HR Block 2006 Annual Report Download

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 ฀   ฀  

Table of contents

  • Page 1
     ฀  ฀

  • Page 2
    ...her tax information digitally from home for preparation of her return by H&R Block Tax Professional Carolyn Nichols in Attleboro, Massachusetts. They've developed a close working relationship over several years using our Online Office service. (Left to right) KAREN KUREK, Managing Director; MICHAEL...

  • Page 3
    ... Financial Highlights Chairman's Letter to Shareholders Our Businesses at a Glance H&R Block Branded Businesses RSM McGladrey Business Services Option One Mortgage Advocate for Middle America Board of Directors and Executive Committee Five Years in Review 2 3 8 10 16 19 22 24 25 Proxy Statement...

  • Page 4
    ... $ 4,666,502 $ 822,302 $ 1,589,398 359,202 30,716 FOR THE YEAR Total revenues Net income before change in accounting principle Net income AT YEAR END Total assets Long-term debt Stockholders' equity Shares outstanding Number of shareholders MEASUREMENTS Basic earnings per share: Net income before...

  • Page 5
    ...worldwide who used and paid for our tax services. These key measures suggest a healthy company supported by a core tax services business valued by our clients. The year 2006 also found H&R Block in the midst of important industry transitions. In some cases, such as the business services industry, we...

  • Page 6
    ...MM -q9 q52 ~MH5Â¥MM Æ¥¹`HGÂ¥M5HÂ"Â"\qÂ"qãHr5PHÂ"\¹MÂ"¹qÂ"Â¥rq52 L¥¥Â"¹\Hr\Â¥9Â'Â¥GÂ"qÂ"H5MÂŒ¹q22H5r`qãÂ¥ -¹¥Â"¹5`qãÂ¥2H¹¥GÂ"ãÂ"M\q¹¥\ã2¥¹MÂ"\Â¥ [qãq5GÂ¥ ÂŒ ¹ Â¥9GÂ¥MM GqÂ'HÂ"qã rÂ¥M Â" M\q¹¥ ¹¥Â'¹G\qMÂ¥M q522H...

  • Page 7
    ... financial strength and flexibility to accommodate industry volatility - and manage for long-term value creation. 40.3% 35.6% 31.3% 32.7% 2002 2003 2004 2005 2006 ATTAINING MIDDLE-MARKET LEADERSHIP RSM McGladrey emerged this year as the leading accounting, tax and business consulting firm...

  • Page 8
    ... (left) District Manager, H&R Block Tax Services DAVID FLOEH Financial Advisor, H&R Block Financial Advisors St. Louis, Missouri Strong relationships developing between professionals of H&R Block Financial Advisors and H&R Block Tax Services are yielding more referrals across business units, which...

  • Page 9
    ... of referrals to H&R Block Financial Advisors. Clients referred from tax professionals in recent years currently account for nearly 90,000 funded investment accounts. This referral model has helped attract financial advisors to the firm - nearly 200 new advisors in 2006 alone. To create a stronger...

  • Page 10
    ..., H&R Block helps clients through a breadth of tax and financial services and products. Our tax professionals provide in-person tax preparation and actionable advice on tax, savings and other financial choices. In the digital channel, we offer powerful yet user-friendly TaxCut® software and online...

  • Page 11
    ...Block Bank 2003 2002 LARGEST U.S. ACCOUNTING FIRMS (ANNUAL REVENUES IN BILLIONS) - Leading U.S. accounting firm focused on serving midsized companies - Fifth largest U.S. accounting firm - Acquired American Express Tax and Business Services in October 2005 - Launched brand-building program in 2006...

  • Page 12
    ... H&R Block Tax Services Hollywood, Florida Studying advanced topics in tax preparation and keeping up with changing laws and regulations are easier and more convenient for Carmen Dean, a 14-year H&R Block tax professional, thanks to an expanding list of courses that can be taken online in the office...

  • Page 13
    ...and preparation services we provide in our offices and via digital solutions. - We're steadily building H&R Block Financial Advisors, which helps clients - many referred from our tax professionals - meet their financial goals. - Our H&R Block Mortgage unit serves individual borrowers with home loans...

  • Page 14
    ...work on their taxes at home and then have a tax professional review, sign and electronically file the return. With our Ask a Tax Advisor service, digital clients can choose phone or e-mail for live help from a tax professional. In tax season 2006, we set ourselves further apart with Worry. It's free...

  • Page 15
    ... H&R Block tax client Denver, Colorado Retired school principal Loyola Martinez had been using a CPA to prepare her income tax return each year. She came to H&R Block when an office opened near her home. It's one of nearly 2,300 locations added over the past two years to move our services closer...

  • Page 16
    ...customers Yuma, Arizona Schoolteachers Bill and Alva Wachunas are financing their family home with a mortgage from H&R Block Mortgage. Our direct-to-consumer business helps clients find the right loan when purchasing a home or when refinancing an existing loan. (Shown with niece Daisy Millan, center...

  • Page 17
    ...rate for tax services. H&R Block Financial Advisors opened more than 17,000 new accounts for tax clients in 2006. Annual production revenue for these and previously referred clients was $31 million, or 16 percent of the Investment Services segment total. Since partnering formally began several years...

