction, we
remove the residual interests sold from our consolidated balance
sheet and record the cash received and the new residual interest
retained. These residual interests are classified as
available-for-sale securities.
Residual interests retained from NIM
securitizations may also be sold in a subsequent securitization
or sale transaction.
Loans totaling $3.2 billion and
$2.2 billion were held by the Trusts as of April 30,
2004 and 2003, respectively, and were not recorded on our
consolidated balance sheets.
In connection with the sale of mortgage loans, we
provide certain representations and warranties allowing the
purchaser the option of returning the purchased loans to us
under certain conditions. We may recognize losses as a result of
the repurchase of loans under these arrangements. We maintain
reserves for the repurchase of loans based on historical trends.
See Item 8, note 19 to our consolidated financial
statements.
The Financial Accounting Standards Board
(“FASB”) has decided to reissue its exposure draft,
“Qualifying Special Purpose Entities and Isolation of
Transferred Assets, an Amendment of FASB Statement
No. 140,” during the third quarter of calendar year
2004. The purpose of the proposal is to provide more specific
guidance on the accounting for transfers of financial assets to
a QSPE.
Provisions in the first exposure draft, as well
as the tentative decision reached by the FASB during its
deliberations, may require us to consolidate the Trusts to whom
we sell our non-prime loans daily. As of April 30, 2004,
the Trusts had assets and liabilities of $3.2 billion. The
provisions of the exposure draft are subject to FASB due process
and are subject to change. We will continue to monitor the
status of the exposure draft, and consider changes, if any, to
current structures as a result of the proposed rules.
COMMERCIAL PAPER ISSUANCE
We participate in the United States and Canadian
commercial paper (“CP”) markets to meet daily cash
needs. CP is issued by BFC and Block Canada, wholly-owned
subsidiaries of the Company. The following chart provides the
debt ratings for BFC as of April 30, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Short-term |
|
Long-term |
|
|
|
|
Fitch
|
|
|
F1 |
|
|
|
A |
|
|
|
|
Moody’s
|
|
|
P2 |
|
|
|
A3 |
|
|
|
|
S&P
|
|
|
A2 |
|
|
|
BBB+ |
|
|
|
|
The following chart provides the debt ratings for
Block Canada as of April 30, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Short-term |
|
Corporate |
|
Trend |
|
|
|
|
DBRS
|
|
|
R-1(low) |
|
|
|
A |
|
|
|
Stable |
|
|
|
|
Moody’s
|
|
|
P |
|
|
|
|
|
|
|
2 |
|
|
|
|
We use capital primarily to fund working capital
requirements, pay dividends, repurchase our shares and acquire
businesses. Short-term borrowings peaked at $2.3 billion in
February 2004 related to funding of our participation
interests in RALs. No CP was outstanding at April 30, 2004
or 2003.
U.S. CP issuances are supported by an unsecured
committed line of credit (“CLOC”) from a consortium of
twenty-four banks. The $2.0 billion CLOC is subject to
annual renewal in August 2004 and has a one-year term-out
provision with a maturity date in August 2005. This line is
subject to various affirmative and negative covenants. This CLOC
includes $1.5 billion for CP back-up and general corporate
purposes and $500 million for working capital use, general
corporate purposes and CP back-up. An additional line of credit
of $500 million was put into place for the period of
January 26 to February 25, 2004 to back-up peak CP
issuance. This line is subject to various covenants,
substantially similar to the primary CLOC. These CLOCs were
undrawn at April 30, 2004. There are no rating
contingencies under the CLOCs.
The Canadian issuances are supported by a credit
facility provided by one bank in an amount not to exceed
$125 million (Canadian). The Canadian CLOC is subject to
annual renewal in December 2004. This CLOC was undrawn at
April 30, 2004.
We believe the CP market to be stable. Risks to
the stability of our CP market participation would be a
short-term rating downgrade, adverse changes in our financial
performance, non-renewal or termination of the CLOCs, adverse
publicity and operational risk within the CP market. We believe
if any of these events were to occur, the CLOCs, to the extent
available, could be used for an orderly exit from the CP market,
though at a higher cost to us. Additionally, we could turn to
other sources of liquidity, including cash, debt issuance under
the existing shelf registration and asset sales or
securitizations.
– 30
Form
10-K – H&R
BLOCK
CONTRACTUAL OBLIGATIONS AND COMMERCIAL
COMMITMENTS
A summary of our obligations to make future
payments as of April 30, 2004 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
Less Than |
|
|
|
After 5 |
|
|
| |
|
Total |
|
1 Year |
|
1 - 3 Years |
|
4 - 5 Years |
|
Years |
|
|
|
|
Debt
|
|
$ |
748,200 |
|
|
$ |
249,975 |
|
|
$ |
498,225 |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
|
Long-term obligation to government
|
|
|
279,976 |
|
|
|
– |
|
|
|
186,651 |
|
|
|
93,325 |
|
|
|
– |
|
|
|
|
Acquisition payments
|
|
|
60,768 |
|
|
|
25,257 |
|
|
|
34,963 |
|
|
|
548 |
|
|
|
– |
|
|
|
|
Pension obligation assumed
|
|
|
17,511 |
|
|
|
2,826 |
|
|
|
5,048 |
|
|
|
4,176 |
|
|
|
5,461 |
|
|
|
|
Capital lease obligations
|
|
|
12,512 |
|
|
|
437 |
|
|
|
1,035 |
|
|
|
1,132 |
|
|
|
9,908 |
|
|
|
|
Operating leases
|
|
|
597,883 |
|
|
|
199,292 |
|
|
|
258,385 |
|
|
|
91,609 |
|
|
|
48,597 |
|
|
|
| |
|
|
|
Total contractual cash obligations
|
|
$ |
1,716,850 |
|
|
$ |
477,787 |
|
|
$ |
984,307 |
|
|
$ |
190,790 |
|
|
$ |
63,966 |
|
|
|
| |
|
|
|
In April 2000, we issued $500 million
of 8 1/2% Senior Notes, due 2007. The Senior Notes are not
redeemable prior to maturity. The net proceeds of this
transaction were used to repay a portion of the short-term
borrowings that initially funded the acquisition of OLDE
Financial Corporation.
In October 1997, we issued $250 million
of 6 3/4% Senior Notes, due 2004. The Senior Notes are not
redeemable prior to maturity. The net proceeds of this
transaction were used to repay short-term borrowings that
initially funded the acquisition of Option One. These Senior
Notes are included in the current portion of long-term debt on
our consolidated balance sheet. We plan to refinance these
Senior Notes during fiscal year 2005.
Also included in debt are future payments related
to Business Services acquisitions and capital lease obligations.
Our debt to total capital ratio was 30.3% at April 30,
2004, compared with 34.5% at April 30, 2003.
As of April 30, 2004, we had
$250 million remaining under our shelf registration
available for additional debt issuance.
In connection with our acquisition of the
non-attest assets of M&P in August 1999, we assumed
certain pension liabilities related to M&P’s retired
partners. We make payments in varying amounts on a monthly
basis. Included in other noncurrent liabilities at
April 30, 2004 and 2003 are $17.5 million and
$19.5 million, respectively, related to this liability.
Operating leases, although requiring future cash
payments, are not included in our consolidated balance sheets.
A summary of our commitments as of April 30,
2004, which may or may not require future payments, expire as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
Less Than 1 |
|
|
|
After 5 |
|
|
| |
|
Total |
|
Year |
|
1 - 3 Years |
|
4 - 5 Years |
|
Years |
|
|
|
|
Commitments to fund mortgage loans
|
|
$ |
2,605,878 |
|
|
$ |
2,605,878 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
|
Commitments to sell mortgage loans
|
|
|
4,748,994 |
|
|
|
4,748,994 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Pledged securities
|
|
|
46,340 |
|
|
|
46,340 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Commitment to fund M&P
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Franchise Equity Lines of Credit
|
|
|
26,990 |
|
|
|
9,149 |
|
|
|
5,995 |
|
|
|
11,846 |
|
|
|
– |
|
|
|
|
Mortgage loan repurchase obligations
|
|
|
25,168 |
|
|
|
25,168 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Other commercial commitments
|
|
|
10,255 |
|
|
|
5,880 |
|
|
|
3,595 |
|
|
|
780 |
|
|
|
– |
|
|
|
| |
|
|
|
Total commercial commitments
|
|
$ |
7,503,625 |
|
|
$ |
7,481,409 |
|
|
$ |
9,590 |
|
|
$ |
12,626 |
|
|
$ |
– |
|
|
|
| |
|
|
|
See discussion of commitments in Item 8,
note 19 to our consolidated financial statements.
REGULATORY ENVIRONMENT
The United States, various state, local,
provincial and foreign governments and some self-regulatory
organizations have enacted statutes and ordinances, and/or
adopted rules and regulations, regulating aspects of our
business, including, but not limited to, commercial income tax
return preparers, income tax courses, the electronic filing of
income tax returns, the facilitation of RALs, loan originations
and assistance in loan originations, mortgage lending, privacy,
consumer protection, franchising, sales methods, brokers,
broker-dealers and various aspects of securities transactions,
financial planners, investment advisors, accountants and the
accounting practice. We seek to determine the applicability of
such statutes, ordinances, rules and regulations (collectively,
“Laws”) and comply with those Laws. From time to time
in the ordinary course of business, we receive inquiries from
governmental and self-regulatory agencies regarding the
applicability of Laws to our products and services. In response
to past inquiries, we have agreed to comply with such Laws,
convinced the authorities that such Laws were not applicable or
that compliance already exists, and/or modified our activities
in the applicable jurisdiction to avoid the application of all
or certain parts of such Laws. We believe that the past
resolution of such inquiries and our ongoing compliance with
Laws have not had a material adverse effect on our consolidated
financial statements. We cannot predict what effect future Laws,
changes in interpretations of existing Laws, or the results of
future regulator inquiries with respect to the applicability of
Laws may have on our consolidated financial statements.
31 –
H&R
BLOCK – Form
10-K
NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to our consolidated
financial statements for a discussion of recently issued
accounting pronouncements.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Interest Rate
Risk. We have established investment
guidelines to help minimize the market risk exposure of our cash
equivalents and available-for-sale securities. These guidelines
focus on managing liquidity, preservation of principal and
earnings, which are primarily affected by credit quality and
movements in interest rates. Most of our interest rate-sensitive
assets and liabilities are managed at the subsidiary level.
Our cash equivalents are primarily held for
liquidity purposes and are comprised of high quality, short-term
investments, including qualified money market funds. As of
April 30, 2004, our non-restricted cash and cash
equivalents had an average maturity of less than one month with
an average credit quality of AAA. With such a short maturity,
our portfolio’s market value is relatively insensitive to
interest rate changes.
We use capital primarily to fund working capital
requirements, pay dividends, repurchase our shares and acquire
businesses. At April 30, 2004, no commercial paper was
outstanding. For fiscal year 2004, the average issuance term was
23 days and the average outstanding balance was
$279.7 million. As commercial paper borrowings are
seasonal, interest rate risk typically increases through our
third fiscal quarter and declines to zero by fiscal year-end.
See Item 7, “Financial Condition” for additional
information.
Our current portion of long-term debt and
long-term debt at April 30, 2004 consists primarily of
fixed-rate Senior Notes; therefore, a change in interest rates
would have no impact on consolidated pretax earnings. See
Item 8, note 10 to our consolidated financial statements.
We have exposure to interest rate risk through
our investment in fixed income securities at our captive
insurance subsidiary and our broker-dealer. See table below for
sensitivities to changes in interest rates. Additionally, we
have exposure to interest rate risk in the financial instruments
associated with Mortgage Operations.
Equity Price
Risk. We have exposure to the equity
markets in several ways. The largest exposures are through our
deferred compensation plans, which have mismatches in asset and
liability amounts and investment choices (both fixed-income and
equity), as well as through equity investments at our captive
insurance subsidiary. At April 30, 2004, the impact of a
10% market value change in the combined equity assets of the
deferred compensation plans and the captive insurance subsidiary
would be approximately $8.9 million, assuming no offset for
the liabilities.
Mortgage Operations
Interest Rate Risk, Prime
Mortgage Origination Operations. We
regularly enter into rate-lock commitments with our customers to
fund prime mortgage loans within specified periods of time. The
fair value of rate-lock commitments and loans held for sale is
calculated based on the current market pricing of short sales of
FNMA, FHLMC and GNMA mortgage-backed securities and the coupon
rates of the eligible loans. At April 30, 2004, we recorded
a liability of $1.7 million related to rate-lock
commitments.
We sell short FNMA, FHLMC and GNMA
mortgage-backed securities to reduce the risk related to our
prime commitments to fund fixed-rate loans. The position hedging
certain, or all, of the fixed-rate mortgage loans is closed
approximately 10-15 days prior to standard Public
Securities Association (“PSA”) settlement dates. At
April 30, 2004, the Company recorded an asset of
$2.1 million related to these instruments.
To finance our prime originations, we utilize a
warehouse facility with capacity up to $50 million, which
bears interest at one-month LIBOR plus 64 to 175 basis
points. As of April 30, 2004, the balance outstanding under
this facility was $4.0 million.
Interest Rate Risk, Non-prime
Mortgage Origination Operations.
Interest rate changes will impact the value of the loans in the
origination pipeline, beneficial interest in Trusts and the
forward loan sale commitments. Additionally, our accretion
earned on our beneficial interest in Trusts may be affected.
We are exposed to interest rate risk associated
with loans in the origination pipeline, consisting of fixed- and
adjustable-rate loans, which will generally be sold, ultimately,
through whole loan sales or securitizations. We have binding
commitments ($.6 billion) and non-binding commitments
($2.0 billion) to fund mortgage loans at April 30,
2004, subject to conditions and loan contract verification. Of
these commitments, external market forces impact the probability
of the loans being funded and we estimate only $1.3 billion
will likely be originated.
As a result of whole loan sales to the Trusts, we
remove the mortgage loans from our balance sheet and record the
gain on sale, cash and a beneficial interest in Trusts, which
represents the ultimate expected outcome from the disposition of
the loans. See Item 7, “Off-Balance Sheet Financing
Arrangements.” At April 30, 2004, there were
$3.2 billion of loans held in the Trusts and the value of
our beneficial interest in Trusts was $137.8 million.
Changes in interest rates and other market factors may result in
a change in value of our beneficial interest in Trusts.
We use forward loan sale commitments to reduce
risk associated with loans in the pipeline and our beneficial
interest in Trusts. These commitments, which represent an
obligation to sell a non-prime loan at a specific price in the
future, increase in value as interest rates rise and decrease as
rates fall. At April 30, 2004, there were $4.7 billion
in forward loan sale commitments, and most of them give us the
option to under- or over-deliver by five to ten percent.
Forward loan sale commitments for non-prime loans are not
considered derivative instruments and are therefore not recorded
in our financial statements. Forward loan sale commitments lock
in the execution price-net gain on sale on the loans which will
ultimately be delivered into a whole loan sale.
We also have used interest rate swaps to reduce
interest rate risk associated with non-prime loans in our
pipeline prior to ultimate disposition. Interest rate swaps
represent an agreement to exchange interest rate payments,
whereby we generally receive a floating rate and pay the fixed
rate. These contracts increase in value as rates rise and
decrease in value as rates fall. There were no swaps outstanding
at April 30, 2004.
Prime and non-prime loans, as well as rate-locks
associated with prime loans, have interest rate risk if interest
rates rise before the loan is sold or hedged and the rate on the
loan does not change. With $4.7 billion of forward loan
sale commitments (and the option to adjust the commitment amount
between $4.5 to $5.0 billion), netting against
pipeline loans estimated at $1.3 billion and
– 32
Form
10-K – H&R
BLOCK
the anticipated sale of $3.2 billion in
loans by the Trusts, we believe the net risk position of loan
origination operations at year end is relatively neutral to
changes in interest rates.
Delivery
Risk. We have exposure to delivery
risk in our non-prime origination operations, which regularly
enter into forward loan sale commitments prior to loans being
originated. Additionally, it is possible that the loans
originated will not meet the required characteristics of the
forward loan sale commitments. Several remedies are available,
however, use of the remedies could reduce the execution price or
the effectiveness of the forward loan sale commitment as a hedge
vehicle.
Residual
Interests. Relative to modeled
assumptions, an increase or decrease in interest rates would
impact the value of our residual interests. Additionally,
accretion income related to our residual interests may be
affected. 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, and the
on-going basis risk between the indices of the floating-rate
assets and liabilities.
We enter into interest rate caps to mitigate
interest rate risk associated with residual interests that are
classified as trading securities because they will be sold in a
subsequent NIM transaction, and to enhance the marketability of
the NIM transactions. Interest rate caps represent a right to
receive cash if interest rates rise above a contractual strike
rate. Therefore, its value increases as interest rates rise. The
interest rate used in our interest rate caps is based on LIBOR.
There were no interest rate caps outstanding at April 30,
2004.
See table below for sensitivities to changes in
interest rates for residual interests. See Item 8,
note 6 to the consolidated financial statements for
additional analysis of interest rate risk and other financial
risks impacting residual interests.
It is our policy to utilize economic hedge
vehicles only for the purpose of offsetting or reducing the risk
of loss in earnings associated with a defined or quantified
exposure.
Mortgage Servicing
Rights. Declining mortgage rates may
cause increased refinancing activity. Increased refinancing
activity reduces the life of the loans underlying the residual
interests and MSRs, thereby reducing their value. Just the
opposite occurs in a rising rate environment, however, MSRs are
recorded at the lower of cost or market value. Reductions in the
value of these assets impact earnings through impairment
charges. See Item 8, note 6 to our consolidated
financial statements for further sensitivity analysis of the
other assumptions.
Investment Services
Interest Rate
Risk. HRBFA holds interest bearing
receivables from customers, brokers, dealers and clearing
organizations, which consist primarily of amounts due on margin
transactions and are generally short-term in nature. We fund
these short-term assets with short-term variable rate
liabilities from customers, brokers and dealers, including stock
loan activity. Although there may be differences in the timing
of the re-pricing related to these assets and liabilities, we
believe we are not significantly exposed to interest rate risk
in this area. As a result, any change in interest rates would
not materially impact our consolidated earnings.
Our fixed-income trading portfolio is affected by
changes in market rates and prices. The risk is the loss of
income arising from adverse changes in the value of the trading
portfolio. We value the trading portfolio at quoted market
prices and the market value of our trading portfolio at
April 30, 2004 was approximately $13.6 million, net of
securities sold short. See table below for sensitivities to
changes in interest rates. With respect to our fixed-income
securities portfolio, we manage our market price risk exposure
by limiting concentration risk, maintaining minimum credit
quality and limiting inventory to anticipated retail demand and
current market conditions.
International Tax Operations
Foreign Exchange Rate
Risk. Our cash and operations in
international markets are exposed to movements in currency
exchange rates. The currencies involved are the Canadian dollar,
the Australian dollar and the British pound. We translate
revenues and expenses related to these operations at the average
of exchange rates in effect during the period. As currency
exchange rates change, translation of the financial results into
U.S. dollars does not presently materially affect, and has not
historically materially affected, our consolidated financial
results, although such changes do affect the year-to-year
comparability of the operating results of our international
businesses. We estimate a 10% change in foreign exchange rates
by itself would impact consolidated pretax income in fiscal year
2004 by approximately $1.3 million and cash balances at
April 30, 2004 by $6.1 million.
The sensitivities of certain financial
instruments to changes in interest rates as of April 30,
2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
- 50 |
|
+ 50 |
|
+ 100 |
|
+ 200 |
|
+ 300 |
|
|
|
|
Fair Value at |
|
Basis |
|
Basis |
|
Basis |
|
Basis |
|
Basis |
|
|
|
|
April 30, 2004 |
|
Points |
|
Points |
|
Points |
|
Points |
|
Points |
|
|
|
|
Residual interests in securitizations –
available-for-sale
|
|
$ |
210,973 |
|
|
$ |
45,449 |
|
|
$ |
(18,563 |
) |
|
$ |
(32,709 |
) |
|
$ |
(46,527 |
) |
|
$ |
(48,090 |
) |
|
|
|
Investments at captive insurance subsidiary
|
|
|
44,667 |
|
|
|
1,079 |
|
|
|
(1,069 |
) |
|
|
(1,591 |
) |
|
|
(3,146 |
) |
|
|
(4,667 |
) |
|
|
|
Fixed income – trading (net)
|
|
|
13,639 |
|
|
|
677 |
|
|
|
(637 |
) |
|
|
(1,228 |
) |
|
|
(2,271 |
) |
|
|
(3,164 |
) |
|
|
|
The table above represents hypothetical
instantaneous and sustained parallel shifts in interest rates
and should not be relied on as an indicator of future expected
results.
33 –
H&R
BLOCK – Form
10-K
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Management Report
We at H&R Block are guided by our core values
of client focus, integrity, excellence, respect and teamwork.
These values govern the manner in which we serve clients and
each other, and are embedded in the execution and delivery of
our financial reporting responsibilities to our shareholders. To
that end, we maintain a comprehensive system of internal
accounting controls designed to provide reasonable assurance the
Company’s assets are safeguarded against material loss from
unauthorized use or disposition, and authorized transactions are
properly recorded. We support an extensive program of internal
audits and require the management teams of our individual
subsidiaries to certify their respective financial information.
Appropriate communication programs aimed at assuring our
policies, procedures and principles of business conduct are
understood and practiced by our associates are also an integral
part of our control environment.
KPMG LLP audited our 2004 consolidated financial
statements and PricewaterhouseCoopers LLP audited our 2003 and
2002 consolidated financial statements. Both issued unqualified
opinions thereon. Their audits were conducted in accordance with
the standards of the Public Company Accounting Oversight Board
(United States) and included an objective, independent review
and testing of the system of internal controls necessary to
express an opinion on the financial statements.
The Audit Committee of the Board of Directors,
composed solely of outside and independent directors, meets
periodically with management, the independent auditors and the
chief internal auditor to review matters relating to our
financial statements, internal audit activities, internal
accounting controls and non-audit services provided by the
independent auditors. The independent auditors and the chief
internal auditor have full access to the Audit Committee and
meet, both with and without management present, to discuss the
scope and results of their audits, including internal control,
audit and financial matters.
The financial information in this Annual Report,
including the consolidated financial statements, is the
responsibility of management. The consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles and necessarily include certain
amounts based on management’s best estimates and judgments.
/s/ Mark A. Ernst
Mark A. Ernst, Chairman of the Board,
President and Chief Executive Officer
/s/ Melanie K. Coleman
Melanie K. Coleman, Vice President and
Corporate Controller
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Shareholders of
H&R Block, Inc.:
We have audited the accompanying consolidated
balance sheet of H&R Block, Inc. and subsidiaries (the
“Company”) as of April 30, 2004, and the related
consolidated income statement, statement of cash flows and
statement of stockholders’ equity for the year then ended.
These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on the consolidated financial statements
based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of H&R Block, Inc. and
subsidiaries as of April 30, 2004, and the results of their
operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the financial
statements, the Company changed its method of accounting to
adopt Staff Accounting Bulletin No. 105, “Application
of Accounting Principles to Loan Commitments,” Emerging
Issues Task Force Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables,” and Statement of
Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation – Transition and
Disclosure” during the year ended April 30, 2004.
/s/ KPMG LLP
June 9, 2004
Kansas City, Missouri
– 34
Form
10-K – H&R
BLOCK
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and Shareholders of
H&R Block, Inc.
In our opinion, the accompanying consolidated
balance sheet and the related consolidated statements of income,
of cash flows and of stockholders’ equity present fairly,
in all material respects, the financial position of H&R
Block, Inc. and its subsidiaries (the “Company”) at
April 30, 2003, and the results of their operations and
their cash flows for each of the two years in the period ended
April 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
June 10, 2003
Kansas City, Missouri
35 –
H&R
BLOCK – Form
10-K
CONSOLIDATED INCOME STATEMENTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts in thousands, except per share amounts |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Service revenues
|
|
$ |
2,740,983 |
|
|
$ |
2,398,081 |
|
|
$ |
2,345,307 |
|
|
|
| |
Gains on sales of mortgage assets, net
|
|
|
726,718 |
|
|
|
740,343 |
|
|
|
424,401 |
|
|
|
| |
Interest income
|
|
|
379,064 |
|
|
|
297,185 |
|
|
|
206,433 |
|
|
|
| |
Product sales
|
|
|
157,417 |
|
|
|
123,510 |
|
|
|
115,505 |
|
|
|
| |
Royalties
|
|
|
184,882 |
|
|
|
174,659 |
|
|
|
164,615 |
|
|
|
| |
Other
|
|
|
16,506 |
|
|
|
12,679 |
|
|
|
29,440 |
|
|
|
| |
|
|
| |
|
|
4,205,570 |
|
|
|
3,746,457 |
|
|
|
3,285,701 |
|
|
|
| |
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Employee compensation and benefits
|
|
|
1,610,103 |
|
|
|
1,387,731 |
|
|
|
1,298,159 |
|
|
|
| |
Occupancy and equipment
|
|
|
384,622 |
|
|
|
345,960 |
|
|
|
305,387 |
|
|
|
| |
Depreciation and amortization
|
|
|
172,038 |
|
|
|
161,821 |
|
|
|
155,386 |
|
|
|
| |
Marketing and advertising
|
|
|
188,317 |
|
|
|
150,847 |
|
|
|
155,729 |
|
|
|
| |
Interest
|
|
|
84,556 |
|
|
|
92,644 |
|
|
|
116,141 |
|
|
|
| |
Supplies, freight and postage
|
|
|
89,189 |
|
|
|
88,748 |
|
|
|
75,710 |
|
|
|
| |
Impairment of goodwill
|
|
|
– |
|
|
|
35,777 |
|
|
|
– |
|
|
|
| |
Other
|
|
|
522,442 |
|
|
|
502,687 |
|
|
|
463,761 |
|
|
|
| |
|
|
| |
|
|
3,051,267 |
|
|
|
2,766,215 |
|
|
|
2,570,273 |
|
|
|
| |
|
|
|
Operating income
|
|
|
1,154,303 |
|
|
|
980,242 |
|
|
|
715,428 |
|
|
|
|
Other income, net
|
|
|
9,854 |
|
|
|
6,835 |
|
|
|
1,412 |
|
|
|
| |
|
|
|
Income before taxes
|
|
|
1,164,157 |
|
|
|
987,077 |
|
|
|
716,840 |
|
|
|
|
Income taxes
|
|
|
459,901 |
|
|
|
407,013 |
|
|
|
282,435 |
|
|
|
| |
|
|
|
Net income before change in accounting principle
|
|
|
704,256 |
|
|
|
580,064 |
|
|
|
434,405 |
|
|
|
|
Cumulative effect of change in accounting
principle
for multiple deliverable revenue arrangements, less taxes of
$4,031
|
|
|
(6,359 |
) |
|
|
– |
|
|
|
– |
|
|
|
| |
|
|
|
NET INCOME
|
|
$ |
697,897 |
|
|
$ |
580,064 |
|
|
$ |
434,405 |
|
|
|
| |
|
|
|
BASIC EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Before change in accounting principle
|
|
$ |
3.98 |
|
|
$ |
3.23 |
|
|
$ |
2.38 |
|
|
|
| |
Cumulative effect of change in accounting
principle
|
|
|
(.04 |
) |
|
|
– |
|
|
|
– |
|
|
|
| |
|
|
| |
Net income
|
|
$ |
3.94 |
|
|
$ |
3.23 |
|
|
$ |
2.38 |
|
|
|
| |
|
|
|
DILUTED EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Before change in accounting principle
|
|
$ |
3.90 |
|
|
$ |
3.15 |
|
|
$ |
2.31 |
|
|
|
| |
Cumulative effect of change in accounting
principle
|
|
|
(.04 |
) |
|
|
– |
|
|
|
– |
|
|
|
| |
|
|
| |
Net income
|
|
$ |
3.86 |
|
|
$ |
3.15 |
|
|
$ |
2.31 |
|
|
|
| |
|
|
|
See accompanying notes to consolidated
financial statements.
