HR Block 2009 Annual Report Download

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H&R BLOCK
2009 ANNUAL REPORT
PREPARING AMERICA’S TAXES SINCE 1955

Table of contents

  • Page 1
    H&R BLOCK P RE PARI NG AME RI CA' S TAXES SINCE 1955 2009 ANNU A L R E P O RT

  • Page 2
    ...President of the Board University Academy Kansas City, MO RUSSEL P. SMYTH President and Chief Executive Officer H&R Block, Inc. Kansas City, MO ROBERT A. GERARD General Partner and Investment Manager GFP, L.P. Southampton, NY ALAN M. BENNETT Retired Chief Financial Officer Aetna, Inc. Madison, CT...

  • Page 3
    ...Identification No.) One H&R Block Way, Kansas City, Missouri 64105 (Address of principal executive offices, including zip code) (816) 854-3000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange...

  • Page 4
    ... Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services PART IV Exhibits and Financial Statement Schedules...

  • Page 5
    .... Major revenue sources include fees earned for tax preparation services performed at company-owned retail tax offices, royalties from franchise retail tax offices, sales of tax-related services, sales of tax preparation and other software, online tax preparation fees, H&R BLOCK 2009 Form 10K 1

  • Page 6
    ... franchisor of tax preparation businesses, for an aggregate cash purchase price of $5.7 million. This acquisition added 249 offices to our network, which continue to operate under the ExpressTax brand. There are currently 368 offices operating under the ExpressTax brand. 2 H&R BLOCK 2009 Form 10K

  • Page 7
    ... 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. We also offer our clients many online options: multiple versions of do-it-yourself tax preparation; professional tax review...

  • Page 8
    .... Our digital tax solutions businesses compete with a number of companies. Intuit, Inc. is the largest supplier of tax preparation software and online tax preparation services. There are many smaller competitors in the online market, as well as free state-sponsored online filing programs. Price and...

  • Page 9
    ... attest and other services related to client financial statements. Through a number of agreements with these Attest Firms, we provide accounting, payroll, human resources, marketing and other administrative services to the Attest Firms. We receive a management fee for these services. We also have...

  • Page 10
    ... Prepaid Emerald MasterCard» and Emerald Advance lines of credit through our Tax Services segment. HRB Bank also offers traditional banking services including prepaid debit card accounts, checking and savings accounts, individual retirement accounts and certificates of deposit. Segment revenues...

  • Page 11
    ... control or its ability to accurately forecast or predict, or could adversely affect our operating results and the value of any investment in our stock. Other factors besides those listed below or discussed in reports filed with the SEC could adversely affect our results. H&R BLOCK 2009 Form 10K 7

  • Page 12
    ... addition to mortgage loans, we also extend secured and unsecured credit to other customers, including RALs and Emerald Advance lines of credit to our tax preparation customers. We may incur significant losses on credit we extend, which in turn could reduce our profitability. Our access to liquidity...

  • Page 13
    ... 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, RALs and H&R BLOCK 2009 Form 10K 9

  • Page 14
    ...Our digital tax solutions businesses also compete with in-office tax preparation services and a number of online and software companies, primarily on the basis of price and functionality. Federal and certain state taxing authorities currently offer, or facilitate the offer of, tax return preparation...

  • Page 15
    ...made under such indemnification agreements. These representations and warranties vary based on the nature of the transaction and the buyer's requirements but generally pertain to the ownership of the loan, the property securing the loan and compliance with applicable laws H&R BLOCK 2009 Form 10K 11

  • Page 16
    ...our financial statements. PEACE OF MIND LITIGATION - We are defendants in lawsuits regarding our Peace of Mind program (collectively, the "POM Cases"), under which our applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation...

  • Page 17
    ... financial statements. SECURITIES LITIGATION - On April 6, 2007, a putative class action styled In re H&R Block Securities Litigation (Case No. 06-0236-CV-W-ODS) was filed against the Company and certain of its officers in the United States District Court for the Western District of Missouri...

  • Page 18
    ... our RSM McGladrey brand is closely linked to the Attest Firms. The Attest Firms are parties to claims and lawsuits (collectively, "Attest Firm Claims") arising in the normal course of business. Judgments or settlements arising from Attest Firm Claims exceeding the Attest Firms' insurance coverage...

  • Page 19
    ... which plaintiffs seek to represent a class of others similarly situated. Some of these investigations, claims and lawsuits pertain to RALs, the electronic filing of customers' income tax returns, the POM guarantee program, wage and hour claims and investment products. We believe we have meritorious...

