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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: April 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission File Number: 1-6089
H&R BLOCK, INC.
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(Exact name of registrant as specified in its charter)
Missouri 44-0607856
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
4400 Main Street, Kansas City, Missouri 64111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 753-6900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 1996, was $3,425,760,718.
Number of shares of registrant's Common Stock, without par value, outstanding
on June 1, 1996: 103,419,705.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to security
holders for the fiscal year ended April 30, 1996, are incorporated herein by
reference in response to Part II, Items 5 through 8, inclusive, and certain
specified portions of the registrant's definitive proxy statement to be filed
within 120 days after April 30, 1996, are incorporated herein by reference in
response to Part III, Items 10 through 13, inclusive. A certain specified
portion of the annual report on Form 10-K of CompuServe Corporation for the
fiscal year ended April 30, 1996, is incorporated herein by reference in
response to Part I, Item 1.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a diversified services corporation that was organized
in 1955 under the laws of the State of Missouri (the "Company"). It is the
parent corporation in a two-tier holding company structure following a 1993
corporate restructuring. The second-tier holding company is H&R Block Group,
Inc., a Delaware corporation and the direct owner of all of the shares of H&R
Block Tax Services, Inc., the Company's primary operating subsidiary involved
in the business of income tax return preparation, electronic filing of income
tax returns and the performance of other tax related services, as well as all
of the shares of Block Financial Corporation, a subsidiary that develops and
provides technology-driven financial services. More than 90% of the Company's
total revenues from continuing operations are generated by H&R Block Tax
Services, Inc. Developments within H&R Block Tax Services, Inc. and Block
Financial Corporation during fiscal year 1996 are described in the section
below entitled "Description of Business."
H&R Block Group, Inc. owns slightly in excess of 80% of CompuServe
Corporation ("CompuServe") following CompuServe's initial public offering of
its common stock in April 1996. Pursuant to such offering, CompuServe sold
18.4 million shares of its common stock to the public at $30.00 per share. The
net proceeds of the initial public offering received by CompuServe were
$518,819,000. The initial public offering was the initial phase of a complete
separation of CompuServe Corporation from the Company first announced in
February 1996. The Company has indicated its intent to complete the separation
by means of a pro rata distribution of the remaining 74,200,000 shares of
CompuServe Corporation stock to shareholders of the Company on or about
November 1, 1996, subject to certain conditions, including shareholder approval
of the distribution at the 1996 annual meeting of shareholders of the Company
and the receipt of a favorable ruling from the Internal Revenue Service ("IRS")
as to the tax-free nature of the transaction. In the Company's financial
statements for fiscal year
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1996, CompuServe's results have been reflected as discontinued operations.
The description of the business of CompuServe Corporation is contained in
the annual report on Form 10-K of CompuServe Corporation for the fiscal year
ended April 30, 1996, in the section entitled "Business and Properties," and
such description is incorporated herein by reference. A copy of the Form 10-K
of CompuServe Corporation will be provided free of charge upon request sent to
H&R Block, Inc., 4400 Main Street, Kansas City, Missouri 64111, Attention:
Investor Relations.
During the year ended April 30, 1996, the Company was not involved in any
bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations and the Company did not acquire or
dispose of any material amount of assets otherwise than in the ordinary course
of business. See, however, the discussion above concerning the initial public
offering by CompuServe Corporation of 18.4 million shares of its common stock
in April 1996.
On May 1, 1995, the Company sold MECA Software, Inc. ("MECA"), a Delaware
corporation involved in developing, publishing and marketing personal
productivity software products, to Bank of America, N.T. & S.A., and
NationsBank, N.A. (Carolinas) for $35 million. The sale resulted in a pretax
gain of $12.4 million. MECA's primary product was Managing Your Money(R),
computer software designed to assist individuals in managing personal finances.
The sale was exclusive of the Company's rights to publish Kiplinger TaxCut(R)
and several other software products.
Thomas M. Bloch resigned as President, Chief Executive Officer and a
director of the Company, effective August 5, 1995, in order to pursue
non-business alternatives. Richard H. Brown succeeded Thomas Bloch and served
as President, Chief Executive Officer and a director of the Company from August
5, 1995, until his resignation from such positions effective June 19, 1996, in
order to become chief executive of Cable & Wireless Group p.l.c. in London,
England. On June 19, 1996, Frank L. Salizzoni, a director of the Company, was
elected its President and Chief Executive Officer and will serve as such on an
interim basis until a successor for Mr. Brown is elected. A search committee
consisting of three members of the Board of Directors was appointed to assist
in the process of selecting a new Chief Executive Officer of the Company.
NUMBER OF EMPLOYEES
The Company, including its direct and indirect wholly owned subsidiaries,
has approximately 1,300 regular full-time employees. The highest number of
persons employed by the Company during the fiscal year ended April 30, 1996,
including seasonal employees, was approximately 79,000.
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DESCRIPTION OF BUSINESS
DIVERSIFIED SERVICES
The Company provides to the public diversified services that include
income tax return preparation, electronic filing and other services related to
income tax return preparation, as well as technology-driven financial services.
INCOME TAX RETURN PREPARATION AND RELATED SERVICES
Generally. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public through a system of offices operated by the Company or
by others to whom the Company has granted franchises. The Company and its
franchisees provide income tax return preparation services, electronic filing
services and other services relating to income tax return preparation in many
parts of the world. For U.S. returns, H&R Block offers a refund anticipation
loan service in conjunction with its electronic filing service. H&R Block also
markets its knowledge of how to prepare income tax returns through its income
tax training schools. As discussed below, H&R Block introduced new products
and services to its tax customers during fiscal year 1996.
Following the end of fiscal year 1996, the Company announced that its tax
operations will be divided structurally into three areas, each targeting
specific markets and focusing on new products and services and areas for
expansion. H&R Block Tax Services, Inc., will focus on tax business operations
in the United States. H&R Block Premium, a division of Tax Services, will
compete for those clients who typically employ accounting firms to prepare
their tax returns. H&R Block International will focus on strengthening
current foreign markets, such as Canada and Australia, and identify and develop
new ones.
References in this section to "Tax Services" include H&R Block Tax
Services, Inc., and its subsidiaries involved in the income tax return
preparation business (including those foreign subsidiaries now operating as a
part of H&R Block International). References in this section to "H&R Block"
include both Tax Services and its franchisees.
Taxpayers Served. H&R Block served approximately 17,415,000 taxpayers
worldwide during fiscal year 1996, an increase from the 17,060,000 taxpayers
served in fiscal year 1995. The number of taxpayers served by H&R Block in
the United States alone was approximately 14,800,000. "Taxpayers served"
includes taxpayers for whom H&R Block prepared income tax returns as well as
taxpayers for whom Block provided only electronic filing services.
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Tax Return Preparation. During the 1996 income tax filing season (January
2 through April 30), H&R Block offices prepared approximately 13,360,000
individual United States income tax returns, compared to the preparation of
12,918,000 such returns in fiscal year 1995. These U.S. returns constituted
about 12% of an IRS estimate of total U.S. individual income tax returns filed
during fiscal year 1996. The following table shows the approximate number of
U.S. income tax returns prepared at H&R Block offices during the last five tax
filing seasons:
Tax Season Ended April 30
(in thousands)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Returns Prepared 12,973 12,968 13,036 12,918 13,360
</TABLE>
During the tax season, most H&R Block offices are open from 9:00 a.m. to
9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have
been developed so that a customer's tax return is prepared in his or her
presence, in most instances in less than one hour, on the basis of information
furnished by the customer. In all company-owned offices and most franchised
offices, tax returns are prepared with the assistance of a computer. After the
customer's return has been initially prepared, he or she is advised of the
amount of his or her tax due or refund. The return, however, is retained and
reviewed for accuracy. After completion of this review and after copies of the
return have been made, the return is presented to the customer for signature
and filing. These post-preparation procedures must be modified somewhat for
customers who desire to have their returns electronically filed (see
"Electronic Filing," below).
If an H&R Block preparer makes an error in the preparation of a customer's
tax return that results in the assessment of any interest or penalties on
additional taxes due, while H&R Block does not assume the liability for the
additional taxes (except under its "Peace of Mind" Program described under "New
Products and Services," below), it guarantees payment of the interest and
penalties.
H&R Block Premium. In addition to its regular offices, H&R Block offers
tax return preparation services at H&R Block Premium offices in the United
States and Canada. Appealing to taxpayers with more complicated returns, H&R
Block Premium, formerly known as Executive Tax Service, stresses the
convenience of appointments, year-round tax service from the same preparer and
private office interviews. The number of H&R Block Premium offices increased
from 528 in fiscal year 1995 to 576 in 1996. In fiscal 1996, the number of H&R
Block Premium clients increased to approximately 643,200,
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compared to approximately 552,800 in 1995. The Company plans to continue to
expand the H&R Block Premium segment of its tax return preparation business.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or
her refund deposited by the Treasury Department directly into his or her
account at a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 1996 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Beneficial National Bank in
amounts based upon the customer's anticipated federal income tax refunds.
Income tax return information is simultaneously transmitted by H&R Block to the
IRS and the lending bank. Within a few days after the date of filing, a check
in the amount of the loan, less the bank's transaction fee and H&R Block's tax
return preparation fee and electronic filing fee, is received by the RAL
customer. The IRS then directly deposits the participating customer's actual
federal income tax refund into a designated account at the bank in order for
the loan to be repaid.
Tax Services and its franchisees filed approximately 6,298,000 U.S. tax
returns electronically in 1996, compared to 5,941,000 in fiscal 1995 and
7,538,000 in fiscal 1994. Approximately 2,361,000 refund anticipation loans
were processed in 1996 by H&R Block, compared to 2,325,000 in fiscal 1995 and
5,554,000 in 1994.
In 1996, H&R Block offered a service to transmit state income tax returns
electronically to state tax authorities in 33 states (compared to 28 states in
fiscal 1995) and plans to continue to expand this program as more states make
this filing alternative available to their taxpayers.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide Tax Services with a source of trained income tax
return preparers. During the 1996 fiscal year, 123,159 students enrolled in
H&R Block's basic and advanced income tax courses, compared to 118,316 students
during fiscal year 1995.
New Products and Services. In fiscal year 1996, H&R Block introduced five
new products and services. Under the "Peace of Mind" Program, customers are
essentially offered an extended warranty with respect to their tax returns. In
addition to the Company's standard guarantee to pay penalty and interest
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attributable to errors made by an H&R Block preparer, under the Peace of Mind
Program, the Company agrees to pay any additional taxes owed by the customer
(for which liability would not ordinarily accrue) resulting from such errors,
from tax law changes or from revised interpretations of Treasury Regulations.
The Company also offered "Block at Home," an in-home tax preparation service
for those customers who prefer both convenience and privacy, and the Last Will
and Testament Kit, a simple, self-service instrument. "BlockCheck" was a new
service aimed at self-preparers desiring a second opinion about their tax
returns. Finally, "Block Value Club," a consumer-friendly packaging of new
services, was offered during fiscal year 1996. For a single, low fee, Value
Club members received a discount on tax return preparation fees, personal copy
and faxing services, a CompuServe trial membership, a discount on the H&R Block
income tax return preparation course and travel discounts.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Free-standing offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year only a limited number of
offices are open, but through telephone listings, H&R Block personnel are
available to provide service to customers throughout the entire year.
In fiscal year 1996, H&R Block also operated 910 offices in department
stores, including 765 offices in Sears, Roebuck & Co. stores operated as "Sears
Income Tax Service by H&R Block." During the 1996 tax season, the Sears'
facilities constituted approximately 7.9% of the tax office locations of H&R
Block. Tax Services is a party to a license agreement with Sears under which
Tax Services will continue to operate in Sears locations throughout the United
States. Such license agreement expires on December 31, 2004. Tax Services
believes its relations with Sears to be excellent and that both parties to the
license arrangement view the operations thereunder to date as satisfactory.