– 36
Form
10-K – H&R
BLOCK
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts in thousands, except share and per share amounts |
|
|
|
|
|
|
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
1,071,676 |
|
|
$ |
875,353 |
|
|
|
| |
Cash and cash equivalents – restricted
|
|
|
545,428 |
|
|
|
438,242 |
|
|
|
| |
Receivables from customers, brokers, dealers and
clearing organizations, net
|
|
|
625,076 |
|
|
|
517,037 |
|
|
|
| |
Receivables, net
|
|
|
347,910 |
|
|
|
403,197 |
|
|
|
| |
Prepaid expenses and other current assets
|
|
|
371,209 |
|
|
|
391,402 |
|
|
|
| |
|
|
| |
|
Total current assets
|
|
|
2,961,299 |
|
|
|
2,625,231 |
|
|
|
| |
Residual interests in securitizations –
available-for-sale
|
|
|
210,973 |
|
|
|
264,337 |
|
|
|
| |
Beneficial interest in Trusts – trading
|
|
|
137,757 |
|
|
|
122,130 |
|
|
|
| |
Mortgage servicing rights
|
|
|
113,821 |
|
|
|
99,265 |
|
|
|
| |
Property and equipment, net
|
|
|
279,220 |
|
|
|
288,594 |
|
|
|
| |
Intangible assets, net
|
|
|
325,829 |
|
|
|
341,865 |
|
|
|
| |
Goodwill, net
|
|
|
959,418 |
|
|
|
714,215 |
|
|
|
| |
Other assets
|
|
|
391,709 |
|
|
|
311,671 |
|
|
|
| |
|
|
| |
|
|
Total assets
|
|
$ |
5,380,026 |
|
|
$ |
4,767,308 |
|
|
|
| |
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
| |
Current portion of long-term debt
|
|
$ |
275,669 |
|
|
$ |
55,678 |
|
|
|
| |
Accounts payable to customers, brokers and dealers
|
|
|
1,065,793 |
|
|
|
862,694 |
|
|
|
| |
Accounts payable, accrued expenses and other
|
|
|
456,167 |
|
|
|
468,933 |
|
|
|
| |
Accrued salaries, wages and payroll taxes
|
|
|
268,747 |
|
|
|
210,629 |
|
|
|
| |
Accrued income taxes
|
|
|
405,667 |
|
|
|
299,262 |
|
|
|
| |
|
|
| |
|
Total current liabilities
|
|
|
2,472,043 |
|
|
|
1,897,196 |
|
|
|
| |
Long-term debt
|
|
|
545,811 |
|
|
|
822,302 |
|
|
|
| |
Other noncurrent liabilities
|
|
|
465,163 |
|
|
|
384,101 |
|
|
|
| |
|
|
| |
|
|
Total liabilities
|
|
|
3,483,017 |
|
|
|
3,103,599 |
|
|
|
| |
|
|
|
COMMITMENTS AND
CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
| |
Common stock, no par, stated value $.01 per
share, 500,000,000 shares
authorized, 217,945,398 shares issued at April 30, 2004 and
2003
|
|
|
2,179 |
|
|
|
2,179 |
|
|
|
| |
Convertible preferred stock, no par, stated value
$.01 per share,
500,000 shares authorized
|
|
|
– |
|
|
|
– |
|
|
|
| |
Additional paid-in capital
|
|
|
545,065 |
|
|
|
496,393 |
|
|
|
| |
Accumulated other comprehensive income
|
|
|
57,953 |
|
|
|
36,862 |
|
|
|
| |
Retained earnings
|
|
|
2,781,368 |
|
|
|
2,221,868 |
|
|
|
| |
Less treasury shares, at cost
|
|
|
(1,489,556 |
) |
|
|
(1,093,593 |
) |
|
|
| |
|
|
| |
|
|
Total stockholders’ equity
|
|
|
1,897,009 |
|
|
|
1,663,709 |
|
|
|
| |
|
|
| |
|
|
Total liabilities and stockholders’ equity
|
|
$ |
5,380,026 |
|
|
$ |
4,767,308 |
|
|
|
| |
|
|
|
See accompanying notes to consolidated
financial statements.
37 –
H&R
BLOCK – Form
10-K
CONSOLIDATED STATEMENTS OF CASH
FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts in thousands | |
|
|
|
|
| |
| Year ended April 30, |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
697,897 |
|
|
$ |
580,064 |
|
|
$ |
434,405 |
|
|
|
| |
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
172,038 |
|
|
|
161,821 |
|
|
|
155,386 |
|
|
|
| |
|
Provision for bad debt
|
|
|
53,663 |
|
|
|
49,748 |
|
|
|
76,804 |
|
|
|
| |
|
Provision for deferred taxes on income
|
|
|
(3,632 |
) |
|
|
(45,734 |
) |
|
|
(89,688 |
) |
|
|
| |
|
Accretion of residual interests in securitizations
|
|
|
(168,029 |
) |
|
|
(145,165 |
) |
|
|
(50,583 |
) |
|
|
| |
|
Impairment of residual interests in
securitizations
|
|
|
30,661 |
|
|
|
54,111 |
|
|
|
30,987 |
|
|
|
| |
|
Realized gain on sale of previously securitized
residual interests
|
|
|
(40,689 |
) |
|
|
(130,881 |
) |
|
|
– |
|
|
|
| |
|
Additions to trading securities –
residual interests in securitizations
|
|
|
(327,996 |
) |
|
|
(542,544 |
) |
|
|
(809,228 |
) |
|
|
| |
|
Proceeds from net interest margin transactions
|
|
|
310,358 |
|
|
|
541,791 |
|
|
|
783,171 |
|
|
|
| |
|
Additions to mortgage servicing rights
|
|
|
(84,274 |
) |
|
|
(65,345 |
) |
|
|
(65,630 |
) |
|
|
| |
|
Amortization of mortgage servicing rights
|
|
|
69,718 |
|
|
|
47,107 |
|
|
|
33,890 |
|
|
|
| |
|
Net change in beneficial interest in Trusts
|
|
|
(15,627 |
) |
|
|
(69,529 |
) |
|
|
(19,960 |
) |
|
|
| |
|
Impairment of goodwill
|
|
|
– |
|
|
|
35,777 |
|
|
|
– |
|
|
|
| |
|
Tax benefit from stock option exercises
|
|
|
23,957 |
|
|
|
37,304 |
|
|
|
57,809 |
|
|
|
| |
|
Stock-based compensation
|
|
|
25,718 |
|
|
|
2,079 |
|
|
|
– |
|
|
|
| |
|
Cumulative effect of change in accounting
principle
|
|
|
6,359 |
|
|
|
– |
|
|
|
– |
|
|
|
| |
|
Changes in assets and liabilities, net of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Cash and cash equivalents – restricted
|
|
|
(107,186 |
) |
|
|
(286,069 |
) |
|
|
(67,976 |
) |
|
|
| |
|
|
Receivables for customers, brokers dealers and
clearing organizations
|
|
|
(108,846 |
) |
|
|
326,824 |
|
|
|
465,926 |
|
|
|
| |
|
|
Receivables
|
|
|
23,887 |
|
|
|
(87,140 |
) |
|
|
(86,531 |
) |
|
|
| |
|
|
Mortgage loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Originations and purchases
|
|
|
(23,255,483 |
) |
|
|
(17,827,828 |
) |
|
|
(11,771,688 |
) |
|
|
| |
|
|
|
Sales and principal repayments
|
|
|
23,246,815 |
|
|
|
17,837,323 |
|
|
|
11,780,758 |
|
|
|
| |
|
|
Prepaid expenses and other current assets
|
|
|
26,978 |
|
|
|
43,818 |
|
|
|
(159,734 |
) |
|
|
| |
|
|
Accounts payable to customers, brokers and dealers
|
|
|
203,099 |
|
|
|
(40,507 |
) |
|
|
(154,799 |
) |
|
|
| |
|
|
Accounts payable, accrued expenses and other
|
|
|
(34,326 |
) |
|
|
56,149 |
|
|
|
57,608 |
|
|
|
| |
|
|
Accrued salaries, wages and payroll taxes
|
|
|
58,468 |
|
|
|
(42,772 |
) |
|
|
31,751 |
|
|
|
| |
|
|
Accrued income taxes
|
|
|
108,801 |
|
|
|
156,023 |
|
|
|
77,047 |
|
|
|
| |
|
|
Other, net
|
|
|
14,478 |
|
|
|
44,400 |
|
|
|
31,721 |
|
|
|
| |
|
|
| |
|
|
|
Net cash provided by operating activities
|
|
|
926,807 |
|
|
|
690,825 |
|
|
|
741,446 |
|
|
|
| |
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Purchases of available-for-sale securities
|
|
|
(11,434 |
) |
|
|
(14,614 |
) |
|
|
(7,241 |
) |
|
|
| |
|
Cash received from residual interests in
securitizations
|
|
|
193,606 |
|
|
|
140,795 |
|
|
|
67,070 |
|
|
|
| |
|
Cash proceeds from sale of previously securitized
residuals
|
|
|
53,391 |
|
|
|
142,486 |
|
|
|
– |
|
|
|
| |
|
Maturities of other available-for-sale securities
|
|
|
– |
|
|
|
– |
|
|
|
8,250 |
|
|
|
| |
|
Sales of other available-for-sale securities
|
|
|
15,410 |
|
|
|
14,081 |
|
|
|
23,173 |
|
|
|
| |
Purchases of property and equipment, net
|
|
|
(127,573 |
) |
|
|
(150,897 |
) |
|
|
(111,775 |
) |
|
|
| |
Payments made for business acquisitions, net of
cash acquired
|
|
|
(280,865 |
) |
|
|
(26,408 |
) |
|
|
(46,738 |
) |
|
|
| |
Other, net
|
|
|
26,332 |
|
|
|
19,896 |
|
|
|
8,228 |
|
|
|
| |
|
|
| |
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
(131,133 |
) |
|
|
125,339 |
|
|
|
(59,033 |
) |
|
|
| |
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Repayments of commercial paper
|
|
|
(4,618,853 |
) |
|
|
(9,925,516 |
) |
|
|
(10,622,011 |
) |
|
|
| |
Proceeds from issuance of commercial paper
|
|
|
4,618,853 |
|
|
|
9,925,516 |
|
|
|
10,622,011 |
|
|
|
| |
Payments on acquisition debt
|
|
|
(59,003 |
) |
|
|
(57,469 |
) |
|
|
(50,594 |
) |
|
|
| |
Dividends paid
|
|
|
(138,397 |
) |
|
|
(125,898 |
) |
|
|
(115,725 |
) |
|
|
| |
Acquisition of treasury shares
|
|
|
(519,862 |
) |
|
|
(317,570 |
) |
|
|
(462,938 |
) |
|
|
| |
Proceeds from issuance of common stock
|
|
|
119,956 |
|
|
|
126,325 |
|
|
|
195,233 |
|
|
|
| |
Other, net
|
|
|
(2,045 |
) |
|
|
(2,344 |
) |
|
|
140 |
|
|
|
| |
|
|
| |
|
|
|
Net cash used in financing activities
|
|
|
(599,351 |
) |
|
|
(376,956 |
) |
|
|
(433,884 |
) |
|
|
| |
|
|
|
Net increase in cash and cash equivalents
|
|
|
196,323 |
|
|
|
439,208 |
|
|
|
248,529 |
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
875,353 |
|
|
|
436,145 |
|
|
|
187,616 |
|
|
|
| |
|
|
|
Cash and cash equivalents at end of the year
|
|
$ |
1,071,676 |
|
|
$ |
875,353 |
|
|
$ |
436,145 |
|
|
|
| |
|
|
|
See accompanying notes to consolidated
financial statements.
– 38
Form
10-K – H&R
BLOCK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts in thousands, except per share amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Common Stock |
|
Preferred Stock |
|
Additional |
|
Other |
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
Paid-in |
|
Comprehensive |
|
Retained |
|
|
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Income (Loss) |
|
Earnings |
|
Shares |
|
Amount |
|
Total Equity |
|
|
|
|
Balances at April 30, 2001
|
|
|
217,945 |
|
|
$ |
2,179 |
|
|
|
– |
|
|
$ |
– |
|
|
$ |
419,957 |
|
|
$ |
(42,767 |
) |
|
$ |
1,449,022 |
|
|
|
(34,337 |
) |
|
$ |
(654,650 |
) |
|
$ |
1,173,741 |
|
|
|
|
Net income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
434,405 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Unrealized translation loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(875 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Change in net unrealized gain on marketable
securities
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
87,770 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Comprehensive income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
521,300 |
|
|
|
|
Stock options exercised
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
47,590 |
|
|
|
– |
|
|
|
– |
|
|
|
9,662 |
|
|
|
202,500 |
|
|
|
250,090 |
|
|
|
|
Restricted stock awards
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
237 |
|
|
|
– |
|
|
|
– |
|
|
|
17 |
|
|
|
400 |
|
|
|
637 |
|
|
|
|
Stock issued for ESPP
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
268 |
|
|
|
– |
|
|
|
– |
|
|
|
97 |
|
|
|
2,047 |
|
|
|
2,315 |
|
|
|
|
Acquisition of treasury shares
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(12,259 |
) |
|
|
(462,938 |
) |
|
|
(462,938 |
) |
|
|
|
Cash dividends paid – $.63 per share
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(115,725 |
) |
|
|
– |
|
|
|
– |
|
|
|
(115,725 |
) |
|
|
| |
|
|
|
Balances at April 30, 2002
|
|
|
217,945 |
|
|
|
2,179 |
|
|
|
– |
|
|
|
– |
|
|
|
468,052 |
|
|
|
44,128 |
|
|
|
1,767,702 |
|
|
|
(36,820 |
) |
|
|
(912,641 |
) |
|
|
1,369,420 |
|
|
|
|
Net income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
580,064 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Unrealized translation gain
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
17,415 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Change in net unrealized gain on marketable
securities
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(24,681 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Comprehensive income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
572,798 |
|
|
|
|
Stock options exercised
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
27,241 |
|
|
|
– |
|
|
|
– |
|
|
|
5,070 |
|
|
|
135,409 |
|
|
|
162,650 |
|
|
|
|
Restricted stock awards
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|
– |
|
|
|
– |
|
|
|
(64 |
) |
|
|
(1,306 |
) |
|
|
(1,301 |
) |
|
|
|
Stock issued for ESPP
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,095 |
|
|
|
– |
|
|
|
– |
|
|
|
94 |
|
|
|
2,515 |
|
|
|
3,610 |
|
|
|
|
Acquisition of treasury shares
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(6,624 |
) |
|
|
(317,570 |
) |
|
|
(317,570 |
) |
|
|
|
Cash dividends paid – $.70 per share
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(125,898 |
) |
|
|
– |
|
|
|
– |
|
|
|
(125,898 |
) |
|
|
| |
|
|
|
Balances at April 30, 2003
|
|
|
217,945 |
|
|
|
2,179 |
|
|
|
– |
|
|
|
– |
|
|
|
496,393 |
|
|
|
36,862 |
|
|
|
2,221,868 |
|
|
|
(38,344 |
) |
|
|
(1,093,593 |
) |
|
|
1,663,709 |
|
|
|
|
Net income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
697,897 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Unrealized translation gain
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
12,355 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Change in net unrealized gain on marketable
securities
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
8,736 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
Comprehensive income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
718,988 |
|
|
|
|
Stock options exercised
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
21,585 |
|
|
|
– |
|
|
|
– |
|
|
|
3,928 |
|
|
|
117,975 |
|
|
|
139,560 |
|
|
|
|
Restricted stock awards
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
385 |
|
|
|
– |
|
|
|
– |
|
|
|
72 |
|
|
|
2,103 |
|
|
|
2,488 |
|
|
|
|
Stock issued for ESPP
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
984 |
|
|
|
– |
|
|
|
– |
|
|
|
127 |
|
|
|
3,821 |
|
|
|
4,805 |
|
|
|
|
Stock-based compensation
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
25,718 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
25,718 |
|
|
|
|
Acquisition of treasury shares
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(10,633 |
) |
|
|
(519,862 |
) |
|
|
(519,862 |
) |
|
|
|
Cash dividends paid – $.78 per share
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(138,397 |
) |
|
|
– |
|
|
|
– |
|
|
|
(138,397 |
) |
|
|
| |
|
|
|
Balances at April 30, 2004
|
|
|
217,945 |
|
|
$ |
2,179 |
|
|
|
– |
|
|
$ |
– |
|
|
$ |
545,065 |
|
|
$ |
57,953 |
|
|
$ |
2,781,368 |
|
|
|
(44,850 |
) |
|
$ |
(1,489,556 |
) |
|
$ |
1,897,009 |
|
|
|
| |
|
|
|
See accompanying notes to consolidated
financial statements.
39 –
H&R
BLOCK – Form
10-K
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
operations: The operating subsidiaries
of H&R Block, Inc. (the “Company”) provide a
variety of financial services to the general public, principally
in the United States, but also in Canada, Australia and the
United Kingdom. Specifically, the Company offers tax return
preparation and electronic filing of tax returns; origination,
sale and servicing of non-prime and prime mortgages; investment
services through a broker-dealer; tax preparation and related
software, refund anticipation loan products offered by a
third-party lending institution; and accounting, tax and
consulting services to business clients.
Principles of
consolidation: The consolidated
financial statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
Some of the Company’s subsidiaries operate
in regulated industries, and their underlying accounting records
reflect the policies and requirements of these industries.
Reclassifications:
Certain reclassifications have been made to prior year amounts
to conform to the current year presentation. Revenues were
decreased $33.3 million and $32.0 million for the
years ended April 30, 2003 and 2002, respectively, related
to the reclassification of loan sale repurchase reserves from
other expenses and certain compensation and benefits expenses to
reduce gains on sales of mortgage assets. These
reclassifications had no effect on the results of operations or
shareholders’ equity as previously reported.
Management
estimates: The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and cash
equivalents: Cash and cash equivalents
include cash on hand, cash due from banks and securities
purchased under agreements to resell. For purposes of the
consolidated balance sheets and consolidated statements of cash
flows, all non-restricted highly liquid instruments purchased
with an original maturity of three months or less are considered
to be cash equivalents.
The Company’s broker-dealers purchase
securities under agreements to resell and account for them as
collateralized financings. The securities are carried at the
amounts at which the securities will be subsequently resold, as
specified in the respective agreements. Collateral relating to
investments in repurchase agreements is held by independent
custodian banks. The securities are revalued daily and
collateral added whenever necessary to bring market value of the
underlying collateral equal to or greater than the repurchase
amount specified in the contracts.
Cash and cash
equivalents – restricted:
Cash and cash equivalents – restricted consists
primarily of securities purchased under agreements to resell and
cash which has been segregated in a special reserve account for
the exclusive benefit of customers pursuant to federal
regulations under Rule 15c3-3 of the Securities Exchange Act of
1934. Also included are cash balances held for outstanding
commitments to fund mortgage loans and funds held to pay payroll
taxes on behalf of customers.
Marketable
securities – trading:
Certain marketable debt securities held by the Company’s
broker-dealer are classified as trading, carried at market value
(based on quoted prices) and marked to market through the
consolidated income statements. Certain residual interests in
securitizations of mortgage loans are classified as trading,
based on management’s intentions, are carried at market
value (based on discounted cash flow models) and marked to
market through the consolidated income statements. These
securities are included in prepaid expenses and other current
assets on the consolidated balance sheets.
Receivables from customers,
brokers, dealers and clearing organizations and accounts payable
to customers, brokers and dealers:
Customer receivables and payables consist primarily of amounts
due on margin and cash transactions. These receivables are
collateralized by customers’ securities held, which are not
reflected in the accompanying consolidated financial statements.
Receivables from brokers are collateralized by
securities in physical possession of, or on deposit with, the
Company or receivables from customers or other brokers. The
allowance for doubtful accounts represents an amount considered
by management to be adequate to cover potential losses.
Securities borrowed and securities loaned
transactions are generally reported as collateralized financing.
These transactions require deposits of cash and/or collateral
with the lender. Securities loaned consist of securities owned
by customers that were purchased on margin. When loaning
securities, cash collateral approximately equal to the value of
the securities loaned is received. The amount of cash collateral
is adjusted, as required, for market fluctuations in the value
of the securities loaned. Interest rates paid on the cash
collateral fluctuate as short-term interest rates change.
Receivables:
Receivables consist primarily of Business Services accounts
receivable and mortgage loans held for sale. Mortgage loans held
for sale are carried at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or
current investor-yield requirements calculated on an aggregate
basis. The allowance for doubtful accounts requires
management’s judgment regarding current market indicators
about general economic trends to establish an amount considered
by management to be adequate to cover potential losses related
to its non-mortgage loan receivable balance.
Marketable
securities – available-for-sale:
Certain marketable debt and equity securities are classified as
available-for-sale, based on management’s intentions, and
are carried at market value (based on quoted prices) with
unrealized gains and losses included in other comprehensive
income. If losses are determined to be other-than-temporary, the
security is written down to fair value with the realized loss,
net of any unrealized gain previously recorded in other
comprehensive income, included in the consolidated income
statements. The cost of marketable securities sold is determined
on the specific identification method. These securities are
included in other assets on the consolidated balance sheets.
Residual interests in
securitizations: Residual interests
classified as available-for-sale securities are carried at
market value (based on discounted cash flow models) with
unrealized gains included in other comprehensive income. The
residual interests are accreted over the estimated life of the
securitization structure. If the carrying value exceeds market
value, the residual is written down to market value with the
realized loss, net of any unrealized gain previously recorded in
other comprehensive income, included in gains on sales of
mortgage assets in the consolidated income statements.
The Company estimates future cash flows from
these residuals and values them utilizing assumptions it
believes to be consistent with those of unaffiliated third-party
purchasers. The Company estimates the fair value of residuals by
computing the present value of the excess of the
weighted-average interest rate on the loans sold over the sum of
(1) the coupon on the securitization bonds, (2) a
contractual servicing fee paid to the servicer of the loans
(which is usually the Company),
– 40
Form
10-K – H&R
BLOCK
(3) expected losses to be incurred on the
portfolio of the loans sold (as projected to occur) over the
lives of the loans, (4) fees payable to the trustee and
insurer, if applicable, (5) estimated collections of
prepayment penalty fee income, and (6) payments made to
investors on NIM bonds, if applicable. The residual valuation
takes into consideration the current and expected interest rate
environment, including projected changes in future interest
rates and the timing of such changes. Prepayment and loss
assumptions used in estimating the cash flows are based on
evaluation of the actual experience of the servicing portfolio,
the characteristics of the applicable loan portfolio, as well as
also taking into consideration the current and expected economic
and interest rate environment and its expected impact. The
estimated cash flows are discounted at an interest rate the
Company believes an unaffiliated third-party purchaser would
require as a rate of return on a financial instrument with a
similar risk profile. The Company evaluates, and adjusts if
necessary, the fair values of residual interests quarterly by
updating the actual and expected assumptions in the discounted
cash flow models based on current information and events and by
estimating, or validating with third-party experts, if
necessary, what a market participant would use in determining
the current fair value. To the extent that actual excess cash
flows are different from estimated excess cash flows, the fair
value of the residual would increase or decrease.
Beneficial interest in
Trusts – trading: The
beneficial interest in Trusts is recorded as a result of daily
non-prime whole loan sales to qualifying special purpose
entities (“Trusts”). The beneficial interest is
classified as a trading security, based on management’s
intentions, is carried at market value and is marked to market
through the consolidated income statements. Market value is
calculated as the present value of future cash flows which are
limited to the ultimate expected outcome from the disposition of
the loans by the Trusts.
Mortgage servicing
rights: Mortgage servicing rights
(“MSRs”) retained in the sale of mortgage loans are
recorded at allocated carrying amounts based on relative fair
values at the time of the sale. The MSRs are carried at the
lower of cost or fair value. Fair values of MSRs are determined
based on the present value of estimated future cash flows
related to servicing loans. Assumptions used in estimating the
value of MSRs include market discount rates and anticipated
prepayment speeds (including default), estimated ancillary fee
income and other economic factors. The prepayment speeds are
estimated using the Company’s historical experience and
third-party market sources. The MSRs are amortized to earnings
in proportion to, and over the period of, estimated net future
servicing income. MSRs are reviewed quarterly for potential
impairment. Impairment is assessed based on the fair value of
each risk stratum. MSRs are stratified by: the fiscal year of
the loan sale date (which approximates date of origination) and
loan type (6-month adjustable, 2- to 3-year adjustable and fixed
rate).
Property and
equipment: Buildings and equipment are
stated at cost and are depreciated over the estimated useful
lives of the assets using the straight-line method. Leasehold
improvements are stated at cost and are amortized over the
lesser of the term of the respective lease or the estimated
useful life, using the straight-line method. Estimated useful
lives are 15 to 40 years for buildings, 3 to 5 years
for computers and other equipment and up to 8 years for
leasehold improvements.
The Company capitalizes certain allowable costs
associated with software developed or obtained for internal use.
These costs are amortized over 36 months using the straight-line
method.
Intangible assets and
goodwill: The Company accounts for its
goodwill and intangible assets in accordance with Statement of
Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets,” (“SFAS 142”).