  • Page 18
    ...2005 2006 CHARLES BROWN Chief Financial Officer, Victor Plastics Inc. RSM McGladrey client Victor, Iowa Victor Plastics, a growing custom injection molder with over $100 million in annual sales, needed a business services provider more focused on midsized clients than a Big 4 accounting firm, yet...

  • Page 19
    ... RSM McGladrey Business Services The industry environment has changed for providing accounting, tax and business consulting services to midsized companies. More than a half million U.S. businesses make up this market, consisting of companies between $2.5 million and $500 million in annual revenues...

  • Page 20
    ... for franchise business #5 IN NEW YORK owners, including auto parts stores, independent grocery stores and restaurants), RSM EquiCo (middle-market valuation and investment banking), and Wealth Management (financial, estate and gift tax planning, investment and insurance advisory services). The...

  • Page 21
    ... at Option One Mortgage since the firm was founded. As a customer-focused non-prime mortgage lender, the company is dedicated to serving the needs of and delivering value to independent mortgage brokers as well as larger accounts. Sometimes service means quickly returning a phone call; other times...

  • Page 22
    ... and in how customers work with us. Internal systems are freeing our account executives from routine tasks, such as data entry, so they can better spend their time on customer service. Automated underwriting technology in Option One and broker offices has lifted our productivity by 25 percent...

  • Page 23
    ... our diverse society, and Option One champions programs to extend home-ownership opportunities to a greater portion of the population. An Emerging Markets department formed in 2006 is developing a deeper understanding of market needs, as well as long-term strategies and specific partnerships and...

  • Page 24
    ... Katrina flooded the Barakat family home and the taxi Basel drove for a living. While they were in an H&R Block office to replace paperwork, Tax Professional Julie Wood double-checked a return prepared elsewhere, finding errors and nearly $5,000 in tax savings that helped Basel back on the road...

  • Page 25
    ... Security - including active service by H&R Block CEO Mark Ernst on the Advisory Board - in creating new policies and product recommendations that help Americans save, invest and own. HELPING PEOPLE RESTORE THEIR FINANCIAL LIVES Tax Professional Diana Searight DAY OF EMPOWERMENT March 19, 2006...

  • Page 26
    ... Executive Officer, Option One Mortgage Corp. STEVEN TAIT President, RSM McGladrey Business Services Inc. STEVEN L. NADON President, Consumer Financial Services Group TOM ALLANSON Senior Vice President and General Manager, Digital Tax Solutions HENRY F. FRIGON Vice Chairman of the Board CARSTAR...

  • Page 27
    ...thousands, except offices and number of loans originated Year Ended April 30 2006 2005 2004 2003 2002 FEE AND CLIENT DATA Tax preparation and related fees: United States Canada Australia Other Clients served: United States : Retail operations Digital tax solutions(1) Canada Australia $ 1,686...

  • Page 28
    ... of shareholders of H&R Block, Inc., a Missouri corporation (the ''Company''), will be held in the H&R Block City Stage Theater at Union Station located at 30 West Pershing (corner of Pershing and Main Street), Kansas City, Missouri, on Thursday, September 7, 2006 at 9:00 a.m., Kansas City time (CDT...

  • Page 29
    ... annual meeting of shareholders of the Company to be held at 9:00 a.m. (CDT), on Thursday, September 7, 2006 in the H&R Block City Stage Theater at Union Station located at 30 West Pershing (corner of Pershing and Main Street), Kansas City, Missouri. This Proxy Statement contains information about...

  • Page 30
    ... record.'' The proxy statement, annual report and proxy card have been made available directly to shareholders of record by the Company. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the ''beneficial owner'' of shares held in street name. The...

  • Page 31
    ...Mellon Investor Services, at 1-888-213-0968. CAN I ACCESS THE PROXY STATEMENT AND ANNUAL REPORT ON THE INTERNET INSTEAD OF RECEIVING PAPER COPIES? This proxy statement and 2006 Annual Report are located on the Company's website. Most shareholders can access future proxy statements and annual reports...

  • Page 32
    ... and Tom D. Seip serve as Class I directors with terms scheduled to expire at the annual meeting of shareholders in 2008. The number of shares of Common Stock beneficially owned by each director is listed under the heading ''Security Ownership of Directors and Management'' on page 29 of this proxy...

  • Page 33
    ...'s Management Program for Executives in October 1987. Mr. Wilkins is a member of the Audit, Finance and Governance and Nominating Committees of the Board of Directors. Louis W. Smith Director since 1998 Age 63 Rayford Wilkins, Jr. Director since 2000 Age 54 H&R BLOCK 2006 Proxy Statement 5

  • Page 34
    ... partner of Seip Investments LP and the managing member of Way Too Much Stuff LLC and Ridgefield Farm LLC, private investment vehicles. He served as the President, Chief Executive Officer and director of Westaff, Inc., Walnut Creek, California, a temporary staffing services company, from May 2001...

  • Page 35
    ... Corporate Secretary, H&R Block, Inc., 4400 Main Street, Kansas plans. All of the members of the Compensation Committee are City, Missouri 64111 (such address to change to One H&R Block independent under the New York Stock Exchange listing Way, Kansas City, Missouri 64105 in September 2006...