On April 15, 1996, there were 9,678 H&R Block offices in operation
principally in all 50 states, the District of Columbia, Canada, Australia and
Europe, compared to 9,703 offices in operation on April 15, 1995. Of the
9,678 offices, 4,738 were owned and operated by Tax Services and 4,940 were
owned and operated by independent franchisees. Of such franchised offices,
3,341 were owned and operated by "satellite" franchisees of Tax Services
(described below), 925 were owned and operated by "major" franchisees
(described below) and 674 were owned and operated by satellite franchisees of
major franchisees. In the United States alone, H&R Block operated 8,308
offices.
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Two types of franchises have principally been granted by the Company and
its subsidiaries. "Major" franchisees entered into agreements with the Company
(primarily in the Company's early years) covering larger cities and counties
and providing for the payment of franchise royalties based upon a percentage of
gross revenues of their offices. Under the agreements, the Company granted to
each franchisee the right to the use of the name "H&R Block" and provided a
Policy and Procedure Manual and other supervisory services. Tax Services
offers to sell furniture, signs, advertising materials, office equipment and
supplies to major franchisees. Each major franchisee selects and trains the
employees for his or her office or offices. Since March 1993, HRB Royalty,
Inc., a wholly-owned subsidiary of Tax Services, has served as the franchisor
under the major franchise agreements.
In smaller localities, Tax Services has granted what it terms "satellite"
franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local advertising, initial training,
and supervisory services and, consequently, pays Tax Services a higher
percentage of his or her gross tax return preparation and related service
revenues as a franchise royalty than do major franchisees. Many of the
satellite franchises of Tax Services are located in cities with populations of
15,000 or less. Some major franchisees also grant satellite franchises in
their respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure
compliance with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and competing tax return preparation businesses and it will
continue to do so if future conditions warrant such acquisitions and
satisfactory terms can be negotiated.
In December 1995, Tax Services purchased the assets of Nationwide Income
Tax Service Company, headquartered in Dearborn, Michigan. Nationwide operated
eight company-owned offices and franchised 30 other locations, primarily in the
Detroit metropolitan area.
After the conclusion of fiscal year 1996, the Company acquired Bay Colony,
Ltd., a major franchise serving central and eastern Virginia and the northeast
corner of North Carolina through 145 offices and 33 satellite offices.
International Operations. H&R Block prepares U.S. income tax returns in
other countries, Canadian tax returns in Canada and Australian tax returns in
Australia. The returns prepared at offices in countries outside of the United
States constituted 16.4% of the total returns prepared by H&R Block in the last
fiscal year.
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H&R Block also offered the electronic filing of U.S. income tax returns at
franchised offices located in Europe and the electronic filing of Australian
and Canadian income tax returns at H&R Block offices in Australia and Canada,
respectively.
Canadian Operations. H&R Block Canada, Inc., a Tax Services' subsidiary,
and its franchisees prepared approximately 2,223,000 Canadian returns filed
with Revenue Canada during the 1996 income tax filing season, compared with
2,141,000 Canadian returns prepared in the previous year. The number of
offices operated by H&R Block in Canada decreased from 1,054 in fiscal year
1995 to 1,016 in fiscal year 1996.
The Company and its franchisees offer a refund discount ("Cash Back")
program to their customers in Canada. The procedures which H&R Block must
follow in conducting the program are specified by Canadian law. In accordance
with current Canadian regulations, if a customer's tax return indicates that
such customer is entitled to a tax refund, a check is issued by H&R Block to
the customer for an amount which is equal to the sum of (1) 85% of that portion
of the anticipated refund which is less than or equal to $300 and (2) 95% of
that portion of the refund in excess of $300. The customer assigns to H&R
Block the full amount of the tax refund to be issued by Revenue Canada. The
refund check is then sent by Revenue Canada directly to H&R Block and deposited
by H&R Block in its bank account. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the fee for tax
refund discounting. This program is financed by short-term borrowing. The
number of returns discounted under the Cash Back program increased to
approximately 681,000 in fiscal year 1996 from 629,000 in fiscal year 1995.
Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's subsidiary in Australia, and by franchisees in
Australia, increased to approximately 389,000 in fiscal year 1996 from 362,000
in fiscal year 1995. The number of offices operated by H&R Block in fiscal
year 1996 was 297, compared to 293 offices operated in fiscal 1995. The tax
season in Australia begins in July and ends in October.
TECHNOLOGY-DRIVEN AND OTHER SERVICES
Generally. Block Financial Corporation ("BFC") is involved in the
following businesses:
(1) financial services delivered by technology and financial service
delivery technology;
(2) financial services associated with Tax Services and its typical
customer; and
(3) software.
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BFC developed the CONDUCTOR(R) service, a technology that delivers
financial services online through existing commercial online services, the
Internet or directly through leased networks. CONDUCTOR provides a national
online electronic credit card statement that provides the cardholder with
access to transaction records and credit availability and the ability to
download transactions from the Internet into a personal financial software
program. A similar service that allows cardholders access online is offered on
CompuServe's information service. Through alliances formed by BFC with various
financial services providers, CONDUCTOR subscribers will use the service for
electronic bill payment and discounted brokerage services, and to review other
financial account statements. Financial institutions will use the system to
communicate directly with their customers.
In excess of 113,400 CompuServe Visa credit cards were issued by the end
of fiscal year 1996, compared to 88,600 accounts at the end of fiscal 1995.
Such cards are issued under a co-branding agreement between BFC and Columbus
Bank and Trust Company, Columbus, Georgia. The portfolio for such card
increased from approximately $107 million at the end of fiscal year 1995 to
more than $162 million by the end of fiscal year 1996. BFC introduced the
WebCard(SM) Visa in January 1996, focusing its marketing efforts toward
Internet/World Wide Web users. The number of WebCard accounts at year end
was approximately 6,000. During fiscal year 1996, BFC sold approximately
19,000 H&R Block branded bank card accounts with $17 million in outstanding
balances.
BFC has developed a nonconforming mortgage origination and funding
operation in which fixed and adjustable rate mortgages, including purchase
money first mortgages, refinance first mortgages and second mortgages are
offered to the public. Nonconforming mortgages are those that may not be
offered through government-sponsored loan agencies. The loans are processed
and serviced by third-party service providers. At present, BFC offers
mortgages through brokers and through a few H&R Block franchisees. BFC plans
to expand this business, including offering these products through Tax
Service's network of company-owned offices.
BFC offers to franchisees of Tax Services lines of credit with reasonable
interest rates under a program designed to better enable the franchisees to
refinance existing business debt, expand or renovate offices or meet off-season
cash flow needs. A franchise equity loan is a revolving line of credit secured
by the H&R Block franchise and the underlying business.
BFC's software business develops and markets the Kiplinger TaxCut(R) tax
preparation software package, as well as markets the Kiplinger Home Legal
Advisor(SM) and Kiplinger Small Business Attorney(SM) software products. In
May 1995, BFC sold MECA Software, Inc., the publisher of the Managing Your
Money(R) personal finance software.
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SEASONALITY OF BUSINESS
Since most of the customers of Tax Services file their tax returns during
the period from January through April of each year, substantially all of Tax
Services' revenues from income tax return preparation, related services and
franchise royalties are received during this period. As a result, Tax Services
operates at a loss through the first nine months of its fiscal year.
Historically, such losses primarily reflect payroll of year-round personnel,
training of income tax preparers, rental and furnishing of tax offices, and
other costs and expenses relating to preparation for the following tax season.
BFC's income tax return preparation software business is also seasonal, with
the substantial portion of its revenues from this business generated during the
tax season.
SERVICE MARKS AND TRADEMARKS
HRB Royalty, Inc., a Delaware corporation and a wholly-owned subsidiary
of Tax Services, claims ownership of the following service marks and trademark
registered on the principal register of the United States Patent and Trademark
Office:
H&R Block in Two Distinct Designs
The Income Tax People
H&R Block Income Tax and Design
Income Tax Saver
Executive (when used in connection with the
preparation of income tax returns for others)
Rapid Refund H&R Block and Design
Accufile
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
Nation's Largest Tax Service
Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax
Services.
BFC claims ownership of the following service mark and trademark
registered on the principal register of the United States Patent and Trademark
Office:
CONDUCTOR
TaxCut
In addition, BFC claims ownership of the following unregistered service
marks:
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B and Design Small Business Attorney
Block Financial Web
Block Financial and Design WebAccount
CONDUCTOR and Design WebBank
CONDUCTOR Card Review WebBroker
CONDUCTOR.COM WebBuyer
DittoCard WebCard
FINANCIAL FINDER WebCheck
FINANCIAL CONDUCTOR WebChecking
Home Legal Advisor WebPay
NetGuard WebQuote
COMPETITIVE CONDITIONS
The tax return preparation and electronic filing business is highly
competitive. Tax Services considers its primary source of tax return
preparation competition to be the individual who prepares his own tax return.
In addition, there are a substantial number of tax return preparation firms.
Many of these firms and many firms not otherwise in the tax return preparation
business are involved in providing electronic filing and refund anticipation
loan services to the public. Commercial tax return preparers and electronic
filers are highly competitive with regard to price, service and reputation for
quality. Tax Services believes that in terms of the number of offices and tax
returns prepared it is the largest tax return preparation firm in the United
States. Tax Services also believes that in terms of the number of offices and
tax returns electronically filed in fiscal year 1996, it is the largest
provider of electronic filing services in the United States.
The financial services, online financial services delivery technology
and software businesses are highly competitive and consist of a large number of
companies. In the software industry, Intuit, Inc. is a dominant supplier of
personal financial software. In the other businesses in which BFC competes, no
single supplier can be considered to occupy a dominant position.
ITEM 2. PROPERTIES.
The executive offices of both the Company and Tax Services are located
at 4400 Main Street, Kansas City, Missouri, in a multi-level building owned by
Tax Services. The building was constructed in 1963, expanded in 1965, 1973 and
1981, and again expanded with the completion of a four-story addition during
fiscal year 1996. Most other offices of Tax Services (except those in
department stores) are operated in premises held under short-term leases
providing fixed monthly rentals, usually with renewal options.
BFC's executive offices are located in leased offices at 4435 Main
Street, Kansas City, Missouri.
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ITEM 3. LEGAL PROCEEDINGS.
Following the end of fiscal year 1996, CompuServe Corporation and the
Company were each served with a Summons and Class Action Complaint in a case
entitled Greenfield v. CompuServe Corporation, et al. and filed in the Court of
Common Pleas, Franklin County, Ohio. Also following the end of fiscal year
1996, a Class Action Complaint for Violations of Federal Securities Laws was
filed in the United States District Court for the Southern District of Ohio in a
case entitled Romine v. CompuServe Corporation, et al. Directors and certain
executive officers of CompuServe at the time of the initial public offering of
CompuServe common stock in April 1996 are additional named defendants in these
actions. The Complaints allege violations of the Securities Act of 1933, the
Ohio Securities Code and common law. The defendants intend to vigorously
defend the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has
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been elected to serve at the discretion of the Board of Directors of the
Company, are:
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ---------
<S> <C>
Henry W. Bloch (73) Chairman of the Board since August 1992; Chairman of the Board and
Chief Executive Officer from August 1989 through July 1992; Member
of the Board of Directors since 1955.
Richard H. Brown (49)1 President and Chief Executive Officer since August 1995; Member of
the Board of Directors since August 1995. See Note 1.
George T. Robson (49) Senior Vice President and Chief Financial Officer since January 1996;
Treasurer since June 1, 1996; See Note 2.
William P. Anderson (47) President of Block Financial Corporation since May 1992; Senior Vice
President and Chief Financial Officer from September 1994 until September
1995; Vice President, Corporate Development and Chief Financial Officer from
August 1992 until September 1994; Vice President, Corporate Development from
December 1991 until August 1992; See Note 3.
Ozzie Wenich (53) President, H&R Block International, since June 1, 1996; Vice President, Finance
and Treasurer from October 1994 through May 1996; Vice President, Corporate Controller
and Treasurer from March 1994 until October 1994; Vice President and Corporate
Controller from September 1985 until March 1994.
Thomas L. Zimmerman (46) President, H&R Block Tax Services, Inc., since June 1, 1996; Executive Vice President,
Field Operations, H&R Block Tax Services, Inc. from May 1994 through May 1996; Senior
Vice President, Central Tax Services,
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ---------
<S> <C>
H&R Block Tax Services, Inc., from April 1993 through April 1994; Vice President,
Director of Central Tax Operations, H&R Block, Inc., from May 1992 through March
1993; Regional Director, H&R Block, Inc., from 1979 through April 1992.
