HR Block 2006 Annual Report Download - page 134

We are responsible for servicing mortgage loans for others of one-half percent per annum on the unused portion of the commitment.
$62.9 billion and subservicing loans of $10.5 billion at April 30, 2006. The loan is fully secured by the accounts receivable, work-in-process
We are required, under the terms of our securitizations, to build and fixed assets of M&P.
and/or maintain overcollateralization (OC) to specified levels, using the We are required, in the event of non-delivery of customers’ securities
excess cash flows received, until specified percentages of the owed to us by other broker-dealers or by our customers, to purchase
securitized portfolio are attained. We fund the OC account from the identical securities in the open market. Such purchases could result in
proceeds of the sale. Future cash flows to the residual holder are used losses not reflected in the accompanying consolidated financial statements.
to amortize the bonds until a specific percentage of either the original As of April 30, 2006, we had pledged securities totaling $53.0 million,
or current balance is retained, which is specified in the securitization which satisfied margin deposit requirements of $43.2 million.
agreement. The bondholders’ recourse to us for credit losses is limited We monitor the credit standing of brokers and dealers and customers
to the future excess cash flows and the amount of OC held by the trust. with whom we do business. In addition, we monitor the market value of
Upon maturity of the bonds, any remaining amounts in the trust are collateral held and the market value of securities receivable from
distributed. The estimated future cash flows to be distributed to us are others, and seek to obtain additional collateral if insufficient protection
included as part of the residual valuation and are valued based upon against loss exists.
anticipated distribution from the OC account. As of April 30, 2006 and In December 2005, HRBFA reduced its $125.0 million letter of credit
2005, $358.2 million and $309.5 million, respectively, was maintained in with an unaffiliated financial institution to $1.0 million. This letter of
various OC accounts. These accounts are not assets of the Company credit will be canceled in the first quarter of fiscal year 2007. HRBFA
and are not reflected in the accompanying consolidated financial also has a secured letter of credit with a financial institution with a
statements, other than to the extent potential OC cash flows are credit limit of $50.0 million. There were no borrowings on these letters
included as part of residual interest valuations. of credit during fiscal years 2006 or 2005 and no outstanding balance at
Option One provides a guarantee up to a maximum amount equal to April 30, 2006 or 2005.
approximately 10% of the aggregate principal balance of mortgage loans We have contractual commitments to fund certain franchises
held by the Trusts before ultimate disposition of the loans by the Trusts. requesting Franchise Equity Lines of Credit (FELCs). The commitment
This guarantee would be called upon in the event adequate proceeds to fund FELCs as of April 30, 2006 totaled $75.9 million, with a related
were not available from the sale of the mortgage loans to satisfy the receivable balance of $45.1 million included in the consolidated balance
current or ultimate payment obligations of the Trusts. No losses have sheets. The receivable represents the amount drawn on the FELCs as of
been sustained on this commitment since its inception. The total April 30, 2006.
principal amount of Trust obligations outstanding as of April 30, 2006 We are self-insured for certain risks, including certain employee
and 2005 was $7.8 billion and $6.7 billion, respectively. The fair value of health and benefit, workers’ compensation, property and general
mortgage loans held by the Trusts as of April 30, 2006 and 2005 was liability claims, and claims related to our POM program. We issued three
$7.9 billion and $6.8 billion, respectively. At April 30, 2006 and 2005, we standby letters of credit to servicers paying claims related to our POM,
recorded liabilities of $1.7 million and $0.9 million, respectively, which errors and omissions and worker’s compensation insurance policies.
were included in accounts payable, accrued expenses and other current These letters of credit are for amounts not to exceed $16.5 million,
liabilities in the consolidated balance sheets. $3.5 million and $0.9 million, respectively. At April 30, 2006 there were
We have various contingent purchase price obligations in connection no balances outstanding on these letters of credit.
with prior acquisitions. In many cases, contingent payments to be made During fiscal year 2004, we announced plans to construct a new
in connection with these acquisitions are not subject to a stated limit. world headquarters facility in downtown Kansas City, Missouri. We
We estimate the potential payments (undiscounted) total approximately expect the remaining expenditure associated with this building to be
$24.5 million as of April 30, 2006. Our estimate is based on current approximately $63.9 million, which will be paid out during fiscal
financial conditions. Should actual results differ materially from the year 2007.
assumptions, the potential payments will differ from the above estimate. During fiscal year 2006, we entered into a transaction with the City of
Such payments, if and when paid, would typically be recorded as Kansas City, Missouri, to provide us with sales and property tax savings
additional purchase price, generally goodwill. on the furniture, fixtures and equipment for our new corporate
Commitments exist to loan M&P the lower of the value of their headquarters facility. Under the transaction, the City purchased
accounts receivable, work-in-process and fixed assets or $75.0 million, equipment by issuing $5.3 million in industrial revenue bonds due in
on a revolving basis through January 31, 2011, subject to certain December 2015, and leased the furniture, fixtures and equipment to us
termination clauses. This revolving facility bears interest at prime rate for an identical term under a capital lease. The City’s bonds were
plus two percent on the outstanding amount and a commitment fee of purchased by us. Because the City has assigned the lease to the bond
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H&R BLOCK 2006 Form 10K