  • Page 36
    ... outstanding options expire ten years after the date of grant. The Company also offers to its non-employee directors free income tax return preparation services at an H&R Block office of their choice, a fifty percent discount on tax preparation services from RSM McGladrey, Inc. and free business...

  • Page 37
    ... each Director during fiscal year 2006 pursuant to the 1989 Stock Option Plan for Outside Directors. (3) This column includes, as applicable, the value of income tax return preparation services at an H&R Block office, the value of the 50% discount on tax preparation services from RSM McGladrey, Inc...

  • Page 38
    ... by the Board. Shareholders may recommend qualified director candidates by writing to the Company's Corporate Secretary, at our offices at 4400 Main Street, Kansas City, Missouri 64111 (such address to change to One H&R Block Way, Kansas City, Missouri 64105 in September 2006). Submissions should...

  • Page 39
    ITEM 2 ON FORM OF PROXY APPROVAL OF AN AMENDMENT TO THE 1999 STOCK OPTION PLAN FOR SEASONAL EMPLOYEES - INTRODUCTION - Since 1969, the Company has offered a stock The Seasonal Plan is intended to reward performance, option program to the seasonal employees of its income tax encourage retention and ...

  • Page 40
    ... the case may be), no option will be awarded. In all cases, the maximum annual grant is an option to purchase 100 shares of Common Stock. The purchase price per share of Common Stock under each stock option is equal to the last reported sales price for the Common Stock on the New York Stock Exchange...

  • Page 41
    ... Stock represented and entitled to vote on this proposal at the annual meeting of shareholders will constitute approval of the amendment to the Seasonal Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE ''FOR'' THE APPROVAL OF THE AMENDMENT TO THE 1999 STOCK OPTION PLAN FOR SEASONAL EMPLOYEES, AND...

  • Page 42
    ... and (iii) the maximum number of Revenue Service regulations to permit the Company to deduct for shares of the Company's common stock that can be awarded federal income tax purposes the payment of Performance Shares under the 2003 Plan during any calendar year. to certain executive officers. We are...

  • Page 43
    ... effect of accounting changes, acquisitions or divestitures, foreign exchange impacts and any unusual nonrecurring gain or loss. ITEM 4 ON FORM OF PROXY The 2003 Plan limits the aggregate maximum number of shares of the Company's common stock that can be awarded in any one calendar year to any...

  • Page 44
    ... on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors of the Company that the Company's audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2006, for filing with the Securities and...

  • Page 45
    ... based upon industry, a ''non-employee director'' pursuant to Rule 16b-3 under size, and similarity to the Company in revenue, earnings, and federal securities laws. market capitalization. The Compensation Committee has retained Mercer Human SHORT-TERM INCENTIVE PROGRAM - The Company's Resource...

  • Page 46
    ... the Company's shareholders. Under the Company's 2003 Long-Term Executive Compensation Plan, option exercise prices are set at 100% of the fair market value of the stock on the date of grant and the options expire after ten years. Options granted to executive officers in fiscal year 2006 generally...

  • Page 47
    ... of stock options, restricted stock and the employee stock purchase plan on a straight-line basis over applicable vesting periods. The Company has adopted Statement of Financial Accounting Standards No. 123(R), ''Share-Based Payment,'' for fiscal year 2007. EXECUTIVE STOCK OWNERSHIP GUIDELINES...

  • Page 48
    ... under the Executive Performance Plan constitutes 80% of Mr. Ernst's overall short-term incentive compensation target award, half of which is based on earnings per share growth and half upon business-unit-specific metrics. Although, based on the Company's results for fiscal year 2006, Mr. Ernst...

  • Page 49
    awards are in the best interest of the shareholders, balancing tax efficiency with long-term strategic objectives. COMPENSATION COMMITTEE Donna R. Ecton, Chairman Henry F. Frigon Roger W. Hale Tom D. Seip Louis W. Smith 21 H&R BLOCK 2006 Proxy Statement

  • Page 50
    ... F. Frigon, Roger W. Hale, Tom D. Seip and Louis W. Smith. No directors on the Compensation Committee (a) are or have been officers or employees of the Company or any of its subsidiaries, or (b) had any relationships requiring disclosure in the proxy statement. 22 H&R BLOCK 2006 Proxy Statement

  • Page 51
    ... Executive Officer, Option One Mortgage Corporation William L. Trubeck Executive Vice President and Chief Financial Officer Steven Tait President, RSM McGladrey Business Services, Inc. Nicholas J. Spaeth Senior Vice President and Chief Legal Officer Fiscal Year 2006 2005 2004 2006 2005 2004 2006...

  • Page 52
    ... fiscal year ended April 30, 2006 to the executive officers named in the Summary Compensation Table (the ''Named Officers'') above. Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(1) Individual Grants Number of Securities Underlying Options Granted...

  • Page 53
    ...-money options at fiscal year-end is calculated by determining the difference between the fair market value of the securities underlying the options at fiscal year-end and the exercise price of the options multiplied by the number of shares underlying such option: Number of Securities Underlying...

  • Page 54
    ... 2006, the cumulative total shareholder return to the Company's shareholders, as well as the cumulative total return of the Standard & Poor's 500 Stock Index and the cumulative total return of the Standard & Poor's Diversified Commercial and Professional Services Index, the published industry index...

