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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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[X] |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: April 30, 2006 |
OR
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[ ] |
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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)
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MISSOURI
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44-0607856 |
(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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4400 Main Street, Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
Common Stock, without par value
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New York Stock Exchange |
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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 is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes No ü
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes No ü
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 ü No .
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 registrants 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one) Large accelerated filer ü
Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes No ü
The aggregate market value of the registrants 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, 2005, was $8,049,475,793.
Number of shares of registrants Common Stock, without par value, outstanding on May 31, 2006:
321,925,770.
Documents incorporated by reference
The definitive proxy statement relating to the registrants Annual Meeting of Shareholders,
to be held September 7, 2006, is incorporated by reference in Part III to the extent described
therein.
2006 FORM 10-K AND ANNUAL REPORT
TABLE OF CONTENTS
1
INTRODUCTION AND FORWARD LOOKING STATEMENTS
Specified portions of our proxy statement, which will be filed in July 2006, 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 2006 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
Companys 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 with subsidiaries providing tax, investment, mortgage and
business services and products. Our Tax Services segment provides income tax return preparation and
other services and products related to tax return preparation to the general public in the United
States, and 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 services through Option One Mortgage Corporation
(Option One) and H&R Block Mortgage Corporation (HRBMC). RSM McGladrey Business Services, Inc.
(RSM) is a national accounting, tax and business consulting firm primarily serving mid-sized
businesses.
H&R BLOCKS MISSION
To help our clients achieve their financial
objectives by serving as their tax
and financial partner.
We serve our clients financial needs through the consistent high quality delivery of a
variety of tax and financial services. Operating through multiple lines of business allows us to
better meet the changing financial needs of our clients.
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 financial services and
products 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 In March 2006, the Office of Thrift Supervision (OTS) approved the
charter of the H&R Block Bank. The bank will commence operations on May 1, 2006. In fiscal year
2007, we will realign certain segments of our business to reflect a new management reporting
structure.
On February 22, 2006, the Companys management and the Audit Committee of the Board of
Directors concluded to restate previously issued consolidated financial statements for the fiscal
quarters ended October 31, 2005 and July 31, 2005, and the fiscal years ended April 30, 2005 and
2004 and the related fiscal quarters. The Company arrived at this conclusion during the course of
its closing process for the quarter ended January 31, 2006. The restatement pertained primarily to
errors in determining the Companys state effective income tax rate, including errors in
identifying changes in state apportionment, expiring state net operating losses and related
factors, for the fiscal years ended April 30, 2005 and 2004, and the related fiscal quarters.
On June 8, 2005, our Board of Directors declared a two-for-one stock split of the Companys
Common Stock in the form of a 100% stock distribution, effective August 22, 2005, to shareholders
of record as of the close of business on August 1, 2005. All share and per share amounts in this
document have been adjusted to reflect the retroactive effect of the stock split.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See discussion below and in Item 8, note 19 to our consolidated financial statements.
2
DESCRIPTION OF BUSINESS
TAX SERVICES
GENERAL Our Tax Services segment is primarily engaged in providing tax return preparation
and related services and products in the United States and its territories, Canada, Australia and
the United Kingdom. Revenues include fees earned for 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 participation in
refund anticipation loans (RALs). Segment revenues constituted 50.3% of our consolidated revenues
for fiscal year 2006, 53.4% for 2005, and 51.6% for 2004.
Retail income tax return preparation and related services are provided by tax professionals
via a system of retail offices operated directly by us or by franchisees. We also offer our
services though seasonal offices located inside major retailers.
We offer a number of digital tax preparation alternatives. 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.
The following are some of the services we offer with our tax preparation service:
PEACE OF MIND GUARANTEE The POM guarantee is offered to U.S. clients, whereby we (1)
represent our clients if audited by the IRS, and (2) assume the cost, subject to certain limits, of
additional taxes owed by a client resulting from errors attributable to one of our tax
professionals work. The POM program has a per client cumulative limit of $5,000 in additional
taxes assessed with respect to the federal, state and local tax returns we prepared for the taxable
year covered by the program.
RALs RALs are offered to our U.S. clients by a designated bank through a contractual
relationship with HSBC Holdings plc (HSBC). 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 HSBC in amounts up to $9,999 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
or direct deposit in the amount of the loan, less the banks transaction fee, our tax return
preparation fee and 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 using the Instant Money service. For a RAL to be repaid, the IRS
directly deposits the participating clients federal income tax refund into a designated account at
the lending bank. See related discussion of RAL participations below.
RACs Refund Anticipation Checks (RACs) are offered to U.S. clients who would like to either
(1) receive their refund faster and do not have a bank account for the IRS to direct deposit their
refund or (2) have their tax preparation fees paid directly out of their refund. A RAC is not a
loan and is provided through a contractual relationship with HSBC.
EXPRESS IRAs Individual retirement accounts (Express IRAs), invested in FDIC-insured money
market accounts, are offered to U.S. clients as a tax-advantaged 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.
TAX RETURN PREPARATION COURSES We offer income tax return preparation courses to the
public, which teach students how to prepare income tax returns and provide us with a source of
trained tax professionals.
SOFTWARE PRODUCTS We develop and market TaxCut income tax preparation software, Kiplingers
Home and Business Attorney and Kiplingers WILLPowerSM software products.
TaxCut 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.
ONLINE TAX PREPARATION We offer a comprehensive range of tax services and products, 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. These websites allow clients to
prepare their federal and state income tax returns using the TaxCut Online
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Tax Program, access tax
tips, advice and tax-related news and use calculators for tax planning.
Beginning with the fiscal year 2003 tax season, we participated in the Free File Alliance
(FFA). This alliance was created by the tax return preparation industry and the IRS, and allows
qualified filers to prepare and file their federal return online at no charge. We feel that this
program provides a valuable public service and increases our visibility with new clients, while
also providing an opportunity to offer our state return preparation services to these new clients
at our regular prices.
CASHBACK
PROGRAM 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 customers 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 the Canada Revenue Agency (CRA) and the refund check is then sent by the CRA
directly to us. In accordance with the law, the discount is deemed to include both the tax return
preparation fee and the fee for tax refund discounting. This program is financed by short-term
borrowings. The number of returns discounted under the CashBack program in fiscal year 2006 was
approximately 653,000, compared to 581,000 in 2005 and 552,000 in 2004. See discussion of the
Canadian tax season extension under Seasonality of Business.
CLIENTS SERVED We, together with our franchisees, served approximately 21.9 million clients
worldwide during fiscal year 2006, compared to 21.4 million in 2005 and 21.6 million in 2004. See
discussion of the Canadian tax season extension under Seasonality of Business. We served 19.5
million clients in the U.S. during fiscal year 2006, compared to 19.1 million in 2005 and 19.3
million in 2004. Clients served includes taxpayers for whom we prepared income tax returns in
offices, federal software units sold, online completed and paid federal returns, paid state returns
when no federal return was purchased, and taxpayers for whom we provided only paid electronic
filing services. Our U.S. clients served constituted 15.7% of an IRS estimate of total individual
income tax returns filed as of April 30, 2006, compared to 15.6% in 2005 and 15.7% in 2004.
OWNED
AND FRANCHISED OFFICES A summary of our company-owned and franchise offices is as
follows:
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April 30, |
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2006 |
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2005 |
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2004 |
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U.S. OFFICES |
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Company-owned offices |
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6,387 |
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5,811 |
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5,172 |
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Company-owned shared locations (1) |
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1,473 |
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1,296 |
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996 |
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Total company-owned offices |
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7,860 |
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7,107 |
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6,168 |
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Franchise offices |
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3,703 |
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3,528 |
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3,418 |
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Franchise shared locations (1) |
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602 |
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526 |
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323 |
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Total franchise offices |
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4,305 |
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4,054 |
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3,741 |
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12,165 |
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11,161 |
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9,909 |
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INTERNATIONAL OFFICES |
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Canada |
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1,011 |
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912 |
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891 |
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Australia |
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362 |
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378 |
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378 |
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Other |
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10 |
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10 |
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7 |
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1,383 |
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1,300 |
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1,276 |
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(1) |
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Shared locations include offices located within Wal-Mart, Sears or other third-party businesses. |
Offices in shared locations include 1,138 offices operated in Wal-Mart stores and
793 offices in Sears stores operated as H&R Block at Sears. The Wal-Mart agreement expires in May
2007, and the Sears license agreement expires in July 2007, both subject to termination rights.
We offer franchises as a way to expand our presence in the market. Our franchise arrangements
provide us with certain rights which are designed to protect our brand. Most of our franchisees
receive signs, designated equipment, specialized forms, local advertising, initial training, and
supervisory services, and pay us a percentage of gross tax return preparation and related service
revenues as a franchise royalty.
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 2004, we paid $243.2 million to acquire
the operations of ten of our former major franchisees.
RAL PARTICIPATIONS Since July 1996, we have been a party to agreements with HSBC and its
predecessors to participate in RALs provided by a lending bank to H&R Block tax clients. 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 and regular franchise offices and a 25% interest in RALs obtained through
major franchise offices. The current agreement continues through June 2006. During fiscal year
2006, we signed a new agreement with HSBC in which we obtained the right to
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purchase a 49.9%
participation interest in all RALs obtained through our retail offices. We received a signing bonus
from HSBC during the current year in connection with this agreement, which was primarily recorded
as deferred revenue at April 30, 2006. The new agreement will be in effect from July 2006 through
June 2011. 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. Our RAL participation revenue was $177.9 million, $182.8 million and $168.4
million in fiscal years 2006, 2005 and 2004, respectively.
SEASONALITY
OF BUSINESS Because most of our clients file their tax returns during the
period from January through April of each year, substantially all of our revenues from income tax
return preparation and related services and products are received during this period. As a result,
our tax segment generally operates at a loss through the first eight months 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 economic
conditions and unemployment rates. Peak revenues occur during the applicable tax season, as
follows:
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United States and Canada
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January April |
Australia
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July October |
In the current fiscal year, the CRA extended the Canadian tax season to May 1, 2006.
Clients served in our Canadian operations in fiscal year 2006 includes approximately 41,400 returns
in both company-owned and franchise offices which were accepted by the client on May 1, 2006. The
revenues related to these returns will be recognized in fiscal year 2007. Last year, the Canadian
tax season was extended to May 2, 2005. Clients served in our Canadian operations in fiscal year
2005 includes approximately 47,500 returns in both company-owned and franchise offices which were
accepted by the client on May 1 and 2, 2005. The revenues related to these returns were recognized
in fiscal year 2006.
COMPETITIVE
CONDITIONS The retail tax services business is highly competitive. There are a
substantial number of tax return preparation firms and accounting firms offering tax return
preparation services. Many tax return preparation firms and many firms not otherwise in the tax
return preparation business are involved in providing electronic filing and 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 and electronically filed in offices, online and via our software, we are the
largest company providing direct tax return preparation and electronic filing services in the U.S.
We also believe we operate the largest tax return preparation businesses in Canada and Australia.
Our 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. Price and marketing competition for tax preparation
services increased in fiscal years 2006 and 2005.
GOVERNMENT
REGULATION Primary efforts toward the regulation of U.S. 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. We cannot, however, 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
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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 filers 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 advertising 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 limit our 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 U.S. 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.
We also seek to determine the applicability of all government and self-regulatory organization
statutes, ordinances, rules and regulations in the international 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 in other countries in
which we operate. In addition, the Canadian government regulates the refund-discounting program in
Canada. These laws have not materially affected our international operations.
See discussion in Risk Factors for additional information.
MORTGAGE SERVICES
GENERAL
Our Mortgage Services segment originates mortgage loans, services non-prime
mortgage loans and sells and securitizes mortgage loans and residual interests in the U.S. Revenues
primarily consist of gains from sales and securitizations of mortgage assets, accretion on residual
interests and servicing fee income. Segment revenues constituted 25.6% of our consolidated revenues
for fiscal year 2006 and 28.2% for 2005 and 31.2% for 2004.
We originate both non-prime and prime mortgage loans. Non-prime mortgages are those that may
not be offered through
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government-sponsored loan agencies and typically involve borrowers with
limited income documentation, high levels of consumer debt or past credit problems. Even though
these borrowers have credit problems, they also tend to have equity in their property that will be
used to secure the loan. Prime mortgages are those that may be offered through government sponsored
loan agencies. We conduct business through four channels:
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Option Ones wholesale origination channel works with independent brokers throughout the
U.S. to fund non-prime mortgage loans through a national branch network. Wholesale
originations represent the majority of Option Ones total loan production. |
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HRBMC originates residential mortgage loans directly to retail consumers. |
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Option Ones national accounts channel forms partnerships with financial institutions,
including national and regional banks, to allow them to offer non-prime loans. |
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Option Ones bulk acquisitions channel specializes in the purchase of performing non-prime
mortgage loan pools. |
Option One is headquartered in Irvine, California and operates in 48 states by serving 49,000
mortgage broker locations and through its network of 35 wholesale loan production branches and
eight retail production offices.
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.
In the current year, we terminated approximately 1,200 employees and closed some of our branch
offices through a restructuring. This resulted in a pretax charge of $12.6 million. See additional
discussion of our restructuring charge in Item 8, note 16 to the consolidated financial statements.
LOAN ORIGINATION We originated $40.8 billion, $31.0 billion and $23.3 billion in mortgage
loans during fiscal years 2006, 2005 and 2004, respectively. Information regarding our non-prime
loan originations is as follows:
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Year Ended April 30, |
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2006 |
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2005 |
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2004 |
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Loan type: |
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2-year ARM |
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43.9% |
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61.6 |
% |
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63.4 |
% |
3-year ARM |
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1.9% |
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4.0 |
% |
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5.2 |
% |
Fixed 1st |
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12.7% |
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17.7 |
% |
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28.7 |
% |
Fixed 2nd |
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4.9% |
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|
|
3.8 |
% |
|
|
1.6 |
% |
Interest only 1st |
|
|
21.1% |
|
|
|
12.6 |
% |
|
|
0.7 |
% |
40-Year |
|
|
13.4% |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Other |
|
|
2.2% |
|
|
|
0.3 |
% |
|
|
0.4 |
% |
Percentage of fixed-rate
mortgages |
|
|
20.0% |
|
|
|
22.1 |
% |
|
|
30.4 |
% |
Percentage of adjustable-rate mortgages |
|
|
80.0% |
|
|
|
77.9 |
% |
|
|
69.6 |
% |
Percentage of first mortgage
loans owner-occupied |
|
|
91.7% |
|
|
|
92.6 |
% |
|
|
92.9 |
% |
Loan purpose: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinance |
|
|
60.2% |
|
|
|
63.5 |
% |
|
|
67.1 |
% |
Purchase |
|
|
35.0% |
|
|
|
30.8 |
% |
|
|
26.0 |
% |
Rate or term refinance |
|
|
4.8% |
|
|
|
5.7 |
% |
|
|
6.9 |
% |
|
WHOLESALE. Wholesale loan originations involve an independent broker who assists the
borrower in completing the loan application, which includes securing information regarding their
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 applicants credit history, we use 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. Qualified independent
appraisers are required to appraise mortgaged properties used to secure mortgage loans. The broker
then identifies a lender who offers a loan product best suited to the borrowers financial needs.
No one broker currently originates more than 0.7% of our total non-prime production.
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
7
of the related borrower. The underwriting process may include an automated
underwriting decision system as a tool to assist in the assessment of the creditworthiness of the
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.
RETAIL. HRBMC originates our retail mortgage loans. In fiscal year 2006, 69% of our retail
originations were non-prime and 31% were prime, compared to 75% and 25%, respectively, in 2005.
During fiscal year 2006, approximately 20% of HRBMCs loans were made to existing H&R Block clients
compared to 35% in 2005.
The application and approval process in our retail locations is similar to those described
above under Wholesale.
SALE AND SECURITIZATION OF LOANS Substantially all non-prime mortgage loans are sold
daily
to qualifying special purpose entities (Trusts). See discussion of our loan sale and securitization
process in Item 7, under Off-Balance Sheet Financing Arrangements. At April 30, 2006, Option One
held $407.5 million in loans for transfer to the H&R Block Bank when it commences operations in May
2006. These loans have been classified as held for investment on our consolidated balance sheet.
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 Countrywides 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. HRBMC 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.
SERVICING 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 2006, we
serviced 441,981 loans totaling $73.4 billion, compared to 435,290 loans totaling $68.0 billion at
April 30, 2005 and 324,364 loans totaling $45.3 billion at April 30, 2004.
The following table summarizes our servicing portfolio by origin and includes related mortgage
servicing rights (MSRs) as of April 30, 2006 and the rate we earned on each type of servicing
during fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
Type of Servicing |
|
Principal Balance |
|
MSR Balance |
|
Rate Earned |
|
Originated |
|
$ |
62,813,849 |
|
|
$ |
272,472 |
|
|
|
0. 38 |
% |
Sub-servicing |
|
|
10,471,509 |
|
|
|
- |
|
|
|
0. 18 |
% |
Purchased |
|
|
96,719 |
|
|
|
- |
|
|
|
0. 50 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
73,382,077 |
|
|
$ |
272,472 |
|
|
|
0. 38 |
% |
|
|
|
|
|
|
|
|
When non-prime loans are sold or securitized, we generally retain the right to
service the loans, which results in MSR assets being recorded on our balance sheet. Assumptions
used in estimating the value of MSRs are
discussed in Item 8, note 1 to our consolidated financial statements. In addition to servicing
loans we originate, we also service non-prime loans originated by other lenders, designated in the
above table as sub-servicing. MSRs are recorded only in conjunction with our originated or
purchased loan-servicing portfolio.
GEOGRAPHIC DISTRIBUTION The following table details the percent of non-prime loan
origination volume and our loan origination branches by state, excluding our Retail channel, for
fiscal years 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Percent of |
|
|
Number of |
|
|
Percent of |
|
|
Number of |
|
State |
|
Volume |
|
|
Branches |
|
|
Volume |
|
|
Branches |
|
|
California |
|
|
24.5 |
% |
|
|
6 |
|
|
|
21.8 |
% |
|
|
8 |
|
Florida |
|
|
10.7 |
% |
|
|
3 |
|
|
|
7.2 |
% |
|
|
4 |
|
New York |
|
|
9.1 |
% |
|
|
2 |
|
|
|
11.5 |
% |
|
|
2 |
|
Massachusetts |
|
|
6.7 |
% |
|
|
2 |
|
|
|
8.4 |
% |
|
|
2 |
|
New Jersey |
|
|
5.1 |
% |
|
|
1 |
|
|
|
5.3 |
% |
|
|
3 |
|
Other |
|
|
43.9 |
% |
|
|
20 |
|
|
|
45.8 |
% |
|
|
23 |
|
|
COMPETITIVE CONDITIONS Both the non-prime and prime sectors of the residential
mortgage loan market are highly competitive. The principal methods of competition are price,
service and product differentiation. 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
non-prime and prime mortgage loans or a
8
dominant servicer of non-prime loans. Inside B&C Lending
ranked Option One as the number seven originator, based on market share as of March 31, 2006, and
the number three servicer, based on servicing volume as of March 31, 2006, 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 Fair Debt Collection Practices Act; |
|
|
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 (HMDA) and Regulation C promulgated thereunder; |
|
|
The federal Fair Housing Act; |
|
|
The Telephone Consumer Protection Act; |
|
|
The Gramm-Leach-Bliley Act and regulations adopted thereunder; |
|
|
The Fair and Accurate Credit Transactions Act; |
|
|
Regulation AB; 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 with interest rates exceeding a (1) specified margin over the Treasury Index for a comparable
maturity, or (2) designated percentage of points and fees charged to borrowers. 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 do not
originate loans which meet 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 OTS to preempt state limitations on prepayment penalties. In September 2003, the OTS released a
new rule that reduced the scope of the Parity Act preemption effective July 1, 2004 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
business consulting services. We have continued to expand the services we offer our clients by
adding wealth management, retirement resources, payroll services, corporate finance and financial
process outsourcing. Segment revenues constituted 18.0% of our consolidated revenues for fiscal
year 2006, 13.0% for 2005 and 11.8% for 2004.
9
This segment consists primarily of RSM McGladrey, Inc., which provides accounting, tax, and
business consulting services from 125 offices in 26 states and offers services in 18 of the top 25
U.S. markets.
Services are also provided through the following businesses:
|
|
|
RSM McGladrey Retirement Resources administers retirement plans, helps clients design the
best plan for their needs, and 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. is a provider of payroll and benefits administration
services to middle-market businesses. |
|
|
|
RSM McGladrey Financial Process Outsourcing, Inc. is a provider of accounting, reporting,
payroll and bill paying services to distributors/franchisors and their population of
retailers/franchisees. |
|
|
|
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. |
From time to time, we have acquired businesses, and will continue to do so if future
conditions warrant and satisfactory terms can be negotiated. During fiscal year 2006, we paid
$190.7 million to acquire all the outstanding common stock of American Express Tax and Business
Services, Inc., which has been merged into RSM McGladrey, Inc.
RELATIONSHIP WITH ATTEST FIRMS By regulation, we cannot provide audit and attest services.
M&P, and other public accounting firms, including those public accounting firms previously
associated with American Express Tax and Business Services, with whom we do business (collectively,
the Attest Firms) provide audit and review services and other services in which the Attest Firms
issue written reports on client financial statements. Through a number of agreements, including
agreements with these Attest Firms, we lease accounting personnel and provide accounting, payroll,
human resources and other administrative services to the Attest Firms and receive a management fee
for these services. We also have a cost-sharing arrangement with the Attest Firms, whereby they
reimburse us for the costs of certain items, mainly supplies and for the use of RSM owned or leased
real estate, property and equipment. The Attest Firms are limited liability partnerships with their
own management committees, legal and business advisors, professional liability insurance and risk
management policies. Accordingly, the Attest Firms are separate legal entities and not affiliates.
Some partners and employees of the Attest Firms are also employees of RSM McGladrey.
SEASONALITY OF BUSINESS Revenues for this segment are largely seasonal in nature, with peak
revenues occurring during January through April.
COMPETITIVE CONDITIONS The accounting, tax and consulting business is highly competitive.
The principal methods of competition are price, service and reputation for quality. There are a
substantial number of accounting firms offering similar services at the international, national,
regional and local levels. As our focus is on middle-market businesses, our principal competition
is with national and regional accounting firms. 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 Tax Services apply to the Business Services segment as well. However, accountants are
not subject to the same prohibition on the use or disclosure of certain income tax return
information as tax professionals. 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 our 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.
Auditor independence rules of the Securities and Exchange Commission (SEC) and the Public
Company Accounting Oversight Board (PCAOB) apply to the Attest Firms as public accounting firms. In
applying its auditor independence rules, the SEC views us and the Attest Firms as a single entity
and requires that the SEC independence rules for the Attest Firms apply to RSM McGladrey and that
we be independent of any SEC audit client of the Attest Firms. The SEC regards any financial
interest or prohibited business relationship we have with a client of the Attest Firms as a
financial interest or prohibited business relationship between the Attest Firms and the client for
purposes of applying its auditor independence rules.
We and the Attest Firms have jointly developed and implemented policies, procedures and
controls designed to ensure
10
the Attest Firms independence and integrity as an audit firm in
compliance with applicable SEC regulations and professional responsibilities. These policies,
procedures and controls are designed to monitor and prevent violations of applicable independence
rules and include, among other things, (1) informing our officers, directors and other members of
senior management concerning auditor independence matters, (2) procedures for monitoring securities
ownership, (3) communicating with SEC audit clients regarding the SECs interpretation and
application of relevant independence rules and guidelines, and (4) requiring RSM employees to
comply with the Attest Firms independence and relationship policies (including the Attest Firms
independence compliance questionnaire procedures). We believe these policies, procedures and
controls are adequate, although there can be no assurances they will result in compliance with
applicable independence rules and requirements. Any noncompliance could cause the Attest Firms to
lose the ability to perform audits for firms subject to regulation by the SEC.
See discussion in Risk Factors for additional information.
INVESTMENT SERVICES
GENERAL Our Investment Services segment provides advice-based brokerage services and
investment planning through HRBFA to our clients in the U.S. Services offered to our customers
include traditional brokerage services, as well as annuities, insurance, fee-based accounts, online
account access, equity research and focus lists, model portfolios, asset allocation strategies, and
other investment tools and information. Segment revenues constituted 5.9% of our consolidated
revenues for fiscal year 2006, and 5.4% of our consolidated revenues for fiscal years 2005 and
2004.
HRBFA is a registered broker-dealer with the SEC and is a member of the New York Stock
Exchange (NYSE), other national securities exchanges, Securities Investor Protection Corporation
(SIPC), and the National Association of Securities Dealers, Inc. (NASD). HRBFA is also a registered
investment advisor.
The integration of investment advice with our tax client base allows us to leverage an already
established relationship. In the past three years, new service offerings have allowed us to shift
our focus from a transaction-based client relationship to a more advice-based focus.
FINANCIAL SERVICES OFFERINGS We offer a full range of financial services, including
investment planning, college savings products, flexible brokerage accounts with cash management
features, professionally managed accounts and a comprehensive line of insurance annuity products.
As previously discussed in Tax Services, we offer our tax clients the opportunity to open an
Express IRA through HRBFA as a part of the tax return preparation
process. Clients opened approximately 67,000 Express IRAs during tax season 2006, approximately 106,500 in
2005 and approximately 145,400 in 2004.
We act as a dealer in fixed income securities including corporate and municipal bonds, various
U.S. Government and U.S. Government Agency securities and certificates of deposit.
CUSTOMER ACTIVITY Customer trades in fiscal year 2006 totaled approximately 1.0 million,
compared to approximately 0.9 million in 2005 and approximately 1.0 million in 2004. Average
revenue per trade was $119.11 in fiscal year 2006, compared to $123.33 in 2005 and $119.36 in 2004.
We had 418,162 traditional brokerage accounts at April 30, 2006, compared to 431,749 at 2005 and
463,736 at 2004. Assets under administration totaled $31.8 billion, $27.8 billion and $26.7 billion
at April 30, 2006, 2005 and 2004, respectively.
FINANCIAL ADVISORS Key to our future success are retaining and recruiting productive
financial advisors. One of our key initiatives in fiscal year 2006 was to build revenues by
attracting and retaining productive advisors.
During fiscal years 2006, 2005 and 2004, we added 193, 258 and 255 advisors, respectively.
These additions were offset by attrition of 257, 233 and 230 advisors, respectively. Our overall
retention rate for fiscal year 2006 was approximately 75%, essentially flat with the prior year.
The retention rate for our higher-producing advisors was approximately 87%, down from 92% in 2005.
Advisor productivity by recruitment class is as follows:
(in 000s)
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
Total Production |
|
|
|
Per Advisor |
|
|
Revenues |
|
|
FISCAL
YEAR 2006 |
|
|
|
|
|
|
|
|
Pre-2004 class |
|
$ |
250 |
|
|
$ |
137,212 |
|
2004 recruits |
|
|
157 |
|
|
|
19,579 |
|
2005 recruits |
|
|
109 |
|
|
|
19,942 |
|
2006 recruits |
|
|
111 |
|
|
|
13,741 |
|
|
|
|
|
|
|
|
|
|
FISCAL
YEAR 2005 |
|
|
|
|
|
|
|
|
Pre-2003 class |
|
$ |
230 |
|
|
$ |
121,342 |
|
2003 recruits |
|
|
114 |
|
|
|
16,416 |
|
2004 recruits |
|
|
98 |
|
|
|
19,941 |
|
2005 recruits |
|
|
65 |
|
|
|
8,203 |
|
|
|
|
|
|
|
|
|
|
FISCAL
YEAR 2004 |
|
|
|
|
|
|
|
|
Pre-2003 class |
|
$ |
216 |
|
|
$ |
135,128 |
|
2003 recruits |
|
|
84 |
|
|
|
17,717 |
|
2004 recruits |
|
|
61 |
|
|
|
7,664 |
|
|
11
Financial advisors generally reach productivity levels equal to those achieved at
their prior firm approximately 24 to 36 months after they join our company.
PARTNERING WITH TAX PROFESSIONALS The H&R Block Preferred Partner ProgramSM
facilitates strategic, referral-based partnerships between tax professionals and financial
advisors. The program includes the Licensed Referral Tax Professional (LRTP) program and a
non-licensed option, which allows non-licensed tax professionals to gain additional rewards and
recognition when making qualified client referrals to financial advisor partners. The LRTP program
helps tax professionals obtain a securities license, teaming them with a financial advisor and
providing a commission to the LRTP for business referred to Investment Services.
As of April 30, 2006, our Preferred Partner Program had 9,552 active tax partners, of which
705 were licensed. We had 6,442 active tax partners, of which 686 were licensed at the end of
fiscal year 2005. As a result of this initiative, we added more than 17,000 new customer accounts
and assets totaling $764.3 million during fiscal year 2006. We expect to continue to increase the
number of tax partners 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.
OFFICE LOCATIONS HRBFA is authorized to do business as a broker-dealer in all 50 states,
the District of Columbia and Puerto Rico. At the end of fiscal year 2006, we operated 219 branch
offices, compared to approximately 257 offices in 2005 and 358 in 2004. The reduced number of
branch offices is primarily due to the evolution of our tax-partnering program, in which financial
advisors are located in retail tax offices, and the consolidation of smaller branches. At April 30,
2006, we had 73 offices co-located with retail tax and mortgage offices. We believe the existence
of these locations contributes to our growth and client satisfaction.
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 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 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 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. Some full-commission brokerage firms also offer greater
product breadth, discounted commissions and more robust 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 expertise and integration with our tax services relationships, quality of
service, breadth of services offered, prices, accessibility through delivery channels and
technological innovation.
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, as well as
fluctuating interest rates.
GOVERNMENT REGULATION The securities industry is subject to extensive regulation, 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 NASD, Municipal
12
Securities Rulemaking Board and the NYSE, which has
been designated as HRBFAs primary regulator. These self-regulatory organizations adopt rules,
subject to SEC approval, governing the industry and conduct periodic examinations of HRBFAs
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 HRBFAs
calculation of net capital is located in Item 7, under Capital Resources and Liquidity by
Segment.
See discussion in Risk Factors for additional information.
13
SERVICE MARKS, TRADEMARKS AND PATENTS
We have made a practice of selling our services and products under service marks and
trademarks and of obtaining protection for these by all available means. Our service marks and
trademarks are protected by registration in the U.S. and other countries where our services and
products are marketed. We consider these service marks and trademarks, in the aggregate, to be of
material importance to our business, particularly our business segments providing services and
products under the H&R Block brand.
We have no registered patents that are material to our business.
EMPLOYEES
We have approximately 16,000 regular full-time employees. The highest number of persons we
employed during the fiscal year ended April 30, 2006, including seasonal employees, was
approximately 134,500.
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 Articles of Incorporation of H&R Block, Inc., (2) The Amended and Restated
Bylaws of H&R Block, Inc., (3) The H&R Block, Inc. Corporate Governance Guidelines, (4) the H&R
Block, Inc. Code of Business Ethics and Conduct, (5) the H&R Block, Inc. Audit Committee Charter,
(6) the H&R Block, Inc. Governance and Nominating Committee Charter, and (7) 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 1A. RISK FACTORS
In this report, and from time to time throughout the year, we share our expectations for the
Companys 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 shares of our common stock 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 Item 7, under
Off-Balance Sheet Financing Arrangements. We are also dependent on commercial paper issuances
and/or bank lines to fund RAL participations and seasonal working capital needs. A disruption in
such markets could adversely affect our access to these funds. 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 reputation 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 reputation and results of operations.
INTERNAL CONTROL CERTIFICATION We have documented and tested our internal control
procedures in accordance with various SEC rules governing Section 404 of
the Sarbanes-Oxley Act (SOX 404). SOX 404 requires us to assess the effectiveness of our internal
controls over financial reporting annually, and obtain an opinion on the effectiveness of this
internal control from our Independent Registered Public Accounting Firm. We may
14
encounter problems
or delays in completing the review and evaluation, the implementation of improvements and the
receipt of an attestation from our independent auditors. Additionally, managements assessment of
our internal controls over financial reporting may identify deficiencies that need to be addressed
in our internal controls over financial reporting or other matters that may raise concerns for
investors. Should we, or our independent auditors, determine in future periods that we have a
material weaknesses in our internal controls over financial reporting, our results of operations or
financial condition may be adversely affected and the price of our common stock may decline.
OPERATIONAL RISK There is a risk of loss resulting from inadequate or failed processes or
systems, theft or fraud. These can occur in many forms including, among others, errors, business
interruptions, inappropriate behavior of or misconduct by our employees or those contracted to
perform services for us, and vendors that do not perform in accordance with their contractual
agreements. These events can potentially result in financial losses or other damages. We rely on
internal and external information and technological systems to manage our operations and are
exposed to risk of loss resulting from breaches in the security, or other failures of these
systems. Replacement of our major operational systems could have a significant impact on our
ability to conduct our core business operations and increase our risk of loss resulting from
disruptions of normal operating processes and procedures that may occur during the implementation
of new information and transaction systems.
TAX SERVICES
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 in Item 7, under Tax Services.
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 use 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. See discussion of RAL litigation in Item 3, Legal Proceedings.
MORTGAGE SERVICES
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 servicer 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.
MARKET RISKS Our day-to-day operating activities of originating and selling mortgage loans
have many aspects of interest rate risk. Additionally, the valuation of our retained residual
interests and mortgage servicing rights includes many estimates and assumptions made by management
surrounding interest rates, prepayment speeds and credit losses. Variation in interest rates or the
factors underlying our assumptions could affect our results of operations. See Item 7A, under
Mortgage Services, for discussion of interest rate risk, and Item 7, under Critical Accounting
Policies, for discussion of our valuation methodology.
LEGISLATION AND REGULATION 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.
In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated under the HMDA.
Among other things, the new regulations require lenders to report pricing data on loans with annual
percentage rates that exceed the yield on treasury bills with comparable maturities by 3%. The
expanded reporting was effective in 2004 for reports filed in 2005. We anticipate that a majority
of our loans would be subject to the expanded reporting requirements. The
expanded reporting does not provide for additional loan information such as credit risk,
debt-to-income ratio, loan-to-value ratio, documentation level or other salient loan features.
However, reported information may lead to increased litigation as the information could be
misinterpreted by third parties and could adversely affect our results of operations.
COUNTERPARTY CREDIT RISK Derivative instruments involve counterparty credit risk, which is
the risk that a counterparty may fail to perform on its contractual obligations. We manage this
risk through the use of a policy that includes
15
credit standard guidelines, counterparty
diversification, monitoring of counterparty financial condition, use of master netting agreements
with counterparties, and exposure limits based on counterparty credit, exposure amount and
management risk tolerance. The policy is reviewed on an annual basis and as conditions warrant. See
Item 7A, under Mortgage Services, and Item 8, note 8 to our consolidated financial statements for
discussion of our derivative instruments.
REAL ESTATE MARKET Our residual interests and beneficial interest in Trusts are secured by
mortgage loans, which are in turn secured by residential real estate. Any material decline in real
estate values would likely result in higher delinquencies, defaults and foreclosures. Additionally,
a significant portion of the mortgage loans we originate or service is secured by properties in
California. A decline in the economy or the residential real estate market values, or the
occurrence of a natural disaster not covered by standard homeowners insurance policies, such as an
earthquake, hurricane or wildfire, could decrease the value of mortgaged properties in California.
Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to
originate and sell loans, the prices we receive on our loans, or the values of our mortgage
servicing rights and residual interests in securitizations, which could adversely affect our
financial condition and results of operations.
BUSINESS SERVICES
ALTERNATIVE PRACTICE STRUCTURE WITH ATTEST FIRMS Our relationship with the Attest Firms requires
us to comply with applicable regulations regarding the practice of public accounting and auditor
independence rules and requirements. In addition, our relationship with the Attest Firms closely
links our RSM McGladrey brand with the Attest Firms. If the Attest Firms were to encounter
regulatory or independence issues resulting from their relationship with us or if significant
litigation arose involving the Attest Firms or their services which implicated RSM McGladrey, 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.
INTEGRATION OF AMERICAN EXPRESS TAX AND BUSINESS SERVICES The integration of American
Express Tax and Business Services is proceeding according to plan. While we expect a successful
integration, there is the potential that it could be delayed or otherwise impacted, which could
adversely affect our financial condition and results of operations.
INVESTMENT SERVICES
REGULATORY ENVIRONMENT The broker-dealer industry continues to come under increased scrutiny by
federal and state regulators and self-regulatory organizations 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
and our ability to recruit and retain qualified advisors. 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 investment service providers and grow our client base.
RECRUITING AND RETENTION OF FINANCIAL ADVISORS Attracting and retaining experienced
financial advisors is extremely competitive in the investment industry. Additionally, in this
industry, clients tend to follow their advisors, regardless of their affiliated investment firm.
The inability to recruit and retain qualified and productive advisors, may adversely affect our
results of operations.
RECURRING OPERATING LOSSES Continuing operating losses in our
Investment Services segment may impact the valuation of goodwill and intangible assets. Such losses
could also necessitate additional capital contributions to comply with regulatory requirements. The
inability to operate this segment in a profitable manner may adversely affect our results of
operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own our corporate headquarters, which is located in Kansas City, Missouri. We have leased
additional office space for corporate, Tax Services and Investment Services personnel, as
necessary, in Kansas City, Missouri.
Most of our tax offices, except those in shared locations, are operated under leases
throughout the U.S. Our Canadian executive offices are located in a leased office in Calgary,
Alberta. Our Canadian tax offices are operated under leases throughout Canada.
Option Ones executive offices are located in leased offices in Irvine, California. Option One
also leases offices for its loan origination and servicing centers and branch office operations
16
throughout the U.S. HRBMC is headquartered in leased offices in Irvine, California. HRBMC also
leases offices for its loan origination centers and branch office operations throughout the U.S.