Robert A. Weinberger (52) Vice President, Government Relations, since March 18, 1996. See Note 4.
Cheryl L. Givens (30) Assistant Vice President and Corporate Controller since June 1, 1996; Corporate
Accounting Manager from May 1994 through May 1996; Special Projects Accountant from
March 1993 through April 1994. See Note 5.
</TABLE>
Note 1: Mr. Brown resigned as President, Chief Executive Officer and a
director of the corporation effective June 19, 1996, upon
acceptance of such resignation by the Board of Directors that
day. In addition to accepting Mr. Brown's resignation, the Board
of Directors, at its meeting on June 19, 1996, elected Frank L.
Salizzoni as President and Chief Executive Officer, effective
immediately.
Mr. Brown served as Vice Chairman of Ameritech Corporation from
1993 until August 1995 and as President and Chief Executive
Officer of Illinois Bell Telephone Co., a subsidiary of Ameritech
Corporation, from 1990 until 1993.
Mr. Salizzoni, age 58, has been a director of the Company since
1988. He was President and Chief Operating Officer of USAir
Group, Inc. and USAir, Inc. from March 1994 to April 1996 and
Executive Vice President - Finance, USAir, Inc. from 1990 until
March 1994.
Note 2: Mr. Robson was Senior Vice President of Unisys Corporation from
April 1991 until January 1996 and Chief Financial Officer of such
corporation from 1990 until January 1996.
Note 3: Mr. Anderson was a partner in KPMG Peat Marwick, accounting firm,
from 1984 until December 1991, in Atlanta, Georgia, serving in
various capacities, including responsibility for the firm's
national corporate finance consulting practice.
15
<PAGE> 16
Note 4: Mr. Weinberger was Director, Washington Affairs, Unilever United
States, Inc., from February 1991 until April 1995.
Note 5: Ms. Givens was Senior Auditor, Price Waterhouse, from July 1991
until March 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1996,
under the heading "Common Stock Data," and is hereby incorporated by reference.
The Company's Common Stock is traded principally on the New York Stock
Exchange. The Company's Common Stock is also traded on the Pacific Stock
Exchange. On June 10, 1996, there were 35,634 stockholders of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1996,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1996,
under the heading "Management's Discussion and Analysis," and is hereby
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a)1 is
contained in the Company's annual report to security holders for the fiscal
year ended April 30, 1996, and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in the registrant's accountants during the two
most recent fiscal years or any subsequent interim time period.
16
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is contained in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later
than 120 days after April 30, 1996, in the section titled "Election of
Directors" and in Item 4a of Part I of this report, and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later
than 120 days after April 30, 1996, in the sections entitled "Directors'
Meetings, Compensation and Committees" and "Compensation of Executive
Officers," and is incorporated herein by reference, except that information
contained in the section entitled "Compensation of Executive Officers" under
the subtitles "Performance Graph" and "Compensation Committee Report on
Executive Compensation" is not incorporated herein by reference and is not to
be deemed "filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information called for by this item is contained in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later
than 120 days after April 30, 1996, in the section titled "Election of
Directors" and in the section titled "Information Regarding Security Holders,"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later
than 120 days after April 30, 1996, in the section titled "Election of
Directors," and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of H&R
Block, Inc., and subsidiaries are incorporated by
reference from the Company's annual report to security
holders for the year ended April 30, 1996:
17
<PAGE> 18
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Earnings 20
Consolidated Balance Sheets 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
Quarterly Financial Data 31
Independent Auditors' Report 32
</TABLE>
2. Financial Statement Schedules
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable,
the information is not material or the information is
set forth in the financial statements or notes thereto.
3. Exhibits
3(a) Restated Articles of Incorporation of H&R Block, Inc., as
amended, filed as Exhibit 4(a) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31,
1991, are incorporated herein by reference.
3(b) Bylaws of H&R Block, Inc., as amended, filed as Exhibit
3(b) to the Company's annual report on Form 10-K for the
fiscal year ended April 30, 1995, are incorporated
herein by reference.
4(a) Conformed copy of Rights Agreement dated as of July 14,
1988 between H&R Block, Inc., and Centerre Trust Company
of St. Louis, filed on August 9, 1993 as Exhibit 4(c) to
the Company's Registration Statement on Form S-8 (File
No. 33-67170), is incorporated herein by reference.
4(b) Copy of Amendment to Rights Agreement dated as of May 9,
1990 between H&R Block, Inc. and Boatmen's Trust Company,
filed as Exhibit 4(b) to the Company's annual report on
Form 10-K for the fiscal year ended April 30, 1995, is
incorporated by reference.
4(c) Copy of Second Amendment to Rights Agreement dated
September 11, 1991 between H&R Block, Inc. and Boatmen's
Trust Company, filed as Exhibit 4(c) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
18
<PAGE> 19
4(d) Copy of Third Amendment to Rights Agreement dated May 10,
1995 between H&R Block, Inc. and Boatmen's Trust Company,
filed as Exhibit 4(d) to the Company's annual report on
Form 10-K for the fiscal year ended April 30, 1995, is
incorporated by reference.
4(e) Form of Certificate of Designation, Preferences and
Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(e) to the Company's annual
report on Form 10-K for the fiscal year ended April 30,
1995, is incorporated by reference.
4(f) Form of Certificate of Designation, Preferences and
Rights of Delayed Convertible Preferred Stock of H&R
Block, Inc., filed as Exhibit 4(f) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
10(a) The Company's 1984 Long-Term Executive Compensation Plan,
as amended (terminated as of September 8, 1993, except
with respect to awards then outstanding thereunder),
filed as Exhibit 28(a) to the Company's quarterly report
on Form 10-Q for the quarter ended October 31, 1991, is
incorporated herein by reference.
10(b) The Company's 1993 Long-Term Executive Compensation Plan,
as amended, filed as Exhibit 10(a) to the Company's
quarterly report on Form 10-Q for the quarter ended
January 31, 1996, is incorporated herein by reference.
10(c) The H&R Block Long-Term Performance Program, as amended,
filed as Exhibit 10(c) to the Company's annual report on
Form 10-K for the fiscal year ended April 30, 1994, is
incorporated herein by reference.
10(d) The H&R Block Deferred Compensation Plan for Directors,
as amended, filed as Exhibit 10 to the Company's
quarterly report on Form 10-Q for the quarter ended July
31, 1994, is incorporated herein by reference.
10(e) The H&R Block Deferred Compensation Plan for Executives,
as amended (Amendments 1 through 5), filed as Exhibit
10(e) to the Company's annual report on Form 10-K for the
fiscal year ended April 30, 1994, is incorporated herein
by reference.
10(f) Amendment No. 6 to H&R Block Deferred Compensation Plan
for Executives, filed as Exhibit 10(b) to the Company's
quarterly report on Form 10-Q for the quarter ended July
31, 1995, is incorporated herein by reference.
19
<PAGE> 20
10(g) The H&R Block Supplemental Deferred Compensation Plan
for Executives, filed as Exhibit 10(f) to the Company's
annual report on Form 10-K for the fiscal year ended April
30, 1994, is incorporated herein by reference.
10(h) Amendment No. 1 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(a) to the Company's quarterly report on Form 10-Q for
the quarter ended October 31, 1994, is incorporated herein
by reference.
10(i) Amendment No. 2 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(c) to the Company's quarterly report on Form 10-Q for
the quarter ended July 31, 1995, is incorporated herein by
reference.
10(j) The Amended and Restated H&R Block, Inc. Retirement Plan
for Non-Employee Directors, filed as Exhibit 10(h) to
the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1995, is incorporated herein by
reference.
10(k) The Company's 1989 Stock Option Plan for Outside
Directors, as amended, filed as Exhibit 28(b) to the
Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1991, is incorporated herein by
reference.
10(l) Executive Employment Agreement between the Company and
Richard H. Brown, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the quarter
ended July 31, 1995, is incorporated herein by reference.
10(m) Restricted Shares Agreement dated August 5, 1995, between
the Company and Richard H. Brown, filed as Exhibit 10 to
the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1995, is incorporated by
reference.
10(n) Letter dated December 20, 1995, setting forth the
compensatory arrangement for George T. Robson, Senior
Vice President, Chief Financial Officer and Treasurer of
the Company, filed as Exhibit 10(b) to the Company's
quarterly report on Form 10-Q for the quarter ended
January 31, 1996, is incorporated by reference.
10(o) Letter dated June 18, 1996, revising the compensatory
arrangement for George T. Robson, Senior Vice Presi-
20
<PAGE> 21
dent, Chief Financial Officer and Treasurer of the
Company.
11 Statement re Computation of Per Share Earnings.
13 Those portions of the annual report to security holders
for the fiscal year ended April 30, 1996 which are
expressly incorporated by reference in this filing.
21 Subsidiaries of the Company.
23 The consent of Deloitte & Touche LLP, Certified Public
Accountants, is located immediately after the signature
pages contained in this filing.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company did not file any current reports on Form 8-K during
the fourth quarter of the year ended April 30, 1996.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
June 19, 1996 By /s/ Richard H. Brown
---------------------------
Richard H. Brown, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
--------- -----
/s/ Richard H. Brown President, Chief
- ------------------------------- Executive Officer and
Richard H. Brown Director (principal executive
officer)
/s/ G. Kenneth Baum Director
- -------------------------------
G. Kenneth Baum
/s/ Henry W. Bloch Director
- -------------------------------
Henry W. Bloch
Director
- -------------------------------
Robert E. Davis
/s/ Donna R. Ecton Director
- -------------------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
- -------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
- -------------------------------
Roger W. Hale
(Signed as to each on June 19, 1996)
22
<PAGE> 23
Signature Title
--------- -----
/s/ Marvin L. Rich Director
- -------------------------------
Marvin L. Rich
/s/ Frank L. Salizzoni Director
- -------------------------------
Frank L. Salizzoni
/s/ Morton I. Sosland Director
- -------------------------------
Morton I. Sosland
/s/ George T. Robson Senior Vice President,
- ------------------------------- Chief Financial Officer
George T. Robson and Treasurer (principal financial
officer)
/s/ Cheryl L. Givens Assistant Vice President
- ------------------------------- and Corporate Controller
Cheryl L. Givens (principal accounting officer)
(Signed as to each on June 19, 1996)
23
<PAGE> 24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8, Registration Statement No. 33-33889 of H&R
Block, Inc. and subsidiaries (relating to shares of Common Stock issuable under
the 1989 Stock Option Plan for Outside Directors) on Form S-8, Registration
Statement No. 33-54985 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issued under the 1993 Long-Term Executive Compensation Plan) on
Form S-8 and Registration Statement No. 33-64147 of H&R Block, Inc. and
subsidiaries (relating to shares of Delayed Convertible Preferred Stock
issuable under the Spry, Inc. 1995 Stock Option Plan) on Form S-8 of our
reports dated June 18, 1996, appearing in and incorporated by reference in this
Annual Report on Form 10-K of H&R Block, Inc. and subsidiaries for the year
ended April 30, 1996.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 26, 1996
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the consolidated financial statements of H&R Block, Inc. and
subsidiaries as of April 30, 1996 and 1995 and for each of the three years in
the period ended April 30, 1996, and have issued our report thereon dated June
18, 1996; such consolidated financial statements and report are included in
your 1996 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of H&R
Block, Inc. and subsidiaries, listed in Item 14(a)(2). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 18, 1996
25
<PAGE> 26
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additions
-----------------------
Charged
Balance to Costs Charged Balance
Beginning and to at End
Description of Period Expenses Other Deductions of Period
- ---------------------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts-deducted from
accounts receivable in
the balance sheet
1996 $ 7,274,000 $20,100,000 $ - $22,955,000 $ 4,419,000
=========== =========== ======== =========== ===========
1995 $12,744,000 $13,619,000 $ - $19,089,000 $ 7,274,000
=========== =========== ======== =========== ===========
1994 $12,000,000 $24,977,000 $ - $24,233,000 $12,744,000
=========== =========== ======== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 10(o)
H&R Block, Inc Richard H. Brown
4410 Main Street President and
Kansas City, Missouri 64111 Chief Executive Officer
(816) 932-7577
Fax (816) 753-8628
June 18, 1996
Mr. George T. Robson
300 Caversham Road
Bryn Mawr, Pennsylvania 19010
Dear George:
This letter confirms our recent verbal agreement to revise the terms of
your employment with HRB Management, Inc. ("HRB"), and to make corresponding
changes to such terms as set forth in my December 20, 1995 letter to you (the
"Employment Letter").