  • Page 55
    ... 30, 2006. The Company currently has four stock-based compensation plans: the 2003 Long-Term Executive Compensation Plan, the 1989 Stock Option Plan for Outside Directors, the 1999 Stock Option Plan for Seasonal Employees, and the 2000 Employee Stock Purchase Plan. The shareholders have approved all...

  • Page 56
    ... as the Executive Vice President, Chief Financial Officer of the Company. The Agreement provides for an initial base salary at an annual rate of $450,000; participation in the Company's Short-Term Incentive Plan; a stock option to purchase 50,000 shares of the Company's Common Stock granted on...

  • Page 57
    ...severance period. INFORMATION REGARDING SECURITY HOLDERS SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT - Stock option agreements entered into on or after June 30, 1996 between the Company and the recipients of stock options granted pursuant to the 1993 Long-Term Executive Compensation Plan and the...

  • Page 58
    ...% 30 H&R BLOCK 2006 Proxy Statement Less than 1% Includes shares that on June 1, 2006 the specified person had the right to purchase as of June 30, 2006 pursuant to options granted in connection with the Company's 1989 Stock Option Plan for Outside Directors or the Company's Long-Term Executive...

  • Page 59
    ... of the outstanding Common Stock of the Company. The information provided is based upon Schedule 13G filings with the Securities and Exchange Commission Name and Address of Beneficial Owner Barclays Global Investors, NA 45 Fremont Street San Francisco, California 94105 Warren E. Buffett, Berkshire...

  • Page 60
    ... is available on our website at www.hrblock.com under the tab ''Our Company'' and then under the heading ''Block Investors'' and then ''Corporate Governance,'' or upon request to: H&R Block, Inc., 4400 Main Street, Kansas City, Missouri 64111 (such address to change to One H&R Block Way, Kansas City...

  • Page 61
    ... forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). At any time during the three years immediately preceding the date of determination, the director has been employed by (or affiliated with) a present or former internal...

  • Page 62
    ...shall constitute a quorum sufficient for the taking of any action by the Committee. The Committee shall periodically and at least quarterly meet with the independent auditor, the Director of Internal Audit (or person with similar responsibilities) and management of the Company in separate executive...

  • Page 63
    ... of the Director of Internal Audit. At least annually review and approve the internal audit plan, and periodically ensure adequate resources are available to execute the plan. Review the results of completed internal audits with the Director of Internal Audit and monitor corrective actions taken by...

  • Page 64
    ... and accounting initiatives as well as off-balance sheet structures on the Company's financial statements. Make recommendations to the Board of Directors as to whether the audited financial statements should be included in the Company's Annual Report on Form 10-K for the last fiscal year for...

  • Page 65
    ...Audit Committee to plan or conduct audits or to determine that the Company's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor. B-4 H&R BLOCK 2006 Proxy Statement

  • Page 66
    ... to be seasonal jobs and (b) have adhered to the working hours agreed upon during such year. ARTICLE 5. STOCK SUBJECT TO THE PLAN. - The shares of Common Stock to be issued upon exercise of the options granted under the Plan shall be made available, at the discretion of the Board of Directors of the...

  • Page 67
    ... of the Plan and of all options then outstanding. ARTICLE 8. OPTION PRICE. - Each year this Plan is in effect, the purchase price per share under each option granted during such year shall be equal to the last reported sale price, regular way, for the Common Stock on the New York Stock Exchange (or...

  • Page 68
    ...are issued to him or her under the terms of the Plan. As used herein, ''full-time employee'' means an individual in the employ of the Company or one of its subsidiaries in a job designated by the applicable employer to be a full-time job. D. Non-transferability of Option; Termination upon Death. The...

  • Page 69
    ...Address of principal executive offices, including zip code) (816) 753-6900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, without par value New York Stock...

  • Page 70
    ...and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors and Executive Officers of...

  • Page 71
    ...2006, are listed as ''incorporated by reference'' in response to certain items. Our proxy statement will be printed within our Annual Report and mailed to shareholders in July 2006 and will also be available on our website at www.hrblock.com. In this report, and from time to time throughout the year...

  • Page 72
    ... though seasonal offices located inside major retailers. We offer a number of digital tax preparation alternatives. TaxCutË› from H&R Block enables do-it-yourself users to prepare their federal and state tax returns easily and accurately. Our software products may be purchased through third-party...

  • Page 73
    .... These websites allow clients to prepare their federal and state income tax returns using the TaxCut Online Tax Program, access tax tips, advice and tax-related news and use calculators for tax planning. Beginning with the fiscal year 2003 tax season, we participated in the Free File Alliance (FFA...

  • Page 74
    ... filed in offices, online and via our software, we are the largest company providing direct tax return preparation and electronic filing services in the U.S. We also believe we operate the largest tax return preparation businesses in Canada and Australia. Our digital tax solutions businesses compete...

  • Page 75
    ...purchase of performing non-prime mortgage loan pools. Option One is headquartered in Irvine, California and operates in 48 states by serving 49,000 mortgage broker locations and through its network of 35 wholesale loan production branches and eight retail production offices. H&R BLOCK 2006 Form 10K...

  • Page 76
    ... our loan sale and securitization process in Item 7, under ''Off-Balance Sheet Financing Arrangements.'' At April 30, 2006, Option One held $407.5 million in loans for transfer to the H&R Block Bank when it commences operations in May 2006. These loans have been classified as held for investment on...