Under SFAS 142, amortization of both goodwill and
indefinite-life intangibles ceased and periodic impairment
testing of these assets is now required. The Company tests
goodwill and other indefinite life intangible assets for
impairment annually or more frequently, whenever events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value.
These tests were completed and no indications of goodwill
impairment were found during fiscal year 2004 or 2002. During
fiscal year 2003 however, impairment charges of
$24.0 million and $11.8 million were recorded in the
Investment Services and Business Services segments, respectively.
In addition, long-lived assets, including
intangible assets with finite lives, are assessed for impairment
whenever events or circumstances indicate the carrying value may
not be fully recoverable by comparing the carrying value to
future undiscounted cash flows. To the extent there is
impairment, analysis is performed based on several criteria,
including, but not limited to, revenue trends, discounted
operating cash flows and other operating factors to determine
the impairment amount. No material impairment adjustments to
other intangible assets or other long-lived assets were made
during the three-year period ended April 30, 2004. The
weighted-average life of intangible assets with finite lives is
10 years.
Commercial
paper: Short-term borrowings are used
to finance temporary liquidity needs and various financial
activities conducted by the Company. There was no commercial
paper outstanding at April 30, 2004 and 2003.
Litigation:
The Company’s policy is to routinely assess the likelihood
of any adverse judgments or outcomes related to legal matters,
as well as ranges of probable losses. A determination of the
amount of the reserves required, if any, for these contingencies
is made after thoughtful analysis of each known issue and an
analysis of historical experience in accordance with Statement
of Financial Accounting Standards No. 5, “Accounting
for Contingencies,” and related pronouncements. The Company
has recorded reserves related to certain legal matters for which
it is probable that a loss has been incurred and the range of
such loss can be estimated. With respect to other matters,
management has concluded that a loss is only reasonably possible
or remote and, therefore, no liability is recorded. In addition,
there are certain gain contingencies for which the Company has
not recorded an asset.
Income
taxes: The Company and its
subsidiaries file a consolidated Federal income tax return on a
calendar year basis. Deferred taxes are provided for temporary
differences between financial and tax reporting, which consist
principally of deductible goodwill, residual interests,
stock-based compensation, accrued expenses, deferred
compensation, mortgage servicing rights and allowances for
credit losses. Deferred taxes are included in prepaid expenses
and other current assets and other assets on the consolidated
balance sheets.
Revenue
recognition: Service revenues consist
primarily of fees for preparation and filing of tax returns,
system administration fees associated with refund anticipation
loans (“RALs”) and refund anticipation checks,
mortgage loan servicing fees, brokerage commissions and fees for
consulting services. Generally, service revenues are recorded in
the period in which the service is performed. Retail and online
tax preparation revenues are recorded when a completed return is
filed or accepted by the customer. RAL participation revenue is
recorded when the Company purchases its participation interest
in the RAL. Commission revenue is recognized on a trade-date
basis. Revenues for services rendered in connection with the
Business Services segment are recognized on a time and materials
basis.
Gains on sales of mortgage assets are recognized
when control of the assets are surrendered (when loans are sold
to Trusts) and are based on the difference between cash proceeds
and the allocated cost of the assets sold.
Interest income consists primarily of interest
earned on customer margin loan balances and mortgage loans, and
accretion income. Interest income on customer margin loan
balances is recognized daily as earned based on current rates
charged to customers for their margin balance. Accretion income
represents interest earned over the life of residual interests
using the effective interest method.
Product sales consist mainly of tax preparation
software, other personal productivity software and the Peace of
Mind (“POM”) guarantee program. Sales of
41 –
H&R
BLOCK – Form
10-K
software are recognized when the product is
ultimately sold to the end user. POM revenues are deferred and
recognized over the term of the guarantee based upon historic
and actual payment of claims.
Franchise royalties, which are based upon the
contractual percentages of franchise revenues, are recorded in
the period in which the franchise provides the service.
Revenue recognition is evaluated separately for
each unit in multiple-deliverable arrangements.
Advertising
expense: Advertising costs are
expensed the first time the advertisement is run.
Foreign currency
translation: Assets and liabilities of
foreign subsidiaries are translated into U.S. dollars at
exchange rates prevailing at the end of the year. Revenue and
expense transactions are translated at the average of exchange
rates in effect during the period. Translation gains and losses
are recorded in other comprehensive income.
Stock-based compensation
plans: Prior to fiscal year 2004, the
Company accounted for stock-based compensation plans under the
recognition and measurement provisions of APB Opinion
No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) as allowed under
Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation”
(“SFAS 123”). Effective May 1, 2003, the
Company adopted the fair value recognition provisions of
SFAS 123, under the prospective transition method as
described in Statement of Financial Accounting Standards
No. 148, “Accounting for Stock-Based
Compensation – Transition and Disclosure”
(“SFAS 148”). Stock-based compensation expense is
recognized on a straight-line basis over the vesting period. Had
compensation cost for all stock-based compensation plan grants
been determined in accordance with the fair value accounting
method prescribed under SFAS 123, the Company’s net income
and earnings per share would have been as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Net income as reported
|
|
$ |
697,897 |
|
|
$ |
580,064 |
|
|
$ |
434,405 |
|
|
|
|
Add: Stock-based compensation expense included in
reported net income, net of taxes
|
|
|
18,029 |
|
|
|
1,223 |
|
|
|
— |
|
|
|
|
Deduct: Total stock-based compensation expense
determined under fair value method for all awards, net of taxes
|
|
|
(30,662 |
) |
|
|
(21,025 |
) |
|
|
(34,045 |
) |
|
|
| |
|
|
|
Pro forma net income
|
|
$ |
685,264 |
|
|
$ |
560,262 |
|
|
$ |
400,360 |
|
|
|
| |
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
3.94 |
|
|
$ |
3.23 |
|
|
$ |
2.38 |
|
|
|
| |
Pro forma
|
|
|
3.87 |
|
|
|
3.12 |
|
|
|
2.19 |
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
3.86 |
|
|
$ |
3.15 |
|
|
$ |
2.31 |
|
|
|
| |
Pro forma
|
|
|
3.80 |
|
|
|
3.06 |
|
|
|
2.13 |
|
|
|
|
Derivative
activities: The Company records
derivative instruments as assets or liabilities, measured at
fair value. The recognition of gains or losses resulting from
changes in the values of those derivative instruments is based
on the use of each derivative instrument and whether it
qualifies for hedge accounting.
The Company uses financial instruments to
mitigate interest rate risk, loan commitments related to
mortgage loans which will be held for sale, and at times, other
instruments which are accounted for as derivatives. The Company
utilizes forward loan sale commitments, interest rate swaps and
interest rate caps throughout the year to manage its interest
rate risk. The Company does not enter into derivative
transactions for speculative or trading purposes.
Disclosure regarding certain
financial instruments: The carrying
values reported in the balance sheet for cash equivalents,
receivables, accounts payable, accrued liabilities and the
current portion of long-term debt approximate fair market value
due to the relative short-term nature of the respective
instruments. Residual interests are recorded at estimated fair
value as discussed above. See note 10 for fair value of
long-term debt.
New accounting
standards: In March 2004, the SEC
Staff issued Staff Accounting Bulletin No. 105,
“Application of Accounting Principles to Loan
Commitments,” (“SAB 105”). SAB 105
states that, when valuing loan commitments, registrants may not
include expected future cash flows related to the associated
servicing of the loans and, similarly, may not recognize any
other internally developed intangible assets as part of the loan
commitment derivative. The guidance in SAB 105 is effective
for new loan commitments entered into after March 31, 2004.
As such, the Company no longer records an asset related to the
fair value of its non-prime commitments to fund loans entered
into after March 31, 2004. The Company recorded an asset of
$.4 million and $11.4 million as of April 30,
2004 and 2003, respectively, related to the fair value of
non-prime loan commitments.
In April 2003, Statement of Financial Accounting
Standards No. 149, “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities”
(“SFAS 149”) was issued. SFAS 149 amends and
clarifies the accounting for derivative instruments and
incorporates many of the implementation issues cleared as a
result of the Derivatives Implementation Group process. The
provisions of this standard are effective for contracts entered
into or modified after June 30, 2003. The adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements.
In January 2003, the Financial Accounting
Standards Board (“FASB”) issued Interpretation
No. 46, “Consolidation of Variable Interest
Entities” (“FIN 46”). A revision of
FIN 46 was issued in December 2003. FIN 46 provides
guidance with respect to the consolidation of certain variable
interest entities (“VIEs”) whereby a VIE must be
consolidated by its primary beneficiary if the entity does not
effectively disperse risks among parties involved. The primary
beneficiary is one who absorbs a majority of the expected
losses, residual returns, or both as a result of holding
variable interests. FIN 46 also requires disclosures for
both the primary beneficiary of a VIE and other parties with
significant variable interests in the entity. The Mortgage
Operations segment has an interest in certain qualifying special
purpose entities (“QSPEs”) it currently does not
consolidate, which are exempt from the provisions of
FIN 46. See discussion of SFAS 140 exposure draft
below, which may affect this conclusion. Adoption of FIN 46
did not have a material impact on the Company’s
consolidated financial statements.
In August 2003, the Company adopted Emerging
Issues Task Force Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables”
(“EITF 00-21”). EITF 00-21 requires
consideration received in connection with arrangements involving
multiple revenue generating activities be measured and allocated
to each separate unit of accounting. Revenue recognition is
determined separately for each unit of accounting within the
arrangement. EITF 00-21 impacts revenue and expense
recognition related to tax preparation in the Company’s
premium tax offices where POM guarantees are included in the
price of a completed tax return. Prior to the adoption of
EITF 00-21, revenues and expenses related to POM guarantees
at premium offices were recorded in the same period as tax
preparation revenues. Beginning May 1, 2003, revenues and
direct expenses related to POM guarantees are now initially
deferred and recognized over the guarantee period in proportion
to POM claims paid. As a result of the adoption of
EITF 00-21, the Company recorded a cumulative effect of a
change in accounting principle of $6.4 million, net of
taxes of $4.0 million, as of May 1, 2003.
– 42
Form
10-K – H&R
BLOCK
Revenues recognized during fiscal year 2004,
which were initially recognized in prior periods and recorded as
part of the cumulative effect of a change in accounting
principle, totaled $36.3 million.
Pro forma results, as if EITF 00-21 had been
applied during fiscal years 2003 and 2002, are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s, except per share amounts) |
|
|
|
| Year ended April 30, 2003 |
|
As Reported |
|
Pro Forma |
|
|
|
|
Net income
|
|
$ |
580,064 |
|
|
$ |
578,418 |
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
3.23 |
|
|
$ |
3.22 |
|
|
|
| |
Diluted
|
|
|
3.15 |
|
|
|
3.14 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s, except per share amounts) |
|
|
|
| Year ended April 30, 2002 |
|
As Reported |
|
Pro Forma |
|
|
|
|
Net income
|
|
$ |
434,405 |
|
|
$ |
435,551 |
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
2.38 |
|
|
$ |
2.38 |
|
|
|
| |
Diluted
|
|
|
2.31 |
|
|
|
2.31 |
|
|
|
|
The FASB intends to reissue the exposure draft,
“Qualifying Special Purpose Entities and Isolation of
Transferred Assets, an Amendment of FASB Statement
No. 140,” during the third quarter of calendar year
2004. The purpose of the proposal is to provide more specific
guidance on the accounting for transfers of financial assets to
a QSPE.
Provisions in the first exposure draft, as well
as tentative decisions reached by the Board during its
deliberations, may require the Company to consolidate its
current QSPEs (the Trusts) established in its Mortgage
Operations segment. As of April 30, 2004, the Trusts had
assets and liabilities of $3.2 billion. The provisions of
the exposure draft are subject to FASB due process and are
subject to change. The Company will continue to monitor the
status of the exposure draft, and consider changes, if any, to
current structures as a result of the proposed rules.
The estimated impact of these new accounting
standards reflects current views. There may be material
differences between these estimates and the actual impact of
these standards.
43 –
H&R
BLOCK – Form
10-K
NOTE 2: BUSINESS COMBINATIONS AND
DISPOSALS
Significant acquisitions during fiscal years
2004, 2003 and 2002 are as follows. Each acquisition was
accounted for as a purchase and, accordingly, results for each
acquisition are included since the date of acquisition.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Business |
|
Asset Acquired |
|
Estimated Life |
|
Asset Value at Acquisition |
|
|
|
|
Fiscal year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Former major franchise territories
|
|
|
Property and equipment |
|
|
|
|
|
|
$ |
2,697 |
|
|
|
| |
|
|
Goodwill |
|
|
|
N/A |
|
|
|
205,313 |
|
|
|
| |
|
|
Customer relationships |
|
|
|
10 years |
|
|
|
18,167 |
|
|
|
| |
|
|
Noncompete agreements |
|
|
|
3 years |
|
|
|
17,069 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted average life |
|
|
|
7 years |
|
|
$ |
243,246 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounting firms
|
|
|
Goodwill |
|
|
|
N/A |
|
|
$ |
3,923 |
|
|
|
| |
|
|
Customer relationships |
|
|
|
10 years |
|
|
|
1,794 |
|
|
|
| |
|
|
Noncompete agreements |
|
|
|
15 years |
|
|
|
747 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted average life |
|
|
|
11 years |
|
|
$ |
6,464 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounting firms
|
|
|
Goodwill |
|
|
|
N/A |
|
|
$ |
2,404 |
|
|
|
| |
|
|
Customer relationships |
|
|
|
10 years |
|
|
|
2,242 |
|
|
|
| |
|
|
Noncompete agreements |
|
|
|
15 years |
|
|
|
728 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted average life |
|
|
|
11 years |
|
|
$ |
5,374 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
MyBenefitSource, Inc.
|
|
|
Goodwill |
|
|
|
N/A |
|
|
$ |
11,929 |
|
|
|
| |
|
|
Trade name |
|
|
|
5 years |
|
|
|
868 |
|
|
|
| |
|
|
Customer relationships |
|
|
|
8 years |
|
|
|
1,616 |
|
|
|
| |
|
|
Noncompete agreements |
|
|
|
5 years |
|
|
|
1,522 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted average life |
|
|
|
6 years |
|
|
$ |
15,935 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Equico Resources, LLC
|
|
|
Goodwill |
|
|
|
N/A |
|
|
$ |
28,383 |
|
|
|
| |
|
|
Trade name |
|
|
|
6 years |
|
|
|
1,560 |
|
|
|
| |
|
|
Customer relationships |
|
|
|
3 years |
|
|
|
2,510 |
|
|
|
| |
|
|
Noncompete agreements |
|
|
|
5 years |
|
|
|
4,370 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted average life |
|
|
|
5 years |
|
|
$ |
36,823 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounting firms
|
|
|
Goodwill |
|
|
|
N/A |
|
|
$ |
15,842 |
|
|
|
| |
|
|
Customer relationships |
|
|
|
10 years |
|
|
|
9,314 |
|
|
|
| |
|
|
Noncompete agreements |
|
|
|
15 years |
|
|
|
3,584 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted average life |
|
|
|
11 years |
|
|
$ |
28,740 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2004, we made payments of
$243.2 million related to the acquisition of assets and
stock in the franchise territories of ten former major
franchisees. The customer relationships will be amortized based
on estimated customer retention over ten years. The noncompete
agreements will be amortized on a straight-line basis over three
years. Goodwill recognized in these transactions is included in
the U.S. Tax Operations segment and all but
$3.9 million is deductible for tax purposes.
During fiscal year 2004, the Company acquired
three accounting firms. Cash payments related to these
acquisitions totaled $6.2 million, with additional cash
payments of $1.0 million over the next five years. The
purchase agreements also provide for possible future contingent
consideration of approximately $3.0 million. Goodwill
recognized in these transactions is deductible for tax purposes
and is included in the Business Services segment.
During fiscal year 2003, the Company acquired two
accounting firms. Cash payments related to these acquisitions
totaled $2.6 million, with additional cash payments of
$2.8 million over the next five years. The purchase
agreements also provide for possible future contingent
consideration of approximately $0.3 million. Goodwill
recognized in these transactions was $2.4 million, which is
deductible for tax purposes and is included in the Business
Services segment.
In December 2001, the Company acquired a
controlling interest in MyBenefitSource, Inc., an integrated
payroll and benefits processing company, with an option to
acquire the remaining shares. The Company also acquired 100% of
EquiCo Resources, LLC (“EquiCo”), a valuation, merger
and acquisition consulting company. Cash payments related to
these acquisitions totaled $28.5 million with additional
cash payments of $31.0 million over the next five years.
The purchase agreements also provide for possible future
contingent consideration of approximately $45.0 million,
which is based on achieving certain revenue, profitability and
working capital targets over the next six years, and such
consideration will be treated as purchase price if paid.
Goodwill recognized in these transactions is not deductible for
tax purposes and is included in the Business Services segment.
– 44
Form
10-K – H&R
BLOCK
During fiscal year 2002, the Company acquired six
accounting firms, giving the Business Services segment a
geographic presence in Seattle and San Francisco, as well
as expanding its existing presence in New York City and Dallas.
Cash payments related to these acquisitions totaled
$6.9 million, with additional cash payments of
$26.1 million over the next five years. The purchase
agreements also provide for possible future contingent
consideration of approximately $6.6 million, which is based
on achieving certain revenue and profitability over the next
five years, and such consideration will be treated as purchase
price if paid. Goodwill of $8.8 million is expected to be
fully deductible for tax purposes and is included in the
Business Services segment.
During fiscal year 2004, 2003 and 2002, the
Company made other acquisitions which were accounted for as
purchases with cash payments totaling $7.9 million,
$3.0 million and $1.6 million, respectively. Their
operations, which are not material, are included in the
consolidated income statements since the date of acquisition.
NOTE 3: EARNINGS PER SHARE
Basic earnings per share is computed using the
weighted-average number of common shares outstanding. The
dilutive effect of potential common shares outstanding is
included in diluted earnings per share. The computations of
basic and diluted earnings per share before change in accounting
principle are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Net income before change in accounting
|
|
$ |
704,256 |
|
|
$ |
580,064 |
|
|
$ |
434,405 |
|
|
|
| |
|
|
|
Basic weighted average common shares
|
|
|
177,076 |
|
|
|
179,638 |
|
|
|
182,903 |
|
|
|
|
Dilutive potential shares from stock options and
restricted stock
|
|
|
3,725 |
|
|
|
4,439 |
|
|
|
5,423 |
|
|
|
|
Convertible preferred stock
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
| |
|
|
|
Dilutive weighted average common shares
|
|
|
180,802 |
|
|
|
184,078 |
|
|
|
188,327 |
|
|
|
| |
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
3.98 |
|
|
$ |
3.23 |
|
|
$ |
2.38 |
|
|
|
| |
Diluted
|
|
|
3.90 |
|
|
|
3.15 |
|
|
|
2.31 |
|
|
|
|
Diluted earnings per share excludes the impact of
weighted-average common shares issuable upon the exercise of
stock options of 2.4 million, 2.6 million, and
0.7 million shares for 2004, 2003 and 2002, respectively,
because the options’ exercise prices were greater than the
average market price of the common shares and therefore, the
effect would be antidilutive.
NOTE 4: RECEIVABLES
The components of receivables from customers,
brokers, dealers and clearing organizations are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Gross receivables
|
|
$ |
626,179 |
|
|
$ |
518,558 |
|
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,103 |
) |
|
|
(1,521 |
) |
|
|
| |
|
|
| |
|
$ |
625,076 |
|
|
$ |
517,037 |
|
|
|
| |
|
|
|
The components of receivables are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Business Services accounts receivable
|
|
$ |
145,231 |
|
|
$ |
185,023 |
|
|
|
|
Mortgage loans held for sale
|
|
|
84,428 |
|
|
|
68,518 |
|
|
|
|
Loans to franchisees
|
|
|
35,872 |
|
|
|
33,341 |
|
|
|
|
Refund anticipation loans (“RALs”)
|
|
|
49,047 |
|
|
|
12,871 |
|
|
|
|
Software receivables
|
|
|
20,882 |
|
|
|
36,810 |
|
|
|
|
Other
|
|
|
65,868 |
|
|
|
89,054 |
|
|
|
| |
|
|
| |
|
|
401,328 |
|
|
|
425,617 |
|
|
|
|
Allowance for doubtful accounts
|
|
|
(38,266 |
) |
|
|
(17,038 |
) |
|
|
|
Lower of cost or market adjustment –
mortgage loans
|
|
|
(15,152 |
) |
|
|
(5,382 |
) |
|
|
| |
|
|
| |
|
$ |
347,910 |
|
|
$ |
403,197 |
|
|
|
| |
|
|
|
45 –
H&R
BLOCK – Form
10-K
NOTE 5: MARKETABLE SECURITIES
AVAILABLE-FOR-SALE
The amortized cost and market value of marketable
securities classified as available-for-sale at April 30,
2004 and 2003 are summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
|
|
| |
|
Cost |
|
Gains |
|
Losses(1) |
|
Value |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
|
Municipal bonds
|
|
$ |
8,846 |
|
|
$ |
27 |
|
|
$ |
78 |
|
|
$ |
8,795 |
|
|
$ |
11,959 |
|
|
$ |
516 |
|
|
$ |
8 |
|
|
$ |
12,467 |
|
|
|
|
Common stock
|
|
|
4,661 |
|
|
|
450 |
|
|
|
82 |
|
|
|
5,029 |
|
|
|
4,491 |
|
|
|
169 |
|
|
|
97 |
|
|
|
4,563 |
|
|
|
| |
|
|
| |
|
|
13,507 |
|
|
|
477 |
|
|
|
160 |
|
|
|
13,824 |
|
|
|
16,450 |
|
|
|
685 |
|
|
|
105 |
|
|
|
17,030 |
|
|
|
| |
|
|
|
Residual interests
|
|
|
98,462 |
|
|
|
112,511 |
|
|
|
– |
|
|
|
210,973 |
|
|
|
166,248 |
|
|
|
98,089 |
|
|
|
– |
|
|
|
264,337 |
|
|
|
| |
|
|
| |
|
$ |
111,969 |
|
|
$ |
112,988 |
|
|
$ |
160 |
|
|
$ |
224,797 |
|
|
$ |
182,698 |
|
|
$ |
98,774 |
|
|
$ |
105 |
|
|
$ |
281,367 |
|
|
|
| |
|
|
|
|
|
| (1) |
Gross unrealized losses have been in a
continuous loss position for less than 12 months. |
Proceeds from the sales of available-for-sale
securities were $68.8 million, $156.6 million and
$23.2 million during 2004, 2003 and 2002, respectively.
Gross realized gains on those sales during 2004, 2003 and 2002
were $41.8 million, $131.4 million and
$0.6 million, respectively; gross realized losses were
$0.1 million, $0.7 million and $0.2 million,
respectively.
Contractual maturities of available-for-sale debt
securities (municipal bonds) at April 30, 2004 occur at
varying dates over the next five to ten years. Because expected
maturities differ from contractual maturities due to the
issuers’ rights to prepay certain obligations or the
seller’s rights to call certain obligations, the first call
date, put date or auction date for municipal bonds and notes is
considered the contractual maturity date.
NOTE 6: MORTGAGE BANKING
ACTIVITIES
The Company originates mortgage loans and sells
most non-prime loans the same day the loans are funded to
Trusts. These Trusts meet the criteria of QSPEs and are
therefore not consolidated. The sale is recorded in accordance
with Statement of Financial Accounting Standards No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities”
(“SFAS 140”). The Trusts purchase the loans from
the Company utilizing five warehouse facilities arranged by the
Company. As a result of the whole loan sales to the Trusts, the
Company removes the mortgage loans from its balance sheet and
records the gain on the sale, cash and a beneficial interest in
Trusts, which represents the ultimate expected outcome from the
disposition of the loans. The beneficial interest in Trusts was
$137.8 million and $122.1 million at April 30,
2004 and 2003, respectively. The beneficial interest in Trusts
was reclassified from prepaid and other current assets to a
non-current asset on the April 30, 2003 balance sheet.
The Trusts, as directed by their third-party
beneficial interest holders, either sell the loans directly to
third-party investors or back to the Company to pool the loans
for securitization. The decision to complete a whole loan sale
or a securitization is dependent on market conditions. If the
Trusts choose to sell the mortgage loans, the Company receives
cash for its beneficial interest in Trusts. In a securitization
transaction, the Trusts transfer the loans to a consolidated
subsidiary of the Company, and the Company transfers its
beneficial interest in Trusts and the loans to a securitization
trust. The securitization trust meets the definition of a QSPE
and is therefore not consolidated. The securitization trust
issues bonds, which are supported by the cash flows from the
pooled loans, to third-party investors. The Company retains an
interest in the loans in the form of a residual interest and
usually assumes the first risk of loss for credit losses in the
loan pool. As the cash flows of the underlying loans and market
conditions change, the value of the Company’s residual
interest may also change, resulting in either additional
unrealized gains or impairment of the value of the residual
interests. These residual interests are classified as trading
securities and had no balance as of April 30, 2004 and 2003.
To accelerate the cash flows from its residual
interests, the Company securitizes the majority of its residual
interests in net interest margin (“NIM”) transactions.
In a NIM transaction, the residual interests are transferred to
another QSPE (“NIM trust”), which then issues bonds to
third-party investors. The proceeds from the bonds are returned
to the Company as payment for the residual interests. The bonds
are secured by the pooled residual interests and are obligations
of the NIM trust. The Company retains a subordinated interest in
the NIM trust, and receives cash flows on its residual interest
generally after the bonds issued to the third-party investors
are paid in full. Residual interests retained from NIM
securitizations may also be bundled and sold in a subsequent
securitization. These residual interests are classified as
available-for-sale securities (see note 5).
Prime mortgage loans are sold in whole loan
sales, servicing released, to third-party buyers.
– 46
Form
10-K – H&R
BLOCK
Activity related to residual interests in
securitizations consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Balance, beginning of year
|
|
$ |
264,337 |
|
|
$ |
365,371 |
|
|
|
|
Additions (resulting from NIM transactions)
|
|
|
9,007 |
|
|
|
753 |
|
|
|
|
Cash received
|
|
|
(193,606 |
) |
|
|
(140,795 |
) |
|
|
|
Cash received on sales of residual interests
|
|
|
(53,391 |
) |
|
|
(142,486 |
) |
|
|
|
Accretion
|
|
|
165,817 |
|
|
|
145,165 |
|
|
|
|
Impairments of fair value
|
|
|
(30,661 |
) |
|
|
(54,111 |
) |
|
|
|
Other
|
|
|
(6,203 |
) |
|
|
– |
|
|
|
|
Change in unrealized holding gains (losses)
arising during the period
|
|
|
55,673 |
|
|
|
90,440 |
|
|
|
| |
|
|
|
Balance, end of year
|
|
$ |
210,973 |
|
|
$ |
264,337 |
|
|
|
| |
|
|
|
The Company sold $23.2 billion and
$17.2 billion of mortgage loans in whole loan sales to the
Trusts during the years ended April 30, 2004 and 2003,
respectively. Gains totaling $716.7 million and
$663.6 million were recorded on these sales, respectively.