We have agreed that, effective immediately, item 6 of the Employment
Letter is revised to read as follows:
"6. You will be protected against a "Change of Control" of Block that is
not initiated by Block, should such a Change of Control occur during the
five-year period following the commencement of your employment with HRB.
If at any time during the one-year period following such Change of
Control, your employment is terminated without "cause" under Block's or
HRB's policies in existence immediately prior to the Change of Control, or
if you terminate your employment for any reason (or no reason) during the
60-day period following such Change of Control of Block, certain elements
of your compensation will continue.
"HRB will continue to pay your base salary for a two-year period following
such termination; HRB will pay to you bonus compensation for the fiscal
year in which the termination occurs and for the fiscal year following the
year of termination, such bonus compensation to be equal to the target
award amount for the year in which the termination occurs; vesting of
nonvested stock options will accelerate and all stock options may be
exercisable for three months following termination; and HRB will continue
health, life and disability insurance benefits for up to two years
following the termination to the extent that you do not obtain similar
benefits from another party.
<PAGE> 2
Mr. George T. Robson
June 18, 1996
Page Two
"A Change of Control means (i) acquisition of beneficial ownership of 50%
or more of Block's voting securities by an individual, entity or group
other than Block or any of its affiliates; (ii) approval by Block's
stockholders of a reorganization, merger or consolidation of Block
(whether by a single transaction or a series of related transactions), but
only if the beneficial owners of Block common stock immediately before the
transaction (or related transactions) do not, immediately after the
transaction (or related transactions), beneficially own, directly or
indirectly, more than 50% of the company resulting from the transaction
(or related transactions); (iii) a complete liquidation or dissolution of
Block or of the sale or other disposition of all or substantially all of
the assets of Block; or (iv) turnover of more than a majority of the
directors on the Board of Directors of Block as a result of a proxy
contest or a series of proxy contests under the Securities and Exchange
Commission proxy rules. Any event, transaction or series of transactions
described in this paragraph that is initiated by Block shall not
constitute a Change of Control under the terms of this letter.
"On the fifth anniversary of your employment by HRB, Block will consider
and discuss with you the possible extension of the Change of Control
provisions.
"The sale, distribution or other disposition by Block or any subsidiary of
Block of all or substantially all of the common stock of CompuServe
Corporation held directly or indirectly by Block on the date of this
letter shall not constitute a Change of Control under the terms of this
letter."
If the foregoing reflects your understanding of our agreement, please sign
and return a copy of this letter to me, and the terms of this letter will
become effective.
Very truly yours,
HRB Management, Inc. Accepted and agreed to this 18th
day of June, 1996:
/s/Richard H. Brown /s/George T. Robson
- ------------------- -------------------
Richard H. Brown George T.Robson
<PAGE> 1
EXHIBIT 11
CALCULATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net earnings $177,168,000 $107,259,000 $200,528,000
============ ============ ============
Weighted average number of shares outstanding -
primary: Weighted average number of common
shares outstanding 103,926,000 105,029,000 105,882,000
Dilutive effect of stock options after
application of treasury stock method 524,000 708,000 887,000
Dilutive effect of Convertible Preferred
Stock 1,609,000 134,000 -
----------- ----------- -----------
Weighted average number of shares outstanding 106,059,000 105,871,000 106,769,000
=========== =========== ===========
Earnings per share:
Primary $1.67 $1.01 $1.88
===== ===== =====
</TABLE>
<PAGE> 2
EXHIBIT 11
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net earnings $177,168,000 $107,259,000 $200,528,000
============ ============ ============
Weighted average number of shares outstanding -
fully diluted: Shares used in calculating
primary earnings per share 106,059,000 105,871,000 106,769,000
Additional effect of stock options after
application of treasury stock method - 155,000 203,000
----------- ----------- -----------
Weighted average number of shares outstanding 106,059,000 106,026,000 106,972,000
=========== =========== ===========
Earnings per share:
Fully diluted $1.67 $1.01 $1.87
===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 13
COMMON STOCK DATA
<TABLE>
<CAPTION>
Stock Price Cash Dividend
High Low Paid per Share
<S> <C> <C> <C>
1995 Fiscal Year:
Quarter ended 7/31/94 44 5/8 37 1/2 .28
Quarter ended 10/31/94 47 1/2 39 .31 1/4
Quarter ended 1/31/95 44 3/4 33 .31 1/4
Quarter ended 4/30/95 46 5/8 34 3/4 .31 1/4
1996 Fiscal Year:
Quarter ended 7/31/95 42 5/8 34 1/2 .31 1/4
Quarter ended 10/31/95 43 36 1/8 .32
Quarter ended 1/31/96 48 7/8 31 1/2 .32
Quarter ended 4/30/96 42 1/8 32 5/8 .32
</TABLE>
Traded on the New York Stock Exchange; Ticker Symbol: HRB
[Logo] Printed on recycled paper
34
<PAGE> 2
SELECTED FINANCIAL DATA
In thousands, except per share amounts and number of shareholders
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Total revenues $ 894,446 $ 790,026 $ 821,977 $ 774,668 $ 719,168
Net earnings from continuing operations
before charge for purchased research
and development $ 125,089 $ 97,989 $ 128,124 $ 126,556 $ 120,423
Net earnings from continuing
operations(1) $ 125,089 $ 97,989 $ 103,052 $ 126,556 $ 120,423
Net earnings(1) $ 177,168 $ 107,259 $ 200,528 $ 180,705 $ 162,253
AT YEAR END:
Total assets $1,417,561 $ 1,078,038 $ 1,074,704 $ 1,005,834 $ 962,664
Cash and marketable securities $ 435,167 $ 444,981 $ 620,091 $ 439,526 $ 391,386
Stockholders equity $1,039,593 $ 685,865 $ 707,875 $ 650,488 $ 613,713
Shares outstanding 103,417 104,863 106,149 106,355 106,598
Number of shareholders 35,634 38,053 35,514 33,457 31,520
MEASUREMENTS:
Per share of common stock:
Net earnings from continuing operations
before charge for purchased research
and development $ 1.18 $ .92 $ 1.21 $ 1.18 $ 1.10
Net earnings from continuing
operations(1) $ 1.18 $ .92 $ .97 $ 1.18 $ 1.10
Net earnings(1) $ 1.67 $ 1.01 $ 1.88 $ 1.68 $ 1.49
Cash dividends declared $ 1.27 1/4 $ 1.21 3/4 $ 1.09 $ .97 $ .85 1/2
Net tangible book value $ 9.64 $ 5.79 $ 6.03 $ 4.93 $ 4.61
Return on total revenues(2) 14.0% 12.4% 15.6% 16.3% 16.7%
Return on beginning stockholders' equity 25.8% 15.2% 30.8% 29.4% 28.3%
</TABLE>
(1) Fiscal 1994 includes a charge to earnings from continuing operations of
$25,072 ($.24 per share) for purchased research and development in connection
with the acquisition of MECA Software, Inc. Fiscal 1995 includes a charge to
earnings from discontinued operations of $83,508 ($.79 per share) for purchased
research and development in connection with the acquisition of SPRY, Inc. See
notes to consolidated financial statements.
(2) Before charge for purchased research and development.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS IN FISCAL 1996
On February 20, 1996, the Company announced its intention to fully separate its
wholly owned subsidiary, CompuServe Corporation ("CompuServe"). The initial
phase of this separation was completed on April 19, 1996 through CompuServe's
initial public offering of 18,400,000 shares of its common stock at $30.00 per
share, which reduced the Company's ownership in CompuServe to just over 80%.
The Company intends to distribute its remaining ownership interest in
CompuServe by means of a spin-off within approximately 12 months of the initial
public offering, subject to certain conditions. CompuServe's results have been
reflected as discontinued operations. CompuServe contributed $.49, $.88 and
$.57 per share in 1996, 1995 and 1994, respectively, exclusive of a charge of
$83.5 million for purchased research and development in 1995.
In August 1995, the Company's Board of Directors approved a series of
investment initiatives for CompuServe designed to enhance its long-term
competitiveness and take advantage of accelerating growth opportunities in the
market for online services. These initiatives included the launch of a new
consumer online service, a simplified and less expensive pricing structure, two
new interfaces, infrastructure expenditures and expansion of Internet
activities offered through the various online services. This undertaking
reduced the Company's liquidity during 1996 and negatively impacted earnings
from discontinued operations.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA Software,
Inc. ("MECA"), exclusive of its rights to publish TaxCut, for $35 million.
The sale resulted in a pretax gain of $12.4 million.
SIGNIFICANT EVENTS IN FISCAL 1995
On October 26, 1994, the IRS announced it would eliminate the Direct Deposit
Indicator ("DDI") as a result of concerns relating to fraudulent tax refund
claims. Previously, the IRS used the DDI to notify the electronic filer after
receiving the taxpayer's electronically filed tax return that the direct
deposit of the refund would be honored. The DDI was a key element of the Refund
Anticipation Loan ("RAL") program because it minimized loan losses and thus
encouraged participating financial institutions to make RALs under relatively
favorable terms to taxpayers. RALs are loans made by financial institutions
that are expected to be retired by an income tax refund. In addition to the
removal of the DDI, the IRS instituted other changes during the tax season to
curb possible fraud in the tax system. As a result of these IRS changes, more
stringent criteria were adopted in the loan approval process and the cost to
the consumer increased. These changes resulted in a 21% decline in the number
of returns filed electronically and a 50% decline in the number of RALs
processed by company-owned and franchised offices. Due to these changes, the
Company experienced a decline in revenues for the first time in its 40-year
history, and only the second decline in pretax earnings.
On April 4, 1995, the Company acquired SPRY, Inc. ("SPRY") for total
consideration of $101.6 million, including cash, Convertible Preferred Stock
and options for Convertible Preferred Stock. In connection with the
acquisition, the Company recorded a charge to earnings of $83.5 million, or
$.79 per share, for purchased research and development. The Company
contributed its investment in SPRY to CompuServe on January 30, 1996; SPRY's
operations are therefore included in discontinued operations since the date of
acquisition.
NEW ACCOUNTING STANDARDS
On May 1, 1995, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used. In connection with the
adoption of this Statement, the Company recognized an impairment loss of $8.4
million, representing the amount by which the carrying value of the tax
preparation software assets at Block Financial Corporation, including goodwill,
exceeded the estimated fair value of those assets. The impairment loss is
included in other expenses in the consolidated statements of earnings.
The Company changed its method of accounting for direct response advertising
costs to conform with the American Institute of Certified Public Accountants
Statement of Position 93-7, "Reporting on Advertising Costs," effective May 1,
1995. Under this accounting method, direct response advertising costs that meet
certain criteria are capitalized and amortized on a cost-pool-by-cost-pool
basis over the period during which the future benefits are expected to be
received. Deferred subscriber acquisition costs are being amortized over 24
months, beginning the month after such costs are incurred, with 60% amortized
in the first 12 months. The net effect of the change in accounting increased
net assets of discontinued operations by $96.6 million at April 30, 1996, and
increased net earnings from discontinued operations by $57.3 million and net
earnings per share by $.54 for the year ended April 30, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years
beginning after December 15, 1995. This Statement requires the disclosure of
the estimated fair value of stock-based compensation arrangements with
employees and encourages, but does not require,
17
<PAGE> 4
the recognition of such expense. The Company does not intend to adopt the
recognition provisions of this Statement. Therefore, the adoption of this
Statement will have no effect on the Company's financial condition or results
from operations.
