HR Block 2006 Annual Report Download - page 92

Revenue from our digital business increased 8.2%, primarily due to a expansion contributed incremental revenues of $24.9 million and pretax
23.3% increase in clients served, partially offset by planned reductions losses of $18.9 million in fiscal year 2005.
in unit prices. Tax preparation and related fees increased $129.4 million, or 8.1%.
Royalty revenue increased $10.2 million, or 5.2%, due to a 5.5% This increase is primarily due to a 7.7% increase in the net average fee
increase in the gross average fee slightly offset by a 1.0% decline in per U.S. client served, resulting from increases in our pricing and the
clients served in franchise offices. complexity of returns prepared. Clients served in our U.S. company-
Revenues earned during fiscal year 2006 in connection with RAL owned offices declined 0.2% from fiscal year 2004.
participations decreased $4.9 million, or 2.7%, from fiscal year 2005. Revenue from our digital business increased 7.9%, primarily due to
This decrease is primarily due to a decrease in the number of RALs, price increases, partially offset by a 6.7% decrease in clients served.
which resulted from increased competition for clients in the early Other service revenues increased $20.6 million, or 12.0%, primarily as
months of the tax season. a result of additional revenues associated with RACs and Express IRAs.
Total expenses increased $167.3 million, or 9.9%, primarily due to Royalty revenues increased $12.7 million, or 6.9%, primarily due to a
$70.2 million of legal reserves and related litigation fees recorded in the 6.3% increase in the gross average fee per client served at our
current year. During the current year we entered into two settlement franchise offices.
agreements. The first was a settlement agreement regarding four Revenues earned during fiscal year 2005 in connection with RAL
separate RAL cases covering 22 states. We also entered into a settlement participations increased $14.4 million, or 8.6%, over fiscal year 2004.
agreement with the plaintiffs in another RAL case. See additional This increase is primarily due to an increase in the dollar amount of
discussion below and in Item 8, note 17 to the consolidated loans in which we purchased participation interests, resulting from an
financial statements. increase in the fee charged by the lender, an increase in our clients’
Cost of services for the current year increased $68.0 million, or 5.4%, average refund size and the maximum loan amount allowed by
from the prior year. Our real estate expansion efforts have contributed the lender.
to a total increase of $43.5 million across all cost of services categories. Cost of services for fiscal year 2005 increased $110.7 million, or 9.7%,
Compensation and benefits increased $39.2 million, or 5.4%, primarily over the prior year. Compensation and benefits increased $54.6 million
due to an increase in staff needed for our new offices and the addition primarily due to increased revenues and an increase in the number of
of costs related to our small business initiatives in the current year. tax professionals and support staff needed in new office locations.
Occupancy expenses increased $35.3 million, or 12.5%, primarily as a Stock-based compensation related to our seasonal associates also
result of higher rent expenses, due to a 9.5% increase in company- increased $4.1 million. Occupancy expenses increased $26.3 million, or
owned offices under lease and a 7.3% increase in the average rent. 10.3%, as a result of an 11.4% increase in U.S. company-owned offices
Depreciation declined $9.7 million, or 17.8%, primarily due to decreased under lease, which also drove increases in depreciation and
capital expenditures compared to the prior year. amortization and supply costs. Of the total increase in occupancy
Other, selling, general and administrative expenses increased expenses, $10.7 million was due to our real estate expansion. Other cost
$29.1 million, or 6.5%, primarily due to a $31.5 million increase in of services increased $11.4 million primarily due to additional expenses
corporate shared services, $20.7 million of which was related to our associated with our POM guarantee and Express IRAs.
marketing efforts. We also incurred $7.5 million in additional corporate Other, selling, general and administrative expenses increased
wages and $7.1 million in additional legal costs in the current year. $31.4 million over fiscal year 2004 primarily due to increased spending
During the fourth quarter of fiscal year 2006, we revised our estimate for related to an $18.8 million increase in allocations from support
the provision for bad debt related to our participation interests in RALs. departments and additional legal expenses of $10.2 million.
This change decreased our provision for bad debt $18.0 million during Pretax income of $663.5 million for fiscal year 2005 represents a 3.9%
the fourth quarter of the current fiscal year. See additional discussion in increase from the prior year. The segment’s operating margin declined
Item 8, note 1 to the consolidated financial statements. 100 basis points to 28.1% in fiscal year 2005.
The pretax income for fiscal year 2006 decreased $73.8 million, or RAL LITIGATION –On December 21, 2005, we entered into a settlement
11.1%, from 2005, primarily due to the impact of the current year agreement regarding litigation pertaining to our RAL programs entitled
RAL litigation. Deadra D. Cummins, et al. v. H&R Block, Inc. et al.; Mitchell v.
FISCAL 2005 COMPARED TO FISCAL 2004 –Tax Services’ revenues H&R Block, Inc. et al.; Green v. H&R Block, Inc. et al.; and Becker v.
increased $167.1 million, or 7.6%, compared to fiscal year 2004. In the H&R Block, Inc. (the ‘‘Cummins Settlement Agreement’’).Pursuant to
U.S., we opened a net 1,252 new offices, 609 of which were part of the the Settlement Agreement’s terms, we will contribute a total of up to
expansion of our company-owned retail distribution network. This $62.5 million in cash for purposes of making payments to the settlement
class, paying all attorneys’ fees and costs to class counsel, and covering
22
H&R BLOCK 2006 Form 10K