Residual interests valued at $328.0 million
and $542.5 million were securitized in NIM transactions
during the years ended April 30, 2004 and 2003,
respectively. Net cash proceeds of $310.4 million and
$541.8 million were received from the NIM transactions for
the years ended April 30, 2004 and 2003, respectively.
Total net additions to residual interests for the years ended
April 30, 2004 and 2003 were $9.0 million and
$0.8 million, respectively.
Cash flows from the residual interests of
$193.6 million and $140.8 million were received from
the securitization trusts for the years ended April 30,
2004 and 2003, respectively. An additional $53.4 million
and $142.5 million was received during fiscal years 2004
and 2003, respectively, as a result of the sale of previously
securitized residuals, as discussed below. Cash received on the
residual interests is included in investing activities on the
consolidated statements of cash flows.
During fiscal year 2004, the Company completed
sales of previously securitized residual interests and recorded
gains of $40.7 million. Cash proceeds of $53.4 million
were received from the transactions and a $1.5 million
residual interest was retained. These sales accelerate cash
flows from the residual interests, effectively realizing
previously recorded unrealized gains included in other
comprehensive income.
During fiscal year 2003, the Company completed
the sale of previously securitized residual interests and
recorded a gain of $130.9 million on the transaction. Cash
proceeds of $142.5 million were received from the
transaction and a residual interest of $57.4 million was
retained.
Residual interests are considered
available-for-sale securities and are therefore reported at fair
value. Gross unrealized holding gains represent the write-up of
residual interests as a result of lower interest rates, loan
losses or loan prepayments to date than most recently projected
in the Company’s valuation models.
Aggregate net unrealized gains on residual
interests, which had not yet been accreted into income, totaled
$112.5 million and $98.1 million at April 30,
2004 and 2003, respectively. These unrealized gains are recorded
net of deferred taxes in other comprehensive income, and may be
recognized in income in future periods either through accretion
or upon further securitization of the related residual interest.
In connection with securitization transactions,
the Company, as servicer, generally has a 10% clean-up call
option, whereby the Company, at its discretion, may repurchase
the outstanding loans in the securitization once the current
value of the loans is 10% or less of their original value.
During fiscal year 2004, the Company exercised call options on
residual interests initially recorded in 1996 and 1999. The
outstanding loans were repurchased from the securitization
trust, and the proceeds were used to pay off the remaining
bondholders. These repurchased loans may be included in future
sale transactions. At the time the call options were exercised,
the carrying value of the corresponding residual interests was
$5.9 million, and is included in “Other” in the
rollforward of residual interests above.
As the Company services non-prime mortgage loans,
$216.1 million and $186.9 million in foreclosure
advances, escrow advances and principal and interest advances
are included in prepaid expenses and other current assets on the
consolidated balance sheets as of April 30, 2004 and 2003,
respectively.
Activity related to mortgage servicing rights
consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Balance, beginning of year
|
|
$ |
99,265 |
|
|
$ |
81,893 |
|
|
|
|
Additions
|
|
|
84,274 |
|
|
|
65,345 |
|
|
|
|
Amortization
|
|
|
(69,718 |
) |
|
|
(47,107 |
) |
|
|
|
Impairments of fair value
|
|
|
– |
|
|
|
(866 |
) |
|
|
| |
|
|
|
Balance, end of year
|
|
$ |
113,821 |
|
|
$ |
99,265 |
|
|
|
| |
|
|
|
Estimated amortization of MSRs for fiscal years
2005, 2006, 2007, 2008 and 2009 is $58.5 million,
$29.1 million, $11.3 million, $3.9 million and
$.7 million, respectively. The carrying value of MSRs
approximates fair value at April 30, 2004 and 2003.
The key assumptions the Company used to
originally estimate the cash flows and values of the residual
interests are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Estimated annual prepayments
|
|
|
30-90% |
|
|
|
30-90% |
|
|
|
30-90% |
|
|
|
|
Estimated credit losses
|
|
|
3.63% |
|
|
|
3.60% |
|
|
|
3.06% |
|
|
|
|
Discount rate
|
|
|
16.25% |
|
|
|
13.03% |
|
|
|
14.43% |
|
|
|
|
Variable returns to third-party beneficial
interest holders
|
|
LIBOR forward curve at closing |
|
|
|
The key assumptions the Company used to estimate
the cash flows and values of the residual interests and MSRs at
April 30 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Estimated annual prepayments
|
|
|
25-90% |
|
|
|
20-90% |
|
|
|
|
Estimated credit losses
|
|
|
4.16% |
|
|
|
5.14% |
|
|
|
|
Discount rate – residual interests
|
|
|
19.09% |
|
|
|
24.22% |
|
|
|
|
Discount rate – MSRs
|
|
|
12.80% |
|
|
|
12.80% |
|
|
|
|
Variable returns to third-party Beneficial
interest holders
|
|
LIBOR forward curve at valuation
date |
|
Expected static pool credit losses are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans securitized in |
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
2003 |
|
2004 |
|
|
|
|
April 30, 2004
|
|
|
3.58% |
|
|
|
4.35% |
|
|
|
3.92% |
|
|
|
|
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
outstanding at April 30, 2004.
At April 30, 2004, the sensitivities of the
current fair value of the residuals and MSRs to 10% and 20%
adverse changes in the above key assumptions are presented in
the table below. These sensitivities are hypothetical and should
be
47 –
H&R
BLOCK – Form
10-K
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) |
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage Loans |
|
|
|
|
|
|
|
|
|
NIM |
|
Beneficial Interest |
|
Servicing |
|
|
|
|
Residuals |
|
in Trusts(1) |
|
Assets |
|
|
|
|
Carrying amount/fair value of residuals
|
|
$ |
210,973 |
|
|
$ |
137,757 |
|
|
|
$ 113,821 |
|
|
|
|
Weighted average life (in years)
|
|
|
1.4 |
|
|
|
2.2 |
|
|
|
1.2 |
|
|
|
|
Prepayments (including defaults):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Adverse 10% – $impact on fair value
|
|
$ |
6,352 |
|
|
$ |
(3,836 |
) |
|
|
$ (12,239) |
|
|
|
| |
Adverse 20% – $impact on fair value
|
|
|
11,458 |
|
|
|
(1,967 |
) |
|
|
(23,003) |
|
|
|
|
Credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Adverse 10% – $impact on fair value
|
|
$ |
(23,156 |
) |
|
$ |
(2,962 |
) |
|
|
Not applicable |
|
|
|
| |
Adverse 20% – $impact on fair value
|
|
|
(47,198 |
) |
|
|
(5,831 |
) |
|
|
Not applicable |
|
|
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Adverse 10% – $impact on fair value
|
|
$ |
(4,176 |
) |
|
$ |
(590 |
) |
|
|
$ (1,545) |
|
|
|
| |
Adverse 20% – $impact on fair value
|
|
|
(8,063 |
) |
|
|
(3,685 |
) |
|
|
(3,055) |
|
|
|
|
Variable interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Adverse 10% – $impact on fair value
|
|
$ |
(9,597 |
) |
|
$ |
(10,571 |
) |
|
|
Not applicable |
|
|
|
| |
Adverse 20% – $impact on fair value
|
|
|
(18,771 |
) |
|
|
(21,910 |
) |
|
|
Not applicable |
|
|
|
|
|
|
| (1) |
Adverse changes are minimized by the Trusts
ability to deliver loans into the Company’s forward loan
sale commitments. See Item 7a for additional
analysis. |
Mortgage loans which have been securitized at
April 30, 2004 and 2003, past due sixty days or more and
the related net credit losses are presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Principal |
|
Principal Amount of Loans |
|
Net Credit Losses |
|
|
|
|
Amount of Loans Outstanding |
|
60 Days or More Past |
|
(net of recoveries) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
Due April 30, |
|
Year ended April 30, |
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
Residual mortgage loans
|
|
$ |
15,732,953 |
|
|
$ |
19,835,641 |
|
|
$ |
1,286,069 |
|
|
$ |
1,308,991 |
|
|
$ |
159,253 |
|
|
$ |
130,065 |
|
|
|
|
Warehouse
|
|
|
3,244,141 |
|
|
|
2,186,224 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
| |
|
|
|
Total loans
|
|
$ |
18,977,094 |
|
|
$ |
22,021,865 |
|
|
$ |
1,286,069 |
|
|
$ |
1,308,991 |
|
|
$ |
159,253 |
|
|
$ |
130,065 |
|
|
|
| |
|
|
|
– 48
Form
10-K – H&R
BLOCK
|
|
| NOTE 7: |
GOODWILL AND INTANGIBLE ASSETS |
Goodwill and other indefinite life intangible
assets were tested for impairment in the fourth quarter of
fiscal year 2004. An independent valuation firm was engaged to
assist in the test for selected reporting units. No impairment
existed at any of the Company’s reporting units.
In light of unsettled market conditions and the
severe decline of comparable business valuations in the
investment industry, the Company engaged an independent
valuation firm in fiscal year 2003 to perform the goodwill
impairment test on the Investment Services segment in accordance
with SFAS 142. Based on this valuation, a goodwill
impairment charge of $24.0 million was recorded during
fiscal year 2003. Also during 2003, the Company’s annual
impairment test resulted in an impairment of $11.8 million
for a reporting unit within the Business Services segment. No
other impairments were identified.
Changes in the carrying amount of goodwill by
segment for the year ended April 30, 2004, are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) |
|
|
|
|
|
|
|
2003 |
|
Additions |
|
Other |
|
2004 |
|
|
|
|
U.S. Tax Operations
|
|
$ |
130,502 |
|
|
$ |
212,200 |
|
|
$ |
– |
|
|
$ |
342,702 |
|
|
|
|
Mortgage Operations
|
|
|
152,467 |
|
|
|
– |
|
|
|
– |
|
|
|
152,467 |
|
|
|
|
Business Services
|
|
|
279,650 |
|
|
|
31,525 |
|
|
|
– |
|
|
|
311,175 |
|
|
|
|
Investment Services
|
|
|
145,732 |
|
|
|
– |
|
|
|
– |
|
|
|
145,732 |
|
|
|
|
International Tax Operations
|
|
|
5,666 |
|
|
|
849 |
|
|
|
619 |
|
|
|
7,134 |
|
|
|
|
Corporate Operations
|
|
|
198 |
|
|
|
10 |
|
|
|
– |
|
|
|
208 |
|
|
|
| |
|
|
|
Total goodwill
|
|
$ |
714,215 |
|
|
$ |
244,584 |
|
|
$ |
619 |
|
|
$ |
959,418 |
|
|
|
| |
|
|
|
Additions to goodwill for U.S. Tax
Operations include $205.3 million related to asset and
stock acquisitions involving former major franchise territories
and other acquisitions of $6.9 million. Additions to
goodwill for Business Services primarily result from the final
contingent payment related to the acquisition of the non-attest
assets of McGladrey & Pullen, LLP of $26.7 million.
The components of intangible assets are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2004 |
|
April 30, 2003 |
|
|
|
|
|
|
|
Gross |
|
|
|
Gross |
|
|
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
|
|
|
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
|
|
|
U.S. Tax Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer relationships
|
|
$ |
18,167 |
|
|
$ |
(3,311 |
) |
|
$ |
– |
|
|
$ |
– |
|
|
|
| |
Noncompete agreements
|
|
|
17,069 |
|
|
|
(5,690 |
) |
|
|
– |
|
|
|
– |
|
|
|
|
Business Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer relationships
|
|
|
121,229 |
|
|
|
(56,313 |
) |
|
|
120,178 |
|
|
|
(44,192 |
) |
|
|
| |
Noncompete agreements
|
|
|
27,424 |
|
|
|
(8,670 |
) |
|
|
26,909 |
|
|
|
(6,157 |
) |
|
|
| |
Trade name – amortizing
|
|
|
1,450 |
|
|
|
(926 |
) |
|
|
1,450 |
|
|
|
(205 |
) |
|
|
| |
Trade name – non-amortizing
|
|
|
55,637 |
|
|
|
(4,868 |
) |
|
|
55,637 |
|
|
|
(4,868 |
) |
|
|
|
Investment Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer relationships
|
|
|
293,000 |
|
|
|
(129,408 |
) |
|
|
293,000 |
|
|
|
(100,108 |
) |
|
|
|
Corporate Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer relationships
|
|
|
844 |
|
|
|
(66 |
) |
|
|
172 |
|
|
|
(10 |
) |
|
|
| |
Noncompete agreements
|
|
|
295 |
|
|
|
(34 |
) |
|
|
60 |
|
|
|
(1 |
) |
|
|
| |
|
|
|
Total intangible assets
|
|
$ |
535,115 |
|
|
$ |
(209,286 |
) |
|
$ |
497,406 |
|
|
$ |
(155,541 |
) |
|
|
| |
|
|
|
Amortization of intangible assets for the year
ended April 30, 2004, 2003 and 2002 was $54.2 million,
$44.5 million and $43.4 million, respectively.
Estimated amortization of intangible assets for fiscal years
2005, 2006, 2007, 2008 and 2009 is $52.9 million,
$51.9 million, $43.0 million, $41.2 million and
$40.0 million, respectively. In fiscal year 2004, the
Company wrote off a $0.6 million trade name for a
subsidiary in its Business Services segment.
49 –
H&R
BLOCK – Form
10-K
NOTE 8: PROPERTY AND EQUIPMENT
The components of property and equipment are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Land
|
|
$ |
29,925 |
|
|
$ |
37,614 |
|
|
|
|
Buildings
|
|
|
78,136 |
|
|
|
81,631 |
|
|
|
|
Computers and other equipment
|
|
|
498,373 |
|
|
|
433,649 |
|
|
|
|
Capitalized software
|
|
|
137,784 |
|
|
|
113,826 |
|
|
|
|
Leasehold improvements
|
|
|
114,537 |
|
|
|
107,482 |
|
|
|
| |
|
|
| |
|
|
858,755 |
|
|
|
774,202 |
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
579,535 |
|
|
|
485,608 |
|
|
|
| |
|
|
| |
|
$ |
279,220 |
|
|
$ |
288,594 |
|
|
|
| |
|
|
|
Depreciation and amortization expense for 2004,
2003 and 2002 was $117.9 million, $117.3 million and
$110.9 million, respectively. Included in depreciation and
amortization expense is amortization of capitalized software of
$28.2 million, $29.9 million and $25.4 million
for fiscal years 2004, 2003 and 2002, respectively.
As of April 30, 2004 and 2003, the Company
has property and equipment under capital lease with a cost of
$14.1 million and $17.6 million, respectively, and
accumulated depreciation of $2.5 million and
$4.2 million, respectively. The Company has an agreement to
lease real estate and buildings under a noncancelable capital
lease for the next 16 years with an option to purchase
after three years.
NOTE 9: DERIVATIVE INSTRUMENTS
The Company, in the normal course of business,
enters into commitments with its customers to fund both
non-prime and prime mortgage loans for specified periods of time
at “locked-in” interest rates. These derivative
instruments represent commitments to fund loans (“rate-lock
equivalents”). The fair value of non-prime loan commitments
is calculated using a binomial option model. The fair value of
prime loan commitments is calculated based on the current market
pricing of short sales of FNMA, FHLMC and GNMA mortgage-backed
securities and the coupon rates of the eligible loans. At
April 30, 2004 and 2003, the Company recorded a liability
of $1.4 million and an asset of $12.5 million,
respectively, in receivables on its consolidated balance sheets
related to these prime and non-prime commitments. Changes in the
fair value totaling a loss of $13.9 million were recognized
in gains on sales of mortgage assets for fiscal year 2004. See
discussion of SAB 105 in note 1, related to a change
in accounting for non-prime loan commitments.
The Company sells short FNMA, FHLMC and GNMA
mortgage-backed securities to reduce its risk related to its
commitments to fund fixed-rate prime loans. The position on
certain or all of the fixed-rate mortgage loans is closed
approximately 10-15 days prior to standard Public
Securities Association (“PSA”) settlement dates. At
April 30, 2004 the Company recorded assets totaling
$2.1 million in prepaid expenses and other current assets
on its consolidated balance sheet related to these instruments.
Changes in the market value of these instruments are included in
gains on sales of mortgage assets and totaled $4.7 million
for fiscal year 2004.
The Company enters into forward loan commitments
to sell its non-prime mortgage loans to manage interest rate
risk. Forward loan sale commitments for non-prime loans are not
considered derivative instruments and are therefore not recorded
in our financial statements. The notional value and the contract
value of the forward commitments at April 30, 2004 were
$4.7 billion and $5.0 billion, respectively.
The Company entered into an agreement with
Household Tax Masters, Inc. (“Household”) during
fiscal year 2003, whereby the Company waived its right to
purchase any participation interests in and receive license fees
relating to RALs during the period January 1 through
April 30, 2003. In consideration for waiving these rights,
the Company received a series of payments from Household,
subject to certain adjustments based on delinquency rates on
RALs made by Household through December 31, 2003. This
adjustment provision was accounted for as a derivative and was
marked-to-market monthly through December 31, 2003.
Accordingly, during fiscal year 2004, the Company recognized
$6.5 million of revenues related to this instrument. The
final settlement in accordance with this agreement was received
in January 2004. A receivable of $5.2 million was included
on the consolidated balance sheet as of April 30, 2003.
None of the derivative instruments qualify for
hedge accounting treatment as of April 30, 2004 and 2003.
– 50
Form
10-K – H&R
BLOCK
The components of long-term debt and capital
lease obligations at year end are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| April 30, |
|
2004 |
|
2003 |
|
|
|
|
Senior Notes, 8 1/2%, due April 2007
|
|
$ |
498,225 |
|
|
$ |
497,625 |
|
|
|
|
Senior Notes, 6 3/4%, due November 2004
|
|
|
249,975 |
|
|
|
249,925 |
|
|
|
|
Business Services acquisition obligations, due
from August 2004 to January 2008
|
|
|
60,768 |
|
|
|
115,874 |
|
|
|
|
Mortgage notes
|
|
|
– |
|
|
|
1,543 |
|
|
|
|
Capital lease obligations
|
|
|
12,512 |
|
|
|
13,013 |
|
|
|
| |
|
|
| |
|
|
821,480 |
|
|
|
877,980 |
|
|
|
|
Less: Current portion
|
|
|
275,669 |
|
|
|
55,678 |
|
|
|
| |
|
|
| |
|
$ |
545,811 |
|
|
$ |
822,302 |
|
|
|
| |
|
|
|
On April 13, 2000, the Company issued
$500.0 million of 8 1/2% Senior Notes under a
shelf registration statement. The Senior Notes are due
April 15, 2007, and are not redeemable prior to maturity.
The net proceeds of this transaction were used to repay a
portion of the short-term borrowings that initially funded the
acquisition of OLDE Financial Corporation and Financial
Marketing Services, Inc. (collectively, “OLDE”).
On October 21, 1997, the Company issued
$250.0 million of 6 3/4% Senior Notes under a
shelf registration statement. The Senior Notes are due
November 1, 2004, and are not redeemable prior to maturity.
The net proceeds of this transaction were used to repay
short-term borrowings, which initially funded the acquisition of
Option One Mortgage Corporation (“Option One”).
The Company has obligations related to Business
Services acquisitions of $60.8 million and
$115.9 million at April 30, 2004 and 2003,
respectively. The current portion of these amounts is included
in the current portion of long-term debt on the consolidated
balance sheet. The long-term portions are due from August 2005
to January 2008.
The Company has a capitalized lease obligation of
$12.5 million at April 30, 2004 that is collateralized
by land and buildings. The obligation is due in 16 years.
The aggregate payments required to retire
long-term debt are $275.7 million, $23.5 million,
$510.7 million, $1.1 million, $0.6 million and
$9.9 million in 2005, 2006, 2007, 2008, 2009 and beyond,
respectively.
Based upon borrowing rates currently available
for indebtedness with similar terms, the fair value of long-term
debt was approximately $893.5 million and
$915.4 million at April 30, 2004 and 2003,
respectively.
|
|
| NOTE 11: |
OTHER NONCURRENT LIABILITIES |
The Company has deferred compensation plans that
permit directors and certain employees to defer portions of
their compensation and accrue income on the deferred amounts.
The compensation, together with Company matching of deferred
amounts, has been accrued. Included in other noncurrent
liabilities are $93.4 million and $65.4 million at
April 30, 2004 and 2003, respectively, reflecting the
liability under these plans. The Company purchases whole-life
insurance contracts on certain director and employee
participants to recover distributions made or to be made under
the plans and records the cash surrender value of the policies
in other noncurrent assets.
The Company has recorded $280.0 million and
$281.7 million for obligations to certain government
agencies at April 30, 2004 and 2003, respectively.
In connection with the Company’s acquisition
of the non-attest assets of McGladrey & Pullen, LLP
(“M&P”) in August 1999, the Company assumed
certain pension liabilities related to M&P’s retired
partners. The Company makes payments in varying amounts on a
monthly basis. Included in other noncurrent liabilities at
April 30, 2004 and 2003 are $17.5 million and
$19.5 million, respectively, related to this liability.
NOTE 12: STOCKHOLDERS’
EQUITY
On June 20, 2001, the Company’s Board
of Directors declared a two-for-one stock split of its Common
Stock in the form of a 100% stock distribution effective
August 1, 2001, to shareholders of record as of the close
of business on July 10, 2001. All share and per share
amounts have been adjusted to reflect the retroactive effect of
the stock split.
The Company is authorized to issue
6.0 million shares of Preferred Stock, without par value.
At April 30, 2004, the Company had 5.6 million shares
of authorized but unissued Preferred Stock. Of the unissued
shares, 0.6 million shares have been designated as
Participating Preferred Stock in connection with the
Company’s shareholder rights plan.
On March 8, 1995, the Board of Directors
authorized the issuance of a series of 0.5 million shares
of nonvoting Preferred Stock designated as Convertible Preferred
Stock, without par value. In April 1995, 0.4 million shares
of Convertible Preferred Stock were issued in connection with an
acquisition. In addition, options to
purchase 51,828 shares of Convertible Preferred Stock
were issued as a part of the acquisition and 37,399 shares
of Convertible Preferred Stock were issued in connection with
these options. Each share of Convertible Preferred Stock became
convertible on April 5, 1998 into four shares of Common
Stock of the Company (eight shares after the August 1, 2001
stock split), subject to adjustment upon certain events. The
holders of the Convertible Preferred Stock are not entitled to
receive dividends paid in cash, property or securities and, in
the event of any dissolution, liquidation or wind-up of the
Company, will share ratably with the holders of Common Stock
then outstanding in the assets of the Company after any
distribution or payments are made to the holders of
Participating Preferred Stock or the holders of any other class
or series of stock of the Company with preference over the
Common Stock.
The Company grants restricted shares to selected
employees under its stock-based compensation plans. Upon the
grant of restricted shares, unearned compensation is recorded as
an offset to additional paid in capital and is amortized as
compensation expense over the restricted period. The balance of
unearned compensation related to restricted shares at
April 30, 2004 was $15.0 million.
51 –
H&R
BLOCK – Form
10-K
|
|
| NOTE 13: |
COMPREHENSIVE INCOME |
Statement of Financial Accounting Standards
No. 130, “Reporting Comprehensive Income,”
establishes standards for reporting and displaying comprehensive
income and its components in stockholders’ equity. The
Company’s comprehensive income is comprised of net income,
foreign currency translation adjustments and the change in the
net unrealized gain or loss on available-for-sale marketable
securities. Included in stockholders’ equity at
April 30, 2004 and 2003, the net unrealized holding gain on
available-for-sale securities was $69.7 million and
$61.0 million, respectively, and the foreign currency
translation adjustment was $(11.8) million and
$(24.1) million, respectively. The net unrealized holding
gain on available-for-sale securities relates primarily to
residual interests in securitizations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Net income
|
|
$ |
697,897 |
|
|
$ |
580,064 |
|
|
$ |
434,405 |
|
|
|
|
Unrealized gains on securities (less applicable
taxes (benefit) of $5,412, ($15,290) and $56,156):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized holding gains arising during the
period (less applicable taxes of $64,174, $70,983 and $58,248)
|
|
|
103,886 |
|
|
|
114,885 |
|
|
|
92,629 |
|
|
|
| |
Less: Reclassification adjustment for gains
included in income (less applicable taxes of $58,762, $86,273
and $2,092)
|
|
|
(95,150 |
) |
|
|
(139,566 |
) |
|
|
(4,859 |
) |
|
|
|
Change in foreign currency translation adjustments
|
|
|
12,355 |
|
|
|
17,415 |
|
|
|
(875 |
) |
|
|
| |
|
|
|
Comprehensive income
|
|
$ |
718,988 |
|
|
$ |
572,798 |
|
|
$ |
521,300 |
|
|
|
| |
|
|
|
|
|
| NOTE 14: |
STOCK-BASED COMPENSATION AND RETIREMENT
BENEFITS |
The Company has four stock-based compensation
plans: the 2003 Long-Term Executive Compensation Plan, the 1989
Stock Option Plan for Outside Directors, the 1999 Stock Option
Plan for Seasonal Employees, and the 2000 Employee Stock
Purchase Plan (“ESPP”). The shareholders have approved
all of the Company’s stock-based compensation plans.
The 2003 Plan replaced the 1993 Long-Term
Executive Compensation Plan, effective July 1, 2003. The
1993 Plan terminated at that time, except with respect to
outstanding awards thereunder. The shareholders had approved the
1993 Plan in September 1993 to replace the 1984 Long-Term
Executive Compensation Plan, which terminated at that time
except with respect to outstanding awards thereunder. Under the
2003 and 1989 plans, options may be granted to selected
employees and outside directors to purchase the Company’s
Common Stock for periods not exceeding 10 years at a price
that is not less than 100% of fair market value on the date of
the grant. Options granted under the Plans are exercisable
either (1) starting one year after the date of the grant,
(2) starting one, two or three years after the date of the
grant on a cumulative basis at the annual rate of 331/3% of the
total number of option shares, or (3) starting three years
after the date of the grant on a cumulative basis at the rate of
40%, 30%, and 30% over the following three years. In addition,
certain option grants have accelerated vesting provisions based
on the Company’s stock price reaching specified levels.
Under the 2003 and 1989 plans, restricted shares
of the Company’s common stock may be granted to selected
employees. Restricted shares granted vest either
(1) starting one or three years after the grant on a
cumulative basis at an annual rate of 331/3% of the total number
of shares, or (2) at the end of three years.