  • Page 77
    ... seasonal fluctuations. The mortgage business is cyclical, however, and directly affected by national economic conditions, trends in business and finance and is impacted by changes in interest rates. GOVERNMENT REGULATION - Mortgage loans purchased, originated and/or serviced are subject to federal...

  • Page 78
    ...retirement plan investment advice, year-end compliance, tax reporting and consulting. RSM EquiCo, Inc. is an investment banking firm specializing in business valuations, acquisitions and divestitures for private middle-market businesses. RSM McGladrey Employer Services, Inc. is a provider of payroll...

  • Page 79
    ... offered to our customers include traditional brokerage services, as well as annuities, insurance, fee-based accounts, online account access, equity research and focus lists, model portfolios, asset allocation strategies, and other investment tools and information. Segment revenues constituted...

  • Page 80
    ... opportunity to open accounts, obtain research, create investment plans, buy and sell securities, and view the status of their accounts. OFFICE LOCATIONS - HRBFA is authorized to do business as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico. At the end of fiscal year 2006...

  • Page 81
    ... interests. See Item 7, under ''Off-Balance Sheet Financing Arrangements.'' We are also dependent on commercial paper issuances and/or bank lines to fund RAL participations and seasonal working capital needs. A disruption in such markets could adversely affect our H&R BLOCK 2006 Form 10K 11

  • Page 82
    H&R BLOCK 2006 Form 10K access to these funds. To meet our future financing needs, we may issue additional debt or equity securities. LITIGATION - We are involved in lawsuits in the normal course of our business related to RALs, our Peace of Mind guarantee program, electronic filing of tax returns,...

  • Page 83
    ..., the new regulations require lenders to report pricing data on loans with annual percentage rates that exceed the yield on treasury bills with comparable maturities by 3%. The expanded reporting was effective in 2004 for reports filed in 2005. We anticipate that a majority of our loans would be...

  • Page 84
    ... new building will be located in downtown Kansas City, Missouri and we expect it to be completed in fiscal year 2007. All current leased and owned facilities are in good repair and adequate to meet our needs. H&R BLOCK 2006 Form 10K of $70.2 million (the ''2006 Settlements''). The 2006 Settlements...

  • Page 85
    ...' claims consist of five counts relating to the Peace of Mind (POM) program under which the applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation error. The plaintiffs allege that the sale of POM guarantees constitutes...

  • Page 86
    ... types of cases, we are parties to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (Other Claims) concerning investment products, the preparation of customers' income tax returns, the fees charged customers for various...

  • Page 87
    ... The remaining information called for by this item relating to ''Securities Authorized for Issuance under Equity Compensation Plans'' is reported in Item 8, note 12 to our consolidated financial statements. On June 15, 2006, there were 24,935 shareholders of record and the closing stock price on the...

  • Page 88
    ... Results of Operations Year ended April 30, 2006 2005 2004 other opportunities to help clients build a better financial future. Our key strategic priorities can be summarized as follows: REVENUES - $ 2,451,806 $ 2,358,293 $ 2,191,177 Tax Services - expand access to our services through improved Tax...

  • Page 89
    ... assumptions we use affect the estimated fair values and the reported gains on sales. Gains on sales of mortgage loans totaled $575.4 million, $772.1 million and $915.6 million for fiscal years 2006, 2005 and 2004, respectively. See discussion in ''Off-Balance Sheet Financing Arrangements'' related...

  • Page 90
    ...with confidence. Also see Item 8, note 1 to our consolidated financial statements, which discusses accounting policies we have selected when there are acceptable alternatives, and new or proposed accounting standards that may affect our financial reporting in the future. H&R BLOCK 2006 Form 10K 20

  • Page 91
    ...United Kingdom. Tax Services - Operating Statistics Year Ended April 30, Clients served - United States: Company-owned operations Franchise operations Digital tax solutions International (3) (2) Tax Services - Financial Results Year Ended April 30, Service revenues: Tax preparation and related fees...

  • Page 92
    H&R BLOCK 2006 Form 10K Revenue from our digital business increased 8.2%, primarily due to a 23.3% increase in clients served, partially offset by planned reductions in unit prices. Royalty revenue increased $10.2 million, or 5.2%, due to a 5.5% increase in the gross average fee slightly offset by ...

  • Page 93
    service awards to the representative plaintiffs. In addition, we will pay costs for providing notice of the settlement to settlement class members. We increased existing reserves related to this matter, resulting in a pretax charge of $50.7 million in fiscal year 2006. On April 19, 2006, we entered ...

  • Page 94
    ... of Non-GAAP Financial Information'' at the end of Item 7. Fiscal year 2006 excludes the impact of a restructuring charge. (2) Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses...

  • Page 95
    ... short-term interest rates and an increase in the average notional amount of swap arrangements to $8.4 billion in the current year, compared to $2.4 billion in fiscal year 2005. See Item 8, note 8 to the consolidated financial statements. In fiscal year 2006, we completed sales of available-for-sale...

  • Page 96
    ...38% 272,472 $ $ H&R BLOCK 2006 Form 10K Loan servicing revenues increased $125.9 million, or 46.1%, compared to the prior year. The increase reflects a higher loan servicing portfolio resulting from our loan origination growth. The average servicing portfolio for the year increased $20.8 billion...