1996 COMPARED TO 1995
Service revenues. Service revenues increased 14.4% to $764.6 million from
$668.3 million in 1995. Tax preparation fees increased $66.6 million, or 13.1%,
as a result of a 3.7% increase in the number of returns prepared by
company-owned offices, with the remainder attributable to price increases. In
the United States, fees from electronic filing were up $13.6 million, or 16.7%,
due to a 1.6% increase in returns electronically filed by company-owned offices
and an increase in state electronic filing fees, resulting from an increase in
the number of states where electronic filing is offered and package pricing.
Credit card revenues were up $10.9 million, or 79.3%, due to an increase in the
number of accounts and related revolving balances.
Royalties. Royalties increased 6.4% to $96.4 million from $90.6 million last
year, reflecting improved results reported by franchises as a result of
a 2.9% increase in the number of returns prepared by franchises, increases in
pricing and greater revenues from electronic filing.
Investment income. Investment income declined 55.8% to $10.5 million
from $23.7 million in 1995, which is attributable to two factors. Less
funds were available for investment this year due to strategic investments
made in CompuServe, described previously. Additionally, investment income in
1995 included gains of $4.9 million from the sale of securities during the
fourth quarter.
Other income. Other income increased 207.8% to $23.0 million from $7.5
million in 1995, primarily due to the gain recorded on the sale of MECA of
$12.4 million.
Compensation and benefits. Compensation and benefits expense increased
9.9% to $366.2 million from $333.0 million last year. Tax preparation and
support wages were higher by $17.2 million, or 7.5%, corresponding to an
increase in tax preparation fee revenues. Field manager wages were also up
$13.3 million, or 42.2%, primarily due to an increase in bonuses driven
by the significant increases in the number of returns and net profits.
Occupancy and equipment. Occupancy and equipment expense increased .8% to
$141.6 million from $140.5 million last year. Office rent, including
commissions paid to department stores, increased $4.9 million, or 6.8%. This
increase was principally offset by a decrease in fees paid to CompuServe for
electronic transmission of tax returns by $3.0 million, or 27.3%.
Marketing and advertising. Marketing and advertising expense increased
3.2% to $57.1 million from $55.3 million last year. In the United States,
television, print and media advertising for tax related services increased
15.2%, while marketing associated with credit cards and tax preparation
software decreased.
Supplies, freight and postage. Supplies, freight and postage expense
decreased 3.0% to $41.5 million from $42.7 million last year, primarily as a
result of management's efforts to contain costs.
Other expenses. Other expenses increased 39.4% to $90.7 million from $65.0
million last year. Bad debts expense increased by $10.7 million, due to an
increase in bank denials associated with an increase in the number of RALs, and
an increase in the allowance for bad debts related to credit card portfolios.
Goodwill amortization increased by $7.2 million, primarily due to an impairment
loss of $8.4 million recognized on the tax preparation software business
assets. Additionally, interest expense on corporate borrowings totaled $2.0
million this year. There were no corporate borrowings during 1995.
Taxes on earnings. The effective tax rate increased to 36.7%, compared
to 36.1% in 1995. The increase resulted principally from a decrease in income
from tax-exempt investments.
1995 COMPARED TO 1994
Service revenues. Service revenues decreased 5.0% to $668.3 million from $703.3
million in 1994. The decrease in revenues was due primarily to a 31.1%
decline in electronic filing fees and a 49.5% decline in RAL license fees
received from participating institutions. These decreases resulted from IRS
actions discussed earlier. Tax return preparation fees increased 5.7% in 1995.
Royalties. Royalties decreased 5.1% to $90.6 million from $95.4 million in
1994, also resulting from a decrease in electronic filing fees generated by
franchises.
Investment income. Investment income improved 55.4% to $23.7 million
from $15.3 million in 1994. Investment income in 1995 included gains of $4.9
million from the sale of securities during the fourth quarter. Exclusive of
such gains, investment income increased 23.4% over 1994 and resulted primarily
from more funds being available for investment in 1995, including the proceeds
from the sale of Interim Services Inc. received in the fourth quarter of
fiscal 1994.
Other income. Other income decreased 7.4% to $7.5 million from $8.1 million
in 1994. The decrease is attributable to a favorable damage settlement with a
Canadian software vendor in 1994.
Compensation and benefits. Compensation and benefits expense increased 6.4%
to $333.0 million from $312.9 million in 1994. Tax preparation wages were up
$9.7 million, or 5.8%, corresponding to the increase in tax preparation fees.
In response to the changes implemented by the IRS, the Company hired client
service coordinators to handle customer concerns, increasing expenses by $3.0
million.
Occupancy and equipment. Occupancy and equipment expense increased 3.5% to
$140.5 million from $135.8 million in 1994. The increase is attributable to an
increase in rent expense for tax offices within the United States.
18
<PAGE> 5
Marketing and advertising. Marketing and advertising expense increased
21.2% to $55.3 million from $45.6 million in 1994. The increase was due to an
increase of $4.5 million, or 39.4%, in discounts and promotions offered in the
United States to counteract the negative impact of the changes implemented by
the IRS. Additionally, credit card marketing increased coincident with the
introduction of CompuServe credit cards.
Supplies, freight and postage. Supplies, freight and postage expense
increased 6.5% to $42.7 million from $40.1 million last year, primarily due to
an increase in office supplies and postage expenses of the tax-related
business in the United States.
Other expenses. Other expenses decreased 20.3% to $65.0 million from $81.6
million in 1994. Bad debts expense decreased $10.2 million, resulting from a
50% decline in the number of RALs processed caused by the elimination of the
DDI, and Block Financial Corporation's decision to not make investments in RALs
due to the IRS changes that increased credit risk. Additionally, the Company's
charitable contributions were $2.8 million less in 1995 than in 1994.
Taxes on earnings. The effective tax rate decreased to 36.1% in 1995
compared to 43.0% in 1994. The change resulted from a decrease in state and
local income taxes in 1995 and a charge for purchased research and development
in 1994 related to the acquisition of MECA, which is not deductible for income
tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong, with cash and marketable
securities of $435.2 million at April 30, 1996, compared to $445.0 million and
$620.1 million at the end of 1995 and 1994, respectively. The significant
decrease in cash and marketables in 1995 as compared to 1994 was due to
significant share repurchases and capital expenditures during 1995 totaling
$114.9 million and $123.3 million, respectively, and cash paid in connection
with the acquisition of SPRY of $41.8 million. Stockholders' equity at April
30, 1996, 1995 and 1994 was $1,039.6 million, $685.9 million and $707.9
million, respectively.
The Company maintains lines of credit to support short-term borrowing
facilities in the United States and Canada. The balance of these lines
fluctuates according to the amount of borrowing outstanding during the year.
From January through April each year, the Company uses Canadian borrowings to
purchase refunds due its clients from Revenue Canada. Maturities of these
borrowings range from 30 to 90 days. Collection of receivables from Revenue
Canada occurs substantially in the last month of the fiscal year and the first
quarter of the subsequent fiscal year. Net accounts receivable at April 30,
1996 and 1995 include amounts due from Revenue Canada of $11.5 million and
$16.4 million, respectively. Prior to 1995, Block Financial Corporation ("BFC")
used borrowings to purchase an interest in a trust to which certain RALs made
by Mellon Bank (DE) National Association were sold. BFC purchased an interest
of just under 50% in those RALs subject to its agreement with Mellon. BFC
financed these purchases through short-term borrowing in the third and fourth
quarters of fiscal 1994.
The Company also maintains a year-round $150 million line of credit to
primarily support the funding of credit card receivables by BFC. At April 30,
1996 and 1995, net credit card receivables amounted to $162.3 million and
$122.5 million, respectively, and commercial paper outstanding amounted to
$72.7 million and $49.4 million, respectively.
At October 31, 1995, the Company's intercompany receivable from CompuServe
was $75 million, upon which interest accrued monthly through April 1996 at a
rate equal to the prime rate at Commerce Bank of Kansas City, adjusted monthly.
In April 1996, the Company received $205 million in repayment of this
intercompany receivable from the proceeds of CompuServe's initial public
offering. In order to meet CompuServe's significant funding requirements during
fiscal 1996, the Company obtained a $200 million corporate credit facility.
This line of credit was repaid and expired by the end of fiscal 1996. In the
future, the Company's liquidity will no longer be affected by CompuServe, since
CompuServe will use the remaining net proceeds from its initial public offering
to meet prospective funding requirements.
With the exception of 1996 described above, the Company has historically
generated sufficient funds to provide for the off-season working capital needs
of the Company, which experiences losses for the period May through December,
capital investments, the operating and expansion needs of its subsidiaries,
cash for acquisitions and the maintenance of a strong dividend policy.
Management believes the Company will continue to generate sufficient funds
internally to finance its investment program and normal working capital
requirements. The Company intends to maintain its quarterly dividend of $.32
per share until the distribution of CompuServe is completed, at which time the
dividend policy will be reviewed in light of current business and market
conditions. The Company will also continue to use short-term financing in the
United States to finance temporary liquidity needs and various financial
activities conducted by BFC, and in Canada to finance the Canadian refund
discount program.
The Company announced in December 1993 its intention to repurchase from
time to time up to 10 million of its shares on the open market. During 1996,
the Company repurchased 1.8 million shares at an aggregate cost of $71.9
million. Other than the possible repurchase of additional shares of the
Company's common stock, there are no material commitments for capital
investments as of April 30, 1996.
