HR Block 2005 Annual Report Download - page 66

challenging the post-expiration restrictive covenants and also year 2005 includes approximately 47,500 returns in both
disputing the payment due under the franchise agreement terms. company-owned and franchise offices which were accepted by
RAL PARTICIPATIONS AND 2003 TAX SEASON the client on May 1 and 2, 2005. The revenues related to these
WAIVER ⬎⬎⬎ Since July 1996, we have been a party to returns will be recognized in fiscal year 2006.
agreements with HSBC and its predecessors to participate in COMPETITIVE CONDITIONS ⬎⬎⬎ The retail tax services
RALs provided by a lending bank to H&R Block tax clients. The business is highly competitive. There are a substantial number of
1996 agreement was amended and restated in January 2003 and tax return preparation firms and accounting firms offering tax
again in June 2003. In the June 2003 agreement, we obtained the return preparation services. Many tax return preparation firms
right to purchase a 49.9% participation interest in RALs obtained and many firms not otherwise in the tax return preparation
through company-owned and regular franchise offices and a 25% business are involved in providing electronic filing and RAL
interest in RALs obtained through major franchise offices. The services to the public. Commercial tax return preparers and
current agreement continues through June 2006. Our purchases electronic filers are highly competitive with regard to price,
of the participation interests are financed through short-term service and reputation for quality. In terms of the number of
borrowings, and we bear all of the credit risk associated with our offices and personal tax returns prepared and electronically filed
interests in the RALs. Revenue from our participation is in offices, online and via our software, we are the largest
calculated as the rate of participation multiplied by the fee paid company providing direct tax return preparation and electronic
by the borrower to the lending bank. Our RAL participation filing services in the U.S. We also believe we operate the largest
revenue was $182.8 million and $168.4 million in fiscal years 2005 tax return preparation businesses in Canada and Australia.
and 2004, respectively. The Digital Tax Solutions businesses compete with a number of
In January 2003, we entered into an agreement with Household companies. Intuit, Inc. is the dominant supplier of tax preparation
Tax Masters, Inc. (‘‘Household,’’ subsequently acquired by HSBC), software and is also our primary competitor in the online tax
whereby we waived our right to purchase any participation preparation market. There are many smaller competitors in the
interests in and to receive fees related to RALs during the period online market, as well as free state-sponsored online filing
January 1 through April 30, 2003. In consideration for waiving programs. Price competition for tax preparation services
these rights, we received a series of payments from Household, increased in fiscal year 2005. In addition, we and Intuit, along
subject to certain adjustments based on delinquency rates for the with several other online companies participating in the FFA,
2003 tax season. We recorded revenues totaling $138.2 million began offering free online federal return preparation with no
during fiscal year 2003. The initial payments were recognized as income limitations. As a result, the IRS indicated the number of
revenue over the waiver period. The waiver agreement only free federal returns filed through the FFA increased 46%. We
covered the 2003 tax season. continue to believe the FFA offers us the opportunity to reach
SEASONALITY OF BUSINESS ⬎⬎⬎ Because most of our new clients; however, this year’s free offer captured new clients
clients file their tax returns during the period from January who may have otherwise paid for a return through our online
through April of each year, substantially all of our revenues from business.
income tax return preparation and related services and products GOVERNMENT REGULATION ⬎⬎⬎ Primary efforts toward
are received during this period. As a result, our tax segment the regulation of U.S. commercial tax return preparers have
generally operates at a loss through the first eight months of the historically been made at the federal level. Federal legislation
fiscal year. Historically, these losses primarily reflect wages of requires income tax return preparers to, among other things, set
year-round personnel, training of tax professionals, rental and forth their signatures and identification numbers on all tax
furnishing of retail tax offices, and other costs and expenses returns prepared by them, and retain all tax returns prepared for
relating to preparation for the upcoming tax season. Additionally, three years. Federal laws also subject income tax return
the tax business is affected by economic conditions and preparers to accuracy-related penalties in connection with the
unemployment rates. Peak revenues occur during the applicable preparation of income tax returns. Preparers may be prohibited
tax season, as follows: from further acting as income tax return preparers if they
continuously and repeatedly engage in specified misconduct.
United States and Canada January – April With certain exceptions, the Internal Revenue Code also prohibits
Australia July – October the use or disclosure by income tax return preparers of certain
This year Revenue Canada extended the Canadian tax season income tax return information without the prior written consent
to May 2, 2005. Clients served in our Canadian operations in fiscal of the taxpayer. In addition, the Gramm-Leach-Bliley Act and
H&R BLOCK 2005 Form 10K
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