  • Page 20
    ... that May be Purchased Under the Plans or Programs(2) $2,000,000 $1,901,419 $1,901,419 5 5,630 1 Of the shares listed above, approximately six thousand shares were purchased in connection with funding employee income tax withholding obligations arising upon the exercise of stock options or the...

  • Page 21
    ... OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our subsidiaries provide tax preparation, retail banking and various business advisory and consulting services. We are the only major company offering a full range of software, online and in-office tax preparation solutions to individual tax clients...

  • Page 22
    ... operations Software Online Free File Alliance Total digital tax solutions Total U.S operations International operations NET AVERAGE FEE PER U.S. TAX RETURN PREPARED Company-owned operations Franchise operations LOAN PRODUCTS : RALs(3): Company-owned operations Franchise operations Emerald Advance...

  • Page 23
    ... 2 to the consolidated financial statements for additional information on this acquisition. Excluding operating results attributable to the acquired franchise operator, tax returns prepared in company-owned offices decreased 7.3% from the prior year and tax preparation fees decreased $32.9 million...

  • Page 24
    ... average fee per U.S. tax return prepared in company-owned offices, and a 1.9% increase in the number of U.S. tax returns prepared in those offices. Our international operations contributed $33.2 million to the increase, resulting from a 6.1% increase in tax returns prepared. Other service revenue...

  • Page 25
    ...by severance costs incurred in the current year. Selling, general and administrative expenses decreased $36.7 million, or 22.6%, primarily due to declines in external consulting fees, allocated corporate and support department costs and travel and entertainment expenses. H&R BLOCK 2009 Form 10K 21

  • Page 26
    ... providing retail banking offerings primarily to Tax Services clients through HRB Bank. HRB Bank offers traditional banking services including prepaid debit card accounts, Emerald Advance lines of credit, checking and savings accounts, individual retirement accounts and certificates of deposit. This...

  • Page 27
    ... income: (dollars in 000s) Average Balance Year Ended April 30, Mortgage loans held for investment, net Emerald Advance lines of credit Investments Deposits, interest-bearing 2009 $839,253 133,252 354,102 863,072 2008 $1,157,360 68,932 196,262 904,836 Average Rate Earned (Paid) 2009 5.14% 35...

  • Page 28
    ... of net interest income: (dollars in 000s) Year Ended April 30, Mortgage loans held for investment, net Emerald Advance lines of credit Investments Deposits, interest-bearing 2008 $1,157,360 68,932 196,262 904,836 Average Balance 2007 $746,387 - 117,350 596,104 Average Rate Earned (Paid) 2008...

  • Page 29
    ... direct corporate parent are presented as discontinued operations in the consolidated financial statements for all periods presented. Our discontinued operations also include our former mortgage loan origination and servicing business, as well as three smaller lines of business previously reported...

  • Page 30
    ... tax rate for discontinued operations was 35.3% and 34.4% for the fiscal years 2008 and 2007, respectively. CRITICAL ACCOUNTING POLICIES We consider the policies discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation...

  • Page 31
    ... discounted cash flow approach and market comparables. 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...

  • Page 32
    ... with confidence. 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. 28 H&R BLOCK 2009 Form 10K

  • Page 33
    ... for an aggregate purchase price of $279.2 million. See Item 8, note 2 to our consolidated financial statements. Total cash received from sales of discontinued operations totaled $304.0 million and $1.1 billion during fiscal years 2009 and 2008, respectively. Mortgage Loans Held for Investment. We...

  • Page 34
    ... customer deposits net of payments on Federal Home Loan Bank (FHLB) borrowings. HRB Bank's current liquidity needs are generally met through deposits from banking clients. HRB Bank has access to traditional funding sources such as deposits, federal funds purchased and repurchase agreements. HRB Bank...

  • Page 35
    ... financial statements for additional information. A summary of our commitments as of April 30, 2009, which may or may not require future payments, are as follows: (in 000s) Total Franchise Equity Lines of Credit Commitment to fund M&P Contingent acquisition payments Other commercial commitments...

  • Page 36
    ... in substantial and unpredictable ways. If enacted, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial 32 H&R BLOCK 2009 Form 10K

  • Page 37
    ...Year Ended April 30, Average Balance Interest-earning assets: Mortgage loans, net Federal funds sold Emerald Advance (1) Available-for-sale investment securities FHLB stock Cash and due from banks Non-interest-earning assets Total HRB Bank assets Interest-bearing liabilities: Customer deposits FHLB...