19
<PAGE> 6
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Service revenues $ 764,618 $ 668,293 $ 703,264
Royalties 96,356 90,556 95,388
Investment income 10,468 23,703 15,256
Other income 23,004 7,474 8,069
---------- ---------- ----------
894,446 790,026 821,977
---------- ---------- ----------
EXPENSES:
Employee compensation and benefits 366,153 333,030 312,869
Occupancy and equipment 141,610 140,487 135,775
Marketing and advertising 57,105 55,330 45,644
Supplies, freight and postage 41,462 42,744 40,136
Other 90,659 66,040 81,614
Purchased research and development -- -- 25,072
---------- ---------- ----------
696,989 636,631 641,110
---------- ---------- ----------
Earnings from continuing operations
before taxes on earnings 197,457 153,395 180,867
Taxes on earnings 72,368 55,406 77,815
---------- ---------- ----------
NET EARNINGS FROM CONTINUING OPERATIONS 125,089 97,989 103,052
Net earnings from discontinued operations
(less applicable taxes of $35,757, $57,331 and $50,080) 52,079 9,270 70,211
Net gain on sale of discontinued operations
(less applicable taxes of $16,711) -- -- 27,265
---------- ---------- ----------
NET EARNINGS $ 177,168 $ 107,259 $ 200,528
========== ========== ==========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS $1.18 $.92 $.97
========== ========== ==========
EARNINGS PER SHARE $1.67 $1.01 $1.88
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
<TABLE>
<CAPTION>
April 30
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash (including certificates of deposit of $22,093 and $25,781) $ 58,414 $ 90,248
Marketable securities 360,212 263,239
Receivables, less allowance for doubtful accounts of $4,419 and $7,274 214,548 260,198
Prepaid expenses 12,226 21,823
Net assets of discontinued operations 617,510 --
---------- ----------
Total current assets 1,262,910 635,508
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 16,541 91,494
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $17,733 and $46,770 42,825 78,205
Other 43,770 45,383
---------- ----------
103,136 215,082
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $122,914 and $227,056 51,515 227,448
---------- ----------
$1,417,561 $1,078,038
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 72,651 $ 49,421
Accounts payable, accrued expenses and deposits 95,314 145,909
Accrued salaries, wages and payroll taxes 94,394 71,281
Accrued taxes on earnings 77,387 92,100
---------- ----------
Total current liabilities 339,746 358,711
OTHER NONCURRENT LIABILITIES 38,222 33,462
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share:
authorized 200,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share: authorized 500,000 shares 4 4
Additional paid-in capital 504,694 140,578
Retained earnings 747,212 700,423
---------- ----------
1,252,999 842,094
Less cost of common stock in treasury 213,406 156,229
---------- ----------
1,039,593 685,865
---------- ----------
$1,417,561 $1,078,038
========== ==========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 177,168 $ 107,259 $ 200,528
Adjustments to reconcile net earnings to net
cash provided:
Depreciation and amortization 32,477 67,684 57,117
Provision for deferred taxes on earnings 1,183 3,440 (2,735)
Gain on sale of subsidiaries (12,445) (2,796) (27,265)
Purchased research and development -- 83,508 25,072
Net gain on sales of marketable securities (1,142) (6,664) (307)
Other noncurrent liabilities 4,760 2,845 5,197
Changes in assets and liabilities net of effects of
purchase and disposition of subsidiaries:
Receivables (41,131) (87,995) 2,284
Prepaid expenses (259) (1,735) (412)
Net assets of discontinued operations (55,771) -- (17,370)
Accounts payable, accrued expenses and deposits 14,003 (24,994) 31,000
Accrued salaries, wages and payroll taxes 35,109 15,722 14,659
Accrued taxes on earnings (16,156) (31,911) (300)
----------- ----------- -----------
Net cash provided by operating activities 137,796 124,363 287,468
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (851,993) (1,904,653) (1,522,609)
Maturities of marketable securities 501,925 1,837,584 891,299
Sales of marketable securities 329,132 299,702 448,978
Purchases of property and equipment, net (36,972) (123,337) (83,744)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (11,139) (47,773) (46,570)
Proceeds from sale of subsidiaries 35,000 5,195 188,500
Proceeds from term loan to former subsidiary -- -- 30,000
Net advances from discontinued operations 35,004 -- --
Other, net (3,829) (5,856) (24,198)
----------- ----------- -----------
Net cash provided by (used in) investing
activities (2,872) 60,862 (118,344)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (2,252,761) (1,856,873) (2,435,254)
Proceeds from issuance of notes payable 2,275,991 1,906,294 2,398,087
Dividends paid (131,263) (128,838) (115,451)
Payments to acquire treasury shares (71,897) (114,900) (68,899)
Proceeds from stock options exercised 13,172 57,997 50,319
----------- ----------- -----------
Net cash used in financing activities (166,758) (136,320) (171,198)
----------- ----------- -----------
Net increase (decrease) in cash (31,834) 48,905 (2,074)
Cash at beginning of the year 90,248 41,343 43,417
----------- ----------- -----------
Cash at end of the year $ 58,414 $ 90,248 $ 41,343
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ 73,041 $ 141,062 $ 131,124
Interest paid 5,898 4,064 4,169
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: H&R Block, Inc. (the "Company") provides a variety of
services to the general public, principally in the United States, but also in
Canada and Australia. More than 90% of total revenues are generated from tax
return preparation, electronic filing of tax returns and other tax-related
services. The Company also offers credit cards and personal productivity
software.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
Management estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Marketable securities: On May 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This Statement addresses the reporting for debt
and equity securities by requiring such investments to be classified in
held-to-maturity, available-for-sale or trading categories. All marketable debt
and equity securities were classified as available-for-sale securities on the
date of adoption, and are carried at market value, based on quoted prices, with
unrealized gains and losses included in stockholders' equity. The adoption of
the Statement resulted in an increase in stockholders' equity of $5,526, net of
taxes. In accordance with the Statement, prior years' financial
statements have not been restated.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
Foreign currency translation: Assets and liabilities of the Company's foreign
branches and subsidiaries are translated into U.S. dollars at exchange rates
prevailing at the end of the year. Revenue and expense transactions are
translated at the average of exchange rates in effect during the period.
Translation gains and losses are recorded directly to stockholders' equity.
Deferred Subscriber Acquisition Costs: Effective May 1, 1995, the Company
changed its method of accounting for direct response advertising costs to
conform with the American Institute of Certified Public Accountants Statement
of Position 93-7, "Reporting on Advertising Costs." Under this accounting
method, direct response advertising costs that meet certain criteria are
capitalized and amortized on a cost-pool-by-cost-pool basis over the period
during which the future benefits are expected to be received. The Company
amortizes its subscriber acquisition costs over 24 months, beginning the month
after such costs are incurred, with 60% amortized in the first 12 months. At
April 30, 1996, subscriber acquisition costs consist principally of direct mail
costs, including mailing lists, postage, related payroll and outsourcing costs,
payments to OEMs, and disk and CD-ROM costs, all of which result in a direct
revenue-generating response. The net effect of the change in accounting
increased net assets of discontinued operations by $96,636 at April 30, 1996,
and increased net earnings from discontinued operations by $57,305 and net
earnings per share by $.54 for the year ended April 30, 1996. The Company
expenses advertising costs not classified as direct response the first time
the advertising takes place.
Excess of cost over fair value of net tangible assets acquired: The excess
of cost of purchased subsidiaries, operating offices and franchises over the
fair value of net tangible assets acquired is being amortized over periods
of up to 40 years on a straight-line basis.
At each balance sheet date, a determination is made by management to
ascertain whether intangibles have been impaired based on several criteria,
including, but not limited to, revenue trends, undiscounted operating cash
flows and other operating factors.
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389.
The impairment loss represents the amount by which the carrying value of the
tax preparation software business assets, including goodwill, exceeded the
estimated fair value of those assets. The estimated fair value was determined
as the present value of estimated expected future cash flows using a discount
rate appropriate for the risks associated with the personal software industry.
The loss is included in other expenses in the consolidated statements of
earnings.
Depreciation and amortization: Buildings and equipment are depreciated over
the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over the period of the respective
lease using the straight-line method.
Notes payable: The Company uses short-term borrowings to finance temporary
liquidity needs and various financial activities conducted by its subsidiaries.
The weighted average interest rate of notes payable at April 30, 1996 was
5.4%.
23
<PAGE> 10
Revenue recognition: Service revenues are recorded in the period in which
the service is performed. The Company records franchise royalties, based upon
the contractual percentages of franchise revenues, in the period in which
the franchise provides the service.
Taxes on earnings: The Company and its subsidiaries file a consolidated
federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes, which are not material, are provided
for temporary differences between financial and tax reporting, which consist
principally of differences between accrual and cash basis accounting, deferred
compensation and depreciation.
Prior to May 1, 1993, taxes on earnings were determined under Accounting
Principles Board Opinion Number 11, whereby the income tax provision was
calculated using the deferred method. Effective May 1, 1993, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which provides for the recognition of deferred
tax assets and liabilities for the tax consequences of temporary differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. The cumulative effect of the change in method as of
May 1, 1993 was not material.
The Company has entered into a Tax Sharing Agreement with CompuServe
Corporation ("CompuServe"), pursuant to which CompuServe is obligated to pay
the Company for CompuServe's liability for federal, state and local income
taxes incurred during any taxable period.
Earnings per share: Earnings per share are computed based on the weighted
average number of common and common equivalent shares outstanding during the
respective years (106,059,000 in 1996, 105,871,000 in 1995 and 106,769,000 in
1994). Earnings per share assuming full dilution have not been shown as
there would be no material dilution.
Consolidated statements of cash flows: For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash.
Disclosure regarding financial instruments: The carrying values reported in
the balance sheet for certificates of deposit, receivables, notes payable,
accounts payable and accrued liabilities approximate fair market value due to
the relatively short-term nature of the respective instruments.
New accounting standard: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," effective for transactions entered
into in fiscal years beginning after December 15, 1995. This Statement requires
the disclosure of the estimated fair value of stock-based compensation
arrangements with employees and encourages, but does not require, the
recognition of such expense. The Company does not intend to adopt the
recognition provisions of this Statement. Therefore, the adoption of this
Statement will have no effect on the Company's financial condition or
results from operations.
24
<PAGE> 11
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30, 1996
and 1995 are summarized below:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
-------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current:
Municipal bonds and notes $ 13,182 $ 440 $ 79 $ 13,543 $ 88,894 $ 310 $ 94 $ 89,110
U.S. Government obligations 285,400 7 1 285,406 52,091 48 -- 52,139
Other equity investments -- -- -- -- 49,100 -- -- 49,100
Other debt investments 61,205 58 -- 61,263 72,830 61 1 72,890
-------------------------------------------------- --------------------------------------------
359,787 505 80 360,212 262,915 419 95 263,239
-------------------------------------------------- --------------------------------------------
Noncurrent:
Municipal bonds 11,013 310 37 11,286 82,702 1,676 1,325 83,053
Preferred stock 1,511 316 32 1,795 1,511 245 131 1,625
Common stock 2,545 935 20 3,460 2,737 396 115 3,018
Other equity investments -- -- -- -- 3,488 -- 692 2,796
Other debt investments -- -- -- -- 999 3 -- 1,002
-------------------------------------------------- --------------------------------------------
15,069 1,561 89 16,541 91,437 2,320 2,263 91,494
-------------------------------------------------- --------------------------------------------
$374,856 $2,066 $169 $376,753 $354,352 $2,739 $2,358 $354,733
================================================== ============================================
</TABLE>
All marketable securities at April 30, 1996 are classified as available-
for-sale. Proceeds from the sales of available-for-sale securities were
$329,132, $299,702 and $448,978 during 1996, 1995 and 1994, respectively. Gross
realized gains on those sales during 1996, 1995 and 1994 were $1,528, $7,014 and
$393, respectively; gross realized losses were $386, $350 and $86, respectively.
Contractual maturities of available-for-sale debt securities at April 30,
1996 are presented below. Since expected maturities differ from contractual
maturities due to the issuers' rights to prepay certain obligations or the
seller's rights to call certain obligations, the first call date, put date or
auction date for municipal bonds and notes is considered the contractual
maturity date.
<TABLE>
<CAPTION>
Amortized Market
Cost Value
-------- --------
<S> <C> <C>
Within one year $347,364 $347,431
After one year through five years 10,748 11,184
After five years through 10 years 12,688 12,883
-------- --------
$370,800 $371,498
======== ========
</TABLE>
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
April 30
1996 1995
--------- --------
<S> <C> <C>
Land $ 2,580 $ 7,116
Buildings 17,824 50,625
Equipment 128,319 367,420
Leasehold improvements 25,706 29,343
--------- --------
174,429 454,504
Less accumulated depreciation
and amortization 122,914 227,056
--------- --------
$ 51,515 $227,448
========= ========
</TABLE>
Depreciation and amortization expense from continuing operations for 1996,
1995 and 1994 amount to $21,006, $20,690 and $23,459, respectively.
25
<PAGE> 12
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
management employees to defer portions of their compensation and earn interest
on the deferred amounts. The compensation, together with Company matching of
deferred amounts, has been accrued, and the only expenses related to these
plans are the Company match and the interest on the deferred amounts, which are
not material to the financial statements. Included in Other Noncurrent
Liabilities is $31,146 at the end of 1996 and $27,112 at the end of 1995 to
reflect the liability under these plans. The Company purchased whole-life
insurance contracts on the related directors and employees to recover
distributions made or to be made under the plans and has recorded the cash
surrender value of the policies in Other Assets. If all the assumptions
regarding mortality, interest rates, policy dividends and other factors are
realized, the Company will ultimately realize its full investment plus a factor
for the use of its money.
STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity during the three years ended
April 30, 1996 are summarized below:
<TABLE>
<CAPTION>
Convertible
Common stock preferred stock Additional Treasury stock
------------------------ ----------------------- paid-in Retained ----------------------
Shares Amount Shares Amount capital earnings Shares Amount
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 1, 1993 108,972,699 $ 1,089 -- -- $101,038 $643,757 (2,617,463) $ (95,396)
Net earnings for the year -- -- -- -- -- 200,528 -- --
Stock options exercised -- -- -- -- (10,486) -- 1,677,674 60,805
Unrealized loss on translation -- -- -- -- -- (9,110) -- --
Acquisition of treasury shares -- -- -- -- -- -- (1,883,816) (68,899)
Cash dividends paid --
$1.09 per share -- -- -- -- -- (115,451) -- --
--------------------------------------------------------------------------------------------------
Balances at April 30, 1994 108,972,699 1,089 -- -- 90,552 719,724 (2,823,605) (103,490)
Net earnings for the year -- -- -- -- -- 107,259 -- --
Stock options exercised -- -- -- -- (4,164) -- 1,624,843 62,161
Unrealized gain on translation -- -- -- -- -- 2,043 -- --
Acquisition of treasury shares -- -- -- -- -- -- (2,910,900) (114,900)
Stock issued for acquisition -- -- 401,768 $ 4 54,190 -- -- --
Cumulative effect of change in
accounting for marketable
securities, net of taxes -- -- -- -- -- 5,526 -- --
Change in net unrealized gain
on marketable securities -- -- -- -- -- (5,291) -- --
Cash dividends paid --
$1.21 3/4 per share -- -- -- -- -- (128,838) -- --
--------------------------------------------------------------------------------------------------
Balances at April 30, 1995 108,972,699 1,089 401,768 4 140,578 700,423 (4,109,662) (156,229)
Net earnings for the year -- -- -- -- -- 177,168 -- --
Stock options exercised -- -- 3,031 -- (1,501) -- 340,395 12,957
Restricted stock granted -- -- -- -- (47) -- 46,370 1,763
Unrealized loss on translation -- -- -- -- -- (50) -- --
Acquisition of treasury shares -- -- -- -- -- -- (1,833,200) (71,897)
Sale of stock by subsidiary -- -- -- -- 365,664 -- -- --
Change in net unrealized gain
on marketable securities -- -- -- -- -- 934 -- --
Cash dividends paid --
$1.27 1/4 per share -- -- -- -- -- (131,263) -- --
--------------------------------------------------------------------------------------------------
Balances at April 30, 1996 108,972,699 $ 1,089 404,799 $ 4 $504,694 $747,212 (5,556,097) $ (213,406)
==================================================================================================
</TABLE>
26
<PAGE> 13
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1996, the Company had 5,595,201 shares of
authorized but unissued Preferred Stock. Of the unissued shares, 600,000 shares
have been designated as Participating Preferred Stock in connection with the
Company's shareholder rights plan.
On March 8, 1995, the Board of Directors authorized the issuance of a series
of 500,000 shares of nonvoting Preferred Stock designated as Convertible
Preferred Stock, without par value. On April 4, 1995, 401,768 shares of
Convertible Preferred Stock were issued to certain shareholders of SPRY, Inc.
("SPRY") in connection with the Company's acquisition of such corporation. Each
share of Convertible Preferred Stock is convertible on or after April 5, 1998
into four shares of Common Stock of the Company, subject to adjustment upon
certain events. The holders of the Convertible Preferred Stock are not entitled
to receive dividends paid in cash, property or securities and, in the event of
any dissolution, liquidation or winding-up of the Company, will share ratably
with the holders of Common Stock then outstanding in the assets of the Company
after any distribution or payments are made to the holders of Participating
Preferred Stock or the holders of any other class or series of stock of the
Company with preference over the Common Stock.
STOCK OPTION PLANS
The Company has three stock option plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors and a plan
for eligible seasonal employees. The 1993 plan was approved by the shareholders
in September 1993 to replace the 1984 Long-Term Executive Compensation Plan,
which terminated at that time except with respect to outstanding awards
thereunder. Under the 1993 and 1989 plans, options may be granted to selected
employees and outside directors to purchase the Company's Common Stock for
periods not exceeding 10 years at a price that is not less than 100% of fair
market value on the date of the grant. A majority of the options are
exercisable each year either starting one year after the date of the grant or
on a cumulative basis at the annual rate of 33 1/3% of the total number of
option shares. Other options are exercisable commencing three years after the
date of the grant on a cumulative basis in annual increments of 60%, 20% and
20% of the total number of option shares.
The plan for eligible seasonal employees, as amended, provided for the grant
of options on June 30, 1996, 1995 and 1994 at the market price on the date of
the grant. The options are exercisable during September in each of the two
years following the calendar year of the grant.
Changes during the years ended April 30, 1996, 1995 and 1994 under these
plans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------- ------------
<S> <C> <C> <C>
Options outstanding, beginning of year 4,865,814 3,538,341 3,901,373
Options granted 3,545,692 3,912,763 2,410,317
Options exercised (362,849) (1,624,203) (1,677,674)
Options which expired (1,634,729) (961,087) (1,095,675)
Options outstanding, end of year 6,413,928 4,865,814 3,538,341
Shares exercisable, end of year 4,029,301 2,727,540 2,807,255
Shares reserved for future grants, end of year 13,554,594 15,465,557 18,417,233
Option prices per share:
Exercised during the year $ 6.9525-39.25 $ 5.515-39.25 $5.515-35.75
Outstanding, end of year $ 9.9688-44.375 $6.9525-44.00 $5.515-44.00
</TABLE>
In connection with the acquisition of SPRY, outstanding options to purchase
SPRY common stock under an employee stock option plan were converted on April 4,
1995 into options to purchase 51,828 shares of the Company's Convertible
Preferred Stock. During 1996, 3,031 options to purchase Convertible Preferred
Stock were exercised, and 2,052 were cancelled. At April 30, 1996, 46,745 of
such options were outstanding, with exercise prices ranging from $9.54 to
$19.08.
During 1996, the Company granted 46,370 shares of restricted stock at a fair
market value of $37.00 per share under the 1993 Long-Term Executive Compensation
Plan, of which 18,153 were vested at April 30, 1996. The remainder vests ratably
over three years starting one year after the date of the grant.
27
<PAGE> 14
SHAREHOLDER RIGHTS PLAN
On July 14, 1988, the Company's Board of Directors adopted a shareholder
rights plan to deter coercive or unfair takeover tactics and to prevent a
potential acquiror from gaining control of the Company without offering a fair
price to all of the Company's stockholders. The plan was amended by the Board
of Directors on May 9, 1990, September 11, 1991, and May 10, 1995. Under the
plan, a dividend of one right (a "Right") per share was declared and paid on
each share of the Company's Common Stock outstanding on July 25, 1988. As to
shares issued after such date, rights automatically attach to them after their
issuance.
Under the plan, as amended, a right becomes exercisable when a person or
group of persons acquires beneficial ownership of 10% or more of the
outstanding shares of the Company's Common Stock without the prior written
approval of the Company's Board of Directors (an "Unapproved Stock
Acquisition"), and after 10 business days following the commencement of a
tender offer that would result in an Unapproved Stock Acquisition. When
exercisable, the registered holder of each Right may purchase from the Company
one two-hundredths of a share of a new class of the Company's Participating
Preferred Stock, without par value, at a price of $60.00, subject to
adjustment. The registered holder of each Right then also has the right (the
"Subscription Right") to purchase for the exercise price of the Right, in lieu
of shares of Participating Preferred Stock, a number of shares of the Company's
Common Stock having a market value equal to twice the exercise price of the
Right. Following an Unapproved Stock Acquisition, if the Company is involved in
a merger, or 50% or more of the Company's assets or earning power are sold, the
registered holder of each Right has the right (the "Merger Right") to purchase
for the exercise price of the Right a number of shares of the common stock 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 the Company's
Common Stock, the Board of Directors may exchange all or part of the then
outstanding and exercisable Rights for Common Stock at an exchange ratio of one
share of Common Stock per Right (the "Exchange"). Upon any such Exchange, the
right of any holder to exercise a Right terminates. Upon the occurrence of any
of the events giving rise to the exercisability of the Subscription Right or
the Merger Right or the ability of the Board of Directors to effect the
Exchange, the Rights held by the acquiring person or group become void as they
relate to the Subscription Right, the Merger Right or the Exchange.
The Company may redeem the Rights at a price of $.005 per Right at any time
prior to an Unapproved Stock Acquisition (and after such time in certain
circumstances). The Rights expire on July 25, 1998, unless extended by the
Board of Directors. Until a Right is exercised, the holder thereof, as such,
has no rights as a stockholder of the Company, including the right to vote or
to receive dividends. The issuance of the Rights alone has no dilutive effect
and does not affect reported earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Bad debts $ 20,100 $ 9,396 $ 19,616
Amortization of goodwill 11,471 4,319 1,915
Taxes and licenses 8,679 7,545 7,317
Travel and entertainment 7,219 7,913 6,425
Interest 5,529 4,056 3,798
Legal and professional 3,101 591 2,755
</TABLE>
TAXES ON EARNINGS
The components of earnings from continuing operations before taxes on earnings
upon which federal and foreign income taxes have been provided are as follows:
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
United States $ 188,749 $ 146,521 $ 174,012
Foreign 8,708 6,874 6,855
--------- --------- ---------
$ 197,457 $ 153,395 $ 180,867
========= ========= =========
</TABLE>
28
<PAGE> 15
Deferred income tax provisions (benefits) reflect the impact of temporary
differences between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. The current and
deferred components of taxes on earnings from continuing operations is
comprised of the following:
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Currently payable:
Federal $ 59,234 $43,486 $ 63,689
State 7,891 6,343 14,309
Foreign 4,060 3,253 3,026
-------- ------- --------
71,185 53,082 81,024
-------- ------- --------
Deferred:
Capitalized research and development (10) (61) 62
Deferred compensation (1,068) (4) (1,729)
Depreciation 374 2,281 (1,289)
Inter-company profit upon sale of fixed assets (5) 756 (257)
Other 1,892 (648) 4
-------- ------- --------
1,183 2,324 (3,209)
-------- ------- --------
$ 72,368 $56,406 $ 77,815
======== ======= ========
</TABLE>
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $58,091 at December 31, 1995. Management believes the cost to
repatriate these earnings would not be material.
The following table reconciles the U.S. federal income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in income taxes resulting from:
State income taxes, net of federal income tax benefit 2.6% 2.7% 5.1%
Foreign taxes, net of federal income tax benefit .5% .5% .4%
Purchased research and development -- -- 4.8%
Nontaxable federal income (.8%) (3.2%) (2.3%)
Other (.6%) 1.1% --
----- ----- -----
Effective rate 36.7% 36.1% 43.0%
===== ===== =====
</TABLE>
ACQUISITIONS
On April 4, 1995, the Company acquired SPRY for $41,785 in cash and issued
Convertible Preferred Stock valued at $54,194. In addition, outstanding options
for SPRY common stock were converted into options for Convertible Preferred
Stock valued at $5,641. The transaction was accounted for as a purchase. On
January 30, 1996, the Company contributed its investment in SPRY to CompuServe;
SPRY's operations are therefore included in discontinued operations since the
date of acquisition. In connection with the purchase, the Company acquired
certain intangible assets, including software technology, tradenames and an
assembled workforce totalling $11,656. These intangibles will be amortized on a
straight-line basis over five years. The Company also acquired research and
development projects related to SPRY's next product generation. These projects
represent SPRY's research and development efforts prior to the merger, which had
not yet reached the stage of technological feasibility and had no alternative
future use; thus, the ultimate revenue generating capability of these projects
was uncertain. The purchased research and development was valued at $83,508
using a discounted, risk-adjusted future income approach. Net earnings from
discontinued operations includes a charge for the purchased research and
development which is not deductible for income tax purposes. The fair value of
assets acquired, including intangibles, was $106,371; liabilities assumed were
$4,751. Liabilities assumed and the Convertible Preferred Stock and stock
options issued were non-cash items excluded from the consolidated statements of
cash flows.
29
<PAGE> 16
On November 24, 1993, the Company acquired MECA Software, Inc. for $45,384
in cash. The transaction was accounted for as a purchase and, accordingly, the
consolidated statements of earnings includes MECA's results since the date
of acquisition. The purchase price has been allocated to assets acquired and
liabilities assumed based on their fair value at the date of acquisition. The
excess of the purchase price over the fair value of the net tangible assets
acquired was $55,978, of which $25,072 was allocated to purchased research and
development, $4,900 was allocated to various other intangibles including
technology, software and trademarks, and the remainder was allocated to
goodwill. Goodwill and other intangibles will be amortized on a straight-line
basis over their estimated useful lives of three to 15 years. The consolidated
statements of earnings includes a charge for the purchased research and
development which is not deductible for income tax purposes. The fair value of
assets acquired, including intangibles, was $62,004; liabilities assumed were
$16,620. Liabilities assumed in connection with the acquisition were non-cash
items excluded from the consolidated statements of cash flows.
During fiscal 1996, 1995 and 1994, the Company made other acquisitions which
were accounted for as purchases. Their operations, which are not material,
are included in the consolidated statements of earnings. Pro forma results
assuming MECA and SPRY had been acquired as of the beginning of the periods
presented would not be materially different from reported results.
SALE OF SUBSIDIARIES
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA Software,
Inc., exclusive of its rights to publish TaxCut, for $35,000 cash. The sale
resulted in a gain of $12,445, which is included in other income.
