HR Block 2007 Annual Report Download - page 41

Public Accounting Firm. Management’s assessment of our internal particularly in home appreciation, continue to decline, our operating
controls over financial reporting may identify deficiencies that need to results, capital levels and liquidity could be negatively impacted during
be addressed in our internal controls over financial reporting or other the periods we continue to own OOMC.
matters that may raise concerns for investors. Should we, or our
independent auditors, determine in future periods that we have a TAXSERVICES
material weaknesses in our internal controls over financial reporting, COMPETITIVE POSITION –Increased competition for tax preparation
our results of operations or financial condition may be adversely clients in our retail offices, online and software channels could
affected and the price of our common stock may decline. adversely affect our current market share and limit our ability to grow
OPERATIONAL RISK –There is a risk of loss resulting from our client base. See clients served statistics included in Item 7, under
inadequate or failed processes or systems, theft or fraud. These can ‘‘Tax Services.’’
occur in many forms including, among others, errors, business REFUND ANTICIPATION LOANS –Changes in government regulation
interruptions, inappropriate behavior of or misconduct by our related to RALs could adversely affect our ability to offer RALs or our
employees or those contracted to perform services for us, and vendors ability to purchase participation interests. Third-party financial
that do not perform in accordance with their contractual agreements. institutions currently originating RALs and similar products could
These events can potentially result in financial losses or other damages. decide to cease or significantly limit such offerings and related
We rely on internal and external information and technological systems collection practices. Changes in IRS practices could adversely affect our
to manage our operations and are exposed to risk of loss resulting from ability to use the IRS debt indicator to limit our bad debt exposure.
breaches in the security, or other failures of these systems. Changes in any of these, as well as possible litigation related to RALs,
Replacement of our major operational systems could have a significant may adversely affect our results of operations. See discussion of RAL
impact on our ability to conduct our core business operations and litigation in Item 3, ‘‘Legal Proceedings.’’
increase our risk of loss resulting from disruptions of normal operating Since July 1996, we have been a party to agreements with HSBC and
processes and procedures that may occur during the implementation of its predecessors to participate in RALs provided by a lending bank to
new information and transaction systems. H&R Block tax clients. During fiscal year 2006, we signed a new
POTENTIAL SALE TRANSACTION –On April 19, 2007, we entered agreement with HSBC under which HSBC and its designated bank will
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into an agreement to sell OOMC. The purchase price to be received in provide funding of all RALs offered through June 2011. We may extend
connection with the sale of OOMC will consist of payments based on this agreement for two successive one-year periods. If HSBC and its
the fair value of the adjusted tangible net assets of OOMC (as defined in designated bank do not continue to provide funding for RALs, we could
the agreement) as of the date of sale less $300.0 million. Because the seek other RAL lenders to continue offering RALs to our clients or
final sale price will be based on third-party bids and valuations received consider alternative funding strategies.
at closing as well as the ultimate value received upon disposition of The RAL program is regularly reviewed both from a business
certain assets after closing, and because market conditions have perspective and to ensure compliance with applicable state and federal
changed and may change significantly during the period prior to closing, laws. It is our intention to continue to offer the RAL program in the
the value of the adjusted tangible net assets of the business at closing foreseeable future.
may be significantly different than the value as of April 30, 2007. In Loss of the RAL program could adversely affect our operating results.
addition, the transaction is subject to various closing conditions, In addition to the loss of revenues and income directly attributable to
including that (1) OOMC maintain at least $8.0 billion of total capacity the RAL program, the inability to offer RALs could indirectly result in
in its warehouse facilities throughout the period to the closing date (of the loss of retail tax clients and associated tax preparation revenues,
which at least $2.0 billion is to be in the form of unused capacity at the unless we were able to take mitigating actions. Total revenues related
closing date), (2) OOMC have servicer ratings of at least RPS2 by Fitch, directly to the RAL program (including revenues from participation
SQ2 by Moody’s and Above Average by S&P, and (3) agreed upon interests) were $193.5 million for the year ended April 30, 2007,
regulatory and other approvals and consents be obtained. See representing 4.8% of consolidated revenues and contributed
discussion of warehouse facilities and related waivers in Item 7 under $120.5 million to the segment’s pretax results. Revenues related directly
‘‘Off-Balance Sheet Financing Arrangements.’’ If the closing conditions to the RAL program totaled $179.3 million for the year ended April 30,
are not satisfied by the requisite time, the sale could be terminated. 2006, representing 5.0% of consolidated revenues and contributed
Failure to complete this transaction could adversely affect the market $106.5 million to the segment’s pretax results.
price of our stock. If conditions in the non-prime mortgage industry,
H&R BLOCK 2007 Form 10K