The executive offices of HRBFA are located in leased offices in Detroit, Michigan. Branch
offices are operated throughout the U.S., in a combination of leased and owned facilities.
RSMs executive offices are located in leased offices in Bloomington, Minnesota. Its
administrative offices are located in leased offices in Davenport, Iowa. RSM also leases office
space throughout the U.S.
We began 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 and we expect it to be completed in
fiscal year 2007.
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 17 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). The RAL Cases
have involved a variety of legal theories asserted by plaintiffs. These theories include
allegations that, among other things, disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious and unconscionable; we did not
disclose that we would receive part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs; breach of state laws on
credit service organizations; breach of contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and Corrupt Organizations Act; violations
of the federal Fair Debt Collection Practices Act and unfair competition with respect to debt
collection activities; and that we owe, and breached, a fiduciary duty to our customers in
connection with the RAL program.
The amounts claimed in the RAL Cases have been very substantial in some instances. We have
successfully defended against numerous RAL Cases, some of which 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 have been settled, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of $70.2 million (the 2006
Settlements). The 2006 Settlements are described below.
On December 21, 2005, we entered into a settlement agreement regarding four RAL Cases entitled
Deadra D. Cummins, et al. v. H&R Block, Inc. et al.; Mitchell v. H&R Block, Inc. et al.; Green v.
H&R Block, Inc. et al.; and Becker v. H&R Block, Inc. (the Cummins Settlement Agreement).
Pursuant to the Cummins Settlement Agreement, we will contribute a total of up to $62.5 million in
cash for purposes of making payments to the settlement class, paying all attorneys fees and costs
to class counsel and covering service awards to the representative plaintiffs. In addition, we paid
costs for providing notice of the settlement to settlement class members. We recorded an additional
reserve of $50.7 million related to this settlement in fiscal year 2006 to fully reserve for the
settlement amount.
On April 19, 2006, we entered into a settlement agreement, subject to final court approval,
regarding litigation entitled Lynne A. Carnegie, et al. v. Household International, Inc., H&R
Block, Inc., et al. (the Carnegie Settlement Agreement). Pursuant to the Carnegie Settlement
Agreement, we will contribute a total of $19.5 million in cash for purposes of making payments to
the settlement class, paying all attorneys fees and costs to
class counsel, incentive payment awards to plaintiff and all notice and administration costs. We
recorded a reserve of $19.5 million related to this settlement in fiscal year 2006.
We believe we have meritorious defenses to the remaining RAL Cases and we intend to defend
them vigorously. There can be no assurances, however, as to the outcome of the pending RAL Cases
individually or in the aggregate. Likewise, there can be no assurances regarding the impact of the
RAL Cases on our financial statements. We have accrued our best estimate of the probable loss
related to the RAL Cases. The following is updated information regarding the pending RAL Cases that
are attorney general actions or 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, 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. This case is stayed and will be resolved
as part of the Carnegie Settlement Agreement.
17
Deadra 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. The court approved the terms of
the Cummins Settlement Agreement at a hearing held on June 8, 2006, and the settlement will become
final upon the expiration of the period for objectors to appeal the courts approval.
Joyce Green, et al. v. H&R Block, Inc., Block Financial Corporation, et al., Case No.
97195023, in the Circuit Court for Baltimore City, Maryland, instituted on July 14, 1997; Levon and
Geral Mitchell, et al. v. H&R Block, Inc. and Ruth Wren, Case No. CV-95-2067, in the Circuit Court
of Mobile County, Alabama, instituted on June 13, 1995; and Lynn Becker v. H&R Block, Inc., Case
No. CV-2004-03-1680 in the Court of Common Pleas, Summit County, Ohio, Instituted on April 15,
2004. These cases are stayed and will be resolved as part of the Cummins Settlement Agreement.
Sandra J. Basile, et al v. H&R Block, Inc., et al, April Term 1992 Civil Action No. 3246 in
the Court of Common Pleas, First Judicial District Court of Pennsylvania, Philadelphia County,
instituted on April 23, 1993. The court decertified the class on December 31, 2003. The
Pennsylvania appellate court subsequently reversed the trial courts decertification decision. We
are seeking review of the appellate courts decision by the Pennsylvania Supreme Court.
The People of California v. H&R Block, Inc., H&R Block Services, Inc., H&R Block Enterprises,
Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc. and Does 1
through 50, Case No. C 06 2058 SC, in the United States District Court for the Northern District of
California, instituted on February 15, 2006 (alleging, among other things, untrue, misleading or
deceptive statements in marketing RALs and unfair competition with respect to debt collection
activities; seeks equitable relief, civil penalties and restitution). The case was removed to
federal court on March 17, 2006, and a motion was filed to add HSBC as a necessary party to the
case. The California attorney general is seeking to remand the case to state court.
PEACE OF MIND LITIGATION Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et al.,
Civil Action 2003L000004, in the Circuit Court of Madison County, Illinois, is a class action case
filed on January 18, 2002, that was granted class certification on August 27, 2003. Plaintiffs
claims consist of five counts relating to the Peace of Mind (POM) program under which the
applicable tax return preparation subsidiary assumes liability for additional tax assessments
attributable to tax return preparation error. The plaintiffs allege that the sale of POM guarantees
constitutes (i) statutory fraud by selling insurance without a license, (ii) an unfair trade
practice, by omission and by cramming (i.e., charging customers for the guarantee even though
they did not request it or want it), and (iii) a breach of fiduciary duty. In August 2003, the
court certified the plaintiff classes consisting of all persons who from January 1, 1997 to final
judgment (i) were charged a separate fee for POM by H&R Block or a defendant H&R Block class
member; (ii) reside in certain class states and were charged a separate fee for POM by H&R Block
or a defendant H&R Block class member not licensed to sell insurance; and (iii) had an unsolicited
charge for POM posted to their bills by H&R Block or a defendant H&R Block class member. Persons
who received the POM guarantee through an H&R Block Premium office and persons who reside in
Alabama are excluded from the plaintiff class. The court also certified a defendant class
consisting of any entity with names that include H&R Block or HRB, or are otherwise affiliated
or associated with H&R Block Tax Services, Inc., and that sold or sells the POM product. The trial
court subsequently denied the defendants motion to certify class certification issues for
interlocutory appeal. Discovery is proceeding. No trial date has been set.
There is one other putative class action pending against us in Texas that involves the POM
guarantee. This case is
being tried before the same judge that presided over the Texas RAL Settlement, involves the same
plaintiffs attorneys that are involved in the Marshall litigation in Illinois, and contains
similar allegations. No class has been certified in this case.
We believe the claims in the POM action are without merit, and we intend to defend them
vigorously. The amounts claimed in the POM actions are substantial, however, and there can be no
assurances as to the outcome of these pending actions individually or in the aggregate. Likewise,
there can be no assurances regarding the impact of these actions on our consolidated financial
statements.
EXPRESS IRA LITIGATION On March 15, 2006, the New York Attorney General filed a lawsuit in
the Supreme Court of the State of New York, County of New York entitled The People of New York v.
H&R Block, Inc. and H&R Block Financial Advisors, Inc. The complaint alleges fraudulent business
practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect
to the Express IRA product. The complaint seeks equitable relief, disgorgement of profits, damages
and restitution, civil penalties and punitive damages. A number of civil actions were subsequently
filed against us concerning the matter. We intend to defend these cases vigorously, but there are
no assurances as to their outcome.
18
SECURITIES AND SHAREHOLDER DERIVATIVE LITIGATION Over a period of several weeks beginning
on March 16, 2006, eight shareholder derivative actions were initiated against certain of the
Companys current and former directors and officers (two of which were subsequently dismissed
voluntarily by the plaintiffs). These cases were purportedly brought on behalf of the Company,
which is named as a nominal defendant. These cases generally involve allegations of breach of
fiduciary duty, abuse of control, gross mismanagement, waste and unjust enrichment pertaining to
(i) the Companys restatement of financial results due to errors in determining the Companys state
effective income tax rate and (ii) certain of the Companys products and other business activities.
We intend to defend these cases vigorously, but there are no assurances as to their outcome. The
shareholder derivative cases that currently have not been dismissed are Hibbard v. H&R Block, Inc.,
et al., in the United States District Court for the Western District of Missouri, Case No.
5:06-cv-06059-RED (instituted on May 16, 2006); Gottlieb v. H&R Block, et al., in the Circuit Court
of Jackson County, Missouri, Case No. 0616-CV-14109 (instituted on June 5, 2006); Lebowitz v. H&R
Block, et al.,, in the Circuit Court of Jackson County, Missouri, Case No. 0616-CV-14124
(instituted on June 5, 2006); Staehr v. H&R Block, Inc., et al., in the United States District
Court for the Western District of Missouri, Case No. 4:06-cv-00284-GAF (instituted on April 5,
2006); Momentum Partners v. H&R Block, et al., in the United States District Court for the Western
District of Missouri, Case No. 06-cv-00465-SWH (instituted on June 8, 2006); and Iron Workers Local
16 Pension Fund v. H&R Block, et al., in the United States District Court for the Western District
of Missouri, Case No. 06-cv-00466-ODS (instituted on June 8, 2006).
In addition to the shareholder derivative actions, five putative class actions alleging
violations of certain securities laws were filed beginning in March 2006 (two of which were
subsequently dismissed by the plaintiffs). These actions allege, among other things, deceptive,
material and misleading financial statements, failure to prepare financial statements in accordance
with generally accepted accounting principles and concealment of the potential for lawsuits
stemming from the allegedly fraudulent nature of the Companys operations. The actions seek
unspecified damages and equitable relief. We intend to defend these cases vigorously, but there are
no assurances as to their outcome. The cases that have not been dismissed are Nettie v. H&R
Block, Inc. and Mark A. Ernst in the United States District Court in the Western District of
Missouri, Case No. 06-0235-CV-W-ODS (instituted on March 17, 2006); Winters v. H&R Block, Inc., et
al., in the United States District Court in the Western District of Missouri, Case No.
04:06-CV-00243-NKL (instituted on March 20, 2006); New Jersey Carpenters Pension Fund v. H&R Block,
Inc., et al., in the United States District Court in the Southern District of New York, Case No.
06-CV-2204-KMK (instituted on March 21, 2006); and Kadagian v. H&R Block, Inc., et al., in the
United States District Court in the Southern District of New York, Case No. 06-CV-2306-KMK
(instituted on March 24, 2006).
OTHER CLAIMS AND LITIGATION As reported previously, the NASD brought charges against HRBFA
regarding the sale by HRBFA of Enron debentures in 2001. A hearing for this matter commenced in May
2006 and was recessed until the fall of 2006. We intend to defend the NASD charges vigorously,
although there can be no assurances regarding the outcome and resolution of the matter.
As part of an industry-wide review, the IRS is investigating tax-planning strategies that
certain RSM clients utilized during fiscal years 2000 through 2003.
Specifically, the IRS is examining these strategies to determine whether RSM complied with tax
shelter reporting and listing regulations and whether such strategies were abusive as defined by
the IRS. If the IRS were to determine that RSM did not comply with the tax shelter reporting and
listing regulations, it might assess fines or penalties against RSM. Moreover, if the IRS were to
determine that the tax planning strategies were inappropriate, clients that utilized the strategies
could face penalties and interest for underpayment of taxes. Some of these clients are seeking or
may attempt to seek recovery from RSM. There can be no assurance regarding the outcome of 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. These claims and lawsuits include actions by state attorneys general,
individual plaintiffs, and cases in which plaintiffs seek to represent a class of similarly
situated customers. The amounts claimed in these claims and lawsuits are substantial in some
instances, and the ultimate liability with respect to such litigation and claims is difficult to
predict. Some of these claims and lawsuits pertain to RALs, the electronic filing of customers
income tax returns, the POM guarantee program and our Express IRA program. We believe we have
meritorious defenses to each of these claims, and we are defending or intend to defend them
vigorously, although there is no assurance as to their outcome.
In addition to the aforementioned types of cases, we are parties to claims and
lawsuits that we consider to be ordinary, routine litigation incidental to our business, including
claims and lawsuits (Other Claims) concerning investment products, the preparation of customers
income tax returns, the fees
19
charged customers for various products and services, losses incurred
by customers with respect to their investment accounts, relationships with franchisees, denials of
mortgage loans, contested mortgage foreclosures, other aspects of the mortgage business,
intellectual property disputes, employment matters and contract disputes. We believe we have
meritorious defenses to each of the Other Claims, and we are defending them vigorously. While we
cannot provide assurance that we will ultimately prevail in each instance, we believe the amount,
if any, we are required to pay in the discharge of liabilities or settlements in these Other Claims
will not have a material adverse effect on our consolidated financial statements.
20
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 2006.
PART II
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ITEM 5. |
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MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
H&R Blocks 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 Blocks common stock appears
in Item 8, note 20 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 12 to our consolidated financial statements. On June 15, 2006, there were
24,935 shareholders of record and the closing stock price on the NYSE was $23.50 per share.
A summary of our purchases of H&R Block common stock during the fourth quarter of
fiscal year 2006 is as follows:
(shares in 000s)
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|
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|
|
|
|
|
|
|
|
|
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Average |
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|
Total Number of Shares |
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Maximum Number of |
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|
|
Total Number of |
|
|
Price Paid |
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|
Purchased as Part of Publicly |
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|
Shares that May Be Purchased |
|
|
|
Shares Purchased (2) |
|
|
per Share |
|
|
Announced Plans or Programs (1) |
|
|
Under the Plans or Programs (1) |
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February 1 February 28 |
|
|
6 |
|
|
$ |
24.09 |
|
|
|
- |
|
|
|
10,494 |
|
March 1 March 31 |
|
|
1 |
|
|
$ |
25.17 |
|
|
|
- |
|
|
|
10,494 |
|
April 1 April 30 |
|
|
3 |
|
|
$ |
22.05 |
|
|
|
- |
|
|
|
10,494 |
|
|
|
|
|
(1) |
|
On June 9, 2004, our Board of Directors approved the repurchase of 15 million shares
of H&R Block common stock. This authorization has no expiration date. |
|
(2) |
|
All 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. |
ITEM 6. SELECTED FINANCIAL DATA
We derived the selected consolidated financial data presented below as of and for each of the five
years in the period ended April 30, 2006 from our consolidated financial statements. The data set
forth below should be read in conjunction with Item 7 and our consolidated financial statements in
Item 8.
(in 000s, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
2002 |
|
|
Revenues |
|
$ |
4,872,801 |
|
|
$ |
4,420,019 |
|
|
$ |
4,247,880 |
|
|
$ |
3,731,126 |
|
|
$ |
3,311,943 |
|
Net income before change in accounting principle |
|
|
490,408 |
|
|
|
623,910 |
|
|
|
700,452 |
|
|
|
477,615 |
|
|
|
441,287 |
|
Net income |
|
|
490,408 |
|
|
|
623,910 |
|
|
|
694,093 |
|
|
|
477,615 |
|
|
|
441,287 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before change in accounting principle |
|
$ |
1.49 |
|
|
$ |
1.88 |
|
|
$ |
1.98 |
|
|
$ |
1.33 |
|
|
$ |
1.21 |
|
Net income |
|
|
1.49 |
|
|
|
1.88 |
|
|
|
1.96 |
|
|
|
1.33 |
|
|
|
1.21 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before change in accounting principle |
|
$ |
1.47 |
|
|
$ |
1.85 |
|
|
$ |
1.94 |
|
|
$ |
1.30 |
|
|
$ |
1.17 |
|
Net income |
|
|
1.47 |
|
|
|
1.85 |
|
|
|
1.92 |
|
|
|
1.30 |
|
|
|
1.17 |
|
Total assets |
|
$ |
5,989,135 |
|
|
$ |
5,538,056 |
|
|
$ |
5,233,827 |
|
|
$ |
4,666,502 |
|
|
$ |
4,396,731 |
|
Long-term debt |
|
|
417,539 |
|
|
|
923,073 |
|
|
|
545,811 |
|
|
|
822,302 |
|
|
|
868,387 |
|
Dividends per share |
|
$ |
0.49 |
|
|
$ |
0.43 |
|
|
$ |
0.39 |
|
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a diversified company with subsidiaries delivering tax, investment, mortgage and
business services and products. We are the only major company offering a full range of software,
online and in-office tax preparation solutions, combined with personalized financial advice
concerning retirement savings, home ownership and other opportunities to help clients build a
better financial future.
Our key strategic priorities can be summarized as follows:
|
|
Tax Services expand access to our services through improved distribution of our digital
offerings and expanding our network of retail offices, continue to improve the quality of
service we provide to our clients. |
|
|
Mortgage Services sustain market share while focusing on our cost structure to lower our
cost of origination, distinguish our service quality, minimize risk and volatility in
performance and optimize value from secondary markets. |
21
|
|
Business Services continue expansion of our national accounting, tax and consulting
business, complete the integration of our American Express Tax and Business Services
acquisition, build and manage brand awareness, build differentiated and value-driven services
and improve our client service culture. |
|
|
|
Investment Services attract and retain productive advisors, serve the broad consumer
market through advisory relationships, integrate the Tax Services client base into this
segment and work to align the segments cost structure with its revenues. |
On February 22, 2006, we determined it was appropriate to restate our previously issued
consolidated financial statements, including financial statements for the three and six months
ended July 31, 2005 and October 31, 2005, respectively, and financial statements for the fiscal
years ended April 30, 2005 and 2004 and all related interim periods. We arrived at this conclusion
during the course of our closing process for the quarter ended January 31, 2006. All prior year
periods presented reflect the impact of the restatement described above.
(in 000s, except per share amounts)
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
2,451,806 |
|
|
$ |
2,358,293 |
|
|
$ |
2,191,177 |
|
Mortgage Services |
|
|
1,247,138 |
|
|
|
1,246,018 |
|
|
|
1,323,709 |
|
Business Services |
|
|
877,259 |
|
|
|
573,316 |
|
|
|
499,210 |
|
Investment Services |
|
|
287,955 |
|
|
|
239,244 |
|
|
|
229,470 |
|
Corporate |
|
|
8,643 |
|
|
|
3,148 |
|
|
|
4,314 |
|
|
|
|
|
|
$ |
4,872,801 |
|
|
$ |
4,420,019 |
|
|
$ |
4,247,880 |
|
|
|
|
PRETAX
INCOME
(LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
589,766 |
|
|
$ |
663,518 |
|
|
$ |
638,493 |
|
Mortgage Services |
|
|
321,616 |
|
|
|
496,093 |
|
|
|
688,523 |
|
Business Services |
|
|
53,378 |
|
|
|
29,871 |
|
|
|
19,312 |
|
Investment Services |
|
|
(32,835 |
) |
|
|
(75,370 |
) |
|
|
(75,614 |
) |
Corporate |
|
|
(104,532 |
) |
|
|
(96,397 |
) |
|
|
(107,739 |
) |
|
|
|
|
|
|
827,393 |
|
|
|
1,017,715 |
|
|
|
1,162,975 |
|
Income taxes |
|
|
336,985 |
|
|
|
393,805 |
|
|
|
462,523 |
|
|
|
|
Net income before change
in accounting principle |
|
|
490,408 |
|
|
|
623,910 |
|
|
|
700,452 |
|
Cumulative effect of change
in accounting principle |
|
|
- |
|
|
|
- |
|
|
|
(6,359 |
) |
|
|
|
Net income |
|
$ |
490,408 |
|
|
$ |
623,910 |
|
|
$ |
694,093 |
|
|
|
|
Basic earnings per share |
|
$ |
1.49 |
|
|
$ |
1.88 |
|
|
$ |
1.96 |
|
Diluted earnings per share |
|
|
1.47 |
|
|
|
1.85 |
|
|
|
1.92 |
|
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 forecasted, and estimates
routinely require adjustment and may require material adjustment.
REVENUE
RECOGNITION We have many different revenue sources, each governed by specific
revenue recognition policies. Our revenue recognition policies can be found in Item 8, note 1 to
our consolidated financial statements. Additional discussion of our recognition of gains on sales
of mortgage assets follows.
GAINS
ON SALES OF MORTGAGE ASSETS 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 loan sales, servicing released, to
third-party buyers. Gains on sales of mortgage assets are recognized when control of the assets is
surrendered (when loans are sold to the Trusts) and are based on the difference between cash
proceeds and the allocated cost of the assets sold, including any guarantees or recourse
obligations. Other components of gain on sales of mortgage loans include gains or losses on
derivatives, loan sale repurchase reserves and direct origination and acquisition expenses.
We determine the allocated cost of assets sold based on the relative fair values of cash
proceeds, MSRs, any guarantee or recourse liabilities to be recorded at the date of sale and the
beneficial interest in Trusts, which represents our residual interest in the ultimate expected
outcome from the disposition of the loans by the Trusts. 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, limited by the ultimate expected outcome from the disposition of
the loans by the Trusts (see discussion below in Valuation of Residual Interests and Valuation
of Mortgage Servicing Rights). The following is an example of a hypothetical gain on sale
calculation:
22
|
|
|
|
|
|
|
(in 000s) |
|
|
Acquisition cost of underlying mortgage loans |
|
$ |
1,000,000 |
|
Fair values: |
|
|
|
|
Net proceeds |
|
$ |
995,000 |
|
Beneficial interest in Trusts |
|
|
20,000 |
|
MSRs |
|
|
7,000 |
|
|
|
|
|
|
$ |
1,022,000 |
|
|
|
|
|
|
|
|
|
Computation of gain on sale: |
|
|
|
|
Net proceeds |
|
$ |
995,000 |
|
Less allocated cost ($995,000 / $1,022,000 x $1,000,000) |
|
|
973,581 |
|
|
|
|
Recorded gain on sale |
|
$ |
21,419 |
|
|
|
|
Recorded beneficial interest in Trusts
($20,000 / $1,022,000 x $1,000,000) |
|
$ |
19,570 |
|
|
|
|
Recorded value of MSRs ($7,000 / $1,022,000 x $1,000,000) |
|
$ |
6,849 |
|
|
|
|
|
Variations in the assumptions we use affect the estimated fair values and the
reported gains on sales. Gains on sales of mortgage loans totaled $575.4 million, $772.1 million
and $915.6 million for fiscal years 2006, 2005 and 2004, respectively.
See discussion in Off-Balance Sheet Financing Arrangements 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 determine the
estimated fair values of our residual interests. We develop our assumptions for expected credit
losses, prepayment speeds, discount rates and interest rates based on historical experience and
third-party market sources. Variations in our 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.
Available-for-sale (AFS) residual interests valued at $159.1 million and $205.9 million were
recorded as of April 30, 2006 and 2005, respectively. We recorded $35.3 million in net write-ups in
other comprehensive income and $34.1 million in impairments in the income statement related to
these residual interests during fiscal year 2006 as actual performance differed from our
assumptions. See Item 8, note 1 to our consolidated financial statements for our methodology used
in valuing residual interests. See Item 8, note 5 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 MSRs are carried at the lower of cost or fair value.
We use discounted cash flow models to determine the estimated fair values of our MSRs. 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.
Variations in our assumptions could materially affect the estimated fair values, which may require
us to record impairments.
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 potential
reduction, or impairment, to the fair value of the capitalized MSR. Prepayment rates are estimated
based on historical experience and third-party market sources. 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. If actual
prepayment rates prove to be higher than the estimate made by management, impairment of the MSRs
could occur.
MSRs valued at $272.5 million and $166.6 million were recorded as of April 30, 2006 and 2005,
respectively. See Item 8, note 1 to our consolidated financial statements for our methodology used
in stratifying and valuing MSRs. See Item 8, note 5 to our consolidated financial statements for
current assumptions and a sensitivity analysis of those assumptions.
VALUATION OF GOODWILL Our goodwill impairment analysis is based on a discounted cash flow
approach and market comparables, when available. This analysis, at the reporting unit level,
requires significant management judgment with respect to revenue and expense forecasts, anticipated
changes in working capital, and the selection and application of an appropriate discount rate.
Changes in the projections or assumptions could materially affect fair values. The use of different
assumptions would increase or decrease estimated discounted future operating cash flows and could
effect our conclusions regarding the existence or amount of potential impairment.
Our goodwill balance was $1.1 billion as of April 30, 2006 and $1.0 billion as of April 30,
2005. No goodwill impairments were identified during fiscal years 2006, 2005 or 2004.
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 we believe 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
23
a loss is only reasonably possible or remote and, therefore, no
liability is recorded.
INCOME TAXES We calculate our current and deferred tax provision for the fiscal year based
on estimates and assumptions that could differ from the actual results reflected in income tax
returns filed during the applicable calendar year. Adjustments based on filed returns are recorded
in the appropriate periods when identified. We file a consolidated federal tax return on a calendar
year basis, generally in the second fiscal quarter of the subsequent year.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. We have considered taxable income in carry-back periods, historical
and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which
we operate, and tax planning strategies in determining the need for a valuation allowance against
our deferred tax assets. In the event we were to determine that we would not be able to realize all
or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be
charged to earnings in the period in which we make such determination. Likewise, if we later
determine that it is more likely than not that the deferred tax assets would be realized, we would
reverse the applicable portion of the previously provided valuation allowance.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign
tax authorities, which may result in proposed assessments. Our estimate for the potential outcome
for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any
reasonably foreseeable outcome related to these matters. However, our future results may include
favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments
are made or resolved or when statutes of limitation on potential assessments expire. As a result,
our effective tax rate may fluctuate on a quarterly basis.
OTHER SIGNIFICANT ACCOUNTING POLICIES Other significant accounting policies, not involving
the same level of judgment of uncertainty as those discussed above, are nevertheless important to
an understanding of the financial statements. These policies may require 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 standard setters and
regulators. Although specific conclusions reached by these standard setters may 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, and new or proposed accounting standards that may
affect our financial reporting in the future.
24
RESULTS OF OPERATIONS
Our business is divided into four reportable segments: Tax Services, Mortgage Services, Business Services and Investment Services.
TAX SERVICES
This segment primarily consists of our income tax preparation businesses retail, online
and software. This segment includes our tax operations in the United States, Canada, Australia and
the United Kingdom.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services Operating Statistics |
|
(in 000s, except average fee) |
|
|
Year Ended April 30, |
|
2006 |
|
|
2005(1) |
|
|
2004(1) |
|
|
CLIENTS SERVED |
|
|
|
|
|
|
|
|
|
|
|
|
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations |
|
|
10,359 |
|
|
|
10,608 |
|
|
|
10,627 |
|
Franchise operations |
|
|
5,373 |
|
|
|
5,428 |
|
|
|
5,460 |
|
|
|
|
|
|
|
15,732 |
|
|
|
16,036 |
|
|
|
16,087 |
|
Digital tax solutions (2) |
|
|
3,721 |
|
|
|
3,017 |
|
|
|
3,234 |
|
|
|
|
|
|
|
19,453 |
|
|
|
19,053 |
|
|
|
19,321 |
|
International (3) |
|
|
2,459 |
|
|
|
2,333 |
|
|
|
2,253 |
|
|
|
|
|
|
|
21,912 |
|
|
|
21,386 |
|
|
|
21,574 |
|
|
|
|
GROSS AVERAGE FEE PER
CLIENT SERVED (4) |
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations |
|
$ |
169.58 |
|
|
$ |
158.19 |
|
|
$ |
146.34 |
|
Franchise operations |
|
|
143.52 |
|
|
|
135.98 |
|
|
|
127.91 |
|
|
|
|
|
|
$ |
160.68 |
|
|
$ |
150.67 |
|
|
$ |
140.09 |
|
|
|
|
NET AVERAGE FEE PER
CLIENT SERVED
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations |
|
$ |
162.91 |
|
|
$ |
153.53 |
|
|
$ |
142.51 |
|
RALs(6) |
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations |
|
|
2,542 |
|
|
|
2,667 |
|
|
|
2,713 |
|
Franchise operations |
|
|
1,487 |
|
|
|
1,499 |
|
|
|
1,508 |
|
|
|
|
|
|
|
4,029 |
|
|
|
4,166 |
|
|
|
4,221 |
|
|
|
|
|
|
|
(1) |
|
Company-owned and franchise data for fiscal years 2005 and 2004 have not been
restated for franchise acquisitions. |
|
(2) |
|
Includes TaxCut federal units sold, online completed and paid federal returns, and
state returns and e-filings only when no payment was made for a federal return. |
|
(3) |
|
In the current year, the end of the Canadian tax season was extended from April 30
to May 1, 2006. Clients served in our international operations in fiscal year 2006 includes
approximately 41,400 returns in both company-owned and franchise offices which were accepted
by the client on May 1, 2006. The revenues related to these returns will be recognized in
fiscal year 2007. In the prior year, the end of the Canadian tax season was extended to May 2,
2005. Clients served in our international operations in fiscal year 2005 includes
approximately 47,500 returns which were accepted by the client on May 1 and 2, 2005. The
revenues related to these returns were recognized in fiscal year 2006. |
|
(4) |
|
Calculated as gross tax preparation and related fees divided by clients served (U.S.
only). |
|
(5) |
|
Calculated as gross tax preparation and related fees, less discounts and coupons,
divided by clients served (U.S. only). |
|
(6) |
|
Data is for tax season (January 1 April 30) only. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services Financial Results |
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax preparation and
related fees |
|
$ |
1,793,325 |
|
|
$ |
1,718,867 |
|
|
$ |
1,589,439 |
|
Other services |
|
|
204,968 |
|
|
|
193,163 |
|
|
|
172,517 |
|
|
|
|
|
|
|
1,998,293 |
|
|
|
1,912,030 |
|
|
|
1,761,956 |
|
Royalties |
|
|
207,728 |
|
|
|
197,551 |
|
|
|
184,882 |
|
RAL participation fees |
|
|
177,852 |
|
|
|
182,784 |
|
|
|
168,375 |
|
Other |
|
|
67,933 |
|
|
|
65,928 |
|
|
|
75,964 |
|
|
|
|
Total revenues |
|
|
2,451,806 |
|
|
|
2,358,293 |
|
|
|
2,191,177 |
|
|
|
|
Cost of services: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
765,868 |
|
|
|
726,654 |
|
|
|
672,066 |
|
Occupancy |
|
|
317,030 |
|
|
|
281,772 |
|
|
|
255,516 |
|
Supplies |
|
|
52,894 |
|
|
|
47,703 |
|
|
|
40,792 |
|
Depreciation and amortization |
|
|
44,846 |
|
|
|
54,579 |
|
|
|
48,808 |
|
Bad debt |
|
|
31,927 |
|
|
|
33,046 |
|
|
|
27,328 |
|
Allocated shared services
and other |
|
|
102,711 |
|
|
|
103,560 |
|
|
|
92,137 |
|
|
|
|
|
|
|
1,315,276 |
|
|
|
1,247,314 |
|
|
|
1,136,647 |
|
Provision for RAL litigation |
|
|
70,200 |
|
|
|
- |
|
|
|
- |
|
Other, selling, general and
administrative |
|
|
476,564 |
|
|
|
447,461 |
|
|
|
416,037 |
|
|
|
|
Total expenses |
|
|
1,862,040 |
|
|
|
1,694,775 |
|
|
|
1,552,684 |
|
|
|
|
Pretax income |
|
$ |
589,766 |
|
|
$ |
663,518 |
|
|
$ |
638,493 |
|
|
|
|
FISCAL
2006 COMPARED TO FISCAL 2005 Tax Services revenues increased $93.5 million, or
4.0%, compared to the prior year. We opened more than 750 new offices, 550 of which were part of
the expansion of our company-owned retail distribution network. This expansion contributed
incremental revenues of $36.4 million and pretax losses of $8.5 million in fiscal year 2006.
Tax preparation and related fees from our retail offices increased $74.5 million, or 4.3%, for
fiscal year 2006. This increase is primarily due to an increase of 6.1% in the net average fee per
U.S. client served, partially offset by a decrease of 2.3% in U.S. clients served in company-owned
offices. The decrease in clients served was partially due to a number of technology problems that
severely hurt the start of our filing season coupled with increased competition due to competitors
refund lending products. Our international
operations contributed $18.1 million to the increase, resulting from a 5.4% increase in clients
served.
25
Revenue from our digital business increased 8.2%, primarily due to a 23.3% increase in clients
served, partially offset by planned reductions in unit prices.
Royalty revenue increased $10.2 million, or 5.2%, due to a 5.5% increase in the gross average
fee slightly offset by a 1.0% decline in clients served in franchise offices.
Revenues earned during fiscal year 2006 in connection with RAL participations decreased $4.9
million, or 2.7%, from fiscal year 2005. This decrease is primarily due to a decrease in the number
of RALs, which resulted from increased competition for clients in the early months of the tax
season.
Total expenses increased $167.3 million, or 9.9%, primarily due to $70.2 million of legal
reserves and related litigation fees recorded in the current year. During the current year we
entered into two settlement agreements. The first was a settlement agreement regarding four
separate RAL cases covering 22 states. We also entered into a settlement agreement with the
plaintiffs in another RAL case. See additional discussion below and in Item 8, note 17 to the
consolidated financial statements.
Cost of services for the current year increased $68.0 million, or 5.4%, from the prior year.
Our real estate expansion efforts have contributed to a total increase of $43.5 million across all
cost of services categories. Compensation and benefits increased $39.2 million, or 5.4%, primarily
due to an increase in staff needed for our new offices and the addition of costs related to our
small business initiatives in the current year. Occupancy expenses increased $35.3 million, or
12.5%, primarily as a result of higher rent expenses, due to a 9.5% increase in company-owned
offices under lease and a 7.3% increase in the average rent. Depreciation declined $9.7 million, or
17.8%, primarily due to decreased capital expenditures compared to the prior year.
Other, selling, general and administrative expenses increased $29.1 million, or 6.5%,
primarily due to a $31.5 million increase in corporate shared services, $20.7 million of which was
related to our marketing efforts. We also incurred $7.5 million in additional corporate wages and
$7.1 million in additional legal costs in the current year. During the fourth quarter of fiscal
year 2006, we revised our estimate for the provision for bad debt related to our participation
interests in RALs. This change decreased our provision for bad debt $18.0 million during the fourth
quarter of the current fiscal year. See additional discussion in Item 8, note 1 to the consolidated
financial statements.
The pretax income for fiscal year 2006 decreased $73.8 million, or 11.1%, from 2005, primarily
due to the impact of the current year RAL litigation.
FISCAL
2005 COMPARED TO FISCAL 2004 Tax Services revenues increased $167.1 million, or 7.6%,
compared to fiscal year 2004. In the U.S., we opened a net 1,252 new offices, 609 of which were
part of the expansion of our company-owned retail distribution network. This expansion contributed
incremental revenues of $24.9 million and pretax losses of $18.9 million in fiscal year 2005.
Tax preparation and related fees increased $129.4 million, or 8.1%. This increase is primarily
due to a 7.7% increase in the net average fee per U.S. client served, resulting from increases in
our pricing and the complexity of returns prepared. Clients served in our U.S. company-owned
offices declined 0.2% from fiscal year 2004.
Revenue from our digital business increased 7.9%, primarily due to price increases, partially
offset by a 6.7% decrease in clients served.
Other service revenues increased $20.6 million, or 12.0%, primarily as a result of additional
revenues associated with RACs and Express IRAs.
Royalty revenues increased $12.7 million, or 6.9%, primarily due to a 6.3% increase in the
gross average fee per client served at our franchise offices.
Revenues earned during fiscal year 2005 in connection with RAL participations increased $14.4
million, or 8.6%, over fiscal year 2004. This increase is primarily due to an increase in the
dollar amount of loans in which we purchased participation interests, resulting from an increase in
the fee charged by the lender, an increase in our clients average refund size and the maximum loan
amount allowed by the lender.
Cost of services for fiscal year 2005 increased $110.7 million, or 9.7%, over the prior year.
Compensation and benefits increased $54.6 million primarily due to increased revenues and an
increase in the number of tax professionals and support staff needed in new office locations.
Stock-based compensation related to our seasonal associates also increased $4.1 million. Occupancy
expenses increased $26.3 million, or 10.3%, as a result of an 11.4% increase in U.S. company-owned
offices under lease, which also drove increases in depreciation and amortization and supply costs.
Of the total increase in occupancy expenses, $10.7 million was due to our real estate expansion.
Other cost of services increased $11.4 million primarily due to additional expenses associated with
our POM guarantee and Express IRAs.
Other, selling, general and administrative expenses increased $31.4 million over fiscal year
2004 primarily due to increased spending related to an $18.8 million increase in allocations from
support departments and additional legal expenses of $10.2 million.
26
Pretax income of $663.5 million for fiscal year 2005 represents a 3.9% increase from the prior
year. The segments operating margin declined 100 basis points to 28.1% in fiscal year 2005.
RAL
LITIGATION On December 21, 2005, we entered into a settlement agreement regarding litigation
pertaining to our RAL programs entitled Deadra D. Cummins, et al. v. H&R Block, Inc. et al.;
Mitchell v. H&R Block, Inc. et al.; Green v. H&R Block, Inc. et al.; and Becker v. H&R Block, Inc.
(the Cummins Settlement Agreement). Pursuant to the Settlement Agreements terms, we will
contribute a total of up to $62.5 million in cash for purposes of making payments to the settlement
class, paying all attorneys fees and costs to class counsel, and covering service awards to the
representative plaintiffs. In addition, we will pay costs for providing notice of the settlement to
settlement class members. We increased existing reserves related to this matter, resulting in a
pretax charge of $50.7 million in fiscal year 2006.
