H&R Block Denies Rumors of Financial Distress

Trading in H&R Block's stock was temporarily halted last week to give the company time to respond to rumors that it faces potentially devastating litigation and settlements in connection with its refund anticipation loans.

The company responded in a statement, saying it has not lost any of the more than 20 class action lawsuits filed against it involving the refund anticipation loan program. It added that the lawsuits will not materially affect its financial statements or cause it to change its product offerings.

But the statement also disclosed, apparently for the first time, that Block paid $12.5 million to settle a class-action lawsuit related to tax-refund loans last year and it now faces additional lawsuits, including one that sources say could present a potential $2 billion off-balance-sheet liability that is more than the company's net worth. Critics have charged that these disclosures should have been made sooner in a Form 8-K.

Under its controversial refund anticipation loan program, Block arranges loans to customers in advance of their income-tax refunds. The loans are made by Household International, a separate finance company, but Block collects a nine-dollar fee per referral. Last year the company generated $160 million of revenue from arranging these loans, a 78% increase since 2000. (Wall Street Journal, "Concerns About Lawsuits Send Block Shares Skidding," November 1, 2002.)

Reports have also surfaced that Block's financial condition is further threatened by its risky subprime mortgage business – a business that accounted for nearly half of the company's pretax earnings during its last fiscal year. Block executives have said the concerns are overblown.

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