  • Page 97
    ... Year Ended April 30, Accounting, tax and business consulting - Chargeable hours (000s) Chargeable hours per person Net billed rate per hour Average margin per person Business Services - Financial Results Year Ended April 30, Service revenues: Accounting, tax and consulting Capital markets Payroll...

  • Page 98
    ...relationship to a more advice-based focus. Investment Services - Operating Statistics Year Ended April 30, Customer trades (1) Customer daily average trades Average revenue per trade (2) Customer accounts: (3) Traditional brokerage Express IRAs Ending balance of assets under administration (billions...

  • Page 99
    ...revenue. CORPORATE Corporate support departments, which provide services to our operating segments consist of marketing, information technology, facilities, human resources, executive, legal, finance, government relations and corporate communications. Support department costs are Production revenue...

  • Page 100
    Corporate - Financial Results Year Ended April 30, Operating revenues Eliminations Total revenues Corporate expenses: Interest expense Other Support departments: Marketing Information technology Finance Other Allocation of shared services Other income, net Pretax loss $ 2006 22,279 (13,636) 8,643 67...

  • Page 101
    ... follows. Generally, interest is not charged on intercompany activities between segments. Detailed consolidated statements of cash flows are located in Item 8. (in 000s) Fiscal Year 2006 Cash provided by (used in): Operations Investing Financing Net intercompany Tax Services $ 596,025 (62,797) 14...

  • Page 102
    ... would be available to replace HSBC should the need arise. We also believe that the RAL program is productive for the Company and a useful service for our customers. The RAL program is regularly reviewed both from a business perspective and to ensure compliance with applicable state and federal laws...

  • Page 103
    ..., for market fluctuations in the value of the securities loaned. Interest rates paid on the cash collateral fluctuate as short-term interest rates change. To satisfy the margin deposit requirement of client option transactions with the Options Clearing Corporation (OCC), HRBFA pledges customers...

  • Page 104
    ... in the first quarter of calendar year 2007. H&R BLOCK 2006 Form 10K The following chart provides the debt ratings for Block Canada as of April 30, 2006: Short-term DBRS R-1 (low) Long-term A Outlook Stable We use capital primarily to fund working capital requirements, pay dividends, repurchase...

  • Page 105
    ... would be a short-term rating downgrade, adverse changes in our financial performance, non-renewal or termination of the CLOCs, adverse publicity and operational risk within the CP market. We believe if any of these events were to occur, the CLOCs, to the extent available, could be used for an...

  • Page 106
    ... ordinances, and/or adopted rules and regulations, regulating aspects of our business. These aspects include, but are not limited to, commercial income tax return preparers, income tax courses, the electronic filing of income tax returns, the facilitation of RALs, loan originations and assistance in...

  • Page 107
    ...value as rates rise and decrease as rates fall. At April 30, 2006, there were $3.1 billion in forward loan sale commitments, and most of them give us the option to under- or over-deliver by five to ten percent. Forward loan sale commitments lock in the execution price on H&R BLOCK 2006 Form 10K 37

  • Page 108
    ... our customers to fund prime mortgage loans within specified periods of time. The fair value of rate-lock commitments is calculated based on the current market pricing of short sales of FNMA, FHLMC and GNMA mortgagebacked securities and the coupon rates of the eligible loans. At April 30, 2006, we...

  • Page 109
    ... the scope and results of their audits, including internal control, audit and financial matters. KPMG LLP audited our consolidated financial statements. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). H&R BLOCK 2006 Form 10K 39

  • Page 110
    ... firm, have issued an audit report on our assessment of the Company's internal control over financial reporting. Mark A. Ernst Chairman of the Board, President and Chief Executive Officer REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - The Board of Directors and Stockholders of H&R Block...

  • Page 111
    ... REGISTERED PUBLIC ACCOUNTING FIRM - The Board of Directors and Stockholders of H&R Block, Inc.: We have audited management's assessment, included in the accompanying Management's Report On Internal Control Over Financial Reporting (Item 9A(b)), that H&R Block, Inc. and subsidiaries (the Company...

  • Page 112
    ... on sales of mortgage assets, net Product and other revenues Interest income OPERATING EXPENSES - Cost of services Cost of other revenues Selling, general and administrative Operating income Interest expense Other income, net Income before taxes Income taxes Net income before change in accounting...

  • Page 113
    ... - Current portion of long-term debt Accounts payable to customers, brokers and dealers Accounts payable, accrued expenses and other current liabilities Accrued salaries, wages and payroll taxes Accrued income taxes Total current liabilities Long-term debt Other noncurrent liabilities Total...

  • Page 114
    ... residuals Sales of other available-for-sale securities Mortgage loans originated and held for investment, net Purchases of property and equipment, net Payments made for business acquisitions, net of cash acquired Other, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES...

  • Page 115
    ...Net income Unrealized translation loss Change in net unrealized gain on marketable securities Stock-based compensation expense Shares issued for: Stock options Restricted shares ESPP Acquisition of treasury shares Cash dividends paid - $0.49 per share Balances at April 30, 2006 435,891 435,891 435...