On April 19, 2006, we entered into a settlement agreement, subject to final court approval,
regarding litigation entitled Lynne A. Carnegie, et al. v. Household International, Inc., H&R
Block, Inc., et al. (the Carnegie Settlement Agreement). Pursuant to the Carnegie Settlement
Agreement, we will contribute a total of $19.5 million in cash for purposes of making payments to
the settlement class, paying all attorneys fees and costs to class counsel, incentive payment
awards to plaintiff and all notice and administration costs. We recorded a reserve of $19.5 million
related to this settlement in the third quarter of fiscal year 2006.
We are named as a defendant in one other class-action lawsuit and one state attorney general
lawsuit alleging that we engaged in wrongdoing with respect to the RAL program. We believe we have
strong defenses to the other lawsuits and will vigorously defend our position. Nevertheless, the
amounts claimed in these lawsuits are, in some instances, very substantial, and there can be no
assurances as to their ultimate outcome, or as to their impact on our financial statements. See
additional discussion of RAL Litigation in Item 8, note 17 to the consolidated financial statements
and in Part I, Item 3, Legal Proceedings.
27
MORTGAGE SERVICES
This segment is primarily engaged in the origination of non-prime mortgage loans through an
independent broker network, the origination of non-prime and 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services Operating Statistics |
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
VOLUME
OF LOANS ORIGINATED |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale (non-prime) |
|
$ |
36,028,794 |
|
|
$ |
26,977,810 |
|
|
$ |
20,150,992 |
|
Retail:Non-prime |
|
|
3,260,071 |
|
|
|
3,005,168 |
|
|
|
1,846,674 |
|
Prime |
|
|
1,490,898 |
|
|
|
1,018,746 |
|
|
|
1,258,347 |
|
|
|
|
|
|
$ |
40,779,763 |
|
|
$ |
31,001,724 |
|
|
$ |
23,256,013 |
|
|
|
|
NON-PRIME
LOAN CHARACTERISTICS |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average FICO score |
|
|
622 |
|
|
|
614 |
|
|
|
608 |
|
Weighted average interest rate
for borrowers (WAC) |
|
|
7.87 |
% |
|
|
7.36 |
% |
|
|
7.39 |
% |
Weighted average
loan-to-value |
|
|
80.6 |
% |
|
|
78.9 |
% |
|
|
78.7 |
% |
Percentage with prepayment
penalty |
|
|
72.4 |
% |
|
|
70.8 |
% |
|
|
73.7 |
% |
ORIGINATION MARGIN (% OF
ORIGINATION
VOLUME)
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale premium |
|
|
1.42 |
% |
|
|
2.77 |
% |
|
|
4.21 |
% |
Residual cash flows from
beneficial interest in Trusts |
|
|
0.51 |
% |
|
|
0.63 |
% |
|
|
0.72 |
% |
Gain (loss) on derivatives |
|
|
0.35 |
% |
|
|
0.15 |
% |
|
|
(0.05 |
%) |
Loan sale repurchase
reserves |
|
|
(0.18 |
%) |
|
|
(0.13 |
%) |
|
|
(0.20 |
%) |
Retained MSRs |
|
|
0.61 |
% |
|
|
0.44 |
% |
|
|
0.36 |
% |
|
|
|
|
|
|
2.71 |
% |
|
|
3.86 |
% |
|
|
5.04 |
% |
Cost of acquisition |
|
|
(0.37 |
%) |
|
|
(0.54 |
%) |
|
|
(0.50 |
%) |
Direct origination expenses |
|
|
(0.58 |
%) |
|
|
(0.68 |
%) |
|
|
(0.65 |
%) |
|
|
|
Net gain on
sale
gross margin (2) |
|
|
1.76 |
% |
|
|
2.64 |
% |
|
|
3.89 |
% |
Other revenues |
|
|
(0.02 |
%) |
|
|
0.03 |
% |
|
|
0.01 |
% |
Other cost of origination |
|
|
(1.33 |
%) |
|
|
(1.55 |
%) |
|
|
(1.68 |
%) |
|
|
|
Net margin |
|
|
0.41 |
% |
|
|
1.12 |
% |
|
|
2.22 |
% |
|
|
|
Total cost of origination |
|
|
1.91 |
% |
|
|
2.23 |
% |
|
|
2.33 |
% |
Total cost of origination
and acquisition |
|
|
2.28 |
% |
|
|
2.77 |
% |
|
|
2.83 |
% |
LOAN
DELIVERY |
|
|
|
|
|
|
|
|
|
|
|
|
Loan sales |
|
$ |
40,272,225 |
|
|
$ |
30,975,523 |
|
|
$ |
23,234,935 |
|
Execution price (3) |
|
|
1.58 |
% |
|
|
3.01 |
% |
|
|
4.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services Financial Results |
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Components of gains on sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on mortgage loans |
|
$ |
575,402 |
|
|
$ |
772,061 |
|
|
$ |
915,628 |
|
Gain (loss) on derivatives |
|
|
141,223 |
|
|
|
46,853 |
|
|
|
(11,957 |
) |
Gain on sales of AFS
residual interests |
|
|
31,463 |
|
|
|
15,396 |
|
|
|
40,689 |
|
Impairment of AFS
residual interests |
|
|
(34,107 |
) |
|
|
(12,235 |
) |
|
|
(26,063 |
) |
|
|
|
|
|
|
713,981 |
|
|
|
822,075 |
|
|
|
918,297 |
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Accretion-residual interests |
|
|
114,346 |
|
|
|
137,610 |
|
|
|
186,466 |
|
Other |
|
|
18,722 |
|
|
|
11,850 |
|
|
|
5,064 |
|
|
|
|
|
|
|
133,068 |
|
|
|
149,460 |
|
|
|
191,530 |
|
|
|
|
Loan-servicing revenue |
|
|
398,992 |
|
|
|
273,056 |
|
|
|
211,710 |
|
Other |
|
|
1,097 |
|
|
|
1,427 |
|
|
|
2,172 |
|
|
|
|
Total revenues |
|
|
1,247,138 |
|
|
|
1,246,018 |
|
|
|
1,323,709 |
|
|
|
|
Cost of services |
|
|
296,710 |
|
|
|
221,148 |
|
|
|
193,383 |
|
Cost of other revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
293,781 |
|
|
|
239,997 |
|
|
|
206,238 |
|
Occupancy |
|
|
45,116 |
|
|
|
37,336 |
|
|
|
28,418 |
|
Other |
|
|
105,494 |
|
|
|
78,769 |
|
|
|
55,265 |
|
|
|
|
|
|
|
444,391 |
|
|
|
356,102 |
|
|
|
289,921 |
|
|
|
|
Selling, general and
administrative |
|
|
184,421 |
|
|
|
172,675 |
|
|
|
151,882 |
|
|
|
|
Total expenses |
|
|
925,522 |
|
|
|
749,925 |
|
|
|
635,186 |
|
|
|
|
Pretax income |
|
$ |
321,616 |
|
|
$ |
496,093 |
|
|
$ |
688,523 |
|
|
|
|
|
|
|
(1) |
|
See Reconciliation of Non-GAAP Financial Information at the end of Item 7. Fiscal
year 2006 excludes the impact of a restructuring charge. |
|
(2) |
|
Defined as gain on sale of mortgage loans (including gain or loss on derivatives,
mortgage servicing rights and net of direct origination and acquisition expenses) divided by
origination volume. |
|
(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). |
FISCAL
2006 COMPARED TO FISCAL 2005 Mortgage Services revenues were essentially flat
compared to the prior year, with higher loan servicing revenues and gains on derivatives offset by
lower margins on mortgage loans sold and lower accretion.
The following table summarizes the key drivers of loan origination volumes and related gains
on sales of mortgage loans:
28
(dollars in 000s)
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
Application process: |
|
|
|
|
|
|
|
|
Total number of applications |
|
|
369,210 |
|
|
|
335,203 |
|
Number of sales associates (1) |
|
|
2,814 |
|
|
|
3,526 |
|
Closing ratio (2) |
|
|
60.3 |
% |
|
|
58.3 |
% |
Originations: |
|
|
|
|
|
|
|
|
Total number of originations |
|
|
222,749 |
|
|
|
195,392 |
|
WAC |
|
|
7.87 |
% |
|
|
7.36 |
% |
Average loan size (all loans) |
|
$ |
183 |
|
|
$ |
159 |
|
Total originations |
|
$ |
40,779,763 |
|
|
$ |
31,001,724 |
|
Direct origination and
acquisition expenses, net |
|
$ |
387,911 |
|
|
$ |
378,674 |
|
Revenue (loan value): |
|
|
|
|
|
|
|
|
Net gain on
sale gross margin (3) |
|
|
1.76 |
% |
|
|
2.64 |
% |
|
|
|
(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 gain on sale of mortgage loans (including gain or loss on derivatives,
mortgage servicing rights and net of direct origination and acquisition expenses) divided by
origination volume. |
Despite a 31.5% increase in loan origination volume, gains on sales of mortgage
loans decreased $196.7 million, primarily as a result of moderating demand by loan buyers and
rising two-year swap rates. Market interest rates, based on the two-year swap, increased from an
average of 3.32% last year to 4.63% in the current year. However, our WAC increased only 51 basis
points, up to 7.87% from 7.36% in the prior year. Due to competitive market conditions, we were
unable to align our WAC with increases in market rates. As such, our loan sale premium declined 135
basis points, to 1.42% from 2.77% last year. In the current year, we also increased our loss
reserves $11.6 million above our normal loss accrual, primarily related to repurchase activity
related to early payment defaults, which reduced gains on sales of mortgage loans. The mortgage
industry has seen an increase in early payment defaults over the past few months, and we have taken
steps in reaction to our loss exposure.
The initial value of MSRs we recorded in fiscal year 2006 increased to 61 basis points from 44
basis points in the prior year, which resulted in an increase of $113.0 million in gains on sales
of mortgage loans. These increases were primarily due to higher origination volumes, average loan
size and interest rates, coupled with updated valuation assumptions. During fiscal year 2006 we updated our assumptions used to value
our MSRs. The assumptions were updated primarily to reflect lower servicing costs, in particular
interest paid to bondholders on monthly loan prepayments, and higher discount rates. These changes
in assumptions increased the weighted average value of MSRs recorded during fiscal year 2006 by
approximately $37.0 million (9 basis points of total retained MSRs of 61 basis points) over the
prior year.
To mitigate the risk of short-term changes in market interest rates related to our loan
originations and beneficial interest in Trusts, we use various derivative financial instruments.
During the current year, we recorded a net $141.2 million in gains, compared to $46.9 million in
the prior year, related to our interest rate swaps and other derivative instruments. This increase
was primarily due to rising short-term interest rates and an increase in the average notional
amount of swap arrangements to $8.4 billion in the current year, compared to $2.4 billion in fiscal
year 2005. See Item 8, note 8 to the consolidated financial statements.
In fiscal year 2006, we completed sales of available-for-sale residual interests and recorded
a gain of $31.5 million. These sales accelerated cash flows from these residual interests,
effectively realizing previously recorded unrealized gains included in other comprehensive income.
We recorded a gain of $15.4 million in the prior year on a similar transaction.
During fiscal year 2006, our available-for-sale residual interests performed better than
expected in our internal valuation models, with lower credit losses than originally modeled,
partially offset by higher than expected interest rates. We recorded favorable pretax
mark-to-market adjustments, which increased the fair value of these residual interests $53.3
million during the year. These adjustments were recorded, net of write-downs of $18.0 million and
deferred taxes of $13.5 million, in other comprehensive income and will be accreted into income
throughout the remaining life of the residual interests. Offsetting this increase were impairments
of $34.1 million, which were recorded in gains on sales of mortgage assets. Future changes in
interest rates or other assumptions, based on market conditions or actual loan pool performance,
could cause additional adjustments to the fair value of these residual interests and could cause
changes to the accretion of these residual interests in future periods.
29
The following table summarizes the key metrics related to our loan servicing business:
(dollars in 000s)
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
Average servicing portfolio: |
|
|
|
|
|
|
|
|
With related MSRs |
|
$ |
56,521,595 |
|
|
$ |
41,021,448 |
|
Without related MSRs |
|
|
19,106,863 |
|
|
|
13,838,769 |
|
|
|
|
|
|
$ |
75,628,458 |
|
|
$ |
54,860,217 |
|
|
|
|
Ending servicing portfolio: |
|
|
|
|
|
|
|
|
With related MSRs |
|
$ |
62,910,568 |
|
|
$ |
47,543,982 |
|
Without related MSRs |
|
|
10,471,509 |
|
|
|
20,450,482 |
|
|
|
|
|
|
$ |
73,382,077 |
|
|
$ |
67,994,464 |
|
|
|
|
Number of loans serviced |
|
|
441,981 |
|
|
|
435,290 |
|
Average delinquency rate |
|
|
5.16 |
% |
|
|
4.85 |
% |
Weighted average FICO score |
|
|
621 |
|
|
|
618 |
|
Weighted average interest rate
(WAC) of portfolio |
|
|
7.58 |
% |
|
|
7.46 |
% |
Weighted average rate earned |
|
|
0.38 |
% |
|
|
0.36 |
% |
Carrying value of MSRs |
|
$ |
272,472 |
|
|
$ |
166,614 |
|
Loan servicing revenues increased $125.9 million, or 46.1%, compared to the prior
year. The increase reflects a higher loan servicing portfolio resulting from our loan origination
growth. The average servicing portfolio for the year increased $20.8 billion, or 37.9%, to $75.6
billion, even with lower volumes in our sub-servicing business. The weighted average rate earned on
our entire servicing portfolio was 38 basis points for fiscal year 2006, compared to 36 basis
points in the prior year.
Total expenses for the current year increased $175.6 million, or 23.4%, from the prior year.
Cost of services increased $75.6 million, or 34.2%, mainly as a result of a higher average
servicing portfolio during the current year and increased amortization of MSRs.
Cost of other revenues increased $88.3 million over fiscal year 2005, and includes a $12.6
million restructuring charge associated with the closing of some of our branch offices. See
additional discussion of the restructuring charge in Item 8, note 16 to the consolidated financial
statements. Compensation and benefits increased $53.8 million primarily due to an increase in the
average number of sales associates during the year to support higher loan volumes and the resulting
increase in origination-based incentives, coupled with $6.7 million in severance charges recorded
as part of the restructuring. Occupancy expenses increased $7.8 million primarily due to $5.9
million in lease termination costs recorded as part of the restructuring. Other expenses increased
$26.7 million primarily as a result of $20.1 million in additional interest expense related to
mortgage loans held on our balance sheet and $5.0 million of additional depreciation and
amortization of our newly implemented origination and servicing software.
Selling, general and administrative expenses increased $11.7 million primarily due to $15.3
million in additional marketing expenses, $5.1 million in additional occupancy costs and $3.2
million in higher allocated shared services. These increases were partially offset by a $15.7
million decline in compensation and benefits resulting from reductions in administrative and
corporate headcount and lower bonus accruals.
Pretax income decreased $174.5 million, or 35.2%, for fiscal year 2006.
FISCAL
2005 COMPARED TO FISCAL 2004 Mortgage Services revenues decreased $77.7 million, or
5.9%, compared to fiscal year 2004. Revenues decreased primarily as a result of a decline in gains
on sales of mortgage loans.
Although origination volumes increased 33.3% over fiscal year 2004, gains on sales of mortgage
loans declined $143.6 million as a result of increased price competition and poorer execution in
the secondary market. As a result, our net margin declined to 1.12% from 2.22% in fiscal year 2004.
The average market interest rate for a 2-year swap increased to 3.32% in fiscal year 2005 from
1.97% in 2004, while our WAC decreased to 7.36% from 7.39% for the same periods. Because our WAC
did not increase as quickly as market rates, our gross margin declined 125 basis points from fiscal
year 2004. During fiscal year 2005, we recorded $46.9 million in net gains, compared to a net loss
of $12.0 million in 2004, related to derivative instruments.
In fiscal year 2005, we completed a sale of available-for-sale residual interests and recorded
a gain of $15.4 million. We recorded a gain of $40.7 million in the prior year on similar
transactions.
Impairments of available-for-sale residual interests in securitizations of $12.2 million were
recognized during fiscal year 2005 compared with $26.1 million in the prior year. The impairments
in fiscal year 2004 were due primarily to loan performance of older residuals and changes in
assumptions to more closely align with the economic and interest rate environment.
Total accretion of residual interests decreased $48.9 million from fiscal year 2004. This
decrease is primarily due to the sale of previously securitized residual interests
during fiscal year 2004, which eliminated future accretion on those residual interests.
During fiscal year 2005, our available-for-sale residual interests continued to perform better
than expected compared
30
to internal valuation models. We recorded favorable pretax mark-to-market
adjustments, which increased the fair value of these residual interests $154.3 million during
fiscal year 2005. These adjustments were recorded, net of write-downs of $58.3 million and deferred
taxes of $36.6 million, in other comprehensive income and will be accreted into income throughout
the remaining life of these residual interests.
Loan-servicing revenues increased $61.3 million, or 29.0%, over fiscal year 2004. The increase
reflects a higher average loan-servicing portfolio. The average servicing portfolio for fiscal year
2005 increased 42.4%.
Cost of services increased $27.8 million, or 14.4%, as a result of a higher average servicing
portfolio, particularly loans with MSRs, which also resulted in an increase in MSR amortization.
Cost of other revenues increased $66.2 million, or 22.8%, over fiscal year 2004. Compensation
and benefits increased $33.8 million as a result of a 25.4% increase in the number of employees,
reflecting resources needed to support higher loan production volumes.
Selling, general and administrative expenses increased $20.8 million, or 13.7%, due to $12.1
million in increased retail marketing expenses and $7.4 million in additional consulting expenses.
Pretax income for fiscal year 2005 decreased $192.4 million, or 27.9%, from fiscal year 2004.
BUSINESS SERVICES
This segment offers middle-market companies accounting, tax and business consulting
services, wealth management, retirement resources, payroll services, corporate finance and
financial process outsourcing.
Business Services Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
ACCOUNTING, TAX AND BUSINESS CONSULTING - |
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable hours (000s) |
|
|
4,357 |
|
|
|
2,898 |
|
|
|
2,598 |
|
Chargeable hours per person |
|
|
1,385 |
|
|
|
1,430 |
|
|
|
1,414 |
|
Net billed rate per hour |
|
$ |
141 |
|
|
$ |
133 |
|
|
$ |
124 |
|
Average margin per person |
|
$ |
114,755 |
|
|
$ |
112,573 |
|
|
$ |
102,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Services Financial Results
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounting, tax
and consulting |
|
$ |
690,817 |
|
|
$ |
412,473 |
|
|
$ |
353,750 |
|
Capital markets |
|
|
59,553 |
|
|
|
67,922 |
|
|
|
73,860 |
|
Payroll, benefits and
retirement services |
|
|
36,605 |
|
|
|
27,331 |
|
|
|
21,172 |
|
Other services |
|
|
52,501 |
|
|
|
31,170 |
|
|
|
19,390 |
|
|
|
|
|
|
|
839,476 |
|
|
|
538,896 |
|
|
|
468,172 |
|
Other |
|
|
37,783 |
|
|
|
34,420 |
|
|
|
31,038 |
|
|
|
|
Total revenues |
|
|
877,259 |
|
|
|
573,316 |
|
|
|
499,210 |
|
|
|
|
Cost of services: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
471,619 |
|
|
|
310,950 |
|
|
|
256,640 |
|
Occupancy |
|
|
56,870 |
|
|
|
24,699 |
|
|
|
20,498 |
|
Other |
|
|
65,386 |
|
|
|
36,672 |
|
|
|
33,080 |
|
|
|
|
|
|
|
593,875 |
|
|
|
372,321 |
|
|
|
310,218 |
|
Selling, general and
administrative |
|
|
230,006 |
|
|
|
171,124 |
|
|
|
169,680 |
|
|
|
|
Total expenses |
|
|
823,881 |
|
|
|
543,445 |
|
|
|
479,898 |
|
|
|
|
Pretax income |
|
$ |
53,378 |
|
|
$ |
29,871 |
|
|
$ |
19,312 |
|
FISCAL
2006 COMPARED TO FISCAL 2005 Business Services revenues for fiscal year 2006
increased $303.9 million, or 53.0%, from the prior year. This increase was primarily due to the
acquisition of American Express Tax and Business Services, Inc., which increased accounting, tax
and consulting revenues $251.3 million. The remaining $27.1 million increase in tax, accounting and
consulting revenues was primarily driven by increases in the net billed rate per hour and
chargeable hours.
Capital markets revenues declined $8.4 million due to a 36.0% decline in the number of
business valuation projects. Payroll, benefits and retirement services revenues increased $9.3
million primarily due to acquisitions completed during the third and fourth quarters of fiscal year
2005. Other service revenues increased $21.3 million as a result of acquisitions completed in the
fourth quarter of fiscal year 2005 in our financial process outsourcing business and growth in
wealth management services.
Total expenses increased $280.4 million, or 51.6%, for fiscal year 2006 compared to the prior
year. Cost of services increased $221.6 million, primarily due to a $160.7 million increase in
compensation and benefits. Compensation and benefits increased $136.0 million due to the American
Express Tax and Business Services, Inc. acquisition. In addition, baseline increases in the number
of personnel and the average wage per employee, driven by marketplace competition for professional staff, also contributed to the increase. Occupancy expenses increased
$32.2 million and other cost of services increased $28.7 million primarily due to acquisitions.
31
Selling, general and administrative expenses increased $58.9 million primarily due to
acquisitions and additional costs associated with our business development initiatives.
Pretax income for the year ended April 30, 2006 was $53.4 million, compared to pretax income
of $29.9 million in the prior year.
FISCAL 2005 COMPARED TO FISCAL 2004 Business Services revenues for fiscal year 2005 increased
$74.1 million, or 14.8%, from the prior year. This increase was primarily due to a $58.7 million
increase in accounting, tax and consulting revenues resulting from an 11.5% increase in chargeable
hours and a 7.3% increase in the net billed rate per hour. The increase in chargeable hours is
primarily due to strong demand for our tax and accounting services as well as our consulting and
risk management services. This demand stems from the current business environment and the emphasis
placed on the accounting industry.
Capital markets revenues declined $5.9 million as a result of an 11.2% decrease in the number
of business valuation projects. Payroll, benefits and retirement services revenues increased as a
result of three acquisitions completed during the last half of fiscal year 2005.
Other service revenues increased $11.8 million due to the acquisition of our financial process
outsourcing business in the second quarter of fiscal year 2004, coupled with overall growth in this
business. Increases in reimbursable expenses and contractor revenues also contributed to higher
revenues.
Cost of services increased $62.1 million, or 20.0%, for fiscal year 2005 compared to the prior
year. Compensation and benefits related to our services increased $54.3 million, primarily as a
result of increases in the number of personnel and the average wage per employee. The increase in
the average wage is being driven by marketplace competition for professional staff. Higher expenses
are also attributable to investments we are making in early-stage businesses within this segment.
Pretax income for the year ended April 30, 2005 was $29.9 million compared to $19.3 million in
fiscal year 2004.
INVESTMENT SERVICES
This segment is primarily engaged in offering advice-based brokerage services and investment
planning. Our integration of investment advice and new service offerings are allowing us to shift
our emphasis from a transaction-based client relationship to a more advice-based focus.
Investment Services
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Customer trades (1) |
|
|
974,625 |
|
|
|
885,796 |
|
|
|
1,004,235 |
|
Customer daily average trades |
|
|
3,883 |
|
|
|
3,529 |
|
|
|
3,923 |
|
Average revenue per trade (2) |
|
$ |
119.11 |
|
|
$ |
123.33 |
|
|
$ |
119.36 |
|
Customer accounts: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional brokerage |
|
|
418,162 |
|
|
|
431,749 |
|
|
|
463,736 |
|
Express IRAs |
|
|
442,157 |
|
|
|
380,539 |
|
|
|
366,040 |
|
|
|
|
|
|
|
860,319 |
|
|
|
812,288 |
|
|
|
829,776 |
|
|
|
|
Ending balance of assets under
administration (billions) |
|
$ |
31.8 |
|
|
$ |
27.8 |
|
|
$ |
26.7 |
|
Average assets per traditional
brokerage account |
|
$ |
75,222 |
|
|
$ |
63,755 |
|
|
$ |
57,204 |
|
Average margin balances
(millions) |
|
$ |
539 |
|
|
$ |
597 |
|
|
$ |
545 |
|
Average customer payables
balances (millions) |
|
$ |
782 |
|
|
$ |
975 |
|
|
$ |
984 |
|
Number of advisors |
|
|
958 |
|
|
|
1,010 |
|
|
|
1,009 |
|
Included in the numbers above are the following relating to fee-based accounts: |
|
|
|
|
Customer household accounts |
|
|
9,224 |
|
|
|
7,668 |
|
|
|
6,964 |
|
Average revenue per account |
|
$ |
2,535 |
|
|
$ |
2,301 |
|
|
$ |
1,572 |
|
Ending balance of assets under
administration (millions) |
|
$ |
2,526 |
|
|
$ |
1,975 |
|
|
$ |
1,494 |
|
Average assets per active
account |
|
$ |
274,981 |
|
|
$ |
260,238 |
|
|
$ |
214,537 |
|
|
|
|
|
|
|
(1) Includes only trades on which revenues are earned (revenue trades). Revenues are
earned on both transactional and annuitized trades. |
|
|
|
(2) Calculated as total trade revenues divided by revenue trades.
|
|
|
|
(3) Includes only accounts with a positive balance. |
|
|
|
Investment Services Financial Results
|
|
(in 000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Transactional revenue |
|
$ |
91,143 |
|
|
$ |
88,516 |
|
|
$ |
99,559 |
|
Annuitized revenue |
|
|
99,331 |
|
|
|
77,386 |
|
|
|
60,950 |
|
|
|
|
Production revenue |
|
|
190,474 |
|
|
|
165,902 |
|
|
|
160,509 |
|
Other services |
|
|
32,256 |
|
|
|
29,206 |
|
|
|
35,619 |
|
|
|
|
|
|
|
222,730 |
|
|
|
195,108 |
|
|
|
196,128 |
|
|
|
|
Margin interest revenue |
|
|
60,795 |
|
|
|
43,698 |
|
|
|
33,408 |
|
Less: interest expense |
|
|
(6,643 |
) |
|
|
(3,114 |
) |
|
|
(1,358 |
) |
|
|
|
Net interest revenue |
|
|
54,152 |
|
|
|
40,584 |
|
|
|
32,050 |
|
|
|
|
Other |
|
|
4,430 |
|
|
|
438 |
|
|
|
(66 |
) |
|
|
|
Total revenues (1) |
|
|
281,312 |
|
|
|
236,130 |
|
|
|
228,112 |
|
|
|
|
Cost of services: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
135,256 |
|
|
|
116,552 |
|
|
|
108,956 |
|
Occupancy |
|
|
21,050 |
|
|
|
22,178 |
|
|
|
21,571 |
|
Other |
|
|
21,132 |
|
|
|
19,555 |
|
|
|
24,091 |
|
|
|
|
|
|
|
177,438 |
|
|
|
158,285 |
|
|
|
154,618 |
|
Selling, general and
administrative |
|
|
136,709 |
|
|
|
153,215 |
|
|
|
149,108 |
|
|
|
|
Total expenses |
|
|
314,147 |
|
|
|
311,500 |
|
|
|
303,726 |
|
|
|
|
Pretax loss |
|
$ |
(32,835 |
) |
|
$ |
(75,370 |
) |
|
$ |
(75,614 |
) |
|
|
|
(1) |
|
Total revenues, less interest expense. |
32
FISCAL 2006 COMPARED TO FISCAL 2005 Investment Services revenues, net of interest expense,
for the fiscal year 2006 increased $45.2 million, or 19.1%.
Total production revenue increased $24.6 million, or 14.8%, over the prior year. Transactional
revenue, which is based on sales of individual securities, increased $2.6 million, or 3.0%, from
the prior year due primarily to a 6.1% increase in transactional trading volume, partially offset
by a 2.4% decrease in average revenue per transactional trade. Annuitized revenue, which is based
on sales of various fee-based products, increased $21.9 million, or 28.4%, due to increased sales
of annuities and insurance, wealth management accounts, mutual funds, and unit investment trusts
(UITs). The shift in revenues from transactional to annuitized demonstrates our continued move
toward an advice-based focus.
Annualized productivity averaged approximately $194,000 per advisor during the current year
compared to $166,000 in the prior year. Increased productivity was due to higher production levels
across all recruiting classes. Minimum production standards put into place during the fourth
quarter of fiscal year 2005 resulted in 111 advisors increasing their production. These standards
also resulted in 152 low-producing advisors leaving the company. We expect average advisor
productivity to continue increasing as we enforce minimum production standards, provide additional
training to advisors and increase productivity levels of newly recruited advisors.
Margin interest revenue increased $17.1 million, or 39.1%, from the prior year, as a result of
higher interest rates earned, partially offset by a decline in average margin balances.
Total expenses increased $2.6 million, or 0.8%. Cost of services increased $19.2 million, or
12.1%, primarily as a result of $18.7 million of additional compensation and benefits expenses
resulting from higher production revenues.
Selling, general and administrative expenses decreased $16.5 million, or 10.8%, primarily due
to a $4.8 million decline in legal expenses, due in part to a favorable arbitration outcome.
Current year results also improved due to reduced back-office headcount relating to cost
containment efforts and gains on the disposition of certain assets during the year. These decreases
were partially offset by increased bonus accruals associated with the segments improved
performance.
The pretax loss for Investment Services for the year ended April 30, 2006 was $32.8 million
compared to the prior year loss of $75.4 million.
FISCAL
2005 COMPARED TO FISCAL 2004 Investment Services revenues, net of interest expense, for
fiscal year 2005 increased $8.0 million, or 3.5%. The increase is primarily due to higher margin
interest revenue.
Production revenue increased $5.4 million, or 3.4% over fiscal year 2004. Transactional
revenue decreased $11.0 million, or 11.1%, from the prior year due primarily to an 18.7% decline in
transactional trading volume. This decline was partially offset by an increase in the average
revenue per trade. Annuitized revenue increased $16.4 million, or 27.0%, due to increased sales of
annuities, mutual funds and our fee-based wealth management accounts. Annuitized revenues represent
46.6% of total production revenues for fiscal year 2005, compared to 38.0% in the prior year.
Advisor productivity averaged approximately $166,000 in fiscal year 2005, essentially flat compared
to the prior year.
Other service revenue declined $6.4 million, or 18.0%, from fiscal year 2004 due to fewer
fixed income underwriting offerings and Express IRA revenues now being recorded as part of Tax
Services.
Margin interest revenue increased $10.3 million, or 30.8%, from fiscal year 2004, which is
primarily a result of higher interest rates earned, coupled with a 9.5% increase in average margin
balances. Margin balances have increased from an average of $545.0 million in fiscal year 2004 to
$597.0 million in fiscal year 2005.
Cost of services increased $3.7 million, or 2.4%, primarily due to $7.6 million of additional
compensation and benefits resulting from a higher average commission rate than fiscal year 2004 and
other financial incentives for attracting new advisors. This increase was partially offset by
declines in depreciation and other expenses.
Selling, general and administrative expenses increased $4.1 million, or 2.8%, over fiscal year
2004 primarily as the result of $6.8 million in additional legal expenses, partially offset by
gains of $4.6 million on the disposition of certain assets.
The pretax loss for Investment Services for fiscal year 2005 was $75.4 million compared to a
loss of $75.6 million in the prior year.
33
CORPORATE
Corporate support departments, which provide services to our operating segments 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. Financial results for our captive insurance, franchise financing and
banking subsidiaries are also included below, as was our small business initiatives subsidiary in
fiscal year 2004.
|
|
|
Corporate Financial Results
|
|
(in 000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Operating revenues |
|
$ |
22,279 |
|
|
$ |
13,592 |
|
|
$ |
12,532 |
|
Eliminations |
|
|
(13,636 |
) |
|
|
(10,444 |
) |
|
|
(8,218 |
) |
|
|
|
Total revenues |
|
|
8,643 |
|
|
|
3,148 |
|
|
|
4,314 |
|
|
|
|
Corporate expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
67,630 |
|
|
|
72,701 |
|
|
|
69,300 |
|
Other |
|
|
65,484 |
|
|
|
51,262 |
|
|
|
50,476 |
|
|
|
|
|
|
|
133,114 |
|
|
|
123,963 |
|
|
|
119,776 |
|
|
|
|
Support departments: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
137,065 |
|
|
|
117,303 |
|
|
|
110,507 |
|
Information technology |
|
|
116,990 |
|
|
|
107,306 |
|
|
|
110,569 |
|
Finance |
|
|
49,719 |
|
|
|
34,498 |
|
|
|
33,829 |
|
Other |
|
|
122,232 |
|
|
|
107,562 |
|
|
|
78,593 |
|
|
|
|
|
|
|
426,006 |
|
|
|
366,669 |
|
|
|
333,498 |
|
|
|
|
Allocation of shared services |
|
|
(425,589 |
) |
|
|
(366,742 |
) |
|
|
(336,639 |
) |
Other income, net |
|
|
20,356 |
|
|
|
24,345 |
|
|
|
4,582 |
|
|
|
|
Pretax loss |
|
$ |
(104,532 |
) |
|
$ |
(96,397 |
) |
|
$ |
(107,739 |
) |
FISCAL
2006 COMPARED TO FISCAL 2005 Corporate expenses increased $9.2 million primarily due
to a $14.2 million increase in other expenses, offset by a $5.1 million decline in interest
expense. Other expenses increased due to higher finance and information technology department
expenses.
Our consolidated interest expense, both operating and non-operating, totaled $103.8 million
for fiscal year 2006, an increase of $15.9 million over the prior year. Of the $103.8 million in
total interest, $49.1 million related to debt incurred on previous acquisitions, with the remaining
$54.7 million related to our operations recorded directly in our operating segments.
Marketing department expenses increased $19.8 million, or 16.8%, due primarily to an increase
in digital advertising efforts. Information technology department expenses increased $9.7 million
primarily due to higher compensation and benefits associated with higher headcount. Finance
department expenses increased $15.2 million, primarily due to additional consulting expenses and
increases in compensation expenses. Other support department expenses increased $14.7 million
primarily due to increases in stock-based compensation expenses and legal department expenses,
partially offset by a decrease in supply department expenses.
Other income declined $4.0 million primarily as a result of $17.3 million in legal recoveries
we received during the prior year, partially offset by other gains recorded in the current year.
The pretax loss was $104.5 million, compared with last years loss of $96.4 million.
Our effective tax rate for the year increased to 40.7% compared to 38.7% in the prior year.
This increase is due to higher deferred tax valuation allowances and increases in reserves for
uncertain tax positions.
FISCAL
2005 COMPARED TO FISCAL 2004 Corporate expenses increased $4.2 million primarily due to
higher interest expense, resulting from higher interest rates and higher average debt balances.
Marketing department expenses increased $6.8 million, or 6.1%, primarily due to additional
marketing efforts in fiscal year 2005. Other support department expenses increased $29.0 million,
primarily due to $15.1 million of additional stock-based compensation expenses, increases in the
cost of employee insurance and supplies.
Other income increased $19.8 million primarily as a result of $17.3 million in legal
recoveries.
The pretax loss was $96.4 million, compared with a loss of $107.7 million in fiscal year 2004.
Our effective income tax rate for fiscal year 2005 decreased to 38.7% compared to 39.8% in
fiscal year 2004. The decrease is due to tax benefits realized on net operating loss carryforwards.
34
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, pay dividends, repurchase shares of our common stock
and acquire businesses.
CASH FROM OPERATIONS Operating cash flows totaled $585.7 million, $513.8 million and $852.5
million in fiscal years 2006, 2005 and 2004, respectively. Operating cash flows in fiscal year 2006
increased from fiscal year 2005 primarily due to lower income tax payments, which totaled $270.5
million this year, compared to $437.4 million in fiscal year 2005, partially offset by higher MSR
balances and increased mortgage loans held for sale.
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 $108.5 million, $136.1 million and $120.0 million in fiscal years 2006, 2005 and
2004, respectively.
DEBT
On October 26, 2004, we issued $400.0 million of 5.125% Senior Notes under our shelf
registration statements. The proceeds from the notes were used to repay our $250.0 million in 63/4%
Senior Notes, which were due on November 1, 2004. The remaining proceeds were used for working
capital, capital expenditures, repayment of other debt and other general corporate purposes.
DIVIDENDS
We have consistently paid quarterly dividends. Dividends paid totaled $160.0
million, $143.0 million and $138.4 million in fiscal years 2006, 2005 and 2004, respectively.
SHARE REPURCHASES On June 9, 2004, our Board of Directors approved an authorization to
repurchase 15 million shares. This authorization is in addition to the authorization of 20 million
shares on June 11, 2003. During fiscal year 2006, we repurchased 9.0 million shares pursuant to
these authorizations at an aggregate price of $254.2 million or an average price of $28.18 per
share. There were 10.5 million shares remaining under the 2004 authorization at the end of fiscal
year 2006.
We plan to continue to purchase shares on the open market in accordance with the existing
authorizations, subject to various factors including the price of the stock, our ability to
maintain liquidity and financial flexibility, securities laws restrictions, targeted capital levels
and other investment opportunities available.
ACQUISITIONS From time to time we acquire businesses that are viewed to be a good strategic
fit to our organization. Total cash paid for acquisitions was $212.5 million, $37.6 million and
$280.9 million during fiscal years 2006, 2005 and 2004, respectively. Acquisitions during fiscal
year 2006 included American Express Tax and Business Services, Inc. Cash paid in fiscal year 2006
related to the acquisition of this business totaled $190.7 million. 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.
RESTRICTED CASH We hold certain cash balances that are restricted as to use. Cash and cash
equivalents - restricted totaled $394.1 million at fiscal year end. Investment Services held $369.0
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. Restricted cash of $16.4
million at April 30, 2006 held by Business Services is related to funds held to pay payroll and
related taxes on behalf of its customers. Restricted cash held by Mortgage Services totaled $8.4
million at April 30, 2006 for outstanding commitments to fund mortgage loans.