The 1999 Stock Option Plan for Seasonal Employees
provided for the grant of options on June 30, 2003, 2002
and 2001 at the market price on the date of the grant. The
options are exercisable during September through November in
each of the two years following the calendar year of the grant,
subject to certain conditions.
Changes during the years ended April 30,
2004, 2003 and 2002 under the stock-based compensation plans
were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
|
|
Shares |
|
Exercise Price |
|
Shares |
|
Exercise Price |
|
Shares |
|
Exercise Price |
|
|
|
|
Options outstanding, beginning of year
|
|
|
15,772 |
|
|
$ |
32.14 |
|
|
|
15,910 |
|
|
$ |
26.33 |
|
|
|
18,908 |
|
|
$ |
20.40 |
|
|
|
|
Options granted
|
|
|
3,744 |
|
|
|
44.05 |
|
|
|
5,364 |
|
|
|
44.32 |
|
|
|
8,816 |
|
|
|
32.85 |
|
|
|
|
Options exercised
|
|
|
(3,927 |
) |
|
|
29.11 |
|
|
|
(5,098 |
) |
|
|
24.65 |
|
|
|
(9,659 |
) |
|
|
19.82 |
|
|
|
|
Options expired/cancelled
|
|
|
(1,107 |
) |
|
|
34.51 |
|
|
|
(404 |
) |
|
|
34.53 |
|
|
|
(2,155 |
) |
|
|
30.21 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year
|
|
|
14,482 |
|
|
|
35.86 |
|
|
|
15,772 |
|
|
|
32.14 |
|
|
|
15,910 |
|
|
|
26.33 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares exercisable, end of year
|
|
|
6,668 |
|
|
|
30.78 |
|
|
|
6,836 |
|
|
|
25.21 |
|
|
|
6,410 |
|
|
|
20.46 |
|
|
|
|
Restricted shares granted
|
|
|
514 |
|
|
|
43.93 |
|
|
|
45 |
|
|
|
44.64 |
|
|
|
17 |
|
|
|
36.85 |
|
|
|
|
Restricted shares vested
|
|
|
72 |
|
|
|
23.79 |
|
|
|
63 |
|
|
|
21.02 |
|
|
|
81 |
|
|
|
19.56 |
|
|
|
|
Shares reserved for future option or restricted
stock grants, end of year
|
|
|
9,880 |
|
|
|
|
|
|
|
14,563 |
|
|
|
|
|
|
|
19,523 |
|
|
|
|
|
|
|
|
– 52
Form
10-K – H&R
BLOCK
A summary of stock options outstanding and
exercisable at April 30, 2004 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in 000s) |
|
|
|
|
|
|
|
Outstanding |
|
Exercisable |
|
|
|
|
|
Number |
|
Weighted-Average |
|
Weighted- |
|
Number |
|
Weighted- |
|
|
|
|
Outstanding |
|
Remaining |
|
Average |
|
Exercisable |
|
Average |
|
|
|
|
at April 30 |
|
Contractual Life |
|
Exercise Price |
|
at April 30 |
|
Exercise Price |
|
|
|
|
$ 16.13 – 21.91
|
|
|
2,292 |
|
|
|
4 years |
|
|
$ |
18.22 |
|
|
|
2,135 |
|
|
$ |
18.08 |
|
|
|
|
$ 22.13 – 27.81
|
|
|
1,693 |
|
|
|
5 years |
|
|
|
25.94 |
|
|
|
1,092 |
|
|
|
25.82 |
|
|
|
|
$ 32.10 – 39.96
|
|
|
3,447 |
|
|
|
8 years |
|
|
|
33.41 |
|
|
|
1,613 |
|
|
|
33.56 |
|
|
|
|
$ 40.00 – 46.26
|
|
|
6,814 |
|
|
|
9 years |
|
|
|
44.79 |
|
|
|
1,828 |
|
|
|
46.11 |
|
|
|
|
$ 47.00 – 58.95
|
|
|
236 |
|
|
|
10 years |
|
|
|
56.60 |
|
|
|
– |
|
|
|
– |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
14,482 |
|
|
|
|
|
|
|
|
|
|
|
6,668 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2000 ESPP provides the option to purchase
shares of the Company’s Common Stock through payroll
deductions to a majority of the employees of subsidiaries of the
Company. The purchase price of the stock is 90% of the lower of
either the fair market value of the Company’s Common Stock
on the first trading day within the Option Period or on the last
trading day within the Option Period. The Option Periods are
six-month periods beginning January 1 and July 1 each year.
During fiscal years 2004 and 2003, 127,246 and
93,657 shares, respectively, were purchased under the ESPP
out of a total authorized 6.0 million shares.
For purposes of computing actual fiscal year 2004
compensation expense and the pro forma effects for fiscal years
2003 and 2002 of stock compensation plans under the fair value
accounting method, disclosed in note 1, the fair value of
each stock option grant or purchase right grant was estimated on
the date of the grant using the Black-Scholes option pricing
model. The weighted-average fair value of stock options granted
during 2004, 2003 and 2002 was $7.58, $8.29 and $5.77,
respectively. The weighted-average fair value of purchase rights
granted during 2004, 2003 and 2002 was $9.96, $9.02 and $5.88,
respectively. The following weighted-average assumptions were
used for stock option grants and purchase right grants during
the following periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Stock option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Risk-free interest rate
|
|
|
1.76% |
|
|
|
3.37% |
|
|
|
4.48% |
|
|
|
| |
Expected life
|
|
|
3 years |
|
|
|
4 years |
|
|
|
3 years |
|
|
|
| |
Expected volatility
|
|
|
31.65% |
|
|
|
29.04% |
|
|
|
28.81% |
|
|
|
| |
Dividend yield
|
|
|
1.65% |
|
|
|
1.50% |
|
|
|
1.84% |
|
|
|
|
Purchase right grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Risk-free interest rate
|
|
|
.97% |
|
|
|
1.45% |
|
|
|
2.70% |
|
|
|
| |
Expected life
|
|
|
6 months |
|
|
|
6 months |
|
|
|
6 months |
|
|
|
| |
Expected volatility
|
|
|
38.14% |
|
|
|
44.38% |
|
|
|
33.07% |
|
|
|
| |
Dividend yield
|
|
|
1.55% |
|
|
|
1.60% |
|
|
|
1.60% |
|
|
|
|
The Company has 401(K) defined contribution plans
covering all full-time employees following the completion of an
eligibility period. Company contributions to these plans are
discretionary and totaled $28.9 million, $20.7 million
and $15.5 million for fiscal years 2004, 2003 and 2002,
respectively.
NOTE 15: SHAREHOLDER RIGHTS
PLAN
On July 25, 1998, the rights under a
shareholder rights plan, adopted by the Company’s Board of
Directors on March 25, 1998, became effective. The 1998
plan was adopted to deter coercive or unfair takeover tactics
and to prevent a potential acquirer from gaining control of the
Company without offering a fair price to all of the
Company’s stockholders. Under the 1998 plan, a dividend of
one right (a “Right”) per share was declared and paid
on each share of the Company’s Common Stock outstanding on
July 25, 1998. Rights automatically attach to shares issued
after such date.
Under the 1998 plan, a Right becomes exercisable
when a person or group of persons acquires beneficial ownership
of 15% or more of the outstanding shares of the Company’s
Common Stock without the prior written approval of the
Company’s Board of Directors (an “Unapproved Stock
Acquisition”), and at the close of business on the tenth
business day following the commencement of, or the public
announcement of an intent to commence, a tender offer that would
result in an Unapproved Stock Acquisition. The Company may,
prior to any Unapproved Stock Acquisition, amend the plan to
lower such 15% threshold to not less than the greater of
(1) any percentage greater than the largest percentage of
beneficial ownership by any person or group of persons then
known by the Company, and (2) 10% (in which case the
acquisition of such lower percentage of beneficial ownership
then constitutes an Unapproved Stock Acquisition and the Rights
become exercisable). When exercisable, the registered holder of
each Right may purchase from the Company one two-hundredth of a
share of a class of the Company’s Participating Preferred
Stock, without par value, at a price of $107.50, subject to
adjustment. The registered holder of each Right then also has
the right (the “Subscription Right”) to purchase for
the exercise price of the Right, in lieu of shares of
Participating Preferred Stock, a number of shares of the
Company’s Common Stock having a market value equal to twice
the exercise price of the Right. Following an Unapproved Stock
Acquisition, if the Company is involved in a merger, or 50% or
more of the Company’s assets or earning power are sold, the
registered holder of each Right has the right (the “Merger
Right”) to purchase for the exercise price of the Right a
number of shares of the common stock of the surviving or
purchasing company having a market value equal to twice the
exercise price of the Right.
After an Unapproved Stock Acquisition, but before
any person or group of persons acquires 50% or more of the
outstanding shares of the Company’s Common Stock, the Board
of Directors may exchange all or part of the then outstanding
and exercisable Rights for Common Stock at an exchange ratio of
one share of Common Stock per Right (the “Exchange”).
Upon any such Exchange, the right of any holder to exercise a
Right terminates. Upon the occurrence of any of the events
giving rise to the exercisability of the Subscription Right or
the
53 –
H&R
BLOCK – Form
10-K
Merger Right or the ability of the Board of
Directors to effect the Exchange, the Rights held by the
acquiring person or group under the new plan will become void as
they relate to the Subscription Right, the Merger Right or the
Exchange.
The Company may redeem the Rights at a price of
$.000625 per Right at any time prior to the earlier of
(1) an Unapproved Stock Acquisition, or (2) the
expiration of the rights. The Rights under the plan will expire
on March 25, 2008, unless extended by the Board of
Directors. Until a Right is exercised, the holder thereof, as
such, will have no rights as a stockholder of the Company,
including the right to vote or to receive dividends. The
issuance of the Rights alone has no dilutive effect and does not
affect reported earnings per share.
NOTE 16: INTEREST INCOME AND INTEREST
EXPENSE
The components of interest income are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Mortgage loans
|
|
$ |
5,064 |
|
|
$ |
5,421 |
|
|
$ |
6,609 |
|
|
|
|
Accretion – residual interests
|
|
|
168,029 |
|
|
|
145,165 |
|
|
|
50,583 |
|
|
|
|
Accretion – beneficial interest
|
|
|
167,705 |
|
|
|
103,294 |
|
|
|
70,668 |
|
|
|
|
Broker-dealer activities
|
|
|
33,408 |
|
|
|
37,300 |
|
|
|
67,849 |
|
|
|
|
Other
|
|
|
4,858 |
|
|
|
6,005 |
|
|
|
10,724 |
|
|
|
| |
|
|
| |
|
$ |
379,064 |
|
|
$ |
297,185 |
|
|
$ |
206,433 |
|
|
|
| |
|
|
|
The components of interest expense are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Acquisition debt
|
|
$ |
68,816 |
|
|
$ |
72,766 |
|
|
$ |
79,002 |
|
|
|
|
Accretion of liabilities and other
|
|
|
7,517 |
|
|
|
7,724 |
|
|
|
12,588 |
|
|
|
|
RAL-related
|
|
|
4,482 |
|
|
|
3,244 |
|
|
|
3,902 |
|
|
|
|
Mortgage loans
|
|
|
1,836 |
|
|
|
3,229 |
|
|
|
4,955 |
|
|
|
|
Margin lending
|
|
|
1,358 |
|
|
|
4,830 |
|
|
|
14,744 |
|
|
|
|
Loans to franchises
|
|
|
547 |
|
|
|
851 |
|
|
|
950 |
|
|
|
| |
|
|
| |
|
$ |
84,556 |
|
|
$ |
92,644 |
|
|
$ |
116,141 |
|
|
|
| |
|
|
|
NOTE 17: INCOME TAXES
The components of income upon which domestic and
foreign income taxes have been provided are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Domestic
|
|
$ |
1,151,632 |
|
|
$ |
976,078 |
|
|
$ |
709,940 |
|
|
|
|
Foreign
|
|
|
12,525 |
|
|
|
10,999 |
|
|
|
6,900 |
|
|
|
| |
|
|
| |
|
$ |
1,164,157 |
|
|
$ |
987,077 |
|
|
$ |
716,840 |
|
|
|
| |
|
|
|
Deferred income tax provisions
(benefits) reflect the impact of temporary differences
between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. The
current and deferred components of taxes on income are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
421,787 |
|
|
$ |
415,083 |
|
|
$ |
335,082 |
|
|
|
| |
State
|
|
|
41,169 |
|
|
|
29,608 |
|
|
|
33,116 |
|
|
|
| |
Foreign
|
|
|
577 |
|
|
|
8,056 |
|
|
|
3,925 |
|
|
|
| |
|
|
| |
|
|
463,533 |
|
|
|
452,747 |
|
|
|
372,123 |
|
|
|
| |
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(3,305 |
) |
|
|
(42,512 |
) |
|
|
(80,275 |
) |
|
|
| |
State
|
|
|
(323 |
) |
|
|
(2,534 |
) |
|
|
(8,416 |
) |
|
|
| |
Foreign
|
|
|
(4 |
) |
|
|
(688 |
) |
|
|
(997 |
) |
|
|
| |
|
|
| |
|
|
(3,632 |
) |
|
|
(45,734 |
) |
|
|
(89,688 |
) |
|
|
| |
|
|
|
Total provision for income taxes before change in
accounting principle
|
|
|
459,901 |
|
|
|
407,013 |
|
|
|
282,435 |
|
|
|
|
Income tax on cumulative effect of change in
accounting principle
|
|
|
(4,031 |
) |
|
|
– |
|
|
|
– |
|
|
|
|
Income tax included in comprehensive income
|
|
|
5,412 |
|
|
|
(15,290 |
) |
|
|
56,156 |
|
|
|
| |
|
|
|
Total provision for income taxes
|
|
$ |
461,282 |
|
|
$ |
391,723 |
|
|
$ |
338,591 |
|
|
|
| |
|
|
|
Unremitted earnings of foreign subsidiaries
totaled $89.5 million at April 30, 2004. Management
intends to indefinitely reinvest foreign earnings, therefore, a
provision has not been made for income taxes which might be
payable upon remittance of such earnings. Moreover, due to the
availability of foreign income tax credits, management believes
the amount of federal income taxes would be immaterial in the
event foreign earnings were repatriated.
– 54
Form
10-K – H&R
BLOCK
The following table reconciles the federal
statutory tax expense to the Company’s income tax expense:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Statutory tax
|
|
$ |
407,455 |
|
|
$ |
345,477 |
|
|
$ |
250,894 |
|
|
|
|
Increases (reductions) in income taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
State income taxes, net of Federal income tax
benefit
|
|
|
27,408 |
|
|
|
25,978 |
|
|
|
16,433 |
|
|
|
| |
Amortization and impairment of goodwill and
intangibles
|
|
|
10,893 |
|
|
|
23,337 |
|
|
|
11,023 |
|
|
|
| |
Other
|
|
|
14,145 |
|
|
|
12,221 |
|
|
|
4,085 |
|
|
|
| |
|
|
|
Total income tax expense
|
|
$ |
459,901 |
|
|
$ |
407,013 |
|
|
$ |
282,435 |
|
|
|
| |
|
|
|
Effective tax rate
|
|
|
39.5% |
|
|
|
41.2% |
|
|
|
39.4% |
|
|
|
|
The components of deferred taxes are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
| |
Accrued expenses
|
|
$ |
46,097 |
|
|
$ |
58,635 |
|
|
|
| |
Allowance for credit losses
|
|
|
23,099 |
|
|
|
35,817 |
|
|
|
| |
|
|
| |
|
Current
|
|
|
69,196 |
|
|
|
94,452 |
|
|
|
| |
|
|
| |
Deferred compensation
|
|
|
34,723 |
|
|
|
24,940 |
|
|
|
| |
Residual interest income
|
|
|
210,826 |
|
|
|
197,747 |
|
|
|
| |
Depreciation
|
|
|
5,612 |
|
|
|
– |
|
|
|
| |
|
|
| |
|
|
Noncurrent
|
|
|
251,161 |
|
|
|
222,687 |
|
|
|
| |
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
| |
Accrued income
|
|
|
(15,040 |
) |
|
|
(24,865 |
) |
|
|
| |
|
|
| |
|
|
Current
|
|
|
(15,040 |
) |
|
|
(24,865 |
) |
|
|
| |
|
|
| |
Mortgage servicing rights
|
|
|
(38,005 |
) |
|
|
(39,339 |
) |
|
|
| |
Amortization of intangibles
|
|
|
(31,985 |
) |
|
|
(19,451 |
) |
|
|
| |
Depreciation
|
|
|
– |
|
|
|
(494 |
) |
|
|
| |
|
|
| |
|
Noncurrent
|
|
|
(69,990 |
) |
|
|
(59,284 |
) |
|
|
| |
|
|
|
Net deferred tax assets (liabilities)
|
|
$ |
235,327 |
|
|
$ |
232,990 |
|
|
|
| |
|
|
|
The Company believes the net deferred tax asset
of $235.3 million is realizable. The Company has federal
taxable income in excess of $1.9 billion and substantial
state taxable income in the carry-back period, as well as a
history of growth in earnings and prospects for continued
earnings growth. Deferred taxes and taxes payable have been
reclassified for a change in method of income tax reporting
initiated by the Company during fiscal year 2004 resulting in an
increase to total assets and liabilities of $163.4 million
at April 30, 2003.
NOTE 18: SUPPLEMENTAL CASH FLOW
INFORMATION
The Company made the following cash payments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Income taxes paid
|
|
$ |
331,635 |
|
|
$ |
247,057 |
|
|
$ |
236,784 |
|
|
|
|
Interest paid
|
|
|
84,551 |
|
|
|
84,094 |
|
|
|
105,072 |
|
|
|
|
The Company characterized the following as
non-cash investing activities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
| Year ended April 30, |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
Additions to residual interests
|
|
$ |
9,007 |
|
|
$ |
753 |
|
|
$ |
26,057 |
|
|
|
|
Residual interest mark-to-market
|
|
|
167,065 |
|
|
|
38,880 |
|
|
|
148,188 |
|
|
|
|
NOTE 19: COMMITMENTS, CONTINGENCIES AND
RISKS
Commitments and
contingencies: At April 30, 2004,
the Company maintained a $2.0 billion back-up credit
facility to support the commercial paper program and for general
corporate purposes. The annual facility fee required to support
the availability of this facility is eleven basis points per
annum on the unused portion of the facility. Among other
provisions, the credit agreement limits the Company’s
indebtedness.
The Company maintains a revolving credit facility
in an amount not to exceed $125.0 million (Canadian) in
Canada to support a commercial paper program with varying
borrowing levels throughout the year, reaching its peak during
February and March for the Canadian tax season.
The Company offers guarantees under its POM
program to tax clients whereby the Company will assume the cost,
subject to certain limits, of additional tax assessments, up to
a cumulative per client limit of $5,000, attributable to tax
return preparation error for which the Company is responsible.
The Company now defers all revenues and direct costs associated
with these guarantees, recognizing these amounts over the term
of the guarantee based upon historic and actual payment of
claims. The related current asset is included in prepaid
expenses and other current assets. The related liability is
included in accounts payable, accrued expenses and other on the
consolidated balance sheets. The related noncurrent asset and
liability are included in other assets and other noncurrent
liabilities, respectively, on the consolidated balance sheets. A
loss on these POM guarantees would be recognized if the sum of
expected costs for services exceeded unearned revenue. The
deferred revenue liability increased in fiscal year 2004 by
$61.5 million due to the change in accounting principle. The
55 –
H&R
BLOCK – Form
10-K
changes in the deferred revenue liability for the
fiscal years ended April 30, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) | |
|
|
|
|
| |
| April 30, |
|
2004 | |
|
2003 | |
|
|
|
|
Balance, beginning of year
|
|
$ |
49,280 |
|
|
$ |
44,982 |
|
|
|
|
Amounts deferred for new guarantees issued
|
|
|
81,803 |
|
|
|
28,854 |
|
|
|
|
Revenue recognized on previous deferrals
|
|
|
(69,522 |
) |
|
|
(24,556 |
) |
|
|
|
Adjustment resulting from change in accounting
principle
|
|
|
61,487 |
|
|
|
– |
|
|
|
| |
|
|
|
Balance, end of year
|
|
$ |
123,048 |
|
|
$ |
49,280 |
|
|
|
| |
|
|
|
The Company has commitments to fund mortgage
loans to customers as long as there is no violation of any
condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses. The
commitments to fund loans amounted to $2.6 billion at
April 30, 2004 and 2003, respectively. External market
forces impact the probability of commitments being exercised,
and therefore, total commitments outstanding do not necessarily
represent future cash requirements.
The Company is responsible for servicing mortgage
loans for others of $36.5 billion and subservicing loans of
$8.8 billion at April 30, 2004.
The Company has entered into whole loan sale
agreements with investors in the normal course of business,
which include standard representations and warranties customary
to the mortgage banking industry. The Company has commitments to
sell loans of $4.7 billion and $1.5 billion as of
April 30, 2004 and 2003, respectively.
Violations of these representations and
warranties may require the Company to repurchase loans
previously sold. In accordance with these loan sale agreements,
the Company repurchased loans with an outstanding principal
balance of $192.3 million and $182.0 million during
the fiscal years ended April 30, 2004 and 2003,
respectively. A liability has been established related to the
potential loss on repurchase of loans previously sold of
$25.2 million and $18.9 million at April 30, 2004
and 2003, respectively. Repurchased loans are normally sold in
subsequent sale transactions. On an ongoing basis, management
monitors the adequacy of this liability, which is established
upon the initial sale of the loans, and is included in accounts
payable, accrued expenses and deposits in the consolidated
balance sheets. In determining the adequacy of the recourse
liability, management considers such factors as known problem
loans, underlying collateral values, historical loan loss
experience, assessment of economic conditions and other
appropriate data to identify the risks in the mortgage loans
held for sale.
The Company is required, under the terms of its
securitizations, to build and/or maintain overcollateralization
(“OC”) to specified levels, using the excess cash
flows received, until specified percentages of the securitized
portfolio are attained. The Company funds the OC account from
the proceeds of the sale. Future cash flows to the residual
holder are used to amortize the bonds until a specific
percentage of either the original or current balance is
retained, which is specified in the securitization agreement.
The bondholders’ recourse to the Company for credit losses
is limited to the excess cash flows received and the amount of
OC held by the trust. Upon maturity of the bonds, any remaining
amounts in the trust are distributed. The estimated future cash
flows to be distributed to the Company are included as part of
the residual valuation and are valued upon distribution from the
OC account. As of April 30, 2004 and 2003,
$316.0 million and $309.6 million, respectively, was
maintained in various OC accounts. These accounts are not assets
of the Company and are not reflected in the accompanying
consolidated financial statements.
Option One Mortgage Corporation provides a
guarantee up to a maximum amount equal to approximately 10% of
the aggregate principal balance of mortgage loans held by the
Trusts before ultimate disposition of the loans by the Trusts.
This guarantee would be called upon in the event adequate
proceeds were not available from the sale of the mortgage loans
to satisfy the current or ultimate payment obligations of the
Trusts. No losses have been sustained on this commitment since
its inception. The total principal amount of Trust obligations
outstanding as of April 30, 2004 and 2003 was
$3.2 billion and $2.2 billion, respectively. The fair
value of mortgage loans held by the Trusts as of April 30,
2004 and 2003 was $3.3 billion and $2.3 billion,
respectively.
The Company is required, in the event of
non-delivery of customers’ securities owed to it by other
broker-dealers or by its customers, to purchase identical
securities in the open market. Such purchases could result in
losses not reflected in the accompanying consolidated financial
statements.
As of April 30, 2004, the Company had
pledged securities totaling $46.3 million, which satisfied
margin deposit requirements of $38.5 million.
The Company monitors the credit standing of
brokers and dealers and customers with whom it does business. In
addition, the Company monitors the market value of collateral
held and the market value of securities receivable from others,
and seeks to obtain additional collateral if insufficient
protection against loss exists.
The Company and its subsidiaries have various
contingent purchase price obligations in connection with prior
acquisitions. In many cases, contingent payments to be made in
connection with these acquisitions are not subject to a stated
limit. The Company estimates the potential payments
(undiscounted) total approximately $7.8 million as of
April 30, 2004. The Company’s estimate is based on
current financial conditions. Should actual results differ
materially from the assumptions, the potential payments will
differ from the above estimate. Such payments, if and when paid,
would be recorded as additional goodwill.
At April 30, 2004, the Company had a
receivable from M&P of $5.8 million. This amount is
included in receivables in the consolidated balance sheet.
Commitments exist to loan M&P up to $40.0 million at
April 30, 2004, which is the lower of the value of their
accounts receivable, work-in-process and fixed assets or
$40.0 million, on a revolving basis through July 31,
2004, subject to certain termination clauses. This revolving
facility bears interest at prime rate plus four and one-half
percent on the outstanding amount and a commitment fee of
one-half percent per annum on the unused portion of the
commitment. The loan is fully secured by the accounts
receivable, work-in-process and fixed assets of M&P. The
Company anticipates entering into a new revolving facility,
which will extend the loan past July 31, 2004.
The Company has contractual commitments to fund
certain franchises requesting Franchise Equity Lines of Credit
(“FELCs”). The commitment to fund FELCs as of
April 30, 2004 totaled $27.0 million, with a related
receivable balance of $35.9 million included in the
consolidated balance sheets. The receivable represents the
amount drawn on the FELCs as of April 30, 2004.
The Company is self-insured for certain risks,
including certain employee health and benefit, workers’
compensation, property and general liability claims, and claims
related to its POM program. In fiscal year 2004, the Company
issued two standby letters of credit to servicers paying claims
related to the Company’s worker’s compensation and POM
programs. These letters of credit are for amounts not to exceed
$0.9 million and $3.6 million, respectively. At
April 30, 2004 there were no balances outstanding on these
letters of credit.
During fiscal year 2004, the Company announced
plans to construct a new world headquarters facility in downtown
Kansas City, Missouri. The Company is in negotiations to enter
into contractual commitments with the City of Kansas City and a
general contractor for the construction of the building. As of
April 30, 2004, no commitment for the total cost of the
building had been negotiated. The Company expects the total
expenditure associated with this building to be in the
– 56
Form
10-K – H&R
BLOCK
range of $140 million to $160 million,
and to be paid out over the next three fiscal years.