  • Page 116
    ...; investment services through a broker-dealer; tax preparation and related software; refund anticipation loans offered by a third-party lending institution; and accounting, tax and consulting services to business clients. Tax preparation services are also provided in Canada, Australia and the United...

  • Page 117
    ... with software developed or purchased for internal use. These costs are typically amortized over 36 months using the straight-line method. We are capitalizing interest costs during construction of our new corporate headquarters facility for qualified expenditures based upon H&R BLOCK 2006 Form 10K...

  • Page 118
    ...consolidated balance sheets. We file a consolidated Federal tax return on a calendar year basis. REVENUE RECOGNITION - Service revenues consist primarily of fees for preparation and filing of tax returns, both in offices and through our online programs, fees associated with our POM guarantee program...

  • Page 119
    ... in which the franchise provides the service. RAL participation revenue is recorded when we purchase our participation interest in the RAL. Software revenues consist mainly of tax preparation software and other personal productivity software. Sales of software are recognized when the product is sold...

  • Page 120
    ... separate unit of accounting. Revenue recognition is determined separately for each unit of accounting within the arrangement. EITF 00-21 impacts revenue recognition related to tax preparation in our premium tax offices where POM guarantees are included in the price of a completed tax return. Prior...

  • Page 121
    ... Other assets (liabilities) Weighted average life Fiscal Year 2005 - Non-accounting firm Business Services acquisitions Property and equipment Goodwill Customer relationships Noncompete agreements Weighted average life Fiscal Year 2004 - Former major franchise territories Property and equipment...

  • Page 122
    ... of certain restrictions or the exercise of options to purchase 8.7 million, 1.2 million, and 4.8 million shares of stock for 2006, 2005 and 2004, respectively. Year Ended April 30, Net income before change in accounting principle Basic weighted average common shares Dilutive potential shares from...

  • Page 123
    ...after the bonds issued to the third-party investors are paid in full. Residual interests retained from NIM securitizations may also be bundled and sold in a subsequent securitization. The new residual interests are classified as available-for-sale securities. See note 4. H&R BLOCK 2006 Form 10K 53

  • Page 124
    ... Balance, end of year residual interests in (in 000s) 2006 $ 205,936 61,651 (80,539) (62,396) 108,396 (34,107) (1,583) (38,300) $ 159,058 2005 $ 210,973 16,914 (136,045) (16,485) 137,610 (12,235) - 5,204 $ 205,936 H&R BLOCK 2006 Form 10K Prime mortgage loans are sold in loan sales, servicing...

  • Page 125
    ... in one factor may result in changes in another, which might magnify or counteract the sensitivities. (in 000s) Residential Mortgage Loans Available-for-sale Beneficial interest Residuals in Trusts Carrying amount/fair value of residuals Weighted average life (in years) $ impact on fair value...

  • Page 126
    ... in the test for selected reporting units. No impairment existed at any of our reporting units during fiscal year 2006, 2005 or 2004. The goodwill and intangible assets added in the Business Services segment relate primarily to the acquisition of American Express Tax and Business Services, Inc., as...

  • Page 127
    ...of our new corporate headquarters. Asset (Liability) Balance at April 30, 2006 Interest rate swaps Put options on Eurodollar futures Forward loans sale commitments Interest rate caps Rate-lock equivalents Prime short sales $ 8,831 3,282 1,961 - (317) 777 $ 14,534 2005 Gain (Loss) in the Year Ended...

  • Page 128
    ... of OLDE Financial Corporation and Financial Marketing Services, Inc. We are planning on refinancing these Senior Notes when they come due. As of April 30, 2006, we had $850.0 million remaining under our shelf registration for additional debt issuances. As a result of our failure to file our Form 10...

  • Page 129
    ... to purchase our Common Stock for periods not basis at an annual rate of 331/3 % of the total number of shares, or (2) at exceeding 10 years at a price that is not less than 100% of fair market the end of three years. value on the date of the grant. The 1999 Stock Option Plan for Seasonal Employees...

  • Page 130
    ... the prior written H&R BLOCK 2006 Form 10K approval of our Board of Directors (an ''Unapproved Stock Acquisition''), and at the close of business on the tenth business day following the commencement of, or the public announcement of an intent to commence, a tender offer that would result in an...

  • Page 131
    ...of the surviving or purchasing company having a market value equal to twice the exercise price of the Right. After an Unapproved Stock Acquisition, but before any person or group of persons acquires 50% or more of the outstanding shares of our Common Stock, the Board of Directors may exchange all or...

  • Page 132
    ... been made for income taxes that might be payable upon remittance of such earnings. Moreover, due to the availability of foreign income tax credits, management believes the amount of federal income taxes would be immaterial in the event foreign earnings were repatriated. H&R BLOCK 2006 Form 10K 62

  • Page 133
    ... and March for the Canadian tax season. We offer guarantees under our POM program to tax clients whereby we will assume the cost, subject to certain limits, of additional tax assessments, up to a cumulative per client limit of $5,000, attributable to tax return preparation error for which we are...

  • Page 134
    ...a transaction with the City of Kansas City, Missouri, to provide us with sales and property tax savings on the furniture, fixtures and equipment for our new corporate headquarters facility. Under the transaction, the City purchased equipment by issuing $5.3 million in industrial revenue bonds due in...