FISCAL YEAR 2007 OUTLOOK We began construction on a new corporate headquarters facility
during fiscal year 2005. Estimated remaining construction costs to be incurred during fiscal year
2007 of $63.9 million will be financed from operating cash flows.
Our Board of Directors approved an increase of the quarterly cash dividend from 12.5 cents to
13.5 cents per share, an 8.0% increase, effective with the quarterly dividend payment on October 2,
2006 to shareholders of record on September 11, 2006. On June 7, 2006, our Board also approved an
additional authorization to repurchase 20.0 million shares.
We plan to refinance our $500.0 million in Senior Notes, which are due in April 2007.
The initial capital contribution for the H&R Block Bank will be $160.0 million, which we
transferred on May 1, 2006, with an additional $10.0 million capital contribution planned during
fiscal year 2007. H&R Block Bank is required to maintain a minimum leverage capital to total asset
ratio of 12% during its first three years of operations.
35
A condensed consolidating statement of cash flows by segment for the fiscal year ended April
30, 2006 follows. Generally, interest is not charged on intercompany activities between segments.
Detailed consolidated statements of cash flows are located in Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
|
|
|
Mortgage |
|
|
Business |
|
|
Investment |
|
|
|
|
|
|
Consolidated |
|
|
|
Tax Services |
|
|
Services |
|
|
Services |
|
|
Services |
|
|
Corporate |
|
|
H&R Block |
|
|
FISCAL YEAR 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
$ |
596,025 |
|
|
$ |
(123,903 |
) |
|
$ |
31,258 |
|
|
$ |
24,894 |
|
|
$ |
57,412 |
|
|
$ |
585,686 |
|
Investing |
|
|
(62,797 |
) |
|
|
(309,302 |
) |
|
|
(221,122 |
) |
|
|
12,615 |
|
|
|
(107,899 |
) |
|
|
(688,505 |
) |
Financing |
|
|
14,173 |
|
|
|
- |
|
|
|
(23,611 |
) |
|
|
14,538 |
|
|
|
(308,136 |
) |
|
|
(303,036 |
) |
Net intercompany |
|
|
(527,564 |
) |
|
|
422,418 |
|
|
|
233,744 |
|
|
|
(13,470 |
) |
|
|
(115,128 |
) |
|
|
- |
|
Net intercompany activities are excluded from investing and financing
activities within the segment cash flows. We believe that by excluding intercompany activities, the
cash flows by segment more clearly depicts the cash generated and used by each segment. Had
intercompany activities been included, those segments in a net lending situation would have been
included in investing activities, and those in a net borrowing situation would have been included
in financing activities.
TAX SERVICES Tax Services has historically been our largest provider of annual operating
cash flows. The seasonal nature of Tax Services generally results in a large positive operating
cash flow in the fourth quarter. Tax Services generated $596.0 million in operating cash flows
primarily related to net income, as cash is generally collected from clients at the time services
are rendered. We also received a signing bonus from HSBC during the current year in connection with
our new RAL participation agreement, which was recorded as deferred revenue at April 30, 2006.
Since July 1996, we have been a party to agreements with HSBC and its predecessors to
participate in RALs provided by a lending bank to H&R Block tax clients. During fiscal year 2006,
we signed a new agreement with HSBC under which HSBC and its designated bank will provide funding
of all RALs offered through June 2011. If HSBC 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 HSBC should the need arise.
We also believe that the RAL program is productive for the Company and a useful service 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. Total revenues related to the RAL program (including
revenues from participation interests) were $179.3 million for the year ended April 30, 2006,
representing 3.7% of consolidated revenues and contributed $106.5 million to the segments pretax
results. Revenues related to the RAL program totaled $182.6 million for the year ended April 30,
2005, representing 4.1% of consolidated revenues and contributed $101.3 million to the segments
pretax results.
Our international operations are generally self-funded. Cash balances are held in Canada,
Australia and the United Kingdom independently in local currencies. H&R Block Canada, Inc. (Block
Canada) has a commercial paper program for up to $225.0 million (Canadian). At April 30, 2006,
there was no commercial paper outstanding. The peak borrowing during fiscal year 2006 was $133.0
million (Canadian).
MORTGAGE SERVICES 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 Services used $123.9 million in cash from operating activities primarily due to higher MSR
balances and mortgage loans held for sale. This segment also used $309.3 million in cash from
investing activities primarily related to loans originated for transfer to the H&R Block Bank,
partially offset by cash received from the maturity and sales of available-for-sale residual
interests. We regularly sell loans as a source of liquidity. Loan sales in fiscal year 2006 were
$40.3 billion compared with $31.0 billion in fiscal year 2005. Additionally, Block Financial
Corporation (BFC) provides a line of credit of at least $150 million for working
capital needs. At the end of fiscal year 2006 there was $372.6 million outstanding on this
facility.
WAREHOUSE FUNDING. See discussion of our non-prime warehouse
facilities below in Off-Balance Sheet Financing Arrangements.
36
To finance our prime mortgage loan originations, we use a warehouse facility with capacity up
to $25 million. This annual facility bears interest at one-month LIBOR plus 140 to 200 basis
points. As of April 30, 2006 and 2005, the balance outstanding under this facility was $1.6 million
and $4.4 million, respectively, and is included in accounts payable, accrued expenses and other
current liabilities on the consolidated balance sheets.
We believe the sources of liquidity available to the Mortgage Services 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 who provide credit enhancement.
Past performance of the securitizations will also impact the segments future participation in
these markets. The off-balance sheet warehouse facilities used by the Trusts 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 in the normal course of business
sufficient to cover these 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 $31.3 million in operating cash flows primarily related to net income.
Additionally, Business Services used $221.1 million in investing activities primarily related to
the acquisition of American Express Tax and Business Services, Inc. and contingent payments on
prior acquisitions, and $23.6 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 $1,000,000 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 2006, HRBFAs net capital of $121.7 million, which
was 22.9% of aggregate debit items, exceeded its minimum required net capital of $10.6 million by
$111.1 million. During fiscal year 2006, H&R Block Financial Corporation, HRBFAs direct corporate
parent, contributed $5.0 million of additional capital to HRBFA. During fiscal year 2005, we
contributed additional capital of $27.0 million. HRBFA was in excess of the minimum net capital
requirement during fiscal years 2006 and 2005, but we may continue to contribute additional capital
in the future.
In fiscal year 2006, Investment Services provided $24.9 million from its operating activities
primarily due to improved performance.
To manage short-term liquidity, BFC provides HRBFA a $300 million unsecured credit facility.
At the end of fiscal year 2006 there was no outstanding balance on this facility.
HRBFA has a secured letter of credit with an unaffiliated financial institution with a credit
limit of $50.0 million. There were no borrowings on this letter of credit during fiscal years 2006
or 2005 and no outstanding balance at April 30, 2006 or 2005.
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
counterparty. Securities loaned consist of customers securities purchased on margin. 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), HRBFA pledges customers margined securities. Pledged securities at the
end of fiscal year 2006 totaled $53.0 million, an excess of $9.9 million over the margin
requirement. Pledged securities at the end of fiscal year 2005 totaled $44.6 million, an excess of
$7.9 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.
37
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 of $4.0 billion and $4.2 billion at April 30, 2006
and 2005, respectively, which are subject to conditions and loan contract verification. There is no
commitment on the part of the borrower to close 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 using nine committed warehouse facilities, arranged by us,
totaling $14.5 billion. These facilities are subject to various Option One performance triggers,
limits and financial covenants, including tangible net worth and leverage ratios and may be subject
to margin calls. 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 400 basis points and expire on various dates during the
year. In addition, some of the facilities provide for the payment of minimum usage fees. Additional
uncommitted facilities of $1.5 billion bring total capacity to $16.0 billion.
When we sell loans to the Trusts, we remove the mortgage loans from our balance sheet and
record the gain on the sale, cash, MSRs, recourse reserves and a beneficial interest in Trusts,
which represents our residual interest in the ultimate expected outcome from the disposition of the
loans by the Trusts. Our beneficial interest in Trusts totaled $188.0 million and $215.4 million at
April 30, 2006 and 2005, respectively.
Subsequently, the Trusts, in response to the exercise of a put option by the 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 loan sale or a securitization is
dependent on market conditions.
For fiscal year 2006, the final disposition of loans sold by the Trusts was 77% loan sales and
23% securitizations. For fiscal year 2005, the final disposition of loans sold by the Trusts was
92% loan sales and 8% securitizations. The higher percentage of loan sale transactions versus
securitizations is due to more favorable pricing in the loan sale market and also results in cash
being received earlier. Additionally, loan sales do not add residual interests to our balance
sheet, and therefore, we do not retain balance sheet risk.
If the Trusts sell the mortgage loans in a loan sale, we receive cash for our beneficial
interest in Trusts. In a securitization transaction, the Trusts transfer the loans and the
corresponding right to receive all payments on the loans to our consolidated special purpose
entity, after which 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 trading 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 trading
residual interests may also change, resulting in potential write-ups or impairment of these
residual interests.
At the settlement of each securitization, we record cash received and our residual interests.
Additionally, we reverse the beneficial interest in Trusts. The resulting 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 receipts from our residual interests, we securitize the majority of our
trading residual interests in net interest margin (NIM) transactions. In a NIM transaction, the
trading 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 trading
residual interests. The bonds are secured by these 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 NIM bonds issued to the third-party investors are paid in
full.
At the settlement of each NIM transaction, we remove the trading residual interests sold from
our consolidated balance sheet and record the cash received and the new residual interest
38
retained.
These new residual interests are classified as available-for-sale securities.
Available-for-sale residual interests retained from NIM securitizations may also be sold in a
subsequent securitization or sale transaction.
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 16 to our consolidated financial statements.
Loans totaling $7.8 billion and $6.7 billion were held by the Trusts as of April 30, 2006 and
2005, respectively, and were not recorded on our consolidated balance sheets. In August 2005, the
Financial Accounting Standards Board (FASB) issued an exposure draft which amends Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This exposure draft seeks to clarify the derecognition
requirements for financial assets and the initial measurement of interests related to transferred
financial assets that are held by a transferor. Our current off-balance sheet warehouse facilities
(the Trusts) in our Mortgage Services segment would be required to be consolidated in our financial
statements based on the provisions of the exposure draft. We will continue to monitor the status of
the exposure draft. The final standard for this exposure draft is scheduled to be issued in the
first quarter of calendar year 2007.
COMMERCIAL PAPER ISSUANCE
We participate in the U.S. 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, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
Long-term |
|
|
Outlook |
|
Fitch |
|
|
F1 |
|
|
|
A |
|
|
Negative |
Moodys |
|
|
P2 |
|
|
|
A3 |
|
|
Stable |
S&P |
|
|
A2 |
|
|
|
BBB+ |
|
|
Stable |
DBRS |
|
R-1 (low) |
|
|
A |
|
|
Stable |
The following chart provides the debt ratings for Block Canada as of April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
Long-term |
|
|
Outlook |
|
|
DBRS |
|
R-1 (low) |
|
|
A |
|
|
Stable |
We use capital primarily to fund working capital requirements, pay dividends,
repurchase our shares and acquire businesses. Commercial paper borrowings peaked at $2.3 billion in
February 2006 related to funding of our participation interests in RALs. No CP was outstanding at
April 30, 2006 or 2005.
U.S. CP issuances are supported by $2.0 billion in unsecured committed lines of credit
(CLOCs), which mature in August 2010 and have an annual facility fee of eight and one-half basis
points per annum. These lines are subject to various affirmative and negative covenants, including
a minimum net worth covenant.
We obtained an additional $900.0 million line of credit for the period of January 3 to
February 24, 2006 to back-up peak commercial paper issuance or use as an alternate source of
funding for RAL participations. This line is subject to various covenants, substantially similar to
the primary CLOCs.
These facilities were undrawn at April 30, 2006. 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 $225.0 million (Canadian). The Canadian CLOC is subject to annual renewal in December
2006. This CLOC was undrawn at April 30, 2006.
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 and asset sales or securitizations.
39
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our obligations to make future payments as of April 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
Total |
|
|
Less Than 1 Year |
|
|
1 - 3 Years |
|
|
4 - 5 Years |
|
|
After 5 Years |
|
|
Debt |
|
$ |
897,426 |
|
|
$ |
499,425 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
398,001 |
|
Long-term obligation to government |
|
|
183,937 |
|
|
|
107,849 |
|
|
|
74,692 |
|
|
|
1,396 |
|
|
|
- |
|
Retirement obligation assumed |
|
|
14,264 |
|
|
|
2,426 |
|
|
|
4,176 |
|
|
|
3,196 |
|
|
|
4,466 |
|
Acquisition payments |
|
|
13,895 |
|
|
|
7,210 |
|
|
|
6,458 |
|
|
|
91 |
|
|
|
136 |
|
Capital lease obligation |
|
|
13,209 |
|
|
|
357 |
|
|
|
860 |
|
|
|
1,043 |
|
|
|
10,949 |
|
Operating leases |
|
|
856,816 |
|
|
|
269,890 |
|
|
|
371,984 |
|
|
|
157,123 |
|
|
|
57,819 |
|
|
|
|
Total contractual cash obligations |
|
$ |
1,979,547 |
|
|
$ |
887,157 |
|
|
$ |
458,170 |
|
|
$ |
162,849 |
|
|
$ |
471,371 |
|
|
|
|
In October 2004, we issued $400.0 million of 5.125% Senior Notes, due 2014.
The Senior Notes are not redeemable by the bondholders prior to maturity. The net proceeds of this
transaction were used to repay the $250.0 million in 63/4% Senior Notes, which were due November 1,
2004. The remaining proceeds were used for working capital, capital expenditures, repayment of
other debt and other general corporate purposes.
In April 2000, we issued $500.0 million of 81/2% 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.
We plan to refinance these Senior Notes when they come due.
As of April 30, 2006, we had $850.0 million remaining under our shelf registration for
additional debt issuances. As a result of our failure to file our Form 10-Q for the fiscal quarter
ended January 31, 2006 by the SECs prescribed due date, we will be unable to issue any debt
securities under this shelf registration statement until April 2007.
Future payments related to acquisitions and capital lease obligations are
included in long-term debt on our consolidated balance sheets.
In connection with our acquisition of the non-attest assets of M&P in August 1999, we assumed
certain retirement liabilities related to M&Ps partners. We make payments in varying amounts on a
monthly basis, which are included in other noncurrent liabilities.
Operating leases, although requiring future cash payments, are not included in our
consolidated balance sheets.
A summary of our commitments as of April 30, 2006, which may or may not require future payments, expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
|
Total |
|
|
Less Than 1 Year |
|
|
1 - 3 Years |
|
|
4 - 5 Years |
|
|
After 5 Years |
|
|
Commitments to fund mortgage loans |
|
$ |
4,032,045 |
|
|
$ |
4,032,045 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Commitments to sell mortgage loans |
|
|
3,052,688 |
|
|
|
3,052,688 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Franchise Equity Lines of Credit |
|
|
75,909 |
|
|
|
18,860 |
|
|
|
29,958 |
|
|
|
27,091 |
|
|
|
- |
|
Commitment to fund M&P |
|
|
75,000 |
|
|
|
75,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Construction of new building |
|
|
63,887 |
|
|
|
63,887 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pledged securities |
|
|
53,026 |
|
|
|
53,026 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other commercial commitments |
|
|
31,282 |
|
|
|
8,209 |
|
|
|
19,888 |
|
|
|
3,185 |
|
|
|
- |
|
|
|
|
Total commercial commitments |
|
$ |
7,383,837 |
|
|
$ |
7,303,715 |
|
|
$ |
49,846 |
|
|
$ |
30,276 |
|
|
$ |
- |
|
|
|
|
See discussion of commitments in Item 8, note 16 to our consolidated financial
statements.
REGULATORY ENVIRONMENT
The U.S., various state, local, provincial and foreign governments and some self-regulatory
organizations have enacted statutes and ordinances, and/or adopted rules and regulations,
regulating aspects of our business. These aspects include, but are not limited to, commercial
income tax return preparers, income tax courses, the electronic filing of income tax returns, the
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 services and products.
40
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. See additional discussion of legal matters in Item 3, Legal Proceedings and Item 8,
note 17 to our consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial statements for a discussion of recently
issued accounting pronouncements.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally accepted accounting principles
(GAAP). However, we believe certain non-GAAP performance measures and ratios used in managing the
business may provide additional meaningful comparisons between current year results and prior
periods, by excluding certain items that do not represent results from our basic operations.
Reconciliations to GAAP financial measures are provided below. These non-GAAP financial measures
should be viewed in addition to, not as an alternative for, our reported GAAP results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Margin |
|
|
|
|
|
|
|
|
|
(dollars in 000s) |
|
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Total Mortgage Services
expenses |
|
$ |
925,522 |
|
|
$ |
749,925 |
|
|
$ |
635,186 |
|
Add: Expenses netted against
gain on sale revenues |
|
|
387,911 |
|
|
|
378,304 |
|
|
|
267,780 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
296,710 |
|
|
|
221,148 |
|
|
|
193,383 |
|
Cost of acquisition |
|
|
150,981 |
|
|
|
169,621 |
|
|
|
114,707 |
|
Allocated support departments |
|
|
26,176 |
|
|
|
24,161 |
|
|
|
21,124 |
|
Other |
|
|
62,500 |
|
|
|
20,323 |
|
|
|
31,378 |
|
|
|
|
Total cost of origination |
|
$ |
777,066 |
|
|
$ |
692,976 |
|
|
$ |
542,374 |
|
|
|
|
Divided by origination volume |
|
$ |
40,779,763 |
|
|
$ |
31,001,724 |
|
|
$ |
23,256,013 |
|
Cost of origination margin |
|
|
1.91 |
% |
|
|
2.23 |
% |
|
|
2.33 |
% |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
INTEREST RATE RISK We have a formal investment policy to help minimize the market risk exposure
of our cash equivalents and available-for-sale securities, which are primarily affected by credit
quality and movements in interest rates. These guidelines focus on managing liquidity and
preserving principal and earnings. 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, 2006, our
non-restricted cash and cash equivalents had an average maturity of less than three months with an
average credit quality of AAA. With such a short maturity, our portfolios market value is
relatively insensitive to interest rate changes. We hold investments in fixed income securities at
our captive insurance subsidiary. See the table below for sensitivities to changes in interest
rates. See additional discussion of interest rate risk included below in Mortgage Services and
Investment Services.
At April 30, 2006, no commercial paper was outstanding. For fiscal year 2006, the average
issuance term was 33 days and the average outstanding balance was $558.4 million. As commercial
paper and bank 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, 2006 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 9 to our consolidated financial statements.
EQUITY
PRICE RISK We have exposure to the equity markets in several ways. The largest
exposure, though relatively small, is through our deferred compensation plans. Within the deferred
compensation plans we have mismatches in asset and liability amounts and investment choices (both
fixed-income and equity). At April 30, 2006 and 2005, the impact of a 10% market value change in
the combined equity assets held by our deferred compensation plans and other equity investments
would be approximately $11.6 million and $9.3 million, respectively, assuming no offset for the
liabilities.
41
TAX SERVICES
FOREIGN EXCHANGE RATE RISK Our 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. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at exchange rates prevailing at the end of the year. Translation
adjustments are recorded as a separate component of other comprehensive income in stockholders
equity. Translation of financial results into U.S. dollars does not presently materially affect,
and has not historically materially affected, our consolidated financial results, although such
changes do affect the year-to-year comparability of the operating results in U.S. dollars of our
international businesses. We estimate a 10% change in foreign exchange rates by itself would impact
consolidated pretax income in fiscal years 2006 and 2005 by approximately $2.1 million and $1.3
million, respectively, and cash balances at April 30, 2006 and 2005 by $6.1 million and $4.7
million, respectively.
MORTGAGE SERVICES
INTEREST RATE RISK NON-PRIME ORIGINATIONS Interest rate changes impact the value of the loans
underlying our beneficial interest in Trusts, on our balance sheet or in our origination pipeline,
as well as residual interests in securitizations and MSRs.
As a result of loan sales to the Trusts, we remove the mortgage loans from our balance sheet
and record the gain on sale, cash, MSRs, recourse reserves and a beneficial interest in Trusts,
which represents our residual interest in the ultimate expected outcome from the disposition of the
loans by the Trusts. See Item 7, Off-Balance Sheet Financing Arrangements. At April 30, 2006,
there were $7.8 billion of loans held in the Trusts and the value of our beneficial interest in
Trusts was $188.0 million. At April 30, 2006, we had $236.4 million of mortgage loans held for sale
and $407.5 million of mortgage loans held for investment on our balance sheet. Changes in interest
rates and other market factors may result in a change in value of our beneficial interest in
Trusts, mortgage loans held for sale and mortgage loans held for investment.
We are exposed to interest rate risk associated with commitments to fund approved loan
applications of $4.0 billion, subject to conditions and loan contract verification. In addition, we
have interest rate risk related to $1.0 billion in new loan applications which have not yet been
approved, and $3.0 billion of applications which we expect to receive prior to our next anticipated
change in rates charged to borrowers. Of these amounts, we estimate only $5.1 billion will likely
be originated.
We use forward loan sale commitments, interest rate swaps and put options on Eurodollar
futures to reduce our interest rate risk associated with non-prime loans. Forward loan sale
commitments represent an obligation to sell a non-prime loan at a specific price in the future and
increase in value as rates rise and decrease as rates fall. At April 30, 2006, there were $3.1
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 lock in the execution price on
the loans that will be ultimately delivered into a loan sale. At April 30, 2006, we recorded an
asset of $2.0 million reflecting the fair value of these instruments.
Interest rate swaps represent an agreement to exchange interest rate payments, whereby we pay
a fixed rate and receive a floating rate. Put options on Eurodollar futures represent the right to
sell a Eurodollar futures contract at a specified price in the future. These swap and put option
contracts increase in value as rates rise and decrease in value as rates fall. At April 30, 2006,
the interest rate swaps and put options provided interest risk coverage of $9.9 billion. At April
30, 2006, we had assets recorded at fair values of $8.8 million and $3.3 million on our balance
sheet related to interest rate swaps and put options, respectively.
See table below for sensitivities to changes in interest rates.
INTEREST RATE RISK PRIME ORIGINATIONS At April 30, 2006, we had commitments to fund
prime mortgage loans totaling $83.2 million. 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 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,
2006, we recorded a liability at a fair value of $0.3 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 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,
2006 we recorded an asset of $0.8 million related to these instruments.
To finance our prime originations, we use a warehouse facility with capacity up to $25
million, which bears interest at one-month LIBOR plus 140 to 200 basis points. As of April 30,
2006, the balance outstanding under this facility was $1.6 million.
42
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. It is
possible that we will be unable to originate the loans or that the loans originated will not meet
the required characteristics of the forward loan sale commitments. Several remedies are available,
although use of the remedies could reduce the execution price or the effectiveness of the forward
loan sale commitment in reducing interest rate risk.
RESIDUAL INTERESTS Relative to modeled assumptions, an increase or decrease in interest
rates would impact the value of our residual interests and could affect accretion income related to
our residual interests. Residual interests bear the interest rate risk embedded within the
securitization due to an initial fixed-rate period on the loans versus a floating-rate funding
cost. Residual interests also bear the on-going risk that the floating interest rate earned after
the fixed period on the mortgage loans is different from the floating interest rate on the bonds
sold in the securitization.
We enter into interest rate caps and swaps to mitigate interest rate risk associated with
mortgage loans that will be securitized and residual interests that are classified as trading
securities because they will be sold in a subsequent NIM transaction. The caps and swaps enhance
the marketability of the securitization and NIM transactions. An interest rate cap represents a
right to receive cash if interest rates rise above a contractual strike rate, its value therefore
increases as interest rates rise. The interest rate used in our interest rate caps and the floating
rate used in swaps are based on LIBOR. At April 30, 2006 we had no assets or liabilities recorded
related to interest rate caps.
See table below for sensitivities to changes in interest rates for residual interests, caps
and swaps. See Item 8, note 5 to the consolidated financial statements for additional analysis of
interest rate risk and other financial risks impacting residual interests.
It is our policy to use derivative instruments only for the purpose of offsetting or reducing
the risk of loss associated with a defined or quantified exposure.
MORTGAGE SERVICING RIGHTS Declining interest rates may cause increased refinancing
activity, which reduces the life of the loans underlying the residual interests and MSRs, thereby
generally reducing their fair value. The fair value of MSRs generally increases in a rising rate
environment, although MSRs are recorded at the lower of cost or market value. Reductions in the
fair value of these assets impact earnings through impairment charges. See Item 8, note 5 to our
consolidated financial statements for further sensitivity analysis of other MSR valuation
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, 2006 was approximately $16.1 million, net of $0.5 million in 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.
43
The sensitivities of certain financial instruments to changes in interest rates as of April
30, 2006 and 2005 are presented below. The following table represents hypothetical instantaneous
and sustained parallel shifts in interest rates and should not be relied on as an indicator of
future expected results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
Carrying Value at |
|
|
Basis Point Change |
|
|
|
April 30, 2006 |
|
|
-300 |
|
|
-200 |
|
|
-100 |
|
|
-50 |
|
|
+50 |
|
|
+100 |
|
|
+200 |
|
|
+300 |
|
|
Mortgage loans held for investment |
|
$ |
407,538 |
|
|
$ |
16,285 |
|
|
$ |
10,885 |
|
|
$ |
5,485 |
|
|
$ |
2,785 |
|
|
$ |
(2,672 |
) |
|
$ |
(5,301 |
) |
|
$ |
(9,592 |
) |
|
$ |
(15,020 |
) |
Mortgage loans held for sale |
|
|
236,399 |
|
|
|
9,253 |
|
|
|
6,113 |
|
|
|
3,057 |
|
|
|
1,528 |
|
|
|
(1,549 |
) |
|
|
(3,146 |
) |
|
|
(6,356 |
) |
|
|
(8,866 |
) |
Beneficial interest in Trusts trading |
|
|
188,014 |
|
|
|
298,013 |
|
|
|
199,029 |
|
|
|
100,039 |
|
|
|
50,542 |
|
|
|
(51,789 |
) |
|
|
(103,365 |
) |
|
|
(189,389 |
) |
|
|
(270,970 |
) |
Residual interests in securitizations
available-for-sale |
|
|
159,058 |
|
|
|
32,692 |
|
|
|
13,543 |
|
|
|
4,795 |
|
|
|
2,503 |
|
|
|
(4,181 |
) |
|
|
(8,798 |
) |
|
|
(17,931 |
) |
|
|
(21,232 |
) |
Fixed income trading (net) |
|
|
15,609 |
|
|
|
4,323 |
|
|
|
2,617 |
|
|
|
1,174 |
|
|
|
509 |
|
|
|
(751 |
) |
|
|
(1,359 |
) |
|
|
(2,368 |
) |
|
|
(3,274 |
) |
Interest rate swaps |
|
|
8,831 |
|
|
|
(523,639 |
) |
|
|
(344,606 |
) |
|
|
(170,090 |
) |
|
|
(84,500 |
) |
|
|
83,466 |
|
|
|
165,791 |
|
|
|
327,397 |
|
|
|
484,929 |
|
Investments at captive insurance subsidiary |
|
|
8,508 |
|
|
|
1,260 |
|
|
|
814 |
|
|
|
395 |
|
|
|
195 |
|
|
|
(189 |
) |
|
|
(372 |
) |
|
|
(723 |
) |
|
|
(1,054 |
) |
Put options on Eurodollar futures |
|
|
3,282 |
|
|
|
- |
|
|
|
10 |
|
|
|
347 |
|
|
|
1,183 |
|
|
|
8,549 |
|
|
|
15,671 |
|
|
|
31,539 |
|
|
|
47,955 |
|
Forward loan sale commitments |
|
|
1,961 |
|
|
|
(158,345 |
) |
|
|
(105,563 |
) |
|
|
(52,782 |
) |
|
|
(26,391 |
) |
|
|
26,391 |
|
|
|
52,782 |
|
|
|
105,563 |
|
|
|
158,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at |
|
|
Basis Point Change |
|
|
|
|
|
|
|
April 30, 2005 |
|
|
-200 |
|
|
-100 |
|
|
-50 |
|
|
+50 |
|
|
+100 |
|
|
+200 |
|
|
+300 |
|
|
Residual interests in securitizations
available-for-sale |
|
|
|
|
|
$ |
205,936 |
|
|
$ |
84,845 |
|
|
$ |
30,417 |
|
|
$ |
13,637 |
|
|
$ |
(13,520 |
) |
|
$ |
(28,174 |
) |
|
$ |
(51,466 |
) |
|
$ |
(75,296 |
) |
Interest rate caps |
|
|
|
|
|
|
12,458 |
|
|
|
- |
|
|
|
205 |
|
|
|
4,580 |
|
|
|
20,746 |
|
|
|
29,262 |
|
|
|
46,751 |
|
|
|
64,195 |
|
Investments at captive insurance subsidiary |
|
|
|
|
|
|
9,968 |
|
|
|
1,079 |
|
|
|
522 |
|
|
|
256 |
|
|
|
(248 |
) |
|
|
(487 |
) |
|
|
(942 |
) |
|
|
(1,368 |
) |
Fixed income trading (net) |
|
|
|
|
|
|
6,252 |
|
|
|
1,958 |
|
|
|
893 |
|
|
|
426 |
|
|
|
(390 |
) |
|
|
(749 |
) |
|
|
(1,383 |
) |
|
|
(1,921 |
) |
Interest rate swaps |
|
|
|
|
|
|
(1,325 |
) |
|
|
(84,723 |
) |
|
|
(43,024 |
) |
|
|
(19,524 |
) |
|
|
19,524 |
|
|
|
43,024 |
|
|
|
84,723 |
|
|
|
123,771 |
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DISCUSSION OF FINANCIAL RESPONSIBILITY
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 responsibilities to our shareholders. H&R Blocks
Management is responsible for the integrity and objectivity of the information contained in this
document. Management is responsible for the consistency of reporting this information and for
ensuring that accounting principles generally accepted in the United States are used. In
discharging this responsibility, Management maintains an extensive program of internal audits and
requires the management teams of our individual subsidiaries to certify their respective financial
information. Our system of internal control over financial reporting also includes formal policies
and procedures, including a Code of Business Ethics and Conduct program designed to encourage and
assist all employees and directors in living up to high standards of integrity.
The Audit Committee of the Board of Directors, composed solely of outside and independent
directors, meets periodically with management, the independent auditors and the chief internal
auditor to review matters relating to our financial statements, internal audit activities, internal
accounting controls and non-audit services provided by the independent auditors. The independent
auditors and the chief internal auditor have full access to the Audit Committee and meet, both with
and without management present, to discuss the scope and results of their audits, including
internal control, audit and financial matters.
KPMG LLP audited our consolidated financial statements. Their audits were conducted in
accordance with the standards of the Public Company Accounting Oversight Board (U.S.).
44
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of April 30, 2006.
Based on our assessment, management concluded that, as of April 30, 2006, the Companys
internal control over financial reporting was effective based on the criteria set forth by COSO.
The Companys external auditors, KPMG, LLP, an independent registered public accounting firm, have
issued an audit report on our assessment of the Companys internal control over financial
reporting.
Mark A. Ernst
Chairman of the Board, President and Chief Executive Officer
William L. Trubeck
Executive Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of H&R Block, Inc.:
We have audited the accompanying consolidated balance sheets of H&R Block, Inc. and its
subsidiaries (the Company) as of April 30, 2006 and 2005, and the related consolidated statements
of income and comprehensive income, stockholders equity, and cash flows for each of the years in
the three-year period ended April 30, 2006. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of H&R Block, Inc. and its subsidiaries as of April 30,
2006 and 2005, and the results of their operations and their cash flows for each of the years in
the three-year period ended April 30, 2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its
method of accounting to adopt Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements
with Multiple Deliverables, during the year ended April 30, 2004.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of April 30, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated June 29, 2006 expressed an unqualified opinion on managements assessment of,
and the effective operation of, internal control over financial reporting.
Kansas City, Missouri
June 29, 2006
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of H&R Block, Inc.:
We have audited managements assessment, included in the accompanying Managements Report On
Internal Control Over Financial Reporting (Item 9A(b)), that H&R Block, Inc. and subsidiaries (the
Company) maintained effective internal control over financial reporting as of April 30, 2006, based
on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that H&R Block, Inc. and subsidiaries maintained
effective internal control over financial reporting as of April 30, 2006, is fairly stated, in all
material respects, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, H&R Block, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of April 30,
2006, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of H&R Block, Inc. and
subsidiaries as of April 30, 2006 and 2005, and the related consolidated statements of income and
comprehensive income, stockholders equity, and cash flows for each of the years in the three-year
period ended April 30, 2006, and our report dated June 29, 2006 expressed an unqualified opinion on those consolidated financial statements.
