HR Block 2006 Annual Report Download - page 135

trustee for our benefit as the sole bondholder, we, in effect, control RESTRUCTURING CHARGE –During fiscal year 2006, we initiated a
enforcement of the lease against ourselves. As a result of the capital restructuring plan within our Mortgage Services segment to reduce
lease treatment, the furniture, fixtures and equipment will remain a costs in our mortgage operations. We have substantially completed the
component of property, plant and equipment in our consolidated restructuring, which included eliminating approximately 1,200 positions
balance sheet. As a result of the legal right of offset, the capital lease and closing some of our branch offices. During fiscal year 2006, we
obligation and the corresponding bond investments have been recorded a $12.6 million pretax restructuring charge, consisting of
eliminated in consolidation. The transaction provides us with property $6.7 million in employee severance costs and $5.9 million in contract
tax exemptions for the leased furniture, fixtures and equipment. termination costs. Of the total pretax charge, $2.5 million of the contract
Additional revenue bonds may be issued to cover the costs of certain termination costs are included in cost of service revenues and the
improvements to this facility. The total amount of revenue bonds remainder in cost of other revenues in our consolidated statement of
authorized for issuance is $31.0 million. income. The significant components of the restructuring charge
Substantially all of the operations of our subsidiaries are conducted incurred as of April 30, 2006 are summarized as follows:
(in 000s)
in leased premises. Most of the operating leases are for periods ranging
from 3 years to 5 years, with renewal options and provide for fixed Charges Cash Accrual
to date payments balance
monthly rentals. Future minimum lease commitments at April 30, 2006
are as follows: Employee severance costs $ 6,742 $ 5,005 $ 1,737
(in 000s) Contract termination costs 5,882 61 5,821
2007 $ 269,890 $ 12,624 $ 5,066 $ 7,558
2008 210,596
The liability related to this restructuring charge is included in
2009 161,388
accounts payable, accrued expenses and other on our consolidated
2010 105,163
2011 51,960
balance sheet. Payments of employee severance costs were
2012 and beyond 57,819
substantially completed by May 2006. The remaining contract
$ 856,816
termination obligations primarily relate to lease obligations for vacant
space resulting from branch office closings, as certain lease terms
Our rent expense for fiscal years 2006, 2005 and 2004 totaled extend through October 2011.
$339.6 million, $275.3 million and $241.2 million, respectively. Employee severance costs include estimates regarding the amount of
In the regular course of business, we are subject to routine severance payments made to certain terminated associates, and
examinations by federal, state and local taxing authorities. In contract termination costs include estimates regarding the length of
management’s opinion, the disposition of matters raised by such taxing time required to sublease vacant space and expected recovery rates.
authorities, if any, in such tax examinations would not have a material Actual results could vary from these estimates.
adverse impact on our consolidated financial statements. RISKS –Loans to borrowers who do not meet traditional underwriting
We routinely enter into contracts that include embedded criteria, or non-prime borrowers, present a higher level of risk of default
indemnifications that have characteristics similar to guarantees. Other than prime loans, because of previous credit problems, higher
guarantees and indemnifications of the Company and its subsidiaries debt-to-income levels, lack of income documentation or limited credit
include obligations to protect counter parties from losses arising from history. Loans to non-prime borrowers also involve additional liquidity
the following: (1) tax, legal and other risks related to the purchase or risks, as these loans generally have a more limited secondary market
disposition of businesses; (2) penalties and interest assessed by federal than prime loans. During fiscal year 2006 approximately 80.0% of our
and state taxing authorities in connection with tax returns prepared for non-prime loan originations were adjustable rate mortgages, 21.1% of
clients; (3) indemnification of our directors and officers; and (4) third- non-prime loan originations, including both adjustable rate mortgages
party claims relating to various arrangements in the normal course of and fixed rate mortgages, were interest-only mortgage loans, and 13.4%
business. Typically, there is no stated maximum payment related to of both adjustable rate mortgages and fixed rate mortgages were loans
these indemnifications, and the term of indemnities may vary and in with a 40-year amortization schedule. The actual rates of delinquencies,
many cases is limited only by the applicable statute of limitations. The foreclosures and losses on loans to non-prime borrowers could be
likelihood of any claims being asserted against us and the ultimate higher under adverse economic conditions than those currently
liability related to any such claims, if any, is difficult to predict. While experienced in the mortgage lending industry in general. While we
we cannot provide assurance we will ultimately prevail in the event any believe the underwriting procedures and appraisal processes we employ
such claims are asserted, we believe the fair value of these guarantees enable us to mitigate certain risks inherent in loans made to these
and indemnifications is not material as of April 30, 2006. borrowers, no assurance can be given that such procedures or
H&R BLOCK 2006 Form 10K
65