  • Page 38
    ... market conditions related to a particular geographical location. The table below presents outstanding loans by state for our portfolio of mortgage loans held for investment as of April 30, 2009: (dollars in 000s) Loans Purchased from SCC Florida California New York Wisconsin All others Total $ 68...

  • Page 39
    ...% 5.39% Money market and savings Interest-bearing checking accounts IRAs Certificates of deposit Non-interest-bearing deposits RATIOS - The following table shows certain of HRB Bank's key ratios for fiscal years 2009, 2008 and 2007: Year Ended April 30, Pretax return on assets Net return on equity...

  • Page 40
    ... INTEREST RATE RISK - We have a formal investment policy that strives to minimize the market risk exposure of our cash equivalents and available-for-sale (AFS) securities, which are primarily affected by credit quality and movements in interest rates. These guidelines focus on managing liquidity...

  • Page 41
    ...FHLB stock. See table below for sensitivity analysis of our mortgage-backed securities. HRB Bank's liabilities consist primarily of transactional deposit relationships, such as prepaid debit card accounts and checking accounts. Other liabilities include money market accounts, certificates of deposit...

  • Page 42
    ...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...

  • Page 43
    ... to the consolidated financial statements for the year ended April 30, 2007 for operations discontinued in 2009, as discussed in Note 19 to the consolidated financial statements. Our procedures included (1) obtaining the Company's underlying accounting analysis prepared by management of the...

  • Page 44
    ... REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders H&R Block, Inc. Kansas City, Missouri We have audited the internal control over financial reporting of H&R Block, Inc. and subsidiaries (the "Company") as of April 30, 2009, based on criteria established in Internal Control...

  • Page 45
    ...financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management...

  • Page 46
    ...Ended April 30, REVENUES: Service revenues Other revenues: Product and other revenues Interest income OPERATING EXPENSES: Cost of services Cost of other revenues Selling, general and administrative Operating...) See accompanying notes to consolidated financial statements. 42 H&R BLOCK 2009 Form 10K

  • Page 47
    ... LIABILITIES: Customer banking deposits Accounts payable, accrued expenses and other current liabilities Accrued salaries, wages and payroll taxes Accrued income taxes Current portion of long-term debt Federal Home Loan Bank borrowings Liabilities of discontinued operations, held for sale Total...

  • Page 48
    ... Accounts payable, accrued expenses and other current liabilities Accrued salaries, wages and payroll taxes Accrued income taxes Other noncurrent liabilities Other, net Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Available-for-sale securities: Purchases...

  • Page 49
    ...available-for-sale securities - Proceeds from common stock issuance, net of expenses 8,286 Stock-based compensation - Shares issued for: Option exercises - Nonvested shares - ESPP - Acquisitions - Acquisition of treasury shares - Cash dividends paid - $0.59 per share - Balances at April 30, 2009 444...

  • Page 50
    ... receivable from customers of our Business Services segment, receivables from tax clients for tax return preparation, refund anticipation loan participations and receivables of our franchise financing subsidiary. The allowance for doubtful accounts requires management's 46 H&R BLOCK 2009 Form 10K

  • Page 51
    ... for anticipated prepayments where applicable. We update our estimates of expected cash flows periodically and recognize changes in calculated effective yields as appropriate. Our investment in the stock of the Federal Home Loan Bank (FHLB) is carried at cost, as it is a restricted security, which...

  • Page 52
    ... operations were made during the three-year period ended April 30, 2009. The weighted-average life of intangible assets with finite lives is 28 years. Intangible assets are typically amortized over the estimated useful life of the assets using the straight-line method. MORTGAGE LOAN REPURCHASE...

  • Page 53
    ... on mortgage loans held for investment includes deferred origination fees and costs and purchase discounts and premiums, which are amortized to income over the life of the loan using the interest method. Interest income on Emerald Advance lines of credit is calculated using the average daily balance...

  • Page 54
    ... related to the acquired business have been included in our consolidated financial statements since November 3, 2008. Pro forma results of operations have not been presented as the effects of this acquisition were not material to our results. Goodwill recognized on this 50 H&R BLOCK 2009 Form 10K

  • Page 55
    ... as a business combination. We also periodically sell company-operated offices to franchisees and record a gain if the sale qualifies as a divestiture for accounting purposes and upon determination that collection of the sales proceeds is reasonably assured. Gains are reported in operating income...