Kansas City, Missouri
June 29, 2006
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF INCOME |
|
|
|
AND COMPREHENSIVE INCOME |
|
(Amounts in 000s, except per share amounts) |
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
3,463,111 |
|
|
$ |
2,920,586 |
|
|
$ |
2,639,367 |
|
Other revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of mortgage assets, net |
|
|
713,981 |
|
|
|
822,075 |
|
|
|
918,297 |
|
Product and other revenues |
|
|
492,502 |
|
|
|
478,443 |
|
|
|
460,421 |
|
Interest income |
|
|
203,207 |
|
|
|
198,915 |
|
|
|
229,795 |
|
|
|
|
|
|
|
4,872,801 |
|
|
|
4,420,019 |
|
|
|
4,247,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
2,383,299 |
|
|
|
1,999,068 |
|
|
|
1,794,866 |
|
Cost of other revenues |
|
|
522,992 |
|
|
|
448,021 |
|
|
|
382,518 |
|
Selling, general and administrative |
|
|
1,112,585 |
|
|
|
920,677 |
|
|
|
846,157 |
|
|
|
|
|
|
|
4,018,876 |
|
|
|
3,367,766 |
|
|
|
3,023,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
853,925 |
|
|
|
1,052,253 |
|
|
|
1,224,339 |
|
Interest expense |
|
|
49,059 |
|
|
|
62,367 |
|
|
|
71,218 |
|
Other income, net |
|
|
22,527 |
|
|
|
27,829 |
|
|
|
9,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
827,393 |
|
|
|
1,017,715 |
|
|
|
1,162,975 |
|
Income taxes |
|
|
336,985 |
|
|
|
393,805 |
|
|
|
462,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before change in accounting principle |
|
|
490,408 |
|
|
|
623,910 |
|
|
|
700,452 |
|
Cumulative effect of change in accounting principle
for multiple deliverable revenue arrangements,
less tax benefit of $4,031 |
|
|
- |
|
|
|
- |
|
|
|
(6,359 |
) |
|
|
|
NET INCOME |
|
$ |
490,408 |
|
|
$ |
623,910 |
|
|
$ |
694,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
Before change in accounting principle |
|
$ |
1.49 |
|
|
$ |
1.88 |
|
|
$ |
1.98 |
|
Cumulative effect of change in accounting principle |
|
|
- |
|
|
|
- |
|
|
|
(0.02 |
) |
|
|
|
Net income |
|
$ |
1.49 |
|
|
$ |
1.88 |
|
|
$ |
1.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
Before change in accounting principle |
|
$ |
1.47 |
|
|
$ |
1.85 |
|
|
$ |
1.94 |
|
Cumulative effect of change in accounting principle |
|
|
- |
|
|
|
- |
|
|
|
(0.02 |
) |
|
|
|
Net income |
|
$ |
1.47 |
|
|
$ |
1.85 |
|
|
$ |
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
490,408 |
|
|
$ |
623,910 |
|
|
$ |
694,093 |
|
Unrealized gains on securities, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period, less
taxes of $13,585, $36,670, and $64,174 |
|
|
22,059 |
|
|
|
59,409 |
|
|
|
103,886 |
|
Reclassification adjustment for gains included in income,
less taxes of $40,846, $40,661 and $67,561 |
|
|
(66,188 |
) |
|
|
(65,848 |
) |
|
|
(109,385 |
) |
Change in foreign currency translation adjustments |
|
|
(2,641 |
) |
|
|
8,946 |
|
|
|
12,355 |
|
|
|
|
|
|
$ |
443,638 |
|
|
$ |
626,417 |
|
|
$ |
700,949 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS |
|
(Amounts in 000s, except share and per share amounts) |
|
|
April 30, |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
694,358 |
|
|
$ |
1,100,213 |
|
|
|
|
|
Cash and cash equivalents restricted |
|
|
394,069 |
|
|
|
516,909 |
|
|
|
|
|
Receivables from customers, brokers, dealers and clearing organizations,
less allowance for doubtful accounts of $1,783 and $1,151 |
|
|
496,577 |
|
|
|
590,226 |
|
|
|
|
|
Receivables, less allowance for doubtful accounts of $64,480 and $34,201 |
|
|
503,188 |
|
|
|
341,706 |
|
|
|
|
|
Mortgage loans held for sale |
|
|
236,399 |
|
|
|
77,082 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
499,356 |
|
|
|
444,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,823,947 |
|
|
|
3,070,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interests in securitizations available-for-sale |
|
|
159,058 |
|
|
|
205,936 |
|
|
|
|
|
Beneficial interest in Trusts trading |
|
|
188,014 |
|
|
|
215,367 |
|
|
|
|
|
Mortgage servicing rights |
|
|
272,472 |
|
|
|
166,614 |
|
|
|
|
|
Mortgage loans held for investment, net |
|
|
407,538 |
|
|
|
- |
|
|
|
|
|
Property and equipment, net |
|
|
443,785 |
|
|
|
330,150 |
|
|
|
|
|
Intangible assets, net |
|
|
219,494 |
|
|
|
247,092 |
|
|
|
|
|
Goodwill, net |
|
|
1,100,452 |
|
|
|
1,015,947 |
|
|
|
|
|
Other assets |
|
|
374,375 |
|
|
|
286,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,989,135 |
|
|
$ |
5,538,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
506,992 |
|
|
$ |
25,545 |
|
|
|
|
|
Accounts payable to customers, brokers and dealers |
|
|
781,303 |
|
|
|
950,684 |
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities |
|
|
768,505 |
|
|
|
564,749 |
|
|
|
|
|
Accrued salaries, wages and payroll taxes |
|
|
330,946 |
|
|
|
318,644 |
|
|
|
|
|
Accrued income taxes |
|
|
505,690 |
|
|
|
375,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,893,436 |
|
|
|
2,234,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
417,539 |
|
|
|
923,073 |
|
|
|
|
|
Other noncurrent liabilities |
|
|
530,361 |
|
|
|
430,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,841,336 |
|
|
|
3,588,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par, stated value $0.01 per share,
800,000,000 shares authorized, 435,890,796 shares
issued at April 30, 2006 and 2005 |
|
|
4,359 |
|
|
|
4,359 |
|
|
|
|
|
Convertible preferred stock, no par, stated value $0.01 per
share, 500,000 shares authorized |
|
|
- |
|
|
|
- |
|
|
|
|
|
Additional paid-in capital |
|
|
653,053 |
|
|
|
598,388 |
|
|
|
|
|
Accumulated other comprehensive income |
|
|
21,948 |
|
|
|
68,718 |
|
|
|
|
|
Retained earnings |
|
|
3,492,059 |
|
|
|
3,161,682 |
|
|
|
|
|
Less treasury shares, at cost |
|
|
(2,023,620 |
) |
|
|
(1,883,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,147,799 |
|
|
|
1,949,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,989,135 |
|
|
$ |
5,538,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
|
|
(Amounts in 000s) |
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
490,408 |
|
|
$ |
623,910 |
|
|
$ |
694,093 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
191,703 |
|
|
|
183,867 |
|
|
|
179,131 |
|
Provision for bad debt |
|
|
39,746 |
|
|
|
52,221 |
|
|
|
53,663 |
|
Provision for deferred taxes on income |
|
|
(43,409 |
) |
|
|
(40,023 |
) |
|
|
(2,081 |
) |
Accretion of residual interests in securitizations |
|
|
(114,346 |
) |
|
|
(137,610 |
) |
|
|
(186,466 |
) |
Impairment of available-for-sale residual interests in securitizations |
|
|
34,107 |
|
|
|
12,235 |
|
|
|
26,063 |
|
Realized gain on sale of previously securitized residual interests |
|
|
(31,463 |
) |
|
|
(15,396 |
) |
|
|
(40,689 |
) |
Additions to trading residual interests in securitizations, net |
|
|
(350,861 |
) |
|
|
(115,657 |
) |
|
|
(327,996 |
) |
Proceeds from net interest margin transactions |
|
|
295,159 |
|
|
|
98,743 |
|
|
|
310,358 |
|
Additions to mortgage servicing rights |
|
|
(250,537 |
) |
|
|
(137,510 |
) |
|
|
(84,274 |
) |
Amortization and impairment of mortgage servicing rights |
|
|
144,679 |
|
|
|
84,717 |
|
|
|
69,718 |
|
Stock-based compensation |
|
|
57,020 |
|
|
|
44,139 |
|
|
|
25,718 |
|
Cumulative effect of change in accounting principle |
|
|
- |
|
|
|
- |
|
|
|
6,359 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents restricted |
|
|
122,840 |
|
|
|
28,519 |
|
|
|
(107,186 |
) |
Receivables from customers, brokers, dealers and clearing organizations |
|
|
88,954 |
|
|
|
33,892 |
|
|
|
(108,846 |
) |
Receivables |
|
|
(136,121 |
) |
|
|
(121,177 |
) |
|
|
26,294 |
|
Mortgage loans held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Originations and purchases |
|
|
(40,358,579 |
) |
|
|
(31,003,456 |
) |
|
|
(23,255,483 |
) |
Sales and principal repayments |
|
|
40,256,802 |
|
|
|
30,990,566 |
|
|
|
23,246,815 |
|
Prepaid expenses and other current assets |
|
|
(61,948 |
) |
|
|
(53,858 |
) |
|
|
26,978 |
|
Beneficial interest in Trusts |
|
|
47,015 |
|
|
|
(61,549 |
) |
|
|
(17,222 |
) |
Accounts payable to customers, brokers and dealers |
|
|
(169,381 |
) |
|
|
(115,109 |
) |
|
|
203,099 |
|
Accounts payable, accrued expenses and other current liabilities |
|
|
130,274 |
|
|
|
113,419 |
|
|
|
(104,563 |
) |
Accrued salaries, wages and payroll taxes |
|
|
(5,643 |
) |
|
|
38,277 |
|
|
|
70,521 |
|
Accrued income taxes |
|
|
101,093 |
|
|
|
(20,281 |
) |
|
|
110,021 |
|
Other non-current liabilities |
|
|
125,482 |
|
|
|
26,527 |
|
|
|
35,965 |
|
Other, net |
|
|
(17,308 |
) |
|
|
4,387 |
|
|
|
2,473 |
|
|
|
|
Net cash provided by operating activities |
|
|
585,686 |
|
|
|
513,793 |
|
|
|
852,463 |
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(9,216 |
) |
|
|
(10,175 |
) |
|
|
(11,434 |
) |
Cash received from residual interests in securitizations |
|
|
80,539 |
|
|
|
136,045 |
|
|
|
193,606 |
|
Cash proceeds from sale of previously securitized residuals |
|
|
62,396 |
|
|
|
16,485 |
|
|
|
53,391 |
|
Sales of other available-for-sale securities |
|
|
11,218 |
|
|
|
9,752 |
|
|
|
15,410 |
|
Mortgage loans originated and held for investment, net |
|
|
(407,538 |
) |
|
|
- |
|
|
|
- |
|
Purchases of property and equipment, net |
|
|
(250,510 |
) |
|
|
(209,458 |
) |
|
|
(123,826 |
) |
Payments made for business acquisitions, net of cash acquired |
|
|
(212,543 |
) |
|
|
(37,621 |
) |
|
|
(280,865 |
) |
Other, net |
|
|
37,149 |
|
|
|
36,562 |
|
|
|
26,332 |
|
|
|
|
Net cash used in investing activities |
|
|
(688,505 |
) |
|
|
(58,410 |
) |
|
|
(127,386 |
) |
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of commercial paper and other short-term borrowings |
|
|
(7,048,881 |
) |
|
|
(5,941,623 |
) |
|
|
(4,618,853 |
) |
Proceeds from issuance of commercial paper and other short-term borrowings |
|
|
7,048,881 |
|
|
|
5,941,623 |
|
|
|
4,618,853 |
|
Repayments of Senior Notes |
|
|
- |
|
|
|
(250,000 |
) |
|
|
- |
|
Proceeds from issuance of Senior Notes |
|
|
- |
|
|
|
395,221 |
|
|
|
- |
|
Payments on acquisition debt |
|
|
(26,819 |
) |
|
|
(25,664 |
) |
|
|
(59,003 |
) |
Dividends paid |
|
|
(160,031 |
) |
|
|
(142,988 |
) |
|
|
(138,397 |
) |
Acquisition of treasury shares |
|
|
(260,312 |
) |
|
|
(530,022 |
) |
|
|
(519,862 |
) |
Proceeds from issuance of common stock |
|
|
108,507 |
|
|
|
136,102 |
|
|
|
119,956 |
|
Other, net |
|
|
35,619 |
|
|
|
(10,564 |
) |
|
|
31,681 |
|
|
|
|
Net cash used in financing activities |
|
|
(303,036 |
) |
|
|
(427,915 |
) |
|
|
(565,625 |
) |
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(405,855 |
) |
|
|
27,468 |
|
|
|
159,452 |
|
Cash and cash equivalents at beginning of the year |
|
|
1,100,213 |
|
|
|
1,072,745 |
|
|
|
913,293 |
|
|
|
|
Cash and cash equivalents at end of the year |
|
$ |
694,358 |
|
|
$ |
1,100,213 |
|
|
$ |
1,072,745 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
|
|
(Amounts in 000s, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Retained |
|
|
Treasury Stock |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
Balances at April 30, 2003 |
|
|
435,891 |
|
|
$ |
4,359 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
494,213 |
|
|
$ |
59,355 |
|
|
$ |
2,125,064 |
|
|
|
(76,688 |
) |
|
$ |
(1,093,593 |
) |
|
$ |
1,589,398 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
694,093 |
|
|
|
- |
|
|
|
- |
|
|
|
694,093 |
|
Unrealized translation gain |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,355 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,355 |
|
Change in net unrealized
gain on marketable
securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,499 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,499 |
) |
Stock-based compensation
expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,718 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,718 |
|
Shares issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,585 |
|
|
|
- |
|
|
|
- |
|
|
|
7,856 |
|
|
|
117,975 |
|
|
|
139,560 |
|
Restricted shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
385 |
|
|
|
- |
|
|
|
- |
|
|
|
145 |
|
|
|
2,103 |
|
|
|
2,488 |
|
ESPP |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
984 |
|
|
|
- |
|
|
|
- |
|
|
|
255 |
|
|
|
3,821 |
|
|
|
4,805 |
|
Acquisition of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(21,266 |
) |
|
|
(519,862 |
) |
|
|
(519,862 |
) |
Cash dividends paid
$0.39 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(138,397 |
) |
|
|
- |
|
|
|
- |
|
|
|
(138,397 |
) |
|
|
|
Balances at April 30, 2004 |
|
|
435,891 |
|
|
|
4,359 |
|
|
|
- |
|
|
|
- |
|
|
|
542,885 |
|
|
|
66,211 |
|
|
|
2,680,760 |
|
|
|
(89,698 |
) |
|
|
(1,489,556 |
) |
|
|
1,804,659 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
623,910 |
|
|
|
- |
|
|
|
- |
|
|
|
623,910 |
|
Unrealized translation gain |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,946 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,946 |
|
Change in net unrealized
gain on marketable
securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,439 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,439 |
) |
Stock-based compensation
expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
44,139 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
44,139 |
|
Shares issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,892 |
|
|
|
- |
|
|
|
- |
|
|
|
6,959 |
|
|
|
124,263 |
|
|
|
140,155 |
|
Restricted shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,718 |
) |
|
|
- |
|
|
|
- |
|
|
|
352 |
|
|
|
6,098 |
|
|
|
380 |
|
ESPP |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,190 |
|
|
|
- |
|
|
|
- |
|
|
|
301 |
|
|
|
5,338 |
|
|
|
6,528 |
|
Acquisition of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(22,564 |
) |
|
|
(530,022 |
) |
|
|
(530,022 |
) |
Cash dividends paid
$0.43 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(142,988 |
) |
|
|
- |
|
|
|
- |
|
|
|
(142,988 |
) |
|
|
|
Balances at April 30, 2005 |
|
|
435,891 |
|
|
|
4,359 |
|
|
|
- |
|
|
|
- |
|
|
|
598,388 |
|
|
|
68,718 |
|
|
|
3,161,682 |
|
|
|
(104,650 |
) |
|
|
(1,883,879 |
) |
|
|
1,949,268 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
490,408 |
|
|
|
- |
|
|
|
- |
|
|
|
490,408 |
|
Unrealized translation loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,641 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,641 |
) |
Change in net unrealized
gain on marketable
securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(44,129 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(44,129 |
) |
Stock-based compensation
expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
57,020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
57,020 |
|
Shares issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,831 |
|
|
|
- |
|
|
|
- |
|
|
|
5,492 |
|
|
|
102,068 |
|
|
|
107,899 |
|
Restricted shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,649 |
) |
|
|
- |
|
|
|
- |
|
|
|
616 |
|
|
|
11,160 |
|
|
|
1,511 |
|
ESPP |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,463 |
|
|
|
- |
|
|
|
- |
|
|
|
398 |
|
|
|
7,343 |
|
|
|
8,806 |
|
Acquisition of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,234 |
) |
|
|
(260,312 |
) |
|
|
(260,312 |
) |
Cash dividends paid
$0.49 per share |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(160,031 |
) |
|
|
- |
|
|
|
- |
|
|
|
(160,031 |
) |
|
|
|
Balances at April 30, 2006 |
|
|
435,891 |
|
|
$ |
4,359 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
653,053 |
|
|
$ |
21,948 |
|
|
$ |
3,492,059 |
|
|
|
(107,378 |
) |
|
$ |
(2,023,620 |
) |
|
$ |
2,147,799 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS Our operating subsidiaries provide a variety of financial services
to the general public, principally in the U.S. Specifically, we offer tax return preparation;
origination, sale and servicing of non-prime and prime mortgages; investment services through a
broker-dealer; tax preparation and related software; refund anticipation loans offered by a
third-party lending institution; and accounting, tax and consulting services to business clients.
Tax preparation services are also provided in Canada, Australia and the United Kingdom.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of
the Company and our wholly-owned and majority-owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
Some of our 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. These reclassifications had no effect on the results of
operations or stockholders 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.
During the fourth quarter of fiscal year 2006, we revised our estimate for the provision for
bad debt related to our participation interests in RALs. The change was made as a result of
incorporating an additional year of collections data into the model, updating the assumption for
the collection period and reviewing the modeled slope of the collection curve. These revisions
decreased our provision for bad debt $18.0 million, increased net income $10.7 million and
increased basic and diluted earnings per share $0.03 in the current year.
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.
Book overdrafts included in accounts payable totaled $128.7 million and $92.7 million at April 30,
2006 and 2005, respectively.
Our broker-dealer purchases securities under agreements to resell and accounts 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. It is our policy to take
possession of securities, subject to resale agreements. The securities are revalued daily and
collateral added whenever necessary to bring market value of the underlying collateral to a level
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 and related taxes on
behalf of customers.
MARKETABLE SECURITIES TRADING Certain marketable debt securities held by our
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 managements intentions, 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 our physical possession, or on
deposit with us, or receivables from customers or other brokers. The allowance for doubtful
accounts represents an amount considered by management to be adequate to cover estimated losses as
of the balance sheet date.
Securities borrowed and securities loaned transactions are generally reported as
collateralized financings. These
51
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. The
allowance for doubtful accounts requires managements judgment regarding current market indicators
concerning general economic trends to establish an amount considered by management to be adequate
to cover estimated losses as of the balance sheet date.
MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are either loans originated but
not yet sold or loans repurchased from investors and pending resale. Loans held for sale are
carried at the lower of amortized cost or fair value as determined by outstanding commitments from
investors or current investor-yield requirements calculated on an aggregate basis. Loan origination
and processing fees and related direct origination costs are deferred until the related loan is
sold.
RESIDUAL INTERESTS IN SECURITIZATIONS Residual interests classified as available-for-sale
securities are carried at fair 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 fair value, the residual is written
down to fair 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.
We estimate future cash flows from these residuals and value them using assumptions we believe
to be consistent with those of unaffiliated third-party purchasers. We estimate the fair value of
residuals by computing the present value of the excess of the weighted-average interest rate on the
loans sold plus estimated collections of prepayment penalty fee income 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 Option One, (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, and (5) payments made to investors on NIM bonds, if applicable. The
residual valuation takes into consideration the current and expected interest rate environment.
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 we
believe an unaffiliated third-party purchaser would require as a rate of return on a financial
instrument with a similar risk profile. We evaluate, and adjust if necessary, the fair values of
residual interests quarterly by updating the actual performance 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 loan sales to Trusts. The beneficial interest is classified as a trading
security, based on managements intentions, is carried at fair value and is marked to market
through the consolidated income statements. Fair value is calculated as the present value of
estimated future cash flows, limited by the ultimate expected outcome from the disposition of the
loans by the Trusts.
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, estimated third-party servicing costs and other economic factors.
The prepayment speeds are estimated using our 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 calendar year of the loan sale date,
which approximates date of origination, and loan type, primarily 2- and 3-year adjustable and fixed
rate.
MORTGAGE LOANS HELD FOR INVESTMENT Mortgage loans held for investment are loans originated
with the ability and intent to hold to maturity. Loans held for investment are carried at amortized
cost less a valuation allowance for credit losses incurred as of the balance sheet date. A loans
cost includes loan origination and processing fees and related direct origination costs.
52
PROPERTY AND EQUIPMENT Buildings and equipment are initially recorded at cost and are
depreciated over the estimated useful life of the assets using the straight-line method. Leasehold
improvements are initially recorded 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.
We capitalize certain allowable costs associated with software developed or purchased for
internal use. These costs are typically amortized over 36 months using the straight-line method.
We are capitalizing interest costs during construction of our new corporate headquarters
facility for qualified expenditures based upon interest rates in place during the construction
period. Capitalized interest costs will be amortized over lives which are consistent with the
constructed assets.
Substantially all of the operations of our subsidiaries are conducted in leased premises. For
all lease agreements, including those with escalating rent payments or rent holidays, we recognize
rent expense on a straight-line basis.
INTANGIBLE ASSETS AND GOODWILL We test 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. 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. These tests were completed and no indications of goodwill
impairment were found during fiscal year 2006, 2005 or 2004.
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, an 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, 2006. The weighted-average
life of intangible assets with finite lives is nine years.
COMMERCIAL PAPER Short-term borrowings are used to finance temporary liquidity needs and
various financial activities. There was no commercial paper outstanding at April 30, 2006 or 2005.
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.
We record 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. Management discloses the facts regarding matters assessed as reasonably possible and
potential exposure, if determinable. Costs incurred with defending claims are expensed as incurred.
Any receivable for insurance recoveries is recorded separately from the corresponding litigation
reserve, and only if recovery is determined to be probable.
INCOME TAXES We account for income taxes under the asset and liability method, which
requires us to record deferred income tax assets and liabilities for future tax consequences
attributable to differences between the financial statement carrying value of existing assets and
liabilities and their respective tax bases. Deferred taxes are determined separately for each
tax-paying component, within each tax jurisdiction, based on provisions of enacted tax law.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. Our deferred tax assets include state and foreign tax loss carryforwards and are reduced
by a valuation allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Our current deferred tax assets are
included in prepaid expenses and other current assets on the consolidated balance sheets.
Noncurrent deferred tax assets are included in other assets on our consolidated balance sheets.
We file a consolidated Federal tax return on a calendar year basis.
REVENUE RECOGNITION Service revenues consist primarily of fees for preparation and filing
of tax returns, both in offices and through our online programs, fees associated with our POM
guarantee program, mortgage loan-servicing fees, fees for consulting services and brokerage
commissions. Generally,
53
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. POM revenues are deferred and recognized over the term of the
guarantee based upon historic and actual payment of claims. Revenues for services rendered in
connection with the Business Services segment with fees based on time and materials, are recognized
as the services are performed and amounts are earned. Investment Services production revenue is
recognized on a trade-date basis.
Gains on sales of mortgage assets are recognized when control of the assets is surrendered
(when loans are sold to Trusts) and are based on the difference between cash proceeds and the
allocated cost of the assets sold, including any guarantees or recourse reserves. Other components
of gain on sales of mortgage loans include gains or losses on derivatives, loan sale repurchase
reserves and direct origination and acquisition expenses.
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 and other revenues include royalties, RAL participation revenues and sales of software
products. Franchise royalties, which are based upon the contractual percentages of franchise
revenues, are recorded in the period in which the franchise provides the service. RAL participation
revenue is recorded when we purchase our participation interest in the RAL. Software revenues
consist mainly of tax preparation software and other personal productivity software. Sales of
software are recognized when the product is sold to the end user.
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.
Total advertising costs recorded in fiscal year 2006, 2005 and 2004 totaled $239.2 million, $195.4
million and $188.3 million, respectively.
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. Translation adjustments are
recorded as a separate component of other comprehensive income in stockholders equity. Revenue and
expense transactions are translated at the average of exchange rates in effect during the period.
COMPREHENSIVE INCOME Our comprehensive income is comprised of net income, foreign currency
translation adjustments and the change in net unrealized gains or losses on available-for-sale
marketable securities. Included in stockholders equity at April 30, 2006 and 2005, the net
unrealized holding gain on available-for-sale securities was $27.4 million and $71.6 million,
respectively, and the foreign currency translation adjustment was $(5.5) million and $(2.8)
million, respectively. The net unrealized holding gain on available-for-sale securities relates
primarily to available-for-sale residual interests in securitizations.
STOCK-BASED COMPENSATION PLANS Effective May 1, 2003, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (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. We recognize stock-based compensation expense for the issuance of stock options,
restricted shares and options granted pursuant to our employee stock purchase plan (ESPP) on a
straight-line basis over the vesting period. Had compensation cost for all stock-based compensation
plan awards been determined in accordance with the fair value accounting method prescribed under
SFAS 123, our net income and earnings per share would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) |
|
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Net income |
|
$ |
490,408 |
|
|
$ |
623,910 |
|
|
$ |
694,093 |
|
Add: Stock-based
compensation expense
included in reported
net income, net of taxes |
|
|
37,254 |
|
|
|
28,819 |
|
|
|
18,029 |
|
Deduct: Total stock-based
compensation expense
determined under fair
value method for all
awards, net of taxes |
|
|
(47,428 |
) |
|
|
(39,544 |
) |
|
|
(30,662 |
) |
|
|
|
Pro forma net income |
|
$ |
480,234 |
|
|
$ |
613,185 |
|
|
$ |
681,460 |
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
As presented |
|
$ |
1.49 |
|
|
$ |
1.88 |
|
|
$ |
1.96 |
|
Pro forma |
|
|
1.46 |
|
|
|
1.85 |
|
|
|
1.92 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
As presented |
|
$ |
1.47 |
|
|
$ |
1.85 |
|
|
$ |
1.92 |
|
Pro forma |
|
|
1.44 |
|
|
|
1.82 |
|
|
|
1.89 |
|
|
DERIVATIVE ACTIVITIES We use forward loan sale commitments, interest rate swaps
and other financial instruments to manage our interest rate risk related to commitments to fund
mortgage loans and mortgage loans underlying our beneficial interest in Trusts. We do not enter
into derivative transactions for speculative or trading purposes.
54
We record derivative instruments as assets or liabilities, measured at fair value. None of
our derivative instruments qualify for hedge accounting treatment as of April 30, 2006 or 2005.
Gains or losses on derivative instruments are presented in our consolidated statements of income
and statements of cash flows in a manner consistent with the earnings effect of the hedged item.
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 and beneficial interests in Trusts are
recorded at estimated fair value as discussed above. See note 5 for the fair value of MSRs and note
9 for fair value of long-term debt.
NEW ACCOUNTING STANDARDS In February 2006, Statement of Financial Accounting Standards No.
155, Accounting for Certain Hybrid Instruments An Amendment of FASB Statements No. 133 and 140
(SFAS 155), was issued. The provisions of this standard establish a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation.
The standard permits a hybrid financial instrument to be accounted for in its entirety if the
holder irrevocably elects to measure the hybrid financial instrument
at fair value, with changes
in fair value recognized currently in earnings. The provisions of this standard are effective as of
the beginning of our fiscal year 2008, although early adoption is permitted. Our residual interests
typically have interests in derivative instruments embedded within the securitization trusts. If we
elect to account for our residual interests on a fair value basis, changes in fair value will
impact earnings in the period in which the change occurs. We are currently evaluating what effect
the adoption of SFAS 155 will have on our consolidated financial statements.
In March 2006, Statement of Financial Accounting Standards No. 156, Accounting for Servicing
of Financial Assets An Amendment of FASB Statement No. 140, (SFAS 156), was issued. The
provisions of this standard require mortgage servicing rights to be initially valued at fair value.
SFAS 156 also allows servicers to choose to measure their servicing rights at fair value or to
continue using the amortization method under SFAS 140. The provisions of this standard are
effective as of the beginning of our fiscal year 2008, although early adoption is permitted. We are
currently evaluating what effect the adoption of SFAS 156 will have on our consolidated financial
statements.
In December 2004, Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123R) was issued. SFAS 123R requires all entities to recognize the
cost of employee services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. Compensation expense must be recognized for the unvested
portions of all awards outstanding as of the date of adoption. The provisions of this standard were
delayed by the SEC and will be effective as of the beginning of our fiscal year 2007. The adoption
of SFAS 123R will not have a material impact on our consolidated financial statements.
In August 2003, we 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 recognition related to tax
preparation in our 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 related to POM guarantees at premium offices
were recorded in the same period as tax preparation revenues. Beginning May 1, 2003, revenues
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, we recorded a cumulative
effect of a change in accounting principle of $6.4 million, net of a tax benefit of $4.0 million,
as of May 1, 2003. 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.
In August 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft which
amends Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. This exposure draft seeks to clarify the
derecognition requirements for financial assets and the initial measurement of interests related to
transferred financial assets that are held by a transferor. Our current off-balance sheet warehouse
facilities (the Trusts) in our Mortgage Services segment would be required to be consolidated in
our financial statements based on the provisions of the exposure draft. We will continue to monitor
the status of the exposure draft and consider what changes, if any, could be made to the structure
of the Trusts to continue to derecognize mortgage loans transferred to the Trusts. At April 30,
2006, the Trusts held loans
55
and debt totaling $7.8 billion, which we would be required to
consolidate into our financial statements under the provisions of this exposure draft. The final
standard for this exposure draft is scheduled to be issued in the first quarter of calendar year
2007.
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.
56
NOTE 2: BUSINESS COMBINATIONS AND DISPOSALS
Acquisitions during fiscal years 2006, 2005 and 2004 are as follows.
Results for each acquisition are included since the date of acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Asset Acquired |
|
Weighted Average Life |
Asset Value at Acquisition |
|
|
FISCAL YEAR 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
American Express Tax and Business Services, Inc. |
|
Property and equipment |
|
|
|
|
|
$ |
17,759 |
|
|
|
Goodwill |
|
|
|
|
|
|
72,123 |
|
|
|
Customer relationships |
|
11 years |
|
|
18,800 |
|
|
|
Noncompete agreements |
|
6 years |
|
|
3,900 |
|
|
|
Trade name |
|
2 years |
|
|
2,600 |
|
|
|
Other assets |
|
|
|
|
|
|
128,998 |
|
|
|
Liabilities |
|
|
|
|
|
|
(53,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life |
|
9 years |
|
$ |
190,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Goodwill |
|
|
|
|
|
$ |
13,616 |
|
|
|
Customer relationships |
|
9 years |
|
|
8,397 |
|
|
|
Noncompete agreements |
|
9 years |
|
|
2,024 |
|
|
|
Other assets (liabilities) |
|
|
|
|
|
|
(4,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life |
|
9 years |
|
$ |
19,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-accounting firm Business Services acquisitions |
|
Property and equipment |
|
|
|
|
|
$ |
2,497 |
|
|
|
Goodwill |
|
|
|
|
|
|
9,666 |
|
|
|
Customer relationships |
|
10 years |
|
|
7,730 |
|
|
|
Noncompete agreements |
|
15 years |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life |
|
10 years |
|
$ |
19,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Former major franchise territories |
|
Property and equipment |
|
|
|
|
|
$ |
2,697 |
|
|
|
Goodwill |
|
|
|
|
|
|
205,313 |
|
|
|
Customer relationships |
|
10 years |
|
|
18,167 |
|
|
|
Noncompete agreements |
|
3 years |
|
|
17,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life |
|
7 years |
|
$ |
243,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting firms |
|
Goodwill |
|
|
|
|
|
$ |
3,923 |
|
|
|
Customer relationships |
|
10 years |
|
|
1,794 |
|
|
|
Noncompete agreements |
|
15 years |
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life |
|
11 years |
|
$ |
6,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2006, we acquired all outstanding common stock of American
Express Tax and Business Services, Inc. for an aggregate purchase price of $190.7 million. The
customer relationships will be amortized based on estimated customer retention and have a weighted
average life of 11 years. The noncompete agreements will be amortized on a straight-line basis and
have a weighted average life of six years. Goodwill recognized in this transaction is included in
the Business Services segment and is not deductible for tax purposes. The preliminary purchase
price allocations are subject to change and will be adjusted based upon resolution of several
matters including, but not limited to, the following:
|
|
Determination of the post-closing adjustment and final purchase price;
|
|
|
Determination of final liabilities relating to planned exit activities; and |
|
|
Determination of the tax basis of acquired assets and liabilities, and deferred tax balances of the acquired business. |
During fiscal year 2005, our Business Services segment acquired six businesses. Cash payments
related to these acquisitions totaled $19.5 million, with additional cash payments of $0.1 million
over the next five years. Goodwill recognized in these transactions is included in the Business
Services segment and all but $3.8 million is deductible for tax purposes.
57
During fiscal year 2004, we made payments of $243.2 million related to the acquisition of
primarily assets 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 Tax Services segment and all but $3.9 million
is deductible for tax purposes.
During fiscal year 2004, we 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 years 2006, 2005 and 2004, we made other acquisitions which were accounted for
as purchases with cash payments totaling $19.7 million, $14.4 million and $7.9 million,
respectively. Their operations, which are not material, are included in the consolidated income
statements since the date of acquisition. During fiscal years 2006, 2005 and 2004, we also paid
$2.1 million, $3.4 million and $27.3 million, respectively, for contingent payments on prior
acquisitions.
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, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Net income before change
in accounting principle |
|
$ |
490,408 |
|
|
$ |
623,910 |
|
|
$ |
700,452 |
|
Basic weighted average
common shares |
|
|
328,118 |
|
|
|
331,612 |
|
|
|
354,152 |
|
Dilutive potential shares
from stock options
and restricted stock |
|
|
5,067 |
|
|
|
6,011 |
|
|
|
7,449 |
|
Convertible preferred stock |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
Dilutive weighted average
common shares |
|
|
333,187 |
|
|
|
337,625 |
|
|
|
361,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.49 |
|
|
$ |
1.88 |
|
|
$ |
1.98 |
|
Diluted |
|
|
1.47 |
|
|
|
1.85 |
|
|
|
1.94 |
|
Diluted earnings per share excludes the impact of common shares issuable upon the lapse of
certain restrictions or the exercise of options to purchase 8.7 million, 1.2 million, and 4.8
million shares of stock for 2006, 2005 and 2004, respectively.
NOTE 4: MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The amortized cost and market value of marketable securities classified as available-for-sale at
April 30, 2006 and 2005 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gains |
|
|
Losses (1) |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses (1) |
|
|
Value |
|
|
Municipal bonds |
|
$ |
8,556 |
|
|
$ |
5 |
|
|
$ |
(53 |
) |
|
$ |
8,508 |
|
|
$ |
9,797 |
|
|
$ |
172 |
|
|
$ |
(1 |
) |
|
$ |
9,968 |
|
Common stock |
|
|
3,998 |
|
|
|
382 |
|
|
|
(100 |
) |
|
|
4,280 |
|
|
|
4,250 |
|
|
|
308 |
|
|
|
(129 |
) |
|
|
4,429 |
|
Residual interests |
|
|
114,922 |
|
|
|
44,136 |
|
|
|
- |
|
|
|
159,058 |
|
|
|
90,525 |
|
|
|
115,411 |
|
|
|
- |
|
|
|
205,936 |
|
|
|
|
|
|
$ |
127,476 |
|
|
$ |
44,523 |
|
|
$ |
(153 |
) |
|
$ |
171,846 |
|
|
$ |
104,572 |
|
|
$ |
115,891 |
|
|
$ |
(130 |
) |
|
$ |
220,333 |
|
|
|
|
(1) Gross unrealized losses have been in a continuous loss position for less than 12 months.
58
We monitor our available-for-sale investment portfolio for impairment and consider
many factors in determining whether the impairment is deemed to be other-than-temporary. These
factors include, but are not limited to, the length of time the security has had a market value
less than the cost basis, the severity of the loss, our intent and ability to hold the security for
a period of time sufficient for a recovery in value, recent events specific to the issuer or
industry, external credit ratings and recent downgrades in such ratings. Impairments of fair value
of available-for-sale residual interests realized during fiscal years 2006 and 2005 totaled $34.1
million and $12.2 million, respectively.
Proceeds from the sales of available-for-sale securities were $73.6 million, $26.2 million and
$68.8 million during fiscal years 2006, 2005 and 2004, respectively. Gross realized gains on those
sales during fiscal years 2006, 2005 and 2004 were $32.1 million, $15.8 million and $41.8 million,
respectively; gross realized losses were $0.2 million, $0.3 million and $0.1 million, respectively.
Contractual maturities of available-for-sale debt securities at April 30, 2006 occur at
varying dates over the next four to nine years. Because expected maturities differ from contractual
maturities due to the issuers rights to prepay certain obligations or the sellers 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 5: MORTGAGE BANKING ACTIVITIES
We originate mortgage loans and sell 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 us using nine warehouse facilities we arrange. As a result of the
loan sales to the Trusts, we remove the mortgage loans from our balance sheet and record the gain
on the sale, cash, MSRs, recourse reserves and a beneficial interest in Trusts, which represents
our residual interest in the ultimate expected outcome from the disposition of the loans by the
Trusts. The beneficial interest in Trusts was $188.0 million and $215.4 million at April 30, 2006
and 2005, respectively.
The Trusts, in response to the exercise of a put option by the 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 loan sale or a securitization is dependent on market
conditions. If the Trusts sell the mortgage loans, we receive cash for our beneficial interest in
Trusts. In a securitization transaction, the Trusts transfer the loans to one of our consolidated
subsidiaries, and 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 trading residual
interest and 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 these residual interests
may also change, resulting in either additional gains or impairment of the value of the residual
interests. These residual interests are classified as trading securities. We held no trading
residual interests as of April 30, 2006 and 2005, as all trading residuals had been securitized.
Activity related to trading residual interests in securitizations consists of the following:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
Balance, beginning of year |
|
$ |
- |
|
|
$ |
- |
|
Additions (resulting from
securitization of mortgage loans) |
|
|
353,882 |
|
|
|
110,305 |
|
Cash received |
|
|
(12,858 |
) |
|
|
- |
|
Accretion |
|
|
5,950 |
|
|
|
- |
|
Change of fair value |
|
|
9,837 |
|
|
|
5,352 |
|
Residuals securitized in
NIM transactions |
|
|
(356,811 |
) |
|
|
(115,657 |
) |
|
|
|
Balance, end of year |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
To accelerate the cash flows from our trading residual interests, we securitize the
majority of these residual interests in NIM transactions. In a NIM transaction, the trading
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. Residual
interests retained from NIM securitizations may also be bundled and sold in a subsequent
securitization. The new residual interests are classified as available-for-sale securities. See note 4.
59
Activity related to available-for-sale residual interests in securitizations consists of the
following:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
Balance, beginning of year |
|
$ |
205,936 |
|
|
$ |
210,973 |
|
Additions (resulting from
NIM transactions) |
|
|
61,651 |
|
|
|
16,914 |
|
Cash received |
|
|
(80,539 |
) |
|
|
(136,045 |
) |
Cash proceeds from sales and
securitizations of residual interests |
|
|
(62,396 |
) |
|
|
(16,485 |
) |
Accretion |
|
|
108,396 |
|
|
|
137,610 |
|
Impairments of fair value |
|
|
(34,107 |
) |
|
|
(12,235 |
) |
Other |
|
|
(1,583 |
) |
|
|
- |
|
Change in unrealized holding gains
arising during the period |
|
|
(38,300 |
) |
|
|
5,204 |
|
|
|
|
Balance, end of year |
|
$ |
159,058 |
|
|
$ |
205,936 |
|
|
|
|
Prime mortgage loans are sold in loan sales, servicing released, to third-party
buyers.
We sold $40.3 billion and $31.0 billion of mortgage loans in loan sales to the Trusts and
other buyers during the years ended April 30, 2006 and 2005, respectively. Gains totaling $575.4
million and $772.1 million were recorded on these sales, respectively.
Trading residual interests initially valued at $356.8 million and $115.7 million were
securitized in NIM transactions during the years ended April 30, 2006 and 2005, respectively. Net
cash proceeds of $295.2 million and $98.7 million were received from the NIM transactions for the
years ended April 30, 2006 and 2005, respectively. Total net additions to available-for-sale
residual interests for the years ended April 30, 2006 and 2005 were $61.7 million and $16.9
million, respectively.
Cash flows from available-for-sale residual interests of $80.5 million and $136.0 million were
received from the securitization trusts for the years ended April 30, 2006 and 2005, respectively.
An additional $62.4 million and $16.5 million was received during fiscal years 2006 and 2005,
respectively, as a result of the sale of previously securitized residuals, as discussed below. Cash
received on available-for-sale residual interests is included in investing activities on the
consolidated statements of cash flows.
During fiscal year 2006, we completed sales of previously securitized residual interests and
recorded gains of $31.5 million. We received cash proceeds of $62.4 million from the transactions
and retained a $10.0 million available-for-sale residual interest. During fiscal year 2005, we
completed sales of previously securitized residual interests and recorded gains of $15.4 million.
We received cash proceeds of $16.5 million from the transactions and retained a $21.5 million
available-for-sale residual interest. These sales accelerate cash flows from the residual
interests, effectively realizing previously recorded unrealized gains included in other
comprehensive income.
Residual interests from NIM securitizations are classified as available-for-sale securities
and are reported at fair value. Gross unrealized holding gains represent the increase in fair value
of residual interests as a result of lower interest rates, loan losses or loan prepayments to date
than most recently projected in our valuation models.
Aggregate net unrealized gains on available-for-sale residual interests, which had not yet
been accreted into income, totaled $44.1 million and $115.4 million at April 30, 2006 and 2005,
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.
