HR Block 2006 Annual Report Download - page 102

H&R Block tax clients. During fiscal year 2006, we signed a new interest at one-month LIBOR plus 140 to 200 basis points. As of April 30,
agreement with HSBC under which HSBC and its designated bank will 2006 and 2005, the balance outstanding under this facility was
provide funding of all RALs offered through June 2011. If HSBC and its $1.6 million and $4.4 million, respectively, and is included in accounts
designated bank do not continue to provide funding for RALs, we could payable, accrued expenses and other current liabilities on the
seek other RAL lenders to continue offering RALs to our clients or consolidated balance sheets.
consider alternative funding strategies. We believe that a number of We believe the sources of liquidity available to the Mortgage Services
suitable lenders would be available to replace HSBC should the segment are sufficient for its needs. Risks to the stability of these
need arise. sources include, but are not limited to, adverse changes in the
We also believe that the RAL program is productive for the Company perception of the non-prime industry, adverse changes in the regulation
and a useful service for our customers. The RAL program is regularly of non-prime lending, changes in the rating criteria of non-prime lending
reviewed both from a business perspective and to ensure compliance by third-party rating agencies and, to a lesser degree, reduction in the
with applicable state and federal laws. It is our intention to continue to availability of third parties who provide credit enhancement. Past
offer the RAL program in the foreseeable future. performance of the securitizations will also impact the segment’s future
Loss of the RAL program could adversely affect our operating results. participation in these markets. The off-balance sheet warehouse
In addition to the loss of revenues and income directly attributable to facilities used by the Trusts are subject to annual renewal, each at a
the RAL program, the inability to offer RALs could indirectly result in different time during the year, and any of the above events could lead to
the loss of retail tax clients and associated tax preparation revenues, difficulty in renewing the lines. These risks are mitigated by a staggering
unless we were able to take mitigating actions. Total revenues related to of the renewal dates related to these warehouse lines and through the
the RAL program (including revenues from participation interests) were use of multiple lending institutions to secure these lines.
$179.3 million for the year ended April 30, 2006, representing 3.7% of BUSINESS SERVICES –Business Services funding requirements are
consolidated revenues and contributed $106.5 million to the segment’s largely related to receivables for completed work and ‘‘work in
pretax results. Revenues related to the RAL program totaled process.’’ We provide funding in the normal course of business
$182.6 million for the year ended April 30, 2005, representing 4.1% of sufficient to cover these working capital needs. Business Services also
consolidated revenues and contributed $101.3 million to the segment’s has future obligations and commitments, which are summarized in the
pretax results. tables below under ‘‘Contractual Obligations and Commercial
Our international operations are generally self-funded. Cash balances Commitments.’’
are held in Canada, Australia and the United Kingdom independently in This segment generated $31.3 million in operating cash flows
local currencies. H&R Block Canada, Inc. (Block Canada) has a primarily related to net income. Additionally, Business Services used
commercial paper program for up to $225.0 million (Canadian). At $221.1 million in investing activities primarily related to the acquisition
April 30, 2006, there was no commercial paper outstanding. The peak of American Express Tax and Business Services, Inc. and contingent
borrowing during fiscal year 2006 was $133.0 million (Canadian). payments on prior acquisitions, and $23.6 million in financing activities
MORTGAGE SERVICES –This segment primarily generates cash as a as a result of payments on acquisition debt.
result of the sale and securitization of mortgage loans and residual INVESTMENT SERVICES –Investment Services, through HRBFA, is
interests and as its residual interests mature. Mortgage Services used subject to regulatory requirements intended to ensure the general
$123.9 million in cash from operating activities primarily due to higher financial soundness and liquidity of broker-dealers.
MSR balances and mortgage loans held for sale. This segment also used HRBFA is required to maintain minimum net capital as defined under
$309.3 million in cash from investing activities primarily related to loans Rule 15c3-1 of the Securities Exchange Act of 1934 and complies with
originated for transfer to the H&R Block Bank, partially offset by cash the alternative capital requirement, which requires a broker-dealer to
received from the maturity and sales of available-for-sale residual maintain net capital equal to the greater of $1,000,000 or 2% of the
interests. We regularly sell loans as a source of liquidity. Loan sales in combined aggregate debit balances arising from customer transactions.
fiscal year 2006 were $40.3 billion compared with $31.0 billion in fiscal The net capital rule also provides that equity capital may not be
year 2005. Additionally, Block Financial Corporation (BFC) provides a withdrawn or cash dividends paid if resulting net capital would be less
line of credit of at least $150 million for working capital needs. At the end than the greater of 5% of combined aggregate debit items or 120% of the
of fiscal year 2006 there was $372.6 million outstanding on this facility. minimum required net capital. At the end of fiscal year 2006, HRBFA’s
WAREHOUSE FUNDING. See discussion of our non-prime warehouse net capital of $121.7 million, which was 22.9% of aggregate debit items,
facilities below in ‘‘Off-Balance Sheet Financing Arrangements.’’ exceeded its minimum required net capital of $10.6 million by
To finance our prime mortgage loan originations, we use a warehouse $111.1 million. During fiscal year 2006, H&R Block Financial
facility with capacity up to $25 million. This annual facility bears Corporation, HRBFA’s direct corporate parent, contributed $5.0 million
32
H&R BLOCK 2006 Form 10K