  • Page 56
    ...Total Amount 2008 % of Total Adjustable-rate loans Fixed-rate loans Unamortized deferred fees and costs Less: Allowance for loan losses $ 534,943 286,894 821,837 7,135 (84,073) $ 744,899 65% 35% 100% $ 715,919 288,721 1,004,640 7,062 (45,401) $ 966,301 71% 29% 100% 52 H&R BLOCK 2009 Form 10K

  • Page 57
    ... its investment portfolio totaling $5.6 million. Amounts classified as real estate owned as of April 30, 2009 and 2008 totaled $44.5 million and $0.3 million, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The H&R BLOCK 2009 Form 10K...

  • Page 58
    ... operations held for sale in the consolidated balance sheet at that date, as the business was sold in November 2008. In fiscal year 2007, we recorded $154.9 million in goodwill impairments related to the sale or winddown of our discontinued mortgage operations. 54 H&R BLOCK 2009 Form 10K

  • Page 59
    .... NOTE 8: CUSTOMER BANKING DEPOSITS The components of customer banking deposits at April 30, 2009 and 2008 are as follows: (in 000s) April 30, Outstanding Balance Money-market deposits Savings deposits Checking deposits: Interest-bearing Non-interest-bearing IRAs and other time deposits: Due in...

  • Page 60
    .... The obligation is due in 12 years. We entered into a committed line of credit agreement with HSBC Finance Corporation effective January 14, 2009 for use as a funding source for the purchase of RAL participations. This line provided funding totaling $2.5 billion 56 H&R BLOCK 2009 Form 10K

  • Page 61
    ...Payment" (SFAS 123R) requires excess tax benefits from stock-based compensation to be included as a financing activity in the statements of cash flows. As a result, we classified $8.6 million, $3.2 million and $3.2 million as cash inflows from financing activities rather H&R BLOCK 2009 Form 10K 57

  • Page 62
    ... trading dates ending on the date the deferred stock units are granted to the outside directors. Each deferred stock unit granted is vested upon award and the settlement of shares occurs six months after separation of service from the Board of Directors. Our 2000 Employee Stock Purchase Plan (ESPP...

  • Page 63
    ... were used to value options during the periods: Year Ended April 30, Options - management and director: Expected volatility Expected term Dividend yield Risk-free interest rate Weighted-average fair value Options - seasonal: Expected volatility Expected term Dividend yield Risk-free interest rate...

  • Page 64
    ...tax assets: Accrued expenses Allowance for credit losses and related reserves Net operating loss carryovers Other Valuation allowance Current Deferred and stock-based compensation Property and equipment Deferred revenue Basis difference in mortgage-related investment Net operating...BLOCK 2009 Form 10K

  • Page 65
    ... Service (IRS). The consolidated tax returns for the years 1999 - 2005 are at the appellate level. Tax years prior to 1999 are closed by statute. Historically, tax returns in various foreign and state jurisdictions are examined and settled upon completion of the examination. H&R BLOCK 2009 Form 10K...

  • Page 66
    ...value of impaired mortgage loans held for investment are generally based on the lower of (1) the amortized cost adjusted for charge-offs, net of allowance for loan losses, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans 62 H&R BLOCK 2009 Form 10K

  • Page 67
    ... April 30, 2009 are as follows: (in 000s) Carrying Amount Mortgage loans held for investment IRAs and other time deposits Long-term debt $ 744,899 495,379 1,040,904 $ Estimated Fair Value 568,920 494,795 1,000,483 FAIR VALUE OPTION - We adopted Statement of Financial Accounting Standards No. 159...

  • Page 68
    ... to BFC in fiscal year 2009. NOTE 17: COMMITMENTS AND CONTINGENCIES We offer guarantees under our POM program to tax clients whereby we will assume the cost of additional tax assessments, up to a cumulative per client limit of $5,000, attributable to tax return preparation error for which we are...

  • Page 69
    ..., results of operations or liquidity. We issued three standby letters of credit to servicers paying claims related to our POM, errors and omissions, and property and casualty insurance policies. These letters of credit are for amounts not to exceed $6.7 million in the aggregate. At April 30, 2009...

  • Page 70
    ... 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...

  • Page 71
    ...our financial statements. PEACE OF MIND LITIGATION - We are defendants in lawsuits regarding our Peace of Mind program (collectively, the "POM Cases"), under which our applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation...

  • Page 72
    ... RSM McGladrey brand is closely linked to the Attest Firms. The Attest Firms are parties to claims and lawsuits (collectively, "Attest Firm Claims") arising in the normal course of business. Judgments or settlements arising from Attest Firm Claims exceeding the Attest Firms' 68 H&R BLOCK 2009 Form...