Included in prepaid expenses and other current assets on our consolidated balance sheets as of
April 30, 2006 and 2005, is $255.2 million and $231.0 million, respectively, in default advances,
escrow advances and principal and interest advances related to the servicing of non-prime loans.
Activity related to mortgage servicing rights consists of the following:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
Balance, beginning of year |
|
$ |
166,614 |
|
|
$ |
113,821 |
|
Additions |
|
|
250,537 |
|
|
|
137,510 |
|
Amortization |
|
|
(144,359 |
) |
|
|
(84,191 |
) |
Impairments of fair value |
|
|
(320 |
) |
|
|
(526 |
) |
|
|
|
Balance, end of year |
|
$ |
272,472 |
|
|
$ |
166,614 |
|
|
|
|
Additions to MSRs during fiscal year 2006 increased primarily as a result of higher
origination volumes, higher average loan balances and higher interest rates. In addition, during
fiscal year 2006 we updated our assumptions used to value MSRs. The assumptions were updated
primarily to reflect lower servicing costs, in particular interest paid to bondholders on monthly
loan prepayments, and higher discount rates. The change in assumptions increased the weighted
average value of MSRs recorded during fiscal year 2006 by approximately $37.0 million (0.09% of
loans originated). These changes in assumptions, coupled with increases in origination volumes,
average loan size and interest rates, increased gains on sales of mortgage loans by $113.0 million
over the prior year.
Estimated amortization of MSRs for fiscal years 2007, 2008, 2009, 2010 and 2011 is $147.5
million, $76.1 million, $32.4 million, $11.8 million and $4.7 million, respectively.
60
The key assumptions we used to originally estimate the cash flows and values of our
available-for-sale residual interests are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Estimated credit losses |
|
|
2.55% |
|
|
|
2.72% |
|
|
|
3.63% |
|
Discount rate |
|
|
25.00% |
|
|
|
25.00% |
|
|
|
16.25% |
|
Variable returns to third-party beneficial interest holders |
|
LIBOR forward curve at closing date |
The key assumptions we used to estimate the cash flows and values of our residual
interests and MSRs at April 30 are as follows:
|
|
|
|
|
|
|
|
|
|
April 30, |
|
2006 |
|
|
2005 |
|
|
Estimated
credit losses residual interests |
|
|
3.07% |
|
|
|
3.03% |
|
Discount
rate residual interests |
|
|
21.98% |
|
|
|
21.01% |
|
Discount
rate MSRs |
|
|
18.00% |
|
|
|
12.80% |
|
Variable returns to third-party beneficial interest holders |
|
LIBOR forward curve at valuation date |
We originate both adjustable and fixed rate mortgage loans. A key assumption used to
estimate the cash flows and values of the residual interests is average annualized prepayment
speeds. Prepayment speeds include voluntary prepayments, involuntary prepayments and scheduled
principal payments. Prepayment rate assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to |
|
|
Months Outstanding Without |
|
|
|
Penalty |
|
|
Prepayment Penalty |
|
|
|
Expiration |
|
|
Zero - 3 |
|
|
Remaining Life |
|
|
Adjustable rate mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
With prepayment penalties |
|
|
31% |
|
|
|
72% |
|
|
|
39% |
|
Without prepayment penalties |
|
|
35% |
|
|
|
52% |
|
|
|
35% |
|
Fixed rate mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
With prepayment penalties |
|
|
30% |
|
|
|
48% |
|
|
|
38% |
|
For fixed rate mortgages without prepayment penalties, we use an average prepayment
rate of 32% over the life of the loans. Prepayment rate is projected based on actual paydown
including voluntary, involuntary and scheduled principal payments.
Expected static pool credit losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Securitized in |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Prior |
|
|
As of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
|
3.05% |
|
|
|
2.48% |
|
|
|
2.18% |
|
|
|
2.13% |
|
|
|
2.69% |
|
|
|
4.75% |
|
April 30, 2005 |
|
|
- |
|
|
|
2.83% |
|
|
|
2.30% |
|
|
|
2.08% |
|
|
|
2.53% |
|
|
|
4.52% |
|
April 30, 2004 |
|
|
- |
|
|
|
- |
|
|
|
3.92% |
|
|
|
4.35% |
|
|
|
3.58% |
|
|
|
4.46% |
|
Static pool credit losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets.
At April 30, 2006, the sensitivities of the current fair value of residual interests and MSRs
to 10% and 20% adverse changes in the above key assumptions are presented in the following table.
These sensitivities are hypothetical and should be used with caution. As the figures indicate,
changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value may not be linear.
Also in this table, the effect of a variation of a particular assumption on the fair value of the
retained interest is calculated without changing any other assumptions; in reality, changes in one
factor may result in changes in another, which might magnify or counteract the sensitivities.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Residential Mortgage Loans |
|
|
|
|
|
|
Available-for-sale |
|
|
Beneficial interest |
|
|
|
|
|
|
Residuals |
|
|
in Trusts |
|
|
MSRs |
|
|
Carrying amount/fair
value of residuals |
|
$ |
159,058 |
|
|
$ |
188,014 |
|
|
$ |
272,472 |
|
Weighted average
life (in years) |
|
|
1.9 |
|
|
|
1.9 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ impact on fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments (including defaults): |
|
|
|
|
|
|
|
|
|
|
|
|
Adverse 10% |
|
$ |
4,330 |
|
|
$ |
(11,656 |
) |
|
$ |
(39,163 |
) |
Adverse 20% |
|
|
13,924 |
|
|
|
(17,892 |
) |
|
|
(65,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Adverse 10% |
|
$ |
(46,560 |
) |
|
$ |
(6,399 |
) |
|
Not applicable |
Adverse 20% |
|
|
(75,445 |
) |
|
|
(12,796 |
) |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
Adverse 10% |
|
$ |
(5,657 |
) |
|
$ |
(5,972 |
) |
|
$ |
(4,368 |
) |
Adverse 20% |
|
|
(10,948 |
) |
|
|
(11,687 |
) |
|
|
(8,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rates: |
|
|
|
|
|
|
|
|
|
|
|
|
Adverse 10% |
|
$ |
(4,143 |
) |
|
$ |
(53,757 |
) |
|
Not applicable |
Adverse 20% |
|
|
(8,590 |
) |
|
|
(107,183 |
) |
|
Not applicable |
Increases in prepayment rates related to available-for-sale residuals can generate a
positive impact to fair value when reductions in estimated credit losses and prepayment penalties
exceed the adverse impact to accretion from accelerating the life of the available-for-sale
residual interest.
61
Mortgage loans which have been securitized at April 30, 2006 and 2005, past due
sixty days or more and the related net credit losses are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Total Principal |
|
|
Principal Amount of Loans |
|
|
Credit Losses |
|
|
|
Amount of Loans Outstanding |
|
|
60 Days or More Past Due |
|
|
(net of recoveries) |
|
|
|
April 30, |
|
|
April 30, |
|
|
Year Ended April 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Securitized mortgage loans |
|
$ |
10,046,032 |
|
|
$ |
10,300,805 |
|
|
$ |
1,012,414 |
|
|
$ |
1,128,376 |
|
|
$ |
115,976 |
|
|
$ |
132,015 |
|
Mortgage loans in
warehouse Trusts |
|
|
7,845,834 |
|
|
|
6,742,387 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
Total loans |
|
$ |
17,891,866 |
|
|
$ |
17,043,192 |
|
|
$ |
1,012,414 |
|
|
$ |
1,128,376 |
|
|
$ |
115,976 |
|
|
$ |
132,015 |
|
|
|
|
NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment for the year ended April 30, 2006, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
2005 |
|
|
Additions |
|
|
Other |
|
|
2006 |
|
|
Tax Services |
|
$ |
360,781 |
|
|
$ |
15,338 |
|
|
$ |
396 |
|
|
$ |
376,515 |
|
Mortgage Services |
|
|
152,467 |
|
|
|
- |
|
|
|
- |
|
|
|
152,467 |
|
Business Services |
|
|
328,745 |
|
|
|
70,401 |
|
|
|
(1,630 |
) |
|
|
397,516 |
|
Investment Services |
|
|
173,954 |
|
|
|
- |
|
|
|
- |
|
|
|
173,954 |
|
|
|
|
|
|
$ |
1,015,947 |
|
|
$ |
85,739 |
|
|
$ |
(1,234 |
) |
|
$ |
1,100,452 |
|
|
|
|
Goodwill and other indefinite life intangible assets were tested for impairment in
the fourth quarter of fiscal year 2006. An independent valuation firm was engaged to assist in the
test for selected reporting units. No impairment existed at any of our reporting units during
fiscal year 2006, 2005 or 2004.
The goodwill and intangible assets added in the Business Services segment relate primarily to
the acquisition of American Express Tax and Business Services, Inc., as discussed in note 2.
The components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Tax Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
27,257 |
|
|
$ |
(10,842 |
) |
|
$ |
16,415 |
|
|
$ |
23,717 |
|
|
$ |
(7,207 |
) |
|
$ |
16,510 |
|
Noncompete agreements |
|
|
18,879 |
|
|
|
(17,686 |
) |
|
|
1,193 |
|
|
|
17,677 |
|
|
|
(11,608 |
) |
|
|
6,069 |
|
Business Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
153,844 |
|
|
|
(81,178 |
) |
|
|
72,666 |
|
|
|
130,585 |
|
|
|
(68,433 |
) |
|
|
62,152 |
|
Noncompete agreements |
|
|
32,534 |
|
|
|
(14,300 |
) |
|
|
18,234 |
|
|
|
27,796 |
|
|
|
(11,274 |
) |
|
|
16,522 |
|
Trade name - amortizing |
|
|
4,050 |
|
|
|
(1,823 |
) |
|
|
2,227 |
|
|
|
1,450 |
|
|
|
(995 |
) |
|
|
455 |
|
Trade name - non-amortizing |
|
|
55,637 |
|
|
|
(4,868 |
) |
|
|
50,769 |
|
|
|
55,637 |
|
|
|
(4,868 |
) |
|
|
50,769 |
|
Investment Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
293,000 |
|
|
|
(235,010 |
) |
|
|
57,990 |
|
|
|
293,000 |
|
|
|
(198,385 |
) |
|
|
94,615 |
|
|
|
|
|
|
$ |
585,201 |
|
|
$ |
(365,707 |
) |
|
$ |
219,494 |
|
|
$ |
549,862 |
|
|
$ |
(302,770 |
) |
|
$ |
247,092 |
|
|
|
|
Amortization of intangible assets for the years ended April 30, 2006, 2005
and 2004 was $64.0 million, $61.4 million and $61.5 million, respectively. Estimated amortization
of intangible assets for fiscal years 2007, 2008, 2009, 2010 and 2011 is $54.5 million, $36.9
million, $14.0 million, $12.3 million and $11.0 million, respectively.
62
NOTE 7: PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
Land |
|
$ |
17,152 |
|
|
$ |
23,716 |
|
Buildings |
|
|
50,232 |
|
|
|
67,031 |
|
Computers and other equipment |
|
|
592,610 |
|
|
|
568,986 |
|
Capitalized software |
|
|
180,591 |
|
|
|
153,794 |
|
Leasehold improvements |
|
|
189,283 |
|
|
|
175,048 |
|
Construction in process |
|
|
118,709 |
|
|
|
- |
|
|
|
|
|
|
|
1,148,577 |
|
|
|
988,575 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
and amortization |
|
|
704,792 |
|
|
|
658,425 |
|
|
|
|
|
|
$ |
443,785 |
|
|
$ |
330,150 |
|
|
|
|
Depreciation and amortization expense for 2006, 2005 and 2004 was $127.7 million,
$122.5 million and $117.6 million, respectively. Included in depreciation and amortization expense
is amortization of capitalized software of $28.0 million, $23.6 million and $28.2 million,
respectively.
As of April 30, 2006 and 2005, we have property and equipment under capital lease with a cost
of $22.1 million and $16.8 million, respectively, and accumulated depreciation of $4.9 million and
$4.2 million, respectively. During the current fiscal year we entered into an agreement to lease
furniture, fixtures and equipment in conjunction with the purchase of Industrial Revenue Bonds from
the City of Kansas City, Missouri as discussed further in note 16. Assets under this capital lease
at April 30, 2006 totaled $5.3 million. We also have a separate agreement to lease real estate and
buildings under a noncancelable capital lease for the next 15 years with an option to purchase
after two years. Total assets under this capital lease at April 30, 2006 totaled $16.8 million.
During fiscal year 2006, we capitalized interest costs of $4.7 million relating to the
construction of our new corporate headquarters.
NOTE 8: DERIVATIVE INSTRUMENTS
A summary of our derivative instruments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Asset (Liability) |
|
|
Gain (Loss) in the |
|
|
|
Balance at April 30, |
|
|
Year Ended April 30, |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Interest rate swaps |
|
$ |
8,831 |
|
|
$ |
(1,325 |
) |
|
$ |
137,192 |
|
|
$ |
47,192 |
|
|
$ |
(2,703 |
) |
Put options on
Eurodollar futures |
|
|
3,282 |
|
|
|
- |
|
|
|
1,071 |
|
|
|
- |
|
|
|
- |
|
Forward loans sale
commitments |
|
|
1,961 |
|
|
|
- |
|
|
|
1,961 |
|
|
|
- |
|
|
|
- |
|
Interest rate caps |
|
|
- |
|
|
|
12,458 |
|
|
|
802 |
|
|
|
(106 |
) |
|
|
- |
|
Rate-lock equivalents |
|
|
(317 |
) |
|
|
801 |
|
|
|
(1,118 |
) |
|
|
2,187 |
|
|
|
(13,917 |
) |
Prime short sales |
|
|
777 |
|
|
|
(805 |
) |
|
|
1,315 |
|
|
|
(2,420 |
) |
|
|
4,663 |
|
|
|
|
|
|
$ |
14,534 |
|
|
$ |
11,129 |
|
|
$ |
141,223 |
|
|
$ |
46,853 |
|
|
$ |
(11,957 |
) |
|
|
|
We use interest rate swaps, put options on Eurodollar futures and forward loan sale
commitments to reduce interest rate risk associated with non-prime loans. We generally enter into
interest rate swap arrangements related to existing loan applications and applications we expect to
receive prior to our next anticipated change in rates charged to borrowers. Interest rate swaps
represent an agreement to exchange interest rate payments, whereby we pay a fixed rate and receive
a floating rate. Put options on Eurodollar futures represent the right to sell a Eurodollar futures
contract at a specified price in the future. These swap and put option contracts increase in value
as rates rise and decrease in value as rates fall. As a result, these contracts increase in value
as rates rise and decrease in value as rates fall. The average notional amount of swap arrangements
during fiscal years 2006 and 2005 was $8.4 billion and $2.4 billion, respectively.
We enter into forward loan sale commitments to manage market risk associated with commitments
to fund mortgage loans. The notional value and the contract value of the forward commitments at
April 30, 2006 were $3.1 billion. Most of our forward commitments give us the option to under- or
over-deliver by five to ten percent.
We generally enter into interest rate caps or swaps to mitigate interest rate risk associated
with mortgage loans that will be securitized and trading residual interests that will be sold in a
subsequent NIM transaction. The caps and swaps enhance the marketability of the securitization and
NIM transactions. An interest rate cap represents a right to receive cash if interest rates rise
above a contractual strike rate, its value therefore increases as interest rates rise. The interest
rates used in our interest rate caps and the floating rates used in swaps are based on LIBOR.
At April 30, 2006, we had commitments to fund both non-prime and prime mortgage loans totaling
$4.0 billion for specified periods of time at locked-in interest rates. These derivative
instruments represent commitments to fund loans (rate-lock equivalents).
We sell short FNMA, FHLMC and GNMA mortgage-backed securities to reduce our risk related to
our commitments to fund fixed-rate prime loans. The position on certain or all of the fixed-
63
rate mortgage loans is closed approximately 10-15 days prior to standard Public Securities
Association (PSA) settlement dates.
None of our derivative instruments qualify for hedge accounting treatment as of April 30, 2006
and 2005.
NOTE 9: LONG-TERM DEBT
The components of long-term debt and capital lease obligations are as follows:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
| | |
Senior Notes, 81/2%, due April 2007 |
|
$ |
499,425 |
|
|
$ |
498,825 |
|
Senior Notes, 5.125%, due
October 2014 |
|
|
398,001 |
|
|
|
397,766 |
|
Business Services acquisition
obligations, due from May
2006 to January 2008 |
|
|
13,439 |
|
|
|
38,022 |
|
Capital lease obligations |
|
|
13,209 |
|
|
|
13,550 |
|
Other obligations |
|
|
457 |
|
|
|
455 |
|
|
|
|
|
|
|
924,531 |
|
|
|
948,618 |
|
Less: Current portion |
|
|
506,992 |
|
|
|
25,545 |
|
|
|
|
|
|
$ |
417,539 |
|
|
$ |
923,073 |
|
|
|
|
On October 26, 2004, we issued $400.0 million of 5.125% Senior Notes under a shelf
registration statement. The Senior Notes are due October 30, 2014, and are not redeemable by the
bondholders prior to maturity. The net proceeds of this transaction were used to repay $250.0
million in 63/4% Senior Notes that were due in November 2004. The remaining proceeds were used for
working capital, capital expenditures, repayment of other debt and other general corporate
purposes.
On April 13, 2000, we issued $500.0 million of 81/2% 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. We are planning on refinancing these Senior Notes when they come due.
As of April 30, 2006, we had $850.0 million remaining under our shelf registration for
additional debt issuances. As a result of our failure to file our Form 10-Q for the fiscal quarter
ended January 31, 2006 by the SECs prescribed due date, we will be unable to issue any debt
securities under our shelf registration statement until April 2007.
We have obligations related to Business Services acquisitions of $13.4 million and $38.0
million at April 30, 2006 and 2005, 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 May 2007 to January 2008.
We have a capitalized lease obligation of $13.2 million at April 30, 2006 that is
collateralized by land and buildings. The obligation is due in 15 years.
The aggregate payments required to retire long-term debt are $507.0 million, $6.8 million,
$0.5 million, $0.6 million, $0.6 million and $409.1 million in 2007, 2008, 2009, 2010, 2011 and
beyond, respectively.
Based upon borrowing rates currently available for indebtedness with similar terms, the fair
value of long-term debt was approximately $900.2 million at April 30, 2006.
NOTE 10: OTHER NONCURRENT ASSETS AND LIABILITIES
We have deferred compensation plans that permit directors and certain employees to defer
portions of their compensation and accrue income on the deferred amounts. Their deferred
compensation and our matching amounts have been accrued. Included in other noncurrent liabilities
is $153.2 million and $115.4 million at April 30, 2006 and 2005, respectively, reflecting the
liability under these plans. We may purchase whole-life insurance contracts on certain director and
employee participants to recover distributions made or to be made under the plans. The cash
surrender value of the policies is recorded in other noncurrent assets and totaled $127.4 million
and $108.8 million at April 30, 2006 and 2005, respectively.
We have recorded $183.9 million and $213.4 million for obligations to certain government
agencies at April 30, 2006 and 2005, respectively.
In connection with our acquisition of the non-attest assets of McGladrey & Pullen, LLP (M&P)
in August 1999, we assumed certain retirement liabilities related to M&Ps partners. We make
payments in varying amounts on a monthly basis. Included in other noncurrent liabilities at April
30, 2006 and 2005 are $14.3 million and $15.9 million, respectively, related to this liability.
NOTE 11: STOCKHOLDERS EQUITY
We are authorized to issue 6.0 million shares of Preferred Stock, without par value. At
April 30, 2006, we 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 our
shareholder rights plan.
64
On March 8, 1995, our 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 sixteen shares of Common Stock of the Company, 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.
We grant restricted shares to selected employees under our 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, 2006 and 2005 was $42.6 million and
$23.7 million, respectively.
NOTE 12: STOCK-BASED COMPENSATION AND RETIREMENT BENEFITS
We have 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 ESPP. The shareholders have approved all of our 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 our 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 2003 Plan 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 our stock price reaching specified levels.
Options granted under the 1989 Plan for Outside Directors prior to June 30, 2004 are
exercisable starting one year after the date of grant on a cumulative basis at an annual rate of
331/3 % of the total number of option shares. Beginning with the grant on
June 30, 2004, options granted under this Plan are fully vested and immediately exercisable as of
the date of grant.
Under the 2003 and 1989 plans, restricted shares of our 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, 2005, 2004 and 2003 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.
65
Changes during the years ended April 30, 2006, 2005 and 2004 under the stock-based
compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in 000s) |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
|
Options outstanding, beginning of year |
|
|
27,103 |
|
|
$ |
19.02 |
|
|
|
28,964 |
|
|
$ |
17.93 |
|
|
|
31,544 |
|
|
$ |
16.07 |
|
Options granted |
|
|
6,918 |
|
|
|
29.11 |
|
|
|
7,604 |
|
|
|
23.86 |
|
|
|
7,488 |
|
|
|
22.03 |
|
Options exercised |
|
|
(5,479 |
) |
|
|
18.17 |
|
|
|
(6,959 |
) |
|
|
18.62 |
|
|
|
(7,854 |
) |
|
|
14.56 |
|
Options expired/cancelled |
|
|
(2,494 |
) |
|
|
24.04 |
|
|
|
(2,506 |
) |
|
|
22.21 |
|
|
|
(2,214 |
) |
|
|
17.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year |
|
|
26,048 |
|
|
|
21.40 |
|
|
|
27,103 |
|
|
|
19.02 |
|
|
|
28,964 |
|
|
|
17.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares exercisable, end of year |
|
|
14,693 |
|
|
|
18.51 |
|
|
|
13,268 |
|
|
|
15.89 |
|
|
|
13,336 |
|
|
|
15.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares granted |
|
|
1,745 |
|
|
|
26.69 |
|
|
|
980 |
|
|
|
23.89 |
|
|
|
1,028 |
|
|
|
21.97 |
|
Restricted shares vested |
|
|
616 |
|
|
|
22.96 |
|
|
|
352 |
|
|
|
21.66 |
|
|
|
144 |
|
|
|
11.90 |
|
Restricted shares outstanding, end of year |
|
|
2,455 |
|
|
|
25.54 |
|
|
|
1,554 |
|
|
|
23.20 |
|
|
|
1,020 |
|
|
|
21.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reserved for future option or
restricted stock grants, end of year |
|
|
27,356 |
|
|
|
|
|
|
|
9,889 |
|
|
|
|
|
|
|
9,880 |
|
|
|
|
|
A summary of stock options outstanding and exercisable at April 30, 2006 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 |
|
|
$8.06 10.95 |
|
|
2,575 |
|
|
3 years |
|
|
$ |
9.11 |
|
|
|
2,575 |
|
|
$ |
9.11 |
|
$11.06 13.91 |
|
|
1,764 |
|
|
3 years |
|
|
|
13.13 |
|
|
|
1,764 |
|
|
|
13.13 |
|
$16.05 19.98 |
|
|
4,900 |
|
|
6 years |
|
|
|
16.69 |
|
|
|
2,728 |
|
|
|
16.74 |
|
$20.00 24.95 |
|
|
10,330 |
|
|
7 years |
|
|
|
23.25 |
|
|
|
7,279 |
|
|
|
23.30 |
|
$25.25 29.48 |
|
|
6,479 |
|
|
9 years |
|
|
|
29.14 |
|
|
|
347 |
|
|
|
28.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,048 |
|
|
|
|
|
|
|
|
|
|
|
14,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ESPP provides the option to purchase shares of our Common Stock through
payroll deductions to a majority of the employees of our subsidiaries. The purchase price of the
stock is 90% of the lower of either the fair market value of our 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 2006
and 2005, 397,786 and 300,976 shares, respectively, were purchased under the ESPP out of a total
authorized 6.0 million shares.
During fiscal years 2006, 2005 and 2004, we recorded compensation expense under the fair value
method using the Black-Scholes option-pricing model on the date of the grant. The following
weighted-average assumptions and fair values were used for stock option grants and ESPP options
during those periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
2005 |
|
2004 |
|
Stock option grants - management: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
3.68 |
% |
|
|
3.86 |
% |
|
|
2.64 |
% |
Expected life |
|
5 years |
|
5 years |
|
5 years |
Expected volatility |
|
|
27.28 |
% |
|
|
32.07 |
% |
|
|
31.13 |
% |
Dividend yield |
|
|
1.72 |
% |
|
|
1.84 |
% |
|
|
1.63 |
% |
Weighted average fair value |
|
$ |
6.23 |
|
$ |
5.87 |
|
$ |
5.01 |
Stock option grants - seasonal: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
3.61 |
% |
|
|
2.60 |
% |
|
|
1.21 |
% |
Expected life |
|
2 years |
|
2 years |
|
2 years |
Expected volatility |
|
|
23.28 |
% |
|
|
27.65 |
% |
|
|
31.97 |
% |
Dividend yield |
|
|
1.71 |
% |
|
|
1.85 |
% |
|
|
1.66 |
% |
Weighted average fair value |
|
$ |
3.70 |
|
$ |
3.29 |
|
$ |
3.03 |
ESPP options: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
3.96 |
% |
|
|
2.17 |
% |
|
|
0.97 |
% |
Expected life |
|
6 months |
|
6 months |
|
6 months |
Expected volatility |
|
|
25.06 |
% |
|
|
21.18 |
% |
|
|
38.14 |
% |
Dividend yield |
|
|
1.91 |
% |
|
|
1.82 |
% |
|
|
1.55 |
% |
Weighted average fair value |
|
$ |
4.55 |
|
$ |
3.84 |
|
$ |
4.98 |
66
We have 401(k) defined contribution plans covering all full-time employees following
the completion of an eligibility period. Our contributions to these plans are discretionary and
totaled $37.3 million, $33.4 million and $28.9 million for fiscal years 2006, 2005 and 2004,
respectively.
NOTE 13: SHAREHOLDER RIGHTS PLAN
On July 25, 1998, the rights under a shareholder rights plan, adopted by our 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 our stockholders. Under the 1998 plan, a dividend of one
right (a Right) per share was declared and paid on each share of our 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 our Common Stock without the prior
written approval of our 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. We 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 four-hundredth of a share of a class of our Participating
Preferred Stock, without par value, at a price of $53.75, 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 our Common Stock having a market value equal to twice the exercise price of the Right. Following
an Unapproved Stock Acquisition, if we are involved in a merger, or 50% or more of our 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 our 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 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.
We
may redeem the Rights at a price of $0.0003125 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.
67
NOTE 14: 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, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Domestic |
|
$ |
808,992 |
|
|
$ |
1,013,844 |
|
|
$ |
1,150,450 |
|
Foreign |
|
|
18,401 |
|
|
|
3,871 |
|
|
|
12,525 |
|
|
|
|
|
|
$ |
827,393 |
|
|
$ |
1,017,715 |
|
|
$ |
1,162,975 |
|
|
|
|
Deferred income tax provisions (benefits) reflect the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The current and deferred components of taxes on income
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
320,244 |
|
|
$ |
379,907 |
|
|
$ |
382,865 |
|
State |
|
|
53,783 |
|
|
|
53,452 |
|
|
|
77,112 |
|
Foreign |
|
|
6,367 |
|
|
|
469 |
|
|
|
4,627 |
|
|
|
|
|
|
|
380,394 |
|
|
|
433,828 |
|
|
|
464,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(36,545 |
) |
|
|
(37,681 |
) |
|
|
(1,880 |
) |
State |
|
|
(6,137 |
) |
|
|
(1,433 |
) |
|
|
(197 |
) |
Foreign |
|
|
(727 |
) |
|
|
(909 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(43,409 |
) |
|
|
(40,023 |
) |
|
|
(2,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income
taxes before change in
accounting principle |
|
|
336,985 |
|
|
|
393,805 |
|
|
|
462,523 |
|
Income tax on cumulative
effect of change in
accounting principle |
|
|
- |
|
|
|
- |
|
|
|
(4,031 |
) |
Income tax included in
comprehensive income |
|
|
(27,261 |
) |
|
|
(3,991 |
) |
|
|
(3,387 |
) |
Income tax included in
stockholders equity for
compensation expense for tax
purposes in excess of amounts
recognized for financial
reporting purposes |
|
|
(9,529 |
) |
|
|
(10,918 |
) |
|
|
(24,730 |
) |
|
|
|
Total income taxes |
|
$ |
300,195 |
|
|
$ |
378,896 |
|
|
$ |
430,375 |
|
|
|
|
The following table reconciles our federal statutory rate of 35% to our effective
tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30, |
|
2006 |
|
2005 |
|
2004 |
|
Statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increases in income tax rate
resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of
Federal income tax benefit |
|
|
3.7 |
% |
|
|
3.7 |
% |
|
|
3.6 |
% |
Other |
|
|
2.0 |
% |
|
|
- |
% |
|
|
1.2 |
% |
|
|
|
Effective tax rate |
|
|
40.7 |
% |
|
|
38.7 |
% |
|
|
39.8 |
% |
|
|
|
The components of deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
Gross deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
63,058 |
|
|
$ |
53,006 |
|
Allowance for credit losses
and related reserves |
|
|
46,192 |
|
|
|
35,116 |
|
Net operating losses |
|
|
- |
|
|
|
3,524 |
|
|
|
|
Current |
|
|
109,250 |
|
|
|
91,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interest income |
|
|
146,348 |
|
|
|
129,323 |
|
Deferred and stock-based
compensation |
|
|
91,030 |
|
|
|
61,111 |
|
Property and equipment |
|
|
43,513 |
|
|
|
33,767 |
|
Deferred revenue |
|
|
57,836 |
|
|
|
- |
|
Net operating losses |
|
|
16,471 |
|
|
|
20,018 |
|
Other |
|
|
394 |
|
|
|
- |
|
|
|
|
Noncurrent |
|
|
355,592 |
|
|
|
244,219 |
|
|
|
|
|
|
|
464,842 |
|
|
|
335,865 |
|
Valuation allowance |
|
|
(25,816 |
) |
|
|
(20,354 |
) |
|
|
|
|
|
|
439,026 |
|
|
|
315,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid expenses and revenue
deferred for tax |
|
|
(16,037 |
) |
|
|
(13,454 |
) |
|
|
|
Current |
|
|
(16,037 |
) |
|
|
(13,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
(101,621 |
) |
|
|
(61,190 |
) |
Intangible assets |
|
|
(87,992 |
) |
|
|
(101,945 |
) |
|
|
|
Noncurrent |
|
|
(189,613 |
) |
|
|
(163,135 |
) |
|
|
|
Net deferred tax assets |
|
$ |
233,376 |
|
|
$ |
138,922 |
|
|
|
|
The net change in the total valuation allowance for fiscal years 2006 and 2005 was
$5.5 million and $(2.9) million, respectively. The valuation allowance for deferred tax assets as
of April 30, 2006 was $25.8 million.
We believe the net deferred tax asset at April 30, 2006 of $233.4 million is more likely than
not realizable. We have federal taxable income in excess of approximately $1.7 billion and
substantial state taxable income in the carry-back period.
As of April 30, 2006, we had net operating loss carryforwards for tax purposes in various
states and foreign countries of approximately $297.3 million. If not used, these carryforwards will
expire in varying amounts during fiscal years 2007 through 2025.
We intend to indefinitely reinvest foreign earnings, therefore, a provision has not been made
for income taxes that 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.
68
NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION
We made the following cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Income taxes paid |
|
$ |
270,540 |
|
|
$ |
437,427 |
|
|
$ |
331,635 |
|
Interest paid (net of
amounts capitalized) |
|
|
102,317 |
|
|
|
82,535 |
|
|
|
84,551 |
|
We characterized the following as non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Additions to available-for-sale
residual interests |
|
$ |
61,651 |
|
|
$ |
16,914 |
|
|
$ |
9,007 |
|
Residual interest mark-to-market |
|
|
35,274 |
|
|
|
95,929 |
|
|
|
167,065 |
|
NOTE 16: COMMITMENTS, CONTINGENCIES AND RISKS
COMMITMENTS AND CONTINGENCIES At April 30, 2006, we maintained $2.0 billion in
back-up credit facilities to support the commercial paper program and for general corporate
purposes. These CLOCs have a maturity date of August 2010 and an annual facility fee of eight and
one-half basis points per annum. These lines are subject to various affirmative and negative
covenants, including a minimum net worth covenant and limit our indebtedness.
We obtained an additional $900.0 million line of credit for the period of January 3 to
February 24, 2006 to back-up peak commercial paper issuance or use as an alternate source of
funding for RAL participations. This line was subject to various covenants, substantially similar
to the primary CLOCs.
We maintain a revolving credit facility in an amount not to exceed $225.0 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.
We offer guarantees under our POM program to tax clients whereby we 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 we are responsible. We defer 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 changes in the
deferred revenue liability for the fiscal years ended April 30, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
(in 000s) |
April 30, |
|
2006 |
|
|
2005 |
|
|
Balance, beginning of year |
|
$ |
130,762 |
|
|
$ |
123,048 |
|
Amounts deferred for new
guarantees issued |
|
|
78,900 |
|
|
|
77,756 |
|
Revenue recognized on previous deferrals |
|
|
(67,978 |
) |
|
|
(70,042 |
) |
|
|
|
Balance, end of year |
|
$ |
141,684 |
|
|
$ |
130,762 |
|
|
|
|
We have 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 $4.0 billion and $4.2
billion at April 30, 2006 and 2005, respectively. External market forces impact the probability of
commitments being exercised, and therefore, total commitments outstanding do not necessarily
represent future cash requirements.
In the normal course of business, we maintain recourse with standard representations and
warranties customary to the mortgage banking industry. Violations of these representations and
warranties may require us to repurchase loans previously sold. In accordance with these loan sale
agreements, we repurchased loans with an outstanding principal balance of $297.6 million and $195.3
million during the fiscal years ended April 30, 2006 and 2005, respectively. A liability has been
established related to the potential loss on repurchase of loans previously sold of $33.4 million
and $41.2 million at April 30, 2006 and 2005, respectively. Repurchased loans are normally sold in
subsequent sale transactions. On an ongoing basis, we monitor the adequacy of this liability, which
is established upon the initial sale of the loans, and is included in accounts payable, accrued
expenses and other current liabilities in the consolidated balance sheets. In determining the
adequacy of the recourse liability, we consider 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.
69
We are responsible for servicing mortgage loans for others of $62.9 billion and subservicing
loans of $10.5 billion at April 30, 2006.
We are required, under the terms of our 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. We fund 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 us for credit losses is limited to the
future excess cash flows 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 us are included as part of the residual valuation and are valued based upon anticipated
distribution from the OC account. As of April 30, 2006 and 2005, $358.2 million and $309.5 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, other than to the
extent potential OC cash flows are included as part of residual interest valuations.
Option One 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, 2006 and 2005 was $7.8
billion and $6.7 billion, respectively. The fair value of mortgage loans held by the Trusts as of
April 30, 2006 and 2005 was $7.9 billion and $6.8 billion, respectively. At April 30, 2006 and
2005, we recorded liabilities of $1.7 million and $0.9 million, respectively, which were included
in accounts payable, accrued expenses and other current liabilities in the consolidated balance
sheets.
We 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. We estimate the potential payments (undiscounted) total approximately $24.5
million as of April 30, 2006. Our 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 typically be recorded as additional purchase
price, generally goodwill.
Commitments exist to loan M&P the lower of the value of their accounts receivable,
work-in-process and fixed assets or $75.0 million, on a revolving basis through January 31, 2011,
subject to certain termination clauses. This revolving facility bears interest at prime rate plus
two percent on the outstanding amount 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.
We are required, in the event of non-delivery of customers securities owed to us by other
broker-dealers or by our 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, 2006, we had pledged securities totaling $53.0 million, which satisfied margin
deposit requirements of $43.2 million.
We monitor the credit standing of brokers and dealers and customers with whom we do business.
In addition, we monitor the market value of collateral held and the market value of securities
receivable from others, and seek to obtain additional collateral if insufficient protection against
loss exists.
In December 2005, HRBFA reduced its $125.0 million letter of credit with an unaffiliated
financial institution to $1.0 million. This letter of credit will be canceled in the first quarter
of fiscal year 2007. HRBFA also has a secured letter of credit with a financial institution with a
credit limit of $50.0 million. There were no borrowings on these letters of credit during fiscal
years 2006 or 2005 and no outstanding balance at April 30, 2006 or 2005.
We have contractual commitments to fund certain franchises requesting Franchise Equity Lines
of Credit (FELCs). The commitment to fund FELCs as of April 30, 2006 totaled $75.9 million, with a
related receivable balance of $45.1 million included in the consolidated balance sheets. The
receivable represents the amount drawn on the FELCs as of April 30, 2006.
We are self-insured for certain risks, including certain employee health and benefit, workers
compensation, property and general liability claims, and claims related to our POM program. We
issued three standby letters of credit to servicers paying claims related to our POM, errors and
omissions and workers compensation insurance policies. These letters of credit are for amounts not
to exceed $16.5 million, $3.5 million and $0.9 million, respectively. At April 30, 2006 there were
no balances outstanding on these letters of credit.
70
During fiscal year 2004, we announced plans to construct a new world headquarters facility in
downtown Kansas City, Missouri. We expect the remaining expenditure associated with this building
to be approximately $63.9 million, which will be paid out during fiscal year 2007.
During fiscal year 2006, we entered into a transaction with the City of Kansas City, Missouri,
to provide us with sales and property tax savings on the furniture, fixtures and equipment for our
new corporate headquarters facility. Under the transaction, the City purchased equipment by issuing
$5.3 million in industrial revenue bonds due in December 2015, and leased the furniture, fixtures
and equipment to us for an identical term under a capital lease. The Citys bonds were purchased by
us. Because the City has assigned the lease to the bond trustee for our benefit as the sole
bondholder, we, in effect, control enforcement of the lease against ourselves. As a result of the
capital lease treatment, the furniture, fixtures and equipment will remain a component of property,
plant and equipment in our consolidated balance sheet. As a result of the legal right of offset,
the capital lease obligation and the corresponding bond investments have been eliminated in
consolidation. The transaction provides us with property tax exemptions for the leased furniture,
fixtures and equipment. Additional revenue bonds may be issued to cover the costs of certain
improvements to this facility. The total amount of revenue bonds authorized for issuance is $31.0
million.