  • Page 135
    ... purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) thirdparty claims relating to various arrangements in the normal course...

  • Page 136
    ... impact of the RAL Cases on our financial statements. We are also a party to claims and lawsuits pertaining to our electronic tax return filing services, our POM guarantee program, our Express IRA product and tax planning services. These claims and lawsuits include actions by individual plaintiffs...

  • Page 137
    ... public. Investment advice and services are primarily offered through H&R Block Financial Advisors branch offices. CORPORATE - Corporate support departments provide services to our operating segments, consisting of marketing, information technology, facilities, human resources, executive, legal...

  • Page 138
    Information concerning the Company's operations by reportable segment is as follows. (in 000s) Year Ended April 30, REVENUES - Tax Services Mortgage Services Business Services Investment Services Corporate INCOME (LOSS) BEFORE TAXES - Tax Services Mortgage Services Business Services Investment ...

  • Page 139
    ... using the equity method of accounting. Income of subsidiaries is, therefore, reflected in our investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholder's equity and other intercompany balances and transactions. H&R BLOCK 2006 Form 10K...

  • Page 140
    ...TAT E M E N T S (in 000s) Year Ended April 30, 2006 Revenues Expenses: Cost of service revenues Cost of other revenues Selling, general and administrative Operating income Interest expense Other income, net Income before taxes Income taxes Net income H&R Block, Inc. (Guarantor 827,393 827,393 336...

  • Page 141
    ... 30, 2006 Cash & cash equivalents Cash & cash equivalents - restricted Receivables from customers, brokers and dealers, net Receivables, net Intangible assets and goodwill, net Investments in subsidiaries Other assets Total assets Accounts payable to customers, brokers and dealers Long-term debt...

  • Page 142
    ... L O W S (in 000s) Year Ended April 30, 2006 Net cash provided by (used in) operating activities: Cash flows from investing activities: Cash received on residual interests Mortgage loans originated and held for investment Purchases of property & equipment Payments made for business acquisitions Net...

  • Page 143
    ... by operating activities: Cash flows from investing activities: Cash received on residual interests Purchases of property & equipment Payments made for business acquisitions Net intercompany advances Other, net Net cash provided by (used in) investing activities Cash flows from financing activities...

  • Page 144
    ..., our Chief ITEM 9B. OTHER INFORMATION None. H&R BLOCK 2006 Form 10K Executive Officer and Chief Financial Officer have concluded that our Disclosure Controls were effective as of the end of the period covered by this Annual Report on Form 10-K. (b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER...

  • Page 145
    ... conduct that applies to our directors, officers and employees, including our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions. A copy of the code of business ethics and conduct is available on our website at www.hrblock.com. We...

  • Page 146
    ..., 2006, in the section titled ''Employee Agreements, Change ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information called for by this item is contained in our definitive proxy statement filed pursuant to Regulation 14A no later than 120 days PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT...

  • Page 147
    ...to be filed as exhibits to this Form 10-K: 10.6 10.38 10.70 10.77 12 21 23.1 31.1 31.2 32.1 32.2 The H&R Block Executive Performance Plan. Agreement of Settlement dated April 19, 2006 among HSBC Finance Corporation, HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company, Inc., H&R Block...

  • Page 148
    ... Executive Vice President and Chief Financial Officer (principal financial officer) Jerry D. Choate Director David B. Lewis Director Jeffrey E. Nachbor Senior Vice President and Corporate Controller (principal accounting officer) Donna R. Ecton Director Tom D. Seip Director H&R BLOCK 2006 Form...

  • Page 149
    .... 10.10* Form of 1989 Stock Option Plan for Outside Directors Stock Option Agreement, filed as Exhibit 10.9 to the Company's annual report on Form 10-K for the year ended April 30, 2005, file number 1-6089, is incorporated by reference. 10.11* The H&R Block Stock Plan for Non-Employee Directors, as...

  • Page 150
    ... by reference. 10.28 Second Amended and Restated Refund Anticipation Loan Operations Agreement dated as of June 9, 2003, between H&R Block Services, Inc., Household Tax Masters, Inc. and Beneficial Franchise Company, filed as Exhibit 10.27 to the annual report on Form 10-K for the fiscal year ended...

  • Page 151
    ...2006, file number 1-6089, is incorporated herein by reference.* 10.38 Agreement of Settlement dated April 19, 2006 among HSBC Finance Corporation, HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company, Inc., H&R Block, Inc., H&R Block Services, Inc., H&R Block Tax Services, Inc., Block...

  • Page 152
    ... Capital Financial Products, Inc. and Option One Loan Warehouse Corporation, filed as Exhibit 10.54 to the Company's annual report on Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. 10.73 Second Amended and Restated Sale and Servicing Agreement dated...

  • Page 153
    ...Company's annual report on Form 10-K for the year ended April 30, 2005, file number, 1-6089, is incorporated by reference. 10.80 Amended and Restated Sale and Servicing Agreement dated as of August 5, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner...

  • Page 154
    ... to the Pacific Stock Exchange NEW H&R BLOCK HEADQUARTERS - H&R Block is in the process of relocating its headquarters in Kansas City, Missouri, to the new H&R Block Center, an 18-story building at 13th and Main Streets, which will bring together associates now spread among six locations in the...

  • Page 155