The Company and its subsidiaries routinely enter
into contracts that include embedded indemnifications that have
characteristics similar to guarantees. Other guarantees and
indemnifications of the Company and its subsidiaries include
obligations to protect counter parties from losses arising from
the following: (1) tax, legal and other risks related to
the purchase or disposition of businesses; (2) penalties
and interest assessed by Federal and state taxing authorities in
connection with tax returns prepared for clients;
(3) indemnification of the Company’s directors and
officers; and (4) third-party claims relating to various
arrangements in the normal course of business. Typically, there
is no stated maximum payment related to these indemnifications,
and the 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 the Company or
its subsidiaries and the ultimate liability related to any such
claims, if any, is difficult to predict. While management cannot
provide assurance the Company and its subsidiaries will
ultimately prevail in the event any such claims are asserted,
management believes the fair value of these guarantees and
indemnifications is not material as of April 30, 2004.
Substantially all of the operations of the
Company’s subsidiaries are conducted in leased premises.
Most of the operating leases are for a three-year period with
renewal options and provide for fixed monthly rentals.
Future minimum lease commitments at
April 30, 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
| (in 000s) |
|
|
|
|
2005
|
|
$ |
199,292 |
|
|
|
|
2006
|
|
|
150,441 |
|
|
|
|
2007
|
|
|
107,944 |
|
|
|
|
2008
|
|
|
56,694 |
|
|
|
|
2009
|
|
|
34,915 |
|
|
|
|
2010 and beyond
|
|
|
48,597 |
|
|
|
| |
|
|
|
|
|
|
| |
|
$ |
597,883 |
|
|
|
| |
|
|
|
|
|
|
|
The Company’s rent expense for fiscal years
2004, 2003 and 2002 totaled $239.8 million,
$211.7 million and $190.4 million, respectively.
In the regular course of business, the Company is
subject to routine examinations by Federal, state and local
taxing authorities. In management’s opinion, the
disposition of matters raised by such taxing authorities, if
any, in such tax examinations would not have a material adverse
impact on the Company’s consolidated financial statements.
Risks:
Loans to borrowers who do not meet traditional underwriting
criteria (non-prime borrowers) present a higher level of risk of
default than federal agency prime loans, because of the
increased potential for default by borrowers who may have
previous credit problems or who do not have any credit history.
Loans to non-prime borrowers also involve additional liquidity
risks, as these loans generally have a more limited secondary
market than prime loans. The actual rates of delinquencies,
foreclosures and losses on loans to non-prime borrowers could be
higher under adverse economic conditions than those currently
experienced in the mortgage lending industry in general. While
the Company believes the underwriting procedures and appraisal
processes it employs enable it to mitigate certain risks
inherent in loans made to these borrowers, no assurance can be
given that such procedures or processes will afford adequate
protection against such risks.
Commitments to fund loans involve, to varying
degrees, elements of credit risk and interest rate risk in
excess of the amount recognized in the financial statements.
Credit risk is mitigated by the Company’s evaluation of the
creditworthiness of potential borrowers on a case-by-case basis.
Risks to the stability of Mortgage Operations
include external events impacting the asset-backed securities
market, such as the level of and fluctuations in interest rates,
real estate and other asset values, changes in the
securitization market and competition.
NOTE 20: LITIGATION COMMITMENTS AND
CONTINGENCIES
The Company has been involved in a number of RAL
class actions and putative RAL class action cases since 1990.
Although the Company has successfully defended many such cases,
it incurred a pretax expense of $43.5 million in fiscal
year 2003 in connection with the settlement of one such case.
Several of these cases are still pending and the amounts claimed
in some of them is very substantial. To avoid the uncertainty of
litigation and the diversion of resources and personnel
resulting from the lawsuits, the Company, the lending bank, and
the plaintiffs in the case Joel E. Zawikowski,
et al. v. Beneficial National Bank, H&R Block,
Inc., et al. (renamed Lynne A. Carnegie,
et al. v. H&R Block, Inc., et al.), Case
No. 98-C-2178 in the United States District Court for
Northern Illinois, had agreed to a settlement class and a
settlement of RAL-related claims on a nationwide basis. Under
that settlement, the Company and the lending bank agreed to each
pay $12.5 million toward a $25.0 million settlement
fund for the benefit of the class members. The settlement was
approved by the District Court in February 2001. Certain class
members who had objected to the settlement appealed the order
approving the settlement to the Seventh Circuit Court of
Appeals. In April 2002, the Court of Appeals reversed the
District Court’s order approving the settlement and
remanded the matter back to the District Court for further
consideration of the fairness and adequacy of the proposed
settlement by a new District Court judge. In April 2003, the
District Court judge declined to approve the $25.0 million
settlement, finding that counsel for the settlement plaintiffs
had been inadequate representatives of the plaintiff class and
failed to sustain their burden of showing that the settlement
was fair. The judge subsequently appointed new counsel for the
plaintiffs who filed an amended complaint and a motion for
partial summary judgment. In March 2004, the court either
dismissed or decertified all of the plaintiffs’ claims
other than part of one count alleging violations of the
racketeering and conspiracy provision of the Racketeer
Influenced and Corrupt Organizations act. The Company intends to
continue defending the case and the remaining RAL class action
litigation vigorously, but there are no assurances as to their
outcome. We have accrued our best estimate of the probable loss
related to the RAL cases.
The Company and certain of its current and former
officers and directors are named defendants in litigation
entitled Paul White, et al. v. H&R Block,
et al., consolidated Case Numbers 02CV8965, 02CV9661,
02CV9682 and 02CV9830 pending in the United States District
Court for the Southern District of New York since the third
quarter of fiscal year 2003. The respective named plaintiffs
seek to represent a class of shareholders who purchased the
Company’s stock between November 8, 1997 and
November 6, 2002, and allege that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by failing to disclose to
shareholders various cases in which the Company had been sued
regarding the RAL program, by failing to set adequate reserves
for those cases, and by failing to disclose the supposed
implications of those cases for the future of the RAL program.
The four securities law cases were all assigned to the same
judge and consolidated for pre-trial matters. A
57 –
H&R
BLOCK – Form
10-K
consolidated complaint was filed in March 2003
and the defendants responded by filing a motion to dismiss in
April 2003. In response to defendants’ motion to dismiss,
the plaintiffs informed defendants that they wished further to
amend their complaint. Defendants consented to the filing of an
amended complaint as a pleading matter, the plaintiffs filed the
amended complaint, and the defendants filed a motion to dismiss
it in August 2003. The Company believes the claims in these
actions are without merit and intends to defend them vigorously.
In addition to the aforementioned cases, the
Company and its subsidiaries have from time to time been parties
to claims and lawsuits arising out of such subsidiaries’
business operations, including other claims and lawsuits
relating to RALs, and claims and lawsuits concerning the
preparation of customers’ income tax returns, the
electronic filing of income tax returns, the fees charged
customers for various services, the Peace of Mind guarantee
program associated with income tax return preparation services,
the Express IRA program, relationships with franchisees,
contract disputes and civil actions, arbitrations, regulatory
inquiries and class actions arising out of our business as a
broker-dealer. Such lawsuits include actions by individual
plaintiffs, as well as 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. The
Company’s management considers these cases to be ordinary,
routine litigation incidental to its business, believes the
Company and its subsidiaries have meritorious defenses to each
of them and is defending, or intends to defend, them vigorously.
While management cannot provide assurance the Company and its
subsidiaries will ultimately prevail in each instance,
management believes that amounts, if any, required to be paid by
the Company and its subsidiaries in the discharge of liabilities
or settlements will not have a material adverse effect on the
Company’s consolidated results of operations, cash flows or
financial position. Regardless of outcome, claims and litigation
can adversely affect the Company and its subsidiaries due to
defense costs, diversion of management and publicity related to
such matters.
It is the Company’s policy to accrue for
amounts related to legal matters if it is probable that a
liability has been incurred and an amount is reasonably
estimable. Many of the various legal proceedings are covered in
whole, or in part, by insurance.
NOTE 21: SEGMENT INFORMATION
The principal business activity of the
Company’s operating subsidiaries is providing tax and
financial services and products to the general public.
Management has determined the reportable segments identified
below according to types of services offered, geographic
locations in which operations are conducted, and the manner in
which operational decisions are made. The Company operates in
the following reportable segments:
U.S. Tax
Operations: This segment is primarily
engaged in providing tax return preparation, filing and related
services and products in the United States. Segment revenues
include fees earned for tax-related services performed at
company-owned tax offices, royalties from franchise offices,
sales of tax preparation and other software, fees from online
tax preparation, and payments related to RALs. This segment
includes the Company’s tax preparation software –
TaxCut® from H&R Block, and other personal productivity
software offered to the general public, and offers online
do-it-yourself-tax preparation, online tax advice to the general
public through the www.hrblock.com website and online
drop-off (whereby the client fills out an online tax organizer
and sends it to a tax professional for preparation). Revenues of
this segment are seasonal in nature.
Mortgage
Operations: This segment is primarily
engaged in the origination of non-prime mortgage loans, sales
and securitizations of mortgage assets and servicing of
non-prime loans in the United States. This segment mainly
offers, through a network of mortgage brokers, a flexible
product line to borrowers who are creditworthy but do not meet
traditional underwriting criteria. Prime mortgage loan products,
as well as the same flexible product line available through
brokers, are offered through H&R Block Mortgage Corporation
retail offices and some other retail offices.
Business
Services: This segment offers
middle-market companies accounting, tax and consulting services,
wealth management, retirement resources, payroll services,
corporate finance, and financial process outsourcing. This
segment offers services through offices located throughout the
United States. Revenues of this segment are seasonal in nature.
Investment
Services: This segment is primarily
engaged in offering investment services and securities products
through H&R Block Financial Advisors, Inc., a full-service
securities broker, to the general public. Investment advice and
services are primarily offered through H&R Block Financial
Advisors branch offices.
International Tax
Operations: This segment is primarily
engaged in providing local tax return preparation, filing, and
related services to the general public in Canada, Australia and
the United Kingdom. In addition, International Tax Operations
prepares U.S. tax returns for U.S. citizens living
abroad. Tax-related service revenues include fees from
company-owned tax offices and royalties from franchised offices.
Revenues of this segment are seasonal in nature. The majority of
the foreign countries in which subsidiaries of the Company
operate, which are individually immaterial, are included within
this segment.
Corporate
Operations: This segment consists
primarily of corporate support departments that provide services
to the Company’s operating segments. These support
departments consist of marketing, information technology,
facilities, human resources, executive, legal, finance,
government relations and corporate communications. These support
department costs are largely allocated to the Company’s
operating segments. The Company’s captive insurance,
franchise financing and small business initiative subsidiaries
are also included within this segment.
Identifiable
assets: Identifiable assets are those
assets, including goodwill and intangible assets, associated
with each reportable segment. The remaining assets are
classified as corporate assets and consist primarily of cash,
marketable securities and equipment.
– 58
Form
10-K – H&R
BLOCK
Information concerning the Company’s
operations by reportable segment as of and for the years ended
April 30, 2004, 2003 and 2002 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) | |
|
|
|
|
| |
| Year ended April 30, |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Tax Operations
|
|
$ |
2,093,617 |
|
|
$ |
1,861,681 |
|
|
$ |
1,831,274 |
|
|
|
| |
Mortgage Operations
|
|
|
1,281,399 |
|
|
|
1,165,411 |
|
|
|
702,333 |
|
|
|
| |
Business Services
|
|
|
499,210 |
|
|
|
434,140 |
|
|
|
416,926 |
|
|
|
| |
Investment Services
|
|
|
229,470 |
|
|
|
200,794 |
|
|
|
250,685 |
|
|
|
| |
International Tax Operations
|
|
|
97,560 |
|
|
|
85,082 |
|
|
|
78,710 |
|
|
|
| |
Corporate Operations
|
|
|
4,314 |
|
|
|
(651 |
) |
|
|
5,773 |
|
|
|
| |
|
|
| |
|
$ |
4,205,570 |
|
|
$ |
3,746,457 |
|
|
$ |
3,285,701 |
|
|
|
| |
|
|
|
INCOME (LOSS) BEFORE
TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Tax Operations
|
|
$ |
627,592 |
|
|
$ |
547,078 |
|
|
$ |
533,468 |
|
|
|
| |
Mortgage Operations
|
|
|
678,261 |
|
|
|
693,950 |
|
|
|
339,388 |
|
|
|
| |
Business Services
|
|
|
19,321 |
|
|
|
(14,118 |
) |
|
|
22,716 |
|
|
|
| |
Investment Services
|
|
|
(64,446 |
) |
|
|
(128,292 |
) |
|
|
(54,862 |
) |
|
|
| |
International Tax Operations
|
|
|
11,097 |
|
|
|
10,464 |
|
|
|
7,093 |
|
|
|
| |
Corporate Operations
|
|
|
(107,668 |
) |
|
|
(122,005 |
) |
|
|
(130,963 |
) |
|
|
| |
|
|
| |
|
$ |
1,164,157 |
|
|
$ |
987,077 |
|
|
$ |
716,840 |
|
|
|
| |
|
|
|
DEPRECIATION AND
AMORTIZATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Tax Operations
|
|
$ |
73,029 |
|
|
$ |
58,131 |
|
|
$ |
59,258 |
|
|
|
| |
Mortgage Operations
|
|
|
24,428 |
|
|
|
21,703 |
|
|
|
14,753 |
|
|
|
| |
Business Services
|
|
|
23,104 |
|
|
|
23,134 |
|
|
|
21,390 |
|
|
|
| |
Investment Services
|
|
|
47,285 |
|
|
|
53,984 |
|
|
|
52,182 |
|
|
|
| |
International Tax Operations
|
|
|
3,250 |
|
|
|
3,356 |
|
|
|
4,854 |
|
|
|
| |
Corporate Operations
|
|
|
942 |
|
|
|
1,513 |
|
|
|
2,949 |
|
|
|
| |
|
|
| |
|
$ |
172,038 |
|
|
$ |
161,821 |
|
|
$ |
155,386 |
|
|
|
| |
|
|
| |
Goodwill impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Business Services
|
|
|
– |
|
|
|
11,777 |
|
|
|
– |
|
|
|
| |
|
Investment Services
|
|
|
– |
|
|
|
24,000 |
|
|
|
– |
|
|
|
| |
|
|
| |
|
|
– |
|
|
|
35,777 |
|
|
|
– |
|
|
|
| |
|
|
| |
|
$ |
172,038 |
|
|
$ |
197,598 |
|
|
$ |
155,386 |
|
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in 000s) | |
|
|
|
|
| |
| Year ended April 30, |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
|
|
CAPITAL
EXPENDITURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Tax Operations
|
|
$ |
46,729 |
|
|
$ |
62,383 |
|
|
$ |
58,683 |
|
|
|
| |
Mortgage Operations
|
|
|
28,176 |
|
|
|
38,204 |
|
|
|
23,087 |
|
|
|
| |
Business Services
|
|
|
18,003 |
|
|
|
15,248 |
|
|
|
10,676 |
|
|
|
| |
Investment Services
|
|
|
14,278 |
|
|
|
15,562 |
|
|
|
10,268 |
|
|
|
| |
International Tax Operations
|
|
|
3,475 |
|
|
|
3,086 |
|
|
|
4,407 |
|
|
|
| |
Corporate Operations
|
|
|
16,912 |
|
|
|
16,414 |
|
|
|
4,654 |
|
|
|
| |
|
|
| |
|
$ |
127,573 |
|
|
$ |
150,897 |
|
|
$ |
111,775 |
|
|
|
| |
|
|
|
IDENTIFIABLE ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Tax Operations
|
|
$ |
622,884 |
|
|
$ |
281,340 |
|
|
$ |
269,476 |
|
|
|
| |
Mortgage Operations
|
|
|
1,200,928 |
|
|
|
1,320,233 |
|
|
|
1,387,774 |
|
|
|
| |
Business Services
|
|
|
636,492 |
|
|
|
674,566 |
|
|
|
665,018 |
|
|
|
| |
Investment Services
|
|
|
1,685,190 |
|
|
|
1,489,297 |
|
|
|
1,656,469 |
|
|
|
| |
International Tax Operations
|
|
|
40,390 |
|
|
|
33,142 |
|
|
|
47,820 |
|
|
|
| |
Corporate Operations
|
|
|
1,194,142 |
|
|
|
968,730 |
|
|
|
358,083 |
|
|
|
| |
|
|
| |
|
$ |
5,380,026 |
|
|
$ |
4,767,308 |
|
|
$ |
4,384,640 |
|
|
|
| |
|
|
59 –
H&R
BLOCK – Form
10-K
NOTE 22: QUARTERLY FINANCIAL DATA
(UNAUDITED)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) | |
|
|
|
|
|
| Fiscal Year
2004 Quarter Ended |
|
April 30, 2004 |
|
January 31, 2004 |
|
October 31, 2003 |
|
July 31, 2003 |
|
Total |
|
|
|
|
|
|
Revenues
|
|
$ |
2,191,793 |
|
|
$ |
959,541 |
|
|
$ |
562,912 |
|
|
$ |
491,324 |
|
|
$ |
4,205,570 |
|
|
|
| |
|
|
|
Income before taxes
|
|
|
952,074 |
|
|
|
176,120 |
|
|
|
17,134 |
|
|
|
18,829 |
|
|
|
1,164,157 |
|
|
|
|
Income taxes
|
|
|
376,439 |
|
|
|
69,394 |
|
|
|
6,758 |
|
|
|
7,310 |
|
|
|
459,901 |
|
|
|
| |
|
|
|
Net income before change in accounting principle
|
|
|
575,635 |
|
|
|
106,726 |
|
|
|
10,376 |
|
|
|
11,519 |
|
|
|
704,256 |
|
|
|
|
Cumulative effect of change in accounting
principle
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(6,359 |
) |
|
|
(6,359 |
) |
|
|
| |
|
|
|
Net income
|
|
$ |
575,635 |
|
|
$ |
106,726 |
|
|
$ |
10,376 |
|
|
$ |
5,160 |
|
|
$ |
697,897 |
|
|
|
| |
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Before change in accounting principle
|
|
$ |
3.30 |
|
|
$ |
.60 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
3.98 |
|
|
|
| |
Net income
|
|
|
3.30 |
|
|
|
.60 |
|
|
|
.06 |
|
|
|
.03 |
|
|
|
3.94 |
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Before change in accounting principle
|
|
$ |
3.23 |
|
|
$ |
.59 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
3.90 |
|
|
|
| |
Net income
|
|
|
3.23 |
|
|
|
.59 |
|
|
|
.06 |
|
|
|
.03 |
|
|
|
3.86 |
|
|
|
|
Dividends per share
|
|
$ |
.20 |
|
|
$ |
.20 |
|
|
$ |
.20 |
|
|
$ |
.18 |
|
|
$ |
.78 |
|
|
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
High
|
|
$ |
61.00 |
|
|
$ |
60.18 |
|
|
$ |
48.36 |
|
|
$ |
46.00 |
|
|
$ |
61.00 |
|
|
|
| |
Low
|
|
|
44.50 |
|
|
|
47.14 |
|
|
|
40.55 |
|
|
|
36.30 |
|
|
|
36.30 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) | |
|
|
|
|
|
| Fiscal Year
2003 Quarter Ended |
|
April 30, 2003 |
|
January 31, 2003 |
|
October 31, 2002 |
|
July 31, 2002 |
|
Total |
|
|
|
|
|
|
Revenues
|
|
$ |
1,909,755 |
|
|
$ |
949,272 |
|
|
$ |
465,041 |
|
|
$ |
422,389 |
|
|
$ |
3,746,457 |
|
|
|
| |
|
|
|
Income (loss) before taxes (benefit)
|
|
|
842,294 |
|
|
|
222,934 |
|
|
|
(62,245 |
) |
|
|
(15,906 |
) |
|
|
987,077 |
|
|
|
|
Income taxes (benefit)
|
|
|
347,652 |
|
|
|
90,621 |
|
|
|
(24,898 |
) |
|
|
(6,362 |
) |
|
|
407,013 |
|
|
|
| |
|
|
|
Net income (loss)
|
|
$ |
494,642 |
|
|
$ |
132,313 |
|
|
$ |
(37,347 |
) |
|
$ |
(9,544 |
) |
|
$ |
580,064 |
|
|
|
| |
|
|
|
Basic earnings per share
|
|
$ |
2.76 |
|
|
$ |
.74 |
|
|
$ |
(.21 |
) |
|
$ |
(.05 |
) |
|
$ |
3.23 |
|
|
|
|
Diluted earnings per share
|
|
|
2.71 |
|
|
|
.73 |
|
|
|
(.21 |
) |
|
|
(.05 |
) |
|
|
3.15 |
|
|
|
|
Dividends per share
|
|
$ |
.18 |
|
|
$ |
.18 |
|
|
$ |
.18 |
|
|
$ |
.16 |
|
|
$ |
.70 |
|
|
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
High
|
|
$ |
44.35 |
|
|
$ |
43.05 |
|
|
$ |
53.15 |
|
|
$ |
48.28 |
|
|
$ |
53.15 |
|
|
|
| |
Low
|
|
|
35.47 |
|
|
|
30.74 |
|
|
|
37.45 |
|
|
|
40.00 |
|
|
|
30.74 |
|
|
|
|
Quarterly revenues for fiscal year 2004 and 2003
in the table above have been adjusted from the reported amounts
on Form 10-Q. Reclassifications between revenues and
expenses were made in the fourth quarter of fiscal year 2004
which related to previous quarters in fiscal year 2004. The
prior year quarters were adjusted to conform to the current
period presentation. Net income did not change in any quarter as
a result of these adjustments. Additionally, upon adoption of
EITF 00-21 in the second quarter of fiscal year 2004, the
first quarter results were restated.
The accumulation of four quarters in fiscal years
2004 and 2003 for earnings per share may not equal the related
per share amounts for the years ended April 30, 2004 and
2003 due to the repurchase of treasury shares, the timing of the
exercise of stock options, and the antidilutive effect of stock
options in the first two quarters.
NOTE 23: CONDENSED CONSOLIDATING
FINANCIAL STATEMENTS
Block Financial Corporation (“BFC”) is
an indirect, wholly-owned subsidiary of the Company. BFC is the
Issuer and the Company is the Guarantor of the
$250.0 million 6 3/4% Senior Notes issued on
October 21, 1997 and of the $500.0 million
8 1/2% Senior Notes issued on April 13, 2000. The
Company’s guarantee is full and unconditional. The
following condensed consolidating financial statements present
separate information for BFC, the Company and for the
Company’s other subsidiaries, and should be read in
conjunction with the consolidated financial statements of the
Company.
These condensed consolidating financial
statements have been prepared using the equity method of
accounting. Income of subsidiaries is, therefore, reflected in
the Company’s investment in subsidiaries account. The
elimination entries eliminate investments in subsidiaries,
related stockholder’s equity and other intercompany
balances and transactions.