Substantially all of the operations of our subsidiaries are conducted in leased premises. Most
of the operating leases are for periods ranging from 3 years to 5 years, with renewal options and
provide for fixed monthly rentals. Future minimum lease commitments at April 30, 2006 are as
follows:
|
|
|
|
|
(in 000s) |
|
2007 |
|
$ |
269,890 |
|
2008 |
|
|
210,596 |
|
2009 |
|
|
161,388 |
|
2010 |
|
|
105,163 |
|
2011 |
|
|
51,960 |
|
2012 and beyond |
|
|
57,819 |
|
|
|
|
|
|
|
$ |
856,816 |
|
|
|
|
|
Our rent expense for fiscal years 2006, 2005 and 2004 totaled $339.6 million, $275.3
million and $241.2 million, respectively.
In the regular course of business, we are subject to routine examinations by federal, state
and local taxing authorities. In managements opinion, the disposition of matters raised by such
taxing authorities, if any, in such tax examinations would not have a material adverse impact on
our consolidated financial statements.
We 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 our directors and officers; and (4) third-party claims
relating to various arrangements in the normal course of business. Typically, there is no stated
maximum payment related to these indemnifications, and the term of indemnities may vary and in many
cases is limited only by the applicable statute of limitations. The likelihood of any claims being
asserted against us and the ultimate liability related to any such claims, if any, is difficult to
predict. While we cannot provide assurance we will ultimately prevail in the event any such claims
are asserted, we believe the fair value of these guarantees and indemnifications is not material as
of April 30, 2006.
RESTRUCTURING CHARGE During fiscal year 2006, we initiated a restructuring plan within
our
Mortgage Services segment to reduce costs in our mortgage operations. We have substantially
completed the restructuring, which included eliminating approximately 1,200 positions and closing
some of our branch offices. During fiscal year 2006, we recorded a $12.6 million pretax
restructuring charge, consisting of $6.7 million in employee severance costs and $5.9 million in
contract termination costs. Of the total pretax charge, $2.5 million of the contract termination
costs are included in cost of service revenues and the remainder in cost of other revenues in our
consolidated statement of income. The significant components of the restructuring charge incurred
as of April 30, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
Charges |
|
|
Cash |
|
|
Accrual |
|
|
|
to Date |
|
|
Payments |
|
|
balance |
|
|
Employee severance costs |
|
$ |
6,742 |
|
|
$ |
5,005 |
|
|
$ |
1,737 |
|
Contract termination costs |
|
|
5,882 |
|
|
|
61 |
|
|
|
5,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,624 |
|
|
$ |
5,066 |
|
|
$ |
7,558 |
|
|
|
|
|
|
|
|
|
|
|
The liability related to this restructuring charge is included in accounts payable,
accrued expenses and other on our consolidated balance sheet. Payments of employee severance costs
were substantially completed by May 2006. The remaining contract termination obligations primarily
relate to lease
71
obligations for vacant space resulting from branch office closings, as certain lease terms extend
through October 2011.
Employee severance costs include estimates regarding the amount of severance payments made to
certain terminated associates, and contract termination costs include estimates regarding the
length of time required to sublease vacant space and expected recovery rates. Actual results could
vary from these estimates.
RISKS Loans to borrowers who do not meet traditional underwriting criteria, or
non-prime borrowers, present a higher level of risk of default than prime loans, because of
previous credit problems, higher debt-to-income levels, lack of income documentation or limited
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. During fiscal year 2006
approximately 80.0% of our non-prime loan originations were adjustable rate mortgages, 21.1% of
non-prime loan originations, including both adjustable rate mortgages and fixed rate mortgages,
were interest-only mortgage loans, and 13.4% of both adjustable rate mortgages and fixed rate
mortgages were loans with a 40-year amortization schedule. 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 we
believe the underwriting procedures and appraisal processes we employ enable us 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. Because we sell or securitize almost
all of the mortgage loans we originate, any potential credit problems will be reflected in our
consolidated financial statements in the fair value of the residual interests we hold in
securitizations, or our recourse reserves established on loans sold to third parties.
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 our evaluation of the creditworthiness of potential borrowers on a case-by-case basis.
Risks to the stability of Mortgage Services 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 17: LITIGATION AND RELATED CONTINGENCIES
We have been named as a defendant in numerous lawsuits throughout the country regarding our
RAL programs (the RAL Cases). The RAL Cases have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among others, (i) disclosures in the RAL
applications were inadequate, misleading and untimely; (ii) the RAL interest rates were usurious
and unconscionable; (iii) we did not disclose that we would receive part of the finance charges
paid by the customer for such loans; (iv) untrue, misleading or deceptive statements in marketing
RALs; (v) breach of state laws on credit service organizations; (vi) breach of contract, unjust
enrichment, unfair and deceptive acts or practices; (vii) violations of the federal Racketeer
Influenced and Corrupt Organizations Act; (viii) violations of the federal Fair Debt Collection
Practices Act and unfair competition with respect to debt collection activities; and (ix) we owe,
and breached, a fiduciary duty to our customers in connection with the RAL program.
The amounts claimed in the RAL Cases have been very substantial in some instances. We have
successfully defended against numerous RAL cases, some of which 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 have been settled, resulting in a combined pretax expense in
fiscal year 2006 of $70.2 million (the 2006 Settlements). The 2006 Settlements are described
below.
On December 21, 2005, we entered into a settlement agreement regarding four RAL Cases.
Pursuant to the terms of this settlement agreement, we will contribute a total of up to $62.5
million in cash for purposes of making payments to the settlement class, paying all attorneys fees
and costs to class counsel and covering service awards to the representative plaintiffs. In
addition, we paid costs for providing notice of the settlement to settlement class members. We
increased existing reserves related to this matter, resulting in a pretax charge of $50.7 million
in fiscal year 2006.
On April 19, 2006, we entered into a settlement agreement, subject to final court approval,
regarding one other RAL Case, pursuant to which we will contribute a total of $19.5 million in cash
for purposes of making payments to the settlement class, paying all attorneys fees and costs to
class counsel, incentive payment awards to plaintiff and all notice and administration costs. We
recorded a reserve of $19.5 million related to this settlement in fiscal year 2006.
One RAL class action case and a state attorney general lawsuit are still pending, with the
amounts claimed on a collective basis being very substantial. The ultimate cost of this litigation
could be substantial. We believe we have meritorious
72
defenses to the remaining RAL Cases and we intend to defend them vigorously. There can be no
assurances, however, as to the outcome of the pending RAL Cases individually or in the aggregate.
Likewise, there can be no assurances regarding the impact of the RAL Cases on our financial
statements.
We are also a party to claims and lawsuits pertaining to our electronic tax return filing
services, our POM guarantee program, our Express IRA product and tax planning services. These
claims and 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 intend to continue defending these cases
vigorously, although there are no assurances as to their outcome.
In addition we and certain of our current and former directors and officers are party to
several putative class actions alleging violations of certain securities laws, and certain of our
current and former officers and directors are defendants in several putative shareholder derivative
actions, which have purportedly been brought on behalf of the Company and in which the Company is
named as a nominal defendant. The putative securities class actions allege, among other things,
deceptive, material and misleading financial statements, failure to prepare financial statements in
accordance with generally accepted accounting principles and concealment of the potential for
lawsuits stemming from the allegedly fraudulent nature of our operations. The shareholder
derivative cases pertain primarily to our recent financial restatement and certain of our products
and business activities and generally allege breach of fiduciary duty, abuse of control, gross
mismanagement, waste and unjust enrichment. 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 intend to continue defending these cases vigorously, although
there are no assurances as to their outcome.
In addition to the aforementioned types of cases, we are parties to claims and lawsuits that
we consider to be ordinary, routine disputes incidental to our business (Other Claims and
Lawsuits), including claims and lawsuits concerning the preparation of customers income tax
returns, tax planning services, the fees charged customers for various services, investment
products, relationships with franchisees, contract disputes, employment matters and civil actions,
arbitrations, regulatory inquiries and class actions arising out of our business as a broker-dealer
and provider of investment products and as a servicer of mortgage loans. We believe we have
meritorious defenses to each of the Other Claims and Lawsuits and are defending them vigorously.
Although we cannot provide assurance we will ultimately prevail in each instance, we believe that
amounts, if any, required to be paid in the discharge of liabilities or settlements pertaining to
Other Claims and Lawsuits will not have a material adverse effect on our consolidated financial
statements. Regardless of outcome, claims and litigation can adversely affect us due to defense
costs, diversion of management attention and time, and publicity related to such matters.
NOTE 18: SUBSEQUENT EVENTS
In March 2006, the OTS approved the charter of the H&R Block Bank. The bank commenced
operations on May 1, 2006, at which time we realigned certain segments of our business to reflect a
new management reporting structure. In May 2006, H&R Block Bank purchased certain mortgage loans
accumulated during the last quarter of fiscal year 2006, which were held by Option One at April 30,
2006.
|
|
|
NOTE 19: |
|
SEGMENT INFORMATION |
The principal business activity of our 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 and the manner in which operational
decisions are made. We operate in the following four reportable segments:
TAX SERVICES This segment is primarily engaged in providing tax return preparation
and related services and products in the U.S., Canada, Australia and the United Kingdom. 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 Companys 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. Revenues of this segment are seasonal in nature.
Our international operations contributed $129.1 million, $110.0 million and $97.6 million in
revenues for fiscal years 2006, 2005 and 2004, respectively, and $19.8 million, $11.3 million and $11.1 million of pretax
income, respectively.
73
MORTGAGE SERVICES 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 U.S. This segment mainly offers, through a network of independent 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
business consulting services, wealth management, retirement resources, payroll services, corporate
finance, and financial process outsourcing. This segment offers services through offices located
throughout the U.S. 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-dealer, to the general public. Investment advice and services are primarily offered through
H&R Block Financial Advisors branch offices.
CORPORATE Corporate support departments provide services to our operating
segments, consisting of marketing, information technology, facilities, human resources, executive,
legal, finance, government relations and corporate communications. These support department costs
are largely allocated to our operating segments. Our captive insurance and franchise financing
subsidiaries are also included below within Corporate, as was our small business initiatives
subsidiary in fiscal year 2004. The pretax loss from Corporate for fiscal year 2005 includes a
non-operating gain of $17.3 million, or $0.03 per diluted share, resulting from legal recoveries.
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.
74
Information concerning the Companys operations by reportable segment is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
Year Ended April 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
2,451,806 |
|
|
$ |
2,358,293 |
|
|
$ |
2,191,177 |
|
Mortgage Services |
|
|
1,247,138 |
|
|
|
1,246,018 |
|
|
|
1,323,709 |
|
Business Services |
|
|
877,259 |
|
|
|
573,316 |
|
|
|
499,210 |
|
Investment Services |
|
|
287,955 |
|
|
|
239,244 |
|
|
|
229,470 |
|
Corporate |
|
|
8,643 |
|
|
|
3,148 |
|
|
|
4,314 |
|
|
|
|
|
|
$ |
4,872,801 |
|
|
$ |
4,420,019 |
|
|
$ |
4,247,880 |
|
|
|
|
INCOME (LOSS)
BEFORE TAXES |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
589,766 |
|
|
$ |
663,518 |
|
|
$ |
638,493 |
|
Mortgage Services |
|
|
321,616 |
|
|
|
496,093 |
|
|
|
688,523 |
|
Business Services |
|
|
53,378 |
|
|
|
29,871 |
|
|
|
19,312 |
|
Investment Services |
|
|
(32,835 |
) |
|
|
(75,370 |
) |
|
|
(75,614 |
) |
Corporate |
|
|
(104,532 |
) |
|
|
(96,397 |
) |
|
|
(107,739 |
) |
|
|
|
|
|
$ |
827,393 |
|
|
$ |
1,017,715 |
|
|
$ |
1,162,975 |
|
|
|
|
DEPRECIATION AND
AMORTIZATION |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
69,095 |
|
|
$ |
79,079 |
|
|
$ |
76,279 |
|
Mortgage Services |
|
|
37,988 |
|
|
|
31,043 |
|
|
|
24,428 |
|
Business Services |
|
|
38,037 |
|
|
|
23,591 |
|
|
|
23,104 |
|
Investment Services |
|
|
46,081 |
|
|
|
48,662 |
|
|
|
54,378 |
|
Corporate |
|
|
502 |
|
|
|
1,492 |
|
|
|
942 |
|
|
|
|
|
|
$ |
191,703 |
|
|
$ |
183,867 |
|
|
$ |
179,131 |
|
|
|
|
CAPITAL
EXPENDITURES |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
43,607 |
|
|
$ |
74,297 |
|
|
$ |
50,204 |
|
Mortgage Services |
|
|
48,694 |
|
|
|
56,613 |
|
|
|
28,176 |
|
Business Services |
|
|
32,270 |
|
|
|
22,582 |
|
|
|
18,003 |
|
Investment Services |
|
|
11,088 |
|
|
|
9,503 |
|
|
|
10,531 |
|
Corporate |
|
|
114,851 |
|
|
|
46,463 |
|
|
|
16,912 |
|
|
|
|
|
|
$ |
250,510 |
|
|
$ |
209,458 |
|
|
$ |
123,826 |
|
|
|
|
IDENTIFIABLE
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Tax Services |
|
$ |
843,717 |
|
|
$ |
716,981 |
|
|
$ |
666,548 |
|
Mortgage Services |
|
|
1,903,729 |
|
|
|
1,336,920 |
|
|
|
1,108,022 |
|
Business Services |
|
|
988,323 |
|
|
|
701,763 |
|
|
|
637,542 |
|
Investment Services |
|
|
1,306,822 |
|
|
|
1,481,127 |
|
|
|
1,624,383 |
|
Corporate |
|
|
946,544 |
|
|
|
1,301,265 |
|
|
|
1,197,332 |
|
|
|
|
|
|
$ |
5,989,135 |
|
|
$ |
5,538,056 |
|
|
$ |
5,233,827 |
|
|
|
|
75
|
|
|
NOTE 20: |
|
QUARTERLY FINANCIAL DATA (UNAUDITED) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts) |
Fiscal Year 2006 Quarter Ended |
|
Fiscal Year 2006 |
|
|
April 30, 2006 |
|
|
January 31, 2006 |
|
|
October 31, 2005 |
|
|
July 31, 2005 |
|
|
Revenues |
|
$ |
4,872,801 |
|
|
$ |
2,496,018 |
|
|
$ |
1,156,747 |
|
|
$ |
605,043 |
|
|
$ |
614,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
827,393 |
|
|
|
980,983 |
|
|
|
25,408 |
|
|
|
(133,129 |
) |
|
|
(45,869 |
) |
Income tax (benefit) |
|
|
336,985 |
|
|
|
393,445 |
|
|
|
13,295 |
|
|
|
(51,880 |
) |
|
|
(17,875 |
) |
|
|
|
Net income (loss) |
|
$ |
490,408 |
|
|
$ |
587,538 |
|
|
$ |
12,113 |
|
|
$ |
(81,249 |
) |
|
$ |
(27,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
1.49 |
|
|
$ |
1.79 |
|
|
$ |
0.04 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.08 |
) |
Diluted earnings (loss) per share |
|
$ |
1.47 |
|
|
$ |
1.77 |
|
|
$ |
0.04 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005 Quarter Ended |
|
Fiscal Year 2005 |
|
|
April 30, 2005 |
|
|
January 31, 2005 |
|
|
October 31, 2004 |
|
|
July 31, 2004 |
|
|
Revenues |
|
$ |
4,420,019 |
|
|
$ |
2,355,279 |
|
|
$ |
1,036,236 |
|
|
$ |
541,953 |
|
|
$ |
486,551 |
|
|
|
|
|
Income (loss) before taxes |
|
|
1,017,715 |
|
|
|
1,003,055 |
|
|
|
153,278 |
|
|
|
(79,818 |
) |
|
|
(58,800 |
) |
Income tax (benefit) |
|
|
393,805 |
|
|
|
388,125 |
|
|
|
59,542 |
|
|
|
(31,016 |
) |
|
|
(22,846 |
) |
|
|
|
Net income (loss) |
|
$ |
623,910 |
|
|
$ |
614,930 |
|
|
$ |
93,736 |
|
|
$ |
(48,802 |
) |
|
$ |
(35,954 |
) |
|
|
|
|
Basic earnings (loss) per share |
|
$ |
1.88 |
|
|
$ |
1.86 |
|
|
$ |
0.28 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.11 |
) |
Diluted earnings (loss) per share |
|
$ |
1.85 |
|
|
$ |
1.83 |
|
|
$ |
0.28 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.11 |
) |
The accumulation of four quarters in fiscal years 2006 and 2005 for earnings per
share may not equal the related per share amounts for the years ended April 30, 2006 and 2005 due
to the repurchase of treasury shares, the timing of the exercise of stock options and release of
restricted shares, and the antidilutive effect of stock options and unvested restricted shares in
the first two quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
Third Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
|
Fiscal Year |
|
|
FISCAL
YEAR 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
$ |
0.11 |
|
|
$ |
0.49 |
|
Stock price range: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
25.67 |
|
|
$ |
26.96 |
|
|
$ |
29.02 |
|
|
$ |
30.00 |
|
|
$ |
30.00 |
|
Low |
|
|
19.80 |
|
|
|
23.06 |
|
|
|
23.01 |
|
|
|
24.47 |
|
|
|
19.80 |
|
FISCAL
YEAR 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.11 |
|
|
$ |
0.11 |
|
|
$ |
0.11 |
|
|
$ |
0.10 |
|
|
$ |
0.43 |
|
Stock price range: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
27.93 |
|
|
$ |
25.25 |
|
|
$ |
25.75 |
|
|
$ |
25.00 |
|
|
$ |
27.93 |
|
Low |
|
|
23.43 |
|
|
|
22.99 |
|
|
|
22.57 |
|
|
|
22.08 |
|
|
|
22.08 |
|
|
|
|
NOTE 21: |
|
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
Block Financial Corporation (BFC) is an indirect, wholly-owned subsidiary of the Company.
BFC is the Issuer and H&R Block, Inc. is the Guarantor of the $500.0 million 81/2% Senior Notes
issued on April 13, 2000 and the $400.0 million 5.125% Senior Notes issued on October 26, 2004. Our
guarantee is full and unconditional. The following condensed consolidating financial statements
present separate information for BFC, the Company and for our other subsidiaries, and should be
read in conjunction with our consolidated financial statements.
These condensed consolidating financial statements have been prepared using the equity method
of accounting. Income of subsidiaries is, therefore, reflected in our investment in subsidiaries
account. The elimination entries eliminate investments in subsidiaries, related stockholders
equity and other intercompany balances and transactions.
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING INCOME STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
Consolidated |
|
Year Ended April 30, 2006 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Revenues |
|
$ |
- |
|
|
$ |
2,018,045 |
|
|
$ |
2,871,364 |
|
|
$ |
(16,608 |
) |
|
$ |
4,872,801 |
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenues |
|
|
- |
|
|
|
500,545 |
|
|
|
1,883,374 |
|
|
|
(620 |
) |
|
|
2,383,299 |
|
Cost of other revenues |
|
|
- |
|
|
|
486,971 |
|
|
|
36,021 |
|
|
|
- |
|
|
|
522,992 |
|
Selling, general and administrative |
|
|
- |
|
|
|
481,544 |
|
|
|
646,535 |
|
|
|
(15,494 |
) |
|
|
1,112,585 |
|
|
|
|
|
|
|
- |
|
|
|
1,469,060 |
|
|
|
2,565,930 |
|
|
|
(16,114 |
) |
|
|
4,018,876 |
|
|
|
|
Operating income |
|
|
- |
|
|
|
548,985 |
|
|
|
305,434 |
|
|
|
(494 |
) |
|
|
853,925 |
|
Interest expense |
|
|
- |
|
|
|
47,242 |
|
|
|
1,817 |
|
|
|
- |
|
|
|
49,059 |
|
Other income, net |
|
|
827,393 |
|
|
|
- |
|
|
|
22,527 |
|
|
|
(827,393 |
) |
|
|
22,527 |
|
|
|
|
Income before taxes |
|
|
827,393 |
|
|
|
501,743 |
|
|
|
326,144 |
|
|
|
(827,887 |
) |
|
|
827,393 |
|
Income taxes |
|
|
336,985 |
|
|
|
198,454 |
|
|
|
138,744 |
|
|
|
(337,198 |
) |
|
|
336,985 |
|
|
|
|
Net income |
|
$ |
490,408 |
|
|
$ |
303,289 |
|
|
$ |
187,400 |
|
|
$ |
(490,689 |
) |
|
$ |
490,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
Consolidated |
|
Year Ended April 30, 2005 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Revenues |
|
$ |
- |
|
|
$ |
1,871,703 |
|
|
$ |
2,565,496 |
|
|
$ |
(17,180 |
) |
|
$ |
4,420,019 |
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenues |
|
|
- |
|
|
|
404,053 |
|
|
|
1,595,199 |
|
|
|
(184 |
) |
|
|
1,999,068 |
|
Cost of other revenues |
|
|
- |
|
|
|
417,508 |
|
|
|
30,513 |
|
|
|
- |
|
|
|
448,021 |
|
Selling, general and administrative |
|
|
- |
|
|
|
447,688 |
|
|
|
487,419 |
|
|
|
(14,430 |
) |
|
|
920,677 |
|
|
|
|
|
|
|
- |
|
|
|
1,269,249 |
|
|
|
2,113,131 |
|
|
|
(14,614 |
) |
|
|
3,367,766 |
|
|
|
|
Operating income |
|
|
- |
|
|
|
602,454 |
|
|
|
452,365 |
|
|
|
(2,566 |
) |
|
|
1,052,253 |
|
Interest expense |
|
|
- |
|
|
|
59,247 |
|
|
|
3,293 |
|
|
|
(173 |
) |
|
|
62,367 |
|
Other income, net |
|
|
1,017,715 |
|
|
|
17,277 |
|
|
|
10,552 |
|
|
|
(1,017,715 |
) |
|
|
27,829 |
|
|
|
|
Income before taxes |
|
|
1,017,715 |
|
|
|
560,484 |
|
|
|
459,624 |
|
|
|
(1,020,108 |
) |
|
|
1,017,715 |
|
Income taxes |
|
|
393,805 |
|
|
|
218,869 |
|
|
|
175,862 |
|
|
|
(394,731 |
) |
|
|
393,805 |
|
|
|
|
Net income |
|
$ |
623,910 |
|
|
$ |
341,615 |
|
|
$ |
283,762 |
|
|
$ |
(625,377 |
) |
|
$ |
623,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
Consolidated |
|
Year Ended April 30, 2004 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Revenues |
|
$ |
- |
|
|
$ |
1,844,772 |
|
|
$ |
2,419,446 |
|
|
$ |
(16,338 |
) |
|
$ |
4,247,880 |
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenues |
|
|
- |
|
|
|
372,582 |
|
|
|
1,422,567 |
|
|
|
(283 |
) |
|
|
1,794,866 |
|
Cost of other revenues |
|
|
- |
|
|
|
357,350 |
|
|
|
25,168 |
|
|
|
- |
|
|
|
382,518 |
|
Selling, general and administrative |
|
|
- |
|
|
|
368,725 |
|
|
|
493,114 |
|
|
|
(15,682 |
) |
|
|
846,157 |
|
|
|
|
|
|
|
- |
|
|
|
1,098,657 |
|
|
|
1,940,849 |
|
|
|
(15,965 |
) |
|
|
3,023,541 |
|
|
|
|
Operating income |
|
|
- |
|
|
|
746,115 |
|
|
|
478,597 |
|
|
|
(373 |
) |
|
|
1,224,339 |
|
Interest expense |
|
|
- |
|
|
|
66,931 |
|
|
|
4,287 |
|
|
|
- |
|
|
|
71,218 |
|
Other income, net |
|
|
1,162,975 |
|
|
|
- |
|
|
|
9,854 |
|
|
|
(1,162,975 |
) |
|
|
9,854 |
|
|
|
|
Income before taxes |
|
|
1,162,975 |
|
|
|
679,184 |
|
|
|
484,164 |
|
|
|
(1,163,348 |
) |
|
|
1,162,975 |
|
Income taxes |
|
|
462,523 |
|
|
|
263,456 |
|
|
|
199,216 |
|
|
|
(462,672 |
) |
|
|
462,523 |
|
|
|
|
Income before change in accounting |
|
|
700,452 |
|
|
|
415,728 |
|
|
|
284,948 |
|
|
|
(700,676 |
) |
|
|
700,452 |
|
Cumulative effect of change in accounting |
|
|
(6,359 |
) |
|
|
- |
|
|
|
(6,359 |
) |
|
|
6,359 |
|
|
|
(6,359 |
) |
|
|
|
Net income |
|
$ |
694,093 |
|
|
$ |
415,728 |
|
|
$ |
278,589 |
|
|
$ |
(694,317 |
) |
|
$ |
694,093 |
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
Consolidated |
|
April 30, 2006 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Cash & cash equivalents |
|
$ |
- |
|
|
$ |
151,561 |
|
|
$ |
542,797 |
|
|
$ |
- |
|
|
$ |
694,358 |
|
Cash &
cash equivalents - restricted |
|
|
- |
|
|
|
377,445 |
|
|
|
16,624 |
|
|
|
- |
|
|
|
394,069 |
|
Receivables from customers,
brokers and dealers, net |
|
|
- |
|
|
|
496,577 |
|
|
|
- |
|
|
|
- |
|
|
|
496,577 |
|
Receivables, net |
|
|
161 |
|
|
|
128,123 |
|
|
|
374,904 |
|
|
|
- |
|
|
|
503,188 |
|
Intangible assets and goodwill, net |
|
|
- |
|
|
|
387,194 |
|
|
|
932,752 |
|
|
|
- |
|
|
|
1,319,946 |
|
Investments in subsidiaries |
|
|
5,237,611 |
|
|
|
215 |
|
|
|
456 |
|
|
|
(5,237,611 |
) |
|
|
671 |
|
Other assets |
|
|
- |
|
|
|
2,116,900 |
|
|
|
463,966 |
|
|
|
(540 |
) |
|
|
2,580,326 |
|
|
|
|
Total assets |
|
$ |
5,237,772 |
|
|
$ |
3,658,015 |
|
|
$ |
2,331,499 |
|
|
$ |
(5,238,151 |
) |
|
$ |
5,989,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable to customers,
brokers and dealers |
|
$ |
- |
|
|
$ |
781,303 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
781,303 |
|
Long-term debt |
|
|
- |
|
|
|
398,001 |
|
|
|
19,538 |
|
|
|
- |
|
|
|
417,539 |
|
Other liabilities |
|
|
2 |
|
|
|
1,042,611 |
|
|
|
1,599,881 |
|
|
|
- |
|
|
|
2,642,494 |
|
Net intercompany advances |
|
|
3,089,971 |
|
|
|
(355,358 |
) |
|
|
(2,734,567 |
) |
|
|
(46 |
) |
|
|
- |
|
Stockholders equity |
|
|
2,147,799 |
|
|
|
1,791,458 |
|
|
|
3,446,647 |
|
|
|
(5,238,105 |
) |
|
|
2,147,799 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,237,772 |
|
|
$ |
3,658,015 |
|
|
$ |
2,331,499 |
|
|
$ |
(5,238,151 |
) |
|
$ |
5,989,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
Consolidated |
|
April 30, 2005 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Cash & cash equivalents |
|
$ |
- |
|
|
$ |
162,983 |
|
|
$ |
937,230 |
|
|
$ |
- |
|
|
$ |
1,100,213 |
|
Cash &
cash equivalents - restricted |
|
|
- |
|
|
|
488,761 |
|
|
|
28,148 |
|
|
|
- |
|
|
|
516,909 |
|
Receivables from customers,
brokers and dealers, net |
|
|
- |
|
|
|
590,226 |
|
|
|
- |
|
|
|
- |
|
|
|
590,226 |
|
Receivables, net |
|
|
101 |
|
|
|
122,908 |
|
|
|
218,697 |
|
|
|
- |
|
|
|
341,706 |
|
Intangible assets and goodwill, net |
|
|
- |
|
|
|
421,036 |
|
|
|
842,003 |
|
|
|
- |
|
|
|
1,263,039 |
|
Investments in subsidiaries |
|
|
4,851,680 |
|
|
|
210 |
|
|
|
449 |
|
|
|
(4,851,680 |
) |
|
|
659 |
|
Other assets |
|
|
- |
|
|
|
1,484,164 |
|
|
|
241,532 |
|
|
|
(392 |
) |
|
|
1,725,304 |
|
|
|
|
Total assets |
|
$ |
4,851,781 |
|
|
$ |
3,270,288 |
|
|
$ |
2,268,059 |
|
|
$ |
(4,852,072 |
) |
|
$ |
5,538,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable to customers,
brokers and dealers |
|
$ |
- |
|
|
$ |
950,684 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
950,684 |
|
Long-term debt |
|
|
- |
|
|
|
896,591 |
|
|
|
26,482 |
|
|
|
- |
|
|
|
923,073 |
|
Other liabilities |
|
|
2 |
|
|
|
532,562 |
|
|
|
1,182,459 |
|
|
|
8 |
|
|
|
1,715,031 |
|
Net intercompany advances |
|
|
2,902,511 |
|
|
|
(641,611 |
) |
|
|
(2,262,818 |
) |
|
|
1,918 |
|
|
|
- |
|
Stockholders equity |
|
|
1,949,268 |
|
|
|
1,532,062 |
|
|
|
3,321,936 |
|
|
|
(4,853,998 |
) |
|
|
1,949,268 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,851,781 |
|
|
$ |
3,270,288 |
|
|
$ |
2,268,059 |
|
|
$ |
(4,852,072 |
) |
|
$ |
5,538,056 |
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s) |
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
Consolidated |
|
Year Ended April 30, 2006 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Net cash provided by (used in) operating activities: |
|
$ |
66,667 |
|
|
$ |
(2,937 |
) |
|
$ |
521,956 |
|
|
$ |
- |
|
|
$ |
585,686 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received on residual interests |
|
|
- |
|
|
|
80,539 |
|
|
|
- |
|
|
|
- |
|
|
|
80,539 |
|
Mortgage loans originated and held for investment |
|
|
- |
|
|
|
(407,538 |
) |
|
|
- |
|
|
|
- |
|
|
|
(407,538 |
) |
Purchases of property & equipment |
|
|
- |
|
|
|
(59,824 |
) |
|
|
(190,686 |
) |
|
|
- |
|
|
|
(250,510 |
) |
Payments made for business acquisitions |
|
|
- |
|
|
|
(2,939 |
) |
|
|
(209,604 |
) |
|
|
- |
|
|
|
(212,543 |
) |
Net intercompany advances |
|
|
245,169 |
|
|
|
- |
|
|
|
- |
|
|
|
(245,169 |
) |
|
|
- |
|
Other, net |
|
|
- |
|
|
|
80,486 |
|
|
|
21,061 |
|
|
|
- |
|
|
|
101,547 |
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
245,169 |
|
|
|
(309,276 |
) |
|
|
(379,229 |
) |
|
|
(245,169 |
) |
|
|
(688,505 |
) |
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term debt |
|
|
- |
|
|
|
(6,790,463 |
) |
|
|
(258,418 |
) |
|
|
- |
|
|
|
(7,048,881 |
) |
Proceeds from issuance of short-term debt |
|
|
- |
|
|
|
6,790,463 |
|
|
|
258,418 |
|
|
|
- |
|
|
|
7,048,881 |
|
Payments on acquisition debt |
|
|
- |
|
|
|
- |
|
|
|
(26,819 |
) |
|
|
- |
|
|
|
(26,819 |
) |
Dividends paid |
|
|
(160,031 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(160,031 |
) |
Acquisition of treasury shares |
|
|
(260,312 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(260,312 |
) |
Proceeds from issuance of common stock |
|
|
108,507 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
108,507 |
|
Net intercompany advances |
|
|
- |
|
|
|
286,253 |
|
|
|
(531,422 |
) |
|
|
245,169 |
|
|
|
- |
|
Other, net |
|
|
- |
|
|
|
14,538 |
|
|
|
21,081 |
|
|
|
- |
|
|
|
35,619 |
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(311,836 |
) |
|
|
300,791 |
|
|
|
(537,160 |
) |
|
|
245,169 |
|
|
|
(303,036 |
) |
|
|
|
Net decrease in cash and cash equivalents |
|
|
- |
|
|
|
(11,422 |
) |
|
|
(394,433 |
) |
|
|
- |
|
|
|
(405,855 |
) |
Cash and cash equivalents at beginning of the year |
|
|
- |
|
|
|
162,983 |
|
|
|
937,230 |
|
|
|
- |
|
|
|
1,100,213 |
|
|
|
|
Cash and cash equivalents at end of the year |
|
$ |
- |
|
|
$ |
151,561 |
|
|
$ |
542,797 |
|
|
$ |
- |
|
|
$ |
694,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. |
|
|
BFC |
|
|
Other |
|
|
|
|
|
|
Consolidated |
|
Year Ended April 30, 2005 |
|
(Guarantor) |
|
|
(Issuer) |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
H&R Block |
|
|
Net cash provided by operating activities: |
|
$ |
39,134 |
|
|
$ |
122,311 |
|
|
$ |
352,348 |
|
|
$ |
- |
|
|
$ |
513,793 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received on residual interests |
|
|
- |
|
|
|
136,045 |
|
|
|
- |
|
|
|
- |
|
|
|
136,045 |
|
Purchases of property & equipment |
|
|
- |
|
|
|
(66,255 |
) |
|
|
(143,203 |
) |
|
|
- |
|
|
|
(209,458 |
) |
Payments made for business acquisitions |
|
|
- |
|
|
|
- |
|
|
|
(37,621 |
) |
|
|
- |
|
|
|
(37,621 |
) |
Net intercompany advances |
|
|
497,774 |
|
|
|
- |
|
|
|
- |
|
|
|
(497,774 |
) |
|
|
- |
|
Other, net |
|
|
- |
|
|
|
33,710 |
|
|
|
18,914 |
|
|
|
- |
|
|
|
52,624 |
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
497,774 |
|
|
|
103,500 |
|
|
|
(161,910 |
) |
|
|
(497,774 |
) |
|
|
(58,410 |
) |
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term debt |
|
|
- |
|
|
|
(5,941,623 |
) |
|
|
- |
|
|
|
- |
|
|
|
(5,941,623 |
) |
Proceeds from issuance of short-term debt |
|
|
- |
|
|
|
5,941,623 |
|
|
|
- |
|
|
|
- |
|
|
|
5,941,623 |
|
Repayments of long-term debt |
|
|
- |
|
|
|
(250,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(250,000 |
) |
Proceeds from issuance of long-term debt |
|
|
- |
|
|
|
395,221 |
|
|
|
- |
|
|
|
- |
|
|
|
395,221 |
|
Payments on acquisition debt |
|
|
- |
|
|
|
- |
|
|
|
(25,664 |
) |
|
|
- |
|
|
|
(25,664 |
) |
Dividends paid |
|
|
(142,988 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(142,988 |
) |
Acquisition of treasury shares |
|
|
(530,022 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(530,022 |
) |
Proceeds from issuance of common stock |
|
|
136,102 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
136,102 |
|
Net intercompany advances |
|
|
- |
|
|
|
(324,424 |
) |
|
|
(173,350 |
) |
|
|
497,774 |
|
|
|
- |
|
Other, net |
|
|
- |
|
|
|
(16,813 |
) |
|
|
6,249 |
|
|
|
- |
|
|
|
(10,564 |
) |
|
|
|
Net cash provided by (used in) financing activities |
|
|
(536,908 |
) |
|
|
(196,016 |
) |
|
|
(192,765 |
) |
|
|
497,774 |
|
|
|
(427,915 |
) |
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
- |
|
|
|
29,795 |
|
|
|
(2,327 |
) |
|
|
- |
|
|
|
27,468 |
|
Cash and cash equivalents at beginning of the year |
|
|
- |
|
|
|
133,188 |
|
|
|
939,557 |
|
|
|
- |
|
|
|
1,072,745 |
|
|
|
|
Cash and cash equivalents at end of the year |
|
$ |
- |
|
|
$ |
162,983 |
|
|
$ |
937,230 |
|
|
$ |
- |
|
|
$ |
1,100,213 |
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
163,464 |
|
|
$ |
624,217 |
|
|
$ |
- |
|
|
$ |
852,463 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received on residual interests |
|
|
- |
|
|
|
193,606 |
|
|
|
- |
|
|
|
- |
|
|
|
193,606 |
|
Purchases of property & equipment |
|
|
- |
|
|
|
(35,482 |
) |
|
|
(88,344 |
) |
|
|
- |
|
|
|
(123,826 |
) |
Payments made for business acquisitions |
|
|
- |
|
|
|
- |
|
|
|
(280,865 |
) |
|
|
- |
|
|
|
(280,865 |
) |
Net intercompany advances |
|
|
473,521 |
|
|
|
- |
|
|
|
- |
|
|
|
(473,521 |
) |
|
|
- |
|
Other, net |
|
|
- |
|
|
|
66,046 |
|
|
|
17,653 |
|
|
|
- |
|
|
|
83,699 |
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
473,521 |
|
|
|
224,170 |
|
|
|
(351,556 |
) |
|
|
(473,521 |
) |
|
|
(127,386 |
) |
|
|
|
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 |
|
|
- |
|
|
|
18,850 |
|
|
|
12,831 |
|
|
|
- |
|
|
|
31,681 |
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(538,303 |
) |
|
|
(434,627 |
) |
|
|
(66,216 |
) |
|
|
473,521 |
|
|
|
(565,625 |
) |
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
- |
|
|
|
(46,993 |
) |
|
|
206,445 |
|
|
|
- |
|
|
|
159,452 |
|
Cash and cash equivalents at beginning of the year |
|
|
- |
|
|
|
180,181 |
|
|
|
733,112 |
|
|
|
- |
|
|
|
913,293 |
|
|
|
|
Cash and cash equivalents at end of the year |
|
$ |
- |
|
|
$ |
133,188 |
|
|
$ |
939,557 |
|
|
$ |
- |
|
|
$ |
1,072,745 |
|
|
|
|
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have established disclosure controls and procedures (Disclosure Controls) to ensure that
information required to be disclosed in the Companys reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange Commissions rules and forms. Disclosure Controls are
also designed to ensure that such information is accumulated and communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our Disclosure Controls were designed to provide reasonable assurance that the controls and
procedures would meet their objectives. Our management, including the Chief Executive Officer and
Chief Financial 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 simple 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 Chief Executive Officer and
Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our Disclosure Controls were effective as of the end of the period
covered by this Annual Report on Form 10-K.