  • Page 73
    ... which plaintiffs seek to represent a class of others similarly situated. Some of these investigations, claims and lawsuits pertain to RALs, the electronic filing of customers' income tax returns, the POM guarantee program, wage and hour claims and investment products. We believe we have meritorious...

  • Page 74
    ... or settlements in these Other Claims will not have a material adverse effect on our consolidated operating results, financial position or cash flows. NOTE 19: DISCONTINUED OPERATIONS Effective November 1, 2008, we sold HRB Financial Corporation, including our securities brokerage business formerly...

  • Page 75
    ... HRB Bank offers traditional banking services including checking and savings accounts, lines of credit, individual retirement accounts, certificates of deposit and prepaid debit card accounts. HRB Bank operates through a single stand-alone branch office. HRB Bank offers the H&R Block Prepaid Emerald...

  • Page 76
    Information concerning the Company's operations by reportable segment is as follows: (in 000s) Year Ended April 30, REVENUES: Tax Services Business Services Consumer Financial Services Corporate INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES: Tax Services Business Services Consumer Financial...

  • Page 77
    ... obligations totaling $202.9 million. The accumulation of four quarters in fiscal years 2009 and 2008 for earnings per share may not equal the related per share amounts for the years ended April 30, 2009 and 2008 due to the timing of the exercise of stock options and H&R BLOCK 2009 Form 10K 73

  • Page 78
    .... These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company's investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders...

  • Page 79
    ...Cash & cash equivalents Cash & cash equivalents - restricted Receivables, net Mortgage loans held for investment, net Intangible assets and goodwill, net Investments in subsidiaries Other assets Total assets Customer deposits Long-term debt FHLB borrowings Other liabilities Net intercompany advances...

  • Page 80
    ... for business acquisitions Net intercompany advances Investing cash flows of discontinued operations Other, net Net cash provided by (used in) investing activities Cash flows from financing: Repayments of short-term borrowings Proceeds from short-term borrowings Customer banking deposits, net...

  • Page 81
    ... borrowings Customer banking deposits, net Dividends paid Acquisition of treasury shares Proceeds from stock options Net intercompany advances Financing cash flows of discontinued operations Other, net Net cash used in financing activities Net decrease in cash Cash - beginning of the year Cash - end...

  • Page 82
    ... CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - During the quarter ended April 30, 2009, 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. 78 H&R BLOCK 2009 Form 10K

  • Page 83
    ... ACCOUNTANT FEES AND SERVICES 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, 2009, in the section titled "Audit Fees" and is incorporated herein by reference. H&R BLOCK 2009 Form 10K...

  • Page 84
    ... Form 10-K: 10.18 10.35 10.36 10.37 2008 Deferred Stock Unit Plan for Outside Directors. Administrative Services Agreement dated January 30, 2006, by and among RSM McGladrey, Inc. and McGladrey & Pullen, LLP. Amendment Number One, dated June 1, 2008, to the Administrative Services Agreement dated...

  • Page 85
    ... 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 29, 2009. Russell P. Smyth President, Chief Executive Officer and Director (principal executive officer) Becky...

  • Page 86
    ...2000, among H&R Block, Inc., Block Financial Corporation, Bankers Trust Company and the Bank of New York, filed as Exhibit 4(a) to the Company's current report on Form 8-K dated April 13, 2000, file number 1-6089, is incorporated herein by reference. 4.3 Officer's Certificate, dated October 26, 2004...

  • Page 87
    ... 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. 10.15* Separation and Release Agreement dated January 21, 2009 between RSM McGladrey Business Services and Steven Tait, filed as Exhibit 10.3 to the...

  • Page 88
    ...Sears, Roebuck and Co., filed as Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended July 31, 2007, file number 1-6089, is incorporated herein by reference.** 10.34 Advances, Pledge and Security Agreement dated April 17, 2006, between H&R Block Bank and the Federal Home Loan Bank...

  • Page 89
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  • Page 90
    10%

  • Page 91
    ...Ticker symbol: HRB Upon request, we will furnish without charge to our shareowners a copy of our 2009 Form 10-K as filed with the Securities and Exchange Commission. Requests should be directed by telephone to Investor Relations, 1-800-8699220, option 8, or by mail to One H&R Block Way, Kansas City...

  • Page 92
    H&R BLOCK H&R BLOCK INC One H&R Block Way Kansas City, MO 64105 816.854.3000 www.hrblock.com