– 60
Form
10-K – H&R
BLOCK
Condensed Consolidating Income
Statements
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) | |
|
|
|
|
|
|
|
H&R Block, Inc. |
|
BFC |
|
Other |
|
|
|
Consolidated |
|
|
| Year Ended April 30, 2004 |
|
(Guarantor) |
|
(Issuer) |
|
Subsidiaries |
|
Eliminations |
|
H&R Block |
|
|
|
|
Total revenues
|
|
$ |
– |
|
|
$ |
1,802,461 |
|
|
$ |
2,404,669 |
|
|
$ |
(1,560 |
) |
|
$ |
4,205,570 |
|
|
|
| |
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation & benefits
|
|
|
– |
|
|
|
465,839 |
|
|
|
1,144,544 |
|
|
|
(280 |
) |
|
|
1,610,103 |
|
|
|
| |
Occupancy & equipment
|
|
|
– |
|
|
|
79,399 |
|
|
|
305,226 |
|
|
|
(3 |
) |
|
|
384,622 |
|
|
|
| |
Interest
|
|
|
– |
|
|
|
45,580 |
|
|
|
38,976 |
|
|
|
– |
|
|
|
84,556 |
|
|
|
| |
Depreciation & amortization
|
|
|
– |
|
|
|
72,482 |
|
|
|
99,556 |
|
|
|
– |
|
|
|
172,038 |
|
|
|
| |
Marketing & advertising
|
|
|
– |
|
|
|
42,664 |
|
|
|
146,117 |
|
|
|
(464 |
) |
|
|
188,317 |
|
|
|
| |
Supplies, freight & postage
|
|
|
– |
|
|
|
19,555 |
|
|
|
69,634 |
|
|
|
– |
|
|
|
89,189 |
|
|
|
| |
Other
|
|
|
– |
|
|
|
382,073 |
|
|
|
140,809 |
|
|
|
(440 |
) |
|
|
522,442 |
|
|
|
| |
|
|
| |
|
|
– |
|
|
|
1,107,592 |
|
|
|
1,944,862 |
|
|
|
(1,187 |
) |
|
|
3,051,267 |
|
|
|
| |
|
|
|
Operating income
|
|
|
– |
|
|
|
694,869 |
|
|
|
459,807 |
|
|
|
(373 |
) |
|
|
1,154,303 |
|
|
|
|
Other income, net
|
|
|
1,164,157 |
|
|
|
– |
|
|
|
9,854 |
|
|
|
(1,164,157 |
) |
|
|
9,854 |
|
|
|
| |
|
|
|
Income before taxes
|
|
|
1,164,157 |
|
|
|
694,869 |
|
|
|
469,661 |
|
|
|
(1,164,530 |
) |
|
|
1,164,157 |
|
|
|
|
Income taxes
|
|
|
459,901 |
|
|
|
280,956 |
|
|
|
179,092 |
|
|
|
(460,048 |
) |
|
|
459,901 |
|
|
|
| |
|
|
|
Income before change in accounting
|
|
|
704,256 |
|
|
|
413,913 |
|
|
|
290,569 |
|
|
|
(704,482 |
) |
|
|
704,256 |
|
|
|
|
Cumulative effect of change in accounting
|
|
|
(6,359 |
) |
|
|
– |
|
|
|
(6,359 |
) |
|
|
6,359 |
|
|
|
(6,359 |
) |
|
|
| |
|
|
|
Net income
|
|
$ |
697,897 |
|
|
$ |
413,913 |
|
|
$ |
284,210 |
|
|
$ |
(698,123 |
) |
|
$ |
697,897 |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
BFC |
|
Other |
|
|
|
Consolidated |
|
|
| Year Ended April 30, 2003 |
|
(Guarantor) |
|
(Issuer) |
|
Subsidiaries |
|
Eliminations |
|
H&R Block |
|
|
|
|
|
|
Total revenues
|
|
$ |
– |
|
|
$ |
1,567,917 |
|
|
$ |
2,180,009 |
|
|
$ |
(1,469 |
) |
|
$ |
3,746,457 |
|
|
|
| |
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation & benefits
|
|
|
– |
|
|
|
391,603 |
|
|
|
995,867 |
|
|
|
261 |
|
|
|
1,387,731 |
|
|
|
| |
Occupancy & equipment
|
|
|
– |
|
|
|
73,837 |
|
|
|
272,123 |
|
|
|
– |
|
|
|
345,960 |
|
|
|
| |
Interest
|
|
|
– |
|
|
|
62,294 |
|
|
|
30,350 |
|
|
|
– |
|
|
|
92,644 |
|
|
|
| |
Depreciation & amortization
|
|
|
– |
|
|
|
101,613 |
|
|
|
95,985 |
|
|
|
– |
|
|
|
197,598 |
|
|
|
| |
Marketing & advertising
|
|
|
– |
|
|
|
34,612 |
|
|
|
117,110 |
|
|
|
(875 |
) |
|
|
150,847 |
|
|
|
| |
Supplies, freight & postage
|
|
|
– |
|
|
|
21,717 |
|
|
|
67,031 |
|
|
|
– |
|
|
|
88,748 |
|
|
|
| |
Other
|
|
|
– |
|
|
|
256,004 |
|
|
|
247,518 |
|
|
|
(835 |
) |
|
|
502,687 |
|
|
|
| |
|
|
| |
|
|
– |
|
|
|
941,680 |
|
|
|
1,825,984 |
|
|
|
(1,449 |
) |
|
|
2,766,215 |
|
|
|
| |
|
|
|
Operating income
|
|
|
– |
|
|
|
626,237 |
|
|
|
354,025 |
|
|
|
(20 |
) |
|
|
980,242 |
|
|
|
|
Other income, net
|
|
|
987,077 |
|
|
|
– |
|
|
|
6,835 |
|
|
|
(987,077 |
) |
|
|
6,835 |
|
|
|
| |
|
|
|
Income before taxes
|
|
|
987,077 |
|
|
|
626,237 |
|
|
|
360,860 |
|
|
|
(987,097 |
) |
|
|
987,077 |
|
|
|
|
Income taxes
|
|
|
407,013 |
|
|
|
265,079 |
|
|
|
141,926 |
|
|
|
(407,005 |
) |
|
|
407,013 |
|
|
|
| |
|
|
|
Net income
|
|
$ |
580,064 |
|
|
$ |
361,158 |
|
|
$ |
218,934 |
|
|
$ |
(580,092 |
) |
|
$ |
580,064 |
|
|
|
| |
|
|
|
61 –
H&R
BLOCK – Form
10-K
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended April 30, |
|
H&R Block, Inc. |
|
BFC |
|
Other |
|
|
|
Consolidated |
|
|
| 2002 |
|
(Guarantor) |
|
(Issuer) |
|
Subsidiaries |
|
Eliminations |
|
H&R Block |
|
|
|
|
Total revenues
|
|
$ |
– |
|
|
$ |
1,187,955 |
|
|
$ |
2,112,438 |
|
|
$ |
(14,692 |
) |
|
$ |
3,285,701 |
|
|
|
| |
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation & benefits
|
|
|
– |
|
|
|
323,600 |
|
|
|
974,622 |
|
|
|
(63 |
) |
|
|
1,298,159 |
|
|
|
| |
Occupancy & equipment
|
|
|
– |
|
|
|
65,305 |
|
|
|
240,015 |
|
|
|
67 |
|
|
|
305,387 |
|
|
|
| |
Interest
|
|
|
– |
|
|
|
100,800 |
|
|
|
15,341 |
|
|
|
– |
|
|
|
116,141 |
|
|
|
| |
Depreciation & amortization
|
|
|
– |
|
|
|
69,497 |
|
|
|
85,889 |
|
|
|
– |
|
|
|
155,386 |
|
|
|
| |
Marketing & advertising
|
|
|
– |
|
|
|
20,642 |
|
|
|
136,342 |
|
|
|
(1,255 |
) |
|
|
155,729 |
|
|
|
| |
Supplies, freight & postage
|
|
|
– |
|
|
|
15,000 |
|
|
|
60,804 |
|
|
|
(94 |
) |
|
|
75,710 |
|
|
|
| |
Other
|
|
|
– |
|
|
|
291,986 |
|
|
|
184,993 |
|
|
|
(13,218 |
) |
|
|
463,761 |
|
|
|
| |
|
|
| |
|
|
– |
|
|
|
886,830 |
|
|
|
1,698,006 |
|
|
|
(14,563 |
) |
|
|
2,570,273 |
|
|
|
| |
|
|
|
Operating income
|
|
|
– |
|
|
|
301,125 |
|
|
|
414,432 |
|
|
|
(129 |
) |
|
|
715,428 |
|
|
|
|
Other income, net
|
|
|
716,840 |
|
|
|
(2,028 |
) |
|
|
3,440 |
|
|
|
(716,840 |
) |
|
|
1,412 |
|
|
|
| |
|
|
|
Income before taxes
|
|
|
716,840 |
|
|
|
299,097 |
|
|
|
417,872 |
|
|
|
(716,969 |
) |
|
|
716,840 |
|
|
|
|
Income taxes
|
|
|
282,435 |
|
|
|
123,884 |
|
|
|
158,602 |
|
|
|
(282,486 |
) |
|
|
282,435 |
|
|
|
| |
|
|
|
Net income
|
|
$ |
434,405 |
|
|
$ |
175,213 |
|
|
$ |
259,270 |
|
|
$ |
(434,483 |
) |
|
$ |
434,405 |
|
|
|
| |
|
|
|
Condensed Consolidating Balance
Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) | |
|
|
|
|
| |
|
|
H&R Block, Inc. | |
|
BFC | |
|
Other | |
|
|
|
Consolidated | |
|
|
| April 30, 2004 |
|
(Guarantor) | |
|
(Issuer) | |
|
Subsidiaries | |
|
Eliminations | |
|
H&R Block | |
|
|
|
|
Cash & cash equivalents
|
|
$ |
– |
|
|
$ |
132,076 |
|
|
$ |
939,600 |
|
|
$ |
– |
|
|
$ |
1,071,676 |
|
|
|
|
Cash & cash equivalents –
restricted
|
|
|
– |
|
|
|
532,201 |
|
|
|
13,227 |
|
|
|
– |
|
|
|
545,428 |
|
|
|
|
Receivables from customers, brokers and dealers,
net
|
|
|
– |
|
|
|
625,076 |
|
|
|
– |
|
|
|
– |
|
|
|
625,076 |
|
|
|
|
Receivables, net
|
|
|
180 |
|
|
|
168,879 |
|
|
|
178,851 |
|
|
|
– |
|
|
|
347,910 |
|
|
|
|
Intangible assets and goodwill, net
|
|
|
– |
|
|
|
461,791 |
|
|
|
823,456 |
|
|
|
– |
|
|
|
1,285,247 |
|
|
|
|
Investments in subsidiaries
|
|
|
4,291,693 |
|
|
|
205 |
|
|
|
297 |
|
|
|
(4,291,693 |
) |
|
|
502 |
|
|
|
|
Other assets
|
|
|
(145 |
) |
|
|
1,115,435 |
|
|
|
389,270 |
|
|
|
(373 |
) |
|
|
1,504,187 |
|
|
|
| |
|
|
| |
Total assets
|
|
$ |
4,291,728 |
|
|
$ |
3,035,663 |
|
|
$ |
2,344,701 |
|
|
$ |
(4,292,066 |
) |
|
$ |
5,380,026 |
|
|
|
| |
|
|
|
Accounts payable to customers, brokers and dealers
|
|
$ |
– |
|
|
$ |
1,065,793 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
1,065,793 |
|
|
|
|
Long-term debt
|
|
|
– |
|
|
|
498,225 |
|
|
|
47,586 |
|
|
|
– |
|
|
|
545,811 |
|
|
|
|
Other liabilities
|
|
|
15,879 |
|
|
|
509,151 |
|
|
|
1,345,822 |
|
|
|
561 |
|
|
|
1,871,413 |
|
|
|
|
Net intercompany advances
|
|
|
2,378,840 |
|
|
|
(327,834 |
) |
|
|
(2,050,445 |
) |
|
|
(561 |
) |
|
|
– |
|
|
|
|
Stockholders’ equity
|
|
|
1,897,009 |
|
|
|
1,290,328 |
|
|
|
3,001,738 |
|
|
|
(4,292,066 |
) |
|
|
1,897,009 |
|
|
|
| |
|
|
| |
Total liabilities and stockholders’ equity
|
|
$ |
4,291,728 |
|
|
$ |
3,035,663 |
|
|
$ |
2,344,701 |
|
|
$ |
(4,292,066 |
) |
|
$ |
5,380,026 |
|
|
|
| |
|
|
|
– 62
Form
10-K – H&R
BLOCK
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) | |
|
|
|
|
| |
|
|
H&R Block, Inc. | |
|
BFC | |
|
Other | |
|
|
|
Consolidated | |
|
|
| April 30, 2003 |
|
(Guarantor) | |
|
(Issuer) | |
|
Subsidiaries | |
|
Eliminations | |
|
H&R Block | |
|
|
|
|
Cash & cash equivalents
|
|
$ |
– |
|
|
$ |
180,181 |
|
|
$ |
695,172 |
|
|
$ |
– |
|
|
$ |
875,353 |
|
|
|
|
Cash & cash equivalents –
restricted
|
|
|
– |
|
|
|
420,787 |
|
|
|
17,455 |
|
|
|
– |
|
|
|
438,242 |
|
|
|
|
Receivables from customers, brokers and dealers,
net
|
|
|
– |
|
|
|
517,037 |
|
|
|
– |
|
|
|
– |
|
|
|
517,037 |
|
|
|
|
Receivables, net
|
|
|
168 |
|
|
|
171,612 |
|
|
|
231,417 |
|
|
|
– |
|
|
|
403,197 |
|
|
|
|
Intangible assets and goodwill, net
|
|
|
– |
|
|
|
491,091 |
|
|
|
564,989 |
|
|
|
– |
|
|
|
1,056,080 |
|
|
|
|
Investments in subsidiaries
|
|
|
3,546,734 |
|
|
|
215 |
|
|
|
1,105 |
|
|
|
(3,546,734 |
) |
|
|
1,320 |
|
|
|
|
Other assets
|
|
|
(1,321 |
) |
|
|
1,182,521 |
|
|
|
293,930 |
|
|
|
949 |
|
|
|
1,476,079 |
|
|
|
| |
|
|
| |
Total assets
|
|
$ |
3,545,581 |
|
|
$ |
2,963,444 |
|
|
$ |
1,804,068 |
|
|
$ |
(3,545,785 |
) |
|
$ |
4,767,308 |
|
|
|
| |
|
|
|
Accounts payable to customers, brokers and dealers
|
|
$ |
– |
|
|
$ |
862,694 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
862,694 |
|
|
|
|
Long-term debt
|
|
|
– |
|
|
|
747,550 |
|
|
|
74,752 |
|
|
|
– |
|
|
|
822,302 |
|
|
|
|
Other liabilities
|
|
|
2,654 |
|
|
|
360,125 |
|
|
|
1,055,860 |
|
|
|
(36 |
) |
|
|
1,418,603 |
|
|
|
|
Net intercompany advances
|
|
|
1,879,218 |
|
|
|
125,627 |
|
|
|
(2,005,346 |
) |
|
|
501 |
|
|
|
– |
|
|
|
|
Stockholders’ equity
|
|
|
1,663,709 |
|
|
|
867,448 |
|
|
|
2,678,802 |
|
|
|
(3,546,250 |
) |
|
|
1,663,709 |
|
|
|
| |
|
|
| |
Total liabilities and stockholders’ equity
|
|
$ |
3,545,581 |
|
|
$ |
2,963,444 |
|
|
$ |
1,804,068 |
|
|
$ |
(3,545,785 |
) |
|
$ |
4,767,308 |
|
|
|
| |
|
|
|
Condensed Consolidating Statements of Cash
Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) | |
|
|
|
|
|
|
|
H&R Block, Inc. |
|
BFC |
|
Other |
|
|
|
Consolidated |
|
|
| Year Ended April 30, 2004 |
|
(Guarantor) |
|
(Issuer) |
|
Subsidiaries |
|
Eliminations |
|
H&R Block |
|
|
|
|
|
|
Net cash provided by operating activities:
|
|
$ |
64,782 |
|
|
$ |
184,949 |
|
|
$ |
677,076 |
|
|
$ |
– |
|
|
$ |
926,807 |
|
|
|
| |
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of available-for-sale securities
|
|
|
– |
|
|
|
– |
|
|
|
(11,434 |
) |
|
|
– |
|
|
|
(11,434 |
) |
|
|
| |
Cash received on residual interests
|
|
|
– |
|
|
|
193,606 |
|
|
|
– |
|
|
|
– |
|
|
|
193,606 |
|
|
|
| |
Sales of available-for-sale securities
|
|
|
– |
|
|
|
53,391 |
|
|
|
15,410 |
|
|
|
– |
|
|
|
68,801 |
|
|
|
| |
Purchases of property & equipment, net
|
|
|
– |
|
|
|
(39,229 |
) |
|
|
(88,344 |
) |
|
|
– |
|
|
|
(127,573 |
) |
|
|
| |
Payments made for business acquisitions
|
|
|
– |
|
|
|
– |
|
|
|
(280,865 |
) |
|
|
– |
|
|
|
(280,865 |
) |
|
|
| |
Net intercompany advances
|
|
|
473,521 |
|
|
|
– |
|
|
|
– |
|
|
|
(473,521 |
) |
|
|
– |
|
|
|
| |
Other, net
|
|
|
– |
|
|
|
12,655 |
|
|
|
13,677 |
|
|
|
– |
|
|
|
26,332 |
|
|
|
| |
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
473,521 |
|
|
|
220,423 |
|
|
|
(351,556 |
) |
|
|
(473,521 |
) |
|
|
(131,133 |
) |
|
|
| |
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Repayments of commercial paper
|
|
|
– |
|
|
|
(4,618,853 |
) |
|
|
– |
|
|
|
– |
|
|
|
(4,618,853 |
) |
|
|
| |
Proceeds from issuance of commercial paper
|
|
|
– |
|
|
|
4,618,853 |
|
|
|
– |
|
|
|
– |
|
|
|
4,618,853 |
|
|
|
| |
Payments on acquisition debt
|
|
|
– |
|
|
|
– |
|
|
|
(59,003 |
) |
|
|
– |
|
|
|
(59,003 |
) |
|
|
| |
Dividends paid
|
|
|
(138,397 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(138,397 |
) |
|
|
| |
Acquisition of treasury shares
|
|
|
(519,862 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(519,862 |
) |
|
|
| |
Proceeds from issuance of common stock
|
|
|
119,956 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
119,956 |
|
|
|
| |
Net intercompany advances
|
|
|
– |
|
|
|
(453,477 |
) |
|
|
(20,044 |
) |
|
|
473,521 |
|
|
|
– |
|
|
|
| |
Other, net
|
|
|
– |
|
|
|
– |
|
|
|
(2,045 |
) |
|
|
– |
|
|
|
(2,045 |
) |
|
|
| |
|
|
|
Net cash provided by (used in) financing
activities
|
|
|
(538,303 |
) |
|
|
(453,477 |
) |
|
|
(81,092 |
) |
|
|
473,521 |
|
|
|
(599,351 |
) |
|
|
| |
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
– |
|
|
|
(48,105 |
) |
|
|
244,428 |
|
|
|
– |
|
|
|
196,323 |
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
– |
|
|
|
180,181 |
|
|
|
695,172 |
|
|
|
– |
|
|
|
875,353 |
|
|
|
| |
|
|
|
Cash and cash equivalents at end of the year
|
|
$ |
– |
|
|
$ |
132,076 |
|
|
$ |
939,600 |
|
|
$ |
– |
|
|
$ |
1,071,676 |
|
|
|
| |
|
|
|
63 –
H&R
BLOCK – Form
10-K
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
BFC |
|
Other |
|
|
|
Consolidated |
|
|
| Year Ended April 30, 2003 |
|
(Guarantor) |
|
(Issuer) |
|
Subsidiaries |
|
Eliminations |
|
H&R Block |
|
|
|
| |
Net cash provided by operating activities
|
|
$ |
36,560 |
|
|
$ |
140,617 |
|
|
$ |
513,648 |
|
|
$ |
– |
|
|
$ |
690,825 |
|
|
|
| |
|
|
| |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Purchases of available-for-sale securities
|
|
|
– |
|
|
|
– |
|
|
|
(14,614 |
) |
|
|
– |
|
|
|
(14,614 |
) |
|
|
| |
|
Maturities of available-for-sale securities
|
|
|
– |
|
|
|
140,795 |
|
|
|
– |
|
|
|
– |
|
|
|
140,795 |
|
|
|
| |
|
Sales of available-for-sale securities
|
|
|
– |
|
|
|
142,486 |
|
|
|
14,081 |
|
|
|
– |
|
|
|
156,567 |
|
|
|
| |
|
Purchases of property & equipment, net
|
|
|
– |
|
|
|
(37,999 |
) |
|
|
(112,898 |
) |
|
|
– |
|
|
|
(150,897 |
) |
|
|
| |
|
Payments made for business acquisitions
|
|
|
– |
|
|
|
– |
|
|
|
(26,408 |
) |
|
|
– |
|
|
|
(26,408 |
) |
|
|
| |
|
Net intercompany advances
|
|
|
280,583 |
|
|
|
– |
|
|
|
– |
|
|
|
(280,583 |
) |
|
|
– |
|
|
|
| |
|
Other, net
|
|
|
– |
|
|
|
(1,480 |
) |
|
|
21,376 |
|
|
|
– |
|
|
|
19,896 |
|
|
|
| |
|
|
| |
Net cash provided by (used in) investing
activities
|
|
|
280,583 |
|
|
|
243,802 |
|
|
|
(118,463 |
) |
|
|
(280,583 |
) |
|
|
125,339 |
|
|
|
| |
|
|
| |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Repayments of commercial paper
|
|
|
– |
|
|
|
(9,925,516 |
) |
|
|
– |
|
|
|
– |
|
|
|
(9,925,516 |
) |
|
|
| |
|
Proceeds from issuance of commercial paper
|
|
|
– |
|
|
|
9,925,516 |
|
|
|
– |
|
|
|
– |
|
|
|
9,925,516 |
|
|
|
| |
|
Payments on acquisition debt
|
|
|
– |
|
|
|
– |
|
|
|
(57,469 |
) |
|
|
– |
|
|
|
(57,469 |
) |
|
|
| |
|
Dividends paid
|
|
|
(125,898 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(125,898 |
) |
|
|
| |
|
Acquisition of treasury shares
|
|
|
(317,570 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(317,570 |
) |
|
|
| |
|
Proceeds from issuance of common stock
|
|
|
126,325 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
126,325 |
|
|
|
| |
|
Net intercompany advances
|
|
|
– |
|
|
|
(402,197 |
) |
|
|
121,614 |
|
|
|
280,583 |
|
|
|
– |
|
|
|
| |
|
Other, net
|
|
|
– |
|
|
|
– |
|
|
|
(2,344 |
) |
|
|
– |
|
|
|
(2,344 |
) |
|
|
| |
|
|
| |
Net cash provided by (used in) financing
activities
|
|
|
(317,143 |
) |
|
|
(402,197 |
) |
|
|
61,801 |
|
|
|
280,583 |
|
|
|
(376,956 |
) |
|
|
| |
|
|
| |
Net increase (decrease) in cash and cash
equivalents
|
|
|
– |
|
|
|
(17,778 |
) |
|
|
456,986 |
|
|
|
– |
|
|
|
439,208 |
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
– |
|
|
|
197,959 |
|
|
|
238,186 |
|
|
|
– |
|
|
|
436,145 |
|
|
|
| |
|
|
|
Cash and cash equivalents at end of the year
|
|
$ |
– |
|
|
$ |
180,181 |
|
|
$ |
695,172 |
|
|
$ |
– |
|
|
$ |
875,353 |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
BFC |
|
Other |
|
|
|
Consolidated |
|
|
| Year Ended April 30, 2002 |
|
(Guarantor) |
|
(Issuer) |
|
Subsidiaries |
|
Eliminations |
|
H&R Block |
|
|
|
| |
Net cash provided by operating activities
|
|
$ |
58,927 |
|
|
$ |
256,188 |
|
|
$ |
426,331 |
|
|
$ |
– |
|
|
$ |
741,446 |
|
|
|
| |
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Purchases of available-for-sale securities
|
|
|
– |
|
|
|
– |
|
|
|
(7,241 |
) |
|
|
– |
|
|
|
(7,241 |
) |
|
|
| |
|
Maturities of available-for-sale securities
|
|
|
– |
|
|
|
67,070 |
|
|
|
8,250 |
|
|
|
– |
|
|
|
75,320 |
|
|
|
| |
|
Sales of available-for-sale securities
|
|
|
– |
|
|
|
– |
|
|
|
23,173 |
|
|
|
– |
|
|
|
23,173 |
|
|
|
| |
|
Purchases of property & equipment, net
|
|
|
– |
|
|
|
(36,434 |
) |
|
|
(75,341 |
) |
|
|
– |
|
|
|
(111,775 |
) |
|
|
| |
|
Payments made for business acquisitions
|
|
|
– |
|
|
|
– |
|
|
|
(46,738 |
) |
|
|
– |
|
|
|
(46,738 |
) |
|
|
| |
|
Net intercompany advances
|
|
|
324,503 |
|
|
|
– |
|
|
|
– |
|
|
|
(324,503 |
) |
|
|
– |
|
|
|
| |
|
Other, net
|
|
|
– |
|
|
|
(4,069 |
) |
|
|
12,297 |
|
|
|
– |
|
|
|
8,228 |
|
|
|
| |
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
324,503 |
|
|
|
26,567 |
|
|
|
(85,600 |
) |
|
|
(324,503 |
) |
|
|
(59,033 |
) |
|
|
| |
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Repayments of commercial paper
|
|
|
– |
|
|
|
(10,622,011 |
) |
|
|
– |
|
|
|
– |
|
|
|
(10,622,011 |
) |
|
|
| |
|
Proceeds from issuance of commercial paper
|
|
|
– |
|
|
|
10,622,011 |
|
|
|
– |
|
|
|
– |
|
|
|
10,622,011 |
|
|
|
| |
|
Payments on acquisition debt
|
|
|
– |
|
|
|
– |
|
|
|
(50,594 |
) |
|
|
– |
|
|
|
(50,594 |
) |
|
|
| |
|
Dividends paid
|
|
|
(115,725 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(115,725 |
) |
|
|
| |
|
Acquisition of treasury shares
|
|
|
(462,938 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(462,938 |
) |
|
|
| |
|
Proceeds from issuance of common stock
|
|
|
195,233 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
195,233 |
|
|
|
| |
|
Net intercompany advances
|
|
|
– |
|
|
|
(167,738 |
) |
|
|
(156,765 |
) |
|
|
324,503 |
|
|
|
– |
|
|
|
| |
|
Other, net
|
|
|
– |
|
|
|
– |
|
|
|
140 |
|
|
|
– |
|
|
|
140 |
|
|
|
| |
|
|
|
Net cash used in financing activities
|
|
|
(383,430 |
) |
|
|
(167,738 |
) |
|
|
(207,219 |
) |
|
|
324,503 |
|
|
|
(433,884 |
) |
|
|
| |
|
|
|
Net increase in cash and cash equivalents
|
|
|
– |
|
|
|
115,017 |
|
|
|
133,512 |
|
|
|
– |
|
|
|
248,529 |
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
– |
|
|
|
82,942 |
|
|
|
104,674 |
|
|
|
– |
|
|
|
187,616 |
|
|
|
| |
|
|
|
Cash and cash equivalents at end of the year
|
|
$ |
– |
|
|
$ |
197,959 |
|
|
$ |
238,186 |
|
|
$ |
– |
|
|
$ |
436,145 |
|
|
|
| |
|
|
|
– 64
Form
10-K – H&R
BLOCK
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The information called for by this item regarding
the change in independent accountants following completion of
the audit of our financial statements for the fiscal year ended
April 30, 2003 was previously reported (as such term is
defined in Rule 12b-2 of the Securities Exchange Act of
1934, as amended) in the current reports on Form 8-K dated
May 12, 2003 and July 10, 2003 and Form 8-K/ A
dated May 12, 2003.
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosures controls are procedures that are
designed with the objective of ensuring that information
required to be disclosed in reports filed or submitted under the
Securities Exchange Act of 1934, such as this Form 10-K, is
recorded, processed, summarized and reported in accordance with
the SEC’s rule. Disclosure controls are also designed with
the objective of ensuring that such information is accumulated
and communicated to management, including the Chief Executive
Officer and Chief Financial Officer or persons performing
similar functions, as appropriate, to allow timely decisions
regarding disclosure.
Our Disclosure Controls were designed to provide
reasonable assurance that the controls and procedures would meet
their objectives. Our management, including the CEO and
Principal Accounting Officer, does not expect that our
Disclosure Controls will prevent all error and all fraud. A
control system, no matter how well designed and operated, can
provide only reasonable assurance of achieving the designed
control objectives and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simply error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusions of two or more people, or by management override of
the control. Because of the inherent limitations in a
cost-effective, maturing control system, misstatements due to
error or fraud may occur and not be detected.
As of the end of the period covered by this
Form 10-K, we evaluated the effectiveness of the design and
operation of our Disclosure Controls. The controls evaluation
was done under the supervision and with the participation of
management, including our CEO and Principal Accounting Officer.
The evaluation of our Disclosure Controls
included a review of the controls’ objectives and design,
our implementation of the controls and the effect of the
controls on the information generated for the use in this
Form 10-K. In the course of the controls evaluation, we
identified a series of control weaknesses related to our
corporate tax accounting function. These weaknesses relate
specifically to the reconciliation and level of detailed support
of both current and deferred income tax accounts. We also
determined an acceleration of taxable income was warranted in
one of our segments, however, there was no change to our total
income tax provision. Upon identification of these control
weaknesses, immediate corrective action was undertaken. Our
efforts to strengthen financial and internal controls continue.
We expect these efforts to be completed by the end of fiscal
year 2005.
Based on this evaluation, other than the item
described above, our CEO and Principal Accounting Officer have
concluded these controls are effective. There have been no
significant changes in internal controls, or in other factors,
which would significantly affect these controls subsequent to
the date of evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
The following information appearing in our
definitive proxy statement, to be filed no later than
120 days after April 30, 2004, is incorporated herein
by reference:
|
|
|
| |
• |
Information appearing under the heading
“Election of Directors”
|
| |
• |
Information appearing under the heading
“Section 16(a) Beneficial Ownership Reporting
Compliance”
|
| |
• |
Information appearing under the heading
“Board of Directors’ Meetings and Committees”
regarding identification of the Audit Committee and Audit
Committee financial experts.
|
We have adopted a code of business ethics and
conduct that applies to our directors, officers and employees,
including our chief executive officer, chief financial officer,
principal accounting officer and persons performing similar
functions. A copy of the code of business ethics and conduct is
available on our website at www.hrblock.com.
