HR Block 2005 Annual Report Download - page 97

WAREHOUSE FUNDING ⬎⬎⬎ To finance our prime if resulting net capital would be less than the greater of 5% of
originations, we use a warehouse facility with capacity up to combined aggregate debit items or 120% of the minimum required
$25 million. This annual facility bears interest at one-month net capital. At the end of fiscal year 2005, HRBFA’s net capital of
LIBOR plus 140 to 200 basis points. As of April 30, 2005 and 2004, $121.2 million, which was 19.2% of aggregate debit items,
the balance outstanding under this facility was $4.4 million and exceeded its minimum required net capital of $12.6 million by
$4.0 million, respectively, and is included in accounts payable, $108.6 million. During fiscal year 2005 and 2004, we contributed
accrued expenses and other on the consolidated balance sheets. additional capital of $27.0 million and $32.0 million, respectively,
See discussion of our non-prime warehouse facilities below in even though HRBFA was in excess of the minimum net capital
‘‘Off-Balance Sheet Financing Arrangements.’’ requirement, and we may continue to do so in the future.
We believe the sources of liquidity available to the Mortgage In fiscal year 2005, Investment Services used $32.4 million in its
Services segment are sufficient for its needs. Risks to the stability operating activities primarily due to operating losses.
of these sources include, but are not limited to, adverse changes To manage short-term liquidity, BFC provides HRBFA a
in the perception of the non-prime industry, adverse changes in $300 million unsecured credit facility. At the end of fiscal year
the regulation of non-prime lending, changes in the rating criteria 2005 there was no outstanding balance on this facility.
of non-prime lending by third-party rating agencies and, to a HRBFA has letters of credit with a financial institution with a
lesser degree, reduction in the availability of third parties that credit limit of $125.0 million. There were no commitments
provide credit enhancement. Past performance of the outstanding on these letters of credit at any time during fiscal
securitizations will also impact the segment’s future participation year 2005 or 2004.
in these markets. The off-balance sheet warehouse facilities used Liquidity needs relating to client trading and margin-borrowing
by the Trusts are subject to annual renewal, each at a different activities are met primarily through cash balances in client
time during the year, and any of the above events could lead to brokerage accounts and working capital. We believe these
difficulty in renewing the lines. These risks are mitigated by a sources of funds will continue to be the primary sources of
staggering of the renewal dates related to these warehouse lines liquidity for Investment Services. Stock loans have historically
and through the use of multiple lending institutions to secure been used as a secondary source of funding and could be used in
these lines. the future, if warranted.
BUSINESS SERVICES ⬎⬎⬎ Business Services funding Securities borrowed and securities loaned transactions are
requirements are largely related to receivables for completed generally reported as collateralized financings. These
work and ‘‘work in process.’’ We provide funding sufficient to transactions require us to deposit cash and/or collateral with the
cover their working capital needs. Business Services also has lender. Securities loaned consist of securities owned by
future obligations and commitments, which are summarized in customers, which were purchased on margin. When loaning
the tables below under ‘‘Contractual Obligations and Commercial securities, we receive cash collateral approximately equal to the
Commitments.’’ value of the securities loaned. The amount of cash collateral is
This segment generated $44.7 million in operating cash flows adjusted, as required, for market fluctuations in the value of the
primarily related to net income. Additionally, Business Services securities loaned. Interest rates paid on the cash collateral
used $37.8 million in investing activities primarily related to fluctuate as short-term interest rates change.
contingent payments on prior acquisitions, and $23.2 million in To satisfy the margin deposit requirement of client option
financing activities as a result of payments on acquisition debt. transactions with the Options Clearing Corporation (‘‘OCC’’),
INVESTMENT SERVICES ⬎⬎⬎ Investment Services, through Investment Services pledges customers’ margined securities.
HRBFA, is subject to regulatory requirements intended to ensure Pledged securities at the end of fiscal year 2005 totaled
the general financial soundness and liquidity of broker-dealers. $44.6 million, an excess of $7.9 million over the margin
HRBFA is required to maintain minimum net capital as defined requirement. Pledged securities at the end of fiscal year 2004
under Rule 15c3-1 of the Securities Exchange Act of 1934 and totaled $46.3 million, an excess of $7.9 million over the margin
complies with the alternative capital requirement, which requires requirement.
a broker-dealer to maintain net capital equal to the greater of We believe the funding sources for Investment Services are
$250,000 or 2% of the combined aggregate debit balances arising stable. Liquidity risk within this segment is primarily limited to
from customer transactions. The net capital rule also provides maintaining sufficient capital levels to obtain securities lending
that equity capital may not be withdrawn or cash dividends paid liquidity to support margin borrowing by customers.
H&R BLOCK 2005 Form 10K
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