On June 30, 1994, the Company sold the stock of a wholly owned subsidiary of
CompuServe, Collier-Jackson, Inc., for $5,195 in cash. The operating results of
Collier-Jackson, Inc. and the related gain on the sale of $2,680 are included
in net earnings of discontinued operations.
On January 27, 1994, the Company completed the sale of its interest in its
wholly owned subsidiary, Interim Services Inc. ("Interim"), through an
initial public offering of 10,000,000 shares at $20.00 per share. The net
proceeds from the sale and the receipt from the retirement of a term loan to
Interim amounted to $218,500. The Company recorded a net gain on the sale of
the stock of $27,265. Interim's results are reflected as discontinued
operations. The net sales of Interim were $399,573 for fiscal 1994.
SALE OF STOCK BY SUBSIDIARY
On February 20, 1996, the Company announced its intention to fully separate its
wholly owned subsidiary, CompuServe. CompuServe provides computer-based
information and communication services to businesses and individual owners of
personal computers. The initial phase of this separation was completed on April
19, 1996 through CompuServe's initial public offering of 18,400,000 shares of
its common stock at $30.00 per share, which reduced the Company's ownership in
CompuServe to just over 80%. The Company did not recognize a gain on this
transaction. Additional paid-in capital was increased by the change in the
Company's proportionate share of CompuServe's equity as a result of the initial
public offering, from which the net proceeds to CompuServe were $518,819. The
Company intends to distribute its remaining ownership interest of 74,200,000
shares of CompuServe common stock by means of a spin-off within approximately
12 months of the initial public offering. The distribution will be subject to
the receipt of a favorable ruling from the Internal Revenue Service or an
opinion of counsel as to the tax-free nature of the transaction, certain other
conditions and the absence of any change in market conditions or other
circumstances that cause the Company to conclude that the distribution is not
in the best interests of its stockholders. CompuServe's results are reflected
as discontinued operations, and amounts for prior periods have been similarly
reported in the consolidated statements of earnings.
Summarized financial information for CompuServe follows:
<TABLE>
<CAPTION>
April 30
1996 1995
---- ----
<S> <C> <C>
Current assets $ 485,890 $ 105,759
Noncurrent assets 479,938 217,798
--------- ---------
$ 965,828 $ 323,557
--------- ---------
Current liabilities $ 138,399 $ 89,886
Noncurrent liabilities 56,763 153,813
Stockholders' equity 770,666 79,858
--------- ---------
$ 965,828 $ 323,557
========= =========
</TABLE>
30
<PAGE> 17
<TABLE>
<CAPTION>
Year Ended April 30
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Revenues $793,165 $582,793 $429,886
Operating earnings 87,836 68,279 104,740
Net earnings 49,094 8,798 62,093
</TABLE>
COMMITMENTS
Substantially all of the Company's operations are conducted in leased premises.
Most of the operating leases are for a one-year period with renewal options of
one to three years and provide for fixed monthly rentals. Lease commitments at
April 30, 1996, for fiscal 1997, 1998, 1999, 2000 and 2001 aggregated $59,967,
$43,298, $28,161, $15,126 and $7,927, respectively, with no significant
commitments extending beyond that period of time. The Company's rent expense
for the years 1996, 1995 and 1994 aggregated $65,462, $62,127 and $57,234,
respectively.
The Company maintains a year-round $150,000 line of credit to support various
financial activities conducted by Block Financial Corporation.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1996 Quarter Ended Fiscal 1995 Quarter Ended
--------------------------------------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
1996 1996 1995 1995 1995 1995 1994 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $712,291 $111,041 $ 37,539 $ 33,575 $614,129 $116,616 $ 39,002 $ 20,279
--------------------------------------------------------------------------------
Continuing operations:
Earnings (loss) before provision
for income taxes (benefits) $297,913 $(26,129) $ (37,205) $(37,122) $256,574 $(28,105) $(36,365) $(38,709)
Provision for income taxes
(benefits) 112,943 (10,432) (14,835) (15,308) 94,806 (10,720) (13,891) (14,789)
--------------------------------------------------------------------------------
Net earnings (loss) 184,970 (15,697) (22,370) (21,814) 161,768 (17,385) (22,474) (23,920)
Net earnings (loss) from
discontinued operations 741 10,226 14,072 27,040 (58,381) 25,469 21,222 20,960
--------------------------------------------------------------------------------
Net earnings (loss) $185,711 $ (5,471) $ (8,298) $ 5,226 $103,387 $ 8,084 $ (1,252) $ (2,960)
================================================================================
Earnings (loss) per share from
continuing operations $1.74 $(.15) $(.21) $(.20) $1.52 $(.16) $(.21) $(.23)
Earnings (loss) per share 1.75 (.05) (.08) .05 .97 .08 (.01) (.03)
</TABLE>
Discontinued operations includes a charge to earnings of $83,508 ($.79 per
share) for purchased research and development in the fourth quarter of 1995,
incurred in connection with the acquisition of SPRY.
31
<PAGE> 18
MANAGEMENT'S REPORT
The financial information in this Annual Report, including the consolidated
financial statements, has been prepared by the management of H&R Block, Inc.
Management believes the information presented in the Annual Report is
consistent with the financial statements, the financial statements are prepared
in accordance with generally accepted accounting principles, and the
financial statements do not contain material misstatements due to fraud or
error. Where appropriate, the financial statements reflect management's best
estimates and judgments.
Management also is responsible for maintaining a system of internal
accounting controls with the objectives of providing reasonable assurance that
the Company's assets are safeguarded against material loss from unauthorized
use or disposition, and that authorized transactions are properly recorded to
permit the preparation of accurate financial data. However, limitations exist
in any system of internal controls based on a recognition that the cost of the
system should not exceed its benefits. The Company believes its system of
accounting controls, of which its internal auditing function is an integral
part, accomplishes the stated objectives.
Deloitte & Touche LLP, independent accountants, audit H&R Block's
consolidated financial statements and issue an opinion thereon. Their audits
are made in accordance with generally accepted auditing standards and include
an objective, independent review of the system of internal controls to the
extent necessary to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, composed of outside directors,
meets periodically with management, the independent accountants and the
internal auditor to review matters relating to the Company's annual financial
statements, internal audit activities, internal accounting controls and
non-audit services provided by the independent accountants. The independent
accountants and the internal auditor have full access to the Audit Committee
and meet with it, both with and without management present, to discuss the
scope and results of their audits including internal controls, audit and
financial matters.
/s/ Richard H. Brown
Richard H. Brown
President and Chief Executive Officer
/s/ George T. Robson
George T. Robson
Senior Vice President,
Chief Financial Officer and Treasurer
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of H&R Block,
Inc. and subsidiaries as of April 30, 1996 and 1995, and the related
consolidated statements of earnings and cash flows for each of the three years
in the period ended April 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of H&R Block, Inc., and
subsidiaries as of April 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1996, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Company changed its method of accounting for its marketable securities
during the year ended April 30, 1995 and advertising costs during the year
ended April 30, 1996.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Kansas City, Missouri
June 18, 1996
32
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF H&R BLOCK, INC.
The following is a list of the direct and indirect subsidiaries of H&R
Block, Inc., a Missouri corporation. All active subsidiaries do business under
their corporate names listed below or close derivatives thereof:
<TABLE>
<CAPTION>
JURISDICTION IN
NAME WHICH ORGANIZED
---- ---------------
<S> <C>
H&R Block Group, Inc.................... Delaware (1)
Block Investment Corporation............ Delaware (1)
Bay Colony, Ltd......................... Virginia (1)
HRB Management, Inc..................... Missouri (2)
H&R Block Tax Services, Inc............. Missouri (2)
H&R Block Eastern Tax Services, Inc..... Missouri (3)
H&R Block of Dallas, Inc................ Texas (3)
HRB Partners, Inc....................... Delaware (4)
H&R Block and Associates, L.P........... Delaware (5)
HRB Royalty, Inc........................ Delaware (3)
BWA Advertising, Inc.................... Missouri (3)
H&R Block Canada, Inc................... Canada (3)
H&R Block (Nova Scotia), Incorporated... Nova Scotia (6)
H&R Block (Guam), Inc................... Guam (3)
H&R Block Limited....................... New South Wales (7)
H&R Block The Income Tax People Limited. New Zealand (3)
Block Financial Corporation............. Delaware (2)
Franchise Partner, Inc.................. Nevada (8)
Block Financial Services Company........ Utah (8)
Chach Key Corporation................... Utah (8)
Companion Mortgage Corporation.......... Delaware (8)
MECA Sub - LFOD, Ltd.................... New Hampshire (8)
Block Mortgage Company, L.L.C........... Virginia (9)
CompuServe Corporation.................. Delaware(10)
CompuServe Incorporated................. Ohio (11)
CompuPlex Incorporated.................. Ohio (12)
CompuServe Ventures Incorporated........ Ohio (12)
CompuServe Works of Wonder, Inc......... Ohio (12)
CompuServe Systems Integration
Group Southwest, Inc.................. Texas (12)
CompuServe Canada Limited............... Canada (12)
CompuServe Consulting Services
(UK) Limited.......................... United Kingdom (12)
CompuServe Information Services
(UK) Limited.......................... United Kingdom (12)
CompuServe Information Services GMBH.... Germany (12)
CompuServe Information Services AG...... Switzerland (12)
CompuServe Information Systems SARL..... France (12)
CompuServe AB........................... Sweden (12)
CompuServe Information Services, B.V.... The Netherlands (12)
CompuServe International Pty, Ltd....... Australia (12)
CNS Information (S) Pte Ltd............. Singapore (12)
Spry, Inc............................... Washington (12)
Spry Soft, Inc.......................... Washington (13)
Network Publishing Inc.................. Utah (14)
Access Technology, Inc.................. Massachusetts (15)
Companion Insurance, Ltd................ Bermuda (15)
HRB Investment, Inc..................... Delaware (15)
PM Industries, Inc...................... Kansas (15)
</TABLE>
<PAGE> 2
__________________________
Notes to Subsidiaries of H&R Block, Inc.:
<TABLE>
<S> <C>
(1) Wholly owned subsidiary of H&R Block, Inc.
(2) Wholly owned subsidiary of H&R Block Group, Inc.
(3) Wholly owned subsidiary of H&R Block Tax Services, Inc.
(4) Wholly owned subsidiary of H&R Block of Dallas, Inc.
(5) Limited partnership in which H&R Block Tax Services, Inc. is a 1% general
partner and HRB Partners, Inc. is a 99% limited partner
(6) Wholly owned subsidiary of H&R Block Canada, Inc.
(7) Wholly owned subsidiary of HRB Royalty, Inc.
(8) Wholly owned subsidiary of Block Financial Corporation
(9) Limited liability company in which Bay Colony, Ltd. has a 99% membership
interest and Block Financial Corporation has a 1% membership interest
(10) 80.1%-owned subsidiary of H&R Block Group, Inc.
(11) Wholly owned subsidiary of CompuServe Corporation
(12) Wholly owned subsidiary of CompuServe Incorporated
(13) Wholly owned subsidiary of Spry, Inc.
(14) 55%-owned subsidiary of CompuServe Incorporated
(15) Wholly owned subsidiary of HRB Management, Inc.
</TABLE>
Exhibit 21 (Continued)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 58414
<SECURITIES> 360212
<RECEIVABLES> 218967
<ALLOWANCES> 4419
<INVENTORY> 0
<CURRENT-ASSETS> 1262910
<PP&E> 174429
<DEPRECIATION> 122914
<TOTAL-ASSETS> 1417561
<CURRENT-LIABILITIES> 339746
<BONDS> 0
0
4
<COMMON> 1089
<OTHER-SE> 1038500
<TOTAL-LIABILITY-AND-EQUITY> 1417561
<SALES> 0
<TOTAL-REVENUES> 894446
<CGS> 0
<TOTAL-COSTS> 696989
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 197457
<INCOME-TAX> 72368
<INCOME-CONTINUING> 125089
<DISCONTINUED> 52079<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177168
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 0
<FN>
<F1> NET OF TAXES ON EARNINGS OF $35,757.
</FN>
</TABLE>