65 –
H&R
BLOCK – Form
10-K
Information about our executive officers as of
May 15, 2004 is as follows:
| |
|
|
|
|
|
|
|
|
|
| Name, age |
|
Current Position |
|
Business Experience Since May 1, 1999 |
|
|
|
|
|
Mark A. Ernst,
age 46
|
|
Chairman of the Board, President and Chief
Executive Officer
|
|
Chairman of the Board of Directors since
September 2002; Chief Executive Officer since January 2001;
President of the Company since September 1999; Chief Operating
Officer from September 1998 through December 2000; Executive
Vice President from September 1998 until September 1999.
Mr. Ernst has been a Member of the Board of Directors since
September 1999.
|
|
|
|
Jeffery W. Yabuki,
age 44
|
|
Executive Vice President and Chief Operating
Officer
|
|
Chief Operating Officer since April 2002;
Executive Vice President since October 2000; President, H&R
Block Services, Inc. since October 2000; President, H&R
Block International from September 1999 until October 2000;
President and Chief Executive Officer of American Express
Tax & Business Services, Inc., from 1998 to September
1999.
|
|
|
|
Melanie K. Coleman,
age 39
|
|
Vice President and Corporate Controller
|
|
Vice President and Corporate Controller since
October 2002; Assistant Vice President and Assistant Controller
at Sprint Corporation (“Sprint”), from December 2000
until October 2002; Executive Assistant to the Chief Financial
Officer of Sprint from September 1999 until December 2000;
Director, Capital Asset Accounting at Sprint from October 1998
until September 1999.
|
|
|
|
Robert E. Dubrish,
age 52
|
|
President and Chief Executive Officer, Option One
Mortgage Corporation
|
|
President and Chief Executive Officer, Option One
Mortgage Corporation, since March 1996.
|
|
|
|
Brad C. Iversen,
age 54
|
|
Senior Vice President and Chief Marketing Officer
|
|
Senior Vice President and Chief Marketing Officer
since September 2003; Founded Catamount Marketing in 2002;
Executive Vice President and Director of Marketing at Bank One
Corporation from 1997 to 2002.
|
|
|
|
Linda M. McDougall,
age 51
|
|
Vice President, Communications
|
|
Vice President, Communications since July 1999;
Assistant Vice President, Communications from November 1995
through June 1999.
|
|
|
|
Timothy R. Mertz,
age 53
|
|
Vice President, Corporate Tax
|
|
Vice President, Corporate Tax since October 2000;
Vice President of Treasury for Payless Cashways, Inc., from
September 1998 through September 2000.
|
|
|
|
Brian L. Nygaard,
age 46
|
|
President and Chief Executive Officer, H&R
Block Financial Advisors, Inc.
|
|
President and Chief Executive Officer, H&R
Block Financial Advisors, Inc., since November 2001; President,
ING Advisors Network, ING Group, from October 2000 until October
2001; Chief Operating Officer, Advisors Network, ING Advisors
Network, from October 1999 until October 2000; Senior Vice
President, Strategic Marketing, ING Advisors Network, from May
1999 until October 1999.
|
|
|
|
Tammy S. Serati,
age 45
|
|
Senior Vice President, Human Resources
|
|
Senior Vice President, Human Resources since
December 2002; Vice President, Human Resources Corporate Staffs,
for Monsanto Agricultural Company, from May 2000 through
November 2002; Vice President, Human Resources, Monsanto
Nutrition & Consumer Sector, from January 1997 through
April 2000.
|
|
|
|
Becky S. Shulman,
age 39
|
|
Vice President and Treasurer
|
|
Vice President and Treasurer since September
2001; Chief Investment Officer of U.S. Central Credit
Union, from September 1998 until August 2001.
|
|
|
|
Nicholas J. Spaeth,
age 54
|
|
Senior Vice President and Chief Legal Officer
|
|
Senior Vice President and Chief Legal Officer
since February 2004; Senior Vice President, General Counsel and
Secretary of Intuit, Inc. from August 2003 to February 2004;
Senior Vice President, General Counsel and Secretary, GE
Employers Reinsurance Corporation from September 2000 until
August 2003; Partner at Cooley Godward LLP from March 1998 until
September 2000.
|
|
|
|
Steven Tait,
age 44
|
|
President, RSM McGladrey Business Services, Inc.
|
|
President, RSM McGladrey Business Services, Inc.
since April 2003; Executive Vice President, Sales &
Client Operations, Gartner, Inc., from June 2001 through March
2003; Senior Vice President, Sales and Operations at Gartner,
Inc. from July 2000 until May 2001; President and Chief
Executive Officer of Xerox Connect, a wholly-owned subsidiary of
Xerox Corporation, from November 1999 until June 2000; Vice
President, Xerox Global Services/ VP Xerox Offsite Document
Management Services, from September 1998 until October 1999.
|
|
|
|
– 66
Form
10-K – H&R
BLOCK
| |
|
|
|
|
|
|
|
|
|
| Name, age |
|
Current Position |
|
Business Experience Since May 1, 1999 |
|
|
|
|
|
Robert A. Weinberger,
age 60
|
|
Vice President, Government Relations
|
|
Vice President, Government Relations, since March
1996.
|
|
|
|
Bret G. Wilson,
age 45
|
|
Vice President and Secretary
|
|
Vice President and Secretary since October 2002;
Vice President, Corporate Development and Risk Management from
October 2000 until October 2002; Vice President, Corporate
Planning and Development from September 1999 until October 2000;
Vice President, Corporate Development, from December 1997 until
September 1999.
|
|
|
ITEM 11. EXECUTIVE
COMPENSATION
The information called for by this item is
contained in our definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after
April 30, 2004, in the sections entitled “Director
Compensation” and “Compensation of Executive
Officers,” and is incorporated herein by reference.
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information called for by this item is
contained in our definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after
April 30, 2004, in the section titled “Equity
Compensation Plans” and in the section titled
“Information Regarding Security Holders,” and is
incorporated herein by reference.
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS |
The information called for by this item is
contained in our definitive proxy statement filed pursuant to
Regulation 14A no later than 120 days after
April 30, 2004, in the section titled “Employee
Agreements, Change in Control and Other Arrangements,” and
is incorporated herein by reference.
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND
SERVICES |
The information called for by this item is
contained in our definitive proxy statement filed pursuant to
Regulation 14A no later than 120 days after
April 30, 2004, in the section titled “Audit
Fees,” and is incorporated herein by reference.
67 –
H&R
BLOCK – Form
10-K
PART IV
|
|
| ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K |
(a) Documents filed as part of this Report:
|
|
|
| |
1. |
The following financial statements appearing in
Item 8: “Consolidated Income Statements;”
“Consolidated Balance Sheets;” “Consolidated
Statements of Cash Flows;” and “Consolidated
Statements of Stockholders’ Equity.”
|
| |
2. |
Financial Statement Schedule II –
Valuation and Qualifying Accounts with the related Reports of
Independent Registered Public Accounting Firms. These will be
filed with the SEC but will not be included in the printed
version of the Annual Report to Shareholders.
|
| |
3. |
Exhibits: The list of exhibits in the
Exhibit Index to this Report is incorporated herein by
reference. The following exhibits are required to be filed as
exhibits to this Form 10-K:
|
| |
|
|
|
3.3
|
|
Amended and Restated Bylaws of H&R Block,
Inc., as amended and restated as of June 9, 2004.
|
|
10.16
|
|
Employment Agreement dated February 2, 2004
between HRB Management, Inc. and Nicholas J. Spaeth.
|
|
10.23
|
|
Severance and Release Agreement dated
February 10, 2004 between HRB Management, Inc. and James H.
Ingraham.
|
|
10.24
|
|
Termination Agreement dated April 16, 2004
between HRB Management, Inc. and Jeffrey G. Brandmaier.
|
|
12
|
|
Computation of Ratio of Earnings to Fixed Charges
for the five years ended April 30, 2004.
|
|
21
|
|
Subsidiaries of the Company.
|
|
23.1
|
|
Consent of KPMG LLP, Independent Registered
Public Accounting Firm.
|
|
23.2
|
|
Consent of PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm.
|
|
31.1
|
|
Certification by Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification by Principal Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certification by Chief Executive Officer pursuant
to 18 U.S.C. 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification by Principal Accounting Officer
pursuant to 18 U.S.C. 1350, as adopted by Section 906
of the Sarbanes- Oxley Act of 2002.
|
The exhibits will be filed with the SEC but will
not be included in the printed version of the Annual Report to
Shareholders.
(b) Reports on Form 8-K:
We filed on February 24, 2004 an amended
report on Form 8-K/ A dated May 12, 2003, with updated
Item 4 disclosures as of and through the date of
PricewaterhouseCoopers LLP’s resignation (the termination
date of the client/auditor relationship) as the Company’s
independent accountants.
We filed on February 26, 2004 a report on
Form 8-K dated February 24, 2004, reporting under
Item 12, Results of Operations and Financial Condition, our
issuance of a press release regarding our results of operations
for the fiscal quarter ended January 31, 2004.
– 68
Form
10-K – H&R
BLOCK
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
| |
|
| |
Mark A. Ernst
|
| |
Chairman of the Board, President and Chief
Executive Officer
|
July 2, 2004
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the date indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
| Signature |
|
Title |
|
|
| |
/s/ MARK A. ERNST
Mark A. Ernst
|
|
Chairman of the Board, President, Chief Executive
Officer and Director
(principal executive officer)
|
|
|
| |
/s/ G. KENNETH BAUM
G. Kenneth Baum
|
|
Director
|
|
|
| |
/s/ THOMAS M. BLOCH
Thomas M. Bloch
|
|
Director
|
|
|
| |
/s/ DONNA R. ECTON
Donna R. Ecton
|
|
Director
|
|
|
| |
/s/ ROGER W. HALE
Roger W. Hale
|
|
Director
|
|
|
| |
/s/ TOM D. SEIP
Tom D. Seip
|
|
Director
|
|
|
| |
/s/ LOUIS W. SMITH
Louis W. Smith
|
|
Director
|
|
|
| |
/s/ RAYFORD WILKINS, JR.
Rayford Wilkins, Jr.
|
|
Director
|
|
|
| |
/s/ MELANIE K. COLEMAN
Melanie K. Coleman
|
|
Vice President and Corporate Controller
(principal accounting officer)
|
|
|
(Signed as to each on June 9, 2004)
69 –
H&R
BLOCK – Form
10-K
EXHIBIT INDEX
The following exhibits are numbered in accordance
with the Exhibit Table of Item 601 of
Regulation S-K:
| |
|
|
|
|
| |
3 |
.1 |
|
Restated Articles of Incorporation of H&R
Block, Inc., as amended, filed as Exhibit 3.2 to the
Company’s quarterly report on Form 10-Q for the
quarter ended October 31, 2001, file number 1-6089, are
incorporated herein by reference.
|
| |
3 |
.2 |
|
Certificate of Amendment of Articles of
Incorporation effective October 15, 2001, filed as
Exhibit 3.1 to the Company’s quarterly report on Form
10-Q for the quarter ended October 31, 2001, file number
1-6089, is incorporated herein by reference.
|
| |
3 |
.3 |
|
Amended and Restated Bylaws of H&R Block,
Inc., as amended and restated as of June 9, 2004.
|
| |
4 |
.1 |
|
Indenture dated as of October 20, 1997,
among H&R Block, Inc., Block Financial Corporation and
Bankers Trust Company, as Trustee, filed as Exhibit 4(a) to
the Company’s quarterly report on Form 10-Q for the
quarter ended October 31, 1997, file number 1-6089, is
incorporated herein by reference.
|
| |
4 |
.2 |
|
First Supplemental Indenture, dated as of
April 18, 2000, among H&R Block, Inc., Block Financial
Corporation, Bankers Trust Company and the Bank of New York,
filed as Exhibit 4(a) to the Company’s current report
on Form 8-K dated April 13, 2000, file number 1-6089, is
incorporated herein by reference.
|
| |
4 |
.3 |
|
Form of 6 3/4% Senior Note due 2004 of Block
Financial Corporation, filed on October 23, 1997 as
Exhibit 2.2 to the Company’s current report on Form
8-K, file number 1-6089, is incorporated herein by reference.
|
| |
4 |
.4 |
|
Form of 8 1/2% Senior Note due 2007 of
Block Financial Corporation, filed as Exhibit 4(b) to the
Company’s current report on Form 8-K dated April 13,
2000, file number 1-6089, is incorporated herein by reference.
|
| |
4 |
.5 |
|
Copy of Rights Agreement dated March 25,
1998, between H&R Block, Inc. and ChaseMellon Shareholder
Services, L.L.C., filed on July 22, 1998 as Exhibit 1
to the Company’s Registration Statement on Form 8-A, file
number 1-6089, is incorporated herein by reference.
|
| |
4 |
.6 |
|
Form of Certificate of Designation, Preferences
and Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(e) to the Company’s annual
report on Form 10-K for the fiscal year ended April 30,
1995, file number 1-6089, is incorporated by reference.
|
| |
4 |
.7 |
|
Form of Certificate of Amendment of Certificate
of Designation, Preferences and Rights of Participating
Preferred Stock of H&R Block, Inc., filed as
Exhibit 4(j) to the Company’s annual report on Form
10-K for the fiscal year ended April 30, 1998, file number
1-6089, is incorporated by reference.
|
| |
4 |
.8 |
|
Form of Certificate of Designation, Preferences
and Rights of Delayed Convertible Preferred Stock of H&R
Block, Inc., filed as Exhibit 4(f) to the Company’s
annual report on Form 10-K for the fiscal year ended
April 30, 1995, file number 1-6089, is incorporated by
reference.
|
| |
10 |
.1 * |
|
The Company’s 1993 Long-Term Executive
Compensation Plan, as amended and restated as of
September 11, 2002, filed as Exhibit 10.1 to the
Company’s quarterly report on Form 10-Q for the quarter
ended October 31, 2002, file number 1-6089, is incorporated
by reference.
|
| |
10 |
.2 * |
|
The Company’s 2003 Long-Term Executive
Compensation Plan, as amended and restated as of
September 10, 2003, filed as Exhibit 10.2 to the
Company’s quarterly report on Form 10-Q for the quarter
ended October 31, 2003, file number 1-6089, is incorporated
by reference.
|
| |
10 |
.3 * |
|
The H&R Block Deferred Compensation Plan for
Directors, as Amended and Restated effective July 1, 2002,
filed as Exhibit 10.2 to the Company’s annual report
on Form 10-K for the fiscal year ended April 30, 2002, file
number 1-6089, is incorporated by reference.
|
| |
10 |
.4 * |
|
The H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated July 1, 2002, filed as
Exhibit 10.3 to the Company’s annual report on Form
10-K for the fiscal year ended April 30, 2002, file number
1-6089, is incorporated by reference.
|
| |
10 |
.5 * |
|
Amendment No. 1 to the H&R Block
Deferred Compensation Plan for Executives, as Amended and
Restated, effective as of March 12, 2003, filed as
Exhibit 10.5 to the company’s annual report on
Form 10-K for the fiscal year ended April 30, 2003,
file number 1-6089, is incorporated herein by reference.
|
| |
10 |
.6 * |
|
The H&R Block Short-Term Incentive Plan,
filed as Exhibit 10.1 to the Company’s quarterly
report on Form 10-Q for the quarter ended October 31, 2000,
file number 1-6089, is incorporated herein by reference.
|
| |
10 |
.7 * |
|
The Company’s 1989 Stock Option Plan for
Outside Directors, as amended September 12, 2001, filed as
Exhibit 10.4 to the Company’s quarterly report on Form
10-Q for the quarter ended October 31, 2001, file number
1-6089, is incorporated herein by reference.
|
| |
10 |
.8 * |
|
The H&R Block Stock Plan for Non-Employee
Directors, as amended August 1, 2001, filed as
Exhibit 10.3 to the Company’s quarterly report on Form
10-Q for the quarter ended October 31, 2001, file number
1-6089, is incorporated herein by reference.
|
| |
10 |
.9 * |
|
The H&R Block, Inc. 2000 Employee Stock
Purchase Plan, as amended August 1, 2001, filed as
Exhibit 10.2 to the Company’s quarterly report on Form
10-Q for the quarter ended October 31, 2001, file number
1-6089, is incorporated herein by reference.
|
| |
10 |
.10 * |
|
The H&R Block, Inc. Executive Survivor Plan
(as Amended and Restated) filed as Exhibit 10.4 to the
Company’s quarterly report on Form 10-Q for the quarter
ended October 31, 2000, file number 1-6089, is incorporated
herein by reference.
|
| |
10 |
.11 * |
|
First Amendment to the H&R Block, Inc.
Executive Survivor Plan (as Amended and Restated), filed as
Exhibit 10.9 to the Company’s annual report on Form
10-K for the fiscal year ended April 30, 2002, file number
1-6089, is incorporated by reference.
|
– 70
Form
10-K – H&R
BLOCK
| |
|
|
|
|
| |
10 |
.12 * |
|
Second Amendment to the H&R Block, Inc.
Executive Survivor Plan (as Amended and Restated), effective as
of March 12, 2003, filed as Exhibit 10.12 to the
company’s annual report on Form 10-K for the fiscal year
ended April 30, 2003, file number 1-6089, is incorporated
herein by reference.
|
| |
10 |
.13 * |
|
Employment Agreement dated July 16, 1998,
between the Company and Mark A. Ernst, filed as
Exhibit 10(a) to the Company’s quarterly report on
Form 10-Q for the quarter ended July 31, 1998, file number
1-6089, is incorporated herein by reference.
|
| |
10 |
.14 * |
|
Amendment to Employment Agreement dated
June 30, 2000, between HRB Management, Inc. and Mark A.
Ernst, filed as Exhibit 10.1 to the Company’s
quarterly report on Form 10-Q for the quarter ended
July 31, 2000, file number 1-6089, is incorporated herein
by reference.
|
| |
10 |
.15 * |
|
Employment Agreement dated September 7,
1999, between HRB Management, Inc. and Jeffery W. Yabuki, filed
as Exhibit 10.4 to the Company’s quarterly report on
Form 10-Q for the quarter ended January 31, 2000, file
number 1-6089, is incorporated herein by reference.
|
| |
10 |
.16 * |
|
Employment Agreement dated as of February 2,
2004, between HRB Management, Inc. and Nicholas J. Spaeth.
|
| |
10 |
.17 * |
|
Employment Agreement dated September 2,
2003, between HRB Management, Inc. and Brad C. Iversen, filed as
Exhibit 10.1 to the Company’s quarterly report on Form
10-Q for the quarter ended January 31, 2004, file number
1-6089, is incorporated herein by reference.
|
| |
10 |
.18 * |
|
Employment Agreement between Option One Mortgage
Corporation and Robert E. Dubrish, executed on
February 9, 2002, filed as Exhibit 10.2 to the
Company’s quarterly report on Form 10-Q for the quarter
ended January 31, 2002, file number 1-6089, is incorporated
herein by reference.
|
| |
10 |
.19 * |
|
Employment Agreement dated as of November 5,
2001, between H&R Block Financial Advisors, Inc. and Brian
L. Nygaard, filed as Exhibit 10.4 to the Company’s
quarterly report on Form 10-Q for the quarter ended
January 31, 2002, file number 1-6089, is incorporated
herein by reference.
|
| |
10 |
.20 * |
|
Employment Agreement dated December 2, 2002
between HRB Management, Inc. and Tammy S. Serati, filed as
Exhibit 10.4 to the quarterly report on Form 10-Q for the
quarter ended January 31, 2003, file number 1-6089, is
incorporated herein by reference.
|
| |
10 |
.21 * |
|
Employment Agreement dated as of April 1,
2003 between HRB Business Services, Inc. and Steven Tait, filed
as Exhibit 10.23 to the annual report on Form 10-K for the
fiscal year ended April 30, 2003, file number 1-6089, is
incorporated herein by reference.
|
| |
10 |
.22 * |
|
Separation Agreement dated September 4, 2003
between HRB Management, Inc. and Frank J. Cotroneo, filed as
Exhibit 10.1 to the Company’s quarterly report on Form
10-Q for the quarter ended October 31, 2003, file number
1-6089, is incorporated herein by reverence
|
| |
10 |
.23 * |
|
Severance and Release Agreement dated
February 2, 2004 between HRB Management, Inc. and James H.
Ingraham.
|
| |
10 |
.24 * |
|
Termination Agreement dated April 16, 2004
between HRB Management, Inc. and Jeffrey G. Brandmaier.
|
| |
10 |
.25 |
|
Second Amended and Restated Refund Anticipation
Loan Operations Agreement dated as of June 9, 2003, between
H&R Block Services, Inc., Household Tax Masters, Inc. and
Beneficial Franchise Company, filed as Exhibit 10.27 to the
annual report on Form 10-K for the fiscal year ended
April 30, 2003, file number 1-6089, is incorporated herein
by reference.
|
| |
10 |
.26 |
|
Third Amended and Restated Refund Anticipation
Loan Participation Agreement dated as of January 1, 2004,
between Block Financial Corporation and Household Tax Masters,
Inc., filed as Exhibit 10.3 to the quarterly report on Form
10-Q for the quarter ended January 31, 2004, file number
1-6089, is incorporated herein by reference.
|
| |
10 |
.27 |
|
Agreement of Settlement dated March 31, 2003
by and between H&R Block, Inc., H&R Block and Associates
L.P., H&R Block Tax Services, Inc., HRBO, Limited, H&R
Block of South Texas, Inc., HRB-Delaware, Inc., H&R Block,
Ltd., HRBOI, Ltd., HRBO III, Ltd., HRBOII, Inc., H&R
Block of Dallas, Inc., H&R Block of Houston, Ltd., Houston
Block, L.C., Block Management, Ltd., and STI-Block, L.C., and
Ronnie and Nancy Haese, on behalf of themselves individually and
on behalf of the Class as defined in such Agreement, filed as
Exhibit 10.29 to the annual report on Form 10-K for
the fiscal year ended April 30, 2003, file number 1-6089,
is incorporated herein by reference.
|
| |
10 |
.28 |
|
Credit and Guarantee Agreement dated as of
August 12, 2003 among Block Financial Corporation, H&R
Block, Inc., The Royal Bank of Scotland PLC, Bank of America,
N.A., JPMorgan Chase Bank, J.P. Morgan Securities, Inc. and
other lending parties thereto, filed as Exhibit 10.3 to the
quarterly report on Form 10-Q for the quarter ended
July 31, 2003, file number 1-6089, is incorporated herein
by reference.
|
| |
10 |
.29 |
|
Settlement Agreement dated January 8, 2004
between (a) Herbert Dicker; HBD, Inc.; Robert Hildorf; RKL,
Inc.; Ray Jiruska; HRB, LLC; RLJ Enterprises, Inc.; DFJ
Enterprises, Inc.; RRJ Enterprises, Inc.; DEJ Enterprises, Inc.;
Moore Business Service, Inc.; T.J. Enterprises, Inc.; Block
Mountain West, Inc.; Orr Enterprises Limited Partnership;
S.E. Iowa Business Services, Inc.; Taxsavers, Inc.; and JBW
Limited Partnership and (b) H&R Block, Inc.; Block
Financial Corporation; HRB Royalty, Inc.; H&R Block Tax
Services, Inc.; and H&R Block Eastern Tax Services, Inc.,
filed as Exhibit 10.2 to the quarterly report on Form 10-Q
for the quarter ended January 31, 2004, file number 1-6089,
is incorporated herein by reference.
|
|
|
| * |
Indicates management contracts, compensatory
plans or arrangements. |
71 –
H&R
BLOCK – Form
10-K
SCHEDULE II –
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30,
2004, 2003 AND 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
|
Beginning of |
|
Costs and |
|
Charged to |
|
|
|
Balance at End |
|
|
| Description |
|
Period |
|
Expenses |
|
Other |
|
Deductions |
|
of Period |
|
|
|
|
Allowance for Doubtful Accounts –
deducted from accounts receivable in the
balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2004
|
|
$ |
23,941,000 |
|
|
$ |
53,663,000 |
|
|
|
— |
|
|
$ |
23,083,000 |
|
|
$ |
54,521,000 |
|
|
|
| |
|
|
| |
2003
|
|
$ |
65,842,000 |
|
|
$ |
49,748,000 |
|
|
|
— |
|
|
$ |
91,649,000 |
|
|
$ |
23,941,000 |
|
|
|
| |
|
|
| |
2002
|
|
$ |
48,817,000 |
|
|
$ |
76,804,000 |
|
|
|
— |
|
|
$ |
59,779,000 |
|
|
$ |
65,842,000 |
|
|
|
| |
|
|
|
– 72
Form
10-K – H&R
BLOCK
Report of Independent
Registered Public Accounting Firm on Schedule
To the Board of Directors and Stockholders of
H&R Block, Inc.:
Under date of June 9, 2004, we reported on
the consolidated balance sheet of H&R Block, Inc. (the
Company) as of April 30, 2004, and the related consolidated
income statement, statement of cash flows and statement of
stockholders’ equity for the year then ended, which are
included in the Company’s annual report filed on
Form 10-K. In connection with our audit of the
aforementioned consolidated financial statements, we also
audited the related financial statement schedule for the year
ended April 30, 2004 included in the Form 10-K. In our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
The audit report on the consolidated financial
statements of H&R Block, Inc. referred to above
contains an explanatory paragraph stating that as discussed in
Note 1 to the consolidated financial statements, the
Company changed its method of accounting to adopt Staff
Accounting Bulletin No. 105, “Application of
Accounting Principles to Loan Commitments,” Emerging
Issues Task Force Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables” and Statement of
Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation – Transition and
Disclosure” during the year ended April 30, 2004.
/s/ KPMG LLP
Kansas City, Missouri
June 9, 2004
73 –
H&R
BLOCK – Form
10-K
Report of Independent
Registered Public Accounting Firm on Financial Statement
Schedule
To the Board of Directors of H&R Block, Inc.:
Our audits of the consolidated financial
statements referred to in our report dated June 10, 2003
appearing in the 2004 Annual Report to Shareholders of H&R
Block, Inc. also included an audit of the financial statement
schedule listed in Item 15(a)(2) of this Form 10-K for
the years ended April 30, 2003 and 2002. In our opinion,
this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
June 10, 2003
– 74