80
(b) MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of April 30, 2006.
Based on our assessment, management concluded that, as of April 30, 2006, the Companys
internal control over financial reporting was effective based on the criteria set forth by COSO.
The Companys external auditors, KPMG LLP, an independent registered public accounting firm,
have issued an audit report on our assessment of the Companys internal control over financial
reporting. This report appears in Item 8.
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter of fiscal year 2006, we completed remediation efforts
relating to a material weakness in our controls over accounting for income taxes that was reported
as of April 30, 2005. In addition to control enhancements identified in our previously filed
reports on Form 10-Q, management implemented additional improvements to controls in the state
income tax rate calculation process to incorporate the use of current period pro forma federal and
state taxable income calculations and the use of current and projected state apportionment factors,
among other data inputs.
Other than the changes outlined above, there were no changes that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None.
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, 2006, 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. We intend to provide information on our website
regarding amendments to, or waivers from, the code of business ethics and conduct.
81
Information about our executive officers as of May 15, 2006 is as follows:
|
|
|
|
|
|
Name, age |
|
Current position |
|
Business experience since May 1, 2001 |
|
Mark A. Ernst, age 47
|
|
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. Mr. Ernst has been a Member of
the Board of Directors since September 1999. |
|
William L. Trubeck, age 59
|
|
Executive Vice President and Chief Financial
Officer
|
|
Executive Vice President and Chief Financial
Officer since October 2004; Executive Vice
President - Western Group of Waste
Management, Inc. from April 2003 until October
2004; Chief Administrative Officer of Waste
Management, Inc. from May 2002 until April
2003; Chief Financial Officer of Waste
Management, Inc., from March 2000 to April
2003. |
|
Jeffrey E. Nachbor, age 41
|
|
Senior Vice President and Corporate Controller
|
|
Senior Vice President and Corporate Controller
since October 2005; Senior Vice President and
Chief Financial Officer of Sharper Image
Corporation from February 2005 until October
2005; Senior Vice President, Corporate
Controller of Staples, Inc., from April 2003
to February 2005; Vice President of Finance of
Victorias Secret Direct, a Division of
Limited Brands, Inc., from December 2000 to
April 2003. |
|
Robert E. Dubrish, age 54
|
|
President and Chief Executive Officer, Option
One Mortgage Corporation
|
|
President and Chief Executive Officer, Option
One Mortgage Corporation, since March 1996. |
|
Timothy C. Gokey, age 44
|
|
President, Retail Tax Services
|
|
President, Retail Tax Services since June
2004; McKinsey & Company from 1986 until June
2004. |
|
Brad C. Iversen, age 56
|
|
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 53
|
|
Vice President, Communications
|
|
Vice President, Communications since July 1999. |
|
Steve L. Nadon, age 49
|
|
President, Consumer Financial Services Group
|
|
President, Consumer Financial Services Group
since March 2006; Executive Vice President and
Chief Operating Officer of Option One Mortgage
Corporation from January 1998 to March 2006. |
|
82
|
|
|
|
|
|
Name, age |
|
Current position |
|
Business experience since May 1, 2001 |
|
Tammy S. Serati, age 47
|
|
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. |
|
Becky S. Shulman, age 41
|
|
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 56
|
|
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. |
|
Steven Tait, age 46
|
|
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. |
|
Robert A. Weinberger,
age 61
|
|
Vice President, Government Relations
|
|
Vice President, Government Relations, since March 1996. |
|
Marc West, age 46
|
|
Senior Vice President and Chief Information Officer
|
|
Senior Vice President and Chief Information Officer since
September 2004; Senior Vice President and Chief Information
Officer of Electronic Arts Inc. from 2000 until September
2004. |
|
Bret G. Wilson, age 47
|
|
Vice President and Secretary
|
|
Vice President and Secretary since October 2002; Vice
President, Corporate Development and Risk Management from
October 2000 until October 2002. |
|
|
|
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, 2006, 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, 2006, 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, 2006, in the section titled
Employee Agreements, Change in Control and Other Arrangements, and is incorporated herein by
reference.
83
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, 2006, in the section titled
Audit Fees, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
Documents filed as part of this Report: |
|
1. |
|
The following financial statements appearing in Item 8: Consolidated
Statements of Income and Comprehensive Income; 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: |
|
10.6 |
|
The H&R Block Executive Performance Plan. |
|
10.38 |
|
Agreement of Settlement dated April 19, 2006 among HSBC Finance Corporation,
HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company, Inc., H&R Block,
Inc., H&R Block Services, Inc., H&R Block Tax Services, Inc., Block Financial
Corporation, HRB Royalty, Inc., H&R Block Eastern Enterprises, Inc., and Lynne A.
Carnegie. |
|
10.70 |
|
Amendment Number Seven, dated April 28, 2006, to Indenture between Option One
Owner Trust 2001-1A and Wells Fargo Bank, N.A. |
|
10.77 |
|
Amendment Number Eight, dated April 28, 2006, to Indenture between Option One
Owner Trust 2001-1B and Wells Fargo Bank, N.A. |
|
12 |
|
Computation of Ratio of Earnings to Fixed Charges for the five years ended April 30, 2006. |
|
21 |
|
Subsidiaries of the Company. |
|
23.1 |
|
Consent of KPMG 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 Chief Financial 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 Chief Financial 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.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
H&R BLOCK, INC.
Mark A. Ernst
Chairman of the Board, President and
Chief Executive Officer
June 30, 2006
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 on June 30, 2006.
Mark A. Ernst
Chairman of the Board, President, Chief Executive
Officer and Director (principal executive officer)
Thomas M. Bloch
Director
Jerry D. Choate
Director
Donna R. Ecton
Director
Henry F. Frigon
Director
Roger W. Hale
Director
Len J. Lauer
Director
David B. Lewis
Director
Tom D. Seip
Director
Louis W. Smith
Director
Rayford Wilkins, Jr.
Director
William L. Trubeck
Executive Vice President and Chief Financial
Officer (principal financial officer)
Jeffrey E. Nachbor
Senior Vice President and Corporate
Controller
(principal accounting officer)
85
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 Companys quarterly report on Form 10-Q for the quarter ended October 31, 2004,
file number 1-6089, are incorporated herein by reference. |
3.2
|
|
Certificate of Amendment of Articles of Incorporation effective September 30, 2004, filed as
Exhibit 3.1 to the Companys quarterly report on Form 10-Q for the quarter ended October 31,
2004, 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,
filed as Exhibit 3.3 to the Companys annual report on Form 10-K for the year ended April 30,
2004, file number 1-6089, is incorporated herein by reference. |
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 Companys 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 Companys current report on Form 8-K dated April 13, 2000, file number 1-6089, is
incorporated herein by reference. |
4.3
|
|
Officers Certificate, dated October 26, 2004, in respect of 5.125% Notes due 2014 of Block
Financial Corporation, filed as Exhibit 4.1 to the Companys current report on Form 8-K dated
October 21, 2004, file number 1-6089, is incorporated herein by reference. |
4.4
|
|
Form of 81/2% Senior Note due 2007 of Block Financial Corporation, filed as Exhibit 4(b) to the
Companys current report on Form 8-K dated April 13, 2000, file number 1-6089, is incorporated
herein by reference. |
4.5
|
|
Form of 5.125% Note due 2014 of Block Financial Corporation, filed as Exhibit 4.2 to the
Companys current report on Form 8-K dated October 21, 2004, file number 1-6089, is
incorporated herein by reference. |
4.6
|
|
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 Companys
Registration Statement on Form 8-A, file number 1-6089, is incorporated herein by reference. |
4.7
|
|
Form of Certificate of Designation, Preferences and Rights of Participating Preferred Stock
of H&R Block, Inc., filed as Exhibit 4(e) to the Companys annual report on Form 10-K for the
fiscal year ended April 30, 1995, file number 1-6089, is incorporated by reference. |
4.8
|
|
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 Companys
annual report on Form 10-K for the fiscal year ended April 30, 1998, file number 1-6089, is
incorporated by reference. |
4.9
|
|
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 Companys 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 Companys 2003 Long-Term Executive Compensation Plan, as amended and restated as of
September 10, 2003, filed as Exhibit 10.2 to the Companys quarterly report on Form 10-Q for
the quarter ended |
|
|
October 31, 2003, file number 1-6089, is incorporated by reference. |
10.2
|
* |
Form of 2003 Long-Term Executive Compensation Plan Award Agreement, filed as Exhibit 10.2
to the Companys annual report on Form 10-K for the year ended April 30, 2005, 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 Companys 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 Companys 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 companys 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 Executive Performance Plan. |
10.7
|
* |
Summary of Non-Employee Director Compensation and Benefits, filed as Exhibit 10.1 to the
Companys current report on Form 8-K dated March 1, 2006, file number 1-6089, is incorporated
herein by reference. |
10.8
|
* |
Description of Executive Officer Cash Compensation, filed as Exhibit 10.8 to the Companys
quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is
incorporated herein by reference. |
10.9
|
* |
The Companys 1989 Stock Option Plan for Outside Directors, as amended and restated as of
September 8, 2004, filed as Exhibit 10.5 to the Companys quarterly report on Form 10-Q for
the quarter ended October 31, 2004, file number 1-6089, is incorporated herein by reference. |
10.10
|
* |
Form of 1989 Stock Option Plan for Outside Directors Stock Option Agreement, filed as
Exhibit 10.9 to the Companys annual report on Form 10-K for the year ended April 30, 2005,
file number 1-6089, is incorporated by reference. |
10.11
|
* |
The H&R Block Stock Plan for Non-Employee Directors, as amended |
|
|
August 1, 2001, filed as Exhibit 10.3 to the Companys quarterly report on Form
10-Q for the quarter ended October 31, 2001, file number 1-6089, is
incorporated herein by reference. |
10.12
|
* |
The H&R Block, Inc. 2000 Employee Stock
Purchase Plan, as amended August 1, 2001,
filed as Exhibit 10.2 to the Companys
quarterly report on Form 10-Q for the
quarter ended October 31, 2001, file number
1-6089, is incorporated herein by reference. |
10.13
|
* |
The H&R Block, Inc. Executive Survivor Plan
(as Amended and Restated) filed as Exhibit
10.4 to the Companys quarterly report on |
86
|
|
|
|
|
Form 10-Q for the quarter ended October 31, 2000, file number 1-6089, is
incorporated herein by reference. |
10.14
|
* |
First Amendment to the H&R Block, Inc.
Executive Survivor Plan (as Amended and
Restated), filed as Exhibit 10.9 to the
Companys annual report on Form 10-K for the
fiscal year ended April 30, 2002, file
number 1-6089, is incorporated by reference. |
10.15
|
* |
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 companys
annual report on Form 10-K for the fiscal
year ended April 30, 2003, file number
1-6089, is incorporated herein by reference. |
10.16
|
* |
Employment Agreement dated July 16, 1998,
between the Company and Mark A. Ernst, filed
as Exhibit 10(a) to the Companys quarterly
report on Form 10-Q for the quarter ended
July 31, 1998, file number 1-6089, is
incorporated herein by reference. |
10.17
|
* |
Amendment to Employment Agreement dated June
30, 2000, between HRB Management, Inc. and
Mark A. Ernst, filed as Exhibit 10.1 to the
Companys quarterly report on Form 10-Q for
the quarter ended July 31, 2000, file number
1-6089, is incorporated herein by reference. |
10.18
|
* |
Employment Agreement dated as of October 4, 2004 between HRB Management, Inc. and William
L. Trubeck, filed as Exhibit 10.2 to the Companys current report on Form 8-K/A Amendment No.
1 dated September 9, 2004, file number 1-6089, is incorporated herein by reference. |
10.19
|
|
Employment Agreement dated as of February 2, 2004, between HRB Management, Inc. and Nicholas
J. Spaeth, filed as Exhibit 10.16 to the companys annual report on Form 10-K for the fiscal
year ended April 30, 2004, file number 1-6089, is incorporated herein by reference. |
10.20
|
* |
Employment Agreement dated September 2, 2003, between HRB Management, Inc. and Brad C.
Iversen, filed as Exhibit 10.1 to the Companys quarterly report on Form 10-Q for the quarter
ended January 31, 2004, file number 1-6089, is incorporated herein by reference. |
10.21
|
* |
Employment Agreement between Option One Mortgage Corporation and Robert E. Dubrish,
executed on February 9, 2002, filed as Exhibit 10.2 to the Companys quarterly report on Form
10-Q for the quarter ended January 31, 2002, file number 1-6089, is incorporated herein by reference. |
10.22
|
* |
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. |
10.23
|
* |
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. |
10.24
|
* |
Employment Agreement dated as of September 15, 2004 between HRB Management, Inc. and Marc
West, filed as Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended October
31, 2004, file number 1-6089, is incorporated herein by reference. |
10.25
|
* |
Employment Agreement dated as of June 28, 2004 between H&R Block Services, Inc. and Timothy
C. Gokey, filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the quarter ended
July 31, 2004, file number 1-6089, is incorporated herein by reference. |
10.26
|
* |
Employment Agreement dated September 27, 2005 between HRB Management, Inc. and Jeff
Nachbor, filed as Exhibit 10.10 to the quarterly report on Form 10-Q for the quarter ended
October 31, 2005, file number 1-6089, is incorporated herein by reference. |
10.27
|
* |
Form of Indemnification Agreement
for directors, filed as Exhibit 10.1 to the Companys
current report on Form 8-K dated December 14, 2005, file number 1-6089, is incorporated herein by reference. |
10.28
|
|
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. |
10.29
|
|
Fourth Amended and Restated Refund Anticipation Loan Participation Agreement dated as of
December 31, 2004, between Block Financial Corporation, HSBC Taxpayer Financial Services, Inc.
and Household Tax Masters Acquisition Corporation, filed as Exhibit 10.2 to the quarterly
report on Form 10-Q for the quarter ended January 31, 2005, file number 1-6089, is
incorporated herein by reference. |
10.30
|
|
2004 Amendment to Second Amended and Restated Refund Anticipation Loan Operations Agreement
dated as of August 20, 2004, by and among H&R Block Services, Inc., Household Tax Masters,
Inc., and Beneficial Franchise Company, filed as Exhibit 10.3 to the quarterly report on Form
10-Q for the quarter ended October 31, 2004, file number 1-6089, is incorporated herein by
reference.** |
10.31
|
|
Second Amendment to Second Amended and Restated Refund Anticipation Loan Operations
Agreement dated as of August 31, 2005 among H&R Block Services, Inc., H&R Block Tax Services,
Inc. HRB Royalty, Inc. HSBC Taxpayer Financial Services, Inc., HSBC Bank USA, National
Association and Beneficial Franchise Company filed as Exhibit 10.23 to the quarterly report on
Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein
by reference.** |
10.32
|
|
HSBC Retail Settlement Products Distribution Agreement dated as of September 23, 2005, among
HSBC Bank USA, National Association, HSBC Taxpayer Financial Services Inc., Beneficial
Franchise Company Inc., Household Tax Masters Acquisition Corporation, H&R Block Services,
Inc., H&R Block Tax Services, Inc., H&R Block Enterprises, Inc., H&R Block Eastern
Enterprises, Inc., H&R Block Digital Tax Solutions, LLC, H&R Block Associates, L.P., HRB
Royalty, Inc., HSBC Finance Corporation and H&R Block, Inc., filed as Exhibit 10.14 to the
quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is
incorporated herein by reference. ** |
10.33
|
|
HSBC Digital Settlement Products Distribution Agreement dated as of September 23, 2005,
among HSBC Bank USA, National Association, HSBC Taxpayer Financial Services Inc., H&R Block
Digital Tax Solutions, LLC, and H&R Block Services, Inc., filed as Exhibit 10.15 to the
quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is
incorporated herein by reference. ** |
10.34
|
|
HSBC Refund Anticipation Participation Agreement dated as of September 23, 2005, among
Household Tax Masters Acquisition |
87
|
|
|
|
|
Corporation, Block Financial Corporation, HSBC Bank USA, National Association and HSBC Taxpayer
Financial Services Inc., filed as Exhibit 10.16 to the quarterly report on Form 10-Q for the
quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference. ** |
10.35
|
|
HSBC Settlement Products Servicing Agreement dated as of September 23, 2005, among HSBC Bank
USA, National Association, HSBC Taxpayer Financial Services Inc., Household Tax Masters
Acquisition Corporation and Block Financial Corporation, filed as Exhibit 10.17 to the
quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is
incorporated herein by reference. ** |
10.36
|
|
HSBC Program Appendix of Defined Terms and Rules of Construction, filed as Exhibit 10.18 to
the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089,
is incorporated herein by reference. ** |
10.37
|
|
Agreement of Settlement dated December 23, 2005 among H&R Block, Inc., H&R Block Services,
Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc., H&R Block
Eastern Enterprises, Inc., Deadra D. Cummins, Ivan and La Donna Bell, Levon Mitchell, Geral
Mitchell, Joyce Green, Lynn Becker, Justin Sevey, Maryanne Hoekman and Renea Griffith, filed
as Exhibit 10.5 to the quarterly report on Form 10-Q for the quarter ended January 31, 2006,
file number 1-6089, is incorporated herein by reference.* |
10.38
|
|
Agreement of Settlement dated April 19, 2006 among HSBC Finance Corporation, HSBC Taxpayer
Financial Services Inc., Beneficial Franchise Company, Inc., H&R Block, Inc., H&R Block
Services, Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc.,
H&R Block Eastern Enterprises, Inc., and Lynne A. Carnegie. |
10.39
|
|
Amended and Restated Five-Year Credit and Guarantee Agreement dated as of August 10, 2005
among Block Financial Corporation, H&R Block, Inc.,. the lenders party thereto, Bank of
America, N.A., HSBC Bank USA, National Association, Royal Bank of Scotland PLC, JPMorgan Chase
Bank, N.A., and J.P Morgan Securities Inc., filed as Exhibit 10.3 to the quarterly report on
Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein
by reference. |
10.40
|
|
Five-Year Credit and Guarantee Agreement dated as of August 10, 2005 among Block Financial
Corporation, H&R Block, Inc., the lenders party thereto, Bank of America, N.A., HSBC Bank USA,
National Association, The Royal Bank of Scotland PLC, JPMorgan Chase Bank, N.A. and J.P.
Morgan Securities, Inc., filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the
quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference. |
10.41
|
|
License Agreement dated as of June 30, 2004 by and between Sears, Roebuck and Co. and H&R
Block Services, Inc., filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the
quarter ended July 31, 2004, file number 1-6089, is incorporated herein by reference. |
10.42
|
|
Other Income License Agreement (Products and/or Services) dated September 15, 2005 between
Wal*Mart Stores, Inc. and H&R Block Services, Inc., filed as Exhibit 10.9 to the Companys
quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is
incorporated by reference |
10.43
|
|
Standard Form of Agreement Between Owner and Designer/Builder dated as of May 5, 2003 by and
between H&R Block Tax Services, Inc. and J.E. Dunn Construction Company, filed as Exhibit 10.2
to the quarterly report on Form 10-Q for the quarter ended October 31, 2004, file number
1-6089, is incorporated herein by reference. |
10.44
|
|
Sale and Servicing Agreement dated as of June 1, 2005 among Option One Mortgage Corporation,
Option One Loan Warehouse Corporation, Option One Owner Trust 2005-6 and Wells Fargo Bank,
N.A., filed as Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended July
31, 2005, file number 1-6089, is incorporated herein by reference. |
10.45
|
|
Note Purchase Agreement dated as of June 1, 2005 among Option One Loan Warehouse
Corporation, Option One Owner Trust 2005-6 and Lehman Brothers Bank., filed as Exhibit 10.2 to
the quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is
incorporated herein by reference. |
10.46
|
|
Indenture dated as of June 1, 2005 between Option One Owner Trust 2005-6 and Wells Fargo
Bank, N.A., filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended
July 31, 2005, file number 1-6089, is incorporated herein by reference. |
10.47
|
|
Fourth Amended and Restated Loan Purchase and Contribution Agreement dated as of September
1, 2005 between Option One Loan Warehouse Corporation and Option One Mortgage Corporation,
filed as Exhibit 10.22 to the quarterly report on Form 10-Q for the quarter ended October 31,
2005, file number 1-6089, is incorporated herein by reference. |
10.48
|
|
Amended and Restated Sales and Servicing Agreement dated November 12, 2004 among Option One
Owner Trust 2003-5, Option One Loan Warehouse Corporation, Option One Mortgage Corporation and
Wells Fargo Bank, N.A., filed as Exhibit 10.4 to the quarterly report on Form 10-Q for the
quarter ended January 31, 2005, file number 1-6089, is incorporated herein by reference. |
10.49
|
|
Amendment Number One to the Amended and Restated Sale and Servicing Agreement dated November
11, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option
One Owner Trust 2003-5 and Wells Fargo Bank, N.A., filed as Exhibit 10.1 to the quarterly
report on Form 10-Q for the quarter ended January 31, 2006, file number 1-6089, is
incorporated herein by reference. |
10.50
|
|
Note Purchase Agreement dated November 14, 2003 between Option One Owner Trust 2003-5,
Option One Loan Warehouse Corporation and Citigroup Global Markets Realty Corp., filed as
Exhibit 10.5 to the quarterly report on Form 10-Q for the quarter ended January 31, 2005, file
number 1-6089, is incorporated herein by reference. |
10.51
|
|
Amendment Number One to the Note Purchase Agreement, dated November 14, 2004, among Option
One Owner Trust 2003-5, Option One Loan Warehouse Corporation and Citigroup Global Markets
Realty Corp., filed as Exhibit 10.6 to the quarterly report on Form 10-Q for the quarter ended
January 31, 2005, file number 1-6089, is incorporated herein by reference. |
10.52
|
|
Indenture dated as of November 1, 2003 between Option One Owner Trust 2003-5 and Wells Fargo
Bank Minnesota, National Association, filed as Exhibit 10.7 to the quarterly report on Form
10-Q for the quarter ended January 31, 2005, file number 1-6089, is incorporated herein by
reference. |
10.53
|
|
Second Amended and Restated Sale and Servicing Agreement dated as of March 8, 2005 among
Option One Owner Trust 2001-2, Option One Loan Warehouse Corporation, Option One Mortgage
Corporation and Wells Fargo Bank Minnesota, National Association, |
88
|
|
|
|
|
filed as Exhibit 10.40 to the Companys annual report on Form 10-K for the year ended April 30,
2005, file number, 1-6089, is incorporated by reference. |
10.54
|
|
Amendment No. 1 to Second Amended and Restated Sale and Servicing Agreement dated March 8,
2005 among Option One Owner Trust 2001-2, Option One Mortgage Corporation, Option One Loan
Warehouse Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.4 to the Companys
quarterly report on Form 10-Q for the quarter ended July 31, 2005, file number, 1-6089, is
incorporated by reference. |
10.55
|
|
Amendment Number Two to the Second Amended and Restated Sale and Servicing Agreement dated
March 8, 2005 among Option One Owner Trust 2001-2, Option One Loan Warehouse Corporation,
Option One Mortgage Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.12 to the
Companys quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number,
1-6089, is incorporated by reference. |
10.56
|
|
Amendment Number Three to the Second Amended and Restated Sale and Servicing Agreement dated
March 8, 2005 among Option One Owner Trust 2001-2, Option One Loan Warehouse Corporation,
Option One Mortgage Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.12 to the
Companys quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number,
1-6089, is incorporated by reference. |
10.57
|
|
Amendment Number Four to the Second Amended and Restated Sale and Servicing Agreement dated
March 8, 2005 among Option One Owner Trust 2001-2, Option One Loan Warehouse Corporation,
Option One Mortgage Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.2 to the
Companys quarterly report on Form 10-Q for the quarter ended January 31, 2006, file number,
1-6089, is incorporated by reference. |
10.58
|
|
Amended and Restated Note Purchase Agreement dated as of November 25, 2003, among Option One
Owner Trust 2001-2, Option One Loan Warehouse Corporation and Bank of America, N.A., filed as
Exhibit 10.11 to the quarterly report on Form 10-Q for the quarter ended January 31, 2005,
file number 1-6089, is incorporated herein by reference. |
10.59
|
|
Amendment Number Seven to Amended and Restated Note Purchase Agreement, dated November 25,
2005, among Option One Loan Warehouse Corporation, Option One Owner Trust 2001-2 and Bank of
America, N.A., filed as Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter
ended January 31, 2006, file number 1-6089, is incorporated herein by reference. |
10.60
|
|
Amended and Restated Indenture dated as of November 25, 2003 between Option One Owner Trust
2001-2 and Wells Fargo Bank Minnesota, National Association, filed as Exhibit 10.14 to the
quarterly report on Form 10-Q for the quarter ended January 31, 2005, file number 1-6089, is
incorporated herein by reference. |
10.61
|
|
Amendment Number Eight to the Amended and Restated Indenture dated as of November 25, 2003
between Option One Owner Trust 2001-2 and Wells Fargo Bank Minnesota, N.A., filed as Exhibit
10.4 to the quarterly report on Form 10-Q for the quarter ended January 31, 2006, file number
1-6089, is incorporated herein by reference. |
10.62
|
|
Letter Agreement dated as of April 1, 2000 among Option One Mortgage Corporation and Bank of
America N.A., filed as Exhibit 10.15 to the quarterly report on Form 10-Q for the quarter
ended January 31, 2005, file number 1-6089, is incorporated by reference. |
10.63
|
|
Amended and Restated Note Purchase Agreement dated as of March 18, 2005 among Option One
Owner Trust 2002-3, UBS Real Estate Securities Inc. and Option One Mortgage Corporation, filed
as Exhibit 10.46 to the Companys annual report on Form 10-K for the year ended April 30,
2005, file number, 1-6089, is incorporated by reference. |
10.64
|
|
Amended and Restated Sale and Servicing Agreement dated as of March 18, 2005, among Option
One Owner Trust 2002-3, Option One Loan Warehouse Corporation, Option One Mortgage Corporation
and Wells Fargo Bank, N.A., filed as Exhibit 10.47 to the Companys annual report on Form 10-K
for the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. |
10.65
|
|
Omnibus Amendment No. 1 dated as of September 8, 2005 among Option One Mortgage Corporation,
Option One Owner Trust 2002-3 and Wells Fargo Bank, N.A. , filed as Exhibit 10.8 to the
Companys quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number
1-6089, is incorporated by reference. |
10.66
|
|
Second Amended and Restated Sale and Servicing Agreement dated as of April 29, 2005 among
Option One Owner Trust 2001-1A, Option One Loan Warehouse Corporation, Option One Mortgage
Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.48 to the Companys annual report
on Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by
reference. |
10.67
|
|
Amendment Number One to Second Amended and Restated Sale and Servicing Agreement dated as of
April 29, 2005 among Option One Owner Trust 2001-1A, Option One Loan Warehouse Corporation,
Option One Mortgage Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.6 to the
quarterly report of Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is
incorporated herein by reference. |
10.68
|
|
Indenture dated as of April 1, 2001 between Option One Owner Trust 2001-1A and Wells Fargo
Bank Minnesota, National Association, filed as Exhibit 10.49 to the Companys annual report on
Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by
reference. |
10.69
|
|
Amendment Number Four, dated April 16, 2004, to Indenture between Option One Owner Trust
2001-1A and Wells Fargo Bank Minnesota, National Association, as amended and restated through
and including November 25, 2003, filed as Exhibit 10.50 to the Companys annual report on Form
10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. |
10.70
|
|
Amendment Number Seven, dated April 28, 2006, to Indenture between Option One Owner Trust
2001-1A and Wells Fargo Bank N.A. |
10.71
|
|
Amended and Restated Note Purchase Agreement dated as of April 16, 2004, among Option One
Owner Trust 2001-1A, Option One Loan Warehouse Corporation and Greenwich Capital Financial
Products, Inc., filed as Exhibit 10.53 to the Companys annual report on Form 10-K for the
year ended April 30, 2005, file number, 1-6089, is incorporated by reference. |
10.72
|
|
Amendment No. 1 to Amended and Restated Note Purchase Agreement dated as of April 29, 2005
among Option One Owner Trust 2001-1A, Greenwich Capital Financial Products, Inc. and |
89
|
|
|
|
|
Option One Loan Warehouse Corporation, filed as Exhibit 10.54 to the Companys annual report on
Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. |
10.73
|
|
Second Amended and Restated Sale and Servicing Agreement dated as of April 29, 2005 among
Option One Owner Trust 2001-1B, Option One Loan Warehouse Corporation, Option One Mortgage
Corporation and Wells Fargo Bank, N.A. filed as Exhibit 10.55 to the Companys annual report
on Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by
reference. |
10.74
|
|
Amendment Number One to Second Amended and Restated Sale and Servicing Agreement dated as of
April 29, 2005 among Option One Owner Trust 2001-1B, Option One Loan Warehouse Corporation,
Option One Mortgage Corporation and Wells Fargo Bank, N.A., filed as Exhibit 10.7 to the
quarterly report of Form 10-Q for the quarter ended July 31, 2005, file number 1-6089, is
incorporated herein by reference. |
10.75
|
|
Indenture dated as of April 1, 2001 between Option One Owner Trust 2001-1B and Wells Fargo
Bank Minnesota, National Association, filed as Exhibit 10.56 to the Companys annual report on
Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by
reference. |
10.76
|
|
Amendment Number Five, dated April 16, 2004, to Indenture between Option One Owner Trust
2001-1B and Wells Fargo Bank Minnesota, National Association, as amended and restated through
and including November 25, 2003, filed as Exhibit 10.57 to the Companys annual report on Form
10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. |
10.77
|
|
Amendment Number Eight, dated April 28, 2006, to Indenture between Option One Owner Trust
2001-1B and Wells Fargo Bank N.A., |
10.78
|
|
Amended and Restated Note Purchase Agreement dated as of April 16, 2004, among Option One
Owner Trust 2001-1B, Option One Loan Warehouse Corporation and Steamboat Funding Corporation,
filed as Exhibit 10.60 to the Companys annual report on Form 10-K for the year ended April
30, 2005, file number, 1-6089, is incorporated by reference. |
10.79
|
|
Amendment No. 1 to Amended and Restated Note Purchase Agreement dated as of April 29, 2005
among Option One Owner Trust 2001-1B, Steamboat Funding Corporation and Option One Loan
Warehouse Corporation, filed as Exhibit 10.61 to the Companys annual report on Form 10-K for
the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. |
10.80
|
|
Amended and Restated Sale and Servicing Agreement dated as of August 5, 2005 among Option
One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2003-4
and Wells Fargo Bank Minnesota, National Association, filed as Exhibit 10.1 to the quarterly
report on Form 10-Q for the quarter ended October 31, 2006, file number 1-6089, is
incorporated herein by reference. |
10.81
|
|
Indenture dated as of August 8, 2003 between Option One Owner Trust 2003-4 and Wells Fargo
Bank Minnesota, National Association, filed as Exhibit 10.65 to the Companys annual report on
Form 10-K for the year ended April 30, 2005, file number 1-6089, is incorporated by reference. |
10.82
|
|
Amended and Restated Note Purchase Agreement dated as of August 5, 2005 among Option One
Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2003-4,
Falcon Asset Securitization Corporation, Jupiter Securitization Corporation, Preferred
Receivables Funding Corporation, financial institutions thereto and JP Morgan Chase Bank, N.A.,
filed as Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended October 31,
2006, file number 1-6089, is incorporated herein by reference. |
10.83
|
|
Sale and Servicing Agreement dated as of September 1, 2005 among Option One Mortgage
Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2005-7 and Wells
Fargo Bank, filed as Exhibit 10.5 to the Companys quarterly report on Form 10-Q for the
quarter ended October 31, 2005, file number 1-6089, is incorporated by reference. |
10.84
|
|
Note Purchase Agreement dated as of September 1, 2005 between Option One Loan Warehouse
Corporation, Option One Owner Trust 2005-7, HSBC Securities (USA) Inc., HSBC Bank USA, N.A.,
Bryant Park Funding LLC and HSBC Securities (USA) Inc., filed as Exhibit 10.6 to the Companys
quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is
incorporated by reference. |
10.85
|
|
Indenture dated as of September 1, 2005 between Option One Owner Trust 2005-7 and Wells
Fargo Bank, N.A. , filed as Exhibit 10.7 to the Companys quarterly report on Form 10-Q for
the quarter ended October 31, 2005, file number 1-6089, is incorporated by reference. |
10.86
|
|
Sale and Servicing Agreement dated as of October 1, 2005 among Option One Mortgage
Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2005-8 and Wells
Fargo Bank, N.A., filed as Exhibit 10.19 to the Companys quarterly report on Form 10-Q for
the quarter ended October 31, 2005, file number 1-6089, is incorporated by reference. |
10.87
|
|
Note Purchase Agreement dated as of October 1, 2005 among Option One Loan Warehouse
Corporation, Option One Owner Trust 2005-8 and Merril Lynch Bank USA, filed as Exhibit 10.20
to the Companys quarterly report on Form 10-Q for the quarter ended October 31, 2005, file
number 1-6089, is incorporated by reference. |
10.88
|
|
Indenture dated as of October 1, 2005 between Option One Owner Trust 2005-8 and Wells Fargo
Bank, N.A. , filed as Exhibit 10.21 to the Companys quarterly report on Form 10-Q for the
quarter ended October 31, 2005, file number 1-6089, is incorporated by reference. |
10.89
|
|
Sale and Servicing Agreement dated as of December 30, 2005 among Option One Mortgage
Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2005-9 and Wells
Fargo Bank, N.A., filed as Exhibit 10.6 to the Companys quarterly report on Form 10-Q for the
quarter ended January 31, 2006, file number 1-6089, is incorporated by reference. |
10.90
|
|
Note Purchase Agreement dated as of December 30, 2005 among Option One Loan Warehouse
Corporation, Option One Owner Trust 2005-9 DB Structured Products, Inc., Gemini Securitization
Corp., LLC, Aspen Funding Corp. and Newport Funding Corp., filed as Exhibit 10.7 to the
Companys quarterly report on Form 10-Q for the quarter ended January 31, 2006, file number
1-6089, is incorporated by reference. |
10.91 |
|
Indenture dated as of December 30, 2005 between Option One Owner Trust 2005-9 and Wells
Fargo Bank, N.A. , filed as Exhibit 10.8 to the Companys quarterly report on Form 10-Q for
the quarter ended January 31, 2006, file number 1-6089, is incorporated by reference. |
12 |
|
Computation of Ratio of Earnings to Fixed Charges for the five years ended April 30, 2006. |
21 |
|
Subsidiaries of the Company. |
23.1 |
|
Consent of KPMG 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 Chief Financial 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 Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
by Section 906 of the Sarbanes-Oxley Act of 2002. |
* |
|
Indicates management contracts, compensatory plans or arrangements. |
** |
|
Confidential Information has been omitted from this exhibit and filed separately with the
Commission pursuant to a confidential treatment request under Rule 24b-2. |
90
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 29, 2006, we reported on the consolidated balance sheets
of H&R Block, Inc. and its subsidiaries (the
Company) as of April 30, 2006 and 2005, and the related consolidated statements of income and
comprehensive income, stockholders equity, and cash flows for each of the years in the three-year
period ended April 30, 2006, which are included in the Companys annual report filed on Form 10-K.
In connection with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule for each of the years in the three-year period ended April 30, 2006, 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. and its subsidiaries 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 Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, during the year ended April 30, 2004.
/s/
KPMG LLP
Kansas City, Missouri
June 29, 2006
H&R BLOCK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2006, 2005 AND 2004
|
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|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
|
|
|
Beginning of |
|
Costs and |
|
|
|
|
|
Balance at |
Description |
|
Period |
|
Expenses |
|
Deductions (1) |
|
End of Period |
Allowance for
Doubtful Accounts -
deducted from
accounts receivable
in the balance
sheet |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
35,352,000 |
|
|
$ |
39,746,000 |
|
|
$ |
8,835,000 |
|
|
$ |
66,263,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
37,424,000 |
|
|
$ |
52,221,000 |
|
|
$ |
54,293,000 |
|
|
$ |
35,352,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
14,329,000 |
|
|
$ |
53,663,000 |
|
|
$ |
30,568,000 |
|
|
$ |
37,424,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability related
to Mortgage
Services
restructuring
charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
- |
|
|
$ |
12,624,000 |
|
|
$ |
5,066,000 |
|
|
$ |
7,558,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deductions from the Allowance for Doubtful Accounts reflect recoveries and charge-offs.
Deductions from the restructuring charge liability represent payments made. |