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territories at higher royalty rates, resulted in a 5.9% increase in associated with RAL participations, which was not incurred in the
royalty revenue. prior year due to the waiver agreement. Intangible amortization
Revenues earned during fiscal year 2004 in connection with increased $9.0 million from the acquisition of assets of former
RAL participations totaled $168.4 million. These revenues are major franchisees. Marketing costs increased $20.7 million as a
approximately $30.1 million higher than waiver fees earned result of additional brand advertising campaigns. Allocated
during fiscal year 2003. See discussion of the waiver below. Our information technology costs increased $13.9 million as a result
RAL participation revenues benefited from the new company- of additional technology projects. These increases were partially
owned operations in former major franchise territories. We offset by a $62.4 million decrease in legal expenses, which is
participate in RALs at a rate of nearly 50% for company-owned primarily a result of the Texas RAL litigation settlement and other
offices compared to 25% in major franchise offices. This cases in the prior year. See discussion in ‘‘RAL Litigation’’ below.
increased participation rate caused our revenues to increase, Pretax income for fiscal year 2004 increased $81.8 million, or
although the number of RALs declined. 14.7%, over 2003. The segment’s operating margin improved fifty
During fiscal year 2003, we entered into an agreement with basis points to 29.1% in fiscal year 2004. Excluding the 2003 RAL
Household, whereby we waived our right to purchase any litigation reserve, pretax income increased 6.7% and our
participation interests in and receive license fees for RALs during operating margin declined 160 basis points.
the period January 1 through April 30, 2003. In consideration for
waiving these rights we received a series of payments from RAL LITIGATION ⬎⬎⬎ In fiscal year 2003, we announced a
Household in fiscal year 2003, subject to certain adjustments in settlement had been reached in the cases Ronnie and Nancy
fiscal year 2004 based on delinquency rates. See discussion in Haese, et al. v. H&R Block, Inc., et al., Case No. CV96-4213,
Item 1, ‘‘RAL Participations and 2003 Tax Season Waiver.’’ District Court of Kleberg County, Texas (Haese I) and Ronnie
A total of 3.8 million software units were sold during fiscal year and Nancy Haese, et al. v. H&R Block, Inc., et al., Case
2004, an increase of 11.2% compared to 3.4 million units in 2003. No. CV-99-314-D, District Court of Kleberg County, Texas (Haese
Revenues from software sales in fiscal year 2004 increased 11.5% II), filed originally as one action on July 30, 1996. As a result of
as a result of the higher sales volume. that settlement, we recorded a liability and pretax expense of
Cost of services for fiscal year 2004 increased $78.2 million, or $43.5 million during fiscal year 2003. This represented our best
7.4%, from 2003. This increase was partially attributable to the estimate of our share of the settlement, plaintiff class legal fees
operation of former major franchise territories as company- and expenses, tax products and associated mailing expenses. Our
owned. Compensation and benefits increased $80.5 million as a share of the settlement is less than the total amount awarded due
result of the former major franchise acquisitions, increased field to amounts recoverable from a co-defendant in the case.
wages during the later part of the tax season and $13.7 million in We have been named as a defendant in a number of lawsuits
expenses for stock options awarded to seasonal tax associates. alleging that we engaged in wrongdoing with respect to the RAL
Occupancy and equipment costs increased $30.5 million due program. We believe we have strong defenses to the various RAL
primarily to a 5.7% increase in the average rent and a 3.4% Cases and will vigorously defend our position. Nevertheless, the
increase in the number of U.S. offices under lease. Depreciation amounts claimed by the plaintiffs are, in some instances, very
and amortization increased as a result of additional equipment substantial, and there can be no assurances as to the ultimate
purchased for new office locations opened during the period. outcome of the pending RAL Cases, or as to the impact of the
Selling, general and administrative expenses increased RAL Cases on our financial statements. See Item 3, ‘‘Legal
$77.3 million over 2003 due to $33.3 million in bad debt expense Proceedings,’’ for additional information.
H&R BLOCK 2005 Form 10K
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